Resilience
through
uncertainty
Annual report and accounts
for the year ended 31 May 2020
NCC Group exists
to make the world
safer and more secure
We are a global cyber and software
resilience business operating across multiple
sectors, geographies and technologies.
Using our global insights into the cyber
threats facing our connected society, we
are passionate about helping organisations
assess, manage and develop their cyber
resilience posture and allowing them to take
advantage of the opportunities the world
has to offer, because they know that their
business, software and personal data are
safe and secure.
Read more online: www.nccgroupplc.com
Contents
STRATEGIC REPORT
Highlights
1
Chair’s statement
2
Chief Executive
4
Officer’s review
Our Covid-19 response
8
10 What we do
11 Where we operate
12 Our strategic roadmap
14
Investment case
16 Markets
18 Business model
20 Strategy and KPIs
22
Chief Financial
Officer’s review
Principal risks and
uncertainties
30
38 Stakeholder engagement
40 Sustainability
ADDITIONAL INFORMATION
159 Glossary of terms
– Alternative Performance
Measures (APMs)
161 Glossary of terms
– other terms
163 Other information
164 Financial calendar
GOVERNANCE
49 Chair’s introduction
to governance
51 Governance framework
52 Board of Directors
54 Executive Committee
56
Board composition and
division of responsibilities
63 Shareholder engagement
64 Audit Committee report
70 Nomination Committee
72
74
report
Cyber Committee report
Remuneration Committee
report
93 Directors’ report
96
Directors’ responsibilities
statement
FINANCIAL STATEMENTS
Independent auditor’s
98
report
107 Consolidated income
statement
107 Consolidated statement
of comprehensive income
108 Consolidated balance
sheet
109 Consolidated cash flow
statement
110 Consolidated statement
of changes in equity
111 Company balance sheet
112 Company cash flow
statement
113 Company statement
of changes in equity
114 Notes to the financial
statements
STRATEGIC REPORT
Highlights 1
GAAP measures
Revenue
£263.7m
.
2
4
0
2
.
3
5
1
2
.
0
3
3
2
.
7
0
5
2
.
7
3
6
2
Statutory operating profit 2
£19.1m
.
7
3
1
.
4
1
1
.
)
4
3
5
(
Basic EPS 2
4.2p
.
5
9
1
.
1
9
1
5
2
.
5
2
.
9
4
.
.
)
4
0
2
(
2
4
.
16
17
18
19
20
16
17
18
19
20
16
17
18
19
20
Alternative Performance Measures 2, 3
Net debt 2, 3
£4.2m
.
7
3
4
.
8
7
2
.
2
0
2
17
18
19
.
7
2
1
16
2
4
.
20
Adjusted operating profit 2, 3
£31.1m
Adjusted EPS 2, 3
8.1p
.
1
5
3
.
5
5
2
.
8
0
3
.
7
3
3
.
1
1
3
16
17
18
19
20
2
6
.
17
8
9
.
16
2
8
.
18
2
9
.
19
1
8
.
20
Footnotes for Strategic Report
1 References to the Group’s results are for continuing operations.
2
Following the adoption of IFRS 16 ‘Leases’ with effect from 1 June 2019, the Group has adopted the accounting standard using the modified retrospective approach to transition
and has accordingly not restated prior years; the results for the year ended 31 May 2020 are not directly comparable with those reported under the previous applicable accounting
standard IAS 17 ‘Leases’. On this basis, to provide meaningful comparatives, the results for the year ended 31 May 2020 have therefore also been presented under IAS 17 with
the like-for-like numbers shown on an IAS 17 basis (‘Pre-IFRS 16’). This Alternative Performance Measure (APM) will be presented for one year until the comparatives also include
the adoption of IFRS 16.
See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items, including a reconciliation to statutory information. Further information is also
contained within the Chief Financial Officer’s Review.
3
Overview of our year
The long-term prospects for the cyber
resilience market are excellent
Covid-19 has impacted demand but we
foresee a strong growth opportunity
as the economy normalises
Our transformation continues and
we are successfully navigating
Covid-19 disruption
Our full year performance demonstrates
our resilience and presents a strong
platform for future growth
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
1
STRATEGIC REPORT Chair’s statement
A year of further
strategic progress
The Group has clearly demonstrated resilience
through uncertain times and we now look forward
to developing further opportunities in the cyber
and software resilience markets.
CHRIS STONE
Non-Executive Chair
I am pleased to report that we have managed to achieve both of
these objectives. Our cash generation and preservation has been
very strong, and whilst the decision to preserve capability and capacity
had an impact on profitability, it means that we can look forward to a
strong growth opportunity as the economy normalises. The long-term
prospects for the cyber and software resilience market are excellent.
Business performance
Overall, the Group delivered revenue growth of 5.2%, adjusted EBITDA 2, 3
of £41.2m and adjusted operating profit on a like-for-like basis 3 of
£31.1m. On a statutory basis, after IFRS 16, operating profit decreased by
2.1% to £19.1m (2019: £19.5m 2) and profit before taxation decreased
9.6% to £16.1m giving rise to a statutory EPS of 4.2p (2019: 4.9p 2)
and adjusted basic EPS 2, 3 of 8.1p (2019: 9.2p 2) respectively.
The Group delivered improved cash flow with cash conversion 2, 3 of
117.0% compared to 109.6% 2 in 2019, resulting in a reduction in
the Group’s net debt on a like-for-like basis 2, 3 to £4.2m (2019: £20.2m),
after benefiting from certain government tax deferral programmes that
amounted to £4.6m.
Assurance experienced encouraging UK growth following softer
demand in the prior year and continued growth within North America.
We have also made good progress in Europe and APAC. Most
significantly, we have further developed our global MDR (Managed
Detection and Response) proposition with growth of c.14%. Within
Software Resilience (Escrow), we have repositioned the business
as a sustainable software resilience service and are starting to stabilise
revenue. In addition, we have accelerated the adoption of our cloud
resilience proposition, and started developing our channel propositions.
Our business performance can be found in more detail on pages 4 to 6
Strategy and transformation programme update
Our strategy remains unchanged and we continue in our mission
“To make the world safer and more secure”. To underpin our vision
“To become the leading cyber security adviser globally”, we launched
our three year transformation programme, entitled Securing Growth
Together (SGT), in May 2018.
As reported with our half year results, our transformation programme,
SGT, continues to deliver 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.
Introduction
At the end of a financial year which has seen massive disruption to
economies and trading environments worldwide, it is a pleasure to be
able to report to all our stakeholders that NCC Group has made good
progress on nearly all of our strategic objectives. Most importantly, our
trading performance for the year has demonstrated our resilience and
the fundamental attractiveness of our market positions. Growing our
revenues in such a difficult environment is a significant achievement, and
underscores the strength of our platform. This bodes well for future years.
Our transformation programme has enabled us to successfully navigate
the Covid-19 disruption. Our primary concern during this time has been
the wellbeing of our colleagues and customers. We switched quickly to
remote working – facilitated by the investment we have made in systems
and infrastructure through our Securing Growth Together transformation
programme – which has enabled us to continue to deliver robustly for our
clients throughout this period of disruption.
Our two objectives through the pandemic were:
• To maintain a strong balance sheet to position ourselves
to capitalise on opportunities in the future.
• To preserve our technical capability and capacity so that we can
meet future growth demands.
2
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT As part of the programme, we have been replacing all of our key
systems to create one way of operating across the firm. It is pleasing
to see that we have continued our momentum from the prior year
and have now rolled out new HR systems and the major components
of the finance systems (Workday) for all our Global operations.
Further details on our strategy are provided on pages 20 and 21
Dividend
We are recommending an unchanged final dividend of 3.15p
(2019: 3.15p) per ordinary share making a total for the year of 4.65p
(2019: 4.65p), with our dividend policy remaining under review.
The final dividend will be paid on 6 November 2020, subject to
approval at the AGM on 20 October 2020, to shareholders on the
register at the close of business on 9 October 2020. The ex-dividend
date is 8 October 2020.
Board composition
There have been no changes to the Board during the year.
Board governance and effectiveness
As Chair, I am responsible for the leadership of the Board and
ensuring its effectiveness in all aspects of its performance. We 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. In particular,
the Board has completed a robust assessment of the Group’s
emerging and principal risks.
Further information on risk management and the key risk
identification procedures are set out on pages 30 to 36
During the year, we have been further embedding the requirements
of the UK Corporate Governance Code 2018 (the ‘Code’), particularly
the renewed focus on identifying and engaging with all our stakeholders.
We have put particular emphasis this year in improving our engagement
with our colleagues around the world. My colleague Jennifer Duvalier
has led this initiative which has included direct conversations with groups
of colleagues in each of our main locations, albeit remotely managed.
During the year we complied with all other aspects of the Code.
Please see the Corporate Governance Statement starting
on page 49 for further information
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 (including emerging risks) has continued to be
a focus for us in monitoring progress against the Securing Growth
Together transformation programme and consideration of the impact
of other risks, such as Brexit and Covid-19, on our global business.
Colleagues
We are a people business and our technical colleagues are at the
core of our customer offer. Our colleagues remain the cornerstone of
this business and they have continued to show their commitment and
resilience through the challenges of Covid-19 in delivering excellent
service to our customers. We seek to provide challenging and rewarding
career paths for all our staff and following our employee engagement
survey we will continue to create a great place to work and focus on
becoming the employer of choice in our markets.
We recognise that we still have progress to make in terms of
improving the diversity of the Board and our Executive Team, and
ensuring that we are an inclusive and diverse organisation. We now
have global volunteers focused on supporting our four key areas:
gender, race and ethnicity, neurodiversity and LGBTQIA+.
On behalf of the Board I would like
to offer our sincere thanks and
appreciation to all of the Group’s
colleagues for their continued
resilience, professionalism
and contribution.
Improvement will not happen overnight, but we are very mindful
of the need to continuously improve and take positive action, and
the matter is fully on our agenda and in our thoughts as a Board to
ensure that anyone can feel welcome in NCC Group and enjoy the
same opportunities to fulfil their potential.
On behalf of the Board I therefore offer our sincere thanks and
appreciation to all of the Group’s colleagues for their continued resilience
and professionalism in delivering this performance through an ambitious
transformation programme while navigating Covid-19 challenges.
Sustainability
Prior to the global pandemic we began a gap analysis exercise
to identify the priority focus areas for our environmental, social and
governance (ESG) framework. We are now in a position to develop
our ESG programme by setting focus areas, which during FY21
will help inform our improvement targets (further details on our
ESG framework is provided on page 42).
Outlook
• We have successfully weathered the initial impact of Covid-19
and our experience of doing so gives us confidence that we
should be resilient, profitable and cash generative through any
likely aftershocks this financial year.
• Parts of our customer base have been impacted by uncertainty,
financial pressures or logistical issues. Consequently, we have
observed procurement cycles lengthen and become less predictable. In
some of the more affected sectors, including Leisure and Entertainment,
we expect some customers to postpone work for 12 months or more.
• The long-term growth prospects for the cyber resilience market
continue to be excellent as the connected environment and society’s
dependence on that connected environment continue to grow.
Against this backdrop:
• Our trading to date has been slightly ahead of the same period last year,
albeit last year was a soft comparator period and the start of this year
has been boosted by some exceptional M&A support engagements.
• The range of outcomes for the full financial year remains unusually
broad and depends, in particular, on the speed and timing with which
our customers’ buying patterns return to normal.
• In the medium-term, our financial objectives remain the same
as last year: to achieve double-digit revenue growth with margin
improvement in Assurance and to return Software Resilience
(Escrow) to sustainable growth.
• Owing to the resilience we have demonstrated as a Group and
the confidence we have in our continued profitability and cash
generation, we are recommending an unchanged final dividend
of 3.15p (2019: 3.15p) per ordinary share.
Chris Stone
Non-Executive Chair
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
3
STRATEGIC REPORT Chief Executive Officer’s review
Resilience through
uncertainty
I am pleased with our trading performance for the year. Thanks to
the stunning way in which my NCC Group colleagues have risen to the
challenge we have weathered the impact of the Covid-19 pandemic
to date and emerged with a stronger balance sheet while preserving
the technical capability that makes NCC Group so distinctive.
ADAM PALSER
Chief Executive Officer
We are all Zoom-bies and Teamsters now
The tumult and uncertainty of the Covid-19 pandemic have thrown
into sharp relief the importance of the connected, digital world for
society. Remote working has become the norm; firms across the
world have brought forward their plans to adopt cloud technology
by years in the space of a few months, and consequently the
associated cyber risks have proliferated.
In the near term, many of our customers are experiencing
uncertainty, financial pressures or logistical challenges owing to
the impact of the pandemic, which have, unsurprisingly, lowered
demand below the run rate we expected coming into this calendar
year. However, we believe that the long-term prospects for the
cyber resilience market are stronger than ever and, as and when
the economy returns to trend growth, we believe that firms like
NCC Group will benefit from the need for organisations to “pay
down the compliance debt” that has accumulated as connected
systems are mobilised in a hurry without the usual care and attention.
As in recent years, the cyber market is a dynamic and busy place.
Cyber threats are now so pervasive, complicated and rapidly
changing that “silver bullets” no longer exist (if they ever did).
Increasingly, it is the role of cyber services firms like NCC Group to
help our customers navigate through the complexity of cyber risks.
Our ability to quickly and efficiently build skills, tools and capability
through research enables us to remain at the forefront of this
exciting market without taking significant risks.
Securing Growth Together (SGT): fulfilling our potential
Since my arrival in December 2017, my colleagues in NCC Group have
worked relentlessly to transform the business and achieve our ambition
to become the leading provider of cyber resilience solutions globally.
It is a pleasing validation of our direction and purpose that, despite
the global upheavals that have occurred this year, our destination
is still relevant and we have made determined progress towards it:
• Our mission is to make the world safer and more secure.
• Our vision is to be the leading cyber security advisor globally,
trusted to protect and secure our customers’ critical assets and
sought after for our complete people-led, technology-enabled
cyber resilience solutions that enable our customers to thrive.
• Our three values are: Work Together; Be Brilliantly Creative;
and Embrace Difference.
The investment and progress we
have made through our Securing
Growth Together programme
underpinned our recent resilience
and the Group is well placed to
thrive when the economy recovers.
4
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Our vehicle for transforming the firm and achieving our vision is the
Securing Growth Together programme which, at its heart, can be
summarised as:
I am pleased that this approach has enabled us to manage the
impact of the pandemic so far and we have not made any Covid-19
redundancies or furloughed any colleagues.
1. Connecting this global firm, creating one global way of working
and generating the information we need to run the business in
an agile and assertive way.
2. Creating stronger relationships with our customers by delivering
a full suite of services and thus guiding them throughout their
journey to cyber resilience.
The programme is run through five workstreams, which have given
rise to following highlights:
• The investment and progress we have made through the first two
years of SGT underpinned our resilience through these uncertain
times. In particular, we had the systems, communication and
collaboration tools that enabled us to work together as one firm
and transition seamlessly to remote working.
• The number of large orders secured from clients has increased,
driven in particular by the strong increase in demand for Managed
Detection and Response services (sales orders growth of 24.2%),
which helps to underpin our forward order book.
• Our technical teams are larger, our retention is higher, and we
have completed more high impact research than in previous years.
Thus, we begin this new financial year in stronger shape than we
have ever been before.
Resilience through uncertainty
We first felt the impact of Covid-19 on our operations in the Asia
Pacific region in January, which, in some ways, provided a helpful early
warning. In February, and before the World Health Organization (WHO)
declared Covid-19 a global pandemic, we had developed our Covid-19
management strategy and mobilised a crisis management team that
met daily (to start with) to steer us through the challenge ahead.
From the outset, our objectives have been to “Survive & Thrive”:
to maintain a strong Balance Sheet and to preserve our technical
capacity and capability so that investors can have confidence in our
enduring ability to generate value and to position ourselves for the
future upswing of the economy. Our Covid-19 management strategy
consisted of five themes:
• Anticipate and measure.
• Be resilient.
• Stay profitable.
• Exploit any downtime.
• Prepare for the bounce back.
The heart of “staying profitable” was, of course, to continue to sell
and deliver value to our customers. Inspiring examples of work
undertaken by my colleagues include:
• The deployment of our internal “Firebase” appliance, originally
developed as part of a UK research programme, across all of
our territories, which helped us to operate remotely, even for
our largest customers.
• Introducing “SOC as a Service” to help customers experiencing
resource shortages and office closures which affected their own
Security Operations Centres.
• Our global “Evolve to Remote” marketing campaign to aggregate
and promote those services which could be bought and
delivered remotely.
Our resilience has unquestionably been helped by the strength
of our customer base, which, in turn, is a validation of the quality
of our services. We now work for 65 of the Fortune 500 (2019: 52)
and 89 of the FTSE 350 (2019: 82). It should be noted, however,
that some of our customers operating in more affected sectors
(including, for example, entertainment and leisure) have delayed or
cancelled work and are expected to do so for much of the coming
financial year.
NCC Group was on course to meet expectations for the year ended
31 May 2020 until the outbreak of Covid-19. The impact on FY20
sales order delivery amounted to an estimated £15m as demand
decreased due to the financial and logistical challenges that our
customers were facing. However, our seamless transition to remote
working, facilitated by the investments we have made through our
Securing Growth Together transformation programme, enabled us
to deliver a resilient performance while maintaining a strong balance
sheet and preserving our technical capacity and capability to meet
future demand.
While the whole firm has moved to remote working, we have now
developed detailed specific working practices for a proportion of
our colleagues to return to our customers’ offices safely when the
opportunity arises. Where appropriate we do expect to give our
people more opportunity to continue to work remotely and are
taking this moment to review our global property footprint and how
we employ that space effectively.
At the time of writing, the pandemic is not yet over and there is still
significant uncertainty in our customer base and the wider world.
However, I am delighted with the way my colleagues have navigated
the challenge so far and have confidence in our ability to continue
to do so.
Playing a full part in society
From a social responsibility perspective, we provided unique threat
intelligence free of charge in the first few months of the pandemic
to national Computer Emergency Response Teams, hospitals and
national institutes of public health around the world, to help them
build cyber resilience and ensure they could focus on patient care
without distraction.
Beyond the advent of Covid-19, another momentous event, which
had a profound impact on the firm was the tragic death of George
Floyd. The anger and shock that swept across the world – felt not
just in our North American teams but throughout NCC Group –
inspired us to redouble our efforts to ensure we are an inclusive and
diverse organisation. Building on our existing plans we now have
global volunteers focused on supporting our four key areas: gender,
race and ethnicity, neurodiversity and LGBTQIA+. It is a matter of
personal importance to me that anyone can feel welcome in NCC
Group and enjoy the same opportunities for career progression.
More broadly, this year has seen the development of our ESG
framework and a sustained focus on the wellbeing of all those who
work in NCC Group. Our Mental Health First Aid and awareness
programme are two of the more structured ways we have sought
to underpin our colleagues’ wellbeing, above and beyond the
plethora of virtual quiz nights, ‘meet the pets’ sessions and other
social interactions that have sprung up over the course of the last
twelve months.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
5
STRATEGIC REPORT Chief Executive Officer’s review continued
Outlook
• We have successfully weathered the initial impact of Covid-19
and our experience of doing so gives us confidence that we
should be resilient, profitable and cash generative through any
likely aftershocks this financial year.
• Parts of our customer base have been impacted by uncertainty,
financial pressures or logistical issues. Consequently, we have
observed procurement cycles lengthen and become less
predictable. In some of the more affected sectors, including
Leisure and Entertainment, we expect some customers to
postpone work for 12 months or more.
• The long-term growth prospects for the cyber resilience market
continue to be excellent as the connected environment and
society’s dependence on that connected environment continue
to grow.
Against this backdrop:
• Our trading to date has been slightly ahead of the same period
last year, albeit last year was a soft comparator period and the
start of this year has been boosted by some exceptional M&A
support engagements.
• The range of outcomes for the full financial year remains
unusually broad and depends, in particular, on the speed and
timing with which our customers’ buying patterns return to normal.
• In the medium-term, our financial objectives remain the same
as last year: to achieve double-digit revenue growth with margin
improvement in Assurance and to return Software Resilience
(Escrow) to sustainable growth.
• Owing to the resilience we have demonstrated as a Group and
the confidence we have in our continued profitability and cash
generation, we are recommending an unchanged final dividend
of 3.15p (2019: 3.15p) per ordinary share.
Adam Palser
Chief Executive Officer
3 September 2020
FY20 performance overview
Group revenues increased by 5.2% representing more people,
skills, capabilities and customer impact than before. From a divisional
perspective, all Assurance regions experienced growth, with the
North America and Europe & APAC regions particularly encouraging
at 9.1% and 8.3% respectively, with the UK region increasing by
2.9%. Software Resilience (Escrow) revenue decreased 1.3% to
£37.5m (2019: £38.0m) although momentum is building as H2
revenues were flat against H2 of the previous year and up compared
to H1. Gross margin reduced slightly to 39.6% (2019: 40.6%)
because we built sales and technical capacity through the year but
suffered a dip in demand from Covid-19 in the second half of the
year. Adjusted EBITDA 2, 3 and operating profit 2 were down 5.7%
to £41.2m (2019: £43.7m) and 7.7% to £31.1m (2019: £33.7m)
respectively, giving rise to an adjusted basic EPS 2, 3 of 8.1p
(2019: 9.2p). The Group delivered improved cash flow with cash
conversion 3 of 117.0% compared to 109.6% 2 in 2019, resulting
in a reduction in the Group’s net debt on a like-for-like basis 2, 3
to £4.2m (2019: £20.2m). On a statutory basis, after IFRS 16,
operating profit decreased by 2.1% to £19.1m (2019: £19.5m 2)
and profit before taxation decreased 9.6% to £16.1m (2019:
£17.8m) giving rise to a statutory EPS of 4.2p (2019: 4.9p 2).
Summary
Financial:
• The Group achieved revenue growth during the year despite the
Covid-19 disruption.
• Effective cash management resulted in another excellent year for
cash conversion and reduced net debt on a like-for-like basis 2, 3
to £4.2m from £20.2m, after benefiting from certain government
tax deferral programmes that amounted to £4.6m.
Operational:
• We were resilient through uncertainty while maintaining
a strong Balance Sheet and preserving our technical capacity
and capability in order to meet future demand.
• Our recurring and long-term revenues from Software Resilience
and our Managed Detection and Response services have
provided us with some protection.
• Our Securing Growth Together transformation programme has
made strong progress with continued deployment of our global
systems infrastructure.
I would like to thank all my
colleagues for their continued
resilience and professionalism
during these challenging times.
6
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Connecting colleagues
during a pandemic at scale
Building a resilient
organisation to last…
The book has not been written on how to engage during
a pandemic, so we wrote our own.
We started by crowdsourcing ideas via our internal social
media and through this came up with a series of initial
initiatives to help connect not only colleagues but their
families too. We know more about our colleagues now
than we ever did – fully embracing and accepting our new
ways of working, with pets and children topping the list.
Colleagues were supported locally and globally to make
their temporary remote working environments work for them
while continuing to support our customers with confidence.
Using our internal news platform we were also able to
start increasing support for mental wellbeing. Regular pulse
checks and personal stories of resilience from colleagues all
helped to create an environment where it is “okay to not be
okay”. This has evolved into a global programme with line
manager training and the launch of mental health first aid
training for colleagues keen to support their peers.
Internally we increased leadership visibility at a local and
a global level, with regular open live sessions with CEO
Adam Palser. Using a live platform, Adam answers questions
live on a host of subjects from across the global business.
This was a valuable channel when colleagues were deeply
affected by the tragic death of George Floyd on 25 May
2020, an event which inspired us to review if we are doing
enough to be an inclusive and diverse organisation.
Creating an environment where all colleagues feel
psychologically, emotionally and physically safe to be
authentic is the foundation of creating a great place to
work. Colleagues were invited to help us build on our
existing plans and we now have global volunteers
focused on supporting our four key areas:
• Gender
• Race and ethnicity
• Neurodiversity
• LGBTQIA+
Volunteers have created an annual plan on engagement,
which includes our new programme NCC Conversations
offering up workshops and engagement sessions on topics
that matter to colleagues.
Our colleagues will help us create the future as we launch
our future world of work study – ensuring we do not lose
the resilience we gained during this time.
Read more on colleague engagement on pages 43 to 45
Throughout the Annual Report you
will meet some of our colleagues who
share what lockdown meant for them…
“It’s hard to tell which is growing faster, the website
or my new chilli plants.”
Kai Kurihara – Manchester
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
7
Our Covid-19 response
Survive and thrive
during a global
pandemic
Prior to the global pandemic being
announced by the World Health
Organisation, we set up a global
Executive incident management team
and appointed local incident
management teams to prepare
for the eventual lockdown.
Our priority was and still remains
colleague welfare and customer
safety. This enables us to maintain
a strong Balance Sheet, and maintain
the capacity and capability we expect
we will need to meet future demand.
We adopted five key themes to help
guide us to ensure that our business
not only survives but emerges ready
to thrive from the uncertainty.
While the pandemic is not yet over,
our experiences have made us stronger
and wiser. The investments we have
made in our technology, processes and
systems meant we transitioned quickly
and confidently to remote working and
continue to support our customers
with over 95 per cent of our services
able to be delivered remotely.
1. Anticipate and measure
2. Be resilient
Plan for different outcomes
and track KPIs to inform
our decision making
• Scenario planning
• Preparation of contingency plans
with different levels of response
• Harnessing our new systems
to gather information
• Regular communication
Ensure the safety of our
colleagues and customers;
maintain continuous operations
• Global systems set up to ensure
colleagues delivering customer
work were supported to do
this remotely
• Activated a global wellbeing
programme to support colleagues
– from how to work in a temporary
remote office to personal mental
health support
• Supported global health care
providers with free threat
intelligence to help ensure their
cyber resilience during the first few
months of the pandemic – so they
could focus efforts and resources
on helping people get well
“Luckily I already had a screen big enough for lockdown.”
Sharique Shaikh – Leatherhead
8
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Jamie Rose
Natasha Gardner
3. Stay profitable
4. Exploit any downtime
Proactively sell remote services;
careful control of cost and cash
• Enabled more than 95 per cent of
our services to be delivered remotely
• Launched our Evolve-to-Remote
campaign to support customers
around the specific challenges they
would be facing by moving their
businesses to remote working
• Modified existing services to meet
unique challenges customers were
having such as SOC as a Service
(see below) – giving customers
short-term solutions to
lockdown issues
Strengthen the firm every
day through research
and development
• Continuing to forge new industry
partnerships – including becoming
a founding member of the new
global industry collaboration – the
Open Source Security Foundation
• Publication of our blueprint for
smart cities and a threat report
to help users map and identify
the cyber threats emerging during
the pandemic
• Developed our environmental,
social and governance framework,
including enhancing our inclusion
and diversity plan through global
online collaboration with colleagues
Read more on smart cities on page 13
5. Prepare for the
bounce back
Preserve capability and
capacity; invest selectively
for the future
• Reimagining our future world of
work by learning and listening from
the experience of the pandemic
including how flexible working
could be an enabler for a more
inclusive and diverse workforce
• Continued investment in
services and solutions to broaden
our portfolio and better serve
our customers
NCC Group launches SOC as a Service to help customers
experiencing resource shortages and office closures
Exploring how we could help businesses around the world during
the pandemic, we offered our cyber security expertise through new
solutions, which can be delivered remotely and meet the current
needs of customers.
One example was the development of our remote Security
Operations Centre (SOC) solution to businesses that were
struggling to keep their in-house SOCs running due to resourcing
issues or office closure. This remote SOC can be set up in a matter
of days without needing to set foot on a client site, helping us to
quickly alleviate some of the pressure our customers may be facing
when it comes to maintaining around-the-clock security monitoring.
The SOC as a Service solution launched with short-term
contracts, (as little as three months), rather than a typically longer
three year contract, and includes a full upfront health check and
assessment, as well as fully managed detection and response
services, providing businesses with peace of mind.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
9
STRATEGIC REPORT What we do
NCC Group is a global cyber and software resilience business
operating across multiple sectors, geographies and technologies.
We work with over 14,000 customers worldwide to address their challenges in the
complex and increasingly connected digital world. This includes:
Getting the basics of
cyber hygiene correct
Knowing what
and how to prioritise
Coping with the scarcity
of skilled resources
needed to deliver quality
improvement, change
and operations
Responding to the
increasing compliance,
regulatory and
legislative burden
Quantifying cyber
spend efficiency and
return on investment
Our divisions
Across our two divisions, we improve our customers’ resilience posture.
This means that we deliver solutions that result in outcomes that match our customers’ goals, budgets and risk appetite, giving them peace
of mind that their most important assets – their business, software and personal data – are safe.
Assurance
Software Resilience (Escrow)
We demystify cyber for our customers,
and ensure that:
• Our customers understand the cyber threats and
vulnerabilities across their technology environments,
supply chains, processes and products.
• Our customers maintain their licence to do business, having
achieved their governance, compliance and accreditation
objectives in a changing regulatory environment.
• Our customers’ resilience against cyber threats is materially
improved as a result of implementing remediation plans
and solutions.
• Our customers are able to reduce risk and achieve greater
resilience for less investment.
• Our customers can outsource their cyber defence
operations and increase their confidence in detecting
and responding to cyber events.
We protect the development, supply and
use of business critical technology and
software applications:
• Our services ensure buyers are safeguarded from
supplier failure, software vulnerabilities and unforeseen
technology disruption.
• Our on-premise and cloud offering can demonstrate
robust business continuity and risk mitigation, and
suppliers benefit from enhanced credibility and
intellectual property rights protection.
• Our escrow contract services secure the long-term
availability of business critical software data
and applications.
• Our verification services assure customers that the
knowledge and guidance are readily available to manage,
maintain or recreate an application from the original
source, should it ever be needed.
• Our cloud Escrow as a Service offering, helps customer
transition to the cloud securely, so they can adopt the latest
technology with confidence.
Read more on our markets on page 16
Read more on our markets on page 17
10
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Where we operate
We operate as one global business, with
in-country delivery tailored to local needs
and culture.
We have a significant market presence in the UK, North
America and Continental Europe and a rapidly growing
footprint in Asia Pacific with offices in Australia, Japan
and Singapore.
Our offices
Group revenues
UK
North America
Europe and Asia Pacific
£117.4m
£90.2m
£56.1m
Assurance revenue
Technical Security Consulting £145.6m
(2019: £134.8m)
Risk Management Consulting £28.7m
(2019: £35.3m)
Managed Detection and Response £41.4m
(2019: £36.4m)
Products £10.5m
(2019: £6.2m)
Software Resilience contracts £25.8m
(2019: £26.5m)
Verification services £11.7m
(2019: £11.5m)
Software Resilience (Escrow) revenue
£226.2m
64+
69+
£37.5m
Read more on our markets on pages 16 and 17
Watching our global NCC
Group community come
together and rise to the
challenges presented by
Covid-19 has been
inspirational. Colleagues
around the world are
working every day to make
our firm stronger. Teams
across NCC Group
mobilised to ensure that
we could continue to
deliver maximum impact
for our customers
remotely. We pooled our
expertise across regions
and practices, and we
supported each other as
one global team. We are
emerging in better shape
than before and are
positioned to take full
advantage of the inevitable
opportunities that the
future will present.
ADAM PALSER
Chief Executive
Read more on pages 8 and 9
11
STRATEGIC REPORT
13
+
18
+
5
+
I
31
+
I
Our strategic roadmap
Our increasingly connected society presents a world of opportunity.
But it is essential for us all to proactively manage any risk to our safety and security. As you go about your daily routines you can be safe in the
knowledge that we are passionate about keeping you and your personal data, the technology and devices you use, and the critical assets, and
software your business relies on, safe and secure. It is our mission and is what drives our strategic roadmap...
Mission
Vision
We exist to make the world safer and more secure.
To be the leading cyber resilience provider globally. Trusted to
protect and secure our customers’ critical assets. Sought after
for our complete people-led, technology-enabled cyber
resilience solutions that enable our customers to thrive.
Delivering our vision through our Securing Growth Together transformation programme
We continue to transform our business.
Our vehicle for transforming the firm and achieving our vision is the Securing Growth Together programme, which is about
connecting our global firm and creating stronger relationships with our customers.
The programme is run through five workstreams:
Lead the market
Win business
Deliver excellence
Support growth
Develop our people
Read more in our Chief Financial Officer’s Review on pages 22 to 29
Delivering value to our customers
Cyber threats are now so pervasive, complicated and rapidly changing that “silver bullets” no longer exist. We help our customers
navigate through the complexity of cyber risks. Through our global research capability, technical expertise and full suite of services
we are able to guide customers through the risks to achieve cyber resilience.
Assess
cyber risk
Develop
cyber maturity
Manage
cyber operation
Read more in our business model on pages 18 and 19
NCC Group is a distinctive place to work and our values help us to make decisions without the need to reach for a comprehensive
instruction manual telling people what to do in every situation.
Our values
We work together
We are brilliantly creative
We embrace difference
Read more on our sustainability on pages 40 to 46
12
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Research and innovation:
Protecting the cities
of the future
Constant research and innovation to match the rapidly
evolving and complex digital environment is an intrinsic part
of NCC Group’s business model. One of our current research
priorities is the cyber resilience of smart cities: it is a great
example of where our research is making a real difference
to our customers and the global community we are a part of.
The individual touch points that make up a smart city form a
significant part of our daily lives. From street parking sensors
to waste management systems and street lighting, an ever
increasing range of technology shapes our experiences of
and interactions with cities. Smart offices might be able to
detect temperature and humidity to gauge the safety of a
space, or smart city technology could be used to automatically
shut stations when they are too congested.
With smart city technology becoming ever more ubiquitous,
the security challenges around availability and privacy are
also increasing in importance. The threats to smart cities
cover a wide spectrum, including everything from citizens
abusing technology to commit fraud, to nation-state actors
affecting or disrupting the operation of entire smart cities.
Many of those systems will be critical, so the ability to affect,
significantly damage or cause significant ill effect by exploiting
any underpinning technical or procedural issues in smart city
components can be an issue.
So now more than ever, it is crucial that resilience is built into
every individual piece of technology that makes up a smart
city. This is not just the responsibility of planners and developers
of smart cities, but also of the end system and device
manufacturers along with third party integrators and operators
who will build, deploy and operate smart city applications.
As governments and regulators around the world focus on
what they can do to guide, advise and mandate the secure
development of smart cities, NCC Group’s research team
has developed “a Blueprint for Secure Smart Cities” that
looks at what testing and governance are needed to secure
smart city infrastructure, applications and Internet of Things
(IOT) components.
At the same time, we are engaged with local authorities and
municipalities to help them deliver their smart city visions
securely while addressing citizens’ concerns about the vast
amount of data smart city applications will collect. And we
are working with the manufacturers of the sensors that
underpin many smart cities, to help them understand how
they can maximise the security assurance in their systems,
and the data they aggregate from their sensor networks.
The capabilities of smart cities are endless, and the future
will be bright and exciting if security is embedded from
the outset.
200,000 1
members of the G20 Global Smart Cities Alliance
on Technology Governance seeking to advance the
responsible and ethical use of smart city technologies
500 2
gateways to be installed in Scotland, providing a wireless
sensor network to collect data from IOT devices
“Working from home is a breeze with the cutest
coworkers ever.”
Sourya Biswas – San Francisco
Sources
1 https://globalsmartcitiesalliance.org/about.
2 https://www.ukauthority.com/articles/glasgow-to-get-99-lora-coverage-for-iot.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
13
STRATEGIC REPORT Investment case
The global cyber resilience
market offers excellent
long-term growth prospects
Four dominant factors continue to drive the global
demand for cyber resilience – the proliferation of
connected devices; our increasing dependence on
this connected environment as a society; the greater
opportunities for mischief this creates for cyber
threat actors; and the increased regulatory
requirements that follow (along with consequent
costs of compliance failure). Changing working
patterns and the accelerated digitisation and adoption
of technology that the worldwide response to
Covid-19 has driven only exacerbate these trends.
Development
of the connected
environment
Society’s
dependence
on the
connected
environment
Agility
and pace
of the
threat
Regulatory
environment
Development of the connected environment
50 bn 1
connected devices
worldwide by 2030
Owing to changes in underlying business models and the value of data, the drive towards pervasive
connectivity and digitisation continues. With increased connectivity comes the need for infrastructure to
support it, and all the while connectivity is enabling new paradigms in computing, processing and service
delivery not previously possible, which further accelerate the rate of innovation. Innovation brings huge
opportunity but also serious cyber risk that needs to be discovered, assessed, managed and maintained.
Society’s dependence on the connected environment
4 hrs,
2 mins 2
per day spent online by the
average UK adult in April 2020
From education to smart cities, from government service delivery to online retail, from transport to
healthcare - as industries become digitised and connected to deliver efficiencies and new ways of working
society becomes increasingly dependent on this new 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.
Sources
1 https://ieeexplore.ieee.org/document/8326056.
2 https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2020/uk-internet-use-surges.
3 https://safeatlast.co/blog/ransomware-statistics.
4 https://dataprivacymanager.net/5-biggest-gdpr-fines-so-far-2020.
14
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Agility and pace of the threat
The barriers to entry for all those wishing to become a cyber-aggressor continue to fall while the
level of cyber resilience and robustness has not, for the most part, increased correspondingly. 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 just too easy.
>£1 bn 3
“revenue” from ransomware
attacks in 2019/20
Regulatory environment
£145m 4
total fines issued under
GDPR to date
Most mature governments deem the free market to have failed at delivering the level of cyber resilience
required. Mature governments are enacting strategies to protect their citizens. This includes creating
central functions or organisations for cyber defence within national governance structures, enacting
legislation and strengthening regulatory requirements, all of which increase the demand for
cyber resilience solutions.
NCC Group is a growing and profitable firm that demonstrates strong
cash conversion and is able to stay at the forefront of the growing and
exciting cyber industry through the efficient use of research to develop
new skills and capabilities.
A strong foundation of cost effective research and innovation, recurring
revenue and cash discipline means we can efficiently take advantage
of the growth opportunities in the global cyber resilience market.
Research and innovation
3,300
research days in 2019/20
Technical expertise is highly valued by customers. Our leading-edge work provides us with low-cost
effective research which is an intrinsic part of our business model. We innovate and continually develop
skills and tools to match the rapidly evolving and complex digital environment and the threat actors that
work to exploit it.
We have recurring high margin revenues and sustainable cash flows from our globally scalable
Managed Detection and Response (MDR) and Software Resilience (Escrow) services, and a quality
customer base.
Recurring revenue
High
margins,
sustainable cash flow
Cash discipline
117.0% 2, 3
cash conversion in 2019/20
We have strengthened our balance sheet through disciplined cash management which positions us
to exploit further opportunities in the future. Unlike other businesses in the technology space, we are
an inherently asset-light business, limiting our capital expenditure and promoting our agility and
flexibility to respond to changing circumstances.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
15
STRATEGIC REPORT Markets
Market dynamics
Global cyber and software resilience markets continue to evolve
rapidly, requiring us to be alert and agile. Having preserved our
technical capacity and capability, we continue to invest selectively
to enhance our proposition and create growth opportunities from
changing market dynamics.
Assurance
The Assurance market continues to be competitive for both talent and customers alike, with a rich
mix of new start-ups in both the technology and services spheres along with the maturing of
established professional and managed services providers. This already dynamic landscape is made
even more complex by frequent mergers and acquisitions of cyber security companies globally.
Trend
Competitors continue to struggle to
attract individuals at their desired levels
organically, which constrains the rate
at which they can grow.
Our response
NCC Group has pursued a diversified
strategy for the past seven years that
consists of:
• Growing our own talent with world
class technical training, resulting in
good retention of those we develop
• Development of an inclusive and
supportive culture to attract, engage
and retain talent
• Investing in people’s careers with
increasingly clear and structured
career development paths
• Attracting experienced individuals
• Using our global footprint to build
resource hubs of talent to take support
delivery into key markets
The above strategy, coupled with our
remuneration, allows us to be competitive
for talent so that we generally do not
face the same challenges.
Trend
Commoditisation of penetration testing
and certain advisory propositions continues,
resulting in increased use of near-shore and
off-shore delivery as well as investment
in automation.
Our response
As a professional services firm in a
technology-dominated market, we continue
to provide a differentiated service. We
believe in the professionalisation of cyber
resilience solutions and promote the
development of “cyber as a science”,
replacing magic bullet solutions with
rigorously quantifiable and evidence-based
risk mitigations. NCC Group continues
to invest wisely in in-house research and
development, and in doing so, develops
value added services to help clients
interpret and respond to their business
and technical challenges. In a highly
fragmented market we provide an
ever-evolving agile global delivery
platform to support our world-class
capability to have maximum impact.
Trend
Continued increase in competition
in Managed Detection and Response
(MDR) and Managed Security Service
Providers (MSSPs) as competitors look
to grow their annual recurring revenue
streams and increase their margins.
Our response
NCC Group is one of the few providers
to offer a broad range of services from
Incident Response to fully outsourced
SOC and across a range of technologies
which now includes the market leading
Sentinel ADP Defender suite from
Microsoft. Our unique Threat Intelligence
services and use of analytics and machine
learning to identify threats provide a
differentiated detection and protection
service, whilst our multi-geography SOCs
offer resilient global coverage.
Assurance revenue (£m)
£226.2m
.
2
6
2
2
.
7
2
1
2
.
9
8
6
1
.
1
8
7
1
.
9
3
9
1
16
17
18
19
20
16
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Read more on our business model on pages 18 and 19
Read more on our strategy on pages 20 and 21
Software Resilience (Escrow)
Traditional software resilience solutions remain a fundamental way for organisations to assure
their software against failure and unplanned disruption. However, our new business models, driven by
accelerated cloud adoption and the reliance on software throughout our connected environment
now offer phenomenal growth potential for innovative software and technology resilience
solutions, meeting the needs of our customers’ maturing business continuity requirements.
Trend
More customers looking to transition
to cloud-based services results in an
increasing need to ensure resilience
of applications and data outside of their
physical environment and legacy controls.
Our response
Risk and resilience are critical
considerations for this transition.
Through our unique tooling and wide
range of service delivery – from third
party escrow of cloud configurations to
rapid online source code deposits, NCC
Group is well positioned to capitalise on
these opportunities.
Trend
The operational technology market is
rapidly moving away from proprietary
protocols previously used to monitor and
manage industrial process assets and
manufacturing/industrial equipment
to the use of IP-based applications.
Our response
NCC Group’s Software Resilience
portfolio is well placed to not only support
this transition but also add extra value to
the provision of both legal and technical
protection against any disruption in these
software application supply chains.
Trend
As technology and business requirements
change, previous escrow clients are
looking to cyber security providers that
can offer a wider range of resilience
solutions for their businesses.
Our response
Leveraging investment in services and the
full extent of NCC Group, our Software
Resilience business now extends far beyond
providing software escrow services; today
we provide operational resilience, business
continuity, regulatory compliance, risk
mitigation and software security, and
we expect these opportunities to grow
even further.
Software Resilience (Escrow) revenue (£m)
£37.5m
.
2
7
3
.
3
5
3
.
1
9
3
.
0
8
3
.
5
7
3
16
17
18
19
20
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
17
STRATEGIC REPORT Business model
Creating value
A
K
ASSURANCE
How we create value
S S E S S CYBER RIS
33+
D
E
V
E
L
O
P C
Y
B
SOFTWARE
RESILIENCE
(ESCROW)
M
A
N
A
G
E
TION
ER M
R+D
ITY
A
C
R
E
Y
B
P
R
U
A
T
E
O
R
33+
RESEARCH AND DEVELOPMENT INVESTMENT
We continue to innovate and develop new technical testing capabilities
to keep pace with the rapid change in technology and threat landscapes.
Our ongoing research allows us to understand and quantify risk for our
clients with regard to the technologies they use and the threats to the
sectors and industries in which they operate.
Inputs
Securing Growth Together strategy
• In a fast-moving and complex environment
our enduring strategy enables us to be agile
to continue to make sustainable investments,
creating the world’s leading cyber resilience,
risk mitigation and remediation specialist.
Talented and motivated colleagues
• We are a global community of talented individuals
working together, being brilliantly creative and
embracing difference to help make the world
safer and more secure.
Culture of innovation
• We are a research-driven firm where every
researcher is also an active consultant.
• Serving more than 14,000 customers
worldwide we discover hundreds of thousands
of vulnerabilities per year.
• Our research areas extend into almost every
area of security – the outcomes of which result
in our vulnerability advisories, whitepapers,
open source tools and knowledge-sharing
presentations delivered all over the world at
security and industry-specific conferences.
Stronger partner relationships
• We are active members of the global cyber
security community, working in collaboration
and in partnership with key industry players.
More than 7,000 successful global partnerships
have delivered integrated, seamless solutions
to customers.
Market leading reputation
• We understand our customers’ challenges and
the risk these pose to their business. Successful
delivery to more than 14,000 customers worldwide
means we are in a strong position to help them
understand and improve their cyber resilience
posture and how best to mitigate against evolving
threats, keeping them up to date and aligned to
regulations and compliance needs throughout.
18
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT34
+
33
+
I
34
+
33
+
I
How we create value
33+
33+
33+
33+
33+
ASSURANCE
As one of the world’s leading cyber security service
providers we are best placed to help businesses assess,
develop and manage the cyber security risks they face.
Through an unrivalled suite of services, we provide
organisations with peace of mind that their most
important assets are protected.
SOFTWARE RESILIENCE (ESCROW)
Regardless of whether the infrastructure or data is
on-premise or in the cloud – the security and regulatory
compliance of business critical technology needs to be
assured. Through our data and application continuity
solutions we safeguard buyers from supplier failure,
software vulnerabilities and unforeseen technology
disruption while providing credibility and IPR protection
for software suppliers.
ASSESS CYBER RISK
A fast and global response with the ability to
understand what the problem is, using experience and/
or relevant industry frameworks. The value is not just in
the assessment but in the clear advice and guidance
from the results to improve cyber resilience.
DEVELOP CYBER MATURITY
We work together with our customers to help them
develop security capability or 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.
MANAGE CYBER OPERATION
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. We help companies manage their
own capability or provide it through efficient security
managed services.
Read more on our strategy on
pages 20 and 21
Value creation
Colleagues
• Our core strength is the expertise of our
people and we aim to create an environment
where everyone can reach their full potential.
From our technical teams to our professional
teams, we work together in support of our
customers. At NCC Group colleagues are part
of a phenomenal knowledge network, connected
through online collaboration and communication
platforms with access to formal and on the job
learning opportunities.
Customers
• The cyber landscape is complex and our unrivalled
global footprint, technical community and
scientific approach mean we can confidently
say: we understand it, we are good at it and
we can help mitigate the risks.
• We advise on the right solution to match our
customers’ cyber resilience posture requirements
– based on goals, budgets and risk appetite.
• We balance our global knowledge with
client-specific prioritisation of risks to ensure
the right actions are taken to mitigate them.
Our network
• We are active members of the cyber security
community, working in collaboration and in
partnership with key industry players around the
world. Our network extends to ensuring we have
the relevant accreditations and certifications
to assure our customers of our professional
service. This includes our partner programme.
Shareholders
• Our scale provides us insights and understanding
of the vulnerability landscape and our technical
teams and tools allow us to provide insight into
the patterns of vulnerability. This, along with
our people-led culture, gives us competitive
advantage and superior shareholder value.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
19
STRATEGIC REPORT34
+
33
+
I
34
+
33
+
I
34
+
33
+
I
34
+
33
+
I
34
+
33
+
I
Strategy and KPIs
Continued transformation
The table summarises the five
workstreams that make up
SGT, what we said we would
do, how we measure our
progress and what we have
achieved over and above
demonstrating resilience
through uncertainty
Link to risks:
1 Business strategy
2 Management of strategic change
3 Global pandemic — Covid-19
4 Availability of critical information systems
5 Attracting and retaining appropriate
colleagues’ capacity and capability
6 Cyber risk (including data protection)
7 Quality of Management Information
Systems (MIS) and internal business
processes
8 Quality of security management systems
9 Brexit
KPI trend:
Improved
Unchanged
Declined
Lead the market
Win business
Deliver world-class research and thought
leadership coupled with leaders who can
engage audiences and convey our
message across all channels.
What we said we would do
• Continue high-impact research
What we have achieved
• Launched a new research blog
publishing 81 posts and reaching over
62,000 individuals in its first 6 months
• Published leading research in Cloud,
Cryptography, IoT, Deepfakes and Nation
State/Organised Crime Threat Actors
• Published strategically important
whitepapers on topics such as Smart
Cities and Space (Satellite) Security
Win high value work as a result of a deep
understanding of our customers’ cyber
needs in the context of their business.
What we said we would do
• Complete the global roll-out of Gated
Business Lifecycle (GBL) in the first
half of FY20
• Develop Software Resilience (Escrow)
channel model to boost volumes
• Complete roll-out of Salesforce in
North America and RoW
What we have achieved
• Soft launch of Software Resilience
(Escrow) partner model
• Salesforce deployed globally
• Accelerated the sales of our Managed
Detection and Response offerings
KPIs
Research days
3,300
(2019: 2,745)
Tier 1 conference talks and papers
76
(2019: 46)
KPIs
Revenue (£m)
.
7
3
6
2
.
7
0
5
2
.
0
3
3
2
.
3
5
1
2
.
2
4
0
2
16
17
18
19
20
No. of orders with a value greater than £250k
144
(2019: 87)
Software Resilience (Escrow) cloud
proposition orders
£1.2m
(2019: £0.2m)
Principal risks
Principal risks
1
2
4
5
6
7
8
1
6
20
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT
Read more on our risks on
pages 30 to 36
Deliver excellence
Support growth
Develop our people
Deliver consistently high quality solutions
that our customers value, fully utilising our
global capability and the technical
excellence of our consultants.
What we said we would do
• Unified platform for global scheduling
and visibility
• Embed new ways of working with our
clients, providing a distinctive service
What we have achieved
• Top-level executive incentives are now
aligned to promote global working
• Better visibility and management of our
global pool of resources
Provide the tools and processes that
enhance how we work today enabling
access to quality management.
What we said we would do
• Deploy systems that provide us with
the information we need to run the
business in an assertive and agile way
What we have achieved
• Workday HCM, Salesforce and UK
payroll implemented on schedule
• Improved information and visibility have
supported our continued disciplined cash
generation and working capital improvement
• Impact of remote working has slowed
the deployment of some systems but
we remain on track to complete in
January 2021
Create a positive colleague experience
like no other offered in the industry,
investing in our talent and organisation
to unlock our full potential.
What we said we would do
• 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
What we have achieved
• Created UK Employee Forums to
enhance the dialogue within the firm
• Launched a “Manager Essentials”
training programme to improve our
leadership capability
KPIs
KPIs
KPIs
Net promoter score
Adjusted operating profit (£m) 2, 3
Attrition rate (%)
50
(2019: N/A)
Technical specialists increased by
91
(9.4% increase)
.
1
5
3
.
5
5
2
.
7
3
3
.
1
1
3
.
8
0
3
.
0
6
2
.
4
3
2
.
1
1
2
.
2
8
1
.
4
4
1
16
17
18
19
20
16
17
18
19
20
Engagement score (Best Companies)
One to Watch
Cash conversion (%) 2
7
1
1
0
1
1
8
8
1
9
1
5
16
17
18
19
20
Principal risks
Principal risks
Principal risks
1
2
3
4
5
6
7
8
1
2
3
4
5
7
9
1
3
5
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
21
STRATEGIC REPORT
Chief Financial Officer’s review
Resilient financial
performance
We continue to grow with a strong balance sheet
and are well placed to thrive in the future.
TIM KOWALSKI
Chief Financial Officer
Overview
We have continued to deliver good financial results despite the
impact of Covid-19, demonstrating resilience in our business model.
Group revenue increased by 5.2% to £263.7m (2019: £250.7m)
despite Covid-19 resulting in sales order delivery of approximately
£15m being delayed or cancelled. Within this, Assurance revenues
increased by 6.3% to £226.2m (2019: £212.7m). All Assurance
regions experienced growth, with the North America and Europe
& APAC regions particularly encouraging at 9.1% and 8.3%
respectively, with the UK region increasing by 2.9%. Software
Resilience (Escrow) revenue was 1.3% behind prior year as
North America and UK fell by 6.0% and 0.4% respectively.
Gross profit increased by 2.6% to £104.4m (2019: £101.8m)
with margin percentage decreasing to 39.6% (2019: 40.6%) due
to our continued investment in sales and technical capacity which
we have maintained during Covid-19 in order to meet expected
strong demand as we get beyond the current disrupted trading
environment. Assurance margin percentage decreased to 34.0%
(2019: 34.6%) and Software Resilience (Escrow) decreased
to 73.3% (2019: 74.5%).
Administrative expenses (excluding depreciation and amortisation and adjusting items) have increased by £0.9m compared to the prior year
mainly due to continued investment in people, increased licence costs in relation to new systems implemented across the Group and provisions
for property costs, partially offset by the net benefit of IFRS 16 (£4.2m). This gives rise to a reduction in statutory operating profit of £19.1m
(2019: £19.5m 2) and a reduction in adjusted 3 operating profit on a like-for-like basis 2 of £31.1m (2019: £33.7m). Adjusted operating profit 3
after the impact of IFRS 16 (-£1.8m) decreased by 13.1% to £29.3m (2019: £33.7m). Adjusted depreciation and amortisation after the impact
of IFRS 16 (+£6.0m) amounted to £24.9m (2019: £19.0m) giving rise to adjusted EBITDA 3 of £45.4m (2019: £43.7m). Adjusted profit before
taxation 3 decreased by 17.8% to £26.3m (2019: £32.0m). Statutory profit before taxation decreased by 9.6% to £16.1m (2019: £17.8m).
Adjusted EPS 3 and statutory EPS after the impact of IFRS 16 (-£2.4m) amounted to 7.2p (2019: 9.2p) and 4.2p (2019: 4.9p) respectively.
Our balance sheet remains strong; we have continued to demonstrate effective cash management and reduced net debt on a like-for-like basis 2, 3
to £4.2m from prior year levels of £20.2m after capital expenditure of £13.2m (2019: £9.1m). Net debt reduced on a like-for-like 2, 3 basis to
£4.2m, including cash balances of £95.0m (2019: £34.9m) following the full draw down of our revolving credit facility in April 2020 to provide
the Group with maximum cash flexibility. As at 31 May 2020, the Group also had a timing benefit of c.£4.6m from certain government taxation
payment deferral schemes that are repayable in FY21. The Group has a committed revolving credit facility of £100m which is due for renewal
in June 2024 following our refinancing in June 2019. Leverage remains in line with the prior year at 0.1x, with sufficient headroom forecasted.
22
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Summary Income Statement:
£m
Revenue
Cost of sales
Gross profit
Other administration expenses
Adjusted 3 EBITDA
Depreciation and amortisation
Adjusted 3 operating profit
Adjusting items
Statutory operating profit
£m
Adjusted 3 profit before taxation
Adjusting items
Profit before taxation
£m
Adjusted 3 profit for the year
Adjusting items after taxation
Profit for the year
Basic EPS
Adjusted 3
Statutory
Revenue summary:
£m
Assurance
Software Resilience (Escrow)
Total revenue
Adjusted operating profit 3 summary:
Statutory operating profit
Adjusting items
Adjusted operating profit 3
Adjusted operating profit 3
Assurance
Software Resilience (Escrow)
Central and head office
Total adjusted operating profit 3
Adjusted operating profit margin % 3
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
263.7
263.7
250.7
5.2%
(159.3)
(159.3)
(148.9)
(7.0)%
104.4
(59.0)
45.4
(16.1)
29.3
104.4
(63.2)
41.2
(10.1)
31.1
(10.2)
(10.2)
19.1
20.9
101.8
2.6%
(58.1)
(8.8)%
43.7
(10.0)
33.7
(14.2)
19.5
(5.7)%
(1.0)%
(7.7)%
28.2%
7.2%
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
26.3
(10.2)
29.3
(10.2)
16.1
19.1
32.0
(14.2)
17.8
(8.4)%
28.2%
7.3%
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
20.0
(8.3)
11.7
22.4
(8.3)
14.1
25.5
(12.2)%
(12.0)
30.8%
13.5
4.4%
7.2p
4.2p
8.1p
5.1p
9.2p
4.9p
(12.0)%
4.1%
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
226.2
37.5
263.7
226.2
37.5
263.7
212.7
38.0
250.7
6.3%
(1.3)%
5.2%
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
19.1
10.2
29.3
20.9
10.2
31.1
19.5
14.2
33.7
7.2%
28.2%
(7.7)%
2020
(IFRS 16) 2
2020
(Pre-IFRS 16) 2
2019
Like-for-like
% change
(Pre-IFRS 16) 2
(Pre-IFRS 16) 2
22.3
16.9
(9.9)
29.3
22.0
17.9
(8.8)
31.1
22.6
19.0
(2.7)%
(5.8)%
(7.9)
(11.4)%
33.7
(7.7)%
11.1%
11.8%
13.4% (1.6)% pts
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
23
STRATEGIC REPORT Chief Financial Officer’s review continued
Basis of preparation
IFRS 16
Following the adoption of IFRS 16 ‘Leases’ with effect from 1 June 2019, the Group has adopted the accounting standard using the
modified retrospective approach to transition and has accordingly not restated prior years; consequently the results for the year ended
31 May 2020 are not directly comparable with those reported under the previous applicable accounting standard, IAS 17 ‘Leases’.
On this basis, to provide meaningful comparatives, the results for the year ended 31 May 2020 have therefore also been presented on
a like-for-like IAS 17 basis (‘Pre-IFRS 16’). This Alternative Performance Measure (APM) will be presented for one year until the comparatives
also include the adoption of IFRS 16. The net impact of IFRS 16 is to decrease statutory and adjusted operating profit by £1.8m and reduce
statutory and adjusted profit before taxation by £3.0m.
Alternative Performance Measures (APMs)
Throughout this Financial Review, other APMs are presented as well as statutory measures and these measures are consistent with prior
years. This presentation is also consistent with the way that financial performance is measured by management, is reported to the Board,
is the basis of financial measures for senior management’s compensation schemes and provides supplementary information that assists
the user to understand the financial performance, position and trends of the Group.
For completeness, a reconciliation of Income Statement APMs 3 to statutory information is shown below:
Profit from
continuing
operations
£m
20.0
(1.6)
(6.7)
11.7
Profit
from
continuing
operations
£m
22.4
(1.6)
(6.7)
14.1
Profit
from
continuing
operations
£m
25.5
(3.1)
(1.8)
(7.2)
0.1
13.5
2020 (IFRS 16)
Continuing operations
Adjusted
Share-based payments
Amortisation of acquired intangibles
Statutory
Revenue
£m
Gross profit
£m
EBITDA
£m
263.7
104.4
—
—
—
—
263.7
104.4
45.4
(1.4)
—
44.0
Depreciation
and
amortisation
£m
(16.1)
—
(8.8)
(24.9)
Depreciation
and
amortisation
£m
Operating
profit
£m
Profit before
taxation
£m
Taxation
£m
29.3
(1.4)
(8.8)
19.1
26.3
(1.4)
(8.8)
16.1
(6.3)
(0.2)
2.1
(4.4)
Operating
profit
£m
Profit before
taxation
£m
Taxation
£m
2020 (Pre-IFRS 16)
Continuing operations
Adjusted
Share-based payments
Amortisation of acquired intangibles
Statutory
Revenue
£m
Gross profit
£m
EBITDA
£m
263.7
104.4
—
—
—
—
263.7
104.4
41.2
(1.4)
—
39.8
(10.1)
—
(8.8)
(18.9)
31.1
(1.4)
(8.8)
20.9
29.3
(1.4)
(8.8)
19.1
(6.9)
(0.2)
2.1
(5.0)
2019 (Pre-IFRS 16)
Continuing operations
Adjusted
Individually Significant Items
Share-based payments
Amortisation of acquired intangibles
Profit on disposal of investments
Revenue
£m
250.7
—
—
—
—
Gross profit
£m
EBITDA
£m
Depreciation
and
amortisation
£m
Operating
profit
£m
Profit before
taxation
£m
Taxation
£m
101.8
—
—
—
—
43.7
(3.6)
(1.7)
—
0.1
(10.0)
33.7
—
—
(9.0)
—
(3.6)
(1.7)
(9.0)
0.1
32.0
(3.6)
(1.7)
(9.0)
0.1
17.8
(6.5)
0.5
(0.1)
1.8
—
(4.3)
Statutory
250.7
101.8
38.5
(19.0)
19.5
See Note 3 for a detailed reconciliation of the Pre-IFRS 16 performance and the glossary of terms for APMs to the equivalent IFRS measures
on pages 159 and 160.
During the year, management has reviewed the application of APMs and has considered ongoing FRC and ESMA best practice guidance
in this area. Accordingly, management has concluded that for future accounting periods, share-based payments and amortisation of acquired
intangibles, which are currently presented as adjusting items, should be included within underlying results. The decision to adopt this
presentation for future reporting periods rather than in the current reporting period is because the implementation of IFRS 16 in the year
(which does not require the restatement of 2019 comparatives) means that the 2020 results are not on a like-for-like basis with 2019, and
management considers that it would be very difficult to understand the true, underlying performance of the Group if this presentational change
to the Income Statement was made in the current reporting period. The impact of this proposal in future reporting periods will be a reduction in
adjusted measures.
24
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT To illustrate this, the Income Statement for the year ended 31 May 2020 has been shown below under the proposed basis:
£m
Revenue
Cost of sales
Gross profit
Administrative expenses:
Depreciation and amortisation
Other administration expenses
Total administrative expenses
Adjusted 3 operating profit
Adjusting items
Statutory operating profit
2020
(IFRS 16) 2
Proposed
basis
2020
(IFRS 16) 2
As currently
reported
263.7
263.7
(159.3)
(159.3)
104.4
104.4
(24.9)
(60.4)
(85.3)
19.1
(16.1)
(59.0)
(75.1)
29.3
—
(10.2)
19.1
19.1
Variance
—
—
—
(8.8)
(1.4)
(10.2)
(10.2)
10.2
—
Divisional performance
Divisional performance includes the allocation of certain central costs incurred on behalf of the divisions. Segmental information is disclosed below:
Revenue
Cost of sales
Gross profit
Gross margin %
Administrative expenses 2
Adjusted EBITDA 3
Depreciation and amortisation
Adjusted operating profit 3
Adjusted operating profit %
Assurance
£m
226.2
(149.3)
76.9
34.0%
(43.9)
33.0
(10.7)
22.3
9.9%
2020 (IFRS 16) 2
Software
Resilience
(Escrow)
£m
Central
and head
office
£m
Group
£m
Assurance
£m
37.5
(10.0)
27.5
73.3%
(10.0)
17.5
(0.6)
16.9
45.1%
—
—
—
—
(5.1)
(5.1)
(4.8)
(9.9)
—
263.7
(159.3)
104.4
39.6%
(59.0)
45.4
(16.1)
29.3
11.1%
212.7
(139.2)
73.5
34.6%
(45.4)
28.1
(5.5)
22.6
2019 (Pre-IFRS 16) 2
Software
Resilience
(Escrow)
£m
38.0
(9.7)
28.3
74.5%
(9.3)
19.0
—
19.0
Central
and head
office
£m
—
—
—
—
(3.4)
(3.4)
(4.5)
(7.9)
—
Group
£m
250.7
(148.9)
101.8
40.6%
(58.1)
43.7
(10.0)
33.7
13.4%
10.6%
50.0%
Assurance
The Assurance division accounts for 85.8 per cent of Group revenue (2019: 84.8 per cent) and 73.7 per cent of Group gross profit
(2019: 72.2 per cent).
Assurance revenue analysis – by originating country:
UK
North America
Europe and APAC
Total Assurance revenue
2020
2019
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
91.5
82.4
52.3
£m
88.9
75.5
48.3
226.2
212.7
Reported %
change
2.9%
9.1%
8.3%
6.3%
As noted above, global Assurance revenue in the year increased by 6.3% to £226.2m (2019: £212.7m) despite approximately £15m of sales
order delivery being cancelled or delayed as a result of Covid-19, without which the division would have achieved double digit sales growth.
In the year, UK revenues increased by 2.9% to £91.5m (2019: £88.9m) as sales growth flattened in the second half of the year due to
Covid-19. North America has continued strong revenue growth of 9.1% to £82.4m (2019: £75.5m), with double digit growth up to and
including Q3 being curtailed by delays and cancellations due to Covid-19.
Assurance Europe and APAC was impacted by a slow first quarter but still achieved growth of 8.3% to £52.3m (2019: £48.3m).
Value-based selling within our Assurance services remains a priority and this is demonstrated by average order values increasing
during the year.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
25
STRATEGIC REPORT Chief Financial Officer’s review continued
Divisional performance continued
Assurance continued
Assurance revenue analysed by type of service/product line:
Technical Security Consulting (TSC)
Risk Management Consulting (RMC)
Managed Detection and Response (MDR)
Product sales (own and third party)
Total Assurance revenue
2020
2019
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
£m
145.6
134.8
28.7
41.4
10.5
35.3
36.4
6.2
226.2
212.7
Reported %
change
8.0%
(18.7)%
13.7%
69.4%
6.3%
Technical Security Consulting, our core professional service, continued to grow by 8.0% to £145.6m (2019: £134.8m) as a result
of continued strong growth supported by global resourcing with varied timing of Covid-19 felt across geographies. Our global average
order value increased by 16.9% compared to 2019.
Risk Management Consulting, a service that addresses the business risks of cyber, declined by 18.7% to £28.7m (2019: £35.3m), with revenue
falling across all regions. Work is underway to clarify our offer and support our sales teams in order to return this service line to growth.
Managed Detection and Response, a service line that provides operational cyber defence and managed security services, grew by a pleasing
13.7% to £41.4m (2019: £36.4m) with our order book growing to £62.0m (2019: £49.9m). This service line scales with less people-intensity
than our professional services business lines and MDR engagements tend to be contracted for a longer duration which adds stability to our
forward order book. Management believes that our global platform is well-placed to help customers navigate an environment of increasing
threats and rising technology requirements; we are therefore focused on continuing the rapid growth of this service line.
The increase of 69.4% in product sales is mainly due to high assurance products in Europe and APAC.
Assurance gross profit is analysed as follows:
UK
North America
Europe and APAC
Assurance gross profit and % margin
2020
(IFRS 16) 2
£m
33.5
25.9
17.5
76.9
2020
(IFRS 16) 2
% margin
2019
(Pre-IFRS 16)
£m
2019
(Pre-IFRS 16)
% margin
Reported
% pts change
36.6%
31.4%
33.5%
34.0%
31.0
25.3
17.2
73.5
34.9% 1.7% pts
33.5% (2.1)% pts
35.6% (2.1)% pts
34.6% (0.6)% pts
Gross margin declined by 0.6% pts as a result of continued investment in technical and sales colleagues with utilisation reducing to
71.2% (2019: 75.4%) as the Group preserved its technical capacity. The reduction in adjusted operating profit 3 of 1.3% to £22.3m
(2019: £22.6m) was driven by the ongoing investment in sales and technical talent. Accordingly, adjusted operating profit 3 margin
decreased to 9.9% (2019: 10.6%).
Software Resilience (Escrow)
The Software Resilience (Escrow) division accounts for 14.2% of Group revenues (2019: 15.2%) and 26.3% of Group gross profit (2019: 27.8%).
Software Resilience (Escrow) revenue analysis – by originating country:
UK
North America
Europe and APAC
Total Software Resilience (Escrow) revenue
£m
25.9
7.8
3.8
37.5
2020
2019
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
26.0
8.3
3.7
Reported %
change
(0.4)%
(6.0)%
2.7%
38.0
(1.3)%
Our overall performance gave rise to a flat H2 sales performance, demonstrating momentum, with our cloud proposition generating sales orders of
c.£1.2m and revenue of £0.5m (2019: £0.2m). Our proposition continues to create opportunities, with increasing demand materialising as clients
seek to improve their resilience.
Our UK operations grew in H2 2020 by 2.3%, which is our largest element of our business, underpinning the return to sustainable growth. North
America declined by 6.0% due to the impact of Covid-19 and also higher verification project revenues in FY19.
During the year, the Group launched its partner program to the Independent Software Vendor (ISV) sector and co-developed with Azure a digital
vault to enable rapid global compliant escrow services of multi-jurisdiction data.
Global renewal rates declined to 87.0% (2019: 89.6%) although this was within management expectations following the integration of the sales
teams under a new Global MD, with the focus now on stabilisation.
26
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Software Resilience (Escrow) revenues analysed by service line:
Software Resilience (Escrow) contracts
Verification services
Total Software Resilience (Escrow) revenue
2020
2019
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
25.8
11.7
37.5
£m
26.5
11.5
38.0
Reported %
change
(2.6)%
1.7%
(1.3)%
Our contract revenue had negligible impact from Covid-19 with the stabilised base growing by 1.6% from H1 2020 to H2 2020. Verification
services grew 1.7% to £11.7m (2019: £11.5m) despite lower volume in North America. Significant verification revenue is under contract.
Gross margin is analysed as follows:
UK
North America
Europe and APAC
2020
(IFRS 16) 2
£m
19.5
5.3
2.7
2020
(IFRS 16) 2
% margin
2019
(Pre-IFRS 16)
£m
2019
(Pre-IFRS 16)
% margin
Reported
% pts
change
75.3%
67.9%
71.1%
19.7
75.8% (0.5)% pts
5.7
2.9
68.7% (0.8)% pts
78.4% (7.3)% pts
Software Resilience (Escrow) gross profit and % margin
27.5
73.3%
28.3
74.5% (1.2)% pts
Software Resilience (Escrow) gross margin decreased by 1.2% pts to 73.3% (2019: 74.5%). Overheads have increased due to the
investment in sales and operational management to return the division to growth, the first signs of which are apparent in the H2
performance, and depreciation and amortisation. These factors gave rise to a reduced adjusted operating profit 3 of £16.9m (2019: £19.0m).
Cash flow and net debt 2, 3
The table below summarises the Group’s cash flow and net debt 2, 3:
Operating cash inflow before movements in working capital
(Increase)/decrease in trade and other receivables
(Increase)/decrease in inventories
Increase in trade and other payables
Cash generated from operating activities before interest and taxation
Interest element of lease payments
Other interest paid
Taxation paid
Net cash generated from operating activities
Plant and equipment
Software and development
Acquisitions
Net proceeds from business disposals (including cash disposed)
Dividends paid
Principal elements of lease payments
Share issues
Net movement
Opening net debt (Pre-IFRS 16) 2, 3
Non-cash movements (release of deferred issue costs)
Foreign exchange
Closing net debt (Pre-IFRS 16) 2, 3
Lease liabilities
Closing net debt (IFRS 16)
2020
(IFRS 16)
£m
2020
(Pre-IFRS 16)
£m
2019
(Pre-IFRS 16)
£m
41.3
6.0
0.1
0.5
47.9
—
(1.7)
(6.4)
39.8
(3.0)
(6.1)
(10.9)
1.8
(12.9)
—
0.3
9.0
(27.8)
—
(1.4)
(20.2)
46.7
(11.0)
(0.2)
19.2
54.7
(1.2)
(1.6)
(4.8)
47.1
(2.8)
40.2
(11.0)
(0.2)
19.2
48.2
—
(1.6)
(4.8)
41.8
(2.8)
(10.4)
(10.4)
—
—
—
—
(12.9)
(12.9)
—
1.1
16.8
(20.2)
(0.2)
(0.6)
(4.2)
(5.3)
1.1
16.8
(20.2)
(0.2)
(0.6)
(4.2)
(38.2)
(42.4)
Free cash flow (net cash generated from operating activities less capital expenditure)
33.9
28.6
30.7
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
27
STRATEGIC REPORT Chief Financial Officer’s review continued
Cash flow and net debt 2, 3 continued
Net debt 2, 3 can be reconciled as follows:
Adjusting items 3
Pre-tax adjusting items are set out below:
Cash and cash equivalents
Borrowings (net of deferred issue costs of
£0.8m)
Net debt (Pre-IFRS 16) 2, 3
Lease liabilities
Net debt (IFRS 16)
2020
(IFRS 16)
£m
2019
(Pre-IFRS 16)
£m
95.0
34.9
(55.1)
(20.2)
(99.2)
(4.2)
(38.2)
(42.4)
Net debt reduced on a like-for-like basis 2, 3 to £4.2m, including cash
balances of £95.0m (2019: £34.9m) following the full draw down
of our revolving credit facility in April 2020 to provide the Group
with maximum cash flexibility.
On a reported basis, the Group generated £54.7m of cash from
operating activities before interest and taxation (2019: £47.9m),
an increase of 14.2% (on a like-for-like basis, an increase of 0.6%).
The Group measures how effectively adjusted EBITDA 3 is converted
into actual cash flows using the cash conversion ratio 3.
The calculation of the cash conversion ratio 3 is set out below:
Individually Significant Items
Share-based payments
Amortisation of acquired intangibles
Profit on disposal of investments
Total pre-tax adjusting items
2020
2019
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
—
1.4
8.8
—
10.2
£m
3.6
1.7
9.0
(0.1)
14.2
During the year, the Group has incurred no Individually Significant
Items (ISIs) (2019: £3.6m).
As noted above and in accordance with FRC and ESMA guidance,
management concluded that for future accounting periods, share-based
payments and amortisation of acquired intangibles will be reclassified
under statutory performance, reducing the number of adjusted measures.
Net finance costs
On a like-for-like basis 3, statutory finance costs for the year were
£1.8m compared to £1.7m in 2019. On an IFRS 16 basis 2, net
finance costs also include lease interest costs of £1.2m, giving rise
to total statutory finance costs of £3.0m (2019: £1.7m).
2020
2020
(IFRS 16) 2
(Pre-IFRS 16) 2
£m
£m
2019
(Pre-IFRS 16)
£m
Like-for-like
change
(Pre-IFRS 16)
£m
Taxation
The Group’s adjusted 3 effective tax rate is 23.5% (2019: 20.3%).
On a statutory basis, the effective tax rate is 27.3% (2019: 24.2%).
Net operating
cash flow before
interest and
taxation (A)
Adjusted
EBITDA 3 (B)
Cash conversion 3
(A)/(B)
54.7
48.2
47.9
0.6%
45.4
41.2
43.7
(5.7)%
120.5%
117.0%
109.6% 7.4% pts
As at 31 May 2020, the Group had a timing benefit of £4.6m from
government payment deferral schemes, of which £3.4m related
to indirect taxes and £1.2m to corporation tax. If the benefit of
the £3.4m relating to indirect taxes is excluded from the above
calculations the cash conversion ratios on an IFRS 16 and Pre-IFRS
16 basis would be 113.0% and 108.7% respectively. This timing
benefit will reverse in the year ending 31 May 2021.
During the year, the Group has improved its working capital
management, in particular trade and other payables is due to
effective cash management.
Cash conversion 3 for FY20 is still expected to normalise and
is targeted at c.85 per cent over the medium term.
The effective tax rate remains above the UK standard rate of corporation
tax of 19%, reflecting the origin of a reasonable proportion of Group
profits in overseas territories with higher rates of tax than the UK.
Statutory corporate tax rates within North America equate to approximately
29% (Federal and State combined) for the year to 31 May 2020.
During the year the Group has recognised an additional provision of
£0.8m against a deferred tax asset in relation to US R&D tax credits.
The Group’s longer-term strategy for tax and treasury matters
remains that of a low-risk appetite and any new strategies will
operate inside this framework.
Earnings per share (EPS)
Statutory earnings
Basic EPS
Diluted EPS
Adjusted earnings 3
Basic EPS
Diluted EPS
2020
(IFRS 16) 2
pence
2020
(Pre-IFRS 16) 2
pence
2019
(Pre-IFRS 16)
pence
4.2p
4.2p
7.2p
7.1p
5.1p
5.0p
8.1p
8.0p
4.9p
4.8p
9.2p
9.1p
The decrease in tax paid is mainly due to the deferral of £1.2m
under government deferral schemes.
On a like-for-like basis, basic adjusted EPS 2, 3 was 8.1p (2019:
9.2p) and on a statutory basis it was 5.1p (2019: 4.9p).
Net capital cash expenditure during the year was £13.2m (2019: £9.1m)
which includes tangible expenditure of £2.8m (2019: £3.0m) and
capitalised software and development costs of £10.4m (2019: £6.1m),
which have increased due to the implementation costs of new systems
as part of the SGT programme. Additional cash capital expenditure will be
incurred during 2021 as we finish the installation of our new systems.
Dividends
Dividends of £12.9m paid in the year (2019: £12.9m) comprised
the final dividend for 2019 of 3.15p and the interim dividend for
2020 of 1.50p.
Given the confidence we have in our continued profitability and cash
generation, we are recommending an unchanged final dividend of 3.15p
(2019: 3.15p) per ordinary share making a total for the year of 4.65p
(2019: 4.65p), with our dividend policy remaining under review.
28
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT The final dividend will be paid on 6 November 2020, subject to
approval at the AGM on 20 October 2020, to shareholders on the
register at the close of business on 9 October 2020. The ex-dividend
date is 8 October 2020.
Financing facilities
The Group is financed through a combination of bank facilities,
retained profits and equity.
As at 31 May 2020, the Group had committed bank facilities (revolving
credit facility) of £100.0m (2019: £97.8m), of which £100.0m
(2019: £55.1m) had been drawn under these facilities, following the
full draw down of our facility in April 2020 to provide the Group with
maximum cash flexibility. These arrangements were agreed in June 2019
and are due for renewal in June 2024. Under these arrangements
the Group can also request an additional accordion facility to increase
the total size of the revolving credit facility by up to £75m.
On our banking covenants, leverage as at 31 May 2020 amounted to
0.1x (2019: 0.5x) and net interest cover amounted to 22.7x (2019: 24.6x).
The Group was in compliance with the terms of all its facilities, including
the financial covenants, at 31 May 2020 and expects to remain in
compliance with the terms going forward. The terms and ratios are
specifically defined in the Group’s banking documents (in line with
normal commercial practice) and are materially similar to GAAP or the
Group’s Alternative Performance Measures of the same name; the
exception is net debt which excludes IFRS 16 lease liabilities.
Going concern
The Directors have acknowledged the “Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting”,
published in September 2014, and also the Covid-19 Thematic
Review published by the Financial Reporting Council in July 2020.
The 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 4 to 6.
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 4 to 6 and 22 to 29.
In addition, Note 25 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.
The Financial Statements have been prepared on a going concern basis
which the Directors consider to be appropriate for the following reasons.
The Directors have prepared cash flow and covenant compliance
forecasts for the period to March 2022 which indicate that, taking
account of reasonably possible downsides and the anticipated impact
of Covid-19 on the operations and its financial resources, the Group
and Company will have sufficient funds to meet its liabilities as they
fall due for that period.
The Group is financed primarily by a £100m revolving credit facility,
further details of which are disclosed in Note 24 to the Financial
Statements. The Group is required to comply with financial covenants
for leverage (net debt to adjusted EBITDA 2, 3) and interest cover
(adjusted EBITDA 2, 3 to interest charge) which are tested bi-annually
at 31 May and 30 November each year. In April 2020, the Group drew
down the entire available funds of £100m under this RCF facility in
order to provide maximum cash flexibility during the Covid-19 crisis.
Although the Group has demonstrated resilience to the challenging
environment resulting from Covid-19, the Directors acknowledge
that the financial performance of the Group was adversely impacted
during the last quarter of the year ended 31 May 2020, and for this
reason the base case budget for FY21 reflects the assumption of a
continued impact from Covid-19 on Group revenues up until November
2020 at a similar level to that experienced in the last quarter of FY20.
The Directors have prepared a number of severe but potentially
plausible scenarios, which are based on the financial impact of the
Group’s principal risks and uncertainties (see page 37) as follows:
• Loss of revenue from June 2020 resulting from the ineffective
execution of the business strategy
• Loss of revenue from June 2020 arising from the failure of critical
systems, leading to inability to provide services to customers
• A fine of 4% of revenue and additional loss of revenue arising from
the failure to maintain control over commercial/customer data
• A further Covid-19 impact representing a further decline in revenues
over and above the impact already reflected in the base case budget
These scenarios have been modelled individually and also in combination
in order to assess the Group’s ability to withstand multiple challenges,
although the Directors do not believe a scenario combining these
risks to be plausible. The impact of these sensitivities has been
reviewed against the Group’s projected cash flow position, available bank
facilities and compliance with financial covenants. Should these occur,
mitigating actions would be required to ensure that the Group remains
liquid and financially viable, which include a reduction of planned
capital expenditure, headcount reduction, freezing pay and recruitment
and not paying a dividend to shareholders. All mitigating actions are
within the Directors’ control. These forecasts, including the severe but
plausible downsides when the mitigating actions are included, show
that the Group is able to operate within the level of the banking
facilities, with no forecasted covenant breaches and that the Group will
have sufficient funds to meets its liabilities as they fall due for that period.
Having reviewed the current performance, forecasts, debt servicing
requirements, total facilities and risks, the Directors are confident that
the Company and the Group have sufficient funds to continue to meet
their liabilities as they fall due for a period of at least 12 months from
the date of approval of these financial statements. Accordingly, they
continue to adopt the going concern basis of accounting in preparing
the Group’s financial statements for the year ended 31 May 2020.
Brexit
The United Kingdom formally departed the European Union and
became a third country on the basis of the ratified Withdrawal
Agreement on 31 January 2020. Until the end of the transition period
on 31 December 2020, current rules and regulations continue to
apply while the UK and the EU negotiate their future relationship.
Until a future UK–EU trade agreement is agreed, there is continuing
uncertainty for businesses operating in the UK and across borders.
This will likely continue until the end of the transition period on
31 December 2020.
NCC Group and its subsidiaries continue their planning through
their Brexit Steering Group, which meets regularly. As the Group’s
operations around the world include business entities based in
Continental Europe we believe NCC Group is structurally resilient to
any future disruptions caused by the next phase of Brexit. The main
risks to the UK business are:
• Any reduction in demand from an economic slowdown
• Real or perceived differences in data protection standards,
and possibly additional rules and regulations, which impact the
Group’s global ways of working
Tim Kowalski
Chief Financial Officer
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
29
STRATEGIC REPORT Principal risks and uncertainties
Embedded risk
management systems
Supporting the Group in pursuing
its strategy for sustainable and
profitable growth.
Risk management
Risk is an inherent part of doing business and risk management is
a fundamental part of good corporate governance. A successful risk
management process balances risk and reward and is underpinned by
sound judgment of their impact and likelihood. The Board has overall
responsibility for ensuring that NCC Group has an effective risk
management framework, which is aligned to our business objectives.
The Board has established a Risk Management Policy, which has
established protocols, including:
• Roles and responsibilities for the risk management framework
• Risk scoring framework
• A definition of risk appetite
The integrated approach to risk management diagram on page 31
summarises the Group’s overall approach to risk management,
which is supported by a web-based tool – the Integrated Risk
Management System (IRMS). The tool is designed to follow the risk
management model described in the next section and records both
strategic and operational risk registers and tracks risk mitigation
action plans, helping embed ownership of risks and treatment
actions while also providing access to live management information,
which is used at both a Board and operational management level.
NCC Group’s approach to risk management
NCC Group adopts both a “top down” and “bottom up” approach
to risk, to manage risk exposure across the Group to enable the
effective pursuit of strategic objectives. The approach is summarised
in the diagram on page 31.
The approach is one of collaboration, which supports our
comprehensive approach to risk identification, from the ”top down”
and “bottom up”. The Group believes that this is the most efficient
and effective way to identify its business risks.
Top down – strategic risk management
The Board, Audit Committee and Cyber Committee review risks on
an ongoing basis and are supported by the Executive Committee
and subject matter specialists (including Assurance, Software
Resilience (Escrow), Information Security, Data Protection and Health
and Safety). The Board gives consideration to the Group’s strategic
objectives and any barriers to their achievement.
Bottom up – operational risk management
The Board and Executive Committee engage with colleagues
at every level of the Group in recognition of the importance of
their expertise, contribution and views. In relation to matters of
wrongdoing, or risks not being recognised and adequately managed,
the Group has a robust and effective whistleblowing procedure,
which is supported by the Safecall reporting line.
30
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Top down
Strategic risk management
Bottom up
Operational risk management
• Establishing guidance on the Group’s risk management
and establishing the parameters for risk appetite and
associated decision making
• Identification, review and management of identified
Group strategic risks and associated actions
• Ongoing consideration of:
– IT and cyber centric risk
– Environment risk
• Implementing and embedding the Group’s Risk
Management Policy and approach
• Directing the delivery of the Group’s identified actions
associated with managing/mitigating risk
• Identification of key risk indicators; monitoring; and
taking timely action where appropriate
• Instrumental in developing the risk management
framework adopted by the Board
• Providing governance and control over the IRMS
• Conduit between the Board and the business units –
providing training and support where appropriate
• Developing and executing a risk-based internal audit
plan to assess the management of risks
• Execution of the delivery of the Group’s identified
actions associated with managing risk
• Timely reporting on the implementation and progress
of agreed action plans
• Provision of key risk indicator updates
n
w
o
d
p
o
t
e
h
t
m
o
r
f
i
k
s
i
r
g
n
g
a
n
a
M
Board
Audit Committee
Cyber Committee
• Periodically assessing the effectiveness of the
embedded Group risk management process
• Challenging the content of the strategic risk register
to support a comprehensive and balanced assessment
of risk
• Reporting on the principal risks and the uncertainties
of the Group
Executive Board
and
Leadership team
• Responsible for reviewing the operational risks across
the business units and Group
• Challenging the appropriateness and adequacy of
proposed action plans to mitigate risk
• Giving due consideration to the aggregation of risk
across the Group
• Provisioning suitable cross functional/business unit
resource to effectively manage risk where appropriate
Global Governance
function, incl.
dedicated CISO
• Ongoing monitoring and reporting to the Board in
relation to the progress being made by the business
units in implementing agreed action plans to mitigate
strategic risk
• CISO dedicated to the identification, management,
monitoring and reporting of data security risks
Business units
• Identification and reporting of strategic risk to the Board
• Provision of reports and data relating to significant
emerging risks to the Group (internal and external)
• Implementation of risk management approach which
promotes the ongoing identification, evaluation,
prioritisation, mitigation and monitoring of
operational risk
M
a
n
a
g
n
g
r
i
s
k
i
f
r
o
m
t
h
e
b
o
t
t
o
m
u
p
Effective pursuit of strategic objectives
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
31
STRATEGIC REPORT
Principal risks and uncertainties continued
C o r p o r a te governance
Identify risks
M onito r
Monitor
delivery of
action plans/
risk universe
Id
e
n
tif
y
Identify
inherent risks
and likelihood
of impact
Risk
management
model
Develop
action plans
(treat, transfer,
tolerate,
terminate)
Assess
adequacy and
effectiveness
of existing
controls
A
d
d
r
e
s
s
Assign
Director-level
sponsorship
Evaluate
mitigated risks
and likelihood
of impact
A ssess
Corporate gov e r n a n c e
Risk management model
The Board has overall responsibility for ensuring that NCC Group
adopts an effective risk management model, which is aligned to our
objectives and promotes good risk management practice. We have
therefore adopted the model described in this section and
summarised in the diagram above.
All identified risks are initially assessed for their “inherent” risk (risk
with no controls in place), using a scoring mechanism that accounts
for the likelihood of an event occurring and the impact that it may
have on the Group. The scoring mechanism adopted takes account
of high impact, low likelihood events and these risks are managed
in a timely manner.
The Board, Audit Committee, Cyber Committee and Executive
Committee review risks on an ongoing basis throughout the year.
The appropriateness and relevance of the risks and issues tracking
system – IRMS – are monitored by the global governance team to
ensure that it continues to be updated, meet the needs of the Group
and remain in line with good risk management practice. In addition,
there is a robust process in place for monitoring and reporting the
implementation of agreed actions.
We are satisfied that the risk management policy, framework
and model currently in place are sufficient to manage risk
across the Group.
The key areas of identifying, assessing, addressing and monitoring
risks are explained in more detail below:
Identify
Risks exist within all areas of our business and it is important for
us to identify and understand the degree to which their impact and
likelihood of occurrence will affect the delivery of our key objectives.
This is achieved through day-to-day working practices and
incorporates risks in both the internal and external environment.
Examples of identification include horizon scanning for legislative
and market changes, operational and delivery reviews (such as SGT),
procedures in relation to projects and change and independent
systems audits.
In addition to ongoing risk identification, an annual exercise is
undertaken to review the Group’s strategic risk universe by the
Board. This exercise is reliant on the “top down”, “bottom up”
approach discussed earlier.
Assess
Following the identification of the Group’s inherent risks exposure,
a comprehensive assessment of the effectiveness of current
mitigating controls is undertaken. This exercise takes account of
the design of the current control environment and the application
of these controls prior to assessing the Group’s current exposure
to risk – mitigated risk score. The Board uses a number of sources
of information to support the scoring of risk and these include,
but are not limited to:
• Management updates
• Action tracking and reporting
• Control environment policies and procedures
• Independent audit activity
• Project monitoring reports
32
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Address
An assessment of whether additional actions are required to
reduce our risk exposure is undertaken, with actions falling into
one of four categories:
• Treat – develop an action plan (applying responsibility, deadlines
and prioritisation) that may include the implementation of additional
controls, or increase the requirement for additional assurance
over the adequacy and effectiveness of the existing controls
• Transfer – use a third party specialist to undertake the activity,
thus mitigating the risk
• Tolerate – determine the risk is within appetite
• Terminate – exit the activity
Output from the evaluation of strategic risks has resulted in
milestone plans owned by senior business leaders, or has been
used in the development of the Group’s Transformation Programme.
Monitor
Ongoing monitoring of risks and related actions is key to the
implementation of our risk management model and, therefore, NCC
Group is committed to making enterprise-wide risk management
part of business as usual. Examples of ongoing monitoring of
business risks include, but are not limited to:
• Annual review of the external audit strategy and plan by the
Audit Committee and Chief Financial Officer to ensure inclusion
of key financial risks
• Annual review of the annual internal audit plan to validate that
it incorporates key areas of business risk
• A review of internal audit reports issued during the period,
including a summary of progress against previously raised
management actions
• Annual review of the strategic risk register by the Board to ensure
that it includes risks arising in year
Internal control
While risk management identifies threats to the Group achieving
its strategic objectives, internal controls are designed to provide
assurance that these objectives are being achieved, such as the
effectiveness and efficiency of operations and delivery, accurate
and reliable financial reporting, and compliance with applicable
laws and regulation.
NCC Group has established a robust internal control framework
which is made up of a number of components:
Control environment
The control environment has primarily been established taking
account of the Group’s values (working together; being brilliantly
creative; and embracing difference), and its Code of Ethics, which
sets the foundations for the expected behaviours, values and
competencies for all colleagues across the Group. The Board,
Executive Committee and its extended leadership team lead by
example and strive to maintain effective control environments, while
also maintaining integrity and transparency.
Risk assessments
Risk assessments are conducted at both a strategic and operational
level of the Group and support the Group in understanding the risks
that it faces and the controls in place to mitigate them. Importantly,
they provide a mechanism to identify operational improvements and
are vital in our transformational programmes.
Policies and procedures
Established policies communicate expected behaviours and these
are supported through procedures and guidelines defining required
processes and controls. This in turn supports the business to adopt
efficient and effective control environments.
Information and communication
Access to accurate and timely data is key in supporting our
colleagues to make decisions and to be well informed in order
to conduct, manage and control their areas of responsibility. During
the year, the Group has focused on its data systems – successfully
implementing Workday HR and currently rolling out the Workday
Finance system.
Activity monitoring
Financial minimum controls have been established during the
current financial year for local finance teams. The financial minimum
controls were self-assessed at the year end and will be audited
by the internal audit function from FY21. The financial minimum
controls framework was established in consultation with the
Chief Financial Officer, the Group Financial Controller and the
local Finance Directors and has taken account of the
implementation of Workday Finance.
Financial accounting and reporting follow generally accepted
accounting practices.
Group review and approval procedures exist in relation to major
areas of risk and require Executive Committee/Board approval,
including mergers and acquisitions, major contracts, capital
expenditure, litigation, treasury management and taxation policies.
Compliance with all legislation, current and new, is closely monitored.
Risk and control reporting structure
During the current financial year, NCC Group has focused on
establishing the “three lines of defence”, to provide a robust internal
controls structure that will support the Board, Audit Committee,
Cyber Committee, Executive Committee and extended leadership
team with accurate and reliable information in relation to the systems
of internal control. This has resulted in the recruitment of a Director
of Global Governance, who was on-boarded in January 2020.
The Group has three lines of defence:
• First line – Group policies and procedures
• Second line – Global Governance function, incorporating
Health and Safety; Information Security; Data Protection;
Compliance & Standards; and Corporate Legal
• Third line – independent challenge and assessment, including
ISO certification; and internal and external audit
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
33
STRATEGIC REPORT Principal risks and uncertainties continued
Principal risks and uncertainties
The Group continues to operate in a particularly dynamic and evolving marketplace. The current strategic risk register has been developed
to reflect those factors and includes those risks 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 below:
Strategic
1. Business strategy
VR
Link to strategy:
Lead the market
Win business
Deliver excellence
Support growth
Develop our people
A comprehensive business strategy
is essential to the continued
success of the Group as we strive
to maximise shareholder value.
Accountable Executive
Adam Palser,
Chief Executive Officer
Potential impact
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.
Key controls and mitigating factors
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 2020.
Risk movement/impact
2. Management of strategic change
Link to strategy:
Lead the market
Deliver excellence
Support growth
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.
Accountable Executive
Adam Palser,
Chief Executive Officer
Potential impact
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.
Key controls and mitigating factors
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.
Risk movement/impact
Operational
3. Global pandemic – Covid-19
Link to strategy:
Deliver excellence
Support growth
Develop our people
NCC Group has a number of
features which give the Group a
greater resilience in the face of a
global pandemic. Failure to prepare
for this may cause disruption and
uncertainty to our business, as
well as risk the health and safety
of our people. Any disruption or
uncertainty could have an adverse
effect on our business, financial
results and operations.
Accountable Executive
Tim Kowalski,
Chief Financial Officer
Potential impact
The potential impact of a pandemic for the Group
could be:
• The inability to operate due to local restrictions
impacting our customers
• The potential inability to deliver work if
required onsite
• Risk of colleagues being exposed due to travel/
onsite work requirements
• Colleagues being unable to work due to illness
or being restricted due to shielding/quarantine
either for themselves or people they live with
• Lower demand due to many of our customers
experiencing uncertainty, financial pressures
or logistical challenges effecting the Group’s
revenue, profitability and cash generation
Risk movement/impact
NR
Key controls and mitigating factors
We established a global response team and mobilised
our whole workforce to remote working ahead of local
lockdown/shelter-in-place orders. Local task forces
were established and processes were in place to
protect colleagues and customers from risk of infection.
Local office track and trace measures were put in place
with 24 hour reporting to support global operations.
We also enabled more than 95 per cent of our
services to be delivered remotely with a dedicated
global marketing campaign to support customers
around their specific Covid-19 challenges. Existing
services were modified to provide customers
short-term solutions to lockdown issues.
For further information in relation to the Group’s
specific Covid-19 response, please see pages 8
and 9 of the Strategic Report.
Risk movement:
Increased
Decreased
Unchanged
Risk impact:
High
Medium
Low
Viability risk: VR New risk: NR
34
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT
4. Availability of critical information systems
VR
Link to strategy:
Lead the market
Deliver excellence
Support growth
Potential impact
If the Group’s critical systems failed, this could affect
our ability to provide services to our customers.
Risk movement/impact
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.
Accountable Executive
Steve Boughton,
Global Operations Director
Key controls and mitigating factors
The Group continues to make significant investment
in its IT infrastructure to ensure it continues to
support the growth of the organisation. This has
been particularly pertinent, during home working,
as part of Covid-19.
The Group has controls in place in order to reduce
the risk of actual loss of critical systems; this has
included a review of single points of failure and these
have been mitigated. 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.
5. Attracting and retaining appropriate colleagues’ capacity and capability
VR
Link to strategy:
Lead the market
Deliver excellence
Support growth
Develop our people
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.
Accountable Executive
Colin Watt,
Global Chief People Officer
Potential impact
Loss of key colleagues or significant colleague
turnover could result in a lack of necessary expertise
or continuity to execute the Group’s strategy.
Key controls and mitigating factors
Colleagues are offered a rewarding career structure
and attractive salary and benefits packages, which
can include participation in share schemes.
An inability to attract and retain sufficient high-calibre
colleagues could become a barrier to the continued
success and growth of NCC Group.
Comprehensive communications with our colleagues
are ongoing and include all-hands calls, The Wire,
and Group and local communications.
Risk movement/impact
Linked to the development of our people, the Group
continues to review our values, has launched
personal performance management processes in
2020 and has aligned development programmes.
6. Cyber risk (including data protection)
VR
Link to strategy:
Lead the market
Win business
Deliver excellence
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.
Accountable Executive
Tim Kowalski,
Chief Financial Officer
Potential impact
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.
Risk movement/impact
Key controls and mitigating factors
The Board operates a Cyber Committee chaired
by the Chair of the Board.
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
Committee. Colleagues also receive regular
security training and updates.
Risk movement:
Increased
Decreased
Unchanged
Risk impact:
High
Medium
Low
Viability risk: VR New risk: NR
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
35
STRATEGIC REPORT
Principal risks and uncertainties continued
Principal risks and uncertainties continued
Operational continued
7. Quality of Management Information Systems (MIS) and internal business processes
VR
Link to strategy:
Lead the market
Deliver excellence
Support growth
We need to ensure that trusted
and relevant MIS are available
on a day-to-day basis to inform
management decisions and
drive performance.
Accountable Executive
Tim Kowalski,
Chief Financial Officer
Potential impact
Suboptimal business decision making and
performance as key financial performance
data is not available or trusted.
Risk movement/impact
8. Quality and security management systems
Link to strategy:
Lead the market
Deliver excellence
We aspire to attain and retain
key internationally recognised
standards. These form an
important component for
many of our customers.
Accountable Executive
Tim Kowalski,
Chief Financial Officer
9. Brexit
Potential impact
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.
Risk movement/impact
Link to strategy:
Support growth
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.
Accountable Executive
Tim Kowalski,
Chief Financial Officer
Potential impact
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.
Risk movement/impact
Key controls and mitigating factors
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 the Audit Committee.
Standardised business process control standards
are in place 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.
Key controls and mitigating factors
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.
VR
Key controls and mitigating factors
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
• Real or perceived differences in data protection
standards, which impact our global ways of working
Risk movement:
Increased
Decreased
Unchanged
Risk impact:
High
Medium
Low
Viability risk: VR New risk: NR
Extraordinary risk during the year
During the year, the global pandemic of Covid-19 occurred and while this had an impact on financial performance, it also provided
opportunities. The Group mobilised its Executive Support Team and its business continuity plan in January 2020 and this enabled a
number of planned initiatives to be brought forward to support a Group-wide response to remote working and delivery.
We have also successfully negotiated with our clients where appropriate to work remotely, which has minimised disruption to service delivery.
36
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Viability statement
The context for assessment
In accordance with the requirements of the UK Corporate Governance
Code, 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 objectives to deliver
sustainable and profitable growth, increase shareholder value and
offer an improved service and product offering to our customers.
This is underpinned by the strategic priorities outlined on pages 20
and 21 of the Strategic Report. The effective management of
principal risks and uncertainties is outlined within pages 30 to 36
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 2023, 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, available bank facilities, and
the Board approved FY21 budget and three year strategic plan.
The Directors have produced a base case budget for FY21 which
reflects the assumption of a continued impact from Covid-19 on
Group revenues up until November 2020 at a similar level to that
experienced in the last quarter of FY20. In addition, years 2-3 of the
strategic plan reflect a reduced growth rate and that the growth is
starting from a lower base (FY21). The Directors have also modelled
the impact of certain scenarios arising from the principal risks, which
have the greatest potential impact on viability in the period under
review, as set out in the table below. In addition to these risks, the
Directors have further stress tested the forecasts by applying a
further decline in revenue over and above the Covid-19 impact
already reflected in the base case strategic plan. Further details
of how these sensitivities have been applied is provided in the
‘Going Concern’ disclosures in Note 1 to the Financial Statements.
The impact of these sensitivities has been reviewed against the
Group’s projected cash flow position, available bank facilities and
compliance with financial covenants over the three-year viability
period. Should these occur, mitigating actions would be required
to ensure that the Group remains liquid and financially viable, which
include a reduction of planned capital expenditure, headcount
reduction, freezing pay and recruitment and not paying a dividend
to shareholders, all of which are within the Directors’ control.
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 remain commercially viable over the
three year period of assessment.
Scenario
Associated principal risks and uncertainties
Description and potential impact
Business
strategy
Attracting and retaining appropriate
colleagues’ capacity and capability
Systems
failure
Availability of critical information systems
Cyber risk (including data protection)
Cyber risk (including data protection)
Global pandemic – Covid-19
Cyber
security
breach
Covid-19
(over and
above base
case short-
term impact)
Failure to deliver the SGT transformation programme.
Loss of key colleagues 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.
The world was victim to a global pandemic of Covid-19 in early
2020. Most affected countries were locked down for a minimum
of six weeks.
The potential longer-term impact of this would be loss of jobs
due to loss of revenue. There would also be reputational
damage if there was a cyber security breach due to the remote
working we have put in place to safeguard our people.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
37
STRATEGIC REPORT STRATEGIC REPORT
Stakeholder engagement
Consistent
and authentic
engagement
We believe by understanding and meeting
the needs of our stakeholders, we will secure
long-term success. This is achieved through
consistent and authentic engagement.
Here we have highlighted our key stakeholders, their identified
needs and how we have engaged with them. Engagement of each
stakeholder is done so with the NCC Group values at the heart
of everything we do. We use insights to support our approach,
addressing opportunities to build enduring and trusted relationships.
Insights are gathered during our day-to-day business and are used
to improve decision making at every level of the organisation –
from the Board down to operations.
Section 172 statement
Section 172 of the Companies Act 2006 requires a director of
a company to act in the way they consider, in good faith, would most
likely promote the success of the company for the benefit of its
members as a whole but having regard to a range of factors set out
in section 172(1)(a)–(f) in the Companies Act 2006. In discharging
our section 172 duty, we have regard for these factors taking them
into consideration when decisions are made. Examples of how the
Directors have oversight of stakeholder matters and have regard for
these matters when making decisions are set out on these pages.
Colleagues
We are a people business and our 1,800+ colleagues around the
world each have a significant role to play in helping to make the
world safer and more secure.
The opportunity
• Understanding our mission, vision, values and strategy
• Understanding what is expected of them and knowing how they are
contributing to our success
• Having quality time with their line manager, and feeling listened to and
supported, enabling them to have the confidence they have the skills
to do their job well
• Feeling they belong and can thrive
How we listen and engage
• Global internal communication and collaboration platforms to provide
access to information for all colleagues
• Learning and knowledge sharing conferences for our technology community
• Annual colleague survey with local team engagement action planning
• Global and local engagement events
38
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Customers
Providing solutions which help to keep their businesses safe and secure.
The opportunity
• Understanding our customers’ challenges
• Developing solutions which improve and enhance our customers’
cyber resilience
• Ability to work collaboratively with them and their partners
How we listen and engage
• Active account management
• Regular client surveys and acting on their feedback
• Investing in research to understand and quantify the risk with regard
to the technology they use and the threats to the sectors and industries
in which they operate
2019/20 highlights
• New Group Sales and Marketing Director joined in October 2019
• Appointed Security Assessment Partner for Google’s Gmail programme
• Fox-IT and ZyLAB joined forces to deliver a highly efficient solution
to search digital files
• Accredited and awarded a security label from ENX to perform
automotive security assessments for the German car manufacturing
industry through the TISAX framework
• Recognised as an Accountability Agent in the United States as
NCC Group Security Services, Inc. under the emerging Asia-Pacific
Economic Cooperation (APEC) Cross-Border Privacy Rules (CBPR)
and Privacy Recognition for Processors (PRP) systems
Covid-19 action
• Quickly established remote working capability to ensure we could
continue to support our customers’ cyber resilience needs
2019/20 highlights
• Appointed Jennifer Duvalier as our lead Non-Executive Director for
colleague engagement and during the year:
• Launched the Listening sessions with a video to explain their
importance, set expectations and create open and direct dialogue
• Hosted sessions with small groups of colleagues face to face and
also online
• Included colleague engagement as a regular Board meeting agenda
item to provide updates and feedback
• Annual colleague survey had a response rate of 80 per cent
• Developed a UK Colleague Forum as part of a broader plan to develop
a global ambassador network
• Became members of Stonewall’s Global Diversity Champion programme
and appointed the first global LGBTQIA+ Committee
• Launched Manager Essentials programme
• Launched a dedicated research blogging platform to support the
development of our technical community
Covid-19 action
• Activated a global wellbeing programme, from awareness to mental
health first aid training
• Implemented a management system to prepare colleagues for return
to onsite/office environments when appropriate
STRATEGIC REPORT Shareholders
Suppliers
We engage with a number of different suppliers across the business.
The opportunity
• Long-term trusted partnerships facilitating real margin improvement
• Strong working relationships
• Collaboration
• Fair contract and payment terms
How we listen and engage
• We now have a dedicated and experienced procurement function which
actively manages and monitors key suppliers and supply chain trends
• Meetings held with key suppliers
• Supplier surveys (PQQ) an embedded part of the procurement process
• Intention to host a supplier conference
• Supplier “Code of Conduct” refreshed and relaunched
2019/20 highlights
• Launched Workday and Salesforce across the business as
strategic enablers
• Engaged a global facilities management provider and outsourced
two initial sites
• Introduction of risk-based analysis of NCC Group’s supply chain
• Launch of the NCC Group Source to Pay Policy which underpins
NCC Group’s relationship with its supply chain
NCC Group is committed to engaging with our shareholders
through continued sufficient and effective communication.
The opportunity
• Financial performance
• Dividend
• Sound long-term sustainable strategy
• Sound corporate governance and stewardship
How we listen and engage
• CEO and CFO regularly meet investors
• Investor roadshows after the full and half year results
• Chair meets investors on an annual basis
• Open door policy with investors
• The AGM
• New NCC Group plc website launched, which articulates the
investment story
2019/20 highlights
• All resolutions passed at 2019 AGM with at least 89 per cent of
votes for, with over 69 per cent of the issued share capital voting
• All directors attended the AGM and were available to answer
shareholder questions
• Brokers and financial PR firm presented to the Board
• Regular reports to the Board on investors and their feedback
Covid-19 action
• Enabled more than 95 per cent of our services to be delivered
remotely to maintain continuous operations, while carefully managing
costs and cash
Our network
NCC Group has a diverse network, which is critical to the ongoing
success of the business. This ranges from regulators and governments,
to schools, universities and academics, to other partners and our
local communities.
The opportunity
• Being mindful of our environmental impact
• Being a responsible corporate citizen, e.g. paying our fair share of tax
• Providing work experience
• Charitable giving
• Being a trusted partner to governments around the world
• Engaging with global think tanks and trade associations to understand
cyber research priorities and opportunities, and offer expertise to shape
policy and industry positions
• Regularly sending speakers to cyber conferences and roundtable events
How we listen and engage
• UK Computer Misuse Act reform campaign to ensure appropriate legal
frameworks suitable for the 21st century
• Responding to government consultations and parliamentary inquiries, and
hosting politicians and civil servants at our offices and in Parliament, to
offer expert input into policy development and debate including on issues
such as cyber risk metrics, Internet of Things security standards and 5G
• Apprenticeship, graduate and work experience schemes, including
support for the UK’s CyberFirst scheme, and the NeuroCyber community
• Strategic partnerships with and trusted advisor to the UK and
Netherlands National Cyber Security Centres
• Emerging relationships with the Australian National Cyber Security Centre
2019/20 highlights
• Assisting UK government on formulating its post-2021 National Cyber
Security Strategy
• Support to the UK National Cyber Security Centre through its Industry
100 scheme in Threat Operations, Parliament and Policy and
Telecommunications
• Developing a partnership with the UK’s Small Charities Coalition to enable
NCC Group colleagues to provide cyber advice and mentoring to charities
• Support the launch of the Manchester Cyber Resilience Centre through
sponsorship and appointment of Steve Boughton on the Board
• Sponsorship and contributor to the Software Assurance Maturity
Model (SAMM)
Covid-19 action
• Support to national health care and cyber bodies around the globe
during Covid-19 through the provision of healthcare sector relevant
threat intelligence related to organised crime at no cost
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
39
STRATEGIC REPORT STRATEGIC REPORT
Sustainability
Acting
responsibly
for our future
Our environmental, social and governance
(ESG) framework captures our commitment
to positively impact the communities we serve
and gives focus to our actions to achieve this.
Each day at NCC Group our technologists
and professionals wake up with one mission
- to help make the world safer and more secure.
YVONNE HARLEY
Group Head of Communications
40
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Our environmental, social and governance (ESG) framework covers
issues from colleague wellbeing through to global societal issues
such as climate change, local benefits and customer satisfaction.
We believe that NCC Group has a significant role to play due
to the importance of technology in achieving the United Nations
Sustainable Development Goals. The benefits of a clear, strategic
and long-term approach to sustainability benefit both our business
by strengthening our resilience and protecting our licence to
operate via regulatory compliance, and our wider stakeholders
including our people, our communities and broader society.
Our ESG framework was developed following a gap analysis
exercise earlier this year, which identified the priority focus areas
for our business. It also includes new opportunities presented by the
global pandemic in terms of how we work.
Like other businesses, we found ourselves in a unique and
uncharted position with the transformation of our business
to operating nearly 100 per cent remotely. We took this as an
opportunity, not just in terms of engagement with colleagues but
also customers, and it provided us with some tangible insights into
how we could operate in the future as an even more responsible
business. Due to the ongoing uncertainty in relation to timescales
of opening offices safely, we are taking a measured approach
to considering how we can harness the benefits for our future
sustainability goals.
Our priority during the pandemic was, and remains, the welfare
of our people and ensuring the safety of our customers.
At this stage of developing our ESG programme, we are setting
focus areas, which over the course of the next financial year will
help inform what our targets for improvement should be. When we
set targets they will be authentic and realistic and will have the
right resource behind them to make them happen and to ensure
we are acting responsibly for our future.
Our contribution to the United Nations
Sustainable Development Goals
The United Nations Sustainable Development Goals (SDGs)
provide us with a blueprint to achieving a better and more
sustainable future for all, building on our existing inclusion
and diversity agenda. NCC Group’s purpose, to make the
world safer and more secure, reinforces our commitment to
improve against the SDGs that are most relevant for our
business and our stakeholders.
If we look at the importance of technology in achieving these
goals then we can better understand how we can play our part:
• Empower individuals so they can advocate and innovate
• Digital financial services enable the non-banker to bank
• Connectivity increases productivity of SMEs
• Social inclusion through technologies that are accessible
and trusted
• Reach the unreached with education
• Improve quality healthcare through telemedicine technology
• New technologies monitor, track, provide information to
farmers and provide access to markets
• Country to city – transmission to smart cities will support
climate action
• Saving lives in disasters through technology
• Innovation and infrastructure – information and communications
technologies (ICT) partnerships and platforms
SDGs
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
41
STRATEGIC REPORT Sustainability continued
Our key sustainability focus areas and objectives
Our stated objective in our Code of Ethics Policy is to treat everyone and everything with respect. This sets the tone for how
we do business and informs our key focus areas and our objectives:
Evolve to
remote
Community
investment and
benefit
Reduce our
non-essential
travel
T
M E N
N
O
IR
V
N
E
S
O
C
I
A
L
Focus
areas and
objectives
Health, safety
and wellbeing
Respect our
environment
Skills, diversity
and development
G
OVERN A N C E
Good governance
enabling investment,
innovation and
sustainable
growth
Responsible
supply chain
Quality services
and satisfied
customers
ENVIRONMENT
SOCIAL
GOVERNANCE
Respect our environment
• Increase education and action on recycling in
our physical and remote office environments
• Reduction in our reliance on printing by
adopting a digital-first policy for marketing
and internal communication materials
Reduce our non-essential travel
• Use technology to continue to innovate how
we engage as an organisation and realise
the social benefits this has with respect to
inclusion and general health and wellbeing
• Ensure a considered approach to how we work
in the future and the role remote working has
in increasing the opportunity for employment
within our industry, as well as enabling our
people to balance the various priorities in
their lives
Evolve to remote
• Continue investment in our services and
innovative solutions to enable agile
deployment quickly and effectively to support
customers and enhance their cyber resilience
• Review how we use our existing office space,
how our people work and how we deliver
services to our customers
Community investment and benefit
• Continue to develop our cyber skills volunteer
programmes, working with local partners to enable
our colleagues to give back to their communities
Quality services and satisfied customers
• Build long-term sustainable relationships, earn
trust through meeting their needs and deliver
the highest quality of services
Health, safety and wellbeing
• Invest in creating a network of trained Mental
Health First Aiders in key locations across
the Group
• Continue investment into and review ways
of working to ensure that our colleagues and
customers are operating safely at all times,
including during the global pandemic
Skills, diversity and development
• Invest in our performance management programme
to ensure that every colleague has the opportunity
to achieve their very best and fulfil their potential
• Embrace difference and create opportunity for all
to contribute to the success of NCC Group through
a dedicated inclusion and diversity programme
• Make time to enable colleagues to personally
reflect on how what they do contributes to
making the world safer and more secure
• Evaluate our performance and welcome
feedback to ensure we continually improve,
and deal with any issues swiftly and properly
• Win business fairly and use our internal
process to assess and carefully consider doing
business with any customer which may
compromise our Code of Ethics
Responsible supply chain
• Enter into any supplier or partner relationship
with a mutual understanding of each other’s
Code of Ethics and general business policies.
• Have in place a Supplier Code of Conduct to
ensure we protect the integrity of our ethics
across the supply chain
Good governance enabling investment,
innovation and sustainable growth
• Provide accurate and timely information to
shareholders and at all times observe the
relevant regulations and corporate governance
principles to protect the integrity of our
business operations
• Consider the interests of all our stakeholders,
including our people, when we make decisions
on NCC’s future priorities and plans
42
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Environmental
In 2019 we launched a pilot next generation management
programme. The one year programme offered a group of high
potential colleagues the opportunity to develop key skills to support
their move into management. The final part of the programme was
to work on a real business improvement opportunity and they were
tasked with proposing how NCC Group should tackle climate change.
The team swiftly got into action, slightly delayed due to the
understandable shift in priorities as we had to move the whole
organisation to remote working due to the impact of the pandemic.
The team used the delay to consider how new ways of working may
have presented us with opportunities to accelerate positive change.
Remote working and flexible working both have a positive impact
on reducing the pressure we place on local infrastructure.
Using both qualitative and quantitative survey methods, the team
was looking at the whole picture in terms of climate change. Clear
from the outset is that, whatever we do, it must be authentic and for
the right reasons. While the move to remote working has reduced
our office environment footprint, research is being undertaken to
look at attitudes in the home environment too and also touches
on the mental health impact to understand the whole picture.
Whatever the outcome, the global pandemic is enabling us to
confidently have the conversation with our customers and
colleagues on how we operate in the future and the positive
impact this can have on climate action.
Over and above this, our commitment to minimising the impact of
our operations on the environment continues. Due to the size and
nature of the Group, an external environmental audit is not required.
This area will be assessed 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.
2.
3.
4.
5.
6.
Conserving energy and other natural resources and improving
efficient use of those resources
Improving the efficiency of materials used
Reducing waste and increasing reuse and recycling wherever possible
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
Promoting flexible working to reduce the impact on
local infrastructures
Providing all colleagues with relevant environmental training
and guidance
The above all being informed by the results of our climate change study.
Of our 105 company cars...
32.8%
are alternative fuel
20.0%
are hybrid
12.3%
are pure electric
Our average fleet CO2 of 107 (down from 111 in 2019)
Greenhouse gas emissions
The greenhouse gas report period is aligned with our financial reporting
year and so runs from 1 June to 31 May.
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. This section is included as
per 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.
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 be environmentally responsible business
and to continue to reduce the scope 2 and scope 2 carbon intensity
for the Group year on year.
Absolute carbon
emissions (tCO2e)
Group revenue (£m)
(including discontinued)
Carbon intensity for the
whole Group (tCO2e/£m)
Year on year carbon
intensity change (tCO2e/£m)
Year on year carbon
intensity change (as a %)
2020
2019
2018
2017
2016
1,499 1,542 1,761 1,550 2,264
263.7 250.7 254.5 244.5 209.1
5.7
6.2
6.9
6.6
10.8
(0.5)
(0.7)
0.3
(4.2)
(0.4)
(8)
(10.1)
4.5 (38.8)
(3.6)
The total UK energy use in kWh for the year ended 31 May 2020
amounted to 47,220,024kWh. Due to the fragmented nature of this
energy use information on a global basis, management is putting
appropriate processes in place to collate this information going
forward on a global basis.
Social
Colleagues
Each day at NCC Group our technologists and professionals wake
up with one mission – to help make the world safer and more secure.
Together our colleagues form a phenomenal knowledge network
easily accessed thanks to the investment made in our vibrant online
collaboration and communication platforms like Microsoft Teams
and Yammer.
We invest in formal and peer-to-peer learning too. There is always
someone organising a lunch and learn on the latest ethical hacking
technique or sharing leading research insights. We have a dedicated
research blogging platform, where colleagues are actively encouraged
to share their ideas with the wider public technical community. We also
have a global newsroom that offers a platform for non-technical blogging.
Internally we have a news service that helps to keep colleagues
connected to all the latest news from around the Group. Our CEO,
Adam Palser, is a regular visitor to offices around the world, popping in
for a coffee and a casual chat. While the global pandemic has restricted
travel, virtual coffees or live sessions with the CEO have become popular
features of our communications activity, thanks to our Securing Growth
Together investment in communication and collaboration technology.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
43
STRATEGIC REPORT Sustainability continued
Social continued
Colleagues continued
These tools helped us stay connected as a community during the
pandemic restrictions, enabling us to seamlessly work remotely to
support our customers. They were used to accelerate our global
wellbeing initiatives and provide colleagues with a number of
support routes as appropriate.
We aim to create an environment where everyone can reach their
full potential.
Values
At NCC Group, we trust our colleagues to do the right thing, guided
by our values.
We work together
No matter how brilliant an individual might be, they are no match for
a team. Our best and most impactful work has always resulted from
collaboration. We act in the best interests of the whole Group and
we never miss an opportunity to help each other and our customers.
We exist to help keep our customers safe and secure – the better
we understand our customers and their values the better we can
help them thrive. So we work closely with our customers too.
We are brilliantly creative
We like to win. We are brilliantly creative – not pointlessly or stupidly
or obstructively creative. We like to and are good at solving hard
problems. We work hard but, in our world, success does not just
come from hard work – it comes from looking at things differently
and never being satisfied with the way things are. In being brilliantly
creative, we need to work together – we expect collaboration,
innovation and diversity, which brings us onto our third value.
We embrace difference
The ability to think in a different way (to, for example, how systems
were intended to be used) is what leads to much cyber vulnerability
and is the cornerstone of the security testing and risk work we do.
So we work together, we are brilliantly creative and:
• We welcome and actively seek out diversity in our thinking and
in our internal representation
• We seek constructive challenge as we gather information before
making a decision
• We want to keep NCC Group’s quirky and distinctive culture
(unusual in an attractive and interesting way)
Listening to colleagues
In 2019, we ran our second consecutive colleague engagement
survey – b:Heard. With an 80 per cent participation rate it provided
us yet again with a great platform to continue to improve the
workplace experience for colleagues.
In addition to the ongoing feedback through our social and
collaboration channels we appointed Jennifer Duvalier, as the
designated Non-Executive Director, for our colleague engagement
programme. You can read more details on page 58 of the Corporate
Governance Report about how this has been progressing.
In the UK, we launched a new colleague forum as a pilot for our planned
global ambassador network, which will ensure every colleague’s voice
is heard no matter where they are, what they do or how they choose
to engage. Local representatives will form the global network and it
will be an important part of our engagement strategy going forward.
Inclusion and diversity
We want to create an environment where all colleagues feel
psychologically, emotionally and physically safe to be authentic and
representative of the diversity of the world they live in, to share their
personal experiences and to have equal opportunity to achieve.
We want to drive the focus globally but empower local action,
ensuring that we reflect and embrace our differences.
Neurodiversity
As members of the UK Neurocyber group, we strive to create
an environment where people with autism spectrum disorder
conditions are treated as individuals and given help and assistance
to meet their personal needs to enable them to be successful in
the workplace.
Race and ethnicity
We are a global business with colleagues in various countries
around the world and our aim is to attract the best candidates,
regardless of where they come from. We work hard to be an inclusive
workplace where everyone is treated with respect and we will not
tolerate any sort of discrimination or harassment. But saying it is
not enough, and like many companies addressing the ongoing
challenges with racial disparity, we are increasing our efforts.
Case study
Inclusion
As part of our ongoing commitment to creating a diverse
and inclusive workplace, we signed up to Stonewall’s Global
Diversity Champion programme in January this year. This has
been followed by the establishment of a global LGBTQIA+
Committee, creating a positive workplace experience for our
LGBTQIA+ colleagues, and supporting the work we are doing
around SDG 10 – Reduced inequalities.
This membership, along with our colleagues’
personal experiences and passion, enables us to
create an even better place to work. We want to
ensure everyone feels welcome and has an equal
opportunity to play a part in the Group’s success.
We are using Stonewall’s extensive resources and guidance to
help inform how we do business – from people policies to travel
– ensuring the safety and wellbeing of all colleagues.
COLIN WATT
Global Chief People Officer
44
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
STRATEGIC REPORT Case study
Military forces
In February we took our first step in pledging support to the
military forces community and their families by signing the UK’s
Armed Forces Covenant. The Covenant is a promise made by
organisations to ensure that those who serve or who have
served in the armed forces, and their families, are treated fairly.
The Covenant was signed by CEO Adam Palser alongside
Lieutenant General James Hockenhull OBE, Late Int Corps,
witnessed by members of our team who previously served in the
UK Armed Forces. This supports the work we are doing under
SDG 8 – Decent work and economic growth.
This is an inclusive process with opportunities for colleagues across
the firm to be involved, share experiences and help set the vision for
how it should feel in the future. The scope will include, but not be
limited to, our hiring process, the channels we use for recruiting,
promotion and career progressions, inclusivity and fairness, metrics
and tracking of progress.
Gender
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. We are
striving to improve gender equality through the following steps:
• Transforming the way we recruit so diversity is promoted in all forms
• Focusing on flexible working, addressing unconscious bias and
standardised interview formats
• Celebrating International Women’s Day to encourage visible role models
who shared their experiences, including our Non-Executive Director
Jennifer Duvalier, and motivate others to achieve their career potential
• Working in collaboration with industry initiatives such as the UK
government’s CyberFirst programme aimed at developing the next
generation of cyber professionals
The statistics setting out the position of the Group on a gender
basis are disclosed below (as at 31 May 2020):
Main Board
Executive
Committee
Direct reports to the
Executive Committee
86%
91%
14% 91+
Female86+
9% 70+
Male
30%
70%
Signing the Armed Forces Covenant is the first
step in an enduring and important relationship
with the Armed Forces community. Over time,
we will work to strengthen and expand this
relationship, confident in the knowledge that it
will bring benefits to both NCC Group and the
regular, reserve and retired forces community,
not just in the UK but wider too.
ADAM PALSER
CEO
LGBTQIA+
We believe in a workplace that empowers people to be proud of
who they are and feel safe, regardless of their sexual orientation
and/or gender identity. We want to be the best company to work for,
for everyone including lesbian, gay, bisexual, transgender, queer/
questioning, intersex, asexual and other colleagues.
With colleagues travelling all over the world, our travel policy takes
into account any potential issues for our LGBTQIA+ colleagues
and seeks to ensure they are not disadvantaged as a result or put
into an unsafe environment.
Flexible working
Prior to the global pandemic we were already trialling flexible
working in several of our global offices following requests from
colleagues. Now with the experience from the pandemic we are
keen to continue to explore how we may work in the future and
while we have this under our environment element of ESG, we are
conscious of the positive impact it can have on the personal lives of
colleagues too. Flexible (including remote) working is an enabler to
attracting and retaining a diverse workforce.
Leadership development and talent management
During the year we made two changes to the Executive Committee.
Max Baldwin joined as Group Sales and Marketing Director and
Simon Fieldhouse joined as Global MD – Software Resilience
(Escrow). You can read more about their appointments on page 54.
A pilot next generation 12 month management programme ran
in our global Software Resilience (Escrow) business to support
ambitious individuals in getting the experience they needed to move
into a management role. Since the programme launch, seven out
of eight of those taking part have now successfully applied for and
achieved promotion to a management role and are applying the skills
they learned. The pilot will now be developed into a Group-wide
offering as part of our ongoing investment in developing talent.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
45
STRATEGIC REPORT
14
+
G
9
+
G
30
+
G
STRATEGIC REPORT
Sustainability continued
Case study
Wellbeing
While we quickly transitioned to fully remote working across our
Group we recognised the need to focus on health and wellbeing
as part of our response activities.
Using pulse surveys we gave colleagues a chance to raise their hand
to ask for help. This was enhanced with local initiatives too and
complemented existing colleague support mechanisms in place.
From formal programmes to informal programmes, teams were
quick to be creative and innovative to ensure they stayed connected.
A lockdown toolkit was created, providing individuals and line managers
with ideas on how to stay connected, use technology to support
ideation and innovation, and have a healthy routine at home.
The key was ensuring that colleagues knew it was okay to say
they were not okay and that someone was there to support them.
This increased focus on wellbeing is driving our FY21 mental
wellbeing programme, which will see line manager training and
mental health first aiders being trained across the Group.
Governance
Anti-corruption and anti-bribery
We do not tolerate bribery and corruption. We have established policies
on anti-bribery and gifts and hospitality. 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 and with plc Board scrutiny.
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.
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 Organization 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. We communicate this to all our suppliers,
contractors and business partners at the outset of the relationship
and regularly thereafter. Our Modern Slavery Statement is available
on our website.
46
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
It is okay to not be okay and here at NCC Group
mental health and wellbeing is firmly on our
agenda in support of Sustainable Development
Goal 3 – Good health and wellbeing.
YVONNE HARLEY
Group Head of Communications
and a Mental Health First Aider
Governance and oversight
The Board recognises that robust governance and oversight are vital
to maintaining a strong business, which can weather a changing
business environment. With this in mind, the Group has a dedicated
Global Governance function, which has been designed to work
together to ensure seamless oversight of the control environment
and management decision making. The team is made up of:
• Group Legal Services
• Compliance and Standards
• Information Security
• Health and Safety
• Data Protection
• Internal Audit
Global Governance is an independent function, with all of these
functions reporting into the Group Board, or its sub-committees:
Audit Committee and Cyber Committee.
The primary remit of the team is to validate compliance with
the Group’s policies and procedures, legislation and regulations
and good practice. In addition, the team adds value through its
proposition to drive efficiency, effectiveness and consistency across
the Group. 2020 has seen the establishment of the minimum
financial controls self-assessment and a minimum health and safety
framework self-assessment to drive accountability and continual
improvement across all of our offices. This process empowers local
office management to identify control environment improvements
outside of the standard audit processes and actions are uploaded
and monitored via the IRMS system.
This Strategic Report was approved by the Board of Directors
and signed on its behalf by:
Adam Palser
Chief Executive Officer
3 September 2020
Tim Kowalski
Chief Financial Officer
3 September 2020
Read more on our governance on page 49
Giving back:
Free cyber threat intelligence
to global healthcare providers
In response to the continued and sustained attacks on
healthcare providers, we offered our unique healthcare
threat intelligence free of charge to help hospitals build
cyber resilience.
With regular updates, those taking up the offer also had
access to a specialist team of threat intelligence analysts
and incident responder who were on hand to answer
questions arising from the report.
I
I
S
S
T
T
R
R
A
A
T
T
E
E
G
G
C
C
R
R
E
E
P
P
O
O
R
R
T
T
With the world’s healthcare systems increasingly reliant on
technology, and under significant pressure dealing with a
global pandemic, building resilience is crucial. The provision
of this threat intelligence free of charge was important to
help them build this resilience for the longer term. And it
was our way of saying thank you to those working hard
to keep us safe and healthy.
The offer went out direct and through our existing contacts
to national Computer Emergency Response Teams, hospitals
and national institutes of public health around the world.
The report, compiled by our Fox-IT threat intelligence team
based in the Netherlands, included:
• An Executive briefing
• Threat actor descriptions
• How to apply threat intelligence to systems
• Chronology of targeted ransomware in hospitals
and health clinics
• A Technical Indicator of Compromise pack related
to targeted ransomware threat actors for deployment
to institutions or national capabilities
“Thinking of our NHS in everything we do.”
Matt Trueman – Cheltenham
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
47
Governance
As Directors 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.
IN THIS SECTION:
Board composition and division of responsibilities
49 Chair’s introduction to governance
51 Governance framework
52 Board of Directors
54 Executive Committee
56
63 Shareholder engagement
64 Audit Committee report
70 Nomination Committee report
Cyber Committee report
72
74
Remuneration Committee report
93 Directors’ report
96
Directors’ responsibilities statement
48
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Chair’s introduction to governance
Committed to
good governance
2019/20 highlights
• Appointed a designated NED for workforce
engagement who reports to every Board meeting
• Obtained a better understanding of our
stakeholders and how we engage with them
• An increased focus on ESG matters
• Kept normal Board and strategy day scheduled
during lockdown and no meetings cancelled
2020/21 priorities
• Continuing to focus on our stakeholders
particularly colleague engagement
• Restarting off-site and overseas Board meetings
and engaging with local colleagues
• Six month health check on Board evaluation priorities
• Continuing to focus on succession planning and
diversity and inclusion
One of the most significant changes
to the Code affecting NCC Group is
in respect of workforce engagement.
As a people business, this is a crucial
area for us to focus on and get right.
CHRIS STONE
Non-Executive Chair
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
As a Board we have focused our attention on the requirements
of the UK Corporate Governance Code 2018 (the ‘Code’) and are
reporting against this Code in our 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 and indeed our stakeholders.
The Board, the Executive Committee and the senior management
continue to promote our culture and standards throughout the
business and lead by example to provide a strong corporate
governance framework.
One of the most significant changes to the Code affecting NCC Group
is in respect of workforce engagement. Our main stakeholder is our
colleagues and we wanted to develop meaningful 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.
To assist us with this, during the year, Jennifer Duvalier, a Non-Executive
Director, was appointed as our designated Non-Executive Director
for workforce engagement. Jennifer (along with other Non-Executive
colleagues, including me) has been meeting and speaking with
colleagues around the world and reporting back on findings at each
Board meeting via a dedicated agenda slot. As a people business,
this is a crucial area for us to focus on and get right.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
49
GOVERNANCE Chair’s introduction to governance continued
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 NCC Group 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.
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. During the year we have reflected on who our key
stakeholders are and assessed our current engagement mechanisms
to ensure the effectiveness of that engagement. We then factor into
our decision making any feedback from that engagement.
Board changes
We have made no changes to the Board during the year. The
biographies of all the Board members can be found on pages 52 and 53.
Effectiveness
As Chair, I am responsible for providing leadership to ensure that
the Board operates effectively. I have been supported in this by all
the Directors, in particular Chris Batterham, our Senior Independent
Director. The annual reviews of Board effectiveness help the Board
to consider how it operates and how its operations can be improved.
This year, the review was undertaken internally and the findings of this
review have provided us with ideas to further improve the manner
in which the Board operates, and build on previous evaluations. The
results were very useful and insightful and have been incorporated
into our plans for the coming year. In particular, Board succession
planning remains a priority, particularly as we look to ensure the Board
and Executive Committee have the right set of skills and experience
to support the Group in the years ahead as the business evolves.
I have been very impressed about how effectively the business as
a whole, and indeed the Board, has transitioned to remote working
during the Covid-19 pandemic. Although I feel that longer meetings
are best done face to face, we have continued to hold all of our
scheduled Board and Committee meetings as planned and also our
strategy day. While being mindful of the impact of Covid-19 on the
wider world and us as a business, our approach as a Board has been
one of “business as usual” and we continue to focus on important
longer-term strategic and governance issues facing the Group, while
supporting management on more short-term tactical decisions.
Board composition and diversity
We recognise that we still have progress to make in terms of
improving the diversity of the Board and our Executive Committee.
We will look to address this during future Board and Executive
Committee appointments.
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, our Senior Independent Director,
and I are also available to meet with investors should the need arise.
Given that this is a fairly young Board in terms of tenure, this
improvement in diversity will not happen overnight but we are
extremely cognisant of the need to make significant strides
in this area to improve this and it is fully on our Board agenda.
With regard to our current diversity, 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.
Board tenure as at 31 May 2020
3 years 2 months
2 years 6 months
1 year 10 months
5 years 1 month
3 years 3 months
Chris Stone
Adam Palser
Tim Kowalski
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
I met with our larger investors in February 2020 and fed back my
findings to Board colleagues at the next Board meeting. In addition,
our brokers undertook an investor survey on the back of our half
year results in January and the results of this were presented and
discussed at a Board meeting. Our aim is to engage with our
shareholders in an open and meaningful way.
Ensuring that the Directors’ remuneration packages align the Directors’
and senior managers’ interests with the long-term interests of
NCC Group 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 at the 2020 AGM we will
be asking shareholders to approve a new Remuneration Policy.
The 2017 Directors’ Remuneration Policy and indeed the Directors’
Remuneration Reports over the last three years have received over
99 per cent of votes in favour, recognising the continued support of
our shareholders for our approach to executive remuneration. The
UK Corporate Governance Code 2018 has increased the role and
remit of the Remuneration Committee and this is reported on within
the Remuneration Report.
Statement of compliance with the UK Corporate
Governance Code
The Company measures itself against the requirements of the UK
Corporate Governance Code 2018 (the ‘Code’), which is available
on the Financial Reporting Council website (www.frc.org.uk).
2 years 1 month
From 1 June 2019 to 31 May 2020, the Company complied with
the Code in full.
31 May:
2014
2015
2016
2017
2018
2019
2020
2 years 8 months
Chris Stone
Non-Executive Chair
3 September 2020
50
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Governance framework
The different parts of the Company’s governance framework are
shown below, with a description of how they operate and the
linkages between them.
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.
Board Committees
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.
Audit
Committee
Nomination
Committee
Cyber
Committee
Remuneration
Committee
Primary function is to
assist the Board in fulfilling
its financial and risk
responsibilities. It also
reviews financial reporting,
the internal controls in
place and the external
audit process.
Responsible for
considering the
Board’s structure, size,
composition, diversity and
succession planning.
Responsible for overseeing
and advising on the Group’s
exposure to cyber risk and
its future cyber risk strategy,
its cyber security breach
response and its 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.
Read more on pages 64 to 69
Read more on pages 70 and 71
Read more on pages 72 and 73
Read more on pages 74 to 92
Chief Executive Officer
Has responsibility for managing the business and overseeing the implementation of the strategy agreed by the Board.
Executive Committee (ExCom)
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
For further details on Board composition
and division of responsibilities see page 56
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
51
GOVERNANCE Board of Directors
Our business is led by our Board of Directors. Biographical and
other details of the Directors as at 31 May 2020 are as follows:
CHRIS STONE
Non-Executive Chair
ADAM PALSER
Chief Executive Officer
TIM KOWALSKI
Chief Financial Officer
and Company Secretary
CHRIS BATTERHAM
Senior Independent
Non-Executive Director
N
C
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
Tim is an accomplished CFO
with significant listed and private
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.
External appointments
Tim does not currently have any
external appointments.
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 the Senior
Independent Director and
Non-Executive Deputy Chair
of Blue Prism Group plc, and
Non-Executive Director at
Nanoco Group plc.
Career experience
Chris has held various
Non-Executive Director and
Chief Executive roles at 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 Chair 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 Chair of
Everynet BV, a privately owned
Internet of Things infrastructure
business, and Chair of AIM
listed Idox plc.
Career experience
Adam’s executive experience
includes former CEO of NSL Ltd
and EMEA Business Development
Director at QinetiQ. His ten year
QinetiQ career included
responsibility for its cyber,
information warfare and
professional services business.
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. Adam has a First Class
degree and Doctorate in Chemistry
from Balliol College, Oxford, and
is an alumnus of Stanford
University’s School of Business.
External appointments
Adam does not currently have
any external appointments.
Committee key:
A Member of
Audit Committee
C Member of
Cyber Committee
N Member of
Nomination Committee
R Member of
Remuneration Committee
Committee Chair
52
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE JONATHAN BROOKS
Independent
Non-Executive Director
JENNIFER DUVALIER
Independent
Non-Executive Director
MIKE ETTLING
Independent
Non-Executive Director
DIVERSITY OF SKILLS
AND EXPERIENCE
Strategy development
Sales and marketing
R
A
C
N
C
N
R
A
Human resources
Appointment to the Board:
16 March 2017
Appointment to the Board:
25 April 2018
Appointment to the Board:
22 September 2017
Corporate governance
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 multinational companies,
including directorships with Aveva
Group plc and FDM Group
(Holdings) plc. Jonathan was
a Non-Executive Director of IP
Group plc between August 2011
and March 2020.
External appointments
Jonathan does not currently
have any external appointments.
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 Non-Executive
Director and Chair of the
Remuneration Committee of Mitie
Group plc and of Guardian Media
Group plc. She is 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 a senior adviser to the
Cleveland Clinic London and to
the Corporate Research Forum.
Career experience
Mike has strong sector and
non-executive experience.
He has had an extensive career
in global technology businesses
including SAP-Sucessfactors,
NorthgateArinso, 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
Non-Executive Director of
Impellam PLC, an AIM listed
recruitment business, and Topia
Inc, a Silicon Valley cloud
relocation software business.
Financial management
M&A
Professional services
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
53
GOVERNANCE Executive Committee
MAX BALDWIN
Group Sales and
Marketing Director
STEVE BOUGHTON
Global Operations Director
Max joined the Group in October 2019 and has responsibility
for Group-level sales and marketing activities, driving the business
to meet its strategic growth targets. Previously holding senior
executive growth, leadership and transformation roles in Airbus,
AusNet Services, IBM, L-3 Harris and Ultra Electronics, his
experience spans selling into multiple sectors: Aerospace,
Defence and Security, IT, Global Services, Energy and Education.
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.
SIMON FIELDHOUSE
Global Managing Director,
Software Resilience
(Escrow)
YVONNE HARLEY
Group Head of
Communications
Simon joined NCC Group in September 2019 and is responsible
for the management and strategic development of the NCC Group
Software Resilience (Escrow) division. Prior to NCC Group, Simon
was the CEO of Hardware.com, an international value-added reseller
of hybrid IT solutions operating in the UK, the USA, Europe and South
Africa. He joined Hardware Group in 2004 as founding employee
and led the growth and scale up of the business over 14 years in
various roles including Global Sales Director and Chief Commercial
Officer. Simon’s early career includes International Marketing
Director of Type 20 SRL, a subsidiary of eyewear giant Luxottica
Group, and has also launched several start-ups in the Sports and
Media sector.
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 cover the whole spectrum of stakeholder management –
from public affairs to colleague engagement and media relations.
ROBERT HORTON
Global Head of
Assurance Delivery
Acting MD of Assurance
Netherlands (Fox-IT)
effective from April 2020
NICK ROWE
Managing Director,
Assurance North America
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.
54
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Nick joined NCC Group 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 the USA, 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 Group’s strategy in the region.
GOVERNANCE TOMAS SORENSEN BOYE
Managing Director,
Assurance Europe
IAN THOMAS
Managing Director,
Assurance UK and RoW
Tomas is the Group’s Managing Director in Denmark. He joined
NCC Group in 2016 as Commercial Director and took up the
position of Managing Director in April 2018. Over a 20 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 joined NCC Group in December 2018 and is responsible for the
Group’s UK and APAC 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
OLLIE WHITEHOUSE
Chief Technical 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 is Chief Technical Officer at NCC Group and
is responsible for the Group’s technical strategy, research and
development. Over the past 20 years, Ollie has worked in a variety
of cyber security consultancy, applied research and management
roles, including being responsible for security research and
assessment at RIM (BlackBerry) in Europe. Ollie is a research and
science adviser to UK government on cyber security and is also a
mentor at the CyLon incubator and an executive steering board
member for the Internet of Things Security Foundation.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
55
GOVERNANCE Board composition and division of responsibilities
Role profiles are in place for the Chair and Chief Executive Officer, which clearly set out the duties of each role.
Role
Responsibilities
Chair of the Board
(Chris Stone)
Chief Executive Officer
(Adam Palser)
Chief Financial Officer
(Tim Kowalski)
Senior Independent Director
(Chris Batterham)
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 Chair, 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.
Together with the senior management team (ExCom), 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 Chair 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.
Provides a sounding board for the Chair and serves as an intermediary for other Directors,
colleagues 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.
Non-Executive Directors
(Jonathan Brooks, Jennifer Duvalier
and Mike Ettling)
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.
Designated Non-Executive Director
for engagement with the workforce
(Jennifer Duvalier)
Company Secretary
(Tim Kowalski)
Leads on Board engagement with the workforce (please see separate section on page 58).
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 Chair on governance matters. The appointment and
removal of the Company Secretary is a matter for the Board as a whole.
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 the 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 2020 is shown below. Unless otherwise indicated, all Directors held office throughout the year.
Chris Stone
Adam Palser
Tim Kowalski
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
Committee Chair
Board
Audit
N/A
N/A
N/A
N/A
Nomination
Cyber
Remuneration
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
56
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE
What have we looked at as a Board during 2019/20?
At every meeting the Board reviews the minutes from the previous meeting and the status of any outstanding actions. Colleague engagement
is a standing agenda item presented by Jennifer Duvalier as our designated Non-Executive Director for workforce engagement. 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. In recent months, the Board has had reports on the Group’s trading in light of Covid-19 along with the defensive measures
the Group has taken in response to the pandemic. Potential opportunities created by Covid-19 have also been discussed.
The Board has also reviewed the following during 2019/20:
Leadership and colleagues
• Received an update on employee engagement and the results
of the annual employee engagement survey
• Noted and approved the Group’s values
• 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)
• Approved new Sharesave scheme launches in Australia, Denmark
and Spain
• Approved a new all employee Share Incentive Plan
• Had an update from the Global Chief People Officer (CPO) on
people, talent and succession planning
• Discussed and approved the approach to employee vetting
• Received an update on the composition of the Executive Committee
• Started a colleague engagement programme, with an appointed
designated NED to lead, with regular updates to the Board
• Appointed a permanent Global Chief People Officer (CPO), Group
Sales and Marketing Director, and Global Managing Director,
Software Resilience (Escrow)
•
Strategy
• Received regular updates on the Group’s transformation
programme, “Securing Growth Together” (SGT)
• Held a dedicated one day strategy session (see page 58)
• Discussed the strategy day and the key points arising out of it
• Approved the establishment of a subsidiary company in Japan
• Received a presentation from the new Group Sales and Marketing
Director on his first impressions and areas of opportunity, plus
also an overlay of sales and marketing against strategy
•
Governance
• Approved the change in Company Secretary
• 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
• Received a briefing on international travel and risks
• Noted and agreed the Board’s annual programme of business
•
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
• Noted and approved the 2019/20 Group insurance cover renewal
• Approved the drawing down of the Group’s revolving credit facility
to provide the Group with maximum cash flexibility
• Provided regular updates on the Group’s cost reduction initiatives
• Discussed and approved the 2020/21 budget and had
presentations from divisional MDs on their individual budgets
• Received presentations from the brokers and financial PR advisers
• Considered and approved trading updates
• Received regular updates from investor meetings and noted
circular investor letters
• Received presentations on shareholder perspectives on the Company
• Started a colleague engagement programme, with an appointed
designated NED to lead
• Completed the Board, Committee and Chair effectiveness reviews
and discussed the results of these reviews, agreeing on key focus
areas for the coming year
•
Other Group business
• Approved the Notice of AGM and Proxy Form
• Had a presentation on the Group’s ESG framework (labelled as
“sustainability” internally)
• Attended the AGM
• Recommended new Articles of Association to shareholders for
approval at the AGM
• Set Board and Committee meeting dates for the next three years
• Reflected on Board stakeholder engagement and mechanisms
for this
• Kept updated on 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 regular updates on Brexit
• Received regular updates on material litigation affecting the Group
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
57
GOVERNANCE Board composition and division of responsibilities continued
Board strategy session
In March 2020 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.
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. Directors are
required to inform the Board without delay should they be aware
of any actual or potential conflicts of interest and an annual check
on conflicts and a report to the Board is undertaken each year.
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:
• Assurance (UK, North America, Europe and APAC)
• Software Resilience (Escrow) (UK, North America, Europe and APAC)
• Overall corporate strategy
The Directors used the insights gained from the strategy sessions in
their consideration of the 2020/21 budget and associated approvals.
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.
Board independence
As required by the Code, at least 50 per cent of the Board, excluding
the Chair, are independent Non-Executive Directors. The Board
comprises two Executive Directors, four independent Non-Executive
Directors and the Non-Executive Chair.
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 a colleague 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 the 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
• Has at the point of this report served on the Board for more than
nine years from the date of their first election
Case study
Colleague engagement
Jennifer Duvalier agreed to become the designated Non-Executive
Director to lead the Board’s colleague engagement programme.
Jennifer also undertakes the designated Non-Executive Director role
at Mitie Group plc meaning she has the relevant experience as to
what is needed and can draw on her successful HR career. She is
committed to understanding the views of our colleagues and ensuring
they are incorporated into the Board’s decision making process.
Colleagues were introduced to Jennifer via our internal social
channels where she explained her role through a video and written
communications. Jennifer has access to these channels to enable
her to engage fully outside of the formal events.
Since the programme launched in January 2020, Jennifer has met
colleagues in Atlanta, Chicago, Edinburgh and New York – virtually
and face to face. The preference is face to face; however, with the
pandemic we switched to virtual events as it was important to keep
momentum. Jennifer has also been joined, on occasion, by our Chair,
Chris Stone, to meet colleagues, all of whom are invited from below
the mid-management level and all parts of the business to ensure
diversity of thought.
Feedback from each session’s participants is shared anonymously
to the Board and to our CEO, Adam Palser. This enables action to
be taken, further strengthening the value of listening. Colleagues
attending are invited to give their feedback and so far, results have
been positive and valued.
58
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
I have really enjoyed getting out and meeting
with colleagues across the Group. I have been
very pleased by the positive comments received
and have been impressed by the people I have
met. Of course, there are things to be addressed
in the short and long term and I hope that as the
designated Non-Executive Director I am able to
facilitate positive change and ensure that the
colleague voice is heard strongly within the
Boardroom and reflected within all the decisions
we as a Board make.
JENNIFER DUVALIER
Designated Non-Executive Director
GOVERNANCE 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
31 May 2020. The overall rating was very positive meaning that
the Board and its Committees are functioning well.
The results were presented to the March 2020 Board meeting and
following that the Chair held one-to-one calls with Board colleagues
for “deeper dives” into any areas they wished to discuss in more detail.
The Chair provided a final verbal update on the 2020 evaluation and
its focus areas at the April 2020 Board meeting and has held sessions
with the CEO to discuss areas highlighted by the evaluation process.
We have also scheduled in a progress check in September 2020
(six months on from the evaluation process) to ascertain how we are
doing against our proposed improvements and whether we need to
do anything different in the second half of the financial year.
The evaluation identified changes which would improve the working
of the Board, including:
• An increased focus on diversity
• Assessing and monitoring culture
• A continued focus on strategy and strategic discussion
• An increased focus on succession planning and ensuring that
these plans are reviewed on a regular basis
• An increased focus on CSR/ESG
Although all of the above were considered important, it was agreed
that the key area to focus on would be succession planning.
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 are set out in their
biographical profiles on pages 52 and 53.
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 71.
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.
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
No new members of the Board were appointed during the year.
New Directors are provided with an induction on appointment, which
would include 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, operating divisions,
colleagues, customers, suppliers and advisers and the role of the
Board in setting the tone of our culture and governance standards.
How will we improve in these areas?
To focus on the above actions, we have agreed the following:
Action
Progress and our plan
An increased focus
on diversity
Assessing and
monitoring culture
• Opportunity to improve diversity when there is a natural change of Board members
• Presenters to Board encouraged to highlight diversity statistics within their business area
• Unconscious bias training undertaken by the ExCom and will be undertaken by the Board
• More Board discussion on ensuring our culture aligns with our values
• Presenters to Board encouraged to highlight culture initiatives within their business area
• Having a designated NED for workforce engagement reporting back to every Board meeting will help
with this
• NEDs to spend more time in the business and at different offices (this may need to be done virtually
in the short to medium term)
• Reporting on the “mood” of the business within the monthly CEO reports
• Discussing the results of both the annual colleague engagement survey and the more regular
“pulse” surveys
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
59
GOVERNANCE Board composition and division of responsibilities continued
Board and Committee effectiveness review continued
Action
Progress and our plan
A continued focus on
strategy and strategic
discussion
• One day dedicated strategy session now held annually, attended by all divisional Managing Directors
and Finance Directors
• Ensuring strategy is more of an ongoing Board discussion between annual strategy days
• Shifting Board discussion away from short-term tactical issues to more longer-term strategic issues
An increased focus on
succession planning and
ensuring that these plans
are reviewed on a regular
basis
An increased focus on
CSR/ESG (labelled as
“sustainability” internally)
• Annual budgets presented by each divisional Managing Director
• Board will check in on strategy halfway through the year
• Additional Nomination Committee meeting planned during the coming year to focus on succession
planning for the Board and senior management including a discussion on Executive Director succession
planning in general terms
• Chris Stone (Nomination Committee Chair) and Colin Watt (Global Chief People Officer) have also met
separately to scope a separate workstream on succession planning
• Global Head of Communications taken on ESG lead within the Group and presents every six months
to the Board
• Gap analysis will be undertaken to provide an action plan to close the gaps
• Recognition that this area will become an ever more important area for new and existing clients when
they are evaluating who to buy from and partner with
• Impact of NCC Group’s operations will be reflected upon, e.g. energy use particularly from servers
and client travel
• Separate social impact/social value report to be done in the future
• Partnerships with organisations such as Stonewall and the establishment of a global LGBTQIA+ Committee
Progress from the previous year
The 2020 evaluation process also reviewed progress on actions identified in the 2019 and 2018 evaluation processes.
Area identified in 2019 and 2018
evaluation processes
2020 evaluation – progress
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
Developing Board
involvement in the Group’s
culture related initiatives
Strengthening of the
senior management team
Good progress and firmly on the Board’s and Nomination Committee’s agenda
(see above table for further details).
Good progress and firmly on the Board’s agenda (see above table for further details).
Good progress (see above table for further details).
Good progress. The Board has interacted with a lot more colleagues on both a Company-wide basis and
via receiving presentations from various members of the ExCom plus senior managers.
Presentations from the Group Sales and Marketing Director on the customer perspective and regular
updates on customers within the CEO’s Report.
Good progress (see above table for further details).
Good progress during the year with the appointment of:
• Global Chief People Officer
• Global Managing Director, Software Resilience (Escrow)
• Group Sales and Marketing Director
Plus other senior positions now filled, e.g. Director of Global Governance and Group Financial Controller.
60
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE BOARD, COMMITTEE AND CHAIR EVALUATION PROCESS 2020
Company Secretary reviewed 2019
questionnaires and evaluation
exercise results and, based on this,
proposed questionnaires for the
2020 evaluation exercise.
The proposed questionnaires were
reviewed and approved by the Chair
and Committee Chair and (for the
Chair’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
Chair and Committee Chair and
(for the Chair’s review) the Senior
Independent Director.
Board members, the Company
Secretary and regular Committee
attendees were then invited to
complete the questionnaires.
The Chair held one-to-one meetings
with Board members where areas
of interest could be discussed in
more detail.
The Senior Independent Director met
with the Chair to discuss the Chair
evaluation results.
Committee evaluation
During the year, each of the Audit, Remuneration, Nomination and Cyber 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
Audit
Focus areas
• Continuing to focus on systems implementation and risk and internal audit
• Ensuring more of a connection between our risk appetite and internal audit programme to ensure that
the most material risks are covered
Cyber
• Taking the papers/presentations as read and focusing on more value-adding dialogue and discussion
rather than going through the Committee briefing packs
• Further updates on the industry, cyber threats, dark web, etc.
• More frequent updates on the nature of the changing cyber threat landscape
Nomination
• The main area for Committee focus would be succession planning for the Board and senior
management and in particular a discussion on Executive Director succession planning in general terms
over the next 6–12 months
Remuneration
• Having further opportunity for more open and unfettered discussion
• Undertaking a review of the remuneration advisers
• Ensuring that the Group’s reward structure aligns to the key issues facing the Group rather than
standard industry practice
Individual Director appraisals process
During the year, the Senior Independent Non-Executive Director evaluated the performance of the Chair and the Chair evaluated the
performance of each Director. In addition, the Non-Executive Directors met independently from the Executive Directors to discuss with
the Chair the overall functioning of the Board and his contribution in making it effective.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
61
GOVERNANCE Board composition and division of responsibilities continued
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 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.
Internal control
The Group has a system of internal controls which aims 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, see pages 30 to 36.
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 68.
The Audit Committee makes a recommendation to the Board on
effectiveness which the Board considers, together with reports from
the Cyber Committee, in forming its own view on the effectiveness
of the risk management and internal control systems.
During the year ended 31 May 2020, 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 68 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 77 to 83 of the Remuneration Committee Report.
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’s 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.
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 the
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 and senior management 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 they are 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.
62
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Shareholder engagement
Share capital structure
The Company’s issued share capital at 31 May 2020 consisted
of 278,909,171 ordinary shares of 1p 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 takes 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 AGM.
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, our Senior Independent
Director, and I are also available to meet with investors should the
need arise. I met with our larger investors in February 2020 and fed
back my findings to Board colleagues at the next Board meeting.
In addition, our brokers undertook an investor survey on the back
of our half year results in January and the results of this were
presented and discussed at a Board meeting. Our aim is to engage
with our shareholders in an open and meaningful way. During the
financial year the Directors held a number of meetings with
shareholders as set out below.
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.
Substantial shareholdings
As at 31 May 2020, the Company had been notified of the following
interests of 3 per cent or more in the issued share capital of the
Company under the UK Disclosure and Transparency Rules:
Shareholder
Number of
ordinary shares
% of
NCC’s total
share capital
Legal & General Investment Management 23,614,274
Schroder Investment Management
Castlefield Fund Partners
Montanaro Asset Management
Artemis Investment Management
Unicorn Asset Management
15,364,318
14,325,000
14,301,032
13,822,640
10,796,426
8.50%
5.53%
5.16%
5.15%
4.98%
3.89%
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 92 of the Directors’ Remuneration Report.
Annual General Meeting
The 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 Chair seeks to ensure
that the Chairs of the Audit, Remuneration, Nomination and Cyber
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 2019 AGM, shareholders representing over 69.44 per cent
of the Company’s issued share capital returned their proxy votes.
Investor meetings
One-to-one meetings
Conference calls
Group meetings
20
5
1
On behalf of the Board
Chris Stone
Non-Executive Chair
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
63
GOVERNANCE Audit Committee report
Ensuring integrity of
our internal controls
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 Chair
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, and 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
Guidance and Transparency Rules and other regulations
• Reviewing material information and significant accounting
judgments contained in the Annual Report and Accounts
• 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
2019/20 highlights
• Thorough review of impact of Covid-19 on key
judgmental areas
• Established new policy on the use of APMs and
ISIs in view of best practice
• Review of IFRS 16 implementation
• Review of accounting policy for MDR revenue
recognition
• Review of SGT progress and time/cost overruns
2020/21 priorities
• Review SGT progress during final year of
programme, and ensure controls are in place
to prevent additional time/cost overruns
• Monitor ongoing impact of Covid-19 on key areas
of judgment
• Ensure compliance with new policy on APMs
and ISIs
64
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE • 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:
• Initiated and considered a revised risk review undertaken by
the new Director of Global Governance who was appointed
in January 2020
• Reviewed the ongoing programme to enhance the quality and
clarity 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
• Received regular briefings from the Director of Global
Governance summarising risk management and control issues
• Reviewed the findings from the internal audit projects conducted
during the year and approved the internal audit plan for the
forthcoming year
• Reviewed the findings from the audit for the year ended
31 May 2019 and from the auditors’ review of the half year
results to 30 November 2019
• Reviewed all significant accounting areas and areas of significant
management judgment. Reviewed KPMG audit conclusions in
these areas
• Reviewed the impact of IFRS 16 ‘Leases’ and disclosures
following transition
• Reviewed the accounting policy for revenue recognition with
respect to Managed Detection and Response, a significant
growth area for the Group, to ensure accordance with IFRS 15
• Reviewed management’s Going Concern and Viability Statement
assessment, including Brexit and Covid-19 considerations.
Reviewed KPMG audit conclusions in these areas
• Reviewed the impact of Covid-19 and management’s conclusions
on how this has impacted other judgmental areas such as
impairment reviews and provisions for doubtful debts and
expected credit losses
• Reviewed the progress of Securing Growth Together as we
enter our final year of the programme, and commenced a review
of the reasons for any time and cost overruns experienced
(e.g. systems implementation)
• Reviewed management’s assessment and our tax advisers’ advice
on transfer pricing due to the changing nature of the Group’s global
operations. Reviewed KPMG audit conclusions in these areas
• Was updated on progress in relation to the Securing Growth
Together programme and received an internal audit health check
report on the programme
Composition
The Audit Committee is chaired by me, a Chartered Accountant of
41 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 Jonathan Brooks and Mike Ettling. 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 52 and 53.
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 Chair, 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
2020 of the Group’s Director of Global Governance who heads up
the Group’s internal audit function, a number of meetings were held
with her without management being present.
The attendance of individual Committee members at Audit
Committee meetings is shown in the table below:
Meetings attended
Attendee
Chris Batterham
Jonathan Brooks
Mike Ettling
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 challenged the significant
estimates and judgments made by the Group’s finance team and
considered the external auditors’ reports setting out their views
on the accounting treatments and judgments included in the
Financial Statements.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
65
GOVERNANCE
Audit Committee report continued
Significant accounting areas and areas of significant management judgment or estimation uncertainty
The table below summarises the significant accounting issues, judgments and estimates 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 or estimation 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
Related metric
Accounting
judgment
Estimation required
Group net assets £214.1m
Goodwill value £193.1m
Adjusted ¹ operating margin N/A
High
Intangible assets – carrying values
(recurring)
Group net assets £214.1m
Intangible assets value £39.2m
Adjusted ¹ operating margin N/A
Low
Individually Significant Items and APMs
(recurring)
Net charges £nil
Adjusted operating profit ¹ £29.3m
Adjusted ¹ operating margin Yes
Low
Long-term loss-making contracts
(recurring)
Group net assets £214.1m
Adjusted operating profit ¹ £29.3m
Adjusted ¹ operating margin N/A
High
Revenue recognition – Managed Detection
and Response revenues (IFRS 15)
(current year focus)
Revenue £263.7m
Adjusted operating profit ¹ £29.3m
Revenue and growth rates
Adjusted ¹ operating margin
Yes
Low
Adoption of IFRS 16 ‘Leases’
(current year focus)
Group net assets £214.1m
Adjusted operating profit ¹ £29.3m
Adjusted ¹ operating margin Yes
Medium
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.
Goodwill carrying value
(Recurring item: see Note 12 to the Financial Statements)
The Group has made a number of historical acquisitions which
generated goodwill at the time of purchase. On 31 May 2020,
the Group had goodwill of £193.1m.
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 (higher of discounted future cash flows or
fair value) 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 the discount rates to be used. This is set out
in more detail in Note 12 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, particularly in relation to Fox-IT since this CGU
is the most sensitive to movements in estimates and assumptions.
There have been no changes to the CGUs in the current year.
The Committee concluded that no impairment should be recognised
as either the discounted future cash flows or fair value was higher
than carrying value. Sensitivity analysis is contained within Note 12
to the Financial Statements.
Intangible assets – carrying value
(Including acquired intangibles, software and capitalised development
costs) (Recurring item: see Note 12 to the Financial Statements)
The total value of acquired intangible assets on 31 May 2020 was
£39.2m. 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 12 to the Financial Statements. Annual
impairment reviews of each intangible asset are based on the same
underlying discounted future cash flow models and fair value data
that are used in assessing the carrying value of goodwill. These
intangibles are included in their respective cash generating units.
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.
Fair values are derived from external third party data. This is set out
in more detail in Note 12 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.
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 (including
employee costs) are capitalised. The total value of development
costs on 31 May 2020 was £4.2m, including additions of £1.3m.
During the year, management undertook a further review of assets
likely to be impacted by the new system implementations arising
from the Securing Growth Together programme. This resulted in
no further write-offs. In previous years, write-offs for a number of
legacy systems (net of R&D tax credit) were recognised as an
Individually Significant Item.
Individually Significant Items and APMs
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
66
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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.
During the year, management has reviewed the application of APMs
and has considered ongoing FRC and ESMA best practice guidance
in this area. Accordingly, management has concluded that for future
accounting periods, share-based payments and amortisation of acquired
intangibles, which are currently presented as adjusting items, should
be included within underlying results. The decision to adopt this
presentation for future reporting periods rather than in the current
reporting period is because the implementation of IFRS 16 in the
year (which does not require the restatement of 2019 comparatives)
means that the 2020 results are not on a like-for-like basis with
2019, and management considers that it would be very difficult to
understand the true, underlying performance of the Group if this
presentational change to the Income Statement was made in the
current reporting period. The impact of this proposal in future
reporting periods will be a reduction in adjusted measures. Further
details, including an illustration of how the Income Statement for
the year ended 31 May 2020 would have been presented under this
proposed basis, is included in Note 3 to the Financial Statements.
Following this review and challenge to management, the Committee
concluded that no ISIs should be recognised in the year ended
31 May 2020 and concurred with management’s conclusions on
the future presentation of the Income Statement with respect to
share-based payments and amortisation of intangibles.
Loss-making contracts
(Recurring item: see Note 21 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 2018. This review
was undertaken due to a significant change in the expected phasing
of the contract revenues, although the overall expected loss from the
contract is unchanged. This revenue phasing change relates to the final
deliverable within the contract, which is now expected to be recognised
in 2021. Management has reviewed the previous estimates of future
income, costs and resulting cash flows associated with the contract,
as well as the net present value (NPV) calculations of the 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 the liabilities recorded are reasonable.
In addition, during the year, the Group reviewed an additional
long-term contract in the Netherlands for the development and
supply of a new product. This review was undertaken due to a
change in the expected number of hours to complete the contract
during 2021. Management reviewed the previous estimates of
future income, costs and resulting cash flows associated with the
contract, as well as the net present value (NPV) calculations of the
contract. Following this review, management’s conclusions were
to recognise a provision for this additional long-term contract of
£0.2m. The Committee reviewed and challenged the assumptions
underpinning this recognition and is satisfied that the contract has
been correctly treated, and that in the case of the loss-making
contract the liabilities recorded are reasonable.
Revenue recognition – Managed Detection and Response
revenues (IFRS 15)
(Current year focus item: see Note 2 to the Financial Statements)
Managed Detection and Response (MDR) services is a growing
revenue stream within the Group’s Assurance division. A typical MDR
contract has a number of performance obligations and sub-revenue
streams, including set-up fees, post “go-live” fees, licence fees and
monitoring services. Due to the growing nature of this revenue
stream, management has performed a full review of the revenue
recognition principles in relation to MDR revenues using the five-step
model. Following this review, management concluded on a critical
judgment in relation to IFRS 15 agency/principal control criteria. In
particular, as control is not conclusive, management reviewed specific
IFRS 15 guidance, applying it to the different types of MDR contracts.
The Committee has reviewed management’s assessment of the
revenue recognition principles in relation to each element of the
Group’s MDR contracts and is satisfied that they are reasonable.
Lease accounting (IFRS 16)
(Current year focus item: see Note 1 to the Financial Statements)
The Group implemented IFRS 16 ‘Leases’ with effect from
1 June 2019. The Group has adopted the accounting standard
using the modified retrospective approach to transition and has
accordingly not restated prior periods. The results for the year ended
31 May 2020 are not directly comparable with those reported under
the previous applicable accounting standard (IAS 17). On this basis,
to provide meaningful comparatives, the results for the year ended
31 May 2020 have therefore also been presented under IAS 17 with
the “like-for-like” numbers shown on an IAS 17 basis (Pre-IFRS 16).
This Alternative Performance Measure will be presented for one
year until the comparatives also include the adoption of IFRS 16.
The impact of adopting IFRS 16 is that leases which were
previously classified as operating leases under IAS 17 for certain
properties, equipment and motor vehicles are now recognised in
the Financial Statements using the new requirements of IFRS 16.
The Group does not lease any server equipment in relation to the
provision of Software Resilience services or have embedded leases
within Assurance service contracts.
The Committee discussed the financial impact, the treatment being
adopted and the IFRS 16 transitional disclosures, and is satisfied that
the Group’s leases have been correctly accounted for and disclosed.
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 findings of which have been reviewed by the Committee. The
Group will look to increase the scope of the audit plan during FY21.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
67
GOVERNANCE Audit Committee report continued
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 30 to 36.
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,
discretionary cost reviews 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
• 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
• Monitoring the completion of the Group’s mandatory
employee training
Whistleblowing and confidential reporting procedures
The Group operates a confidential reporting and whistleblowing
procedure (known as our “Whistleblowing 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 and effective and
continues to improve.
Auditors’ independence and objectivity
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.
• Clearly documented internal procedures set out in the Group’s
ISO 9001:2008 accredited quality manual
During this financial year non-audit fees of £50,000 (2019: £27,500)
were paid to the external auditors for the half year review.
• 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 2020 included:
• Assessment of the identification and management of risks connected
to the Group’s strategy and management of strategic change
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 were not compromised.
68
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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:
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.
• 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
• The auditors’ explanations of significant risks to audit quality by
reference to the Company’s specific circumstances and changes
to the risks, including Covid-19 implications
• 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
Related party transactions and other fees approved by
the Committee
Refer to Note 32 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
2020 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, and
reviews of the balance of good and bad news and ensure the
Annual Report and Accounts correctly reflects:
• The FRC’s Audit Quality Review report relating to KPMG
• The Group’s position and performance as described on pages
4 to 6 and 22 to 29
• The Group’s business model as described on pages 18 and 19
• The Group’s strategy, as described on pages 20 and 21
The independent reviewers 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 96.
Chris Batterham
Chair, Audit Committee
3 September 2020
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.
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.
FAIR, BALANCED AND UNDERSTANDABLE
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
• Review of detailed
verification documents
• Those who have not been
major contributors
• Review of findings and
observations from
independent reviewers
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
69
GOVERNANCE Nomination Committee report
Assessing skills
and capabilities
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). The
matter is fully on our agenda.
CHRIS STONE
Committee Chair
The members of the Nomination Committee are me along with
Chris Batterham, Jonathan Brooks and Jennifer Duvalier.
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 Chair 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 Officer, in
conjunction with the Chair, leads the process for the Chief Financial
Officer. The Senior Independent Director leads the process for
a new Chair of the Board.
2019/20 highlights
• Succession planning and senior talent session held
• Briefed on plans to be a destination employer with
a quirky, distinctive environment
• Obtained a more in-depth understanding of
diversity and inclusion throughout the Group
2020/21 priorities
• Succession planning – deep dive session planned
• Continue to maintain sharp focus on diversity
and inclusion at a senior level and throughout
the organisation
• Being aware of future skills needs for
the organisation
70
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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 the assessment of internal candidates and
are then formally considered by the Nomination Committee.
Extensive external referencing is completed.
Activities during the year
During the year, the Committee:
• Evaluated the skills, knowledge and experience around the
Board table
• Reviewed the structure, size and composition of the Board
• Reviewed the Directors’ length of service
• Reviewed the diversity of the Board
• Reviewed the memberships of all Committees
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.
The Group’s gender diversity statistics are set out on page 45. At Board
level, we currently have one female on our Board and no BAME Board
members, 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). 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 be a quick process but
we are very mindful of the need to improve this and take positive
action, and the matter is fully on our agenda.
When a new Director is appointed they receive a full, formal and
tailored induction into the Company and discuss with the Chair
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.nccgroupplc.com/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.
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.
• Reviewed the expected time commitment of the Chair and the
Non-Executive Directors
During the year, the Nomination Committee had an in-depth
presentation from the Chief People Officer and the Global Head
of Learning and Development which focused on people, talent and
succession planning. This presentation looked at the overall current
position and in particular senior succession, i.e. the Executive
Committee and its direct reports. The presentation also described a
roadmap to a 2022 future state where we wish to be a “destination
employer with a quirky, distinctive environment.” In terms of our
ongoing focus on improving diversity, we are:
Processes
• Reviewing all our processes/documentation as part of our
Workday system go-live – i.e. ensuring the wording on adverts
and job descriptions is gender neutral
• Providing better tracking and reporting at all points of the
colleague cycle to check for bias
Training
• Introducing a manager essentials programme which covers
recruiting and managing a diverse team
• Providing unconscious bias training for leadership groups
Colleague voice
• Building on the NCC Cares Champions, creating colleague forums so
that all colleagues have a voice and feel a greater sense of belonging
and inclusion, regardless of their characteristics/how they identify
Long term
• Building strategic partnerships with organisations with hard to
reach groups – women in technology, neurodiversity groups and
BAME groups
• Connecting the initiatives we are involved in so we get the best return
for investment – work experience, mentoring and Cyberfirst bursaries
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 the call
for some additional work on succession planning for the Board, the
Executive Committee and senior management.
The intention is to again have a Committee discussion on all senior
roles during the 2020/21 financial year, to ensure that we have the
depth and breadth of diverse talent to deliver our strategy.
Attendee
Chris Stone
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Meetings attended
External search consultancies
No external search consultancies were utilised in the year.
Chris Stone
Chair, Nomination Committee
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
71
GOVERNANCE Cyber Committee report
A focus on
cyber risks
Through the Committee, the Group
maintains a strong focus on information
security and data protection risks, the
controls we have in place to mitigate
them, and how fluctuations in the
cyber threat landscape affect both
the risks and mitigations.
CHRIS STONE
Committee Chair
The Cyber 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 its customers entrust
to it, with the proper care and attention.
The Committee was formed in November 2016 and I have been
Chair 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 Global Governance, the Group’s Chief
Information Security Officer (CISO), and the Group’s Data Protection
Officer (DPO) 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 Committee’s objectives and responsibilities
The Cyber 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
2019/20 highlights
• Implementing Microsoft Defender ATP
• Continued safe rollout of new cloud systems
• Successfully dealing with an upswing in SARs in
a timely manner, hitting deadlines, and outsourcing
for the first time
• Progress on our strategy despite challenging
volumes of BAU and urgent Covid-19 related
activities such as Cyberstore, LinkedIn and Google
for re-marketing, and ImPartner and Hubspot
for marketing
2020/21 priorities
• Enhancing SOC detection use cases
• Running cyber exercises to test our
response processes
• Development of an Information Security and
Data Protection (ISDP) Champion Framework
throughout the Group
• Development of a global risk
management framework
72
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE • Receive and consider the regular update reports from the CISO
and DPO and ensure the CISO and DPO are given the right of
direct access to the Committee
• Consider and recommend actions in respect of all cyber risk
issues escalated to it
• 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 can be found in the Group’s Investors
section of the Company’s website: https://www.nccgroupplc.com/
investor-relations/corporate-governance/. The terms of reference
are reviewed annually and updated when necessary.
Committee effectiveness
During the year, the Cyber 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 and effective and continues to improve. In terms of
specific focus areas for the year ahead we agreed on the following:
• Taking the papers/presentations as read and focusing on more
value-adding dialogue
• Further updates on the industry, cyber threats, dark web, etc.
• More frequent updates on the nature of the changing cyber
threat landscape
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.
Committee activities during the year
The Committee assessed 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 continued to progress smoothly, with the
necessary layered defences to protect the information that we
entrust to these systems.
The Committee oversees the Information Security and Data Protection
(ISDP) Steering Group which comprises the CISO and the DPO along
with a number of Executive Committee members and Managing
Directors, ensuring that cyber security and data protection matters
are discussed at the very highest levels within the Group.
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.
The Group continues to improve its cyber security controls, taking
full advantage of the expertise within the Group that it offers to its
customers. We implemented Microsoft Defender ATP – a significant
change to our corporate endpoint protection regime – in January
2020, dramatically improving the granularity of security monitoring
that the SOC is able to carry out on the Group’s systems. This meant
that we were able to transition to full remote working during the
coronavirus pandemic confident in our ability to detect attacks even
when endpoints are not connected to the corporate network.
In terms of our global data protection compliance programme
and internal data privacy activities, our approach continues to be
proportionate, pragmatic and risk based. New laws such as the
Californian Consumer Privacy Act have been interwoven in our
policies and training, alongside a continuing Group-wide focus
on GDPR compliance. The Group continues to develop strategies,
policies and processes to improve its data protection maturity.
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 to make sure that the
Group continues to have the necessary resource to cover all its
data protection obligations. We now have an experienced and
well resourced data protection team with colleagues primarily
in the UK but also in the US, where we have a hybrid compliance
and privacy role
• 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
Committee meetings
During this financial year, the Committee met twice and the attendance
of individual Committee members at the Cyber Committee meetings
is shown in the table below. Unless otherwise indicated, all Directors
held office throughout the year.
Meetings attended
Attendee
Chris Stone
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Chris Stone
Chair, Cyber Committee
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
73
GOVERNANCE
Remuneration Committee report
Annual statement
Developing
our policy
In light of the Covid-19 pandemic, we
have only made incremental changes
to our Remuneration Policy for the
period 2020–23. Once the pandemic
is behind us, we do expect to
undertake a more comprehensive
review of our Policy, possibly as early
as 2021, to ensure it better reflects the
needs of the business. We have also
embedded the key changes to the
Committee’s responsibilities following
the recent changes arising from the
2018 UK Corporate Governance Code.
JONATHAN BROOKS
Committee Chair
On behalf of your Board, I am pleased to present our Directors’
Remuneration Report (DRR) for the year ended 31 May 2020.
The report is divided into three sections: an Annual Statement,
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. At the 2020 AGM,
we will be asking shareholders to vote on a new Remuneration Policy
that will apply for the period 2020–23. A copy of the 2020–23
Remuneration Policy, which shows the key changes from the 2017–20
Remuneration Policy, can be found in the next section of this report.
This revised Remuneration Policy has few changes from the current
Remuneration Policy other than to ensure that there is pension
alignment (by the end of 2022) between our Executive Directors
Adam Palser (5%) and Tim Kowalski (10%), and the wider UK
workforce pension of 4.5% of base salary, and secondly to formalise
our post-employment shareholding policy. During the coming year
we intend to undertake a comprehensive review of the policy to ensure
that it better reflects the future needs and shape of the business and
incentivises performance appropriately. Depending on the outcome
of that review, we may put a revised policy to shareholders at the
2021 AGM. This will also allow us to assess the impact of Covid-19
on the business.
2019/20 highlights
• Responded to the impact of Covid-19 and adapted
variable remuneration quickly
• Consulted with shareholders on new Remuneration
Policy and 2019/20 and 2020/21 incentives
• Launched new colleague share plans in Australia,
Denmark and Spain
• Reviewed our share plan rules
2020/21 priorities
• Intention to consult with shareholders once impact
of Covid-19 is better known
• Remaining agile with regard to remuneration
during Covid-19 pandemic
• Embedding new Restricted Share Plan for wider
employee share ownership
74
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE At the 2020 AGM we will also be seeking shareholder approval
for the following executive share plans:
• Long Term Incentive Plan (LTIP) – refreshing the rules and
ensuring they adhere to best practice
• Deferred Annual Bonus Share Plan (DABS Plan) – making this
a standalone plan and allowing us more flexibility to satisfy these
awards with newly issued shares rather than exclusively via
shares bought in the market
• Restricted Share Plan (RSP) – this will enable RSP grants at
Executive Committee level and below
There were no Board changes during 2019/20.
Our commitment to senior management owning a meaningful
shareholding in the Company continues as it does across the entire
Group. During the year, we continued to offer employee share plans
in the UK, the US and Canada, and the Netherlands, which, as usual,
proved popular in terms of take-up. For the first time, this year we
launched employee share plans in Australia, Denmark and Spain
and were very encouraged by the overall participation levels.
For the 2020/21 financial year, in line with the general workforce,
neither the Chief Executive Officer nor the Chief Financial Officer
have been awarded an increase in base salary. Should the wider
workforce receive a pay rise during 2020/21 then we will revisit
this during the year, but any increases will not be more than those
for the wider workforce.
In line with the Policy, Non-Executive Director fees are also reviewed
annually. Again, in line with the wider workforce and the Executive
Directors no increases were proposed following this review. As
reported last year, 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 introduced, with effect from 6 April 2019, an expense
allowance which would be incorporated into base fees. In light of the
Covid-19 crisis and the fact that the Board was meeting virtually,
this expense allowance was not paid for March, April and May 2020.
Details of these fees and allowances are given in the Annual Report
on Remuneration on page 85.
Performance related pay – bonus
The annual bonus for the year ended 31 May 2020 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 23 per cent of base salary
for the CEO and 20 per cent 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
£37.0m and £40.0m. Performance was on track during the first
three quarters of trading. However, with the impact of Covid-19,
the last quarter fell short, although in the opinion of the Board, the
Company performed very well in the circumstances. No colleagues
were furloughed, there were no redundancies due to Covid-19 and
external financial support was not required. The final result saw
an adjusted operating profit 1 of £31.1m which, while short of the
threshold target, in the context of the economic downturn and
uncertain outlook represented a good outcome for the Company,
being only some 8 per cent lower than the corresponding result
in 2019. Nonetheless, the missed financial target resulted in
no bonuses for financial targets being paid. However, given the
creditable result for the business, the Remuneration Committee
was minded to modify the financial underpin and pay the strategic
element of the bonus, and so undertook a consultation exercise with
its major shareholders, who were broadly supportive. Consequently,
the Committee exercised its discretion to assess the underpin on
the basis of performance over the first three quarters and taking
account of the fact that the Company had not received external
support and that underlying performance remains good. As a result
of performance against the strategic objectives the CEO earned a
bonus of 23 per cent of base salary and the CFO a bonus of 20 per
cent of base salary. As a reminder, the strategic objectives for the
CEO and CFO for 2019/20 are set out below, and further information
on the assessment of performance is provided later in the report.
2019/20 objectives
CEO only
• Colleague engagement, diversity and inclusion
• Continued delivery of efficiencies through the Securing Growth
Together programme
• Develop and implement a strategic plan for Software Resilience
(Escrow) and EaaS growth
CFO only
• Colleague engagement, diversity and inclusion
• Best-in-class finance and administration functions
• Develop and streamline KPI reporting
2020/21 objectives
For 2020/21, in anticipation of the continued trading uncertainties
following the Covid-19 pandemic, the Committee intends to keep
the annual bonus structure the same, comprising financial and
strategic elements. However, we intend to increase the amount of
bonus attributable to strategic targets to 40 per cent, with 60 per
cent being attributed to the achievement of financial targets. The
increased weighting of 40 per cent on the strategic element will
only apply for the 2020/21 financial year and after this will revert
back to our normal practice of 25 per cent. The increased focus
on strategic goals will help us continue to lay the foundations for
future growth which were already being successfully laid before the
impact of the Covid-19 pandemic. We intend to use the increased
weighting to increase the significance of a range of measures under
management’s control which we use to assess performance. This
should result in a more rounded assessment of performance for
2020/21 and provide a better incentive and greater alignment
with shareholders in an uncertain year.
Furthermore, rather than set a single profit underpin, the Company
has modelled a range of scenarios including a scenario where the
impact of the pandemic is prolonged as well as a more optimistic
scenario assuming a steady recovery in demand in the second half
of the year. Following shareholder consultation, we intend to use the
first scenario for the underpin when determining the strategic element
of the bonus. For the financial element of the bonus, our current plan
is to divide the year in two, with the first six months of the year
qualifying for a financial bonus based on the slower recovery scenario,
with the financial target for the second half of the year being based
on a more optimistic one, assuming a sustained recovery materialises.
The adjusted operating profit ¹ target for 2020/21 will be reported
on within the 2021 Remuneration Report with bonuses of between
12 per cent and 60 per cent of base salary being calculated by
linear interpolation.
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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
75
GOVERNANCE Remuneration Committee report continued
Annual statement continued
2020/21 objectives continued
Strategic targets for both the CEO and CFO in 2020/21 include:
• Broadening the product portfolio: the broad objective is to
offer the complete portfolio of products and services tailored to
specific customer sectors and to be able to deliver this globally.
This will be broken down by market with specific revenue
objectives for different products. There will be a basket of specific
and measurable targets within this strategic objective (20%)
• Sustainability: to act as a responsible corporate citizen to
ensure our future. This will include objectives with respect to
training of future leaders in the Group, diversity targets for
recruitment, the development of action plans to improve
engagement with under-represented groups and the
assessment of customer and employee experience (10%)
• Specific improvements and efficiencies: delivered through
strategic programmes with the objective of placing data and
process re-engineering at the heart of the business. This will
include the development of global support functions, certain
identified key hires, as well as specific global product lines (10%)
35 per cent 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
The LTIP outcome for those LTIPs issued in 2017 was an award
equivalent to 52.37% of the maximum award, which in the case
of the CEO constituted an award of 93,533 shares.
With respect to the LTIP for 2020–23, the Committee intends
to make awards of up to 100 per cent of base salary and these
will vest after three years as long as a number of demanding
performance targets are satisfied. As in previous years, 60 per
cent of the potential award will be based on the achievement of a
demanding EPS target, 30 per cent on the achievements of certain
cash targets and 10 per cent on relative TSR targets. It is intended
to issue LTIPs to the Executive Directors shortly after publication
of the full year results in September or October 2020, although
the issue of these may be delayed depending on an assessment
of the impact of Covid-19 on the business until February 2021.
Clawback and malus provisions are in place for the LTIP.
In order to further align Executives with shareholders, Executives
are required to retain any LTIP vested shares (net of tax) for a
period of two years. After this holding period, all vested shares must
also be retained if the shareholding guideline has not been met.
In addition, our post-employment shareholding policy requires the
two year holding period to be enforced once an Executive has left
employment, and requires any outstanding deferred bonus awards
to vest at the normal time.
At the AGM in September 2019, 100 per cent of shareholders
voted in favour of the adoption of the Annual Report on
Remuneration. The 2020 Annual Statement and Annual Report
on Remuneration will be put to an advisory vote at the AGM on
20 October 2020, 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. Depending on the outcome of that review,
a new Policy for the period 2021–24 may be put to shareholders
at the 2021 AGM. As part of this process, before finalising any
proposals for change, we would consult with our major shareholders.
We will also be continuing to focus on the Committee’s additional
responsibilities that fall under its consideration and review remit
arising from the 2018 UK Corporate Governance Code.
These include:
• Ensuring that the Remuneration Policy continues to support
and incentivise the achievement of our strategy
• Setting the remuneration for the Executive Committee (i.e. 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 and reporting on the CEO to colleague pay ratio
between our CEO and UK workforce
Jonathan Brooks
Chair, Remuneration Committee
3 September 2020
76
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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 long-term sustained growth in shareholder value,
without encouragement to take 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 and delivered
in a mix of cash and shares
• 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 will take effect from the date of the 2020 AGM on
20 October 2020.
Current Policy table for Executive Directors
Purpose and link to short
and long-term strategic
objectives
Salary
Operation (including framework to assess performance)
Maximum opportunity
Changes since
last Directors’
Remuneration
Policy
To 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 2020 annually unless responsibilities change.
Details of current Executive
Director salaries are set out
on page 85.
N/A
Pay reviews take into account Group and personal performance.
Salaries are set on appointment and benchmarked periodically
against 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 colleagues 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.
Salary increases are normally
in line with those for other
colleagues but also take
account of other factors such
as changes to responsibility
and the complexity of the role.
Benefits
To attract, retain and
reward high calibre
Executive Directors
Benefits in kind currently 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 or other benefits
introduced for all employees.
Market-competitive benefits.
N/A
SAYE Sharesave
Scheme subject to
HMRC-approved limits.
Pension
To provide a
competitive benefit,
which attracts high
calibre Executives
and allows flexible
retirement planning to
suit individual needs
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 per cent of base salary
into the Group scheme,
providing they make a
contribution of not less than
5 per cent of base salary, or
a base salary supplement of
10 per cent of base salary.
Pensions will be brought in
line with workforce levels
by the end of 2022.
Alignment
of Executive
Directors’
pensions
with the wider
workforce
by the end
of 2022.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
77
GOVERNANCE Remuneration Committee report continued
Directors’ remuneration policy continued
Current Policy table for Executive Directors continued
Purpose and link to short
and long-term strategic
objectives
Annual bonus
To drive and reward
sustainable business
performance
Operation (including framework to assess performance)
Maximum opportunity
Changes since
last Directors’
Remuneration
Policy
Chief Executive Officer: 100
per cent of base salary.
N/A
Chief Financial Officer: 100
per cent of base salary.
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 colleague engagement. Performance below the minimum
performance target results in no bonus. No more than 20 per cent
of the maximum opportunity is paid for achievement of the
threshold performance targets. Payments rise from the threshold
payment to 100 per cent 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.
At least 35 per cent of any bonus payment is normally deferred
into shares or 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.
Award over shares with a
face value at grant of 100
per cent of salary p.a.
N/A
Long Term Incentive Plan
To drive long-term
performance in line
with Group strategy
and incentivise
through share
ownership
Awards have a performance period of three years and must be
held for a further two years after vesting.
The level of vesting is determined by measures appropriate to
the strategic priorities of the business. At least half of any award
will normally be subject to financial performance measures.
Measures might include, but not exclusively, EPS, cash flow
and relative TSR metrics.
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 per cent and rises to
100 per cent of the shares vesting.
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.
78
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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 per cent
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.
N/A
Changes since
last Directors’
Remuneration
Policy
Addition
of post-
employment
shareholding
policy.
For the avoidance of doubt, Executive Directors are permitted
to sell sufficient shares in order to meet any tax or withholding
obligation arising from vesting shares.
Retention of shares post-employment: As a minimum, the
Committee will normally enforce bonus deferral and post-vesting
holding periods after an employee has left employment.
Choice of performance measures and target setting
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 Executives are 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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
79
GOVERNANCE Remuneration Committee report continued
Directors’ remuneration policy continued
Differences in pay policy for colleagues and Executive Directors
The principles behind the Remuneration Policy for Executive Directors are cascaded down through the Group and their 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 the 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 colleagues.
The main difference between pay for Executive Directors and colleagues is that, for Executive Directors, the variable element of total
remuneration is greater while the total remuneration opportunity is also higher to reflect the increased responsibility of the role. In addition,
we have the ability to grant awards of restricted shares to Executive Committee members. This will enable us to be competitive in certain
markets, most notably the USA, where such plans are very much part of any executive remuneration package.
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. As stated in the policy table, Executive Directors are expected to build a shareholding equal to 200%
of base salary.
In any event, 35 per cent 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. During 2020 and 2021, the Committee may vary this percentage of 35% upwards to as much as 100% of bonus.
Non-Executive Director Policy table
Purpose and link to
short and long-term
strategic objectives
Fees
Operation (including framework to assess performance)
Maximum opportunity
To 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.
Additional fees may be paid in certain circumstances such as
taking on extra duties, or if exceptionally the time commitment
is significantly increased.
An expenses allowance is paid or alternatively any reasonable
business related expenses (including tax thereon) can be
reimbursed if determined to be a taxable benefit.
Current fee levels are set out
on page 85.
The overall fee limit will be
within the current £750,000
limit set out in the Company’s
Articles of Association,
approved on 25 September
2019, which is subject to
increase on 25 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.
Changes since
last Directors’
Remuneration
Policy
The overall fee
limit is now
£750,000.
Extra fees
may be paid
in certain
circumstances
such as taking
on extra duties.
Approach to recruitment
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 are set out below.
80
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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 and pension
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. Pension would be set in line with the workforce level.
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.
“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 9.4.2R. 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 or to settle or compromise any legal claims. Assistance with outplacement may also be provided.
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 per cent 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.
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-colleague share schemes
The Executive Directors, where eligible for participation in all-colleague share schemes, participate on the same basis as for other colleagues.
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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
81
GOVERNANCE Remuneration Committee report continued
Directors’ remuneration policy continued
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.
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
0
0
0
£
900
800
700
600
500
400
300
200
100
0
£1,603,000
£1,379,000
32%
42%
£664,000
13%
13%
£485,000
32%
28%
£1,032,000
£891,000
32%
41%
£327,000
£440,000
13%
13%
32%
27%
100%
Fixed
74%
36%
30%
Target
Maximum
Chief Executive Officer
Maximum +
50% share
price growth
100%
Fixed
74%
36%
32%
Target
Maximum
Chief Financial Officer
Maximum +
50% share
price growth
Long-term incentives
Annual bonus
Fixed pay
Note that the charts are indicative, as actual amounts may depend on share price. Assumptions made for each scenario are as follows:
• Minimum. Fixed remuneration only: salary, benefits and pension. Salary based on 2020/21 salary and benefits based on 2019/20
disclosed benefit amounts.
• Target. Fixed remuneration plus minimum annual bonus opportunity of 20 per cent of salary for both the Chief Executive Officer and
Chief Financial Officer, plus 20 per cent vesting of the maximum award under the Long Term Incentive Plan.
• Maximum. Fixed remuneration plus maximum annual bonus opportunity equivalent to 100 per cent of salary for both the Chief Executive
Officer and Chief Financial Officer, as well as 100 per cent vesting of the maximum award under the Long Term Incentive Plan, being
100 per cent of salary for both Executives.
• Effect of a 50% increase in share price. Same assumptions as for the maximum scenario, but with the additional assumption that the
value of LTIP awards increases by 50% as a result of share price appreciation over the performance period.
Statement of consideration of employment conditions elsewhere in the Group
The Remuneration Committee does not consult directly with colleagues when determining the Remuneration Policy for Executive Directors.
However, as stated above, the annual bonus and LTIP are operated for other colleagues 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 colleagues. 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 Chair will inform major shareholders in advance
and will generally offer a meeting to discuss these. In developing the current proposals, the Committee Chair consulted with shareholders
representing 60% of NCC’s issued shares, the majority of whom expressed their support for the policy.
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NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE 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 the following:
• Selecting the participants in the incentive plans on an annual basis
• Determining the timing of grants of awards and/or payments
• Determining the quantum of awards and/or payments (within the limits set out in the Policy table above)
• Reviewing performance against annual bonus and LTIP performance metrics
• Determining the extent of pay out or vesting based on the assessment of performance
• Making the appropriate adjustments required in certain circumstances, for instance for changes in capital structure
• Determining “good leaver” status for incentive plan purposes and applying the appropriate treatment
• Undertaking the annual review of weighting of performance measures and setting targets for the incentive plans, where applicable, from
year to year
• Discretion to override formulaic outcomes of the incentive schemes if an event occurs which results in the annual bonus plan or LTIP
performance conditions and/or targets being deemed no longer appropriate (e.g. material acquisition or divestment); the Committee will
have the ability to adjust appropriately the measures and/or targets and alter weightings, provided that the revised conditions are not
materially less challenging than the original conditions
• Discretion to override formulaic vesting outcomes if they are judged by the Committee not to be an accurate reflection of Company performance
Legacy arrangements
For the avoidance of doubt, in approving the Remuneration Policy, authority is 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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
83
GOVERNANCE Remuneration Committee report continued
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.
The following report will be subject to an advisory shareholder vote at the 2020 AGM, which is scheduled to be held on 20 October 2020.
The information on pages 84 to 92 has been audited where indicated.
How will the Remuneration Policy be implemented in the year ending 31 May 2021
Executive Directors’ base salaries
The Committee has decided not to award a salary increase to either the Chief Executive Officer or Chief Financial Officer given that salaries
across the Group have been frozen due to Covid-19. This will be reviewed during 2020/21.
The table below details the Executive Directors’ salaries as at 31 May 2020 and salaries which took effect from 1 June 2020.
Chief Executive Officer
Chief Financial Officer
Base salary
at 31 May
2020
£000
Base salary
at 1 June
2020
£000
447
282
447
282
% change
—
—
Pension and benefits
There will be no changes to the pension or benefits provision. The CEO receives an employer pension contribution of 5% and the CFO
of 10%. The pension contribution for the wider workforce is 4.5%.
Annual bonus
The annual bonus maximum for the Chief Executive Officer and the Chief Financial Officer in 2020/21 will be 100 per cent of salary with
60 per cent based on the achievement of certain adjusted operating profit ¹ targets and 40 per cent based on the achievement of strategic
targets as outlined on page 76. The financial underpin to the bonus will be based on a scenario which assumes a prolonged impact of
Covid-19 on the business. For the financial element of the bonus, our current plan is to divide the year in two, with the first six months of the
year qualifying for a financial bonus based on the slower recovery scenario, with the financial target for the second half of the year being
based on a more optimistic one, assuming a sustained recovery materialises. To the extent they are no longer commercially sensitive, these
targets will be disclosed in next year’s report.
In addition, to ensure that this bonus opportunity results in shareholder alignment and provides greater retention value, 35 per cent of any
bonus payment will be deferred into nominal cost share options for two years.
The bonus, nominal cost share options and associated dividend equivalents are also subject to malus and clawback provisions.
Long Term Incentive Plan (LTIP)
It is expected that awards of 100 per cent of base salary will be made under the LTIP in September or October 2020, though the issue of
these may be delayed depending on an assessment of the impact of Covid-19 on the business, until February 2021. These will be subject
to a two year post-vesting holding period for the Executive Directors. As well as the holding period, the Executives have to achieve a
shareholding guideline of 200 per cent 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 per cent), a cash flow metric (30 per cent) and a relative total
shareholder return metric (10 per cent). The performance targets for 2020/21 are expected to be the same as for 2019/20, subject to
final review by the Board based on its assessment of the longer-term impact of Covid-19 on trading conditions.
• Earnings per share needs to grow at between a threshold of 9 per cent and a maximum of 20 per cent per annum over three years
to qualify for an award of between 12 per cent and 60 per cent of salary respectively.
• The cash conversion metric enables Executives to earn 30 per cent of salary. A cash conversion ratio of 70 per cent represents the
threshold, qualifying for an award of 6 per cent of salary, with the maximum award of 30 per cent due if the cash conversion ratio ¹
achieved is 80 per cent or higher.
• Finally, the relative TSR component is worth up to 10 per cent of salary. If the business achieves a level of TSR equivalent to the median
of the FTSE 250 (excluding investment trusts), then this will qualify for an award of 2 per cent. Achieving a TSR equivalent to upper
quartile for the FTSE 250 will result in the maximum award of 10 per cent 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.
84
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Non-Executive Directors’ remuneration
In line with the current Policy, Non-Executive Director fees are reviewed annually.
Annualised fees
Chris Stone
Chris Batterham
Jonathan Brooks
Mike Ettling
Jennifer Duvalier
As at
1 June
2020
£000
147
64
58
51
51
As at
1 June
2019
£000
147
64
58
51
51
How has the Remuneration Policy been implemented in the year ended 31 May 2020?
This section sets out how the Remuneration Policy was implemented in 2019/20. The key implementation decisions during the year related to:
• The determination of annual bonus outcomes for the 2019/20 performance period
• The performance targets and value of awards to be granted under the LTIP, which will vest in 2022
Further detail on these decisions, together with other information on payments made to Directors, is set out in the following sections.
Single total figure of remuneration (audited)
The detailed emoluments received by the Executive and Non-Executive Directors for the year ended 31 May 2020 are below:
Director
Chris Stone
Adam Palser
Tim Kowalski 6
Chris Batterham
Jonathan Brooks
Jennifer Duvalier
Mike Ettling
Total
Salary/
Non-Executive
Director fees 1
£000
145
140
447
436
282
237
63
60
57
54
50
47
50
47
1,094
1,021
Year ended
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
31 May 2020
31 May 2019
Benefits 2
£000
Pension
benefits 3
£000
Total
fixed pay
£000
Annual
bonus 4
£000
Long-term
incentive 5
£000
145
140
485
470
327
274
63
60
57
54
50
47
50
47
—
—
103
209
56
104
—
—
—
—
—
—
—
—
—
—
154
—
—
—
—
—
—
—
—
—
—
—
—
—
16
12
17
13
—
—
—
—
—
—
—
—
33
25
—
—
22
22
28
24
—
—
—
—
—
—
—
—
50
46
Total
variable
pay
£000
—
—
257
209
56
104
—
—
—
—
—
—
—
—
Total
£000
145
140
742
679
383
378
63
60
57
54
50
47
50
47
1,177
1,092
159
313
154
—
313
313
1,490
1,405
1
2
3
4
5
6
In 2018/19, a review was undertaken of the expenses and the expense claiming processes for the Chair 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 the Non-Executive Directors and £8,200 for the Chair. This increase resulted in a new base fee level of £50,750 for the
NEDs and £146,575 for the Chair, effective from 6 April 2019. In light of Covid-19 and the fact that Board meetings were being held virtually, these allowances were not paid
for the months of March, April and May 2020.
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 two Executive Directors during the year ended 31 May 2020.
Annual bonus payments for performance in the relevant financial year; 35 per cent 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. 93,533 shares vested to Adam Palser with respect to the LTIP granted in 2017. These have been valued using a share price
of £1.651 which is the three month average share price over March, April and May 2020. These shares were awarded based on a share price of £1.98 on the day before the date
of grant. As a result, the change in share price since the date of grant has resulted in a reduction in value of £30,772.40.
Tim Kowalski was appointed as Chief Financial Officer on 23 July 2018.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
85
GOVERNANCE Remuneration Committee report continued
Annual report on remuneration continued
Additional information in respect of the single total figure of remuneration
Annual bonus
2019/20 annual bonus (audited)
For the year ended 31 May 2020, the maximum potential bonus opportunity for Adam Palser was 100 per cent of salary. For Tim Kowalski,
the maximum potential bonus opportunity was also 100 per cent of salary. For the year ended 31 May 2020, bonuses of 23% and 20% of
base salary respectively were payable.
As disclosed in the Annual Statement, following consultation with shareholders on the operation of the underpin in 2019/20 and 2020/21,
the Committee exercised its discretion to assess the underpin on the basis of performance over the first three quarters and taking account
of the fact that the Company had not relied on external support and that underlying performance remains good. It therefore determined that
the underpin had been met and that bonuses in respect of the strategic element of the bonus could be paid.
The actual bonus awarded to Adam Palser was £102,699 and to Tim Kowalski was £56,375 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, with the remaining 65% paid
in cash. The performance measures and targets are set out below.
Financial targets – up to 75 per cent of the bonus
31 May 2020
Adjusted operating
profit ¹
Strategic targets
Performance targets
Threshold
Maximum
Actual
£37m
£40m
£31.1m
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
Adam Palser
Tim Kowalski
Weighting (% of salary)
Weighting (% of salary)
Payout (% of salary)
Weighting (% of salary)
Payout (% of salary)
Payout (% of salary)
0%
0%
0%
25%
23%
23%
0%
0%
0%
25%
20%
20%
Total bonus
£102,699
£56,375
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.
Strategic targets – up to 25 per cent of the bonus
The table below highlights the key strategic targets and achievements for each Executive Director.
Maximum % of bonus
Target and performance outcome
CEO: 8%
CFO: 5%
CEO: 7%
CEO: 10%
CFO: 10%
CFO: 10%
Colleague engagement, diversity and inclusion.
Target: Improve gender representation at senior level, implement measures to improve awareness
of inclusion and diversity and complete global implementation of flexible working policy.
Assessment: Fully met. Gender representation was improved at the senior level. Partnership
with Stonewall and trial of enhanced training on equality, diversity, inclusivity and unconscious
bias. Completed the implementation of flexible working policies, which is supported by our
remote working capability, the success of which was immediately proven by the successful
continuation of operations throughout the Covid-19 pandemic.
Continued delivery of efficiencies through the Securing Growth Together programme.
Target: £5m of cost savings and completion of project milestones due in 2019/20.
Assessment: Partially met. Cost savings target exceeded but some milestones delayed into 2020/21.
Develop and implement a strategic plan for Software Resilience (Escrow) and EaaS growth.
Target: Develop strategic plan with three year targets for Software Resilience. Achieve target
for EaaS sales.
Assessment: Fully met. Strategic plan in place together with three year targets. EaaS sales
target exceeded by over 25%.
Best-in-class finance and administration functions.
Target: Meet plan milestones for development of Workday system and on-budget delivery.
Key roles filled and performing across the finance function.
Assessment: Partially met. Achievement of Workday system milestones delayed but already
live in many divisions. Key roles filled and already demonstrating value.
Develop and streamline KPI reporting and management of net debt.
Target: Improve reporting of KPIs. Reduce net debt below £11m. Demonstrate impact of
Workday on KPI reporting.
Assessment: Partially met. KPI reporting improved and net debt managed to below £5m. However,
delay in Workday implementation meant the impact on KPI reporting could not be demonstrated.
31 May 2020
Adam Palser
Tim Kowalski
8%
5%
5%
N/A
10%
N/A
N/A
7%
N/A
8%
86
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Long-term incentive plan vesting
The LTIP awards made in June 2017 vested in May 2020. Adam Palser was a beneficiary of these and achieved a vesting of 52.37% of the
award of 178,601 shares, being 93,533 shares:
Executive
Number of LTIP
awards 1
Adam Palser
178,601
Basis
Performance condition
100% of
base salary
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
Performance period
1 June 2017
to 31 May 2020
The performance conditions for these awards are set out below:
Proportion
Component
Metric
Threshold
Maximum
vesting
Actual
performance
Actual %
vested
60%
30%
Adjusted
EPS 3
Cash
conversion
Average growth over
a three year period
Average cash conversion
ratio ³ over three years
9%
20%
10.22%
17.32%
70%
80%
105.6%
30%
Vesting basis
Straight line between
threshold and maximum
Straight line between
threshold and target,
then target and maximum
10%
TSR
TSR over three years vs
FTSE 250 comparator group
(excluding investment trusts)
Median
Upper
quartile
Above mid/
below UQ%
5.05%
Straight line between
threshold and maximum
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 2022, subject to the performance
conditions set out below. The awards were as follows:
Executive
Number of LTIP
awards 1
Adam Palser
245,338
Basis
Face value 2
Performance condition
100% of
base salary
£447,000
Vesting determined by:
• Growth in adjusted ³ EPS over the
performance period
Performance period
1 June 2019
to 31 May 2022
• Average cash conversion ratio ³ over the
performance period
• TSR over the performance period vs FTSE 250
comparator group
Tim Kowalski
154,876
100% of
base salary
£282,000
As above
The performance conditions for these awards are set out below:
Proportion
Component
Metric
Threshold
Threshold
vesting
9%
20%
Target
N/A
Target
vesting
N/A
Maximum
Maximum
vesting
20%
100%
70%
20%
75%
50%
80%
100%
1 June 2019
to 31 May 2022
Vesting basis
Straight line
between threshold
and maximum
Straight line
between threshold
and target, then
target and
maximum
Median
20%
N/A
N/A
Upper
quartile
100%
Straight line
between threshold
and maximum
60%
30%
Adjusted
EPS 3
Cash
conversion
Average growth
over a three year
period
Average cash
conversion ratio ³
over three years
10%
TSR
TSR over
three years vs
FTSE 250
comparator group
(excluding
investment trusts)
1 LTIP awards are structured as nominal cost options (£1 being payable upon each exercise).
2 Based on a share price of £1.82, which was the closing mid-market price of the Company’s shares on the day before the date of grant.
3
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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
87
GOVERNANCE Remuneration Committee report continued
Annual report on remuneration continued
SAYE options granted in the year
The Group operates an HMRC-approved SAYE scheme. All eligible colleagues, 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 did not join any new SAYE schemes.
Neither Executive Director participated in the 2020 SAYE scheme as both contribute the maximum £500 per month to the 2018 SAYE scheme.
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
Total LTIP
options held at
31 May
2019
Granted
during the
period
Exercised
during the
period
Share price
on date of
exercise
Lapsed
during the
period
Total LTIP
options
held at
31 May
2020
375,886
245,338
124,434
154,876
—
—
—
—
(85,068)
536,156
—
279,310
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.
Share ownership (audited)
The beneficial and non-beneficial interests of the current Directors in the share capital of NCC Group plc at 31 May 2020 are set out below:
Beneficial interests
in ordinary shares 1
Maximum share awards
subject to performance
conditions 2
Share options 3
Deferred Bonus Plan 4
Vested but unexercised
nil cost options
Total
31 May
2020
31 May
2019
31 May
2020
31 May
2019
31 May
2020
31 May
2019
31 May
2020
31 May
2019
31 May
2020
31 May
2019
31 May
2020
31 May
2019
Chris
Stone
Adam
Palser
Tim
Kowalski
Chris
Batterham
Jonathan
Brooks
Jennifer
Duvalier
Mike
Ettling
124,382 124,382
—
—
—
—
—
—
—
23,779
23,199
442,623 375,886
10,273
10,273
52,225
10,993
93,533
23,614
23,614
279,310 124,434
10,273
10,273
20,462
50,000
50,000
50,000
50,000
9,500
9,500
50,000
50,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
124,382 124,382
622,433 420,351
333,659 158,321
50,000
50,000
50,000
50,000
9,500
9,500
50,000
50,000
1 This information includes holdings of any connected persons.
2 These awards represent the outstanding LTIP interests, included in the table above, which are due to vest in either July/August 2021 or July/August 2022.
3 Representative SAYE scheme interests, which are due to vest in October 2021.
4
Nominal cost share options granted under the 2018–20 and 2019–21 Deferred Bonus Plans on 23 August 2018 and 4 September 2019. Subject to a service condition,
tax and National Insurance.
Shareholding requirements
The Executive Directors are expected to build and retain a shareholding in the Group equivalent to at least 200 per cent 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.
88
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE The percentages within this table have been calculated using a three month average share price (1 March 2020 to 31 May 2020) of £1.651
and include Adam Palser’s 2017–2020 LTIP of 93,533 shares on a net of tax and National Insurance basis.
Adam Palser
Tim Kowalski
Appointment terms for new Directors
No new Directors were appointed within the year.
Shareholding
as at
31 May
2020
(% of salary)
Requirement
met
37%
20%
No
No
Shareholding
requirements
(% of salary)
200%
200%
Relative importance of the spend on pay
The following table sets out the percentage change in distributions to shareholders and colleague remuneration costs.
Colleague remuneration costs 1
Dividends 2
31 May
2020
£m
170.1
12.9
31 May
2019
£m
154.5
12.9
% change
10.1%
0%
1 Based on the figure shown in Note 7 to the Financial Statements.
2
Based on the total cash returned to shareholders in the year ended 31 May 2020 through dividends, as shown in Note 10 to the Financial Statements (excluding the proposed
2020 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 colleagues of the Company.
The comparator group for salaries and benefits is all colleagues in the UK – there were no benefit policy changes in this time.
The comparator group for the bonus is those in the 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
Colleagues
Chief Executive (% of salary)
Colleagues (% of salary)
Chief Executive (% of salary)
Colleagues (% of salary)
% increase
2.5
3.0
—
—
(50.7%)
(12.5%)
Chief Executive pay compared to pay of UK employees
The following table shows the ratio between the single total figure of remuneration (STFR) of the Chief Executive for 2019/20 and the
lower quartile, median and upper quartile pay of our UK colleagues. The salary and total pay and benefits for the lower quartile, median
and upper quartile employee is also shown.
Total pay ratio
Financial year
2019/20
Salary (£000)
Total pay and benefits (£000)
Method
25th percentile
pay ratio
50th percentile
pay ratio
75th percentile
pay ratio
Option B
18:1
12:1
8:1
CEO 25th percentile 50th percentile 75th percentile
447
742
32
41
56
62
81
95
Option B was chosen to calculate the CEO pay ratio. This option uses the most recent gender pay gap information to determine the relevant
employee at the 25th, 50th and 75th percentile. We have omitted joiners and leavers from the data to ensure that the data is on a like-for-like
basis. This option was chosen in preference to the other possibilities as it uses the most accurate and comprehensive data currently
available. It refers to gender pay data as at April 2020.
The pay ratio is consistent with the pay, reward and progression policies currently in place at NCC. A common pay structure operates
throughout our organisation in the United Kingdom with a greater focus on performance-related pay for more senior levels.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
89
GOVERNANCE Remuneration Committee report continued
Annual report on remuneration continued
Performance graph and table
The following graph shows the total shareholder return, with dividends reinvested, from 31 May 2010 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 Indices represent broad equity indices. The Company is a constituent member of the FTSE All Share
Index and the Committee has adopted the FTSE 250 Index for part of its LTIP performance measure. Both indices give a market
capitalisation-based perspective.
During the year, the Company’s share price varied between £1.34 and £2.335 and ended the financial year at £1.534.
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, and the FTSE All Share and FTSE 250 Indices (excluding investment trusts) based on spot values.
)
£
(
e
u
a
V
l
700
600
500
400
300
200
100
0
£146
£100
£200
£179
£492
£358
£376
£300
£300
£305
£289
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
NCC Group
FTSE All Share
FTSE 250 (excluding investment trusts)
Year ended 31 May
The share price was £1.656 on 1 June 2019 and £1.534 on 31 May 2020.
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 2020
31 May 2019
31 May 2018 1
31 May 2018 2
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 maximum 4
Long-term
incentives
% of max imum 5
742
679
292 1
257 2
610
1,091
993
1,089
1,118
1,074
1,222
836
23
48
32.5
32.5
—
70
73
73
— 6
85
67
71
52
—
—
—
—
20
15
50
63
70
54
72
1 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.
2
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.
3 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.
5 This shows the LTIP vesting level as a percentage of the maximum opportunity.
6
In 2012/13 Rob Cotton waived his right to a bonus, which would have been equal to 32 per cent of salary. This was equivalent to 50 per cent of the maximum bonus opportunity.
90
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE
Membership and attendance
The Remuneration Committee membership consists solely of Non-Executive Directors and comprises Jonathan Brooks as Chair,
Chris Batterham and Jennifer Duvalier.
The Company Chair, Chief Executive Officer, Chief Financial Officer, Chief People Officer and Company Secretary attend the Remuneration
Committee by invitation of the Chair 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:
Attendee
Jonathan Brooks
Chris Batterham
Jennifer Duvalier
Meetings attended
Adviser to the Committee
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 its Code of Conduct. The total
fee charged in 2019/20 for providing advice in relation to executive remuneration was £40,740. Aon plc did not provide any other services
to the Company during the year. From 1 June 2020, following the transfer of the lead partner from Aon to Alvarez and Marsal, Alvarez and
Marsal will be the adviser to the Committee.
The Committee reviews the performance and independence of its adviser 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
Dilution
The LTIP has a dilution limit, for new and treasury shares, of 10 per cent 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 2020 the Company had utilised 15,250,101 (31 May 2019:
13,792,836) ordinary shares through LTIP, SAYE, CSOP, ISO and ESPP awards counting towards the 10 per cent limit which represents
5.47 per cent (2019: 4.96 per cent) of the issued ordinary share capital of the Company. To clarify, this figure of 5.47 per cent includes both
discretionary and all-colleague share schemes.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
91
GOVERNANCE
Remuneration Committee report continued
Annual report on remuneration continued
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:
Remuneration Report
(2019 AGM)
Remuneration Policy
(2017 AGM)
For 1
Against
Total votes cast (for and against excluding
withheld votes)
Votes withheld 2
Total number of votes
192,916,766
8,003
192,924,769
5,136,633
%
of votes cast
100.0
—
Total number of votes
202,309,191
318,649
100.0
202,627,840
4,046,993
Total votes cast (including withheld votes)
198,061,402
100.0
206,674,833
Includes Chair’s discretionary votes.
1
2 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.
%
of votes cast
99.84
0.16
100.0
100.0
Approved by the Board and signed on its behalf:
Jonathan Brooks
Chair, Remuneration Committee
3 September 2020
92
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE Directors’ report
The Directors present
their 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 2020.
Details of the movements of the called up share capital of the
Company are set out in Note 27 to the Financial Statements and
the information in this Note is incorporated by reference and forms
part of this Directors’ Report.
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 Software
Resilience (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 2020 are set out on pages 107 to 158.
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 6 March 2020, makes a total dividend of 4.65p for the year.
The final dividend will be paid on 6 November 2020, subject to
approval at the AGM on 20 October 2020, to shareholders on the
register at the close of business on 9 October 2020. The ex-dividend
date is 8 October 2020.
Post-Balance Sheet events
There were no Post-Balance Sheet events.
Share capital and control
At the AGM held on 25 September 2019, the Directors were granted
authority to allot up to 92,610,200 ordinary shares representing
approximately a third of the Company’s issued share capital. In
addition, the Directors were granted authority to allot a further
92,610,200 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 2020, the Company’s issued ordinary share capital
comprised 278,909,171 ordinary shares with a nominal value of
1p each, of which no ordinary shares were held in treasury.
During the year ended 31 May 2020, 1,078,546 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.
All rights and obligations attaching to the Company’s ordinary shares
are set out in the Company’s Articles of Association (the ‘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 colleagues 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
their shares.
The Company is not aware of any agreements between shareholders
that may result 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.
Authority to purchase own shares
At the AGM held on 25 September 2019, shareholders authorised
the Company to make market purchases of up to 27,783,000
ordinary shares representing approximately 10 per cent of the
issued share capital. This authority was not used during the financial
year ended 31 May 2020. At the 2020 AGM, shareholders will be
asked to give a similar authority.
The Company does not currently hold any ordinary shares in treasury.
Directors
Biographical details of the Company’s current Directors are set out
on pages 52 and 53. 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
one-third of the 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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
93
GOVERNANCE Directors’ report continued
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 2019/20). This cover was in place throughout the
financial year ended 31 May 2020 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 2020 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.
Colleagues
The Group uses a number of ways to engage with its colleagues 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, global communications
and update emails which together provide, among other information,
an awareness of the financial and economic factors affecting the
Company’s performance. Further information on how the Directors
engage with colleagues along with how colleague interests are
taken into account during decision making can be found within
the Corporate Governance Report on page 58.
We conduct a colleague engagement survey to ensure all
colleagues are given a voice in the organisation. In 2018, using
insights from our survey and subsequent colleague engagement,
we defined new values for the organisation. Details of these values
are set out in the Sustainability Report on page 44.
We offer colleagues the opportunity to purchase ordinary shares
in the Company through participation in the Company’s Save As
You Earn Scheme. At the 2019 AGM, shareholders also approved
a Share Incentive Plan. Both schemes help to encourage colleague
interest in the performance of the Group.
Equal opportunities
The Group is committed to providing equality of opportunity to
all colleagues 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 colleague 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 colleagues are fairly treated in
respect of training and career development. For those colleagues
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 (2019: £nil).
Sustainability Report
The Company’s Sustainability Report on pages 40 to 46 provides
an update on the Group’s policies and activities in respect of its
wider stakeholders, including colleagues; community, environmental,
ethical and health and safety issues; and modern slavery.
94
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
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 colleagues 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 reasonable steps to
ascertain any relevant audit information and ensure the auditors
are aware of such information.
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 as 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 AGM.
Annual General Meeting
The notice of the Company’s AGM to be held at 10.30am on
20 October 2020 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.
The health and wellbeing of the Company’s shareholders, employees
and customers is of paramount importance and never more so with
the extraordinary challenges presented by the Covid-19 pandemic.
This significantly restricts our ability to follow our usual AGM format
and, having regard to their own safety and that of others, in particular
should “stay at home” measures or other restrictions be in force at
the time, shareholders are respectfully asked not to attend the AGM,
especially as the meeting is being held at the Company’s offices
where we do have a small number of key employees undertaking
essential work.
GOVERNANCE Capitalised interest
During the period, no interest was capitalised by the Group (2019: £nil). The tax benefit on this amount was £nil (2019: £nil).
Reporting requirements
The following sets out the location of additional information forming part of the Directors’ Report which is incorporated by reference into
this 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 51 to 62 and Audit
Committee Report on page 68
Note 25 (Financial Instruments) on pages 147 to 151
Directors’ interests
Directors’ Remuneration Report on page 88
Directors’ Responsibilities Statement
Directors’ Responsibilities Statement on page 96
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 84 to 92
DTR4.1.8.R – Management Report – the Directors’ Report and
Strategic Report comprise the management report
Directors’ Report on pages 93 to 95 and Strategic Report on pages
1 to 47
Going concern statement
Chief Financial Officer’s Review on page 29
Greenhouse gas emissions and energy consumption
Sustainability Report on page 43
Likely future developments of the business and Group
Strategic Report on pages 4 to 6
LR 9.8.4 (4) – Long-term incentive schemes
Directors’ Remuneration Report on pages 84 and 87 to 89
LR 9.8.6 (2) – Substantial shareholders
Statement on corporate governance
Shareholder relations section of Corporate Governance Report on
page 63
Corporate Governance Report, Audit Committee Report, Nomination
Committee Report and Directors’ Remuneration Report on pages
49 to 92
Strategic Report – Companies Act 2006 section 414A-D
Strategic Report on pages 1 to 47
The Strategic Report on pages 1 to 47 and this Directors’ Report on pages 93 to 95 have been approved and authorised for issue by the
Board. They were signed on its behalf by:
Adam Palser
Chief Executive Officer
3 September 2020
Tim Kowalski
Chief Financial Officer
3 September 2020
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
95
GOVERNANCE
Responsibility statement of the Directors in respect
of the annual financial report
We confirm that to the best of our knowledge:
• The Financial Statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole
• The Strategic 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
3 September 2020
Tim Kowalski
Chief Financial Officer
3 September 2020
Directors’ responsibilities statement
Statement of Directors’ responsibilities in respect of the
Annual Report and Accounts and the Financial Statements
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 both 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
• 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.
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 comply 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.
96
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
GOVERNANCE
Financial
statements
Resilient financial performance.
IN THIS SECTION:
98
Independent auditor’s report
107 Consolidated income statement
107 Consolidated statement of comprehensive income
108 Consolidated balance sheet
109 Consolidated cash flow statement
110 Consolidated statement of changes in equity
111 Company balance sheet
112 Company cash flow statement
113 Company statement of changes in equity
114 Notes to the financial statements
ADDITIONAL INFORMATION:
159 Glossary of terms – Alternative Performance Measures (APMs)
161 Glossary of terms – other terms
163 Other information
164 Financial calendar
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
97
I
I
F
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
FINANCIAL STATEMENTS
We were first appointed as auditor by the directors on 1 November
2013. The period of total uninterrupted engagement is for the seven
financial years ended 31 May 2020. 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.
£0.8m (2019: £0.95m)
5% of Group profit before tax (2019: 4.4%
Group profit before tax normalised to
exclude individually significant items as
disclosed in Note 5)
93% (2019: 88%) of the total profits and
losses that made up group profit before tax
vs 2019
Recoverability of goodwill
in respect of Fox-IT cash
generating unit (‘CGU’)
New: Fox-IT long term
contract accounting
Assurance revenue
recognition
Recoverability of parent
company’s investment in
subsidiaries
The impact of uncertainties
due to the UK exiting the
European Union on our audit
Going concern
FE
New
FE
FE
FE
Independent auditor’s report
to the members of NCC Group plc
1. Our opinion is unmodified
We have audited the financial statements of NCC Group plc
(“the Company”) for the year ended 31 May 2020 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 2020 and of the Group’s profit for the year then ended;
Overview
Materiality:
group financial
statements as
a whole
• 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);
Coverage
• 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.
Key audit matters
Recurring risks
Event driven
98
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS 2. Key audit matters: including 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 36 (Principal Risks),
page 37 (Viability Statement),
page 114 (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 cash generating unit
(‘CGU’) and Fox-IT long term contract
accounting 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 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 its effects
are subject to unprecedented levels of
uncertainty of consequences, 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
CGU and Fox-IT long term contract accounting
and other areas that depend on forecasts, we
compared the directors’ analysis to our
assessment of the full range of reasonably
possible scenarios including 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 with respect of
Fox-IT CGU and Fox-IT long term contract
accounting, 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 CGU and Fox-IT long term
contract accounting, we found the resulting
estimates and related disclosures in relation
to these key audit matters 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.
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
99
FINANCIAL STATEMENTS Independent auditor’s report continued
to the members of NCC Group plc
2. Key audit matters: including our assessment of risks of material misstatement continued
The risk
Our response
Going concern
Refer to page 34 (Principal
risks), page 37 (Viability
Statement), page 65 (Audit
Committee Report), pages
118–119 (accounting policy)
Our procedures included:
• Funding assessment: Evaluated the directors’ assessment
of the Group’s compliance with debt covenants and the
headroom on available committed facilities;
• Historical comparison: Assessed the Group’s forecasting
accuracy by comparing actual results in the year to the
Group’s previous forecast for the year;
• Sensitivity analysis: Considered sensitivities over the level
of available financial resources indicated by the Group’s
forecasts, taking account of reasonably possible (but not
unrealistic) adverse effects that could arise from these risks
individually and collectively;
• Benchmarking assumptions: Critically evaluated the cash
flow forecast assumptions and performed additional stress
testing considering the downside in performance seen to
date during Covid-19 and lockdown, particularly in relation
to growth rates with respect of revenue and costs to assess
if these are realistic, achievable and consistent with external
and internal information and other matters identified in the
course of the audit including actual performance post year end;
• Evaluating directors’ intent: Evaluated the achievability
of the actions the directors consider they would take to
improve the position should the risks materialise;
• Assessing transparency: Assessed 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 (2019 result: acceptable).
Disclosure Quality
The financial statements explain how the
Board has formed a judgement that it is
appropriate to adopt the going concern
basis of preparation of the Group and
Parent company.
That judgement 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.
There is increased risk this year due
to the economic uncertainty caused
by Covid-19.
The risks most likely to adversely affect
the Group’s and Company’s available
financial resources over this period were:
• The uncertainty of the impact of
Covid-19, with the future range
of possible effects on financial
performance currently unknown
to performance, given the rapidly
evolving nature;
• Market demand and increased
pressure from competitors, and;
• Working capital requirements.
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.
100
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS 2. Key audit matters: including our assessment of risks of material misstatement continued
The risk
Our response
Recoverability of goodwill
in respect of Fox-IT Cash
Generating Unit (‘CGU’)
(£64.3 million; 2019:
£63.1 million)
Refer to page 66 (Audit
Committee Report), page 128
(accounting policy) and pages
137–140 (financial disclosures)
Fox-IT long-term
contract accounting
Revenue associated with
long term contracts £1.1m
(2019: £nil)
Provision for long-term contracts
£0.2m (2019: £1.0m)
Contract costs – costs to fulfil
£2.1m (2019: £1.2m)
Refer to page 67 (Audit
Committee Report), page 129
(accounting policy) and page
146 (financial disclosures)
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 unit (‘CGU’) 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 of the
financial statements as a whole, and
possibly many times that amount. The
financial statements (Note 12) disclose
the sensitivity estimated by the Group.
Subjective estimates
The contractual arrangements that
underpin the measurement and
recognition of revenue and associated
profit by Fox-IT can be complex, with
significant subjective estimates involved
in the assessment of current and future
contract performance. In particular, where
services rendered are provided through
long-term contracts which are not
completed at the balance sheet date.
Within Fox-IT, the forecasts used in
assessing the contract outturn positions
are inherently judgemental, due to the
uncertainty involved in forecasting future
cash flows including costs to complete.
Where the contract is loss-making or low
margin, these assumptions may have
a significant impact on the accounting
recognition in the period and may result in
impairment of related contract assets or
onerous contract provisions being required.
The effect of these matters is that, as part of
our risk assessment, we determined that the
assessment of onerous contract provisions
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. The
financial statements (Note 2) disclose
the sensitivity estimated by the Group.
Our procedures included:
• Historical comparison: Assessed 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 revenue with regard to actual growth
rates in previous years;
• Benchmarking assumptions: Challenged, with the
support of our own valuation specialists, the risk adjusted
discount rates, having regard for market observable data
with regard to risk free rates and returns on equity for
comparator companies. We also evaluated the assumptions
for cost inflation, long term growth rates and the terminal
growth rate, comparing to external sources of data including
industry growth rates and order book;
• Sensitivity analysis: Performed breakeven analysis on the
key assumptions, including discount rate and revenue growth;
• Comparing valuations: Compared 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;
• Assessing transparency: Assessed whether the group’s
disclosures about the sensitivity of the outcome of the
impairment assessment to changes in key assumptions
reflected the risks inherent in the valuation of the CGU.
Our results
• We found the carrying value of the goodwill related to Fox-IT
CGU to be acceptable (2019 result: acceptable).
Our procedures included:
• Test of details: For a sample of the selected contracts,
agreed costs incurred to date (such as direct costs, labour
charges and hardware costs) to quotations and purchases
orders for external costs and challenged the internal hours
charged, to be able to assess the stage of completion;
• Personnel enquiries: Corroborated forecasts used in the
long-term contracting accounting through discussions with
operational management for the same sample of contracts
regarding their expectations for the contracts, including
forecast costs to complete and the timetable to completion
for the contracts;
• Historical comparison: Assessed the forecasting accuracy
of costs to complete by comparing actual results in the year
to what was previously forecast for the year.
• Assessing transparency: Assessed the completeness and
accuracy of the matters covered in the disclosures relating
to Fox-IT long term contract accounting and assessed the
adequacy of the group’s disclosures about the sensitivity
of the impact of reasonably possible changes in the key
assumption in the long term contract accounting.
Our results
• We found the resulting estimates of the onerous contract
provision and the assessment of the recoverability of the
related contract assets for Fox-IT long-term contracts
to be acceptable.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 101
NCC GROUP PLC
FINANCIAL STATEMENTS Independent auditor’s report continued
to the members of NCC Group plc
2. Key audit matters: including our assessment of risks of material misstatement continued
Assurance revenue recognition
Contract assets – accrued
income £18.0m (2019 £14.7m)
Contract liabilities – deferred
income £40.9m (£36.2m)
Refer to page 67 (Audit
Committee Report), pages
122–124 and page 128
(accounting policy) and page
146 (financial disclosures)
The risk
Our response
2020/2021 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 in
the assurance business where projects
are ongoing at the year end and there are
judgements in determining completion/
progress to date.
Our procedures included:
• Tests of detail: Agreed 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 item testing of
a sample of items held in accrued and deferred income
at the year end;
• Test of detail: Used data & analytics tools to identify
journals with unusual account combinations involving
revenue close to the year end and performed testing over
the identified items. This included enquiry to understand
the nature and substance of the transaction and obtaining
supporting documentation.
Recoverability of parent
company’s investments
in subsidiaries
(£78.3 million; 2019:
£60.8 million)
Refer to page 119 (accounting
policy) and page 156–158
(financial disclosures)
Low risk, high value
The carrying amount of the Parent
Company’s investments in subsidiaries
represents 34% (2019: 28%) of the
Company’s total assets. Their
recoverability is not at a high risk of
significant misstatement or subject to
significant judgement. 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 results
• The results of our procedures were satisfactory
(2019 result: satisfactory).
Our procedures included:
• Tests of detail: Compared a sample of the carrying amount
of the investments with the relevant subsidiaries’ draft
balance sheet as at 31 May 2020 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: Assessed the work
performed by the group and subsidiary audit teams on
a sample of those subsidiaries and considering the results
of that work, on those subsidiaries’ profits and net assets.
Our results
• We found the group’s assessment of the recoverability
of the investment in subsidiaries to be acceptable
(2019 result: acceptable).
We continue to perform procedures on the capitalisation of software and development costs as intangibles on our audit. However, following
a number of systems being implemented in the year, the judgement levels have reduced considerably. Therefore, we have not assessed this
as one of the most significant risks in our current year audit and it is not separately identified in our audit report this year.
102
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS 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 £0.80 million (2019: £0.95 million), determined with reference
to a benchmark of Group profit before tax of £16.1 million
(2019: £21.4 million being Group profit before tax normalised
to exclude individually significant items as disclosed in Note 5),
of which it represents 5.0% (2019: 4.4%).
Materiality for the Parent Company financial statements as a whole
was set at £0.30 million (2019: £0.90 million), determined with
reference to a benchmark of Company total assets, of which it
represents 0.1% (2019: 0.6%).
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding £40,000
(2019: £47,000), in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Of the Group’s 23 (2019: 23) reporting components, we
subjected 10 (2019: 11) to full scope audits for Group purposes.
We conducted reviews of financial information (including enquiry)
at a further 4 (2019: 4) 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 95%
(2019: 96%) of total Group revenues, 93% (2019: 88%) of total
profits and losses that made up Group profit before tax and 98%
(2019: 96%) of total Group assets.
The remaining 5% of total Group revenue, 7% of Group profit
before tax and 2% of total Group assets is represented by 9
reporting components. 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.
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 £0.10m to £0.625m
(2019: £0.2m to £0.65m), having regard to the mix of size and risk
profile of the Group across the components. The work on 1 of the
23 components (2019: 1 of the 23 components) was performed
by component auditors and the rest, including the audit of the
Parent Company, was performed by the Group team.
The Group audit team had planned to visit component locations in
the Netherlands and the US. However, these visits were prevented
by movement restrictions relating to the Covid-19 pandemic.
Instead, video conferences were held with component auditors
in the Netherlands to discuss audit strategy, risk assessment, key
accounting judgements and estimates and the outcomes of audit
testing. The US components were audited remotely by the
Group audit team.
Group profit before tax
(2019: Group profit before
tax normalised to exclude
individually significant items
as disclosed in Note 5)
£16.1m (2019: £21.4m)
96+4+I
Normalised Group PBT
Group materiality
Group revenue
9
8
86
88
Group total assets
95%
(2019: 96%)
I88+
86+
I94+
96+
98%
(2019: 96%)
96
94
2
2
Group Materiality
£0.80m (2019: £0.95m)
£0.80m
Whole financial
statements materiality
(2019: £0.95m)
£0.625m
Range of materiality
at 10 components
(£0.10m–£0.625m)
(2019: £0.20m to
£0.65m)
£0.04m
Misstatements reported
to the audit committee
(2019: £0.047m)
6
3
87
85
Total profits and losses
that made up Group profit
before tax
93%
(2019: 88%)
I85+
87+
I78+
87+
Total profits and losses that
made up Group profit before
individually significant items
and tax
93%
(2019: 85%)
87
78
7
6
Full scope for group audit purposes 2020
Reviews of financial information (including enquiry) 2020
Full scope for group audit purposes 2019
Reviews of financial information (including enquiry) 2019
Residual components
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 103
NCC GROUP PLC
FINANCIAL STATEMENTS9
+
5
+
8
+
4
+
I
6
+
7
+
3
+
12
+
I
2
+
2
+
2
+
4
+
I
6
+
7
+
7
+
15
+
I
Independent auditor’s report continued
to the members of NCC Group plc
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 as 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 judgements that were reasonable at the time they were made,
the absence of reference to a material uncertainty in this auditor’s
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
twelve months from the date of approval of the financial
statements; or
• the related statement under the Listing Rules set out on page 29
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
The directors are responsible for the other information presented
in the Annual Report 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 emerging and 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 37 that they have carried out a robust assessment of the
emerging and 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.
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.
104
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS 7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 96,
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.
Auditor’s 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 auditor’s 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.
5. We have nothing to report on the other information
in the Annual Report continued
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
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
• we have not received all the information and explanations
we require for our audit.
We have nothing to report in these respects.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 105
NCC GROUP PLC
FINANCIAL STATEMENTS 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 Auditor
Chartered Accountants
One St. Peter’s Square
Manchester
M2 3AE
3 September 2020
Independent auditor’s report continued
to the members of NCC Group plc
7. Respective responsibilities continued
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) the policies and procedures regarding
compliance with laws and regulations.
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.
The potential effect of these laws and regulations on the financial
statements varies considerably.
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.
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, data protection
laws, 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.
106
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS Consolidated income statement
for the year ended 31 May 2020
Revenue
Cost of sales
Gross profit
Administrative expenses 2
Depreciation and amortisation
Other administrative expenses
Total administrative expenses 2
Operating profit
Net finance costs
Profit before taxation
Taxation
2020 3
Adjusting
items ¹
£m
Statutory
£m
–
–
–
263.7
(159.3)
104.4
(8.8)
(1.4)
(10.2)
(10.2)
–
(10.2)
1.9
(24.9)
(60.4)
(85.3)
19.1
(3.0)
16.1
(4.4)
Adjusted ¹
£m
263.7
(159.3)
104.4
(16.1)
(59.0)
(75.1)
29.3
(3.0)
26.3
(6.3)
Notes
4
4
4
4
4
8
6
9
2019 3
Adjusting
items ¹
£m
–
–
–
(9.0)
(5.2)
(14.2)
(14.2)
–
(14.2)
2.2
Adjusted ¹
£m
250.7
(148.9)
101.8
(10.0)
(58.1)
(68.1)
33.7
(1.7)
32.0
(6.5)
Statutory
£m
250.7
(148.9)
101.8
(19.0)
(63.3)
(82.3)
19.5
(1.7)
17.8
(4.3)
Profit for the year attributable to the owners
of the Company
20.0
(8.3)
11.7
25.5
(12.0)
13.5
Earnings per ordinary share
11
Basic EPS
Diluted EPS
4.2p
4.2p
4.9p
4.8p
Consolidated statement of comprehensive income
for the year ended 31 May 2020
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
2020 3
£m
11.7
2019 3
£m
13.5
4.0
15.7
1.5
15.0
The accompanying Notes 1 to 35 are an integral part of these consolidated Financial Statements.
Footnotes for Financial Statements
1 See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items, including for a reconciliation to statutory information.
2 Administrative expenses include £0.7m (2019: £0.4m) of credit losses on financial assets.
3 See Note 1 for further details on the impact of the adoption of IFRS 16 with effect from 1 June 2019.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 107
NCC GROUP PLC
FINANCIAL STATEMENTS Consolidated balance sheet
at 31 May 2020
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Investments
Deferred tax asset
Total non-current assets
Current assets
Inventories
Trade and other receivables
Current tax receivable
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Borrowings
Lease liabilities
Provisions
Contract liabilities - deferred revenue
Total current liabilities
Non-current liabilities
Borrowings
Lease liabilities
Deferred tax liability
Provisions
Contract liabilities - deferred revenue
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Merger reserve
Currency translation reserve
Retained earnings
Total equity attributable to equity holders of the parent
Notes
2020 3
£m
2019 3
£m
12
12
13
14
15
18
16
17
24
19
24
20
21
22
24
20
18
21
22
27
27
27
27
27
193.1
39.2
13.9
28.7
0.3
0.5
189.4
41.8
16.9
–
0.3
1.1
275.7
249.5
0.9
73.2
0.6
95.0
169.7
445.4
46.4
–
5.3
2.0
39.5
93.2
99.2
32.9
2.9
1.7
1.4
138.1
231.3
214.1
2.8
150.9
42.3
31.9
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
27.9
(13.8)
(12.0)
214.1
210.8
The accompanying Notes 1 to 35 are an integral part of these consolidated Financial Statements.
These Financial Statements were approved and authorised for issue by the Board of Directors on 3 September 2020. They were signed
on its behalf by:
Adam Palser
Chief Executive Officer
3 September 2020
Tim Kowalski
Chief Financial Officer
3 September 2020
108
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS
Consolidated cash flow statement
for the year ended 31 May 2020
Cash flow from operating activities
Profit for the year
Adjustments for:
Depreciation of property, plant and equipment
Depreciation of right-of-use assets
Share-based payments
Amortisation of acquired intangible assets
Amortisation of internally developed intangible assets and software
Impairment of right-of-use assets
Lease financing costs
Other financing costs
Foreign exchange
Individually Significant Items (non-cash impact)
Profit on disposal of investments
Profit on disposal of right-of-use assets
Loss on sale of plant and equipment
Research and development tax credits
Income tax expense
Decrease in provisions
Cash inflow for the year before changes in working capital
(Increase)/decrease in trade and other receivables
(Increase)/decrease in inventories
Increase in trade and other payables
Cash generated from operating activities before interest and taxation
Interest element of lease payments
Other 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
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issue of ordinary share capital
Principal element of lease payments
Drawdown of borrowings (net of deferred issue costs)
Issue costs related to borrowings
Repayment of borrowings
Equity dividends paid
Net cash generated/(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 ¹
Net increase in cash and cash equivalents
Change in net debt resulting from cash flows (net of deferred issue costs)
Non-cash movements (release of deferred issue costs)
Effect of foreign currency on cash flows
Foreign currency translation differences on borrowings
Change in net debt 1 during the year
Net debt 1 at start of year (Pre-IFRS 16)
Net debt 1 at end of year (Pre-IFRS 16)
Lease liabilities
Net debt 1 at end of year (IFRS 16)
Notes
13
14
26
12
12
14
8
8
5
9
27
10
24
20
2019 3
£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)
2020 3
£m
11.7
5.8
6.0
1.4
8.8
4.4
1.1
1.2
1.8
–
–
–
(0.1)
–
(0.6)
4.4
0.8
46.7
(11.0)
(0.2)
19.2
54.7
(1.2)
(1.6)
(4.8)
47.1
(2.8)
(10.4)
–
–
(13.2)
1.1
(5.3)
44.3
(1.0)
–
(12.9)
26.2
60.1
34.9
–
95.0
2020
£m
60.1
(43.3)
(0.2)
–
(0.6)
16.0
(20.2)
(4.2)
(38.2)
(42.4)
The accompanying Notes 1 to 35 are an integral part of these consolidated Financial Statements.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 109
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 109
NCC GROUP PLC
NCC GROUP PLC
FINANCIAL STATEMENTS
Consolidated statement of changes in equity
for the year ended 31 May 2020
Balance at 31 May 2018 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 and 1 June 2019
(as reported)
Impact of change in accounting policies in
respect of IFRS 16 3 (Note 1)
Balance at 1 June 2019 (restated 3)
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
Shares issued
Total contributions by and
distributions to owners
Balance at 31 May 2020
Notes
Issued
share
capital
£m
2.8
Share
premium
£m
149.5
Merger
reserve
£m
42.3
Currency
translation
reserve
£m
Retained
earnings
£m
Total
£m
26.4
(14.4)
206.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.3
0.3
–
–
–
–
–
–
–
–
–
1.5
1.5
–
–
–
–
–
13.5
–
13.5
13.5
1.5
15.0
(12.9)
(12.9)
1.7
0.1
–
1.7
0.1
0.3
(11.1)
(10.8)
2.8
149.8
42.3
27.9
(12.0)
210.8
–
2.8
–
149.8
–
42.3
–
(2.0)
(2.0)
27.9
(14.0)
208.8
–
–
–
–
–
–
–
–
–
–
–
–
1.1
1.1
–
–
–
–
–
–
–
–
4.0
4.0
–
–
–
–
2.8
150.9
42.3
31.9
11.7
–
11.7
11.7
4.0
15.7
(12.9)
(12.9)
1.4
–
1.4
1.1
(11.5)
(13.8)
(10.4)
214.1
10
26
9
27
10
26
27
The accompanying Notes 1 to 35 are an integral part of these consolidated Financial Statements.
110
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS Company balance sheet
at 31 May 2020
Company no: 4627044
Non-current assets
Goodwill
Investments in subsidiary undertakings
Trade and other receivables
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Merger reserve
Retained earnings
Total equity
Notes
12
33
17
17
24
19
27
27
27
27
2020
£m
–
78.3
142.0
220.3
–
6.8
6.8
227.1
13.0
13.0
13.0
Restated 1
2019
£m
–
75.2
–
75.2
141.4
0.2
141.6
216.8
–
–
–
214.1
216.8
2.8
150.9
42.3
18.1
214.1
2.8
149.8
42.3
21.9
216.8
1 See Note 34 for prior year adjustment.
The accompanying Notes 1 to 35 are an integral part of these Financial Statements.
These Financial Statements were approved and authorised for issue by the Board of Directors on 3 September 2020. They were signed on
its behalf by:
Adam Palser
Chief Executive Officer
3 September 2020
Tim Kowalski
Chief Financial Officer
3 September 2020
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 111
NCC GROUP PLC
FINANCIAL STATEMENTS
Company cash flow statement
for the year ended 31 May 2020
Cash flow from operating activities
Profit for the year
Cash inflow for the year before changes in working capital
(Increase)/decrease in trade and other receivables
Increase in trade and other payables
Net cash generated from operating 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 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 35 are an integral part of these Financial Statements.
Notes
28
27
10
2020
£m
2019
£m
6.0
6.0
(0.6)
13.0
18.4
1.1
(12.9)
(11.8)
6.6
0.2
6.8
0.3
0.3
12.4
–
12.7
0.3
(12.9)
(12.6)
0.1
0.1
0.2
112
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS
Company statement of changes in equity
for the year ended 31 May 2020
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 and 1 June 2019
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
Notes
Share
capital
£m
Share
premium
£m
2.8
149.5
Merger
reserve
£m
42.3
–
–
–
–
–
–
–
–
0.3
0.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.1
1.1
–
–
–
–
–
–
10
27
10
27
Retained
earnings
£m
Total
£m
34.5
229.1
0.3
0.3
0.3
0.3
(12.9)
(12.9)
–
0.3
(12.9)
(12.6)
6.0
6.0
6.0
6.0
(12.9)
(12.9)
3.1
–
(9.8)
18.1
3.1
1.1
(8.7)
214.1
2.8
149.8
42.3
21.9
216.8
Balance at 31 May 2020
2.8
150.9
42.3
The accompanying Notes 1 to 35 are an integral part of these Financial Statements.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 113
NCC GROUP PLC
FINANCIAL STATEMENTS Notes to the financial statements
for the year ended 31 May 2020
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 Software
Resilience (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
3 September 2020.
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. Management also notes no changes to this assessment from a post
Balance Sheet event perspective.
Covid-19
Management has reviewed the potential impact of Covid-19 on the financial statements. Accordingly, consideration has been given to the
impact on the IFRS 9 expected credit loss model, IFRS 15 collectability assessments, IFRS 16 lease term assessments (no material impact
on lease term assessment), the annual impairment review and the Going Concern and viability assessments.
Application of significant new EU-endorsed accounting standard – IFRS 16 ‘Leases’
Background and adoption
During the year, the Group adopted IFRS 16 ‘Leases’. The date of the initial application of IFRS 16 for the Group is 1 June 2019. The Group
has adopted the accounting standard using the modified retrospective approach to transition and has accordingly not restated prior periods.
The results for the year ended 31 May 2020 are not directly comparable with those reported under the previous applicable accounting
standard IAS 17 ‘Leases’ and IFRIC 4 ‘Determining Whether an Arrangement Contains a Lease’. On this basis, to provide meaningful
comparatives, the results for the year ended 31 May 2020 have therefore also been presented under IAS 17 with the “like-for like” numbers
shown on an IAS 17 basis (Pre-IFRS 16). This Alternative Performance Measure (APM) will be presented for one year until the comparatives
also include the adoption of IFRS 16. Further details are provided in Note 3 to the Financial Statements.
In applying the modified retrospective approach the Group has valued right-of-use assets on a lease by lease basis using the approach that
IFRS 16 had always been applied but using the incremental borrowing rate at the date of the application.
Implications of IFRS 16 adoption
The implications of IFRS 16 adoption are noted as follows:
• A number of lease contracts previously disclosed under IAS 17 within the Financial Statements, which gave rise to recurring expenses
within operating expenses, have been recognised on the Balance Sheet as a “right-of-use asset” for the year ended 31 May 2020.
• A corresponding lease liability (current and non-current) reflecting the Group’s commitment to pay consideration to third parties
under these contracts has also been recognised, increasing the Group’s net debt although the net cash flow profile remains the
same for the Group.
• The Group has depreciated the right-of-use asset through the Income Statement over the shorter of the assets’ useful lives and the
assessed lease term.
• The Group has recognised interest on the liability using the Group’s incremental borrowing rate. Interest has been charged to finance costs.
• The profile of the overall expense in profit and loss has now changed, as the interest expense will be more front-loaded compared
to a straight-line operating lease rental expense under IAS 17.
Specifically, management had to conclude on whether a contract is or contains a lease, with the following being considered:
• Whether there is an identified asset that the Group has the right to obtain substantially all the economic benefits from.
• Whether the Group has the right to direct how and for what purpose the asset is used.
• Whether the Group has the right to operate the asset without the supplier having the right to change those operating instructions.
• Whether the Group has designed the asset in a way that predetermines how and for what purpose the asset will be used.
114
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTS 1 Accounting policies continued
Application of significant new EU-endorsed accounting standard – IFRS 16 ‘Leases’ continued
Implications of IFRS 16 adoption continued
In addition, management has also considered other salient factors in the assessment of the standard such as:
• The length of assessed lease term taking into account the non-cancellable period of the lease including periods covered by an option
to extend or an option to terminate if the Group is reasonably certain to exercise either option.
• The applicability of interest rate implicit in the lease or the Group’s incremental borrowing rate.
Following the above assessment, management has concluded that the following items that were previously classified as operating leases
under IAS 17 have been recognised in the Financial Statements using the new requirements of IFRS 16:
• Certain properties
• Equipment leases
• Motor vehicles
The Group does not lease any server equipment in relation to the provision of software resilience services or have embedded leases within
Assurance service contracts.
Exemptions and practical expedients applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
• The use of a single discount rate to a portfolio of leases with reasonably similar characteristics.
• Reliance on previous assessments on whether leases are onerous.
• The accounting for operating leases with a remaining lease term of less than 12 months as at 1 June 2019 as short-term leases.
• Right-of-use assets and liabilities for leases of low value assets (e.g. IT equipment) have not been recognised.
• The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application.
• The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
Transition elections
The Group has offset the previously recognised onerous leases immediately before transition as opposed to performing an impairment
review under IAS 36.
Impact on covenants and cash flows
The Group renegotiated its banking facilities in June 2019. The debt covenants on the Group’s borrowing facilities have been unaffected by
the application of IFRS 16 as the covenant calculations are based on the accounting principles in place prior to 1 January 2019. The IFRS 16
changes have not impacted the interest paid by the Group for its banking facilities. The overall net cash flow for the Group is also unaffected
by IFRS 16; however, the cash flows in the Consolidated Cash Flow Statement are now split between a principal portion and a finance portion,
which are presented within financing activities and operating cash flows respectively. Previously under IAS 17 the operating lease payments were
presented as operating cash flows.
New accounting policies under IFRS 16
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract
conveys the right to control the use of an identified asset, the Group assesses whether:
• The contract involves use of the identified asset; this may be specified explicitly or implicitly and should be physically distinct or represent
substantially all of the capacity or a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified.
• The Group has the right to obtain substantially all of the economic benefits from use of the asset and throughout the period of use.
• The Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most
relevant to changing how and for what purpose the asset is used. In rare cases where all the decisions about how and for what purpose
the asset is used are predetermined, the Group has the right to direct the use of the asset if either:
• The Group has the right to operate the asset.
• The Group designed the asset in a way that predetermines how and for what purpose it will be used.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost,
which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, and an estimate of
costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of
the useful life of the right-of-use asset or the end of lease term. The estimated useful lives of right-of-use assets are determined on the
same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any,
and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted
using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. The Group
has used its incremental borrowing rate of 3.3% as the discount rate for the calculation of the lease liabilities on the transition to IFRS 16.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 115
NCC GROUP PLC
FINANCIAL STATEMENTS 1 Accounting policies continued
Application of significant new EU-endorsed accounting standard – IFRS 16 ‘Leases’ continued
New accounting policies under IFRS 16 continued
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable, or if
the Group changes its assessment of whether it will exercise a purchase, extension or termination option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in
the Income Statement if the carrying amount of the right-of-use asset has been reduced to zero. As noted above, the Group has elected not to recognise
right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets, including certain
IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
This policy is now applied to contracts entered into, or changed, on or after 1 June 2019.
Other judgments
Lease term
The lease term is a key judgment into calculating the lease liability under IFRS 16. Management considers it appropriate to initially set a lease term
equal to the non-cancellable period of the lease. The lease term is reassessed only in specific circumstances, for example where management
makes the decision to renew a lease, exercise an option to extend a lease or exercise a break clause. In these circumstances the adjustment to
the right-of-use asset and associated lease liability is accounted for as an addition or disposal (as appropriate) in the period of reassessment.
Summary of financial impact on consolidated Financial Statements
The application of this standard has had a significant impact on the Group’s consolidated Financial Statements for the year ended 31 May 2020 as follows:
Consolidated Income Statement financial impact:
Statutory
Revenue
Cost of sales
Gross profit
Administrative expenses
– Depreciation and amortisation
– Other administrative expenses
Total administrative expenses
Operating profit
Net finance costs
Profit before taxation
Taxation
Profit for the period attributable to the owners of the Company
Earnings per ordinary share
Basic EPS
Diluted EPS
Consolidated Statement of Comprehensive Income financial impact:
2020
(IFRS 16)
£m
Rent and
finance costs
£m
ROU asset
impairment
£m
Depreciation
£m
Taxation
£m
2020
(Pre-IFRS 16)
£m
–
–
–
–
(5.3)
(5.3)
(5.3)
1.2
(4.1)
–
(4.1)
–
–
–
–
1.1
1.1
1.1
–
1.1
–
1.1
–
–
–
6.0
–
6.0
6.0
–
6.0
–
6.0
263.7
(159.3)
104.4
(24.9)
(60.4)
(85.3)
19.1
(3.0)
16.1
(4.4)
11.7
4.2p
4.2p
–
–
–
–
–
–
–
–
–
(0.6)
(0.6)
263.7
(159.3)
104.4
(18.9)
(64.6)
(83.5)
20.9
(1.8)
19.1
(5.0)
14.1
5.1p
5.0p
2020
(IFRS 16)
£m
Adjustment
on application
of IFRS 16
£m
2020
(Pre-IFRS 16)
£m
Total comprehensive income for the year (net of tax) attributable to the owners of the Company
15.7
2.4
18.1
During the year ended 31 May 2020, the following charges arising from lease arrangements were recognised in the Consolidated Income Statement:
Depreciation of right-of-use assets
Finance costs – interest on lease liabilities
Profit on disposal of right-of-use assets
Impairment of right-of-use assets
116
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
2020
£m
6.0
1.2
(0.1)
1.1
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 1 Accounting policies continued
Application of significant new EU-endorsed accounting standard – IFRS 16 ‘Leases’ continued
Summary of financial impact on consolidated Financial Statements continued
Consolidated Balance Sheet on transition:
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Investments
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Current tax receivable
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Borrowings
Lease liabilities
Provisions
Contract liabilities – deferred revenue
Total current liabilities
Non-current liabilities
Borrowings
Lease liabilities
Deferred tax liability
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Merger reserve
Currency translation reserve
Retained earnings
Total equity attributable to equity holders of the parent
2019
(Pre-IFRS 16)
£m
Right-of-use
assets and
liabilities on
transition
£m
Onerous leases
and lease
incentives
offset
£m
Taxation
£m
2019
(IFRS 16)
£m
189.4
41.8
16.9
–
0.3
1.1
–
–
–
–
–
–
33.2
(6.7)
–
–
–
–
249.5
33.2
(6.7)
0.7
61.6
0.6
34.9
97.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.5
0.5
–
–
–
–
–
189.4
41.8
16.9
26.5
0.3
1.6
276.5
0.7
61.6
0.6
34.9
97.8
347.3
33.2
(6.7)
0.5
374.3
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
27.9
(12.0)
210.8
–
–
5.2
–
–
5.2
–
30.5
–
–
30.5
35.7
(2.5)
–
–
–
–
(2.5)
(2.5)
–
–
–
(2.5)
–
(2.5)
–
–
–
(4.2)
(4.2)
(6.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.5
–
–
–
–
0.5
0.5
31.6
5.0
5.2
0.2
36.2
78.2
50.1
30.5
5.4
1.3
87.3
165.5
208.8
2.8
149.8
42.3
27.9
(14.0)
208.8
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 117
NCC GROUP PLC
FINANCIAL STATEMENTS 1 Accounting policies continued
Application of significant new EU-endorsed accounting standard – IFRS 16 ‘Leases’ continued
Summary of financial impact on consolidated Financial Statements continued
At 31 May 2019, the Group had £35.6m of non-cancellable operating lease commitments. The difference between the operating lease
commitments disclosed in the Group consolidated Financial Statements for the year ended 31 May 2019 and the lease liabilities recognised
on the date of transition can be explained as follows:
Undiscounted future minimum lease payments under operating leases at 31 May 2019
Short-term leases
Increase in minimum lease commitments
Impact of discounting
Other
IFRS 16 lease liability recognised at 1 June 2019
£m
35.6
(1.4)
6.1
(6.2)
1.6
35.7
The increase in minimum lease commitments relates to leases where the minimum lease payments disclosed at 31 May 2019 were
calculated by reference to break clauses, but under IFRS 16 have been calculated including periods covered by options to extend the lease
where the Group is reasonably certain that such options will be exercised, and periods covered by an option to terminate the lease if the
Group is reasonably certain not to exercise that option.
Of the lease liability of £35.7m recognised at 1 June 2019, £33.6m related to property leases and £2.1m related to other leases.
New and amended accounting standards that have been issued but are not yet effective
At the date of authorisation of these financial statements, the following standards and interpretations were in issue but have not been
applied in these financial statements as they were not yet mandatory:
• IFRS 17 ‘Insurance Contracts’ *
• ‘Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)’ *
• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)
• ‘Definition of Material (Amendments to IAS 1 and IAS 8)’
• ‘Definition of a Business (Amendments to IFRS 3)’ *
• Revised ‘Conceptual Framework’ and ‘Amendments to References to the Conceptual Framework in IFRS Standards’
• Covid-19-Related Rent Concessions amendment to IFRS 16
* Standards and interpretations not yet endorsed.
The following accounting standards and interpretations became effective this financial year and have been applied for the first time in these
financial statements:
• IFRS 16 ‘Leases’
• ‘Annual Improvements to IFRS Standards 2015-2017 Cycle’
• ‘Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)’
• ‘Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)’
• ‘Prepayment Features with Negative Compensation (Amendments to IFRS 9)’
• IFRIC 23 ‘Uncertainty over Income Tax Treatments’
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, and also the Covid-19 Thematic Review published by the Financial Reporting Council in July 2020.
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 4 to 6.
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 4 to 6 and 22 to 29. In addition, Note 25 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.
118
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 1 Accounting policies continued
Going concern continued
The Financial Statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons.
The Directors have prepared cash flow and covenant compliance forecasts for the period to March 2022 which indicate that, taking account
of reasonably possible downsides and the anticipated impact of Covid-19 on the operations and its financial resources, the Group and
Company will have sufficient funds to meet its liabilities as they fall due for that period.
The Group is financed primarily by a £100m committed revolving credit facility which matures in June 2024, further details of which are disclosed in
Note 24 to the Financial Statements. The Group is required to comply with financial covenants for leverage (net debt to Adjusted EBITDA 1) and
interest cover (Adjusted EBITDA 1 to interest charge) which are tested bi-annually at 31 May and 30 November each year. In April 2020, the
Group drew down the entire available funds of £100m under this RCF facility in order to provide maximum cash flexibility during the Covid-19 crisis.
Although the Group has demonstrated resilience to the challenging environment resulting from Covid-19, the Directors acknowledge that the
financial performance of the Group was adversely impacted during the last quarter of the year ended 31 May 2020, and for this reason the
base case budget for FY21 reflects the assumption of a continued impact from Covid-19 on Group revenues up until November 2020 at a
similar level to that experienced in the last quarter of FY20.
The Directors have prepared a number of severe but potentially plausible scenarios, which are based on the financial impact of the Group’s
principal risks and uncertainties (see page 37) as follows:
• Loss of revenue from September 2020 resulting from the ineffective execution of the business strategy
• Loss of revenue from September 2020 arising from the failure of critical systems, leading to inability to provide services to customers
• A fine of 4% of revenue and additional loss of revenue arising from the failure to maintain control over commercial/customer data
• A further Covid-19 impact representing a further decline in revenues throughout FY21 over and above the impact already reflected
in the base case budget
These scenarios have been modelled individually and also in combination in order to assess the Group’s ability to withstand multiple
challenges, although the Directors do not believe a scenario combining these risks to be plausible. The impact of these sensitivities has
been reviewed against the Group’s projected cash flow position, available bank facilities and compliance with financial covenants. Should
these occur, mitigating actions would be required to ensure that the Group remains liquid and financially viable, which include a reduction
of planned capital expenditure, headcount reduction, freezing pay and recruitment and not paying a dividend to shareholders. All of the
mitigating actions included in these forecasts are within the Directors’ control. These forecasts, including the severe but plausible downsides
when the mitigating actions are included, show that the Group is able to operate within its available banking facilities, with no forecasted
covenant breaches and that the Group will have sufficient funds to meets its liabilities as they fall due for that period.
Having reviewed the current performance, forecasts, debt servicing requirements, total facilities and risks, the Directors are confident that the
Company and the Group have sufficient funds to continue to meet their liabilities as they fall due for a period of at least 12 months from the
date of approval of these financial statements. Accordingly, they continue to adopt the going concern basis of accounting in preparing the
Group’s financial statements for the year ended 31 May 2020.
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.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 119
NCC GROUP PLC
FINANCIAL STATEMENTS 1 Accounting policies continued
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, if the Group has the technical ability
and sufficient resources to complete development, if future economic benefits are probable and if 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 more than one year, 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.
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 receivables’ 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.
120
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
1 Accounting policies continued
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.
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 32 to these Financial Statements.
Property, plant and equipment
Property, 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
– between three and five years
Plant and equipment
– between three and five years
Furniture
– between three and five years
Fixtures and fittings
– term of the lease
Motor vehicles
– four years
Property, 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
Summary
The Group provides independent global cyber Assurance security and Software Resilience (Escrow) services.
The revenue streams in relation to Assurance include:
• Technical Security Consulting (TSC) – cyber-security consultancy services
• Risk Management Consulting (RMC) – focus on the business risks of cyber from a governance perspective
• Managed Detection and Response (MDR) – operational cyber defence, incident response, scanning, simulation and managed security
operations centres (SOCs)
• Product Sales – sale of own manufactured and/or resale of third party products
The revenue streams in relation to Software Resilience (Escrow) include:
• Escrow contract services – securely maintain in “escrow” the long-term availability of business critical software and applications
• Verifications services – verify source code, and provide a fully managed secure service and result validation
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 121
NCC GROUP PLC
FINANCIAL STATEMENTS
1 Accounting policies continued
Revenue recognition continued
Summary continued
While the detailed recognition is contract specific, and set out in the table on pages 122 to 125, in most cases:
• TSC and RMC revenues are recognised on an input method over time
• MDR revenues are bifurcated according to the separate performance obligations (see pages 123 and 124) below
• Product sales are recognised when control passes, usually on delivery
• Escrow contract revenues are recognised over time
• Verification services are recognised on the completion of the verification service
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 Group recognises revenue when it transfers
control over a good or service to a customer.
Due to the nature of the Group’s activities, the Group transaction price for the majority of its contracts is entirely variable consideration as
these contracts are on a times and material basis, using set contractual rates per hour/day worked, giving rise to no estimation or reversal
risk at period end. The Group does not have any material obligations in respect of returns, refunds or warranties. The impact of any financing
component within contracts with customers has been assessed and concluded to be immaterial.
On contract inception, the probability of collectability is assessed across the Group and, unless there is a significant change in facts and
circumstances, revenue is recognised. During the year, no instances have been identified where reassessment of the collectability has had
to be reassessed, nor have there been any new contracts with customers for which the collection of consideration has not been assessed
at inception as probable. This current year assessment also takes into account the impact of Covid-19 on the Group’s customer base.
Detailed policies
The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with
customers by reportable segments, including significant payment terms, and the related revenue recognition policies.
Assurance
Revenue stream
Nature
Technical Security
Consulting (TSC)
TSC is the Group’s core consulting service
represented by consultants providing
cyber-security consultancy services to a
customer over time or to a set deliverable.
Some contracts may contain multiple
services (e.g. cyber security assessment
and certified product evaluation services).
These will be identified as separate
performance obligations, and the
transaction price allocated to each of
these is determined by using the fixed
contract rate based upon day rates, being
the relative stand-alone selling price basis.
Specifically, the contract terms range
from time and materials (based upon
consultants’ time and expenses) and
discrete statements of work, whereby
the customer benefits gradually over the
period over which the work is performed,
unless there is a set deliverable (for example:
a defined security assessment report).
The Group in certain situations operates
on agreed customer terms 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.
Timing of satisfaction of performance
obligations and significant payment terms
Revenue recognition policies, including
determination of transaction price and rationale
The customer simultaneously receives
and consumes the benefits provided by
the Group’s performance over the period
over which the work is performed and one
promise (performance obligation) is identified.
Work is performed on a daily basis.
Invoices are raised monthly or based on an
agreed invoicing profile with the customer.
Invoices are usually payable within 30 days.
No discounts or retrospective rebates
are provided.
Where a set deliverable is required and
the customer receives the incremental
benefit at the end, this represents one
performance obligation. In this situation,
the contract will have no abortive revenue
rights; therefore, the Group has no right
to consideration for performance to date.
Invoicing will usually be on completion of the
set deliverable and payable within 30 days.
The customer simultaneously receives and
consumes the benefits provided over the
period over which the work is performed
by the Group and one performance
obligation is identified.
Invoices in relation to the abortive revenue
will be recognised when aborted. Invoices
are usually payable within 30 days.
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
of the performance obligation. The work
performed occurs on a daily basis
(for example: security assessment of
a customer’s security environment).
It is considered that as the customer benefits
over time based on consultants’ time, the
input method faithfully depicts the Group’s
performance towards complete satisfaction
of the single performance obligation.
Transaction price is determined by fixed
contract rates based upon day rates and
number of days.
Revenue is recognised at a point in time,
on completion of the performance
obligation deliverable.
It is considered that as the customer benefits
once the set deliverable is received, the point
in time method faithfully depicts the Group’s
performance towards complete satisfaction
of the single performance obligation.
Transaction price is determined by fixed
contract rates.
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 of
the performance obligation.
Transaction price is determined by fixed
contract rates based upon day rates and
number of consultancy days.
122
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
1 Accounting policies continued
Revenue recognition continued
Assurance continued
Revenue stream
Nature
Risk Management
Consulting (RMC)
Managed Detection
and Response
(MDR)
These services focus on the business risks
of cyber from a governance perspective
whereby the Group provides cyber-security
risk management consultancy to the
customer over time or to a set deliverable.
These services help customers protect
critical systems and information, in particular,
by defining security strategies, policies,
security architecture, security awareness and
training and undertaking risk assessments.
These services provide operational cyber
defence, incident response, scanning,
simulation and managed security
operations centres (SOCs). Services are
typically for an extended delivery duration,
with contract lengths varying up to
a maximum of five years.
The proposition will also provide the
customer with software licence(s)
to enable these services to occur.
On this basis, the Group operates
two types of MDR contracts:
• A Managed Service Provider (MSP)
model whereby the customer
is supplied with one complete
integrated MDR service including
the software licence(s)
• A reseller model whereby the Group
sources the software licence(s) on
behalf of the customer and provides
the managed detection and
response services
These services will also include set-up
fees. Set-up fees represent workshops,
design, and configuration to create a
“connection” between systems.
Following services going live, the Group
will also provide a certain level of
professional service consultancy days
based on a day rate (post-go-live fees).
Timing of satisfaction of performance
obligations and significant payment terms
Revenue recognition policies, including
determination of transaction price and rationale
Revenue is recognised on the same basis as outlined for TSC.
The customer will benefit from the
services over the period of the contract.
However, the type of MDR contract will
depend on how the customer benefits
from the software licence(s).
Where a MSP model is selected by the
customer, the Group recognises three
performance obligations:
• Set-up fees
• Post-go-live fees
• Combined monitoring cyber and
licence service
The MSP model is considered to be under
a principal arrangement whereby the
Group controls the service prior to transfer.
Where a reseller model is selected by the
customer, the Group recognises four
performance obligations:
• Sourced software licence(s)
• Set-up fees
• Post-go-live fees
• Monitoring cyber service
The reseller model is considered to be
under an agency arrangement whereby
the customer receives the benefit and
control of the licence on delivery.
Invoices are raised monthly or based on an
agreed invoicing profile with the customer.
Invoices are usually payable within
30 days.
The amount of revenue recognised in relation
to software licence(s) depends on whether the
Group acts as an agent or as a principal.
The Group acts as principal when the Group
controls the specified software licence or
service prior to transfer (MSP model).
When the Group acts as a principal the revenue
recorded is the gross amount billed. The
transaction price is determined by a contract
price (cost plus mark-up). The transaction price
for the overall service is outlined within the
customer contract. In certain scenarios, the
contract will outline the price for each
performance obligation, which is considered to
be the stand-alone selling price of the services/
goods, and the transaction price is allocated to
each performance obligation on this basis.
Where the contract does not stipulate the price
per performance obligation, management
determines the relative stand-alone selling price
for each performance obligation based on a
market assessment approach for the services
provided in comparison to market prices, and
the contract transaction price is allocated to
each performance obligation in proportion to
those stand-alone selling prices.
Under a reseller model, the Group’s
responsibility is to arrange for a third party to
provide a specified software licence(s) to the
customer. In these cases, the Group is acting as
an agent and the Group does not control the
relevant licence(s) before it is transferred to the
customer. In particular, the Group does not have
inventory risk, have access to its source code or
hold the IP rights.
When the Group is acting as an agent, the
revenue is recorded at the net amount retained
(commission) at a point in time as the customer
receives immediate benefit from access to the
licence and the Group does not have any
further obligations in relation to the provision of
the licence. The commission transaction value
represents the mark-up on the licence provided.
Set-up fees are recognised over time of the
set-up. In particular, the level of administrative
tasks involved in the set-up process is considered
immaterial and therefore the work performed is
considered a distinct promised service and
incremental benefit of the installation to the
customer. The fees are based on day rates
incurred (defined by an in-house day rate sales
pricing matrix). Accordingly, the charge out rates
are recognised and allocated to these tasks
when performed akin to technical professional
day rate services. These rates are considered to
be the standalone selling prices and are not
discounted or reduced for other services.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 123
NCC GROUP PLC
FINANCIAL STATEMENTS 1 Accounting policies continued
Revenue recognition continued
Assurance continued
Revenue stream
Nature
Managed Detection
and Response
(MDR) continued
Timing of satisfaction of performance
obligations and significant payment terms
Revenue recognition policies, including
determination of transaction price and rationale
Post-go-live fees are recognised on delivery of
consultancy services over time as the customer
obtains incremental benefit from the hours
provided. Revenue is recognised on an input
basis (day rates) to measure the satisfaction
of performance obligations over time.
Transaction price is determined by fixed contract
rates based upon day rates and number of
post-go-live consultancy days.
One performance obligation, being a combined
monitoring cyber and licence service, is identified
in relation to the MSP model monitoring service.
Revenue is recognised over the contract length
as the software and monitoring process is
an overall service, whereby the Group retains
control of the licence and provides a complete
monitoring service to the customer. If the
customer cancels the contract, the Group will
retain control of the licence.
The customer benefits from a 24/7 monitoring
service whereby benefit is obtained daily and
therefore revenue is recognised on straight-line
basis as the performance obligation is satisfied
over time.
The transaction price is determined by fixed
contract rates for the combined services.
Revenue in relation to the reseller model
monitoring service is recognised over the
contract length on a straight-line basis as the
performance obligation is satisfied over time.
The customer benefits from a 24/7 monitoring
service whereby benefit is obtained daily on
straight-line basis.
The above MDR policies include one key
judgments in relation to agent vs principal.
Further detail in relation to this judgment is
made in the critical accounting judgments
within Note 2 to the financial statements.
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.
Revenue is recognised over time on a
straight-line basis representing the service
delivery agreement. The nature of the
agreement gives rise to the customer having
the benefit of software resilience if and when
required over the contract period. Revenue is
recognised on a straight-line basis as the
pattern of benefit to the customer as well
as the Group’s efforts to fulfil the contract
are generally even throughout the period.
The transaction price is determined
by a contract price.
Set-up time is not considered distinct and
a separate performance obligation due to
the administrative nature and therefore is
recognised over the period of the contract.
Product sales
This revenue represents the sale of own
manufactured and/or resale of third party
products with no connection to other
Group services.
The customer only benefits from the
products on delivery.
Invoices are raised monthly or based on an
agreed invoicing profile with the customer.
Invoices are usually payable within 30 days.
Software Resilience (Escrow)
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.
The service will include set-up time which
is administrative in nature.
The customer benefits from the service
evenly over a contract period, usually at
least a year and potentially up to three
years.
The service represents one performance
obligation.
Invoices are raised based on an agreed
invoicing profile with the customer.
Invoices are usually payable within
30 days.
124
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 1 Accounting policies continued
Revenue recognition continued
Software Resilience (Escrow) continued
Verifications
services
These services verify source code based
upon an agreed scope between all parties,
and provide a fully managed secure
service and result validation, typically
delivered over a short period of time
(days).
These include SAAS services and
ICANN services.
The customer benefits from the service on
completion because the source code will
have been verified/validated.
The service represents one
performance obligation.
Revenue is recognised on completion of the
verification services.
Transaction price is determined by fixed
contract rates based upon day rates and
number of verification days.
Invoices are raised monthly or based on an
agreed invoicing profile with the customer.
Invoices are usually payable within 30 days.
Contract costs
Contract costs comprise incremental sales commissions paid to sales agents which can be directly attributed to an acquired or retained contract.
Capitalised commission costs are amortised on a systematic basis that is consistent with the transfer to the customer of the services when the
related revenues are recognised. In all other cases, all internal and external costs of obtaining the contract are recognised as incurred.
Costs directly incurred in fulfilling a contract with a customer, which comprise of labour hours on long-term contracts are recognised as an asset
and amortised on a systematic basis that is consistent with the transfer to the customer of the services when the related revenues are recognised.
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.
Long-term loss-making contracts
Long-term contracts are reviewed annually to establish if the contract is onerous in nature. In particular, the long-term contract becomes an
onerous contract when the unavoidable costs (i.e. the lower of the cost of fulfilling the contract and any compensation or penalties arising
from failure to fulfil it) exceed the economic benefits expected to be received under the contract. The assessment of cost to fulfil include
costs that relate directly to the contract and include direct costs of production, direct costs of supplies/hardware from external suppliers
(materials), direct labour in relation to performance obligations and if appropriate any potential contractual fine dependent on items
(performance obligations) not being delivered/performed. Any assets dedicated to the specific contract are also tested for potential impairment.
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 Assurance division and the Software Resilience (Escrow) division. 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 CODM. 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. Both of the Group’s divisions (segments) are run by a senior executive team,
those teams make all decisions on resource allocation, product development, marketing and areas for focus and investment.
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 5.
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.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 125
NCC GROUP PLC
FINANCIAL STATEMENTS 1 Accounting policies continued
Operating lease payments
Operating lease rentals in respect of short-term leases (less than one year) and low value assets which are exempt from being accounted
for under IFRS 16, are charged to the Income Statement on a straight-line basis over the period 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.
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 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.
126
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 1 Accounting policies continued
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.
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
Long-term loss-making contracts
Revenue recognition – MDR
Capitalisation of development costs
Accounting
judgment?
Accounting
estimate?
No
Yes
No
Yes
Yes
Yes
No
Yes
No
No
2.1 Critical accounting judgments
Information about critical accounting judgments made in applying accounting policies that have the most significant effects on the amounts
recognised in the consolidated Financial Statements are as follows.
Individually Significant Items (ISIs)
During the year, the Group has not recognised any ISIs, however in the prior year the Group categorises certain items as ISIs on the basis
of accounting judgment.
These prior year judgments have regard to the Group’s approach to materiality. 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).
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 127
NCC GROUP PLC
FINANCIAL STATEMENTS 2 Critical accounting judgments and key sources of estimation uncertainty continued
2.1 Critical accounting judgments continued
Revenue recognition – MDR
The application of IFRS 15 in relation to MDR requires the Group to make critical judgments which affect the determination of the amount
and timing of revenue from contracts with customers.
The critical judgment relates to agent vs principal. Where the Group obtains control of a good or a right to services in advance of transferring
those goods or services to the customer, then the Group is considered principal and revenue recorded is the gross amount billed. Otherwise,
it is an agent. Within this context, control is considered the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the goods or services (or prevent others from doing so).
Due to the nature of the MDR contracts, control is not conclusive and therefore management has reviewed other specific guidance in
accordance with IFRS 15.B34A, B37 as follows:
• Under the MSP model, the Group purchases a licence from a third party that it then combines with other goods or services to produce
the specified good or service promised to the customer i.e. monitoring cyber service. Management applies judgment that this is considered
a principal relationship because the Group holds the contracting relationship with the third party end user licence agreement.
• Under the reseller model, the Group does not hold the contractual relationship with the third party end user licence agreement. In addition,
the following other factors give rise to an agency relationship:
• The customer holds the contractual relationship with third party end user licence agreement
• The Group’s terms and conditions with the customer notes the Group’s limited responsibilities in relation to licence
• The Group holds no inventory risk and the Group does not hold speculative inventory, as each licence is unique and based on each
customer requirements
• The Group does not control the licence software, have access to its source code or hold the IP rights
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.
Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such
changes in estimates and assumptions may have a material impact. Estimates and assumptions used in the preparation of the Financial
Statements are continually reviewed and revised as necessary at each reporting date.
Carrying values of intangible assets (including goodwill and acquired intangible assets)
The Group has significant balances relating to goodwill at 31 May 2020 as a result of acquisitions of businesses in previous years. The
carrying value of goodwill at 31 May 2020 is £193.1m (2019: £189.4m). Goodwill balances are tested annually for impairment. Tests for
impairment are primarily based on the calculation of a value in use for each CGU. Acquired intangibles and capitalised development and
software costs are also allocated to CGUs.
This involves the preparation of discounted cash flow projections, which require significant estimates of both future operating cash flows
and an appropriate risk-adjusted discount rate.
The commercial viability of individually capitalised development project costs is also part of the overall assessment of carrying values.
Future cash flow estimates are based on two critical estimates: the rate of revenue growth and the discount rate. These estimates are
deemed to be particularly critical in the current year due to consideration of the short and long-term impact of Covid-19 on the individual
CGUs, and as disclosed in Note 12, are particularly critical in relation to Fox-IT since this CGU is the most sensitive to movements
in estimates.
The calculation of an appropriate discount rate to apply to the future cash flow estimate is itself an estimate. While some aspects of discount
rate calculations can be more mechanical in nature (such as using the 30 year gilt yield as a proxy for the risk free rate) others, such as entity or
sector-specific risk adjustments, rely more on management estimates. The discount rate is also a key component in assessing the terminal value
which is often an important part of any valuation. Sensitivity analysis on what are regarded as reasonably possible changes is provided in Note 12.
128
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 2 Critical accounting judgments and key sources of estimation uncertainty continued
2.2 Estimation uncertainties continued
Long-term loss-making contracts
Some aspects of the Group’s revenue derive from relatively long-term contracts. Long-term loss-making contracts are represented
by the following:
• Contract 1 – a onerous provision was recognised in the year ended 31 May 2018 that has consequently incurred costs to fulfil giving
rise to a contract asset at 31 May 2020 of £2.1m (2019: £1.2m). The contract costs represent costs relating to future performance
obligations and benefits to the customer in relation to the long-term onerous contract (see Notes 17, 21 and 23).
• Contract 2 – a onerous provision recognised during the year of £0.2m (see Note 21).
Management prepares projections, which require significant estimates of both revenue and cost recognition. Revenue is recognised based
on the input method of IFRS 15 in relation to labour hours and therefore management has to estimate the number of hours still required to
complete the long-term projects and labour cost to complete. Due to the level of estimation, sensitivity analysis on what is regarded a severe
but plausible scenario for each contract is provided below:
• Contract 1 – a 5% increase in total labour hours to the project would give rise to a further provision of up to £0.4m (or impairment of the
existing contract asset).
• Contract 2 – a 2% increase in total labour hours to the project would give rise to a further provision of up to £0.2m.
Any increase in hours beyond this would lead to a material increase in provision.
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.
This presentation is also consistent with the way that financial performance is measured by management and reported to the Board, and
the basis of financial measures for senior management’s compensation schemes, and provides supplementary information that assists the
user in understanding the financial performance, position and trends of the Group. At all times, the Group aims to ensure that the Annual
Report and Accounts give a fair, balanced and understandable view of the Group’s performance, cash flows and financial position. IAS 1
‘Presentation of Financial Statements’ requires the separate presentation of items that are material in nature or scale in order to allow the
user of the accounts to understand underlying business performance.
The APMs were the same as those that applied to the audited consolidated Financial Statements for the year ended 31 May 2019 and the
unaudited interim Financial Statements for the period ended 30 November 2019. See below for a reconciliation of adjusted information to
statutory information and refer to the Glossary on pages 159 and 160 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 1, defined as operating profit or loss before adjusting items, as presented to the CODM.
Adjusting items during the year and prior year are:
• Individually Significant Items
• Share-based payments
• Amortisation of acquisition intangibles
• Profit on disposal of investment
During the year, the Group has adopted IFRS 16 ‘Leases’ using the modified retrospective approach to transition and has accordingly not
restated prior years. Consequently the results for the year ended 31 May 2020 are not directly comparable with those reported under the
previous applicable accounting standard IAS 17 ‘Leases’ and IFRIC 4 ‘Determining whether an arrangement contains a lease’.
On this basis, to provide meaningful comparatives, certain figures for the year ended 31 May 2020 have therefore also been presented
under IAS 17 with the “like-for-like” numbers shown on an IAS 17 basis (‘Pre-IFRS 16’). This alternative performance measure (APM),
will be presented for one year until the comparatives also include the adoption of IFRS 16.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 129
NCC GROUP PLC
FINANCIAL STATEMENTS 3 Alternative Performance Measures (APMs) and adjusting items continued
Reconciliation of adjusted information to statutory information
The following tables include details of adjusting items and reconciles adjusted information to statutory information for continuing operations:
Year ended
31 May 2020
(IFRS 16)
Adjusted
Share-based payments
Amortisation of acquired intangibles
Statutory
Year ended
31 May 2020
(Pre-IFRS 16)
Adjusted
Share-based payments
Amortisation of acquired intangibles
Statutory
Year ended
31 May 2019
(Pre-IFRS 16)
Adjusted
Revenue
£m
Gross profit
£m
EBITDA
£m
Depreciation
and
amortisation
£m
Operating
profit
£m
263.7
104.4
–
–
–
–
263.7
104.4
45.4
(1.4)
–
44.0
(16.1)
–
(8.8)
(24.9)
29.3
(1.4)
(8.8)
19.1
Revenue
£m
Gross profit
£m
EBITDA
£m
263.7
104.4
–
–
–
–
263.7
104.4
Revenue
£m
250.7
Gross profit
£m
101.8
Depreciation
and
amortisation
£m
Operating
profit
£m
(10.1)
–
(8.8)
(18.9)
31.1
(1.4)
(8.8)
20.9
Depreciation
and
amortisation
£m
Operating
profit
£m
(10.0)
33.7
–
–
(9.0)
–
(3.6)
(1.7)
(9.0)
0.1
41.2
(1.4)
–
39.8
EBITDA
£m
43.7
(3.6)
(1.7)
–
0.1
Profit
before
taxation
£m
26.3
(1.4)
(8.8)
16.1
Profit
before
taxation
£m
29.3
(1.4)
(8.8)
19.1
Profit
before
taxation
£m
32.0
(3.6)
(1.7)
(9.0)
0.1
Profit from
continuing
operations
£m
20.0
(1.6)
(6.7)
11.7
Profit from
continuing
operations
£m
22.4
(1.6)
(6.7)
14.1
Profit from
continuing
operations
£m
25.5
(3.1)
(1.8)
(7.2)
0.1
13.5
Taxation
£m
(6.3)
(0.2)
2.1
(4.4)
Taxation
£m
(6.9)
(0.2)
2.1
(5.0)
Taxation
£m
(6.5)
0.5
(0.1)
1.8
–
(4.3)
Individually Significant Items (Note 5)
Share-based payments
Amortisation of acquired intangibles
Profit on disposal of investment
–
–
–
–
–
–
–
–
Statutory
250.7
101.8
38.5
(19.0)
19.5
17.8
During the year ended 31 May 2020, cash adjusting items were £nil (2019: £3.6m).
During the year, management has reviewed the application of APMs and have considered ongoing FRC and ESMA best practice guidance
in this area. Accordingly, management has concluded that for future accounting periods, share-based payments and amortisation of acquired
intangibles, which are currently presented as adjusting items, should be included within underlying results. The decision to adopt this
presentation for future reporting periods rather than in the current reporting period is because the implementation of IFRS 16 in the year
(which does not require the restatement of 2019 comparatives) means that the 2020 results are not on a like-for-like basis with 2019,
and management considers that it would be very difficult to understand the true, underlying performance of the Group if this presentational
change to the income statement was made in the current reporting period. The impact of this proposal in future reporting periods will be
a reduction in adjusted measures.
130
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 3 Alternative Performance Measures (APMs) and adjusting items continued
Reconciliation of adjusted information to statutory information continued
To illustrate this, the income statement for the year ended 31 May 2020 has been shown below under the proposed basis:
£m
Revenue
Cost of sales
Gross profit
Administrative expenses:
Depreciation and amortisation
Other administration expenses
Total administrative expenses
Adjusted operating profit 1
Adjusting items
Statutory operating profit
Net debt
Net debt 1 is set out below:
Cash and cash equivalents (Note 24)
Borrowings (Note 24)
Net debt 1 (Pre-IFRS 16)
Lease liabilities
Net debt 1 (IFRS 16)
Cash conversion ratio
The calculation of the cash conversion ratio 1 is set out below:
Continuing
Cash generated from operating activities before interest and taxation (A)
Adjusted EBITDA (B)
Cash conversion ratio (%) (A)/(B)
2020
(IFRS 16)
Proposed
basis
2020
(IFRS 16)
As currently
reported
263.7
263.7
(159.3)
(159.3)
104.4
104.4
(24.9)
(60.4)
(85.3)
19.1
–
19.1
(16.1)
(59.0)
(75.1)
29.3
(10.2)
19.1
2020
£m
95.0
(99.2)
(4.2)
(38.2)
(42.4)
Variance
–
–
–
(8.8)
(1.4)
(10.2)
(10.2)
10.2
–
2019
£m
34.9
(55.1)
(20.2)
2020
(IFRS 16)
£m
2020
(Pre-IFRS 16)
£m
54.7
45.4
48.2
41.2
2019
£m
47.9
43.7
120.5%
117.0%
109.6%
As at 31 May 2020, the Group had a timing benefit of £4.6m from government payment deferral schemes, of which £3.4m related to indirect
taxes and £1.2m to corporation tax. If the benefit of the £3.4m relating to indirect taxes is excluded from the above calculations the cash
conversion ratios on an IFRS 16 and Pre-IFRS 16 basis would be 113.0% and 108.7% respectively. This timing benefit will reverse in the
year ending 31 May 2021.
4 Segmental information
The Group is organised into the following two (2019: two) reportable segments: Assurance and Software Resilience (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 1. Interest and tax are not allocated
to business segments and there are no intra-segment sales.
As disclosed in Note 3, due to the adoption of IFRS 16 ‘Leases’ during the year, the results for the year ended 31 May 2020 are not
directly comparable with the previous year. On this basis, to provide meaningful comparatives, the segmental results below for the year ended
31 May 2020 have therefore also been presented under IAS 17 with the like-for like numbers shown on an IAS 17 basis (Pre-IFRS 16),
as this is the basis on which the CODM allocates resources and assesses performance.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 131
NCC GROUP PLC
FINANCIAL STATEMENTS 4 Segmental information continued
Segmental analysis 2020
Revenue
Cost of sales
Gross profit
Gross margin %
General administration expenses allocated 1
Adjusted EBITDA 1
Depreciation and amortisation
Adjusted operating profit 1
Adjusting items 1
Operating profit
Impact of IFRS 16
Operating profit (Pre-IFRS 16 1)
Segmental analysis 2019
Revenue
Cost of sales
Gross profit
Gross margin %
General administration expenses allocated 1
Adjusted EBITDA 1
Depreciation and amortisation
Adjusted operating profit 1
Adjusting items 1
Operating profit
Segmental analysis 2020
Additions to non-current assets
Reportable segment assets
Reportable segment liabilities
Segmental analysis 2019
Additions to non-current assets
Reportable segment assets
Reportable segment liabilities
Assurance
£m
226.2
(149.3)
76.9
34.0%
(43.9)
33.0
(10.7)
22.3
Assurance
£m
212.7
(139.2)
73.5
34.6%
(45.4)
28.1
(5.5)
22.6
Assurance
£m
3.5
88.0
73.9
Assurance
£m
4.4
78.7
48.9
Software
resilience
(Escrow)
£m
Central and
head office
£m
37.5
(10.0)
27.5
73.3%
(10.0)
17.5
(0.6)
16.9
Software
Resilience
(Escrow)
£m
38.0
(9.7)
28.3
74.5%
(9.3)
19.0
–
19.0
Software
resilience
(Escrow)
£m
0.1
18.4
14.5
Software
resilience
(Escrow)
£m
–
19.0
12.8
–
–
–
–
(5.1)
(5.1)
(4.8)
(9.9)
Central and
head office
£m
–
–
–
–
(3.4)
(3.4)
(4.5)
(7.9)
Central and
head office
£m
9.6
339.0
142.9
Central and
head office
£m
5.1
249.6
74.8
Group
£m
263.7
(159.3)
104.4
39.6%
(59.0)
45.4
(16.1)
29.3
(10.2)
19.1
1.8
20.9
Group
£m
250.7
(148.9)
101.8
40.6%
(58.1)
43.7
(10.0)
33.7
(14.2)
19.5
Group
£m
13.2
445.4
231.3
Group
£m
9.5
347.3
136.5
Included within Central and head office are assets and liabilities not specifically allocated to the reporting segments and include investments,
head office tangible and intangible assets, deferred tax assets and liabilities, right-of-use assets and associated lease liabilities, Parent
Company cash balances, the RCF facility and certain provisions.
132
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 4 Segmental information continued
The net book value of non-current assets is analysed geographically as follows:
UK
North America
Europe and APAC
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 APAC
Total revenue
Revenue by category
Services
Products
Total revenue
Timing of revenue recognition
Services and products transferred over time
Services and products transferred at a point in time
Total revenue
Assurance
£
Software
resilience
(Escrow)
£m
91.5
82.4
52.3
226.2
25.9
7.8
3.8
37.5
Assurance
£
Software
resilience
(Escrow)
£m
215.7
10.5
226.2
41.4
184.8
226.2
37.5
–
37.5
25.7
11.8
37.5
2020
Total
£m
117.4
90.2
56.1
263.7
2020
Total
£m
253.2
10.5
263.7
67.1
196.6
263.7
Assurance
£
88.9
75.5
48.3
212.7
Assurance
£
206.5
6.2
212.7
36.4
176.3
212.7
2020
£m
196.5
68.6
10.6
275.7
Software
resilience
(Escrow)
£m
26.0
8.3
3.7
38.0
Software
resilience
(Escrow)
£m
38.0
–
38.0
26.5
11.5
38.0
2019
£m
180.0
60.8
8.7
249.5
2019
Total
£m
114.9
83.8
52.0
250.7
2019
Total
£m
244.5
6.2
250.7
63.1
187.6
250.7
There are no customer contracts in either 2020 or 2019 which account for more than 10% of segment revenue.
5 Individually Significant Items
The Group separately identifies items as Individually Significant Items. Each of these is considered by the Directors to be sufficiently unusual
in terms of nature or scale so as not to form part of the underlying performance of the business. They are therefore separately identified and
excluded from adjusted results (as explained in Note 3).
Individually Significant Items (ISIs)
SGT – legacy systems accelerated amortisation (net of R&D tax credit)
Revisions to deferred and contingent consideration
Onerous leases and other property related costs
Total ISIs – continuing operations
2020
£m
–
–
–
–
2019
£m
3.8
(0.8)
0.6
3.6
There were no Individually Significant Items in the year. The Individually Significant Items in the prior year are explained below:
SGT – legacy systems accelerated amortisation
As part of the transformation projects underway across the Group, the Group accelerated amortisation on legacy systems in advance of
new systems coming into effect. The charge in the prior year was a large, one-off transaction which was not expected to be repeated and
therefore was deemed to be an ISI. The charge is net of an R&D tax credit.
Revisions to deferred and contingent consideration
The revisions to deferred and contingent consideration in the prior year 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 was treated as an ISI.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 133
NCC GROUP PLC
FINANCIAL STATEMENTS 5 Individually Significant Items continued
Onerous leases and other property related costs
Following a review of the UK property portfolio and capacity requirements in the prior year, management identified three onerous property
leases. The amount provided for represents the forecasted discounted net cash flows, and the cost was treated as an ISI because it arose
in connection with unoccupied properties which are not considered to be part of the underlying performance of the business.
6 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 13)
Depreciation of right-of-use assets (Note 14)
Impairment of right-of-use assets (Note 14)
Amortisation of development costs (Note 12)
Amortisation of software costs (Note 12)
Amortisation of acquired intangibles (Note 12)
Accelerated amortisation of software costs (included within ISIs) (Note 12)
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 2
Research and development expenditure
Profit on disposal of investment
Profit on disposal of ROU assets
2020
£m
2019
£m
0.4
0.1
0.5
5.8
6.0
1.1
2.0
2.4
8.8
–
–
0.5
–
0.5
0.6
–
(0.1)
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)
–
1 The only non-audit service provided by the auditors was the half year review for which the fee was £50,000 (2019: £27,500).
2 The charge to the income statement in respect of operating lease rentals for 2020 relates entirely to short-term leases for which the Group has taken exemption from
applying the principles of IFRS 16.
7 Staff numbers and costs
Directors’ emoluments are disclosed in the Remuneration Committee Report. Total aggregate emoluments of the Directors in respect
of 2020 were £1.5m (2019: £1.6m). Employer contributions to pensions for Executive Directors for qualifying periods were £50,000
(2019: £46,000). The aggregate net value of share awards granted to the Directors in the period was £0.7m (2019: £0.7m). 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 (2019: nil).
The average monthly number of persons employed by the Group during the year, including Directors, is analysed by category as follows:
Operational
Administration
Total
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Share-based payments (Note 26)
Social security costs
Other pension costs (Note 31)
Total payroll costs
134
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Number of employees
2020
1,518
355
1,873
2019
1,380
343
1,723
2020
£m
2019
£m
148.4
133.2
1.4
14.7
5.6
1.7
13.0
6.6
170.1
154.5
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 8 Net finance costs
Interest payable on bank loans and overdrafts
Interest expense on lease liabilities
Net finance costs
The above finance costs relate entirely to liabilities not at fair value through profit or loss.
9 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 on continuing operations
2020
£m
1.8
1.2
3.0
2020
£m
2.0
(0.6)
–
4.4
5.8
(1.5)
(0.3)
(0.4)
0.5
0.3
(1.4)
4.4
2019
£m
1.7
–
1.7
2019
£m
2.1
1.3
(0.5)
2.3
5.2
0.3
0.1
–
(0.7)
(0.6)
(0.9)
4.3
The current tax charge includes a prior year credit of £0.6m in connection with the review of corporation tax creditors of Group companies
across a number of territories (though arising primarily in connection with revisions relating to Dutch subsidiaries).
Reconciliation of effective tax rate
Profit before taxation
Current tax using the UK corporation tax rate of 19% (2019: 19%)
Effects of:
Items not deductible/assessable 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 on continuing operations
2020
£m
16.1
3.1
0.8
(0.3)
0.5
0.9
(0.3)
(0.3)
4.4
2019
£m
17.8
3.4
0.6
0.7
(1.2)
1.3
(0.6)
0.1
4.3
Current and deferred tax recognised directly in equity was £nil (2019: credit £0.1m).
A change to the UK corporation tax rate was announced in the March 2020 Budget. This was substantively enacted on 17 March 2020 and
the corporation tax rate now applicable from 1 April 2020 remains at 19% rather than the previously enacted reduction to 17%. Accordingly,
the UK deferred tax balances have been calculated using a rate of 19% (2019: 17%).
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).
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 135
NCC GROUP PLC
FINANCIAL STATEMENTS 9 Taxation continued
Tax uncertainties
The tax expense reported for the current year and prior year are affected by certain positions taken by management where there may be
uncertainty. The most significant source of uncertainty arises from claims for US R&D tax credits relating to historical periods. Uncertainty
arises as a result of a degree of uncertainty concerning interpretation of US legislation and because the statute of limitations has not
expired. The aggregate net tax benefit to the income statement relating to the US R&D tax credits is £4.3m. The deferred tax asset relating
to the US R&D tax credits is £0.8m, although due to the uncertainty we have made a full provision of £0.8m against this asset.
10 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
2020
£m
12.9
4.65p
3.15p
2019
£m
12.9
4.65p
3.15p
The proposed final dividend for the year ended 31 May 2020 of 3.15p per ordinary share on approximately 278.9m ordinary shares
(approximately £8.8m) was approved by the Board on 3 September 2020 and will be recommended to shareholders at the AGM on
20 October 2020. The dividend has not been included as a liability as at 31 May 2020. The payment of this dividend will not have any
tax consequences for the Group.
11 Earnings per ordinary share
Earnings per ordinary share are shown on a statutory and an adjusted 1 basis to assist in the understanding of the performance of the Group.
Statutory earnings – continuing operations
Adjusted 1 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
2020
(IFRS 16)
£m
2020
(Pre-IFRS 16)
£m
11.7
20.0
14.1
22.4
Number
of shares
m
Number
of shares
m
278.0
2.5
280.5
278.0
2.5
280.5
2019
£m
13.5
25.5
Number
of shares
m
277.8
1.5
279.3
For the purposes of calculating the dilutive effect of share options, the average market value is based on quoted market prices for the period
during which the options are outstanding.
Basic earnings per ordinary share
Statutory – continuing operations
Adjusted 1
Diluted earnings per ordinary share
Statutory – continuing operations
Adjusted 1
2020
(IFRS 16)
Pence
2020
(Pre-IFRS 16)
Pence
4.2
7.2
5.1
8.1
2020
(IFRS 16)
Pence
2020
(Pre-IFRS 16)
Pence
4.2
7.1
5.0
8.0
2019
Pence
4.9
9.2
2019
Pence
4.8
9.1
136
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 12 Goodwill and other intangible assets
Group
Cost
At 1 June 2018
Additions – internally developed
Effects of movements in exchange rates
At 31 May 2019
Additions – internally developed
Transfers
Disposals
Effects of movements in exchange rates
At 31 May 2020
Accumulated amortisation and impairment losses
At 1 June 2018
Charge for year 1
Effects of movements in exchange rates
At 31 May 2019
Charge for year ¹
Disposals
Effects of movements in exchange rates
At 31 May 2020
Net book value
At 31 May 2019
At 31 May 2020
Other intangible assets
Goodwill
£m
Software
£m
Development
costs
£m
Customer
contracts and
relationships
£m
253.4
–
2.2
255.6
–
–
–
3.7
19.7
4.6
–
24.3
9.1
0.2
(9.1)
–
10.9
1.8
–
12.7
1.3
(0.2)
(2.3)
–
259.3
24.5
11.5
86.6
–
0.5
87.1
–
–
–
1.1
88.2
Total
£m
370.6
6.4
2.7
379.7
10.4
–
(11.4)
4.8
383.5
(66.2)
–
–
(12.0)
(7.0)
–
(66.2)
(19.0)
–
–
–
(2.4)
9.1
–
(66.2)
(12.3)
189.4
193.1
5.3
12.2
(5.8)
(1.7)
–
(7.5)
(2.0)
2.3
(0.1)
(7.3)
5.2
4.2
(46.6)
(130.6)
(9.0)
(0.2)
(17.7)
(0.2)
(55.8)
(148.5)
(8.8)
–
(0.8)
(13.2)
11.4
(0.9)
(65.4)
(151.2)
31.3
22.8
231.2
232.3
1 Charge for the year includes accelerated amortisation of £nil (2019: £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. The assessment of CGUs is a key accounting judgment as set out in Note 2 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 APAC
Total Software Resilience (Escrow)
UK: professional services
North America: professional services
North America: Payment Software Company Inc.
North America: Virtual Security Research LLC
Europe and APAC: Fox-IT
Total Assurance
Total Group
Goodwill
2020
£m
Goodwill
2019
£m
22.9
8.7
7.5
39.1
47.3
29.5
10.4
2.5
64.3
22.9
8.4
7.3
38.6
47.1
28.2
10.0
2.4
63.1
154.0
193.1
150.8
189.4
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 137
NCC GROUP PLC
FINANCIAL STATEMENTS
12 Goodwill and other intangible assets continued
Impairment review
Goodwill is tested for impairment annually at the level of the CGU to which it is allocated. In each of the tests carried out as at 31 May 2020,
the recoverable amount of the CGUs concerned was measured on a value in use basis (VIU). VIU represents the present value of the future
cash flows that are expected to be generated by the CGU to which the goodwill is allocated.
Capitalised development and software costs are included in the CGU asset bases when performing the impairment review. Capitalised
development projects and software intangible assets are also considered, on an asset-by-asset basis, for impairment where there are
indicators of impairment. During the year, management carried out a detailed review of the capitalised product portfolio and, based on cash
flow projections for the respective projects, concluded that no impairment was required.
VIU calculations are an area of material management estimation as set out in Note 2 to the consolidated Financial Statements. These
calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate.
Further detail in relation to these key assumptions used in the Group’s goodwill annual impairment review is as follows:
Pre-tax cash flow projections
Pre-tax cash flow projections are based on the Group’s budget for the forthcoming financial year and longer term three year strategic
plans to 2023, which have both been approved by the Board. The budget and three year strategic plan are compiled by the business unit
management teams using a detailed, bottom-up process with respect to revenue, margin and overheads, taking into account factors specific
to that business unit as well as wider economic factors such as the impact of Covid-19.
Assumptions have then been applied for expected revenue, margin growth, overheads and EBITDA ¹ for the subsequent two years from the
end of 2023. EBITDA ¹ is considered a proxy for operating cash flow before changes in working capital. Pre-tax cash flow projections also
include assumptions on working capital and capital expenditure requirements for each CGU.
These assumptions are based on management’s experience of growth and knowledge of the industry sectors, markets and the Group’s
internal opportunities for growth and margin enhancement. The projections beyond five years into perpetuity use an estimated long-term
growth rate. Management has taken into account the impact of Covid-19 in formulating the above assumptions, and the underlying
uncertainty of Covid-19 has been reflected in the assumptions underpinning the cash flow forecasts for each CGU rather than the pre-tax
discount rates used in the impairment test. The impact of Covid-19 has been reflected in the Group’s forecasts primarily by a reduction to the
revenue growth rates to allow for such factors as a reduction in contract renewal rates and new business won. This can be seen in the table
below which shows that the assumed revenue growth rates are below the prior year assumptions for several CGUs.
Forecast working capital and capital expenditure included within the pre-tax cash flow projections are based on management’s expectations
of future expenditure required to support the Group and current run rate requirements.
The revenue growth rate is considered a critical estimate by management. Revenue growth is considered to be the most critical estimate,
rather than EBITDA 1 growth which was used in the prior year, due to the Group’s relatively stable overhead base and high operating
leverage. Gross margins for each CGU are assumed to be maintained and therefore direct costs are assumed to increase in line with
revenue growth. The table below summarises the cumulative average growth rate (CAGR) assumed for revenue over the five year forecast
period to 2025, for each CGU:
Software Resilience (Escrow) UK
Software Resilience (Escrow) North America
Software Resilience (Escrow) Europe and APAC
Assurance UK
Assurance North America
Assurance North America: Payment Software Company Inc.
Assurance North America: Virtual Security Research LLC
Assurance Europe and APAC: Fox-IT
Revenue
CAGR (%)
2020
Revenue
CAGR (%)
2019
5.5%
1.2%
5.1%
8.3%
9.6%
7.3%
6.5%
13.1%
3.9%
(0.7)%
(0.4)%
10.2%
13.0%
12.8%
10.0%
9.5%
The revenue % 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. Management has considered available external market data in determining the revenue growth rates over
the five year forecast period.
138
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 12 Goodwill and other intangible assets continued
Long-term growth rates
To forecast growth beyond the detailed cash flows into perpetuity, a long-term average growth rate ranging between 1.9–2.5% (2019: 1.7%)
has been used based on the specific geography of the CGU, as shown in the table below. This range represents management’s best
estimate of a long-term annual growth rate aligned to an assessment of long-term GDP growth rates. A higher sector-specific growth rate
would be a valid alternative estimate. A different set of assumptions may be more appropriate in future years dependent on changes in the
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.
Software Resilience (Escrow) UK
Software Resilience (Escrow) North America
Software Resilience (Escrow) Europe and APAC
Assurance UK
Assurance North America
Assurance North America: Payment Software Company Inc.
Assurance North America: Virtual Security Research LLC
Assurance Europe and APAC: Fox-IT
2020
1.9%
2.5%
1.9%
1.9%
2.5%
2.5%
2.5%
1.9%
2019
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
Pre-tax discount rates
Discount rates can change relatively quickly for reasons both inside and outside of management’s control. Those outside management’s
direct control or influence include changes in the Group’s Beta, changes in risk-free rates of return and changes in Equity Risk Premia.
The discount rates are determined using a capital asset pricing model and reflect current market interest rates, relevant equity and size risk
premiums and the risks specific to the CGU concerned. On this basis, specific discount rates are used for each CGU in the VIU calculation
and the rates reflect management’s assessment on the level of relative risk in each respective CGU. The table below summarises the pre-tax
discount rates used for each CGU:
Software Resilience (Escrow) UK
Software Resilience (Escrow) North America
Software Resilience (Escrow) Europe and APAC
Assurance UK
Assurance North America
Assurance North America: Payment Software Company Inc.
Assurance North America: Virtual Security Research LLC
Assurance Europe and APAC: Fox-IT
Pre-tax
discount rate
2020
Pre-tax
discount rate
2019
15.4%
13.5%
13.6%
11.6%
13.5%
18.7%
13.5%
12.7%
9.4%
10.6%
9.2%
9.6%
10.6%
12.0%
11.9%
13.9%
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:
• Revenue is the primary cash flow driver (since due to the Group’s operating leverage, revenue is the key driver of EBITDA ¹, considered
as a proxy for operating cash flow before changes in working capital and capital expenditure), and a key contributor to VIU. Revenue
growth assumptions were sensitised for each specific CGU by reducing the five year CAGR % by a range of 0.5% pts (Fox-IT) to 5.0% pts
(other CGUs), as this is considered by management as a reasonably possible change due to the estimation uncertainty.
• The discount rate for each CGU: both factors inside and outside of management’s control impact the discount rate and 2% 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. Management has
considered the short and long-term impact of Covid-19 on the challenging growth targets for this CGU and believes a reasonably possible
change in the key assumptions of a 0.5% pts reduction in the revenue CAGR or a 2% pts increase in the discount rate would significantly
reduce the headroom. The impact of these changes in assumptions is illustrated in the table on page 140, together with the change in each
assumption that would result in the VIU falling below the carrying amount.
1 See Note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items, including a reconciliation to statutory information.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 139
NCC GROUP PLC
FINANCIAL STATEMENTS 12 Goodwill and other intangible assets continued
Sensitivity analysis continued
Carrying value of assets (goodwill, development and software costs, right-of-use assets)
Total VIU
Surplus over carrying value of assets
Assumptions used in the VIU calculation:
Five year revenue CAGR %
Impact of reduction of 0.5% pts to five year revenue CAGR % on VIU
Change required in five year revenue CAGR % for VIU to fall below the carrying amount
Pre-tax discount rate
Impact of 2% pts increase in pre-tax discount rate on VIU
Change required in the pre-tax discount rate for VIU to fall below the carrying amount
Impact of both 0.5% pts reduction to revenue CAGR and 2% pts increase in pre-tax discount rate on VIU
13 Property, plant and equipment
Computer
equipment
£m
Fixtures,
fittings and
equipment
£m
Motor
vehicles
£m
Fox-IT
£72.9m
£92.3m
£19.4m
13.1%
£(13.8)m
0.7% pts
12.7%
£(16.1)m
2.5% pts
£(27.5)m
Total
£m
38.3
3.1
(0.8)
0.3
40.9
2.8
(3.2)
0.3
40.8
0.4
–
(0.2)
–
0.2
–
(0.1)
–
0.1
(0.2)
(18.9)
–
0.1
–
(5.6)
0.6
(0.1)
(0.1)
(24.0)
–
–
–
(5.8)
3.2
(0.3)
17.3
20.6
2.7
(0.4)
–
0.4
(0.2)
0.3
19.6
21.1
2.9
(2.8)
–
19.7
(11.6)
(3.3)
0.3
–
(14.6)
(3.0)
2.6
(0.3)
(0.1)
(0.3)
0.3
21.0
(7.1)
(2.3)
0.2
(0.1)
(9.3)
(2.8)
0.6
–
(15.3)
(11.5)
(0.1)
(26.9)
5.0
4.4
11.8
9.5
0.1
–
16.9
13.9
Cost
At 1 June 2018
Additions
Disposals
Movement in foreign exchange rates
At 31 May 2019
Additions
Disposals
Movement in foreign exchange rates
At 31 May 2020
Depreciation
At 1 June 2018
Charge for year
Disposals
Movement in foreign exchange rates
At 31 May 2019
Charge for year
Disposals
Movement in foreign exchange rates
At 31 May 2020
Net book value
At 31 May 2019
At 31 May 2020
140
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
14 Right-of-use assets
Cost
At 1 June 2019
Initial recognition on adoption of IFRS 16 (Note 1)
Additions
Disposals
At 31 May 2020
Depreciation
At 1 June 2019
Charge for year
Impairment charge
At 31 May 2020
Net book value
At 31 May 2019
At 31 May 2020
Land and
buildings
£m
Motor
vehicles
£m
–
24.6
11.0
(2.8)
32.8
–
(4.9)
(1.1)
(6.0)
–
26.8
–
1.9
1.1
–
3.0
–
(1.1)
–
(1.1)
–
1.9
Total
£m
–
26.5
12.1
(2.8)
35.8
–
(6.0)
(1.1)
(7.1)
–
28.7
In the previous year, the Group only recognised lease assets and lease liabilities in relation to leases that were classified as finance leases
under IAS 17 ‘Leases’. For adjustments recognised on the adoption of IFRS 16 on 1 June 2019, please refer to Note 1.
The impairment charge of £1.1m in the year relates to leased properties which are not currently occupied by the Group, which have been
tested for impairment separately rather than within the CGU impairment tests. The impairment charge is based on the estimated recoverable
amount of the right-of-use asset at the assumed date of disposal or termination of the lease, which is considered to be £nil.
15 Investments
Interest in unlisted shares
Group
2020
£m
0.3
Group
2019
£m
0.3
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.
16 Inventory
Goods for resale
Group
2020
£m
0.9
Group
2019
£m
0.7
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. There have been no write-downs of inventory in the
year (2019: £nil).
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 141
NCC GROUP PLC
FINANCIAL STATEMENTS
17 Trade and other receivables
Current
Trade receivables
Prepayments
Contract costs
Other receivables
Contract assets – accrued income
Amounts owed by Group undertakings
Total
Disclosed as follows:
Current assets
Non-current assets
Group
2020
£m
41.6
10.6
2.1
0.9
18.0
–
73.2
73.2
–
73.2
Group
2019
£m
36.7
8.4
1.2
0.6
14.7
–
61.6
61.6
–
61.6
Company
2020
£m
Company
2019
£m
–
–
–
–
–
–
–
–
–
–
142.0
142.0
141.4
141.4
–
141.4
142.0
142.0
–
141.4
The carrying value of trade and other receivables classified at amortised cost approximates fair value.
The contract costs to fulfil represent recoverable costs relating to future performance obligations and economic benefits to the customer in
relation to a long-term onerous contract (see Note 21). No impairment charge has been recognised during the year.
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 in respect of contract assets or
amounts owed by Group undertakings (Parent Company only) in the year (2019: £nil) since they are not material. The increase in accrued
income in the year is due to the growth of the Assurance division.
Amounts owed by Group undertakings in the Parent Company balance sheet have been disclosed as repayable after more than one year.
Although these are repayable on demand, the disclosure as non-current is based on management’s expectation of the timing of repayment,
which has changed from the prior year.
The ageing of trade receivables, other receivables and accrued income at the end of the reporting period was:
Group
Trade receivables:
Not past due
Past due 0–30 days
Past due 31–90 days
Past due more than 90 days
Other receivables:
Not past due
Contract assets – accrued income:
Not past due
Total
The Company had no trade receivables (2019: £nil).
Gross
2020
£m
Expected
credit losses
2020
£m
19.6
14.4
6.5
3.6
44.1
0.9
0.9
18.0
63.0
–
(0.1)
(0.2)
(2.2)
(2.5)
–
–
–
(2.5)
Net
2020
£m
19.6
14.3
6.3
1.4
41.6
0.9
0.9
18.0
60.5
Gross
2019
£m
25.5
7.1
3.2
2.7
38.5
0.6
0.6
14.7
53.8
Expected
credit losses
2019
£m
(0.2)
(0.1)
(0.1)
(1.4)
(1.8)
–
–
–
(1.8)
Net
2019
£m
25.3
7.0
3.1
1.3
36.7
0.6
0.6
14.7
52.0
The standard period for credit sales varies from 30 days to 60 days. Trade receivables which are over 30 days past due are considered to
be credit impaired. The Group assesses creditworthiness of all trade debts on an ongoing basis providing for expected credit losses in line
with IFRS 9. The Group has considered credit risk rating grades, these are based on the ageing categories above. Covid-19 has not had
a material impact on the collection of trade receivables, and consequently has not materially impacted our forward looking estimates for
expected credit losses. New customers are subject to stringent credit checks.
142
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 17 Trade and other receivables continued
The movement in the expected credit losses of trade and other receivables is as follows:
Balance at 1 June
Charged to the Income Statement
Balance at 31 May
Group
2020
£m
(1.8)
(0.7)
(2.5)
Group
2019
£m
(1.4)
(0.4)
(1.8)
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:
Asset/(liability)
Plant and equipment
Short-term temporary differences
IFRS 16 assets/liabilities
Intangible assets
Share-based payments
Tax losses
Deferred tax asset/(liability)
Analysed as follows:
Non-current assets
Non-current liabilities
Asset/(liability)
Plant and equipment
Short-term temporary differences
Intangible assets
Share-based payments
Tax losses
Deferred tax (liability)/asset
Analysed as follows:
Non-current assets
Non-current liabilities
Movement in deferred tax during the year:
Plant and equipment
Short-term temporary differences
IFRS 16 assets/liabilities
Intangible assets
Share-based payments
Tax losses
Total
UK
£m
0.4
0.1
0.3
(1.8)
0.2
–
(0.8)
–
(0.8)
UK
£m
0.4
0.1
(1.9)
0.4
–
(1.0)
–
(1.0)
2020
US
£m
Netherlands
£m
Denmark
£m
0.1
4.2
0.2
(4.6)
0.2
–
0.1
0.1
–
0.4
–
0.1
(2.7)
0.1
–
(2.1)
–
(2.1)
–
–
–
–
–
0.4
0.4
0.4
–
2019
US
£m
Netherlands
£m
Denmark
£m
(0.4)
4.4
(3.4)
0.2
–
0.8
0.8
–
0.4
–
(4.9)
–
0.1
(4.4)
–
(4.4)
–
–
–
–
0.3
0.3
0.3
–
Total
£m
0.9
4.3
0.6
(9.1)
0.5
0.4
(2.4)
0.5
(2.9)
Total
£m
0.4
4.5
(10.2)
0.6
0.4
(4.3)
1.1
(5.4)
1 June
2019
£m
Recognised
in income
£m
Exchange
differences
£m
Recognised
in equity
£m
Adjustment to
opening reserves
£m
31 May
2020
£m
0.4
4.5
–
(10.2)
0.6
0.4
(4.3)
0.5
(0.4)
–
1.4
(0.1)
–
1.4
–
0.2
–
(0.2)
–
–
–
–
–
–
–
–
–
–
–
–
0.5
–
–
–
0.5
0.9
4.3
0.5
(9.0)
0.5
0.4
(2.4)
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 143
NCC GROUP PLC
FINANCIAL STATEMENTS 18 Deferred tax assets and liabilities (Group) continued
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
Adjustment to
opening reserves
£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
–
–
–
–
–
–
31 May
2019
£m
0.4
4.5
(10.2)
0.6
0.4
(4.3)
The Group has recognised a deferred tax asset of £0.4m (2019: £0.4m) 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 £13.9m (2019: £11.0m)
of tax losses carried forward in the UK (£10.6m), Australia (£2.2m), North America (£0.6m) and Singapore (£0.5m) due to current uncertainties
over their future recoverability (and in the case of the UK and North America because of specific legislative restrictions). A potential deferred
tax asset of £0.8m in respect of R&D tax claims submitted in North America has not been recognised due to uncertainty.
No deferred tax liability is recognised on temporary differences of £0.3m (2019: £0.1m) 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
Amounts owed to Group companies
Total
Group
2020
£m
10.8
11.7
23.9
–
46.4
Group
2019
£m
7.8
5.4
18.4
–
31.6
–
–
–
13.0
13.0
Company
2020
£m
Company
2019
£m
The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates fair value.
20 Lease liabilities
At 1 June 2019
Initial recognition on adoption of IFRS 16 (Note 1)
Additions
Disposals
Lease payments
Interest expense
At 31 May 2020
Analysed as follows:
Current
Non-current
The maturity of lease liabilities is as follows:
Less than one year
Two to five years
More than five years
Total lease liabilities
144
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Land and
buildings
£m
Motor
vehicles
£m
–
33.6
9.6
(2.9)
(5.4)
1.1
36.0
–
2.1
1.1
–
(1.1)
0.1
2.2
2020
£m
5.3
15.7
17.2
38.2
–
–
–
–
–
Total
£m
–
35.7
10.7
(2.9)
(6.5)
1.2
38.2
5.3
32.9
2019
£m
–
–
–
–
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 20 Lease liabilities continued
The total cash outflow for leases in the year was £7.0m (2019: £6.2m), which consists of £6.5m lease payments disclosed above and £0.5m
lease payments charged to the income statement in respect of short-term leases. The prior year figure of £6.2m was all charged to the
income statement in accordance with IAS 17 ‘Leases’.
21 Provisions
Balance as at 1 June 2018
Provisions arising in the year
Provisions utilised in the year
Balance as at 31 May 2019 and 1 June 2019
Provision transferred to right-of-use assets on implementation of IFRS 16
Provisions created in the year
Provisions utilised during the year
Balance as at 31 May 2020
Analysed as follows (2020):
Current
Non-current
Analysed as follows (2019):
Current
Non-current
Lease
incentives
£m
Loss-making
contracts
£m
Onerous
property costs
£m
Other
provisions
£m
5.9
(1.8)
–
4.1
(4.1)
–
–
–
–
–
0.4
3.7
1.0
–
(1.0)
–
–
0.2
–
0.2
0.2
–
–
–
2.0
2.7
(0.6)
4.1
(2.6)
2.1
(0.7)
2.9
1.2
1.7
2.3
1.8
–
–
–
–
–
0.6
–
0.6
0.6
–
–
–
Total
£m
8.9
0.9
(1.6)
8.2
(6.7)
2.9
(0.7)
3.7
2.0
1.7
2.7
5.5
The lease incentives provision represents capital contributions towards fit-out costs and rent-free incentives. On the implementation
of IFRS 16, the opening provision of £4.1m has been transferred and offset against the associated right-of-use assets.
The loss-making contracts represent the estimated remaining net lifetime loss on two long-term development and supply contracts. This
is explained in more detail in Note 2. During the year, costs have been incurred to fulfil one contract; these costs amounting to £2.1m are
included within contract costs within receivables (see Note 17). The contract is expected to be completed in 2021. An additional long-term
development and supply contract has also been provided for as at 31 May 2020 amounting to £0.2m and is expected to be completed in
2021. During the year, revenue has been recognised in relation to this long-term contract of £1.2m.
The onerous property costs provision relates to vacant premises in Reading and unused floors in the Manchester head office building. On the
implementation of IFRS 16, the opening provision of £2.6m relating to the onerous rent costs has been transferred and offset against the
associated right-of-use asset. The provision of £2.9m at 31 May 2020 includes £2.5m of non-rent costs relating to the onerous properties
including rates, service charges and insurance, and also the estimated costs of disposing or terminating these leases which includes rent
incentives, renovation costs and letting fees. The provision at 31 May 2020 also includes estimated dilapidations liabilities of £0.4m relating
to the Group’s leased premises. Both of these provisions are expected to be unwind over the period of the relevant leases (2021–2034).
Other provisions of £0.6m includes reorganisation costs to which the Group was committed at the balance sheet date and are expected
to be incurred within the next financial year.
22 Contract liabilities – deferred revenue
Deferred revenue represents advanced consideration received from customers, for which revenue is recognised over time. Deferred revenue
is analysed as follows and is considered a contract liability:
Assurance
Software Resilience (Escrow)
Total
Analysed as follows:
Current
Non-current
Group
2020
£m
29.8
11.1
40.9
39.5
1.4
40.9
Group
2019
£m
25.1
11.1
36.2
36.2
–
36.2
Revenue recognised in the year ended 31 May 2020 that was included in the contract liability at 1 June 2019 amounted to £35.3m.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 145
NCC GROUP PLC
FINANCIAL STATEMENTS 22 Contract liabilities – deferred revenue continued
The above deferred revenue will be allocated to the remaining performance obligations for the year ending as follows:
Assurance
Software resilience (Escrow)
Total
2021
£m
28.5
11.0
39.5
Group 2020
2022
£m
0.9
0.1
1.0
2023
£m
0.4
–
0.4
Total
£m
29.8
11.1
40.9
2020
£m
25.1
11.1
36.2
Group 2019
2021
£m
2022
£m
–
–
–
–
–
–
Total
£m
25.1
11.1
36.2
The Group has taken advantage of the IFRS 15 practical expedient not to disclose when revenue will unwind for all contracts less than 12
months in length. The increase in deferred revenue in the year is due to the growth of the Assurance division.
23 Contract balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
Receivables, which are included in trade and other receivables
Contract assets – accrued income
Contract costs – costs to obtain
Contract costs – costs to fulfil an onerous contract
Contract liabilities – deferred income
Note
17
17
17, 21
22
Group
2020
£m
41.6
18.0
0.4
2.1
Group
2019
£m
36.7
14.7
0.3
1.2
(40.9)
(36.2)
Receivables represent invoiced services usually payable within 30 days whereby performance obligations have been satisfied.
The contract assets primarily relate to the Group’s rights to consideration for work completed but not billed at the reporting date.
The contract assets were not impacted by any impairment charge. The contract assets are transferred to receivables when the rights become
unconditional. This usually occurs when the Group issues an invoice to the customer. Invoices usually become payable within 30 days.
The contract costs to obtain represent incremental sales commissions to obtain specific contracts.
The contract costs to fulfil represent recoverable costs relating to future performance obligations and economic benefits to the customer
in relation to a long-term onerous contract (see Note 21). Due to nature of the onerous contract, no revenue has been directly recognised
within the income statement during the year. The net year on year movement of the costs to fulfil the contract equates to Revenue
amounting to £1.1m offset by costs incurred of £2.0m.
Contract liabilities primarily relate to advanced consideration received from customers, for which revenue is recognised over time in line with
the respective performance obligation.
No information is provided about remaining performance obligations at 31 May 2020 or at 31 May 2019 that have an original expected
duration of one year or less, as allowed by IFRS 15.
24 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
Bank term loan
Non-current liabilities
Revolving credit facility
Bank term loan
Total borrowings
146
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
Group
2020
£m
95.0
Group
2020
£m
Group
2019
£m
34.9
Company
2020
£m
6.8
Company
2019
£m
0.2
Group
2019
£m
Company
2020
£m
Company
2019
£m
Maturity
2020
–
5.0
2024
2020
99.2
–
99.2
23.5
26.6
55.1
–
–
–
–
–
–
–
–
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
24 Cash and cash equivalents and borrowings continued
Cash and cash equivalents continued
The maturity profile is as follows:
Less than one year
Two to five years
Total borrowings
Group
2020
£m
–
99.2
99.2
Group
2019
£m
5.0
50.1
55.1
Company
2020
£m
Company
2019
£m
–
–
–
–
–
–
In June 2019, the Group renegotiated its previous term loan and multi-currency revolving credit facilities into a new fully revolving credit
facility (‘RCF’) of £100m with a new five year term up to June 2024, on similar terms (pricing and covenants). The interest payable on drawn
down funds ranges from 0.9% to 2.0% above LIBOR subject to the Group’s leverage (net debt ¹ to Adjusted EBITDA ¹) ratio. 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.
The Group is required to comply with financial covenants for leverage (net debt 1 to Adjusted EBITDA 1) and interest cover (Adjusted EBITDA 1
to interest charge) which are tested bi-annually at 31 May and 30 November each year. Arrangement fees incurred of £1.0m are being
amortised over the term. Since the new facility is on broadly similar pricing terms to the previous facility, the refinancing has been accounted
for as a non-substantial modification with no gain or loss arising on modification.
As at 31 May 2020, the Group had committed bank facilities of £100.0m (2019: £97.8m), of which £100.0m (2019: £55.1m) had been
drawn under these facilities, leaving £nil (2019: £42.7m) of undrawn facilities. Unamortised arrangement fees of £0.8m (2019: £nil) have
been offset against the amounts drawn down, resulting in a carrying value of borrowings at 31 May 2020 of £99.2m (2019: £55.1m).
Under the terms of the RCF, the Group can select an ‘interest period’ for amounts drawn down (defined as a ‘Loan’) of one week, one month,
two months, three months or six months, and repayment of the Loan must be made at the end of the specified interest period. However, the
Group has the unconditional option to roll a Loan into a new interest period. Accordingly, the contractual repayment of the RCF is the facility
termination date of June 2024 and hence the outstanding balance on the RCF has been disclosed as non-current.
The fair value of borrowings is not materially different to its amortised cost.
25 Financial instruments
Loans and borrowings
Non-current
Variable rate:
Revolving credit facility
Bank term loan
Current
Variable rate:
Bank term loan
Total loans and borrowings (excluding IFRS 16 lease liabilities)
Cash
Comparable (net debt 1)/cash (excluding IFRS 16 lease liabilities)
Non-current
IFRS 16 lease liabilities
Current
IFRS 16 lease liabilities
(Net debt 1)/cash
Group
2020
£m
Group
2019
£m
Company
2020
£m
Company
2019
£m
(99.2)
–
(99.2)
–
–
(99.2)
95.0
(4.2)
(32.9)
(5.3)
(42.4)
(23.5)
(26.6)
(50.1)
(5.0)
(5.0)
(55.1)
34.9
(20.2)
–
–
–
–
–
–
–
–
6.8
6.8
–
–
–
–
–
–
–
–
0.2
0.2
–
–
(20.2)
6.8
0.2
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 147
NCC GROUP PLC
FINANCIAL STATEMENTS 25 Financial instruments continued
Reconciliation of movements in liabilities to cash flows arising from financing activities
Group
Revolving credit facility/bank term loan:
Drawdown on facility
Repayment of facility
Transaction costs
Release of deferred arrangement fees
Foreign exchange movement
Movement in liability
IFRS 16 lease liability:
IFRS 16 transition adjustment
New leases entered into
Leases terminated
Principal element of lease payments
Interest element of lease payments
Interest cost (non-cash)
Movement in liability
2020
£m
2019
£m
44.3
–
(1.0)
0.2
0.6
44.1
35.7
10.7
(2.9)
(5.3)
(1.2)
1.2
38.2
13.0
(8.6)
–
–
1.7
6.1
–
–
–
–
–
–
–
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 identifies and addresses 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 1 divided by total capital. Net debt 1 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 1. As at 31 May 2020 the Group’s gearing ratio was 1.9% (2019: 8.7%).
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 2020 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).
148
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 25 Financial instruments continued
Fair value of financial instruments continued
Borrowings are 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
2020
Level 2
£m
Level 3
£m
Level 1
£m
2019
Level 2
£m
Level 3
£m
Financial assets at fair value through profit or loss
Investments (Note 15)
–
0.3
–
–
0.3
–
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
Cash and cash equivalents
Total
Group
2020
£m
41.6
0.9
18.0
95.0
155.5
Group
2019
£m
36.7
0.6
14.7
34.9
86.9
Company
2020
£m
Company
2019
£m
–
–
–
6.8
6.8
–
–
–
0.2
0.2
The maximum exposure to credit risk for trade receivables and other receivables at the reporting date by geographic region was:
Debtors by geographical segment
UK
North America
Europe and APAC
Total
The maximum exposure to credit risk at the reporting date by business segment was:
Debtors by business segment
Assurance
Software Resilience (Escrow)
Total
Group
2020
£m
21.9
13.5
7.1
42.5
Group
2020
£m
35.4
7.1
42.5
Group
2019
£m
18.7
11.8
6.8
37.3
Group
2019
£m
30.3
7.0
37.3
Company
2020
£m
Company
2019
£m
–
–
–
–
–
–
–
–
Company
2020
£m
Company
2019
£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 9.2% of total Group receivables (2019: 1.9%).
This figure is considered to be exceptionally high due to a high value of sales in the latter part of the year and has been substantially settled
by cash receipts after the year end, and hence management does not consider the Group has any exposure from concentration of credit risk.
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 which
regularly review customer debt balances to assess the risk of recovery.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 149
NCC GROUP PLC
FINANCIAL STATEMENTS
25 Financial instruments continued
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.
As disclosed in Note 24, in June 2019 the Group entered into a new revolving credit facility (RCF) of £100m with a new five year term up
to June 2024, which is considered by the Directors to be sufficient to meet the liquidity needs of the Group in the medium term. However, in
view of the impact of Covid-19 the Directors have taken the following additional measures during the period to improve the Group’s liquidity:
• Fully drawn down the available £100m on the RCF in order to provide maximum cash flexibility.
• Taken advantage of government tax payment deferral schemes which resulted in a timing benefit of £4.6m as at 31 May 2020.
These measures have been taken to reduce our leverage and strengthen our financial liquidity, and allows the Group to not only weather the
Covid-19 crisis but to continue to selectively invest in the business to enhance our technical capacity and capability to ensure the Group can
meet the anticipated growth in demand for the Group’s services as normal activity resumes.
The following are the contractual maturities of financial liabilities, including interest payments, of the Group:
At 31 May 2020
Borrowings
Lease liabilities
Trade and other payables
At 31 May 2019
Borrowings
Trade and other payables
Carrying
amount
£m
Contractual
cash flows
£m
(104.4)
(44.8)
(46.4)
(99.2)
(38.2)
(46.4)
(55.1)
(31.6)
<1 year
£m
(1.1)
(6.4)
(46.4)
1–2
years
£m
(1.1)
(5.6)
–
2+
years
£m
(102.2)
(13.5)
–
–
–
5+
years
£m
–
(19.3)
–
–
–
(58.4)
(31.6)
(6.4)
(31.6)
(52.0)
–
The contractual cash flows for borrowings disclosed above relate to the Group’s RCF facility, which terminates in June 2024. The contractual
cash flows include an estimate of the interest payable based on the assumption that the facility remains fully drawn at £100m, and is
calculated based on LIBOR plus a margin of 0.9% based on the current leverage ratio.
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
16.9
0.7
30.3
(49.9)
(24.2)
2020
USD
£m
17.6
–
40.0
(49.3)
(10.6)
EUR
£m
5.0
–
17.7
–
(2.5)
Other
£m
2.1
0.2
7.0
–
(0.9)
Total
£m
41.6
0.9
95.0
(99.2)
(38.2)
(20.9)
(13.2)
(9.0)
(3.3)
(46.4)
Trade receivables
Other receivables
Cash and cash
equivalents
Borrowings
Lease liabilities
Trade and other
payables
Total
(47.1)
7.0
(11.3)
5.1
(46.3)
Sterling
£m
14.7
0.4
8.0
(23.5)
–
(20.7)
(21.1)
2019
USD
£m
15.1
–
10.3
(31.6)
–
(2.3)
(8.5)
EUR
£m
4.4
0.1
12.3
–
–
(5.7)
11.1
Other
£m
2.5
0.1
4.3
–
–
Total
£m
36.7
0.6
34.9
(55.1)
–
(2.9)
(31.6)
4.0
(14.5)
A change in exchange rate of 10% would have an impact of £14.8m (2019: £13.8m) on revenue, £1.9m (2019: £2.4m) on operating profit,
£7.9m (2019: £6.5m) on net assets and £4.9m (2019: £3.2m) on borrowings.
150
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
25 Financial instruments continued
Interest rate risk
The Group and Company finance their operations through a combination 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 and liabilities of the Company at the end of the financial year were as follows:
Company
Financial assets
Sterling denominated financial assets
Amounts owed by Group undertakings
Total
Financial liabilities
Amounts owed to Group undertakings
Total
2020
£m
30.3
17.7
40.0
7.0
95.0
2019
£m
8.0
12.3
10.3
4.3
34.9
2020
£m
2019
£m
6.8
142.0
148.8
13.0
13.0
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 £1.0m (2019: £0.6m). The Directors do
not consider that the LIBOR reform will impact the Group in the medium term, however they will be discussing any implications with its
lenders in advance of the LIBOR reform process being implemented in 2021.
The financial liabilities of the Group and their maturity profile are as follows:
Sterling
£m
(2.7)
(57.9)
(13.5)
2020
USD
£m
(1.4)
(55.0)
(3.5)
EUR
£m
(0.9)
(1.5)
(0.1)
Other
£m
(0.3)
(0.5)
(0.1)
Total
£m
(5.3)
(114.9)
(17.2)
(20.9)
(13.2)
(9.0)
(3.3)
(46.4)
Less than one year
Two to five years
More than five years
Trade and other
payables
Total
(95.0)
(15.7)
(68.9)
(4.2)
(183.8)
Sterling
£m
–
(23.5)
–
(20.7)
(44.2)
2019
USD
£m
(5.0)
(26.6)
–
(2.3)
(33.9)
EUR
£m
–
–
–
(5.7)
(5.7)
Other
£m
–
–
–
(2.9)
(2.9)
Total
£m
(5.0)
(50.1)
–
(31.6)
(86.7)
26 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 £1.4m (2019: £1.7m) of which £1.3m (2019: £1.7m)
related to equity settled payments and £0.1m (£nil) to cash-settled payments. Share-based payments reduced during the year due to the
reduced likelihood of a number of historical schemes meeting scheme performance criteria resulting in a reversal of historical charges.
Company Share Option (CSOP) scheme – equity settled
Under the CSOP scheme, 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
August 2018
August 2018
September 2019
Expected term
of options
7 years
7 years
7 years
Exercisable
between
July 2015–July 2022
August 2021–August 2028
August 2021–August 2028
7 years September 2022–September 2029
Exercise
price
£1.36
£2.20
£2.20
£1.79
2020
Number
outstanding
80,868
49,995
27,270
385,451
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 151
NCC GROUP PLC
FINANCIAL STATEMENTS
26 Share-based payments continued
Sharesave schemes – equity settled
The Company operates sharesave schemes, which are available to all employees based in the UK, Netherlands, Denmark, Spain and
Australia, and full-time Executive Directors of the Company and its subsidiaries who have worked for a qualifying period.
Date of grant
March 2017
August 2017
March 2018
August 2018
March 2019
March 2020
March 2020
Expected term
of options
Exercisable
between
3 years
3 years
3 years
3 years
3 years
3 years
3 years
May 2020–October 2020
October 2020–March 2021
May 2021–October 2021
October 2021–March 2022
May 2022–October 2022
May 2023–October 2023
May 2023–October 2023
Exercise
price
£0.92
£1.56
£1.58
£1.75
£0.99
£1.84
£1.84
2020
Number
outstanding
293,545
998,855
78,098
441,049
415,608
748,967
387,695
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 2020
Expected term
of options
1 year
Exercisable
in
February 2021
Exercise
price
£1.93
2020
Number
outstanding
439,735
Incentive Stock Option (ISO) scheme – 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
August 2018
September 2019
Expected term
of options
Exercisable
between
7 years
August 2021–August 2028
7 years September 2022–September 2029
Exercise
price
£2.22
£1.82
2020
Number
outstanding
9,016
82,410
Long Term Investment Plan (LTIP) schemes – equity settled
The vesting condition for the award of the LTIP schemes, related to options granted in 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 (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
October 2017
November 2017
January 2018
August 2018
September 2019
March 2020
Expected term
of options
3 years
3 years
3 years
3 years
3 years
3 years
Exercisable
between
Exercise
price
June 2020–August 2020
June 2020–August 2020
June 2020–August 2020
June 2021–August 2021
June 2022–August 2022
June 2022–August 2022
£nil *
£nil *
£nil *
£nil *
£nil *
£nil *
2020
Number
outstanding
257,224
300,412
178,601
935,485
1,307,975
194,116
* The option exercise price is £nil; however, £1 is payable on each occasion of exercise.
152
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 26 Share-based payments continued
Restricted State Unit (RSU) schemes – 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
September 2019
Deferred share scheme – equity settled
Date of grant
August 2018
September 2019
Expected term
of options
3 years
3 years
3 years
3 years
Expected term
of options
2 years
2 years
Exercisable
between
June 2020–August 2020
June 2020–August 2020
June 2021–August 2021
June 2022–August 2022
Exercisable
between
June 2020–August 2028
June 2021–August 2029
Exercise
price
£0.01
£0.01
£0.01
£0.01
Exercise
price
£nil *
£nil *
2020
Number
outstanding
187,980
20,058
227,501
686,607
2020
Number
outstanding
10,993
61,694
* The option exercise price is £nil; however, £1 is payable on each occasion of exercise.
Phantom schemes – cash settled
Phantom schemes are used 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. The vesting conditions for the award of the Phantom
schemes, related to options granted in August 2016, relate 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 in October 2017 and November 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.
Options granted in September 2019 do not have any performance criteria.
Date of grant
October 2017
November 2017
September 2019
Expected term
of options
3 years
3 years
Exercisable
between
Exercise
price
June 2020–October 2021
June 2020–November 2021
3 years
September 2022-September 2023
£nil *
£nil *
£nil *
2020
Number
outstanding
113,120
8,189
67,036
* The option exercise price is £nil; however, £1 is payable on each occasion of exercise.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 153
NCC GROUP PLC
FINANCIAL STATEMENTS 26 Share-based payments continued
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 criterion of 9%; the Monte Carlo model has been used to calculate the fair value of this
proportion of the grant.
The assumptions used in the model are illustrated in the table below:
Grant date
Fair value at
measurement date
Exercise price
Expected
volatility
Option
expected term
Risk free
interest rate
CSOP scheme
July 2012 – September 2019 £0.35–£0.63 £1.36–£2.20
35.0–48.0%
7 years
0.35–2.75%
Sharesave scheme
March 2017 – May 2020 £0.43–£0.88 £0.92–£1.84
39.7–53.2%
3 years
0.50–2.20%
ESPP scheme
ISO scheme
LTIP scheme
RSU scheme
February 2020
£0.55
£1.84
37.6%
1 year
0.50%
August 2018 – September 2019 £0.54–£0.65 £1.82–£2.22
40.7–48.4%
7 years
0.38–1.50%
October 2017 – March 2020 £1.61–£2.22
£nil * 37.4–51.5%
3 years
0.21–2.00%
November 2017 – September 2019 £1.60–£2.17
£nil *–£0.01
47.6–51.5%
3 years
0.32–2.00%
Deferred shares
August 2018 – September 2019 £1.84–£1.90
£nil * 40.4–55.0%
2 years
0.35–1.50%
Phantom schemes
August 2016 – September 2019 £1.84–£2.75
£nil * 31.0–47.6%
3 years
1.81–1.96%
* 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 2020, dividend yield assumed at the time of option grant is 2.7%
(2019: 2.6%).
Reconciliation of outstanding share options
The options outstanding at 31 May 2020 have an exercise price in the range of £nil to £2.22 (2019: £nil to £3.37) and a weighted average
contractual life of three years (2019: three years).
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, outstanding share awards
during the year:
Outstanding at 1 June
Granted during the year
Exercised during the year
Forfeited in the year
Outstanding at 31 May
Exercisable at end of year
2020
No (’000)
7,326
4,438
(1,098)
(1,671)
8,995
385
2020
WAEP
£1.01
£0.88
£1.35
£1.39
£0.83
£0.99
2019
No (’000)
7,128
3,363
(171)
(2,994)
7,326
98
2019
WAEP
£1.13
£0.99
£1.76
£1.30
£1.01
£1.39
154
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 26 Share-based payments continued
Reconciliation of outstanding share options continued
Scheme
CSOP schemes
Sharesave/SAYE schemes
ESPP schemes
ISO schemes
LTIP schemes
RSU schemes
Deferred shares
Phantom schemes
Number of
instruments
as at
1 June 2019
Instruments
granted during
the year
Options
exercised in
the year
Forfeitures
in the year
Number of
instruments
as at
31 May 2020
350,009
413,383
(11,028)
(208,780)
543,584
3,286,637 1,150,979
(488,417)
(585,382) 3,363,817
723,263
439,735
(598,572)
(124,691)
439,735
159,512
82,410
2,208,617 1,525,500
447,194
686,607
10,993
139,585
61,694
78,209
–
–
–
–
–
(150,496)
91,426
(560,304) 3,173,813
(11,655) 1,122,146
–
72,687
(29,449)
188,345
7,325,810 4,438,517 (1,098,017) (1,670,757) 8,995,553
The liability for the cash-settled share-based payments at 31 May 2020 was £0.3m (2019: £0.2m).
27 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
2020
Number
of shares
2019
Number
of shares
277,830,625
277,660,081
1,078,546
170,544
Ordinary shares of 1p each at the end of the year
278,909,171 277,830,625
2020
£m
2.8
–
2.8
2019
£m
2.8
–
2.8
During the year, 1,078,546 (2019: 170,544) new ordinary shares of 1p were issued as a result of the exercise of share options.
The proceeds of £1.1m (2019: £0.3m) were credited to the share premium account. As at 31 May 2020, no shares were held in treasury
(2019: 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.
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.
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.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 155
NCC GROUP PLC
FINANCIAL STATEMENTS 28 Profit attributable to members of the Parent Company
The profit for the year dealt with in the accounts of the Parent Company was £6.0m (2019: £0.3m).
29 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
2020
2019
Land and
buildings
£m
0.1
–
–
0.1
Other
£m
–
–
–
–
Land and
buildings
£m
5.5
15.1
14.2
34.8
Other
£m
0.5
0.3
–
0.8
Following the adoption of IFRS 16 in the current year, the lease commitments at 31 May 2020 disclosed above represent short term (less
than one year) leases only for which the Group has taken the exemption from accounting for under IFRS 16. A reconciliation of the lease
commitments at 31 May 2019 disclosed above and the lease liabilities recognised on the date of transition to IFRS 16 is included in Note 1.
30 Contingencies
There are no contingent liabilities not provided for at the end of the financial year (2019: £nil). Similarly, there are no contingent assets (2019: £nil).
31 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 £5.6m (2019: £6.6m).
For the Company, the pension cost charge for the year represents contributions payable by the Company to the fund and amounted to £nil
(2019: £nil).
32 Related party transactions
The Group’s key management personnel comprise the Executive Directors of the Group. Details of the remuneration paid to key
management personnel are as follows:
Group
Salary costs (including bonus)
Benefits in kind
Share-based payments
Total
There were no other related party transactions during the year.
33 Investments in subsidiary undertakings
Company
At 1 June 2018 and at 31 May 2019 – as reported
Prior year adjustment (see Note 34)
At 1 June 2018 and 31 May 2019 – as restated
Increase in subsidiary investment for share-based charges
At 31 May 2020
Fixed asset investments are recognised at cost.
156
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
2020
£m
1.3
–
0.2
1.5
2019
£m
1.4
–
–
1.4
Shares in
Group
undertakings
£m
60.8
14.4
75.2
3.1
78.3
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020
33 Investments in subsidiary undertakings continued
The undertakings in which the Company has a 100% interest at 31 May 2020 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)
NCC Services Limited
England and Wales
Escrow and central/
head office costs
NCC Group Escrow Limited
England and Wales
Dormant
The National Computing Centre Limited
England and Wales
Dormant
NCC Group Security Services Limited
England and Wales
Assurance
NCC Group Audit Limited
NCC Group Pte Limited
NCC Group FZ-LLC
England and Wales
Assurance
United Arab Emirates Escrow
XYZ 1
XYZ 1
XYZ 1
XYZ 1
XYZ 1
Singapore
Assurance
20 Collyer Quay, #19-03, Singapore (049319)
NCC Group Security Services Espana SLU Spain
Assurance
NCC Group Escrow Europe BV
Netherlands
Escrow
NCC Group Escrow Europe
(Switzerland) AG
NCC Group GmbH
NCC Group A/S
Germany
Denmark
Escrow
Assurance
NCC Group UAB
Lithuania
Assurance
NCC Group Security Services, Inc.
USA
Assurance
Office 30, Building 16, Dubai Internet City,
Dubai, UAE
Calle Serrano Galvache, 56, Edificio Abedul, 4a
planta, 28033 Madrid, Spain
Van Heuven Goedhartlaan 13A, 1181LE
Amstelveen, The Netherlands
Leibnizstrasse 1, 85521 Ottobrunn, Germany
2nd Floor, Svanevej 12, DK–2400 København
NV, Denmark
Kareiviu g. 11B, 6th Floor, LT 09109, Vilnius,
Lithuania
650 California Street, Suite 2950. San
Francisco California, CA 94108 USA
(North America HQ2)
Switzerland
Escrow
Ibelweg 18A, 6300 Zug, Switzerland
NCC Group Escrow Associates LLC
NCC Group Secure Registrar, Inc.
NCC Group Domain Services, Inc.
NCC Group Inc.
USA
USA
USA
USA
Escrow
Domain services
Domain services
Escrow and central/
head office costs
North America HQ 2
North America HQ 2
North America HQ 2
North America HQ 2
NCC Group Pty Limited
Australia
Assurance
NCC Group Security Services Corporation Canada
Assurance
NCC Group Japan KK
Japan
Assurance
Level 13, 92 Pitt Street, Sydney NSW 2000,
Australia
51 Breithaupt Street, Suite 100, Kitchener,
Ontario N2H 5G5, Canada
Level 18, Yesibu Garden Place Tower, 4-20-3
Ebisu Shibuya-Ku, Tokyo
ArmstrongAdams Limited
England and Wales
Assurance
NCC Group Signify Solutions Limited
England and Wales
Assurance
NCC Group Accumuli Security Limited
England and Wales
Assurance
XYZ 1
XYZ 1
XYZ 1
Fox-IT Holding B.V.
Netherlands
Assurance
Olof Palmestraat 6, 2616 LM Delft
Fox-IT Group B.V.
Fox-IT B.V.
Fox-IT Operations B.V.
Fox-IT Crypto B.V.
Netherlands
Netherlands
Netherlands
Netherlands
Payment Software Company Inc.
USA
Assurance
Assurance
Assurance
Assurance
Assurance
The Netherlands (Fox-IT 4)
Fox-IT 3
Fox-IT 3
Fox-IT 3
Fox-IT 3
591 West Hamilton Avenue, Suite 200,
Campbell, California 95008, USA
Payment Software Company Limited
England and Wales
Assurance
XYZ 1
Virtual Security Research LCC 4
USA
Assurance
76 Sumner St, 4th Floor, Boston, MA 02110,
USA
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 157
NCC GROUP PLC
FINANCIAL STATEMENTS 33 Investments in subsidiary undertakings continued
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.
1 2 Hardman Boulevard, Spinningfields, Manchester M3 3AQ.
2 650 California Street, Suite 2950. San Francisco California, CA 94108 USA.
3 Olof Palmestraat 6, 2616 LM Delft, The Netherlands.
4 On 1 June 2020, Virtual Security Research LLC was merged into NCC Group Security Services, Inc., with NCC Group Security Services, Inc. being the surviving entity
of the merger.
34 Prior year adjustment (Company)
During the year ended 31 May 2020, the Parent Company identified that £14.4m of goodwill held on the Parent Company balance sheet
should be restated to be presented within the carrying value of the Parent Company investments in subsidiaries.
This goodwill was recognised when the trade and assets of Randomstorm Limited were transferred from Randomstorm Limited to NCC
Group Security Services Limited on 1 June 2016. The Directors consider that a better presentation of this transaction would have been
to transfer this amount from cost of investment in Randomstorm Limited to NCC Group Security Services Limited. As a result, the cost
of investment balance was understated by £14.4m and goodwill overstated by £14.4m as at the prior year end.
These adjustments have no impact on the Group results, or on the Parent Company’s net assets, net current assets, profit or loss in the prior
year or cash flows. A third balance sheet for 2018 comparatives has not been presented as the Directors do not believe this provides any
additional information to the 2019 restated balance sheet, as this is a reclassification within non-current assets and does not impact any
company KPIs.
The prior period has accordingly been restated.
35 Post-balance sheet events
There were no post-Balance Sheet events.
158
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
FINANCIAL STATEMENTSNotes to the financial statements continuedfor the year ended 31 May 2020 ADDITIONAL INFORMATION
Glossary of terms – Alternative Performance Measures (APMs)
APMs are the way that financial performance is measured by management and reported to the Board, and the basis of financial measures
for senior management’s compensation schemes, and provide supplementary information that assists the user in understanding the
underlying trading results.
APM
Closest 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, profit on the
disposal of investments,
share-based payments
and Individually
Significant Items
Operating profit
or loss
Operating profit
or loss
Earnings before
interest, tax,
depreciation and
amortisation
(EBITDA)
Adjusted earnings
before interest, tax,
depreciation and
amortisation
(EBITDA)
3
3
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
Represents operating profit before adjusting items to
assist in the understanding of the Group’s performance.
Adjusting items represent amortisation of acquired
intangibles, profit on the disposal of investments,
share-based payments and Individually Significant Items.
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 the profit on the
disposal of investments.
Individually Significant Items are items that are
considered unusual by nature or scale, and are of such
significance that separate disclosure is relevant to
understanding the Group’s financial performance and
therefore requires separate presentation in the Financial
Statements in order to fairly present the financial
performance of the Group.
The Directors consider share-based payments to be an
adjusting item on the basis that fair values are volatile
due to movements in share price, which may not be
reflective of the underlying performance of the Group.
See Note 2 for proposed changes to adjusting items
in forthcoming reporting periods.
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.
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 159
NCC GROUP PLC
ADDITIONAL INFORMATION Glossary of terms – Alternative Performance Measures (APMs) continued
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 (continued):
Adjusted profit
before taxation
Profit before
taxation
Profit before taxation
before adjusting items
Adjusted
basic EPS
Basic EPS
Basic EPS excluding
adjusting items
Balance Sheet measure
Net debt
(Pre IFRS 16) –
like for like basis
Total borrowings
(excluding lease
liabilities) offset by
cash and cash
equivalents
Total borrowings offset
(excluding lease
liabilities) by cash and
cash equivalents
3
12
3
Cash flow measure
Cash conversion
ratio (Pre IFRS 16)
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
Like-for-like measures
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.
During the year, the Group has adopted IFRS 16
‘Leases’. The date of the initial application of IFRS 16 for
the Group is 1 June 2019. The Group has adopted the
accounting standard using the modified retrospective
approach to transition and has accordingly not restated
prior years, consequently the results for the year ended
31 May 2019 are not directly comparable with those
reported under the previous applicable accounting
standard IAS 17 ‘Leases’ and IFRIC 4 ‘Determining
whether an arrangement contains a lease’.
On this basis, to provide meaningful comparatives, the
results for the year ended ended 31 May 2020 have
therefore also been presented under IAS 17 with the
“like-for-like” numbers shown on an IAS 17 basis
(Pre-IFRS 16). This alternative performance measure
(APM), will be presented for one year until the
comparatives also include the adoption of IFRS 16.
160
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
ADDITIONAL INFORMATION Glossary of terms – other terms
Other terms
Definition and usage
2016 Code/2018 Code
Adjusted
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.
Any result described as adjusted excludes the impact of Individually Significant Items, 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 52 and 53).
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 52 and 53 of this report.
EBIT
EBIT margin %
EBITDA
Earnings before interest and tax.
EBIT margin % is calculated as follows: adjusted EBIT divided by revenue.
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
Financial year
FRC
Free cash flow
FRS
Earnings per share. Profit for the year attributable to equity shareholders of the parent allocated
to each ordinary share.
Financial Conduct Authority.
For NCC Group this is an accounting year ending on 31 May.
Financial Reporting Council.
Net cash from operating activities less capital expenditure.
A UK Financial Reporting Standard as issued by the UK Financial Reporting Council (FRC).
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 161
NCC GROUP PLC
ADDITIONAL INFORMATION Glossary of terms – other terms continued
Other terms
Gross profit
Definition and usage
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.
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
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.
Software Resilience (Escrow)
Software Resilience represents our Escrow resilience services.
Subsidiary
TSC
TSR
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.
162
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
ADDITIONAL INFORMATION Other information
Directors
Chris Stone
– Non-Executive Chair
Adam Palser
– Chief Executive Officer
Tim Kowalski
– Chief Financial Officer
and Company Secretary
Chris Batterham – Senior Independent Non-Executive Director
Jonathan Brooks –
Independent Non-Executive Director
Mike Ettling
–
Independent Non-Executive Director
Jennifer Duvalier –
Independent Non-Executive Director
Company Secretary
Tim Kowalski
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
100 Bishopsgate
London
EC2N 4JL
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
HSBC UK Bank plc
2nd Floor
4 Hardman Square
Spinningfields
Manchester
M3 3EB
National Westminster Bank plc
1 Hardman Boulevard
Manchester
M3 3AQ
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
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020 163
NCC GROUP PLC
ADDITIONAL INFORMATION
Financial calendar
Ex-dividend date
Record date
AGM
Dividend payment date
2021 half year end
2021 interim statement
2021 year end
2021 year end trading pre-close statement
2021 preliminary year end statement
These dates are provisional and may be subject to change.
8 October 2020
9 October 2020
20 October 2020
6 November 2020
30 November 2020
January 2021
31 May 2021
June 2021
July 2021
164
NCC GROUP PLC
ANNUAL REPORT AND ACCOUNTS – FOR THE YEAR ENDED 31 MAY 2020
ADDITIONAL INFORMATION CBP003543
NCC Group plc’s commitment to environmental stewardship is reflected in this
Annual Report.
The material is derived from sustainable resources and is FSC® certified. Printed
in the UK by CPI Group using vegetable-based inks, with 99% of dry waste being
diverted from landfill. Both the mill and the printer are certified to ISO 14001
(Environmental Management System) and ISO 9001 (Quality Management System).