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

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July 31, 2019 02:01 ET (06:01 GMT)

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