Half Yearly Report

RNS Number : 7363V

NCC Group PLC

17 January 2013

 



17 January 2013

NCC Group plc

Growth momentum maintained with adjusted pre-tax profits up 6% and dividend up 15%

NCC Group plc (LSE: NCC), the international, independent provider of Escrow and Assurance, has reported its half year results for the six months ended 30 November 2012.

Financial highlights

·      Group revenue increased 13% to £48.1m (£42.4m in 2011)

o  Organic revenue growth was 9%

o  International revenue now 35% (31% in 2011) of total Group revenue

·      Group adjusted operating margin* was 24% (25% in 2011)

·      Reported operating profit was £8.1m (£8.3m in 2011)

·      Group adjusted pre-tax profit* increased 6% to £10.9m (£10.3m in 2011)

·      Adjusted fully diluted earnings per share** increased 4% to 3.67p (3.52p in 2011)

·      Interim dividend** up 15% to 0.98p (0.85p in 2011)

·      Cash conversion ratio was 114% of operating profit (144% in 2011)

Operational highlights

·      Escrow maintained solid revenue growth of 3%

·      Escrow adjusted operating profits* up by 2% to £7.7m (£7.6m in 2011)

·      Assurance achieving strong growth with revenues increasing by 18% (11% organic)

·      Assurance adjusted operating profits* up 16% to £5.5m (£4.7m in 2011)

·      Two acquisitions completed in the US, widening international Assurance capabilities

Outlook

·      Orders and renewals up 6% totalling £46.5m (£43.7m in November 2011) for the current financial year

·      Price increases for UK Escrow implemented in November 2012

* Operating profit is adjusted for amortisation of acquired intangibles, exceptional items and share based payment charges.  Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' contingent consideration. 

** The interim dividend and adjusted fully diluted earnings per share are calculated after the five for one bonus issue on 18 December 2012.

Rob Cotton, NCC Group Chief Executive, commented:

"We have maintained our strong momentum, with both divisions seeing solid organic growth and benefitting from their leading positions in growing markets.

"Assurance has made particularly strong progress as international information security markets continued to show double digit growth.  Following the two recent acquisitions in New York, we now have the largest multi-national accredited security team in the industry with over 270 testers.

"We remain on course for another year of good growth with an increased contribution from our international operations"

Enquiries:

NCC Group  (www.nccgroup.com)	[phone]
Rob Cotton, Chief Executive
Atul Patel, Group Finance Director
College Hill
Adrian Duffield/Rozi Morris	[phone]

Overview

Group revenue in the first half increased by 13% to £48.1m (£42.4m in 2011) with good growth coming from both the Escrow and Assurance divisions despite the challenging trading economy. 

Organic Group revenue grew by 9% with an underlying growth of 13% excluding the positive effects of an unusually large one-off operational response contract in Assurance in the first four months of the last financial year.

Group adjusted operating profit increased by 6% to £11.3m (£10.7m in 2011).  Escrow operating profits grew by 2% to £7.7m (£7.6m in 2011) and Assurance by 16% to £5.5m (£4.7m in 2011).

Group adjusted diluted earnings per share improved 4% to 3.67p (3.52p in 2011). The Board has continued its progressive dividend policy, increasing the interim dividend by 15% to 0.98p (0.85p in 2011).  Both earnings and dividend per share are calculated on the shares in issue after the five for one bonus issue on 18 December 2012.

The Group continues to be highly cash generative with the ratio of operating cash flow before interest and tax being 114% of operating profits (144% in 2011) and net debt at the end of the period was £28.1m (£23.4m in 2011), after £7.9m of acquisition payments, against existing facilities of £37m.

Financial review

Revenue

Group revenues were £48.1m (£42.4m in 2011) with international revenue now making up 35% (31% in 2011) of total Group revenue. 

Organic revenue growth was 9%, excluding the contribution from the two US businesses acquired in August 2012,Matasano Security Services and Intrepidus Group.  After removing the effects of the one-off operational response contract in Assurance in the first four months of last year, the underlying organic growth was 13%.

Escrow accounted for 29% of NCC Group's total revenue (32% in 2011) with Assurance representing 71% (68% in 2011).  This reflects the impact of acquisitions as well as the strong organic growth in Assurance.

The table below summarises the revenue by division, including their key business areas.

£'000's	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	% Change
Revenue by business segment
Escrow UK	10,119	9,776	4
Escrow Europe	1,560	1,682	(7)
Escrow USA	2,183	2,021	8
Total Escrow	13,862	13,479	3
Assurance	29,916	25,070	19
Web Performance Testing	4,273	3,853	11
Total Assurance	34,189	28,923	18
Total revenue	48,051	42,402	13

The table below provides an analysis of the Group's revenue by geographical market where the customer is based.  It highlights the significant increase in the scale of the US operations which makes up almost all of the rest of the world revenue. 

£'000's	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	% Change
Revenue by geographical origin & destination
UK	31,176	29,258	7
Rest of Europe	3,329	2,902	15
Rest of the world	13,546	10,242	32
Total revenue	48,051	42,402	13

Profitability

Group adjusted operating profit, before amortisation of intangible assets, exceptional items, share-based payments, the unwinding of the discount on acquisitions and exceptional items, increased by 6% to £11.3m (£10.7m in 2011).

The Group adjusted operating profit margin was 24% (25% in 2011) as a result of the continued growth of Assurance, which has lower margins than Escrow. Both Escrow and Assurance margins remained firm at 56% (56% in 2011) and 16% (16% in 2011) respectively.

£'000's	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November restated (unaudited)
Operating profit by business segment
Group Escrow	7,720	7,594
Assurance	5,456	4,687
Segment operating profit	13,176	12,281
Head office costs	(1,856)	(1,600)
Operating profit before amortisation, charges for share based payments and exceptional items	11,320	10,681
Amortisation of intangible assets Escrow	(492)	(368)
Amortisation of intangible assets Assurance	(1,458)	(1,489)
Share based payments	(470)	(439)
Operating profit before exceptional items	8,900	8,385
Exceptional items	(825)	(68)
Operating profit	8,075	8,317

The Group's operating profit before exceptional items grew by 6%.

The Group's reported pre-tax profit, which is after charging exceptional costs of £0.8m relating to the acquisitions of Matasano Security and Intrepidus in August 2012, was £7.5m (£7.8m in 2011). 

Taxation 

The tax charge for the six months ended 30 November 2012 is 29% (29% in 2011) of profit before tax and is based upon the expected tax charge for the year.  The expected rate reflects the reduction in the UK corporate tax rates, which are offset by the increased proportion of income expected to arise in higher tax jurisdictions.

Earnings per share

On 18 December 2012, NCC Group made a bonus issue of five ordinary shares for every one share held.  The table below analyses the effect on the Group's basic earnings per share of the amortisation on intangibles, unwinding of the discount on contingent consideration for acquisitions, the effect of the exceptional items and share based payments.

The adjusted basic earnings per share from operations increased by 3% to 3.7p (3.6p in 2011) and reported basic earnings per share from operations were 2.6p (2.7p in 2011).

			2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November restated (unaudited)
Basic EPS
Group earnings per share - unadjusted			2.6p	2.7p
Amortisation of acquired intangibles			0.7p	0.7p
Exceptional items			0.2p	0.0p
Unwinding of the discount on the contingent consideration of the acquisitions			0.0p	0.0p
Share based payments			0.2p	0.2p
Adjusted basic EPS			3.7p	3.6p

The table below analyses the effect on the Group's basic earnings per share, before the bonus issue of five shares for every one held.  Basic earnings per share are before the amortisation on intangibles, unwinding of the discount on contingent consideration for acquisitions, the effect of the exceptional items and share based payments.

The adjusted basic earnings per share from continuing operations increased by 3% to 22.3p (21.6p in 2011) and reported basic earnings per share from continuing operations were 15.4p (16.1p in 2011).

			2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November restated (unaudited)
Basic EPS as per the income statement
Group earnings per share - unadjusted			15.4p	16.1p
Amortisation of acquired intangibles			4.0p	4.0p
Exceptional items			1.7p	0.2p
Unwinding of the discount on the contingent consideration of the acquisitions			0.2p	0.3p
Share based payments			1.0p	1.0p
Adjusted basic EPS			22.3p	21.6p

Dividends

In line with a continuing progressive dividend policy, the Board is paying an interim dividend of 0.98p (0.85p in 2011), an increase of 15%.   If the interim dividend were to be calculated before the bonus issue, it would have been 5.9p per share (5.1p in 2011).  This will be paid on 22 February 2013 to shareholders on the register at the close of business on 25 January 2013, with an ex-dividend date of 23 January 2013.

This represents cover of 2.6 times (3.2 times in 2011) based on basic earnings from continuing operations and cover of 3.8 times on an adjusted basic earnings on continuing operations basis (4.2 times in 2011).

Cash & funding

The Group remains committed to strong balance sheet management and borrowing only for affordable value enhancing acquisitions.  Operating cash flow before interest and tax, as a ratio to operating profits of £8.1m, remained strong at 114% (144% in 2011).

After acquisition payments of £7.9m, the Group had net debt of £28.1m (£23.4m in 2011) at the period end against facilities of £37.0m.  The final deferred consideration payment of £2.5m for iSEC will be paid during the second half of the financial year.

The Group's existing funding consists of a revolving credit facility of £35m and a £2m overdraft that both expire in July 2013.  The agreement terms are for interest to be charged on the facility at 2% over LIBOR and on the £2.0m overdraft facility at 2% over bank base rate.  The Group is in advanced discussions to renegotiate this facility and agree terms in advance of July 2013.

Capital expenditure decreased to £2.2m (£3.6m in 2011) with only the continued investment in Artemis of £0.4m to date, being significant.

Operational review

Group Escrow

Escrow remains the cornerstone of the Group's profitability and cash generation. All of the Escrow businesses offer substantial margins, a high degree of recurring revenue due to the contract renewal rates as well as very strong cash conversion characteristics.

Group Escrow organic revenue increased by 3% (6% in 2011) to £13.9m (£13.5m in 2011).  Group Escrow operating profitability grew organically by 2% (7% in 2011) to £7.7m (£7.6m in 2011). 

Global verification revenues continued the trend seen in the second half of the last financial year and grew by 12% to £2.8m (£2.5m in 2011).  Group recurring revenues through the renewals process will grow to £17.7m this year (£17.2m in 2011).

The European and US operations, as outlined below, went through a period of change in the calendar year 2012 but now have the secure foundations and structures to deliver improved sustained and controlled growth.  The Group is continuing to improve its staff retention and will progressively increase headcount carefully in these two units. 

In November 2012 Escrow UK prices were increased in line with inflation and mainland Europe and US are following in the second half of the financial year.

Escrow UK.  The first half of the financial year saw a consistent and robust performance.  A slow and difficult market, albeit in the traditionally quiet period for the division, saw the rate of growth fall.  Overall Escrow revenue in the UK grew 4% (6% in 2011) to £10.1m (£9.8m in 2011).

The underlying termination rate remains at or about 12%.  The rate has been static for the last five years, with no discernible change in the reasons for termination. 

Escrow Europe & Escrow USA.  Escrow Europe revenues were£1.6m (£1.7m in 2011).  The business had been affected by the departure of the General Manager and poor recruitment which allowed the competition to capitalise on the Group's weakened position.

The European teams are now stable and it is expected that positive growth will be achieved by the year-end.  Further investment will be made in the Netherlands and Switzerland operations, as it is clear there is plenty of potential in both of these markets. 

Escrow USA increased revenue by 8% (4% in 2011) to £2.2m in six months that saw a complete change of the US Escrow management team in both Atlanta and San Francisco.  The newly recruited team is capitalising on the Group's position in North America and expects to open a sales office in New York during 2013.

Assurance Division

Assurance revenues increased by 18% to £34.2m (£28.9m in 2011).  Excluding the acquisitions of Matasano and Intrepidus, the Division's revenue increased 11% to £32.2m (£28.9m in 2011).  Whilst operating profits increased 16% to £5.5m (£4.7m in 2011).  If the effects of an unusually large one-off operational response contract in the first four months of last year are excluded, the underlying organic revenue growth is 18%.

The Division is now uniquely placed to offer complete international support to multi-national organisations seeking to improve their information security. The Group now has the largest multi-national accredited security testing team in the industry with over 270 members. 

The Group has a very good reputation for security research as well as for the delivery of web applications, vulnerability assessments and forensics, in addition to being a leading provider of managed security services.

The increased presence in New York and Chicago, from the two acquisitions, as well as the opening of a small operation in Austin, Texas, further emphasises the Group's ambition in the security space.  Future growth will be achieved organically, by further recruitment of leading security experts, as well as by careful acquisitions in both existing and new emerging markets.

For Assurance, staff retention and recruitment remain the most important issues.  The careful balancing of paid-for utilisation, quality of deliverable work and research ensures that employee churn in the security team is consistently and significantly less than the 10% staff churn regarded as normal in skilled IT environments.  Adopting this approach also ensures the Group's exemplary reputation remains intact, which is one of the draws for new employees.

The Group actively promotes a responsible disclosure policy for both paid for and self-funded vulnerability research.  In the last 12 months, Group employees uncovered 259 new vulnerabilities, an increase of 100%, of which 165 were classified as of being of critical or high importance.  To date, developers and software owners have only fixed 17 of them.

The web monitoring, performance and load testing business continued to perform strongly.  It achieved a recurring revenue rate above 90% (90% in 2011) as businesses continue to recognise the importance of their website to their business prospects.

Assurance & Security Markets.  The market place for information security has not been affected by the global downturn. It is apparent that organisations and developers need to spend considerably more to ensure that they stay up-to-date and gain some protection as the scale of the security problem has become considerably larger and more complex.

Security threats can be split into five areas with the costs of loss and defence against each ever increasing. The five areas are: Internet trust; social media and Bring Your Own Device (BYOD); espionage; mobile malware; and digital vandalism and hacktivism.

Trust in the Internet is falling and will continue to do so.  The proliferation of generic Top Line Domains (gTLDs) will present more opportunities for fraud and with anti-virus software being now largely incapable of providing an active defence, real investment is required by organisations and government agencies.

Social media, allied to the growth of BYOD, opens both individuals and organisations up to threat.  The security of BYOD is largely overlooked due to its complexity by organisations whilst social media provides a primary route for hackers to target them.

Industrial and cyber espionage is becoming even more commonplace and difficult to detect.  The Flame virus has replaced Stuxnet as the most potent piece of malware seen to date and defence and detection is incredibly difficult and expensive.   More concerning is that this malware is becoming more widely available to hackers.

Mobile malware again poses a huge and growing threat.  Mobile now accounts for 13% of Internet traffic and so the 81% increase in malware attacks reported by Symantec for 2011, 403m virus and worms, will be easily surpassed this year.

Digital vandalism and hacktivism is also a growing threat.  This can be both malicious and disruptive, whatever the end objectives, either way defending against the damage and disruption is expensive and time consuming and can paralyse organisations.

It has been forecast by SC Magazine that the security industry will be worth €55.6bn in 2014, which for NCC Group is a very positive statement about its niche market.

IT Systems

At the end of the last financial year NCC Group abandoned the implementation of the Group SAP system, which had been invested in over the previous three years, as it failed to deliver a workable global end-to-end solution. 

Since then, the Group has been following the contractual dispute resolution process with regard to the third party implementer who was responsible for the design and delivery of the project, and discussions have continued between the parties and their legal advisers.  The Group remains committed to pursuing robustly all reasonable and appropriate steps to receive a suitable recompense from the providers.

The Group has now identified a suitable replacement for its existing IT system.  Negotiations are well advanced and it is expected that the design, development and implementation of the new system will begin in the next financial year.

Artemis & .secure

The project to develop a safe and secure gTLD, .secure, is progressing well and the application for the gTLD is due to be reviewed by ICANN.  The Group believes that the use and purpose for .secure will be widely supported, although the application is one of two for the particular domain. 

To date the market reception towards the concept has been extremely positive and the Group is close to announcing early adopters of .secure's principal processes and rules. 

The project's momentum is increasing and the Group is currently building the infrastructure to deliver the domain.  The anticipated costs are now likely to be £7m - £8m in this calendar year. This would give the Group the capability to launch the service, if the application for the domain name is successful, at the end of Q1 2014.  Some of the costs incurred will be of a start-up nature and will be expensed.

To date the Group has capitalised £0.8m of development costs for this project.  This relates primarily to the cost of the application, product and infrastructure design, know-how and filing of patents.  The Group expects to capitalise about £4m - £5m out of the £7m - £8m of the anticipated costs of the project with the rest expensed as operating costs over the next 12 months.

Current trading & outlook

The Group remains focused on risk mitigation and delivering client peace of mind, by providing a complementary range of services that has the width and depth to provide multinational clients with a total solution to their information security issues. 

The approach of both Divisions remains unchanged, to develop the business by a combination of acquisitions of earnings enhancing, high quality businesses, with strong organic growth, all focused away from areas of discretionary expenditure.

The Escrow businesses expect annual renewals to be £17.7m (£17.2m in November 2011) in this financial year, based on termination rates at 12%.  The Escrow verification testing worldwide order book stands at £2.0m (£1.9m in November 2011).  Assurance order books have improved to £20.6m (£19.4m in November 2011) and have £6.2m of monitoring renewals forecast for the current financial year (£5.2m in November 2011).

In total, the Group's orders and renewals for the current financial year have increased by 6% to £46.5m (£43.7m in November 2011).

The Group's revenue has always been biased towards the second half of the financial year and this is expected to continue this year.  The Board remains confident of a good second half to the financial year, in line with its expectations.

Principal risks & uncertainties

The Group faces operational risks and uncertainties, which the Directors take all reasonable steps possible to mitigate, however the Directors recognise that they can never be eliminated completely.

The principal operational risks and uncertainties the Group faces include those in relation to the recruitment of additional staff to meet the Group's ambitious growth plans, the occurrence of unforeseen difficulties in the integration of the current or future acquisitions the Group may enter into and the dependence on key executives and senior managers. 

There are no persons with whom the Company has contractual or other arrangements that are deemed to be essential to the Group.

INDEPENDENT REVIEW REPORT TO NCC Group plc 

Introduction 

We have been engaged by the Company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 November 2012 which comprises the Group Condensed Income Statement, the Group Condensed Statement of Comprehensive Income, the Group Condensed Balance Sheet, the Group Condensed Cash Flow Statement, the Group Condensed Statement of Changes of Equity and the related explanatory notes 1 to 14. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by la w, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of consolidated financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 November 2012 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP

Manchester

17 January 2013

Group condensed income statement
	Notes	2012 six months ended 30 November (unaudited)	2011 six months ended 30 November (unaudited)	2012 year ended  31 May (audited)
		£000	£000	£000
			(Restated)
Continuing operations
Revenue	2	48,051	42,402	87,713
Cost of sales		(31,161)	(26,720)	(54,140)
Gross profit		16,890	15,682	33,573
Administrative expenses before amortisation of intangible assets, share based payments, impairment losses and exceptional items		(5,570)	(5,001)	(10,171)
Operating profit before amortisation, share based payments, impairment losses and exceptional items		11,320	10,681	23,402
Amortisation of intangible assets		(1,950)	(1,857)	(3,726)
Share based payments		(470)	(439)	(946)
Impairment losses	3	-	-	(6,104)
Exceptional items	3	(825)	(68)	(1,007)
Total administrative expenses		(8,815)	(7,365)	(21,954)
Operating profit	2	8,075	8,317	11,619
Financial income		-	1	3
Finance expense excluding unwinding of discount		(456)	(431)	(842)
Net finance expense excluding unwinding of discount		(456)	(430)	(839)
Unwinding of discount effect relating to deferred consideration on business combinations		(84)	(111)	(208)
Financial expenses		(540)	(542)	(1,050)
Net financing costs		(540)	(541)	(1,047)
Profit before taxation		7,535	7,776	10,572
Taxation	4	(2,213)	(2,257)	(2,957)
Profit for the period		5,322	5,519	7,615
Attributable to equity holders of the parent company		5,322	5,519	7,615
Earnings per share from continuing operations	5
Basic earnings per share		15.4p	16.1p	22.2p
Diluted earnings per share		15.2p	15.7p	21.7p

Group condensed statement of comprehensive income
		2012 six months ended 30 November (unaudited)	2011 six months ended 30 November (unaudited)	2012 year ended  31 May (audited)
		£000	£000	£000
Profit for the period		5,322	5,519	7,615
Other comprehensive income
Foreign exchange translation differences		144	618	357
Total comprehensive income for the period		5,466	6,137	7,972
Attributable to:
Equity holders of the parent		5,466	6,137	7,972

Group condensed balance sheet

	Notes	2012 30 November (unaudited)	2011 30 November (unaudited)	2012 31 May (audited)
		£000	£000	£000
Non current assets
Intangible assets	7	103,199	96,454	89,499
Plant and equipment		5,318	4,540	5,068
Deferred tax assets		1,787	1,152	1,943
Total non-current assets		110,304	102,146	96,510
Current assets
Trade and other receivables	9	23,247	20,101	21,347
Cash and cash equivalents		6,192	7,775	5,450
Total current assets		29,439	27,876	26,797
Total assets		139,743	130,022	123,307
Equity
Issued capital		345	342	343
Share premium		24,790	23,163	23,244
Retained earnings		37,365	36,033	36,730
Currency translation reserve		(103)	302	41
Total equity attributable to equity holders of the parent		62,397	59,840	60,358
Non current liabilities
Interest bearing loans	11	-	31,196	28,149
Other financial liabilities		629	416	579
Deferred tax liability		2,021	994	1,343
Contingent consideration on acquisitions		3,916	3,822	250
Total non current liabilities		6,566	36,428	30,321
Current liabilities
Interest bearing loans	11	34,328	-	-
Trade and other payables	10	11,059	11,051	11,593
Contingent consideration on acquisitions		6,283	4,939	3,493
Deferred revenue		15,757	15,831	15,926
Current tax payable		3,047	1,933	712
Provisions		306	-	904
Total current liabilities		70,780	33,754	32,628
Total liabilities		77,346	70,182	62,949
Total liabilities and equity		139,743	130,022	123,307

Group condensed cash flow statement

		2012 six months ended 30 November (unaudited)	2011 six months ended 30 November (unaudited)	2012 year ended 31 May (audited)
		£000	£000	£000
Cash inflow from operating activities
Profit for the period		5,322	5,519	7,615
Adjustments for:
Depreciation charge		969	705	1,574
Share based charges		389	316	725
Amortisation of intangible assets		1,950	1,857	3,726
Impairment of intangible assets		-	-	6,104
Net financing costs		540	541	1,047
(Profit)/loss on sale of plant and equipment		(27)	7	10
Income tax expense		2,213	2,257	2,957
Cash inflow for the period before changes in working capital		11,356	11,202	23,758
Increase in trade and other receivables		(978)	(1,656)	(2,899)
(Decrease)/Increase in trade and other payables		(2,099)	2,407	3,781
Cash generated from operating activities before interest and tax		8,279	11,953	24,640
Interest paid		(486)	(378)	(735)
Income tax repayment/( paid)		65	(2,908)	(5,452)
Net cash generated from operating activities		7,858	8,667	18,453
Cash flows from investing activities
Interest received		-	1	3
Acquisition of plant and equipment		(1,192)	(2,492)	(3,620)
Development expenditure		(422)	-	(354)
Acquisition of business net of cash acquired		(7,855)	(3,745)	(7,498)
Acquisition of intangible fixed assets		(562)	(1,106)	(3,306)
Net cash used in investing activities		(10,031)	(7,342)	(14,775)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		268	334	416
Draw down of borrowings		6,592	5,461	2,354
Equity dividends paid		(3,796)	(3,032)	(4,778)
Net cash from financing activities		3,064	2,763	(2,008)
Net Increase in cash and cash equivalents		891	4,088	1,670
Cash and cash equivalents at beginning of period		5,450	4,701	4,701
Effect of exchange rate fluctuations		(149)	(1,014)	(921)
Cash and cash equivalents at end of period		6,192	7,775	5,450

Group condensed statement of changes of equity

	Share capital	Share premium	Currency Translation reserve	Retained earnings	Total
	£000	£000	£000	£000	£000
Balance at 1 June 2011	341	22,830	(316)	33,230	56,085
Profit for the period	-	-	-	5,519	5,519
Foreign currency translation differences	-	-	618	-	618
Total comprehensive income for the period	-	-	618	5,519	6,137
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-	(3,032)	(3,032)
Share based payment transactions	-	-	-	316	316
Deferred tax on share based payments	-	-	-	-	-
Shares issued	1	333	-	-	334
Purchase of own shares	-	-	-	-	-
Total contributions by and distributions to owners	1	333	-	(2,716)	(2,382)
Balance at 30 November 2011	342	23,163	302	36,033	59,840
	Share capital	Share premium	Currency Translation reserve	Retained earnings	Total
	£000	£000	£000	£000	£000
Balance at 1 June 2011	341	22,830	(316)	33,230	56,085
Profit for the period	-	-	-	7,615	7,615
Foreign currency translation differences	-	-	357	-	357
Total comprehensive income for the period	-	-	357	7,615	7,972
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-	(4,778)	(4,778)
Share based payment transactions	-	-	-	725	725
Deferred tax on share based payments	-	-	-	(62)	(62)
Shares issued	2	414	-	-	416
Total contributions by and distributions to owners	2	414	-	(4,115)	(3,699)
Balance at 31 May 2012	343	23,244	41	36,730	60,358

	Share capital	Share premium	Currency Translation reserve	Retained earnings	Total
	£000	£000	£000	£000	£000
Balance at 1 June 2012	343	23,244	41	36,730	60,358
Profit for the period	-	-	-	5,322	5,322
Foreign currency translation differences	-	-	(144)	-	(144)
Total comprehensive income for the period	-	-	(144)	5,322	5,178
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-	(3,796)	(3,796)
Share based payment transactions	-	-	-	389	389
Deferred tax on share based payments	-	-	-	-	-
Shares issued	2	266	-	-	268
Purchase of own shares	-	1,280	-	(1,280)	-
Total contributions by and distributions to owners	2	1,546	-	(4,687)	(3,139)
Balance at 30 November 2012	345	24,790	(103)	37,365	62,397

Notes to the interim report

1 Accounting policies

Basis of preparation

This interim report for the six months ended 30 November 2012 has been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the EU.

As required by the Disclosure and Transparency Rules of the Financial Services Authority the financial information contained in this report has been prepared using the accounting policies applied for the year ended 31 May 2012 and is unaudited but has been reviewed by Ernst & Young LLP.  They do not contain all the information required for full annual financial statements and should be read in conjunction with the annual financial statements for the year ended 31 May 2012.

The financial statements of the Group for the year ended 31 May 2012 are available from the Company's registered office, or from the website www.nccgroup.com.

The comparative figures for the financial year ended 31 May 2012 are not the company's statutory accounts for that financial year.  Those accounts have been reported on by the company's auditors and delivered to the registrar of companies.  The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Significant accounting policies

The accounting policies applied by the Group in these consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 May 2012.

Going concern

The Group's activities, together with the factors likely to affect its future development, performance and position are set out in the financial and operational reviews.

The Group funds its strategic acquisitions and meets its day to day working capital requirements via a revolving credit facility of £35m and an overdraft of £2m.  This facility is due for renewal in July 2013.

The Group continues to be highly cash generative and the Group forecasts and projections, taking account of reasonably foreseeable changes in trading performance, show that the Group will be able to operate within the level of its current facility.

The Group has held discussions with prospective lenders about its future borrowing needs and draft lending terms have been received (subject to credit approval) at rates which are comparable to those currently available.  Due to these discussions being at an advanced stage the Directors expect to have finalised this process and agreed terms well in advance of July 2013.

The directors therefore continue to adopt the going concern basis of accounting in preparing the interim financial statements.

NCC Group plc ("the Company") is a company incorporated in the UK.

Restatement

The Group condensed income statement for the period ended 30 November 2011 has been restated to present charges in respect of share based payments within administrative expenses rather than within cost of sales.  The purpose of this restatement is to report the share based payments charges with other indirect salary expenses within administrative expenses.  The impact of this restatement is an increase in administrative expenses of £0.4 million for the period ended 30 November 2011.  Cost of sales has decreased by the same amount.  The restatement has no impact on the Group's reported profit.

Use of estimates and judgements

The preparation of the consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.  Actual results may differ from these estimates.

In preparing the consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimated uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 May 2012. 

2 Segmental information

The Group is organised into two reportable segments: Group Escrow and Assurance Testing.  These two segments are the Group's primary reporting format for segment information.

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Revenue by business segment
Escrow UK	10,119	9,776	20,296
Escrow Europe	1,560	1,682	3,224
Escrow USA	2,183	2,021	4,424
Total Group Escrow	13,862	13,479	27,944
Assurance  Delivery	29,916	25,070	51,760
Monitoring Performance	4,273	3,853	8,009
Total Assurance Testing	34,189	28,923	59,769
Total revenue	48,051	42,402	87,713

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November restated (unaudited)	2012 Year ended 31 May (audited)
Operating profit by business segment
Group Escrow	7,720	7,594	16,320
Assurance Testing	5,456	4,687	10,259
Segment operating profit	13,176	12,281	26,579
Head office costs	(1,856)	(1,600)	(3,177)
Operating profit before amortisation, share based payments and exceptional items	11,320	10,681	23,402
Amortisation of intangible assets Group Escrow	(492)	(368)	(559)
Amortisation of intangible assets Assurance	(1,458)	(1,489)	(3,167)
Share based payments	(470)	(439)	(946)
Operating profit before exceptional items	8,900	8,385	18,730
Exceptional items	(825)	(68)	(7,111)
Operating profit	8,075	8,317	11,619

There are no customer contracts which account for more than 10% of segment revenue.

The table below provides an analysis of the Group's revenue by geographical market where the customer is based.

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Revenue by geographical origin and destination
UK	31,176	29,258	60,383
Rest of Europe	3,329	2,902	6,172
Rest of the World	13,546	10,242	21,158
Total revenue	48,051	42,402	87,713

3 Exceptional items and acquisition related costs

The Group identifies separately items as "exceptional".  These are items which in the management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.

	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Exceptional items and acquisition related costs
Impairment losses	-	-	(6,104)
Remedial costs	-	-	(904)
Acquisition related costs	(825)	(68)	(103)
Total	(825)	(68)	(7,111)

Acquisition related costs of £825,000 principally consist of professional fees incurred in relation to the acquisitions of Matasano Security Services LLC and Intrepidus Group Inc.  in August 2012.

Acquisition related costs in the period ended 30 November 2011 were £68,000 principally consisting of professional fees incurred in relation to the acquisitions of Axzona Limited in August 2011.

Following the termination of the Groups IT system implementation project in May 2012, the Group wrote off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m.

As a result of the termination, remedial costs of £0.9m were also provided in respect of the Group's transfer of operations to its previous IT system. 

Acquisition related costs of £103,000 principally consisted of professional fees incurred in relation to acquisitions and adjustments to deferred consideration balances.

4 Taxation

The Group tax charge represents the estimated annual effective rate of 29% (29% in 2011) applied to the profit before tax for the period. The interim period is regarded as an integral part of the annual period and all tax liabilities are disclosed as such.

5 Earnings per share

The calculation of earnings per share is based on the following:

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November restated  (unaudited)	2012 Year ended 31 May (audited)
Profit for the period from continuing operations used for earnings per share	5,322	5,519	7,615
Amortisation of intangible assets	1,950	1,857	3,726
Exceptional items	825	68	7,111
Unwinding of discount	84	111	208
Share based payments	470	439	946
Tax arising on the above items	(945)	(597)	(3,207)
Adjusted profit from continuing operations used for adjusted earnings per share	7,706	7,397	16,399

	Number of shares 000's	Number of shares 000's	Number of shares 000's
Basic weighted average number of shares in issue	34,548	34,197	34,263
Dilutive effect of share options	542	856	831
Diluted weighted average shares in issue	35,090	35,053	35,094

6 Dividends

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Dividends paid and recognised in the period	3,769	3,032	4,778
Dividends proposed but not recognised in the period	2,038	1,744	3,769
Dividends per share paid and recognised in the period	11.00p	8.85p	13.95p
Dividends per share proposed but not recognised in the period	5.9p	5.1p	11.00p

7 Intangible assets

	Software	Development costs	Customer  contracts and relationships	Goodwill	Total
	£000	£000	£000	£000	£000
Net book value:
At 1 June 2011	4,084	-	11,728	77,947	93,759
Acquisitions through business combinations	-	-	422	1,393	1,815
Other acquisitions - internally developed	954	153	-	-	1,107
Effects of movements in exchange rates	-	-	511	1,119	1,630
Amortisation	(72)	-	(1,785)	-	(1,857)
At 30 November 2011	4,966	153	10,876	80,459	96,454
Acquisitions through business combinations	-	-	-	101	101
Other acquisitions - internally developed	2,352	201	-	-	2,553
Reclassification to plant and equipment	(300)	-	-	-	(300)
Effects of movements in exchange rates	-	-	(105)	(231)	(336)
Contingent consideration adjustment	-	-	-	(1,000)	(1,000)
Impairment loss	(6,104)	-	-	-	(6,104)
Amortisation	(187)	-	(1,682)	-	(1,869)
At 31 May 2012	727	354	9,089	79,329	89,499
Acquisitions through business combinations	-	-	3,958	11,371	15,329
Other acquisitions - internally developed	562	422	-	-	984
Effects of movements in exchange rates	-	(9)	(118)	(536)	(663)
Amortisation	(179)	-	(1,771)	-	(1,950)
At 30 November 2012	1,110	767	11,158	90,164	103,199

8 Capital expenditure

Additions to plant and equipment during the period ended 30 November 2012 amounted to £1,192,000 (£2,492,000 in 2011) and depreciation charged in the period amounted to £969,000 (2011: £705,000).

9 Trade and other receivables

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Trade debtors	15,607	13,233	14,280
Prepayments and accrued income	7,640	6,868	7,067
	23,247	20,101	21,347

10 Trade and other payables

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Trade creditors	2,203	2,414	2,630
Non trade payables	3,203	2,733	2,960
Accruals	5,653	5,904	6,003
	11,059	11,051	11,593

11 Interest bearing loans

£'000	2012 Six months ended 30 November (unaudited)	2011 Six months ended 30 November (unaudited)	2012 Year ended 31 May (audited)
Secured bank loan	34,328	31,196	28,149
	34,328	31,196	28,149
Analysed as:
Current	34,328	-	-
Non current	-	31,196	28,149
	34,328	31,196	28,149

As at 30 November 2012, the Group had a revolving credit facility of £35m (2011: £35m).  The interest payable on drawn down funds is 2% above LIBOR (2011:2%).  This facility is due for renewal in July 2013.

Draft terms have been received from prospective lenders for the renewal of the facility, but as these have not been finalised as at 30 November 2012, the facility has been classified as a current liability.

12 Acquisitions

A On 1 August 2012 the Group acquired 100% of the partnership interests of Matasano Security LLC for a maximum consideration of £8.1m, of which up to a maximum of £4.2m has been withheld subject to the achievement of performance criteria specified in the purchase agreement.  The performance conditions are required to be satisfied by 31 July 2013 and 31 July 2014.  The contingent consideration is expected to be paid in August 2013 and August 2014.

The acquisition had the following effect on the Group's assets and liabilities:

			Fair values
			£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment			-
Trade and other receivables			460
Cash			38
Creditors & accruals			(363)
Current tax liability			(120)
Deferred tax liability			-
Intangible assets purchased			2,163
Net identifiable assets			2,178
Goodwill on acquisition			5,694
Expected consideration to be paid			7,872
Less purchase consideration withheld			(3,922)
Net cash outflow			3,950
Cash acquired			(38)
Net cash outflow excluding cash acquired			3,912

Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills.  The amount recognised as contingent consideration reflects the amount which is considered probable to be paid and is based on profit forecasts.  There are inherent uncertainties in deriving forecasts and the level of contingent consideration will be reassessed at each reporting date to reflect revisions to forecasts or differences between forecast and actual performance. 

During the period from acquisition, the Company contributed £304,000 to Group income and £389,000 to Group cash flows.  It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Matasano Security Services LLC been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.

B On 17 August 2012 the Group acquired 100% of the share capital of Intrepidus Group Inc. for a maximum consideration of £7.1m, of which up to a maximum of £3.9m has been withheld subject to the achievement of performance criteria specified in the purchase agreement.  The performance conditions are required to be satisfied by 31 July 2012 and 31 July 2013.  The contingent consideration is expected to be paid in August 2012 and August 2013.

The acquisition had the following effect on the Group's assets and liabilities:

			Fair values
			£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment			-
Trade and other receivables			186
Cash			184
Creditors & accruals			(328)
Deferred tax liability			(718)
Intangible assets purchased			1,795
Net identifiable assets			1,119
Goodwill on acquisition			5,677
Expected consideration to be paid			6,796
Less purchase consideration withheld			(3,525)
Net cash outflow			3,271
Cash acquired			(184)
Net cash outflow excluding cash acquired			3,087

Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired.  Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills.  The amount recognised as contingent consideration reflects the amount which is considered probable to be paid and is based on profit forecasts.  There are inherent uncertainties in deriving forecasts and the level of contingent consideration will be reassessed at each reporting date to reflect revisions to forecasts or differences between forecast and actual performance. 

During the period from acquisition, the Company contributed £176,000 to Group income and £30,000 to Group cash flows.  It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Intrepidus Group Inc. been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.

C During the period, as a result of the acquisitions noted above, total acquisition related costs of £825,000 were incurred (see note 3).

D During the period, £856,000 was paid in relation to the part settlement of the deferred consideration due on the acquisition of Escrow Associates.

13 Post balance sheet events

On 18 December 2012, NCC Group Plc shareholders approved a bonus issue of ordinary shares of five shares for every one share held.  On the same date the Company's shareholders approved a resolution authorising the board to capitalise an amount of the Company's share premium account and to apply such an amount in paying up the new Company shares.

14 Related party transactions

The Group's key management personnel comprises the Directors of the Group.

NCC Group's Non Executive Chairman Paul Mitchell is a director of Rickitt Mitchell & Partners Limited (Rickitt Mitchell) with whom the Group conducted business to the value of £262,500 (2011: £60,500).  Included within the charge is £32,500 in relation to the services of the Non Executive Chairman and the remaining £230,000 relates to advice received in connection with the acquisitions made during the period ended 30 November 2012.  Rickitt Mitchell provides an outsourced acquisition service, which facilitates the delivery of acquisition targets, which have been identified and approved by the Board.

Rickitt Mitchell also held 7,000 1.0p ordinary shares (2011: 7,000).

Responsibility statement of the Directors in respect of the interim report

We confirm that to the best of our knowledge:

-      The condensed set of consolidated financial statements has been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the EU;

-      The interim management report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period and any changes in the related party transactions described in the last annual report that could do so.

Rob Cotton

Chief Executive

On behalf of the Board

17 January 2013

 

END

 

 

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