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NCC GROUP PLC
ANNUAL REPORT
AND ACCOUNTS
for the year ended 31 May 2019
Our mission
NCC Group exists to make the world safer and more secure.
We are global experts in cyber security and risk mitigation, and home
to some of the world’s leading cyber scientists. Trusted to protect and
secure our customers’ critical assets from the ever-changing threat
landscape, we continually invest in research and innovation.
Our core strength is the expertise of our people. To support our mission we are committed to developing the future
generation of cyber scientists, analysts and professionals, offering internships, graduate placements as well as sponsorship
of education programmes.
As a global business with over 1,800 colleagues in 12 countries we have a significant market presence in North America,
continental Europe and the UK, and a rapidly growing footprint in Asia Pacific with offices in Australia and Singapore,
all working together to achieve our mission.
OUR VISION
We have a vision 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 security solutions that
enable individuals, businesses and society to thrive.
OUR STRUCTURE
Share of revenue
ASSURANCE
£212.7m
£38.0m
ESCROW
INVESTMENT CASE
SHARE OF
REVENUE
Assurance 85% (2018: 83%)
Escrow 15% (2018: 17%)
• We operate in high growth markets growing globally
at approximately 10%
• We provide an agile global delivery platform for our
world‑class capability in a highly fragmented market
• Our expertise adds value to our blue chip client base
• Our profitable services and products provide sustainable
• We continue to be at the forefront of thought leadership
cash generation
in cyber security
Visit us online at www.nccgroup.com
Read more about our business model and strategic
priorities on pages 10 to 11 and 16 to 17 respectively
Highlights
Financial highlights
GAAP
Measures
Revenue (£m)
Alternative
Performance Measures 1
Adjusted Operating Profit 1 (£m)
110.0
174.7
215.3
233.0
250.7
22.9
35.1
25.5
30.8
33.7
20153
20163
20173
20182
2019
20153
20163
20173
20182
2019
Profit/(loss) for the year (£m)
Cash Conversion (%) 1
16.8
6.3
(56.6)
6.7
13.5
55
51
88
90
110
20153
20163
20173
20182
2019
20153
20163
20173
20182
2019
Basic EPS (pence) – all operations
Basic adjusted EPS (pence) 1
8.0
2.5
(20.4)
2.4
4.9
8.2
9.8
6.2
8.2
9.2
20153
20163
20173
20182
2019
20153
20163
20173
20182
2019
Operational highlights
•
Assurance division continues to achieve good revenue growth (+9.7%)
and global headcount in the technical teams is now at the levels required
to satisfy current demand
• Escrow division revenues have decreased over the year (‑2.8%), with North America
up 10.7%, but UK down 6.5%. However, focused recruitment means sales teams
enter the new financial year at full strength
• New Cloud‑resilience Escrow‑as‑a‑Service (EaaS) offering, aimed at the fast‑
growing cloud software market, launched during spring 2019 with encouraging
initial demand
• Strong financial position with effective cash management reducing net debt 1 below
prior year to £20.2m, gearing equating to 8.7% (2018: 11.9%) and post year‑end,
a new £100m multi‑currency revolving credit facility obtained to June 2024 on
similar terms to previous facility
• Comprehensive systems upgrade programme continues on time and within budget
Read about performance
on pages 12 to 15
1
2
3
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting
items. See note 3 for a reconciliation to statutory information.
See note 1 for further details on the restatement of comparative information due to the
retrospective application of IFRS 15.
Comparative periods 2015 to 2017 have not been restated for IFRS 15.
BUSINESS OVERVIEW
Our mission
Highlights
Group at a glance
Chairman’s statement
IFC
01
02
04
STRATEGIC REPORT
08
Market landscape
10
Business model
11
A customer journey
12
Chief executive officer’s review
16
Our strategy
18
Our strategy in action
22
Key performance indicators
Chief financial officer’s review
24
Principal risks and uncertainties 32
39
A day in the life
40
Sustainability
45
46
48
50
GOVERNANCE
Chairman’s letter
Governance framework
Board of Directors
Executive committee
Board composition and
52
division of responsibilities
59
Shareholder relations
61
Audit committee report
Nomination committee report
68
Cyber security committee report 70
Remuneration committee report 72
Directors’ report
91
Directors’ responsibilities
statement
95
106
107
FINANCIAL STATEMENTS
Independent auditors’ report
97
Consolidated income statement 106
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated cash flow
statement
Consolidated statement of
changes in equity
Company balance sheet
Company cash flow statement
Company statement of changes
in equity
112
Notes to the financial statements 113
109
110
111
108
ADDITIONAL INFORMATION
Glossary of terms – alternative
performance measures
155
Glossary of terms – other terms 157
159
Other information
160
Financial calendar
01
BUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONNCC GROUP PLC ¦ STOCK CODE: NCC Group at a glance
NCC Group is a leading independent cyber security advisor, sought
after for our expert solutions that enable individuals, businesses and
society to thrive. We are trusted to protect and secure our customers’
critical assets.
We aim to innovate and continually develop new products and services to match the rapidly evolving and complex digital world.
We operate across multiple sectors, geographies and technologies. Our goal is to stay at the forefront of thought leadership and
delivery in our current markets while expanding geographically where appropriate.
Our values:
We work
together
We want to be
brilliantly creative
We embrace
difference
Our values underpin the decisions made in our organisation.
They are fundamental to our business model and our focus
on sustainable success.
Read more in Sustainability on pages 40 to 43
Our Group operates in two distinct but complementary divisions:
Assurance and Escrow
The two divisions are also disclosed in the Financial Statements as our two Reporting Segments. While these are managed and
reported internally as similar groups of activities, throughout this report we are able to disclose additional revenue information
at a geographical level but also at a sub‑level of similar services. This additional analysis is to aid the users in understanding our
different types of revenue.
Assurance key facts
We provide the following complementary value‑based services
and products:
•
Technical Security Consulting is our core professional service with
industry sector specialisms
• Risk Management Consulting, a service line that addresses the
business risks of cyber
• Managed Detection and Response which provides operational
cyber defence, scanning, simulation and SOC services
• Products such as sensors, licences, encryption software and
hardware and other complementary products
Our agile global delivery platform represents 85% of the
Group’s revenue.
Escrow key facts
We provide the following services:
• Escrow contract services that securely maintain the long‑
term availability of business critical software and applications
while protecting the intellectual property rights (IPR) of
technology partners
• Verification services documenting the processes to rebuild and
restore an application, mitigating risk of failure
Leading provider in the UK, with a growing North American,
continental Europe and RoW capability representing 15% of the
Group’s revenue.
02
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 WHERE NCC GROUP OPERATES
We have a significant market presence in North America, the UK,
continental Europe and a rapidly growing footprint in Asia Pacific
with offices in Australia and Singapore. All of our geographical
markets present opportunities for growth.
KEY:
ASSURANCE ESCROW
NORTH AMERICA
£83.8m
UK
£114.9m
EUROPE AND ROW
£52.0m
Read more on the market landscape on pages 8 to 9
OUR
REVENUE1
SPLIT
ASSURANCE
Technical Security
Consulting £134.8m
Risk Management
Consulting £35.3m
Managed Detection
and Response 36.4m
Products £6.2m
ESCROW
Contracts
£26.5m
Verification and
other services
£11.5m
1
Types of revenue groupings within the Escrow and Assurance divisions are not management units or profit centres.
03
BUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONNCC GROUP PLC ¦ STOCK CODE: NCC
Chairman’s statement
INTRODUCTION
STRATEGY UPDATE
“ The outlook for the
Group remains very
positive in a growing
market. I look forward to
working with our highly
talented teams and
experienced colleagues
around the world to
deliver great value for
all of our customers.”
Chris Stone
NON-EXECUTIVE CHAIRMAN
As reported with our half year results,
our transformation programme, SGT, is
delivering on a number of fronts in terms
of how we lead the market, win business
and deliver it, while supporting growth
and developing our people.
The programme is ambitious and involves
replacement of all of our key systems
– all with the aim of creating one way
of operating across the firm to achieve
common actionable business data.
We have rolled out expenses and
credit control systems and our new
CRM system (Salesforce) has already
been launched in the UK. Later this
year, we will commence the roll‑out
of our new HR and finance systems
(Workday), starting with the UK. Both
projects remain in line with the original
targeted launch dates. Further details
are provided on page 15.
DIVIDEND
The Board has considered our business
performance in the light of our continued
need for investment through the
transformation phase and accordingly,
the Board recommends that the dividend
is maintained at the current level.
A final dividend of 3.15p is therefore
being recommended by the Board,
making a total for the year of 4.65p.
If approved, the final dividend in respect
of the year ended 31 May 2019 will be
paid on 4 October 2019 to shareholders
on the register as at 6 September 2019
(ex dividend date of 5 September 2019).
I am pleased to report a year of robust
progress has been made against the
ambitious three‑year transformation
programme we embarked upon under
the umbrella of Securing Growth
Together (SGT) last year. Our business
has performed well against a backdrop
of weaker UK trading, offset by good
growth in the North American markets
for both Escrow and Assurance.
Our senior management team is now
well established and they have, in turn,
strengthened our teams to ensure
that we are building for success on
a scalable basis.
BUSINESS PERFORMANCE
Overall we delivered revenue growth on
a continuing basis of 8% and adjusted
operating profit ¹ growth of 9%. On
a statutory basis, operating profit
increased by 44%.
Assurance experienced softer
demand in the UK offset by good
North American based growth. We have
also continued to make good progress
in Europe and Asia.
Within Escrow we have seen a decline in
the UK from a combination of continued
net attrition of on‑premise agreements
in a mature market and operational
challenges from sales staff turnover
issues, which have now been addressed.
This has been offset by encouraging
performance in North America as we
continue to increase our presence there.
As our dependency on connectivity
increases across society and cyber
incidents become more commonplace,
the awareness of the need for security
continues to increase, our worldwide
market opportunity grows and our
breadth of expertise and geographic
spread leaves us ideally placed to
capitalise on this.
Read more on the business
performance on pages 12 to 15
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items.
See note 3 for a reconciliation to statutory information.
04
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BOARD COMPOSITION
PEOPLE
OUTLOOK
We look forward with confidence to a
dynamic year and expect full year trading
to be in line with our expectations.
The next 12 months will see significant
changes as we launch our new systems
and look to achieve the expected
benefits of having a global view of all our
operations. While not without challenge,
the implementation of these systems
will enable us to be far more efficient
and effective which in turn enables
us to better serve our customers.
The outlook for the Group remains
very positive in the growing market
for cyber resilience. We have a unique
asset in our teams of highly talented
and experienced colleagues around the
world, and demand for their skills and
the services they create is only going
to grow over the coming years. I look
forward to working with them to deliver
great value for all of our customers.
Chris Stone
NON-EXECUTIVE CHAIRMAN
24 July 2019
We are in a people business and
our technical people are at the core
of our customer offer. Our people
are the cornerstone of this business
and they continue to show their
commitment to our business and to
delivering excellent service to our
customers. As we progress through
the transformation programme our
people are key to its success. We seek
to provide challenging and rewarding
career paths for all our people to ensure
that we can attract and retain the very
best talent.
We recognise that we still have
much progress to make in terms of
improving the diversity of the Board
and our Executive Team and indeed
our wider workforce in terms of gender.
Improvement in diversity will not happen
overnight but we are very mindful of the
need to improve this and take positive
action, and the matter is fully on our
agenda and in our thoughts as a Board.
For more information on gender diversity,
see pages 40 to 42, 55 and 68.
We take our role as a responsible
employer seriously and see the UK
requirement to publish gender pay gap
figures as a positive move towards
transparency around a key issue within
our industry. We recognise that steps
need to be taken to improve our gender
mix at all levels as a part of our broader
strategy and the investment we are
making under our Sustainability agenda
is supporting us to achieve this.
On behalf of the Board I therefore offer
our sincere thanks and appreciation
to all of the Group’s employees
for their continued dedication in
delivering excellence.
Tim Kowalski, an experienced public
company finance director, joined the
Group and the Board on 23 July 2018
as CFO. He succeeded Brian Tenner
who subsequently left the Group in
August 2018. Tim’s biography and
those of the other Board members can
be found on pages 48 to 49. Thomas
Chambers, independent Non‑Executive
Director, resigned from the Board
following the Company’s AGM on
26 September 2018. I would like to
record my thanks to Thomas for his
valuable contribution during his six
years as a Director.
BOARD GOVERNANCE AND
EFFECTIVENESS
As Chairman, I am responsible for the
leadership of the Board and ensuring
its effectiveness in all aspects of
its performance. We now have an
established and experienced Board
which actively oversees the Group’s
strategic development, monitors the
delivery of its business objectives and
considers risks and mitigating actions.
During the year we complied with all
the provisions of the UK Corporate
Governance Code 2016. As a Board
we are firmly turning our attention to
the requirements of the UK Corporate
Governance Code 2018 (2018 Code)
and will report against the 2018 Code in
our 2020 Annual Report and Accounts.
We maintain our focus on an effective
corporate governance framework
that keeps pace with the rate of
growth and change inside and outside
of NCC Group. In particular, the
identification and management of
risk has continued to be a focus for
us in monitoring progress against the
SGT transformation programme and
consideration of potential Brexit impact.
Further information on risk management
and the key risk focus areas during the
year are set out on pages 32 to 37.
NCC GROUP PLC ¦ STOCK CODE: NCC
05
BUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Strategic
report
Market landscape
Business model
A customer journey
Chief executive officer’s review
Our strategy
Our strategy in action
Key performance indicators
Chief financial officer’s review
Principal risks and uncertainties
A day in the life
Sustainability
08
10
11
12
16
18
22
24
32
39
40
06
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Case study – System Bookings
Global booking system experts
embrace innovation through
Escrow-as-a-Service.
Based in London, System Bookings is a leading online
booking system specialist providing high‑end bespoke
solutions to businesses across the globe, ranging from
start‑ups to major FTSE 100 companies.
System Bookings has been working in partnership with
NCC Group since 2017 to demonstrate its commitment
to best practice and long‑term client relationships.
“ As a company that promises to deliver
a specialised bespoke service with
fast turnaround times, we required a
business continuity solution to match
our offering. Through NCC Group’s
streamlined Escrow-as-a-Service
solution, not only can we continue
to provide market leading software
solutions, but we can assure our
customers that their most valuable
assets are protected at all times.”
Chris Campbell
DIRECTOR, SYSTEM BOOKINGS
CHALLENGE
System Bookings required a customised booking system
to help improve the efficiency of appointment scheduling for
a market leader in the photography industry. This booking
system would help them stay ahead of their competition in
a fast‑paced and dynamic environment.
To provide reassurance and confidence to the customer that
they’d be protected against any disruption to their bespoke
software, System Bookings recognised the need for a
third‑party escrow solution.
SOLUTION
After previous positive experiences with us, System
Bookings got in touch. During the initial scoping call our
specialists worked with System Bookings to understand
the infrastructure of the application and proposed an
Escrow‑as‑a‑Service (EaaS) Access agreement.
The agreement provides the customer with the necessary
information needed to access the live environment of their
cloud software application in the unlikely event that System
Bookings is unable to support or maintain the application.
For further reassurance we recommended the inclusion of
the source code as part of the agreement. This allows the
customer to maintain or further develop the software from
the original code.
All information required to access the live environment was
transferred from System Bookings to our secure vault with
a mutually signed legal agreement these would be released
if required.
Our secure online depositing portal ‘View’ made the upload
deposit a quick and seamless process for System Bookings.
RESULTS
Although new cloud hosted software has been developed to
improve the customer experience, software suppliers face
the challenge of ensuring the long‑term availability of the
application for their customers.
System Bookings has demonstrated a proactive approach to risk
mitigation and governance enabling them to embrace innovation
through their bespoke software while assuring customer
confidence by minimising the impact of business disruption.
NCC GROUP PLC ¦ STOCK CODE: NCC
07
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORT Market landscape
The market landscape in cyber resilience continues to be driven by four
dominant factors:
01.
The increasing
number of
connected devices
and services
03.
The proliferation
of threats and
threat actors
02.
Individuals,
businesses and the
growing dependence
of society on
this connected
environment
Built on top of this foundation of
communication infrastructure is a range
of innovations, solutions, services and
new technologies. All industries are
being digitised and connected to deliver
efficiencies and new ways of working
that derive value from data: from
education to smart cities, from
government service delivery to customer
service, from transport to healthcare,
from agriculture to Enterprise Internet
of Things (IoT), from the military to the
broader industrial base.
As a result, society is becoming
increasingly dependent on a connected
world and not in an always‑obvious
manner. The complexity of this
connectivity and interdependence
means the risk of contagion from a
breach leading to disruption in one part
of a system affecting another has never
been higher.
The first ransomware appeared only
seven years ago and today ransomware
forms the backbone of a multi‑tens‑
of‑billion dollar criminal enterprise that
targets individuals, small through to
large businesses (including listed multi‑
nationals) and government.
Coupled with new state and state‑proxy
actors, these organised criminal threats
look to utilise cyber to augment traditional
military and intelligence capabilities.
They represent increasing numbers
of bad actors looking for an edge and
an opportunity to exploit weaknesses
and leverage cyber against an ever‑
increasing set of targets.
The bar of entry to become a cyber‑
aggressor continues to fall while the
level of cyber resilience and robustness
has not correspondingly increased for
the most part. While governments have,
through international accords such as
The Wassenaar Arrangement, tried
to stem the proliferation of advanced
capabilities, the reality is that advanced
hacking today is simply too easy.
Owing to changes in underlying business
models, and value now attributed to
data, we see a drive towards pervasive
connectivity and digitisation.
The dawn of 5G mobile networks,
fibre‑to‑the‑premises and waves
of new communication satellites,
launched by incumbent operators and
start‑ups alike, heralds the arrival of
infrastructure required for the next
wave of ubiquitous connectivity.
This connectivity is enabling paradigms
in computing, processing and service
delivery not previously possible,
which further accelerates the rate of
innovation. Innovation brings huge
opportunity but also cyber risk that
needs discovering, assessing, managing
and maintaining.
08
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
04.
Relentless increase in regulation and
consequent costs of compliance failure
Most mature governments deem the
free market to have failed at delivering
the level of cyber resilience required.
As such, mature governments are
enacting strategies, which often
involve two key priorities.
The first is the establishment of a
central function or organisation for cyber
defence within the national governance
structure and protecting legislation in
place. In the past year, we have seen
the United States, Australia, Canada,
and the European Union all do this. The
roles of these organisations include
capability capacity building, awareness
raising and guidance on how to be cyber
resilient, managing incidents of national
significance and being the authority as
to what good looks like in cyber.
The second is to embark on regulation,
be it The Network and Information
System (NIS) Directive, General Data
Protection Regulation (GDPR), or sector
specific regulation such as the 2017
New York State Department of Financial
Services (NYDFS) cyber security
regulations. Regulators are employing
a variety of strategies including looking
for evidence of the real‑world resilience
of an organisation as opposed to similar
verification and paper‑based audits.
To collect this evidence regulators are
increasingly stipulating advanced red‑
team engagements, which we offer.
It is also becoming increasingly clear that
regulators are willing to issue material
fines for failures with high profile cases
coming to light. Our work in pre‑close
technical due diligence is showing
heightened awareness of the risk of
buying a breach and customers wanting
to do more than a light touch due‑
diligence due to these regulations.
Owing to these four market drivers,
aggregate demand for cyber services and
products continues to grow. However,
as a consequence, this attractive market
is very busy having attracted significant
investment from participants including
system integrators, management
consulting firms, defence contractors and
private‑equity or venture‑capital‑backed
technology companies.
We have observed many clients – rightly
– becoming frustrated with vendors
offering ‘magic bullet’ solutions. As an
antidote, we promote the development
of ‘cyber science’, which aims to take
the mystery out of cyber and replace it
with evidence‑based risk mitigations and
performance quantification. We believe
this professionalisation of cyber will
enable organisations to engage much
more easily and will clear the path for
further market growth.
Finally, as a professional services firm
in a technology‑dominated market we
observe two positive dynamics. First,
what we offer is distinctive in that we
are able to develop and maintain leading
technical capability without investing
massive amounts of capital expenditure.
Instead, targeted research undertaken
by skilled individuals continues to yield
world‑leading discoveries that we use
to educate ourselves and engage with
our clients. Secondly, it is clear that
competitors continue to struggle to build
and retain a critical mass of individuals
even a fraction of the size of our talent
pool let alone with the market diversity.
Therefore, while we will continue
to compete with an ever‑increasing
number of firms, we continue to provide
a differentiated service that attracts
clients and colleagues alike.
09
NCC GROUP PLC ¦ STOCK CODE: NCC 26271 13 August 2019 4:58 pm Proof ThirteenResearch and InnovationTechnical Security Consulting andManaged Detection and ResponseEscrow and Cloud ServicesBusiness modelThe model highlights how this translates into a customer journey across our broad service offering Risk Management ConsultancyWe continually look for intellectual property development and commercialisation opportunities to create further value within the Group. This has led to the development and acquisition of a rich portfolio of products and cloud services, for example our new Escrow-as-a-Service proposition – see page 14.Our world-class research enables us to continually understand, discover, exploit and mitigate threats in technology, people and processes. This in turn allows us to deliver innovative solutions while at the same time deliver on legacy commoditised services.Our Managed Detection and Response capability is supported by our security operations centres in the Netherlands and the UK. We also provide managed vulnerability scanning services.Our security experts provide a wide range of integrated professional cyber services including end-to-end capability in all facets of cyber security aimed at improving our client’s business operations.Strategy, risk and technologyDriving value and capabilityThreatRiskDefenceCapabilityTechnologyScaling and efficiencyManaged Detection & ResponseEducating AdvisingAssessing RespondingStrategy, risk and technologyASSURANCE & ESCROWManagingMonitoringAlertingRespondingSafeguardingInformingDefending10ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019NCC-AR-2019.indd 1015-Aug-19 1:22:24 PM BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
A customer journey
We continually develop our cyber business to provide security services that help our customers meet their everyday business
challenges. We develop strong relationships with our customers based on their business objectives and goals. Our relationship
is typically based on a three‑stage journey.
ASSESS
DEVELOP
MANAGE
The first stage of the journey with us
is typically an assessment or baseline
review to understand what problem the
customer is trying to fix.
Ideally this involves a comprehensive
Cyber Security Review undertaken
against an industry framework, such
as the NIST Cybersecurity Framework.
However the baseline can be derived
from any number of activities including
red teaming, a breach response exercise
or an executive workshop, all of which
are underpinned by our advance threat
intelligence capability.
The real value lies not just in the
assessment but in the clear advice and
guidance provided to improve the level
of business resilience.
For example:
• How to protect the customer’s
organisation and what primary
actions they need to take
• How to improve their security
maturity rating to satisfy
Board requirements
• How to ensure their cloud
environment is secure so they can
capture new opportunities and
move into new markets efficiently
• How to comply with legal and
regulatory requirements to ensure
their business can continue to
deliver its services.
To enable businesses to grow and thrive
it is essential to work with them to fix
the issues identified during the Assess
stage. It is only once these areas have
been remediated that the true return on
investment will be realised against their
cyber spend.
Being cyber safe and protecting against
risks isn’t an exercise with a start and
end date. The ever evolving threat
landscape means that beyond the initial
assess and develop phases it is vital to
continually improve levels of security,
detect incidents and react to them.
The key to successful security
transformation is working closely with
the customer as a trusted advisor,
developing in partnership a strategy that
works for their business. This, coupled
with robust governance, is essential for
any successful implementation.
We operate a full security service and
can deliver a range of services during
this phase, all of which are dependent
on the issues identified and the needs
of the business.
For example we may:
• Provide recommended fixes and
a testing programme to ensure
that these fixes have been
implemented correctly
• Assess the security of their
cloud environment with our
Scout Suite auditing tool to
ensure the configuration of any
applications being moved to
the cloud are secure
• Build a virtual team, working as
an extension to the customer’s
team, bringing specialist skills such
as risk management or in‑depth
knowledge of key cloud platforms
for example
• Work in collaboration with the
customer to design and identify
specific technology solutions to
meet their requirements
• Engage our senior advisors to
provide support to engage the
Board in any remediation activity.
In the final stage of this journey, we
transition the customer into a set
of services, which allows them to
continually evolve to meet this threat
landscape head on.
We are able to do this through a range
of services:
• Utilising our Managed Detection and
Response proposition, which gives
confidence that we are working
alongside the customer, responding
quickly, mitigating threats, reducing risk
and ensuring their business continues
to operate
• Our Escrow‑as‑a‑Service (see page 14)
provides a simple answer to the question
of cloud resilience
• World‑leading threat intelligence
offers an insight into threats faced
by our customers.
Successfully helping our
customers to be cyber safe is
achieved through working in
partnership with them.
Leveraging our skills and experience
the customer can transition on
the journey from assess through
develop to the manage phase and
realise the value to their business.
This consistent, cohesive approach
aims to ensure they are protected
and their cyber security programme
is continually refreshed and fit for
purpose.
NCC GROUP PLC ¦ STOCK CODE: NCC
11
Chief executive officer’s review
“ This has been a pivotal
year in NCC Group’s
transformation as we
lay the foundations to
enable us to compete
and win globally,
delivering on our mission
to make the world safer
and more secure.”
Adam Palser
CHIEF EXECUTIVE OFFICER
A YEAR OF PROGRESS IN
RESULTS AND TRANSFORMATION
Over the past 12 months, NCC Group
has grown revenue, profit and cash
flow while making significant progress
through its transformation programme.
Revenue on a continuing basis was up
7.6% and adjusted operating profit ²
increased by 9.4%, while the Group
also delivered improved cash flow with
cash conversion ² of 109.6% compared
to 90.2% ¹ in FY18. On a statutory
basis, operating profit increased by
44.4% to £19.5m (2018: £13.5m ¹)
and profit before taxation increased
52.1% to £17.8m giving rise to a
basic adjusted EPS ² and statutory
EPS from continuing operations
of 9.2p (2018: 8.2p ¹) and 4.9p
(2018: 4.4p ¹) respectively.
These results have been achieved
alongside significant transformation
activity (described below), which
is building a strong platform
for future scalable growth
and margin improvement.
I am particularly pleased with the
progress made in the second half
in two critical areas for NCC Group.
First, the improvement in our cash
management processes, which has
led to a sustainable reduction in our
working capital and a year‑end net
debt ² position of £20.2m (compared to
£27.8m at the end of FY18 and £45.1m
at the end of H1 FY19). Second, after
a first half in which we were unable to
resource all of our opportunities because
of skill shortages, we have rebuilt the
capacity of our technical cyber teams
within the Assurance division.
Headcount in our Assurance technical
delivery teams increased by 102
people across the world to 1,047, which
means that we are well positioned
to deliver further growth. Given
the scarcity and demand for cyber
skills, our ability to attract sufficient
specialists is a pleasing endorsement
of our progress towards being the
employer of choice for cyber talent.
OUR ASSURANCE BUSINESS
CONTINUES TO OPERATE IN A
GROWING AND DYNAMIC MARKET
Demand for cyber services continues
to grow globally, driven by:
1. The increasing number of connected
devices and services;
2. The growing dependence of
individuals, businesses and society
on this connected environment;
3. The proliferation of threats and threat
actors; and
4. The relentless increase in regulation
and consequent costs of
compliance failure.
Thanks to this growing global demand,
the cyber market continues to attract
massive investment from system
integrators, defence companies,
consulting firms and private equity
or venture capital technology and/
or security firms. In this intensely
competitive market, NCC Group
continues to demonstrate sustainable,
profitable growth and this is in no small
part due to our world‑leading and cost‑
effective approach to research.
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
12
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
Our talented employees continue to
discover key vulnerabilities in existing
and new technologies – from printers
to blockchain – which allow us to
educate and protect our clients thereby
monetising our knowledge.
Across different geographies we
observed variability in demand growth:
NCC Group grew 23.4% in North
America, 12.9% across continental
Europe and Asia‑Pacific but only 3.1%
in the UK (after taking into account a
reduction of £3.6m in UK product sales,
which is a consequence of our deliberate
move away from low‑margin re‑selling).
We attribute the strong growth in North
America partly to growing demand from
a thriving ecosystem of ‘technology
producers’ for whom privacy and security
are of existential importance, and partly
to the work we have done over the
last 12 months to build a powerful and
empowered North American business.
Cross‑region delivery in our technical
security consulting teams increased by
31% in support of sales growth around
the world, which evidences our maturing
ability to deploy resources globally.
We intend to return all parts of our
Assurance business to double‑digit
growth in the year ahead, and a key
success factor for achieving this goal is
attracting and retaining sufficient talent.
I am consequently pleased to report
that attrition in our Technical Security
Consulting teams dropped from 24.9%
in FY18 to 17.9% in FY19. Overall,
attrition in our Assurance business
was 19.8% (FY18: 23.2%), driven
in particular by attrition of 28.6% in
our sales teams, which was largely
the consequence of more vigorous
performance management as we seek
to upgrade our sales capabilities.
While our current focus is on
strengthening and growing our organic
operations we will take advantage of
acquisition opportunities that fit our
target profile as and when they
present themselves.
Read more on the market
landscape on pages 8 to 9
13
NCC GROUP PLC ¦ STOCK CODE: NCC Chief executive officer’s review
ESCROW A YEAR OF TRANSITION
Revenue in our Escrow business
declined 2.8% over the course of the
financial year with a 6.5% decline in the
UK outweighing an encouraging 10.7%
increase in North America.
Although our current Escrow business
is dominated by on‑premise software
solutions – and it is true to acknowledge
that on‑premise software is declining
as a proportion of the software market
– we observed that the renewal rates
for our agreements remained constant
at 89.6%. During Q4 FY19, we secured
our largest ever on‑premise contract win
(£800k) with a major international bank,
which, coupled with our strong North
American growth, leads us to believe
that Escrow continues to be a good
business for NCC Group.
We did, however, find the UK market
challenging for Escrow this year but,
in line with our strategic priority to
return the Escrow division to growth,
we increased our UK sales team to 44
people in the second half of the year.
Beyond our existing on‑premise
software escrow solutions, we believe
that the need for business resilience
is just as relevant – if not more so –
in the growing world of cloud services.
Towards the end of the financial year,
we launched our Escrow‑as‑a‑Service
cloud‑resilience proposition and are
encouraged by initial demand and
feedback from the market. Over the
course of the coming year, our intention
is to prove that our EaaS product is a
scalable high‑margin offering, which
has the potential to match the market
penetration of our on‑premise solutions.
Investment in the EaaS market launch
may dilute margin temporarily.
Overall, we continue to view the
extensive client list and recurring
revenue streams of our Escrow division
as important assets for the Group
and intend to return this business
to growth through:
1 Better sales operations, particularly
in the UK;
2
International expansion in North
America (in particular) and
continental Europe; and
3 Developing new offerings that we
can sell to our existing client base –
of which EaaS is the first.
Escrow-as-a-Service offers organisations the option to either access or replicate their unique cloud
environment, applications and data providing assurance against software supplier failure.
EaaS Access
Software Supplier
cloud environment
Credentials
&
associated
materials
Cloud service
provider environment
NCC Group’s
cloud environment
Software Supplier
cloud environment
Customer
specific
&
application
data
Customer
specific
&
application
data
EaaS
Replicate
Source
code/
scripts
14
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
Highlights across our five transformation
workstreams to date include:
Develop our People: Consistent global
approaches to induction, performance
management and leadership have been defined
and are ready for FY20 launch. We undertook a
Global Employee Engagement survey with Best
Companies that led us to identify a number of
activities including mentoring and management
programmes (currently in pilot) and ‘NCC
Cares’, our global wellness initiative. During the
year we have also strengthened our leadership
with the arrival of Tim Kowalski, Chief Financial
Officer, Ian Thomas as Managing Director of
Assurance (UK and APAC) and Colin Watt as
Chief People Officer.
Lead the Market: Days invested in research
increased globally by 15% resulting in high‑
impact output across fields including Enterprise
Internet of Things (IoT), AI/Machine Learning,
Smart Cities and Connected Health.
Win Business: We launched Salesforce in our
Assurance division across Europe (including
the UK) in June 2019 in conjunction with our
Gated Business Lifecycle (GBL). The GBL has
harmonised the way we go to market across
the world, which prepares us further for greater
co‑operation across geographies. We shall
complete the global roll‑out in the first half of
the next calendar year.
Deliver Excellence: Performance was
supported by increased cross‑region global
resourcing as our scale allows us to capture
market share when others face more pressing
delivery resource constraints.
Support Growth: Seven out of nine of our
future core systems are now operational in at
least one major region, with the remainder due
to roll out progressively over the next financial
year. Our Workday installation, which is the
largest component, remains on track and has
delivered an additional benefit of bringing
teams across the world together to define a
common way of working across the Group.
OUR TRANSFORMATION PROGRAMME: SECURING
GROWTH TOGETHER (SGT) AND THE NEXT VERSION
OF NCC GROUP
May 2019 saw the first anniversary of our three‑year
transformation programme, Securing Growth Together (SGT).
SGT is the vehicle through which we are executing our
strategy and delivering on our priorities. We are making
good progress and have successfully achieved our year one
milestones. Our SGT programme will result in us having the
information we need to run the firm in an assertive and agile
way globally and will provide a stable platform for future growth
and margin improvement.
SUMMARY, OPERATIONAL PRIORITIES AND OUTLOOK
In summary:
• Robust revenue growth during first year of operational
transformation
• Adjusted operating profit margin ² improved to 13.4%
(2018: 13.2% ¹) with strong cash conversion ² and net debt ²
reduced to £20.2m (2018: £27.8m). On a statutory basis
operating profit margin increased to 7.8% (2018: 5.8%)
Our operational priorities for FY20 include:
•
Assurance: continued double‑digit growth and margin
improvement
• Escrow:
• Stabilise revenue this year and growth thereafter
• Accelerating the adoption of our new cloud‑resilience
(EaaS) proposition
•
People: increasing our sales capability and effectiveness,
particularly in the UK (where we are rebuilding our sales
team) and North America (to support further growth)
Outlook:
• Regulatory pressure and high‑profile breaches continue
to increase the strategic importance and value of cyber
security in our target markets
•
•
Three‑year transformation, SGT, progressing on time and
within budget to create the next version of NCC Group
We look forward with confidence to a dynamic year and
expect full year trading to be in line with our expectations
Adam Palser
CHIEF EXECUTIVE OFFICER
24 July 2019
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
15
NCC GROUP PLC ¦ STOCK CODE: NCC Our strategy
As technology development continues to play an even more
important role in everyday life, so does the need for cyber security
innovation to keep society safe and secure.
Develop
our people
Lead
the market
We want to create a positive colleague
experience like no other offered in the
industry, investing in our talent and
organisation to unlock our full potential.
Deliver world‑class research and thought
leadership coupled with leaders who
can engage audiences and convey our
message across all channels.
PROGRESS IN 2018/19
PROGRESS IN 2018/19
• Strengthened our leadership with
the arrival of Tim Kowalski, Chief
Financial Officer, Ian Thomas as
Managing Director of Assurance
(UK and APAC) and Colin Watt as
Chief People Officer
• Consistent global approaches to
induction, performance management
and leadership have been defined
and are ready for FY20 launch
• Significant UK sales recruitment to
rebuild capacity
• Boosted senior management
presence in North America
• Global research days increased
by 15%
• Leading research published in fields
including Enterprise Internet of
Things (IoT), Artificial Intelligence/
Machine Learning, Smart Cities and
Connected Health
• Appointment of a VP Research in
North America
FOCUS FOR 2019/20
•
•
Continue high‑impact research
Accelerating the adoption of our new
cloud‑resilence (EaaS) proposition.
FOCUS FOR 2019/20
LINK TO KPIs
• Support new recruits to recreate
effective sales team
•
•
•
Support our people on learning and
development and ways of working
Be a hub for cyber talent
Be a quirky, distinctive environment
where individuals and teams thrive
LINK TO KPIs
Our strategy is designed to meet
this challenge encapsulating the
passion we have, and how our people
thrive on doing great work, solving
challenges others can’t. We have the
capability and opportunity to do more
and our strategy provides us with the
framework to do this – disrupting
the market and creating exciting
opportunities for our people and
our customers.
We will continue to serve our key
markets while developing expertise
in the sectors of our customers. We’ll
invest in research and development so
we secure tomorrow’s future today.
Our five strategic themes, each of
which has an executive sponsor
and a programme of activity, are
managed through our transformation
programme – Securing Growth
Together – to ensure sustainable
and effective change management.
See page 15 for more on our
transformation.
Performance above prior year
Performance in line with
prior year
Performance below prior year
Read about our strategy in
action on pages 18 to 21
Read about KPIs
on pages 22 and 23
16
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
Win
Business
Deliver
excellence
Support
growth
We want to win high‑value work as a
result of a deep understanding of our
customer’s cyber needs in the context
of their business.
Deliver consistently high‑quality
solutions that our customers value, fully
utilising our global capability and the
technical excellence of our consultants.
PROGRESS IN 2018/19
PROGRESS IN 2018/19
•
•
Launched Salesforce across UK and
Europe in conjunction with our Gated
Business Lifecycle (GBL). The GBL
has significantly harmonised the way
we go to market across the world,
which prepares us further for greater
co‑operation across geographies
Largest ever on‑premise Escrow
contract win (£800k) with a major
international bank
•
•
•
•
Increased global resourcing
Lower attrition and higher capacity in
technical teams now established
Single product development
roadmap and offering created for
global managed detection and
response business
Global account management
established
FOCUS FOR 2019/20
•
•
•
Complete the global roll‑out of GBL in
the first half of the next calendar year
Develop Escrow channel model to
boost volumes
Complete roll‑out of Salesforce in
North America and RoW
FOCUS FOR 2019/20
•
•
Unified platform for global
scheduling and visibility
Embed new ways of working
with our clients, providing a
distinctive service
LINK TO KPIs
LINK TO KPIs
Providing the tools and processes
that enhance how we work today
enabling access to quality management
information to help us make the right
decisions quickly.
PROGRESS IN 2018/19
• Assurance revenue growth per
territory, strong in North America:
+23.4%, robust in Europe and
RoW: +12.9% albeit disappointing
in UK: ‑1.1% (+3.1% excluding
product sales)
•
•
Escrow revenue growth in North
America +10.7% as we increase our
presence; however, UK disappointing
with operational challenges resulting
in revenue decline of 6.5%
Seven out of nine of our core
systems are now operational in at
least one major region
FOCUS FOR 2019/20
• Continued Assurance double‑digit
growth and margin improvement
• Stabilise Escrow revenue in FY20
and growth thereafter
•
Increased collaboration between
businesses by continued roll‑out of
new core systems
LINK TO KPIs
17
NCC GROUP PLC ¦ STOCK CODE: NCC Our strategy in action
To enable NCC Group to reach
its full potential, our strategy
is delivered through the
transformation programme
– Securing Growth Together.
A small transformation office
ensures that activity is in line
with our strategic priorities,
benefits are tracked and we
manage change effectively.
Proposals are approved by
the NCC Group Board prior to
any commitment being made
to ensure the benefits case
is scrutinised.
The Securing Growth Together programme draws on
the knowledge and capability within the Group, fostering
greater team working and delivering greater value for our
clients as a result. The priority for year one and into year
two is fixing the basics – investing in the platforms and
systems that enable us to act as one firm globally.
We’ve made great progress in year one, implementing
seven out of the nine new systems which are needed
to modernise our firm. By fixing the basics we have the
information and the ability to run this firm in the agile,
dynamic way necessary for us to focus delivering value
to our clients.
We are evolving how we work, building high‑value
relationships, which are enduring and enable us to predict
and plan to secure the work our colleagues yearn for.
INVESTING IN PEOPLE: EMPLOYEE
ENGAGEMENT
Knowing how important engagement is to the
success of our business, in July 2018 we launched
the Best Companies bHeard survey to gather feedback
from colleagues.
Insights gathered from the survey were vital in helping
us to prioritise activity at both a global and a local level.
And they provide us with a benchmark to measure
progress in the future. The survey is due to be run
annually with the addition of monthly employee
engagement pulse surveys.
At the global level, feedback highlighted the need to
connect the organisation and to improve sharing of
information. This led to the launch of the employee
engagement platform – Dynamic Signal, which provides
a mobile‑first solution to push tailored content to different
audiences as well as encourage user‑generated content.
The Dynamic Signal platform seamlessly integrates
with our collaboration and communication channels
– Microsoft Teams and Yammer. And it also enables
us to empower colleagues to share approved content
externally through their social media channels.
18
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Investing in research: Taking
security posture to the next level
We were challenged to quantify
the real-world impact of a
self-propagating worm-based
ransomware attack like NotPetya,
and help one customer to
understand how its security
investment could better deliver
the intended resilience against
such threats.
Working closely with the customer and
bringing innovative technical expertise from
across the Company together, we created
EternalGlue – a safe, controllable and self‑
propagating malware simulator that could test
an organisation’s resilience against malware
attacks in a live environment.
WHAT WE DID
THE RESULTS
We reverse engineered NotPetya to create
from scratch a new worm with clean exploits,
a benign payload, detailed suicide logic, kill
switches and telemetry information.
The EternalGlue test identified a number of
improvements in the customer’s Windows
Active Directory, which improve resilience
against similar propagation attempts.
We launched this into our client’s network,
enabling them to run several scenarios from
six user accounts.
When we triggered the kill switch at the
end of the test a couple of hours later, our
EternalGlue worm had safely infected a
significant number of the client’s hosts, using
lateral movement vectors, including token
impersonation and unpatched systems.
Most importantly, the results gave the
customer’s CISO and Board a unique,
evidence‑based insight into their security
posture, and how they could materially
improve their resilience by investing in the
right areas.
This is a great example of challenging
ourselves to create innovative cyber
solutions through expert research putting our
customers at the heart of everything we do.
19
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC
Our strategy in action
Innovative solutions: A new perspective
breeds better detection
WHAT WE DID
To create the best quality detection, we
innovatively combined traditional techniques
with our own leading threat detection
services. We used our wealth of experience in
thorough, research‑based offensive attacks
to improve the Engine’s defensive ability and
drive its detection rates up.
Drawing on our extensive threat intelligence
network, we also created a constantly
updated library of Cyber Threat Indicators
with applied detection logic.
Every month, we collect and analyse billions
of security events logged by our clients, and
break these down to the few that matter to
the organisations we work with.
We used the intelligence garnered from this
practice to create a real‑time library of reports
on alert investigations and findings, using the
recognised MITRE ATT&CK framework to
classify detected attack tactics, techniques
and procedures. We also used the MITRE
framework to correlate detected activity to
drive false positive rates down.
All of this data is fed into our Managed
Detection Engine and interrogated in real‑time,
enabling us to identify the malicious and
anomalous activity as it happens and work with
our customers to mitigate risk more efficiently.
THE RESULTS
By bringing together external content such
as the MITRE ATT&CK framework and our
own offensive threat hunting, intelligence
framework, insights and more, the Managed
Detection Engine has already improved
detection rates, enhanced the quality of
findings and reduced false positive rates
for many of the customers we work with.
Importantly, this approach enabled us to apply
our deep offensive expertise to improve our
ability to defend our clients from real‑world
cyber‑attacks.
Cyber is a 24/7 threat, making
round-the-clock detection an
essential component of any
organisation’s security strategy.
By maintaining a holistic,
360-degree view of your business,
you significantly improve your
chances of detecting and
responding to cyber-attacks
before they can cause damage.
Our Security Operations Centre (SOC)
keeps watch for our clients every minute
of every day, combining world‑leading
technologies and expert analysis to deliver
a comprehensive Managed Detection and
Response service.
At the heart of this service is a commitment
to providing a greater quality of detection to
our clients that goes beyond recognised user
case alerts.
We challenged ourselves to create a solution
that could understand attacker behaviours and
tradecraft in real‑time, to enhance detection
rates of real‑world threats. The result was our
Managed Detection Engine.
20
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Collaboration: giving businesses
technology to thrive
Visibility is crucial when it comes
to any comprehensive and robust
security strategy. This means
mapping out an IT estate and
establishing where any potential
risks lie – providing businesses
with a clear understanding of any
changes that need to be made,
or any security issues that need
to be addressed.
Security logging is an important part of this
process. It is widely acknowledged across
the industry that gathering and logging
information on any installations and user
behaviour across a system is an important
practice that can help organisations to
identify any potential risks, as well as
ensuring compliance with a range of
security standards.
However, knowing where to start can often
be a challenge – particularly for small
enterprises, or those that don’t have large
amounts of money to invest in a complex
monitoring solution.
SIMPLICITY IS KEY
We’ve collaborated with the UK’s National
Cyber Security Centre (NCSC) and the
Cabinet Office on the ‘Logging Made Easy’
project, building the guidance, scripts and
tutorials needed to enable organisations to
deploy an effective, scalable logging solution.
Built using open source and freely available
software, the solution is based on tried and
tested architectural design methods and best
practice from real‑life cyber investigations,
enabling businesses to understand their IT
estate in more detail.
Logging information across an IT estate,
including user details, uninstalled software
updates, and administrative privileges, can
help organisations to monitor their systems
and detect attacks quickly, as well as
improving access to information for
reporting purposes.
Building a strong cyber security strategy
should be a priority for all businesses,
regardless of size or sector. It’s up to
government and industry to work together
to help businesses that may not have the
resources to source their own incident
investigation and protective monitoring tools.
Making the monitoring process more simple
for these companies is just one way to help
work towards a safer society.
21
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Key performance indicators
Our strategy
Rationale and current status
Trend
KPIs 2019 performance
Commentary
DEVELOP OUR PEOPLE
LEAD THE MARKET
Our key strategic goals will rely fundamentally on our people and
their skills, so we need to ensure that we attract and retain high
quality colleagues. We need to ensure they are properly trained,
gain the right experience, and are also properly incentivised by
recognition and the working environment, as much as by reward.
The market is evolving so quickly that we need to be at the
forefront of developing new services and responses to address
emerging threats. Our customers’ needs are also changing:
not just in response to new threats but also in respect of how
and where they carry out their business. We must respond to
those changes in how we position ourselves and our services.
WIN BUSINESS
In attractive and growing markets where we enjoy strong
competitive differentiators, we aim to deliver medium‑term
growth in excess of market rates. By focusing on higher value
added services we will avoid growth for its own sake while
simultaneously protecting our margins.
DELIVER EXCELLENCE
The Strategic Review identified that we do not organise ourselves
in a way that brings simplicity and efficiency to our service delivery.
SUPPORT GROWTH
Our existing business processes are inefficient, and in many
cases difficult to scale. They often rely on manual activity and
disparate information systems that can lead to a lack of clarity
in decision‑making.
Trend direction
Performance above prior year
22
Performance in line with
prior year
Performance below prior year
Employee turnover 22.0% (2018: 23.5%)
• Global Best Companies employee engagement survey
• Global headcount in the technical assurance teams is
now at the levels required to satisfy current demand
undertaken, which identified areas for improvement.
• Focused recruitment means escrow sales teams enter
Targeted action plan created and executed, including NCC
the new financial year at full strength
Cares, our global wellness initiative
• Performance management approach has been agreed and
is ready for FY20 launch
Global research days increased
Significant content production:
• 17 whitepapers
• 81 technical blogs
• 31 technical security advisories
• 41 conference presentations
Key external deliverables around:
• Enterprise IOT
• Artificial Intelligence/Machine Learning applications
to security assessments
• Connected Health
Revenue growth (metric unchanged)
2019: 7.6% (2018: 8.3%)
• Global account management initiated for largest clients
• High Value Selling training delivered and embedded
• Maintain world‑leading capability through
intelligent working, including new rapid concept to
market process
• Future specialist cyber resilience practice incubation
research in Connected Health, Smart Cities
and Artificial Intelligence/Machine Learning
Cyber Resilience
• Cyber as a science solutions whose efficacy can be
measured and operating constraints understood
• Embed salesforce and drive improved sales metrics
• Grow Managed Detection and Response services
Gross margin improvement (metric unchanged)
• Take further steps in FY20 towards agile global
2019: 40.6% (2018: 41.2%)
• Global resourcing improved through more harmonised ways
of working; achieved by better communication and the
introduction of a Gated Business Lifecycle
• Cross‑region delivery in our technical security consulting
teams increased by 31% in support of sales growth around
the world
resourcing: harnessing cyber talent across the globe
and using it to support both multinational and local
organisations
• Measuring utilisation globally to manage recruitment/
attrition ‘hot spots’ and enable surge resourcing
Adjusted operating profit
2019: 13.4% (2018: 13.2%)
•
Install Workday as the backbone of our Human Capital,
Finance and Professional Services Automation
• Systems installations are on track and within budget
• Prepare to drive efficiencies in FY20 following
systems installations
• Overhead increases this year were primarily related to the
professionalisation of our support functions
Cash conversion ratio (metric unchanged)
2019: 109.6% (2018: 90.2%)
• Sustainable improvement in working capital through better
processes, the introduction of weekly measurement dashboards
and increased management focus
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Our strategy
Rationale and current status
Trend
KPIs 2019 performance
Commentary
DEVELOP OUR PEOPLE
LEAD THE MARKET
Our key strategic goals will rely fundamentally on our people and
their skills, so we need to ensure that we attract and retain high
quality colleagues. We need to ensure they are properly trained,
gain the right experience, and are also properly incentivised by
recognition and the working environment, as much as by reward.
The market is evolving so quickly that we need to be at the
forefront of developing new services and responses to address
emerging threats. Our customers’ needs are also changing:
not just in response to new threats but also in respect of how
and where they carry out their business. We must respond to
those changes in how we position ourselves and our services.
WIN BUSINESS
In attractive and growing markets where we enjoy strong
competitive differentiators, we aim to deliver medium‑term
growth in excess of market rates. By focusing on higher value
added services we will avoid growth for its own sake while
simultaneously protecting our margins.
DELIVER EXCELLENCE
The Strategic Review identified that we do not organise ourselves
in a way that brings simplicity and efficiency to our service delivery.
SUPPORT GROWTH
Our existing business processes are inefficient, and in many
cases difficult to scale. They often rely on manual activity and
disparate information systems that can lead to a lack of clarity
in decision‑making.
Employee turnover 22.0% (2018: 23.5%)
• Global Best Companies employee engagement survey
undertaken, which identified areas for improvement.
Targeted action plan created and executed, including NCC
Cares, our global wellness initiative
• Performance management approach has been agreed and
is ready for FY20 launch
• Global headcount in the technical assurance teams is
now at the levels required to satisfy current demand
• Focused recruitment means escrow sales teams enter
the new financial year at full strength
Global research days increased
Significant content production:
• 17 whitepapers
• 81 technical blogs
• 31 technical security advisories
• 41 conference presentations
Key external deliverables around:
• Enterprise IOT
• Artificial Intelligence/Machine Learning applications
to security assessments
• Connected Health
Revenue growth (metric unchanged)
2019: 7.6% (2018: 8.3%)
• Global account management initiated for largest clients
• High Value Selling training delivered and embedded
• Maintain world‑leading capability through
intelligent working, including new rapid concept to
market process
• Future specialist cyber resilience practice incubation
research in Connected Health, Smart Cities
and Artificial Intelligence/Machine Learning
Cyber Resilience
• Cyber as a science solutions whose efficacy can be
measured and operating constraints understood
• Embed salesforce and drive improved sales metrics
• Grow Managed Detection and Response services
Gross margin improvement (metric unchanged)
2019: 40.6% (2018: 41.2%)
• Global resourcing improved through more harmonised ways
of working; achieved by better communication and the
introduction of a Gated Business Lifecycle
• Cross‑region delivery in our technical security consulting
teams increased by 31% in support of sales growth around
the world
• Take further steps in FY20 towards agile global
resourcing: harnessing cyber talent across the globe
and using it to support both multinational and local
organisations
• Measuring utilisation globally to manage recruitment/
attrition ‘hot spots’ and enable surge resourcing
Adjusted operating profit
2019: 13.4% (2018: 13.2%)
•
Install Workday as the backbone of our Human Capital,
Finance and Professional Services Automation
• Systems installations are on track and within budget
• Prepare to drive efficiencies in FY20 following
• Overhead increases this year were primarily related to the
professionalisation of our support functions
Cash conversion ratio (metric unchanged)
2019: 109.6% (2018: 90.2%)
• Sustainable improvement in working capital through better
processes, the introduction of weekly measurement dashboards
and increased management focus
systems installations
23
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Chief financial officer’s review
“ 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 INFORMATION ¹
Revenue
Cost of sales
Gross profit
Administration expenses
Operating profit
Net finance costs
Profit before taxation
Taxation
Profit from continuing operations
Loss from discontinued operations, net of tax
Profit for the year
Earnings per share:
Basic EPS – continuing
Diluted EPS – continuing
2019
Adjusting
Item 3
£m
–
–
–
(14.2)
(14.2)
–
(14.2)
2.2
(12.0)
–
(12.0)
2019
Adjusted 3
£m
250.7
(148.9)
101.8
(68.1)
33.7
(1.7)
32.0
(6.5)
25.5
–
25.5
9.2
9.1
2019
Statutory
£m
250.7
(148.9)
101.8
(82.3)
19.5
(1.7)
17.8
(4.3)
13.5
–
13.5
4.9
4.8
2018
(restated 2)
Adjusting
Items 3
£m
2018
Adjusted 3
£m
–
–
–
(17.3)
(17.3)
(0.3)
(17.6)
7.1
(10.5)
(5.5)
(16.0)
233.0
(137.1)
95.9
(65.1)
30.8
(1.5)
29.3
(6.6)
22.7
–
22.7
8.2
8.1
2019
£m
212.7
38.0
250.7
2019
£m
19.5
3.6
1.7
9.0
(0.1)
33.7
2018
(restated 2)
£m
193.9
39.1
233.0
2018
(restated 2)
£m
13.5
7.6
0.3
9.4
–
30.8
Continuing revenue
Assurance
Escrow
Total – continuing operations
Operating profit
Individually significant items
Share‑based payments
Amortisation of acquired intangibles
Profit on disposal of investments
Adjusted operating profit ³
24
2018
Statutory
£m
233.0
(137.1)
95.9
(82.4)
13.5
(1.8)
11.7
0.5
12.2
(5.5)
6.7
4.4
4.4
%
change
9.7%
(2.8%)
7.6%
%
change
44.4%
(52.6%)
466.7%
(4.3%)
–
9.4%
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Adjusted operating profit ³
Assurance
Escrow
Central and head office
Total – continuing operations
Adjusted operating profit % margin ³ – continuing operations
2019
£m
22.6
19.0
(7.9)
33.7
13.4%
2018
(restated 2)
£m
16.5
21.9
(7.6)
30.8
13.2%
%
change
37.0%
(13.2%)
3.9%
9.4%
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 Measures ³ to statutory information
is shown below:
2019
Continuing operations
Adjusted
Individually significant items
Share‑based payments
Amortisation of acquired intangibles
Profit on disposal of investments
Statutory
2018
Continuing operations
Adjusted
Individually significant items
Share‑based payments
Amortisation of acquired intangibles
Unwind of discount on acquisition
consideration
R&D prior year tax credits
Statutory
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
250.7
–
–
–
–
250.7
Revenue
£m
233.0
–
–
–
–
–
233.0
101.8
–
–
–
–
101.8
Gross
profit
£m
95.9
–
–
–
–
–
95.9
43.7
(3.6)
(1.7)
–
0.1
38.5
EBITDA
£m
42.9
(7.6)
(0.3)
–
–
–
35.0
(10.0)
–
–
(9.0)
–
(19.0)
33.7
(3.6)
(1.7)
(9.0)
0.1
19.5
Depreciation
and
amortisation
£m
(12.1)
–
–
(9.4)
Operating
profit
£m
30.8
(7.6)
(0.3)
(9.4)
–
–
(21.5)
–
–
13.5
32.0
(3.6)
(1.7)
(9.0)
0.1
17.8
Profit
before
taxation
£m
29.3
(7.6)
(0.3)
(9.4)
(0.3)
–
11.7
(6.5)
0.5
(0.1)
1.8
–
(4.3)
25.5
(3.1)
(1.8)
(7.2)
0.1
13.5
Profit from
continuing
operations
£m
22.7
(6.1)
0.1
(5.6)
(0.3)
1.4
12.2
Taxation
£m
(6.6)
1.5
0.4
3.8
–
1.4
0.5
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
2
3
4
References to the Group’s results, unless stated to the contrary, are to continuing operations only and exclude discontinued activities.
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
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.
25
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC
Chief financial officer’s review
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: £193.9m ²).
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: £95.9m ²) 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 operations ³ increased by 9.4% to £33.7m (2018: £30.8m ²) and operating profit
increased by 44.4% to £19.5m (2018: £13.5m ²). Adjusted depreciation and amortisation amounted to £10.0m (2018: £12.1m)
giving rise to Adjusted EBITDA ³ of £43.7m (2018 restated: £42.9m ²). Adjusted profit before taxation ³ increased by 9.2% to
£32.0m (2018: £29.3m ²). Statutory profit before taxation increased by 52.1% to £17.8m. Adjusted EPS and statutory EPS from
continuing operations amounted to 9.2p (2018: 8.2p ²) and 4.9p (2018: 4.4p ²) respectively.
We have also reduced net debt ³ 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:
2019
2018 ²
Assurance
£m
Escrow
£m
Central
and head
office
£m
Group
£m
Assurance
£m
Escrow
£m
212.7
(139.2)
73.5
34.6%
(50.9)
22.6
10.6%
38.0
(9.7)
28.3
74.5%
(9.3)
19.0
50.5%
–
–
–
–
(7.9)
(7.9)
–
250.7
(148.9)
101.8
40.6%
(68.1)
33.7
13.4%
193.9
(127.9)
66.0
34.0%
(49.5)
16.5
8.5%
39.1
(9.2)
29.9
76.5%
(8.0)
21.9
56.0%
Central
and head
office
£m
–
–
–
–
(7.6)
(7.6)
Continuing operations
Revenue
Cost of sales
Gross profit
Gross margin %
General administrative expenses ²
Adjusted operating profit ³
Adjusted operating profit %
ASSURANCE
The Assurance division accounts for 84.8% of continuing Group revenue (2018: 83.2%).
Assurance revenue analysis – by originating country
UK
North America
Europe and RoW
Total Assurance revenue
2019
£m
88.9
75.5
48.3
212.7
2018
(restated 2)
£m
89.9
61.2
42.8
193.9
Group
£m
233.0
(137.1)
95.9
41.2%
(65.1)
30.8
13.2%
%
change
(1.1%)
23.4%
12.9%
9.7%
As noted above, UK Assurance revenue in the year declined by 1.1% to £88.9m (2018: £89.9m ²) 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: £61.2m ²) supported by continued penetration of the
technology market. The division continues to push for larger market share with a focus on diversification of markets.
26
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Assurance Europe and RoW grew by 12.9% to £48.3m (2018: £42.8m ²) with the business now restructured under new
leadership into simpler organisation units.
Assurance revenue analysed by type service/product line:
Technical Security Consulting (TSC)
Risk Management Consulting
Managed Detection and Response (MDR)
Product sales (own and third‑party)
Total Assurance revenue
2019
£m
134.8
35.3
36.4
6.2
212.7
2018
(restated 2)
£m
118.8
32.5
33.3
9.3
193.9
%
change
13.5%
8.6%
9.3%
(33.3%)
9.7%
Technical Security Consulting, our core professional service, grew by 13.5% to £134.8m (2018: £118.8m ²) 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:
UK
North America
Europe and RoW
Assurance gross profit and % margin
2019
£m
31.0
25.3
17.2
73.5
2019
% margin
34.9%
33.5%
35.6%
34.6%
2018
(restated 2)
£m
29.8
20.7
15.5
66.0
2018
% margin
33.1%
33.8%
36.2%
34.0%
%
change
4.0%
22.2%
11.0%
11.4%
The growth in revenue and the improvement in gross profit contributed to the improvement in adjusted operating profit ³
(+37.0%) of £6.1m to £22.6m (2018: £16.5m ²). In addition, adjusted operating profit ³ margin improved to 10.6% (2018: 8.5%).
27
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Chief financial officer’s review
ESCROW
The Escrow division accounts for 15.2% of Group revenues (2018: 16.8%).
Escrow revenue analysis – by originating country
UK
North America
Europe and RoW
Total Escrow revenue
Escrow revenue analysed by service line:
Escrow services revenue
Escrow contracts
Verification and other services
Total Escrow revenue
2019
£m
26.0
8.3
3.7
38.0
2019
£m
26.5
11.5
38.0
2018
(restated 2)
£m
27.8
7.5
3.8
39.1
2018
(restated 2)
£m
27.9
11.2
39.1
%
change
(6.5%)
10.7%
(2.6%)
(2.8%)
%
change
(5.0%)
2.7%
(2.8%)
Escrow UK revenue was £26.0m (2018: £27.8m ²). Escrow UK contract revenues were £18.2m (2018: £19.6m ²) 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: £8.2m ²). 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: £7.5m ²). 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: £3.8m ²). 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:
UK
North America
Europe and RoW
Escrow gross profit
2019
£m
19.7
5.7
2.9
28.3
2019
% margin
75.8%
68.7%
78.4%
74.5%
2018
(restated 2)
£m
21.9
5.3
2.7
29.9
2018
% margin
78.8%
70.7%
71.7%
76.5%
%
change
(10.0%)
7.5%
7.4%
(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 profit ³ (‑13.2%) of £2.9m to £19.0m
(2018: £21.9m ²). The adjusted operating profit ³ margin was also impacted by increased investment in support colleagues
to professionalise the business resulting in a decline in adjusted operating margin ³ to 50.0% (2018: 56.0%).
28
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 ADJUSTING ITEMS 3
Pre‑tax adjusting items are set out below:
Individually Significant Items
Share‑based payments
Amortisation of acquired intangibles
Unwinding of discounts on deferred consideration
Profit on disposal of investments
Total pre‑tax adjusting items – continuing operations
Individually Significant Items (ISIs) are set out below:
Securing Growth Together – legacy systems accelerated amortisation (net of R&D tax credit)
Loss‑making contract
Revisions to deferred and contingent consideration
Restructuring costs
Onerous leases and other property‑related costs
Market‑related costs
Total ISIs – continuing operations
2019
£m
3.6
1.7
9.0
–
(0.1)
14.2
2019
£m
3.8
–
(0.8)
–
0.6
–
3.6
2018
£m
7.6
0.3
9.4
0.3
–
17.6
2018
£m
–
2.5
0.6
1.6
2.7
0.2
7.6
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.
29
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC
Chief financial officer’s review
EARNINGS PER SHARE (EPS)
Statutory earnings – continuing
Basic EPS
Diluted EPS
Statutory earnings – all operations
Basic EPS
Diluted EPS
Adjusted earnings – continuing ³
Basic EPS
Diluted EPS
2019
£m
2018
(restated 2)
£m
4.9
4.8
4.9
4.8
9.2
9.1
4.4
4.4
2.4
2.4
8.2
8.1
Basic adjusted EPS ³ from continuing operations was 9.2p (2018: 8.2p ²) and on a statutory basis it was 4.9p (2018: 4.4p ²). The
year‑on‑year increase in EPS reflects the increase in the Group’s profitability during the year.
CASH FLOW AND NET DEBT ³
The table below summarises the Group’s cash flow and net debt ³:
Operating cash inflow before movements in working capital
Changes in working capital
Cash generated from operating activities before interest and taxation
Interest paid
Taxation paid
Net cash generated from operating activities
Net capital expenditure
Acquisitions
Net proceeds from business disposals (including cash disposed)
Dividends paid
Share issues
Net movement
Opening net debt ³
Foreign exchange
Closing net debt ³
Net debt ³ can be reconciled as follows:
Cash and cash equivalents
Borrowings
Net debt ³
2019
£m
41.3
6.6
47.9
(1.7)
(6.4)
39.8
(9.1)
(10.9)
1.8
(12.9)
0.3
9.0
(27.8)
(1.4)
(20.2)
2019
£m
34.9
(55.1)
(20.2)
2018
(restated 2)
£m
39.8
(0.3)
39.5
(1.8)
(4.7)
33.0
(12.7)
(3.1)
9.2
(12.8)
1.5
15.1
(43.7)
0.8
(27.8)
2018
£m
21.2
(49.0)
(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 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:
Continuing and discontinued
Net operating cash flow before interest and taxation (A)
Adjusted EBITDA ³ (B)
Cash conversion ratio ³ (%) (A)/(B)
30
2019
£m
47.9
43.7
109.6%
2018
(restated 2)
£m
39.5
43.8
90.2%
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 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 conversion ³ 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 cover 4 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
31
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Principal risks and uncertainties
RELAUNCH OF RISK
MANAGEMENT
During the previous year we appointed a
risk management subject matter expert,
the Director of Risk and Assurance.
Following this appointment, the Board
commissioned an evaluation of our
existing risk management framework.
The review led to the implementation of
a range of enhancements to build on the
established platform.
The Group has continued to develop
and implement a Risk Management
Policy, against which we are monitoring
enterprise‑wide risk management.
This policy sets out protocols covering
roles and responsibilities for the risk
framework and the definition of risk
appetite as set by the Board (see the
Risk Management Framework diagram
below). A web‑based tool, the Integrated
Risk Management System (IRMS), has
been deployed to record risk registers
and to track risk mitigation action plans,
helping embed ownership of risks and
treatment actions while also providing
access to live management information.
Risks are evaluated at a number of
levels of the organisation, commencing
with those which link to the Group
achieving its strategic objectives.
These risks are presented overleaf under
our principal risks and uncertainties.
Risks are identified primarily by
the management team through the
use of a structured risk framework.
Non‑Executive reviews are carried out
by two Board Committees: the Cyber
Security Committee for IT centric
risks and the Audit Committee for all
other risk types. The Chief Information
Security Office (CISO) reports to the
Cyber Committee and the Director
of Risk and Assurance reports to the
Audit Committee.
While distinct from the established CISO
role, the Director of Risk and Assurance
works closely with the CISO to facilitate
risk oversight across the full range of
risk types.
RISK MANAGEMENT FRAMEWORK
As described below, risks are considered at various levels across the Group, commencing with a strategic view of risk.
Sets the “tone at the top” – the culture
adopted in respect of risk
Sets direction for key areas of focus, e.g.
Cyber risk
Responsible for risk management and
Defines acceptable levels of risk –
internal control processes
our risk appetite
Monitors adherence to our risk appetite
and management’s responsiveness to
excessive risk
THE BOARD
CYBER SECURITY AND
GROUP AUDIT COMMITTEES
GROUP RISK FUNCTION AND THE
CHIEF INFORMATION SECURITY OFFICER
Supporting the Board reviewing the end-to-end risk
management process
Emphasis given to risk identification and management
responsiveness to the treatment of excessive risk
Maintains a particular focus on strategic type risks
Facilitates the development and maintenance of risk registers
Assists management to scope risk treatment actions
Monitors the status of risk treatment actions
Reports progress to the Board subcommittees – the CISO
reports to the Cyber Security Committee on IT-centric risk,
the Risk and Assurance Director reports on all other risk
areas to the Audit Committee
Maintains local risk registers and plans
Ongoing action management and tracking
Embeds the Group culture and risk
appetite at a local level
BUSINESS UNITS
32
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
RISK HEAT MAP
1 Business Strategy VR
2 Management of
Strategic Change
3 Availability of critical
information systems VR
4 Attracting and retaining
appropriate colleague
capacity and capability VR
5 Cyber risk (including
GDPR) VR
T
C
A
P
M
I
6 Quality of Management
Information Systems (MIS)
and internal business
processes
7 Quality and Security
Management Systems
8 Brexit VR
High impact
Medium impact
Low impact
VR Viability Risk
5
4
7
3
1
2
6
8
PROBABILITY
RISK MANAGEMENT PROCESSES
AND CONTROLS
The Board monitors the ongoing process
by which relevant material risks are
identified, evaluated and managed
via the two subcommittees noted on
page 32. On a quarterly basis, the
subcommittees review the detailed risk
registers that have been prepared and
updated across the business along with
the status of action plans that are in
place to treat risks, which are considered
to be excessive.
EVALUATION AND TREATMENT
OF RISK
Risks are evaluated using a simple but
robust model, which forms part of the
Risk Management Policy. The model,
which is capable of application across
multiple risk types, is sufficiently sensitive
to record risks that have the potential to
impact Viability Reporting obligations.
Risks are evaluated without
considering the operation of any
existing controls. This is done to
form a view of inherent risk.
The impact of existing mitigating
controls are then considered along with
their effectiveness to determine the
extent of residual risk. The assessments
are made using a combination of
impact and likelihood criteria to arrive
at a total risk score. Residual risk is
then considered against the Group
Risk Appetite, which is a judgmental
scoring matrix created by the Board to
identify risks as being within or outside
acceptable parameters for the Group.
Output from the evaluation of strategic
risks has been used to help shape the
Group’s Transformation Programme.
Where risks are assessed as being
outside of appetite, treatment actions
are agreed including owners, priorities
and due dates, either within the
Transformation governance structures
or milestone plans owned by senior
business leaders. The IRMS is used to
track these actions, with data mining
capabilities to produce reports to the
Cyber Security and Audit Committees.
The Group uses a simple Risk Heat Map
(above) to record an up‑to‑date view of
residual risk. Viability risks are principal
risks that the Directors consider are so
extreme that they could jeopardise the
business viability if they crystallise.
PRINCIPAL RISKS AND
UNCERTAINTIES
The Group continues to operate in
a particularly dynamic and evolving
marketplace. The very latest strategic
risk register has been developed to
reflect those factors.
The Directors have carried out a robust
assessment of the principal risks facing
the Group including those that would
threaten its business model, future
performance, solvency or liquidity.
Detailed descriptions of the current
principal risks and uncertainties faced
by the Group, their potential impact and
mitigating processes and controls are
set out on the next page. The tables also
highlight whether the risk is assessed as
increasing or decreasing with a similar
assessment for the position last year.
This includes identifying new principal
risks and uncertainties.
33
NCC GROUP PLC ¦ STOCK CODE: NCC Principal risks and uncertainties
Risk Areas
Potential Impact
Mitigation
1 Business Strategy VR
A comprehensive business strategy
is essential to the continued success
of the Group as we strive to maximise
shareholder value.
A poor strategy or ineffective execution
of a strategy could have a material
negative impact on the Group’s financial
performance and value. It would
potentially weaken the Group compared
to its competitors and risk the Group’s
established position in the marketplace.
Members of the Board have significant experience in evolving
business strategies. The Board is significantly engaged in both
setting and reviewing strategy and held a dedicated strategy
session in March 2019.
2019
2018
2 Management of Strategic Change
As the Group adapts and executes its
strategy there are a number of complex
projects and initiatives that not only need to
be delivered but also require understanding
and support from all colleagues.
Poor change management could lead to
ineffective implementation of projects
that then cost more to deliver, take longer
to deliver and result in fewer benefits
being realised (or all three). Poor delivery
of change could ultimately impair
business performance.
The Group has established a Strategic Change Management
capability and this includes access to Programme Management
professionals and the deployment of associated change
management processes, for example the operation of senior
change oversight committees.
2019
2018
3 Availability of critical information systems VR
The Group is heavily reliant on continued
and uninterrupted access to its IT systems.
As well as environmental and physical
threats, the Group is a natural target for
individuals who may seek to disrupt the
Group’s commercial activities.
If the Group’s critical systems failed, this
could affect the Group’s ability to provide
services to our customers.
The Group continues to make significant investment in its IT
infrastructure to ensure it continues to support the growth of
the organisation.
The Group has controls in place in order to reduce the risk of
actual loss of critical systems. Further, controls are operated to
ensure the availability of backup media in the event of prolonged
loss of systems.
Initiating to standardise and simplify while increasing resilience,
continues to be implemented. Additional focus is being periodically
given to proving the recoverability of systems and data.
2019
2018
4 Attracting and retaining appropriate colleagues capacity and capability VR
The Group would be adversely impacted if
it were unable to attract and retain the right
calibre of skilled colleagues.
Some roles within the Group operate in
highly technical and extremely specialised
areas in which there are shortages of
skilled people.
Loss of key colleagues or significant
colleagues turnover could result in a lack of
necessary expertise or continuity to execute
the Group’s strategy.
An inability to attract and retain sufficient
high‑calibre colleagues could become
a barrier to the continued success and
growth of NCC Group.
Colleagues are offered a rewarding career structure and attractive
salary and benefits packages, which can include participation in
share schemes.
Linked to the development of our people, the Group continues to
review our values, personal performance management processes
and aligned development programmes.
2019
2018
5 Cyber risk (including GDPR) VR
As a provider of security services, the
Group is a high profile target and could
therefore be subject to attacks specifically
designed to disrupt the Group’s business
and harm the Group’s reputation.
There could also be implications relating
to our GDPR control obligations. Such
events could adversely affect the market’s
perception of the Group as well as causing
business disruption.
Failure to maintain control over customer,
colleague, commercial and/or operational
data could lead to a range of impacts,
including reputational damage. The misuse
of personal data, for example without
the customer’s consent, or retaining for
longer than is necessary, may also result in
reputational harm, regulatory investigations
and potential fines.
The Board operates a Cyber Security Committee chaired by the
Chairman of the Board. The CISO reports to each meeting, in line
with the Group Risk Management Policy.
Security testing is regularly carried out on the Group’s
infrastructure and there are extensive response plans, which were
reviewed during the year, in the event of a major security incident.
Comprehensive plans are in place and being delivered associated
with discharging our GDPR obligations. Progress is monitored by
the Cyber Security Committee.
Colleagues also receive regular security training and updates.
2019
2018
34
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Risk Areas
Potential Impact
Mitigation
6 Quality of Management Information Systems (MIS) and internal business processes
We need to ensure that trusted and
relevant MIS are available on a day‑to‑day
basis to inform management decisions and
drive performance.
Suboptimal business decision‑making and
performance as key financial performance
data is not available or trusted.
7 Quality and Security Management Systems
We aspire to attain and retain key
internationally recognised standards, which
form an important component for many of
our customers.
The risk of the Group failing to retain a
core standard, e.g. 9001, 27001 or PCI,
with a consequential loss of key customer
accounts or ability to operate.
The Group finance function has developed a forward‑facing
Finance Functional Strategy. Enhancements were identified
covering system and process standardisation. A comprehensive
milestone plan is in place and progress is tracked and reported
to each Audit Committee.
Standardised business process control standards were recently
issued across all parts of the Group. As the new financial
year progresses, control self‑assessment techniques will be
implemented along with an aligned programme of Internal Audits.
2019
2018
We operate a comprehensive programme to ensure the retention
of our core standards. This includes a portfolio of aligned policies
and cascading business processes. A programme of internal
audit provides assurance over the design and application of these
policies and procedures. External assessors provide a further layer
of review and challenge, confirming during the year the retention
of our Quality and Security standards.
2019
2018
8 Brexit VR NEW
Failure to prepare for the UK’s departure
from the EU may cause disruption to, and
create uncertainty around, our business.
Any disruption or uncertainty could have an
adverse effect on our business, financial
results and operations.
Uncertainty around the UK’s departure from
the EU continues as a result of the political
deadlock. The risks associated with Brexit
are the possibility of a ‘no‑deal’ scenario
and also the potential for an abrupt
departure from the EU.
Similar to any UK company, we list Brexit as a significant risk due
to the uncertainty surrounding the final form Brexit will actually
take and when it will happen.
We continue to plan for Brexit internally and the Brexit Steering
Group 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.
•
•
2019
Trend effect
Trend direction
High impact
Medium impact
Low impact
Increasing
Unchanged
Decreasing
VR
Viability Risk
NEW
New risk
35
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Principal risks and uncertainties
VIABILITY STATEMENT
THE CONTEXT FOR ASSESSMENT
In accordance with the requirements of
the UK Corporate Governance Code
2016, the aim of the viability statement
is for the Directors to report on the
assessment of the prospects of the
Group meeting its liabilities over the
assessment period, taking into account
the current financial position, outlook,
principal risks and uncertainties, key
judgments and estimates in preparing
the Financial Statements.
The Directors have based their
assessment of viability on the Group’s
current business model and strategic
plan, which is updated and approved
annually by the Board, in line with our
objective to deliver sustainable and
profitable growth, increasing shareholder
value and offering an improved service
and product offering to our customers.
This is underpinned by the strategic
priorities outlined on pages 16 and 17
of the Strategic Report. The effective
management of principal risks and
uncertainties is outlined within
pages 32 to 35 and this assessment
emphasises those risks that could
theoretically threaten the Group’s
ability to operate or to continue in
existence (with the VR designation).
THE ASSESSMENT PERIOD
The Directors have assessed the viability
of the Group over the three‑year period
to May 2022, as this is an appropriate
planning time horizon given the speed
of change and customer demand in the
industry and is in line with the Group’s
strategic planning period.
ASSESSMENT OF VIABILITY
The viability of the Group has been
assessed taking into account the
Group’s current financial position,
including the recently renegotiated
external funding committed for the
period of assessment, and after
modelling the impact of certain
scenarios arising from the principal risks,
which have the greatest potential impact
on viability in the period under review. In
particular, the Board has considered the
Group’s ability to execute its strategy,
the impact of a critical system failure, a
successful cyber attack and the long‑
term impact on the Group’s reputation
and how the Group would respond to a
no‑deal Brexit.
The specific scenarios are hypothetical
and necessarily severe for the purpose
of creating outcomes that have the
ability to threaten the viability of the
Group. Should any of these scenarios
occur, various options are available to
the Group to maintain liquidity so as to
continue in operation such as: accessing
new external funding, more radical
short‑term cost reduction actions,
and/or reductions in capital expenditure.
None of these actions have been
factored into our scenario modelling.
OTHER RISKS
Furthermore, as the Group’s international
footprint expands, there is an inherent
risk of adverse foreign exchange
movements affecting profitability. At
present this risk is limited due to the
relatively low level of inter‑territorial
trading but it will increase in future.
Inability to refinance the Group’s core
banking facilities could call into doubt
the Group’s longer term viability. We
have recently achieved a new five‑year
refinancing facility, which is more flexible
and suited to our future needs. Equally,
if those facilities lacked the appropriate
flexibility and structure, this could
inhibit delivery of the Group’s strategy.
The Group’s current banking facilities
cover all of the expected needs of the
Group for the period of such facilities
and are sufficiently flexible to allow
the Group to function effectively. The
Group has a Tax and Treasury Manager.
Part of their role is to support the
CFO in developing a Treasury strategy
and overseeing its implementation.
IMPACT OF BREXIT ON
THE GROUP
There is continuing uncertainty around
the likely impact of Brexit on businesses.
This uncertainty is likely to continue until
at least 31 October 2019, which is the
current deadline for the UK’s departure
from the EU.
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.
36
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
Scenario
Associated principal risks
and uncertainties
Business Strategy
Business Strategy
Attracting and retaining appropriate
colleagues capacity and capability
Systems failure
Availability of critical information systems
Cyber risk (including GDPR)
Cyber security breach
Cyber risk (including GDPR)
No-deal Brexit scenario
Brexit
Description and potential impact
Failure to deliver the SGT transformation
programme
Loss of key employees or inability to attract and
retain key talent
The potential impact of the above would act as
a barrier to future growth
A critical systems failure, leading to an inability
to provide services to customers
The potential impact of this would be short‑
term reputational damage and an inability to do
business in the short term, impacting revenue
and profits
A cyber security breach occurs with theft of data
and disruption to business services
The potential impact of this would be long‑term
reputational damage significantly impacting
future revenue
All EU customers that are based in continental
Europe no longer do business with the UK
We are unable to transfer contracts/relationship
to another EU subsidiary
The potential impact of this would not be severe
as there are a limited number of services provided
by the UK to other EU countries
CONCLUSIONS
Based on these severe but possible scenarios, the Directors have a reasonable expectation that the Group and Company will be
able to continue in operation and meet its liabilities as they fall due over this forthcoming three‑year period.
37
NCC GROUP PLC ¦ STOCK CODE: NCC Securing our connected society
Our increasingly connected society has become a playground for hackers. And when everything is
connected, everything is vulnerable. The consequences of an attack range from the frustrating to
the physically dangerous.
But as you go about your daily routine, you can be safe in the knowledge that our cyber security
experts are advising global manufacturers, financial institutions, critical national infrastructure
providers, retailers and government on the best way to keep you and your personal data safe.
We are proud to be helping to create a more secure society.
38
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 A day in the life
ATM
7:10AM
MORNING ROUTINE
NCC Group protects the critical
national infrastructure that provides
power, water and gas 24/7 through its
Security Operations Centres. Its data
diode products allow these providers
to connect their most sensitive
networks to the Internet, powering
smart grids. The smart meter in your
house has been through NCC Group’s
government approved hardware
testing laboratories.
7:50AM
DRIVE TO WORK
The car you drive has benefited
from NCC Group’s transport security
practice who has worked with the
manufacturer and their supply chain
to identify and mitigate risks through
threat modelling, applied research,
and ethical hacking before it has even
rolled off the production line.
9:15AM
CROSS THE STREET
The traffic lights and traffic control
systems have been subjected to
technical assessment and risk advice
by NCC Group consultants.
9:25AM
TAKE THE ELEVATOR
TO THE OFFICE
The building management system
that controls the modern offices
in which you work has been
assessed for novel attack and
defence approaches by NCC Group
researchers. This knowledge has
allowed the building owner to minimise
the risk that a building outage can be
caused by a cyberattack.
11:00AM
WORK ON THE
INTERNET
From the software on your desktop,
laptop or mobile device through
the carriers that connect you to
the cloud and the cloud providers
themselves, NCC Group has worked
with the largest firms to produce more
resilient environments.
12:20PM
MAKE CASH MACHINE
WITHDRAWAL
The cash machine, the networks upon
which it operates and the financial
system fabric is assessed regularly by
Red Team technical specialists at NCC
Group on behalf of the institutions
and their regulators. When incidents
occur, NCC Group’s Cyber Incident
Response team provides experts
in intrusion and malware analysis
to supplement an organisation’s
own capabilities.
12:30PM
BUY LUNCH
NCC Group’s threat intelligence tipped
off the point‑of‑sale operator that their
systems were breached. This allowed
the organisation to respond and
minimise impact on their customers
while ensuring commerce can occur
with confidence.
12:45PM
BUY SHOES
NCC Group’s software testing team
worked on the roll‑out of the new
EPOS system and loyalty scheme
application across the store’s network
of shops.
1:00PM
BOOK A HOLIDAY
NCC Group’s Escrow Division hold
the software that is required to run
the travel agent’s reservations system
in escrow, which would be released
in the event of certain trigger events
where the software owner was unable
to perform its contractual duties.
This helps ensure minimal disruption
to the travel agent’s business
critical software.
4:00PM
PICK CHILD UP
FROM NURSERY
The biometrics used to gain access to
the nursery benefits from research and
advice provided to the manufacturer,
avoiding a system, which could be
bypassed with a selfie.
A walk through of some
typical daily activities,
demonstrating where we
might be involved in helping
to create a more cyber
resilient world. This work
never ends and our impact
is felt everywhere – making
our colleagues proud to be
helping to keep society safer
and more secure.
5:10PM
HEALTH CHECK
The medical imaging system used at
the doctors was assessed by NCC
Group technical experts.
6:30PM
COOK DINNER
The distribution supply chains, which
provide the food to your door have
been assessed by NCC Group
risk management and governance
experts and benefited from security
improvement programmes undertaken
by the retailers who deliver them.
7:20PM
RECYCLE RUBBISH
The recycling centre is protected
by a cyber insurance policy that is
supported by NCC Group experts.
7:30PM
PUT BABY TO BED
The Internet‑of‑Things baby monitor
has been subject to assessment by
NCC Group’s hardware labs.
7:30PM
WATCH AN
ON-DEMAND MOVIE
From the set‑top box you use to the
service you use. NCC Group risk and
technical experts have ensured that
piracy risk is minimised while ensuring
your data is safe.
39
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Sustainability
The United Nations Sustainable Development Goals provide a blueprint to achieve a better
and more sustainable future for all building on our existing diversity and inclusion agenda.
With Information Security Technologies playing an essential role in these being achieved, they
provide us with a framework to support our commitment to responsible business operations.
The following goals have been selected as particularly relevant to NCC Group:
3. GOOD HEALTH
AND WELL-BEING
We support the mental
well‑being of our own workforce.
In addition, our services can
secure technology for increasing
the provision of health services
in remote areas as well as wider
within the world.
8. DECENT WORK
AND ECONOMIC
GROWTH
We are a global organisation,
with offices around the world and
remote working opportunities.
This provides access to careers
in what is a growing and highly
sought‑after skills market.
13. CLIMATE ACTION
We continually seek to minimise
impact on the environment.
A number of initiatives are being
explored, thanks to ideas from
colleagues and customers on
how to further reduce our impact.
4. QUALITY
EDUCATION
We are investing in the future
of cyber security skills for
the long‑term sustainable
development of technology
in society.
5. GENDER EQUALITY
We provide access to education
through technology, investing in
the STEM agenda and working
in partnership with education
providers to ensure fair access
to all.
10. REDUCED
INEQUALITIES
We maintain an Equality and
Diversity Policy, which aims to
create a working environment
free from unlawful discrimination,
victimisation and harassment in
which all employees are treated
with dignity and respect.
17. PARTNERSHIPS
FOR THE GOALS
We are committed to inclusive
partnerships built upon principles
and values, a shared vision,
and shared goals.
9. INDUSTRY,
INNOVATION AND
INFRASTRUCTURE
We are actively involved
in supporting Critical
Infrastructure Networks, and
continue to invest in research
and innovation, working in
support of the UK’s National
Cyber Security Centre
Industry 100 programme.
16. PEACE, JUSTICE
AND STRONG
INSTITUTIONS
We promote just, peaceful
and inclusive societies. We
have zero tolerance for bribery
and corruption and promote
a speak‑up campaign. We
have a clear and well‑
advertised whistleblowing
policy and follow responsible
financial practices.
40
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BUSINESS
OVERVIEW
STRATEGIC
REPORT
GOVERNANCE
FINANCIAL
STATEMENTS
ADDITIONAL
INFORMATION
THE COMMUNITY
In 2019 we launched our NCC Cares
programme – a colleague well‑being
programme.
In addition, we are committed to
developing specific relationships that
encourage more people to consider a
career in cyber security. Our mission is
to make the world more secure so that
society can thrive safely; therefore, we
need to ensure we have representation
from the whole of society to achieve this.
We work closely with the UK
Government’s National Cyber Security
Centre as well as local government and
NGOs and trade associations globally to
support initiatives.
We are apolitical and do not support any
political party in any jurisdiction nor have
we ever made a political donation.
Our employee engagement investment
includes systems that encourage sharing
and collaboration across our global
business as well as supporting team
leader led engagement. See page 18 for
an example of what we are doing.
CUSTOMERS
INVESTING IN SKILLS TO SUPPORT
OUR CLIENTS
As a people business, our investment in
continued learning and development is
critical in the value we offer our clients.
We continue to invest in our professional
academies, global research programmes,
and leadership skills programme,
creating opportunities for colleagues
to grow their career – and help keep
society safe and secure.
OUR VALUES
Using insights from our employee
engagement survey and subsequent
dialogue across the Group we defined
new values for the organisation.
We chose values that were distinctive
and authentic to represent the firm we
are today, with aspiration to drive us
to hold ourselves to a higher standard
every day.
Our values:
• We work together
• We want to be brilliantly creative
• We embrace difference
A campaign to launch the values along
with our mission, vision and strategy
ran from December 2018 to February
2019 and continues through creation
of our core messages both internally
and externally.
HOW WE CREATE A MORE
SECURE SOCIETY
We know by doing great things for
our customers, they continue to want
to work with us and understand the
value of our partnership. This attracts
investment and enables us to continue
to develop our people, our research and
our capabilities.
In doing this we solve problems,
delivering a real difference and making
the world a safer and more secure place.
ECONOMIC SUSTAINABILITY
An increasingly digital society has
contributed to the exponential growth
in the cyber security sector. We are well
placed to build on a firm foundation of
talent that will build on this opportunity,
taking steps to harness existing talent
and build talent for the future through
local and global initiatives
STAKEHOLDERS
INVESTORS
The Group communicates regularly with
its investors in meetings and roadshows
to keep them up to date with both the
opportunities and challenges faced by
the Company. Further details of this
engagement can be found on page 59
of the Governance report.
EMPLOYEES
CREATING A GLOBAL
WAY OF WORKING
Through consistent and technology
enabled ways across our Group, we
believe we will create an environment
that enables our people to succeed in
their careers and also better serve our
customers. We are continuing to invest
in new global systems and processes
that will support our HR, Finance and
Professional Services operations,
and in a new customer relationship
management system.
41
NCC GROUP PLC ¦ STOCK CODE: NCC Sustainability
HUMAN RIGHTS (INCLUDING
ANTI-SLAVERY AND HUMAN
TRAFFICKING)
We recognise our responsibility to uphold
and protect the rights of individuals in
all aspects of our operations across the
world. Our Human Rights Policy makes
it clear that we will observe and uphold
the principles contained in the Universal
Declaration of Human Rights and the
International Labour Organisation
Fundamental Conventions. We believe
that human rights belong equally to all
people without distinction as to race,
colour, sex, language, religion, political
or other convictions, national or social
origin, birth or other traits. We support
freedom of association, the abolition
of forced labour, and the elimination of
child labour.
We have a zero tolerance approach to
Modern Slavery and are committed to
acting ethically and with integrity in all of
our business dealings and relationships.
Effective enforcing systems and controls
are implemented to ensure Modern
Slavery is not taking place anywhere
in our business or in any of our
supply chains.
We communicate our zero tolerance
approach to all our suppliers, contractors
and business partners at the outset of
the relationship and regularly thereafter.
We expect high standards from all of our
contractors, suppliers and other business
partners, and also expect that our
suppliers will hold their own suppliers to
the same standards.
The Board discussed and approved our
Modern Slavery Statement at its March
2019 meeting and this is published on
our website.
ANTI-CORRUPTION AND
ANTI-BRIBERY
We aim to create an environment where
everyone can reach their full potential.
We strive to make NCC Group one
of the most admired places to work,
with a diverse colleague base and
inclusive culture.
We have a zero tolerance position in
relation to bribery, wherever and in
whatever form that may be encountered
and have policies on Anti‑Bribery, and
Gifts and Hospitality.
We ensure colleagues are engaged and
encouraged to progress internally, and
also operate a Refer a Friend scheme
to support their role in attracting future
talent when we need to hire externally.
Anti‑Bribery awareness is part of the
colleague induction process and regular
refresher training is also provided.
Colleagues can also report any concerns
to their manager or, if required, a
confidential reporting service operated
by an independent third party.
We aim to engender in our colleagues
principles of honesty and integrity, and the
desire to work to the best of their ability.
We strive to act in a professional, honest
and ethical manner in all our dealings
with our clients, colleagues, shareholders,
suppliers and the community. Our
reputation is paramount and nothing we
do should detract from, or compromise, our
standing in the market and the community.
Our independence and impartiality as a
Group is fundamental. We have a Code
of Ethics Policy, which all colleagues are
required to adhere to.
MAXIMISING EQUALITY OF
OPPORTUNITY
We welcome applicants and value
colleagues who have a passion for what
we do and who want to help us make
society a safer place.
Our global talent teams continually review
our recruitment language and coach
hiring managers to remove any potential
barriers to attracting talent, creating a
positive interview experience to encourage
people to perform at their best. We
ensure all colleagues are aware of the
risks associated with unconscious bias in
recruitment and in our workplace generally.
We are proud to partner with organisations
promoting the benefits of having a
neurodiverse workforce, promoting and
encouraging applications from candidates
identifying as neurodiverse.
GENDER PAY REPORT
We take our role as a responsible
employer seriously and see the UK
requirement to publish gender pay gap
figures as a positive move towards
transparency around a key issue within
our industry. We recognise that steps
need to be taken to improve our gender
mix at all levels as a part of our broader
strategy and the investment we are
making under our sustainability agenda
is supporting us to achieve this. Our full
report is available to view on our website.
The statistics setting out the position of the Group on a gender basis are disclosed below:
ALL AT 31 MAY 2019
Main Board
Executive
Committee
Direct
Reports to
the Executive
Committee
n Male 86% n Female 14%
n Male 84% n Female 16%
n Male 71% n Female 29%
42
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 HEALTH AND SAFETY
GREENHOUSE GAS EMISSIONS
This section includes our mandatory reporting of greenhouse gas emissions
pursuant to the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2014 and the Companies (Directors’ Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018.
The greenhouse gas report period is aligned with our financial reporting year and
so runs from 1 June to 31 May for each reported year.
The method we have used to calculate GHG emissions is the GHG Protocol
Corporate Accounting and Reporting Standard (revised edition), together with the
latest emission factors from recognised public sources including, but not limited to,
BEIS, the US Energy Information Administration, the US Environmental Protection
Agency and the Intergovernmental Panel on Climate Change.
Our emissions cover scope 1 and scope 2 and we have used revenue as the
intensity ratio as it best reflects the size and scale of the business. Our aim is to
reduce the scope 1 and scope 2 carbon intensity for the Group by at least 10%
between a 2019 baseline and 2022 ¹.
Absolute carbon emissions (tCO2e)
Group revenue (£m)
(including discontinued)
Carbon intensity for whole Group
Year‑on‑year carbon intensity change
Year‑on‑year carbon intensity change
(as a %)
For and on behalf of the Board
2019
1,542
2018 ¹
1,761
2017 ¹
1,550
2016 ¹
2,264
250.7
6.2
(0.7)
254.5
6.9
0.3
244.5
6.6
(4.2)
209.1
10.8
(0.4)
10.1
4.5
(38.8)
(3.6)
Adam Palser
CHIEF EXECUTIVE OFFICER
Tim Kowalski
CHIEF FINANCIAL OFFICER
24 July 2019
24 July 2019
We recognise the importance of health
and safety and the positive benefits to
the Group. We have a health and safety
policy, which is communicated to all
colleagues as part of their induction and
regular updates and discussions through
our internal communication channels.
The recent appointment of a global
health and safety manager will see the
development of the Group’s ‘Healthy
and Safe for Life’ framework to ensure
colleagues’ health and safety at work
through awareness and training.
ENVIRONMENT
We seek to minimise the detrimental
impact of our operations on the
environment.
Due to the size and nature of the Group,
an external environmental audit is not
required. This area will be reassessed as
the Group grows in conjunction with any
new legislative developments.
The Group’s Environmental Policy aims to
reduce the energy our business uses by:
1 Conserving energy and other natural
resources and improving efficient
use of those resources
2
Improving the efficiency of
materials used
3 Reducing waste and increasing
reuse and recycling wherever
possible
4 Reducing the need for travel and
encouraging the use of alternative
means of transport, for example,
public transport, cycle to work
schemes and car sharing
5 Promoting flexible working to reduce
the impact on local infrastructures
6 Providing all colleagues with relevant
environmental training and guidance
1
See note 1 for further details on the restatement of comparative information due to the retrospective
application of IFRS 15. Revenue comparatives for 2016 to 2017 are not restated for IFRS 15.
43
GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS OVERVIEWSTRATEGIC REPORTNCC GROUP PLC ¦ STOCK CODE: NCC Governance
Chairman’s letter
Governance framework
Board of Directors
Executive committee
Board composition and division of responsibilities
Shareholder relations
Audit committee report
Nomination committee report
Cyber security committee report
Remuneration committee report
Directors’ report
Directors’ responsibilities statement
45
46
48
50
52
59
61
68
70
72
91
95
44
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Chairman’s letter
“ A key focus for the 2018
Code is culture and
ensuring that it aligns
with the Group’s purpose,
strategy and values.
Culture has been high
on the Board’s agenda
for some time and the
Board considers culture
to be an essential
ingredient in meeting our
long-term, sustainable
returns to shareholders.”
Chris Stone
NON-EXECUTIVE CHAIRMAN
DEAR SHAREHOLDER
The Board is committed to creating and
maintaining a culture where strong levels
of governance thrive throughout the
organisation, specifically ensuring that
we send out consistent messages on our
values and acceptable behaviours for our
colleagues, our customers, our suppliers
and our advisers.
GOVERNANCE STANDARDS
During the year we complied with
all provisions of the UK Corporate
Governance Code 2016. As a Board
we are firmly turning our attention to
the requirements of the UK Corporate
Governance Code 2018 (2018 Code)
and will report against the 2018 Code in
our 2020 Annual Report and Accounts.
A key focus for the 2018 Code is culture
and ensuring that it aligns with the
Group’s purpose, strategy and values.
Culture has been high on the Board’s
agenda for some time and the Board
considers culture to be an essential
ingredient in meeting our long‑term,
sustainable returns to shareholders.
BOARD TENURE
The Board, the Executive Committee and
senior management continue to promote
the Company’s culture and standards
throughout the business and lead by
example to provide a strong corporate
governance framework.
OUR APPROACH
As individual Directors we recognise
our statutory duty to act in the way we
each consider, in good faith, would be
most likely to promote the success
of the Company for the benefit of its
members as a whole, as set out in
Section 172 of the Companies Act
2006. Our role as the Board is to set
the strategy of the Group and ensure
that management operates the business
in accordance with this strategy. We
believe this approach will promote the
Group’s long‑term success and our
customers’ interests as well as create
value for shareholders and have regard
to our other key stakeholders such as
our colleagues.
Chris Stone
2 years 2 months
Adam Palser
Tim Kowalski
1 year 6 months
10 months
Chris Batterham
4 years 1 month
Jonathan Brooks
2 years 3 months
Jennifer Duvalier
1 year 1 month
Mike Ettling
1 year 8 months
0
1
0
2
y
a
M
1
3
1
1
0
2
y
a
M
1
3
2
1
0
2
y
a
M
1
3
3
1
0
2
y
a
M
1
3
4
1
0
2
y
a
M
1
3
5
1
0
2
y
a
M
1
3
6
1
0
2
y
a
M
1
3
7
1
0
2
y
a
M
1
3
8
1
0
2
y
a
M
1
3
9
1
0
2
y
a
M
1
3
45
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION
Governance framework
The Board’s intention is to hand over the
business to our successors in a better
and more sustainable position for the
future. We recognise the renewed focus
on the contribution that a successful
company can make to wider society in
general in addition to generating value
for shareholders, and as a Board we
want to ensure that we have effective
engagement with, and encourage
participation from, shareholders and
other stakeholders. We intend to reflect
on who our key stakeholders are
and assess our current engagement
mechanisms to ensure effectiveness of
that engagement. We will then factor in
to our decision‑making any feedback
from that engagement.
Our main stakeholder is our colleagues
and we intend to develop mechanisms
to ensure that we, as a Board, have
meaningful and regular dialogue with
our dedicated and committed workforce.
This then puts us in a strong position to
deliver our strategy.
BOARD CHANGES
Tim Kowalski, an experienced public
company finance director, joined the
Group and the Board on 23 July 2018
as CFO. He succeeded Brian Tenner
who subsequently left the Group in
August 2018. Tim’s biography and
those of the other Board members can
be found on pages 48 to 49. Thomas
Chambers, independent Non‑Executive
Director, resigned from the Board
following the Company’s AGM on
26 September 2018. I would like to
record my thanks to Thomas for his
valuable contribution during his six years
as a Director.
BOARD COMPOSITION
AND DIVERSITY
We recognise that we still have much
progress to make in terms of improving
the diversity of the Board and our
Executive Committee in terms of gender.
We will look to address this during
future Board and Executive Committee
appointments. Given that this is a fairly
young Board in terms of tenure, this
improvement in diversity will not happen
overnight but we are very mindful of the
need to improve this and it is fully on our
Board agenda.
With regards to diversity more
generally, I am satisfied that we have an
appropriately diverse Board in terms of
experience, skills and personal attributes
among our Board members. The
Directors have many years of experience
gained across a variety of industries and
sectors, ensuring a mix of views and
providing a broad perspective.
OUR INVESTORS
We are in regular contact with our large
investors through a regular scheduled
programme of meetings attended by
either our CEO or CFO or both of them.
Chris Batterham, Senior Independent
Director, and myself are also available
to meet with investors should the
need arise. Chris Batterham wrote to
our largest shareholders in late 2018
offering a face‑to‑face meeting, with one
shareholder taking him up on this offer
of a meeting, providing some very useful
feedback for the Board to consider.
Ensuring that the Directors’
remuneration packages align the
Directors’ and senior managers’ interests
with the long‑term interests of the
Company and its shareholders is always
a key area of interest for investors.
Our Directors’ remuneration policy was
last approved by shareholders at the
2017 AGM and the current intention is
that the 2017 Directors’ remuneration
policy will apply until the 2020 AGM.
The 2017 Directors’ remuneration
policy and indeed the 2018 Directors’
remuneration report both received over
99% of votes in favour recognising
shareholder support for our approach
to executive remuneration. The UK
Corporate Governance Code 2018
increases the role and remit of the
Remuneration Committee and we will
be reporting on this in our 2020 Annual
Report and Accounts.
STATEMENT OF COMPLIANCE
WITH THE UK CORPORATE
GOVERNANCE CODE
The Company measures itself against
the requirements of the UK Corporate
Governance Code 2016 (Code), which
is available on the Financial Reporting
Council website (www.frc.org.uk).
From June 2018 to May 2019, the
Company complied with the Code in
full. From 1 June 2019 we will measure
ourselves against the requirements of
the 2018 Code and report back on this in
our 2020 Annual Report and Accounts.
Chris Stone
NON-EXECUTIVE CHAIRMAN
24 July 2019
46
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 The different parts of the Company’s Governance framework
are shown below, with a description of how they operate and
the linkages between them.
For further details on Board composition
and division of responsibilities see page 52
Board
The Board provides leadership and is responsible for the overall management of NCC Group,
its strategy, long‑term objectives and risk management. It ensures the right company structure is in place to deliver long‑term
value to shareholders and other stakeholders.
Support the Board in its work with specific areas of review and oversight objectives and risk management. They ensure the right
company structure is in place to deliver long‑term value to shareholders and other stakeholders.
Board Committees
Audit
Committee
Nomination
Committee
Cyber Security
Committee
Remuneration
Committee
Primary function is to
assist the Board in fulfilling
its financial and risk
responsibilities. It also
reviews financial reporting
and the internal controls in
place and the external
audit process.
Responsible for
considering the Board’s
structure, size, composition
and succession planning.
Responsible for overseeing
and advising on cyber risk
exposure of the Group and
its future cyber risk strategy,
the Group’s cyber security
breach response and crisis
management plan and the
review of reports on any
cyber security incidents.
Responsible for determining
the overall remuneration
of the Executive Directors
and the remuneration of
senior managers within the
broader institutional context
of remuneration practice.
For further information
see pages 61 to 67
For further information
see pages 68 and 69
For further information
see pages 70 and 71
For further information
see pages 72 to 90
Has responsibility for managing the business and overseeing the implementation of the strategy agreed by the Board.
Chief Executive Officer
Executive Committee (ExCom)
The Executive Committee currently comprises the Group’s most senior business and operational executives.
It is responsible for assisting the Chief Executive Officer in the performance of its duties including:
• developing the budget
•
reviewing the Company’s policies and procedures
• monitoring the performance of the different
divisions of the Company against the plan
•
carrying out a formal risk review process
• prioritisation and allocation of resources
• overseeing the day‑to‑day running of the Company
• being responsible for people, talent and culture
47
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board of Directors
CHRIS STONE
ADAM PALSER
TIM KOWALSKI
CHRIS BATTERHAM
Non-Executive Chairman
N C
Chief Executive Officer
Chief Financial Officer
Senior Independent
Non-Executive Director
A C N R
Appointment
to the Board:
6 April 2017
Appointment
to the Board:
1 December 2017
Appointment
to the Board:
23 July 2018
Appointment
to the Board:
1 May 2015
Career experience
Chris is a qualified chartered
accountant and was Finance
Director of Unipalm plc, before
becoming CFO of Searchspace
Limited until 2005.
External appointments
Chris is currently a Non‑
Executive Director of Blue Prism
Group plc and Nanoco Group plc.
Career experience
Prior to NCC Group, Adam was
the CEO of NSL Ltd, the public
services provider. He joined NSL
in 2015 and led the successful
transformation and sale of the
business for its private equity
owner, leaving in March 2017.
Before that he held a number of
senior roles at QinetiQ between
2003 and 2013, most recently
as EMEA Business Development
Director. Prior to that, Adam
had responsibility for QinetiQ’s
cyber, information warfare and
professional services businesses.
External appointments
Adam does not currently have
any external appointments.
Career experience
Tim is an accomplished CFO
with significant listed company
experience. Prior to joining
NCC Group, Tim was Group
Finance Director of Findel Plc
between 2010 and 2017 and
prior to that held similar roles
with Homestyle Group Plc and
N Brown Group Plc. Tim qualified
as a Chartered Accountant with
KPMG and has also been an
FCA ‘approved person’.
External appointments
Tim does not currently have any
external appointments.
Career experience
Chris has held various non‑
executive director and chief
executive roles of listed and
private equity‑backed technology
companies. He was CEO of
Northgate Information Solutions
plc, a UK listed company, from
1999 to 2008, when it was sold
to a private buyer, and stayed
as CEO until 2011. From 2013
to 2016, he was CEO of Radius
Worldwide. During this period
he was also a Non‑Executive
Director of CSR plc, and Chair
of the Remuneration Committee,
from 2012 until its acquisition
by Qualcomm in 2015. Chris
was also Chairman of AIM listed
CityFibre plc from January 2017
until June 2018, when it was sold
to private equity buyers.
External appointments
Chris is also the Chairman of
Everynet BV, a privately owned
Internet of Things infrastructure
business, and Chairman of AIM
listed Idox plc.
KEY:
A Member of
Audit Committee
C Member of Cyber
Security Committee
N Member of
Nomination Committee
R Member of
Remuneration Committee
Chairman
of Committee
48
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 JONATHAN BROOKS
JENNIFER DUVALIER
MIKE ETTLING
Independent
Non-Executive Director
R A C N
Independent
Non-Executive Director
C N R
Independent
Non-Executive Director
A
Appointment
to the Board:
16 March 2017
Appointment
to the Board:
25 April 2018
Appointment
to the Board:
22 September 2017
Career experience
Jonathan was Chief Financial
Officer of ARM Holdings plc
from 1995 until 2002. He has
also held a number of senior
finance and non‑executive
director positions with other
listed and private companies,
including directorships with
Aveva Group plc and FDM Group
(Holdings) plc.
External appointments
Jonathan has been a
Non‑Executive Director of IP
Group plc since August 2011.
Career experience
Jennifer was Executive Vice
President of People at ARM
Holdings plc, with responsibility
for all People and Internal
Communications activity globally,
from September 2013 to
March 2017.
External appointments
Jennifer is currently a Non‑
Executive Director and Chair of
the Remuneration Committee of
Mitie Group plc and of Guardian
Media Group plc. She is also
a Non‑Executive Director of
The Cranemere Group Ltd, a
member of The Council of the
Royal College of Art and Chair
of its Remuneration Committee,
and is a senior adviser to the
Cleveland Clinic London and to
the Corporate Research Forum.
Career experience
With strong sector and non‑
executive experience, Mike was
President of SAP‑Successfactors
globally. He has had an extensive
executive career in global
technology businesses including
at NGA HR, Unisys, Synstar and
EDS and was formerly a Non‑
Executive Director of Backoffice
Associates LLC, a US PE‑backed
data business, and also formerly a
Non‑Executive Director of Telkom
BCX Ltd, a South African IT and
telecommunications business.
External appointments
Mike is currently CEO of Unit4,
a world leader in enterprise
applications for services and people
organisations. He is also a non‑
executive director of Impellam PLC,
an AIM‑listed recruitment business,
and Topia Inc, a Silicon Valley cloud
relocation software business.
EXPERIENCE OF THE BOARD
The members of the Board bring a wide range of skills and experience to the Group. This diverse skill set allows the Board to
appropriately challenge and lead the Group’s strategy. The chart below summarises their key areas of significant experience.
Strategy
development
Sales and
marketing
Human
resources
Corporate
governance
Financial
management
M&A
Professional
services
Chris Stone
Adam Palser
Tim Kowalski
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
49
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Executive committee
STEVE BOUGHTON
Global Operations Director
Steve is responsible for the operational efficiency and effectiveness of the Group around the world.
He joined the business in March 2018 and previously served as Managing Director of QinetiQ’s
technical advisory business, leading software and service subsidiaries in the UK, Canada and Australia.
Most recently Steve was the Chief Operating Officer of the NSL group, supporting the business through
its sale in 2017.
SUZY CROSS
General Counsel and Company Secretary
Suzy joined the Group in January 2018. Suzy has over 20 years’ legal experience and is a trusted adviser
to the Board. Suzy previously served as General Counsel in Dechra Pharmaceuticals plc, Victrex plc and
Speedy Hire plc, all groups listed on the Main Market of the London Stock Exchange. As a qualified
solicitor, Suzy is able to execute the role of Company Secretary by advising the Board on governance
issues and the regulatory environment.
YVONNE HARLEY
Group Head of Communications
Yvonne joined the Group in July 2018. With over 25 years in communications, Yvonne has international
experience across a wide range of industry sectors including broadcasting, telecommunications, finance,
oil and gas, and shipping. Former roles include Head of Communications roles at V.Group, BP and
Castrol. Her experience and education covers the whole spectrum of stakeholder management –
from public affairs to employee engagement and media relations.
ROBERT HORTON
Global Head of Assurance Delivery
Rob joined the Group in 2008 and has managed and grown security consulting services in the
Assurance division, as well as overseeing the integration of a number of the acquired security consulting
companies into the Group. Rob was a director of NGS Software, a security consulting company he
co‑founded, from its formation in 2001 through to its acquisition by and successful integration into
the Group.
DANIEL LIPTROTT
Managing Director, Escrow
Daniel is responsible for the management and strategic development of the Escrow division globally.
Daniel joined the Group in November 2013 from private practice where he had been a corporate partner
at a number of international law firms. From 2006 until 2013 he was the Group’s outside counsel at
Eversheds LLP and advised on a range of issues including its move to the Main Market of the London
Stock Exchange in 2007 and each of the Group’s subsequent acquisitions until 2013.
ERIK PLOEGMAKERS
Managing Director, Assurance Netherlands (also known as Fox-IT)
Erik is responsible for the end‑to‑end functioning of Fox‑IT in the Netherlands. He is a Master of Law
(criminal law and eLaw) and after his studies, he became a digital forensic expert at Fox‑IT, after which
he managed the lawful interception department of the company. After this division was acquired by
NetScout Systems, Erik joined PwC and led the Cyber security consulting practice in Amsterdam.
He then joined KPN, where he held the position of Managing Director Security Services. In 2018 he
returned to Fox‑IT as Managing Director.
50
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 NICK ROWE
Managing Director, Assurance North America
Nick joined the company in 2009 and held positions in both sales and delivery leadership, initially in the
UK Assurance division. With 20 years experience working in professional services, he specialises in the
complex people and operational challenges of fast paced, high tech consulting teams.
Following a series of acquisitions in North America, Nick relocated to California in 2013 to focus
on managing the complexities of business integration and establishing the Group’s North American
operations. Currently as Managing Director of the North American Assurance division, he is responsible
for the continued growth and execution of the Groups strategy in the region.
SHANE SLATER
Group Sales and Marketing Director
Having joined the Group in July 2018 Shane has responsibility for Group level sales and marketing
activities while also supporting the regional business units to meet their sales goals and objectives.
Prior to joining NCC Group, Shane was the Sales and Marketing Director for V.Group, the world’s largest
ship management company. He also has over 15 years’ experience as a Sales Director in the defence
and security space including sales management for a cyber business. Shane comes from a technology
background with IBM and also has start‑up experience.
TOMAS SORENSEN BOYE
Managing Director, Assurance Europe (FortConsult)
Tomas is the Group’s Managing Director in Denmark, responsible for the European market for Assurance.
He joined the Company in 2016 as Commercial Director and took up the position of Managing Director
in April 2018. Over a 25‑year career in the technology industry, Tomas has focused heavily on increasing
the value that various products and services bring to customers. Prior to NCC Group, Tomas has held
senior roles within KiSS Technology, Cisco and GreenWave Systems.
IAN THOMAS
Managing Director, Assurance UK and RoW
Ian joined NCC Group in December 2018 and is responsible for the Group’s UK and RoW Assurance
division. Prior to that he was UK MD at Sopra Steria for two and a half years, following a successful
Interim career working for a number of global businesses and Private Equity backed firms, in Managing
Director and Sales Director positions. He was at Cable&Wireless for eight years, where he ran Global
Service Assurance and the Wholesale and Public Sector divisions. Ian’s early career includes 14 years at
British Airways running contact centres and offshore operations.
COLIN WATT
Global Chief People Officer
Colin is the Global Chief People Officer for NCC Group. He is responsible for the human resources team
across the Group.
Prior to joining NCC Group, Colin was the Director of Employee Engagement and Relations at Shop
Direct, the online digital retailer. He previously held a number of senior leadership roles in Telefonica’s
O2UK, Research, European and Global HR teams and Co‑operative Financial Services.
OLLIE WHITEHOUSE
Global Chief Technical Officer
Ollie Whitehouse is responsible for the Group’s technical strategy and research and development
functions. In a career spanning more than 20 years Ollie has worked in a variety of cyber security
consultancy, applied research and management roles for firms including BlackBerry and Symantec.
He is named on eight patents at two firms for inventions in cyber security and is the author of numerous
whitepapers. Ollie is an independent research and science advisor to the UK government on matters of
cyber security.
51
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board composition and
division of responsibilities
Chairman
Chief Executive Director
Chief Financial Officer
Senior Independent Non-Executive Director
Independent Non-Executive Director
Company Secretary
Role profiles are in place for the Chairman and Chief Executive Officer, which clearly set out the duties of each role.
Chairman
Chief Executive Director
Role
Chief Financial Officer
Responsibilities
Senior Independent Non-Executive Director
The Chairman
of the Board
Independent Non-Executive Director
Company Secretary
(Chris Stone)
Is responsible for the running and leadership of the Board, setting its agenda and ensuring its
effectiveness on all aspects of its role, and promoting a culture of openness, debate and the
highest standards of corporate governance. The Chairman, in conjunction with the CEO and
other Board members, plans the agendas, which are issued with the supporting Board papers
in advance of the Board meetings. These supporting papers provide appropriate information to
enable the Board to discharge its duties which include monitoring, assessing and challenging
the executive management of the Group.
The Chief
Executive Officer
(Adam Palser)
The Chief
Financial Officer
(Tim Kowalski)
Together with the senior management team, is responsible for the day‑to‑day running of the
Group’s business, implementing the strategy and policies approved by the Board, and regularly
providing performance reports to the Board. The role of CEO is separate from that of the
Chairman to ensure that no one individual has unfettered powers of decision.
Works closely with the CEO with specific responsibility for all financial matters, including Group
accounting policies, financial control, tax and treasury management, risk management and
financial probity. The CFO is also accountable for the transparency and appropriateness of
management information and key performance indicators, internally and externally.
The Senior
Independent Director
(Chris Batterham)
Provides a sounding board for the Chairman and serves as an intermediary for other Directors,
employees and shareholders when necessary. The main responsibility is to be available to the
shareholders should they have concerns that they have been unable to resolve through normal
channels or when such channels would be inappropriate.
Bring experience and independent judgment to the Board. Maintain an ongoing dialogue
with the Executive Directors which includes constructive challenge of performance and the
Group’s strategy.
Ensures good information flows within the Board and its Committees and between senior
management and Non‑Executive Directors. The Company Secretary is responsible for
facilitating the induction of new Directors and assisting with their professional development
as required. All Directors have access to the advice and services of the Company Secretary
to enable them to discharge their duties as Directors. The Company Secretary is responsible
for ensuring that Board procedures are complied with and for advising the Board through the
Chairman on governance matters. The appointment and removal of the Company Secretary is a
matter for the Board as a whole.
The other
Non-Executive
Directors
(Jonathan Brooks,
Jennifer Duvalier
and Mike Ettling)
Company Secretary
(Suzy Cross)
52
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 MEETINGS AND ATTENDANCE
The Board considers that each Director is able to allocate sufficient time to the Company to discharge their responsibilities
effectively. The Non‑Executive Directors are contracted to spend a minimum of 24 days per annum on Group’s affairs.
A summary of each current Director’s attendance at meetings that they were eligible to attend of the Board and its committees
during the financial year ended 31 May 2019 is shown below. Unless otherwise indicated, all Directors held office throughout
the year.
Board
Audit Nomination
Cyber Security
Remuneration
Chris Stone
Adam Palser
Tim Kowalski ¹
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling 2
Brian Tenner 3
Thomas Chambers 4
#Committee Chair.
8(8)
8(8)
7(7)
8(8)
8(8)
8(8)
8(8)
1(1)
1(2)
n/a
n/a
n/a
4(4)#
4(4)
n/a
2(2)
n/a
1(1)
1(1)#
3(3)#
n/a
n/a
1(1)
1(1)
1(1)
n/a
n/a
0(0)
n/a
n/a
3(3)
3(3)
3(3)
n/a
n/a
0(0)
n/a
n/a
n/a
4(4)
4(4)#
4(4)
n/a
n/a
1(1)
1
2
3
4
Appointed to the Board on 23 July 2018 and the July 2018 Board meeting was held before Tim was appointed.
Appointed to the Audit Committee in January 2019 and the Committee met twice between January 2019 and May 2019.
Left the Company and Board on 12 August 2018.
Left the Company and Board on 26 September 2018.
WHAT HAVE WE LOOKED AT AS A BOARD DURING 2018/19?
At every meeting the Board reviews the minutes from the previous meeting and the status of any outstanding actions. The CEO
and CFO present their monthly performance update reports which are also circulated to Board members in months where there
is no scheduled Board meeting. The Board has also reviewed the following during 2018/19.
Leadership and employees
Received an update on employee engagement and the results of the annual employee survey
Onboarded our new Chief Financial Officer (Tim Kowalski)
Approved a number of share scheme grants to employees including UK Sharesave, International Sharesave (in the Netherlands),
and the Employee Stock Purchase Plan (in the US)
Had the opportunity to meet informally with colleagues from across the business at Board meetings held in New York and Leatherhead,
and the Board strategy day held in Manchester
Received an update on the composition of the Executive Committee
Appointed an interim Chief People Officer (CPO) and received regular updates on the recruitment of a permanent CPO
Strategy
Regular updates on the Group’s transformation programme ‘Securing Growth Together’ (SGT)
Visited the Group’s New York office to meet colleagues and receive updates and the future plans from the US Assurance and
US Escrow businesses
Had presentations providing an overview of the Group’s intellectual property and strategy in relation to identifying, registering,
protecting and managing intellectual property.
Held a dedicated one‑day strategy session (see page 54)
Discussed the strategy day and the key points arising out of it
53
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board composition and
division of responsibilities
Governance
Completed the Board, Committee and Chairman effectiveness reviews and discussed the results of these reviews, agreeing on key focus areas
for the coming year
Approved the Notice of AGM and Proxy Form
Approved a revised Chairman and Non‑Executive Director annual UK travel and subsistence allowance which replaces expenses
Attended the AGM
Delegated authority to the CEO and CFO to deal with routine share scheme maturities
Set Board and Committee meeting dates for the next three years
Reviewed and approved the Delegated Authority Matrix along with the Schedule of Matters Reserved for Decision by the Board
Reviewed and approved the Terms of Reference for all of the Board Committees
Approved some minor amendments of an administrative nature to employee share plan rules
Discussed and approved the Group’s Modern Slavery Statement
Reviewed Directors’ outside directorships and potential conflicts of interest and also Directors’ shareholdings
Financial
Reviewed and approved the Annual Report and Accounts, ensuring that it is fair, balanced and understandable
Discussed and approved the full year and half year results and associated presentations to investors
Approved the interim and final dividends and discussed the dividend policy
Approved changes to the bank mandates and authorised signatories
Noted and approved the 2018/19 Group insurance covers renewal
Approved adding the Group’s US entities as additional guarantors with regard to the Group’s bank loan facilities
Considered and discussed the refinancing of the Group’s bank loan/debt facilities arrangements
Noted the appointment of a global tax adviser for the Group
Discussed and approved the 2019/20 budget
Shareholder relations
Received regular updates from investor meetings
Received presentations on shareholder perspectives on the Company
Other Group business
Approved a number of strategic projects including the implementation of new business systems such as Salesforce and Workday
Approved a number of major customer contracts
Received updates on the Group’s office location strategy
Received a briefing on the Group’s crisis communications response plan and on managing and engaging stakeholders
Received regular updates on Brexit
Received regular update on material litigation affecting the Group
BOARD STRATEGY SESSION
In March 2019 the Board held a dedicated one‑day strategy
session which allowed for ‘deep dives’ into all aspects of the
Group’s businesses. All Managing Directors from across the
Group attended for the day so that ideas could be discussed
and shared. Finance Directors from the Group’s businesses
also attended for their particular briefing session. Board
members received a briefing pack in advance of the day which
contained a high level presentation for each business along
with additional background briefing material.
The day was divided into sections focusing on a different area
of the business and included the three‑year strategic plans
from the businesses around the Group such as:
• Escrow (UK, North America, Europe and RoW)
• Assurance (UK, North America, Europe and RoW)
• Overall corporate strategy
The Directors used the insights gained from the strategy
sessions in their consideration of the 2019/20 budget and
associated approvals.
54
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 INDEPENDENT ADVICE
All Directors have access to the advice and services of
the Company Secretary and Directors are entitled to take
independent professional advice if necessary, at the expense
of the Company.
CONFLICTS OF INTEREST
The Companies Act 2006 requires Directors to avoid
situations where they have, or could have, a direct or indirect
interest that conflicts or potentially conflicts with the interests
of the Company. The Company’s Articles of Association require
any Director with a conflict or potential conflict to declare this
to the Board. That Director will not then be involved in the
discussions relating to the proposal, transaction, contract or
arrangement in which they have an interest, unless agreed
otherwise by the Directors of the Company in the limited
circumstance specified in the Articles of Association, nor will
they be counted in the quorum or be permitted to vote on any
issue in which they have an interest.
BOARD INDEPENDENCE
As required by the Code, at least 50% of the Board, excluding
the Chairman, are independent Non‑Executive Directors.
The Board comprises two Executive Directors, four independent
Non‑Executive Directors and the Non‑Executive Chairman.
The Board has debated and considers that all of the current
Non‑Executive Directors are independent, and in so doing
considered the profile of all of the individuals, concluding that
none of them:
• has ever been an employee of the Group;
• has ever had a material business relationship with the
Group or receives any remuneration other than their salary
or fees;
• has close family ties with advisers, other Directors or
senior management of the Group that could reasonably
be expected to cause a conflict;
• holds cross‑directorships or has significant links with
other Directors through involvement with other companies
or bodies;
•
represents a significant shareholder; or
• has at the point of this report served on the Board for more
than nine years from the date of their first election.
The Non‑Executive Directors provide a strong independent
element on the Board and are well placed to constructively
challenge and help develop proposals on strategy and
succession planning. Between them they bring an extensive
and broad range of experience to the Group.
Details of the Directors’ respective experience is set out in
their biographical profiles on pages 48 to 49.
The terms and conditions of appointment of Non‑Executive
Directors are available for inspection at the Company’s
registered office during normal business hours.
DIVERSITY
The principle of Board diversity (and indeed diversity across
the Group) is strongly supported by the Board. It is the Board’s
policy that appointments to the Board will always be based on
merit so that the Board has the right balance of individuals in
place. The Board recognises that diversity of thought, approach
and experience is an important consideration and is therefore
one of the selection criteria used to assess candidates prior
to any Board appointments. Read more about diversity in the
Nomination Committee report on page 68.
The Company’s policy is to find, develop and maintain a diverse
workforce at all levels with an initial focus on developing a
culture where women can achieve and retain senior positions.
55
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board composition and
division of responsibilities
ANNUAL RE-ELECTION
In accordance with the Code, any Directors appointed in the
financial year are subject to election by shareholders at the
AGM and, in line with best practice, all the other Directors are
subject to re‑election annually.
DIRECTOR INDUCTION,
TRAINING AND DEVELOPMENT
Tim Kowalski joined the Board during the year and was
provided with an induction and also time with the previous
CFO (Brian Tenner) to ensure an orderly handover. During the
year the Board had training on ‘Digital Footprints’ in relation
to online security and identity theft and undertook visits to
the Group’s New York and Leatherhead offices which allowed
Board members to interact and engage with colleagues across
the organisation.
New Directors are provided with an induction on appointment,
which included visits to the Group’s operations and meetings
with operational and executive management. Each Director’s
induction is tailored to their experience and background with
the aim of enhancing their understanding of the Group’s
strategy, business, the operating divisions, employees,
customers, suppliers and advisers and the role of the Board
in setting the tone of our culture and governance standards.
The Company acknowledges the importance of developing
the skills of the Directors to run an effective Board.
To assist in this, Directors are given the opportunity to attend
relevant courses and seminars to acquire additional skills and
experience to enhance their contribution to the ongoing
progress of the Group. All of the Directors attend sessions
which are aimed at updating the Board on trends and
developments in corporate governance.
BOARD AND COMMITTEE EFFECTIVENESS REVIEW
The performance of the Board and its Committees is
appraised annually and an internal effectiveness review was
completed for the year ended 2019. The overall rating was
very positive meaning that the Board and its Committees are
functioning well.
The results were presented to the March 2019 Board meeting
and following that the Chairman held 1:1 calls with Board
colleagues for ‘deeper dives’ into any areas they wished to
discuss in more detail. The Chairman provided a final verbal
update on the 2019 evaluation and its focus areas at the
April 2019 Board meeting and has held sessions with the
CEO to discuss areas highlighted by the evaluation process.
The evaluation identified changes which would improve the
working of the Board, including:
• An increased focus on succession planning and ensuring
that these plans are reviewed on a regular basis;
• An increased focus on Corporate Social Responsibility;
• A continued focus on strategy and strategic discussion;
• Enhancing Board interactions and communications with
the Company and its customers; and
• Developing Board involvement in the Group’s culture
related initiatives.
PROGRESS FROM THE PREVIOUS YEAR
The 2019 evaluation process also reviewed progress on
actions identified in the 2018 evaluation process.
Area identified in 2018
evaluation process
2019 evaluation
– progress
Increased strategic
discussion
Enhancements to the
Board through NED
appointments
Strengthening of the
Senior Management
Team
Good progress and more Board
strategic discussion including
a dedicated one‑day Board
strategy session.
Good progress with appointment
of two Non‑Executives who bring
HR/remuneration experience and
technology expertise.
Good progress with the appointment
of new senior management members
including a Group Operations
Director, a Group Sales and
Marketing Director, a Chief People
Officer, a Director of Risk and
Assurance, and a Transformation
Programme Manager to oversee and
drive through a change programme
linked to the Group’s strategy.
56
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 BOARD AND COMMITTEE AND CHAIRMAN EVALUATION PROCESS 2019
Company Secretary reviewed 2018
questionnaires and evaluation exercise
results and, based on this, proposed
questionnaires for the 2019 evaluation
exercise.
The proposed questionnaires were
reviewed and approved by the Chairman
and Committee Chairmen and (for
the Chairman’s review) the Senior
Independent Director.
Questionnaires were added to an
online survey website which ensured
the anonymous and efficient collection
of answers.
Summary reports together with the
results and comments received were
prepared for the Board and Committee
meetings where the results were
discussed and key actions for the
coming year agreed.
The responses were collated and
analysed by the Company Secretary
who then shared these with the
Chairman and Committee Chairmen
and (for the Chairman’s review) the
Senior Independent Director.
Board members and the Company
Secretary were then invited to complete
the questionnaires.
The Chairman held 1:1s with Board
members where areas of interest
could be discussed in more detail.
The Senior Independent Director met
with the Chairman to discuss the
Chairman evaluation results.
COMMITTEE EVALUATION
INDIVIDUAL DIRECTOR APPRAISALS PROCESS
During the year, each of the Audit, Remuneration, Nomination
and Cyber Security Committees carried out an internal
self‑evaluation on their effectiveness. The conclusion from the
Committee reviews is that, overall, the Committees are
working well but some recommendations were made, as per
the table below.
Committee
Focus areas
Audit
• No recommendations.
Cyber Security
• No recommendations.
Nomination
• Succession planning.
Remuneration
•
Increased consultation with the
external remuneration consultants,
the Chief People Officer, and
the Group’s shareholders when
considering senior executive reward.
• Better alignment of remuneration
policy to key business metrics.
• Developing reward strategy and
reward competitive positioning.
•
Increased Committee involvement
with HR policies in the wider business.
During the year, the Senior Independent Non‑Executive
Director evaluated the performance of the Chairman and
the Chairman evaluated the performance of each Director.
In addition, the Non‑Executive Directors met independently
from the Executive Directors to discuss with the Chairman the
overall functioning of the Board and his contribution in making
it effective.
OPERATION OF GOVERNANCE FRAMEWORK
ROLE OF THE BOARD
The Board is responsible for reviewing, challenging and
approving the strategic direction of the Group, while providing
strong values‑based leadership of the Company, within a
framework of prudent and effective controls, which enable risk
to be assessed and appropriately managed. The Board reviews
the Group’s business model and strategic objectives to ensure
that the necessary financial and human resources are in place
to achieve these objectives, to sustain them over the long term
and to review management performance in their delivery.
The Board sets the tone of the Company’s values and ethical
standards and manages the business in a manner to meet its
obligations to shareholders and other stakeholders.
57
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board composition and
division of responsibilities
INTERNAL CONTROL
The Group has a system of internal controls which aim to
support the delivery of the Group’s strategy by managing the
risk of failing to achieve business objectives and to protect the
stewardship of the Group’s assets. As with all such systems,
the goal is to manage risk within acceptable parameters
rather than to eliminate risk entirely. The Group can therefore
only provide reasonable and not absolute assurance that
the business objectives and asset stewardship will be
provided successfully.
In addition, the Group insures against various risks, but certain
risks remain difficult to insure, due to the breadth and cost
of cover. In some cases, external insurance is not available
at all, or at least not at an economically viable price. The
Group regularly reviews both the type and amount of external
insurance that it buys in conjunction with its insurance brokers.
For a more detailed review of risk management processes,
the principal risks faced by the Group and their mitigation, as
well as a risk ‘heat map’ see pages 32 to 37.
The Audit Committee is responsible for reviewing the
effectiveness of the risk management and internal control
systems. The steps it takes in relation to the review are set out
on page 65.
The Audit Committee makes a recommendation to the Board
on effectiveness which the Board considers, together with
reports from the Cyber Security Committee, in forming its own
view on the effectiveness of the risk management and internal
control systems.
During the year ended 31 May 2019, the Board reviewed the
effectiveness of the Group’s risk management and internal
control systems. We confirm that the processes outlined
above and on page 65 have been in place for the year under
review and up to the date of approval of this Annual Report
and Accounts and that these processes accord with the UK
Corporate Governance Code and the FRC Guidance on Risk
Management, Internal Control and Related Financial and
Business Reporting. We also confirm that no significant failings
or weaknesses were identified in relation to the review.
EXECUTIVE REMUNERATION
During the year, we operated within the Remuneration Policy
approved by shareholders at the 2017 AGM. Details of how
the Remuneration Policy has been applied during this financial
year are set out on pages 81 to 88 of the Remuneration
Committee report.
The Board receives information on at least a monthly basis to
enable it to review trading performance, forecasts and strategy
and it has a schedule of matters specifically reserved for its
decision. The most significant of these are:
• Approval of strategic plans, the annual budget and any
material changes to them.
• Oversight of the Group’s operations ensuring competent
and prudent management, sound planning, and an
adequate system of internal control and governance.
• Through the Audit Committee, oversight of financial
reporting systems and information and adherence to
appropriate accounting policies.
• Changes to the structure, size and composition of the
Board and Executive Committee, oversight of the Company
culture and ethical standards of the leadership and the
independence of Non‑Executive Directors, taking into
consideration prudent succession planning.
• Approval of the acquisition or disposal of subsidiaries and
major investments and capital projects.
• Approval of the dividend, treasury and banking policies,
including the Group’s capital structure.
• Through the Remuneration Committee, the delivery of an
effective Executive Remuneration Policy.
• Receiving reports on the views of shareholders and
approval of all documents put to shareholders at a general
meeting or circulated to shareholders.
• Approval of the appointment of key advisers.
The Board has reviewed and revised this schedule during the
year and added specific matters where it feels it is critical to
the ongoing success of the business and are of a significant
nature to merit the Board having such a decision reserved
to it. Also during the year, the Group Authority Matrix (which
documents the levels of authority delegated from the Board
to various role holders within the Group) was revised and
refreshed. The schedule of matters reserved for decision by
the Board and the Group Authority Matrix are complementary
documents and are designed to ensure that decisions are
either made by the Board or delegated to an appropriate
senior colleague within the Group.
As noted above, the operational management of the Group
is delegated to the Executive Committee. The Board
also delegates other matters to Board committees and
management as appropriate.
RISK MANAGEMENT
The Board has ultimate responsibility for ensuring that
business risks are effectively managed. The Board has
delegated regular review of the risk management procedures
to the Cyber Security Committee in relation to cyber risks and
to the Audit Committee in relation to all other risks. The Board
reviews the overall risk environment on at least an annual
basis. The day‑to‑day management of business risks is the
responsibility of the Executive Committee.
58
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Shareholder relations
SHARE CAPITAL STRUCTURE
The Company’s issued share capital at 31 May 2019 consisted
of 277,830,625 ordinary shares of one pence each. There are
no special control rights or restrictions on share transfer or
special rights pertaining to any of the shares in issue and the
Company does not have preference shares.
As far as is reasonably known to the Board, the Company
is not directly or indirectly owned or controlled by another
Company or by any government.
BOARD ENGAGEMENT WITH SHAREHOLDERS
Communications with shareholders are given high priority.
There is a regular dialogue with institutional investors including
presentations after the Company’s year‑end and half‑year
results announcements.
A programme of meetings take place throughout the year
with major institutional shareholders and private shareholders
have the opportunity to meet the Board face‑to‑face and
ask questions at the Annual General Meeting. During the
financial year the Directors held a number of meetings with
shareholders as set out below.
Chris Batterham, Senior Independent Director, wrote to our
largest shareholders in late 2018 offering a face‑to‑face
meeting. One shareholder took up the offer and the meeting
provided some very useful feedback for the Board to consider.
BOARD SHAREHOLDER UPDATES
Feedback from major institutional shareholders is provided to
the Board on a regular basis and, where appropriate, the Board
takes steps to address their concerns and recommendations.
INVESTOR MEETINGS
(FY18 results roadshows)
One-to-one
meetings
29
Conference
calls
7
Group
meetings
2
SUBSTANTIAL SHAREHOLDINGS
As at 31 May 2019, the Company had been notified of the following interests of 3% or more in the issued share capital of the
Company under the UK Disclosure and Transparency Rules:
Shareholder
Legal And General Investment Management
Schroder Investment Management
Artemis Investment Management
Montanaro Asset Management
Unicorn Asset Management
Number of
ordinary shares
23,614,274
15,364,318
15,033,307
14,350,000
10,200,315
% of NCC’s total
share capital
8.50
5.53
5.41
5.17
3.67
The following changes to the above interests have been notified to the Company from 31 May 2019 up until 24 July 2019.
Shareholder
Artemis Investment Management
Montanaro Asset Management
Number of
ordinary shares
13,822,640
10,796,426
% of NCC’s total
share capital
4.98
3.89
59
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Shareholder relations
DIRECTORS’ SHAREHOLDINGS
For details of Directors’ shareholdings, remuneration and
interests in the Company’s shares and options, together with
information on service contracts, see pages 84 to 90 of the
Directors’ remuneration report.
ANNUAL GENERAL MEETING
The Annual General Meeting (AGM) is an opportunity for
shareholders to vote on certain aspects of Group business
and provides a useful forum for one‑to‑one communication
with private shareholders. At the AGM shareholders receive
presentations on the Company’s performance and may ask
questions of the Board. The Chairman seeks to ensure that the
Chairmen of the Audit, Remuneration, Nomination and Cyber
Security Committees are available at the meeting to answer
questions and all Directors attend.
The Company prepares separate resolutions on each
substantially separate issue to be voted upon at the AGM.
The result of the vote on each resolution is published on the
Company’s website after the AGM and will be announced
via the regulatory information service. At the 2018 AGM,
shareholders representing 73.22% of the Company’s issued
share capital returned their proxy votes.
On behalf of the Board
Chris Stone
NON-EXECUTIVE CHAIRMAN
24 July 2019
60
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Audit committee report
“ The Committee
particularly focuses on
systems and processes
of management
control, the reporting of
internal management
information and
externally reported
financial information.”
Chris Batterham
COMMITTEE CHAIRMAN
THE AUDIT COMMITTEE’S KEY OBJECTIVES
The purpose of the Audit Committee is to assist the Board in the discharge of its
fiduciary duties of stewardship of the Group’s assets. The Committee particularly
focuses on systems and processes of management control, the reporting of
internal management information and externally reported financial information.
The Committee also provides a forum for reporting by the external auditors.
THE AUDIT COMMITTEE’S RESPONSIBILITIES
The Committee’s main responsibilities include:
• Monitoring the integrity of the
Financial Statements relating to the
Group’s financial performance and
their compliance with the provisions of
IFRS, the UK Corporate Governance
Code, Disclosure and Transparency
Rules and other regulations.
• Reviewing material information and
significant accounting judgments
contained in it.
• Advising the Board on the
continuing appropriateness of
the Group’s existing accounting
policies and the application of any
new or modified accounting and
reporting standards.
• Advising the Board on the
effectiveness of the processes
ensuring that the Annual Report and
Accounts, when taken as a whole, is
fair, balanced and understandable.
• Reviewing the audit findings with
the external auditors including
discussing any major issues that
arise during an audit, the accounting
and audit judgments made, the level
of any errors identified during the
audit and the effectiveness of the
audit process itself.
• Reviewing the effectiveness of the
Group’s internal control systems.
• Reviewing the nature and extent of
significant financial risks and how
they can be mitigated.
• Making recommendations to the
Board in relation to the appointment
of the external auditors, approving
their remuneration and terms
of engagement.
• Overseeing the relationship with
the external auditors including,
but not limited to, assessing their
independence, objectivity and
effectiveness.
• Reporting to the Board on the
procedures for responding to
whistleblowing, fraud or potential
breaches of anti‑bribery legislation.
A full copy of the Committee’s Terms of
Reference can be found in the Investor
Relations section of the Group’s website
at www.nccgroup.trust/uk/about‑us/
investor‑relations.
ACTIVITIES DURING THE YEAR
During the year, the Committee:
Reviewed and updated their Terms of Reference
Continued to support relatively new Board members in their onboarding process as well as welcoming a new committee member
Completed the process with the external auditors for the partner rotation at the end of the reporting cycle at the beginning of the current financial year
Initiated and considered a revised risk review undertaken by the new Director of Risk and Assurance
Reviewed the ongoing programme to enhance the quality of the Group’s external reporting, including in the Annual Report and Accounts
Considered and approved updated policies including policies on: Treasury, Foreign Exchange, Tax Strategy and Individually Significant Items
Received a presentation from the Group Health and Safety Manager who was appointed in January 2019
Received regular briefings from the Associate Director of Risk and Assurance summarising risk management and control issues
Reviewed the reporting around various areas, including discontinued operations and disposals, onerous contracts and software write‑off costs
Was updated on progress in relation to the Securing Growth Together Programme and received an internal audit health check report on the programme
61
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Audit committee report
COMPOSITION
The Audit Committee is chaired by myself, a Chartered
Accountant of 40 years’ standing. I have previously served
as the Finance Director of Unipalm plc, before becoming
Chief Financial Officer of Searchspace Limited until 2005.
Both businesses operated in digital technology sectors.
My earlier career included roles with BICC Group and
accountants Arthur Andersen. The Board considers that I have
the recent and relevant experience required by the Code.
The other members of the Committee who served throughout
the year are: Thomas Chambers (who stepped down from
the Committee and Board on 26 September 2018), Jonathan
Brooks and Mike Ettling (who was appointed to the Committee
in January 2019). All members of the Committee are
considered to be independent and the Committee as a whole
continues to have competence in the technology sector.
Summary biographies of each member of the Committee are
included on pages 48 to 49.
MEETING FREQUENCY AND ATTENDANCE
The Terms of Reference for the Committee require at least
three meetings per year. During this financial year the
Committee met four times. As well as the members of the
Committee, standing invitations are given to the Chairman,
the other Independent Non‑Executive Directors, the Chief
Executive Officer, and the Chief Financial Officer, with other
attendees also appearing by invitation. The external auditors
also attend each meeting. During the year the Committee met,
on a number of occasions, with the external auditors without
the Executive Directors being present. In addition, following
the appointment in 2017/18 of the Group’s Director of Risk
and Assurance who heads up the Group’s Internal Audit
function, a number of meetings were held with him without
management being present.
The attendance of individual Committee members at Audit
Committee meetings is shown in the table below:
Attendee
Chris Batterham
Jonathan Brooks
Thomas Chambers
Mike Ettling
Meetings attended
4(4)
4(4)
1(1)
2(2)
SIGNIFICANT ISSUES CONSIDERED DURING THE
YEAR IN RELATION TO THE FINANCIAL STATEMENTS
During the year, the Committee reviewed and considered
the following areas in respect of financial reporting and the
preparation of the interim and annual Financial Statements:
The appropriateness of the accounting policies used
Significant areas of management judgment or estimation
The effectiveness and changes to the financial control environment
Compliance with external and internal financial reporting standards
and policies
Disclosure and presentation of GAAP and Alternative Performance
Measures (APMs)
Whether the Annual Report and Accounts taken as a whole is fair,
balanced and understandable and provides the information necessary
to assess the Group’s financial position, performance, business model
and strategy
In carrying out this review the Committee considered the
advice of the Group’s finance team and the external auditors’
reports setting out their views on the accounting treatments
and judgments included in the Financial Statements.
2017 ANNUAL REPORT AND ACCOUNTS FRC REVIEW
In the previous year the Group received a letter from the
Conduct Committee of the Financial Reporting Council (FRC),
a body appointed to review the Annual Report and Accounts
of public and large companies. The reviews are intended to
support continuous improvement in the quality of reporting.
The letter was sent following a review of the Group’s 2017
Annual Report and Accounts. The letter focused on the
disclosures given around accounting errors in respect of prior
years, acquisitions arising in that financial year (PSC and VSR),
sensitivity analyses around impairment reviews and the Group’s
use of Alternative Performance Measures (APMs).
As a result of the responses made by the Company, the review
was formally closed in June 2018 and the proposals suggested
by the FRC have been incorporated in subsequent Company
announcements and publications.
62
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 SIGNIFICANT ACCOUNTING AREAS AND AREAS OF SIGNIFICANT MANAGEMENT JUDGMENT
The table below summarises some of the significant accounting issues and judgments that the Committee considered during
the year in relation to the Financial Statements. These are split between those items which are identified either as recurring
items that the Committee regularly reviews or as items of current year focus. The table also sets out the financial context and
potential impact of each item as well as the impacted metric. Finally, the table shows the degree of judgment that the Committee
feels has to be applied for each item. Items with a significant impact but with a ‘low’ judgment level will typically have extensive
independent third party evidence of the bases for any judgment. Areas assessed as requiring a ‘high’ level of judgment tend to
rely more heavily on management estimates and historical trends than extensive independent third party evidence.
Review items
Goodwill carrying values (recurring)
Relevance to the
Financial Statements
Group net assets £210.8m
Goodwill value £189.4m
Related metric
–
Intangible assets – carrying values (recurring) Group net assets £210.8m
Adjusted ¹ operating margin
Onerous leases (recurring)
Loss‑making contracts (recurring)
Intangible assets value £41.8m
Group net assets £210.8m
Adjusted operating profit ¹ £33.7m
Group net assets £210.8m
Adjusted operating profit ¹ £33.7m
Adjusted ¹ operating margin
Adjusted ¹ operating margin
Medium
Estimation
required
High
Low
Low
Revenue recognition/IFRS 15
(current year focus)
Revenue £250.7m
Adjusted operating profit ¹ £33.7m
Revenue and growth rates
Adjusted ¹ operating margin
Individually significant items (recurring) and
APMs
Net charges (£3.6m)
Adjusted operating profit ¹ £33.7m
Adjusted ¹ operating margin
IFRS 16 Leases
Disclosure only this year
Adjusted ¹ operating margin
Low
Low
Low
GOODWILL CARRYING VALUE
(Recurring item: see note 13 to the Financial Statements)
The Group has made a number of historical acquisitions which
generated goodwill at the time of purchase. On 31 May 2019,
the Group had goodwill of £189.4m.
In accordance with IAS 36, management has determined
appropriate cash generating units (CGUs) on which to base
the annual impairment review for goodwill and indefinite‑lived
intangible assets by comparing the recoverable amount to the
carrying value. Impairment reviews are based on discounted
future cash flow models that can contain a significant degree
of management estimate in terms of the basis of the CGUs,
the associated forecast cash flows, the appropriate growth
rates to apply to revenues and margins, and the discount rates
to be used. This is set out in more detail in note 13 to the
Financial Statements.
The Committee has reviewed the rationale used to determine
the CGUs and assumptions used in future cash flows that
underpin the valuation of goodwill. There have been no
changes to the CGUs in the current year other than the
UK MSS (Accumuli) CGU has been incorporated into the
Assurance CGU as its operations have been subsumed into
the UK Assurance division following its acquisition.
INTANGIBLE ASSETS – CARRYING VALUE
(Including acquired intangibles, software and capitalised
development costs) (Recurring item: see note 13 to the
Financial Statements).
The total value of acquired intangible assets on 31 May 2019
was £41.8m. Acquired intangible assets are amortised over
a period of ten years. Movements in the balance sheet
values during the year are set out in note 13 to the Financial
Statements. Annual impairment reviews of each intangible
asset are based on the same underlying discounted future
cash flow models that are used in assessing the carrying
value of goodwill. These models can contain a degree of
management estimate in terms of the forecast cash flows,
the appropriate growth rates to apply to revenues and margins,
and the discount rates to be used. This is set out in more detail
in note 13 to the Financial Statements.
The Committee reviews the assumptions and estimates
underpinning the cash flow models each year given the high
level of estimation required in assessing cash flows over an
extended period of time to arrive at recoverable values.
1
See note 3 for an explanation and definitions of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the financial statements for a
reconciliation to statutory information.
63
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Audit committee report
Finally, the Group also undertakes a number of development
projects aimed at producing new products and services.
These activities are collectively referred to as ‘Development’
costs and where IFRS recognition criteria are met, costs
incurred are capitalised.
During the year, management undertook a review of assets
likely to be impacted by the new system implementations arising
from the Securing Growth Together programme. This resulted
in a write‑off of £3.8m in respect of accelerated amortisation
for a number of legacy systems (net of R&D tax credit). The
Committee considered the accounting treatment for this and
concurred that reflection as an Individually Significant Item was
most appropriate.
ONEROUS LEASES
(Recurring item: see note 20 to the Financial Statements)
During the year, the Group reviewed the position for the two
UK properties that were previously identified as surplus to
requirements in the prior year. In addition, they considered
the impact of a further element of the Group’s head office
being identified as surplus. Discounted cash flow models were
reviewed and challenged on their assumptions. The Committee
is satisfied that liability for onerous leases is properly recorded.
LOSS-MAKING CONTRACTS
(Recurring item: see note 20 to the Financial Statements)
During the year, the Group reviewed the major long‑term
contract in the Netherlands for the development and supply of
a new product which was identified as a loss‑making contract
in the prior year. Management prepared updated estimates of
future income, costs and resulting cash flows associated with
the contract. The annual cash flows were then discounted
using appropriate risk‑adjusted discount rates to arrive at the
Net Present Value (NPV) of the contract in question.
An additional long‑term contract in the Netherlands for the
development and supply of a new product was reviewed by the
Group to assess whether it should be treated as a loss‑making
contract. Management analysed the relevant cash flows, which
were discounted, and concluded that the contract should not
be accounted for as a loss‑making contract.
The Committee reviewed and challenged the assumptions
underpinning the cash flows and discount rates and is satisfied
that the contracts have been correctly treated, and that in the
case of the loss‑making contract that the liabilities recorded
are reasonable.
REVENUE RECOGNITION/IFRS 15
(Current year focus item: see note 1 to the
Financial Statements)
The Group implemented IFRS 15 Revenue from Contracts
with Customers from 1 June 2018 using the full retrospective
method. As a result, prior year revenue and deferred income
balances have been restated as shown in note 1. The impacts
on the Group were found to be:
− For Escrow, the initial set‑up exercise is not considered to
be a distinct service and, as a result, these fees are now
recognised with the rest of the contract with revenue being
recognised over time.
− For Assurance, set‑up fees charged in respect of initial
work and configuration of equipment to allow customers
to benefit from a monitoring contract are not considered
to be a distinct service and, as a result, this revenue is now
recognised over time with the fee for the monitoring activity.
In both cases performance obligations are considered to be
satisfied over time as the performance does not create an
asset with an alternative use to the Group and the Group has
an enforceable right to payment for performance completed
to date.
The Committee discussed the financial impact, the treatment
being adopted, IFRS 15 transitional disclosures and is satisfied
that the Group’s revenue has been correctly accounted for
and disclosed.
INDIVIDUALLY SIGNIFICANT ITEMS ¹
(Current year focus item: see note 6 to the
Financial Statements)
Individually significant items by their nature and scale could
have a significant impact on the reporting of ‘Adjusted’
metrics such as ‘Adjusted Operating Profit’ 1, ‘Adjusted
EBITDA’ 1 and ‘Adjusted EPS’ 1. It is critical that these are
properly categorised in order to allow a user of the Financial
Statements to form an accurate picture of the underlying
performance of the business. The Committee challenged
management to provide the rationale for the treatment of
certain costs as Individually Significant. The Committee has
also challenged management on the use of ‘Adjusted’ or
APMs. All APMs are fully disclosed and reconciled to GAAP
measurements in the Financial Statements.
Following this review and challenge to management,
the Committee concluded that the items that have been
designated as individually significant and hence excluded from
‘Adjusted’ measures of performance, were sufficiently material
and unrelated to the underlying business to be properly
classified in this way.
1
See note 3 to the Financial Statements for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the Financial
Statements for a reconciliation to statutory information.
64
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 THE GROUP’S APPROACH TO MATERIALITY
In considering the materiality of any individual issue or issues
in aggregate, the Group looks at a range of qualitative and
quantitative measures to assess whether or not a user of
the accounts would be likely to be influenced by the item in
question. The range of measures includes (but is not limited to)
the primary Financial Statements themselves, the individual line
item in question, and whether or not the issue moves the result
from one side of an inflection point to another (for example,
turning a profit into a loss or a net asset into a net liability).
Qualitative and quantitative measures are both considered
as is any potential impact on remuneration or banking
arrangements such as debt covenants.
INTERNAL AUDIT
The internal audit function is responsible for internal audit,
the assurance of other quality systems and processes, and
monitoring the embedding of risk management processes
throughout our operations. The internal audit plan was
approved by the Committee during the financial year and
a number of audits were performed. The Group will look to
increase the scope of the audit plan during FY20.
INTERNAL CONTROLS AND RISK MANAGEMENT
The Board is responsible for establishing, maintaining and
monitoring the Group’s system of risk management and
internal control and reviewing its effectiveness. The Committee
monitors the performance of management in this area.
We have an ongoing process for identifying, evaluating and
managing the principal risks faced by the Group which has
been in place for the year under review and up to the date of
approval of the Annual Report and Accounts. The Group’s non
cyber security risks are monitored by the Audit Committee
on behalf of the Board which sets aside time for an in‑depth
discussion of notable or changing risks to the business. A
description of the process for managing risk together with a
description of the Principal Risks and strategies to manage
those risks is provided on pages 32 to 37.
Internal control systems are designed to meet the particular
needs of the Group and the risks to which it is exposed. By
their nature, however, internal control systems are designed
to manage rather than eliminate the risk of failure and can
provide only reasonable but not absolute assurance against
material misstatement or loss. Key elements of the risk
management and internal control system are described below.
Enhancements during the year are highlighted while the other
elements have all been in place throughout the year.
CONTROLS RELATING TO FINANCIAL REPORTING AND
PREPARATION OF THE ANNUAL REPORT AND ACCOUNTS
•
Information provided to management covering financial
performance and key performance indicators, including
non‑financial measures (enhanced by new KPIs and
targeted management reports).
• A detailed budgeting process where business units
prepare plans for the coming year (enhanced with
new standardised reporting and consolidation models
and systems).
• Procedures for the approval of capital expenditure and
investments and acquisitions (enhanced by standardised
capital approval request forms).
• Monthly operational reviews to monitor and reforecast
results as required against the annual operating plan, with
major variances followed up and management action taken
where appropriate.
OTHER CONTROLS
• Defined management structure and delegation of authority
to Committees of the Board, subsidiary boards and
associated business units (enhanced by more detailed
authorities and guidance notes).
• Recruitment standards and training to ensure the integrity
and competence of staff.
• Anti‑bribery, security and compliance training for
all employees.
• Clearly documented internal procedures set out in the
Group’s ISO 9001:2008 accredited quality manual.
• Regular internal audits of key processes and procedures
under the Group’s ISO 9001 and ISO 27001 accredited
quality assurance process.
• Monitoring of any whistleblowing or fraud reports.
The external auditors regularly report their findings on those
areas of internal control which they assess as part of the
external audit and Half Year review to the Board and the
Audit Committee.
Our internal control effectiveness is assessed through the
performance of regular checks, which in the year ended
31 May 2019 included:
• Assessment of the identification and management of risks
connected to the Group’s strategy and management of
strategic change;
• Reviewing and testing the Group’s financial reporting
processes;
• Performing compliance monitoring activities;
• Assessment of the Group’s processes for identifying
and mitigating potential conflicts of interest; and
• Monitoring the completion of the Group’s mandatory
employee training.
65
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Audit committee report
WHISTLEBLOWING AND CONFIDENTIAL
REPORTING PROCEDURES
The Group operates a confidential reporting and
whistleblowing procedure (known as our ‘Open Door Policy’).
The policy aims to support the stewardship of the Group’s
assets and the integrity of the Financial Statements as well as
protecting staff welfare. The procedure is reviewed annually by
the Committee to ensure that it remains fit for purpose.
In the previous year, the Committee appointed an independent
third party reporting agent to be the first point of contact for
those who do not wish to use normal internal line management
channels for reporting their concerns. This is advertised
internally via staff noticeboards and our intranet.
The Committee reviews any whistleblowing or confidential
reporting of concerns raised during the year with respect to
their nature, scale and any associated or consequential risks.
REVIEW OF THE AUDIT
COMMITTEE’S EFFECTIVENESS
The Committee has reviewed and considered the effectiveness
of its performance during the year. The review included the
views of members of the Committee and of regular attendees
at the various meetings (including the Executive Directors).
I am satisfied that the degree of rigour and challenge applied
in performing the Committee’s responsibilities is appropriate,
effective and continues to improve.
All significant pieces of non‑audit work are put to informal
tender to suitable parties that, if appropriate, can include
the external auditors. Upon review as to suitability and
price, the work will then be placed with the service provider
recommended. If this is the external auditors, then Audit
Committee approval is required.
The external auditors were not engaged during the year to
provide any services which may have given rise to a conflict of
interest. The Committee is satisfied that the overall levels of
audit and non‑audit fees (i.e. the half year review fee) are not
material relative to the income of the external auditors as a
whole and therefore that the objectivity and independence of
the external auditors was not compromised.
EXTERNAL AUDITORS’ EFFECTIVENESS
AND APPOINTMENT
The Committee reviews and makes recommendations
regarding the reappointment of the external auditors following
a formal review of the auditors’ performance following the July
Audit Committee meeting. In making these recommendations
the Committee considers:
• The experience, industry knowledge and expertise
of the auditors.
• The scope and planning of the audit and any variations
from the plan.
• The quality of the processes adopted.
AUDITORS’ INDEPENDENCE AND OBJECTIVITY
• The auditors’ explanations of significant risks to
The Committee received a formal statement of independence
from the external auditors.
The Company also operates a rigorous policy designed to
ensure that the auditors’ independence is not compromised
by their undertaking inappropriate non‑audit work. The Audit
Committee’s approval is therefore required for any fees for
any non‑audit work undertaken by the auditors. However, the
Company recognises that it can receive particular benefit from
certain non‑audit services provided by the external auditors
due to their technical skills and detailed understanding of the
Company’s business. A copy of the full policy on the payment
of fees to the external auditors for non‑audit services can be
found on the Company website at www.nccgroup.com.
During this financial year non‑audit fees of £27,500
(2018: £27,500) were paid to the external auditors for the
half year review.
audit quality by reference to the Company’s specific
circumstances and changes to the risks.
• The fees charged.
• Their attitude to and handling of key audit judgments.
• Their ability to challenge and communicate effectively
with management.
• The quality of the final report.
• The FRC’s Audit Quality Review report relating to KPMG.
During the financial year, I attended regular meetings with
KPMG’s engagement partner without management being
present. This provided the opportunity for open dialogue.
The engagement partner demonstrated his understanding of
the Group’s business risks and the consequential impact on
the Financial Statements. Feedback on the conduct of the
audit from the engagement partner’s perspective is used to
determine if any challenges in the prior year audit would be
sufficiently addressed in the next audit cycle.
66
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 The Group’s current auditors, KPMG LLP, have been in place
since 1 November 2013 with a competitive audit tender
process having last been undertaken in November 2011.
The lead audit partner rotates every five years to ensure
independence and was last rotated in 2018. While the
Company is not a FTSE 350 listed company, we continue
to comply with the UK Competition and Markets Authority’s
(CMA) Statutory Audit Services Order (Order) which states,
among other matters, that FTSE 350 listed companies should
put their external audit contract out to public tender at least
every ten years.
The Group will continue to keep this position under review
during the new financial year. The Group intends to remain
in full compliance with the requirement to carry out a formal
tender at least once every ten years.
Therefore, having fully considered the effectiveness,
independence and objectivity of the external auditors and the
reports they have produced in the current financial year, the
Committee has concluded that it is appropriate to recommend
to the Board the reappointment of KPMG LLP as the Group’s
external auditors for the next financial year.
RELATED PARTY TRANSACTIONS AND OTHER
FEES APPROVED BY THE COMMITTEE
Refer to note 31 for related party transactions in the year.
There were no such fees payable in the current year.
FAIR, BALANCED AND UNDERSTANDABLE
At the request of the Board, the Committee considered
whether the 2019 Annual Report and Accounts, when taken
as a whole, was fair, balanced and understandable (FBU) and
whether it provided the necessary information for shareholders
to assess NCC Group’s position and performance, business
model and strategy. The reviews outlined in the diagram below
include reviews of all material matters, as reported elsewhere
in this Annual Report and Accounts, reviews of the balance
of good and bad news and ensure the Annual Report and
Accounts correctly reflects:
• The Group’s position and performance as described
on pages 12 to 15 and 22 to 31;
• The Group’s business model as described on pages
10 to 11; and
• The Group’s strategy, as described on pages 16 to 21.
The independent reviewers noted below were not major
contributors to the Annual Report and Accounts but, at
the same time, as members of the Executive Committee,
are deemed to be sufficiently well informed on the Group’s
activities to be able to give appropriate feedback on the FBU
criteria. They undertake a qualitative review of disclosures and
a review of internal consistency throughout the Annual Report
and Accounts.
The Directors’ statement on a fair, balanced and
understandable Annual Report and Accounts is set out
on page 95.
Chris Batterham
CHAIRMAN, AUDIT COMMITTEE
24 July 2019
Financial
Information
Narrative
Disclosures
Independent
Reviewers
Audit Committee
Chair
• Prepared by
individual business
units
• Consolidated by
Group Finance team
• Reviewed by Group
Financial Controller
and CFO
• Prepared by Group
Finance team
• Reviewed by Group
Financial Controller
and CFO
• Various reports
prepared by
Committee Chairs,
CEO and CFO
• Senior members
of the Executive
Committee
• Those who have
not been major
contributors
• Review of detailed
verification
documents
• Review of findings
and observations
from independent
reviewers
67
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Nomination committee report
The members of the Nomination
Committee are myself along with
Chris Batterham, Jonathan Brooks
and Jennifer Duvalier. During the year,
Thomas Chambers also served on the
Committee until he resigned from the
Board on 26 September 2018.
THE NOMINATION
COMMITTEE’S OBJECTIVES AND
RESPONSIBILITIES
The Nomination Committee is responsible
for reviewing the size, structure, balance,
composition and progressive refreshing
of the Board and its committees and as
such its duties include:
• Reviewing the structure of the Board.
• Evaluating the balance of skills,
knowledge, experience and diversity
on the Board.
• Making recommendations for further
recruitment to the Board or proposing
changes to the existing structure of
the Board, or individual Directors.
• Reviewing the leadership needs of
the Company, both Executive and
Non‑Executive.
• Succession planning for Directors
and other senior Executives within
the business.
• Recruiting, appointing and exiting
of Directors.
• Overseeing membership of, and
succession to, the various Board
committees.
• Reviewing the time commitment
required from the Non‑Executive
Directors on NCC business.
The Chairman of the Board leads the
process for the appointment of new
Non‑Executive Directors to the Board
and for the appointment of the Chief
Executive Officer. The Chief Executive, in
conjunction with the Chairman, leads the
process for the Chief Financial Officer.
The Senior Independent Director leads the
process for a new Chairman of the Board.
In relation to an appointment to the
Board, the Committee draws up
a specification and assesses the
capabilities and experience required
for such a role, taking into account the
Board’s existing composition, including
relevant experience and understanding
of our stakeholder groups.
We also assess the time commitment
required. Candidates are sought by third
party executive search consultants and,
where appropriate, through assessment
of internal candidates and are then
formally considered by the Nomination
Committee. Extensive external referencing
is completed.
DIVERSITY
Our objective is to have a broad range
of skills, backgrounds, experiences and
personal attributes within the Board as
this ensures the Board is best placed to
serve the Company.
All appointments are made on merit
and against objective criteria with due
regard for the benefits of diversity on
the Board, including gender, nationality,
and educational and professional
background, as well as individual
characteristics which will enhance
diversity of thinking on the Board. The
Company and the Committee value the
aims and objectives of the Hampton‑
Alexander Review on FTSE Women
Leaders and the Parker Review on
ethnic diversity of UK Boards and
support and apply the Group’s diversity
policy set out on page 55.
The Group’s gender diversity statistics
are set out on page 42. At Board level,
we currently have one female on our
Board but we note that diversity extends
beyond the measurable statistics of
gender and ethnicity. As such, while we
do not set any particular targets, we
continue to take diversity in its wider
context into account, having regard to
the diversity policy, and recommend only
the most appropriate candidates for
appointment to the Board.
That said, we recognise that we still
have much progress to make in terms
of improving the diversity of the Board
and our Executive Team (and indeed
our workforce as a whole) in terms of
gender. We will look to address this
during future Board and Executive
Committee appointments. Given that
this is a fairly young Board in terms of
tenure, this improvement in diversity will
not happen overnight but we are very
mindful of the need to improve this and
take positive action, and the matter is
fully on our agenda.
“ Given that this is a fairly
young Board in terms of
tenure, this improvement
in diversity will not
happen overnight but
we are very mindful of
the need to improve this
and take positive action,
and the matter is fully on
our agenda.”
Chris Stone
COMMITTEE CHAIRMAN
68
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 When a new Director is appointed they receive a full, formal and tailored induction into the Company and discuss with the
Chairman any immediate training requirements.
The Committee’s terms of reference can be found in the Group’s Investors’ section of the Company’s website:
www.nccgroup.trust/uk/about‑us/investor‑relations
The terms of reference are reviewed annually and updated when necessary.
COMMITTEE MEETINGS
During this financial year, the Committee held one scheduled meeting. One ad hoc meeting was also held to consider candidates
for the CFO position and make a recommendation to the Board on the proposed candidate.
The attendance of individual Committee members at Nomination Committee meetings is shown in the table below.
Unless otherwise indicated, all Directors held office throughout the year.
Attendee
Chris Stone
Chris Batterham
Jonathan Brooks
Thomas Chambers
(until 26 September 2018)
Jennifer Duvalier
ACTIVITIES DURING THE YEAR
During the year, the Committee:
Meetings attended
1(1)
1(1)
1(1)
0(0)
1(1)
Conducted the search for a new CFO, considered the candidates, and recommended to the Board the appointment of Tim Kowalski
Evaluated the skills, knowledge and experience around the Board table
Reviewed the structure, size and composition of the Board
Reviewed Director length of service
Reviewed the diversity of the Board
Reviewed the memberships of all Committees
Reviewed the expected time commitment of the Chairman and the Non‑Executive Directors
COMMITTEE EFFECTIVENESS
During the year, the Nomination Committee carried out an internal self‑evaluation on its effectiveness. A small number of
recommendations were made, including a renewed focus on succession planning for both the Board and senior management.
EXTERNAL SEARCH CONSULTANCIES
In accordance with B.2.4 of the Code, during the year the Committee engaged Elliott Armstrong in the recruitment of
Tim Kowalski (Chief Financial Officer). Elliott Armstrong has no other connection with the Company.
Chris Stone
CHAIRMAN, NOMINATION COMMITTEE
24 July 2019
69
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Cyber security committee report
The Cyber Security Committee was
formed to focus specifically on the cyber
risks faced by the Group. This reflects
the significant threat posed by cyber
risks, the nature of our business, and
the potential damage to the business
as a high value target for malicious
acts. The Committee’s activities aim to
challenge and support improvements
to the Group’s information security
and data protection policies, defences
and controls, so as to comply with data
protection regulations around the world
(including GDPR, the EU’s General
Data Protection Regulation), and ensure
that the Group looks after its own
information, and the information that our
customers entrust to us, with the proper
care and attention.
The Committee was formed in November
2016 and I have chaired the Committee
since January 2018.
Chris Batterham, Jonathan Brooks and
Jennifer Duvalier (all independent Non‑
Executive Directors) served as members
of the Committee throughout the year.
The Group’s Director of Risk and
Assurance and the Group’s Chief
Information Security Officer (CISO) are
standing invitees of the Committee.
The Executive Directors are invited to
attend Committee meetings when the
Committee considers it to be appropriate.
THE CYBER SECURITY
COMMITTEE’S OBJECTIVES AND
RESPONSIBILITIES
The Cyber Security Committee is
responsible for assessing the performance
of the Group’s internal security and
defences and as such its duties are to:
• Oversee and advise the Board on the
current cyber risk exposure of the
Group and future cyber risk strategy.
• Review at least annually the Group’s
cyber security breach response and
crisis management plan.
• Review reports on any cyber security
incidents and the adequacy of
resulting actions.
• Receive and consider the regular
update reports from the CISO.
• Ensure the CISO is given the right of
direct access to the Committee.
• Consider and recommend actions
in respect of all cyber risk issues
escalated by the CISO, Head of IT
and the compliance function.
• Keep under review the effectiveness
of the Company’s controls, services
and products to analyse potential
vulnerabilities that could be exploited.
• Regularly assess what are the Group’s
most valuable intangible assets and
the most sensitive Group and customer
information and assess whether the
controls in place sufficiently protect
those assets and information.
• Review the Group’s ability to identify
and manage new cyber risks.
• Assess the adequacy of resources
and funding for cyber security
defence and control activities.
• Regularly review the cyber risk
posed by third parties including
outsourced IT and other partners.
• Oversee cyber security due diligence
undertaken as part of an acquisition
and advise the Board of the
risk exposure.
• Annually assess the adequacy of the
Group’s cyber insurance cover.
The Committee’s terms of reference
(which during the year were reviewed
and updated with some minor
amendments) can be found in the
Group’s Investors’ section of the
Company’s website, www.nccgroup.
trust/uk/about‑us/investor‑relations.
The terms of reference are reviewed
annually and updated when necessary.
COMMITTEE EFFECTIVENESS
During the year, the Cyber Security
Committee carried out an internal self‑
evaluation on its effectiveness, as it
continues to mature since its formation
in November 2016. The Committee was
found to be working effectively and
I am satisfied that the degree of rigour
and challenge applied in performing the
Committee’s responsibilities is appropriate,
effective and continues to improve.
As an output of both this and previous
evaluations, the Committee, along with
the Board, reaffirmed that cyber security
is a sufficiently important risk for the
business that the Committee should
remain focused on this specific set of
risks. Therefore, the current structure in
which the responsibility for broader risk
management remains with the Audit
Committee will continue.
“ Through the Committee,
the Group continues
to maintain an intense
focus on cyber security
during this year of
change as new Group-
wide IT systems and
ways of working are
put in place. We take
advantage of the
considerable expertise
we offer to our
customers to ensure that
we keep pace with the
cyber threat landscape
as it evolves.”
Chris Stone
COMMITTEE CHAIRMAN
70
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 COMMITTEE ACTIVITIES DURING THE YEAR
During the year we recruited a new CISO who joined us in August 2018, replacing the previous CISO who left earlier in 2018.
The Committee assessed both the Group’s short‑term tactical requirements, while simultaneously addressing longer term
strategic goals around ensuring the Group’s resilience to all levels of cyber attack. A strong focus was on making sure that
the Group’s adoption of new cloud‑based systems as part of the Securing Growth Together programme progressed smoothly
taking into account and mitigating where appropriate the different sorts of risks that this kind of deployment brings, and this will
continue into the next year.
The Group increased its capability to respond to incidents by improving its detective and reactive controls taking full advantage
of the expertise within the Group that we offer to our customers. We intend to continue to invest in the Group’s infrastructure to
ensure that the Group keeps up with the ever evolving cyber threat landscape.
The Committee oversaw the establishment of an Information Security and Data Protection (ISDP) Steering Group which
comprises of the CISO, the Data Protection Officer along with a number of Executive Committee members and Managing
Directors ensuring that cyber security matters are discussed at the very highest levels within the Group. The Committee receives
regular summary reports from the ISDP at Committee meetings.
In terms of our global data protection compliance programme and internal data privacy activities, our approach continues to be
proportionate, pragmatic, and risk‑based. As the Information Commissioner, Elizabeth Denham, made clear following the arrival
of GDPR, this is not the end, but the beginning. The Group continues to make excellent progress.
Noteworthy highlights since our previous report include:
Raised awareness of the requirements for data protection impact assessments (DPIA), in particular where new cloud systems are being
implemented as part of the Securing Growth Together programme. DPIAs are now completed as a matter of course for significant new systems
Growth of the data privacy team in the UK and EU to make sure that the Group continues to have the necessary resource to cover all its data
protection obligations. We are also recruiting for a hybrid compliance and privacy role in the US
Strengthened data breach reporting procedures for employees and management in case of a data breach involving personal data
Implementation of legitimate interest assessments using a bespoke tool
Brexit preparation activities to facilitate the continued free flow of data to third countries in the event of a no deal Brexit
The Committee reviewed the Company’s cyber risk insurance and initiated an external benchmarking exercise to understand the
robustness of its performance and risk processes relative to other external organisations. This resulted in a rebalancing of our
insurance spend to give a greater coverage on cyber‑related risks.
Finally, the Committee has also been conducting some ‘deep dives’ into specific aspects of cyber security, provoked by the
release last year of the UK National Cyber Security Centre’s Board Toolkit guidance material. The Committee will continue this
programme of ‘deep dives’ on an ongoing basis.
COMMITTEE MEETINGS
The Committee is required, in accordance with its terms of reference, to meet at least three times per year. During this financial
year, the Committee met three times.
The attendance of individual Committee members at the Cyber Security Committee meetings is shown in the table below.
Unless otherwise indicated, all Directors held office throughout the year.
Attendee
Chris Stone
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Chris Stone
CHAIRMAN, CYBER SECURITY COMMITTEE
24 July 2019
Meetings attended
3(3)
3(3)
3(3)
3(3)
71
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual statement
“ During the coming year,
we will be considering
and developing our
Remuneration Policy
for the period 2020-23.
We will also be
embedding the key
changes to the
Committee’s
responsibilities following
the recent changes
arising from the 2018
UK Corporate
Governance Code.”
Jonathan Brooks
COMMITTEE CHAIRMAN
On behalf of your Board, I am pleased
to present our Directors’ Remuneration
Report (DRR) for the year ended
31 May 2019.
The Report is divided into three sections:
an Annual Statement, a summary of
our Directors’ Remuneration Policy and
the Annual Report on Remuneration
(which sets out the actual application
of the Policy).
ANNUAL STATEMENT
During the year, we operated within the
Remuneration Policy that was approved
by shareholders at the 2017 AGM, a
copy of which can be found in the next
section of this Report.
There was one Board change during
2018/19 which was the appointment
of a new Chief Financial Officer,
Tim Kowalski.
Tim Kowalski joined the business
as our new Chief Financial Officer
on 23 July 2018. He was awarded a
base salary of £275,000 and benefits
and incentives in line with our Policy.
This salary was 10% higher than the
£250,000 salary of the previous Chief
Financial Officer Brian Tenner, which
had been set on his appointment as
CFO in February 2017, before he took
on the role of interim CEO. Upon Brian’s
departure, he received a payment
representing six months’ basic salary in
lieu of notice which was a contractual
payment relating to his departure. Brian
received a bonus payment in respect
of the 2017/18 financial year and the
Committee elected not to defer 35% of
this into shares for two years. Brian will
not receive any bonus in relation to the
2018/19 financial year. The Committee
determined he would be treated as a
good leaver for the LTIP granted to him
in 2017. Full details of this are disclosed
in the notes to the single total figure of
remuneration on page 82.
For the 2019/20 financial year, both the
Chief Executive Officer and the Chief
Financial Officer have been awarded an
increase in base salary of 2.5%.
By reference, the average salary
review awarded to all other UK‑based
employees was 3%.
In line with Policy, Non‑Executive
Director fees are also reviewed annually.
Following a review of expenses and
the expense claim process for Non‑
Executive Directors, a simplification was
proposed and approved which would
remove the ability to claim expenses, but
introduce with effect from 6 April 2019,
an expense allowance which would be
incorporated into base fees. As a result,
base fees would not be adjusted for the
coming year, other than the uplift for the
new expense allowance.
Details of these fees and allowances
are given in the Annual Report on
Remuneration on page 82.
PERFORMANCE RELATED
PAY – BONUS
The annual bonus for the year ended
31 May 2019 for both the Chief
Executive Officer and Chief Financial
Officer was based on the satisfaction of
stretching financial and strategic targets.
This resulted in an overall payment
of 48% of base salary for the CEO
and 44% of base salary for the CFO.
With respect to the financial targets,
these were set last year at an adjusted
operating profit ¹ from continuing
operations of between £33.0m and
£36.0m and by delivering an adjusted
operating profit ¹ of £33.7m. This
resulted in a bonus of 28% out of a
maximum of 75% of base salary being
achieved. With respect to the strategic
objectives which comprised 25% of the
available bonus opportunity, the bonus
earned was judged to be 20% for the
CEO and 16% for the CFO, with the
components of these figures broken
down as follows:
2018/19 OBJECTIVES FOR BOTH THE
CEO AND CFO
Implement ERP and CRM systems for
the business: Bonus potential 7.5%;
Actual bonus achieved 7.5%.
Develop KPI reporting: Bonus potential
5%; Actual bonus achieved 0%.
1
See note 3 to the Financial Statements for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the Financial
Statements for a reconciliation to statutory information.
72
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 CEO ONLY
Develop and implement a strategic plan for Fox‑IT and certain
of its product offering: Bonus potential 12.5%; Actual bonus
achieved 12.5%.
CFO ONLY
Build a fit for purpose Finance Team: Bonus potential 7.5%;
Actual bonus achieved 5%.
Simplify financial reporting: Bonus potential 5%; Actual bonus
achieved 3.5%.
For both the CEO and CFO, 35% of the actual bonuses
achieved will be deferred into nominal cost share options and
will vest after two years.
For 2019/20, the Committee intends to keep the same
annual bonus structure, with up to 75% being attributed to the
achievement of financial targets and 25% for strategic targets.
The adjusted operating profit ¹ target for 2019/20 will be
reported on within the 2020 Remuneration Report but as in
previous years the adjusted operating profit target will be set
within a tight range with bonuses of between 15% and 75%
of base salary being calculated by linear interpolation.
STRATEGIC TARGETS FOR 2019/20 INCLUDE:
CEO
• Employee engagement, diversity and inclusion (8%)
• Continued delivery of efficiencies through the Securing
Growth Together programme (7%)
• Develop and implement a strategic plan for Escrow and
EaaS growth (10%)
CFO
• Employee engagement, diversity and inclusion (5%)
• Best in class finance and administration functions (10%)
• Develop and streamline KPI reporting (10%)
As in prior years, the bonus will continue to be self‑funding
and as such, no bonus will be payable, even for strategic
targets, unless the minimum profit target is met. 35% of any
bonus earned will be deferred into nominal cost share options
and after a vesting period of two years, these shares must be
retained until the shareholding guideline is achieved. Clawback
and malus provisions are in place for the annual bonus.
PERFORMANCE RELATED PAY – LTIP
No LTIP vested in the year for the Executive Directors
as neither executive has been employed for more than
three years.
With respect to the LTIP for 2019/22, the Committee intends
to make awards of up to 100% of base salary and these will
vest after three years as long as a number of demanding
performance targets are satisfied. 60% of the potential award
will be based on the achievement of a demanding EPS target,
30% on the achievements of certain cash targets and 10% on
relative TSR targets.
Clawback and malus provisions are in place for the LTIP.
In order to further align executives with shareholders,
executives are required to retain any vested shares (net of
tax) for a period of two years. After this holding period, vested
shares must also be retained if the shareholding guideline has
not been met.
At the Annual General Meeting in September 2018, 99.25%
of shareholders voted in favour of the adoption of the Annual
Report on Remuneration. The 2019 Annual Statement and
Annual Report on Remuneration will be put to an advisory
vote at the Annual General Meeting on 25 September
2019, providing shareholders with the opportunity to voice
their opinions on how the Committee has implemented the
Remuneration Policy this year. As always, the Committee
remains committed to engagement and transparency and
I welcome the opportunity for discussion of the Group’s
remuneration with any shareholder, at our AGM or at any other
time during the year.
During the coming year, we will be considering and developing
our Remuneration Policy for the period 2020‑23 which we will
put to shareholders at the 2020 AGM. As part of this process,
in the event we were proposing any significant changes to our
Remuneration Policy and structure, we would consult with our
major shareholders.
We will also be embedding the key changes to the Committee’s
responsibilities following the recent changes arising from the
2018 UK Corporate Governance Code. We will report on this in
the 2020 Remuneration Report but some of the areas which the
Committee will now consider and review are as follows:
• Ensuring that the remuneration policy continues to support
and incentivise the achievement of our strategy.
• Setting the remuneration for the ExCom (i.e. ExCom the
layer of senior management immediately below Board level).
• Ensuring that the Committee takes into account workforce
remuneration and related policies when setting executive
remuneration and that executive awards are aligned
with culture.
• Reviewing share plan rules to allow the use of discretion
to override formulaic outcomes in respect of variable pay.
• Developing our formal policy for post‑employment
shareholding requirements for vested and unvested shares.
• Reviewing and reporting on the CEO to employee pay ratio
between our CEO and UK workforce.
•
Including further scenario charts and narrative on our
potential LTIP vesting outcomes to show the effect of a
50% increase in the share price.
• Reviewing our approach to Post‑Employment
shareholdings and developing our policy on this which we
will include as part of 2020 Remuneration Policy.
Jonathan Brooks
CHAIRMAN, REMUNERATION COMMITTEE
24 July 2019
73
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Directors’ remuneration policy
The Remuneration Committee determines the Company’s
policy on the remuneration of the Executive Directors and
(from 1 June 2019) the Executive Committee (ExCom). The
principles which underpin the Remuneration Policy for the
Company are to:
• Ensure Executive Directors’ rewards and incentives are
directly aligned with the interests of the shareholders
in order to reinforce the strategic priorities of the
Group, optimise the performance of the Group and
create sustained growth in shareholder value, without
encouragement to take excessive undue risk.
• Provide the level of remuneration required to attract, retain
and motivate Executive Directors and senior executives of
an appropriate calibre.
• Ensure a proper balance of fixed and variable
performance‑related components, linked to short and
longer term objectives.
Current policy table for Executive Directors
• Reflect market competitiveness, taking account of the total
value of all the benefit elements.
Our Remuneration Strategy has been designed to reflect the
needs of a complex multinational organisation, which has
grown both organically and by acquisition.
Remuneration for the Executive Directors is structured so
that the variable pay elements (annual bonus and long‑term
incentives) form a significant proportion of the overall package.
This provides a strong link between the remuneration paid
to Executive Directors and the performance of the Group as
well as providing a strong alignment of interest between the
Executive Directors and shareholders.
For the purposes of section 226D‑(6)(b) of the Companies Act
2006, this policy took effect from the date of the 2017 AGM,
which was held on 21 September 2017.
Purpose and link to short and
long-term strategic objectives Operation (including framework to assess performance)
Maximum opportunity
Salary
Attract, retain and reward high
calibre Executive Directors
The Remuneration Committee reviews salaries for Executive
Directors and also the Executive Committee (ExCom) from
1 June 2019 annually unless responsibilities change.
Pay reviews take into account Group and personal
performance and externally benchmarked market data for
companies operating in IT services, management consulting
and relevant high‑tech sectors, which, although not directly
comparable, provide an indicative range.
In setting appropriate salary levels the Committee takes
into account pay and employment conditions of employees
elsewhere in the Group, alongside the impact of any increase
to base salaries on the total remuneration package.
Any changes are effective from 1 June each year.
Details of current Executive
Director salaries are set out
in the Annual Report and
Accounts on Remuneration
(page 80).
Salary increases are normally
in line with those for other
employees but also take
account of other factors such
as changes to responsibility
and the complexity of
the role.
Benefits
Attract, retain and reward high
calibre Executive Directors
Pension
To provide a competitive
benefit, which attracts high
calibre executives
and which allows flexible
retirement planning to suit
individual needs
Benefits in kind include the provision of a car or car allowance,
payment of private fuel, car insurance, private medical
insurance, life assurance and permanent health insurance.
Executive Directors may be invited to participate in the
Sharesave Scheme approved by HMRC.
Market‑competitive benefits.
SAYE Sharesave Scheme
subject to HMRC
approved limits.
Executive Directors are entitled to a company pension
contribution, which is paid into the Group defined contribution
personal pension scheme.
They can also opt to have the same level of contribution made
as a percentage of base salary.
10% of base salary into the
Group Scheme, providing
they make a contribution of
not less than 5% of base
salary, or a base salary
supplement of 10% of
base salary.
74
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Purpose and link to short and
long-term strategic objectives Operation (including framework to assess performance)
Maximum opportunity
Annual bonus
Drive and reward sustainable
business performance
Long Term Incentive Plan
To drive long-term
performance in line
with Group strategy and
incentivise through share
ownership
Chief Executive Officer
100% of base salary.
Chief Financial Officer
100% of base salary.
Award over shares with a
face value at grant of:
100% of salary p.a. for the
Chief Executive Officer.
100% of salary p.a. for the
Chief Financial Officer.
Based on a range of stretching targets measured over one
year. This might include, but not exclusively, profit measures and
other strategic objectives such as cash management, brand
development, customer satisfaction and retention, business unit
sales growth and employee engagement. Performance below
the minimum performance target results in no bonus. No more
than 20% of the maximum opportunity is paid for achievement
of the threshold performance targets. Payments rise from the
threshold payment to 100% of the maximum opportunity for
levels of performance between the threshold and maximum
targets. The rate of the rise and the various payment targets are
determined annually by the Committee.
The Committee has discretion to reduce the formulaic
bonus outcome if individual performance is determined
to be unsatisfactory or if the individual is the subject of
disciplinary action.
35% of any bonus payment is deferred into nominal
cost share options which vest after a two‑year period.
Dividend equivalents are paid on vesting share options.
Malus and clawback provisions are in place for both cash
and deferred elements.
Awards have a performance period of three years.
The level of vesting is determined by measures appropriate
to the strategic priorities of the business. At least half of any
award will be subject to financial performance measures.
Measures might include, but not exclusively, EPS, cash flow
and relative TSR metrics.
The targets will represent a maximum of 60% of total
potential for EPS growth, 30% for the achievement of
cash flow targets and 10% for the achievement of relative
TSR targets.
The Remuneration Committee has the discretion to determine
the number of measures to be used.
Performance below the threshold target results in no vesting.
For performance between the threshold target and maximum
performance target, vesting starts at 20% and rises to 100%
of the shares vesting.
Any awards granted under this policy to Executive Directors
which vest and are exercised after the completion of the
three‑year performance period must be held for a further two
years after vesting, even if the Director has met the 200%
shareholding guideline.
Should a change in control of the Group occur, crystallisation
of any LTIP awards is within the discretion of the
Remuneration Committee.
Malus and clawback provisions are in place.
75
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Directors’ remuneration policy
Purpose and link to short and
long-term strategic objectives Operation (including framework to assess performance)
Maximum opportunity
Executive Director Shareholding Guideline
To align the interests of
Executive Directors with
the interests of all of the
Company’s shareholders
The Executive Directors are expected to build and retain a
shareholding in the Group at least equivalent to 200% of base
salary. Executives will be required to retain all vested deferred
bonus shares and LTIP shares released from the holding
period until they have attained the minimum shareholding
guideline and even then they may only sell when they have
held vested LTIP shares for a minimum period of two years.
For the avoidance of doubt, Executive Directors are permitted
to sell sufficient shares in order to meet any tax obligation
arising from vesting shares.
CHOICE OF PERFORMANCE MEASURES AND
TARGET SETTING
DIFFERENCES IN PAY POLICY FOR EMPLOYEES AND
EXECUTIVE DIRECTORS
For both the annual bonus and LTIPs, the objective of our
Policy is to choose performance measures which help drive
and reward the achievement of our strategy and which also
provide alignment between executives and shareholders.
The Committee reviews metrics annually to ensure they
remain appropriate and reflect the future strategic direction
of the Group.
Targets for each performance measure are set by the
Committee with reference to internal plans and external
expectations. Performance is generally measured so that
incentive payouts increase pro rata for levels of performance
in between the threshold and maximum performance targets.
With regard to the annual bonus, the Remuneration Committee
believes that a simple and transparent scheme with sufficiently
stretching targets and an element of bonus deferral
prevents short‑term decisions being made and ensures
that the executive is focused on the delivery of sustainable
business performance.
With regard to the LTIP, the Committee believes in setting
demanding objectives, which reward steady, progressive
growth, in order to incentivise and encourage long‑term growth
and enhance shareholder value.
Performance measures and targets are disclosed in the
Annual Report on Remuneration. In cases where targets are
commercially sensitive, for example annual profit targets for
the annual bonus, they will be disclosed retrospectively in the
year in which the bonus is paid.
The principles behind the Remuneration Policy for Executive
Directors are cascaded down through the Group and its
aims are to attract and retain the best staff and to focus
their remuneration on the delivery of long‑term sustainable
growth by using a mix of salary, benefits, bonus and longer‑
term incentives.
As a result, no element of Executive Director Remuneration
Policy is operated exclusively for Executive Directors:
• The annual performance‑related pay scheme for Executive
Directors is largely the same as that of the Executive
Committee and other senior managers within the business
and all are aligned with similar business objectives.
• Participation in the LTIP is extended to the Executive
Committee and other senior managers where possible.
• The pension scheme is operated for all
permanent employees.
The main difference between pay for Executive Directors
and employees is that for Executive Directors, the variable
element of total remuneration is much greater while the total
remuneration opportunity is also higher to reflect the increased
responsibility of the role.
EXECUTIVE SHAREHOLDING GUIDELINES
The Committee considers that Executive Directors should
retain a personal holding of shares in the Company, so as to
align their interests with the interests of shareholders.
In any event, 35% of the value achieved as part of the annual
bonus scheme will be deferred into nominal cost share options,
to be held for a period of no less than two years and share
options vesting under the LTIP scheme, if exercised, are to be
held for a minimum of two years after the vesting date.
76
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 NON-EXECUTIVE DIRECTOR POLICY TABLE
Purpose and link to strategy
Operation
Maximum opportunity
Fees
Attract, reward and retain
experienced Non-Executive
Directors
Fees for the Non‑Executive Directors are determined by the
Board within the limits set by the Articles of Association and
are based on information on fees paid in similar companies,
taking into account the experience of the individuals and the
relative time commitments involved.
There will be separate disclosures of fees paid for Chairing the
Audit and Remuneration Committees and for acting as Senior
Independent Director.
Fees for the Non‑Executive Directors are reviewed annually.
Any reasonable business‑related expenses (including
tax thereon) can be reimbursed if determined to be a
taxable benefit.
Current fee levels are set
out in the Annual Report and
Accounts on Remuneration
on page 81.
Overall fee limit will be within
the current £300,000 limit
set out in the Company’s
Articles of Association,
approved on 21 September
2010, which is subject to
increase on 21 September
each year by the same
percentage increase as
the percentage increase in
the General Index of Retail
Prices for all items (or such
other comparable index as
may be substituted for it
from time to time before
such anniversary) in the
12 months immediately
preceding such date.
APPROACH TO RECRUITMENT
BENEFITS
The principle applied in the recruitment of a new Executive
Director is for the remuneration package to be set in
accordance with the terms of the approved Remuneration
Policy for existing Executive Directors in force at the time of
appointment. Further details of this Policy for each element of
remuneration is set out below.
SALARY
Salaries for new hires, including internal promotions, will be set
to reflect their skills and experience, the Company’s intended
pay positioning and the market rate for the applicable role.
Where it is appropriate to offer a salary initially below median
levels, the Committee will have the discretion to allow phased
salary increases over a period of time for newly appointed
Directors, even though this may involve increases in excess of
the rate for the wider workforce and inflation.
Benefits will be provided in line with those offered to other
Executive Directors, taking account of local market practice,
with relocation expenses or arrangements provided if
necessary. Tax equalisation may also be considered if an
Executive Director is adversely affected by taxation due to
their employment with the Company. The Company may also
pay legal fees and other costs incurred by the individual.
These would all be disclosed.
INCENTIVE OPPORTUNITY
The aggregate ongoing incentive opportunity offered to new
recruits will be no higher than that offered under the annual
bonus plan and the LTIP to the existing Executive Directors.
Different performance measures and targets may be set
initially for the annual bonus plan, taking into account the
responsibilities of the individual and the point in the financial
year at which they join.
77
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Directors’ remuneration policy
‘BUYOUT’ AWARDS
Sign‑on bonuses are not generally offered by the Group but
at Board level, the Committee may offer additional cash and/
or share‑based ‘buyout’ awards when it considers these
to be in the best interests of the Company and, therefore,
shareholders, including awards made under Listing Rule
9.4.2 R. Any such ‘buyout’ payments would be based solely
on remuneration lost when leaving the former employer
and would reflect the delivery mechanism such as cash,
shares, options, time horizons and performance requirements
attaching to that remuneration.
TRANSITIONAL ARRANGEMENTS FOR INTERNAL
APPOINTMENTS TO THE BOARD
In the case of an internal appointment, any variable pay
element awarded in respect of the prior role may be allowed
to pay out according to its terms on grant, adjusted as relevant
to take into account the appointment. In addition, any other
ongoing remuneration obligations existing prior to appointment
may continue, provided that they are put to shareholders for
approval at the first AGM following their appointment.
POLICY ON PAYMENT FOR LOSS OF OFFICE
Payments on termination for Executive Directors are restricted
to the value of salary and contractual benefits for the duration
of the notice period. It is the policy of the Remuneration
Committee to seek to mitigate termination payments and
pay what is due and fair. There are no predetermined special
provisions for Executive Directors with regard to compensation
in the event of loss of office. The Company may also pay an
amount considered to be reasonable by the Committee where
loss of office is due to redundancy or in respect of fees for
legal advice for the outgoing Director.
Elements of variable remuneration would be treated as follows:
ANNUAL BONUS
The treatment of annual bonus payments upon cessation of
employment is determined on a case‑by‑case basis. When the
Committee determines that the payment of an annual bonus is
appropriate, the annual bonus payment is typically:
• Prorated for the period of time served from the start of the
financial year to the date of termination and not for any
period in lieu of notice or garden leave.
• Subject to the normal bonus targets, tested at the end of
the year, and would take into account performance over
the notice period.
• Subject to deferral of 35% of the value.
The Committee also has the discretion to determine whether
any nominal cost share options from previous deferral of
annual bonus payments will vest at the normal vesting date
or earlier on leaving or whether they lapse. If the Committee
exercises this discretion, it can also determine if the vesting
should be prorated to reflect time served since the beginning
of the deferral date. The same discretionary principle would
apply to the payment of dividend equivalents on any shares
that have been deferred, but not yet vested. This too would be
prorated to reflect tenure.
78
LONG TERM INCENTIVE PLAN
Under the LTIP, unvested awards will normally lapse upon
cessation of employment. However, in line with the plan rules,
the Committee has discretion to allow awards to vest at the
normal vesting date, or earlier. If the Committee exercises this
discretion, awards are normally prorated to reflect time served
since the date of grant and based on the achievement of the
performance criteria. The holding period detailed above will
apply to such incentives.
ALL EMPLOYEE SHARE SCHEMES
The Executive Directors, where eligible for participation in all
employee share schemes, participate on the same basis as for
other employees.
APPROACH TO SERVICE CONTRACTS AND LETTERS
OF APPOINTMENT
The Committee’s policy is to offer service contracts for
Executive Directors with notice periods of between six and
12 months exercisable by either party. In addition, the Executive
Directors are subject to a non‑compete clause from the date of
termination, where enforceable.
All Non‑Executive Directors’ appointments are terminable on
at least three months’ notice on either side.
The Executive Directors and Non‑Executive Directors offer
themselves for re‑election at the AGM every year.
ILLUSTRATION OF REMUNERATION SCENARIOS
The chart below details the hypothetical composition of each
Executive Director’s remuneration package and how it could
vary at different levels of performance under the policy set
out above.
£’000
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
£1,373,598
32.5%
£636,847
14%
£480,567
11%
32.5%
£889,294
31.5%
31.5%
£325,544
£424,200
13%
10%
100%
75%
35%
100%
77%
37%
Fixed
Target
Maximum
Fixed
Target
Maximum
CHIEF EXECUTIVE OFFICER
CHIEF FINANCIAL OFFICER
Total Fixed
Annual Bonus
Long-term incentives
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Note that the charts are indicative, as share price movement
has been excluded. Assumptions made for each scenario are
as follows.
• Minimum. Fixed remuneration only: salary, benefits and
pension. Salary based on 2019/20 salary and benefits
based on 2018/19 disclosed benefit amounts.
• Target. Fixed remuneration plus minimum annual bonus
opportunity of £66,977 for the Chief Executive Officer and
£42,281 for the Chief Financial Officer, which is equivalent
to 15% of salary for both the Chief Executive Officer and
Chief Financial Officer, plus 20% vesting of the maximum
award under the Long Term Incentive Plan.
• Maximum. Fixed remuneration plus maximum annual
bonus opportunity, £446,516 for the Chief Executive
Officer and £281,875 for the Chief Financial Officer,
equivalent to 100% of salary for both the Chief Executive
Officer and Chief Financial Officer, as well as 100%
vesting of the maximum award under the Long Term
Incentive Plan, being 100% of salary for both Executives.
STATEMENT OF CONSIDERATION OF EMPLOYMENT
CONDITIONS ELSEWHERE IN THE GROUP
The Remuneration Committee does not consult directly
with employees when determining Remuneration Policy for
Executive Directors. However, as stated above, the annual
bonus and LTIP are operated for other employees to ensure
alignment of objectives across the Group and the terms of
the pension scheme (save for the contribution entitlements)
are the same for all permanent employees. In addition, the
Committee compares information on general pay levels and
policies across the Group when setting Executive Director pay.
HOW SHAREHOLDER VIEWS ARE TAKEN
INTO ACCOUNT
The Remuneration Committee considers shareholder feedback
received on the Directors’ Remuneration Report each year
and guidance from shareholder representative bodies more
generally. Shareholders’ views are key inputs when shaping
remuneration policy. When any material changes are proposed
to the Remuneration Policy, the Remuneration Committee
Chairman will inform major shareholders in advance and will
generally offer a meeting to discuss these.
KEY AREAS OF DISCRETION IN THE
REMUNERATION POLICY
The Committee operates the Group’s variable incentive
plans according to their respective rules and in accordance
with HMRC rules where relevant. To ensure the efficient
administration of these plans, the Committee will apply
certain operational discretions. These discretions are implicit
in the policy stated above, but we have listed them for clarity.
These include, but are not limited to:
• Whether annual bonus is paid to Executives once notice
has been served.
• Discretion in exceptional circumstances to amend
previously set incentive targets or to adjust the proposed
payout to ensure a fair and appropriate outcome.
• Certain decisions relating to the LTIP awards for which
the Committee has discretion as set out in the rules
of the relevant share plans which have been approved
by shareholders.
• The decisions on exercise of clawback rights.
LEGACY ARRANGEMENTS
For the avoidance of doubt, in approving the Remuneration
Policy in 2017, authority was given to the Company to honour
any commitments entered into with current or former Directors
before the current legislation on remuneration policies came
into force or before an individual became a Director, such as
the payment of outstanding incentive awards, even where it
is not consistent with the policy prevailing at the time such
commitment is fulfilled.
Details of any payments to former Directors will be set out in
the Annual Report on Remuneration as they arise.
EXTERNAL DIRECTORSHIPS FOR
EXECUTIVE DIRECTORS
Executive Directors may accept one external Non‑Executive
Directorship with the prior agreement of the Board, provided
it does not conflict with the Group’s interests and the time
commitment does not impact upon the Executive Director’s
ability to perform their primary duty. The Executive Directors
may retain the fee from external directorships.
79
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
This part of the report has been prepared in accordance with
Part 3 of The Large and Medium‑sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013 and
9.8.8R of the Listing Rules.
In addition, to ensure that this bonus opportunity results in
shareholder alignment and provides greater retention value,
35% of any bonus payment will be deferred into nominal cost
share options for two years.
The following report will be subject to an advisory shareholder
vote at the 2019 AGM, which is scheduled to be held on
25 September 2019. The information on pages 80 to 90 has
been audited where indicated.
HOW WILL THE REMUNERATION POLICY BE
IMPLEMENTED IN THE YEAR ENDING 31 MAY 2020?
EXECUTIVE DIRECTORS’ BASE SALARIES
The Committee has decided to award a salary increase of
2.5% to both the Chief Executive Officer and Chief Financial
Officer. With regard to all other UK‑based employees, the
average increase has been 3%.
On 23 July 2018, Tim Kowalski was appointed as
Chief Financial Officer on a salary of £275,000.
The table below details the Executive Directors’ salaries as at
31 May 2019 and salaries which took effect from 1 June 2019.
Base salary
at 31 May
2019
£000
Base salary
at 1 June
2019
£000
436
275
447
282
% Change
2.5
2.5
Chief Executive
Officer
Chief Financial
Officer
PENSION AND BENEFITS
There will be no changes to pension or benefits provision.
ANNUAL BONUS
The annual bonus maximum for the Chief Executive Officer
and the Chief Financial Officer in 2019/20 will be 100%
of salary with 75% based on the achievement of adjusted
operating profit ¹ targets and 25% on the achievement
of strategic priorities. The strategic priorities for 2019/20
are outlined on pages 16 to 17. To ensure that the bonus is
self‑funding, no bonus, including any due for achievement
of strategic targets, will be payable if the minimum adjusted
operating profit target is not met. The profit target will be
based on delivery of the Group’s own internal plans, which
are comprehensively set, scrutinised and agreed by the
Board. The Committee believes that the underlying targets
are commercially sensitive and cannot be disclosed at this
stage. To the extent they are no longer commercially sensitive,
they will be disclosed in next year’s Report.
The bonus, nominal cost share options and associated dividend
equivalents are also subject to malus and clawback provisions.
The targets relating to the 2018/19 bonus payments are
shown on page 83.
LONG TERM INCENTIVE PLAN (LTIP)
It is expected that awards of 100% of base salary will be made
under the LTIP in July or August 2019. These will be subject to
a two‑year post‑vesting holding period for Executive Directors.
As well as the holding period, the Executives have to achieve
a shareholding guideline of 200% of salary (post shares sold
to cover any tax) before they can sell any shares that vest. The
awards are also subject to malus and clawback provisions.
The vesting of these LTIP awards will be based on Earnings
Per Share (60%), a cash flow metric (30%) and a relative Total
Shareholder Return metric (10%). The performance conditions
for 2019/20 will be the same as for 2018/19:
• Earnings per share needs to grow at between a threshold
9% and a maximum of 20% per annum over three years
to qualify for an award of between 12% and 60% of salary
respectively.
• The cash conversion metric enables executives to earn
30% of salary. A cash conversion ratio of 70% represents
the threshold, qualifying for an award of 6% of salary, with
the maximum award of 30% due if the cash conversion
ratio ¹ achieved is 80% or higher.
• Finally, the relative TSR component is worth up to
10% of salary. If the business achieves a level of share
performance equivalent to the median of the FTSE 250
(excluding investment trusts), then this will qualify for an
award of 2%. Achieving a share price equivalent to upper
quartile for the FTSE 250 will result in the maximum award
of 10% of salary.
The Committee believes that these three measures
are transparent, easy to understand, easy to track and
communicate, cost‑effective to measure and fundamentally
aligned to the Group’s strategic goals.
1
See note 3 to the Financial Statements for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the Financial
Statements for a reconciliation to statutory information.
80
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 NON-EXECUTIVE DIRECTORS’ REMUNERATION
In line with the current Policy, Non‑Executive Director fees are
reviewed annually.
In 2018/19, this included a review of expenses and the
expense claiming processes. Following this review, and taking
into account the additional complexities of applying tax and
national insurance to many but not all of the expense claims,
a simplification was proposed and approved to remove the
ability to claim expenses for all UK travel expenses, but
instead to provide a compensatory increase to base fees.
The compensatory increase was based on the average cost
to the Company of previous expense claims, and was set
at £4,750 for Non‑Executive Directors, and £8,200 for the
Chairman. This increase resulted in a new base fee level of
£50,750 for NEDs and £146,575 for the Chairman, effective
from 6 April 2019.
HOW HAS THE REMUNERATION POLICY BEEN
IMPLEMENTED IN THE YEAR ENDED 31 MAY 2019?
This section sets out how the Remuneration Policy was
implemented in 2018/19. The key implementation decisions
during the year related to:
•
•
•
Determination of annual bonus outcomes for the 2018/19
performance period.
Terms of the new Directors appointed to the Board,
including the Chief Financial Officer.
The performance targets and value of awards to be
granted under the LTIP, which will vest in 2021.
Further detail on these decisions, together with other
information on payments made to Directors, is set out in
the following sections.
Annualised Fees
Chris Stone
Thomas Chambers*
Chris Batterham
Jonathan Brooks
Mike Ettling
Jennifer Duvalier
As at
1 June 2019
£000
As at
1 June 2018
£000
147
–
64
58
51
51
138
46
59
53
46
46
* Thomas Chambers stepped down from the Board at the 2018 AGM on
26 September 2018.
81
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
SINGLE TOTAL FIGURE OF REMUNERATION (AUDITED)
The detailed emoluments received by the Executive and Non‑Executive Directors for the year ended 31 May 2019 are below.
Director
Chris Stone
Adam Palser 6
Tim Kowalski 6
Brian Tenner 7
Chris Batterham
Jonathan Brooks
Jennifer Duvalier 6
Mike Ettling 6
Thomas Chambers 8
Debbie Hewitt 9
Total
Year
ended
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
31 May 2019
31 May 2018
Salary /
Non‑Executive
Director fees 1
£000
140
243
436
213
237
–
49
300
60
47
54
46
47
4
47
31
15
51
–
48
1,085
983
Benefits 2
£000
–
–
12
6
13
–
3
15
–
–
–
–
–
–
–
–
–
–
–
–
28
21
Pension
benefits 3
£000
–
–
22
4
24
–
5
30
–
–
–
–
–
–
–
–
–
–
–
–
51
34
Annual
bonus 4
£000
–
–
209
69
104
–
–
98
–
–
–
–
–
–
–
–
–
–
–
–
313
167
Long‑term
incentive 5
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Other
£000
–
–
–
–
–
–
125
–
–
–
–
–
–
–
–
–
–
–
–
–
125
–
Total
£000
140
243
679
292
378
–
182
443
60
47
54
46
47
4
47
31
15
51
–
48
1,602
1,205
1
2
3
4
5
6
7
8
9
In 2018/19, a review was undertaken of the expenses and the expense claiming processes for the Chairman and Non‑Executive Directors. Following this review,
and taking into account the additional complexities of applying tax and national insurance to many but not all of the expense claims, a simplification was proposed
and approved to remove the ability to claim expenses for all UK travel expenses, but instead to provide a compensatory increase to base fees. The compensatory
increase was based on the average cost to the Company of previous expense claims, and was set at £4,750 for Non‑Executive Directors, and £8,200 for the
Chairman. This increase resulted in a new base fee level of £50,750 for NEDs and £146,575 for the Chairman, effective from 6 April 2019.
Taxable benefits include the provision to every Executive Director of a car or car allowance, payment of private fuel, car insurance, private medical insurance,
life assurance and permanent health insurance.
Pension benefits include employer contributions to the Group pension scheme and payments in lieu of pension contributions. The Company provided pension
payments in lieu of pension contributions for three Executive Directors during the year ended 31 May 2019.
Annual bonus payments for performance in the relevant financial year; 35% of this bonus is deferred into nominal cost share options for two years.
Dividend equivalents accrue on these shares.
Long‑term incentive awards vesting under the LTIP.
Adam Palser was appointed as Chief Executive Officer on 1 December 2017. Tim Kowalski was appointed as Chief Financial Officer on 23 July 2018.
Mike Ettling and Jennifer Duvalier were appointed as Non‑Executive Directors on 22 September 2017 and 25 April 2018 respectively.
Brian Tenner stepped down as an Executive Director and from the Board on 12 August 2018. The Committee agreed his leaving arrangements in line with the
Remuneration Policy. He received £125,000 representing six months’ basic salary in lieu of notice in accordance with his service agreement. This pay in lieu of
notice relates to a contractual payment relating to his departure. The Committee decided not to defer 35% of Brian Tenner’s bonus of £97,500 into nominal cost
share options for two years hence the £97,500 bonus relating to the financial year ended on 31 May 2018 was paid in full as cash. Brian was not eligible for a
bonus for the financial year ended 31 May 2019 (Please see the section on ‘Policy on payment for loss of office’ within the Directors’ Remuneration policy). The
Committee determined that Brian Tenner would be treated as a good leaver for the purposes of his unvested 2017 Long Term Incentive Plan award, vesting on
its normal vesting date (in 2020), reduced pro rata to 12 February 2019 (being six months from his leaving date) and subject to achievement of the performance
criteria. Brian will then be required to hold his shares for a further two years until 2022 in accordance with the Company’s shareholding guidelines.
Thomas Chambers stepped down from the Board on 26 September 2018. Prior to that Thomas stepped down as Chair of the Audit Committee with effect from
31 March 2018 and his fee was accordingly reduced from £52,000 to £45,000.
Debbie Hewitt resigned from the Board on 28 March 2018.
In the 2018 Annual Report and Accounts, an omission was made within the Single Total Figure of Remuneration table on page
85, in that the 2017/18 bonuses were not shown for the CEO and CFO although the bonuses paid were correctly disclosed on
page 86. The above table has been consequently restated.
82
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
ADDITIONAL INFORMATION IN RESPECT OF THE SINGLE TOTAL FIGURE OF REMUNERATION
ANNUAL BONUS
2018/19 Annual bonus (audited)
For the year ended 31 May 2019, the maximum potential bonus opportunity for Adam Palser was 100% of salary.
For Tim Kowalski, the maximum potential bonus opportunity was also 100% of salary but the bonus payable will be prorated
to reflect the fact that Tim started on 23 July 2018 and not 1 June 2018.
For Brian Tenner, the maximum potential was also 100% of salary but Brian left on 12 August 2018 and will not be eligible
for an annual bonus in respect of the 2018/19 financial year.
The actual bonus paid to Adam Palser was £209,318 and to Tim Kowalski £103,880 based on the achievement of the
performance conditions set out below. 35% of each payment will be deferred into nominal cost share options for two years.
The performance measures and targets are set out below:
FINANCIAL TARGETS – UP TO 75% OF THE BONUS
Performance targets
Adam Palser Tim Kowalski
31 May 2019
Adjusted
operating profit ¹
Strategic
targets
Threshold
Maximum
Actual
The strategic targets were set individually for the
Executive Directors based on key strategic objectives
for the year in their area of responsibility – see below
£33m Weighting (% of salary)
£36m Weighting (% of salary)
Payout (% of salary)
Weighting (% of salary)
£33.7m
15%
75%
28%
25%
15%
75%
28%
25%
Payout (% of salary)
Payout (% of salary)
Total bonus
20%
48%
£209,318
16%
44%
£103,880
STRATEGIC TARGETS – UP TO 25% OF THE BONUS
The table below highlights the key strategic targets and achievements for each Executive Director. As the minimum profit target
was exceeded, the strategic element of the bonus became eligible for consideration for payment as detailed below.
Maximum
% of
bonus
Target and performance outcome
7.5%
Implement ERP and CRM systems for the business.
31 May 2019
Adam Palser Tim Kowalski
7.5%
7.5%
5%
12.5%
7.5%
5%
Achieved – deliverables met on time and on budget. Salesforce rolled out to UK Assurance and
Fort Consult in May 2019, and Fox‑IT in June 2019.
Concur Expenses system now implemented in UK and Netherlands and already in use by 1,400
staff. The Workday architect phase was completed by the end of May 2019.
Develop KPI reporting.
Progress with some KPIs instigated but scope for more work to be done.
Develop and implement a strategic plan for Fox‑IT and certain of its product offering.
Achieved – Portfolio reviewed and strategic plan created, new structure around three core
business units with leaders having been appointed. Unit Income Statements now communicated
and tracked, with a base and stretch three‑year plan in place.
Build a fit for purpose Finance Team.
Significant progress with key appointments made.
Simplify financial reporting.
Significant progress in providing more information to all areas of the business. Strong
performance in cash management after introduction of management reporting to underpin this.
0%
0%
12.5%
N/A
N/A
5%
N/A
3.5%
1
See note 3 for an explanation and definitions of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the financial statements for a
reconciliation to statutory information.
NCC GROUP PLC ¦ STOCK CODE: NCC
83
BUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
LONG-TERM INCENTIVE PLAN VESTING
LTIP awards vest based on a three‑year performance period. As the Chief Executive Officer and Chief Financial Officer have
been employed since 1 December 2017 and 23 July 2018 respectively, no LTIP awards vested for the Executive Directors
during the year.
LONG-TERM INCENTIVES GRANTED DURING THE YEAR (AUDITED)
During the financial year, the Executive Directors were granted awards which are due to vest on 31 May 2021, subject to the
performance conditions set out below. The awards were as follows:
Executive
Number of LTIP
awards 1
Basis
Face
value 2
Adam Palser
197,285
100% of base salary £436,000
Performance condition
Vesting determined by:
• growth in Adjusted ³ EPS over the
performance period
• Average cash conversion ratio ³ over the
performance period
• TSR over the performance period vs FTSE
250 comparator group
Tim Kowalski
124,434
100% of base salary £275,000
As above
The performance conditions for these awards is set out below:
Proportion
Component
Metric
Threshold
Threshold
vesting % Target
Target
vesting % Maximum
Maximum
vesting %
60%
EPS
30%
Cash
conversion
10%
TSR
Average growth
over a three‑year
period
Average Cash
conversion ratio ³
over three years
TSR over three
years vs FTSE 250
comparator group
(excluding investment
funds)
9%
20%
n/a
n/a
20%
100%
70%
20%
75%
50%
80%
100%
Median
20%
n/a
n/a
Upper
quartile
100%
Performance
Period
1 June 2018
to 31 May 2021
1 June 2018
to 31 May 2021
Vesting basis
Straight‑line
between
threshold
and max
Straight‑line
between
threshold and
target, then target
to max
Straight‑line
between
threshold
and max
LTIP awards are structured as nominal‑cost options (£1 being payable upon each exercise).
Based on a share price of £2.21 which was the closing mid‑market price of the Company’s shares on the day before the date of grant.
See note 3 to the Financial Statements for an explanation of alternative performance measures (APMs) and adjusting items. See note 3 to the
Financial Statements for a reconciliation to statutory information.
1
2
3
84
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 SAYE OPTIONS GRANTED IN THE YEAR.
The Group operates an HMRC‑approved SAYE scheme. All eligible employees, including Executive Directors, may be invited to
participate on similar terms for a fixed period of three years. During the year Adam Palser and Tim Kowalski opted to participate
in this scheme.
Brian Tenner’s outstanding Save as You Earn awards lapsed on the cessation of his employment on 12 August 2018.
These awards will be included in the other column of the single figure table in the 2021/22 annual remuneration report,
once they have been exercised.
Executive
Date of
grant
Number of
options
Basis
Adam Palser
24 Aug 2018
Tim Kowalski
24 Aug 2018
10,273 £500 per month
contribution over
a three‑year
period
10,273 £500 per month
contribution over
a three‑year
period
Face
value 1
£22,487
Exercise
price
£1.752
£22,487
£1.752
Vesting
date
October 2021
October 2021
Performance
condition
Awards vest
subject to
continued
employment
Awards vest
subject to
continued
employment
1
Calculated on the price of £2.189, which was the average mid‑market share price over the three days preceding the date of grant.
DIRECTORS’ INTERESTS IN SHARES (AUDITED)
The tables below set out details of the Executive Directors’ outstanding share awards, which will vest in future years subject to
performance conditions and/or continued service.
SUMMARY OF MAXIMUM LTIP AWARDS OUTSTANDING
Adam Palser
Tim Kowalski
Brian Tenner 1
Total LTIP
Options held
at 31 May
2018
178,601
–
148,777
Granted
during
the period
197,285
124,434
–
Exercised
during
the period
–
–
–
Share price
on date
of exercise
–
–
–
Lapsed
during
the period
–
–
64,266
Total LTIP
Options
held
at 31 May
2019
375,886
124,434
84,511
All awards granted under the LTIP are subject to continued employment and the satisfaction of the performance conditions as
set out above. The awards were all nominal cost options.
1
The Committee determined that Brian Tenner would be treated as a good leaver for the purposes of his unvested 2017 Long Term Incentive Plan award,
vesting on its normal vesting date (in 2020), reduced pro rata to 12 February 2019 (being six months from his leaving date) and subject to achievement of the
performance criteria. Brian will then be required to hold his shares for a further two years until 2022 in accordance with the Company’s shareholding guidelines.
85
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
SHARE OWNERSHIP (AUDITED)
The beneficial and non‑beneficial interests of the current Directors in the share capital of NCC Group plc at 31 May 2019 are set
out below:
Beneficial interests
in ordinary shares 1
31 May
2019
31 May
2018
Maximum share
awards subject
to performance
conditions 2
Share options 3
31 May
2019
31 May
2018
31 May
2019
31 May
2018
Deferred Bonus Plan 4
31 May
2018
31 May
2019
Total
31 May
2019
31 May
2018
Chris Stone
Adam Palser
Tim Kowalski
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
124,382
23,199
23,614
50,000
50,000
9,500
50,000
50,000
–
–
50,000
30,000
–
50,000
–
375,886
124,434
–
–
–
–
–
178,601
–
–
–
–
–
–
10,273
10,273
–
–
–
–
–
–
–
–
–
–
–
–
10,993
–
–
–
–
–
–
–
–
–
–
–
–
124,382
420,351
158,321
50,000
50,000
9,500
50,000
50,000
178,601
–
50,000
30,000
–
50,000
1
2
This information includes holdings of any connected persons.
These awards represent the outstanding LTIP interests, which are included in the table above which are due to vest in either July/August 2021 or 2022.
3 Representative SAYE scheme interest, which are due to vest in October 2021.
4 Nominal cost share options granted under the 2018‑20 Deferred Bonus Plan on 23 August 2018. Subject to a service condition, tax and National Insurance.
The beneficial and non‑beneficial interests of the Directors who departed from the Group during the year in the share capital of
NCC Group plc shown as at the date of leaving are set out below:
Beneficial interests
in ordinary shares 1
Date of
leaving 2
111,309
29,134
31 May
2018
111,309
29,134
Maximum share awards
subject to performance
conditions
Share options
Total
Date of
leaving 2
84,511
–
31 May
2018
148,777
–
Date of
leaving 2
–
–
31 May
2018
11,568 3
–
Date of
leaving 2
195,820
29,134
31 May
2018
271,654
29,134
Brian Tenner
Thomas Chambers
1
2
3
This information includes holdings of any connected persons.
Brian Tenner left the Company on 12 August 2018 and Thomas Chambers left the Company on 26 September 2018.
Brian Tenner’s SAYE scheme (2017‑20) lapsed when he left the Company on 12 August 2018.
SHAREHOLDING REQUIREMENTS
The Executive Directors are expected to build and retain a shareholding in the Group at least equivalent to 200% of base
salary. Executives will be required to retain all vested deferred bonus shares and LTIP shares released from the holding period,
until they have attained the minimum shareholding guideline and even then, only when they have held vested LTIP shares for a
minimum period of two years. Executive Directors will also be required to retain all shares vesting from SAYE schemes. For the
avoidance of doubt, Executive Directors are permitted to sell sufficient shares in order to meet any tax obligation arising from
vesting shares.
Shareholding
requirements
(% of salary)
Shareholding
as at 31 May
2019
(% of salary)
Requirement
met
200
200
10%
13%
No
No
(The percentages within this table have been calculated using a three‑month
average share price (1 March 2019 to 31 May 2019) of £1.56)
Adam Palser
Tim Kowalski
86
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 APPOINTMENT TERMS FOR NEW DIRECTORS
CHIEF FINANCIAL OFFICER
Tim Kowalski, Chief Financial Officer, joined the business on 23 July 2018. The remuneration arrangements provided to him
were in accordance with the current approved Policy and are as follows:
•
Base salary of £275,000
• Maximum annual bonus potential of 100% of salary, with 35% of any payment deferred into nominal cost share options
•
•
•
for two years
Annual grant under the LTIP of 100% of salary
Allowance in lieu of pension of 10% of salary
Benefits of a monthly car allowance of £1,100, private fuel, life assurance of 4 × salary, private medical insurance for self
and family and income protection insurance
• Notice period of six months
RELATIVE IMPORTANCE OF THE SPEND ON PAY
The following table sets out the percentage change in distributions to shareholders and employee remuneration costs.
Employee remuneration costs 1
Dividends 2
31 May
2019
£m
154.5
12.9
31 May
2018
£m
146.5
12.8
% Change
5.5%
0.8%
1
2
Based on the figure shown in note 8 to the Financial Statements.
Based on the total cash returned to shareholders in the year ended 31 May 2019 through dividends as shown in note 11 to the Financial Statements
(excluding the proposed 2019 final dividend).
PERCENTAGE INCREASE IN THE REMUNERATION OF THE CHIEF EXECUTIVE
The table below shows the movement in the salary, benefits and annual bonus for the Chief Executive between the current
and previous financial year compared to all employees of the Company.
The comparator group for salaries and benefits are all employees in the UK – there were no benefit policy changes in this time.
The comparator group for bonus is those in management population who also have an annual scheme, and excludes those on
commission and incentive plans.
Element of remuneration
Salary
Taxable benefits
Annual Bonus
Chief Executive
Employees
Chief Executive (% of salary)
Employees (% of salary)
Chief Executive (% of salary)
Employees (% of salary)
% increase
2.5
3.0
–
–
47.8%
(4.2%)
PERFORMANCE GRAPH AND TABLE
The following graph shows the total shareholder return, with dividends reinvested, from 31 May 2009 against the corresponding
changes in a hypothetical holding in shares in both the FTSE All Share and FTSE 250 Indices.
The FTSE All Share and FTSE 250 represent broad equity indices. The Company is a constituent member of the FTSE All Share
and the Committee has adopted the FTSE 250 Index for part of its LTIP performance measure. Both indices give a market
capitalisation‑based perspective.
87
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
During the year, the Company’s share price varied between £1.19 and £2.24 and ended the financial year at £1.66.
Ten‑year historical TSR performance is the growth in the value of a hypothetical £100 holding over ten years. It has been
calculated for NCC Group plc, the FTSE All Share and FTSE 250 (excluding investment trusts) based on spot values.
900
800
700
600
500
400
300
200
100
0
1 June 09
1 June 10
1 June 11
1 June 12
1 June 13
1 June 14
1 June 15
1 June 16
1 June 17
1 June 18
1 June 19
NCC GROUP PLC
FTSE ALL-SHARE INDEX
FTSE 250 INDEX
The share price was £2.09 on 1 June 2018 and £1.66 on 31 May 2019.
The table below shows the total remuneration for the Chief Executive over the same ten‑year period, including share awards
valued at the date they vested.
Year ended 1, 2, 3
31 May 2019
31 May 2018
31 May 2017
31 May 2016
31 May 2015
31 May 2014
31 May 2013
31 May 2012
31 May 2011
31 May 2010
Total remuneration
(£000)
Annual bonus
(% of max) 4
Long‑term incentives
(% of max) 5
679
292 1
257 2
610
1,091
993
1,089
1,118
1,074
1,222
836
48
32.5
32.5
–
70
73
73
0 6
85
67
71
–
–
–
–
20
15
50
63
70
54
72
1
2
3
Adam Palser was appointed on 1 December 2017. The total remuneration figure above is in respect of the period from 1 December 2017 to 31 May 2018.
During the year ended 31 May 2018, Brian Tenner acted as Interim Chief Executive Officer for the period 1 June 2017 to 30 November 2017.
The total remuneration figure above is the total remuneration received in relation to that six month period.
Rob Cotton was CEO in the period above between 1 June 2009 and 31 May 2017.
4 Note that this shows the annual bonus payments as a percentage of the maximum opportunity.
Shows the LTIP vesting level as a percentage of the maximum opportunity.
In 2012/13 Rob Cotton waived his right to a bonus, which would have been equal to 32% of salary. This was equivalent to 50% of the maximum bonus
opportunity.
5
6
88
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 MEMBERSHIP AND ATTENDANCE
The Remuneration Committee membership consists solely of Non‑Executive Directors and comprises Jonathan Brooks as
Chairman, Chris Batterham and Jennifer Duvalier. Thomas Chambers stepped down from the Committee on 26 September 2018.
The Company Chairman, Chief Executive Officer, Chief Financial Officer, Chief People Officer and Company Secretary attend
the Remuneration Committee by invitation of the Chairman of the Committee from time to time and assist the Committee with
its considerations. No Director is involved in setting their personal remuneration.
The attendance of individual Committee members at Remuneration Committee meetings is shown in the table below:
Attended
Jonathan Brooks
Chris Batterham
Jennifer Duvalier
Thomas Chambers 1
1
Stepped down from the Committee on 26 September 2018.
ADVISERS TO THE COMMITTEE
Meetings attended
4(4)
4(4)
4(4)
1(1)
During the year, the Committee received advice on senior executive remuneration from Aon plc and was comfortable that the
advice was objective and independent. Aon plc is a member of the Remuneration Consultants’ Group and is a signatory to
their Code of Conduct. The total fee charged 2018/19 for providing advice in relation to executive remuneration was £21,653.
Aon plc did not provide any other services to the Company during the year.
The Committee reviews the performance and independence of its advisers on an annual basis.
SERVICE CONTRACTS AND LETTERS OF APPOINTMENT
The service contracts and letters of appointment of the current Directors include the following terms.
Date of contract
Notice period
Executive
Adam Palser
Tim Kowalski
Non-Executive
Chris Stone
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
1 December 2017
23 July 2018
6 April 2017
9 April 2015
13 March 2017
25 April 2018
1 September 2017
12 months
6 months
3 months
3 months
3 months
3 months
3 months
89
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration committee report
Annual report on remuneration
DILUTION
The LTIP has a dilution limit, for new and treasury shares, of 10% of the issued ordinary share capital of the Company in any
ten‑year period for any share option scheme operated by the Company. As at 31 May 2019 the Company had utilised13,792,836
(31 May 2018: 17,516,337) ordinary shares through LTIP, SAYE, EMI, CSOP, ISO and ESPP awards counting towards the 10%
limit which represents 4.96% (2018: 6.31%) of the issued ordinary share capital of the Company. To clarify, this figure of 4.96%
includes both discretionary and all‑employee share schemes.
STATEMENT OF SHAREHOLDER VOTING
The following votes were received from the shareholders in respect of the Directors’ Remuneration Report and in respect of the
Remuneration Policy:
For 1
Against
Total votes cast (for and against excluding withheld votes)
Votes withheld 2
Total votes cast (including withheld votes)
Remuneration Report
(2018 AGM)
Remuneration Policy
(2017 AGM)
Total number
of votes
%
of votes cast
Total number
of votes
%
of votes cast
201,787,826
1,525,485
203,313,311
435
203,313,746
99.25
0.75
100.0
100.0
202,309,191
318,649
202,627,840
4,046,993
206,674,833
99.84
0.16
100.0
100.0
1
2
Includes Chairman’s discretionary votes.
A vote withheld is not a vote in law and is not counted in the calculation of the proportion of votes cast ‘for’ and ‘against’ a resolution.
Approved by the Board and signed on its behalf:
Jonathan Brooks
CHAIRMAN, REMUNERATION COMMITTEE
24 July 2019
90
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Directors’ report
The Directors present their report and the Group and Company
Financial Statements of NCC Group plc (the ‘Company’) and
its subsidiaries (together the ‘Group’) for the financial year
ended 31 May 2019.
PRINCIPAL ACTIVITIES
The Company is a public limited company incorporated
in England, registered number 4627044, with its
registered office at XYZ Building, 2 Hardman Boulevard,
Spinningfields, M3 3AQ.
The principal activity of the Group is the provision of
independent advice and services to customers through the
provision of escrow and cyber assurance services. The principal
activity of the Company is that of a holding company.
RESULTS AND DIVIDENDS
The Group’s and Company’s audited Financial Statements for
the financial year ended 31 May 2019 are set out on pages
106 to 156.
The Directors propose a final dividend of 3.15p per ordinary
share, which together with the interim dividend of 1.5p per
ordinary share paid on 28 February 2019 makes a total
dividend of 4.65p for the year.
The final dividend will, if approved by shareholders at the Annual
General Meeting, be paid on 4 October 2019 to shareholders
on the register at the close of business on 6 September 2019.
The ex dividend date will be 5 September 2019.
POST BALANCE SHEET EVENTS
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. Historical arrangements fees have been
fully amortised.
There were no other post balance sheet events.
SHARE CAPITAL AND CONTROL
At the Company’s Annual General Meeting held on
26 September 2018, the Directors were granted authority
to allot up to 92,559,426 ordinary shares representing
approximately a third of the Company’s issued share capital. In
addition, the Directors were granted authority to allot a further
92,559,426 ordinary shares, again representing approximately
a third of the Company’s issued share capital, solely to be used
in connection with a pre‑emptive rights issue.
As at 31 May 2019, the Company’s issued ordinary share
capital comprised 277,830,625 ordinary shares with a nominal
value of one pence each, of which no ordinary shares were
held in treasury.
During the year ended 31 May 2019, 170,544 shares in the
Company were issued further to the exercise of options
pursuant to the Company’s share option schemes.
The holders of ordinary shares are entitled, among other rights,
to receive the Company’s Annual Reports and Accounts, to
attend and speak at general meetings of the Company, to
appoint proxies and to exercise voting rights.
Details of the movements of the called up share capital of the
Company are set out in note 26 to the Financial Statements
and the information in this note is incorporated by reference
and forms part of this Directors’ Report.
All rights and obligations attaching to the Company’s
ordinary shares are set out in the Company’s Articles of
Association (Articles), copies of which can be obtained from
the Companies House website or by writing to the Company
Secretary. Unless otherwise provided in the Articles, the
terms of issue of any shares, any restrictions from time to
time imposed by laws or regulations (for example, insider
trading laws) or pursuant to the EU Market Abuse Regulations
whereby certain Directors, officers and employees of the
Group require the approval of the Company to deal in ordinary
shares of the Company, any shareholder may transfer any or all
of his shares.
The Company is not aware of any agreements between
shareholders that may results in restrictions on the transfer of
securities and/or voting rights.
The Directors may refuse to register a transfer of shares in
certificated form that are not fully paid‑up or otherwise in
accordance with the Articles.
91
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Directors’ report
AUTHORITY TO PURCHASE OWN SHARES
EMPLOYEES
At the Company’s Annual General Meeting held on
26 September 2018, shareholders authorised the Company
to make market purchases of up to 27,767,828 ordinary
shares representing approximately 10% of the issued share
capital. This authority was not used during the financial year
ended 31 May 2019. At the 2019 Annual General Meeting,
shareholders will be asked to give a similar authority.
The Company currently holds nil ordinary shares in treasury.
DIRECTORS
Biographical details of the Company’s current Directors are set
out on pages 48 to 49. In addition, Brian Tenner and Thomas
Chambers were Directors of the Company in the financial
year. Subject to law and the Company’s Articles of Association,
the Directors may exercise all of the powers of the Company
and may delegate their power and discretion to committees.
The Company’s Articles of Association give the Directors
power to appoint and replace Directors. Under the terms of
reference of the Nomination Committee, any appointment
to the Board of the Company must be recommended by the
Nomination Committee for approval by the Board. The Articles
of Association also require two Directors to retire by rotation
each year end and each Director must offer himself for re‑
election at least every three years. However, in accordance with
previous years and in accordance with best practice all Directors
will submit themselves for re‑election at the AGM each year.
During the year, no Director had any material interest in any
contract of significance in the Group’s business.
DIRECTORS’ AND OFFICERS’ INSURANCE
AND INDEMNITIES
The Company maintains Directors’ and Officers’ liability
insurance, which provides appropriate cover for any legal
action brought against its Directors (including those who
served as Directors or Officers during 2018/2019). This cover
was in place throughout the financial year ended 31 May 2019
and up to the date of this Directors’ Report. The Directors
of the Company have also entered into individual deeds of
indemnity with the Company which constitute as qualifying
third party indemnity provisions for the purposes of section
234 of the Companies Act 2006.
The deeds were in effect during the course of the financial
year ended 31 May 2019 for the benefit of the Directors and,
at the date of this report, are in force for the benefit of the
Directors in relation to certain losses and liabilities which they
may incur (or have incurred) in connection with their duties,
powers or office.
The Group uses a number of ways to engage with its
employees on matters that impact them and the performance
of the Group. These include briefings by members of the
Executive Committee, regular team meetings, the Group’s
intranet site and weekly update emails which together provide,
among other information, an awareness of the financial and
economic factors affecting the Company’s performance. In July
2018 we created a dedicated Group Communications function,
which oversaw the implementation of systems that enable
access to information about all aspects of the Group’s activity,
improving the way that we communicate and engage internally.
We conduct an employee engagement survey to ensure all
employees are given a voice in the organisation. In 2018,
using insights from our survey and subsequent employee
engagement, we defined new values for the organisation.
Details of these values are set out in the Sustainability Report
on page 41.
We offer employees the opportunity to purchase ordinary
shares in the Company through participation in the Company’s
Save As You Earn Scheme. We will also be launching, subject
to shareholder approval at the 2019 AGM, a Share Incentive
Plan. Both schemes help to encourage employee interest in
the performance of the Group.
EQUAL OPPORTUNITIES
The Group is committed to providing equality of opportunity
to all employees without discrimination and applies fair and
equitable employment policies which seek to promote entry
into and progression within the Group. Appointments are
determined solely by application of job criteria, personal ability,
behaviour and competency.
In the opinion of the Directors, all employee policies are deemed
to be effective and in accordance with their intended aims.
DISABLED PERSONS
Disabled persons have equal opportunities when applying
for vacancies, with due regard to their aptitudes and abilities.
Procedures ensure that disabled employees are fairly treated
in respect of training and career development. For those
employees becoming disabled during the course of their
employment, the Group is supportive so as to provide an
opportunity for them to remain with the Group, wherever
reasonably practicable.
POLITICAL DONATIONS
During the year the Company made no political donations
(2018: nil).
92
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 SUSTAINABILITY REPORT
REAPPOINTMENT OF AUDITORS
The Board approved the Audit Committee’s recommendation
to put a resolution to shareholders recommending the
reappointment of KPMG LLP as the Company’s auditors
and KPMG LLP have indicated their willingness to accept
the reappointment of auditors to the Company. The Audit
Committee, in its recommendation, confirmed that (1) the
recommendation was free from influence by a third party and
(2) no contractual term of the kind mentioned in Article 16(6)
of the EU Regulation 537/2014 has been imposed on the
Company. A resolution to reappoint KPMG LLP as auditors
will be put to the members at the Annual General Meeting.
ANNUAL GENERAL MEETING
The notice of the Company’s Annual General Meeting to be
held at 9.30am on 25 September 2019 at its head office
at XYZ Building, 2 Hardman Boulevard, Spinningfields,
Manchester, M3 3AQ, along with details of the business to
be proposed and explanatory notes, will be available on the
Group’s website together with the Annual Report and Accounts.
All shareholders will be notified by post or email, at their
request, when the documents have been made available.
CAPITALISED INTEREST
During the period, no interest was capitalised by the Group
(2018: £nil). The tax benefit on this amount was £nil (2018: £nil).
The Company’s sustainability report on pages 38 to 43
provides an update on the Group’s policies and activities
in respect of its wider stakeholders, including employees,
community, environmental, ethical and health and safety issues
and modern slavery.
OVERSEAS BRANCHES
The Group has one overseas branch in Spain. This is a branch
of NCC Group Security Services Limited.
RESEARCH AND DEVELOPMENT
We are committed to using innovative, cost‑effective and
practical solutions for providing high‑quality services and
we recognise the importance of ensuring that we focus our
investment on the development of technology. The Group’s
research and development expenditure is predominantly
associated with computer and software systems.
CHANGE OF CONTROL
In the event of a change of control of the Company, the Group
and each of its lenders shall enter into negotiation for a period
to determine how the Group’s loan facilities may continue and
if after negotiation there is no agreement the lender has the
right to cancel the commitment.
There are no agreements between the Company and its
Directors or employees providing for compensation for loss of
office or employment (whether through resignation, purported
redundancy or otherwise) that occurs because of a takeover bid.
DISCLOSURE OF INFORMATION TO THE AUDITORS
The Directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditors are unaware; and each Director has taken all the steps
that they ought to have taken as a Director to make themselves
aware of any relevant audit information and to establish that the
Company’s auditors are aware of that information.
93
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Directors’ report
REPORTING REQUIREMENTS
The following sets out the location of additional information forming part of the Directors’ Report:
Reporting requirement
Location
Board’s assessment of the Group’s internal control systems
Details of uses of financial instruments and specific policies
for managing financial risk
Corporate Governance Report on pages 52 to 60 and the
Audit Committee Report on page 65
Note 24 (Financial Instruments) on pages 142 to 145
Directors’ interests
Directors’ Remuneration Report on page 86
Directors’ responsibilities statement
Directors’ Responsibilities Statement on page 95
Directors’ remuneration including disclosures required by
Schedule 5 and Schedule 8 of SI2008/410 – Large and
Medium‑sized Companies and Groups (Accounts and
Reports) Regulations 2008
Directors’ Remuneration Report on pages 80 to 90
DTR4.1.8.R – Management Report – the Directors’ Report
and Strategic Report comprise the management report
Directors’ Report on pages 91 to 94 and the Strategic Report
on pages IFC to 43
Going concern statement
Greenhouse gas emissions
Chief Financial Officer’s Review on page 31
Sustainability Report on page 43
Likely future developments of the business and Group
Strategic Report on pages 15 to 17
LR 9.8.4 (4) – Long‑term incentive schemes
Directors’ Remuneration Report on pages 84 to 85
LR 9.8.6 (2) – Substantial shareholders
Statement on corporate governance
Shareholder relations section of Corporate Governance
Report on page 59
Corporate Governance Report, Audit Committee Report,
Nomination Committee Report and Directors’ Remuneration
Report on pages 45 to 90
Strategic Report – Companies Act 2006 s414A‑D
Strategic Report on pages IFC to 43
The Strategic Report comprising the inside cover to page 43 and this Directors’ Report on pages 91 to 94 have been approved
and authorised for issue by the Board. They were signed on its behalf by:
Adam Palser
CHIEF EXECUTIVE OFFICER
24 July 2019
Tim Kowalski
CHIEF FINANCIAL OFFICER
24 July 2019
94
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Directors’ responsibilities statement
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on
the Company’s website. Legislation in the UK governing the
preparation and dissemination of Financial Statements may
differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN
RESPECT OF THE ANNUAL FINANCIAL REPORT
Each of the Directors whose names and functions are set out on
pages 48 to 49 confirms that, to the best of their 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; and
the Directors’ report includes a fair review of the
development and performance of the business and the
position of the issuer and the undertakings included in the
consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a
whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
position and performance, business model and strategy.
For and on behalf of the Board
Adam Palser
CHIEF EXECUTIVE OFFICER
24 July 2019
Tim Kowalski
CHIEF FINANCIAL OFFICER
24 July 2019
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN
RESPECT OF THE ANNUAL REPORT AND ACCOUNTS
The Directors are responsible for preparing the Annual Report
and Accounts and the Group and parent Company Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and
parent Company Financial Statements for each financial
year. Under that law they are required to prepare the Group
Financial Statements in accordance with International
Financial Reporting Standards as adopted by the European
Union (IFRSs as adopted by the EU) and applicable law
and have elected to prepare the parent Company Financial
Statements on the same basis.
Under company law the Directors must not approve the
Financial Statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Group and
parent Company and of their profit or loss for that period. In
preparing each of the Group and parent Company Financial
Statements, the Directors are required to:
•
select suitable accounting policies and then apply
them consistently;
• make judgments and estimates that are reasonable,
relevant and reliable;
•
state whether they have been prepared in accordance
with IFRSs as adopted by the EU;
• assess the Group and parent Company’s ability to continue
as a going concern, disclosing, as applicable, matters
related to going concern; and
• use the going concern basis of accounting unless they
either intend to liquidate the Group or the parent Company
or to cease operations, or have no realistic alternative but
to do so.
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and explain the
parent Company’s transactions and disclose with reasonable
accuracy at any time the financial position of the parent
Company and enable them to ensure that its Financial
Statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is
necessary to enable the preparation of Financial Statements
that are free from material misstatement, whether due to fraud
or error, and have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
95
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Financials
Independent auditors’ report
Consolidated income statement
97
106
Consolidated statement of comprehensive income 106
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement of changes in equity
Company balance sheet
Company cash flow statement
Company statement of changes in equity
Notes to the financial statements
107
108
109
110
111
112
113
96
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Independent auditors’ report
to the members of NCC Group plc
Overview
Materiality:
Group financial
statements as
a whole
Coverage
Risks of material
misstatement
Recurring risks
Event driven risks
£0.95m (2018: £0.80m)
4.4% (2018: 4.6%) of Consolidated
profit before taxation normalised to
exclude individually significant items
as disclosed in note 6
85% (2018: 91%) of Consolidated
profit before taxation
vs 2018
Recoverability of goodwill
in respect of Fox IT
Capitalised software and
development costs as
intangible assets
Assurance revenue
recognition in the
cut-off period
Recoverable amount of
investment in subsidiary
– parent Company
The impact of uncertainties
due to the UK exiting the
European Union on our audit
Going concern
<>
<>
New
<>
New
New
1 OUR OPINION IS UNMODIFIED
We have audited the financial statements of NCC Group
plc (the Company) for the year ended 31 May 2019 which
comprise the consolidated income statement, consolidated
statement of comprehensive income, consolidated balance
sheet, consolidated cash flow statement, consolidated
statement of changes in equity, Company balance sheet,
Company cash flow statement, Company statement of
changes in equity, and the related notes, including the
accounting policies in note 1.
In our opinion:
•
•
•
•
the Financial Statements give a true and fair view of the
state of the Group’s and of the parent Company’s affairs
as at 31 May 2019 and of the Group’s profit for the year
then ended;
the Group Financial Statements have been properly
prepared in accordance with International Financial
Reporting Standards as adopted by the European Union
(IFRSs as adopted by the EU);
the parent Company Financial Statements have been
properly prepared in accordance with IFRSs as adopted by
the EU and as applied in accordance with the provisions of
the Companies Act 2006; and
the Financial Statements have been prepared in
accordance with the requirements of the Companies Act
2006 and, as regards the Group Financial Statements,
Article 4 of the IAS Regulation.
BASIS FOR OPINION
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities are described below. We believe
that the audit evidence we have obtained is a sufficient
and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the Audit Committee.
We were first appointed as auditors by the Directors
on 1 November 2013. The period of total uninterrupted
engagement is for the six financial years ended 31 May 2019.
We have fulfilled our ethical responsibilities under, and we
remain independent of, the Group in accordance with UK
ethical requirements including the FRC Ethical Standard as
applied to listed public interest entities. No non-audit services
prohibited by that standard were provided.
97
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Independent auditors’ report
to the members of NCC Group plc
2 KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the Financial
Statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified
by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. We summarise below the key audit matters in arriving at our audit opinion above,
together with our key audit procedures to address those matters and, as required for public interest entities, our results from
those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and
solely for the purpose of, our audit of the Financial Statements as a whole, and in forming our opinion thereon, and consequently
are incidental to that opinion, and we do not provide a separate opinion on these matters.
The risk
Our response
THE IMPACT OF
UNCERTAINTIES
DUE TO THE UK
EXITING THE
EUROPEAN UNION
ON OUR AUDIT
Refer to page 35
(principal risks
and uncertainties),
page 36 (viability
statement), page 113
(accounting policies).
UNPRECEDENTED LEVELS OF UNCERTAINTY
All audits assess and challenge the reasonableness
of estimates, in particular as described in
recoverability of goodwill in respect of Fox-IT and
capitalised software and development costs as
intangible assets below, and related disclosures
and the appropriateness of the going concern basis
of preparation of the Financial Statements (see
below). All of these depend on assessments of the
future economic environment and the Group’s future
prospects and performance.
In addition, we are required to consider the other
information presented in the Annual Report and
Accounts, including the principal risks disclosure
and the viability statement and to consider the
Directors’ statement that the Annual Report and
Financial Statements taken as a whole is fair,
balanced and understandable and provides the
information necessary for shareholders to assess the
Group’s position and performance, business model
and strategy.
Brexit is one of the most significant economic events
for the UK and at the date of this report its effects
are subject to unprecedented levels of uncertainty
of outcomes, with the full range of possible
effects unknown.
We developed a standardised firm-wide approach to the
consideration of the uncertainties arising from Brexit in
planning and performing our audits. Our procedures included:
•
Our Brexit knowledge: We considered the Directors’
assessment of Brexit-related sources of risk for the
Group’s business and financial resources compared with
our own understanding of the risks. We considered the
Directors’ plans to take action to mitigate the risks.
• Sensitivity analysis: When addressing recoverability of
goodwill in respect of Fox-IT and capitalised software and
development costs as intangible assets and other areas
that depend on forecasts, we compared the Directors’
analysis to our assessment of the full range of reasonably
possible scenarios resulting from Brexit uncertainty and,
where forecast cash flows are required to be discounted,
considered adjustments to discount rates for the level of
remaining uncertainty.
• Assessing transparency: As well as assessing individual
disclosures as part of our procedures on recoverability of
goodwill in respect of Fox-IT and capitalised software and
development costs as intangible assets we considered
all of the Brexit-related disclosures together, including
those in the strategic report, comparing the overall picture
against our understanding of the risks.
OUR RESULTS
As reported under recoverability of goodwill in respect of
Fox-IT and capitalised software and development costs as
intangible assets, we found the resulting estimates and related
disclosures of the outcome of the impairment assessment
in the valuation of goodwill and disclosures in relation to
going concern to be acceptable. However, no audit should
be expected to predict the unknowable factors or all possible
future implications for a company and this is particularly the
case in relation to Brexit.
98
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 GOING CONCERN
Refer to pages 33 to
37 (principal risks and
uncertainties), page 36
(viability statement),
page 118 (accounting
policies).
The risk
DISCLOSURE QUALITY
The Financial Statements explain how the Board has
formed a judgment that it is appropriate to adopt the
going concern basis of preparation for the Group and
parent Company.
That judgment is based on an evaluation of the
inherent risks to the Group’s and Company’s
business model and how those risks might affect
the Group’s and Company’s financial resources
or ability to continue operations over a period of
at least a year from the date of approval of the
Financial Statements.
The risks most likely to adversely affect the Group’s
and Company’s available financial resources over this
period were:
•
•
The impact of Brexit on market demand;
Increased pressure from competitors; and
• Adverse fluctuations in foreign exchange rates.
There are also less predictable but realistic second
order impacts, such as the impact of Brexit and
the erosion of customer or supplier confidence,
which could result in a rapid reduction of available
financial resources.
The risk for our audit was whether or not those
risks were such that they amounted to a material
uncertainty that may have cast significant doubt
about the ability to continue as a going concern.
Had they been such, then that fact would have been
required to have been disclosed.
Our response
Our procedures included:
• Key dependency assessment: Assessed sufficiency of the
Group’s resources to repay the debt falling due in at least
the 12 months from the date of approval of the Financial
Statements by assessing the Group’s cash flow forecasts
and key assumptions within the forecasts.
•
Funding assessment: We inspected key correspondence
with finance providers to ascertain the committed level
of financing, any related covenant requirements, and the
attitude of the lender to any required refinancing.
• Historical comparisons: Assessing the Group’s forecasting
accuracy by comparing actual results in the year to what
was previously forecast for the year.
• Sensitivity analysis: We considered sensitivities over the
level of available financial resources indicated by the
Group’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could
arise from these risks individually and collectively.
• Benchmarking assumptions: Critically evaluating the
cash flow forecast assumptions particularly in relation to
growth rate to assess if these are realistic, achievable and
consistent with external and internal information and other
matters identified in the course of the audit.
• Assessing transparency: Assessing the completeness
and accuracy of the matters covered in the going concern
disclosure particularly in relation to the sensitivity of the
outcome of the cash flow forecasts and compliance
with covenants.
OUR RESULTS
We found the going concern disclosure without any material
uncertainty to be acceptable (2018 result: acceptable).
99
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Independent auditors’ report
to the members of NCC Group plc
Our response
Our procedures included:
• Historical comparison: Assessing the Group’s forecasting
accuracy by comparing actual results in the year to what
was previously forecast for the year. Critically evaluated
the assumptions for future growth, with regard to actual
growth rates in previous years.
• Benchmarking assumptions: Critically evaluating the
risk adjusted discount rates, having regard for market
observable data with regards to risk-free rates and returns
on equity for comparator companies. We also evaluated
the assumptions for cost inflation and the terminal
growth rate.
• Our sector experience: Using our valuation specialists and
our discount rate tool to determine an appropriate discount
rate adjusted for forecasting risk and comparing this to the
rate used by the Group.
• Comparing valuations: Comparing the sum of the
discounted cash flows to the Group’s market capitalisation
adjusted for debt to assess the reasonableness of the
value in use calculations.
• Sensitivity analysis: Performing breakeven analysis on the
key assumptions.
•
Assessing transparency: Assessing the completeness
and accuracy of the Group’s disclosures and ensuring that
the disclosure reflects the impact of reasonably possible
changes in key assumptions on the amount of impairment.
OUR RESULTS
We found the carrying value of the goodwill related to Fox IT to
be acceptable (2018 result: acceptable).
Our procedures included:
•
•
•
Testing application: Agreeing a sample of costs to
supporting documentation to understand the nature of
the items and evaluate the appropriateness. This included
discussions with project teams, agreeing a sample of
project team members’ capitalised hours to timesheets
and assessing whether major projects are commercially
viable by reference to existing and future orders and
assessing whether there are indicators of impairment.
Historical comparison: Assessing the Group’s forecasting
accuracy by comparing actual results in the period to what
was previously forecast for the year for each significant
project to assess whether an impairment is required.
Assessing transparency: Assessing the adequacy of
the Group’s disclosures about the capitalised software
and development intangible assets and the degree of
estimation involved in assessing their recoverability.
OUR RESULTS
We found the carrying value of the capitalised software and
development costs to be acceptable (2018 result: acceptable).
RECOVERABILITY
OF GOODWILL IN
RESPECT OF FOX-IT
(£63.1m; 2018:
£63.1m).
Refer to page 63
(Audit Committee
Report), page 119
(accounting policies)
and pages 133-135
(financial disclosures).
The risk
FORECAST-BASED VALUATION
Due to the inherent uncertainty involved in
forecasting and discounting future cash flows which
are the basis of the assessment of recoverability,
the outcome could vary significantly if different
assumptions were applied in the model.
This risk is specifically related to the cash generating
units (CGUs) for Fox-IT where there is minimal
headroom on the carrying value of goodwill.
The effect of these matters is that, as part of our risk
assessment, we determined that the value in use of
Fox-IT has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes
greater than our materiality for the Financial
Statements as a whole, and possibly many times that
amount. The Financial Statements (note 13) disclose
the sensitivity estimated by the Group.
CAPITALISATION OF
SOFTWARE AND
DEVELOPMENT
COSTS AS
INTANGIBLE
ASSETS
(Carrying value £5.2m
(2018: £5.1m)).
Refer to page 63
(Audit Committee
Report), page 119
(accounting policies)
and pages 133-135
(financial disclosures).
ACCOUNTING TREATMENT
The Group capitalises internal and external costs
in respect of software and development projects.
The Group has also capitalised costs in relation to
the finance and operational systems upgrades that
represent substantial improvements to these assets.
The Directors apply judgment in the classification of
expenditure as capital in nature rather than ongoing
operational expenditure.
FORECAST-BASED VALUATION
There remains a degree of uncertainty around
whether expected revenues and profits will be
realised and be sufficient to ensure the recoverability
of the assets recognised on the balance sheet.
Certain of the key inputs, specifically timing and
amount of capital expenditure, customer sign-up
rates and related cost of sales, and discount rates
applied to future cash flows require significant
estimation and judgment.
100
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 The risk
FY19/FY20 SALES
Incentives and pressures relating to meeting
market expectations increase the risk of fraudulent
premature revenue recognition.
There is a heightened risk around the cut-off
point at the year-end with regards to ensuring
revenue (including deferred and accrued income)
is recognised in the correct accounting period,
particularly where projects are ongoing at
the year-end.
ASSURANCE
REVENUE
RECOGNITION
IN THE CUT-OFF
PERIOD
(Total Assurance
revenue £212.7m;
2018: £193.9m).
Refer to page 64
(Audit Committee
Report), pages 121
to 122 (accounting
policies) and pages
127-128 (financial
disclosures).
RECOVERABILITY
OF INVESTMENTS IN
SUBSIDIARIES
(£60.8m; 2018:
£60.8m).
Refer to page 121
(accounting policy)
and page 153
(financial disclosures).
LOW RISK, HIGH VALUE
The carrying amount of the parent Company’s
investments in subsidiaries represents 28%
(2018: 27%) of the Company’s total assets. Their
recoverability is not at a high risk of significant
misstatement or subject to significant judgment.
However, due to their materiality in the context of
the parent Company Financial Statements, this is
considered to be the area that had the greatest
effect on our overall parent Company audit.
Our response
Our procedures included:
•
•
•
Test of details: Agreeing a sample of revenue transactions
within the cut-off period to supporting documentation to
assess whether these have been recorded in the correct
accounting period. This included specific testing of a
sample of items held in accrued and deferred income at
the year-end.
Analytic sampling: Using data and analytics tools
we searched for unusual account combinations
involving revenue.
Test of details: Using the output from our analytic
sampling, we have performed testing over the identified
sample. This included enquiry to understand the nature
and substance of the transaction and obtaining supporting
documentation for the journal.
• Assessing transparency: Assessing the adequacy of the
Group’s disclosures around revenue recognition.
OUR RESULTS
We found the amount of Assurance revenue to be acceptable
(2018 result: acceptable).
Our procedures included:
•
Test of detail: Comparing the carrying amount of
investments with the relevant subsidiaries’ draft balance
sheet as at 31 May 2019 to identify whether their
net assets, being an approximation of their minimum
recoverable amount, were in excess of their carrying
amount and assessing whether those subsidiaries have
historically been profit-making.
• Assessing subsidiary audits: Assessing the work
performed by the subsidiary audit team on a sample of
those subsidiaries and considering the results of that work,
on those subsidiaries’ profits and net assets.
• Our sector experience: For the investments where the
carrying amount exceeded the net asset value, comparing
the carrying amount of the investment with the expected
value of the business based on its value in use.
OUR RESULTS
We found the carrying value of the investments in subsidiaries
to be acceptable (2018 result: acceptable).
101
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Independent auditors’ report
to the members of NCC Group plc
3 OUR APPLICATION OF MATERIALITY AND AN
OVERVIEW OF THE SCOPE OF OUR AUDIT
Materiality for the Group Financial Statements as a whole was
set at £0.95m (2018: £0.80m), determined with reference
to a benchmark of Group profit before taxation normalised
to exclude Individually Significant Items as disclosed in note
6 of £21.4m (2018: £17.3m), of which it represents 4.4%
(2018: 4.6%).
The remaining 12% of total Group revenue, 15% of Group
profit before tax and 5% of total Group assets is represented
by eight reporting components, none of which individually
represented more than 1% of total Group revenue, Group
profit before tax or total Group assets. For these residual
components, we performed analysis at an aggregated Group
level to re-examine our assessment that there were no
significant risks of material misstatement within these.
Materiality for the parent Company Financial Statements as
a whole was set at £0.90m (2018: £0.60m), determined with
reference to a benchmark of Company total assets, of which it
represents 0.4% (2018: 0.3%).
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding £47,000
(2018: £40,000), in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Of the Group’s 23 (2018: 22) reporting components, we
subjected 11 (2018: 11) to full scope audits for Group
purposes. We conducted reviews of financial information
(including enquiry) at a further four (2018: three) non-
significant components as these components were not
individually financially significant enough to require an audit
for Group reporting purposes but a review was performed to
provide further coverage over the Group’s results.
The components within the scope of our work accounted for
88% (2018: 93%) of total Group revenues, 85% (2018: 94%)
of Group profit before taxation and 95% (2018: 98%) of total
Group assets.
GROUP PROFIT BEFORE
TAX NORMALISED TO
EXCLUDE INDIVIDUALLY
SIGNIFICANT ITEMS AS
DISCLOSED IN NOTE 6
n Normalised Group profit before tax
n Group materiality
£21.4m
(2017: £17.3m)
74
The Group team instructed component auditors as to the
significant areas to be covered, including the relevant risks
detailed above and the information to be reported back. The
Group team approved the component materialities, which
ranged from £0.20m to £0.65m, having regard to the mix
of size and risk profile of the Group across the components.
The work on one of the 23 components (2018: one of the
22 components) was performed by component auditors
and the rest, including the audit of the parent Company, was
performed by the Group team. The Group team performed
procedures on the items excluded from normalised Group
profit before taxation.
The Group team visited one (2018: one) component location
in Delft, Netherlands (2018: Delft, Netherlands) to assess
the audit risk and strategy. Telephone conference meetings
were also held with these component auditors. At these visits
and meetings, the findings reported to the Group team were
discussed in more detail, and any further work required by the
Group team was then performed by the component auditors.
Group Materiality £0.95m (2018: £0.80m)
£0.95m
Whole financial statements materiality
(2018: £0.80m)
£0.90m
Range of materiality
at 11 components
(£0.20m-£0.90m)
(2018: £0.20m to £0.65m)
Group revenue
Group profit before tax
Group total assets
£0.047m
Misstatements reported to the audit
committee (2018: £0.04m)
Group profit before exceptional
items and taxation
14
5
88%
(2018: 93%)
88
74
9
4
84%
(2018: 94%)
90
75
3
1
14
96%
(2018: 98%)
97
74
93
8
14
9
86%
(2018: 87%)
78
74
78
n Full scope for group audit
purposes 2019
n Specified risk-focused
audit procedures 2019
n Full scope for group audit
purposes 2018
n Specified risk-focused
audit procedures 2018
n Residual components
102
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 4 WE HAVE NOTHING TO REPORT ON
GOING CONCERN
The Directors have prepared the Financial Statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and they
have concluded that the Company’s and the Group’s financial
position means that this is realistic. They have also concluded
that there are no material uncertainties that could have cast
significant doubt over their ability to continue as a going
concern for at least a year from the date of approval of the
Financial Statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of
the Directors’ conclusions and, had there been a material
uncertainty related to going concern, to make reference to
that in this audit report. However, as we cannot predict all
future events or conditions and as subsequent events may
result in outcomes that are inconsistent with judgments that
were reasonable at the time they were made, the absence of
reference to a material uncertainty in this auditors’ report is
not a guarantee that the Group and the Company will continue
in operation.
We identified going concern as a key audit matter (see section
2 of this report). Based on the work described in our response
to that key audit matter, we are required to report to you if:
• We have anything material to add or draw attention to
in relation to the Directors’ statement in note 1 to the
Financial Statements on the use of the going concern
basis of accounting with no material uncertainties that may
cast significant doubt over the Group and Company’s use
of that basis for a period of at least 12 months from the
date of approval of the Financial Statements; or
•
The related statement under the Listing Rules set
out on page 95 is materially inconsistent with our
audit knowledge.
We have nothing to report in these respects.
5 WE HAVE NOTHING TO REPORT ON THE
OTHER INFORMATION IN THE ANNUAL REPORT
AND ACCOUNTS
The Directors are responsible for the other information
presented in the Annual Report and Accounts together
with the Financial Statements. Our opinion on the Financial
Statements does not cover the other information and,
accordingly, we do not express an audit opinion or,
except as explicitly stated below, any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing
so, consider whether, based on our Financial Statements
audit work, the information therein is materially misstated
or inconsistent with the Financial Statements or our audit
knowledge. Based solely on that work we have not identified
material misstatements in the other information.
STRATEGIC REPORT AND DIRECTORS’ REPORT
Based solely on our work on the other information:
•
•
•
We have not identified material misstatements in the
strategic report and the Directors’ report;
In our opinion, the information given in those reports
for the financial year is consistent with the Financial
Statements; and
In our opinion, those reports have been prepared in
accordance with the Companies Act 2006.
DIRECTORS’ REMUNERATION REPORT
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
DISCLOSURES OF PRINCIPAL RISKS AND
LONGER-TERM VIABILITY
Based on the knowledge we acquired during our Financial
Statements audit, we have nothing material to add or draw
attention to in relation to:
•
The Directors’ confirmation within the Viability statement
on page 36 that they have carried out a robust
assessment of the principal risks facing the Group,
including those that would threaten its business model,
future performance, solvency and liquidity;
•
The principal risks disclosures describing these risks and
explaining how they are being managed and mitigated; and
• The Directors’ explanation in the Viability statement of how
they have assessed the prospects of the Group, over what
period they have done so and why they considered that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary
qualifications or assumptions.
103
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Independent auditors’ report
to the members of NCC Group plc
Under the Listing Rules we are required to review the Viability
statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of
only the knowledge acquired during our Financial Statements
audit. As we cannot predict all future events or conditions
and as subsequent events may result in outcomes that are
inconsistent with judgments that were reasonable at the
time they were made, the absence of anything to report on
these statements is not a guarantee as to the Group’s and
Company’s longer-term viability.
CORPORATE GOVERNANCE DISCLOSURES
We are required to report to you if:
• We have identified material inconsistencies between the
knowledge we acquired during our Financial Statements
audit and the Directors’ statement that they consider that
the Annual Report and Financial Statements taken as a
whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
Group’s position and performance, business model and
strategy; or
• The section of the Annual Report describing the work
of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the 11
provisions of the UK Corporate Governance Code specified by
the Listing Rules for our review.
We have nothing to report in these respects.
6 WE HAVE NOTHING TO REPORT ON THE OTHER
MATTERS ON WHICH WE ARE REQUIRED TO REPORT
BY EXCEPTION
Under the Companies Act 2006, we are required to report to
you if, in our opinion:
• Adequate accounting records have not been kept by the
parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
• The parent Company Financial Statements and the part of
the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
• Certain disclosures of Directors’ remuneration specified by
law are not made; or
7 RESPECTIVE RESPONSIBILITIES
DIRECTORS’ RESPONSIBILITIES
As explained more fully in their statement set out on page
95, the Directors are responsible for: the preparation of the
Financial Statements including being satisfied that they give
a true and fair view; such internal control as they determine is
necessary to enable the preparation of Financial Statements
that are free from material misstatement, whether due to fraud
or error; assessing the Group and parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern; and using the going concern basis
of accounting unless they either intend to liquidate the Group
or the parent Company or to cease operations, or have no
realistic alternative but to do so.
AUDITORS’ RESPONSIBILITIES
Our objectives are to obtain reasonable assurance about
whether the Financial Statements as a whole are free
from material misstatement, whether due to fraud or other
irregularities (see below), or error, and to issue our opinion in
an auditors’ report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from
fraud, other irregularities or error and are considered material
if, individually or in aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of the financial statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
IRREGULARITIES – ABILITY TO DETECT
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the
Financial Statements from our general commercial and sector
experience, and through discussion with the Directors and
other management (as required by auditing standards).
We communicated identified laws and regulations throughout
our team and remained alert to any indications of non-
compliance throughout the audit. This included communication
from the Group to component audit teams of relevant laws and
regulations identified at Group level, with a request to report on
any indications of potential existence of non-compliance with
relevant laws and regulations (irregularities) in these areas, or
other areas directly identified by the component team.
• We have not received all the information and explanations
we require for our audit.
The potential effect of these laws and regulations on the
Financial Statements varies considerably.
We have nothing to report in these respects.
Firstly, the Group is subject to laws and regulations that
directly affect the Financial Statements including financial
reporting legislation (including related companies legislation),
distributable profits legislation, and taxation legislation and
we assessed the extent of compliance with these laws and
regulations as part of our procedures on the related financial
statement items.
104
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 8 THE PURPOSE OF OUR AUDIT WORK AND TO
WHOM WE OWE OUR RESPONSIBILITIES
This report is made solely to the Company’s members, as
a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so
that we might state to the Company’s members those matters
we are required to state to them in an auditor’s report and for
no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the
Company and the Company’s members, as a body, for our audit
work, for this report, or for the opinions we have formed.
Mick Davies
SENIOR STATUTORY AUDITOR
for and on behalf of KPMG LLP, Statutory Auditors
Chartered Accountants
One St Peter’s Square
Manchester
M2 3AE
25 July 2019
Secondly, the Group is subject to many other laws and
regulations where the consequences of non-compliance
could have a material effect on amounts or disclosures in the
Financial Statements, for instance through the imposition of
fines or litigation. We identified the following areas as those
most likely to have such an effect: health and safety, anti-
bribery, employment law, regulatory capital and liquidity and
certain aspects of company legislation.
Auditing standards limit the required audit procedures to
identify non-compliance with these laws and regulations
to enquiry of the Directors and other management and
inspection of regulatory and legal correspondence, if any.
Through these procedures, we became aware of actual or
suspected non-compliance and considered the effect as part
of our procedures on the related financial statement items.
The identified actual or suspected non-compliance was not
sufficiently significant to our audit to result in our response
being identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some material
misstatements in the Financial Statements, even though we
have properly planned and performed our audit in accordance
with auditing standards. For example, the further removed
non-compliance with laws and regulations (irregularities) is
from the events and transactions reflected in the Financial
Statements, the less likely the inherently limited procedures
required by auditing standards would identify it. In addition, as
with any audit, there remained a higher risk of non-detection
of irregularities, as these may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal controls. We are not responsible for preventing non-
compliance and cannot be expected to detect non-compliance
with all laws and regulations.
105
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Consolidated income statement
for the year ended 31 May 2019
Notes
Adjusted ²
£m
2019
Adjusting
items ²
£m
–
–
–
(14.2)
(14.2)
–
(14.2)
2.2
(12.0)
–
2018 (restated ¹)
Statutory
£m
Adjusted ²
£m
Adjusting
items ²
£m
Statutory
£m
250.7
(148.9)
101.8
(82.3)
19.5
(1.7)
17.8
(4.3)
13.5
–
233.0
(137.1)
95.9
(65.1)
30.8
(1.5)
29.3
(6.6)
22.7
–
–
–
–
(17.3)
(17.3)
(0.3)
(17.6)
7.1
(10.5)
(5.5)
233.0
(137.1)
95.9
(82.4)
13.5
(1.8)
11.7
0.5
12.2
(5.5)
250.7
(148.9)
101.8
(68.1)
33.7
(1.7)
32.0
(6.5)
25.5
–
25.5
(12.0)
13.5
22.7
(16.0)
6.7
4.9p
4.8p
–
–
4.9p
4.8p
4.4p
4.4p
(2.0)p
(2.0)p
2.4p
2.4p
4
4
4
4
4
9
7
10
5
12
Continuing operations
Revenue
Cost of sales
Gross profit
Administration expenses ³
Operating profit
Net finance costs
Profit before taxation
Taxation
Profit from continuing
operations
Loss from discontinued
operations, net of tax
Profit for the year
attributable to the owners
of the Company
Earnings per share
Basic EPS – continuing
Diluted EPS – continuing
Basic EPS – discontinuing
Diluted EPS – discontinuing
Basic EPS – all operations
Diluted EPS – all operations
Consolidated statement of comprehensive income
for the year ended 31 May 2019
Profit for the year attributable to the owners of the Company
Other comprehensive income
Items that may be reclassified subsequently to profit or loss (net of tax)
Foreign exchange translation differences
Total comprehensive income for the year (net of tax) attributable to the owners of the Company
The accompanying notes 1 to 33 are an integral part of these consolidated Financial Statements.
2019
£m
13.5
1.5
15.0
2018
(restated ¹)
£m
6.7
0.3
7.0
1
2
3
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
Administrative expenses includes £0.4m (2018: £0.7m) of credit losses on financial assets.
106
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Consolidated balance sheet
at 31 May 2019
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Consideration receivable on disposals
Current tax receivable
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Borrowings
Current tax payable
Provisions
Consideration on acquisitions
Deferred revenue
Total current liabilities
Non-current liabilities
Borrowings
Deferred tax liability
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Merger reserve
Retained earnings
Currency translation reserve
Total equity attributable to equity holders of the parent
Notes
13
13
14
15
18
16
17
22
23
19
23
20
22
21
23
18
20
26
26
26
26
26
2019
£m
189.4
41.8
16.9
0.3
1.1
249.5
0.7
61.6
–
0.6
34.9
97.8
347.3
31.6
5.0
–
2.7
–
36.2
75.5
50.1
5.4
5.5
61.0
136.5
210.8
2.8
149.8
42.3
(12.0)
27.9
210.8
2018
(restated ¹)
£m
187.2
52.8
19.4
0.4
4.5
264.3
0.8
66.0
1.5
–
21.2
89.5
353.8
35.7
–
1.3
2.6
11.9
30.6
82.1
49.0
9.8
6.3
65.1
147.2
206.6
2.8
149.5
42.3
(14.4)
26.4
206.6
The accompanying notes 1 to 33 are an integral part of these consolidated Financial Statements.
These Financial Statements were approved and authorised for issue by the Board of Directors on 24 July 2019. They were
signed on its behalf by:
Adam Palser
CHIEF EXECUTIVE OFFICER
Tim Kowalski
CHIEF FINANCIAL OFFICER
24 July 2019
24 July 2019
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
107
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Consolidated cash flow statement
for the year ended 31 May 2019
Cash flow from operating activities
(includes continuing and discontinued operations)
Profit for the year
Adjustments for:
Depreciation
Share-based payments
Amortisation of acquired intangible assets
Amortisation of internally developed intangible assets and software
Net financing costs
Foreign exchange
Individually Significant Items (non-cash impact)
Profit on disposal of investments
Loss on disposal of subsidiaries
Loss on sale of plant and equipment
Research and development tax credits
Income tax expense/(credit)
Decrease in provisions
Cash inflow for the year before changes in working capital
Decrease/(increase) in trade and other receivables
Decrease in inventories
Increase in trade and other payables
Cash generated from operating activities before interest and taxation
Interest paid
Taxation paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Software and development expenditure
Acquisition of businesses
Net proceeds from sale of subsidiaries and investments
Cash disposed of from sale of subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issue of ordinary share capital
Drawdown of borrowings
Repayment of borrowings
Equity dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign currency exchange rate changes
Cash and cash equivalents at end of year
Reconciliation of net change in cash and cash equivalents
to movement in net debt ²
Net increase in cash and cash equivalents
Change in net debt resulting from cash flows
Effect of foreign currency on cash flows
Foreign currency translation differences on borrowings
Change in net debt ² during the year
Net debt ² at start of year
Net debt ² at end of year
Notes
14
25
13
13
6
5
22
15, 22
26
11
23
3
2019
£m
13.5
5.6
1.7
9.0
4.4
1.7
0.2
3.6
(0.1)
–
0.2
(0.3)
4.3
(2.5)
41.3
6.0
0.1
0.5
47.9
(1.7)
(6.4)
39.8
(3.0)
(6.1)
(10.9)
1.8
–
(18.2)
0.3
13.0
(8.6)
(12.9)
(8.2)
13.4
21.2
0.3
34.9
2019
£m
13.4
(4.4)
0.3
(1.7)
7.6
(27.8)
(20.2)
2018
(restated ¹)
£m
6.7
6.5
0.2
9.4
5.9
1.8
–
3.5
–
6.4
–
–
(0.6)
–
39.8
(4.8)
–
4.5
39.5
(1.8)
(4.7)
33.0
(7.7)
(5.0)
(3.1)
9.9
(0.7)
(6.6)
1.5
7.5
(12.9)
(12.8)
(16.7)
9.7
12.3
(0.8)
21.2
2018
£m
9.7
5.4
(0.8)
1.6
15.9
(43.7)
(27.8)
The accompanying notes 1 to 33 are an integral part of these consolidated Financial Statements.
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
108
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
Consolidated statement of changes in equity
for the year ended 31 May 2019
Issued
share
capital
£m
Share
premium
£m
Merger
reserve
£m
Currency
translation
reserve
£m
Retained
earnings
£m
Notes
Balance at 1 June 2017 previously
reported
Change in accounting policies in respect
of IFRS 15 (net of tax)
Balance at 1 June 2017 (restated ¹)
Profit for the year (restated ¹)
Foreign currency translation differences
Total comprehensive income for
the year (restated ¹)
Transactions with owners recorded
directly in equity
Dividends to equity shareholders
Current and deferred tax on share-based
payments
Shares issued
Total contributions by and
distributions to owners
Balance at 31 May 2018 (restated ¹)
and 1 June 2018
Profit for the year
Foreign currency translation differences
Total comprehensive income for
the year
Transactions with owners recorded
directly in equity
Dividends to equity shareholders
Share-based payments
Current and deferred tax on share-based
payments
Shares issued
Total contributions by and
distributions to owners
Balance at 31 May 2019
1
11
10
26
11
25
10
26
2.8
–
2.8
–
–
–
–
–
–
–
2.8
–
–
–
–
–
–
–
–
2.8
148.0
–
148.0
–
–
–
–
–
1.5
1.5
42.3
–
42.3
–
–
–
–
–
–
–
26.1
–
26.1
–
0.3
0.3
–
–
–
–
Total
£m
212.1
(1.4)
210.7
6.7
0.3
7.0
(7.1)
(1.4)
(8.5)
6.7
–
6.7
(12.8)
(12.8)
0.2
–
0.2
1.5
(12.6)
(11.1)
149.5
–
–
42.3
–
–
26.4
–
1.5
(14.4)
13.5
–
206.6
13.5
1.5
–
–
–
–
0.3
0.3
149.8
–
–
–
–
–
–
42.3
1.5
13.5
15.0
–
–
–
–
–
27.9
(12.9)
1.7
0.1
–
(11.1)
(12.0)
(12.9)
1.7
0.1
0.3
(10.8)
210.8
The accompanying notes 1 to 33 are an integral part of these consolidated Financial Statements.
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
109
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Company balance sheet
at 31 May 2019
Company no: 4627044
Non-current assets
Goodwill
Investments in subsidiary undertakings
Total non-current assets
Current assets
Intercompany receivables
Cash and cash equivalents
Total current assets
Total assets
Net assets
Equity
Issued capital
Share premium
Merger reserve
Retained earnings
Total equity
Notes
13
32
17
23
26
26
26
26
2019
£m
14.4
60.8
75.2
141.4
0.2
141.6
216.8
216.8
2.8
149.8
42.3
21.9
216.8
2018
£m
14.4
60.8
75.2
153.8
0.1
153.9
229.1
229.1
2.8
149.5
42.3
34.5
229.1
The accompanying notes 1 to 33 are an integral part of these Financial Statements.
These Financial Statements were approved and authorised for issue by the Board of Directors on 24 July 2019. They were
signed on its behalf by:
Adam Palser
CHIEF EXECUTIVE OFFICER
Tim Kowalski
CHIEF FINANCIAL OFFICER
24 July 2019
24 July 2019
110
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
Company cash flow statement
for the year ended 31 May 2019
Cash flow from operating activities
Profit for the year
Cash inflow for the year before changes in working capital
Decrease/(increase) in intercompany balances
Net cash generated from operating activities
Cash flows from investing activities
Cash flows from financing activities
Proceeds from the issue of ordinary share capital
Equity dividends paid
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes 1 to 33 are an integral part of these Financial Statements.
Notes
27
2019
£m
0.3
0.3
12.4
12.7
–
26
11
0.3
(12.9)
(12.6)
0.1
0.1
0.2
2018
£m
15.5
15.5
(4.3)
11.2
–
1.5
(12.8)
(11.3)
(0.1)
0.2
0.1
111
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE
Company statement of changes in equity
for the year ended 31 May 2019
Balance at 1 June 2017
Profit for the year
Total comprehensive income for the year
Transactions with owners recorded
directly in equity
Dividends to equity shareholders
Increase in subsidiary investment for share-
based charges
Shares issued
Total contributions by and distributions to
owners
Balance at 31 May 2018 and 1 June 2018
Profit for the year
Total comprehensive income for the year
Transactions with owners recorded
directly in equity
Dividends to equity shareholders
Shares issued
Total contributions by and distributions to
owners
Balance at 31 May 2019
Notes
Share
capital
£m
2.8
–
–
Share
premium
£m
148.0
–
–
Merger
reserve
£m
Retained
earnings
£m
Total
£m
42.3
–
–
31.7
15.5
15.5
224.8
15.5
15.5
11
–
–
–
(12.8)
(12.8)
–
–
–
1.5
– 0.1
–
–
0.1
1.5
26
–
2.8
–
–
1.5
149.5
–
–
–
42.3
–
–
(12.7)
34.5
0.3
0.3
(11.2)
229.1
0.3
0.3
11
26
–
–
–
0.3
–
–
(12.9)
–
(12.9)
0.3
–
2.8
0.3
149.8
–
42.3
(12.9)
21.9
(12.6)
216.8
The accompanying notes 1 to 33 are an integral part of these Financial Statements.
112
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Notes to the financial statements
for the year ended 31 May 2019
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 Group
financial statements consolidate those of the Company and
its subsidiaries (together referred to as ‘the Group’). The
principal activity of the Group is the provision of independent
advice and services to customers through the supply of
escrow and cyber assurance services. The parent Company
financial statements present information about the Company
as a separate entity and not about the Group. These Financial
Statements have been approved for issue by the Board of
Directors on 24 July 2019.
Both the parent Company and the Group Financial Statements
have been prepared in accordance with International
Financial Reporting Standards as adopted by the European
Union (IFRS as adopted by the EU) and Article 4 of the IAS
regulation. The parent Company Financial Statements have
also been prepared in accordance with the provisions of the
Companies Act 2006. On publishing the parent Company
Financial Statements here together with the Group Financial
Statements, the Company is also taking advantage of the
exemption in s408 of the Companies Act 2006 not to present
its individual Income Statement and related notes that form a
part of these approved Financial Statements.
BREXIT
Management has reviewed the potential impact of Brexit on
the Financial Statements. As the Group’s operations around
the world include business entities based in continental
Europe management believes 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 has concluded that the impact should
be limited; this includes any impact on the IFRS 9 Expected
Credit Loss model. Further details have been included in note
17 to the consolidated Financial Statements. Management
also notes no changes to this assessment from a post balance
sheet event perspective.
APPLICATION OF SIGNIFICANT NEW EU -
ENDORSED ACCOUNTING STANDARD - IFRS 9 ‘FINANCIAL
INSTRUMENTS’
BACKGROUND AND ADOPTION
The Group has adopted IFRS 9. The application of
IFRS 9’s impairment requirements as at 1 June 2017 resulted
in a reallocation of the existing impairment provision between
ageing classifications only, and additional disclosures related
to the ageing of the provision, as disclosed within note 17 to
the consolidated Financial Statements.
IFRS 9 introduces new requirements for the following areas:
•
the classification and measurements of financial assets
and financial liabilities;
•
impairment of financial assets; and
• general hedge accounting.
CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS AND
FINANCIAL LIABILITIES
All recognised financial assets that are within the scope of IFRS 9
are required to be subsequently measured at amortised cost or fair
value on the basis of the Group’s business model for managing
financial assets and the contractual cash flow characteristics.
The Group has not designated any debt investments that meet
the amortised cost or FVTOCI criteria as measured at fair value
through profit or loss (FVTPL). The Directors of the Company
reviewed and assessed the Group’s existing financial assets and
liabilities based on the facts and circumstances upon transition
and concluded that the initial application of IFRS 9 has had
no impact on classification and measurement, apart from the
impairment of financial assets noted below.
IMPAIRMENT OF FINANCIAL ASSETS
The only impact on the consolidated Financial Statements
is in relation to the impairment of trade receivables within
financial assets.
IFRS 9 requires an Expected Credit Loss (ECL) model
as opposed to an Incurred Credit Loss (ICL) model under
previous accounting policies (IAS 39 ‘Financial Instruments:
Recognition and Measurement’). The ECL model requires
the Group to account for lifetime ECL and changes in those
expected credit losses at each reporting date to reflect
changes in credit risk since initial recognition of the financial
assets. On this basis, it is no longer necessary for a default
event to have occurred before credit losses are recognised.
As a consequence of this change, credit losses are recognised
earlier than under IAS 39. IFRS 9 requires the Group to
assess the risk profile of its trade and other receivables.
113
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
The Group analysed the risk profile of trade and other
receivables based on past experience and an analysis of the
receivables current financial position, adjusted for specific
factors, general economic conditions of the industry in which
the receivables operate, and assessment of both the current
and the forecast direction of conditions at the reporting date.
The Group has performed the calculation of ECL separately
for each business unit and rebutted the assumption under
IFRS 9 that all debts that are over 30 days past the due date
should have a credit allowance due to the inherent credit risk
on certain specific receivables.
In addition to the changes to revenue recognition described
above, IFRS 15 also provides guidance in relation to certain
costs incurred obtaining a contract or fulfilling the contract with
the customer, requiring such costs to be deferred over time.
The Group put in place a team to assess the impact of IFRS 15
to determine appropriate accounting policies, and implement
appropriate systems and processes so as to be able to calculate
opening adjustments and maintain ongoing IFRS 15 compliant
financial records/disclosures. Assessment was also given to
other matters, such as implications for employee remuneration,
tax, forecasting and covenant compliance.
KEY CHANGES IN ACCOUNTING POLICY
The key effects of the application of IFRS 15 are as follows:
• For Escrow, the initial set-up exercise is not considered
to be a distinct service, and as a result, these fees are
now recognised with the rest of the contract with revenue
being recognised over time.
• For Assurance, set-up fees charged in respect of initial
work and configuration of equipment to allow customers
to benefit from a monitoring contract are not considered
to be a distinct service and as a result this revenue
is now recognised over time with the revenue for the
monitoring activity.
In both cases performance obligations are considered to be
satisfied over time as the performance does not create an
asset with an alternative use to the Group and the Group has
an enforceable right to payment for performance completed
to date.
The above key effects have given rise to a restatement of
deferred revenue as outlined below, with no restatements to
accrued income.
GENERAL HEDGE ACCOUNTING
On the basis the Group does not hedge account, there has
been no impact on the Group.
APPLICATION OF SIGNIFICANT NEW EU - ENDORSED
ACCOUNTING STANDARD - IFRS 15 ‘REVENUE FROM
CONTRACTS WITH CUSTOMERS’
BACKGROUND AND ADOPTION
IFRS 15 impacts the amount, timing and recognition
of revenue and certain associated costs, as well as
related disclosures.
The Group has implemented IFRS 15 in the current year
and has applied the fully retrospective approach meaning
the comparative year has been restated and there has been
a one-off cumulative debit to retained earnings relating to
transition at 1 June 2017 of £1.4m (net of tax).
IFRS 15 requires the Group to apportion revenue earned
from contracts with customers to performance obligations the
Group has with its customers.
This is done through applying a five-step model defined in the
standard:
1.
2.
Identify the contract with the customer.
Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance
obligations in the contract.
5. Recognise revenue when (or as) the entity satisfies a
performance obligation.
114
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 PRACTICAL EXPEDIENTS
The Group has applied the following practical expedients on the application of IFRS 15:
Area
Qualitative assessment of the impact
Completed contracts have not been restated that begin and
end within the same annual reporting period
Significant benefit in application due to the high number of
contracts within the Group
Completed contracts that have variable consideration have
used the transaction price at the date the contract was
completed rather than estimating variable consideration
amounts in the comparative reporting periods
Incident response contracts are variable in duration due
to the unknown emerging cyber risk. On this basis, the
expedient simplifies the application of IFRS 15
For all reporting periods before the transition date, the
Group has not disclosed the amount of the transaction price
allocated to the remaining performance obligations and an
explanation of when the Group expects to recognise that
amount of revenue
Significant benefit in application due to the high number of
contracts within the Group
Cost to obtain a contract that lasts less than one year has
been expensed immediately
Significant benefit in application due to the high number of
contracts within the Group
Contracts with similar terms and features have been treated
on a portfolio basis as opposed to individual assessment
Significant benefit in application due to the large range of
small contracts with identical terms and conditions
Significant financing component within contracts
Limited relevance due to the nature of contracts
CONSOLIDATED INCOME STATEMENT FINANCIAL IMPACT
Assurance
£m
Escrow
£m
Central &
Head Office
£m
194.4
(0.5)
193.9
17.0
(0.5)
16.5
38.8
0.3
39.1
21.6
0.3
21.9
–
–
–
(7.6)
–
(7.6)
Segmental analysis
2018
Revenue:
Revenue previously reported
Adjustment on application of IFRS 15
Revenue restated
Adjusted operating profit:
Adjusted operating profit ¹ previously reported
Adjustment on application of IFRS 15
Adjusted operating profit ¹ restated
Operating profit:
Operating profit previously reported
Adjustment on application of IFRS 15
Operating profit restated
Profit before taxation:
Profit before taxation previously reported
Adjustment on application of IFRS 15
Profit before taxation restated
Profit for the year attributable to the owners of the Company:
Profit for the year previously reported
Adjustment on application of IFRS 15
Profit for the year attributable to the owners of the Company
restated
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
Group
£m
233.2
(0.2)
233.0
31.0
(0.2)
30.8
13.7
(0.2)
13.5
11.9
(0.2)
11.7
6.9
(0.2)
6.7
115
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FINANCIAL IMPACT
Total comprehensive income for the year (net of tax) attributable to the owners of the
Company
7.2
(0.2)
7.0
EARNINGS PER SHARE FINANCIAL IMPACT
2018
Adjustment
on
application
of IFRS 15
£m
Previously
reported
£m
Restated
balance
£m
Statutory profit from - continuing operations (£m)
Statutory profit from - all operations (£m)
Adjusted ¹ profit from continuing operations (£m)
Basic weighted average number of shares in issue (m)
Dilutive effect of share options (m)
Dilutive weighted average shares in issue (m)
Basic earnings per ordinary share
Statutory - continuing operations
Statutory - all operations
Adjusted ¹
Diluted earnings per ordinary share
Statutory - continuing operations
Statutory - all operations
Adjusted ¹
CONSOLIDATED CASH FLOW STATEMENT FINANCIAL IMPACT
Profit for the year
Operating cash inflow before movements in working capital
Increase in trade and other receivables
Cash generated from operating activities before interest and taxation
2018
Adjustment
on
application
of IFRS 15
Previously
reported
12.4
6.9
22.9
277.0
2.3
279.3
(0.2)
(0.2)
(0.2)
–
–
–
2018
Adjustment
on
application
of IFRS 15
pence
Previously
reported
pence
Restated
balance
12.2
6.7
22.7
277.0
2.3
279.3
Restated
balance
pence
4.5
2.5
8.3
(0.1)
(0.1)
(0.1)
4.4
2.4
8.2
2018
Adjustment
on
application
of IFRS 15
pence
Previously
reported
pence
Restated
balance
pence
4.4
2.5
8.2
–
(0.1)
(0.1)
4.4
2.4
8.1
2018
Adjustment
on
application
of IFRS 15
£m
(0.2)
(0.2)
0.2
–
Previously
reported
£m
6.9
40.0
(5.0)
39.5
Restated
balance
£m
6.7
39.8
(4.8)
39.5
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
116
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 CONSOLIDATED BALANCE SHEET FINANCIAL IMPACT
2017
Deferred revenue
Net assets
Retained earnings
2018
Deferred revenue
Net assets
Retained earnings
May 2017
(as reported)
£m
(35.6)
212.1
7.1
May 2018
(as reported)
£m
(29.0)
208.2
12.8
Adjustment
on
application
of IFRS 15
£m
(1.4)
(1.4)
1.4
Adjustment
on
application
of IFRS 15
£m
(1.6)
(1.6)
1.6
Restated
balance
£m
(37.0)
210.7
8.5
Restated
balance
£m
(30.6)
206.6
14.4
FUTURE ACCOUNTING DEVELOPMENTS – IFRS 16 LEASES
TRANSITION APPROACH
The Group will adopt this standard for the year ending
31 May 2020 under a modified retrospective approach.
The Group has a variety of operating leases within the
consolidated financial statements. The accounting for
operating leases in particular will change when IFRS 16
is implemented.
STRUCTURE AND STATUS OF IFRS 16 IMPLEMENTATION PROJECT
The Group commenced an implementation project during
the year ended 31 May 2019, whereby management
performed a feasibility impact of the proposed standard.
Following this feasibility review, management has
implemented specific governance around the project
culminating in the development of an in-house central
depositary platform for leases.
The platform and its control environment will continue to
be developed as the Group transitions to IFRS 16 during
the year ending 31 May 2020.
IMPLICATIONS OF IFRS 16
Following a detailed review by management of the implications
of IFRS 16, the following can be noted:
• A number of lease contracts currently disclosed within the
financial statements, which currently give rise to recurring
expenses within operating expenses, will be recognised
on the balance sheet as a ‘right of use asset’ for the year
ending 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, will also be recognised,
increasing the Group’s net debt although the net cash flow
profile remains the same for the Group;
• The Group will depreciate the right of use assets through
the Income Statement over the shorter of the assets’
useful lives and the assessed lease term;
• The Group will recognise interest on the liability using the
rate of interest implicit in the lease or, if the interest rate
implicit in the lease cannot be determined, the Group’s
incremental borrowing rate as adjusted for a specific risk
adjustment. Interest will be charged to finance costs; and
• The profile of the overall expense in profit and loss will
change as the interest expense will be more front-loaded
compared to a straight-line operating lease rental expense.
Specifically, for management to conclude on whether a
contract contains a lease, the following has been 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; and
• 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; and
• The applicability of interest rate implicit in the lease or
the Group’s incremental borrowing rate, as adjusted for a
specific risk adjustment.
117
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
NEW AND AMENDED ACCOUNTING STANDARDS THAT
HAVE BEEN ISSUED BUT ARE NOT YET EFFECTIVE
At the date of authorisation of these consolidated Financial
Statements, the Group has not applied the following new
and revised IFRSs that have been issued but are not yet
effective and, in some cases, had not yet been adopted by the
European Union:
•
•
•
•
•
•
•
IFRS 3 ‘Business Combinations’
IFRS 11 ‘Joint Arrangements’
IAS 8 ‘Accounting Policies, Changes in Accounting
Estimates and Errors’
IAS 12 ‘Income Taxes’
IAS 19 ‘Employee Benefits’
IAS 28 ‘Investment in Associates and Joint Ventures’
IAS 39 ‘Financial Instruments: Recognition and
Measurement’
These IFRSs are not expected to have a material impact on
the Group’s consolidated financial position or performance of
the Group.
BASIS OF MEASUREMENT
The consolidated Financial Statements have been prepared
on the historical cost basis except for consideration payable
on acquisitions, the revaluation of certain financial instruments
and investments.
FUNCTIONAL AND PRESENTATION CURRENCY
The Group and Company Financial Statements are presented
in millions of Pounds Sterling (£m) because that is the
currency of the principal economic environment in which the
Group operates.
GOING CONCERN
The Directors have acknowledged the ‘Guidance on Risk
Management, Internal Control and Related Financial and
Business Reporting’, published in September 2014.
The Group’s business activities, together with the factors likely
to affect its future development, performance and position are
set out in the Strategic Report on pages 6 to 43.
The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Chief
Executive Officer and Chief Financial Officer Reviews
on pages 12 to 31. In addition, note 24 to the Financial
Statements includes the Group’s policies and processes for
managing its capital, its financial risk management objectives,
details of its financial instruments and its exposures to credit
risk and liquidity risk.
Following the above assessment, management has concluded
that the following items that are currently classified as
operating leases will be recognised in the financial statements
using the new requirements:
• Certain properties;
• Equipment leases, including printers; and
• Motor vehicles.
The Group does not lease any server equipment in relation to
the provision of Escrow services.
EXEMPTIONS AND PRACTICAL EXPEDIENTS TO BE APPLIED
AND TAKEN
Management has reviewed available exemptions contained
within IFRS 16 and concluded not to apply the low value or
short-life exemptions. In addition, the Group plans to offset the
onerous leases under IAS 37 immediately before transition as
opposed to performing an impairment review under IAS 36.
INDICATIVE FINANCIAL IMPACT
As shown in note 28, at 31 May 2019, the Group had
approximately £36m of non-cancellable operating lease
commitments. It is expected that the application of this
standard will have a significant impact on the Group’s Financial
Statements.
Indicatively, the changes can be summarised as having the
following effect on the opening consolidated financial position
as at 1 June 2019:
• Assets and liabilities will increase by £29.0m to £31.0m
primarily reflecting the rental property portfolio of the
Group;
• Assets will be offset by an onerous lease provision of
approximately £4m; and
• EBITDA will increase in year one by £5.0m to £7.0m
reflecting the reclassification of rental payments to interest
and depreciation charges. Net profit is unaffected over the
lifetime of a lease.
Deferred taxation will arise on the transition adjustment at
1 June 2019 of £0.5m to £1.0m and a movement of £0.2m
to £0.5m during the year ended 31 May 2020, giving rise to a
net deferred tax asset of £0.7m to £1.5m as at 31 May 2020.
As discussed in note 23, the Group has recently renegotiated
its banking facilities. The debt covenants on the Group’s
borrowing facilities will be 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 are not expected to impact the interest paid
by the Group for its banking facilities. The overall net cash
flow for the Group will be unaffected by IFRS 16 other than
operating cash outflows (excluding interest costs) relating to
leases being reclassified as financing outflows. Interest costs
relating to the lease will be disclosed within interest paid.
118
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 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.
BUSINESS COMBINATIONS
Business combinations are accounted for by applying the
acquisition method at the acquisition date, which is the date on
which control is transferred to the Group. The Group controls
an entity when the Group is exposed to, or has rights to,
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity.
ACQUISITIONS
The Group measures goodwill at the acquisition date as:
• The fair value of the consideration transferred; plus
• The recognised amount of any non-controlling interests in
the acquiree; plus
•
If the business combination is achieved in stages, the fair
value of the existing equity interest in the acquiree; less
• The fair value of the identifiable assets acquired and
liabilities assumed.
When the excess is negative, a bargain purchase gain is
recognised immediately in profit or loss. The consideration
transferred does not include amounts related to the settlement
of pre-existing relationships. Such amounts generally are
recognised in the Income Statement.
Costs related to the acquisition, other than those associated with
the issue of debt or equity securities, are expensed as incurred.
Any deferred or contingent consideration payable is
recognised at fair value at the acquisition date. If the
contingent consideration is classified as equity, it is not
remeasured and settlement is accounted for within equity.
Otherwise, subsequent changes to the fair value of contingent
consideration are recognised in the Income Statement.
On a transaction-by-transaction basis, the Group elects to
measure non-controlling interests either at its fair value or
at its proportionate interest in the recognised amount of the
identifiable net assets of the acquiree at the acquisition date.
SUBSIDIARIES
Subsidiaries are entities controlled by the Group. The financial
statements of subsidiaries are included in the consolidated
Financial Statements from the date that control commences
until the date that control ceases.
Control is achieved where the Company has the power to
govern the financial and operating policies of an investee
entity so as to obtain benefits from its activities. Intercompany
transactions and balances between subsidiaries are eliminated
on consolidation.
INTANGIBLE ASSETS AND GOODWILL
Goodwill represents amounts arising on acquisition of
subsidiaries. In respect of business acquisitions that have
occurred since 1 June 2004, goodwill represents the
difference between the cost of the acquisition and the
fair value of the net identifiable assets acquired including
identifiable intangible assets. Identifiable intangibles are those
which can be sold separately or which arise from legal rights
regardless of whether those rights are separable.
In respect of acquisitions prior to 1 June 2004, goodwill is
included at its deemed cost, which represents the amount
recorded under UK GAAP at 31 May 2004 which was
broadly comparable, save that only separable intangibles were
recognised and goodwill was amortised.
Goodwill is stated at cost less any accumulated impairment
losses. Goodwill is allocated to cash-generating units and is not
amortised but is tested annually for impairment. In respect of
equity accounted investees, the carrying amount of goodwill is
included in the carrying amount of the investment in the investee.
RESEARCH AND DEVELOPMENT
Expenditure on research activities is recognised in the
Income Statement as an expense as incurred. Expenditure on
development activities is capitalised as ‘development costs’
if the product or process is technically and commercially
feasible and the Group has the technical ability and sufficient
resources to complete development. In addition, that future
economic benefits are probable and the Group can measure
reliably the expenditure attributable to the intangible asset
during its development. Development activities involve a plan
or design for the production of new or substantially improved
products or processes.
SOFTWARE COSTS
The Group capitalises ‘software costs’ in accordance with the
criteria of IAS 38. Software costs comprise two elements:
IT licences for periods of one year or more, and the third
party and internal employee time costs for internal system
developments. Capitalised costs are initially measured at cost
and amortised on a straight-line basis over the licence term or
the period for which the developed system is expected to be in
use as a business platform.
The expenditure capitalised includes the cost of materials, direct
labour, overhead costs that are directly attributable to preparing
the asset for its intended use and capitalised borrowing costs.
Other development expenditure is recognised in the Income
Statement as an expense as incurred. Software costs are stated
at cost less accumulated amortisation and less accumulated
impairment losses.
119
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
OTHER INTANGIBLE ASSETS
Expenditure on internally generated goodwill is recognised in
the Income Statement as an expense as incurred.
Other intangible assets that are acquired by the Group
are stated at cost less accumulated amortisation and less
accumulated impairment losses.
SUBSEQUENT EXPENDITURE
Subsequent expenditure is capitalised only when it increases
the future economic benefits embodied in the specific asset
to which it relates. All other expenditure, including expenditure
on internally generated goodwill, is recognised in the Income
Statement as an expense as incurred.
AMORTISATION
Amortisation is charged to the Income Statement on a
straight-line basis over the estimated useful economic
lives of intangible assets unless such lives are indefinite.
Intangible assets with an indefinite useful life and goodwill are
systematically tested for impairment at each balance sheet
date. Other intangibles are amortised from the date they are
available for use. The estimated useful lives are as follows:
Acquired customer contracts
and relationships
– between three and ten years
Software
– between one and seven years
Capitalised development costs – between three and five years
FINANCIAL INSTRUMENTS
Financial assets and financial liabilities, in respect of financial
instruments, are recognised in the Group balance sheet when
the Group becomes a party to the contractual provisions of the
instrument.
CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS AND
LIABILITIES
Classification of financial assets is generally based on the
business model in which the financial asset is managed and
its contractual cash flow characteristics. A financial asset
is measured at amortised cost if it is held with the objective
of collecting the contractual cash flows and its contractual
terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding. All other financial assets are measured at fair value
through other comprehensive income or the Income Statement.
FINANCIAL ASSETS AT AMORTISED COST
TRADE AND OTHER RECEIVABLES
Trade receivables and other receivables that have fixed or
determinable payments that are not quoted in an active market
are classified as financial assets measured at amortised cost.
Under the IFRS 9 ‘Expected Credit Loss’ model, a credit event
(or impairment ‘trigger’) no longer needs to occur before credit
losses are recognised.
The Group analyses the risk profile of trade receivables
based on past experience and an analysis of the receivable’s
current financial position, potential for a default event to occur,
adjusted for specific factors, general economic conditions of
the industry in which the receivables operate and assessment
of both the current and the forecast direction of conditions
at the reporting date. A default event is considered to occur
when information is obtained that indicates that a receivable is
unlikely to be paid to the Group.
Credit risk is regularly reviewed by management to ensure
the expected credit loss (ECL) model is being appropriately
applied. The Group has performed the calculation of ECL
separately for each business unit and rebutted the assumption
under IFRS 9 that all debts that are over 30 days past the due
date should have a credit allowance.
Interest income is recognised by applying the effective interest
rate, except for short-term receivables when the recognition of
interest would be immaterial.
FINANCIAL LIABILITIES AT AMORTISED COST
TRADE PAYABLES
Trade payables are other financial liabilities initially measured
at fair value and subsequently measured at amortised cost.
IMPAIRMENT OF NON-FINANCIAL ASSETS
The carrying amounts of the Group’s non-financial assets,
other than deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication
of impairment. If any such indication exists, then the asset’s
recoverable amount is estimated. For goodwill, and intangible
assets that have indefinite useful lives or that are not yet
available for use, the recoverable amount is estimated each
year at the same time.
The recoverable amount of an asset or cash generating unit
is the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time
value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest
group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of
other assets or groups of assets (the ‘cash generating unit’).
The goodwill acquired in a business combination, for the
purpose of impairment testing, is allocated to cash generating
units, (CGUs). Subject to an operating segment ceiling test, for
the purposes of goodwill impairment testing, CGUs to which
goodwill has been allocated are aggregated so that the level
at which impairment is tested reflects the lowest level at which
goodwill is monitored for internal reporting purposes. Goodwill
acquired in a business combination is allocated to groups
of CGUs that are expected to benefit from the synergies of
the combination.
120
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 An impairment loss is recognised if the carrying amount
of an asset or its CGU exceeds its estimated recoverable
amount. Impairment losses are recognised in the Income
Statement. Impairment losses recognised in respect of CGUs
are allocated first to reduce the carrying amount of any
goodwill allocated to the units, and then to reduce the carrying
amounts of the other assets in the unit (group of units) on a
pro rata basis. An impairment loss in respect of goodwill is
not reversed. In respect of other assets, impairment losses
recognised in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no
longer exists. An impairment loss is reversed if there has been
a change in the estimates used to determine the recoverable
amount. An impairment loss is reversed only to the extent
that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised.
RELATED PARTY TRANSACTIONS
Details of related party transactions are set out in note 31 to
these Financial Statements.
PLANT AND EQUIPMENT
Plant and equipment assets are carried at cost less
accumulated depreciation and any recognised impairment
in value. To the extent that borrowing costs relate to the
acquisition, construction or production of a qualifying asset,
borrowing costs are capitalised as part of the cost of that
asset. Depreciation is charged to the Income Statement on a
straight-line basis over the estimated useful economic lives of
each part of an item of plant and equipment as follows:
Computer equipment
Plant and equipment
Furniture
Fixtures and fittings
Motor vehicles
– between three and five years
– between three and five years
– between three and five years
– term of the lease
– four years
Plant and equipment is also tested for impairment whenever
there is an indication of potential impairment.
INVESTMENTS
Investments in subsidiaries are carried at cost less impairment.
Investments in property and unlisted shares are carried at cost
less impairment, which is based on the fair value at acquisition.
INVENTORY
Inventory is held at the lower of cost or net realisable value.
REVENUE RECOGNITION
Revenue is presented net of VAT and other sales-related
taxes. Revenue is measured based on the consideration
specified in a contract with a customer. The application of this
policy in each of the operating segments is as follows.
ASSURANCE
The Assurance division groups its revenue into four types of
revenue streams.
i) Technical Security Consulting (TSC)
TSC, is the Group’s core professional service. The contract
terms range from time and materials (based upon consultants’
time and expenses upon completion of work) and short-term
discreet statements of work, whereby the customer benefits
gradually over the period over which the work is performed,
unless there is a set deliverable.
Revenue is recognised on an input basis to measure the
satisfaction of performance obligations over time. This is done
according to the number of days worked in comparison to the
total contracted number of days by including the profit or loss
earned on work completed to the balance sheet date, whether
fixed price or on a time and materials basis.
Where a contract has multiple performance obligations,
revenue is recognised separately as each performance
obligation is satisfied.
Provisions are made for any losses on uncompleted contracts
expected to be incurred after the balance sheet date.
The Group operates on certain terms and conditions which
allow the Group to recover any abortive revenue from its
customer in the event that a customer terminates a contract
before the contract or deliverable is complete. On this basis,
the Group will have recognised revenue on an input basis.
For certain services, where there are set-up activities with
a higher proportion of costs incurred at that stage, and the
activity creates a separate performance obligation with the
customer receiving immediate benefit from the activity, then
an appropriate proportion of revenue is recognised. Where
there is no separate performance obligation and benefit, the
costs of the set-up activities are recognised over the life of the
service contract in line with the revenue on the basis that the
Group has an enforceable right to payment for performance to
a specific date.
ii) Risk Management Consulting
These services focus on the business risks of cyber.
Revenue is recognised on the same basis outlined for
Technical Security Consulting.
iii) Managed Detection and Response (MDR)
These services provide operational cyber defence, incident
response, scanning, simulation and managed security
operations centres (SOCs). Services are typically for an
extended delivery duration where the customer derives
continual benefit over the contract length. Contract lengths
vary from one to three years.
121
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE
Notes to the financial statements
for the year ended 31 May 2019
Revenue is recognised over the length of the contract as the
performance obligation is satisfied over time.
Services include set-up fees which are charged in respect of
initial work and configuration of equipment to allow customers
to benefit from a monitoring contract over a period of time.
These fees are not considered to be a distinct service, and as
a result, this revenue is recognised over time with the revenue
for the monitoring activity.
iv) Product sales (own manufactured and resale of third
party products)
Revenue is recognised when control of the product is
transferred to the customer. This occurs upon delivery under
the contractual terms. On certain sales of third-party products,
the control of the product is considered to pass from the vendor
to the end customer and in these cases the Group acts as an
agent, and hence only records a commission on sale as opposed
to gross revenue and costs of sale.
ESCROW
The Escrow division groups its revenue into two main types of
income streams.
i) Escrow contract services
These services securely maintain in ‘escrow’ the long-term
availability of business-critical software and applications while
protecting the intellectual property rights (IPR) of technology
partners.
Revenue is recognised on the provision of an escrow service
over a period of time, usually at least a year and potentially up
to three years. Such revenue is recognised on a straight-line
basis over the life of the service delivery agreement on the
basis that benefit is consumed by the customer evenly over the
period. Initial set-up fees are recognised over time as they are
not considered a distinct service.
ii) Verifications and other Escrow services
These services verify source code, provide a fully managed
secure service and result validation.
Revenue is recognised on completion of the related services
which are typically delivered over a short period of time
(typically a matter of weeks). These include SAAS services and
ICANN services.
ACCRUED INCOME
Accrued income represents the Group’s rights to consideration
for work completed but not billed at the reporting date.
Remaining balances are transferred to receivables when the
rights become unconditional.
DEFERRED REVENUE
Deferred revenue represents advanced consideration received
from customers, for which revenue is recognised over time.
DETERMINATION AND PRESENTATION OF OPERATING
SEGMENTS
The Group determines and presents operating segments
based on the information that is provided to the Board, which
acts as the Group’s chief operating decision-maker (CODM)
in order to assess performance and to allocate resources.
An operating segment is a component of the Group that
engages in business activities from which it may earn revenues
and incur expenses, including revenues and expenses
that relate to transactions with any of the Group’s other
components. An operating segment’s results are reviewed
regularly by the CODM to make decisions about resources to
be allocated to the segment and to assess its performance.
The Group reports its business in two key segments: the
Escrow division and the Assurance division. Within the Escrow
division we manage some aspects of the day-to-day business
on a geographical basis and this allows us to disclose revenue
and operating profit for those geographies. However, while we
can manage and disclose some aspects of those as individual
operating segments, they are all managed under the Escrow
division’s senior executive team. That team takes the decisions
on resource allocation, product development, marketing and
areas for focus and investment. For this reason, the Escrow
division is regarded as the appropriate reporting segment with
additional operating segment disclosures presented to give the
user of the accounts a further level of granularity.
Within the Assurance division, all activities are under one
Assurance management team for strategic and resource
allocation decision-making.
ALLOCATION OF CENTRAL COSTS
Some costs are collected and managed in one location but
are actually incurred on behalf of multiple operating segments
or reporting segments. These costs are then allocated to
the reporting segments. The allocation is based on logical or
activity driven cost algorithms. The allocation is necessary to
give an accurate picture of the consumption of resources by
each reporting segment.
INDIVIDUALLY SIGNIFICANT ITEMS
The Group separately identifies items as individually significant
if the item is considered unusual by its nature or scale, and
is 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.
Such items are referred to as ‘Individually Significant Items’ and
are described in note 6.
122
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the
appropriate monthly exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in
foreign currencies are retranslated using the exchange rate
ruling at the balance sheet date and the gains or losses on
translation are included in the Income Statement.
The assets and liabilities of overseas subsidiaries denominated
in foreign currencies are retranslated at the exchange rate
ruling at the balance sheet date. The income statements
of overseas subsidiary undertakings are translated at the
weighted average exchange rates for the financial year. Gains
and losses arising on the retranslation of overseas subsidiary
undertakings are taken to the currency translation reserve.
They are released to the Income Statement upon disposal of
the subsidiary to which they relate.
OPERATING LEASE PAYMENTS
Operating lease rentals are charged to the Income Statement on
a straight-line basis over the period of the lease. Lease incentives
received are recognised in the Income Statement as an integral
part of the total lease expense, over the term of the lease.
EMPLOYEE BENEFITS
– DEFINED CONTRIBUTION PENSIONS
The Group operates a defined contribution pension scheme.
The assets of the scheme are kept separate from those of
the Group in an independently administered fund. The amount
charged as an expense in the Income Statement represents
the contributions payable to the scheme in respect of the
accounting period.
SHORT-TERM BENEFITS
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A liability is recognised for the amount expected to
be paid under short-term cash bonus or profit-sharing plans
if the Group has a present legal or constructive obligation to
pay this amount as a result of past service provided by the
employee and the obligation can be estimated reliably.
SHARE-BASED PAYMENT TRANSACTIONS
Share-based payments in which the Group receives goods
or services as consideration for its own equity instruments
are accounted for as equity-settled share-based payment
transactions, regardless of how the equity instruments are
obtained by the Group. They are treated as an adjusting item
(see note 3).
The grant date fair value of share-based payment awards
granted to employees is recognised as an employee expense,
with a corresponding increase in equity, over the period that
the employees become unconditionally entitled to the awards.
The fair value of the options granted is measured using an
option valuation model, taking into account the terms and
conditions upon which the options were granted.
The amount recognised as an expense is adjusted to reflect
the actual number of awards for which the related service and
non-market vesting conditions are expected to be met, such
that the amount ultimately recognised as an expense is based
on the number of awards that do meet the related service
and non-market performance conditions at the vesting date.
For share-based payment awards with non-vesting conditions,
the grant date fair value of the share-based payment is
measured to reflect such conditions and there is no true-up
for differences between expected and actual outcomes.
Share-based payment transactions in which the Group
receives goods or services by incurring a liability to transfer
cash or other assets that is based on the price of the Group’s
equity instruments are accounted for as cash-settled share-
based payments. The fair value of the amount payable to
employees is recognised as an expense, with a corresponding
increase in liabilities, over the period in which the employees
become unconditionally entitled to payment. The liability is
remeasured at each balance sheet date and at settlement date.
Any changes in the fair value of the liability are recognised as
personnel expense within the Income Statement.
Where the Company grants options over its own shares to
the employees of a subsidiary it recognises in its individual
financial statements, an increase in the cost of investment in
that subsidiary equivalent to the equity-settled share-based
payment charge is recognised in respect of that subsidiary in
its consolidated Financial Statements with the corresponding
credit being recognised directly in equity.
HOLIDAY OR VACATION PAY
The Group recognises a liability in the balance sheet for any
earned but not yet taken holiday entitlement for staff.
Earned holiday is calculated on a straight-line basis over a
holiday year which can vary by business unit. Taken holiday
is based on actually taken holiday. Any movement in the
liability between the opening and closing balance in the year
is recorded as an employee cost or a reduction in employee
costs in the Income Statement in the year.
BORROWINGS
Borrowings are recognised initially at fair value less attributable
transaction costs. Subsequent to initial recognition, borrowings
are stated at amortised cost with any difference between cost
and redemption value being recognised in the Income Statement
over the period of the borrowings on an effective interest basis.
NET FINANCE COSTS
Net finance costs are recognised within the Income Statement
in the year in which they are incurred.
TAXATION
Taxation on the profit or loss for the year comprises current
and deferred taxation. Taxation is recognised in the Income
Statement except to the extent that it relates to items
recognised directly in equity, in which case it is recognised
in equity.
123
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
CURRENT TAXATION
Current tax is the expected tax payable or receivable on the
taxable income or loss for the year, using tax rates enacted
or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
DEFERRED TAXATION
Deferred tax is provided on temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. The
following temporary differences are not provided for: the initial
recognition of goodwill; the initial recognition of assets or
liabilities that affect neither accounting nor taxable profit other
than in a business combination, and differences relating to
investments in subsidiaries to the extent that they will probably
not reverse in the foreseeable future. The amount of deferred
tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using
tax rates enacted or substantively enacted at the balance sheet
date. A deferred tax asset is recognised only to the extent that
it is probable that future taxable profits will be available against
which the temporary difference can be utilised.
INTRA-GROUP FINANCIAL INSTRUMENTS
Where the Company enters into financial guarantee contracts
to guarantee the indebtedness of other companies within
the Group, the Company considers these to be insurance
arrangements and accounts for them as such. In this respect the
Company treats the guarantee contract as a contingent liability
until such time as it becomes probable that the Company will be
required to make a payment under the guarantee.
TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at their nominal amount
less impairment losses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash in hand and deposits
repayable on demand. Bank overdrafts that are repayable on
demand form part of the Group’s cash management and are
included as a component of cash and cash equivalents for the
purpose only of the statement of cash flows.
TREASURY SHARES
NCC Group plc shares held by the Group are deducted
from equity as ‘treasury shares’ and are recognised at cost.
Consideration received for the sale of such shares is also
recognised in equity, with any difference between the proceeds
from sale and the original cost being taken to reserves.
No gain or loss is recognised in the Income Statement on
the purchase, sale, issue or cancellation of equity shares.
NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
A non-current asset or a group of assets containing a non-
current asset (a disposal group) is classified as held for sale if
its carrying amount will be recovered principally through sale
rather than through continuing use, it is available for immediate
sale and sale is highly probable within one year.
On initial classification as held for sale, non-current assets and
disposal groups are measured at the lower of previous carrying
amount and fair value less costs to sell with any adjustments
taken to the Income Statement. The same applies to gains
and losses on subsequent remeasurement although gains
are not recognised in excess of any cumulative impairment
loss. Any impairment loss on a disposal group is first allocated
to goodwill, and then to remaining assets and liabilities on a
pro rata basis, except that no loss is allocated to inventories,
financial assets, deferred tax assets, employee benefit assets
and investment property, which continue to be measured in
accordance with the Company’s accounting policies. Intangible
assets and property, plant and equipment once classified as
held for sale or distribution are not amortised or depreciated.
A discontinued operation is a component of the Company’s
business that represents a separate major line of business or
geographical area of operations that has been disposed of
or is held for sale, or is a subsidiary acquired exclusively with
a view to resale. Classification as a discontinued operation
occurs upon disposal or when the operation meets the criteria
to be classified as held for sale, if earlier. When an operation
is classified as a discontinued operation, the comparative
Income Statement is restated as if the operation had been
discontinued from the start of the comparative period.
2 CRITICAL ACCOUNTING JUDGMENTS AND KEY
SOURCES OF ESTIMATION UNCERTAINTY
GROUP
The preparation of Financial Statements requires management
to exercise judgment in applying the Group’s accounting
policies. Different judgments would have the potential to
change the reported outcome of an accounting transaction
or statement of financial position. It also requires the use
of estimates that affect the reported amounts of assets,
liabilities, income and expenses. Actual results may differ
from these estimates. Estimates and underlying assumptions
are reviewed on an ongoing basis, with changes recognised
in the period in which the estimates are revised and in any
future periods affected. The table below shows those areas
of critical accounting judgments and estimates that the
Directors consider material and that could reasonably change
significantly in the next year. In some cases, the accounting
area requires both an accounting judgment and an estimate.
Accounting area
Carrying value of intangible assets
(including goodwill)
Individually Significant Items
Loss-making contract
Capitalisation of development costs
Accounting
Judgment?
Accounting
Estimate?
Yes
Yes
Yes
Yes
Yes
No
Yes
No
2.1 JUDGMENTS
Information about judgments made in applying accounting
policies that have the most significant effects on the amounts
recognised in the consolidated Financial Statements are as
follows.
124
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 CARRYING VALUE OF INTANGIBLE ASSETS – ASSESSMENT OF CGUs
A CGU is the smallest identifiable group of assets that generate
cash inflows that are largely independent of the cash inflows from
other assets or groups of assets. Identification of a CGU does
involve judgment. The Directors have reviewed the continuing
applicability of the judgments made in the prior year in determining
the CGUs within the Group and in allocating goodwill to these
CGUs. Accordingly, the UK MSS (Accumuli) CGU has been
incorporated into the Assurance CGU as its operations have been
subsumed into the UK Assurance division following its acquisition.
INDIVIDUALLY SIGNIFICANT ITEMS (ISIs)
The Group categorises certain items as ISIs on the basis of
management judgment. These judgments have regard to the
Group’s approach to materiality as set out on page 65 of the
Audit Committee Report. Some items are deemed material
because of scale, some because of their nature or frequency
of occurrence, and others through a combination of both.
These judgments can be significant not only in changing the
Group’s Adjusted ¹ results (refer to note 3) but can also have
a significant impact on senior management and executive
reward which in some cases are linked to Adjusted ¹ results
as opposed to GAAP results (as set out in note 3).
To the extent that they relate to provisions for future costs or
income this also involves a degree of judgment on the appropriate
level of provision (such as in onerous property leases).
CAPITALISATION OF DEVELOPMENT COSTS
Development activities involve a plan or design for the
production of new or substantially improved products or
processes. Judgment is required in determining whether the
project is technically and commercially feasible; judgment
is required in assessing the future economic benefit. Such
judgments are inherently subjective and can have a material
impact on determining the viability of the project and ultimately
whether the costs should be capitalised.
2.2 ESTIMATION UNCERTAINTIES
Information about estimation uncertainties that have a
significant risk of resulting in a material adjustment to the
carrying values of assets and liabilities within the next financial
year are addressed below.
CARRYING VALUES OF INTANGIBLE ASSETS (INCLUDING
GOODWILL, ACQUIRED INTANGIBLE ASSETS AND CAPITALISED
SOFTWARE AND DEVELOPMENT COSTS)
The Group has significant balances relating to goodwill at
31 May 2019 as a result of acquisitions of businesses in
previous years. The carrying value of goodwill at 31 May 2019
is £189.4m (2018: £187.2m). Goodwill balances are tested
annually for impairment. Tests for impairment are primarily
based on the calculation of a value in use for each CGU.
Acquired intangibles and capitalised development and software
costs are also allocated to CGUs. The carrying value of acquired
intangible assets and capitalised software and development
costs at 31 May 2019 is £41.8m (2018: £52.8m).
This involves the preparation of discounted cash flow
projections, which require significant estimates of both
future operating cash flows and an appropriate risk-adjusted
discount rate.
The commercial viability of individually capitalised development
project costs is also part of the overall assessment of
carrying values.
Future cash flow estimates are made up of two critical
estimates: the rate of revenue growth and the associated rate
of cost growth (or, in other words, EBITDA ¹ improvement,
or contraction if costs grow at a different rate from revenue).
The calculation of an appropriate discount rate to apply to
the future cash flow estimate is itself an estimate. While
some aspects of discount rate calculations can be more
mechanical in nature (such as using the 30-year gilt yield
as a proxy for the risk-free rate) others, such as entity or
sector-specific risk adjustments, rely more on management
estimates. The discount rate is also a key component in
assessing the Terminal Value which is often an important part
of any valuation. Sensitivity analysis on what are regarded as
reasonably possible changes is provided in note 13.
LOSS-MAKING CONTRACT
Some aspects of the Group’s revenue derive from relatively
long-term contracts. While this is in respect of a very limited
number of contracts, the risk of loss on such long-term
contracts could have a significant impact. On an annual basis,
the Group performs a review of long-term contracts and where
appropriate has recognised a provision for the remaining
loss on these contracts. In such situations project managers
use established methodologies to estimate the percentage
completion of a project and hence the amount of revenue that
should have been recognised to date. In some cases, long-
term contract revenue is signed off by reference to meeting
customer agreed milestones, in which case the degree of
estimation can be lower. Furthermore, identifying whether or
not an as yet incomplete contract will be loss-making over
its life includes estimates of future costs to complete. This
inevitably includes judgments on unknown contingencies,
labour rates and future prices.
COMPANY
There are no critical accounting judgments or key sources of
estimation uncertainty.
3 ALTERNATIVE PERFORMANCE MEASURES (APMs)
AND ADJUSTING ITEMS
The consolidated Financial Statements include APMs as
well as statutory measures. These APMs used by the Group
are not defined terms under IFRS and may therefore not be
comparable with similarly titled measures reported by other
companies. They are not intended to be a substitute for, or
superior to, Generally Accepted Accounting Practice (GAAP)
measures. All APMs relate to the current year results and
comparative periods where provided.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
125
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
This presentation is also consistent with the way that financial performance is measured by management, reported to the Board,
the basis of financial measures for senior management’s compensation schemes and provides supplementary information that
assists the user in understanding the financial performance, position and trends of the Group. At all times the Group aims to
ensure that the Annual Report and Accounts give a fair, balanced and understandable view of the Group’s performance, cash
flows and financial position. IAS 1 ‘Presentation of Financial Statements’, requires the separate presentation of items that are
material in nature or scale in order to allow the user of the accounts to understand underlying business performance.
The APMs were the same as those that applied to the audited consolidated Financial Statements for the year ended 31 May
2018 and the unaudited interim Financial Statements for the period ended 30 November 2018. See below for reconciliation of
adjusted information to statutory information and refer to the Glossary on pages 155 to 156 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 operating profit ², defined as operating profit or loss before adjusting items, as presented
to the CODM.
Adjusting items are:
•
Individually Significant Items;
• Share-based payments;
• Amortisation of acquired intangibles;
• Profit on disposal of investment;
• Unwind on discount on acquisition consideration; and
• Historic R&D prior year tax credits.
RECONCILIATION OF ADJUSTED INFORMATION TO STATUTORY INFORMATION
The following table includes details of adjusting items and reconciles adjusted information to Statutory information for
continuing operations:
Year ended
31 May 2019 – continuing operations
Adjusted
Individually Significant Items (note 6)
Share-based payments (note 25)
Amortisation of acquired intangibles
Revenue
£m
250.7
–
–
–
Profit on disposal of investment (note 15)
Statutory
–
250.7
Year ended
31 May 2018 – continuing operations
(restated 1)
Adjusted
Individually Significant Items (note 6)
Share-based payments (note 25)
Amortisation of acquired intangibles
Unwind of discount on acquisition
consideration (note 9)
R&D prior-year tax credits
Statutory
Revenue
£m
233.0
–
–
–
–
–
233.0
Gross
profit
£m
101.8
–
–
–
–
101.8
Gross
profit
£m
95.9
–
–
–
–
–
95.9
EBITDA
£m
43.7
(3.6)
(1.7)
–
0.1
38.5
EBITDA
£m
42.9
(7.6)
(0.3)
–
–
–
35.0
Depreciation
and
amortisation
£m
(10.0)
–
–
(9.0)
Operating
profit
£m
33.7
(3.6)
(1.7)
(9.0)
Profit
before
taxation
£m
32.0
(3.6)
(1.7)
(9.0)
–
(19.0)
0.1
19.5
0.1
17.8
Taxation
£m
(6.5)
0.5
(0.1)
1.8
–
(4.3)
Depreciation
and
amortisation
£m
(12.1)
–
–
(9.4)
Operating
profit
£m
30.8
(7.6)
(0.3)
(9.4)
–
–
(21.5)
–
–
13.5
Profit
before
taxation
£m
29.3
(7.6)
(0.3)
(9.4)
(0.3)
–
11.7
Taxation
£m
(6.6)
1.5
0.4
3.8
–
1.4
0.5
Profit from
continuing
operations
£m
25.5
(3.1)
(1.8)
(7.2)
0.1
13.5
Profit from
continuing
operations
£m
22.7
(6.1)
0.1
(5.6)
(0.3)
1.4
12.2
Amortisation of acquired intangibles represents amortisation of customer contracts and relationships arising from acquisitions as
disclosed in note 13 to the consolidated Financial Statements.
R&D prior-year tax credits relate to a significant historic R&D tax claim in North America which was recognised in 2018.
During the year ended 31 May 2019, cash adjusting items were £nil (2018: £1.8m).
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
126
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
NET DEBT ²
Net debt ² is set out below:
Cash and cash equivalents (note 23)
Borrowings (note 23)
Net debt ²
CASH CONVERSION RATIO ²
The calculation of the cash conversion ratio ² is set out below:
Continuing and discontinued
Cash generated from operating activities before interest and taxation (A)
Adjusted EBITDA ² (B)
Cash conversion ratio ² (%) (A)/(B)
2019
£m
34.9
(55.1)
(20.2)
2019
£m
47.9
43.7
109.6%
2018
£m
21.2
(49.0)
(27.8)
2018
£m
39.5
43.8
90.2%
4 SEGMENTAL INFORMATION
The Group is organised into the following two (2018: two) reportable segments: Assurance and Escrow. The two reporting
segments provide distinct types of service. Within each of the reporting segments the operating segments provide a
homogeneous group of services. The operating segments are grouped into the reporting segments on the basis of how they are
reported to the Chief Operating Decision-Maker (CODM) for the purposes of IFRS 8: ‘Operating Segments’, which is considered
to be the Board of Directors of NCC Group plc. Operating segments are aggregated into the two reportable segments based
on the types and delivery methods of services they provide, common management structures, and their relatively homogeneous
commercial and strategic market environments. Performance is measured based on reporting segment profit, which comprises
adjusted operating profit 2. Interest and tax are not allocated to business segments and there are no intra-segment sales.
Segmental analysis 2019
Revenue
Cost of sales
Gross profit
Gross margin %
General administration expenses allocated ²
Adjusted operating profit ²
Adjusting items ²
Operating profit
Segmental analysis 2018 (Restated ¹)
Revenue
Cost of sales
Gross profit
Gross margin %
General administration expenses allocated ²
Adjusted operating profit ²
Adjusting items ²
Operating profit
Assurance
£m
Escrow
£m
Central &
Head Office
£m
212.7
(139.2)
73.5
34.6%
(50.9)
22.6
Assurance
£m
193.9
(127.9)
66.0
34.0%
(49.5)
16.5
38.0
(9.7)
28.3
74.5%
(9.3)
19.0
Escrow
£m
39.1
(9.2)
29.9
76.5%
(8.0)
21.9
–
–
–
–
(7.9)
(7.9)
Central &
Head Office
£m
–
–
–
–
(7.6)
(7.6)
Group
£m
250.7
(148.9)
101.8
40.6%
(68.1)
33.7
(14.2)
19.5
Group
£m
233.0
(137.1)
95.9
41.2%
(65.1)
30.8
(17.3)
13.5
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
127
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
Revenue is disaggregated by primary geographical market, by category and timing of revenue recognition as follows:
Revenue by originating country
UK
North America
Europe and RoW
Total revenue from continuing operations
Revenue from discontinued operations
Total revenue
Revenue by category
Services
Products
Total revenue from continuing operations
Timing of revenue recognition
Services and products transferred over time
Services and products transferred at a point in time
Total
2019
£m
114.9
83.8
52.0
250.7
–
250.7
2019
£m
244.5
6.2
250.7
63.1
187.6
250.7
2018
(Restated ¹)
£m
117.7
68.7
46.6
233.0
21.5
254.5
2018
(Restated ¹)
£m
223.7
9.3
233.0
58.8
174.2
233.0
There are no customer contracts which account for more than 10% of segment revenue.
5 DISCONTINUED OPERATIONS
In the prior financial year, the Group sold Web Performance and Software Testing, both part of the Assurance division but not
aligned to the core cyber security activities of the division. The tables below provide an analysis of these discontinued operations.
Loss of discontinued operations
Revenue
Cost of sales
Gross profit
General administrative expenses
Share-based payments
Operating profit
Loss of discontinued operations
Loss on sale of discontinued operations before tax
Loss on discontinued operations before tax
Taxation
Loss on discontinued operations after tax
Effect of discontinued operations on assets and liabilities
Intangible assets
Plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Net assets
2019
£m
–
–
–
–
–
–
–
–
–
–
2019
£m
–
–
–
–
–
–
2018
£m
21.5
(17.2)
4.3
(3.6)
0.1
0.8
(6.4)
(5.6)
0.1
(5.5)
2018
£m
6.2
0.5
4.5
0.7
(5.8)
6.1
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
128
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Summary of loss on disposal of subsidiary
Consideration received or receivable:
Cash consideration
Carrying amount of net assets disposed of
Elimination of goodwill
Professional fees and other costs
Loss on disposal before taxation
Taxation
Loss on disposal after taxation
2019
£m
–
–
–
–
–
–
–
6 INDIVIDUALLY SIGNIFICANT ITEMS ¹
The Group separately identifies items as Individually Significant Items. Each of these is considered by the Directors to
be sufficiently unusual in terms of nature or scale so as not to form part of the underlying performance of the business.
They are therefore separately identified and excluded from adjusted results (as explained in note 3).
Individually Significant Items (ISIs)
SGT – legacy systems accelerated amortisation (net of R&D tax credit)
Loss-making contract
Revisions to deferred and contingent consideration (note 24)
Restructuring costs
Onerous leases and other property-related costs
Market-related costs
Total ISIs – continuing operations
2019
£m
(3.8)
–
0.8
–
(0.6)
–
(3.6)
2018
£m
11.3
(6.1)
(10.2)
(1.4)
(6.4)
–
(6.4)
2018
£m
–
(2.5)
(0.6)
(1.6)
(2.7)
(0.2)
(7.6)
SGT – LEGACY SYSTEMS ACCELERATED AMORTISATION
As part of the transformation projects underway across the Group, the Group has accelerated amortisation on legacy systems in
advance of new systems coming into effect. The charge is a large, one-off transaction which will not be repeated in coming years,
and therefore, was deemed to be an ISI. The charge is net of an R&D tax credit.
LOSS-MAKING CONTRACT
In the prior year, a loss-making contract was identified by management, whereby it was considered that significant additional
effort would be required to satisfy the contractual commitments that has led the contract to be loss-making over its lifetime. The
Group has a very small number of long-term contracts and hence this is a very unusual occurrence for the Group. It was therefore
deemed, both in terms of its unusual nature and size, that it should be treated as an ISI.
REVISIONS TO DEFERRED AND CONTINGENT CONSIDERATION
The revisions to deferred and contingent consideration represent changes to amounts payable by the Group on the purchase of
overseas subsidiaries, as well as foreign exchange differences on that consideration. Due to the size of the movement and that
there was no connection to the underlying performance of the business, this has been treated as an ISI.
RESTRUCTURING COSTS
Restructuring costs arose due to a prior-year Strategic Review and hence are treated as an ISI given the one-off nature of the
Strategic Review and the level of the costs incurred.
ONEROUS LEASES AND OTHER PROPERTY-RELATED COSTS
Following a review of the UK property portfolio and capacity requirements, management has identified three onerous property
leases. The amount provided for represents the forecasted discounted net cash flows.
In the prior year, onerous property leases arose on a vacant property and an unused floor in the Manchester head office. In the
current year, the Directors have decided to vacate another floor in the head office. In addition, in the prior year, costs included
dual running costs of the Manchester head office, prior to occupancy.
These costs are treated as an ISI because they arise in connection with unoccupied properties and this is not considered to be
part of the underlying performance of the business.
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
129
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
MARKET-RELATED COSTS
Market-related costs in the prior year were in respect of the shareholder circular and exercise to remediate a number of invalid
dividends. This exercise completed successfully at the September EGM. The correction of invalid dividends being paid in the prior
year by means of a shareholder circular is a highly unusual occurrence and hence while small in scale was deemed not to form
part of the underlying business performance.
7 EXPENSES AND AUDITORS’ REMUNERATION
Continuing activities
Profit before taxation is stated after charging/(crediting):
Amounts receivable by auditors and their associates in respect of:
Audit of these financial statements
Audit of financial statements of subsidiaries pursuant to legislation
Total audit ¹
Depreciation of property, plant and equipment (note 14)
Amortisation of development costs (note 13)
Amortisation of software costs (note 13)
Amortisation of acquired intangibles (note 13)
Accelerated amortisation of software costs (included within ISIs) (note 13)
R&D tax credit relating to accelerated amortisation of software costs (included within ISIs)
Cost of inventories recognised as an expense
Foreign exchange losses
Operating lease rentals charged:
– Hire of property, plant and equipment
Research and development expenditure
Profit on disposal of investment (note 15)
Loss on disposal of plant and equipment
2019
£m
2018
£m
0.2
0.1
0.3
5.6
1.7
2.7
9.0
4.3
(0.5)
0.6
0.2
6.2
0.4
(0.1)
–
0.2
0.1
0.3
6.5
2.7
2.9
9.4
–
–
1.1
0.6
5.8
0.5
–
0.1
1
The only non-audit service provided by the auditors was the half-year review for which the fee was £17,500 (2018: £17,500).
8 STAFF NUMBERS AND COSTS
Directors’ emoluments are disclosed in the Remuneration Committee report. Total aggregate emoluments of the Directors in
respect of 2019 were £1.6m (2018: £1.2m). Employer contributions to pensions for Executive Directors for qualifying periods
were nil (2018: nil). The aggregate net value of share awards granted to the Directors in the period was £0.7m (2018: £0.3m).
The net value has been calculated by reference to the closing mid-market price of the Company’s shares on the day before the
date of grant. During the year, no share options were exercised by Directors (2018: nil).
The average monthly number of persons employed by the Group during the year, including Directors, is analysed by category
as follows:
Number of employees
Operational
Administration
Total
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Share-based payments (note 25)
Social security costs
Other pension costs (note 30)
Total payroll costs
130
2019
1,380
343
1,723
2019
£m
133.2
1.7
13.0
6.6
154.5
2018
1,361
274
1,635
2018
£m
127.2
0.3
13.3
5.7
146.5
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 9 NET FINANCING COSTS
Interest payable on bank loans and overdrafts
Unwinding discount on deferred and contingent consideration
Net financing costs
2019
£m
1.7
–
1.7
2018
£m
1.5
0.3
1.8
The unwinding of discount on deferred and contingent consideration payable relates to future payments for the historical
acquisitions of subsidiary companies where the future payments have been discounted to their present value.
10 TAXATION
RECOGNISED IN THE INCOME STATEMENT
Current tax expense
Current year
Adjustment to tax expense in respect of prior periods
Impact of prior-year US R&D tax credits
Foreign tax
Total current tax
Deferred tax expense
Origination and reversal of temporary differences
Movement in tax rate
Recognition of previously unrecognised deductible timing differences
Impact of prior-year US R&D tax credits
Adjustment to tax expense in respect of prior periods
Total deferred tax
Tax expense/(credit) on continuing operations
RECONCILIATION OF EFFECTIVE TAX RATE
Profit before taxation
Current tax using the UK corporation tax rate of 19% (2018: 19%)
Effects of:
Items not taxable for tax purposes
Adjustment to tax charge in respect of prior periods
Impact of prior-year US R&D tax credits
Differences between overseas tax rates
Movements in temporary differences not recognised
Movement in tax rate
Total tax expense/(credit) on continuing operations
2019
£m
2018
£m
2.1
1.3
(0.5)
2.3
5.2
0.3
0.1
–
(0.7)
(0.6)
(0.9)
4.3
2019
£m
17.8
3.4
0.6
0.7
(1.2)
1.3
(0.6)
0.1
4.3
2.4
(0.6)
(0.2)
1.8
3.4
(2.1)
(0.6)
1.3
(2.3)
(0.2)
(3.9)
(0.5)
2018
£m
11.7
2.2
0.1
0.4
(2.5)
1.4
(1.5)
(0.6)
(0.5)
Current and deferred tax recognised directly in equity was a credit of £0.1m (2018: credit of £0.2m). The UK Government
enacted Finance Act 2016 in September 2016 including provisions to reduce the main rate of corporation tax to 17% with effect
from 1 April 2020. Accordingly, the UK deferred tax balances have been revalued in these accounts where relevant.
The United States Tax Cuts and Jobs Act was enacted on 22 December 2017 and included several provisions that impact NCC
Group, notably a reduction in the US federal rate of corporate income tax from 35% to 21% (effective 1 January 2018).
TAX UNCERTAINTIES
The tax expense/(credit) reported for the current year and prior year are affected by certain positions taken by management
where there may be uncertainty over future benefit. The most significant source of uncertainty arises from US R&D tax credits
relating to historical periods with £2.3m of credits utilised in 2019 (2018: £1.3m). Uncertainty arises as a result of a degree of
subjectivity with such claims and because the statute of limitations has not expired.
131
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE
Notes to the financial statements
for the year ended 31 May 2019
11 DIVIDENDS
Dividends paid and recognised in the year
Dividends per share paid and recognised in the year
Dividends per share proposed but not recognised in the year
2019
£m
12.9
4.65p
3.15p
2018
£m
12.8
4.65p
3.15p
The proposed final dividend for the year ended 31 May 2019 of 3.15p per ordinary share on approximately 277.8m ordinary
shares (approximately £8.8m) was approved by the Board on 24 July 2019 and will be recommended to shareholders at the
AGM on 25 September 2019. The dividend has not been included as a liability as at 31 May 2019. The payment of this dividend
will not have any tax consequences for the Group.
12 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.
Statutory earnings - continuing operations
Statutory earnings - all operations
Adjusted ² profit from continuing operations (note 3)
Basic weighted average number of shares in issue
Dilutive effect of share options
Diluted weighted average shares in issue
2019
£m
13.5
13.5
25.5
Number
of shares
m
277.8
1.5
279.3
2018
(restated ¹)
£m
12.2
6.7
22.7
Number
of shares
m
277.0
2.3
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 period during which the options are outstanding.
Basic earnings per ordinary share
Statutory - continuing operations
Statutory - all operations
Adjusted ²
Diluted earnings per ordinary share
Statutory - continuing operations
Statutory - all operations
Adjusted ²
2019
pence
2018
(restated ¹)
pence
4.9
4.9
9.2
4.4
2.4
8.2
2019
pence
2018
(restated ¹)
pence
4.8
4.8
9.1
4.4
2.4
8.1
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
132
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 13 GOODWILL AND OTHER INTANGIBLE ASSETS
GROUP
Cost:
At 1 June 2017
Additions – internally developed
Disposal of subsidiaries
Effects of movements in exchange rates
At 31 May 2018
Additions – internally developed
Effects of movements in exchange rates
At 31 May 2019
Accumulated amortisation and impairment losses:
At 1 June 2017
Charge for year
Disposals of subsidiaries
Effects of movements in exchange rates
At 31 May 2018
Charge for year ¹
Effects of movements in exchange rates
At 31 May 2019
Net book value:
At 31 May 2018
At 31 May 2019
Other intangible assets
Goodwill
£m
Software
£m
Development
costs
£m
Customer
contracts and
relationships
£m
264.9
–
(9.8)
(1.7)
253.4
–
2.2
255.6
(66.2)
–
–
–
(66.2)
–
–
(66.2)
187.2
189.4
20.2
2.5
(3.0)
–
19.7
4.6
–
24.3
(11.2)
(2.9)
2.1
–
(12.0)
(7.0)
–
(19.0)
7.7
5.3
19.3
2.5
(10.9)
–
10.9
1.8
–
12.7
(9.1)
(2.7)
6.0
–
(5.8)
(1.7)
–
(7.5)
5.1
5.2
87.0
–
0.1
(0.5)
86.6
–
0.5
87.1
(37.3)
(9.4)
(0.1)
0.2
(46.6)
(9.0)
(0.2)
(55.8)
40.0
31.3
Total
£m
391.4
5.0
(23.6)
(2.2)
370.6
6.4
2.7
379.7
(123.8)
(15.0 )
8.0
0.2
(130.6)
(17.7)
(0.2)
(148.5)
240.0
231.2
1
Charge for the year includes accelerated amortisation of £4.3m (included within ISIs).
CASH GENERATING UNITS (CGUs)
Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. CGUs are defined by
accounting standards as the lowest level of asset groupings that generate separately identifiable cash inflows that are not
dependent on other CGUs. The Directors have reviewed the continuing applicability of the judgments made in the prior year in
determining the CGUs within the Group and in allocating goodwill to these CGUs. Accordingly, the UK MSS (Accumuli) CGU
amounting to £14.1m has been incorporated into the UK Assurance CGU as its operations have been subsumed into the UK
Assurance division following its acquisition. Comparatives have therefore been re-presented to allocate the carrying value of
goodwill to the respective CGU. The assessment of CGUs is a key accounting judgment as set out in note 3 of the consolidated
Financial Statements.
The CGUs and the allocation of goodwill to those CGUs is shown below:
Cash generating units
UK
North America
Europe and RoW
Total Escrow
UK: professional services
North America: professional services
North America: Payment Software Company Inc
North America: Virtual Security Research LLC
Europe and RoW: Fox-IT
Total Assurance
Total Group
Goodwill
2019
£m
Goodwill
2018
(re-presented)
£m
22.9
8.4
7.3
38.6
47.1
28.2
10.0
2.4
63.1
150.8
189.4
22.9
8.0
7.4
38.3
47.1
27.0
9.5
2.2
63.1
148.9
187.2
133
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE
Notes to the financial statements
for the year ended 31 May 2019
IMPAIRMENT REVIEW
Goodwill is tested for impairment annually at the level of the CGU to which it is allocated. In each of the tests carried out during
2019, the recoverable amount of the CGUs concerned was measured on a value-in-use basis (VIU). VIU represents the present
value of the future cash flows that are expected to be generated by the CGU to which the goodwill is allocated.
Capitalised development and software costs are included in the CGU asset bases when performing the impairment review.
Capitalised development projects and software intangible assets are also considered, on an asset-by-asset basis, for impairment
where there are indicators of impairment. During the year, management carried out a detailed review of the capitalised product
portfolio and, based on cash flow projections for the respective projects, concluded that no impairment was required.
VIU calculations are an area of material management estimation as set out in note 3 to the consolidated Financial Statements.
These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax
discount rate. Further detail in relation to these key assumptions used in the Group’s goodwill annual impairment review are
as follows:
PRE-TAX CASH FLOW PROJECTIONS
Pre-tax cash flow projections are based on the Group’s budget for the forthcoming financial year and long-term three-year
strategic plans, which have both been approved by the Board.
Assumptions have then been applied for expected revenue, margin growth, overheads and EBITDA ¹ for the subsequent five
years from the end of 2023 and 2024. EBITDA ¹ is considered a proxy for operating cash flow before changes in working
capital. Pre-tax cash flow projections also include assumptions on working capital and capital expenditure requirements for
each CGU.
These assumptions are based on management’s experience of growth and knowledge of the industry sectors, markets and the
Group’s internal opportunities for growth and margin enhancement. The projections beyond five years into perpetuity use an
estimated long-term growth rate.
Forecast working capital and capital expenditure included within the pre-tax cash flow projections are based on management’s
expectations of future expenditure required to support the Group and current run rate requirements.
The EBITDA ¹ margin % growth rate represents the average growth over five years and is considered a critical estimate by
management. The table below summarises the EBITDA ¹ margin % growth for each CGU:
Escrow UK
Escrow North America
Escrow Europe and RoW
Assurance UK: professional services
Assurance North America: professional services
Assurance North America: Payment Software Company Inc
Assurance North America: Virtual Security Research LLC
Assurance Europe and RoW: Fox-IT
EBITDA
Margin %
Growth
2019
EBITDA
Margin %
Growth
2018
(4.9%)
1.6%
2.1%
0.6%
4.2%
(4.0%)
(5.5%)
10.0%
(0.2%)
3.5%
(5.9%)
6.3%
3.3%
2.6%
(6.6%)
12.8%
The EBITDA ¹ margin % growth for Fox-IT is considered by management to be appropriate for the specific industry to which the
CGU operates, albeit above the long-term average growth rate of the country. Management believes this specific growth rate is
more appropriate, as the CGU operates in a high-growth industry.
LONG-TERM GROWTH RATES
To forecast growth beyond the detailed cash flows into perpetuity, a long-term average growth rate of 1.7% (2018: 2.5%)
has been used for EBITDA ¹. This represents management’s best estimate of a long-term annual growth rate aligned to an
assessment of long-term GDP growth rates. A higher sector-specific growth rate would be a valid alternative estimate. A
different set of assumptions may be more appropriate in future years dependent on changes in the macroeconomic environment.
These rates are not greater than the published International Monetary Fund average growth rates in gross domestic product for
the next five-year period in each relevant territory in which the CGUs operate.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
134
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 PRE-TAX DISCOUNT RATES
Discount rates can change relatively quickly for reasons both inside and outside of management’s control. Those outside
management direct control or influence include changes in the Group’s Beta, changes in risk-free rates of return and changes in
Equity Risk Premia. In context, the estimated changes in risk-free rates and the Group’s Beta from last year to this have reduced
all of the CGU discount rates by approximately 2.5% (2018: reduction 0.5%) except for the discount rate in relation to Fox-IT that
has reduced due to specific risk factors.
The discount rates are determined using a capital asset pricing model and reflect current market interest rates, relevant equity
and size risk premiums and the risks specific to the CGU concerned. On this basis, specific discount rates are used for each
CGU in the VIU calculation and the rates reflect management’s assessment on the level of relative risk in each respective CGU.
The table below summarises the pre-tax discount rates used for each CGU:
Escrow UK
Escrow North America
Escrow Europe and RoW
Assurance UK: professional services
Assurance North America: professional services
Assurance North America: Payment Software Company Inc
Assurance North America: Virtual Security Research LLC
Assurance Europe and RoW: Fox-IT
Pre-tax
discount rate
2019
Pre-tax discount
rate 2018
9.4%
10.6%
9.2%
9.6%
10.6%
12.0%
11.9%
13.9%
12.1%
13.4%
12.3%
11.9%
13.4%
13.4%
13.4%
14.3%
SENSITIVITY ANALYSIS
Sensitivity analysis has been performed in respect of certain scenarios where management considers a reasonably possible
change in key assumptions could occur. A reasonably possible change in key assumptions could occur as follows:
• EBITDA ¹ (as a proxy for operating cash flow before changes in working capital) is the primary cash flow driver, and a key
contributor to VIU. EBITDA ¹ growth assumptions were sensitised by a 10% annual fall to perpetuity, as this is considered
by management as a reasonably possible change due to the estimation uncertainty relating to cost reduction and revenue
growth assumptions.
• The discount rate for each CGU: both factors inside and outside of management’s control impact the discount rate and 1% is
considered a reasonably possible change in assumption due to changing market conditions.
The outcome of this analysis indicated that there is headroom in most CGUs except, as in the prior year, for Fox-IT where a reasonably
possible change in the key assumptions would cause the carrying value of the CGUs to fall below the recoverable amount as follows:
Carrying value of assets (goodwill, development and software costs)
Total VIU
Surplus over carrying value of assets
Assumptions used in the VIU calculation:
EBITDA ¹ margin (average)
Change required in EBITDA ¹ value for VIU to fall below the carrying amount
Pre-tax discount rate
Change required in the discount rate for VIU to fall below the carrying amount
Fox-IT
£78.1m
£87.0m
£8.9m
25.8%
7.0%
13.9%
0.9%
COMPANY
The goodwill of £14.4m (2018: £14.4m) represents a transfer from investments of the value attributable to the continuing
Assurance business, assets and liabilities of RandomStorm Limited, which was hived up to a fellow NCC Group subsidiary
company, NCC Group Security Services Limited, in June 2016.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
135
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
14 PROPERTY, PLANT AND EQUIPMENT
Computer
equipment
£m
Plant and
equipment
£m
Fixtures and
fittings
£m
Motor
vehicles
£m
Cost:
At 1 June 2017
Additions
Disposals
Movement in foreign exchange rates
At 31 May 2018
Additions
Disposals
Movement in foreign exchange rates
At 31 May 2019
Depreciation:
At 1 June 2017
Charge for year
Disposals
Movement in foreign exchange rates
At 31 May 2018
Charge for year
Disposals
Movement in foreign exchange rates
At 31 May 2019
Net book value:
At 31 May 2018
At 31 May 2019
15 INVESTMENTS
Interest in unlisted shares
23.8
2.3
(8.8)
–
17.3
2.7
(0.4)
–
19.6
(16.9)
(3.9)
8.0
1.2
(11.6)
(3.3)
0.3
–
(14.6)
5.7
5.0
0.1
0.1
–
–
0.2
0.1
–
–
0.3
–
(0.2)
–
–
(0.2)
(0.1)
–
–
(0.3)
–
–
19.6
5.3
(4.3)
(0.2)
20.4
0.3
(0.2)
0.3
20.8
(8.5)
(2.3)
4.3
(0.4)
(6.9)
(2.2)
0.2
(0.1)
(9.0)
13.5
11.8
0.4
–
–
–
0.4
–
(0.2)
–
0.2
(0.1)
(0.1)
–
–
(0.2)
–
0.1
–
(0.1)
0.2
0.1
Group
2019
£m
0.3
Total
£m
43.9
7.7
(13.1)
(0.2)
38.3
3.1
(0.8)
0.3
40.9
(25.5)
(6.5)
12.3
0.8
(18.9)
(5.6)
0.6
(0.1)
(24.0)
19.4
16.9
Group
2018
£m
0.4
The investment in unlisted shares relates to a 3.35% ordinary shareholding in an unlisted company acquired as part of the
Accumuli acquisition. The investment’s carrying value at acquisition date was considered appropriate to use as the fair value. The
Directors consider there has been no change in the year.
During the year, the Group disposed of Tracks Inspector B.V, a 35% shareholding for £0.2m, giving rise to a profit on disposal of
£0.1m. Tracks Inspector B.V, was not equity accounted as the Group did not have significant influence or control over the entity.
16 INVENTORY
Goods for resale
Group
2019
£m
0.7
Group
2018
£m
0.8
The Group holds stock of certain critical components for key customers in relation to our own product sales (as opposed to third
party products). The carrying value of inventory is expected to be recovered or settled within one year.
136
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
17 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Prepayments
Contract costs
Other receivables
Contract assets - accrued income
Amounts owed by Group undertakings
Total
Group
2019
£m
36.7
8.4
1.2
0.6
14.7
–
61.6
Group
2018
£m
Company
2019
£m
Company
2018
£m
40.8
7.2
–
0.9
17.1
–
66.0
–
–
–
–
–
141.4
141.4
–
–
–
–
–
153.8
153.8
Contract costs represent costs relating to future performance obligations and benefits to the customer.
Accrued income represents the Group’s rights to consideration for work completed but not billed at the reporting date. Remaining
balances are transferred to receivables when the rights become unconditional. No credit losses have been recognised or any
changes in performance obligations assessments during 2018 and 2019.
The ageing of trade receivables at the end of the reporting period was:
GROUP
Not past due
Past due 0–30 days
Past due 31–90 days
Past due more than 90 days
Total
Gross
2019
£m
Expected
credit losses
2019
£m
25.5
7.1
3.2
2.7
38.5
(0.2)
(0.1)
(0.1)
(1.4)
(1.8)
Net
2019
£m
25.3
7.0
3.1
1.3
36.7
Gross
2018
£m
25.1
6.8
8.0
2.3
42.2
The Company had no trade receivables (2018: £nil).
The movement in the expected credit losses of trade receivables is as follows:
Balance at 1 June
Charged to the Income Statement
Balance at 31 May
Expected
credit losses
2018
(restated ¹)
£m
(0.1)
–
(0.1)
(1.2)
(1.4)
Group
2019
£m
(1.4)
(0.4)
(1.8)
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
Net
2018
£m
25.0
6.8
7.9
1.1
40.8
Group
2018
£m
(0.7)
(0.7)
(1.4)
137
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
18 DEFERRED TAX ASSETS AND LIABILITIES (GROUP)
Deferred tax assets and liabilities on the consolidated statement of financial position are offset in accordance with IAS 12. A
summary of this, offset with significant jurisdictions, is shown below:
Assets/(liabilities)
Plant and equipment
Short-term temporary differences
Intangible assets
Share-based payments
Tax losses
Deferred tax asset/(liability)
Analysed as follows:
Non-current assets
Non-current liabilities
Assets/(liabilities)
Plant and equipment
Short-term temporary differences
Intangible assets
Share-based payments
Tax losses
Deferred tax asset/(liability)
Analysed as follows:
Non-current assets
Non-current liabilities
UK
£m
0.4
0.1
(1.9)
0.4
–
(1.0)
–
(1.0)
UK
£m
(0.1)
0.3
(2.5)
0.5
0.4
(1.4)
1.2
(2.6)
2019
Netherlands
£m
Denmark
£m
0.4
–
(4.9)
–
0.1
(4.4)
–
(4.4)
–
–
–
–
0.3
0.3
0.3
–
2018
Netherlands
£m
Denmark
£m
–
(1.1)
(4.4)
–
–
(5.5)
(1.1)
(4.4)
–
(0.1)
–
–
0.3
0.2
0.2
–
US
£m
(0.4)
4.4
(3.4)
0.2
–
0.8
0.8
–
US
£m
(0.4)
4.2
(2.4)
–
–
1.4
4.2
(2.8)
Movement in deferred tax during the year:
Plant and equipment
Short-term temporary differences
Intangible assets
Share-based payments
Tax losses
Total
1 June
2018
£m
Recognised
in income
£m
Exchange
differences
£m
Recognised
in equity
£m
Disposals
£m
(0.5)
3.3
(9.3)
0.5
0.7
(5.3)
0.9
1.2
(0.9)
–
(0.3)
0.9
–
–
–
–
–
–
–
–
–
0.1
–
0.1
–
–
–
–
–
–
Total
£m
0.4
4.5
(10.2)
0.6
0.4
(4.3)
1.1
(5.4)
Total
£m
(0.5)
3.3
(9.3)
0.5
0.7
(5.3)
4.5
(9.8)
31 May
2019
£m
0.4
4.5
(10.2)
0.6
0.4
(4.3)
138
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Plant and equipment
Short-term temporary differences
Intangible assets
Share-based payments
Tax losses
Total
1 June
2017
£m
Recognised
in income
£m
Exchange
differences
£m
Recognised
in equity
£m
Disposals
£m
31 May
2018
£m
(1.9)
1.4
(12.3)
0.3
2.5
(10.0)
1.5
1.9
2.3
0.1
(1.8)
4.0
–
–
(0.1)
–
–
(0.1)
–
–
–
0.2
–
0.2
(0.1)
–
0.8
(0.1)
–
0.6
(0.5)
3.3
(9.3)
0.5
0.7
(5.3)
The Group has recognised a deferred tax asset of £0.4m (2018: £0.7m) on tax losses as management considers it probable
that future taxable profits will be available against which it can be utilised. The Group has not recognised a deferred tax asset on
£11.0m (2018: £10.4m) of tax losses carried forward in North America (£8.6m), Australia (£2.2m) and Singapore (£0.2m) due to
current uncertainties over their future recoverability. The Group has recognised a deferred tax asset in respect of R&D tax claims
submitted in North America that are expected to be fully utilised within one year.
Included in recognised and unrecognised tax losses are losses of £nil that will expire in 2034 (2018: £0.5m). Other losses may
be carried forward indefinitely.
No deferred tax liability is recognised on temporary differences of £0.1m (2018: £nil) relating to the unremitted earnings of
overseas subsidiaries as the Group is able to control the timing of the reversal of these temporary differences and it is probable
that they will not reverse in the foreseeable future.
19 TRADE AND OTHER PAYABLES
Trade payables
Non-trade payables
Accruals
Total
20 PROVISIONS
Balance as at 1 June 2017
Provisions arising in the year
Provisions utilised in the year
Balance as at 31 May 2018 and 1 June 2018
Provisions (released)/created in the year
Provisions utilised during the year
Balance as at 31 May 2019
Analysed as follows:
Non-current
Current
Analysed as follows:
Non-current
Current
Company
2019
£m
Company
2018
£m
Group
2019
£m
7.8
5.4
18.4
31.6
Group
2018
£m
8.1
7.4
20.2
35.7
–
–
–
–
Lease
incentives
£m
Loss-making
contract
£m
Onerous
leases
£m
5.0
1.7
(0.8)
5.9
(1.8)
–
4.1
3.7
0.4
5.5
0.4
–
2.6
(1.6)
1.0
–
(1.0)
–
–
–
(1.0)
2.0
–
2.4
(0.4)
2.0
2.7
(0.6)
4.1
1.8
2.3
1.8
0.2
–
–
–
–
Total
£m
5.0
6.7
(2.8)
8.9
0.9
(1.6)
8.2
5.5
2.7
6.3
2.6
Lease incentives provision of £4.1m represents capital contributions of £2.1m towards fit-out costs on the new Manchester head
office building and a rent-free allowance of £2.0m which are being amortised over the period of the lease.
The loss-making contract represents the estimated remaining net lifetime loss on a long-term development and supply contract.
This is explained in more detail in note 2. During the year, costs have been incurred to fulfil the contract; these costs are included
within other receivables. The contract is expected to be completed in 2021.
139
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
In the previous year, onerous lease provisions arose due to vacant premises in Reading (£0.4m) and an unused floor in
the Manchester head office building (£1.6m). In the current year, the Directors have decided to vacate another floor in the
Manchester head office building (£2.6m). The Directors intend to dispose of the obligations of the Manchester properties under
onerous leases during the next two years, and the Reading property within the coming year. A 1% change in the discount rate
of the cash outflows does not lead to a material increase in the provision.
21 DEFERRED REVENUE
Deferred revenue represents advanced consideration received from customers, for which revenue is recognised over time.
Deferred revenue is analysed as follows:
Assurance
Escrow
Total
Group
2019
£m
25.1
11.1
36.2
The above deferred revenue will be allocated to the remaining performance obligations for the year ending as follows:
2020
£m
24.3
11.0
35.3
2019
2021
£m
0.8
0.1
0.9
2022
£m
–
–
–
Total
£m
25.1
11.1
36.2
2019
£m
14.0
15.8
29.8
2018
2020
£m
0.7
–
0.7
2021
£m
0.1
–
0.1
Assurance
Escrow
Total
22 OUTSTANDING CONSIDERATION ON ACQUISITIONS AND DISPOSALS
ACQUISITIONS
Consideration paid during the year related to the acquisition of Fox-IT, Payment Software Company Inc and Virtual Security
Research LLC and amounted to £10.9m (2018: £3.1m).
Current
Non-current
Total
2019
Contingent
£m
(note 24)
–
–
–
Deferred
£m
–
–
–
Total
£m
–
–
–
Deferred
£m
9.9
–
9.9
2018
Contingent
£m
(note 24)
2.0
–
2.0
Group
2018
(restated ¹)
£m
14.8
15.8
30.6
Total
£m
14.8
15.8
30.6
Total
£m
11.9
–
11.9
DISPOSALS
During the year, deferred consideration was received of £1.6m against a 2018 receivable of £1.5m in relation to the disposal of
Open Registry S. A, Intellectual Property S.A (C.H.I.P.), Nexperteam CVBA and Sensirius CVBA.
1
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
140
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
23 CASH AND CASH EQUIVALENTS AND BORROWINGS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise:
Cash at bank and in hand
Borrowings are analysed as follows:
Current liabilities
Secured and interest-bearing bank loan
Non-current liabilities
Revolving credit facility
Secured and interest-bearing bank loan
Total borrowings
The maturity profile is as follows:
Less than one year
1-2 years
2-3 years
Total borrowings
Maturity
2020
2020
2020
Group
2019
£m
34.9
Group
2019
£m
5.0
23.5
26.6
55.1
Group
2019
£m
5.0
50.1
–
55.1
Group
2018
£m
21.2
Company
2019
£m
Company
2018
£m
0.2
0.1
Group
2018
£m
Company
2019
£m
Company
2018
£m
–
10.5
38.5
49.0
Group
2018
£m
–
5.0
44.0
49.0
–
–
–
–
–
–
–
–
Company
2019
£m
Company
2018
£m
–
–
–
–
–
–
–
–
As at 31 May 2019, the Group had a funding facility comprising a multi-currency revolving credit facility of £80m (2018: £80m), a £20m
multi-currency term loan (2018: £20m) and an additional overdraft of £5m (2018: £5m). The term loan amortises at a rate of £2.5m every six
months. The interest payable on drawn-down funds ranges from 0.9% to 2.0% above LIBOR subject to the Group’s net debt ¹ and interest to
EBITDA ¹ ratios.
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. Historical arrangement fees have been fully amortised.
The fair value of borrowings is not materially different to its amortised cost.
141
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
24 FINANCIAL INSTRUMENTS
FINANCIAL RISK MANAGEMENT
The Group has exposure to the following risks from its use of financial instruments:
• Credit risk
• Liquidity risk
• Currency risk
•
Interest rate risk
The Board has overall responsibility for establishing appropriate management of exposure to risk. The Audit Committee oversees
how management identify and address risks to the Group.
CAPITAL MANAGEMENT
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain
future development of the business.
The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt ² divided by total capital.
Net debt ² is calculated as total borrowings as shown in the consolidated balance sheet, less cash and cash equivalents. Total
capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt ². As at 31 May 2019 the Group’s
gearing ratio was 8.7% (2018: 11.9%).
The contingent consideration on acquisitions reflected the estimated cash outflows and was discounted using a risk-adjusted
discount rate in the prior year.
FINANCIAL INSTRUMENTS POLICY
All instruments utilised by the Company and Group are for financing purposes. The financial management and treasury activities
of the Group are controlled centrally for all operations with local finance teams responsible for day-to-day banking activities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As at 31 May 2019 the Group and Company had no other financial instruments other than those disclosed below. In addition,
no embedded derivatives have been identified. The carrying value of contingent consideration on acquisitions, held at the prior
year end, is valued using a level 3 valuation method as defined by IFRS 13 ‘Fair Value Measurement’ and IFRS 9 ‘Financial
Instruments’. There have been no transfers between levels in the year.
The following table presents the Group’s financial assets and liabilities that are measured at fair value by level of fair value
hierarchy:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
•
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is,
as prices) or indirectly (that is, derived from prices) (Level 2).
•
Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
The loan is held at amortised cost which is considered to equate to fair value. All other assets and liabilities are held at either fair
value or their carrying value which approximates to fair value.
Level 1
£m
2019
Level 2
£m
2018 (restated ¹)
Level 3
£m
Level 1
£m
Level 2
£m
Level 3
£m
Investments (note 15)
Trade receivables (note 17)
Other receivables (note 17)
Deferred consideration receivable (note 22)
Cash and cash equivalents (note 23)
Borrowings (note 23)
Trade and other payables (note 19)
Deferred consideration (note 22)
Contingent consideration (note 22)
–
36.7
0.6
–
34.9
–
(31.6)
–
–
0.3
–
–
–
–
(55.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
40.8
0.9
–
21.2
–
(35.7)
(9.9)
–
0.4
–
–
1.5
–
(49.0)
–
–
–
–
–
–
–
–
–
–
–
(2.0)
1
2
See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
142
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
A reconciliation of level 3 fair values is displayed in the following table:
Balance at 1 June 2017
Unwind of discount
Payments made
Foreign exchange difference
Balance at 31 May 2018 and 1 June 2018
Payments made
Revisions to contingent consideration (notes 6 and 22)
Foreign exchange difference
Balance at 31 May 2019
Contingent
consideration
4.1
0.1
(2.1)
(0.1)
2.0
(1.0)
(0.8)
(0.2)
–
CREDIT RISK
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its
contractual obligations and arises principally from the Group’s receivables from customers. The Group’s exposure to credit risk
is influenced mainly by the individual characteristics of each customer.
EXPOSURE TO CREDIT RISK
The carrying value of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the
reporting date was:
Trade receivables
Other receivables
Accrued income
Deferred consideration receivable
Cash and cash equivalents
Total
Group
2019
£m
36.7
0.6
14.7
–
34.9
86.9
Group
2018
£m
Company
2019
£m
Company
2018
£m
40.8
0.9
17.1
1.5
21.2
81.5
–
41.7
1.5
–
–
43.2
–
–
–
–
–
–
The maximum exposure to credit risk for trade receivables, other receivables and deferred consideration receivable at the
reporting date by geographic region was:
Debtors by geographical segment
UK
USA
Rest of Europe
Rest of the World
Total
Group
2019
£m
18.7
11.8
5.8
1.0
37.3
The maximum exposure to credit risk at the reporting date by business segment was:
Debtors by business segment
Escrow
Assurance
Total
Group
2019
£m
7.0
30.3
37.3
Group
2018
£m
24.9
10.7
6.4
1.2
43.2
Group
2018
£m
9.3
33.9
43.2
Company
2019
£m
Company
2018
£m
–
–
–
–
–
–
–
–
–
–
Company
2019
£m
Company
2018
£m
–
–
–
–
–
–
The trade receivables of the Group typically comprise many amounts due from a large number of customers and represent a
spread of industry sectors. The largest amount due from a single customer at the reporting date represented 1.9% of total Group
receivables (2018: 2.9%). All of the Group’s cash is held with financial institutions of high credit rating.
The provisions in respect of trade receivables are used to record expected credit losses. The Group has dedicated credit control
teams who regularly review customer debt balances to assess the risk of recovery.
143
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
LIQUIDITY RISK
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages
liquidity risks by regular reviews of forecast and actual cash flows in line with contractual maturities of financial liabilities and the
Revolving Credit Facility available.
The following are the contractual maturities of financial liabilities, including interest payments, of the Group:
At 31 May 2019
Borrowings
Trade and other payables
At 31 May 2018
Borrowings
Trade and other payables
Deferred consideration
Contingent consideration
Carrying
amount
£m
Contractual
cash flows
£m
6 months
or less
£m
6–12
months
£m
(55.1)
(31.6)
(49.0)
(35.7)
(9.9)
(2.0)
(58.4)
(31.6)
(52.8)
(35.7)
(9.9)
(2.0)
(3.2)
(31.6)
–
(35.7)
(9.9)
–
(3.2)
–
–
–
–
(2.0)
1–2
years
£m
(52.0)
–
(6.4)
–
–
–
2+
years
£m
–
–
(46.4)
–
–
–
The Company has no financial liabilities at 31 May 2019 (2018: £nil).
CURRENCY RISK
The Group is exposed to currency risk on sales, purchases, cash and borrowings that are denominated in a currency other than
the respective functional and presentational currency of the Group. The Group’s management reviews the size and probable
timing of settlement of all financial assets and liabilities denominated in foreign currencies. The Group’s exposure to currency risk
is as follows:
Sterling
£m
14.7
0.4
8.0
(23.5)
EUR
£m
4.4
0.1
12.3
–
2019
USD
£m
15.1
–
10.3
(31.6)
Other
£m
2.5
0.1
4.3
–
Total
£m
36.7
0.6
34.9
(55.1)
Sterling
£m
EUR
£m
20.4
0.8
7.4
(10.5)
5.7
0.1
2.5
–
2018
USD
£m
12.0
–
9.8
(38.5)
Other
£m
2.7
–
1.5
–
Total
£m
40.8
0.9
21.2
(49.0)
(20.7)
(5.7)
(2.3)
(2.9)
(31.6)
(20.9)
(6.9)
(6.2)
(1.7)
(35.7)
–
–
(21.1)
–
–
11.1
–
–
(8.5)
–
–
4.0
–
–
(14.5)
–
–
(2.8)
(9.9)
–
(8.5)
–
(2.0)
(24.9)
–
–
2.5
(9.9)
(2.0)
(33.7)
Trade receivables
Other receivables
Cash and cash
equivalents
Borrowings
Trade and other
payables
Deferred
consideration
Contingent
consideration
Total
A change in exchange rate of 10% would have an impact of £13.8m (2018: £11.6m) on revenue, £2.4m (2018: £1.7m) on
operating profit, £6.5m (2018: £5.0m) on net assets and £3.2m (2018: £3.5m) on borrowings.
144
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
INTEREST RATE RISK
The Group and Company finances its operations through a mixture of retained profits and bank borrowings. The Group borrows
and invests surplus cash at floating rates of interest based upon bank base rate. The financial assets of the Group and Company
at the end of the financial year were as follows:
Group
Sterling denominated financial assets
Euro denominated financial assets
US dollar denominated financial assets
Other denominated financial assets
Total
The financial assets of the Company at the end of the financial year were as follows:
Company
Sterling denominated financial assets
Amounts owed by Group undertakings
Total
2019
£m
8.0
12.3
10.3
4.3
34.9
2019
£m
0.2
141.4
141.6
A change of 100 basis points in interest rates would result in a difference in annual pre-tax profit of £0.6m (2018: £0.5m).
The financial liabilities of the Group and their maturity profile are as follows:
Sterling
£m
EUR
£m
Less than one year
1–2 years
2–3 years
3–5 years
Trade and other
payables
Total
–
(23.5)
–
–
(20.7)
(44.2)
–
–
–
–
(5.7)
(5.7)
2019
USD
£m
(5.0)
(26.6)
–
–
(2.3)
(33.9)
Other
£m
–
–
–
–
(2.9)
(2.9)
Total
£m
(5.0)
(50.1)
–
–
(31.6)
(86.7)
Sterling
£m
–
–
(10.5)
–
(20.9)
(31.4)
2018
USD
£m
(2.0)
(5.0)
(33.5)
–
(6.2)
(46.7)
EUR
£m
(9.9)
–
–
–
(6.9)
(16.8)
Other
£m
–
–
–
–
(1.7)
(1.7)
2018
£m
7.4
2.5
9.8
1.5
21.2
2018
£m
0.1
153.8
153.9
Total
£m
(11.9)
(5.0)
(44.0)
–
(35.7)
(96.6)
25 SHARE-BASED PAYMENTS
The Company has a number of share option schemes under which options to subscribe for the Company’s shares have been
granted to Directors and employees, details of which are illustrated in the tables below. Expected term of options represents the
period over which the fair value calculations are based. The share-based payment charge for the year was £1.7m (2018: £0.3m).
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.
COMPANY SHARE OPTION SCHEME (CSOP) - EQUITY-SETTLED
Under the CSOP Scheme, options granted will be subject to performance criteria. Options will vest if the average EPS growth for
the three years following their grant is greater than 10% per annum.
Date of grant
July 2012
July 2016
August 2016
August 2018
August 2018
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
7 years
7 years
7 years
7 years
7 years
July 2015 – July 2022
August 2019 – July 2026
August 2019 – August 2026
August 2021 – August 2028
August 2021 – August 2028
£1.36
£3.28
£3.37
£2.20
£2.20
91,896
149,429
17,784
59,085
31,815
145
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE
Notes to the financial statements
for the year ended 31 May 2019
SHARESAVE SCHEMES - EQUITY-SETTLED
The Company operates sharesave schemes, which are available to all UK and Netherlands-based employees and full-time
Executive Directors of the Company and its subsidiaries who have worked for a qualifying period.
Date of grant
August 2015
August 2016
March 2017
August 2017
March 2018
August 2018
March 2019
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
3 years
3 years
3 years
3 years
3 years
3 years
3 years
October 2018 – March 2019
October 2019 – March 2020
May 2020 – October 2020
October 2020 – March 2021
May 2021 – October 2021
October 2021 – March 2022
May 2022 – October 2022
£1.87
£2.62
£0.92
£1.56
£1.58
£1.75
£0.99
5,763
85,873
880,304
1,165,540
93,064
572,327
483,766
EMPLOYEE STOCK PURCHASE PLAN - EQUITY-SETTLED
The Company operates a stock purchase plan, which is available to all US-based employees who have worked for a qualifying
period. All options are to be settled by equity. Under the scheme the following options have been granted and are outstanding at
year end.
Date of grant
February 2019
Expected term
of options
Exercisable
in
Exercise
price
2019
number
outstanding
1 year
February 2020
£1.06
723,263
INCENTIVE STOCK OPTION SCHEME (ISO) - EQUITY-SETTLED
Under the ISO Scheme, options granted will be subject to performance criteria. Options will vest if the average EPS growth for
the three years following their grant is greater than 10% per annum.
Date of grant
July 2016
August 2018
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
7 years
7 years
July 2019 – July 2026
August 2021 – August 2028
£3.26
£2.22
150,496
9,016
LONG-TERM INVESTMENT PLAN SCHEMES (LTIP) - EQUITY-SETTLED
The vesting condition for the award of the LTIP schemes, related to options granted July 2015 and July 2016 relates to growth
in the Group’s EPS over the performance period. If growth is equal to 25% or more per annum then 100% of the award will vest.
If, however, growth is less than 9% per annum, none of the award will vest. Between these two points, vesting is determined on a
straight-line basis.
Options granted on or after October 2017 have three separate vesting conditions as set out below:
• 60% will vest based on achieving an increase in Group EPS of 9% over three years. If growth is equal to 20% or more per
annum then 100% of the award will vest. If, however, growth is less than 9% per annum, none of the award will vest. Between
these two points, vesting is determined on a straight-line basis.
• 30% will vest based on achieving a cash conversion ratio ¹ expressed as a percentage over the measurement period of
greater than 70% per annum on average. If cash conversion ¹ is greater than or equal to 80% per annum then 100% of the
award will vest. If, however, cash conversion is less than 70% per annum, none of the award will vest. Between these two
points, vesting is determined on a straight-line basis.
• 10% will vest based on the Group’s Total Shareholder Return (TSR) ranking when measured against the FTSE 250. If
the Group’s TSR is consistent with the median group, 20% of the award will vest; below this level, none of the award will
vest. If the TSR is within the upper quartile or above, 100% of the award will vest; between the median and upper quartile,
vesting is determined on a straight-line basis.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
146
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Date of grant
July 2016
October 2017
November 2017
January 2018
August 2018
Expected term
of options
Exercisable
between
Exercise
price
3 years
3 years
3 years
3 years
3 years
June 2019 – August 2019
June 2020 – August 2020
June 2020 – August 2020
June 2020 – August 2020
June 2021 – August 2021
nil*
nil*
nil*
nil*
nil*
2019
number
outstanding
353,620
257,224
354,039
178,601
1,065,133
*
The option exercise price is nil; however, £1 is payable on each occasion of exercise.
RESTRICTED STATE UNIT SCHEMES (RSU) - EQUITY-SETTLED
Options granted related to the RSU schemes on or after October 2017 have three separate vesting conditions as set out below:
• 60% will vest based on achieving an increase in Group EPS of 9% over three years. If growth is equal to 20% or more
per annum then 100% of the award will vest. If, however, growth is less than 9% per annum, none of the award will vest.
Between these two points, vesting is determined on a straight-line basis.
• 30% will vest based on achieving a cash conversion ratio ¹ expressed as a percentage over the measurement period of
greater than 70% per annum on average. If cash conversion ¹ is greater than or equal to 80% per annum then 100% of the
award will vest. If, however, cash conversion is less than 70% per annum, none of the award will vest. Between these two
points, vesting is determined on a straight-line basis.
• 10% will vest based on the Group’s Total Shareholder Return (TSR) ranking when measured against the FTSE 250
(excluding investment trusts). If the Group’s TSR is consistent with the median group, 20% of the award will vest; below this
level, none of the award will vest. If the TSR is within the upper quartile or above, 100% of the award will vest; between the
median and upper quartile, vesting is determined on a straight-line basis.
The options are to be settled in equity.
Date of grant
November 2017
January 2018
August 2018
DEFERRED SHARE SCHEME - EQUITY-SETTLED
Date of grant
July 2018
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
3 years
3 years
3 years
June 2020 – August 2020
June 2020 – August 2020
June 2021 – August 2021
£0.01
£0.01
£0.01
199,635
20,058
227,501
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
2 year
June 2020 – August 2028
nil*
10,993
*
The option exercise price is nil; however, £1 is payable on each occasion of exercise.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
147
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
PHANTOM SCHEMES - CASH-SETTLED
Phantom schemes were used on a temporary basis during the year ended 31 May 2017 to allow the grant of LTIPs to members of
the Executive Committee based in certain overseas locations at a time when the Group’s Option Scheme rules were not structured
to allow overseas grants. This was remedied in the prior year and no further grants of Phantom Options are expected. The vesting
conditions for the award of the Phantom schemes, related to options granted in August 2016, relates to growth in the Group’s EPS
over the performance period. If growth is equal to 25% or more per annum then 100% of the award will vest. If, however, growth is
less than 10% per annum, none of the award will vest. Between these two points, vesting is determined on a straight-line basis.
Options granted on or after October 2017 have three separate vesting conditions as set out below:
• 60% will vest based on achieving an increase in Group EPS of 9%. If growth is equal to 20% or more per annum then 100%
of the award will vest. If, however, growth is less than 9% per annum, none of the award will vest. Between these two points,
vesting is determined on a straight-line basis.
• 30% will vest based on achieving a cash conversion ratio ¹ expressed as a percentage over the measurement period of
greater than 70% per annum on average. If cash conversion ¹ is greater than or equal to 80% per annum then 100% of the
award will vest. If, however, cash conversion is less than 70% per annum, none of the award will vest. Between these two
points, vesting is determined on a straight-line basis.
• 10% will vest based on the Group’s Total Shareholder Return (TSR) ranking when measured against the FTSE 250
(excluding investment trusts). If the Group’s TSR is consistent with the median group 20% of the award will vest; below this
level, none of the award will vest. If the TSR is within the upper quartile or above, 100% of the award will vest; between the
median and upper quartile, vesting is determined on a straight-line basis.
Date of grant
August 2016 ¹
October 2017
November 2017
Expected term
of options
Exercisable
between
Exercise
price
2019
number
outstanding
3 years
3 years
3 years
June 2019 – August 2020
June 2020 – October 2021
June 2020 – November 2021
nil*
nil*
nil*
18,276
113,120
8,189
*
The option exercise price is nil; however, £1 is payable on each occasion of exercise.
MEASUREMENT OF FAIR VALUES
The fair value of services received in return for share options is calculated with reference to the fair value of the award on the
date of grant. The fair value is spread over the period during which the employee becomes unconditionally entitled to the award,
adjusted to reflect actual and expected levels of vesting. Black Scholes and Binomial models have been used to calculate the fair
values of options on their grant date for all options issued after 7 November 2002, which had not vested by 1 January 2005. The
LTIPs and RSUs granted in the current year have introduced a market-based performance criteria of 9%; the Monte Carlo model
has been used to calculate the fair value of this proportion of the grant.
1
See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.
148
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 The assumptions used in the model are illustrated in the table below:
Fair value at
measurement
date
Grant date
Exercise
price
Expected
volatility
Option
expected
term
Risk-free
interest rate
CSOP scheme
CSOP scheme
CSOP scheme
CSOP scheme
CSOP scheme
CSOP scheme
Sharesave scheme
Sharesave scheme
Sharesave scheme
Sharesave scheme
Sharesave scheme
Sharesave scheme
Sharesave scheme
ESPP scheme
ESPP scheme
ISO scheme
ISO scheme
ISO scheme
ISO scheme
LTIP
LTIP
LTIP
90% of LTIP under Black Scholes
10% of LTIP under Monte Carlo
90% of LTIP under Black Scholes
10% of LTIP under Monte Carlo
90% of LTIP under Black Scholes
10% of LTIP under Monte Carlo
90% of LTIP under Black Scholes
10% of LTIP under Monte Carlo
90% of RSU under Black Scholes
10% of RSU under Monte Carlo
90% of RSU under Black Scholes
10% of RSU under Monte Carlo
90% of RSU under Black Scholes
10% of RSU under Monte Carlo
Deferred shares July 2016
Deferred shares July 2018
Phantom
90% of Phantom under Black Scholes
10% of Phantom under Monte Carlo
90% of Phantom under Black Scholes
10% of Phantom under Monte Carlo
July 2012
July 2015
July 2016
August 2016
August 2018
August 2018
August 2015
August 2016
March 2017
August 2017
March 2018
August 2018
March 2019
February 2018
February 2019
August 2015
February 2016
July 2016
August 2018
July 2014
July 2015
July 2016
October 2017
October 2017
November 2017
November 2017
January 2018
January 2018
August 2018
August 2018
November 2017
November 2017
January 2018
January 2018
August 2018
August 2018
July 2016
July 2018
August 2016
October 2017
October 2017
November 2017
November 2017
£0.35
£1.45
£0.65
£0.66
£0.63
£0.43
£1.53
£0.95
£0.43
£0.88
£0.76
£0.75
£0.67
£0.40
£0.31
£1.45
£1.91
£0.64
£0.65
£1.92
£2.14
£2.75
£2.22
£2.20
£2.18
£2.16
£1.98
£1.98
£2.09
£2.09
£2.17
£2.16
£2.16
£2.16
£2.09
£2.09
£3.14
£1.90
£2.75
£2.22
£2.20
£2.18
£2.16
£1.36
£2.46
£3.28
£3.37
£2.20
£2.20
£1.87
£2.62
£0.92
£1.56
£1.58
£1.75
£0.99
£1.69
£1.06
£2.46
£3.24
£3.26
£2.22
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£0.01
£0.01
£0.01
£0.01
£0.01
£0.01
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
£nil*
35%
103%
31%
31%
48%
48%
103%
31%
46.6%
47.5%
47.8%
48%
53.2%
32.4%
48.3%
103%
103%
31%
48.4%
32%
103%
31%
47.5%
47.5%
47.6%
47.6%
47.7%
47.7%
48%
48%
47.6%
47.6%
47.7%
47.7%
48.1%
48.1%
31%
55%
31%
47.5%
47.5%
47.6%
47.6%
7 years
7 years
7 years
7 years
7 years
7 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
1 year
1 year
7 years
7 years
7 years
7 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
2 years
2 years
3 years
3 years
3 years
3 years
3 years
2.75%
2.75%
1.50%
1.50%
1.50%
1.50%
2.75%
1.50%
1.50%
1.96%
2.20%
1.50%
1.50%
1.82%
1.50%
2.75%
2.75%
1.50%
1.50%
2.75%
2.75%
1.81%
1.96%
1.96%
1.96%
1.96%
2.00%
2.00%
1.50%
1.50%
1.96%
1.96%
2.00%
2.00%
1.50%
1.50%
1.81%
1.50%
1.81%
1.96%
1.96%
1.96%
1.96%
*
The option exercise price is nil; however, £1 is payable on each occasion of exercise.
The expected volatility has been based on an evaluation of the historical volatility of the Company’s share price, particularly over
the historical period commensurate with the expected term. The expected term of the instruments has been based on historical
experience and general option holder behaviour. For the options granted in the year ended 31 May 2019, dividend yield assumed
at the time of option grant is 2.6% (2018: 2.0%).
149
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
RECONCILIATION OF OUTSTANDING SHARE OPTIONS
The options outstanding at 31 May 2019 have an exercise price in the range of £nil to £3.37 (2018: £nil to £3.37) and a
weighted average contractual life of three years (2018: three years). The weighted average share price at the time the share
options were exercised in the year was £2.01 and the weighted average share price at the time the share options were forfeited
in the year was £1.67.
Number of
instruments
as at 1 June
2018
Instruments
granted during
the year
Options
exercised in
the year
Forfeitures in
the year
Number of
instruments
as at 31 May
2019
98,924
303,135
195,366
59,280
–
–
485,578
185,425
961,485
1,879,497
136,087
–
–
351,035
–
20,338
129,940
19,476
202,709
–
378,289
368,808
349,626
427,004
178,601
–
208,053
20,058
–
27,183
–
19,779
113,120
8,189
–
–
–
–
63,630
31,815
–
–
–
–
–
712,561
486,914
–
723,263
–
–
–
–
13,524
–
–
–
–
–
1,093,172
–
–
227,501
–
10,993
–
–
–
(7,028)
–
–
–
–
–
(116,157)
–
–
(39,854)
–
–
–
(7,505)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(303,135)
(45,937)
(41,496)
(4,545)
–
(363,658)
(99,552)
(81,181)
(674,103)
(43,023)
(140,234)
(3,148)
(343,530)
–
(20,338)
(129,940)
(19,476)
(52,213)
(4,508)
(378,289)
(15,188)
(92,402)
(72,965)
–
(28,039)
(8,418)
–
–
(27,183)
–
(1,503)
–
–
91,896
–
149,429
17,784
59,085
31,815
5,763
85,873
880,304
1,165,540
93,064
572,327
483,766
–
723,263
–
–
–
150,496
9,016
–
353,620
257,224
354,039
178,601
1,065,133
199,635
20,058
227,501
–
10,993
18,276
113,120
8,189
Scheme
CSOP scheme July 2012
CSOP scheme August 2015
CSOP scheme July 2016
CSOP scheme August 2016
CSOP scheme August 2018
CSOP scheme August 2018
Sharesave scheme August 2015
Sharesave scheme August 2016
Sharesave scheme March 2017
Sharesave scheme August 2017
Sharesave scheme March 2018
Sharesave scheme August 2018
Sharesave scheme March 2019
ESPP scheme February 2018
ESPP scheme February 2019
ISO scheme January 2013
ISO scheme August 2015
ISO scheme February 2016
ISO scheme July 2016
ISO scheme August 2018
LTIP July 2015
LTIP July 2016
LTIP October 2017
LTIP November 2017
LTIP January 2018
LTIP August 2018
RSU November 2017
RSU January 2018
RSU August 2018
Deferred shares July 2016
Deferred shares July 2018
Phantoms August 2016
Phantoms November 2017
Phantoms October 2017
150
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Scheme
Approved EMI scheme August 2007
Approved EMI scheme February 2008
CSOP scheme July 2012
CSOP scheme July 2013
CSOP scheme August 2015
CSOP scheme July 2016
CSOP scheme August 2016
Sharesave scheme August 2014
Sharesave scheme August 2015
Sharesave scheme August 2016
Sharesave scheme March 2017
Sharesave scheme August 2017
Sharesave scheme March 2018
ESPP scheme February 2017
ESPP scheme February 2018
ISO scheme January 2013
ISO scheme January 2014
ISO scheme January 2015
ISO scheme August 2015
ISO scheme February 2016
ISO scheme July 2016
LTIP July 2014
LTIP July 2015
LTIP July 2016
LTIP October 2017
LTIP November 2017
LTIP January 2018
RSU November 2017
RSU January 2018
Deferred shares July 2015
Deferred shares July 2016
Phantoms August 2016
Phantoms November 2017
Phantoms October 2017
Number of
instruments
as at 1 June
2017
Instruments
granted during
the year
Options
exercised in
the year
Forfeitures in
the year
Number of
instruments
as at 31 May
2018
10,908
2,862
110,780
14,252
325,401
234,820
59,280
683,424
614,751
440,094
1,057,848
–
–
592,592
–
20,338
30,074
50,000
129,940
19,476
202,709
308,625
378,289
377,586
–
–
–
–
–
37,869
27,183
19,779
–
–
–
–
–
–
–
–
–
–
–
–
–
1,883,769
136,087
–
351,035
–
–
–
–
–
–
–
–
–
349,626
439,853
178,601
208,053
20,058
–
–
–
113,120
8,189
(10,908)
–
(11,856)
(1,589)
–
–
–
(670,774)
(413)
–
–
(4,272)
–
(451,721)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(37,869)
–
–
–
–
–
(2,862)
–
(12,663)
(22,266)
(39,454)
–
(12,650)
(128,760)
(254,669)
(96,363)
–
–
(140,871)
–
–
(30,074)
(50,000)
–
–
–
(308,625)
–
(8,778)
–
(12,849)
–
–
–
–
–
–
–
–
–
–
98,924
–
303,135
195,366
59,280
–
485,578
185,425
961,485
1,879,497
136,087
–
351,035
20,338
–
–
129,940
19,476
202,709
–
378,289
368,808
349,626
427,004
178,601
208,053
20,058
–
27,183
19,779
113,120
8,189
151
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
26 CALLED UP SHARE CAPITAL AND RESERVES
Allotted, called up and fully paid
Ordinary shares of 1p each at the beginning of the year
Ordinary shares of 1p each issued in the year
Ordinary shares of 1p each at the end of the year
2019
Number of
shares
2018
Number of
shares
277,660,081
276,510,137
170,544
277,830,625
1,149,944
277,660,081
2019
£m
2.8
–
2.8
2018
£m
2.8
–
2.8
During the year, 170,544 (2018: 1,149,944) new ordinary shares of one pence were issued as a result of the exercise of share
options. The proceeds of £0.3m (2018: £1.5m) were credited to the share premium account. As at 31 May 2019, no shares were
held in treasury (2018: nil).
SHARE PREMIUM
The share premium account records the difference between the nominal amount of shares issued and the fair value of the
consideration received. The share premium account may be used for certain purposes specified by UK law, including to write off
expenses incurred on any issue of shares and to pay fully paid bonus shares. The share premium account is not distributable but
may be reduced by special resolution of the Company’s ordinary shareholders and with court approval.
MERGER RESERVE
The merger reserve arose in 2015 from the acquisition of Accumuli plc through a share-for-share exchange in part consideration
for the business.
RETAINED EARNINGS
Retained earnings for the Group are made up of accumulated reserves. For the Company, retained earnings are made up of
accumulated reserves and are considered distributable reserves.
CURRENCY TRANSLATION RESERVE
The results of overseas operations are translated at the average foreign exchange rates for the year, and their balance sheets are
translated at the rates prevailing at the balance sheet date. Exchange differences arising on the translation of opening net assets
and results of overseas operations are recognised in the currency translation reserve. All other exchange differences are included
in the Income Statement.
27 PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARENT COMPANY
The profit for the year dealt with in the accounts of the parent Company was £0.3m (2018: £15.5m).
28 OTHER FINANCIAL COMMITMENTS
Non-cancellable operating lease rentals are payable as follows:
Within one year or less
Between one and five years
Over five years
Total
2019
Land and
Buildings
£m
5.5
15.1
14.2
34.8
Other
£m
0.5
0.3
–
0.8
2018
Land and
Buildings
£m
4.5
17.2
10.3
32.0
Other
£m
0.7
0.5
0.2
1.4
29 CONTINGENCIES
There are no contingent liabilities not provided for at the end of the financial year. Similarly, there are no contingent assets.
30 PENSION SCHEME
The Group operates a defined contribution pension scheme that is open to all eligible employees. The pension cost charge for
the year represents contributions payable by the Group to the fund and amounted to £6.6m (2018: £5.7m).
For the Company, the pension cost charge for the year represents contributions payable by the Company to the fund and
amounted to £nil (2018: £nil).
31 RELATED PARTY TRANSACTIONS
The Group’s key management personnel comprise the Directors of the Group. The Group and Company’s transactions with those
Directors are disclosed in the Directors’ Remuneration Report. There were no other related party transactions during the year.
152
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019
32 INVESTMENTS IN SUBSIDIARY UNDERTAKINGS
Company
At 1 June 2017
Increase in subsidiary investment for share-based charges
At 31 May 2018
At 1 June 2018 and at 31 May 2019
Fixed asset investments are recognised at cost.
Shares in
Group
undertakings
£m
60.7
0.1
60.8
60.8
The undertakings in which the Company has a 100% interest at 31 May 2019 are as follows:
Subsidiary undertakings
Country of
incorporation
Principal activity
Registered office
NCC Group (Solutions) Limited
England and Wales
Holding company
XYZ Building, 2 Hardman Boulevard, Spinningfields,
Manchester, M3 3AQ (XYZ)
England and Wales
NCC Services Limited
NCC Group Escrow Limited
England and Wales
The National Computing Centre Limited England and Wales
England and Wales
NCC Group Security Services Limited
England and Wales
NCC Group Audit Limited
Singapore
NCC Group Pte Limited
United Arab Emirates
NCC Group FZ-LLC
Axzona Limited
NCC Group Escrow Europe BV
NCC Group Escrow Europe
(Switzerland) AG
NCC Group GmbH
FortConsult A/S
NCC Group UAB
Scotland
Netherlands
Switzerland
Germany
Denmark
Lithuania
NCC Group Security Services, Inc.
USA
NCC Group Escrow Associates LLC
NCC Group Secure Registrar, Inc.
NCC Group Domain Services, Inc.
NCC Group Inc.
NCC Group Pty Limited
NCC Group Security Services
Corporation
Accumuli Limited
USA
USA
USA
USA
Australia
Canada
England and Wales
Holding company
Accumuli (Holdings) Limited
ArmstrongAdams Limited
Randomstorm Limited
Eqalis Limited
Accumuli Security Services Limited
NCC Group Signify Solutions Limited
Fujin Technology Limited
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Holding company
Assurance
Non–trading
Non–trading
Non–trading
Assurance
Non–trading
1
2 Hardman Boulevard, Spinningfields, Manchester, M3 3AQ
123 Mission Street, Suite 900, San Francisco, CA 94105, USA
2
3 Hill House, 1 Little New Street, London, EC4A 3TR
4 Olof Palmestraat 6, 2616 LM Delft, The Netherlands
Escrow and Assurance XYZ 1
XYZ 1
Dormant
XYZ 1
Dormant
XYZ 1
Assurance
XYZ 1
Assurance
20 Collyer Quay, #19-03, Singapore (049319)
Assurance
Office 30, Building 16, Dubai Internet City, Dubai,
Escrow
UAE
110 Queen Street, Glasgow, G1 3BX
Van Heuven Goedhartlaan 13A, 1181LE Amstelveen,
The Netherlands
Ibelweg 18A, 6300 Zug, Switzerland
Dormant
Escrow
Escrow
Assurance
Assurance
Escrow
Assurance
Leibnizstrasse 1, 85521 Ottobrunn, Germany
2nd Floor, Svanevej 12, DK–2400 København NV,
Denmark
Kareiviu g. 11B, 6th Floor, LT 09109, Vilnius,
Lithuania
123 Mission Street, Suite 900, San Francisco, CA
94105, USA (North America HQ 2)
North America HQ 2
Escrow
North America HQ 2
Domain Services
North America HQ 2
Domain Services
Escrow and Assurance North America HQ 2
Assurance
Assurance
Level 13, 92 Pitt Street, Sydney NSW 2000, Australia
51 Breithaupt Street, Suite 100, Kitchener, Ontario
N2H 5G5, Canada
Hill House, 1 Little New Street, London, EC4A 3TR
(Hill House 3)
Hill House 3
Hill House 3
Hill House 3
Hill House 3
Hill House 3
XYZ ¹
Hill House 3
153
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTADDITIONAL INFORMATIONFINANCIAL STATEMENTSGOVERNANCE Notes to the financial statements
for the year ended 31 May 2019
Subsidiary undertakings
Accumuli Security Systems Limited
Accumuli Security Technology Limited
Accumuli Security ASH Limited
NCC Group Accumuli Security Limited
Accumuli B.V.
Boxing Orange MSS Limited
Fox-IT Holding B.V.
Country of
incorporation
England and Wales
England and Wales
England and Wales
England and Wales
Netherlands
England and Wales
Netherlands
Fox-IT Group B.V.
Fox-IT B.V.
Fox-IT Operations B.V.
Fox-IT Crypto B.V.
Payment Software Company Inc.
Netherlands
Netherlands
Netherlands
Netherlands
USA
Principal activity
Non–trading
Non–trading
Non–trading
Assurance
Holding company
Dormant
Assurance
Assurance
Assurance
Assurance
Assurance
Assurance
Payment Software Company Limited
England and Wales
Assurance
Virtual Security Research LCC
USA
Assurance
Registered office
Hill House 3
Hill House 3
Hill House 3
XYZ 1
XYZ 1
Hill House 3
Olof Palmestraat 6, 2616 LM Delft
The Netherlands (Fox-IT 4)
Fox-IT 4
Fox-IT 4
Fox-IT 4
Fox-IT 4
591 West Hamilton Avenue, Suite 200, Campbell,
California 95008, USA
Upper Deck Admirals Quarters, Portsmouth Road,
Thames Ditton, Surrey, USA
76 Sumner St, 4th Floor, Boston, MA 02110, USA
The undertakings in which the Company holds less than a 100% interest at the year end are as follows:
Undertaking
Deposit AB Escrow Europe
% interest
24%
Country of
incorporation
Sweden
Principal
activity
Assurance
The Directors consider the above ownership structure and no Board representation gives rise to no significant influence over the
undertaking. Accordingly, the undertaking has not been consolidated.
33 POST BALANCE SHEET EVENTS
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. Historical arrangement fees have been fully amortised.
There were no other post balance sheet events.
154
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Glossary of terms –
alternative performance measures (APM)
APMs are the way that financial performance is measured by management, reported to the Board, the basis of financial
measures for senior management’s compensation schemes and provides supplementary information that assists the user in
understanding the underlying trading results.
APM
Closest
equivalent IFRS
measure
Adjustments to
reconcile to IFRS
measure
Note
reference for
reconciliation
Definition, purpose and considerations
made by the Directors
Income Statement measure – continuing operations:
Adjusted
operating
profit (EBIT)
Operating profit
or loss
Operating profit
or loss before
adjusting items
3
Adjusting items
represent
amortisation
of acquired
intangibles,
discount unwind
on acquisition
consideration, profit
on the disposal
of investments,
individually
significant items
and share-based
payments
Represents operating profit before adjusting
items to assist in the understanding of the Group’s
performance. Adjusting items represent amortisation
of acquired intangibles, discount unwind on
acquisition consideration, profit on the disposal of
investments, individually significant items, and share-
based payments.
The Directors consider amortisation 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 non-
cash unwind of discounts on deferred and contingent
acquisition consideration and 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.
155
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCE Glossary of terms –
Alternative performance measures (APM)
Closest
equivalent IFRS
measure
Adjustments to
reconcile to IFRS
measure
Note
reference for
reconciliation
Definition, purpose and considerations
made by the Directors
APM
Earnings
before
interest, tax,
depreciation
and
amortisation
(EBITDA)
Adjusted
earnings
before
interest, tax,
depreciation
and
amortisation
(EBITDA)
Adjusted
Profit before
taxation
Adjusted
basic EPS
Operating profit
or loss
Operating profit
or loss
Profit before
taxation
Basic EPS
Balance sheet measure
Net debt
Total
borrowings
offset by cash
and cash
equivalents
Operating profit
or loss, before
depreciation and
amortisation, net
finance costs and
taxation
Operating profit
or loss before
adjusting items,
depreciation and
amortisation, net
finance costs and
taxation
Profit before
taxation before
adjusting items
Basic EPS
excluding adjusting
items
Total borrowings
offset by cash and
cash equivalents
3
3
3
12
3
Cash flow measure
Cash
conversion
ratio
Ratio % of
net cash flow
from operating
activities before
interest and
taxation divided
by operating
profit
3
Ratio % of net
cash flow from
operating activities
before interest and
taxation divided by
adjusted EBITDA
156
Represents operating profit before depreciation and
amortisation.
EBITDA is disclosed as this is a measure widely used
by various stakeholders.
Represents operating profit before adjusting items,
depreciation and amortisation to assist in the
understanding of the Group’s performance.
Adjusted EBITDA is disclosed as this is a measure
widely used by various stakeholders and used by
the Group to measure the cash conversion ratio
noted below.
Represents profit before taxation before adjusting
items and provides supplementary information on the
Group’s profitability before taxation.
Represents Basic EPS excluding adjusting items and
provides supplementary information that assists the
user in understanding the underlying trading results.
Represents total borrowings offset by cash 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.
The cash conversion ratio is a measure of how
effectively adjusted operating profit (as detailed
above) is converted into cash and effectively
highlights both non-cash accounting items within
operating profit and also movements in working
capital. It is calculated as net cash flow from
operating activities before interest and 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.
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Glossary of terms –
other terms
Other terms
Definition and usage
2016 Code / 2018 Code
Guidance, issued by the Financial Reporting Council in 2016 and updated in 2018, on how companies
should be governed, applicable to UK-listed companies including NCC Group plc.
Adjusted
Any result described as adjusted excludes the impact of individually significant items, share–based
payments, unwinding of discount on deferred or contingent consideration, amortisation of acquired
intangible assets, profit on disposal of investments and any tax on any of these items.
Adjusted Operating Profit Margin
Calculated as adjusted operating profit divided by revenue from continuing activities.
AGM
Annual General Meeting of shareholders of the Company held each year to consider ordinary and
special business as provided in the Notice of AGM.
Alternative Performance Measure
(APM)
An Alternative Performance Measure (which is denoted in each case or use thereof by a footnote)
is a non–GAAP performance metric used by management either internally or externally to present
management’s view of the underlying business performance. They are not superior to GAAP–based
measures and are simply an alternative way of looking at performance. See note 3 for further
information.
Board
The Board of Directors of the Company (for more information see pages 48 to 49).
Cash conversion ratio
Calculated as cash generated from operating activities before interest and taxation divided by
adjusted EBITDA, expressed as a percentage.
CDO
CEO
CFO
CISO
Cyber Defence Operations
Chief Executive Officer
Chief Financial Officer
Chief Information Security Officer
Company, Group, NCC, we, our
or us
We use these terms, depending on the context, to refer to either NCC Group plc, the individual
company, or to NCC Group plc and its subsidiaries collectively.
CPO
CTO
Chief People Officer
Chief Technology Officer
Directors/Executive Directors/
Non-Executive Directors
The Directors/Executive Directors and Non–Executive Directors of the Company whose names are
set out on pages 48 to 49 of this Report.
EBIT
Earnings before interest and tax.
EBIT Margin %
EBIT Margin % is calculated as follows: Adjusted EBIT divided by revenue.
EBITDA
Earnings before interest, tax, depreciation and amortisation. Calculated as operating profit before
individually significant items and adding back depreciation and amortisation charged.
EBITDA Margin %
EBITDA divided by revenue.
EPS
FCA
Earnings per share. Profit for the year attributable to equity shareholders of the parent allocated to
each ordinary share.
Financial Conduct Authority
Financial year
For NCC Group this is an accounting year ending on 31 May.
FRC
Financial Reporting Council
Free cash flow
Net cash from operating activities less capital expenditure.
FRS
Gross profit
A UK Financial Reporting Standard as issued by the UK Financial Reporting Council (FRC).
Gross profit is revenue less direct costs of sale. It excludes costs considered to be overheads that are
supporting the business as a whole as opposed to a specific revenue item.
157
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCE Glossary of terms –
other terms
Other terms
Definition and usage
Gross margin %/GM %
Calculated as gross profit divided by revenue from continuing activities.
HMRC
IAS or IFRS
Individually Significant Items
KPMG
LTIP
MD
MDR
Net debt
Ordinary shares
SAYE/Sharesave
Subsidiary
TSC
TSR
Her Majesty’s Revenue & Customs, the tax collecting authority of the UK.
An International Accounting Standard or International Financial Reporting Standard, as issued by
the International Accounting Standards Board (IASB). IFRS is also used as the term to describe
international generally accepted accounting principles as a whole. Financial statements are prepared
in accordance with IFRS as adopted by the EU.
Items that the Directors consider to be material in nature, scale or frequency of occurrence that need
to be excluded when calculating some non–GAAP performance measures in order to allow users of
the Financial Statements to gain a full understanding of the underlying business performance. See
note 6 for further information.
The Company’s external auditors, KPMG LLP.
Long Term Incentive Plan established to align the interests of senior and Executive management with
those of shareholders. The plan is formally known as the NCC Group Long Term Incentive Plan 2013
(approved by shareholders in 2013).
Managing Director
Managed Detection and Response
Total borrowings offset by cash and cash equivalents.
Voting shares entitling the holder to part ownership of a company.
Save As You Earn, being a tax efficient scheme to encourage employee share ownership.
A company or other entity that is controlled by NCC Group.
Technical Security Consulting
Total Shareholder Return, which is share price growth plus dividends reinvested (where applicable)
over a specified period of time, divided by the share price at the start of the period.
158
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 Other information
DIRECTORS
Chris Stone
– Non-Executive Chairman
Adam Palser
– Chief Executive Officer
Tim Kowalski
Brian Tenner
– Chief Financial Officer
(from 23 July 2018)
– Chief Financial Officer
(until 12 August 2018)
Chris Batterham
– Senior Independent Non-
Executive Director
Thomas Chambers – Non-Executive Director
(until 26 September
2018)
Jonathan Brooks
– Non-Executive Director
Mike Ettling
– Non-Executive Director
Jennifer Duvalier
– Non-Executive Director
COMPANY SECRETARY
Suzy Cross
REGISTERED AND HEAD OFFICE
XYZ Building
2 Hardman Boulevard
Spinningfields
Manchester
M3 3AQ
REGISTERED NUMBER
4627044
Registered in England and Wales
JOINT BROKERS AND CORPORATE FINANCE ADVISERS
Jefferies International Limited
Vintners Place
68 Upper Thames Street
London
EC4V 3BJ
Peel Hunt LLP
Moor House
120 London Wall
London
EC2Y 5ET
AUDITORS
KPMG LLP
1 St Peter’s Square
Manchester
M2 3AE
SOLICITORS
DLA Piper UK LLP
1 St Peter’s Square
Manchester
M2 3DE
BANKERS
National Westminster Bank plc
1 Hardman Boulevard
Manchester
M3 3AQ
HSBC UK Bank plc
2nd Floor
4 Hardman Square
Spinningfields
Manchester
M3 3EB
Lloyds Bank plc (until 10 June 2019)
8th Floor
40 Spring Gardens
Manchester
M2 1EN
ING Bank N.V. London Branch (from 10 June 2019)
8-10 Moorgate
London
EC2R 6DA
REGISTRARS
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
159
NCC GROUP PLC ¦ STOCK CODE: NCCBUSINESS OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCE Financial calendar
Ex-dividend date
Record date
AGM
Dividend payment date
2020 Half year end
2020 Interim statement
2020 Year end
5 September 2019
6 September 2019
25 September 2019
4 October 2019
30 November 2019
January 2020
31 May 2020
2020 Year end trading pre-close statement
June 2020
2020 Preliminary year end statement
July 2020
These dates are provisional and may be subject to change
160
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 MAY 2019 N
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www.nccgroup.com