Annual Report • Mar 31, 2019
Annual Report
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Annual Report
01 Highlights
02 Chief Executive Officer's statement
The Group's Digital Services include full lifecycle development and support of customised Digital Services for government and commercial customers. Kainos is also the leading boutique partner for Workday, Inc. ('Workday') in Europe, responsible for implementing Workday's innovative Software-as-a-Service (SaaS) platform for enterprise customers.
The Group's Digital Platforms comprise specialised digital products in the mobile healthcare and automated testing arenas. Smart is an automated testing platform for Workday customers; Evolve Electronic Medical Records (EMR) is the market-leading product for the digitisation of patient notes in the Acute sector of the NHS.
Kainos has 1,470 people across 12 offices in Europe and North America, working interchangeably across its Services and Platforms businesses.
Kainos is listed on the London Stock Exchange (LSE: KNOS).
For further information, please visit www.kainos.com
SaaS and software-related revenues up 6% to £16.9 million (2018: £15.9 million).
Very strong revenue growth in Digital Services, up 69% to £132.6 million (2018: £78.6 million).
| 2019 | 2018 | Change | |
|---|---|---|---|
| Revenue | £151.3m | £96.7m | 56% |
| Adjusted pre-tax profit1 | £23.3m | £15.3m | 52% |
| Statutory profit before tax | £21.1m | £14.3m | 48% |
| Cash | £42.5m | £29.0m | 47% |
| Sales orders | £171.7m | £130.7m | 31% |
| SaaS sales orders | £18.4m | £13.3m | 38% |
| Backlog2 | £122.2m | £110.7m | 10% |
| Adjusted diluted earnings per share1 | 15.4p | 10.4p | 48% |
| Diluted earnings per share | 13.9p | 9.6p | 45% |
| Proposed total dividend | 9.3p | 6.6p | 41% |
1 Adjusted measures are based on reported statutory profit numbers excluding the effect of share-based payments. Reconciliations between the reported and adjusted measures are included in the Financial Review.
2 The value of contracted revenue that has yet to be recognised.
The Group's pipeline of prospects continues to strengthen across all divisions and the Board believes that the Group is well-positioned for growth. In what is our ninth consecutive year of growth, I am pleased to report the strongest annual performance in that period, with significant increases in the number of people working in Kainos and in sales, revenue and adjusted pre-tax profit growth.
In Digital Transformation we continue to deliver significant programmes in partnership with UK government and with leading commercial and international clients. In what is now a familiar pattern, our growth is fuelled by demand from both existing and new clients.
Within Workday Implementation we continue to be the European partner of choice for forward-thinking organisations that are choosing Workday's innovative Software-as-a-Service platform to support their people and finance requirements. To support our growing international client base, we have opened offices in Paris and Toronto in 2019, alongside existing offices in Amsterdam, Copenhagen, Frankfurt, Gdansk and Atlanta.
Smart, our market-leading Software as a Service (SaaS) platform for automated testing of the Workday suite, continues to win global brands as customers, adding Home Depot, Prudential and Vassar College during the year.
As a Group, our healthcare-related revenues have grown strongly, however Evolve, our market-leading Electronic Medical Records (EMR) solution for the NHS continues to experience the headwinds within the NHS funding landscape.
As a Group, we remain focused on providing exceptional careers for our staff and exceptional digital products and services for our customers. The Group's pipeline of prospects continues to strengthen, and the Board believes that the Group is well-positioned for growth both in the short term and in the coming years.
Dr Brendan Mooney Chief Executive Officer
The financial results for the year ended 31 March 2019 represent the ninth consecutive year of revenue and adjusted pre-tax profit growth; the success in winning projects with new and existing customers provides an excellent platform for future growth.
Revenue for the year ended 31 March 2019 grew by 56% to £151.3 million (2018: £96.7 million). Adjusted pre-tax profits increased by 52% to £23.3 million (2018: £15.3 million), which also included £4.3 million in R&D expensed in the year (2018: £4.9 million).
Sales orders for this period amounted to £171.7 million (2018: £130.7 million), a total that included £18.4 million (2018: £13.3 million) of SaaS product sales orders, an increase of 38%. The contracted backlog for the Group increased by 10% to £122.2 million (2018: £110.7 million). The proportion of revenue generated from customers outside the UK increased by 44% in 2019 and now accounts for 19% of total Group revenue (2018: 21%).
Staff and contractor numbers increased by 301 to 1,470 at 31 March 2019 (2018: 1,169). The Group continues to attract very strong interest from both graduates and experienced senior candidates in key employment markets, with 21,890 job applications received during the year; 73% of people joining Kainos were recruited directly rather than via recruitment agencies (2018: 80%). Employee engagement remains high, although the Group placed outside the Sunday Times Top 100 'Best Companies to Work For' for the first time in seven years. Attrition across the Group rose to 15% (2018: 13%) but remains below UK average (19.7%)3.
Customer satisfaction remains high, with 91% of customers rating Group service 'good' or better. This high level of customer service underpins the Group's long-term customer relationships, with existing customers accounting for 88% of Group revenue (2018: 86%). In the year to 31 March 2019, the Group acquired 68 new customers, making a total of 362 active customers.
Across sectors, 59% of revenue is derived from government customers (2018: 56%), 27% from commercial sector (2018: 30%) and 14% from healthcare (2018: 16%). Commercial sector revenue grew 42% to £40.0 million (2018: £28.1 million).
In the year ended 31 March 2019, Digital Services experienced very strong growth across both Digital Transformation (a 70% increase) and Workday
Implementation (a 63% increase) service lines. Digital Transformation continues to play a major role in the UK government's digitisation programme, with ongoing demand from existing customers and with an increasing number of programmes for commercial customers. Workday Implementation experienced very strong growth with increased demand from existing customers, new customer acquisition and geographic expansion. The appointment of Kainos as a Workday partner in France and Canada and the subsequent opening of the Paris and Toronto offices provides the platform for further growth.
In the Digital Platforms division, the Kainos Smart automated testing platform continued its growth trajectory, adding further global customers during the period to bring the total number of customers on the platform to 154 at 31 March 2019.
The funding landscape within the NHS continues to be challenging and this has had an impact on Evolve revenues, decreasing by 27% to £7.5 million (2018: £10.3 million), which is in line with previous guidance.
Finally, the Group finished the year with a strong net cash balance of £42.5 million at 31 March 2019 (2018: £29.0 million), representing 100% cash conversion (2018: 96%).
The strategy of the Group is to achieve sustained revenue, adjusted pre-tax profit and cash flow growth in its chosen markets through:
Revenue 2019
£151.3m
Kainos achieved revenue of £151.3 million (2018: £96.7 million), representing an increase of 56%. Digital Services revenue grew 69% to £132.6 million (2018: £78.6 million) which was driven by growth in both Digital Transformation and Workday Implementation. Whilst the headline Digital Platform revenue increased by a modest 3% to £18.7 million (2018: £18.1 million), this is a combination of 45% growth in Smart to £11.3 million (2018: £7.8 million) and a decline of 27% in Evolve to £7.5 million (2018: £10.3 million).
Overall gross margin was 46% (2018: 48%) with Digital Services decreasing to 44% (2018: 46%), whilst Digital Platforms gross margin decreased to 56% (2018: 59%). The reduction in Digital Services gross margin was mainly a result of increasing the number of contractors to support the significant revenue growth and the geographic expansion within Workday Implementation services. The decrease in gross margin for Digital Platforms was due to the decline in Evolve revenue as noted below.
Operating expenses excluding share-based payments for 2019 increased by 47% to £45.9 million (2018: £31.3 million). This increase is in line with revenue growth and relates to the geographic expansion and sales investment within the Digital Services division. Within Digital Platforms one loss-making contract was identified which resulted in an onerous contract provision of £1.0 million. Investment in product development has reduced to £4.3 million (2018: £4.9 million), due to a reduction in staff involved in Evolve product development which was partially offset by a growth in Smart product development. All product
development costs were expensed in the period. Research and Development Expenditure Credit (RDEC) grants recognised in the period totalled £2.0 million (2018: £2.8 million).
The share-based payment expense incurred in the period was £2.2 million (2018: £1.1 million). This increase relates mainly to social security costs associated with vesting of share awards. Adjusted pre-tax profit increased by 52% to £23.3 million (2018: £15.3 million). Statutory profit before tax increased by 48% to £21.1 million (2018: £14.3 million). The adjusted profit measures can be reconciled to the reported statutory numbers as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Statutory profit before tax | 21,125 | 14,251 |
| Share-based payments | 2,196 | 1,096 |
| Adjusted profit before tax | 23,321 | 15,347 |
| 2019 (£000s) |
2018 (£000s) |
|
| Statutory profit after tax | 16,939 | 11,666 |
| Share-based payments (net of associated taxes) |
1,823 | 910 |
The effective tax rate for 2019 was 20% (2018: 18%). The 2019 effective tax rate was above the UK corporation tax rate due to increased overseas activity. Going forward we expect the effective tax rate to be broadly in line with the UK corporation tax rate.
The Group continues to have a strong financial position with £42.5 million of cash (2018: £29.0 million), no debt and net assets of £48.2 million (2018: £35.7 million). Cash conversion, calculated by taking cash generated by operations over EBITDA4, continued to be strong at 100% (2018: 96%). The combined underlying trade debtor and accrued income totalled £37.5 million (2018: £25.8 million) with the increase of 45% in line with expectations given revenue growth. The Group has acquired a site for the development of Kainos' future Belfast headquarters, as announced on 12 February 2019. The purchase price is £7.1 million, with a 10% deposit paid during the period and the balance due upon completion, which is expected on 3 June 2019. The purchase will be funded using cash on the statement of financial position.
4 EBITDA is calculated as being adjusted pre-tax profit add back depreciation and finance income.
Consistent with the guidance set out in the 2015 Prospectus, the Group has adopted a progressive dividend policy, maximising shareholder return alongside retaining sufficient funds in the Group to invest in long-term growth. Kainos has consistently been profitable and has generated a strong cash balance. The final dividend, if approved by shareholders, will be 6.5p and payable on 25 October 2019 to shareholders on the register on 27 September 2019, with an ex-dividend date of 26 September 2019. This will make the total dividend for the year 9.3p (2018: 6.6p) which will represent a distribution of 60% of the adjusted profit after taxation for the year (2018: 63%).
The Digital Services division comprises two areas of activity:
Digital Services revenue for the year ended 31 March 2019 grew by 69% to £132.6 million (2018: £78.6 million). Digital Services revenue from customers in commercial sectors accounted for £29.8 million (2018: £20.8 million), an increase of 43%. Sales orders in Digital Services increased by 38% to £149.1 million (2018: £108.4 million) and backlog for the division increased by 14% to £80.6 million (2018: £70.6 million).
Despite the Brexit debate continuing to generate uncertainty within the wider UK economy, Digital Transformation delivered 70% growth, underpinning previous guidance that there was minimal negative impact to the programmes with which Kainos has been involved. Furthermore, the Group believes that there will
be significant IT change as a result of the EU Exit, with over 300 IT systems impacted, which will present growth opportunities; the challenge, as with Brexit in general, is predicting when this will occur.
Within central government, Kainos continues to consolidate our position across key accounts, extending our services to deliver a number of the most high profile digital programmes including the Passport Application service for Home Office and the recently launched NHS App for NHS Digital. We also continue to expand our footprint in large scale digital services including the Courts Reform programme for Ministry of Justice and have commenced a two year digital partner programme with Land Registry.
Progress continues in the commercial sector, both within the UK and in Germany where contracts have been signed with Concardis and Skeyos. The partnership with NHS Digital continues to strengthen, with Kainos having a leading role in the delivery of the NHS App. The NHS App entered private beta in September 2018 and is presently being rolled out across England with a national launch planned for September 2019.
Looking forward, the Group remains optimistic about the future of digitisation in the UK public sector and is confident that it is well positioned to maintain a central role in public sector transformation. In the near term, there is an increased possibility that Brexit, a general election and a spending review all occur within a similar timeframe. Whilst this is unlikely to disrupt in-flight programmes, it may cause the deferral of significant new programmes by a number of months.
Outside of UK public sector, a growing reputation in the commercial sector, opportunities within NHS Digital and international expansion, most particularly in Germany, are expected to generate further long-term growth for the Group.
The UK public sector is now a key market for Workday and Kainos has been instrumental in securing early customers.
Kainos first engaged with Workday in 2010 and is now one of the most experienced participants in Workday's partner ecosystem. Kainos remains the only boutique Workday partner headquartered in the UK and one of only 34 partners globally accredited to implement Workday's innovative SaaS platform.
Within Europe, Kainos continues to consolidate its position as a leading Workday partner, being appointed as a partner in France during the period. This leadership position is a result of geographic expansion and high satisfaction levels within the Kainos customer base, but is also aided by the consolidation within the partner ecosystem5.
Kainos has continued its geographic expansion, with the opening of an office in Paris in January 2019 to support growth within the French market. This is in addition to offices opened in Copenhagen (2017 to develop the Nordic markets of Denmark, Sweden, Norway and Finland), Amsterdam (2015, covering Belgium, Netherlands and Luxembourg) and Frankfurt (2017, covering Germany, Austria and Switzerland). Kainos now has 45 clients for Workday Implementation in mainland Europe (2018: 29).
In North America, Kainos has been appointed partner for Canada (October 2018) and has already secured eight customers; an office has been opened in Toronto in 2019 to support this expansion within this market. Within the US, Kainos is delivering two Workday Financials projects for clients that have substantial international operations.
The UK public sector is now a key market for Workday and Kainos has been instrumental in securing early customers. Of the eight deals signed by Workday to date, Kainos is undertaking the implementation with seven customers and Workday is delivering the remaining project directly. Kainos customers include Crown Commercial Services and the Department for Education.
5 Recent transactions include the Appirio acquisition by Wipro (2016), DayNine by Accenture (2016) and Ataraxis by HR Path (2018). In 2016, Wipro acquired Appirio, a boutique Workday and Salesforce consultancy, in 2019 Alight acquired the Workday elements of the Appirio business from Wipro, for a reported \$110 million, with 350 consultants joining Alight. In addition to the delivery of Workday for new customers, Kainos is increasingly involved in supporting the operation of customers that are already live on the Workday platform. This annuity-style revenue stream, described as Post Deployment Services, accounts for £8.8 million revenue (2018: £4.5 million) and has 84 customers (2018: 44).
The number of accredited Workday consultants in the Group's Digital Services division has increased by 48% to 251 people (2018: 170 people).
Looking forward, growth prospects remain very strong, driven by geographic expansion, increased penetration within the UK public sector and the further development of the Post Deployment Services offering. These prospects are, in turn, underpinned by very strong revenue growth at Workday Inc.
The Digital Platforms division comprises two discrete platforms:
In aggregate, Digital Platforms revenue for the 12 months ended 31 March 2019 increased by 3% to £18.7 million (2018: £18.1 million). Sales orders for Digital Platforms increased by 1% to £22.6 million (2018: £22.3 million) of which sales orders for the Group's SaaS platforms increased by 38% to £18.4 million (2018: £13.3 million).
Within Smart, revenue for the period increased by 45% to £11.3 million (2018: £7.8 million), of which £9.4 million relates to SaaS subscriptions (2018: £6.4 million). New sales bookings for the period amounted to £20.2 million (2018: £10.7 million), an increase of 88%. The Annual Recurring Revenue (ARR) for Smart at period end was £11.0 million (2018: £7.1 million); backlog for Smart is £22.8 million (2018: £14.2 million).
The ongoing funding constraints within the NHS continue to impact Evolve revenues. Despite a stable maintenance revenue stream, there has been a reduction in revenue, decreasing 27% to £7.5 million (2018: £10.3 million). Sales orders for the period amounted to £2.4 million (2018: £11.5 million), suggesting no material increase in revenues in the short term.
Smart is now used by 154 global customers to automatically verify their Workday configurations (2018: 115). Kainos has four Smart modules: HCM, Security, Financials and Payroll.
Workday Inc. has a Platform-as-a-Service offering known as Workday Cloud Platform (WCP), which is expected to have general availability by late 2019. Kainos has been part of the early adopter programme since 2017, and while WCP is at an early stage it may offer new future growth opportunities – such as additional IP development for Kainos or specialised development services to other Workday customers and partners.
Looking forward, continued strong growth for Smart will be powered by increased penetration of Smart in the Workday Inc. customer base, by expansion of the Workday customer base itself and by the development and adoption of new Smart modules.
Evolve EMR continues to be a leading supplier to the NHS and is now deployed at enterprise scale across 30 Health Trusts, managing over 2.0 billion images with 39 million patients registered on the system.
The dominant feature of the UK NHS market is that of restricted funding, which has significantly reduced procurement activity across the sector. Within the existing client base, there is growing interest in migrating to Cloud EMR.
Looking forward, the Group believes that the opportunity for Evolve EMR growth remains in the longer term, with over 90 Health Trusts in England still to address their considerable paper challenge, representing an available market of c. £200 million. Near-term, expectations are for a continued, subdued market, offering limited growth opportunities.
Kainos believes that the future success of the organisation is dependent upon the capability of the people working in the Group and the People Development Plan focuses on the key objectives of development, retention and recruitment.
The Group has 1,470 people working in Kainos (2018: 1,169), an increase of 301, of whom 12% are contractors (2018: 11%). Attrition across the Group rose to 15% (2018: 13%).
Kainos operates from the offices outlined in the table below, with the expectation that further locations will open based upon demand.
| Office | Opened People6 Address | ||
|---|---|---|---|
| Belfast | 1987 | 661 | 4-6 Upper Crescent, Belfast, BT7 1NT |
| Dublin | 1994 | 25 | 6-7 St Stephens Green, Dublin, D02 X827 |
| London | 2001 | 335 | 21 Farringdon Road, London, EC1M 3HA |
| Gdansk | 2007 | 276 | Tryton Business House, ul. Jana z Kolna 11, 80-864, Gdansk |
| Derry | 2012 | 40 | Timber Quay, Strand Road, BT48 7NR |
| Amsterdam 2015 | 6 | World Trade Center, Strawinskylaan 601, 1077 XX, Amsterdam, Tower A, Level 6 |
|
| Frankfurt | 2017 | 15 | The Square 12, Am Flughafen, 60549 Frankfurt am Main |
| Copenhagen 2017 | 11 | Rådhuspladsen 16, 3, 1550 Copenhagen V |
|
| Birmingham 2017 | 73 | Alpha Works Suffolk Street, Birmingham, B1 1TT |
|
| Atlanta | 2017 | 23 | WeWork Tower Place, 3340 Peachtree Road, Atlanta, Georgia |
| Toronto | 2019 | 2 | WeWork 100 University Avenue, Toronto, M5J 1V6 |
| Paris | 2019 | 3 | WeWork Lafayette, 33 Rue la Fayette, 75009 Paris |
6 Some staff will be classified as 'home workers' and may not actually spend much time in their designated office. There are 184 people classified as 'home workers', many of whom are contract staff.
Kainos continues to attract strong interest in key recruitment markets, with 21,890 applicants in the period (2018: 11,465). In total, 483 people joined Kainos (2018: 360), representing 2.2% of the original applicants (2018: 3%).
The Kainos Academy and associated programmes are central to the development of staff. During the reporting period, 7,911 training days were completed, an average of six days per employee. The Digital Academy has been central to the development of new capabilities in Cyber Security, Data, Machine Learning and Artificial Intelligence.
Employee wellbeing is a key priority and Kainos strives to be an excellent employer, the success of which is reflected in holding Sunday Times Top 100 Employer status from 2012 through to 2018, an accreditation that is entirely based upon employee feedback. On Glassdoor, the website allowing employees to anonymously review companies, 81% of reviewers would recommend working at Kainos.
Kainos provides a comprehensive range of benefits to support with financial security, such as Private Health Insurance, Life Insurance and Income Protection, and a comprehensive health plan, Healthshield. This includes subsidised gym membership, personal coaching, 24/7 counselling, health assessments and alternative therapies to assist staff and their families' health and wellbeing.
The Group operates a Share Incentive Plan for all staff. Including the annual awards made in December 2018 a total of 2,155,859 free shares have been distributed to staff. In addition, the Group operates SAYE schemes through which 2,340,985 options have been granted to staff.
The Group views it as part of its mission to promote awareness of digital technologies amongst school leavers and young people. Over the past five years, these outreach programmes have directly benefited the lives of over 5,000 young people in the UK and Ireland, catering for students from a range of socioeconomic backgrounds and with a high percentage of female students taking part.
The Group continues to expand its popular Earn as You Learn® apprenticeship scheme, which has proven particularly successful since its inception in 2013. Designed to encourage young people into the digital industry, Earn as You Learn® has allowed the Group to identify talent outside its traditional graduate recruitment pools. There are now 53 Earn as You Learn® recruits employed in Kainos, all of whom have been successfully integrated into operating divisions. It is expected that the scheme will expand further in the coming years to take advantage of the UK government's Apprentice Levy scheme.
Kainos is committed to being an inclusive and fair employer and the Group's 'Equality, Diversity and Inclusion Policy', published on the Kainos website, reiterates Kainos' commitment to creating equal opportunity for employees regardless of colour, nationality, gender, marital status, sexual orientation, age, religion, disability or any other characteristic protected by law.
During 2019, Kainos has improved inclusivity within recruitment practices, expanded innovative and flexible working options for Kainos employees and is striving to have more women in senior roles. Supporting the returners programme for people who have taken time out of the workplace, Kainos have co-hosted a Data Science Bootcamp with Microsoft, in Birmingham.
The Group also looks to encourage a wider range of ethnicities and means that today the Group employs staff with more than 36 different nationalities.
Gender Diversity remains a challenge within the wider industry, where 17% of roles in technology are undertaken by women7. Within Kainos, the proportion of women has increased to 30% (2018: 28%); 24% (2018: 26%) of manager level and above are female and 18% (2018: 20%) of executive management roles are held by women (compared to 5% nationally8). There are no female appointees to the Group Board although the Group is currently engaged in recruiting additional independent directors.
Kainos continues to seek opportunities to promote technology careers, particularly among female students, to improve the gender balance in the wider industry and as noted above 5,000 students have benefited from these programmes. The Kainos CodeCamp, aimed at students aged 14-17 had 197 participants in 2018, 40% of whom were female.
7 womenintech.co.uk.
8 PwC research report: Women in Tech.
The Group does not tolerate any slavery or human trafficking in any part of its business operations and takes a risk-based approach regarding its supply chains.
Kainos has a zero-tolerance approach to bribery and corruption and this is reflected in its anti-bribery policy, which forbids bribery or corruption of any type. In addition, there is a whistleblowing policy which allows employees the opportunity to report matters of significant concern to the Chairman of the Audit Committee and Company Secretary.
Those policies are periodically reviewed and updated where necessary so that they remain fit for purpose. The review includes identifying any new regions in which Kainos operates, changes in business practices and any recommendations received from local counsel that might require specific processes or procedures to be put in place to mitigate any actual or perceived increased risk. Kainos provides training and awareness raising programmes designed to ensure that employees understand the anti-bribery and whistleblowing policies.
Training on these policies is compulsory. The Audit Committee receives a report on the effectiveness of the anti-bribery and whistleblowing policies together with a summary of any known instances of bribery or corruption.
The Group uses a digital service to capture high-level customer feedback on client engagements. Data gathered in this way is submitted to an in-house Services Management solution and used to track and present key metrics in an easy to digest dashboard format.
Feedback is captured for quality of solution, services and people. In 2019, 152 customer engagement surveys were received. An overall feedback rating is also measured, and in 2019, 91% of responses gave Kainos an overall rating of 'Good or Above'.
The Group uses these statistics to inform its continuous improvement programme, which is designed to meet and often exceed customer expectations on every engagement.
Over the past five years, Kainos' outreach programmes have directly benefited the lives of over 5,000 young people in the UK and Ireland.
Within Kainos, Research and Development occurs within two models. Each operating division seeks to evolve current offerings and solutions to reflect changes or opportunities within the marketplace. These activities operate under the guidance and direction of the divisional Chief Technology Officer (CTO). This would include product enhancements to Evolve and Smart as well as extending existing service offerings such as Post Deployment Support in Workday Implementation or Service Design within Digital Transformation.
Future Technology trends and their application operates under the guidance of the Group CTO and the Applied Innovation team. Current areas of focus include Machine Learning, Virtual and Augmented Reality and Artificial Intelligence.
The Group aims to increase profitability while maintaining a healthy statement of financial position and investing in the operations and locations which underpin growth. It tracks a number of KPIs to identify trends in trading performance and to benchmark progress of key objectives, such as staff well-being and satisfaction. Financial KPI targets are used as a basis for remuneration awards and are identified in the Directors' Remuneration Report.
Total sales orders
2018 £130.7m
Revenue 2019 £151.3m
2018 £96.7m
Adjusted pre-tax profit
£23.3m
2018
2019
£15.3m
Overall customer satisfaction rating9 2019
91%
2018 99%
Number of customers 2019
362
2018 294 Staff attrition 2019
15%
2018
13%
Number of staff 2019
1,470
2018 1,169
9 Data collated from regular feedback surveys conducted with sub-set of Kainos customers over the course of the year.
There are a number of potential risks and uncertainties which could have a material impact on the Group's operations, its financial results, reputation or the value and liquidity of its securities and could cause actual results to differ materially from forecast and historic results.
During the year the Board carried out a robust assessment of the principal risks facing Kainos, including those that threaten its business model, future performance and solvency or liquidity.
The table below identifies the known principal risks. The table is not intended to be exhaustive and the principal risks are not listed in order of seriousness or potential impact. There may also be risks that are not currently considered to be serious or which are currently unknown and risks that are outside of the Group's control. Where reasonably possible, Kainos has taken steps to manage or mitigate the risks, or potential risks, but it cannot entirely safeguard against all of them. Additionally, and where feasible, Kainos has purchased reasonable levels of insurance, including cyber liability cover, to mitigate against the financial exposure arising from known or potential risk.
There has been no material change to Kainos' risk profile from previous years. The principal risks in this Annual Report reflect the underlying risk register and risk management processes. Key focus points this year have been the cyber threat faced by Kainos and staff engagement.
The Board considers its risk assessment processes to be robust and comprehensive.
| Principal risk | Type | Description | Potential impact on Kainos |
How the risk is mitigated |
|---|---|---|---|---|
| Operational risk | Cyber security risk |
Kainos relies upon the confidentiality, integrity and availability of its IT systems internally and as part of its service offerings to customers. Cyber security events are occurring more frequently, and attacks are designed with greater complexity. |
A major cyber security event causing loss of availability or loss of customer data could limit Kainos' operations, expose Kainos to fines (for example under GDPR) and/or contractual liability, negatively impact profit and cash flow in the short term, cause reputational damage, and damage customer relationships and credibility in the market. |
Kainos regularly reviews and improves its systems and processes in order to mitigate the risk of a cyber security event. These reviews include the Chief Information Officer, the legal function, business representatives and security specialists. The output of these reviews influences Kainos internal controls, processes and working practices at a Group infrastructure and customer project level. Mitigations include technical, operational and contractual measures to address risk coupled with regular staff training on information security and data privacy and management. Kainos has cyber liability insurance in place to mitigate the impact of a cyber security event. |
| Compliance with information security and data privacy laws and requirements |
General compliance with legal, regulatory and contractual information security and data privacy requirements. |
Non-compliance could expose Kainos to liability and fines (for example under GDPR), and negatively impact profit and cash flow in the short term, cause reputational damage and damage customer relationships and credibility in the market. |
Kainos reviews the impact of new information security and data privacy regulations and legislation on Kainos and its customers. The output of these reviews influences Kainos' internal controls and processes and the design of products, solutions and working practices. Kainos makes staff aware of the potential impact of changing regulations and provides targeted training within business divisions. |
| Principal risk | Type | Description | Potential impact on Kainos |
How the risk is mitigated |
|---|---|---|---|---|
| Operational risk | Employee action |
Fraud, theft or other disruptive actions by employees. |
Employee action could negatively impact Kainos operations, expose Kainos to liability and fines, and negatively impact profit and cash flow in the short term, cause reputational damage and damage customer relationships and credibility in the market. |
New staff are subject to background checks, provided with induction on Kainos policies and processes. All staff are required to complete regular training programmes. Systems and processes are in place to protect against data loss. Incidents are managed in accordance with the incident management processes. |
| Data loss | Loss of sensitive customer or employee data. |
Loss of customer or Kainos' data whether through a cyber security incident, employee action or otherwise could expose Kainos to liability and fines (for example under GDPR), and/or contractual liability, and negatively impact profit and cash flow in the short term, cause reputational damage and damage customer relationships and credibility in the market. |
Systems and processes are in place to protect against data loss, including data loss prevention technology. Measures are in place that are designed to ensure logical segregation to protect applicable data. |
|
| Solution or software product errors or lack of service availability |
Software bugs or lack of availability of hosted or supported services. |
This could expose Kainos to liability and negatively impact profit and cash flow in the short term, cause reputational damage and damage customer relationships and credibility in the market. |
Kainos designs its systems, customer solutions and infrastructure to provide both resilience and service availability. Kainos' software development lifecycle includes following coding practices, quality assurance and testing which are audited as part of Kainos' ISO9001 accreditation. Critical incident and problem management processes are in place and are audited as part of Kainos' ISO9001 accreditation. Professional indemnity insurance is in place. |
|
| Service deployment delays or non compliance with requirements |
Inability to deploy customer requirements for services to comply with contractual requirements in a timely manner. |
Project delay or failure could expose Kainos to liability, and negatively impact profit and cash flow in the short term, cause reputational damage and damage customer relationships and credibility in the market. |
Kainos has a proven track record of delivering successful projects and applies the staff and expertise to meet contractual requirements in a timely manner. |
| Principal risk | Type | Description | Potential impact on Kainos |
How the risk is mitigated | |
|---|---|---|---|---|---|
| Operational risk | Loss of key employees |
Loss of key employees who carry out critical activities across the business. |
Could harm Kainos' ability to provide solutions and services exposing Kainos to liability, negatively impacting profit and cash flow in the short term and causing damage to reputation and customer relationships, and staff morale. |
Kainos endeavours to ensure that key employees are remunerated appropriately, has a dedicated Staff Engagement Plan and actively monitors attrition for trends and key areas requiring attention. Kainos has developed a succession plan that addresses succession for senior management (including divisional management teams) in the case of unforeseen events, and also from the point of view of career progression for up and coming leaders. |
|
| Inability to recruit employees |
Failure to recruit employees with suitable qualifications at all required levels in core locations. |
This could impact Kainos' ability to provide contracted solutions and services exposing Kainos to liability, negatively impacting profit and cash flow in the short term and causing damage to reputation, customer relationships and staff morale. |
Kainos has worked to become an employer of choice in certain of its key locations, notably Belfast, Birmingham and Gdansk, and has implemented a team, processes and infrastructure dedicated to recruiting the most appropriate candidates in a streamlined hiring process. |
||
| Strategic risk | Intellectual property infringement and/or litigation |
Kainos' intellectual property (IP) is centred around the software and services it develops for customers. Kainos has to manage the risk of infringing a third party's intellectual property rights in its development of software and services. |
If Kainos infringes a third party's intellectual property rights it could expose Kainos to liability, negatively impact profit and cash flow in the short term and cause reputational damage. |
Kainos enters into non-disclosure agreements with employees, independent contractors and third parties in the ordinary course of its business to provide a degree of protection. Staff are made aware of client confidentiality requirements. |
|
| If a third party infringes Kainos' intellectual property rights it can expose the Group to competitive or security risk. |
Where practical, focused patent searches are undertaken to identify areas in which new products or services under development may conflict with third party IP. |
||||
| Kainos monitors the use of third party software in its product offerings. The choice of third party components is subject to technical review and assessment at design stage. |
|||||
| Employment and consultancy contracts have clauses to protect intellectual property. |
|||||
| Background checks are performed on employees. |
| Principal risk | Type | Description | Potential impact on Kainos |
How the risk is mitigated |
|---|---|---|---|---|
| Strategic risk | Partner relationships |
Removal of access to essential intellectual property or deterioration in strategic partner relationships. |
Failure of partner relationships could negatively impact profit and cash flow in the short term and cause reputational damage and damage market confidence and customer relationships. |
Kainos has entered into contracts with its main partners including Workday, to detail the relationship which may include secure access to proprietary materials including code, know-how and branding which the Group needs to deliver or enhance its services. Kainos partner managers have regular contact with key partners to maintain and build relationships. |
| Investment decisions |
Kainos' investment decisions may not be satisfactory. |
Failure to manage investment decisions could negatively impact profit and cash flow in the short term and cause reputational damage. |
Kainos undertakes regular strategic reviews using customer and market intelligence to inform and support its decision-making processes. |
|
| Macro economic risk |
Events occurring that are outside of Kainos' control |
Instability of the financial system, market disruptions or suspensions. Material downturn in the financial markets or economic recession. The insolvency, closure, consolidation or rationalisation of |
Could harm Kainos' revenue, profit, growth and cash flow over a sustained period. Could result in cost and disruption to Kainos' business. Could result in damage to Kainos' reputation or financial loss if customers do not renew their contracts. |
Kainos' business model includes both service and platform offerings, which lessens the immediate effect of downturns in individual end markets. Kainos' service line structure together with stakeholder engagement plans, regular dialogue with customers, research and marketing activities and regular strategic reviews of the overall business assist in maintaining a sustainable business. |
| parts of Kainos' customer base. |
| Principal risk | Type | Description | Potential impact on Kainos |
How the risk is mitigated |
|---|---|---|---|---|
| Financial risk | Risk of fraud or theft |
Unauthorised access or misuse of Kainos' bank accounts or other resources leads to loss of funds. |
Could harm Kainos' revenue, profit, growth and cash flow. |
System, review and approval controls are in place restricting access to accounts and are regularly monitored. |
| EU Exit | Financial or trading risks associated with the UK leaving the European Union. |
Potential to limit or harm Kainos' trading activities, overheads and staff mobility. |
The Group has evaluated scenarios associated with 'Brexit' and concluded that there is no substantial risk to operations in the next two to three years. The Group is not overly reliant on UK-EU trade, its most significant customers being UK public sector organisations. |
|
| Exchange rate fluctuations |
Material detrimental movements in foreign exchange rates. |
Could harm Kainos' revenue, profit, growth and cash flow over a sustained period. |
There is a documented treasury policy which is reviewed and approved annually to mitigate currency risk. |
|
| Legal and compliance risk |
Non compliance with laws and regulations |
Kainos has to comply with laws and regulations applicable to the Kainos group and design its products and services to meet laws and regulations applicable to |
Non-compliance could expose Kainos to liability and/or fines, negatively impact profit and cash flow in the short term and cause reputational damage. |
Kainos has dedicated finance and legal teams that review new draft and current regulatory and legislative requirements, including, for example, MiFID II and GDPR and provides an impact assessment for the products and services that the Group delivers to customers. Kainos' internal processes and |
| its customers. | systems are monitored with a view to ensuring compliance with applicable laws and regulations. |
|||
| Processes are in place designed to ensure awareness of regulatory requirements and the relevant information is appropriately disseminated. There are well established training and awareness activities. |
||||
| In relation to bribery and corruption, Kainos has an |
established anti-bribery policy.
Kainos recognises the importance of meeting globally recognised corporate responsibility standards.
Kainos endeavours to minimise energy and natural resource usage, support the reduction and recycling of materials and ensure the legal disposal of waste arising from the activities of the business. Kainos encourages employees to reduce their usage of those resources and sets policies and procedures to assist in this so that productivity is not negatively impacted.
With regard to greenhouse gas emissions, for the year ended 31 March 2019 the quantity of Scope 2 emissions by Kainos was 429.0 tonnes of carbon dioxide equivalent (CO2e), (2018: 444.4 tonnes).
The GHG Protocol Corporate Accounting and Reporting standard (revised edition) and emission factors from the UK government's GHG Conversion Factors Guidance 2013 were used to calculate the quantity of emissions. The standard requires a statement of relevant intensity ratios, which are an expression of the quantity of emissions in relation to a quantifiable factor of the business activity. Kainos has identified three such intensity ratios, set out below. These figures were calculated from data available for the Group's main operations and extrapolated to take account of its smaller locations. Scope 1 data has not been included as it is not considered to be material.
Ratios of carbon emissions to:
| 2019 | 2018 | |
|---|---|---|
| Total revenue | 0.00 | 0.00 |
| Operating profit | 0.02 | 0.03 |
| Employees | 0.29 | 0.38 |
The Strategic Report was approved by the Board and signed on its behalf by:
Brendan Mooney Chief Executive Officer 24 May 2019
This section of the outlines how the Board maintains high standards of corporate governance as well as providing a summary of how each of the Board's Committees function. This includes detailed Remuneration Committee, Nominations Committee and Audit Committee reports.
The Board believes in strong governance and recognises the importance of complying with the various aspects of the UK governance framework. Crucial to strong governance is a stable Board that contains the right balance of skills and experience; therefore, Board appointments are taken very seriously.
The Board continues to welcome interaction with shareholders and I and the other Non-Executive Directors (NEDs) are available for dialogue as an alternative to meetings with the Executive Directors.
Chairman
The directors present their report and the audited financial statements for Kainos Group plc (company number 9579188) for the year ended 31 March 2019. These will be laid before the shareholders at the Annual General Meeting (AGM) to be held on 26 September 2019. The Strategic Report is incorporated by reference into this Directors' Report.
All sections of the Annual Report contain certain forward looking statements which by their nature involve risk and uncertainty. The forward looking statements are based on the knowledge and information available at the date of preparation and on what are believed to be reasonable judgements. A wide range of factors may cause the actual results to differ materially from those contained within, or implied by, these forward looking statements. The forward looking statements should not be construed as a profit forecast.
The Board currently comprises a Chairman, three Independent NEDs and three Executive Directors. The serving directors are:
John is a Fellow of the Institute of Management Accountants and has been in the Information Technology industry for over 50 years. In 1997 he stepped down as Group Finance Director of ICL (now Fujitsu Services) after a long career with the Group in which he worked in the UK, Europe, US and the Far East filling roles in divisional management and various aspects of finance, including group CFO where he was responsible for acquisitions, disposals, start-ups and recovery programmes. In 2011 he was awarded an Honorary Doctorate from Queen's University, Belfast for services to commerce and industry. John has been Chairman of seven start-up companies, is a trustee director for a large pension fund and works for a prison reform charity. John acts as a Non-Independent Non-Executive Chairman and chairs the Nominations Committee.
Brendan joined Kainos in 1989 as a graduate software engineer before moving into a number of technical and commercial roles in Dublin, London and the US. He was appointed CEO of Kainos in 2001. In addition to his role at Kainos, Brendan has been a Non-Executive Director at Meridio, Property News, the Probation Service for Northern Ireland and has served as a Lay Magistrate. Brendan has received both an Honorary Doctor of Science (DSc) and an Honorary Doctor of Economics (DSc Econ) in recognition of the contribution that Kainos has made to the economy.
Richard is a Fellow of the Institute of Chartered Accountants in Ireland and trained with Coopers & Lybrand, before moving into industry with Galen Holdings plc. Richard joined Galen as financial controller of a start-up subsidiary in the US and subsequently became Senior Vice President in charge of Corporate Finance with responsibility for the organisation's acquisitions and investor relations. He served as the Managing Director of two subsidiaries in the Almac Group, including a US subsidiary that provides software development services for pharmaceutical companies. Richard joined Kainos in 2011, with over 20 years' experience in accounting and serves as the Chief Financial Officer and Chief Operating Officer.
Paul studied Engineering at Trinity College, Dublin. Before joining Kainos, Paul spent four years in a sales role with ICL (now Fujitsu) in Dublin and prior to that worked as a management consultant for Accenture in London. He started his professional career working for Siemens in Munich. He joined Kainos in 1998 as the sales manager for Ireland. Paul subsequently took on a Group-wide role in strategy and marketing, and until 31 March 2017 was SVP Sales, responsible for all product and service sales activities in Kainos. He is currently the SVP Business Development at Kainos, responsible for identifying new markets and opportunities for the Group.
Andy graduated with a BA (Hons) in Accounting and Finance from Lancaster University and is a Fellow of the Chartered Institute of Management Accountants. He has over 30 years' experience in the software industry covering both private and public companies. Most recently, Andy served as Group Finance Director of Fidessa Group plc (formerly Royalblue Group plc) which he joined in 1995, and where he has also been Company Secretary. In June 2018, Andy was appointed as a Non-Executive Director and chair of the Audit Committee of accesso Technology Group plc. Andy acts as Senior Independent NED and chairs the Audit Committee.
Chris holds a MA History from St Catharine's College, Cambridge. Chris runs a board advisory business focused on business performance improvement and digital transformation. He has previously served as Managing Director of Accenture's Telco, Media and Technology business in the UK and Ireland; Accenture's Telco Industry Managing Director for EMEA; COO/CTO of Accenture New Businesses; Chairman and CEO of Digiplug (an Accenture Digital business); and Managing Director of Value Partners Strategy Consulting business in the UK. Chris acts as an Independent NED and sits on the Audit Committee, Nominations Committee and Remuneration Committee.
Tom graduated with an MBA from the University of Edinburgh. Tom was previously CEO and Executive Chairman of AIM company accesso Technology Group plc, a leading supplier of technology platforms to the global leisure and attractions market, serving over 1,000 customers in over 30 countries. Tom retired from his position as Executive Chairman of accesso in 2019 but continues to serve on the accesso board. He is also Chairman of PCMS Group and Chairman of The Baillie Gifford US Growth Trust plc. He started his career as the UK's youngest Army Officer serving in the Black Watch (R.H.R.) and is a member of the Queen's Bodyguard in Scotland. At Kainos, Tom acts as an Independent NED; he sits on the Nominations Committee and chairs the Remuneration Committee.
The Board considers its overall size and composition to be appropriate, having regard to the experience and skills which the Board members bring together. When reaching its decision, the Board considered the independence criteria set out in paragraph B.1.1 of the Code. Given the due diligence carried out on their independence, prior to their appointment, the Board confirmed that Andy Malpass, Chris Cowan and Tom Burnet are independent in character and judgement. The Chairman, John Lillywhite, did not meet the independence criteria on appointment set out in the Code. The Board considers that John Lillywhite's long experience as Chairman of the Board of Kainos Software Limited (which, prior to the IPO, was the parent company of the Group) will be of benefit to the Board in providing continuity of knowledge of the Group. John Lillywhite will remain Chairman of the Board in the short term.
The Board confirms that, as supported by the results of the 2019 Board Evaluation exercise undertaken by the Nominations Committee, the performance of each of the directors continues to be effective and that they continue to demonstrate commitment to their roles, bringing their considerable commercial experience to Kainos.
The Senior Independent Director (SID), Andy Malpass, confirms that, as supported by the results of the 2019 Board Evaluation exercise, the performance of the Chairman continues to be effective.
Directors' interests in shares and share incentives in Kainos Group plc are detailed in the Directors' Remuneration Report.
At the date of this Directors' and Corporate Governance Report, indemnities are in force under which Kainos has agreed to indemnify the directors and the Company Secretary to the extent permitted by law and by Kainos Group plc's Articles of Association in respect of losses arising in their capacity as director or officer of any member of the Kainos Group. In addition, Kainos has purchased and maintained throughout the year directors' and officers' liability insurance in respect of itself and its directors and officers.
At 31 March 2019 the Board comprised the Chairman, three Executive Directors and three NEDs whose Board and Committee responsibilities are set out in the table below:
| Board | Audit | Remuneration | Nominations | ||
|---|---|---|---|---|---|
| John Lillywhite | Chairman | Chairman | – | – | Chairman |
| Brendan Mooney | CEO | Member | – | – | – |
| Richard McCann | CFO/COO | Member | – | – | – |
| Paul Gannon | SVP Business Development | Member | – | – | – |
| Andy Malpass | Senior Independent NED | Member | Chairman | – | – |
| Chris Cowan | Independent NED | Member | Member | Member | Member |
| Tom Burnet | Independent NED | Member | – | Chairman | Member |
The Board meets formally on a regular basis to monitor operating issues, risk and trading performance, to review forecasts, strategy and policy, to consider key projects and major investments and to oversee appropriate shareholder reporting. The Board is responsible for corporate governance and delegates operational control to the Executive Directors. During the year, the Board met on 10 scheduled occasions for this purpose. In addition, if required, impromptu Board meetings occur to consider specific issues as and when necessary. Meetings were held by the Chairman with the NEDs, without the Executive Directors present, to discuss the performance of the Executive Directors.
The Chairman and NEDs also held meetings throughout the year with various senior managers to improve insight into the business operations and marketplace. The attendance of individual directors at Board meetings and Committee meetings is presented in the table below:
| Board meetings attended |
Audit Committee meetings attended |
Remuneration Committee meetings attended |
Nominations Committee meetings attended |
|
|---|---|---|---|---|
| John Lillywhite | 10/10 | 1/2 | 2/7 | 3/3 |
| Brendan Mooney | 10/10 | – | – | – |
| Richard McCann | 10/10 | – | – | – |
| Paul Gannon | 09/10 | – | – | – |
| Andy Malpass | 10/10 | 2/2 | – | – |
| Chris Cowan | 10/10 | 2/2 | 7/7 | 3/3 |
| Tom Burnet | 10/10 | – | 7/7 | 2/3 |
• The Chairman resigned as a member of the Audit Committee and the Remuneration Committee, effective 1 June 2018. From the start of the reporting period 1 April 2018 up to and including the date of his resignation on 1 June 2018 there was one Audit Committee meeting and two Remuneration Committee meetings; the Chairman attended all three meetings whilst a member of these committees.
There is a formal schedule of matters reserved for the decision of the Board that covers key areas of Kainos' affairs. The schedule includes approval of the Annual Report and any other financial statements, the adoption of budgets or business plans, decisions on acquisitions and disposals, material financial commitments and the release of inside information. Certain matters require Board approval and other matters may be approved by senior management, but notification to the Board is required. The schedule of matters reserved for the Board is reviewed annually. A procedure exists to allow the directors to seek independent legal advice in respect of their duties at Kainos' expense where the circumstances are appropriate. All directors have access to the Company Secretary for her advice and services.
There was a formal evaluation of the performance of the Board during 2019 which was undertaken by way of a performance evaluation questionnaire, completed in January 2019, based on the Code and coordinated by the Chairman and Company Secretary. The questionnaire included questions related to: Board structure, diversity, frequency and content of Board meetings, decision making, strategy, risk, succession planning and Committees. The results of the evaluation exercise were discussed at the Nominations Committee meetings and presented to the Board, where the directors were given the opportunity to discuss the results together with potential improvements that could be made; discussions were largely positive and constructive. The conclusion was reached that the Board is operating effectively and is considered to be the right size, with appropriate skills represented and that each director continues to provide effective contribution and commitment.
An evaluation of the Chairman by the NEDs without the Executive Directors present was also carried out and it was concluded that he was performing his role effectively. The next formal evaluation of the Board's performance is scheduled to be conducted in 2020.
There is a formal written policy on the division of responsibilities between the Chairman and the CEO such that their roles are complementary to each other. John Lillywhite as Chairman is principally responsible for leading the Board, promoting constructive debate amongst the Board and facilitating communication with shareholders as well as overseeing strategy. Brendan Mooney as CEO is responsible for all aspects of Kainos' operations; he leads and develops the strategic plans for the business and identifies risk factors.
Directors undergo a thorough, formal and tailored induction process on joining and, following regular reviews by the Chairman of training and development requirements, receive ongoing updates to improve their skills and knowledge according to their personal and external needs. The Company Secretary is responsible for advising the Board and updating it on governance and regulatory matters.
The Companies Act 2006 imposes a statutory duty on directors to avoid conflicts of interest. The Articles of Association allow the directors to consider and, if they deem fit, to authorise conflicts of interest. The Articles of Association set out the process for authorisation of such conflicts and any such conflicts will be recorded in the Board minutes and maintained on a register which will be reviewed on an annual basis by the Nominations Committee and by the Board.
No conflicts have arisen in the year ended 31 March 2019.
The Directors and Corporate Governance Report was approved by the Board and signed on its behalf by:
Grainne Burns Company Secretary 24 May 2019
As Chairman of the Remuneration Committee I am pleased to introduce the Directors' Remuneration Report for the year ended 31 March 2019.
This is the Group's fourth Annual Report since its admission to the Official List of the London Stock Exchange in July 2015. I was appointed Chairman of the Remuneration Committee at the time of the Listing and my fellow members of the Committee, Chris Cowan and John Lillywhite, were appointed at the same time. John Lillywhite resigned as a member of the Remuneration Committee, effective from 1 June 2018.
This report by the Remuneration Committee has been approved by the Board for submission to shareholders in accordance with the UK Corporate Governance Code, the requirements of the Listing Rules of the UK Listing Authority and the reporting requirements of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations).
The report has been split into two sections: The Directors' Remuneration Policy, which sets out the policy on the remuneration of the Executive Directors and NEDs, and an Annual Report on Remuneration, which discloses the directors' remuneration for the year ended 31 March 2019. The 2016 AGM approved the Directors' Remuneration Policy and the 2016, 2017 and 2018 AGM's approved the Annual Report on Remuneration. The Remuneration Committee has kept the policy under review to ensure that it remains appropriate to the delivery of long-term value for all stakeholders. At the 2019 AGM, shareholders will have an opportunity to vote on the policy. The policy is set out below and took effect from the 2016 AGM. Overall, the Remuneration Committee believes that the policy remains appropriate and, accordingly, it has decided not to make any changes to the policy being put forward for shareholder approval in 2019.
The strategy of the Group is to achieve sustained revenue, profit and cash flow growth in its chosen markets. The Remuneration Committee is committed to continue structuring executive remuneration to fit the Group's business model and support its strategy. Overall packages are set at attractive levels to retain and motivate executives with a significant portion based on performance. Salaries are kept at below median levels compared to peer companies. Short-term performance is incentivised via an annual bonus which is currently based on revenue, adjusted pre-tax profit and sales order value targets and paid in cash. Long-term performance is incentivised via a share plan under which executives are awarded performance shares subject to achieving stretch targets over a three-year period.
The Board has applied a policy of using share incentives extensively across the Group. The Board regards this as an important principle aligning all employees with shareholders and allowing them the potential to benefit from the Group's success. This includes Company Share Option Plan (CSOP) awards to more senior staff, excluding executives, and awards under both Save As You Earn (SAYE) and Share Incentive Plan (SIP) across the Group, including executives.
The CEO's statement earlier in this Annual Report provides a summary of the progress the Group has made in the year ended 31 March 2019. In summary, the Group has delivered good performance across all divisions, extended operations in Europe and the US and decreased expenditure in research and development of its platform portfolio. Key performance indicators are solid across the Group: revenue increased from £96.7 million to £151.3 million, adjusted profit before tax increased from £15.3 million to £23.3 million, and sales orders increased from £130.7 million to £171.7 million. The Group continues to attract high quality talent and is pleased to note that the number of staff at year end was 1,470 across 12 offices in North America and Europe.
Performance against the adjusted pre-tax profit target and Group revenue was ahead of target with performance against the sales order value target being between threshold and target. As a result, bonuses paid to the CEO, CFO and SVP Business Development were 98%, 102% and 77% of salary, respectively.
In July 2018, the Group made performance share awards to the CEO, CFO and SVP Business Development at 32%, 37% and 31% of salary, respectively.
In July 2015, long-term incentive awards were granted to the CEO, CFO and SVP Business Development. These awards vested during the year with the CEO receiving 98,921 shares and the CFO and the SVP Business Development each receiving 68,345 shares.
Set out below is a copy of the policy which was approved by shareholders at the 2016 AGM, held on 22 September 2016 and which will be voted on at the 2019 AGM.
The Group's remuneration policy seeks to ensure that the Group is able to attract, retain and motivate its executives and senior management. The Remuneration Committee believes that the Executive Directors and senior managers should be rewarded fairly and competitively according to their performance. Overall, this should be at a comparable level to directors in similar companies and at a level that will attract, motivate and retain individuals of an appropriate calibre to deliver the Group's strategy and value to shareholders.
The Group's executive remuneration philosophy is that salaries should remain lean and that a significant proportion of the remuneration of the Executive Directors and senior management should be performance related, so that management is clearly focused on financial performance. While the annual bonus is focused on revenue, adjusted pre-tax profit and sales order value in the year, the long- term share-based incentives are primarily focused on earnings per share and share price performance measured over many years. The focus on financial performance and shareholder return encourages consistent performance over multiple years and aligns remuneration with the Kainos strategy and shareholders' interests. It aims to deliver value and good growth over the long term while striking an appropriate balance between caution and risk.
The Remuneration Committee is directly responsible for setting the remuneration of Executive Directors, giving guidance on the remuneration of other members of the senior management team and supervising the workings of all the Group's share incentive plans.
The individual elements of the remuneration packages offered to Executive Directors are set out in the table below.
| Element | Purpose | Operation | Potential remuneration |
Performance metrics |
|---|---|---|---|---|
| Base salary | To attract Reviewed annually and fixed for and retain 12 months, commencing 1 June executives each year. The Remuneration Committee takes into account: |
Percentage increases will normally be in line with other employees in the same location. |
None | |
| • an individual's experience, knowledge and performance in the role |
Higher increases may be awarded in certain circumstances if there are |
|||
| • business and individual performance |
commercial reasons for doing so such as to reflect market movements, changes in job responsibilities and to address |
|||
| • achievement of objectives |
||||
| • comparative salaries and periodic reviews |
retention issues. | |||
| • the Group's financial position |
||||
| • the salary increases being provided to Kainos employees. |
||||
| Benefits | To attract and retain executives |
The Executive Directors are entitled to a car allowance, private medical insurance, life insurance and permanent |
No maximum is set but the Remuneration Committee will monitor the overall cost of the benefits package. |
None |
| health insurance. | Any changes will normally be in line with other employees in the same location. |
| Element | Purpose | Operation | Potential remuneration |
Performance metrics |
|---|---|---|---|---|
| Pension | To attract and retain executives |
The Executive Directors are entitled to participate in the Group's pension scheme or receive a payment in lieu of pension. |
The maximum payment by the Group is set at 15% of salary. The CEO and CFO currently receive payments in lieu of pension of 8.6% and 5% of salary, respectively. The SVP Business Development participates in the Group's pension scheme and receives a Group contribution of 15% of salary. |
None |
| Annual bonus |
To reward and incentivise performance within a financial year with adequate reward for good performance and excellent reward for exceptional performance, to focus executives on key objectives and support positive team behaviour |
Performance is measured on an annual basis for each financial year. Criteria are established and weighted at the beginning of each year based on Group financial targets. Threshold and target levels of performance are determined for each criterion. At the end of the year, the Remuneration Committee determines the extent to which targets were achieved. On target levels of payment are set for each Executive Director at the start of each year. Up to 150% of these levels may be paid where targets are exceeded based on the extent to which the target is exceeded. |
The maximum annual bonus opportunity under the policy as a percentage of the Executive's salary is 150% for the CEO, 150% for the CFO and 225% for the SVP Business Development. |
Annual bonus is discretionary. Criteria are chosen, weighted and targets set each year by the Remuneration Committee in accordance with business priorities. An element of the bonus may also be based on personal performance. |
| Annual bonus is normally paid in cash following the completion of the audit of that year's financial statements. |
||||
| Annual bonus is subject to clawback provisions (net of any irrecoverable tax) for up to two years in the event of misstatement of financial information. |
||||
| Payments may be deferred for up to three years and then paid in cash or in shares. |
||||
| The Remuneration Committee has discretion to apply 'corporate override' in the event core targets are not achieved or in the event of a material negative event. |
| Element | Purpose | Operation | Potential remuneration |
Performance metrics |
|---|---|---|---|---|
| Long term incentive plan (LTIP) |
To motivate executives, incentivise performance over the long term and to facilitate share ownership |
Performance share awards are made under the Group's 2015 Performance Share Plan (PSP). Awards, made in the form of nil or nominal cost options, normally vest at least three years following the date of award subject to continued employment and the meeting of appropriately challenging performance conditions specified at the outset. The Remuneration Committee determines the extent to which performance conditions have been met. Awards may be increased for dividends paid during the period. The Remuneration Committee determines the performance conditions, weighting and target performance levels at the point of award. Clawback may be applied at the discretion of the Remuneration |
The normal maximum level of annual award is 200% of salary. In exceptional circumstances, awards may be made up to a maximum of 300% of salary. In the event of a new appointment the Remuneration Committee would expect to make a higher award, closer to the normal maximum. 30% of awards vest at threshold levels of performance. |
For the awards at the time of IPO and each year thereafter, 50% was linked to growth in adjusted EPS and 50% linked to total shareholder return. For future awards, the Remuneration Committee will assess what measures and targets best support the long-term focus of the Group and so measures and targets may be different from year to year. |
| Committee in the event of material misstatement of the financial results or if other exceptional circumstances exist such as gross misconduct. |
||||
| Policy for other employee incentive arrangements | ||||
| Share options |
To motivate and facilitate share ownership |
Market value options may be granted to employees at the discretion of the Remuneration Committee under the 2015 Performance Share Plan. UK employees may receive tax |
It is not intended to grant CSOP options to Executive Directors. |
Performance conditions may be applied but it is intended that CSOP options will not normally have |
advantaged awards under the CSOP Sub-Plan. Options have a market value exercise price and have a normal minimum vesting
At the time of the IPO, options were granted to certain managers and employees, not Executive
period of three years.
Directors.
performance conditions attached.
| Element | Purpose | Operation | Potential remuneration |
Performance metrics |
|---|---|---|---|---|
| Save As You Earn Option Plan (SAYE) |
To motivate, facilitate share ownership and align employees with shareholders |
An 'all employee' share option plan approved by HMRC, supervised by the Remuneration Committee. UK Employees, including Executive Directors, may enter into a savings contract under which they agree to save a specified monthly amount for three or five years. At the end of the contract period, participating employees may use the amount saved to exercise options with an exercise price of up to a 20% discount to the market price at the outset. |
Under the plan, the maximum monthly savings amount is £500. At the time of IPO and in July 2018, UK employees were offered participation with a maximum monthly savings limit of £100. |
None |
| The Board shall determine if and when further SAYE awards will be made and the terms of SAYE participation. |
||||
| Share Incentive plan (SIP) |
To motivate, facilitate share ownership and align employees with shareholders |
An 'all employee' share option plan approved by HMRC, supervised by the Remuneration Committee. Significant tax advantages apply if shares acquired under the plan are held for five years. |
At the time of IPO and each consecutive year since, free shares with a value of between £1,000 and £3,600 were awarded to UK employees, including Executive Directors, |
None |
| UK Employees, including Executive Directors, may be awarded free shares up to a maximum value of £3,600 each year. |
depending on their length of service. |
|||
| They may purchase partnership shares out of pre-tax salary up to £1,800 per tax year and may be awarded up to two free matching shares for each partnership share acquired (although no matching was implemented for Kainos 2015, 2016, 2017 or 2018 SIP awards). |
||||
| The Board shall determine if and when further SIP awards will be made and the terms of those awards. |
| Policy for other employee incentive arrangements continued | ||||||||
|---|---|---|---|---|---|---|---|---|
| Element | Purpose | Operation | Potential remuneration |
Performance metrics |
||||
| Poland and Ireland Share Schemes |
To motivate, facilitate share ownership and align employees with shareholders |
The Group has implemented share schemes for employees in Poland and the Republic of Ireland with the intention of making share awards to these employees on similar terms and of a similar value to those made under the UK SAYE and SIP schemes. |
Employees based in these countries may be awarded participation in these plans at similar levels of that offered to UK employees under the SAYE and SIP schemes. If Executive Directors were based in these countries, they would be able to participate in these schemes. |
None | ||||
| NED remuneration | ||||||||
| Chairman and NEDs |
To attract and retain NEDs with appropriate experience and skills |
The Chairman and NED remuneration comprises only fees. The Chairman's fee is approved by the Board on recommendation of the Remuneration Committee (with the Chairman who is a member of the Remuneration Committee recusing himself). Fees for the NEDs are approved by the Board on the recommendation of the Chairman and Executive Directors. Additional fees, over and above the base fee for the NEDs, are payable to the Chairmen of the Audit and Remuneration Committees and to the SID. Additional fees are paid in the event the time requirement is above normal levels. |
The fees of the NEDs are reviewed annually taking into consideration the time commitment and responsibilities of the role and fees paid in other companies of comparable size and complexity. The Chairman's fee is currently £80,000 per annum. The base fee for NEDs is currently £40,000 per annum. Additional fees per annum are set out below: SID – £10,000 Chairman of Audit Committee – £6,000 Chairman of Remuneration Committee – £4,000. NEDs are entitled to additional payment in the event the time requirement is above normal levels. The Chairman receives an amount of £1,750 for each additional day. NEDs receive £1,500 for each additional day. |
None |
Brendan Mooney, Richard McCann and Paul Gannon all entered into new contracts with the Company effective at the time of IPO.
The key terms of all their contracts are summarised in the table below:
| Provisions | Summary |
|---|---|
| Term and notice | Indefinite with 12 months' notice from either party. |
| Payment | Salary and discretionary annual bonus. |
| Benefits and other entitlements |
Company pension contribution or payment in lieu of pension, car allowance, private medical insurance and permanent health insurance. |
| Termination | Terminable on 12 months' written notice served by either party. The Company will have a contractual right to pay the Executive Directors in lieu of all of their notice period and also to place them on garden leave during all or part of their notice period. In the event of gross misconduct, their employment will be terminable with immediate effect without the requirement for notice or payment in lieu thereof. |
The NEDs entered into letters of appointment with the Company on 1 June 2015 which are terminable in certain circumstances, including the giving of three months' written notice by either party or failure to be re-elected by shareholders.
In the event that a new Executive Director is appointed, or a new service contract is entered into, the service contract would be subject to a notice period of not greater than 12 months with the director entitled to receive salary, bonus and benefits as well as participate in the current share plans. The remuneration package for the new director would be set in accordance with the terms of the approved Kainos remuneration policy in force at the time of appointment, while at the same time reflecting the experience and skill of the individual.
The new director's total remuneration would be consistent with comparative packages as advised by the Remuneration Committee's remuneration advisers. In the year of joining, the annual bonus and associated performance measures will be varied to reflect the part year. In addition, when recruiting new Executive Directors, the Remuneration Committee may need to offer additional cash and/or share-based elements on a one-time basis when it considers these to be in the best interests of Kainos and its shareholders. Such payments would be limited to the remuneration lost when leaving the former employer to take up a position with Kainos and would broadly reflect the delivery mechanism (e.g. cash, shares, options), time horizons and whether performance requirements are attached to that remuneration. Shareholders will be informed of such payments at the time of appointment. In the case of an internal appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms, adjusted as relevant to take into account the appointment. In addition, other ongoing remuneration obligations existing prior to appointment would continue as appropriate, provided that they are put to shareholders for approval at the earliest opportunity. For external and internal appointments, the Remuneration Committee may agree that Kainos will meet reasonable relocation expenses in line with market practice.
The appointment of NEDs shall be on terms substantially similar to those of the existing NEDs and in accordance with the remuneration policy for NEDs applicable at the time.
In the event of termination, the directors will receive payments for loss of office in accordance with the termination provisions of their service contracts and letters of appointment as applicable.
The default position is that on loss of office, an Executive Director forfeits any right to any bonus payment which would otherwise have accrued in respect of that year. If an Executive is deemed a good leaver, the Executive Director will be entitled to receive a bonus pro-rated to the proportion of the year that the Executive worked.
The treatment for share-based incentives previously granted to an Executive Director will be determined based on the relevant plan rules. The default treatment will be for outstanding unvested awards to lapse on cessation of employment. In relation to awards granted under the PSP, SIP or SAYE plans, in certain prescribed circumstances 'good leaver' status may be applied, and the awards may vest in full.
In respect of performance shares, awards of good leavers will normally vest subject to the achievement of any performance conditions, on the normal vesting date reduced on a pro-rata basis to reflect the portion of the vesting period elapsed at the point of departure. Under the rules of the plan, the Remuneration Committee may determine that awards vest at the point of departure to the extent that performance conditions have been met at that point (as determined by the Remuneration Committee acting reasonably) and on a reduced basis pro-rated for time unless the Remuneration Committee determines to allow vesting to a greater extent.
Kainos expects the total remuneration for employees to be at a level appropriate to attract, recruit, motivate and retain the most suitable individuals. Some employees receive a bonus, which in many cases will be a percentage of salary with an element determined by personal performance and an element determined by the Group's financial performance. For more senior employees, a higher proportion of remuneration is payable as a bonus. The benefits available are dependent on market practice in each country. The pension scheme available to an employee varies according to location with contributions at a competitive level for each country.
It is the policy of the Group to offer participation in share incentive plans to all employees. More senior employees may receive discretionary share option awards. Other employees participate in all employee arrangements.
There is no formal mechanism through which Kainos consults with employees when determining Executive Directors' remuneration, but the Remuneration Committee takes into consideration the pay and benefits of employees when reviewing the remuneration of the Executive Directors.
The 2019 AGM will be the Group's fourth as a listed company. At the 2016 AGM, the Directors' Remuneration Policy, and the Annual Report on Remuneration, were unanimously approved on a show of hands. The 2018 Annual Report on Remuneration was approved at the 2018 AGM. Kainos is keen to ensure that its shareholders are supportive of the Group's remuneration philosophy and policy. The Remuneration Committee is keen to hear shareholder feedback, with the Chairman of the Remuneration Committee as the initial point of contact and will consider any feedback provided in advance of the forthcoming AGM and throughout the year.
The Remuneration Committee has attempted to ensure this policy has sufficient flexibility to deal with unusual situations and scenarios which may arise. As outlined in the policy table, the Remuneration Committee retains flexibility to determine the objectives, weightings and target levels of performance under its annual bonus at the start of each year. The Remuneration Committee may also alter the performance criteria during the year reflecting the overall circumstances and the Group's performance to ensure targets remain both challenging and appropriate.
Similarly, the Remuneration Committee retains flexibility to determine the conditions, weightings and target levels of performance share awards at the point awards are made. In addition, where performance conditions have been set, if events subsequently happen which cause the Remuneration Committee to consider that any performance condition no longer represents a fair measure of performance, the Remuneration Committee may amend the performance condition so as to be more appropriate. The alternative performance condition will be equally challenging.
Executive Directors may accept appointments as NEDs in other companies provided that such appointments do not conflict with their duties or time commitments to the Group and subject to receiving prior written approval from the Board. They are entitled to receive the fees themselves from such appointments.
From the date of Listing in July 2015, the Remuneration Committee comprised Tom Burnet as Chairman of the Committee, John Lillywhite and Chris Cowan. John Lillywhite resigned as a member of the Remuneration Committee with effect from 1 June 2018.
All members of the Remuneration Committee are Independent NEDs. None of the members of the Remuneration Committee has any personal financial interest (other than as shareholders, to the extent disclosed in this report), conflicts of interest arising from cross-directorships, or day-to-day involvement in running the business. The Executive Directors may attend Remuneration Committee meetings by invitation. The Company Secretary acts as secretary to the Remuneration Committee.
The Remuneration Committee operates within its terms of reference, which are reviewed and updated annually and are available from the Group's website at www.kainos.com.
The Remuneration Committee is directly responsible for managing all aspects of the remuneration of Executive Directors, for giving guidance on the remuneration of other members of the senior management team and supervising the workings of all the Group's share incentive plans.
During the year, the Remuneration Committee took independent advice from h2glenfern Remuneration Advisory (a division of h2glenfern Limited) and Skyfall Consulting Limited. Both h2glenfern and Skyfall Consulting Limited operate in accordance with the principles of the Code of Conduct for the Remuneration Consultants' Group in relation to executive remuneration consulting in the United Kingdom. For the year under review, h2glenfern and Skyfall Consulting Limited received fees of £9,500 and £7,000 respectively, related to advisory work for the Remuneration Committee on operational matters. Both h2glenfern and Skyfall Consulting Limited do not provide any other consulting services to Kainos.
In accordance with the Regulations, the tables below set out the remuneration for each director for the year ended 31 March 2019.
| Name | Financial year |
Salary/fees (000s) |
Benefits2 (000s) |
Bonus (000s) |
Total (excluding pension) (000s) |
Pension1 (000s) |
Other3 | Incentives vested |
Total (including pension) (000s) |
|---|---|---|---|---|---|---|---|---|---|
| Executive Directors | |||||||||
| Brendan Mooney | 2019 | £220 | £7 | £215 | £442 | £19 | £1 | £141 | £603 |
| 2018 | £220 | £8 | £175 | £403 | £19 | £1 | N/A | £423 | |
| Richard McCann | 2019 | £212 | £6 | £215 | £433 | £11 | £1 | £99 | £544 |
| 2018 | £195 | £7 | £151 | £353 | £10 | £1 | N/A | £364 | |
| Paul Gannon | 2019 | €233 | €22 | €179 | €434 | €35 | €4 | €114 | €587 |
| 2018 | €243 | €19 | €299 | €561 | €36 | €1 | N/A | €598 | |
| NEDs | |||||||||
| John Lillywhite | 2019 | £80 | N/A | N/A | £80 | N/A | N/A | N/A | £80 |
| 2018 | £80 | N/A | N/A | £80 | N/A | N/A | N/A | £80 | |
| Andy Malpass | 2019 | £56 | N/A | N/A | £56 | N/A | N/A | N/A | £56 |
| 2018 | £56 | N/A | N/A | £56 | N/A | N/A | N/A | £56 | |
| Chris Cowan | 2019 | £40 | N/A | N/A | £40 | N/A | N/A | N/A | £40 |
| 2018 | £40 | N/A | N/A | £40 | N/A | N/A | N/A | £40 | |
| Tom Burnet | 2019 | £44 | N/A | N/A | £44 | N/A | N/A | N/A | £44 |
| 2018 | £44 | N/A | N/A | £44 | N/A | N/A | N/A | £44 |
1 Pension amounts for Brendan Mooney and Richard McCann are payments in lieu of pension.
2 Benefits are the taxable value of benefits received by directors in the year including car allowance and private health insurance.
3 Other relates to the award of SIP shares or ROI restricted shares for Paul Gannon in 2018.
Kainos did not make any payments to past or current directors for loss of office.
The Executive Directors' bonus for the year ended 31 March 2019 was based on revenue, adjusted pre-tax profit and sales order value targets. The structure of the bonus and targets is set out in the table below:
| Target performance |
Threshold performance |
Outcome | Bonus pay-out | ||||
|---|---|---|---|---|---|---|---|
| Objective | Weighting | (£000s) | (£000s) | (£000s) | (£000s) | (£000s) | (£000s) |
| B Mooney | R McCann P Gannon10 | ||||||
| Revenue | 30% | 133,300 | 113,305 | 151,294 | 68 | 68 | 50 |
| Adjusted pre-tax profit | 40% | 20,366 | 16,293 | 23,321 | 88 | 88 | 64 |
| Sales order value | 30% | 157,000 | 133,450 | 171,700 | 59 | 59 | 43 |
| Totals | 100% | 215 | 215 | 157 |
10 Data collated from regular feedback surveys conducted with sub-set of Kainos customers over the course of the year.
Annual bonus payments are subject to thresholds and accelerators as set out below:
The bonuses paid to Brendan Mooney, Richard McCann and Paul Gannon were 98%, 102% and 77% of salary respectively.
Under the remuneration policy the maximum annual bonus opportunity as a percentage of the Executive's salary is 150% for the CEO, 150% for the CFO and 225% for the SVP Business Development.
The Remuneration Committee granted performance related share awards to the Executive Directors under the PSP in July 2018 as outlined below:
| Name | Date of grant |
No. of ordinary shares under option |
Value of award at date of grant |
Exercise price per ordinary share |
First exercise date |
Lapsing date |
|---|---|---|---|---|---|---|
| Brendan Mooney | July 2018 | 17,621 | £70,956 | Nominal | July 2021 | July 2028 |
| Richard McCann | July 2018 | 19,552 | £78,732 | Nominal | July 2021 | July 2028 |
| Paul Gannon | July 2018 | 15,690 | £63,180 | Nominal | July 2021 | July 2025 |
The 2018 PSP awards are subject to the following performance conditions. The vesting of 50% of the award is subject to a condition that measures growth in earnings per share over a three-year performance period up to the year ending 31 March 2021 using the financial year ended 31 March 2018 as the base year. The vesting of 50% of the award is subject to a condition that measures the Group's total shareholder return over a three-year period from the date of the grant and using the price of 419p as the base value per share. Between threshold and maximum vesting, awards vest on a straight-line basis.
| Performance condition | EPS growth | TSR growth |
|---|---|---|
| Portion of award subject to this condition | 50% | 50% |
| Threshold vesting – vesting at 30% of total | 9% compound growth per annum | 9% compound growth per annum |
| Maximum vesting – 100% of total | 16% compound growth per annum 16% compound growth per annum |
The Executive Directors were entitled to participate in the SIP and SAYE schemes without performance conditions, on no more favourable terms than other employees with similar length of service. The SIP shares awarded during the year to Executive Directors are shown below.
| Name | 2018 SIP shares |
Face value |
Vesting period |
|---|---|---|---|
| Brendan Mooney | 400 | £1,692 | 3 years from the date of grant |
| Richard McCann | 400 | £1,692 | 3 years from the date of grant |
| Paul Gannon11 | 400 | £1,692 | 5 years, 1 week from the date of grant |
On 7 July 2015, awards were granted under the Kainos PSP to Brendan Mooney, Richard McCann and Paul Gannon. The TSR performance measurement period ended on 6 July 2018 with the following outcome:
| Award | Measure | Weighting | Vesting scale | Performance achieved |
% of award vesting |
|||
|---|---|---|---|---|---|---|---|---|
| 2015 | TSR | 50% | No vesting if TSR growth below 9% p.a. 30% of awards vest if TSR growth equals 9% p.a. and 100% vests if TSR growth exceeds 16% p.a. Straight-line pro-rata basis from 30% to 100% if TSR growth exceeds 9% but is less than 16% p.a. |
46.36% compound growth per annum. |
100% | |||
| No of shares |
% vested | Number of shares vested |
Number of shares lapsed |
Share price at end of performance period |
Value at vesting |
|||
| Brendan Mooney Richard McCann Paul Gannon |
98,921 68,345 68,345 |
100% 100% 100% |
98,921 68,345 68,345 |
– – – |
407p 407p 407p |
£402,608 £278,164 £278,164 |
On 23 June 2016, awards were granted under the Kainos PSP to Brendan Mooney, Richard McCann and Paul Gannon. The TSR performance measurement period does not end until 22 June 2019. However, the performance measurement period for the EPS performance condition ended on 31 March 2019, with the following outcome:
| Award | Measure | Weighting | Vesting scale | Performance achieved |
% of award vesting |
|---|---|---|---|---|---|
| 2016 | EPS | 50% | No vesting if EPS growth below 9% p.a. 30% of awards vest if EPS growth equals 9% p.a. and 100% vests if EPS growth exceeds 16% p.a. Straight-line pro-rata basis from 30% to 100% if EPS growth exceeds 9% but is less than 16% p.a. |
14.4% compound growth per annum. |
83.7% |
11 Paul Gannon awarded 400 shares under the Republic of Ireland Restricted Share Scheme which have a vesting period of 5 years and 1 week.
| No of shares |
% vested | Number of shares vested |
Number of shares lapsed |
Share price at end of performance period |
Value at vesting |
|
|---|---|---|---|---|---|---|
| Brendan Mooney | 28,205 | 83.7% | 23,605 | 4,600 | 556p | £131,244 |
| Richard McCann | 31,250 | 83.7% | 26,154 | 5,096 | 556p | £145,416 |
| Paul Gannon | 25,000 | 83.7% | 20,905 | 4,095 | 556p | £116,232 |
The interests of the directors and their connected persons in Kainos ordinary shares at 31 March 2019 were:
| Name | Current shareholding |
Unvested SIP shares |
Vested but unexercised options |
Unvested performance options |
|---|---|---|---|---|
| Brendan Mooney | 14,205,941 | 1,492 | – | 97,756 |
| Richard McCann | 6,211,582 | 1,492 | – | 106,191 |
| Paul Gannon | 8,499,585 | 1,492 | – | 85,036 |
| John Lillywhite | 460,000 | – | – | – |
| Andy Malpass | 38,950 | – | – | – |
| Chris Cowan | 31,582 | – | – | – |
| Tom Burnet | 14,388 | – | – | – |
In view of the size of each of the shareholdings of the Executive Directors, the value of which is a significant multiple of their salary, the Remuneration Committee has not implemented a guideline in respect of the value of shareholding which executives should hold. There is no shareholding guideline for the NEDs.
The regulations require the presentation of a number of graphs and tables setting out a comparison of Group performance and CEO remuneration for the same period of time. The Board believes that the FTSE techMARK All-Share Index, of which the Group is a constituent, provides the best benchmark for comparison. The Group's TSR performance against FTSE techMARK All-Share Index TSR performance from the date of IPO in July 2015 to the end of the 2018 financial year is shown below. The Group's share price and the FTSE techMARK All-Share Index are both set to 100 at the start of the period.
The table below sets out the total remuneration delivered to the CEO over the last four years valued using the methodology applied to the single total figure of remuneration. The Remuneration Committee does not believe that the remuneration payable in its earlier years as a private company bears any comparative value to that paid in its later years and therefore the Remuneration Committee has chosen to disclose remuneration only for the three most recent financial years. The CEO held options in Kainos Software Limited which were not subject to performance conditions. These were satisfied in full, or lapsed, on or prior to listing of Kainos Group plc.
| Vesting of | |||||
|---|---|---|---|---|---|
| Salary | Annual | Total | Bonus as | long term | |
| and benefits | bonus remuneration | percentage of | incentives as | ||
| (£000s) | (£000s) | (£000s) | maximum % of maximum | ||
| 2019 | £246 | £215 | £461 | 66% | 51% |
| 2018 | £248 | £175 | £423 | 53% | n/a |
| 2017 | £248 | £151 | £399 | 46% | n/a |
| 2016 | £242 | £186 | £428 | 57% | 100% |
The table below highlights the percentage change in the sum of salary, benefits and bonus of the Chief Executive and all UK employees for recent years. Kainos considers the comparator group of all UK employees to be representative of Kainos as a whole and a global comparator group would not result in a material variance.
| Change for CEO's salary |
Change for UK employees' salary |
Change for CEO's annual bonus |
Change for UK employees' annual bonus |
Change for CEO's benefits |
Change for UK employees' benefits |
Change for CEO's total |
Change for UK employees' total |
|
|---|---|---|---|---|---|---|---|---|
| 2019 | – | 7.1% | 23.2% | 32.3% | – | – | 9.9% | 11.8% |
| 2018 | – | 10.9% | 15.8% | 1.6% | – | – | 6.0% | 11.7% |
| 2017 | 2.0% | 6.5% | (18.8%) | (18.3%) | – | – | (7.1%) | (4.7%) |
Kainos employees are vital to the growth and success of the business. As a software business with a strategy focused on organic development, its primary costs are related to its employees. The profit and corporation tax figures have been included to provide greater context to staff remuneration and the total distributions to shareholders.
| Staff remuneration (£000s) |
Profit before tax (£000s) |
Corporation tax (£000s) |
Effective tax rate |
Dividends (£000s) |
|
|---|---|---|---|---|---|
| 2019 | 73,899 | 21,125 | (4,186) | 20% | (8,917) |
| 2018 | 55,881 | 14,251 | (2,585) | 18% | (7,581) |
| 2017 | 43,747 | 13,320 | (2,904) | 22% | (7,208) |
| 2016 | 35,373 | 14,261 | (1,834) | 13% | (13,309) |
| 2015 | 30,954 | 11,837 | (2,072) | 18% | (1,325) |
| 2014 | 22,954 | 7,056 | (1,600) | 23% | (651) |
The 2019 AGM will be the Group's fourth since its IPO. The Directors' Annual Report on Remuneration will be put to an advisory shareholder vote.
| Salary | The Committee will continue to monitor the remuneration of Executive Directors of other companies in the IT sector and other listed companies with similar market capitalisation to ensure that the Executive Directors remain sufficiently rewarded to promote long-term success. The Committee will also take into account the salary increases across the wider workforce. |
|---|---|
| Benefits | There will be no change to the benefits for the Executive Directors in the year commencing 1 April 2019. |
| Pension | There will be no change to the pension arrangements of the Executive Directors in the year commencing 1 April 2019. |
| Annual bonus | Annual bonus for the year commencing 1 April 2019 will be operated within the policy disclosed in this report. The principles of bonus criteria which will be applied to each Executive Director during the year ending 31 March 2020 will be similar to those applied during the year ended 31 March 2019. |
| The targets for the annual bonus for 2019/20 are not being disclosed in this report as that information is deemed commercially sensitive and may be interpreted to be a forecast. That information will be disclosed in the 2020 Annual Report. |
|
| Long term incentives |
The Committee intends to make further performance share awards in mid-2019. These will be made in line with the Remuneration Policy. The Committee will determine the levels, performance conditions, weighting and growth targets to be applied at the time of award and disclose them in the 2020 Annual Report. |
| NED remuneration |
For the year commencing 1 April 2019, it is proposed that NED fees remain the same as in the year ended 31 March 2019. |
On behalf of the Board
Tom Burnet Chairman of the Remuneration Committee 24 May 2019
As Chairman of the Audit Committee, I am pleased to introduce the Audit Committee Report for the year ended 31 March 2019. The Audit Committee has met two times during the year, in May 2018 and November 2018. The Audit Committee plays a central role in the review of Kainos Group's financial reporting, risk review and internal control processes. The Committee has focused on the integrity, completeness and clarity of financial reporting, the areas where judgements and estimates are required in the financial statements and the quality and effectiveness of audit processes to complement the other risk management activities. There has been no significant change to these areas of focus during the year and the Committee will continue to monitor them.
Andy Malpass Chairman of the Audit Committee
In accordance with the provisions of the Code, the Audit Committee is made up of two independent NEDs. The Audit Committee is chaired by Andy Malpass. The Board considers that Andy Malpass, who is a fellow of the Chartered Institute of Management Accountants with significant financial experience including serving as Finance Director of Fidessa group plc until October 2015, has the recent and relevant experience required to act as Chairman of the Committee. In addition to Andy Malpass, the Committee comprises one Non-Executive Director, Chris Cowan, who has considerable experience in the technology sector. Accordingly, the Committee continues to comprise both the financial and industry relevant experience required. Further details of relevant experience of all members of the Committee are detailed in the 'Directors' and Corporate Governance Report'.
The performance of the Committee was evaluated as part of the Board evaluation process and the conclusion was that the Committee was functioning effectively.
The Committee operates within its terms of reference, which are reviewed and updated annually and are available from the Group's website at www.kainos.com. The Committee's main responsibilities include:
The Audit Committee advises the Board on the appointment, reappointment or removal of the Group's external auditor. Deloitte has been the Group's auditor since 2011 and for the year ended 31 March 2018 the provider of the service changed to Deloitte (NI) Ltd from Deloitte LLP. In line with EU legislation, all EU public interest entities must tender their audit every 10 years. The Committee is satisfied with the effectiveness of the audit. During the year the Audit Committee reviewed and approved the scope and timetable for the interim review and final audit.
During the year the external auditor provided no non-audit services. The Group has engaged another independent accounting firm to perform tax consulting work and other assignments to further ensure the independence and objectivity of the auditor is not compromised. The Committee received a written confirmation from the external auditor that it considered itself to be independent.
Audit partners for listed companies are ordinarily rotated every five years.
The Committee assessed the effectiveness of the external audit process at its meeting in May 2018. The audit was undertaken through both reliance on the Group's internal control environment and substantive testing and included significant testing in areas identified as key risks such as revenue. This gave the Committee confidence as to the overall quality of the audit. The Committee also asked Deloitte (NI) Ltd to report on control findings arising from the audit as part of the year end process. In addition, feedback on the audit was obtained from management and the finance team.
Following its review of the effectiveness of the external audit and independence of the external auditor, the Committee is satisfied that independence has been maintained and that it is appropriate to reappoint Deloitte as the external auditor. The Committee therefore recommended to the Board that Deloitte be reappointed as the external auditor for 2020 and a resolution for its appointment will be submitted to the AGM.
The Board is ultimately responsible for the overall system of internal controls and risk management for the Group and for reviewing their effectiveness. The system of internal controls is designed to manage, rather than eliminate, the risks to which the Group is exposed, including the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The concept of reasonable assurance recognises that the cost of control procedures should not exceed the expected benefits. Details of the principal risks are set out in the Strategic Report.
The Board confirms that Kainos has established systems, procedures and controls designed to establish an ongoing process for identifying, evaluating and managing the principal risks faced by Kainos and that they have been in place for the period under review and up to the date of approval of the Annual Report. The effectiveness of those systems, procedures and controls are regularly reviewed by the Board.
As required by the Code, the Committee has reviewed the internal controls and risk management systems, including those relating to financial reporting, information technology, business continuity, management of employees, operational and compliance matters and the Committee has confirmed to the Board that it is satisfied that Kainos has established internal controls and risk management systems that are effective and compliant with the current governance provisions.
The key elements of the Group's ongoing processes for the provision of effective internal control and risk management systems include:
During the year ended 31 March 2019 the Committee reviewed the results of the external audit for the previous financial year including reviewing the 2018 Annual Report and Preliminary Announcement, the external auditor's half year review and the half year results as well as the external audit plan for 2019. In May 2019, the Committee received the 2019 Annual Report including the financial statements contained within it, the Preliminary Results Announcement for the year ended 31 March 2019 and reports from the external auditor on their audit of the financial statements and Annual Report.
The Committee's prime areas of focus were:
The preparation of financial statements requires management to make assumptions, judgements and estimates and the material ones are detailed in note 4 of the consolidated financial statements. The key areas of judgements, estimates and assumptions that have been reviewed and considered by the Committee were:
The Group operates an audit programme which forms part of its ISO9001 (Quality Management System), ISO20000 (Information Technology Service Management System) and ISO27001 (Information Security Management System) certifications. As part of the certification process Kainos undergoes a bi-annual assessment to ensure that all of the controls are robust and any Kainos assets are appropriately protected. Information Security risks are assessed and reviewed regularly in IT steering meetings with the Group's senior management.
Kainos also participates in additional third party assessments for public and private sector customers to ensure that associated security controls are effective and address any related risks. The key elements of the Group's internal control framework and procedures are noted above, while the principal risks faced by the Group are set out in the 'Risk Factors and Uncertainties' section of the Strategic Report. Through the various audit activities outlined above and the close control of operations exercised by the Executive Directors as well as the centralisation of financial management in Belfast, the Group does not require these activities to be separated into a standalone audit function.
The Audit Committee will review the internal control framework and procedures on an ongoing basis giving consideration to whether certain areas should be looked at more closely. In doing so, the Audit Committee will continue to monitor whether there is a requirement for a dedicated internal audit function.
The Nominations Committee, which is chaired by John Lillywhite, comprises John Lillywhite, Chris Cowan and Tom Burnet and is therefore compliant with the requirements of the Code.
The performance of the Committee was evaluated as part of the Board evaluation process during the year and the conclusion was that the Committee was functioning effectively.
The Committee operates within its terms of reference, which are reviewed and updated annually and are available from the Group's website at www.kainos.com. The Committee's main responsibilities are to advise and make recommendations to the Board on the following matters:
During the year ended 31 March 2019, the Committee:
In relation to appointments and diversity, the Board believes that better diversity creates a more inclusive corporate culture and better equips companies to navigate the challenges facing businesses and support longterm strategic needs. Diversity is viewed by the Board through a broad lens, to include gender, ethnicity, nationality, skills and experience.
The Board acknowledges that achieving diversity in certain sectors, including the technology sector, presents challenges when considering the profile of the available talent pool in those sectors. The Board confirms that whilst it is not in favour of setting specific targets for Board diversity to be achieved by particular dates, in the event that a Board position requires filling (and in all succession planning activities undertaken by the Board and the Group), it will proactively ensure that recruitment and selection practices are transparent, fair and result in appointments
based on merit and objective criteria, promoting diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. In addition, search processes will use a wide range of channels, including advertising, to encourage applications from diverse candidates with relevant skills, experience and knowledge.
The Board recognises the importance of succession planning and the role it plays in maintaining a continuous level of quality in management and reducing the level of instability that may arise following unforeseen events, such as the departure of a key individual. As part of succession planning exercises, the Nominations Committee reviews the Group's Executive Team and leadership structures, and the output of this exercise feeds into the Group's strategic objectives of facilitating business scaling for growth and furthering individual training and development requirements. The Nominations Committee, in conjunction with the Board, formally discusses and reviews succession planning at each of the three meetings held during the year; this is a key area of focus for the Nominations Committee.
In accordance with Section 414C (11) of the Companies Act 2006, to the extent they are not addressed in the Directors' and Corporate Governance Report, the disclosures relating to the following matters are included in the Strategic Report: environmental matters (including greenhouse gas emissions and the impact of the Group's business on the environment); the Group's employees (including equal opportunities, gender diversity and employee engagement); and, social, community and human rights issues (including corporate social responsibility).
The financial results and position are shown in the financial statements. A fuller explanation of the results, including the recommended dividend and financial position, is provided in the Overview and the Financial Review sections of the Strategic Report and the notes to the financial statements.
No political donations were made during the year ended 31 March 2019.
There are no off-balance sheet arrangements. Details of the trusts relating to Kainos' share incentive plans are set out in note 23 to the consolidated financial statements. The shares held by the trust rank pari passu with all the other shares in issue and have no special rights.
For the purposes of LR9.8.4C R, the information required to be disclosed by LR9.8.4 R can be found in the following locations:
| Section | Topic | Location |
|---|---|---|
| 1 | Interest capitalised | Not applicable |
| 2 | Publication of unaudited financial information | Not applicable |
| 4 | Details of long-term incentive schemes | Directors' Remuneration Report |
| 5 | Waiver of emoluments by a director | Not applicable |
| 6 | Waiver of future emoluments by a director | Not applicable |
| 7 | Non pre-emptive issues of equity for cash | Not applicable |
| 8 | Section (7) in relation to major subsidiary undertakings | Not applicable |
| 9 | Parent participation in a placing by a listed subsidiary | Not applicable |
| 10 | Contracts of significance | Directors' Report |
| 11 | Provision of services by a controlling shareholder | Not applicable |
| 12 | Shareholder waivers of dividends | Not applicable |
| 13 | Shareholder waivers of future dividends | Not applicable |
| 14 | Agreements with controlling shareholders | Not applicable |
Details of the called-up and fully paid share capital are set out in note 20 to the consolidated financial statements. The rights and obligations attaching to the shares and the powers of the directors are set out in the Articles of Association, copies of which can be obtained from Companies House. There are no restrictions on the voting rights attached to the shares and no person holds securities carrying special rights regarding control.
Kainos holds a general authority to purchase up to 11,892,035 of ordinary shares in the market. This represented approximately 10% of the Kainos' issued share capital as at 20 July 2018, as voted on and approved by shareholders at the 2018 AGM. No purchase of shares has been made pursuant to this authority. There is no present intention to use such authority, but the Board considers it desirable that the possibility of making such purchases under appropriate circumstances remains available. A similar authority will be requested at the forthcoming AGM, again limited to a maximum of 10% of the issued share capital. The Board intends only to exercise this authority if it believes that it will lead to an increase in earnings per share for the remaining shareholders.
The appointment and replacement of directors is governed by the Articles of Association and the Nominations Committee's Terms of Reference. The Articles of Association may be amended by a special resolution.
The directors who held office at the date of approval of this Directors' and Corporate Governance Report confirm that, so far as they are each aware, there is no relevant audit information of which the auditor is unaware, and each director has taken the steps that he or she ought to have taken as a director to ascertain any relevant audit information and to establish that the auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.
Members of the Group are subject to certain customer contracts which require them to notify the relevant counterparty of a change of control of the Group which, in some instances, may allow the relevant counterparty to terminate their contracts with the Group. The directors are not aware and do not anticipate any reason or circumstances where any such customers would wish to trigger their termination rights under such change of control provisions. The only significant agreements with change of control provisions are the share incentive plans. Under the CSOP, SAYE and Polish share plans, on a change of control, options and awards that are not lapsed would generally vest in full. The PSP awards would also vest subject to the satisfaction of any performance conditions at the time, but these would be time pro-rated. Other than as set out in this statement, Kainos is not party to any other significant agreements that take effect, alter or terminate upon a change of control following a takeover or upon a takeover bid.
Kainos is committed to high standards of corporate governance and is subject to the principles of the UK Corporate Governance Code. In respect of the year ended 31 March 2019 Kainos has complied with all of the provisions of the Code with the exception of the non-independence on appointment of the NED/Chairman, John Lillywhite.
Kainos values the views of its shareholders and recognises their interests in its strategy and performance. The CEO and CFO hold briefing meetings with analysts and institutional shareholders, primarily following the announcement of interim and preliminary results but also at other times during the year as may be suitable.
The CEO and CFO provide feedback to the Board from meetings with shareholders. The Board also obtains formal feedback from analysts and institutional shareholders via Kainos' PR advisers and financial advisers. Communication with private investors is through the Annual Report and the AGM. Financial and other information is made available on the website, www.kainos.com which is regularly updated.
The following have disclosed that they have an interest in 5% or more of the issued ordinary share capital. At 16 May 2019, the last holding notified to the Company is shown below.
| Investor | Ordinary 0.5p shares |
% of issued share capital |
|---|---|---|
| QUBIS Ltd | 15,441,170 | 12.8% |
| Brendan Mooney | 14,206,541 | 11.7% |
| Standard Life Aberdeen plc | 13,322,833 | 11.0% |
| Liontrust investment Partners LLP | 13,069,835 | 10.8% |
| Paul Gannon | 8,499,585 | 7.0% |
| Richard McCann | 6,211,582 | 5.1% |
| Dr Brian Gannon | 6,086,288 | 5.0% |
Kainos' business activities and position in its market are described in the Overview, Divisional Review and Risks sections of the Strategic Report. The financial position, cash flows and liquidity position are described in the Financial Review and the notes to the financial statements. In addition, the notes to the financial statements include Kainos' objectives, policies and processes for managing its capital, its financial risk management objectives and its exposures to credit and liquidity risk.
Having reviewed the future plans and projections for the business and its current financial position, the Board believes that Kainos is well placed to manage its business risks successfully. Kainos has adequate financial resources, no borrowings, a good level of recurring revenue, and a broad spread of customers. As a consequence of these factors and having reviewed the forecasts for the coming year, the Board has a reasonable expectation that Kainos has adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. For this reason, it continues to adopt the going concern basis of accounting in preparing the annual financial statements.
In addition to the going concern consideration, the directors have assessed the Group's viability over a longer period than 12 months. The assessment was conducted over a three-year period, ending March 2021. A period of three years was selected for the following reasons:
In performing the assessment, the Group's long-term strategy and focus, the growing demand for its products and services, the increasing level of recurring revenue and low customer attrition, the track record of strong cash generation and a healthy cash balance with no debt from financial institutions were all taken into consideration. Consideration has also been given to the risks of regional and political changes in the Group's main markets. The Board believes that the Kainos global structure of its entities means that it is less susceptible to the effects of regional changes, as the vast majority of the Group's costs are incurred in Sterling, with most revenue also being earned in Sterling and revenues earned in foreign currency including Euro and US Dollar have most of their costs in foreign currency. The Group remains optimistic that its portfolio of digital services and platforms continues to be in demand, and that it remains well positioned to help public and private sector organisations in their digital transformation initiatives.
The review included sensitivity analysis on the future performance and solvency over three years and also for the principal risks facing the business in severe but reasonable scenarios. Based on the results of this assessment, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. In doing so, it is recognised that such future assessments are subject to a level of uncertainty that increases with time and, therefore, future outcomes cannot be guaranteed or predicted with certainty.
The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and Article 4 of the IAS Regulation and have also chosen to prepare the parent company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework.
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 Company and of their profit or loss for that period.
In preparing the parent company financial statements, the directors are required to:
In preparing the Group financial statements, International Accounting Standard 1 requires that the directors:
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain transactions and disclose with reasonable accuracy at any time the financial position and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of 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 corporate and financial information included on Kainos' website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The directors confirm that to the best of their knowledge:
On behalf of the Board
John Lillywhite Chairman
24 May 2019
In our opinion the Group and Company financial statements:
The financial statements we have audited comprise:
The Group financial statements:
The Company financial statements:
The relevant financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union (IFRSs as adopted by the EU) and IFRSs as issued by the International Accounting Standards Board (IASB).
The relevant financial reporting framework that has been applied in the preparation of the Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS101 "Reduced Disclosure Framework" (United Kingdom Generally Accepted Accounting Practice) ("relevant financial reporting frameworks").
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the financial statements" section of our report.
We are independent of the Group and the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
| Key audit matters | The key audit matters that we identified in the current year were: |
|---|---|
| • Revenue recognition relating to misstatement of accrued and deferred revenue; • Recognition of research and development credits (RDECs); and • Appropriateness of transfer pricing rates. |
|
| Materiality | The materiality that we used for the Group financial statements was £1,051,000 which was determined on the basis of approximately 5% of profit before tax. |
| Scoping | The Group and Company is headquartered from Belfast in Northern Ireland where the Group finance function is also located. All of the audit work covering the Group's revenue and profit for the year and its assets and liabilities is undertaken and performed by the audit team based in Belfast. |
| Significant changes in our approach |
A new key audit matter has been identified in relation to the appropriateness of transfer pricing rates used. This reflects the increasing number of jurisdictions in which the Group is operating, with operations commencing in the current financial year in France and Canada. |
We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you where:
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current financial year and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
In the prior year the mid-year implementation of the new financial management system was included as a separate key audit matter, however this was a matter discrete to the prior financial year, with the new system in place in the current period for the full financial year. A new key audit matter has been identified in relation to the appropriateness of transfer pricing rates.
| Revenue Recognition relating to Misstatement of Accrued and Deferred Income | |
|---|---|
| Key audit matter description |
The delivery of licensing or service revenue may occur over multiple accounting periods such that revenue is misstated at the balance sheet date due to incorrect recognition of accrued or deferred revenue. |
| Revenue could be misstated where the correct revenue recognition policies may not have been applied to contracts primarily due to the following factors: |
|
| • Multi-element contracts may not have been correctly unbundled where they contain separable deliverables; • Accrued income balances recorded at year end may not reflect the appropriate level of revenue to be recognised at the balance sheet date; and • Revenue may not be deferred over the appropriate period for services contracts or where the related billed service has not yet been performed. |
|
| Revenue recognition has been identified in the Audit Committee Report as a significant financial reporting item. Management's accounting policies for revenue are detailed within note 3 to the financial statements, with the critical judgements applied in revenue recognition set out in note 4 to the financial statements. |
|
| How the scope of our audit responded to the key audit matter |
In order to address the key audit matter, we performed the following procedures: • Obtained an understanding of the process and related controls for ensuring appropriate recognition of revenue and evaluated the design and determined the implementation of the controls relating to accrued and deferred revenue; • Carried out a review of the appropriateness of revenue recognition policies adopted under IFRS including disclosures in the financial statements; • Testing a sample of contracts including a recalculation of revenue to be recognised based on the contract terms and comparing this to actual revenue, with each contractual element reviewed to assess the appropriateness of revenue recognition; • Testing accrued income and deferred income to assess the appropriateness of accrued or deferred revenue as at the balance sheet date; and • Testing fixed price contracts to assess whether the revenues recognised to date were appropriate; this work included reviewing stage of completion by reference to post year end data and understanding budget versus actual variances where applicable and the impact on revenue to be recognised by reference to the stage of completion. |
| Recognition of Research and Development Credits (RDEC) | |
|---|---|
| Key audit matter description |
The financial statements include disclosure of significant assumptions made in respect of the eligibility of research and development costs for tax relief. The Group avails of the UK research and development expenditure credit regime (RDEC) with recognised RDECs for the current period totalling £2.0 million. |
| This is a key audit matter due to the risk associated with the appropriateness of management assumptions regarding the eligibility and valuation of research and development costs for RDECs and the adequacy of disclosure in the financial statements of the nature and extent of these assumptions. |
|
| The accuracy and disclosure of RDEC assumptions has been identified in the Audit Committee Report as a significant financial reporting item. Management's associated accounting policies are detailed in note 3 to the financial statements, with the material judgements relating to RDEC tax credits explained in note 4 to the financial statements. |
|
| How the scope of our audit responded to the key audit matter |
To address this key audit matter, we performed the following procedures: • Documented our understanding of management's processes to calculate the qualifying research and development costs and evaluated the design and determined the implementation of the controls relating to appropriate recognition of RDECs and the appropriate valuation of the year end RDEC receivable balance; • Developed an understanding of the supporting documentation and submissions prepared by the Group's tax advisors to support the RDEC claims including eligibility of costs incurred; • Tested the validity of a sample of the costs on which the claims are based back to the clients' underlying workings; and • Challenged the underlying assumptions used by management in assessing the recoverability of RDEC claims and assessed the conclusions reached by the Board on the quantification of amounts to be included in the financial statements. |
| Appropriateness of Transfer Pricing Rates | ||||
|---|---|---|---|---|
| The global nature of the Group's business means it is subject to taxation in numerous jurisdictions and cross-border transactions can be challenged by taxation authorities resulting in tax exposures. |
||||
| As a result of the interaction of tax laws in different jurisdictions, there is significant complexity in determining the most appropriate transfer pricing rates and thus the appropriate tax liabilities in each. |
||||
| There is a risk that tax authorities could have different interpretations to those of the directors resulting in potential misstatement of taxation provisions. |
||||
| Refer to note 3 and 17 to the financial statements. | ||||
| The Audit Committee has included their assessment of this risk on page 39. | ||||
| How the scope of our audit responded to the key audit matter |
• We obtained an understanding of the Group's tax strategy and management's process for determining the appropriate transfer pricing rates applicable to cross-border transactions; • Assisted by our transfer pricing tax specialists, who are part of the audit team, we reviewed material cross-border intergroup agreements and transactions and the underlying data used in determining applicable royalty and mark-up rates and assessed the appropriateness of the royalties and mark-up rates being used; and • We challenged and evaluated management's assumptions and critical estimates and judgements in respect of tax exposures, based on the royalty and mark-up rates utilised and their interpretation of the relevant tax laws in jurisdictions where the Group has significant operations. |
|---|---|
| Key observations | • We have no observations that impact on our audit in respect of the amounts and disclosures related to the taxation provisions. |
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Group financial statements | Company financial statements | |
|---|---|---|
| Materiality | £1,051,000 | £420,000 |
| Basis for determining materiality |
Approximately 5% of profit before tax |
Approximately 1.2% of net assets |
| Rationale for the benchmark applied |
Profit before tax has been chosen as the basis for determining materiality as we determine this to be the most relevant measure to users of the financial statements. |
Net assets has been chosen as a benchmark as it is considered the most relevant benchmark given the nature of the Company as being primarily an investment holding company. |
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £46,000 for the Group and £21,000 for the Company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Groupwide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope on the audit work at the Belfast location, where all of the Group entities finance functions are centrally managed.
There were no component audit teams, with the entire audit including the testing of the consolidation being conducted in Kainos Group plc's Belfast office by one central audit team.
All of the Group entities were subject to full audit scope covering 100% of the Group's revenue and profit for the year and 100% of its assets and liabilities. The extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group's operations at those entities. Our audit work was executed at levels of materiality applicable to each individual entity which ranged from £183,000 to £893,000.
The directors are responsible for the other information. The other information comprises the information included in the Annual Report other than the financial statements and our Auditor's Report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in respect of these matters.
In this context, we also have nothing to report with regards to our responsibility to specifically address the following items in other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group's and the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs (UK), the auditor exercises professional judgement and maintains professional scepticism throughout the audit. The auditor also:
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
In our opinion the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
In the light of the knowledge and understanding of the Group and of the Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors' Report.
We have nothing to report in respect of the provisions of the Companies Act 2016 which require us to report to you if in our opinion:
We also have nothing to report in respect of the provisions of the Companies Act 2006 which require us to report to you if, in our opinion certain disclosures of Directors' Remuneration have not been made or the part of the Directors' Remuneration report to be audited is not in agreement with the accounting records and returns.
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors in 2017 to audit the financial statements for the year ending 31 March 2018 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm, and its predecessor firm, is eight years covering the years ending 31 March 2012 to 31 March 2019.
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).
Richard Howard (Senior statutory auditor)
For and on behalf of Deloitte (NI) Limited Statutory Auditor Belfast, United Kingdom
FOR THE FINANCIAL PERIOD ENDED 31 MARCH 2019
| Note | 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|---|
| CONTINUING OPERATIONS | |||
| Revenue | 3,5 | 151,294 | 96,680 |
| Cost of sales | 5 | (82,189) | (50,076) |
| GROSS PROFIT | 5 | 69,105 | 46,604 |
| Operating expenses excluding share-based payments | 5 | (45,895) | (31,308) |
| Share-based payments | 23 | (2,196) | (1,096) |
| Operating expenses | (48,091) | (32,404) | |
| OPERATING PROFIT | 21,014 | 14,200 | |
| Finance income | 111 | 53 | |
| Finance expense | – | (2) | |
| PROFIT BEFORE TAX | 21,125 | 14,251 | |
| Taxation on ordinary activities | 8 | (4,186) | (2,585) |
| PROFIT FOR THE YEAR | 16,939 | 11,666 |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| PROFIT FOR THE YEAR Other comprehensive income: |
16,939 | 11,666 |
| Currency translation difference | 240 | (201) |
| TOTAL COMPREHENSIVE INCOME FOR THE YEAR | 17,179 | 11,465 |
| EARNINGS PER SHARE | ||
| Basic 10 |
14.3p | 10.0p |
| Diluted 10 |
13.9p | 9.6p |
AS AT 31 MARCH 2019
| Note | 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|---|
| NON-CURRENT ASSETS | |||
| Property, plant and equipment | 11 | 2,978 | 2,109 |
| Investments | 13 | 1,025 | 1,025 |
| Deferred tax assets | 16 | 1,310 | 1,289 |
| 5,313 | 4,423 | ||
| CURRENT ASSETS | |||
| Trade and other receivables | 14 | 29,302 | 23,157 |
| Prepayments | 2,652 | 2,647 | |
| Accrued income | 15 | 11,305 | 6,106 |
| Cash and bank balances | 42,488 | 28,961 | |
| 85,747 | 60,871 | ||
| TOTAL ASSETS | 91,060 | 65,294 | |
| CURRENT LIABILITIES | |||
| Trade creditors and accruals | 18 | (21,412) | (13,039) |
| Deferred income | 18 | (10,820) | (6,993) |
| Corporation tax | 18 | (2,755) | (3,157) |
| Other tax and social security | 18 | (6,514) | (6,028) |
| (41,501) | (29,217) | ||
| NON-CURRENT LIABILITIES | |||
| Other provisions | 18 | (1,392) | (347) |
| (1,392) | (347) | ||
| TOTAL LIABILITIES | (42,893) | (29,564) | |
| NET ASSETS | 48,167 | 35,730 | |
| EQUITY | |||
| Share capital | 20 | 605 | 593 |
| Share premium account | 20 | 3,596 | 1,702 |
| Capital reserve | 20 | 665 | 666 |
| Share-based payment reserve | 3,895 | 2,549 | |
| Translation reserve | (210) | (450) | |
| Retained earnings | 20 | 39,616 | 30,670 |
| TOTAL EQUITY | 48,167 | 35,730 |
Richard McCann Director 24 May 2019
FOR THE YEAR ENDED 31 MARCH 2019
| Share-based | |||||||
|---|---|---|---|---|---|---|---|
| Share capital (£000s) |
Share premium (£000s) |
Capital reserve (£000s) |
payment Translation reserve (£000s) |
reserve (£000s) |
Retained earnings (£000s) |
Total equity (£000s) |
|
| BALANCE AT 31 MARCH 2017 | 592 | 1,626 | 667 | 1,279 | (249) | 26,071 | 29,986 |
| Profit for the year | – | – | – | – | – | 11,666 | 11,666 |
| Other comprehensive income | – | – | – | – | (201) | – | (201) |
| Total comprehensive income for the year | – | – | – | – | (201) | 11,666 | 11,465 |
| Share-based payment expense (note 23) | – | – | – | 1,096 | – | – | 1,096 |
| Adjustments in respect of prior periods | – | – | – | 174 | – | (174) | – |
| Current tax for equity-settled share-based payments |
– | – | – | – | – | 82 | 82 |
| Deferred tax for equity-settled share-based payments |
– | – | – | – | – | 606 | 606 |
| Issue of share capital | 1 | 76 | (1) | – | – | – | 76 |
| Dividends | – | – | – | – | – | (7,581) | (7,581) |
| BALANCE AT 31 MARCH 2018 | 593 | 1,702 | 666 | 2,549 | (450) | 30,670 | 35,730 |
| Profit for the year | – | – | – | – | – | 16,939 | 16,939 |
| Other comprehensive income | – | – | – | – | 240 | – | 240 |
| Total comprehensive income for the year | – | – | – | – | 240 | 16,939 | 17,179 |
| Share-based payment expense (note 23) | – | – | – | 1,346 | – | – | 1,346 |
| Adjustments in relation to prior periods | – | – | – | – | – | 33 | 33 |
| Current tax for equity-settled share-based payments |
– | – | – | – | – | 899 | 899 |
| Deferred tax for equity-settled share-based payments |
– | – | – | – | – | (8) | (8) |
| Issue of share capital | 12 | 1,894 | (1) | – | – | – | 1,905 |
| Dividends | – | – | – | – | – | (8,917) | (8,917) |
| BALANCE AT 31 MARCH 2019 | 605 | 3,596 | 665 | 3,895 | (210) | 39,616 | 48,167 |
FOR THE YEAR ENDED 31 MARCH 2019
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| NET CASH FROM OPERATING ACTIVITIES | 22,520 | 14,152 |
| Investing activities | ||
| Purchases of trading investments | – | (125) |
| Purchases of property, plant and equipment | (2,016) | (1,130) |
| NET CASH USED IN INVESTING ACTIVITIES | (2,016) | (1,255) |
| Financing activities | ||
| Dividends paid | (8,917) | (7,581) |
| Proceeds on issue of shares | 1,905 | 76 |
| NET CASH USED IN FINANCING ACTIVITIES | (7,012) | (7,505) |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 13,492 | 5,392 |
| Cash and cash equivalents at beginning of year | 28,961 | 23,722 |
| Effects of foreign exchange rate changes | 35 | (153) |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | 42,488 | 28,961 |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Profit for the year | 16,939 | 11,666 |
| Adjustments for: | ||
| Income tax expense | 4,186 | 2,585 |
| Share-based payment expense | 2,196 | 1,096 |
| Government grants released | – | (13) |
| Depreciation | 1,147 | 976 |
| (Profit)/loss on disposal of property, plant and equipment | (22) | 47 |
| Increase in provisions | 1,045 | 50 |
| Operating cash flows before movements in working capital | 25,491 | 16,407 |
| Increase in receivables | (11,215) | (8,087) |
| Increase in payables | 10,146 | 7,370 |
| Cash generated by operations | 24,422 | 15,690 |
| Income taxes (paid) | (1,902) | (1,538) |
| NET CASH FROM OPERATING ACTIVITIES | 22,520 | 14,152 |
Kainos Group plc ("the Company") is a public company limited by shares incorporated in the UK under the Companies Act 2006 and is registered in England and Wales (company registration number 09579188), having its registered office at 21 Farringdon Road, 2nd Floor, London, EC1M 3HA.
The financial statements are presented in Pounds Sterling and rounded to the nearest thousand. The consolidated financial statements consolidate those of the Company and its subsidiaries (together "Kainos", or "the Group").
The Group's operations and principal activities are outlined in the Strategic Report. The financial position is outlined in the Financial Review and the notes to the financial statements.
The financial statements were authorised for issue by the directors on 24 May 2019.
At the date of authorisation of these financial statements, the following standards and interpretations were in issue and applicable to periods commencing on or after:
| • | IFRS9 Financial Instruments | 1 January 2018 |
|---|---|---|
| • | IFRS15 Revenue from Contracts with Customers | 1 January 2018 |
At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue and applicable to periods commencing on or after:
| • | IFRS3 (Amendment) Definition of a Business | 1 January 2020 |
|---|---|---|
| • | IFRS9 (Amendment) Prepayment Features with Negative Compensation | 1 January 2019 |
| • | IFRS16 Leases | 1 January 2019 |
| • | IFRS17 Insurance Contracts | 1 January 2021 |
| • | AS1 (Amendment) Definition of Material | 1 January 2020 |
| • | IAS8 (Amendment) Definition of Material | 1 January 2020 |
| • | IAS19 (Amendment) Plan Amendment, Curtailment or Settlement | 1 January 2019 |
| • | IAS28 (Amendment) Long-term Interests in Associates and Joint Arrangements | 1 January 2019 |
| • | Annual Improvements to IFRS Standards 2015-2017 Cycle (Amendment) | 1 January 2019 |
| • | IFRIC23 Uncertainty over Income Tax Treatments | 1 January 2019 |
| • | Amendments to References to Conceptual Framework in IFRS Standards | 1 January 2020 |
IFRS16 was published in January 2016 and will become effective for accounting periods beginning on or after 1 January 2019. IFRS16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard.
The Group is currently finalising the quantification of the impact that IFRS16 will have on its consolidated financial statements. All of the Group's leases are currently accounted for as operating leases, and the most significant leases, by value, are those for rented office space. The main impact on transition to the new standard will be a significant increase in the Group's total liabilities due to the recognition of a liability for the present value of future lease payments on these leases, and a corresponding increase in total assets for the right of use lease asset. Information on the Group's operating lease commitments and expense recognised in the year is included within note 21.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.
The consolidated financial statements have been prepared on the historical cost basis modified by certain financial instruments which are carried at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. The consolidated financial statements have been prepared on the going concern basis as detailed in the Directors' Report. The principal accounting policies adopted are set out below.
The consolidated financial statements incorporate the Group and entities controlled by the Group (its subsidiaries) made up to 31 March each year. Control is achieved when the Group:
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Group has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally.
The Group considers all relevant facts and circumstances in assessing whether or not the Group's voting rights in an investee are sufficient to give it power, including:
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date the Group gains control until the date when the Group ceases to control the subsidiary.
Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring the accounting policies used into line with the Group's accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation.
Revenue is recognised to depict the transfer of promised services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. The Group has adopted the five-step approach to the timing of revenue recognition based on performance obligations in customer contracts. This involves identifying the contract with customers, identifying the performance obligations, determining the transaction price, allocating the price to the performance obligations within the contract and recognising revenue when the performance obligations are satisfied.
Revenue from the Group's activities is recognised as detailed below.
IFRS15 contains a new set of principles on when to recognise and measure revenue as well as new requirements related to presentation and disclosure. Prior to adoption, the Group performed detailed analysis of the impact of IFRS15 on the consolidated financial statements and no material impact was identified. Service revenue remains the largest revenue stream (88% of total revenue for the year ended 31 March 2019 (81% for the year ended 31 March 2018)) and the adoption of IFRS15 had no impact on revenue recognition. IFRS15 has also had no impact on revenue recognition for our other revenue streams, such as licence revenue and managed service revenue and no contract acquisition or contract fulfilment costs have been identified thus far that meet the criteria for capitalisation under IFRS15. As a result, there was no adjustment to retained earnings on application at 1 April 2018.
Unbilled revenue relates to work undertaken where the contract value is known but the billing has not yet occurred at the balance sheet date and is classified as a contract asset and is included within accrued income in the Consolidated Balance Sheet. Unearned revenue is classified as a contract liability and is included within deferred income in the Consolidated Balance Sheet. Amounts invoiced for services which will be performed over a period of time are deferred and recognised over the relevant period. Time and material projects are generally billed when the inputs are known so will therefore occur after the balance sheet date, which gives rise to accrued revenue at the balance sheet date. Payment for the services is generally on industry standard payment terms.
If the total estimated costs and revenues of a contract cannot be reliably estimated, revenue is recognised only to the extent that costs have been incurred and where the Group has an enforceable right to payment as work is being performed. A provision for forecast excess costs over forecasted revenue is made as soon as a loss is foreseen. On occasion, the Group may have a limited number of contracts where revenue is recognised on a percentage of completion basis, which is determined by reference to the costs incurred as a proportion of the total estimated costs of the contract. Due to the nature of the Group's business revenue is generally recognised over time and point in time revenue is not material.
Contract assets are represented by trade debtors (note 14) and accrued income and contract liabilities are represented by deferred income (note 18) and onerous contract provisions (note 18).
Contracts for the provision of services generally tend to be 'time and materials' contracts whereby the customer is contractually bound to pay for services for each hour or day spent in delivering a contractually agreed services scope. These contracts typically have no payment milestones, refunds or bundling with other services or products. Revenue is therefore recognised in line with the chargeable 'time and materials' which are allocated to the contracted project.
When the outcome of a fixed price contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion. This is normally measured by the proportion of contract costs incurred for work performed to date against the estimated total contract costs. This is reviewed on a monthly basis. Where costs are anticipated to be in excess of revenues an onerous contract will be recognised.
Support and maintenance fees are recognised on a straight-line basis over the contracted term in line with the estimated delivery of performance obligations.
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.
Licences charged to customers for the use of proprietary software are assessed on a contract by contract basis and depending on the terms, revenue is generally recognised on a straight-line basis during the licence implementation period as are the licence fee and related implementation.
SaaS is charged on a subscription basis and the revenue is recognised pro-rata over the period that the service is provided.
Subscription revenue for the management of software applications for customers in the cloud will be recognised pro-rata over the period the service is provided.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group entity are expressed in the presentation currency which is Pounds Sterling.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each statement of financial position date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in the income statement in the period in which they arise, except for, exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future (therefore forming part of the net investment in the foreign operation), which are recognised initially in the statement of comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the statement of financial position date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in the statement of comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate).
Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.
Government grants are generally recognised in the income statement on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase noncurrent assets are recognised as deferred revenue in the statement of financial position and transferred to the income statement on a systematic and rational basis over the useful lives of the related assets. Other grants are credited to the income statement when there is reasonable assurance the grant conditions have been complied with and that the grant money will be received.
Research and development credits are accounted for as having the substance of a government grant and are offset against related operating expenditure. The grants are recognised on the basis of the fair value of claims made. A corresponding other receivable is recognised at the time the grants are earned and will subsequently be offset against tax payable.
The Group operates two defined contribution pension schemes and the pension charge represents the amounts payable by the Group to the funds in respect of the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.
Current tax is recognised in the income statement, except when it relates to items that are recognised in the statement comprehensive income or directly in equity, in which case, the current tax is also recognised in the statement of comprehensive income or directly in equity respectively.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the statement of financial position date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in the statement of comprehensive income, in which case the deferred tax is also dealt with in the statement of comprehensive income.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Property, plant and equipment assets are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided at rates calculated to write-off the cost less residual value of each asset on a straight-line basis, over its expected life.
The principal annual rates are as follows:
| Long-term leasehold property | 2.5% |
|---|---|
| Short-term leasehold property | Over the term of the lease up to five years |
| Fixtures and fittings | 20% |
| Office equipment | 33% |
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Trade receivables, which generally have 30- to 90-day credit terms, are initially recognised and carried at their original invoice amount less an allowance for any uncollectable amounts. Trade receivables are held for the collection of contractual cash flows that are solely payments of principal and interest on the principal amounts outstanding, are subsequently measured at amortised cost. Given the short lives of the trade receivables, there are generally no material fair value movements between initial recognition and the derecognition of the receivable. The Group assesses for doubtful debts (impairment) using the expected credit losses model as required by IFRS9. For trade receivables, the Group applies the simplified approach which requires expected lifetime losses to be recognised from the initial recognition of the receivables.
Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 23.
Where the Company has granted rights to its equity instruments to employees of other Group companies, such arrangements are accounted for as equity-settled share-based payment arrangements. A capital contribution is recognised in the subsidiary company accounts to the extent that they are not recharged with a corresponding increase in the investment in the subsidiary held by the Company.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straightline basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest.
At each statement of financial position date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally generated intangible asset arising from development (or from the development phase of an internal project) is recognised if all of the following conditions have been demonstrated:
The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, development expenditure is recognised in the income statement in the period in which it is incurred.
Financial assets and financial liabilities are recognised in the Group's statement of financial position when the Group becomes a party to the contractual provisions of the instrument.
IFRS9 replaced the classification and measurement models for financial instruments previously used in IAS39, including a new expected credit loss model for calculating impairment on financial assets. The vast majority of financial assets held are trade receivables and cash, which continue to be accounted for at amortised cost. Due to the general quality and short-term nature of trade receivables, the move from an incurred loss model to an expected loss model has not had a material impact. As permitted by IFRS9, the Group applies the simplified approach to measure expected credit losses which uses a lifetime expected loss allowance. The impact of adopting IFRS9 on the consolidated financial statements was not material for the Group and there was no adjustment to retained earnings on application at 1 April 2018.
Financial assets are assessed for indicators of impairment at each balance sheet date. For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis.
IFRS9 introduces an 'expected loss' model for the assessment of impairment of financial assets. The 'incurred loss' model under IAS39 required the Group to recognise impairment losses when there was objective evidence that an asset was impaired. Under the expected loss model, impairment losses are recorded if there is an expectation of credit losses, even in the absence of a default event. However, as permitted by IFRS9, the Group applies the 'simplified approach' to trade receivable balances. Due to the general quality and short-term nature of the trade receivables, there is no significant impact on introduction of the 'simplified approach'.
There has been no adjustment required on transition to IFRS9 to the loss allowance against financial assets.
Financial liabilities are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
The Group derecognises financial liabilities when the Group's obligations are discharged, cancelled or expire.
Investments in equity shares, which are all unquoted equity investments, are stated at fair value.
In the Company financial statements, investments in subsidiaries are stated at cost and, where appropriate, less provisions for impairment.
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received, and the amount of the receivable can be measured reliably.
Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
In the application of the Group's accounting policies, which are described in note 3, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
In the application of the Group's accounting policies and preparation of financial statements in conformity with IFRSs, management are required to make judgements and estimates that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors considered relevant and take account of the circumstances and facts at the period end. Actual results may differ from these estimates. This summary is not a list of all uncertainties, estimates and judgements encountered and others could arise that cause a material adjustment to the carrying value of assets or liabilities within the next financial year.
(a) Key sources of estimation that have been made that have the most significant effect on the amounts recognised in the consolidated financial statements include:
Kainos charges for its digital services on a time and materials or fixed price basis. Where there are fixed price contracts, revenue is recognised based on the stage of completion. Stage of completion is measured by reference to costs incurred to date as a percentage of total estimated costs. The Group estimates costs to complete its contractual obligations by reference to the current run rate of these costs until contractual completion. Estimates can vary as there will be technical issues to overcome, timescales change and there could be commercial issues. Therefore, the status of customer contracts is assessed on an ongoing basis.
The Group's Digital Platforms are licensed to customers on a recurring annual basis following a SaaS business model and less frequently as a fixed one-off lifetime perpetual licence (for some Evolve customers). Licences charged to customers for the use of proprietary software are assessed on a contract by contract basis depending on the implementation terms specified in the underlying contract. The implementation period may change due to customer requirements, and as such changes in the estimated implementation period can impact the amount of licence revenue recognised.
Estimates are made in determining the product development expenditure eligible for RDEC. RDEC grants are recognised when there is certainty that related conditions have been met and the grant will be received. The unrecognised RDEC component at 31 March 2019 equates to £2.1 million and appropriate amounts will be released as and when the conditions have been met and the grants in relation to that amount have been received.
IFRSs require many assets, liabilities and expenses to be recognised at fair value. Where open market values are not available the fair values are estimates and therefore subject to assumptions. This applies to share-based payments as detailed in note 23.
(b) The significant judgements that have been made that have the most significant effect on the amounts recognised in the consolidated financial statements include:
Kainos invests on a continual basis in the development of new and enhanced features in the product suite. There is a continual process of enhancements to and expansion of the overall product suite. Judgement is required in assessing whether the development costs meet the criteria for capitalisation. These judgements have been applied consistently year to year. In making this judgement, the Group evaluates, amongst other factors, whether there are future economic benefits beyond the current period, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Research and product development expenditure incurred on minor or major upgrades, or other changes in software functionality, does not satisfy the criteria in order to capitalise. Such expenditure is therefore recognised as an expense.
Therefore, judgement is required in determining the practice for capitalising development costs. The accounting policy for research and product development is in note 3 and in the current year there are no development expenses that have been capitalised (2018: nil). The total product development expenditure in the period is £4.3 million (2018: £4.9 million). Product development expenditure is partially offset against RDEC grants received from HMRC.
Generally, commercial viability of new products is not proven until all high-risk development issues have been resolved through testing pre-launch versions of the product. As a result, technical feasibility is proven only after completion of the detailed design phase and formal approval, which occurs just before the products are ready to go to market. Accordingly, development costs have not been capitalised.
Costs which are incurred after the general release of internally generated software, or costs which are incurred in order to enhance existing products are expensed in the period in which they are incurred and included within research and development expense in the financial statements.
Government grants are generally recognised in the income statement on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Judgement is applied in assessing when there is reasonable assurance the grant conditions have been complied with and that the grant money will be received.
All of the Group's revenue during the period to 31 March 2019 was derived from continuing operations. Kainos is structured into two divisions: Digital Services and Digital Platforms.
Digital Services include full lifecycle development and support of digital solutions for government and commercial customers. Kainos is also the largest partner for Workday in Europe, responsible for implementing Workday's innovative Software-as-a-Service (SaaS) platform for enterprise customers.
Digital Platforms comprise Evolve EMR, the market-leading product for the digitisation of patient notes in the Acute sector of the NHS; Evolve IC, an integrated care platform for NHS and international healthcare providers; and Smart, an automated testing platform for Workday customers.
The following is an analysis of the Group's revenue and results by reportable segment:
| 2019 | Digital Services | Digital Platforms | Consolidated |
|---|---|---|---|
| 12 months to 31 March | (£000s) | (£000s) | (£000s) |
| Revenue | 132,587 | 18,707 | 151,294 |
| Cost of sales | (73,961) | (8,228) | (82,189) |
| GROSS PROFIT | 58,626 | 10,479 | 69,105 |
| Direct expenses12 | (16,926) | (9,938) | (26,864) |
| CONTRIBUTION Central overheads12 |
41,700 | 541 | 42,241 (18,920) |
| ADJUSTED PRE-TAX PROFIT | 23,321 |
| 2018 | Digital Services | Digital Platforms | Consolidated |
|---|---|---|---|
| 12 months to 31 March | (£000s) | (£000s) | (£000s) |
| Revenue | 78,592 | 18,088 | 96,680 |
| Cost of sales | (42,605) | (7,471) | (50,076) |
| GROSS PROFIT | 35,987 | 10,617 | 46,604 |
| Direct expenses12 | (9,297) | (9,099) | (18,396) |
| CONTRIBUTION Central overheads12 |
26,690 | 1,518 | 28,208 (12,861) |
| ADJUSTED PRE-TAX PROFIT | 15,347 |
12 Operating expenses excluding share-based payments includes direct expenses, central overheads and finance income/expenses.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| ADJUSTED PRE-TAX PROFIT Share-based payments |
23,321 (2,196) |
15,347 (1,096) |
| PROFIT BEFORE TAX | 21,125 | 14,251 |
The Group's revenue from external customers by geographic location is detailed below:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| United Kingdom | 122,304 | 76,478 |
| Republic of Ireland | 5,827 | 6,632 |
| US | 10,597 | 6,715 |
| Other | 12,566 | 6,855 |
| 151,294 | 96,680 |
The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 3. Segment assets and liabilities are not reported to the chief operating decision maker (CODM) on a segmental basis and therefore are not disclosed.
A Digital Services client ("Customer A") accounted for £21.1 million (or 14%) of total Group revenue during 2019 (2018: £4.4 million or 5%). Digital Services client ("Customer B") accounted for £13.6 million (or 9%) of total 2019 Group revenue (2018: £12.6 million or 15%). No other single customer contributed 10% or more to the Group's consolidated revenue during the period 31 March 2019.
Profit for the year has been arrived at after charging/(crediting):
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Total staff costs (note 7) | 73,899 | 55,881 |
| Government grants | (984) | (3,076) |
| Operating lease rentals (note 21) | 2,272 | 1,499 |
| Research and development costs | 4,321 | 4,909 |
| Research and Development Expenditure Credit grant | (2,014) | (2,781) |
| Depreciation of property, plant and equipment (note 11) | 1,147 | 976 |
| Net foreign exchange (gain)/loss | (69) | 43 |
The analysis of auditor's remuneration is as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Fees payable to the Group's auditor for the audit of the Group's annual accounts Fees payable to the Group's auditor for the audit of subsidiaries |
60 42 |
57 32 |
| Total audit fees | 102 | 89 |
| Fees payable to the Group's auditor for other services to the Group: Review of interim report Other audit related services |
16 – |
16 – |
| Total audit related fees | 118 | 105 |
| Non-audit fees Total audit and non-audit fees |
– 118 |
– 105 |
| Total % of non-audit fees | 0% | 0% |
The average number of employees during the year was:
| 2019 Number |
2018 Number |
|
|---|---|---|
| Technical | 1,004 | 780 |
| Administration | 115 | 129 |
| Sales | 59 | 55 |
| 1,178 | 964 |
Their aggregate remuneration comprised:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Wages and salaries | 62,627 | 47,037 |
| Social security costs | 7,128 | 6,192 |
| Other pension costs | 1,948 | 1,556 |
| Share-based payments | 2,196 | 1,096 |
| 73,899 | 55,881 |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Corporation tax: | ||
| Current year (UK) | 3,657 | 2,434 |
| Current year (overseas) | 599 | 489 |
| Adjustments in respect of prior years | (33) | 19 |
| 4,223 | 2,942 | |
| Deferred tax (note 17) | (37) | (357) |
| 4,186 | 2,585 |
UK corporation tax is calculated at 19% (2018: 19%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The effective tax rate for 2019 was 20% (2018: 18%).
Changes to the UK corporation tax rates were substantively enacted as part of the Finance Act 2016 and Finance Act 2015. As a result, the main rate of corporation tax reduced to 19% from 1 April 2017 and will reduce to 17% from 1 April 2020. We envisage our future effective tax rates to be broadly in line with the main UK corporation tax rate.
The Group's tax charge can be reconciled to the profit in the income statement as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Profit before tax on continuing operations | 21,125 | 14,251 |
| Tax at the UK corporation tax rate of 19% (2018: 19%) | 4,014 | 2,708 |
| Non-deductible expenses | 66 | 19 |
| Non-taxable income | (1) | – |
| Effect of foreign exchange on consolidation | 29 | (91) |
| Effect of non-UK tax rates | 17 | 98 |
| Movement in prior year unrecognised deferred tax assets | 15 | (218) |
| Adjustments to tax charge in respect of prior years | 46 | 34 |
| Change in UK tax rates | – | 35 |
| Tax expense for the year | 4,186 | 2,585 |
In addition to the amount charged to the income, the following amounts relating to tax have been recognised directly in equity.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| CURRENT TAX | ||
| Permanent element of stock option deduction | 899 | 82 |
| DEFERRED TAX | ||
| Adjustments in respect of previous periods | – | 28 |
| Deferred tax on stock option | (8) | 578 |
| Total tax recognised directly in equity | 891 | 688 |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Amounts recognised as distributions to equity holders in the period: | ||
| Interim dividend for 2019 of 2.8p per share | 3,382 | – |
| Final dividend for 2018 of 4.6p per share | 5,535 | – |
| Interim dividend for 2018 of 2.0p per share | – | 2,371 |
| Final dividend for 2017 of 4.4p per share | – | 5,215 |
| 8,917 | 7,586 |
The proposed final dividend for 2019 is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements. The final dividend, if approved by shareholders, will be 6.5p and payable on 25 October 2019 to shareholders on the register on 27 September 2019, with an ex-dividend date of 26 September 2019.
Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares in issue during the period.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Profit for the period | 16,939 | 11,666 |
| Thousands | Thousands | |
| Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares from share options |
118,318 3,250 |
117,231 3,668 |
| Weighted average number of ordinary shares for the purposes of diluted earnings per share |
121,568 | 120,899 |
| Basic earnings per share Diluted earnings per share |
14.3p 13.9p |
10.0p 9.6p |
Adjusted basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the parent company, excluding exceptional items and share-based payments (including associated taxes) by the weighted average number of ordinary shares in issue during the period.
| 2019 (£000s) |
2018 (£000s |
|
|---|---|---|
| Profit for the period | 16,939 | 11,666 |
| Share-based payments (net of associated taxes) | 1,823 | 910 |
| Adjusted profit for the period | 18,762 | 12,576 |
| Thousands | Thousands | |
| Weighted average number of ordinary shares for the purposes of | ||
| basic earnings per share | 118,318 | 117,231 |
| Effect of dilutive potential ordinary shares from share options | 3,250 | 3,668 |
| Weighted average number of ordinary shares for the purposes of | ||
| diluted earnings per share | 121,568 | 120,899 |
| Adjusted basic earnings per share | 15.9p | 10.7p |
| Adjusted diluted earnings per share | 15.4p | 10.4p |
| Leasehold | Office | Fixtures and | ||
|---|---|---|---|---|
| property | equipment | fittings | Total | |
| (£000s) | (£000s) | (£000s) | (£000s) | |
| At 1 April 2017 | 2,545 | 3,190 | 1,450 | 7,185 |
| Additions | 5 | 1,091 | 34 | 1,130 |
| Disposals | (8) | (835) | (167) | (1,010) |
| At 31 March 2018 | 2,542 | 3,446 | 1,317 | 7,305 |
| Additions | 185 | 1,831 | – | 2,016 |
| Disposals | – | (419) | – | (419) |
| At 31 March 2019 | 2,727 | 4,858 | 1,317 | 8,902 |
| Accumulated depreciation | ||||
| At 1 April 2017 | 2,027 | 2,118 | 1,038 | 5,183 |
| Charge for the year | 37 | 786 | 153 | 976 |
| Eliminated on disposals | (8) | (788) | (167) | (963) |
| At 31 March 2018 | 2,056 | 2,116 | 1,024 | 5,196 |
| Charge for the year | 59 | 957 | 131 | 1,147 |
| Eliminated on disposals | – | (419) | – | (419) |
| At 31 March 2019 | 2,115 | 2,654 | 1,155 | 5,924 |
| Carrying amount | ||||
| At 31 March 2019 | 612 | 2,204 | 162 | 2,978 |
| At 31 March 2018 | 486 | 1,330 | 293 | 2,109 |
| At 31 March 2017 | 518 | 1,072 | 412 | 2,002 |
The subsidiary undertakings at 31 March 2019 are in the table below. All principally operate in their country of incorporation.
| Subsidiary undertakings | Incorporated | Registered office | Principal activity | Proportion of ordinary share capital held |
|---|---|---|---|---|
| Kainos Software Limited | Northern Ireland | Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT |
Software development |
100% |
| Kainos Software Ireland Limited | Republic of Ireland | 6-7 Saint Stephen's Green, Software Dublin 2 |
development | 100% |
| Kainos Software Poland Spólka z.o.o | Poland | Tryton Business House, ul. Jana z Kolna 11, 80-864 Gdansk |
Software development |
100% |
| Kainos Trustees Limited | Northern Ireland | Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT |
Share Scheme Trustee |
100% |
| Kainos Managers Limited | Northern Ireland | Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT |
Dormant | 100% |
| Kainos Evolve Limited | Northern Ireland | Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT |
Software development |
100% |
| Kainos WorkSmart Limited | Northern Ireland | Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT |
Software development |
100% |
| Kainos WorkSmart Inc. | US | 470 Atlantic Avenue, 4th Floor, Boston, Massachusetts 02210 |
Software development |
100% |
| Kainos Evolve Inc. | US | 470 Atlantic Avenue, 4th Floor, Boston, Massachusetts 02210 |
Software development |
100% |
| Kainos Worksmart GmbH | Germany | The Squaire 12, Am Flughafeb Hessen, Frankfurt 60549 |
Software development |
100% |
| Kainos Worksmart ApS | Denmark | Radhuspladsen 16, 3., 1550 Copenhagen V, Denmark |
Software development |
100% |
| Kainos Worksmart Canada Inc | Canada | 500–20 Wellington Street East, Toronto, ON, M5E 1C5 |
Software development |
100% |
| Kainos Worksmart SAS | France | 3-5 Rue Saint Georges TMF Pole 750008, Paris, France |
Software development |
100% |
There are no significant restrictions on the ability of the Group to access or use assets and settle liabilities. The directors consider that the Group has no ultimate controlling party.
The Group has unlisted investments as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Carrying value | 1,025 | 1,025 |
In February 2016, the Group acquired 10% of the share capital of Cirdan Imaging Limited, a privately-owned supplier of medical diagnostic hardware and software, incorporated in Northern Ireland, for £0.9 million. Cirdan's wide international presence and its strong credentials in the healthcare industry offers the potential to strengthen significantly the Evolve proposition in new global markets.
In March 2018, the Group purchased an additional 23,443 shares in Cirdan for £0.1 million resulting in a total shareholding in Cirdan of 11.2% at 31 March 2018.
The directors consider that the carrying amount of the investment approximates to its fair value.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Trade receivables Allowance for doubtful debts |
26,216 (53) |
19,738 – |
| Other receivables | 26,163 3,139 |
19,738 3,419 |
| 29,302 | 23,157 |
Included in trade receivables are the following amounts from significant customers listed in note 5 above (Segment Reporting): Customer A – 2019: £3.4 million (2018: £0.6 million) and Customer B – 2019: £2.7 million (2018: £3.0 million). In addition to Customer A and B there are three further customers who represent greater than 5% of the total balance of trade receivables as at 31 March 2019.
The average credit period extended to customers is 30 days. Specific provision on overdue amounts is made based on historical trade with the counterparty and the counterparty's current financial standing.
The Group does not hold any collateral or other credit enhancements over any of its trade receivables nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.
The ageing of the Group's trade receivables which are past due but not impaired is shown below:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| 31-60 days | 522 | 3,301 |
| 61-90 days | 518 | 983 |
| 91+ days | 2,204 | 26 |
| Sub-total | 3,244 | 4,310 |
The aged 90+ days receivable balance includes £2.0 million of overdue amounts for services invoiced and not yet performed with a corresponding balance booked to deferred income.
The Group's impaired trade debtors at each statement of financial position date were aged as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| 91+ days | 53 | – |
The movement in the allowance for doubtful debts is shown below:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Balance at the beginning of the period | – | 15 |
| Impairment losses recognised | 53 | – |
| Amounts recovered during the year | – | (15) |
| Balance at the end of the period | 53 | – |
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated with the customer base consisting primarily of government bodies, state agencies and blue-chip corporates.
The Group always measures the loss allowance for trade receivables at an amount equal to lifetime ECL. The expected credit losses on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor's current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of the conditions at the reporting date.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Accrued income | 11,305 | 6,106 |
| 11,305 | 6,106 |
All accrued income relates to contractual revenue recognised in the income statement.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Deferred tax asset (note 17) | 1,310 | 1,289 |
| 1,310 | 1,289 |
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon.
| Accelerated | |||||
|---|---|---|---|---|---|
| capital | Share-based | ||||
| allowances | payment | Tax losses | Other | Total | |
| (£000s) | (£000s) | (£000s) | (£000s) | (£000s) | |
| At 1 April 2017 | (71) | 235 | 19 | 141 | 324 |
| Foreign exchange differences | – | – | – | 2 | 2 |
| Credit to retained earnings | – | 606 | – | – | 606 |
| Credit to profit | 51 | 58 | 8 | 240 | 357 |
| At 1 April 2018 | (20) | 899 | 27 | 383 | 1,289 |
| Foreign exchange differences | – | – | (4) | (3) | (7) |
| Debit to retained earnings | – | (9) | – | – | (9) |
| Credit/(debit) to profit | 34 | (17) | (23) | 43 | 37 |
| At 31 March 2019 | 14 | 873 | – | 423 | 1,310 |
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Deferred tax liabilities | – | (20) |
| Deferred tax assets | 1,310 | 1,309 |
| 1,310 | 1,289 |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Trade creditors and accruals | 21,412 | 13,039 |
| Deferred income | 10,820 | 6,993 |
| Corporation tax | 2,755 | 3,157 |
| Other tax and social security | 6,514 | 6,028 |
| 41,501 | 29,217 |
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs, including payroll. For most suppliers, no interest is charged on payables.
The deferred income can arise in respect of support and maintenance contracts billed quarterly or annually in advance and certain licence agreements which are billed annually in advance, with revenue being recognised for both over the licence implementation period.
There was no revenue recognised in the current reporting period that related to performance obligations that were satisfied in a prior year. All deferred income is recognised within 12 months.
Other provisions are analysed as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Property-related provision | 394 | 347 |
| Onerous contract provision | 998 | – |
| 1,392 | 347 | |
| 2019 (£000s) |
2018 (£000s) |
|
| Current | 771 | – |
| Non-current | 621 | 347 |
| 1,392 | 347 | |
| Property-related provision (£000s) |
Onerous contract provision (£000s) |
Total (£000s) |
| At 1 April 2018 347 |
– | 347 |
| Additional provision in the year 47 |
998 | 1,045 |
| At 31 March 2019 394 |
998 | 1,392 |
The property-related provision represents management's best estimate of the Group's liability for future contractual repair works at the end of the lease period.
Regular review of all customer contracts identified one loss-making contract. Management have determined that the costs of completing the contract exceed expected revenues resulting in an expected total loss of £1.0 million. The total loss has been provided for in 'other provisions' in accordance with IAS37. The directors are satisfied with this approach and have assessed that the total provision is reasonable.
In the US, the commercial arrangement with Evolve IC and Telehealth provider InTouch Health concluded on 31 March 2018. InTouch Health terminated their commercial relationship with Kainos to develop their own internal solution. Kainos has since referred this matter to US legal counsel and has pursued legal recourse for breach of contract by InTouch Health. In response, InTouch Health has counterclaimed against Kainos. At this stage the directors' assessment, based on independent US legal advice, is that the basis for InTouch's counter-claim has little merit and it is not probable that an economic outflow will be required to settle the claim.
Share capital
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| ISSUED AND FULLY PAID: | ||
| Ordinary shares | ||
| Opening balance | 593 | 592 |
| Issued during the year | 12 | 1 |
| Total share capital | 605 | 593 |
The Company has one class of ordinary share which carries no right to fixed income. The Company's Articles of Association do not specify any limit on the total authorised share capital of the Company.
At 31 March 2019, the Company has 121,009,439 ordinary shares (2018: 118,575,272) with a nominal value of £0.005 each.
| Balance at 31 March 2019 | 39,616 |
|---|---|
| Profit for the year | 16,939 |
| Dividends paid | (8,917) |
| Adjustments in respect of previous periods | 33 |
| Current tax equity movement | 899 |
| Deferred tax equity movement | (8) |
| Balance at 31 March 2018 | 30,670 |
| Profit for the year | 11,666 |
| Dividends paid | (7,581) |
| Adjustments in respect of previous periods | (174) |
| Current tax equity movement | 82 |
| Deferred tax equity movement | 606 |
| Balance at 31 March 2017 | 26,071 |
| Retained earnings | (£000s) |
| Balance at 31 March 2019 | 665 |
| Issue of share capital | (1) |
| Balance at 31 March 2018 | 666 |
| Capital reserve account | (£000s) |
| Balance at 31 March 2019 | 3,596 |
| Issue of share capital at a premium | 1,894 |
| Balance at 31 March 2018 | 1,702 |
| (£000s) |
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Lease payments recognised as an expense in the year | 2,272 | 1,499 |
The Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Within one year | 2,307 | 1,326 |
| In the second to fifth years inclusive | 1,717 | 1,440 |
| Greater than five years | – | – |
| 4,024 | 2,766 |
Operating lease payments represent rentals payable by the Group for certain of its office properties and vehicles. The Group's property leases cover its offices and the apartments required to deliver customer projects. The lease terms vary in duration and are all priced at prevailing market rate.
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows:
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Land | 6,692 | – |
During the financial year the Group entered negotiations to purchase a site with intention of constructing a new headquarter office in Belfast. Included in this amount are existing commitments outstanding.
The Group has the following share schemes:
Share options are granted to employees as determined by the Remuneration Committee and will only vest in accordance with the performance conditions established by the Committee. The options cannot generally be exercised within three years and have a maximum life of 10 years. The options will be settled by the issue of new shares and there are no cash settlement alternatives.
Share options are granted to employees as determined by the Remuneration Committee. The CSOP is a subplan of the PSP and permits the Company to grant CSOP options which have tax advantages pursuant to the provisions of Schedule 4 to the Income Tax (Earnings & Pensions) Act 2003 ("Schedule 4"). The options cannot be ordinarily exercised within three years and have a maximum life of 10 years. Exercise of the options will be settled by the issue of shares and there are no cash alternatives.
The Group has an all-employee share plan open to UK employees. To date there has been only one grant under this scheme. Under the scheme, employees who participate have entered into a savings contract under which they agree to save between £5 and £100 per month (or such limit as may be permitted by the tax legislation governing SAYE schemes from time to time) for three years. Options cannot be ordinarily exercised within three years and must be exercised within six months of the end of the three-year period.
The Group has a share option scheme for employees of Kainos Software Ireland Limited. This scheme utilised the PSP Scheme to grant options to all eligible employees. Options cannot be ordinarily exercised within three years and must be exercised within six months of the end of the three-year period. The options will be settled by shares and there are no cash alternatives.
The Group has established a Share Incentive Plan for UK employees. Under this scheme all eligible employees are awarded a number of shares determined by length of service of each employee at a specified date for each respective grant. The shares are held in trust for each employee by Yorkshire Building Society, which also administers the scheme. The vesting period for these shares is three years.
The Group introduced a Restricted Share Scheme for all eligible employees of Kainos Software Ireland Limited. Under this scheme all eligible employees were awarded a number of shares determined by length of service of each employee. The vesting period for these shares is five years and one week and the shares are not accessible by the employee until expiry of that period. The shares are held in trust for the employees until they vest.
In order to replicate the share-based awards available to staff in the UK and Ireland, the Group implemented the Kainos Group plc Poland Share Plan. The Remuneration Committee may grant Share Options or Conditional Share Awards to employees of the Group Polish subsidiary. Share options will not generally be exercisable within three years and have a maximum life of 10 years. Conditional Share Awards may be granted for free or at a purchase price determined by the Committee. Conditional Share Awards will generally be subject to a minimum three-year vesting period. All options and awards will be satisfied out of newly issued shares and there are no cash settlement alternatives.
Vesting conditions are detailed within the remuneration report for the schemes with vesting conditions.
For share awards under the PSP, CSOP and ROI share option schemes, the fair value has been measured using the Black-Scholes model. In the absence of historic volatility data, expected volatility has been estimated using the volatility rates of comparable companies.
| PSP | Granted during year to 31 March 2019 |
Granted during year to 31 March 2018 |
Granted during year to 31 March 2017 |
|---|---|---|---|
| Fair value | £2.42-£3.84 | £0.88-£2.41 | £0.50-£1.38 |
| Share price at grant | £4.19 | £2.82 | £1.62 |
| Expected volatility | 31% | 30% | 30% |
| Expected life (years) | 3.5 | 3.5 | 3.5 |
| Expected dividends per annum | 2.3% | 3.0% | 3.1% |
| CSOP | Granted during year to 31 March 2019 |
Granted during year to 31 March 2018 |
Granted during year to 31 March 2017 |
|---|---|---|---|
| Fair value | £0.97 | £0.54 | £0.28 - £0.38 |
| Share price at grant | £4.19 | £2.87 | £1.62 - £2.06 |
| Expected volatility | 31% | 30% | 30% |
| Expected life (years) | 5 | 5 | 5 |
| Expected dividends per annum | 2.3% | 3% | 3.1% |
| UK SAYE | Granted during year to 31 March 2019 |
Granted during year to 31 March 2018 |
Granted during year to 31 March 2017 |
| Fair value | £1.13 | – | – |
| Share price at grant | £4.19 | – | – |
| Expected volatility | 31% | – | – |
| Expected life (years) | 3.25 | – | – |
| Expected dividends per annum | 2.3% | – | – |
| Granted during year |
Granted during year |
Granted during year |
| ROI share options | to 31 March 2019 |
to 31 March 2018 |
to 31 March 2017 |
|---|---|---|---|
| Fair value | £1.13 | – | – |
| Share price at grant | £4.19 | – | – |
| Expected volatility | 31% | – | – |
| Expected life (years) | 3.25 | – | – |
| Expected dividends per annum | 2.3% | – | – |
| Poland share options | Granted during year to 31 March 2019 |
Granted during year to 31 March 2018 |
Granted during year to 31 March 2017 |
|---|---|---|---|
| Fair value | £1.15 | – | £0.72 |
| Share price at grant | £4.19 | – | £1.90 |
| Expected volatility | 31% | – | 30% |
| Expected life (years) | 3.5 | – | 3.5 |
| Expected dividends per annum | 2.3% | – | 2.63% |
| Restricted shares | UK SIP (000s) |
ROI (000s) |
Poland conditional share awards (000s) |
Total (000s) |
|---|---|---|---|---|
| Outstanding at 31 March 2018 | 1,131 | 53 | 337 | 1,521 |
| Granted during period | 275 | 8 | 75 | 358 |
| Exercised during the period | (103) | – | (139) | (242) |
| Forfeited during the period | (72) | (8) | (46) | (126) |
| Outstanding at 31 March 2019 | 1,231 | 53 | 227 | 1,511 |
| PSP (000s) |
CSOP (000s) |
UK SAYE (000s) |
ROI share options (000s) |
Poland share options (000s) |
Total (000s) |
|
|---|---|---|---|---|---|---|
| Outstanding at 31 March 2018 | 1,836 | 1,021 | 907 | 55 | 298 | 4,117 |
| Granted during the period | 144 | 67 | 532 | 20 | 229 | 992 |
| Exercised during the period | (562) | (428) | (878) | (45) | (246) | (2,159) |
| Forfeited during the period | (566) | (31) | (59) | – | (52) | (708) |
| Outstanding at 31 March 2019 | 852 | 629 | 502 | 30 | 229 | 2,242 |
The Group recognised total expenses of £2.2 million related to share-based payment transactions during the year (2018: £1.1 million).
The weighted average share price at the date of exercise for share options exercised during the period was £3.93 per share.
The Group operates two defined contribution retirement benefit schemes. The assets of the schemes are held separately from those of the Group in independently administered funds under the control of trustees. The total cost charged to the income statement of £1.9 million (2018: £1.6 million) represents contributions payable to these funds by the Group at rates specified in the rules of the schemes. As at 31 March 2019, contributions of £693,840 (2018: £21,000) were payable to the funds and are included in trade creditors and accruals (note 18).
The Group manages its capital to ensure that all Group entities will be able to continue as going concerns while maximising the return to shareholders. The Group's overall strategy remained unchanged throughout the period 1 April 2018 to 31 March 2019. The capital structure of the Group consists of Company equity only (comprising issued capital, reserves and retained earnings). The Group is not subject to any externally imposed capital requirements and has no borrowings.
The Group's Corporate Treasury function provides services to the business, manages and forecasts cash balances on each bank account held and researches available facilities and reports to the CFO on the financial risks relating to the operations of the Group. These risks include market (including currency risk and price risk), credit and liquidity risk.
The use of financial derivatives is governed by the Group's policies approved by the Board, which provide written principles on foreign exchange risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed by the CFO and the Finance function on a continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
The Finance function reports to the Group's Audit, which monitors risks and policies implemented to mitigate risk exposures.
The Group's activities expose it to changes in foreign currency exchange rates. This risk is measured through the Group's budgeting and cash flow forecasting processes which identify net foreign currency exposures in Polish Zloty, Euro and US Dollars. The Finance function quantifies and suggests risk mitigation measures to manage the risk in accordance with Group policies and obtains CFO approval for implementation of these risk mitigation procedures.
There has been no change to the nature of market risk which the Group was exposed to during the year but, consistent with the overall growth of the Group's business, the value of this exposure has increased in absolute size, as shown below.
The carrying amounts of the Group's foreign currency denominated monetary assets and monetary liabilities at 31 March 2019 are as follows:
| Liabilities | Assets | |||
|---|---|---|---|---|
| 2019 (£000s) |
2018 (£000s) |
2019 (£000s) |
2018 (£000s) |
|
| Polish Zloty | 1,773 | 1,422 | 1,196 | 1,314 |
| Euro | 3,315 | 2,104 | 6,825 | 5,197 |
| US Dollar | 7,039 | 3,447 | 7,125 | 5,502 |
The Group is mainly exposed to the currency of Poland (Polish Zloty currency), Ireland and Germany (Euro currency), and the US (US Dollar currency). The following table details the Group's profit and loss sensitivity to a 1% increase in Sterling against the relevant foreign currencies. 1% is the sensitivity rate used when considering foreign currency risk internally by key management personnel. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 1% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where Sterling strengthens 1% against the relevant currency. For a 1% weakening of Sterling against the relevant currency, there would be a comparable impact on the profit and other equity and the balances below would be negative:
| Euro impact | PLN impact | USD impact | ||||
|---|---|---|---|---|---|---|
| 2019 (£000s) |
2018 (£000s) |
2019 (£000s) |
2018 (£000s) |
2019 (£000s) |
2018 (£000s) |
|
| 1% increase in | ||||||
| strength of Sterling | 35 | 31 | (6) | (1) | 1 | 21 |
The Group may enter into forward foreign exchange contracts to manage the risk associated with anticipated costs for a period up to 12 months.
There were no forward contracts entered into during the year and subsequently there are no outstanding forward contracts at 31 March 2019 (2018: nil).
The Group does not currently hedge expected future revenue denominated in Euro or US Dollars as the net exposure is not material to the Group's financial performance or position.
The Group's exposures to interest rates on financial assets are detailed in the liquidity risk management section of this note. The Group's exposure to interest rate risk is immaterial to its financial performance and position given that no external borrowings are held, and bank deposit interest income amounted to £110,549 during the year ended 31 March 2019 (2018: £53,000).
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties, as a means of mitigating the risk of financial loss from defaults. The Group only transacts with entities that are rated the equivalent of investment grade and above, many of whom are UK government public sector bodies. The Group uses publicly available financial information and its own trading records to rate its major customers.
In addition to Customer A and Customer B (noted as significant customers in note 5 – Segment Reporting), there are three further customers that represent greater than 5% of the total balance of trade receivables as at 31 March 2019.
The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group's exposure and the credit ratings of its counterparties are continuously monitored, and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the CFO in line with Group policies. The expected maturity of the financial assets and liabilities is the same as the reported contractual maturity.
Ultimate responsibility for liquidity risk management rests with the Board, which has established an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities and by matching the maturity profiles of financial assets and liabilities.
The interest rates obtained on the Group's bank deposits during the year attracted interest at below 1% per annum. All other cash balances are instantly accessible.
The Group expects to meet its obligations from existing cash balances and future operating cash flows.
All financial liabilities of the entity will be settled within 12 months of the financial year end.
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
| Sale of goods and services | Purchase of goods and services | |||
|---|---|---|---|---|
| 2019 (£000s) |
2018 (£000s) |
2019 (£000s) |
2018 (£000s) |
|
| Cirdan Imaging Limited | 750 | 685 | – | – |
| Queen's University Belfast | – | – | 299 | 259 |
| Total | 750 | 685 | 299 | 259 |
The following amounts were outstanding at the statement of financial position date:
| Amounts owed by related parties | Amounts owed to related parties | |||
|---|---|---|---|---|
| 2019 (£000s) |
2018 (£000s) |
2019 (£000s) |
2018 (£000s) |
|
| Cirdan Imaging Limited | 199 | 395 | – | – |
Queen's University Belfast is a related party as one of the Group's material shareholders.
Cirdan Imaging Limited is a related party due to the Group's purchases of share capital in Cirdan in February 2016 and March 2018.
The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS24 Related Party Disclosures.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Short-term employee benefits (emoluments) | 1,512 | 1,495 |
| Post-employment benefits (pension contributions) | 31 | 32 |
| Gains on exercise of share options | 889 | – |
| Share-based payments | 165 | 105 |
| 2,597 | 1,632 |
One director is a member of the Group's defined contribution pension schemes (2018: one). Three directors exercised options over shares in the Group (2018: none). Remuneration of the highest paid director was £516,607 (2018: £525,000), including pension contributions of £30,872 (2018: £32,000). The highest paid director exercised 101,510 share options in the year (2018: none).
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Salaries, fees, bonuses and benefits in kind | 1,512 | 1,495 |
| Amounts receivable under long-term incentives schemes | 165 | 105 |
| Gains on exercise of share options | 889 | – |
| Money purchase pension contributions | 31 | 32 |
| 2,597 | 1,632 |
AS AT 31 MARCH 2019
| Note | 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|---|
| NON-CURRENT ASSETS | |||
| Investments in subsidiaries | 3 | 6,524 | 6,524 |
| Deferred tax | – | 176 | |
| 6,524 | 6,700 | ||
| CURRENT ASSETS | |||
| Debtors | 4 | 18,123 | 23,730 |
| Prepayments | 35 | 23 | |
| Cash at bank and in hand | 17,008 | 1,511 | |
| 35,166 | 25,264 | ||
| CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR | 5 | (874) | (850) |
| NET CURRENT ASSETS | 34,292 | 24,414 | |
| TOTAL ASSETS LESS CURRENT LIABILITIES | 40,816 | 31,114 | |
| NET ASSETS | 40,816 | 31,114 | |
| CAPITAL AND RESERVES Called up share capital |
6 | 605 | 593 |
| Share premium account | 6 | 3,596 | 1,700 |
| Share-based payments reserve | 6 | 3,895 | 2,549 |
| Capital reserve | 7 | 5,938 | 5,938 |
| Profit and loss account | 8 | 26,782 | 20,334 |
| SHAREHOLDERS' FUNDS | 40,816 | 31,114 |
As permitted by section 408 of the Companies Act 2006, the parent company has elected not to present its own profit and loss account for the year. The parent company reported a profit for the year of £15.4 million (2018: £15.8 million).
The financial statements of Kainos Group plc (registered number 09579188) were approved by the Board of Directors and authorised for issue on 24 May 2019. They were signed on its behalf by:
Richard McCann Director 24 May 2019
| Equity attributable to equity holders of the Company | ||||||
|---|---|---|---|---|---|---|
| Share capital (£000s) |
Share premium account (£000s) |
Share-based payments (£000s) |
Capital reserve (£000s) |
Retained earnings (£000s) |
Total equity (£000s) |
|
| Balance at 31 March 2017 | 592 | 1,626 | 1,279 | 5,939 | 12,158 | 21,594 |
| Issue of share capital (note 6) | 1 | 74 | – | (1) | – | 74 |
| Share-based payments (note 6) | – | – | 1,096 | – | – | 1,096 |
| Adjustments in respect of previous periods | – | – | 174 | – | (174) | – |
| Deferred tax for equity-settled share-based payments |
– | – | – | – | 109 | 109 |
| Profit and total comprehensive income | – | – | – | – | 15,822 | 15,822 |
| Dividends paid | – | – | – | (7,581) | (7,581) | |
| Balance at 31 March 2018 | 593 | 1,700 | 2,549 | 5,938 | 20,334 | 31,114 |
| Issue of share capital (note 6) | 12 | 1,896 | – | – | – | 1,908 |
| Share-based payments (note 6) | – | – | 1,346 | – | – | 1,346 |
| Profit and total comprehensive income | – | – | – | – | 15,365 | 15,365 |
| Dividends paid | – | – | – | – | (8,917) | (8,917) |
| Balance at 31 March 2019 | 605 | 3,596 | 3,895 | 5,938 | 26,782 | 40,816 |
The separate financial statements of the parent company are presented as required by the Companies Act 2006. The parent company meets the definition of a qualifying entity under FRS100 (Financial Reporting Standard 100) issued by the Financial Reporting Council. Accordingly, the financial statements have therefore been prepared in accordance with FRS101 (Financial Reporting Standard 101) 'Reduced Disclosure Framework' as issued by the Financial Reporting Council and the recognition and measurement criteria of IFRS as adopted by the EU.
As permitted by FRS101, the parent company has taken advantage of the disclosure exemptions available under that standard in relation to share-based payments, financial instruments, capital management, presentation of a cash flow statement and certain related party transactions.
Where required, equivalent disclosures are given in the consolidated financial statements.
The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are the same as those set out in note 3 to the consolidated financial statements.
As permitted by section 408 of the Companies Act 2006, the parent company has elected not to present its own profit and loss account for the year. The parent company reported a profit for the year of £15.4 million (2018: £15.8 million).
The auditor's remuneration for audit and other services is disclosed in note 6 to the consolidated financial statements.
The average monthly number of employees (including Executive Directors) was 2, Brendan Mooney and Richard McCann (2018: 2).
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Wages and salaries Social security costs |
977 70 |
779 14 |
| 1,047 | 793 |
Further information about share-based payments is provided in note 23 to the consolidated financial statements.
| (£000s) | |
|---|---|
| COST | |
| At 31 March 2018 and 31 March 2019 | 6,524 |
| Provisions for impairment | |
| At 31 March 2018 and 31 March 2019 | – |
| Carrying amount | |
| At 31 March 2018 and 31 March 2019 | 6,524 |
Details of the Group's subsidiaries at 31 March 2019 are included in note 12.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| AMOUNTS FALLING DUE WITHIN ONE YEAR: Amounts owed from Group undertakings Trade receivables |
18,114 9 |
23,730 – |
| 18,123 | 23,730 |
Amounts owed from other Group companies are repayable on demand, unsecured and carry interest of 5% per annum charged on the average outstanding loan balances.
Amounts owed from group undertakings are assessed for credit risks and no impairments noted as being required.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Trade creditors and accruals | 861 | 550 |
| Corporation tax | – | 284 |
| Other tax and social security | 13 | 16 |
| 874 | 850 |
Amounts owed to other Group companies are repayable on demand, unsecured and carry interest of 5% per annum charged on the average outstanding loan balances.
The movements on these items are disclosed in note 20 of the consolidated financial statements.
The movements in the reserve are disclosed in note 20 of the consolidated financial statements.
| 2019 (£000s) |
2018 (£000s) |
|
|---|---|---|
| Opening balance | 20,334 | 12,158 |
| Dividends paid | (8,917) | (7,581) |
| Deferred tax equity movement | – | 109 |
| Adjustments in respect of previous periods | – | (174) |
| Profit for the period | 15,365 | 15,822 |
| 26,782 | 20,334 |
2nd Floor 21 Farringdon Road London EC1M 3HA
Kainos House 4-6 Upper Crescent Belfast BT7 1NT Northern Ireland
Email: [email protected]
Link Asset Services 34 Beckenham Road Kent BR3 4TU
Email: [email protected]
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