TIDMKCOM
RNS Number : 2783H
KCOM Group PLC
31 July 2019
31 July 2019
KCOM GROUP PLC (KCOM.L) ("KCOM")
Results ANNOUNCEMENT for the year ended 31 March 2019
IFRS 15 and IFRS 9 were adopted on 1 April 2018, without restating
prior year figures. As a result, for comparative purposes, discussion
of our operating results is primarily based on an IAS 11, IAS
18 and IAS 39 basis for all periods presented.
KCOM Group PLC (KCOM.L) announces its full year results for the
year ended 31 March 2019. The annual report and accounts for year
ended 31 March 2019 are now available to view on KCOM Group PLC's
website: www.kcomplc.com. The information provided below is in
satisfaction of the requirements of Disclosure Guidance and
Transparency Rule 6.3.5.
Summary
-- Group revenue(1) declined by 5%
-- Group EBITDA(1,2,4) declined by 14%
-- Continued progress in Hull & East Yorkshire
_ Roll-out of fibre across existing network complete
_ Percentage of broadband customers taking full fibre continues to increase
-- Ongoing challenges in two national businesses in line with
revised expectations set at the half year
_ Broadly flat revenue in Enterprise reflecting disappointing order intake performance
_ Revenue decline in National Network Services, due to continuing churn
-- Performance of the national businesses results in a non-cash
exceptional impairment of goodwill of GBP51.4 million
-- Increase in net debt to GBP107.2 million (2018: GBP62.6 million), driven by:
_ Planned capital investment in Hull & East Yorkshire
_ Material one-off working capital outflow as previously
communicated in the first half of the year
Financial summary
Pro forma
IAS 11/ IAS 11/
IFRS 15/ IAS 18/ IAS 18/ IAS 11/
IFRS 9 IAS 39 IAS 39 IAS 18/
Audited Unaudited Audited IAS 39
2019 2019 2018 Change over
GBP'm GBP'm GBP'm prior year
------------------------------------ -------- ---------- -------- ------------
Revenue 281.6 285.9 301.9 (5%)
EBITDA (2,4) 57.1 58.9 68.3 (14%)
Profit before tax (2,4) 24.3 24.2 33.3 (27%)
Adjusted basic earnings per
share (pence) (3,4) 3.84p 3.81p 5.26p (28%)
Cash capital expenditure (4) 37.5 38.4 43.9 (13%)
Reported results
(Loss)/profit before tax (31.6) 34.0 (193%)
Basic (loss)/earnings per share
(pence) (6.63p) 5.38p (112%)
Net debt (4) 107.2 62.6 71%
Final dividend per share (pence)(5) - 4.00p (100%)
Full year dividend per share
(pence)(5) 1.00p 6.00p (83%)
(1) All numbers and movements quoted in summary are on a
pre-IFRS 15 and IFRS 9 basis.
(2) Before exceptional items.
(3) Adjusted basic EPS is basic EPS adjusted for exceptional
items (including the tax impact of exceptional items).
(4) Alternative performance measures, used throughout the
results announcement, are defined and reconciled to statutory
measures in the Glossary on pages 33 and 34.
(5) As a result of the acquisition of KCOM outlined in Note 13
'Subsequent events', no final dividend was declared for the year
ended 31 March 2019.
Post-period end
As per the process set out in detail in Note 13 "Subsequent
Events", and hereafter referred to as the 'Acquisition of KCOM',
KCOM Group PLC is expected to de-list from the London Stock
Exchange in early August, upon completion of the acquisition of
KCOM by MEIF 6 Fibre Limited, a wholly-owned indirect subsidiary of
Macquarie European Infrastructure Fund 6 SCSp (an investment fund
managed by Macquarie Infrastructure and Real Assets (Europe)
Limited) ("MEIF 6 Fibre").
For further information please contact:
KCOM Group PLC 01482 602 595
Graham Sutherland, Chief Executive Officer
Anna Bielby, Chief Financial Officer
Cathy Phillips, Investor Relations
FTI Consulting LLP 020 3727 1137
Edward Bridges / Matt Dixon / Jamie Ricketts
/ Leah Dudley
Performance review
Basis of preparation
IFRS 15 "Revenue from contracts with customers" and IFRS 9
"Financial Instruments" have been adopted for the first time in the
year ended 31 March 2019.
The Group has applied both these new standards in the current
year only. As a result, our reported results in the current year
are prepared in accordance with IFRS 15 and IFRS 9 and our
comparatives are in line with previous accounting standards (IAS
11, IAS 18 and IAS 39).
In order to aid the comparison of year on year results, the
directors have deemed it appropriate to provide and analyse
proforma results as well as reported results for the Group on a
like for like basis. Proforma results are presented for the year
ended 31 March 2019 under the previous accounting standards (IAS
11, IAS 18 and IAS 39) for this purpose.
In aggregate, the standards have an impact of a reduction in
revenue of GBP4.3 million, in EBITDA of GBP1.9 million and an
increase in profit before tax and exceptional items of
GBP0.1million. The impact of both these new standards is cash flow
neutral. Further detail is provided in Note 2.
Group performance
On a reported basis, the results for the year show an
anticipated decline in Group revenue of GBP20.3 million (7%) and a
decline in EBITDA of GBP11.2 million (16%), compared to the prior
year. When adjusting for the impact of IFRS 15 and IFRS 9, revenue
has reduced by GBP16.0 million (5%) and EBITDA by GBP9.4 million
(14%).
Our Hull & East Yorkshire segment continued to perform well
with revenue growth in the Consumer channel. Our conversion and
acquisition of customers onto fibre broadband continues to drive
higher average revenue per user ("ARPU") across our consumer
base.
We have now completed the rollout of fibre across our existing
network, passing all properties we are able to pass and making full
fibre broadband available across our network. However, there are c.
9,000 premises where third party permission is required (for
example to access multi-dwelling units and private land) that will
delay fibre availability for those premises.
EBITDA in the Group's Hull & East Yorkshire segment has
declined; however, the prior year benefited from a GBP4.4 million
multi-year rebate on network infrastructure hereditament (rateable
value). Without the effect of this rebate, adjusting for the impact
of IFRS 15 and IFRS 9, EBITDA is broadly flat.
As discussed at the half year, the performance of our two
national business segments has been significantly below expectation
in the year.
In the Group's Enterprise segment, revenue has remained broadly
flat. EBITDA has improved; however, the prior year was impacted by
GBP5.3 million of losses on complex software contracts. Without the
effect of these contracts, EBITDA has declined. Trading within the
Group's Enterprise segment remains challenging and the Directors
now have lower future growth expectations for this segment.
As a result of this lower growth trajectory and a refocus of the
Group's strategy towards core connectivity we have impaired the
full Enterprise goodwill balance which has resulted in a non-cash
exceptional charge of GBP19.1 million recognised in the second half
of the year.
Revenue in the Group's National Network Services segment has
continued to fall, again as communicated previously. This decline
reflects continued churn and a performance well below the
underlying market for its services. This performance led to the
Directors' decision to impair the carrying value of goodwill for
this segment in the first half of the year, resulting in a non-cash
exceptional charge of GBP32.2 million.
The total non-cash goodwill impairments during the year across
both the Enterprise and National Network Services segments was
GBP51.4 million.
Remaining exceptional costs of GBP4.6 million relate to
restructuring costs of GBP3.8 million and GBP0.8 million relating
to the non-cash accounting impact of a guaranteed minimum pension
equalisation adjustment in respect of the Group's defined benefit
pension liabilities.
Net debt increased from GBP62.6 million at 31 March 2018 to
GBP107.2 million at 31 March 2019, largely as a result of permanent
one-off working capital outflows in the first half of the year as
previously communicated and the continued investment in the Hull
& East Yorkshire infrastructure.
Segmental analysis
The KCOM Group PLC Board makes decisions and manages the
business in line with the segmental analysis set out below. This
information is presented before exceptional items to provide a
better understanding of underlying performance. A reconciliation of
the Group's pre-exceptional results is set out in Note 3.
Hull & East Yorkshire
Pro forma
IAS 11/ IAS 11/
IFRS 15/ IAS 18/ IAS 18/
IFRS 9 IAS 39 IAS 39
Audited Unaudited Audited
2019 2019 2018
GBP'm GBP'm GBP'm
------------------------------------- -------- ---------- --------
Revenue
Consumer 60.1 59.9 58.5
Business 29.6 29.9 30.5
Wholesale 9.7 9.7 10.8
Non-core - Media and Contact Centres 1.7 1.7 4.4
------------------------------------- -------- ---------- --------
Total revenue 101.1 101.2 104.2
------------------------------------- -------- ---------- --------
Gross margin 79.1 80.7 85.4
------------------------------------- -------- ---------- --------
EBITDA 59.5 61.2 65.7
------------------------------------- -------- ---------- --------
Compared to the prior year, reported total revenue has reduced
by GBP3.1 million and EBITDA by GBP6.2 million. The impact of IFRS
15 and IFRS 9 is a reduction in revenue of GBP0.1 million and in
EBITDA of GBP1.7 million. This is principally due to the change in
accounting for routers under IFRS 15 with router sales now
recognised at the beginning of a customer contract and the cost
recognised as a cost of sale rather than an asset which is
depreciated over the life of the contract.
Adjusting for the impact of changes in accounting standards,
revenue has declined by GBP3.0 million over the prior year and
EBITDA has reduced by GBP4.5 million. The majority of the revenue
decline relates to non-core activities and reflects the exit of the
Contact Centres business. Broadly flat core revenue reflects growth
in Consumer offset by decline in both Business and Wholesale.
On a comparable basis, Consumer revenue has increased by 2%
compared to the prior year and our fibre rollout continues to
deliver new broadband customers. The proportion of customers within
this broadband base taking a fibre service has increased to 71% at
31 March 2019 (31 March 2018: 54%), supporting a 2% increase in
ARPU in the last 12 months.
Business revenue on a like for like basis has declined by 2%.
This reflects a reduction in project activity when compared to the
prior year. The Business channel has, however, seen continued
growth in its fibre base with a further 1,000 business sites
connected in the year, supported by take-up in the SMB market
through utilisation of the government funded voucher scheme.
The success of our award-winning, ultrafast full fibre offering
continues. We passed a further 31,000 premises in the year and our
deployment has now passed all 195,000 premises on our existing
network that we are able to pass at this time.
The key metrics for our Hull & East Yorkshire segment are as
follows:
Unaudited Unaudited
2019 2018
------------------------------------------------- --------- ---------
Total Consumer customers ('000s of voice lines) 139.9 138.7
Total Consumer broadband customers (fibre
and copper - '000s) 121.0 118.3
Total Consumer fibre broadband customers ('000s) 85.5 63.5
Total Business fibre broadband sites ('000s) 5.9 4.9
Consumer Average Revenue Per User (ARPU) per GBP35.93 GBP35.17
month (GBP)
Total fibre availability ('000s premises passed) 195 164
As anticipated and signalled previously, our non-core Media and
Contact Centres revenue has declined following the closure of our
outsourced Contact Centre on 31 March 2018, after expiry of its
largest customer contract.
Pro-forma EBITDA has reduced by GBP4.5 million year on year,
which is mainly explained by the GBP4.4 million multi-year rebate
on network infrastructure hereditament (rateable value) received in
the prior year. EBITDA growth from more consumer customers and
higher ARPU has been re-invested in various customer experience
initiatives, designed to improve our customer satisfaction
metrics.
Enterprise
Pro forma
IAS 11/ IAS 11/
IFRS 15/ IAS 18/ IAS 18/
IFRS 9 IAS 39 IAS 39
Audited Unaudited Audited
2019 2019 2018
GBP'm GBP'm GBP'm
---------------- -------- ---------- --------
Revenue
Projects 29.6 34.7 30.1
Managed Service 43.5 42.5 45.2
Network 12.5 12.5 13.0
----------------- -------- ---------- --------
Total revenue 85.6 89.7 88.3
----------------- -------- ---------- --------
Gross margin 30.2 29.8 29.9
----------------- -------- ---------- --------
EBITDA 5.9 6.0 5.1
----------------- -------- ---------- --------
Enterprise performance in the year has been disappointing, due
to lower than anticipated order intake, as previously communicated.
Reported revenue has reduced by GBP2.7 million and EBITDA has
increased by GBP0.8 million compared to the prior year. The impact
of IFRS 15 and IFRS 9 is a reduction in revenue of GBP4.1 million
and decrease in EBITDA of GBP0.1 million. This is principally due
to the revenue classification of certain customer contracts as
'agent' rather than 'principal' under the new standard. Adjusting
for the impact of the new accounting standards, revenue has
increased by GBP1.4 million (2%) and EBITDA has improved by GBP0.9
million (18%).
Despite the relatively flat revenue position, EBITDA has
improved in the year due to GBP5.3 million of losses on complex
software contracts in the prior year. Without the effect of these
contracts, comparable EBITDA has declined year on year by GBP4.4
million, reflecting the underlying gross margin decline.
National Network Services
Pro forma
IAS 11/ IAS 11/
IFRS 15/ IAS 18/ IAS 18/
IFRS 9 IAS 39 IAS 39
Audited Unaudited Audited
2019 2019 2018
GBP'm GBP'm GBP'm
------------------------ -------- ---------- --------
Revenue
Connectivity 62.3 62.3 68.1
Voice 23.6 23.6 30.5
Hosting 6.8 6.8 7.3
Managed Service & Other 5.3 5.2 7.3
------------------------- -------- ---------- --------
Total revenue 98.0 97.9 113.2
------------------------- -------- ---------- --------
Gross margin 22.7 23.1 32.0
------------------------- -------- ---------- --------
EBITDA 3.0 3.0 9.0
------------------------- -------- ---------- --------
Reported revenue has reduced by GBP15.2 million and EBITDA by
GBP6.0 million. The impact of IFRS 15 and IFRS 9 is an increase in
revenue of GBP0.1 million and is EBITDA neutral.
Adjusting for the impact of the new accounting standards,
revenue has declined by GBP15.3 million and EBITDA by GBP6.0
million. This decline is in line with the revised expectations set
at the half year. Revenue decline has been seen across all product
categories which reflects churn, both in terms of customers leaving
and declining use of traditional voice platforms. Voice revenues
also continue to be impacted by the industry-wide change in the mix
of call traffic (for example the movement to 03 numbers). The
EBITDA decline is a consequence of churn with a decreasing
contribution towards fixed network operating costs and continued
gross margin pressure.
In the year we have focused on a specific public sector
opportunity relating to the delivery of the Health and Social Care
Network. We have been named preferred supplier on four aggregated
procurements and have subsequently signed up a number of individual
customers under framework agreements. The delivery of services to
these customers commenced in the final quarter of the year ended 31
March 2019, with minimal impact in the year under review.
Central
Central costs include PLC and corporate costs, where allocation
to the underlying segments would not improve understanding of those
segments. These costs include share-based payments and pensions,
along with the residual Group cost of finance, HR, risk, legal and
communications, once appropriate recharges have been made to the
three business segments.
Central costs have decreased from GBP11.5 million to GBP11.3
million.
EBITDA reconciliation
EBITDA before exceptional items is the key measure used by
management and the Directors to monitor the underlying performance
of the Group. EBITDA before exceptional items is defined as 'profit
before tax' before share of profit of associates, finance costs,
amortisation, depreciation and exceptional items. A reconciliation
of EBITDA to its closest statutory measure (profit before tax) is
set out in Note 3. The items classified as exceptional items are
described below.
Exceptional items
The Group incurred exceptional charges totalling GBP56.0 million
in the year. This comprises:
-- a non-cash impairment of National Network Services goodwill
of GBP32.2 million and Enterprise goodwill of GBP19.1 million;
-- a non-cash plan amendment to the Group's pension scheme
liabilities of GBP0.8 million to account for legislative changes
relating to guaranteed minimum pension equalisation; and
-- restructuring costs of GBP3.8 million.
The goodwill impairment reflects the disappointing performance
of National Network Services and the continued low levels order
intake in Enterprise.
Management scrutinises all restructuring costs on a line by line
basis to determine whether they meet the criteria of being
exceptional. During the year restructuring costs were incurred in
relation to four main areas:
-- termination and recruitment costs associated with Executive Directors (GBP1.3 million);
-- transformation of project delivery (GBP0.4 million);
-- transformation of central functions (GBP0.8 million); and
-- costs associated with a strategic business review (GBP1.3 million).
The treatment of the termination and recruitment costs
associated with Executive Directors is in line with the Group's
accounting policy. The transformation costs are a completion of
activity which had begun in the prior year in addition to the
commencement of a fundamental re-organisation of the Group's
product and propositions teams. The strategic business review costs
mainly relate to third party consultant costs incurred performing
the review. The outputs of this review are expected to be further
reviewed and refined as part of a post-acquisition completion
business review with implementation resulting in a number of
operating model transformation initiatives which will lead to a
reduction in organisation complexity, duplication and costs.
Additional exceptional costs are expected to be incurred in the
next financial year to support the realisation of these cost
savings.
Net debt and cash flow
As expected, net debt at 31 March 2019 is higher than the prior
year, at GBP107.2 million (31 March 2018: GBP62.6 million),
representing a net debt to EBITDA ratio of 1.9 times. Undrawn
committed borrowing facilities at 31 March 2019 were GBP65.0
million (31 March 2018: GBP105.0 million).
The anticipated increase in net debt compared to the prior year
end position arises as a result of a working capital outflow and
continued investment in our fibre deployment. The working capital
outflow mainly relates to permanent differences arising in the
first half of the year principally relating to:
-- the successful insource of a managed service arrangement with
a key partner, delivering overall cost benefit but with a one-off,
in-year working capital outflow; and
-- unwind of certain deferred revenue balances.
Underlying working capital continues to be well controlled. Both
Days Sales Outstanding and Days Purchases Outstanding are
consistent with the prior year end on an underlying basis.
Alternative performance measures, used throughout the results
announcement, are defined and reconciled to statutory measures in
the Glossary on pages 33 and 34.
Dividend
At the half year, the Group declared and paid an interim
dividend of 1.00 pence per share (2018: 2.00 pence per share). As
the acquisition of KCOM by MEIF 6 Fibre is due to complete in early
August, the Board did not declare a final dividend for the year
ending 31 March 2019 (2018: 4.00 pence per share). Consequently,
the full year dividend is 1.00 pence per share (2018: 6.00 pence
per share).
Pensions
The IAS 19 pension position at 31 March 2019 is a combined net
asset of GBP3.5 million (31 March 2018: GBP7.5 million liability).
The movement from 31 March 2018 arises as a result of a GBP12.0
million increase in the fair value of the schemes' assets offset by
a GBP1.0 million increase in the net present value of the schemes'
liabilities. The increase in the value of assets reflects employer
contributions into the schemes' and an increase in the expected
return of the schemes' assets.
The increase in the value of schemes' liabilities is mainly due
to a plan amendment to the Group's pension scheme liabilities of
GBP0.8 million to account for legislative changes relating to
guaranteed minimum pension equalisation. On 26 October, the High
Court handed down a judgement involving the Lloyds Banking Group's
defined benefit pension schemes. The judgement concluded the
schemes should be amended to equalise pension benefits for men and
women in relation to guaranteed minimum pension benefits. The
issues determined by the judgement arise in relation to many other
defined benefit pension schemes.
The agreed level of deficit repair payments across both schemes
for the current year is GBP7.0 million (rising in line with
Consumer Price Index until the year ending 31 March 2020 for the
Data scheme and 31 March 2022 for the Main scheme). In addition,
the Group makes pre-agreed payments to its pension schemes through
the asset backed partnership. The full year payment for the current
year is GBP2.8 million (2018: GBP2.7 million). Our most recent
actuarial review date was 31 March 2019. The review is ongoing and
the outputs, including valuation and agreed recovery plan will be
finalised before 30 June 2020.
Capital investment
Cash capital expenditure during the year was GBP37.5 million or
GBP38.4 million when adjusted for the impact of IFRS 15 (2018:
GBP43.9 million). The major project in the year was the continued
deployment of fibre and the transformation of the network in our
Hull & East Yorkshire segment.
The Group's depreciation and amortisation charge for the year
was GBP29.9 million or GBP31.9 million before the impact of IFRS 15
(2018: GBP32.6 million). The charge was lower on an IFRS 15 basis
as routers are no longer capitalised and depreciated but directly
expensed as a cost of sale.
Tax
The Group's tax charge was GBP2.3 million (2018: GBP6.6
million). The effective tax rate was -7%, which is different to the
prevailing rate of corporation tax of 19% principally due to the
tax impact of the goodwill impairment.
Risk management: our principal risks and uncertainties
As with all businesses, we are affected by a number of risks and
uncertainties. The tables below show the principal risks and
uncertainties, some of which are beyond our control, that could
have a material adverse effect on the business and have been
identified through our risk management framework. Some of the risks
reported in the prior year such as upgrading of our network
equipment and flood risk, have been consolidated this year within
the principal risk of security and resilience of our networks and
IT systems in the current year. Improved contract governance and
project management has been observed during the year, and risks
relating to customer focus and staff retention specifically
attributed to the Enterprise segment in the prior year are now
incorporated as part of the wider Group risk profile in the current
year. This list is not exhaustive and there may be risks and
uncertainties of which we are currently unaware, or which are
believed to be immaterial, that could have an adverse effect on the
business.
Risks reported in the prior year
Customer service and delivery Substitute technologies entering
the consumer market
----------------------------------------- ----------------------------------------
Why is it important? Why is it important?
Our aim is to provide exceptional Much of our business in Hull &
service wherever we can as this East Yorkshire is currently based
supports the creation of long-term on the provision of services over
sustainable revenue. The risk of a fixed--line network. If substitute
not achieving this is the loss technologies were developed to
of customers and this is therefore the extent where similar services
a key risk for the business. could be provided without the use
of a fixed--line network, then
this would present a competitive
threat to the consumer part of
our business.
----------------------------------------- ----------------------------------------
What are we doing to mitigate the What are we doing to mitigate the
risk? risk?
During the year we have continued We are always seeking to improve
our focus on improving the customer our services to our consumers and
experience in all parts of our to provide a speed and quality
business. We have sought more regular of service that would not be achievable
feedback from customer satisfaction over a wireless network. Our full
metrics. In response to customer fibre deployment is part of this
feedback, a new range of broadband aim.
packages was launched for our Hull We offer bundles of products and
& East Yorkshire consumers. A specialist services that offer our customers
team has also been established value for money. We are also investing
that is dedicated to optimising in innovative products and services
the Wi-Fi experience in customers' which take advantage of our full
homes and a more focused approach fibre deployment, and which provides
to sales and customer service has a clear alternative to a substitute
been introduced. technology.
----------------------------------------- ----------------------------------------
Change in level of risk Change in level of risk
The level of risk remains the same. The level of risk remains unchanged
from the prior year.
----------------------------------------- ----------------------------------------
How does this link to our strategy? How does this link to our strategy?
Customers and Partners Customers and Partners
People People
Systems and processes Systems and processes
Assets
----------------------------------------- ----------------------------------------
Risks reported in the prior year
Security and resilience of our Regulatory obligations
networks and IT systems
--------------------------------------- ----------------------------------------
Why is it important? Why is it important?
We need our networks and IT systems As a telecommunications provider,
to continue operating in order we are regulated by Ofcom and there
to provide service to our customers. are multiple conditions and regulations
It is therefore essential that with which we need to comply. We
we have secure systems and networks take our regulatory responsibilities
in place that are resilient to extremely seriously and seek to
network upgrades, malicious activity ensure we are compliant in all
and physical factors (e.g. risk regards.
of flooding). Regulatory changes may also have
an impact on commercial pricing
which in turn may affect ARPU,
a key performance measure.
--------------------------------------- ----------------------------------------
What are we doing to mitigate the What are we doing to mitigate the
risk? risk?
We hold certifications in several We have an in--house regulatory
standards that relate to security team which is responsible for ensuring
and resilience, including we understand our obligations and
ISO 27001, the Information Security that these are communicated to
Management standard, and ISO 22301, the appropriate people across the
the Business Continuity Management business so that we can ensure
standard. The Director of Risk the necessary controls are in place.
Management is responsible for ensuring We have brought additional resource
a consistent approach to security into this team during the year
and resilience across the business to enable additional focus in this
and we have detailed policies and area. We continue to work closely
processes in place. We regularly with our suppliers to make sure
test our resilience plans and feed that our obligations are passed
back any lessons learnt from such on and complied with in the areas
tests into the resilience planning where we are reliant on third parties
process, which in turn is continually for the provision of services.
reviewed and updated on an ongoing
basis.
We monitor flood risk closely and
are always alert to increased risks
caused by extreme weather and high
tides, so that we can activate
our defences as required.
--------------------------------------- ----------------------------------------
Change in level of risk Change in level of risk
The level of risk remains unchanged The level of risk remains the same.
from the prior year.
--------------------------------------- ----------------------------------------
How does this link to our strategy? How does this link to our strategy?
Customers and Partners Customers and Partners
Systems and processes Systems and processes
Assets
--------------------------------------- ----------------------------------------
Risks reported in the prior year
Health and safety Accuracy, security and confidentiality
of customer data
------------------------------------------- ---------------------------------------
Why is it important? Why is it important?
The health and safety of our people The security, confidentiality and
is of paramount importance to us. accuracy of our customer data is
We have a number of people who of paramount importance to us and
undertake high risk activities; to our customers.
such as climbing telegraph poles, There is an increased inherent
working in confined spaces, working risk from the constantly evolving
alone or working next to roads. nature of cyberattacks, particularly
It is important to us to mitigate for those businesses that operate
health and safety risks as far in technology sectors.
as possible to try to prevent incidents
from occurring.
------------------------------------------- ---------------------------------------
What are we doing to mitigate the What are we doing to mitigate the
risk? risk?
We have an in--house health and We have clear and comprehensive
safety team with significant experience policies in place for the management
of health and safety issues specific of data and run training in this
to our industry. We have a comprehensive area for all employees. Specific
training programme in place which roles are in place that focus entirely
provides general training to all on data to help ensure our ongoing
our people, through mandatory e--learning, compliance with the General Data
and specific training to those Protection Regulation (GDPR).
who undertake higher risk activities, We keep up-to-date on emerging
which is then followed up by on--the--job cyber risks through membership
checks to ensure our engineers of information sharing forums.
are practising what they have learnt. Cybersecurity is also considered
For large projects which contain as part of annual disaster recovery
increased health and safety risks, scenario testing.
such as our fibre deployment, we
have brought in external health
and safety advisors to work on
the project full--time to ensure
we are complying with all the appropriate
health and safety requirements
mitigating all known risks.
------------------------------------------- ---------------------------------------
Change in level of risk Change in level of risk
The level of risk remains the same. The risk is increasing as the volume
and nature of cyberattacks continues
to grow and evolve, which threatens
the security of data.
------------------------------------------- ---------------------------------------
How does this link to our strategy? How does this link to our strategy?
People Customers and Partners
Systems and processes People
Systems and processes
Assets
------------------------------------------- ---------------------------------------
Risk reported for the first time this year
Ability to attract and retain talent
within the business
-----------------------------------------
Why is it important?
Many of the services that we provide
are technically complex and require
skills that are hard to find. Attracting
and retaining the right skills
is key to being able to deliver
the services that our customers
require.
-----------------------------------------
What are we doing to mitigate the
risk?
Colleague feedback has been obtained
from employee engagement surveys
in the year and acted upon where
appropriate. We will be reviewing
our ways of working in conjunction
with employee feedback to realise
the desired KCOM culture. We will
strive to become an employer of
choice and reduce the gender pay
gap.
-----------------------------------------
Change in level of risk
The level of risk has increased
during the year due to the uncertainty
of KCOM's future ownership and
direction.
-----------------------------------------
How does this link to our strategy?
Customers and Partners
People
Systems and processes
Assets
-----------------------------------------
Forward looking statements
Certain statements in this results announcement are forward
looking. Although the Group believes that the expectations
reflected in these forward looking statements are reasonable, we
can give no assurance that these expectations will prove to be
correct. Because these statements involve risks and uncertainties,
actual results may differ materially from those expressed or
implied by these forward looking statements.
We undertake no obligation to update any forward looking
statements whether as a result of new information, future events or
otherwise.
Consolidated income statement
2019 2018
Note GBP'000 GBP'000
Revenue 3 281,637 301,898
Operating expenses (310,459) (265,462)
----------------------------------------------------------------- ----- ---------- ----------
Operating (loss)/profit (28,822) 36,436
Finance costs 5 (2,837) (2,399)
Share of profit of associates 16 12
----------------------------------------------------------------- ----- ---------- ----------
(Loss)/profit before taxation 3 (31,643) 34,049
Taxation 6 (2,260) (6,571)
----------------------------------------------------------------- ----- ---------- ----------
(Loss)/profit for the year attributable to owners of the parent (33,903) 27,478
----------------------------------------------------------------- ----- ---------- ----------
Operating (loss)/profit analysed as:
EBITDA before exceptional items 3 57,062 68,270
Exceptional credits 4 - 2,361
Impairment of goodwill 4,8 (51,372) -
Other exceptional charges 4 (4,588) (1,638)
Depreciation of property, plant and equipment (16,913) (16,906)
Amortisation of intangible assets (13,011) (15,651)
Earnings per share
Basic 7 (6.63p) 5.38p
Diluted 7 (6.63p) 5.33p
Consolidated statement of comprehensive income
2019 2018
Note GBP'000 GBP'000
(Loss)/profit for the year (33,903) 27,478
Other comprehensive income/(expense)
Items that will not be reclassified to profit or loss:
Remeasurements of retirement benefit obligations 10 2,901 4,203
Tax on items that will not be reclassified (493) (715)
---------------------------------------------------------------------------------------- ----- --------- --------
Total items that will not be reclassified to profit or loss 2,408 3,488
---------------------------------------------------------------------------------------- ----- --------- --------
Total comprehensive (expense)/income for the year attributable to owners of the parent (31,495) 30,966
---------------------------------------------------------------------------------------- ----- --------- --------
Consolidated balance sheet
2019 2018
Note GBP'000 GBP'000
Assets
Non-current assets
Goodwill 8 - 51,372
Other intangible assets 32,051 36,816
Property, plant and equipment 132,548 122,928
Investments 62 46
Retirement benefit asset 5,924 -
Deferred tax assets 4,539 4,376
Contract Costs 5,313 -
----------------------------------------------------------- ----- ---------- ----------
180,437 215,538
----------------------------------------------------------- ----- ---------- ----------
Current assets
Inventories 3,080 3,713
Contract assets 2,903 -
Trade and other receivables 55,257 53,568
Cash and cash equivalents 11 7,347 13,223
68,587 70,504
----------------------------------------------------------- ----- ---------- ----------
Total assets 249,024 286,042
----------------------------------------------------------- ----- ---------- ----------
Liabilities
Current liabilities
Trade and other payables (56,233) (87,281)
Contract liabilities (18,264) -
Finance leases 11 (418) (1,722)
Provisions for other liabilities and charges (182) (471)
----------------------------------------------------------- ----- ---------- ----------
(75,097) (89,474)
----------------------------------------------------------- ----- ---------- ----------
Non-current liabilities
Bank loans 11 (114,129) (73,821)
Retirement benefit obligation 10 (2,378) (7,507)
Deferred tax liabilities (9,109) (8,016)
Finance leases 11 - (285)
Provisions for other liabilities and charges (3,160) (5,746)
----------------------------------------------------------- ----- ---------- ----------
(128,776) (95,375)
----------------------------------------------------------- ----- ---------- ----------
Total liabilities (203,873) (184,849)
----------------------------------------------------------- ----- ---------- ----------
Net assets 45,151 101,193
----------------------------------------------------------- ----- ----------
Equity
Capital and reserves attributable to owners of the parent
Share capital 51,660 51,660
Share premium account 353,231 353,231
----------
Accumulated losses(1) (359,740) (303,698)
----------------------------------------------------------- ----- ---------- ----------
Total equity 45,151 101,193
----------------------------------------------------------- ----- ---------- ----------
1 Included within accumulated losses is a loss after tax of
GBP33.9 million (2018: profit of GBP27.5 million).
Consolidated statement of changes in shareholders' equity
Share
Share premium Accumulated
Capital account losses Total
Note GBP'000 GBP'000 GBP'000 GBP'000
At 1 April 2017 51,660 353,231 (305,003) 99,888
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Profit for the year - - 27,478 27,478
Other comprehensive expense - - 3,488 3,488
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Total comprehensive income for the year ended 31 March 2018 - - 30,966 30,966
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Purchase of ordinary shares - - (450) (450)
Employee share schemes - - 1,785 1,785
Dividends 9 - - (30,996) (30,996)
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Transactions with owners - - (29,661) (29,661)
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
At 31 March 2018 51,660 353,231 (303,698) 101,193
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Changes in accounting standards 2 - - 345 345
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
At 1 April 2018 (unaudited) 51,660 353,231 (303,353) 101,538
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Loss for the year - - (33,903) (33,903)
Other comprehensive income - - 2,408 2,408
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Total comprehensive expense for the year ended 31 March 2019 - - (31,495) (31,495)
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Purchase of ordinary shares - - (450) (450)
Employee share schemes - - 1,381 1,381
Deferred tax credit relating to share schemes - - 7 7
Dividends 9 - - (25,830) (25,830)
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Transactions with owners - - (24,892) (24,892)
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
At 31 March 2019 51,660 353,231 (359,740) 45,151
-------------------------------------------------------------- ----- --------- --------- ------------ ---------
Consolidated cash flow statement
2019 2018
Note GBP'000 GBP'000
--------------------------------------------------------- ---- -------- --------
Cash flows from operating activities
Operating (loss)/profit (28,822) 36,436
Adjustments for:
- depreciation and amortisation 29,924 32,557
- impairment of goodwill 51,372 -
- increase in working capital (24,057) (4,197)
- loss/(profit) on sale of property, plant and equipment 17 (15)
- non-employee-related pension charges 1,534 1,100
- share-based payment charge 1,381 1,785
Payments made to defined benefit pension schemes 10 (9,762) (9,470)
Tax paid (1,852) (3,698)
Net cash generated from operations 19,735 54,498
--------------------------------------------------------- ---- -------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (27,540) (34,139)
Purchase of intangible assets (8,309) (7,697)
Proceeds from sale of property, plant and equipment 451 517
Net cash used in investing activities (35,398) (41,319)
--------------------------------------------------------- ---- -------- --------
Cash flows from financing activities
Dividends paid 9 (25,830) (30,996)
Interest paid (2,315) (1,601)
Capital element of finance lease repayments (1,618) (2,099)
Repayment of bank loans (10,000) (20,000)
Drawdown of bank loans 50,000 45,000
Purchase of ordinary shares (450) (450)
--------------------------------------------------------- ---- -------- --------
Net cash generated from/(used in) financing activities 9,787 (10,146)
--------------------------------------------------------- ---- -------- --------
(Decrease)/increase in cash and cash equivalents (5,876) 3,033
Cash and cash equivalents at the beginning of the year 13,223 10,190
--------------------------------------------------------- ---- -------- --------
Cash and cash equivalents at the end of the year 11 7,347 13,223
--------------------------------------------------------- ---- -------- --------
Notes to the financial information
1. General information and basis of preparation
General information
KCOM Group PLC is a public limited company, limited by shares,
which is listed on the London Stock Exchange and incorporated and
domiciled in England in the United Kingdom. The address of the
registered office is 37 Carr Lane, Hull HU1 3RE.
The financial information included in this results announcement
does not include all the disclosures required by IFRS or the
Companies Act 2006 and accordingly it does not itself comply with
IFRS or the Companies Act 2006. The financial information set out
in this announcement does not constitute the company's statutory
accounts within the meaning of Section 434 of the Companies Act
2006 for the years ended 31 March 2019 or 2018 but it is derived
from those accounts. The auditors have reported on those accounts;
their reports (i) were 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 in respect of the accounts for the years ended 31 March
2019 or 31 March 2018. Statutory accounts for the year ended 31
March 2018 were approved by the Board of Directors on 8 June 2018
and have been delivered to the Registrar of Companies.
The condensed consolidated financial statements ('the financial
statements') on pages 12 to 15 comprise the financial results of
KCOM Group plc for the financial years ended 31 March 2019 and 2018
together with the audited balance sheet as at 31 March 2019 and
2018. The results for the year ended 31 March 2019 have been
extracted from the 31 March 2019 audited consolidated financial
statements which were approved by the Board of Directors on 31
July. These have not yet been delivered to the Registrar of
Companies but are now available to view on KCOM Group PLC's
website: www.kcomplc.com.
This results announcement will be published on the Company's
website. The maintenance and integrity of the website is the
responsibility of the directors. The work carried out by the
auditors does not involve consideration of these matters.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Basis of preparation
The Group prepares its annual consolidated financial statements
in accordance with International Financial Reporting Standards
(IFRS) and International Financial Reporting Interpretations
Committee (IFRIC) interpretations endorsed by the European Union
(EU) and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS.
The consolidated financial information has been in accordance
with the accounting policies set out in Note 2 and have been
prepared under the historical cost convention, as modified by the
revaluation of financial assets and financial liabilities
(including derivative financial instruments) at fair value through
reserves.
2. New accounting standards
2.1 Initial application of new standards, interpretations and
amendments
The following amendments to standards published by the
International Accounting Standards Board (IASB) were effective for
the first time for the financial year beginning 1 April 2018:
-- IFRS 9 "Financial Instruments"
-- IFRS 15 "Revenue from Contracts with Customers"
-- IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
-- Amendments to the following standards:
-- IAS 40 "Transfers of Investment Property"
-- IFRS 2 "Classification and Measurement of Share-based Payment Transactions"
-- IFRS 4 "Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts"
-- Clarifications to IFRS 15 "Revenue from Contracts with Customers"
-- Improvements to IFRSs (2014 - 2016)
The above new and amended standards do not have a material
effect on the Group except as described below:
IFRS 9 "Financial Instruments"
In July 2014, the IASB issued IFRS 9 "Financial Instruments",
which replaces IAS 39 "Financial Instruments - Recognition and
Measurement". Application of the standard is mandatory for annual
periods beginning on or after 1 January 2018. Transition to IFRS 9
for the Group took place on 1 April 2018 and in accordance with the
transitional provisions of IFRS 9, comparative figures have not
been restated. The Group has also adopted the consequential
amendments to IFRS 7 "Financial Instruments: Disclosures" which
have been applied to current year disclosures but have not
generally been applied to comparatives.
IFRS 9 introduces three key changes when compared to IAS 39
relating to: the classification and measurement of financial assets
and financial liabilities; impairment of financial assets; and
general hedge accounting.
Upon adoption of IFRS 9, no change in the classification of
financial assets has arisen because, at the date of transition, all
financial assets of the Group were held at amortised cost under IAS
39 and continue to be held at amortised cost under IFRS 9. There
has also been no change in the classification of financial
liabilities since the classification and measurement requirements
of IAS 39 have been largely retained under IFRS 9.
The financial asset impairment requirements of IFRS 9 introduce
a forward-looking expected credit loss model which results in
earlier recognition of credit losses than the incurred loss model
under IAS 39. The Group has adopted the simplified approach to
provide for losses on receivables and contract assets resulting
from transactions within the scope of IFRS 15. Receivables and
contract assets have been grouped based on shared credit risk
characteristics and days past due and a provision rate matrix
derived from historical information has been applied to estimate
the expected credit losses.
Adoption of the expected credit loss model has not had a
significant impact on the financial statements of the Group. The
loss allowances for trade receivables and contract assets as at 31
March 2018 reconcile to the opening loss allowances on 1 April 2018
as follows:
Contract assets Total
Trade receivables GBP'000 Unbilled receivables GBP'000 GBP'000 GBP'000
At 31 March 2018 (calculated
under IAS 39) 1,308 - - 1,308
Change in accounting policy (303) 53 17 (233)
Opening loss allowance as at
1 April 2018 (calculated
under IFRS 9) 1,005 53 17 1,075
------------------------------ -------------------------- ----------------------------- ---------------- ---------
Cash and cash equivalents are also subject to the impairment
requirements of IFRS 9 but the identified impairment loss was
immaterial.
The hedge accounting requirements of IFRS 9 have also been
simplified and are more closely aligned to an entity's risk
management strategy. The Group does not currently hedge account,
however IFRS 9 introduces a new hedge accounting model which is
optional to apply and is closer aligned to commercial activities,
therefore it may be applied in the future if deemed
appropriate.
IFRS 15 "Revenue from Contracts with Customers"
In May 2014, the IASB issued IFRS 15 "Revenue from Contracts
with Customers" which replaces IAS 11 "Construction Contracts" and
IAS 18 "Revenue". Application of the standard is mandatory for
annual periods beginning on or after 1 January 2018 and requires
the Group to use a five step approach to allocate the revenue
earned from contracts to individual performance obligations on a
relative stand-alone basis.
Transition to IFRS 15 for the Group took place on 1 April 2018
and in accordance with the transition provisions of the standard we
have adopted IFRS 15 using the modified retrospective transition
method. Consequently, the prior period comparatives have not been
restated, and the full cumulative impact of applying this standard
retrospectively had been reflected in an adjustment to equity at
the date of transition. The following adjustments were made to
amounts recognised on the balance sheet at the date of initial
application:
As at As at
31 Mar 2018 1 Apr 2018
IAS11/IAS18/ IFRS 15 Unaudited IFRS 15 Unaudited IFRS 9 Unaudited IFRS 15
IAS 39(1) Reclassi-fication Remeasure-ments Remeasure-ments IFRS 9
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Assets
Non-current assets
Goodwill 51,372 - - - 51,372
Other intangible assets 36,816 - - - 36,816
Property, plant and
equipment (i) 122,928 - (1,495) - 121,433
Investments 46 - - - 46
Deferred tax assets (vii) 4,376 - 406 - 4,782
Contract costs (ii) (iii)
(iv) (v) (vi) - - 5,204 - 5,204
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
215,538 - 4,115 - 219,653
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Current assets
Inventories 3,713 - - - 3,713
Contract assets (i) (iv)
(v) (viii) - 2,147 915 (17) 3,045
Trade and other receivables
(ii) (vi)(viii) 53,568 (2,147) (215) 250 51,456
Cash and cash equivalents 13,223 - - - 13,223
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
70,504 - 700 233 71,437
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Total assets 286,042 - 4,815 233 291,090
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Liabilities
Current liabilities
Trade and other payables
(viii) (87,281) 17,446 - - (69,835)
Contract liabilities (ii)
(iv) (v) (vi) (viii) - (17,446) (4,274) - (21,720)
Finance leases (1,722) - - - (1,722)
Provisions for other
liabilities and charges (471) - - - (471)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
(89,474) - (4,274) - (93,748)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Non-current liabilities
Bank loans (73,821) - - - (73,821)
Retirement benefit
obligations (7,507) - - - (7,507)
Deferred tax liabilities
(vii) (8,016) - (429) - (8,445)
Finance leases (285) - - - (285)
Provisions for other
liabilities and changes (5,746) - - - (5,746)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
(95,375) - (429) - (95,804)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Total liabilities (184,849) - (4,703) - (189,552)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Net assets 101,193 - 112 233 101,538
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Equity
Capital and reserves,
attributable to owners of
the parent
Share capital 51,660 - - - 51,660
Share premium account 353,231 - - - 353,231
Accumulated losses (303,698) - 112 233 (303,353)
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
Total equity 101,193 - 112 233 101,538
---------------------------- -------------- ------------------- ------------------ ----------------- ------------
(1) The amounts presented in this column are as reported and are
therefore shown before the adjustments from the adoption of IFRS 9
or IFRS 15.
(i) Routers
Prior to transition, routers were capitalised and the expense
recognised as depreciation over the term of the contract. Under
IFRS 15 we will treat routers as a discrete sale and performance
obligation, and as a result these assets will no longer be
capitalised and the cost will be recognised as an operating expense
at the point control passes to the customer. Therefore transition
to IFRS 15 resulted in the de-recognition of routers previously
capitalised (GBP1.5 million) and the creation of a contract asset
arising from the earlier revenue recognition for the sale of
routers which were previously accounted for as part of a bundle
(GBP2.0 million).
(ii) Connection fees
Under IFRS 15, connection fees are included in the transaction
price and allocated to the performance obligations identified in
the contract resulting in later recognition of revenue. Due to the
timing of connection fee payments from customers a contract
liability balance of GBP2.2 million has arisen upon transition to
IFRS 15 and unbilled receivables has decreased by GBP0.1 million.
Costs of GBP0.9 million associated with these connection activities
have been capitalised on the balance sheet as costs of fulfilling a
contract and will be amortised over the term of the contract on a
systematic basis in line with the recognition of revenue.
(iii) Costs of obtaining a contract
IFRS 15 requires an asset to be recognised for the incremental
costs incurred in obtaining a contract which is then amortised over
the period that the goods or services are transferred to the
customer. Therefore upon transition an asset of GBP1.8 million was
recognised relating to deferred customer acquisition costs (e.g.
sales commissions). Under previous accounting treatment, these
would have been expensed as incurred and thus application of IFRS
15 results in later recognition of selling expenses spread over the
contract lifetime.
(iv) Multi-element contracts
IFRS 15 introduces a clear link between the value provided to a
customer and the timing of revenue recognition. A small number of
contracts have been identified within the Enterprise operating
segment for which we have previously recognised revenue relating to
professional services rendered during the 'project phase' of the
contract, but under IFRS 15 it has been determined that in these
specific instances, the 'project phase' did not represent a
separate performance obligation. Therefore, depending on timing of
customer payments, for each contract identified there has either
been a reduction in contract assets (cumulative impact GBP0.7
million) or the creation of a contract liability balance
(cumulative impact GBP0.5 million) upon transition to IFRS 15. In a
similar manner to the costs associated with connection activities
detailed above, professional services costs incurred during the
'project phase' of GBP0.9 million have been capitalised on the
balance sheet as costs of fulfilling a contract. Revenue is being
recognised and the fulfilment assets are being amortised on a
straight-line basis over the "managed service" phase of the
contracts.
(v) Enforceable right to payment
Generally, the 'installation phase' in Enterprise contracts does
represent a performance obligation and results in the creation of
an asset with no alternative use to the Group. Therefore, provided
we have an enforceable right to payment, under IFRS 15 we recognise
revenue over time using a percentage cost to complete methodology
similar to the accounting treatment previously used. In limited
circumstances, where we do not have an enforceable right to payment
during the "project phase", a difference in accounting treatment
arises. IFRS 15 dictates that if we do not have an enforceable
right to payment for performance completed to date then revenue
should not be recognised over the project phase, but instead at the
point in time that control of the asset transfers to the customer
resulting in later recognition of revenue. Upon transition to IFRS
15, this has resulted in a decrease in contract assets of GBP0.4
million, an increase in contract liabilities of GBP0.1 million and
the creation of contract fulfilment assets of GBP0.5 million.
(vi) Licences
The Group frequently enters into multi-element contracts with
customers which may include the provision of third party licences.
Under previous accounting the revenue associated with the licences
was recognised at the point in time that the licences were provided
to the customer. Under IFRS 15 we recognise that, for the supply of
some licences, we have an ongoing obligation to the customer with
respect to these licences as part of the managed service provided
and thus we will recognise revenue associated with the licence over
the shorter of the contract term and the licence term. Upon
transition to IFRS 15 this has resulted in a contract liability of
GBP1.5 million, reduction in unbilled receivables of GBP0.1 million
and an asset relating to the cost of fulfilling the contracts of
GBP1.1 million.
(vii) Deferred tax
Due to the changes in the pattern and timing of revenue and cost
recognition under IFRS 15, and remeasurements resulting in revenue
and costs moving between past and future periods, the principles of
IAS 12 give rise to a movement in the deferred tax asset and
liability due to temporary timing differences. In addition, a
permanent difference arises from the derecognition of routers as
capital assets. The net impact is negligible.
(viii) Presentation of contract assets and contract
liabilities
The Group has voluntarily changed the presentation of certain
amounts in the consolidated balance sheet to reflect the
terminology of IFRS 15:
-- contract assets of GBP2.1 million in relation to incomplete
projects where we do not have an unconditional right to
consideration have been reclassified upon transition from trade and
other receivables; and
-- contract liabilities of GBP17.4 million which were previously
presented as deferred income within trade and other payables are
now being presented separately on the balance sheet.
Comparative figures for the items of the financial statements
affected by the first-time adoption of IFRS 15 and IFRS 9
The following tables present the consolidated income statement
and the consolidated balance sheet as at 31 March 2019 in
accordance with IFRS 15 and IFRS 9 as well as the previous
accounting treatment in accordance with IAS 11/IAS 18, IAS 39 and
related interpretations along with an explanation of the movements
in balances:
Consolidated income statement
2019 2019
as reported under
IFRS 15 IAS11/IAS18
IFRS 9 IAS 39 Change
GBP'000 GBP'000 GBP'000
Revenue 281,637 285,891 (4,254)
Operating expenses (310,459) (314,842) 4,383
---------------------------------------------------------- ------------- ------------- ---------
Operating loss (28,822) (28,951) 129
Finance costs (2,837) (2,837) -
Share of profit of associates 16 16 -
---------------------------------------------------------- ------------- ------------- ---------
Loss before tax (31,643) (31,772) 129
Tax (2,260) (2,537) 277
---------------------------------------------------------- ------------- ------------- ---------
Loss for the period attributable to owners of the parent (33,903) (34,309) 406
----------------------------------------------------------
Operating loss analysed as:
EBITDA before exceptional items 57,062 58,932 (1,870)
Impairment of goodwill (51,372) (51,372) -
Other exceptional charges (4,588) (4,588) -
Depreciation of property, plant and equipment (16,913) (18,912) 1,999
Amortisation of intangible assets (13,011) (13,011) -
---------------------------------------------------------- ------------- ------------- ---------
Operating loss (28,822) (28,951) 129
---------------------------------------------------------- ------------- ------------- ---------
Without the effect of IFRS 15, revenue would have amounted to
GBP285.9 million, GBP4.3 million higher than reported. The most
significant item contributing to this is the recognition of agency
relationships. The guidance in IFRS 15, for the distinction between
an agent and a principal, is based on the concept of 'control'
which differs to the previously applied notion of transfer of
'risks and rewards'. This has resulted in a reduction of revenue of
GBP4.3 million within the Enterprise market segment due to sales
previously recognised on a gross basis now being recognised net of
costs under IFRS 15 as 'agency' revenue. The impact of this item is
GBPNil at operating loss, EBITDA and loss before tax.
Application of IFRS 15 and IFRS 9 has also resulted in a
decrease in EBITDA of GBP1.9 million, largely attributable to the
change in accounting treatment for routers. Under previous
accounting treatment, routers were capitalised and the expense
recognised as depreciation over the term of the contract. Under
IFRS 15 we treat routers as a discrete sale and performance
obligation, and as a result these assets will no longer be
capitalised and the cost will be recognised as an operating expense
at the point control passes to the customer. The reclassification
of costs and the change in timing of revenue recognition mainly
impacts our Hull & East Yorkshire market segment resulting in a
reduction of segmental EBITDA of GBP1.4 million. The overall impact
on Group EBITDA is GBP1.7 million, but the impact at operating loss
and loss before tax is not significant due to a reduction in
depreciation of GBP2.0 million.
The impact of these factors is summarised below:
Revenue EBITDA Loss before tax
GBP'000 GBP'000 GBP'000s
Year ended 31 March 2019 as reported under IAS11/IAS18 and IAS 39 285,891 58,932 (31,772)
Agency relationships (4,329) - -
Routers 196 (1,742) 257
Other (121) (128) (128)
------------------------------------------------------------------- --------- --------- ----------------
Year ended 31 March 2019 as reported under IFRS 15 and IFRS 9 281,637 57,062 (31,643)
------------------------------------------------------------------- --------- --------- ----------------
The other category relates to the cumulative impact of the
following factors described within this note:
-- connection fees;
-- costs of obtaining a contract;
-- multi-element contracts licences; and
-- application of the forward-looking expected credit loss model under IFRS 9.
Consolidated balance sheet
2019 2019
as reported under
IFRS 15 IAS11/IAS18
IFRS 9 IAS 39 Change
GBP'000 GBP'000 GBP'000
Assets
Non-current assets
Goodwill - - -
Other intangible assets 32,051 32,051 -
Property, plant and equipment 132,548 133,983 (1,435)
Investments 62 62 -
Retirement benefit asset 5,924 5,924 -
Deferred tax assets 4,539 4,539 -
Contract costs 5,313 - 5,313
------------------------------------------------------------ ------------- ------------- ----------
180,437 176,559 3,878
------------------------------------------------------------ ------------- ------------- ----------
Current assets
Inventories 3,080 3,080 -
Contract assets 2,903 - 2,903
Trade and other receivables 55,257 57,004 (1,747)
Cash and cash equivalents 7,347 7,347 -
------------------------------------------------------------ ------------- ------------- ----------
68,587 67,431 1,156
------------------------------------------------------------ ------------- ------------- ----------
Total assets 249,024 243,990 5,034
------------------------------------------------------------ ------------- ------------- ----------
Liabilities
Current liabilities
Trade and other payables (56,233) (69,960) 13,727
Contract liabilities (18,264) - (18,264)
Finance leases (418) (418) -
Provisions for other liabilities and charges (182) (182) -
(75,097) (70,560) (4,537)
Non-current liabilities
Bank loans (114,129) (114,129) -
Retirement benefit obligations (2,378) (2,378) -
Deferred tax liabilities (9,109) (9,363) 254
Provisions for other liabilities and changes (3,160) (3,160) -
------------------------------------------------------------
(128,776) (129,030) 254
------------------------------------------------------------ ------------- ------------- ----------
Total liabilities (203,873) (199,590) (4,283)
------------------------------------------------------------ ------------- ------------- ----------
Net assets 45,151 44,400 751
------------------------------------------------------------ ------------- ------------- ----------
Equity
Capital and reserves, attributable to owners of the parent
Share capital 51,660 51,660 -
Share premium account 353,231 353,231 -
Accumulated losses (359,740) (360,491) 751
------------------------------------------------------------ ------------- ------------- ----------
Total equity 45,151 44,400 751
------------------------------------------------------------ ------------- ------------- ----------
Upon application of IFRS 15, non-current assets have increased
by GBP3.9 million in part due to the first time recognition of
contract costs i.e. costs of obtaining and costs of fulfilling
contracts of GBP5.3 million. Previous accounting treatment would
have resulted in earlier cost recognition with these costs
generally being recognised as incurred. This impact is offset by
the derecognition of routers from property, plant and equipment of
GBP1.4 million because under IFRS 15 these are being treated as a
discrete sale and performance obligation satisfied at the point in
time when the router is delivered to the customer.
Current assets are GBP1.2 million higher under IFRS 15 due to
the recognition of a contract asset for the sale of routers of
GBP2.2 million. This is offset by a reduction in contract assets
and unbilled receivables of GBP0.7 million arising from the
de-recognition of revenue for specific contracts where the project
phase has not been identified as a performance obligation under
IFRS 15 or it has been determined that there is no enforceable
right to payment during the project phase and thus revenue cannot
be recognised until project completion (GBP0.2 million). This is
also offset by the release of unbilled receivables (GBP0.1 million)
in relation to connection activities which we have concluded do not
represent a performance obligation.
Current liabilities have increased by GBP4.5 million due to the
deferral of connection revenue of GBP2.3 million, the deferral of
licence revenue of GBP1.8 million and the deferral of "project
phase" revenue of GBP0.6 million; offset by the deferral of
"project phase" costs of GBP0.2 million. Non-current liabilities
have decreased by GBP0.3 million due to the permanent deferred tax
adjustment relating to the derecognition of routers as capital
assets.
Due to the change in terminology of IFRS 15 and IFRS 9, there
has also been a reclassification of certain balances:
-- GBP1.4 million from trade and other receivables to contract assets; and
-- GBP13.5 million from trade and other payables to contract liabilities.
2.2 New accounting standards, amendments and interpretations
effective for annual periods beginning after 1 April 2019
The following accounting standards, amendments and
interpretations have been issued by the IASB but are not yet
effective and have not been applied in preparing these financial
statements.
-- IFRS 16 Leases
-- IFRS 17 Insurance Contracts
-- IFRIC 23 Uncertainty over Income Tax Treatments
-- Amendments to the following standards:
-- IAS 19 Plan Amendment, Curtailment or Settlement
-- IAS 28 Long-term Interests in Associates and Joint
Ventures
-- IFRS 9 Prepayment Features with Negative Compensation
-- Improvements to IFRSs (2015 - 2017)
-- References to the Conceptual Framework
Of these new standards, interpretations and amendments, only
IFRS 16 is expected to have a material impact on the Group's
financial statements.
3. Segmental analysis
The Group's operating and reportable segments are based on the
reports reviewed by the KCOM Group PLC Board which are used to make
strategic decisions. The chief operating decision-maker of the
Group is the KCOM Group PLC Board.
For the year ended 31 March 2019, the Board considered four
segments in assessing the performance of the Group and making
decisions in relation to the allocation of resources. These four
segments are:
-- Hull & East Yorkshire - providing communication and
internet-based services to consumer and business customers within
the region.
-- Enterprise - providing consulting, design, implementation and managed services related to the collaborative systems and cloud markets.
-- National Network Services - providing network connectivity
and related services to business customers nationally.
-- Central - holding the PLC costs and corporate costs, where
allocation to the underlying segments would not improve
understanding of these segments. These include costs associated
with our defined benefit pension obligations and share schemes,
alongside the residual cost of finance, HR, risk, legal and
communications once appropriate recharges have been made to the
go-to-market segments.
Segmental information has been prepared on a basis consistent
with the prior financial year. The segment information provided to
the KCOM Group PLC Board for the reportable segments, for the year
ended 31 March 2019 and for the year ended 31 March 2018, is as
follows:
Revenue EBITDA
---------------- ------------------
2019 2018 2019 2018
GBP'000 GBP'000 GBP'000 GBP'000
Before exceptional items
Hull & East Yorkshire 101,054 104,216 59,519 65,660
Enterprise 85,590 88,285 5,854 5,115
National Network Services 97,976 113,212 2,980 9,021
Central (2,983) (3,815) (11,291) (11,526)
-------------------------------- ------- ------- -------- --------
Total before exceptional items 281,637 301,898 57,062 68,270
-------------------------------- ------- --------
Exceptional items
Hull & East Yorkshire - - (52) (357)
Enterprise - - (20,128) (591)
National Network Services - - (32,654) 2,059
Central - - (3,126) (388)
-------------------------------- ------- ------- -------- --------
Total - - (55,960) 723
-------------------------------- ------- ------- -------- --------
Total post-exceptional items 281,637 301,898 1,102 68,993
-------------------------------- ------- ------- -------- --------
A reconciliation of total EBITDA post-exceptional items to
(loss)/profit before tax is provided as follows:
2019 2018
GBP'000 GBP'000
EBITDA post-exceptional items 1,102 68,993
Depreciation (16,913) (16,906)
Amortisation (13,011) (15,651)
Finance costs (2,837) (2,399)
Share of profit of associate 16 12
------------------------------- -------- --------
(Loss)/profit before tax (31,643) 34,049
------------------------------- -------- --------
The table below shows revenue disaggregated by segment and
nature:
2019 2018
GBP'000 GBP'000
--------------------------------- -------- --------
Revenue
Hull & East Yorkshire:
Consumer 60,103 58,415
Business 29,573 30,531
Wholesale 9,665 10,828
Media 1,531 1,912
Contact Centres 182 2,530
--------------------------------- -------- --------
Total Hull & East Yorkshire 101,054 104,216
--------------------------------- -------- --------
Enterprise:
Projects 29,605 30,065
Managed Service 43,454 45,224
Network 12,531 12,996
--------------------------------- -------- --------
Total Enterprise 85,590 88,285
--------------------------------- -------- --------
National Network Services:
Connectivity 62,327 68,102
Voice 23,599 30,497
Hosting 6,804 7,331
Managed Service 4,073 5,055
Other 1,173 2,227
--------------------------------- -------- --------
Total National Network Services 97,976 113,212
--------------------------------- -------- --------
Central (2,983) (3,815)
--------------------------------- -------- --------
Group total 281,637 301,898
--------------------------------- -------- --------
Disclosure has not been made of segmental assets and
liabilities. This is in accordance with IFRS 8 as this measure is
not provided regularly to the KCOM Group PLC Board.
The split of total revenue between external customers and
inter-segment revenue is as follows:
2019 2018
GBP'000 GBP'000
Revenue from external customers
Hull & East Yorkshire 98,065 100,375
Enterprise 85,590 88,285
National Network Services 97,976 113,212
Central 6 26
-------------------------------- ------- -------
Total 281,637 301,898
-------------------------------- ------- -------
Inter-segment revenue
Hull & East Yorkshire 2,989 3,841
Central (2,989) (3,841)
-------------------------------- ------- -------
Total - -
-------------------------------- ------- -------
Group total 281,637 301,898
-------------------------------- ------- -------
Inter-segment sales are charged at prevailing market prices.
None of the revenue, operating profit or net operating assets
arising outside the United Kingdom are material to the Group. In
the current year, revenue of GBP29.1 million (2018: GBP33.3
million) from transactions with one customer within the Enterprise
segment exceeded 10% of Group revenue.
4. Exceptional items
2019 2018
GBP'000 GBP'000
Regulatory matters - (2,361)
---------------------------------------- ------- -------
Credited to income statement - (2,361)
---------------------------------------- ------- -------
- Impairment of goodwill 51,372 -
- Restructuring costs 3,799 1,638
- GMP equalisation 789 -
---------------------------------------- ------- -------
Charged to income statement 55,960 1,638
---------------------------------------- ------- -------
Net charge/(credit) to operating profit 55,960 (723)
---------------------------------------- ------- -------
The Directors continue to recognise the need to differentiate
costs incurred outside the normal course of business from the
underlying trading performance.
In accordance with IAS 36, the group's goodwill balances are
tested annually for impairment. In the year all of the group's
goodwill of GBP51.4 million has been impaired. This is a non-cash
item and is treated as exceptional in line with our accounting
policy. See note 8 for further details.
During the year exceptional restructuring costs of GBP3.8
million were incurred (year ending 31 March 2018: GBP1.6 million).
Management scrutinises all restructuring costs on a line by line
basis to determine whether they meet the exceptional criteria.
During the year restructuring costs were incurred in relation to
four main areas:
-- Termination and recruitment costs associated with Executive
Directors (GBP1.3 million). In line with the Group's accounting
policy these costs are classified as exceptional.
-- Transformation of project delivery capability (GBP0.4
million). The Group has undertaken a discrete project designed to
improve and de-risk our delivery of complex customer contracts. The
transformation will enable us to deliver in-flight and future
contracts more profitably and help avoid a reoccurrence of the
losses on specific contracts incurred in prior years. Costs were
also incurred in relation to this project in the prior year. We now
consider this project to be complete.
-- Transformation of central functions (GBP0.8 million). The Group has completed the process of centralisation of the technical and customer support teams into centres of excellence designed to provide an improved customer experience, which commenced in the prior year. The Group has also completed a structural re-organisation of its product and propositions teams to help design and create new offerings for the go-to-market segments.
-- The strategic business review costs (GBP1.3 million) mainly
relate to third party consultant costs incurred performing the
review. The outputs of this review are expected to be further
reviewed and refined as part of a takeover completion business
review with implementation resulting in a number of operating model
transformation initiatives which will lead to a reduction in
organisation complexity, duplication and costs. Additional
exceptional costs are expected to be incurred in the next financial
year to support the realisation of these cost savings.
On 26 October the High Court handed down a judgement involving
the Lloyds Banking Group's defined benefit pension schemes. The
judgement concluded the schemes should be amended to equalise
pension benefits for men and women in relation to guaranteed
minimum pension benefits. The issues determined by the judgement
arise in relation to many other defined benefit pension schemes.
During the year, the Group recognised an exceptional charge of
GBP0.8 million as a result of the crystallisation of additional
liabilities in the Group's defined benefit pension schemes.
In the prior year, the Group recorded an exceptional credit of
GBP2.4 million relating to regulatory matters. The credit resulted
from an industry wide settlement which arose as a result of a
breach in BT Openreach's contractual and regulatory obligations
relating to compensation for misapplying 'Deemed Consent'.
The combined effect of these items is a credit of GBP0.9 million
(2018: charge of GBP0.1 million) in respect of current tax and
GBP1.6 million (2018: GBPNil) in respect of deferred tax.
The cash flow impact of exceptional items was an outflow of
GBP3.4 million (2018: GBP1.1 million). The impact on working
capital of exceptional items was an inflow of GBP0.1 million (2018:
outflow of GBP1.8 million).
5. Finance costs
2019 2018
GBP'000 GBP'000
Bank loans, overdrafts and other loans 2,383 1,583
Retirement benefit obligations 76 389
Finance lease and hire purchase contracts 29 69
------------------------------------------ ------- -------
2,488 2,041
Amortisation of loan arrangement fees 308 234
Provision: unwind of discount 41 124
------------------------------------------ ------- -------
Charged to (loss)/profit before tax 2,837 2,399
------------------------------------------ ------- -------
6. Taxation
The charge based on the profit for the year comprises:
2019 2018
GBP'000 GBP'000
UK corporation tax
- current tax on profits for the year 1,925 3,865
- adjustment in respect of prior years (86) (558)
---------------------------------------------------------------- -------- --------
Total current tax 1,839 3,307
UK deferred tax
Origination and reversal of timing differences in respect of:
- profit for the year (462) 1,740
- change in rate (90) (309)
- adjustment in respect of prior years (340) 540
- charge in respect of retirement benefit obligation 1,313 1,293
---------------------------------------------------------------- -------- --------
Total deferred tax 421 3,264
Total taxation charge for the year 2,260 6,571
---------------------------------------------------------------- -------- --------
2019 2018
GBP'000 GBP'000
(Loss)/profit before taxation (31,643) 34,049
(Loss)/profit before taxation at the standard rate of corporation tax in the UK of 19% (2018:
19%) (6,012) 6,469
Effects of:
- expenses not deductible for tax purposes 8,788 429
- adjustment in respect of prior years (426) (18)
- change in rate reflected in the deferred tax asset (90) (309)
Total taxation charge for the year 2,260 6,571
----------------------------------------------------------------------------------------------- --------- --------
7. Earnings per share
2019 2018
No. No.
Weighted average number of shares
For basic earnings per share 511,531,719 511,133,847
Share options in issue 4,787,062 4,730,273
------------------------------------------------------------- ----------- -----------
For diluted earnings per share 516,318,781 515,864,120
------------------------------------------------------------- ----------- -----------
2019 2018
GBP'000 GBP'000
Earnings
(Loss)/Profit attributable to equity holders of the company (33,903) 27,478
Adjustments:
Exceptional items 55,960 (723)
Tax on exceptional items (2,446) 137
------------------------------------------------------------- ----------- -----------
Adjusted profit attributable to equity holders
of the company 19,611 26,892
------------------------------------------------------------- ----------- -----------
2019 2018
Pence Pence
Earnings per share
Basic (6.63) 5.38
Diluted (6.63) 5.33
--------------------- ------ -----
Adjusted basic(1) 3.83 5.26
Adjusted diluted(1) 3.80 5.21
--------------------- ------ -----
1 For the definition and purpose of the alternative performance
measure stated here and used subsequently throughout this document,
please see the glossary. The glossary also provides a
reconciliation to the closest equivalent IFRS measure.
8. Goodwill
Total
Consolidated GBP'000
------------------------------------------------- --------
Cost
At 1 April 2017, 31 March 2018 and 31 March 2019 85,272
------------------------------------------------- --------
Provisions for impairment
At 1 April 2017 and 31 March 2018 33,900
Charge for the period 51,372
------------------------------------------------- --------
At 31 March 2019 85,272
------------------------------------------------- --------
Net book value
At 31 March 2019 -
------------------------------------------------- --------
At 31 March 2018 51,372
------------------------------------------------- --------
At 1 April 2017 51,372
------------------------------------------------- --------
Goodwill acquired in a business combination is allocated at the
date of acquisition to the cash generating unit (CGU) that is
expected to benefit from that business combination.
CGUs represent the smallest identifiable groups of assets that
generate cash inflows that are largely independent of the cash
inflows from other groups of assets. As in previous years, KCOM's
CGUs are based on customer type and geographic service
location.
Goodwill is tested annually for impairment, or more frequently
if there are indications that goodwill may be impaired. The key
assumptions for the value in use calculation relate to forecast
cash flows, discount rate and growth rate. The Directors estimated
the discount rate using a pre-tax rate that reflects current market
assessments of the time value of money and the level of risk. The
growth rate reflects the long-term growth rate prospects for the UK
economy. The estimates used within the value in use calculation
takes into account historical experience and the Board's estimate
of future events.
The discount rate and growth rate (in perpetuity) used for value
in use calculations are as follows:
2019 2018
---------------------------------------------------- ---- ----
Discount rate (pre-tax) Enterprise % 9.6 12.0
Discount rate (pre-tax) National Network Services % 8.2 9.4
Terminal value growth rate % 2.0 2.0
---------------------------------------------------- ---- ----
The discount rate was a pre-tax measure based on the rate of
10-year UK Government bonds, being the relevant market and in the
same currency as the cash flows, adjusted for a risk premium to
reflect both the increased risk of investing in equities generally
and the systematic risk of KCOM and the relevant CGU.
Three years of cash flows were included in the discounted cash
flow models. A long-term growth rate into perpetuity has been
determined as the lower of the nominal gross domestic product (GDP)
rate for the UK and the long-term compound annual EBITDA growth
rate estimated by management.
Budgeted EBITDA was based on expectations of future outcomes
taking into account past experience and our anticipation of future
growth. The cash flow forecast was prepared by using the latest
Board approved operating budget. The forecast covers a three-year
period and an appropriate extrapolation of cash flows beyond this
point into perpetuity based on the above assumptions.
Revenue in the Group's National Network Services segment has
continued to fall. This decline reflects continued churn and a
performance well below the underlying market for its services. This
performance led to the Directors' decision to impair the full
carrying value of goodwill of GBP32.2 million for this CGU, in the
first half of the year. There has been no change to this assessment
at the year end.
An impairment charge of the full value of the goodwill allocated
to the Enterprise CGU, of GBP19.1 million, has also been recorded.
At the half year, the carrying value of KCOM's Enterprise CGU
goodwill balance was supported by the Group's medium/ long term
cashflow forecasts. In the second half of the year, and as part of
the Group's strategic review, the Group's cashflow forecasts were
updated to reflect a reduction in Enterprise's growth expectations
due to the long term cashflows expected from major customers and
change in the Group's national focus towards core connectivity. As
a result of these updated cashflow forecasts the Group's Enterprise
CGU goodwill balance has been fully impaired.
Management also considered the carrying value of goodwill in the
context of the acquisition of KCOM detailed in Note 13, including
whether on a fair value less cost to sell basis this would impact
the impairment decision. This did not change the conclusion that
there is a full impairment of both the Enterprise and National
Network Services goodwill.
Following both impairments, the Group reassessed the
depreciation policies of its property, plant and equipment in both
CGUs and estimated that their useful lives would not be affected
following this decision. No class of asset other than goodwill was
impaired. The combined impairment charge of GBP51.4 million has
been treated as an exceptional item in line with the Group
accounting policies.
Following the Group's impairment charge, the carrying amount of
goodwill is GBPNil (31 March 2018: GBP51.4 million):
CGUs 2019 2018
-------------------------- ---- ------
Enterprise - 19,125
National Network Services - 32,247
-------------------------- ---- ------
Total - 51,372
-------------------------- ---- ------
9. Dividends
2019 2018
GBP'000 GBP'000
Final dividend for the year ended 31 March 2017 of 4.00 pence per share - 20,664
Interim dividend for the year ended 31 March 2018 of 2.00 pence per share - 10,332
Final dividend for the year ended 31 March 2018 of 4.00 pence per share 20,664 -
Interim dividend for the year ended 31 March 2019 of 1.00 pence per share 5,166 -
--------------------------------------------------------------------------- -------- --------
Total 25,830 30,996
--------------------------------------------------------------------------- -------- --------
No final dividend has been declared for the year ended 31 March
2019, see Note 13 for further details.
10. Retirement benefit obligation
The movements in the net defined benefit obligation over the
year and the amounts recognised in the balance sheet are detailed
below:
Main Data
scheme scheme Total
GBP'000 GBP'000 GBP'000
At 1 April 2018 (2,719) (4,788) (7,507)
Net finance costs 13 (89) (76)
Net administrative expenses (799) (735) (1,534)
Contributions under asset-backed partnership 2,456 336 2,792
Deficit repair payments 4,656 2,314 6,970
Actuarial remeasurements 2,317 584 2,901
At 31 March 2019 5,924 (2,378) 3,546
---------------------------------------------- -------- -------- --------
Main Data
scheme scheme Total
GBP'000 GBP'000 GBP'000
At 31 March 2018
Present value of defined benefit obligations (221,282) (40,502) (261,784)
Fair value of plan assets 218,563 35,714 254,277
---------------------------------------------- ---------- --------- ----------
(Deficit) (2,719) (4,788) (7,507)
---------------------------------------------- ---------- --------- ----------
At 31 March 2019
Present value of defined benefit obligation (221,969) (40,781) 262,750
Fair value of plan assets 227,893) 38,403 (266,296)
---------------------------------------------- ---------- --------- ----------
Surplus/(Deficit) 5,924 (2,378) 3,546
---------------------------------------------- ---------- --------- ----------
Principal financial assumptions
2019 2018
------------------------ ------------------------
Main scheme Data Scheme Main scheme Data Scheme
% % % %
RPI inflation 3.20 3.20 3.10 3.10
CPI inflation 2.20 2.20 2.10 2.10
Rate of increase to pensions in payment 2.02 3.79 1.93 3.78
Discount rate for scheme liabilities 2.35 2.35 2.50 2.50
---------------------------------------- ----------- ----------- ----------- -----------
11. Movement in net debt
2019 2018
GBP'000 GBP'000
Opening net debt (62,605) (42,433)
Closing net debt (107,200) (62,605)
--------------------------------------------------- --------- --------
Increase in net debt in the year (44,595) (20,172)
--------------------------------------------------- --------- --------
Reconciliation of movement in the year
Net cash flow from operations 19,736 54,498
Cash capital expenditure (37,467) (43,935)
Proceeds on sale of property, plant and equipment 451 517
Interest (2,315) (1,601)
Dividends (25,830) (30,996)
Purchase of ordinary shares (450) (450)
Finance leases(1) 1,589 2,029
Other (309) (234)
--------------------------------------------------- --------- --------
Increase in net debt in the year (44,595) (20,172)
--------------------------------------------------- --------- --------
(1) Represents the movement in finance lease liabilities during the year.
Net debt comprises:
2019 2018
GBP'000 GBP'000
Cash and cash equivalents (including bank overdrafts) 7,347 13,223
Bank loans (114,129) (73,821)
Finance leases (418) (2,007)
------------------------------------------------------- --------- --------
Net debt (107,200) (62,605)
------------------------------------------------------- --------- --------
12. Related party transactions
The remuneration of the Directors who are key management
personnel of KCOM Group PLC are disclosed in the audited part of
the Directors' Remuneration report in the Annual report and
accounts.
There are no other material related party transactions.
13. Subsequent events
Acquisition of KCOM Group PLC
On 24 April 2019, Humber Bidco Limited, a wholly-owned indirect
subsidiary of Universities Superannuation Scheme Limited, announced
a recommended cash offer for the entire issued and to be issued
ordinary share capital of KCOM for 97.0 pence per share. On 3 June
2019, MEIF 6 Fibre Limited, a wholly-owned indirect subsidiary of
Macquarie European Infrastructure Fund 6 SCSp (an investment fund
managed by Macquarie Infrastructure and Real Assets (Europe)
Limited), announced a recommended cash offer for the entire issued
and to be issued ordinary share capital of KCOM for 108.0 pence per
share. Both offers were to be effected by way of a Scheme of
Arrangement.
As a result of there being a competitive situation, and in order
to provide an orderly framework, the Takeover Panel ruled that the
auction procedure set out in Appendix 8 of the Takeover Code would
apply. The auction process ended on 12 July 2019 after which the
KCOM board recommended unanimously the revised MEIF 6 Fibre offer
of 120.3 pence per share.
The reconvened Court Meeting and General Meeting relating to the
MEIF 6 Fibre offer took place on 26 July 2019 at which 99.48% and
99.52% repsectively of shares voted were in favour of the Scheme.
The Company obtained Court approval for the Scheme on 30 July 2019,
which will see the Scheme become effective and the shares will be
de-listed in early August 2019. An announcement will be made
following the conclusion of this process.
Significant agreements - change of control
The following significant agreements contain provisions
entitling the counterparties to exercise termination or other
rights in the event of a change of control of the Company:
-- Under our GBP180.0 million multi-currency revolving facility
agreement dated 30 September 2016, the Company must notify Lloyds
Bank PLC, the Agent of the agreement, within seven days of becoming
aware of a change of control of the Company. Any bank or financial
institution named within the facility agreement may then notify the
Agent within seven days that they wish to cancel their commitments.
The Agent must then give at least 21 days' notice to the Company of
this and all outstanding amounts due to that bank or financial
institution will become immediately due and payable. For these
purposes, a 'change of control' occurs if any person or group of
persons acting in concert gains control of the Company. At 31 March
2019, the Group had borrowings or GBP115.0 million.
-- The Company's share schemes, details of which can be found in
the Remuneration report on pages 54 to 64 of Group's annual report
and accounts for the year ended 31 March 2019 which can be found on
the KCOM Group PLC's website: www.kcomplc.com, contain provisions
which take effect in the event of a change of control, as a result
of which options and awards may vest and become exercisable. The
provisions do not entitle participants to a greater interest in the
shares of the Company than that created by the initial grant or
award under the relevant scheme. At 31 March 2019, the Group had
4,787,062 share options outstanding.
Dividend
At the half year, the Group declared and paid an interim
dividend of 1.00 pence per share (2018: 2.00 pence per share). As
the acquisition of KCOM by MEIF 6 Fibre is due to complete in
August, the Board did not declare a final dividend for the year
ending 31 March 2019 (2018: 4.00 pence per share). Consequently,
the full year dividend is 1.00 pence per share (2018: 6.00 pence
per share).
Directors' responsibility statement
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare
financial statements for each financial year. Under that law, the
Directors have prepared the Group and Company financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union (EU). Under company law,
the Directors must not approve the financial statements unless they
are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the profit or loss of
the Group for that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether applicable IFRSs as adopted by the EU have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and the
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and the Company and enable
them to ensure that the financial statements and the Directors'
Remuneration report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS
Regulation. The Directors are also responsible for safeguarding the
assets of the Group and the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the Group's website, www.kcomplc.com. Legislation in the United
Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Signed by Order of the Board on 31 July 2019 by:
Glossary
Alternative Performance Measures
In response to the Guidelines on Alternative Performance
Measures (APMs) issued by the European Securities and Markets
Authority (ESMA), we have provided additional information on the
APMs used by the Group. The Directors use the APMs listed below as
they are critical to understanding the financial performance of the
Group. As they are not defined by IFRS, they may not be directly
comparable with other companies who use similar measures.
Measure Closest equivalent IFRS Definition and purpose Reconciliation to closest
measure equivalent IFRS measure of
performance
Profit measures
EBITDA before exceptional Profit before tax EBITDA before exceptional A reconciliation of this
items ("EBITDA") items is the key measure measure is provided in Note
used by management to 3 of the financial
monitor the underlying information.
performance of the Group.
EBITDA before exceptional
items is also reported to
the Board, is
incorporated in banking
covenants and is an
important measure for
setting remuneration.
EBITDA
before exceptional items is
important to the users of
the accounts as it assists
with comparing
performance from previous
periods. The items
classified as exceptional
items are described
in Note 4.
EBITDA before exceptional
items is defined as 'profit
before tax' before share of
profit before
associates, finance costs,
amortisation, depreciation
and exceptional items.
---------------------------- ---------------------------- ----------------------------
Adjusted basic earnings per Basic earnings per share This provides additional A reconciliation of this
share information regarding measure is provided in Note
earnings per share 7 of the financial
attributable to the information.
underlying
activities of the business.
Basic earnings per share
based upon profit after tax
adjusted for the impact of
exceptional
items.
---------------------------- ---------------------------- ----------------------------
Adjusted diluted earnings Diluted earnings per share This provides additional A reconciliation of this
per share information regarding measure is provided in Note
diluted earnings per share 7 of the financial
attributable to information.
the underlying activities
of the business.
Diluted earnings per share
based upon profit after tax
adjusted for the impact of
exceptional
items.
---------------------------- ---------------------------- ----------------------------
Cash flows and net debt measures
Net debt Cash and cash equivalents, Net debt is important as it A reconciliation of this
bank overdrafts, finance allow management to assess measure is provided in Note
leases (current and available funds by 11 of the financial
non-current) and bank calculating how information.
loans much headroom there is
within the Group's
borrowing facilities. It is
used in the monitoring,
reporting and planning of
cash flows, and for the
purpose of monitoring
compliance with the
terms of the Group's
Facilities. Net debt to
EBITDA is a key ratio used
by external stakeholders.
Net debt is cash and cash
equivalents, bank
overdrafts, finance leases
(current and non-current)
and bank loans.
---------------------------- ---------------------------- ----------------------------
Cash capital expenditure Net cash used in investing A proportion of our capital Reported in the
activities expenditure is obtained consolidated cash flow: Net
under financing cash used in investing
arrangements therefore, activites (GBP35.4 million)
compared to captial add back proceeds from sale
additions, this measure of property, plant and
allows management to equipment (GBP0.5 million)
monitor, report and plan plus capital
the cash flows relating to element of finance lease
capital projects. This repayments (GBP1.6
measure is important to the million).
users of the
accounts as it provides the
outflow of cash expenditure
in the current year
relating to assets
purchased in current and
prior years.
Cash capital expenditure is
net cash used in investing
activities before proceeds
from sale
of property, plant and
equipment plus capital
element of finance lease
repayments.
---------------------------- ---------------------------- ----------------------------
Underlying working capital No direct equivalent This measure is used by Increase in working capital
movement management as it provides a quoted in consolidated
more appropriate reflection cashflow (GBP24.1 million)
of the working less decrease
capital movement by due to exceptional items
excluding certain movements quoted in Note 4 (GBP0.1
relating to exceptional million).
items.
Underlying working capital
movement is working capital
movement less working
capital movement
due to exceptional items.
---------------------------- ---------------------------- ----------------------------
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END
FR MMGFNLGRGLZM
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