NCC Group plc...£’000’s 2012 Six months ended 30 November (unaudited) 2011 Six months ended 30...

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) +44 (0)161 209 5432

Rob Cotton, Chief Executive

Atul Patel, Group Finance Director

College Hill

Adrian Duffield/Rozi Morris +44 (0)20 7457 2020

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. As expected, the anticipated costs are 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.

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 current market 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


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


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


Foreign currency translation differences - - 357 - 357

Total comprehensive income for the period - - 357 7,615 7,972

Transactions with owners recorded directly in

equity



Deferred tax on share based payments - - - (62) (62)


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


Foreign currency translation differences - - (144) - (144)

Total comprehensive income for the period - - (144) 5,322 5,178

Transactions with owners recorded directly in equity



Deferred tax on share based payments - - - - -


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


business combinations - - - 101 101


internally developed 2,352 201 - - 2,553

Reclassification to plant

and equipment (300) - - - (300)


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


business combinations - - 3,958 11,371 15,329


internally developed 562 422 - - 984


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

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.

£’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

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

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