REG - Knights Group Hldgs - Full Year Results
12/07/2022 07:00
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RNS Number : 1057S Knights Group Holdings PLC 12 July 2022
Knights Group Holdings plc
("Knights" or the "Group")
Full Year Results
Robust financial performance with strategy execution driving growth
Knights today announces its full year results for the year ended 30 April
2022.
Financial highlights
· Revenue increased by 22% to £125.6m (2021: £103.2m)
o Organic growth(1) of 2%, held back by Omicron in the typically
important fourth quarter
o 20% revenue growth from acquisitions; a £14.8m increase in contribution
from prior year acquisitions and £5.8m from in year acquisitions
· Gross margins increased to 49.3% (2021: 48.9%)
· Underlying PBT(2) fell by 2% to £18.1m (2021: £18.4m),
representing an underlying PBT margin of 14.4% (2021: 17.8%)
· Underlying EPS decreased to 17.23p (2021: 18.30p). Basic EPS -
loss of 3.02p (2021: profit of 4.14p)
· Strong cash conversion(3) of 109% (2021: 96%)
· Lock up(4) was 86 days (2021: 89 days excluding acquisitions),
with continued improvement driven by strong culture and discipline of
day-to-day cash collection across the Group
· Net debt, excluding leases, of £28.9m (30 April 2021: £21.1m)
after paying £18.0m of initial and deferred cash consideration for
acquisitions
· Proposed final dividend of 2.04p, giving a total dividend of
3.50p (FY 21: nil, FY 20: 1.10p)
Strategic and operational highlights
· Continued to expand geographic presence, with acquisition
strategy gaining momentum
o Three acquisitions completed during the period, providing platforms for
future organic growth
§ Keebles strengthened Knights' Yorkshire presence, complementing
existing offices in Nottingham and Leeds
§ Archers provided entry into the North East, one of the largest
markets for legal and professional services in the UK
§ Langleys established Knights as the leading firm in York and
expanded its operations in the East of England, with entry into Lincoln
§ Acquisition pipeline remains strong, with acquisition of Coffin
Mew completed post-period end adding four offices in the South of England,
providing a new presence in Portsmouth, Southampton, Brighton and Newbury
o Integration of newly acquired businesses is progressing well with
performance in line with expectations, overseen by the growing Client Services
Executive
· Strong employee retention and continued recruitment driven by
unique culture, increased scale and national reputation
o Remains an attractive location for talent with over 1000 fee earners at
the year end
o Strong net promoter scores, driven by strong culture (Client NPS +72,
Employee NPS +24)
o Workforce remains stable with very low churn(5) of 9% (excluding
anticipated churn in acquisitions), which continues to improve. Average length
of service of partners of over 9 years
· Expanded Client Services Director team working more closely with
Operational Directors
o Added four new Client Services Directors ("CSDs"), through recruitment
and internal promotion
o New lines of reporting allowing CSDs and Operational Directors to work
more closely with each other, reporting directly to CEO and CFO
· Continued progress with ESG, with new targets being developed
o Increasing momentum in the 4 our community programme with colleagues
doing more activities together to support local communities
o Continued focus on the health and wellbeing of colleagues, a key theme
at a successful annual conference on 10th June 2022 with over 1,000 colleagues
socialising together, giving feedback and being encouraged to work with our
retained psychologist on mindset
o Greater investment in local office social events encouraging colleagues
to have fun and get to know each other better to promote well-being and to
accelerate the return to office-based working
o New targets being developed for 2022, having surpassed performance
targets for our greenhouse gas emissions, and paper consumption set in 2019
o Maintained good gender balance in senior positions, with five of the 12
CSDs and 60% of the Board being female
o Expanded ESG governance to include climate change, adopting TCFD
guidance
· Current trading and outlook
o A positive start to the new year with prior year acquisitions
integrating and performing well and as planned
o Continuing to attract high calibre professionals, with strong client
followings
o Acquisition pipeline growing in quality and quantity, aided by the
return to normality following the pandemic and accelerated by the uncertain
economic environment
o While uncertainty around economic conditions persists, the Board
considers that the business is highly resilient, with a significant market
opportunity, the right strategy and team in place to deliver on it, giving
confidence in its medium-term outlook
David Beech, CEO of Knights, commented:
"We have delivered another robust financial performance despite the short-term
challenges experienced in the fourth quarter, with a positive start to the new
financial year supported by the acquisitions completed in prior years.
"I am extremely grateful to the support our people have given to me and the
business in recent weeks and we have a great culture and high morale which
will enable us to continue to make good progress in the current year.
"Our ability to attract and retain top industry talent remains strong, while
our pipeline of high quality acquisition targets continues to grow.
"I'm very pleased not only with the level of growth we have delivered over the
last ten years since we corporatised, growing from two offices and £9m of
revenue to a Top 50 law firm with 22 offices, and revenue of over £125m but
also with our continued discipline to deliver market leading working capital
days and cash generation.
"We continue to execute our strategy and remain confident in our outlook, as
we leverage our enhanced scale and national reputation to realise our ambition
to be the leading legal and professional services firm outside London."
A presentation of the full year results will be made to analysts via a webinar
at 9am today. To register interest in attending, please contact Christian Hart
at MHP Communications on 020 3128 8147 or email knights@mhpc.com
(mailto:knights@mhpc.com) .
Enquiries
Knights
David Beech, CEO Via MHP Communications
Numis (Nomad and Broker)
Stuart Skinner, Kevin Cruickshank 020 7260 1000
MHP Communications (Media enquiries)
Andrew Jaques, Katie Hunt, Eleni Menikou, Robert Collett-Creedy 020 3128 8100
07736 464749
knights@mhpc.com
Notes to Editors
Knights is a fast-growing, legal and professional services business, ranked
within the UK's top 50 largest law firms by revenue. Knights was one of the
first law firms in the UK to move from the traditional partnership model to a
corporate structure in 2012 and has since grown rapidly. Knights has
specialists in all key areas of corporate and commercial law so that it can
offer end-to-end support to businesses of all sizes and in all sectors. It is
focussed on key UK markets outside London and currently operates from 22
offices located in Birmingham, Brighton, Cheltenham, Chester, Crawley, Exeter,
Leeds, Leicester, Lincoln, Maidstone, Manchester, Newbury, Nottingham, Oxford,
Portsmouth, Sheffield, Southampton, Stoke, Teesside, Weybridge, Wilmslow and
York.
Footnotes:
(1)Organic growth excludes revenue growth from acquisitions in the year of
their acquisition, and for the first full financial year following
acquisition, based on the fees generated by the individuals joining the Group
from the acquired entity. Recruitment of individuals into the acquired
offices post acquisition is treated as part of the organic growth of the
business.
(2)Underlying PBT is before amortisation of acquired intangibles, one off
transaction costs relating to acquisitions made during the year, restructuring
costs, disposals of acquired assets and recognition of onerous leases. It
also excludes one off share-based payment charges along with contingent
consideration payments required to be reflected through the Statement of
Comprehensive Income as remuneration under IFRS accounting
conventions. Underlying EPS excludes these items and the tax related to these
items. The Board believes that these underlying figures provide a more
meaningful measure of the Group's underlying performance.
(3)Cash conversion is calculated as the total of net cash from operations, tax
paid and payments of lease interest and lease finance liabilities under IFRS
16, divided by the underlying profit after tax, which is calculated from
profit after tax by adding back amortisation of acquired intangibles, the
effect of the change in the tax rate, non-underlying operating costs
relating to acquisitions, non-recurring finance, restructuring costs in the
reporting period, and non-underlying share-based payments and the tax in
respect of these costs.
(4)Lock up excludes the impact of acquisitions in the last quarter of the
financial year as well as clinical negligence, insolvency, highways and ground
rents work in progress as these matters operate mainly on a conditional fee
arrangement and a different profile to the rest of the business.
(5)Employee churn is calculated based on the number of qualified fee earners
who have been employed by the Group for more than one year, excluding expected
churn from acquisitions.
A more detailed explanation of the Group's alternative performance measures
used in this report have been included in the glossary.
Chairman's Statement
Knights delivered a robust financial performance this year, with revenue of
£125.6m, up c.22% compared to the prior year. This growth in the year
principally reflects acquisitions, with in-year acquisition contributing
c.£5.8m and the full year impact of prior year acquisitions delivering an
additional £14.8m, giving total revenue growth from acquisitions of £20.6m
(20%). This acquisition-led growth was complemented by our COVID affected
organic growth of 2% in the period, 4% disregarding the impact of closing down
volume debt recovery and conveyancing, and further enhancing the Group's
position in its market.
Throughout the year we continued to realise our vision of building the UK's
leading legal and professional services business outside London. We expanded
our geographic footprint, strengthening our presence in Yorkshire and entering
the North East and East of England as we welcomed more high quality businesses
and people into our Group. As we entered the new financial year, we extended
our presence in the South East, meaning that as Knights celebrates a decade
since its corporatisation, we are now a diversified business of truly national
scale, operating from offices across the UK. As we grow the business, the
Board continually reviews Knights' corporate structure, operational
infrastructure, and processes to ensure they will support the continued
scaling up of the business.
During the year, we faced unusual challenges, including the emergence of the
Omicron variant of the COVID-19 virus, leading to disruption within the
business due to increased employee sickness and absence during what is
historically our most significant trading period in the fourth quarter of the
financial year. Despite this, the Group delivered underlying profit before tax
of c.£18.1m, reflecting the resilience of our business model and agility of
our management team. I am proud of how our people met these challenges and
have bounced back quickly, demonstrating the benefits of our strong and unique
culture. I would like to express my thanks, on behalf of the whole Board, for
their dedication, and tireless hard work. I would also like to thank our
exceptional management team, who continue to successfully drive the business
forward, despite such unpredictable headwinds.
Increasingly well positioned to execute our acquisition strategy
Our strategy is delivering tangible results. Knights' differentiated corporate
structure is increasingly understood and a heightened awareness of its strong
culture and reputation is helping to drive continued growth. Within a large,
highly fragmented market, Knights is well-positioned to continue to seize
opportunities that align with our strategy and goals.
This year, we built on our exemplary track record of deriving value from
acquisitions and continued to roll out our targeted expansion, executing our
strategy. This growth has increased our ability to attract high-quality
acquisition targets that are a strong strategic and cultural fit for our
business, bringing a significant number of talented new professionals into our
Group. Our reach now spans a large proportion of the UK.
Strong recruitment momentum as we continue to scale the business
We continue to attract the highest calibre people and I am pleased to say that
this year we recruited from leading law firms across the country as quality
lawyers, typically with a strong client following, continue to favour our
model over equity partnership. As importantly, I am delighted to say that
employee churn, at 9%, remains low across all experience levels.
During the year, we have continued to attract new clients who recognise the
unique combination of expertise, excellent service and value that we offer,
adding to our already strong client base. We have also broadened Knights'
portfolio of specialisms, adding a complementary debt advisory service
offering to the Group. This is performing well, providing opportunities for
cross-selling, and has attracted experienced accountants and corporate bankers
from respected institutions, further demonstrating the strong positioning of
the Knights brand.
Our strong culture, which is recognised across the industry, and enhanced
reputation, are key draws for talented professionals. The cultural integration
of our newly acquired businesses is overseen by our growing Client Services
Executive team, which we expanded during the year. This team and our
Operational Directors, report directly into David Beech and Kate Lewis (CEO
and CFO), ensuring that this deeply experienced group continues to work
together to support the growth and scaling up of the business.
The adoption of a hybrid working model has allowed our people to work flexibly
and maintain a healthy work-life balance, whilst continuing to benefit from
our strong team culture. We continued to invest in our systems, building on
the technological improvements we implemented during the pandemic, to
facilitate a more seamless flow between home and office. This, together with
the depth and breadth of our resources, has further accelerated the
integration of new businesses and joiners into our Group during the year.
Board and ESG
We continue to be mindful of the impact of our business on the world around
us. Throughout the year we proactively managed this through improving energy
efficiency by moving from older office buildings to grade A space, maximising
space by consolidating into fewer, larger offices and building on the habits
adopted by our professionals to digitise the way in which they work. I am
pleased with our performance against targets, having surpassed those we set in
2019, successfully reducing our greenhouse gas emissions, paper consumption
and office usage. We are in the process of agreeing new targets for 2022 and
beyond. During the year we expanded the scope of our ESG governance to
include Climate Change, adopting TCFD guidance. Following a strategic review
to assess risk under various climate change scenarios, we see no material risk
or opportunity for the business.
Our volunteering programme also continues, with colleagues supporting their
local communities through our 4 Our Community programme. Our partnership with
Mind is also yielding positive results.
In terms of gender balance at a senior level, we are making significant
progress. Of our 12 Client Services Directors, 5 are female as is 60% of our
Board. We are extremely proud of these figures but recognise there is more we
can do in this area. We are also proud of the diversity across the business,
with 72% of all fee earning professionals being female.
In acknowledgement of the challenges Knights has faced during the period, it
was agreed that no bonuses would be paid to the executive directors, even
though some of the non-financial measures had been achieved, with no increase
in salary for the CEO and only an inflationary pay rise for the CFO for FY23.
In acknowledgement of the difficulties that may be faced by our people in
light of the cost-of-living crisis, we undertook a detailed salary review,
increasing salaries across the business which, along with other initiatives,
has had a positive impact on employee morale at all levels.
Shortly after the period end, we announced that Richard King would step down
from his role as Chief Operating Officer, and from the Knights Board, to
pursue other opportunities. Richard was instrumental in establishing the
strong operational infrastructure which has enabled the Group to achieve
critical mass and will support the continued scaling up of the business.
Richard leaves Knights with our gratitude and on behalf of the Board I offer
him our best wishes for the future.
Dividend
The Group's progressive dividend policy balances the retention of profits to
fund our long-term growth strategy of providing shareholders with a return, as
that growth strategy delivers strong results. In line with that policy, the
Board is proposing a final dividend of 2.04p Together with the interim
dividend of 1.46p per share, this gives a total dividend for the year of
3.50p. The dividend will be payable on 30 September 2022 to shareholders on
the register at 2 September 2022, subject to shareholder approval at the
Group's AGM.
Summary and medium-term outlook
I am encouraged by our clear strategic and operational progress during the
year, which was achieved despite considerable external challenges in the final
quarter.
There is good momentum in the business going into the new financial year and
our outlook is positive, with a healthy pipeline of acquisition opportunities
of quality firms and high calibre recruits, all with a strong cultural fit,
and which will provide entry into new markets or additional capabilities or
scale in our existing office locations.
We have a significant market opportunity, with the right strategy and team in
place to deliver on it and we look forward to continuing to make strong
progress in achieving our goals.
Bal Johal
Non Executive Chairman
Chief Executive's Review
2022 marks ten years since Knights was corporatised. As I reflect on our
remarkable journey over the past decade, I am exceptionally proud of what we
have achieved.
Over ten years, Knights has grown from a firm with two offices and revenues of
£9m to an industry-leading legal and professional services group, now ranked
among the UK's Top 50 law firms with 18 offices delivering over £125m in
revenues as at 30 April 2022 and now 22 offices following our most recent
acquisition in the South East. We are a well-balanced business, increasingly
recognised for our strong culture. We have forged a solid reputation as a
premium service provider across the UK, with a diversified, full service legal
offering complemented by specialist planning, tax and debt advisory services,
among others.
In recent years, our steady pace of selected acquisitions across the UK has
enabled us to achieve critical mass. Knights now has the credibility, market
positioning and scale to attract the highest calibre talent. We are
recruiting from Top 40 law firms and well-reputed professional services firms,
and crucially, are attracting and retaining key professionals who favour our
forward-thinking corporate model over partnership and see how Knights are well
positioned to support them and their strong client following.
Today, in line with the vision set out in 2012, our Group is consistently
sought out by clients seeking high-quality legal expertise, deep sector
knowledge, a broad range of specialisms and bespoke advice.
Robust performance despite short term challenges
During the year, we delivered pre tax profitable, cash generative growth
albeit this was held back by short term challenges in the last quarter, a
period which has typically seen strong revenues convert to a significant
contribution to annual profits. This year, the emergence of the Omicron
variant of the COVID-19 virus and the resulting employee sickness levels,
alongside some softening of business confidence as a result of macroeconomic
pressures, slowed growth to a greater extent than anticipated during this
important trading period. As we have started a new financial year we have
been pleased to see a growing appetite to work together in our offices with
less disruption to our team business model and culture.
Our appetite for commercially and strategically sound acquisitions with a
clear cultural fit remains strong, and our acquisition strategy gained further
momentum during the year. We successfully integrated prior acquisitions and
acquired two additional well-established and respected independent law firms.
In doing so, we expanded our geographical reach and added over 100
professional colleagues to the Group.
As a result of our increased credibility and the heightened awareness of
Knights, we saw several significant additions to our client base during the
year, including the Teesside Regional Development Corporation, Warner Media,
Barratt Homes, Aesop and Durham Cathedral. We also saw our income from our Top
50 clients by revenue increase by 33% to £20.5m. Our ability to service
clients of this calibre across an increased number of service lines reflects
the strength of Knights' positioning in key regions for legal and professional
services, driving organic growth across the business.
Despite this considerable growth, we maintained our industry leading levels of
lock-up days* at 86 days, reflecting our strong culture and discipline of
day-to-day cash collection across the Group. We continued to be cash
generative, and our strong cash position and credit facilities mean we remain
well-positioned to continue to execute our ambitious growth plans.
Continuing to put people and culture first
Knights is a people-centric business. We fully understand that our success
depends on the quality of talent across the Group and our ability to attract
and retain the best people. To support this, we strengthened our operational
infrastructure during the year, and bolstered our team of Client Services
Directors (CSDs), increasing this group to 12. Our CSDs not only oversee
day-to-day management of the Group's offices, but also lead on the integration
of new professionals and acquired businesses, ensuring Knights' 'one team'
ethos and commercially driven approach is deeply embedded across the business.
We continued to actively minimise churn, which remained at low levels across
the Group at 9%. I am particularly pleased that we also maintained low levels
of attrition at a senior level. While attrition among our most experienced
partners has always been low, we are maintaining low churn comparative to
large City firms due to the market leading positions that we tend to occupy in
regional towns and cities. This is testament to both our business model and
our approach to integration, and also reflects our 'one team' collaborative
culture, something we believe is a strong differentiator, of which we are
immensely proud. We saw a powerful example of building on the Group's culture
at our recent full company event in June which focussed on listening to and
communicating with our incredible talent and continuing to evolve how we look
after employee health and wellbeing and support them in building their
careers.
We undertook a salary review across the business which took effect on 1 May
2022. This followed a comprehensive body of work to ensure our pricing
reflects the levels of service and the value that we deliver to clients. This
enabled us to deliver positive uplifts to our colleagues across the Group. We
are confident that the salaries we offer at all levels are competitive and
generally higher than independent regional firms. We have also made 109
promotions during the year, testament to how we continue to nurture and
develop our talent.
We expect that all of the increased costs from salary increases will be offset
by price increases which we implemented at the commencement of FY23.
Throughout the pandemic and beyond, we have seen a migration of talented
lawyers and other professionals away from London. We believe this represents a
structural change, and one which has provided us with a recruitment pipeline
of increasingly high quality in other areas of the UK.
As a result of our ongoing investment in cutting-edge IT infrastructure, our
hybrid working model and our expanded presence across the UK, we have been
able to take advantage of and better leverage this reshaped talent map. While
we continue to embrace new ways of working, it is also pleasing to see more
colleagues transitioning back to offices, allowing the full benefits of our
strong team-based culture to be realised.
Acquisition strategy gaining momentum
In line with the Group's strategy to accelerate organic growth through
carefully targeted regional acquisitions, we acquired two high-quality law
firms during the year, extending the Group's presence into the North East and
taking us into a new regional market in the East of England. The acquisition
after our year end of Coffin Mew further expanded the Group's presence in the
South East.
Strengthening the Group's presence in Yorkshire
In addition to the two acquisitions announced in the financial year, we also
completed the acquisition of Keebles LLP in June 2021 (exchanged at the end of
FY21), a firm established in Sheffield over a century ago with a strong
corporate and real estate offering. This was a significant acquisition for
the Group, complementing Knights' existing presence in Nottingham and Leeds
with a leading position in South Yorkshire. This business is now fully
integrated into our business, making a positive contribution to revenue and
profit.
New presence in one of the UK's largest legal and professional services
markets in the North East
In November 2021, the Group welcomed Archers Law LLP, a leading independent
firm based in Teesside in the North East. This region, which is currently
receiving significant public and private investment, represents one of the
UK's largest markets for legal and professional services outside London.
This acquisition has provided us with a platform for future organic growth in
the region. It has integrated well, with the business performing in line with
our expectations, underscoring the strong cultural fit and well-aligned
service offering we had identified.
Strategic advance into the East of England
In March 2022, we successfully completed the acquisition of Langleys, a
leading independent law firm. This established Knights as the leading law firm
in York while also providing a new presence for us in Lincoln. This strategic
acquisition expands the Group's operations in the East of England, an
attractive growth market for our services. The integration of this business
so far has been very successful. Of the two elements of the business
identified at acquisition as not fully aligning to the Group strategy we have
transferred the Child Law business, amounting to circa £1m of acquired
revenues, for asset value. The HPL part of the business, a separate
subsidiary focused on high volume conveyancing, is held for resale. As
planned, we have exchanged contracts on 5 July 2022 to sell the HPL subsidiary
focused on high volume conveyancing and non core to our strategy.
Momentum maintained in the current financial year
Post period end, in July 2022, we completed the acquisition of Coffin Mew, a
leading independent law firm, which will provide us with entry into new
markets, including Portsmouth, Southampton, Brighton and Newbury. The
acquisition brings circa 100 new professionals to Knights, significantly
expanding the Group's presence in the South of England.
Current trading and outlook
Since the year end, we have been encouraged by the Group's positive trading
momentum, as we continue to realise the benefits of prior acquisitions. We
have continued to strengthen the business through diversification and are
confident of our resilience for the year ahead.
We see significant opportunities for further high-quality acquisitions, as
seen with the acquisition of Coffin Mew since the beginning of the new
financial year. We are strongly placed for further organic growth, as we
increasingly attract high calibre professionals with client followings and as
we further extend our complementary services which align within our current
offerings.
While we acknowledge that uncertainty around economic conditions persists, we
strongly believe that Knights remains well-positioned to meet any associated
challenges with more resilience than ever. We remain confident in our ability
to continue to execute our growth plans, further enhancing the Group's already
strong position in key legal services markets outside London.
David Beech
Chief Executive Officer
Chief Financial Officer Review
I am pleased to report that, despite challenging conditions in the last two
trading months of the year, during which we typically record our strongest
trading of the financial year, we have delivered good revenue growth, with
underlying profits in line with the previous year.
Our continued focus on cash flow has resulted in excellent cash conversion* of
109% for the year and a lower than expected net debt figure. This positions
the Group well to continue to deliver on its strategy to grow the business
both organically and acquisitively, through carefully selected strategic
acquisitions.
Financial results
2022 2021
£'000
£'000
Revenue 125,604 103,201
Staff costs (76,863) (62,707)
Other underlying costs and charges (30,610) (22,075)
Underlying profit before tax 18,131 18,419
Amortisation of acquisition related intangibles (3,815) (2,622)
One-off costs on acquisitions * (13,260) (10,288)
Profit before tax 1,056 5,509
Basic EPS (3.02p) 4.14p
Basic Underlying EPS 17.23p 18.30p
Revenue
Reported revenue for the period was £125.6m compared with £103.2m in FY21,
representing a 21.7% increase.
Of this increase 25%, or £5.8m, was from acquisitions made during the
financial year and £16.9m was contributed by acquisitions made in FY21, an
increase of £14.8m from the revenue relating to those acquisitions recognised
in FY21.
The Group achieved organic growth of 1.8% overall for FY22, with organic
growth in the first half of the year amounting to £4.3m (9.3%). However,
this was offset by a £2.5m (4.6%) reduction in organic revenues in the second
half of the year compared to the same period the previous year. This decline
was due to the impact of unusually high levels of employee sickness and
disruption caused by the Omicron variant and a slight softening in business
confidence as a result of macroeconomic pressures in the last quarter of the
year, typically the most significant trading period of the financial year.
Our strategic focus is to deliver premium services to a high-quality client
base and as such, it is necessary in some instances to restructure certain
areas of the business to ensure our focus is on executing our overall
strategy. During the financial year, both our organic growth and our income
from acquisitions was impacted by the restructuring of some less profitable
and strategically misaligned teams.
The cessation of volume debt recovery and volume conveyancing business during
the last 12 months has impacted organic revenues by c.£2m. Excluding the
impact of this restructuring, organic growth for FY22 would be c.4%.
In relation to acquisition income, for the Keebles acquisition, approximately
£0.9m of revenue relating to legal aid matters and other non-strategically
aligned areas was transferred to third parties for asset value.
Given the full year impact of acquisitions made during the year, as at 30
April 2022 the run rate revenue for the Group was c.£132m.
.* see glossary
Staff costs
Total staff costs represented 61.2% of revenue during the financial year
compared with 60.8% in 2021. Fee earner staff costs have decreased, from 51.1%
to 50.7% of revenue, reflecting our ongoing efforts to control costs whilst
continuing to invest in high quality senior recruits who bring a client
following. During the year 19 partners joined the Group as part of our active
recruitment process. Each new recruited partner typically requires a period
of three to six months minimum before achieving their full expected fee
earning run rate.
Support staff costs increased slightly to 10.5% of revenue in the year,
compared to 9.7% in the prior year, driven by the full year cost of investment
made in our operational infrastructure in FY21, including additional office
services employees required to manage the move to an increased level of
office-based working.
Staff costs leverage was impacted during the year due to trading headwinds
adversely affecting revenue at the end of the financial year. Management
continues to focus on ensuring staffing costs are leveraged sufficiently,
balancing this with ensuring the business is fully invested in and supported
ahead of planned future growth.
Underlying profit before tax (PBT)
To reflect the impact of the Omicron variant and softening of business
confidence due to the macro-economic environment in the last two months of the
financial year, headline figures for the year have been analysed as a half
year period in the table below to facilitate a view of the Group's trading
performance.
H1 H2 FY22 H1 H2 FY21
FY22
FY22
£'000
FY21
FY21
£'000
£'000
£'000
£'000
£'000
Revenue 59,730 65,874 125,604 46,237 56,964 103,201
Other operating income 449 821 1,270 539 771 1,310
Staff costs (37,849) (39,014) (76,863) (29,635) (33,072) (62,707)
Depreciation and amortisation charges (5,226) (5,552) (10,778) (3,367) (4,363) (7,730)
Impairment of trade receivables and contract assets (309) (189) (498) (105) (118) (223)
Other operating charges (10,087) (11,990) (22,077) (7,909) (8,264) (16,173)
Non-underlying costs (4,804) (8,456) (13,260) (6,007) (4,281) (10,288)
Operating profit/(loss) 1,904 1,494 3,398 (247) 7,637 7,390
Finance costs (1,059) (1,305) (2,364) (890) (991) (1,881)
Finance income 3 19 22 - - -
Profit/(loss) before tax 848 208 1,056 (1,137) 6,646 5,509
Underlying Profit Before Tax 7,551 10,580 18,131 5,993 12,426 18,419
Underlying PBT margin 12.6% 16.1% 14.4% 13.0% 21.8% 17.8%
Underlying Profit After Tax 14,422 15,040
Basic EPS (pence) (3.02) 4.14
Underlying basic earnings per share (pence) 17.23 18.30
Underlying profit before tax excludes amortisation of acquired intangibles,
transaction and onerous lease costs in relation to acquisitions, disposals of
acquired assets, restructuring costs as a result of the streamlining of the
support function in acquisitions and restructuring undertaken in response to
the COVID-19 pandemic in FY21.
Underlying profit before tax has been calculated as an alternative performance
measure (see note 37 of the financial statements) in order to provide a more
meaningful measure and year on year comparison of the profitability of the
underlying business.
Underlying profit before tax decreased slightly compared with the same period
last year, by 1.6% to £18.1m (2021: £18.4m), representing a margin of 14.4%
for the full year, compared with 17.8% in the prior year. This decrease in
margin is due to the direct impact on profit of the lower than anticipated
revenue in the last two trading months of the financial year, as previously
explained. The cost base of the business was at a level that budgeted for
anticipated revenue of circa £131m. If this revenue budget of £131m had
been achieved, the additional £5m of revenue would have supported
profitability and delivered an underlying PBT margin of circa 17.7%, in line
with prior years.
Reported profit before tax (PBT)
Reported profit before tax for the year has decreased to £1.1m (2021:
£5.5m), reflecting the net impact of the £0.3m decrease in underlying profit
before tax, a £1.2m increase in amortisation of acquired intangibles and a
£3.0m increase in non-underlying costs.
Non-underlying costs increased from £10.3m in FY21 to £13.3m principally due
to the following increases in costs compared to prior year: £1.4m relating to
the impairment of right of use assets, a £0.7m loss on disposal of tangible
assets acquired in a business combination, £0.6m in redundancy and
reorganisation costs on acquisitions completed during the year, and £0.3m in
respect of the contingent consideration element of the purchase cost of
acquisitions being recognised in the Statement of Comprehensive Income in
accordance with IFRS accounting conventions.
(Loss)/Earnings per share (EPS)
The weighted average number of shares in the year to 30 April 2022 was
83,717,952 (2021: 82,189,113) which gives a basic loss per share (Basic EPS)
for the year of (3.02p) (2021: profit of 4.14p). Due to the loss in the year,
the options are not dilutive; diluted EPS in 2021 was 4.09p.
In order to compare the EPS year on year, underlying EPS has been calculated
showing 17.23p in the year to 30 April 2022 compared with 18.30p in the prior
year. This measure eliminates the effect of any non-recurring and
non-underlying costs on the EPS calculation. The decrease in the underlying
EPS of 6% compared to the prior year is due to an increase in both the tax
rate and the average number of shares in issue in FY22 compared to the prior
year.
Corporation tax
The Group's tax charge for the year is £3.6m (2021: £2.1m), made up of a
current corporation tax charge of £1.5m (2021: £2.6m) and a deferred tax
charge of £2.1m (2021: deferred tax credit of £0.5m).
As corporation tax will increase from 19% to 25% from 1 April 2023 the effect
of the new rate on the Group's deferred tax charge has been applied in the
year and amounts to £1.7m which is included within the deferred tax charge.
The total effective rate of tax is 340% (2021: 38%) based on reported profit
before tax. This has been adversely affected by the change in the rate of
deferred tax applied in the year as noted above. The effective rate of tax
on the underlying profit of the business is 21% (2021: 18%) (see note 17 of
the financial statements).
Dividend
As previously outlined, the Board did not declare a dividend during the COVID
pandemic. The Board has decided to resume paying dividends in respect of the
year ended 30 April 2022 in accordance with the previous dividend policy,
being a total dividend payable of c.20% of profits after tax.
Subject to approval at the AGM in September 2022, the Board is pleased to
announce a final dividend for the year of 2.04p per share. This, together
with the interim dividend of 1.46p per shares brings the total dividend in
respect of FY22 to 3.50p per share.
Balance sheet 30 April 22 30 April 21
£'000
£'000
Goodwill and intangible assets 82,172 79,523
Right of use assets 40,663 40,406
Working capital 44,302 36,929
Accrued consideration - (8,310)
Other net liabilities (3,028) (991)
Lease liabilities (46,528) (42,640)
Assets held for resale (net of cash included below) 635 -
118,216 104,917
Cash and cash equivalents 4,227 4,783
Overdraft - (1,852)
Borrowings (33,153) (24,064)
Net debt * (28,926) (21,133)
Deferred consideration (3,631) (1,095)
Net assets 85,659 82,689
* Net debt excludes lease liabilities.
The Group's net assets as at 30 April 2022 increased by £3.0m from the prior
year reflecting equity consideration on acquisitions in the year and the net
result for the year.
Goodwill and intangible assets
Included within intangible assets and goodwill is £30.1m of intangible assets
identified on current and prior year acquisitions. This relates to customer
relationships, values attached to restrictive covenants and brand. £0.3m
relates to computer software, with the remaining balance of £51.8m relating
to goodwill from acquisitions.
The Board carries out an impairment review of goodwill each year to ensure the
carrying value is supportable. The value in use of the goodwill was calculated
using a number of different scenarios, some of which assumed a considerably
more negative outcome than is anticipated by the Directors. In all instances,
the future trading of the business was more than sufficient to justify the
carrying value of goodwill. Therefore, as at 30 April 2022, the Board is
satisfied that the goodwill was not impaired.
Working capital
The Group manages its working capital requirements closely, with impact on
working capital a key consideration in all business decisions. The management
of working capital has always been a key performance indicator, with strong
controls and systems in place to monitor the level of debtors and work in
progress in the business. Number of lock up days is the primary metric used by
the Group to measure the length of time it takes to convert work recorded into
cash received.
The reported working capital balance has been impacted by the year end
corporation tax position. Tax installments in the first half of the year
were based on a higher level of year end profitability, resulting in an
overpayment of £1.8m. The net impact of the corporation tax asset in FY22,
compared to the liability as at FY21 resulted in a reported increase in
working capital of £2.5m. Excluding corporation tax balances at each year
end working capital has increased from £37.7m at 30 April 2021 to £42.5m at
30 April 2022, an increase of 13% which is in line with the increase in the
run rate level of revenue at each year end taking into account the full year
impact of acquisitions during the year. As at 30 April 2022 run rate revenue
is c.£132m being £126m reported plus c.£6m for the full year impact of FY22
acquisitions.
Due to the strong controls already in place the Group did not experience any
significant change in its working capital cycle throughout the year as a
result of the pandemic. Bad debts have increased slightly but remain at a very
low level at 0.4% of turnover.
Management is satisfied with the level of working capital at the year end and
the management of working capital over the period.
Right of use and lease liabilities
The right of use assets capitalised in the Statement of Financial Position
represent the present value of property, equipment and vehicle leases. The
increase in right of use assets during the year from £40.4m in FY21 to
£40.7m in FY22 was the result of new leases acquired as part of the
acquisitions completed during the year and new leases entered into by the
Group during the period less depreciation of £4.8m.
The lease liabilities represent the present value of the total liabilities
recognised for right of use assets and the increase during the year to £46.5m
(FY21: £42.6m) again reflects the leases in acquired entities and new leases
entered into during the period, less repayments in the period.
During the year the Group entered into a lease for new premises in Maidstone
and completed on a lease in York. Under IFRS16 these are accounted for as
right of use assets and accordingly £2.3m has been capitalised within
non-current assets in the Consolidated Statement of Financial Position.
During the year, in order to minimise the cost of some unoccupied property
space, the Group agreed to lease one floor of an existing office to a third
party. This has resulted in the Group recognising total lease receivables of
£1.2m in the Statement of Financial Position during the period (FY21:£nil),
representing the total present value of amounts receivable under the sub
lease.
Net debt, financing and leverage
Strong cash conversion in the period has resulted in net debt of £28.9m at
the year end. This figure represents an increase in net debt from £21.1m as
at 30 April 2021 due to an aggregate cash outlay of £18.0m relating to
consideration for acquisitions completed during the period, deferred
consideration paid in relation to acquisitions in prior years, repayment of
debt on acquisitions, and contingent consideration charged as remuneration.
The Group's RCF facility was extended to £60m during the period, giving
significant headroom to continue to support the growth strategy into 2023
through organic recruitment and strategic acquisitions.
Cash conversion
2022 2021
£'000
£'000
Net cash generated from underlying operating activities* 25,060 20,378
Tax paid (4,095) (2,125)
Cash outflow for IFRS 16 leases (rental payments excluded from operating (5,302) (3,741)
activity cash flows under IFRS 16)
Free cash flow 15,663 14,512
Underlying profit after tax* 14,422 15,040
Cash conversion 109% 96%
*See glossary
The cash conversion percentage measures the Group's conversion of its
underlying profit after tax into free cash flow. Due to a continued focus on
management of working capital and lock up, the Group has again delivered
strong cash conversion of 109% (2021:96%) demonstrating strong cash controls.
Capital expenditure
Capital expenditure during the year was £2.5m (FY21: £4.3m).
During the year the Group continued to invest in its systems and premises to
expand capacity and ensure staff continue to benefit from a high quality
working environment, with consistent systems across the Group to aid
integration of acquisitions and support its 'one team' culture. This includes
refurbishment of offices that were part of acquisitions of c.£1.0m and system
/ equipment upgrades for acquisitions of £0.5m.
Capital budgets for FY23 include the normal level of expected investment in
general IT, communications, and infrastructure to ensure we continue to have
the capacity required for a growing business. Due to the acquisitions
completed during FY22 and early FY23, and some potential relocation of offices
due to expiring leases, we expect some one-off refurbishment costs amounting
to c.£2.5m in the current financial year.
Acquisitions
During the year we signed and completed two acquisitions and finalised the
integration of the Keebles acquisition for which contracts were exchanged at
the end of FY21. The table below summarises the net impact of acquisitions on
cashflows during the year and in future years. This shows the impact of
consideration payable net of any cash in the acquired businesses.
For completeness, the table also shows the cash impact of the acquisition post
year end of Coffin Mew that completed on 8 July 2022.
Financial year ended Cash impact from Repayment of Cash impact from Total cash Cash impact of post
acquisitions
debt on
prior year
impact from
year end
in the year
acquisitions
acquisitions
acquisitions
acquisitions
£m
£m
£m
£m
£m
2022 6.8 4.7 6.5 18.0 -
2023 2.6 - 2.5 5.1 5.5
2024 2.6 - 1.4 4.0 2.0
2025 2.6 - - 2.6 2.0
2026 - - - - 2.0
The above includes estimated contingent consideration charged as remuneration
in the Consolidated Statement of Comprehensive Income.
Tax - Cash flow impact
Corporation tax
Corporation tax of £4.1m (FY21: £2.1m) was paid during the year. This
included an overpayment of c.£1.8m due to the quarterly payment scheme
calculations. Cash payments due for 2023 will be reduced by this amount.
In summary
Given the unexpected trading headwinds at the end of the financial year, the
Board is pleased to deliver in line with its revised expectations, continuing
to drive good levels of revenue growth and cash conversion. The lower than
anticipated levels of net debt as at the end of the year are the result of the
Group's continued excellent cash management policy. The Group is in a strong
position to invest in growing the business both organically and through
strategic acquisition opportunities with headroom within its current RCF
facility of over £30m.
Kate Lewis
Chief Financial Officer
1. Consolidated Statement of Comprehensive Income
For the year ended 30 April 2022
Note Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Revenue 5 125,604 103,201
Other operating income 7 1,270 1,310
Staff costs 8 (76,863) (62,707)
Depreciation and amortisation charges 11 (10,778) (7,730)
Impairment of trade receivables and contract assets (498) (223)
Other operating charges 12 (22,077) (16,173)
Operating profit before non-underlying charges 16,658 17,678
Non-underlying operating costs 13 (13,260) (10,288)
Operating profit 3,398 7,390
Finance costs 14 (2,364) (1,881)
Finance income 15 22 -
Profit before tax 1,056 5,509
Taxation 17 (1,840) (2,107)
Impact of change in tax rate on deferred tax charge 17 (1,747) -
(Loss)/ profit and total comprehensive income for the year attributable to (2,531) 3,402
equity owners of the parent
Earnings per share Pence Pence
Basic earnings per share 18 (3.02) 4.14
Diluted earnings per share 18 (3.02) 4.09
2. Consolidated Statement of Financial Position
As at 30 April 2022
Note 30 April 2022 30 April 2021
£'000
£'000
Assets
Non-current assets
Intangible assets and goodwill 20 82,172 79,523
Property, plant and equipment 22 10,240 9,538
Right-of-use assets 22 40,663 40,406
Finance lease receivables 26 1,091 -
134,166 129,467
Current assets
Contract assets 23 31,777 28,530
Trade and other receivables 24 32,309 31,521
Finance lease receivables 26 76 -
Corporation tax asset 1,815 -
Cash and cash equivalents 4,097 4,783
Assets held for sale 27 1,195 -
71,269 64,834
Total assets 205,435 194,301
Equity and liabilities
Equity
Share capital 25 169 165
Share premium 74,264 68,369
Merger reserve (3,536) (3,536)
Retained earnings 14,762 17,691
Equity attributable to owners of the parent 85,659 82,689
Non-current liabilities
Lease liabilities 28 41,183 39,020
Borrowings 29 32,798 23,650
Deferred consideration 30 2,421 -
Deferred tax 31 8,332 5,655
Provisions 33 4,331 2,998
89,065 71,323
Current liabilities
Lease liabilities 28 5,345 3,620
Borrowings 29 355 414
Trade and other payables 32 21,362 32,303
Deferred consideration 30 1,210 1,095
Contract liabilities 23 237 216
Corporation tax liability - 765
Provisions 33 1,772 1,876
Liabilities held for sale 27 430 -
30,711 40,289
Total liabilities 119,776 111,612
Total equity and liabilities 205,435 194,301
3. Consolidated Statement of Changes in Equity
For the year ended 30 April 2022
Note Share capital Share premium Merger reserve £'000 Retained earnings Total
£'000
£'000
£'000
£'000
As at 1 May 2020 164 66,252 (3,536) 13,070 75,950
Profit for the period and total comprehensive income - - - 3,402 3,402
Transactions with owners in their capacity as owners:
Credit to equity for equity-settled share-based payments 9 - - - 1,219 1,219
Issue of shares 25 1 2,117 - - 2,118
Balance at 30 April 2021 165 68,369 (3,536) 17,691 82,689
Loss for the period and total comprehensive income - - - (2,531) (2,531)
Transactions with owners in their capacity as owners:
Credit to equity for equity-settled share-based payments 9 - - - 835 835
Issue of shares 25 4 5,895 - - 5,899
Dividends 19 - - - (1,233) (1,233)
Balance at 30 April 2022 169 74,264 (3,536) 14,762 85,659
4. Consolidated Statement of Cash Flows
For the year ended 30 April 2022
Note Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Operating activities
Cash generated from operations 35 25,060 20,378
Non-underlying operating costs paid 13 (3,691) (4,268)
Interest received 274 461
Tax paid (4,095) (2,125)
Contingent acquisition payments (5,383) (5,597)
Net cash from operating activities 12,165 8,849
Investing activities
Acquisition of subsidiaries (net of cash acquired) 21 (6,801) (1,195)
Purchase of intangible fixed assets 20 (62) (196)
Purchase of property, plant and equipment 22 (2,526) (4,356)
Proceeds from sale of property, plant and equipment - 6
Proceeds from lease receivables 30 -
Landlord capital contribution 146 2,265
Associated lease costs (23) (289)
Payment of deferred and contingent consideration (1,095) (3,171)
Net cash used in investing activities (10,331) (6,936)
Financing activities
Proceeds of borrowings 47,350 19,000
Repayment of borrowings (38,600) (24,000)
Proceeds from exercise of share options 798 -
Repayment of debt acquired with subsidiaries 21 (2,903) (2,387)
Repayment of lease liabilities (3,890) (2,564)
Interest and other finance costs paid (2,060) (1,772)
Dividends paid (1,233) -
Net cash used in financing activities (538) (11,723)
Net increase/(decrease) in cash and cash equivalents 1,296 (9,810)
Cash and cash equivalents at the beginning of the period (net of overdraft 2,931 12,741
£nil (2021:£1,852,000))
Cash - continuing operations 4,097 2,931
Cash - assets held for disposal (note 27) 130 -
Total Cash and cash equivalents at end of period (net of overdraft £nil 4,227 2,931
(2021: £1,852,000))
5. Notes to the Consolidated Financial Statements
For the year ended 30 April 2022
1. General Information
Knights Group Holdings plc ("the Company") is a public company limited by
shares and is registered, domiciled and incorporated in England.
The Group consists of Knights Group Holdings plc and all of its subsidiaries.
The principal activity and nature of operations of the Group is the provision
of legal and professional services. The address of its registered office is:
The Brampton
Newcastle-under-Lyme
Staffordshire
ST5 0QW
Preliminary announcement
The preliminary results for the year ended 30 April 2022 were approved by
the Board of Directors on 11 July 2022.
The preliminary announcement set out above does not constitute Knights Group
Holdings plc's statutory financial statements for the years ended 30 April
2022 or 30 April 2021 within the meaning of section 434 of the Companies Act
2006 but is derived from those audited financial statements.
The auditor's report on the consolidated financial statements for the years
ended 30 April 2022 and 30 April 2021 is unqualified and does not contain
statements under s498(2) or (3) of the Companies Act 2006.
The accounting policies used for the year ended 30 April 2022 are
unchanged from those used for the statutory Financial Statements for the year
ended 30 April 2021. The 30 April 2022 statutory accounts will be delivered
to the Registrar of Companies following the Company's Annual General Meeting.
Compliance with accounting standards
While the financial information included in this preliminary announcement has
been computed in accordance with the measurement principles
of UK-adopted international accounting standards, this announcement does not
itself contain sufficient information to comply with these accounting
standards.
2. Accounting policies
2.1 Basis of preparation
The financial statements have been prepared in accordance with UK-adopted
International Accounting Standards.
Applying these standards requires the directors to exercise judgement and use
certain critical accounting estimates, the judgments and estimates that the
directors deem significant in the preparation of these financial statements
are explained in note 4.
The financial statements have been prepared on the historical cost basis.
Historical cost is generally based on the fair value of the consideration
given in exchange for goods and services.
Monetary amounts are presented in sterling, being the functional currency of
the Group, rounded to the nearest thousand except where otherwise indicated.
The principal accounting policies adopted are set out below. These policies
have been consistently applied to all periods presented in the financial
statements, unless otherwise stated.
2.2 Going concern
The accounts are prepared on a going concern basis as, at the time of
approving the financial statements, the Directors have a reasonable
expectation that the Group and Company have adequate resources to continue in
operational existence for the foreseeable future. The Group was cash
generative for FY22 and is forecast to continue to be so. The group has
banking facilities of £60,000,000 available until October 2024. The Group's
forecasts show sufficient cash generation and headroom in banking facilities
and covenants by comparison to anticipated future requirements to support the
Directors' conclusion that the assumption of the going concern basis of
accounting in preparing the financial statements is appropriate.
The Group continues to trade profitably before non underlying charges and cash
generation at an operating cashflow level has remained strong and in line with
expectation. In order to satisfy the validity of the going concern assumption,
a number of different trading scenarios have been modelled and reviewed. Some
of these scenarios forecast a significantly more negative trading performance
than is expected. In all of these scenarios the Group remained profitable and
with significant headroom in its cash resources for the 12 months from the
date of approval of the accounts.
2.3 Basis of consolidation
The consolidated financial statements incorporate the results of Knights Group
Holdings plc and all of its subsidiaries. Subsidiaries results are
consolidated in the financial statements from the date of exchange of the sale
and purchase agreement, at which time control is obtained until the date that
control ceases.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an
entity when it is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns
through its power over the entity. In assessing control, the Group takes into
consideration potential voting rights that are currently exercisable. The
acquisition date is the date on which control is transferred to the acquirer
which is the date of exchange of the sale and purchase agreement. The
financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that
control ceases.
Transactions eliminated on consolidation
All intra-group transactions, balances and unrealised gains on transactions
between group companies are eliminated on consolidation. Unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of
the asset transferred.
Where necessary, adjustments are made to the financial information of
subsidiaries to bring the accounting policies used into line with those used
by the Group.
Audit exemption of subsidiaries
The following subsidiaries are exempt from the requirements of the UK
Companies Act 2006 relating to the audit of individual accounts by virtue of
s479A of the Act.
Name Registered number
BrookStreet Des Roches LLP OC317863
Dakeyne Emms Gilmore Liberson Limited 06850969
ERT Law Limited 09182964
Shulmans LLP OC348166
ASB Law LLP OC351354
ASB Aspire Limited Liability Partnership OC327667
OTB Eveling LLP OC371214
Mundays LLP OC313856
K & S Trust Corporation Limited 02885753
Keebles LLP OC351421
Archers Law Limited Liability Partnership OC306705
Langleys Solicitors LLP OC361149
Langleys Law Firm Limited 07500419
Home Property Lawyers Limited 09356408
The outstanding liabilities at 30 April 2022 of the above named subsidiaries
have been guaranteed by the Company pursuant to s479A to s479C of the Act. In
the opinion of the directors, the possibility of the guarantee being called
upon is remote since the trade, assets and majority of liabilities of these
subsidiaries were transferred to Knights Professional Services Limited before
30 April 2022.
2.4 Business combinations
The cost of a business combination is the fair value at the acquisition date
of the assets given, equity instruments issued and liabilities incurred or
assumed.
The excess of the cost of a business combination over the fair value of the
identifiable assets, liabilities and contingent liabilities acquired is
recognised as goodwill.
Costs related to the acquisition, other than those associated with the issue
of debt or equity securities, are expensed as incurred.
Where settlement of any part of cash consideration is deferred, the amounts
payable in the future are discounted to their present value as at the date of
exchange. This discount rate used is the entity's incremental borrowing
rate, being the rate at which similar borrowing could be obtained from an
independent financier under comparable terms and conditions.
Contingent consideration is classified as a financial liability. Amounts
classified as a financial liability are subsequently remeasured to fair value,
with changes in fair value recognised in profit or loss.
2.5 Revenue
The Group earns revenue from the provision of legal and professional services.
Revenue for these services is recognised over time in the accounting period
when services are rendered as the Group has an enforceable right to payment
for work performed to date under its client terms of engagement.
Fee arrangements for legal and professional services include fixed fee
arrangements, unconditional fee-for-service arrangements ("time and
materials"), and variable or contingent fee arrangements.
For fixed fee arrangements, revenue is recognised based on the stage of
completion with reference to the actual services provided as a proportion of
the total services expected to be provided under the contract. The stage of
completion is tracked on a contract-by-contract basis using the hours spent by
professionals providing the services.
In fee-for-service contracts, revenue is recognised up to the amount of fees
that the Group is entitled to bill for services performed to date based on
contracted rates.
Under variable or contingent fee arrangements, fees may be earned only in the
event of a successful outcome of a client's claim. Fees under these
arrangements may be fixed or may be variable based on a specified percentage
of damages awarded under a claim.
For variable or contingent fee arrangements management makes a detailed
assessment of the amount of revenue expected to be received and the
probability of success of each case. Variable consideration is recognised over
the duration of the matter only to the extent that it is highly probable that
the amount recognised will not be subject to significant reversal when the
matter is concluded based on the expected amount recoverable at that point in
time. In such circumstances, a level of judgement is required to determine the
likelihood of success of a given matter, as well as the estimated amount of
fees that will be recovered in respect of the matter. Where the likelihood of
success of a contingent fee arrangement is less than highly probable, the
value recognised in contract assets is further reduced to reflect this
uncertainty.
Certain contingent fee arrangements are undertaken on a partially funded
basis. In such arrangements, the funded portion of fees is not contingent on
the successful outcome of the litigation and in these instances the revenue is
recognised up to the amount of fees that the Group is entitled to bill for
services performed to date based on contracted rates. The remaining
consideration is variable and conditional on the successful resolution of the
litigation. The variable consideration is recognised over the duration of the
matter and included in revenue based on the expected amount recoverable only
to the extent that it is highly probable that the amount recognised will not
be subject to significant reversal when the uncertainty is resolved at that
point in time.
The Group's contracts with clients each comprise of a single distinct
performance obligation, being the provision of legal and professional services
in relation to a particular matter and the transaction price is therefore
allocated to this single performance obligation.
Estimates of revenues, costs or extent of progress toward completion are
revised if circumstances change. Any resulting increases or decreases in
estimated revenues or costs are reflected in the Consolidated Statement of
Comprehensive Income in the period in which the circumstances that give rise
to the revision become known by management.
The Group has determined that no significant financing component exists in
respect of the provision of legal and professional services because the period
between when the Group transfers its services to a client and when the client
pays for that service will generally be one year or less.
Consideration for services provided under contingent or variable fee
arrangements may be paid after a longer period. In these cases, no significant
financing component exists because the consideration promised by the customer
is variable subject to the occurrence or non-occurrence of a future event that
is not substantially within the control of the client or the Group.
A receivable is recognised when a bill has been issued to the client, as this
is the point in time that the consideration is unconditional because only the
passage of time is required before the payment is due.
Unbilled revenue is recognised as contract assets. Costs incurred in
fulfilling the future performance obligations of a contract are recognised as
contract assets if the costs are expected to be recovered.
Contract liabilities are recognised in respect of consideration billed in
advance of satisfying the performance obligation under the contract.
Revenue does not include disbursements. Recoverable expenses incurred on
client matters that are expected to be recovered and are billed during the
period are recognised in other income.
2.6 Taxation
The tax expense represents the sum of the current tax expense and the deferred
tax expense. Current tax assets are recognised when the tax paid exceeds the
tax payable. Current tax is based on taxable profit for the year. Current tax
assets and liabilities are measured using tax rates that have been enacted or
substantively enacted by the reporting date.
Deferred tax is calculated at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled based on tax
rates that have been enacted or substantively enacted by the reporting date.
Deferred tax liabilities are recognised in respect of all timing differences
that exist at the reporting date. Timing differences are differences between
taxable profits and total comprehensive income that arise from the inclusion
of income and expenses in tax assessments in different periods from their
recognition in the financial statements. Deferred tax assets are recognised
only to the extent that it is probable that they will be recovered by the
reversal of deferred tax liabilities or other future taxable profits.
Deferred tax is recognised on differences between the value of assets (other
than goodwill) and liabilities recognised in a business combination and the
amounts that can be deducted or assessed for tax. The deferred tax recognised
is adjusted against goodwill.
Current tax assets and current tax liabilities and deferred tax assets and
deferred tax liabilities are offset if, and only if, there is a legally
enforceable right to set off the amounts and the entity intends either to
settle on a net basis or to realise the asset and settle the liability
simultaneously.
2.7 Intangible assets - Goodwill
Goodwill arising on the acquisition of an entity represents the excess of the
cost of acquisition over the Group's interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities of the entity
recognised at the date of acquisition. Goodwill is initially recognised as an
asset at cost and is subsequently measured at cost less accumulated impairment
losses. Goodwill is tested annually by the directors for evidence of
impairment.
2.8 Intangible assets - Other than goodwill
Intangible assets purchased, other than in a business combination, are
recognised when future economic benefits are probable and the cost or value of
the asset can be measured reliably.
Intangible assets arising on a business combination, such as customer
relationships, are initially recognised at estimated fair value, except where
the asset does not arise from legal or contractual rights, and there is no
history or evidence of exchange transactions for the same or similar assets
and estimating the assets fair value would depend on immeasurable variables.
The fair value represents the directors' best estimate of future economic
benefit to be derived from these assets discounted at an appropriate rate.
Intangible assets are initially recognised at cost (which for intangible
assets acquired in a business combination is the fair value at acquisition
date) and are subsequently measured at cost less accumulated amortisation and
accumulated impairment losses.
Intangible assets are amortised to the Consolidated Statement of Comprehensive
Income on a straight-line basis over their estimated useful lives, as follows:
Purchased computer software - 4 years
Customer relationships - 4-25 years
Restrictive covenants - remaining length of covenant
Brand - 100 years
Purchased computer software is amortised over a period of 4 years, being the
minimum period expected to benefit from the asset.
Customer relationships are amortised over a period of 4-25 years being the
average length of relationship with key clients for acquired entities.
Restrictive covenants are amortised over the remaining length of covenant.
Brand value is amortised over a period of 100 years based on the directors'
assessment of the future life of the brand. This is supported by a trading
history dating back to 1759. Brand value relates to the 'Knights' brand only.
Other acquired brands are not recognised as an asset as the acquired entities
are rebranded as Knights and the impact of such recognition would not be
material.
2.9 Property, plant and equipment
Property, plant and equipment are stated at cost net of depreciation and any
provision for impairment.
Depreciation is provided on property, plant and equipment at rates calculated
to write each asset down to its estimated residual value over its expected
useful life, as follows:
Expenditure on short leasehold property - 10% on cost
Office equipment - 25% on cost
Furniture and fittings - 10% on cost
Right-of-use assets - useful life of the lease
(between 1 and 25 years)
Residual value is calculated on prices prevailing at the reporting date, after
estimated costs of disposal, for the asset as if it were at the age and in the
condition expected at the end of its useful life.
2.10 Impairment of non-current assets
An assessment is made at each reporting date of whether there are indications
that non-current assets may be impaired or that an impairment loss previously
recognised has fully or partially reversed. If such indications exist, the
Group estimates the recoverable amount of the asset or, for goodwill, the
recoverable amount of the cash-generating unit.
Shortfalls between the carrying value of non-current assets and their
recoverable amounts, being the higher of fair value less costs to sell and
value in use, are recognised as impairment losses. All impairment losses are
recognised in the Consolidated Statement of Comprehensive Income.
Recognised impairment losses are reversed if, and only if, the reasons for the
impairment loss have ceased to apply. Reversals of impairment losses are
recognised in the Consolidated Statement of Comprehensive Income. On reversal
of an impairment loss, the depreciation or amortisation is adjusted to
allocate the asset's revised carrying amount (less any residual value) over
its remaining useful life.
2.11 Professional indemnity provisions
In common with comparable practices, the Group is involved in a number of
disputes in the ordinary course of business which may give rise to claims.
Professional indemnity insurance cover is maintained in respect of
professional negligence claims. Premiums are expensed as they fall due with
prepayments being recognised accordingly.
Provision is made in the financial statements for all claims where costs are
likely to be incurred. The provision represents management's best estimate of
the cost of defending and concluding claims and any excesses that may become
payable. No separate disclosure is made of the cost of claims covered by
insurance as to do so could seriously prejudice the position of the Group.
2.12 Leases
Group as lessee
The Group leases offices, equipment and vehicles. Rental contracts are for
periods of between 1 and 25 years. Lease terms are negotiated on a lease by
lease basis and contain a variety of terms and conditions.
The Group assesses whether a contract is or contains a lease at inception of
the contract. The Group recognises a right-of-use asset and a corresponding
lease liability with respect to all lease arrangements in which it is the
lessee, except for short term leases (defined as leases with a lease term of
12 months or less) and leases of low value assets (being those assets with a
value less than £4,000). For short term and low value leases, the Group
recognises the lease payments as an operating expense on a straight line basis
over the term of the lease.
Assets and liabilities arising from a lease are initially measured on a
present value basis. Lease liabilities include the net present value of the
following lease payments:
• fixed payments (including in-substance fixed
payments), less any lease incentives receivable;
• variable lease payments that are based on an
index or a rate;
• amounts expected to be payable by the Group
under residual value guarantees;
• the exercise price of a purchase option if the
Group is reasonably certain to exercise that option; and
• payments of penalties for terminating the
lease, if the lease term assumed reflects the group exercising that option.
The lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be determined, the Group's incremental borrowing
rate is used, being the rate that the Group would have to pay to borrow the
funds necessary to obtain an asset of similar value in a similar economic
environment with similar terms and conditions.
Lease payments of both principal and interest are included in financing
activities in the cash flow.
The lease liability is presented as a separate line in the Consolidated
Statement of Financial Position.
Right-of-use assets are recognised at commencement of the lease and initially
measured at the amount of the lease liability, plus any incremental costs of
obtaining the lease and any lease payments made at or before the leased asset
is available for use by the Group.
Subsequent to initial recognition, the lease liability is reduced for payments
made and increased to reflect interest on the lease liability (using the
effective interest method). The related right-of-use asset is depreciated over
the term of the lease or, if shorter, the useful economic life of the leased
asset. The lease term shall include the period of an extension option where it
is reasonably certain that the option will be exercised. Interest on the lease
liability is recognised in the Consolidated Statement of Comprehensive Income.
An estimate of the costs to be incurred in restoring the leased asset to the
condition required under the terms and conditions of the lease is recognised
as part of the cost of the right-of-use asset when the Group incurs the
obligation for these costs. The costs are incurred at the start of the lease
or over the lease term. The provision is measured at the present value of the
best estimate of the expenditure required to settle the obligation.
The Group remeasures the lease liability (and makes a corresponding adjustment
to the related right-of-use asset) whenever:
• the lease term has changed or there is a significant
change in the assessment of exercise of a purchase option, in which case the
lease liability is remeasured by discounting the revised lease payments using
a revised discount rate;
• the lease payments change due to changes in an index or
rate or a change in expected payment under a guaranteed residual value, in
which cases the lease liability is remeasured by discounting the revised lease
payments using the initial discount rate (unless the lease payments change is
due to a change in a floating interest rate, in which case a revised discount
rate is used);
• a lease contract is modified and the lease
modification is not accounted for as a separate lease, in which case the lease
liability is remeasured by discounting the revised lease payments using a
revised discount rate.
The Group did not make any such adjustments during the periods presented.
Group as lessor
The Group enters into lease agreements as a lessor with respect to one of its
properties.
When the Group acts as a lessor, it determines at lease inception whether each
lease is a finance lease or an operating lease.
To classify each lease, the Group makes an overall assessment of whether the
lease transfers substantially all of the risks and rewards incidental to
ownership of the underlying asset. If this is the case, then the lease is a
finance lease; if not, then it is an operating lease. As part of this
assessment, the Group considers certain indicators such as whether the lease
is for the major part of the economic life of the asset.
When the Group is an intermediate lessor, it accounts for its interests in the
head lease and the sub-lease separately. It assesses the lease classification
of a sub-lease with reference to the right-of-use asset arising from the head
lease, not with reference to the underlying asset. If a head lease is a
short-term lease to which the Group applies the exemption described above,
then it classifies the sub-lease as an operating lease.
2.13 Retirement benefits
2.13a Defined contribution scheme
The Group operates a defined contribution scheme. The amount charged to the
Consolidated Statement of Comprehensive Income in respect of pension costs is
the contributions payable in the year. Differences between contributions
payable in the year and contributions actually paid are shown as either
accrued expenses or prepayments and other receivables.
2.13b Defined benefit pension scheme
For defined benefit schemes the amounts charged to operating profit are the
current service costs and gains and losses on settlements and curtailments.
They are included as part of staff costs. The interest cost and the expected
return on assets are shown as a net amount of other finance costs or finance
income. Actuarial gains and losses are recognised immediately in Other
Comprehensive Income.
Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the Group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are measured
on an actuarial basis using the projected unit credit method and discounted at
a rate equivalent to the current rate of return on a high quality corporate
bond of equivalent currency and term to the scheme liabilities. The actuarial
valuations are obtained at least triennially and are updated at each reporting
date.
Defined benefit assets are not recognised in the Consolidated Statement of
Financial Position, on the basis that they are not deemed to be material.
For the 'With Profit Section' contributions are recognised in the Consolidated
Statement of Comprehensive Income in the period to which they relate as there
is insufficient information available to use defined benefit accounting. A
liability will be recognised based on the agreed share of the Group in the
scheme. No asset has been recognised in the current or prior period on the
basis that future economic benefits are not available to the Group in the form
of a reduction in future contributions or a cash refund.
2.14 Share Based Payments
The cost of providing share based payments to employees is charged to the
Consolidated Statement of Comprehensive Income over the vesting period of the
awards. The cost is based on the fair value of awards at the date of grant
of the award using an appropriate valuation model. The amount recognised as
an expense will be adjusted to reflect differences between the expected and
actual vesting levels. Further details of the schemes are included in note
9.
2.15 Financial instruments
Financial instruments are recognised on the date when the Group becomes a
party to the contractual provisions of the instrument. Financial instruments
are recognised initially at fair value. Financial instruments are
derecognised when the Group is no longer party to the contractual provisions
of the instrument.
Financial assets
Contract assets and trade and other receivables
Contract assets and trade and other receivables which are receivable within
one year are initially measured at fair value. These assets are subsequently
measured at amortised cost, being the transaction price less any amounts
settled and any impairment losses.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses ('ECL') on
contract assets and trade and other receivables. The expected credit losses on
trade receivables includes specific provisions against known receivables and
an estimate using a provision matrix by reference to past experience, adjusted
for forward looking considerations, and an analysis of the debtor's current
financial position on the remaining balance. The expected credit losses on
contract assets and other receivables is assessed based on historical credit
loss experienced on these types of assets adjusted for known foreseeable
estimated losses.
Financial liabilities and equity
Financial instruments are classified as liabilities and equity instruments
according to the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in the
assets of the Group after deducting all of its liabilities.
Trade and other payables
Trade and other payables due within one year are initially measured at fair
value and subsequently measured at amortised cost, being the transaction price
less any amounts settled.
Deferred consideration
Deferred consideration is initially recognised at the fair value of the
amounts payable and subsequently at amortised cost of the agreed payments in
accordance with the agreement. Any interest payable on the balance is
reflected in the value of the liability and charged monthly to the Statement
of Comprehensive Income as it arises.
Borrowings
Borrowings are initially recognised at the fair value of the consideration
received net of issue costs associated with the borrowings. Borrowings are
subsequently measured at amortised cost using the effective interest
method. Interest expense is recognised on the basis of the effective
interest method and is included in Finance costs.
Derecognition of financial assets and liabilities
A financial asset is derecognised only when the contractual rights to cash
flows expire or are settled, or substantially all the risks and rewards of
ownership are transferred to another party. A financial liability (or part
thereof) is derecognised when the obligation specified in the contract is
discharged, cancelled or expires.
3. Accounting developments
New and amended IFRSs that are effective for the future
At the date of these financial statements, there were new standards and
amendments to IFRSs which were in issue but which were not yet effective and
which have not been applied. The principal ones were:
Revised IFRS Effective date
Amendments to IFRS3 Business Combinations; IAS16 Property, Plant and 1 January 2022
Equipment, IAS37 Provisions, Contingent Liabilities and Contingent Assets and
Annual Improvements on IFRS1, IFRS9, IAS41 and IFRS16
IFRS17 : Insurance contracts 1 January 2023
Amendments to IAS 1, Practice statement 2 and IAS 8 1 January 2023
Amendment to IAS 12 - deferred tax related to assets and liabilities arising 1 January 2023
from a single transaction
Amendments to IAS1 Presentation of Financial Statements: Classification of 1 January 2024
Liabilities as Current and Non- current and Classification of Liabilities as
Current or Non-current
The directors do not expect that the adoption of the Standards listed above
will have a material impact on the financial statements of the Group in future
periods.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are described in
note 2, 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.
Critical accounting judgements
The following are the critical judgements, apart from those involving
estimations (which are dealt with separately below), that the directors have
made in the process of applying the Group's accounting policies and that have
the most significant effect on the amounts recognised in the financial
statements.
Amounts recoverable on contracts - contingent fee arrangements
A level of judgement is required to determine the likelihood of success of a
given matter for contingent fee arrangements. This is determined on a
contract-by-contract basis after considering the relevant facts and
circumstances surrounding each matter. The valuation exercise is conducted by
experienced professionals with detailed understanding of the individual
matters. The carrying value of contingent fee arrangements at 30 April 2022
was £7,804,000 (2021: £5,781,000).
IFRS 16
In applying IFRS 16, the Group uses judgement to assess whether the interest
rate implicit in the lease is readily determinable. When the interest rate
implicit in the lease is not readily determinable, the Group estimates the
incremental borrowing rate based on its external borrowings secured against
similar assets, adjusted for the term of the lease.
Business combinations
Management make judgements regarding the date of control of an acquisition in
accordance with IFRS10. The judgement considers the individual legal
agreements on each transaction and the date at which the Group starts to
exercise control over the activities of the subsidiary, usually the date of
exchange of contracts. Financial performance of the acquisitions is included
in the consolidated group from the deemed date of control.
Alternative performance measures (AMP's)
The Group presents various APMs to assist the user in understanding the
underlying performance of the Group. The selection of these APMs requires the
exercise of judgement as to the key performance indicators used.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation
uncertainty in the reporting period that may have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are discussed below.
IFRS 16
The Group makes estimates of the cost of restoring leased assets to their
original condition when required to do so under the terms and conditions of
the lease. Those estimates are based on the current condition of the leased
assets and past experience of restoration costs. As at 30 April 2022 the
Group had total provisions of £4,462,000 (2021: £3,999,000) (see note 33).
Amounts recoverable on contract assets- recoverable amounts
The valuation of amounts recoverable on contract assets ('AROC') involves the
use of estimates of the likely recovery rate which will be made on the gross
value of chargeable time recorded to each matter.
This percentage represents management's best estimate of future value
following a line by line review of the matters by professionals. The
estimation process takes into account the progress of the case at the
reporting date, the estimated eventual fee payable by the client and the
amount of time which will be incurred in bringing the matter to a successful
conclusion. The amount recognised in AROC at the year end was £31,777,000
(2021: £28,530,000), a 3% change in the estimated recovery of all matters
would impact the profit for the period by approximately £1,245,000 (2021:
£982,000).
Accounting for business combinations and valuation of acquired intangibles
Business combinations are accounted for at fair value. The valuation of
goodwill and acquired intangibles is calculated separately on each individual
acquisition. In attributing value to intangible assets arising on acquisition,
management has made certain assumptions in relation to the expected growth
rates, length of key customer relationships and the appropriate weighted
average cost of capital ('WACC') and internal rate of return ('IRR').
Profitability at an EBITDA margin level is also assumed, but is considered
reasonably predictable.
The value attributable to the intangible assets acquired on acquisitions also
impacts the deferred tax provision relating to these items.
The total carrying value of acquired intangibles (excluding brands) is
£25,122,000 (2021: £26,544,000). In order to assess the impact of the key
assumptions on the values disclosed in the Financial Statements the Directors
have applied the following sensitivities to the acquisitions in the current
year:
Key assumption Rate applied in the financial statements Sensitivity tested Annual profit impact Value of intangible assets
£'000
£'000
Long term growth rate 2% 0% 5 (6)
WACC and IRR 10.0% - 10.3% (1) Increase by 5% 61 (59)
Length of customer relationships 3.5 - 7 years Increase of 5 years (175) 345
(1) Each acquisition has been reviewed and, dependent upon the structure
of the acquisition, an appropriate WACC or IRR rate has been applied. These
sensitivities have been calculated by adjusting the adopted rates as noted
above.
Growth rates are estimated based on the current conditions at the date of each
acquisition with reference to independent surveys of future growth rates in
the legal profession in real, inflation adjusted terms.
The length of customer relationships is estimated by considering the length of
time the acquiree has had its significant client relationships up to the date
of acquisition and historic customer attrition rates as appropriate.
The Directors consider the resulting valuations used give a reasonable
approximation as to the value of the intangibles acquired and that any
reasonably possible change in any one of the estimations in isolation would
not have a material impact on the financial statements.
Intangible Assets - carrying amount of goodwill - impairment review
The Directors undertake an annual impairment review of goodwill to assess
whether the carrying value of £51.8 million is still supported by using a
discounted cash flow model to derive the value in use of the cash generating
unit ('CGU'). Cash flow forecasts are derived from the most recent financial
budgets approved by management for the next three years and extrapolated using
a terminal value calculation.
The key assumptions for the value in use calculations are those regarding the
discount rates and growth rates for the Group's revenues from legal and
professional services and the EBITDA margin. Management estimates discount
rates using pre-tax rates that reflect current market assessments of the time
value of money and the risks specific to the CGU.
Revenue growth over the three years of the forecast period reflects, for FY23,
the current run rate of revenue from the Group's existing business and a full
year of revenue from acquisitions made during the year ended 30 April 2022,
with an element of organic growth in FY24 and FY25. The long term growth rate
of 2% (2021: 2%) is based on UK economic growth forecasts for the legal
services market.
The Group has conducted a sensitivity analysis on the impairment test of the
CGU value in use. Management considers there is no reasonably plausible
scenario under which goodwill would be impaired.
5. Revenue
All revenue is derived from contracts with customers and is recognised over
time. As explained further in note 6, the Group's legal and professional
services business operates as a single business unit so there are no relevant
categories into which revenue can be disaggregated.
The transaction price allocated to unsatisfied performance obligations of
contracts at 30 April 2022 is not required to be disclosed because it is
comprised of contracts that are expected to have a duration of one year or
less.
Management information does not distinguish between contingent and
non-contingent revenue as contingent fees are not separately identifiable from
other fees.
6. Segmental reporting
The Board of Directors, as the chief operating decision-making body, reviews
financial information for and makes decisions about the Group's overall legal
and professional services business and has identified a single operating
segment, that of legal and professional services operating entirely in the UK.
The legal and professional services business operates through a number of
different service lines and in different locations; however, management effort
is consistently directed to the firm operating as a single segment. No
segmental reporting disclosure is therefore provided as all revenue is derived
from this single segment.
7. Other operating income
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Other income 996 912
Bank interest 274 398
1,270 1,310
8. Staff costs
The average monthly number of employees (including executive directors) of the
Group was:
Year ended Year ended
30 April 2022
30 April 2021
Number
Number
Fee earners 1,080 933
Other employees 268 230
1,348 1,163
Their aggregate remuneration comprised:
Year ended Year ended
30 April 2021
30 April 2022
£'000
£'000
Wages and salaries 67,923 54,927
Social security costs 7,123 5,603
Other pension costs 2,324 1,848
Share based payment charge 835 1,219
Other employment costs 1,159 1,169
Aggregate remuneration of employees 79,364 64,766
Redundancy costs and share based payment charges analysed as non-underlying (2,501) (2,059)
costs (note 13)
Underlying staff costs in Statement of Comprehensive Income 76,863 62,707
Directors' remuneration
Companies Act disclosures
The total amounts for directors' remuneration in accordance with Schedule 5 to
the Accounting Regulations were as follows:
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Salaries, fees, bonuses and benefits in kind 892 729
Gains on exercise of options 913 -
Money purchase pension contributions 14 10
1,819 739
The number of directors to whom benefits are accruing under money purchase
pension schemes is 2 (2021: 2).
The remuneration of the highest paid director was: Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Salaries, fees, bonuses, benefits in kind and share based payment gains on 1,140 212
exercise of options
9. Share-based payments
The Group issues equity-settled share-based payments to its employees. The
Group recognised total expenses of £835,000 (2021: £1,219,000) relating to
equity-settled share-based payment transactions in the year. £414,000 (2021:
£619,000) is recognised within staff costs and £421,000 (2021: £600,000) in
non-underlying costs.
Any charges relating to schemes introduced as one-off schemes as part of the
listing on AIM in 2018 are included in non-underlying costs because the
directors view these schemes as a reward to employees for their past
performance prior to the IPO and on acquisitions. Additionally, in the current
year there has been £260,000 of charges in respect of employees leaving a
share scheme but remaining with the business. One off accelerated charges
required under IFRS 2 due to employees leaving the scheme, as a result of
COVID or the reduction in share price following the trading announcement, are
also excluded from underlying charges as once an individual has left the
scheme this charge is an accounting convention only and is not an alternative
form of remuneration for the employee. All charges relating to other
recurring LTIP or SAYE schemes are included as a normal operating expense.
The following schemes were in place during the period:
Omnibus Plan
The Omnibus Plan is a discretionary share plan, which is administered, and the
grant of awards is supervised by, the Remuneration Committee.
Three forms of award are available under the Omnibus Plan, as considered
appropriate by the Remuneration Committee, as follows:
a) "Restricted Stock Awards": Awards granted in the form of nil or
nominal cost share options, subject to time-based vesting requirements and
continued employment within the Group. No performance targets will apply to
Restricted Stock Awards.
b) "Performance Share Awards": Awards granted in the form of nil or
nominal cost share options, whereby vesting is subject to satisfaction of
performance conditions and continued employment within the Group. The
performance condition is in relation to meeting target underlying EPS values.
c) "Share Options": Awards granted in the form of a share option with
an exercise price equal to the market value of an Ordinary share at the time
of grant, subject to continued employment within the Group. Share Options may
or may not be subject to performance conditions.
Restricted stock awards Performance share awards
Number Weighted average Number Weighted average
exercise price
exercise price
Pence
Pence
Outstanding at 1 May 2020 575,398 0.2 206,214 0.2
Granted during the period 85,322 0.2 77,410 0.2
Forfeited during the period (15,278) 0.2 (39,814) -
Exercised during the period (59,119) 0.2 - -
Outstanding at 30 April 2021 586,323 0.2 243,810 0.2
Exercisable at 30 April 2021 69,934 0.2 - -
Granted during the period 265,300 0.2 100,228 0.2
Dividend equivalents awarded 2,137 0.2 - -
Forfeited during the period (37,395) 0.2 - -
Exercised during the period (354,954) 0.2 - -
Outstanding at 30 April 2022 461,411 0.2 344,038 0.2
Exercisable at 30 April 2022 166,652 0.2 - -
The options outstanding at 30 April 2022 had a weighted average exercise price
of 0.2p and a weighted average remaining contractual life of 1.52 years. The
average share price for options exercised during the year was 382.4p.
During the year 265,300 options were granted as restricted stock awards. In
addition, 100,228 of performance share awards were granted. The maximum term
of any award is three years.
The aggregate of the estimated fair values of the options granted on these
dates is £1,574,000. The model used is based on intrinsic values and the
inputs are as follows:
Date Granted Number of Shares Fair Value Share Price Exercise Price Expected Life Type of award
5 July 2021 50,000 205,900 412p 0.2p 2.8 years Restricted stock
13 July 2021 145,000 644,960 445p 0.2p 3.0 years Restricted stock
1 September 2021 18,292 74,778 409p 0.2p 1.0 years Restricted stock
21 September 2021 4,722 20,295 430p 0.2p 1.0 years Restricted stock
15 October 2021 10,000 42,380 424p 0.2p 2.8 years Restricted stock
1 November 2021 12,428 48,444 390p 0.2p 1.0 years Restricted stock
1 November 2021 12,429 48,448 390p 0.2p 2.0 years Restricted stock
1 November 2021 12,429 48,448 390p 0.2p 3.0 years Restricted stock
19 July 2021 100,228 440,803 440p 0.2p 3.0 years Performance share
Share Incentive Plan ('SIP')
The SIP is an "all employee" scheme under which every eligible employee within
the Group was invited to participate. Eligible employees could apply to invest
up to £1,800 from pre-tax income in partnership shares; matching shares were
awarded on the basis of two free matching shares for each partnership share
purchased. The matching shares are forfeited if the employee leaves within
three years of the grant date.
Partnership Shares Matching Shares
Number
Number
Outstanding at 1 May 2020 181,524 363,049
Withdrawn during the period (16,485) -
Forfeited during the period - (32,970)
Outstanding at 30 April 2021 165,039 330,079
Unrestricted at 30 April 2021 - -
Withdrawn during the period (40,694) -
Forfeited during the period - (81,388)
Outstanding at 30 April 2022 124,345 248,691
Unrestricted at 30 April 2022 124,345 248,691
Sharesave Scheme ('SAYE')
This is an HMRC approved scheme and is open to any person that was an employee
or officer of the Group at the launch date of each scheme. Under the scheme,
members save a fixed amount each month for three years. Subject to remaining
in employment by the Group, at the end of the three-year period they are
entitled to use these savings to buy shares in the Company at 80% of the
market value at launch date.
The first scheme was launched in November 2018 and further new SAYE schemes
have been launched in February 2020 and March 2022.
SAYE options
Number Weighted average exercise price
Pence
Outstanding at 1 May 2020 1,360,189 251
Forfeited during the period (104,557) 350
Exercised during the period (16,678) 164
Outstanding at 30 April 2021 1,238,954 244
Exercisable at 30 April 2021 - -
Granted during the period 1,430,251 296
Forfeited during the period (311,248) 342
Exercised during the period (491,530) 161
Outstanding at 30 April 2022 1,866,427 289
Exercisable at 30 April 2022 209,829 162
The options outstanding at 30 April 2022 had a weighted average exercise price
of 289p and a weighted average remaining contractual life of 2.41 years. The
average share price for options exercised during the year was 370.4p.
November 2018 scheme
The aggregate of the estimated fair values of the options granted in November
2018 is £500,000. The inputs into the Black-Scholes model are as follows:
Exercise price 162p
Expected volatility 39.2%
Expected life 3.1 years
Risk-free rate 1.4%
Expected dividend yield 1.1%
The November 2018 scheme matured on 1 February 2022, the number of shares
exercised in respect of this scheme as at 30 April 2022 is 489,037. There are
209,829 shares which remain exercisable.
February 2020 scheme
The aggregate of the estimated fair values of the options granted in February
2020 is £1,163,000. The inputs into the Black-Scholes model are as follows:
Exercise price 361p
Expected volatility 34.3%
Expected life 3.1 years
Risk-free rate 1.1%
Expected dividend yield 0.7%
March 2022 Scheme
The aggregate of the estimated fair values of the options granted in March
2022 is £110,000. The inputs into the Black-Scholes model are as follows:
Exercise price 296p
Weighted average share price 148p
Expected volatility 53.7%
Expected life 3.1 years
Risk-free rate 5.9%
Expected dividend yield 3.0%
Volatility is based on the daily change in share price from 29 June 2018 to
the date of measurement
10. Retirement benefit schemes
The Group operates a defined contribution pension scheme for employees. The
total cost charged to income of £2,324,000 (2021: £1,848,000) represents
contributions payable to the scheme by the Group. As at 30 April 2022,
contributions of £892,000 (2021: £439,000) due in respect of the reporting
period had not been paid over to the schemes.
The defined benefit impact is discussed in note 39. There were no charges
against income in the year ended 30 April 2022.
11. Depreciation and amortisation charges
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Depreciation 2,027 1,309
Depreciation on right-of-use assets 4,799 3,684
Amortisation 3,936 2,704
Loss on disposal of property, plant and equipment 16 33
10,778 7,730
Depreciation of £nil (2021: £43,000) is included in non-underlying operating
costs.
12. Other operating charges
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Establishment costs 5,633 4,140
Short term and low value lease costs 187 291
Other overhead expenses 16,257 11,742
22,077 16,173
13. Non-underlying operating costs
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Redundancy and reorganisation costs 2,080 1,459
Transaction costs 988 1,245
Onerous short life asset leases 472 132
Impairment of right-of-use assets 2,065 635
Loss on disposal of intangible assets and property, plant and equipment 967 284
Share based payment charges 421 600
Contingent consideration treated as remuneration 6,267 5,933
13,260 10,288
Non-underlying costs cash movement
Year ended Year ended
30 April 2022
30 April 2021
£'000 £'000
Non-underlying operating costs 13,260 10,288
Adjustments for:
Contingent consideration shown separately (6,267) (5,933)
Non cash movements:
Share based payment charge (421) (600)
Impairment of right of use assets (2,065) -
Loss on disposal of property, plant and equipment (967) (284)
Onerous leases (97) (302)
Accrual 248 1,099
3,691 4,268
Non-underlying costs relate to redundancy costs to streamline the support
function of the Group following acquisitions, transaction costs in respect of
acquisitions, onerous lease costs in respect of acquisitions, disposals of
acquired assets and share based payment charges relating to one off share
schemes offered to employees as part of the IPO and on acquisitions. Any one
off accelerated charges required under IFRS 2 due to employees leaving the
scheme, as a result of COVID or the reduction in share price following the
trading announcement in March 2022, are also excluded from underlying charges
as once an individual has left the scheme this charge is an accounting
requirement only and is not an alternative form of remuneration for the
employee. FY21 also included some costs relating to reorganisation actions
taken in response to the impact of COVID-19.
Contingent consideration is included in non-underlying costs as it represents
payments which are contingent on the continued employment of those individuals
with the Group, agreed under the terms of the sale and purchase agreements
with vendors of certain businesses acquired. The payments extend over periods
of one to three years and are designed to preserve the value of goodwill and
customer relationships acquired in the business combinations. IFRS requires
such arrangements to be treated as remuneration and charged to the Statement
of Comprehensive Income. The individuals also receive market rate salaries for
their work, in line with other similar members of staff in the Group. The
contingent earnout payments are significantly in excess of these market
salaries and would distort the Group's results if not separately identified.
14. Finance costs
Year ended Year ended
30 April 2022
30 April 2021
£'000 £'000
Interest on borrowings 952 704
Interest on leases 1,412 1,177
2,364 1,881
15. Finance income
Year ended Year ended
30 April 2022
30 April 2021
£'000 £'000
Lease interest receivable 22 -
16. Auditor's remuneration
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Fees payable to the parent company's auditor and their associates for the 36 29
audit of the parent company's annual accounts
Fees payable to the auditor and their associates for other services to the
Group:
- The audit of the Company's subsidiaries 126 113
Total audit fees 162 142
- Audit-related assurance services 19 16
Total non-audit fees 19 16
17. Taxation
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Corporation tax:
Current year 1,574 2,852
Adjustments in respect of prior years (96) (247)
1,478 2,605
Deferred tax:
Origination and reversal of temporary differences 362 (498)
Effect of change in tax rates 1,747 -
2,109 (498)
Tax expense for the year 3,587 2,107
The charge for the period can be reconciled to the Statement of Comprehensive
Income as follows:
Year ended Year ended
30 April 2022
30 April 2021
£'000 £'000
Profit before tax 1,056 5,509
Tax at the UK corporation tax rate of 19% (2021: 19%) 201 1,047
Expenses that are not deductible in determining taxable profit 2,296 1,748
Accelerated capital allowances (561) (441)
Effect of change in tax rates 1,747 -
Adjustment in respect of prior years (96) (247)
Tax expense for the year 3,587 2,107
Consisting of:
Underlying tax charge 1,840 2,107
Non-underlying tax charge 1,747 -
The impact of non-underlying costs on the effective rate of tax is set out
below:
Year ended 30 April 2022 Year ended 30 April 2021
Total Underlying Non-Underlying Total Underlying Non-Underlying £'000
£'000
£'000
£'000
£'000
£'000
Profit before tax 1,056 18,131 (17,075) 5,509 18,419 (12,910)
Tax expense 1,840 3,709 (1,869) 2,107 3,379 (1,272)
Effective rate of tax 174% 20% 11% 38% 18% 10%
Change in tax rate 1,747 136 1,611 - - -
Effective rate of tax (post change in tax rate) 340% 21% 2% 38% 18% 10%
On 24 May 2021, the increase in corporation tax from 19% to 25% from 1 April
2023 was substantively enacted for tax accounting purposes. At the reporting
date, the effect of the new rate on the Group's tax charge has been applied to
the deferred tax assets and liabilities where the differences will not reverse
until after 1 April 2023. The impact of changing the tax rate from 19% to 25%
on the associated assets and liabilities is outlined in the below table:
Year ended 30 April 2022
£'000
Tax Charge at 19% (1,840)
Tax Charge at 25% (3,587)
Impact of change in tax rate (1,747)
The impact of the change in tax rate has been classified as a non-underlying
cost.
18. Earnings per share
Basic and diluted earnings per share have been calculated using profit after
tax and the weighted average number of ordinary shares in issue during the
period.
Year ended Year ended
30 April 2022
30 April 2021
Number
Number
Weighted average number of ordinary shares for the purposes of basic earnings 83,717,952 82,189,113
per share
Effect of dilutive potential ordinary shares:
Share options 409,640 1,021,132
Weighted average number of ordinary shares for the purposes of diluted 84,127,592 83,210,245
earnings per share
£'000 £'000
(Loss)/profit after tax (2,531) 3,402
Earnings per share Pence Pence
Basic earnings per share (3.02) 4.14
Diluted earnings per share (3.02) 4.09
As the Group has incurred a loss after tax for the year, the options are
non-dilutive and basic and diluted earnings per share are the same.
Underlying earnings per share is calculated as an alternative performance
measure in note 37.
19. Dividends
Year ended Year ended
30 April 2022
30 April 2021
£'000 £'000
Amounts recognised as distributions to equity holders in the year:
Interim dividend for the year ended 30 April 2022 of 1.46p per share (2021: 0p 1,233 -
per share)
1,233 -
For the year ended 30 April 2022 the Board have proposed a final dividend of
2.04p per share (2021: 0p per share). The proposed final dividend is subject
to approval by shareholders at the Annual General Meeting and has not been
included as a liability in these financial statements. The proposed dividend
is payable to all shareholders on the register of members on 2 September 2022.
The payment of this dividend will not have any tax consequences for the Group.
20. Intangible assets and goodwill
Goodwill Brand Customer relationships and restrictive covenants Purchased computer software Total
£'000
£'000
£'000
£'000
£'000
Cost
As at 1 May 2020 39,678 5,401 26,475 372 71,926
Acquisitions of subsidiaries 7,435 - 3,702 - 11,137
Measurement period adjustments in respect of 2020 acquisitions 544 - 118 9 671
Additions - - 1,097 196 1,293
As at 30 April 2021 47,657 5,401 31,392 577 85,027
Acquisitions of subsidiaries 5,771 - 2,386 527 8,684
Adjustments (1,666) - (47) - (1,713)
Additions - - - 62 62
Disposals - - - (449) (449)
Reclassification of assets held for sale - - - (114) (114)
As at 30 April 2022 51,762 5,401 33,731 603 91,497
Amortisation and impairment
As at 1 May 2020 - 270 2,280 241 2,791
Adjustments - - - 9 9
Amortisation charge - 54 2,568 82 2,704
As at 30 April 2021 - 324 4,848 332 5,504
Amortisation charge - 54 3,761 121 3,936
Eliminated on disposal - - - (112) (112)
Reclassification of assets held for sale - - - (3) (3)
As at 30 April 2022 - 378 8,609 338 9,325
Carrying amount
At 30 April 2022 51,762 5,023 25,122 265 82,172
At 30 April 2021 47,657 5,077 26,544 245 79,523
At 30 April 2020 39,678 5,131 24,195 131 69,135
As noted in the prior year accounts, the initial accounting for the business
combination which occurred at the end of the prior year was not complete.
During the current year further information has come to light about estimated
provisions and debt items which existed at the acquisition date.
On settling debt items on completion, it became apparent that we had accounted
for some items as both an acquired liability and consideration payable to the
vendors. In addition, an estimated provision was subsequently identified as
being overstated once the actual costs were incurred. Both items resulted in
goodwill being overstated by £1.6m and the error has now been corrected. The
error is not considered to be qualitatively material, as it has no impact on
reported profits or cash flows and is c 2% of intangible assets. It is not,
therefore, considered to be a prior period adjustment.
The carrying amount of goodwill of £51,762,000 (2021: £47,657,000) has been
allocated to the single cash generating unit (CGU) present in the business,
which is the provision of legal and professional services.
The recoverable amount of the Group's goodwill has been determined by a value
in use calculation using a discounted cash flow model. The Group has prepared
cash flow forecasts derived from the most recent financial budgets approved by
management for the next three years after which cash flows are extrapolated
using a terminal value calculation based on an estimated growth rate of 2%
(2021: 2%). This rate does not exceed the expected average long-term growth
rate for the UK legal services market.
The key assumptions for the value in use calculations are those regarding the
growth rates for the Group's revenues from legal and professional services,
the EBITDA margin and the discount rate. Management estimates discount rates
using pre-tax rates that reflect current market assessments of the time value
of money and the risks specific to the CGU.
The rate used to discount the forecast cash flows is based on a pre tax
estimated weighted average cost of capital of 12.4% (2021: 15.1%).
Revenue growth over the three years of the forecast period reflects, for FY23,
the current run rate of revenue from the Group's existing business and a full
year of revenue from acquisitions made during the year ended 30 April 2022,
and an element of organic growth in FY24 and FY25 through continued
recruitment and increases in chargeable hours and recovered rates. The
long-term growth rate is based on UK economic growth forecasts for the legal
services market.
The Group has conducted a sensitivity analysis on the impairment test of the
CGU value in use. Management considers there is no reasonably plausible
scenario under which goodwill would be impaired.
21. Acquisitions
Acquisitions summary
During the year the Group has completed three acquisitions (Langleys
Solicitors LLP and Home Property Lawyers Limited being in the same acquired
group) and also completed the acquisition of Keebles LLP (which was accounted
for in the year ended 30 April 2021). The table below summarises the
consideration paid and the net cash flow arising on all acquisitions in the
period:
Total
£'000
Total identifiable assets less liabilities acquired 4,652
Goodwill 5,771
Total consideration 10,423
Satisfied by:
Cash 5,192
Equity instruments (395,060 ordinary shares of Knights Group Holdings plc) 1,600
Deferred consideration arrangement 3,631
Total consideration transferred 10,423
Net cash outflows arising on acquisition:
Cash consideration net of cash acquired 4,071
Net investing cash outflow arising on acquisition 4,071
Repayment of debt acquired 2,454
Net financing cash outflow arising on acquisition 2,454
Details for the individual acquisitions are included on the following pages.
The acquisition date in each case is the date of exchange of the sale and
purchase agreement, being the date on which control passes and the Group is
exposed to variable returns.
The Group exchanged contracts to acquire Keebles on 30 April 2021, by
purchasing the controlling membership interests of the entity. Economic
benefit was obtained from 30 April 2021. This acquisition completed on 11 June
2021. As a result the cashflow timings for payment of initial consideration
and repayment of debt in relation to the Keebles acquisition occurred in the
current year.
The table below provides a reconciliation to the cashflow statement for
cashflows relating to acquisitions
£'000 Acquisition Keebles cashflows on Total acquisitions cashflows in the year ended 30 April 2022
in the
completion
year ended
30 April 2022
Net cash outflows arising on acquisition:
Cash consideration net of cash acquired 4,071 2,730 6,801
Net investing cash outflow arising on acquisition 4,071 2,730 6,801
Repayment of debt acquired on acquisition 2,454 - 2,454
Repayment of debt acquired post acquisition 35 414 449
Net financing cash outflow arising on acquisition 2,489 414 2,903
Archers Law Limited Liability Partnership ('Archers')
On 1 November 2021, the Group exchanged contracts to acquire Archers by
purchasing the controlling membership interests of the entity. This
acquisition completed on 29 November 2021. Archers is a law firm which will
strengthen Knights' presence in the North East region.
The amounts recognised in respect of the identifiable assets acquired and
liabilities assumed are as set out in the table below:
Carrying amount £'000 Fair value adjustment £'000 Total
£'000
Identifiable assets
Identifiable intangible assets - 671 671
Property, plant and equipment 108 - 108
Right-of-use assets - 1,065 1,065
Contract assets 588 - 588
Trade and other receivables (net of £228,000 loss allowance provision) 377 (3) 374
Cash and cash equivalents 912 - 912
Liabilities
Trade and other payables (420) (20) (440)
Lease liabilities - (1,065) (1,065)
Borrowings (247) (2) (249)
Provisions - (250) (250)
Deferred tax - (127) (127)
Total identifiable assets and liabilities 1,318 269 1,587
Goodwill 2,349
Total consideration 3,936
Satisfied by:
Cash 2,336
Equity instruments (395,060 Ordinary Shares of Knights Group Holdings plc) 1,600
Total consideration transferred 3,936
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired) 1,424
Repayment of debt 218
Net cash outflow arising on acquisition 1,642
The goodwill of £2,349,000 arising from the acquisition represents the
assembled workforce. None of the goodwill is expected to be deductible for
income tax purposes.
The fair value of the ordinary shares issued as part of the consideration was
determined on the basis of the volume weighted average share price for the
five days prior to exchange..
A contingent consideration arrangement was entered into as part of the
acquisition. This is contingent on the sellers remaining in employment by the
Group so it has been excluded from the consideration and will be recognised in
the Consolidated Statement of Comprehensive Income on a straight-line basis
over the three year post acquisition period. The maximum undiscounted amount
of all potential future payments under the contingent consideration
arrangement is £1,500,000 and is payable in equal instalments on the first,
second and third anniversary of completion.
Archers contributed £2,180,000 of revenue to the Group's Consolidated
Statement of Comprehensive Income for the period from 1 November 2021 to 30
April 2022. The profit contributed is not separately identifiable due to the
hive-up of its trade and assets being incorporated into Knights Professional
Services Limited from 29 November 2021.
If the acquisition occurred at the beginning of the year Archers would have
contributed £4,272,000 of revenue to the Group. Profit is not separately
identifiable due to the full integration on hive up.
Langleys Solicitors LLP ('Langleys')
On 31 January 2022, the Group exchanged contracts to acquire Langleys by
purchasing the controlling membership interests of the entity. This
acquisition completed on 25 March 2022. Langleys is a law firm which will
strengthen Knights' presence in York and provide access into the Lincoln
market.
The amounts recognised in respect of the identifiable assets acquired and
liabilities assumed are as set out in the table below:
Carrying Fair value Total
amount
adjustment
£'000
£'000
£'000
Identifiable assets
Identifiable intangible assets 1,104 847 1,951
Property, plant and equipment 741 - 741
Right-of-use assets - 4,159 4,159
Contract assets 2,651 - 2,651
Trade and other receivables (net of £199,000 loss allowance provision) 1,818 - 1,818
Cash and cash equivalents 37 - 37
Liabilities
Trade and other payables (2,324) 432 (1,892)
Lease liabilities - (3,630) (3,630)
Borrowings (2,415) (575) (2,990)
Provisions - (409) (409)
Deferred tax - (293) (293)
Total identifiable assets and liabilities 1,612 531 2,143
Goodwill 3,344
Total consideration 5,487
Satisfied by:
Cash 1,856
Deferred consideration arrangement 3,631
Total consideration transferred 5,487
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired) 1,819
Repayment of debt 2,236
Net cash outflow arising on acquisition 4,055
The goodwill of £3,344,000 arising from the acquisition represents the
assembled workforce. None of the goodwill is expected to be deductible for
income tax purposes.
A contingent consideration arrangement was entered into as part of the
acquisition. This is contingent on the sellers remaining in employment by the
Group so it has been excluded from the consideration and will be recognised in
the Consolidated Statement of Comprehensive Income on a straight-line basis
over the three year post acquisition period. The maximum undiscounted amount
of all potential future payments under the contingent consideration
arrangement is £2,619,000 and is payable in equal instalments on the first,
second and third anniversary of completion.
There are also deferred consideration payments totalling £3,631,000
outstanding. This is payable in installments on the first, second and third
anniversaries of completion.
Langleys contributed £2,546,000 of revenue to the Group's Consolidated
Statement of Comprehensive Income for the period from 1 February 2022 to 30
April 2022. The profit contributed is not separately identifiable due to the
hive-up of its trade and assets being incorporated into Knights Professional
Services Limited from 25 March 2022.
If the acquisition occurred at the beginning of the year Langleys would have
contributed £9,444,000 of revenue to the Group. Profit is not separately
identifiable due to the full integration on hive up.
Home Property Lawyers Limited ('HPL')
On 31 January 2022, the Group exchanged contracts to acquire HPL, through the
agreement to purchase the shares of the entity. This acquisition completed on
25 March 2022. HPL was purchased as part of the Langleys acquisition, this
entity provides volume conveyancing services.
The amounts recognised in respect of the identifiable assets acquired and
liabilities assumed are as set out in the table below.
Carrying Fair value Total
amount
adjustment
£'000
£'000
£'000
Identifiable assets
Identifiable intangible assets 114 177 291
Contract assets 492 - 492
Trade and other receivables (net of £12,000 loss allowance provision) 446 (94) 352
Cash and cash equivalents 172 - 172
Liabilities
Trade and other payables (363) 68 (295)
Provisions - (19) (19)
Corporation tax (100) 63 (37)
Deferred tax - (34) (34)
Total identifiable assets and liabilities 761 161 922
Goodwill 78
Total consideration 1,000
Satisfied by:
Cash 1,000
Total consideration transferred 1,000
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired) 828
Repayment of debt -
Net cash outflow arising on acquisition 828
The goodwill of £78,000 arising from the acquisition represents the assembled
workforce. None of the goodwill is expected to be deductible for income tax
purposes.
HPL contributed £1,111,000 of revenue to the Group's Consolidated Statement
of Comprehensive Income for the period from 1 February 2022 to 30 April
2022. HPL contributed £57,000 profit to the Group in the period 31 January
2022 to 30 April 2022.
If the acquisition occurred at the beginning of the year HPL would have
contributed £4,489,000 of revenue to the Group. Profit is not separately
identifiable due to a lack of management information available.
22. Property, plant and equipment
Expenditure on Office equipment Furniture and Total
short leasehold
£'000
fittings
£'000
property
£'000
£'000
Right-of-use
assets
£'000
Cost
As at 1 May 2020 3,501 3,430 995 25,744 33,670
Acquisitions of subsidiaries 566 493 183 4,615 5,857
Additions 3,350 1,005 1 16,385 20,741
Disposals (160) (20) (149) (154) (483)
Impairment - - - (739) (739)
Alignment 618 (452) 11 - 177
As at 30 April 2021 7,875 4,456 1,041 45,851 59,223
Acquisitions of subsidiaries 543 224 82 5,224 6,073
Additions 1,292 1,176 58 3,144 5,670
Disposals (1,358) (216) (113) (1,482) (3,169)
Alignment 5 53 4 - 62
As at 30 April 2022 8,357 5,693 1,072 52,737 67,859
Depreciation and impairment
As at 1 May 2020 656 1,440 268 1,995 4,359
Depreciation charge 446 761 102 3,727 5,036
Eliminated on disposal (25) (3) (24) (84) (136)
Impairment - - - (193) (193)
Alignment 616 (416) 13 - 213
As at 30 April 2021 1,693 1,782 359 5,445 9,279
Depreciation charge 787 1,132 108 4,799 6,826
Impairment - - - 2,065 2,065
Eliminated on disposal (860) (155) (24) (235) (1,274)
Alignment (1) 60 1 - 60
As at 30 April 2022 1,619 2,819 444 12,074 16,956
Carrying amount
At 30 April 2022 6,738 2,874 628 40,663 50,903
At 30 April 2021 6,182 2,674 682 40,406 49,944
At 30 April 2020 2,845 1,990 727 23,749 29,311
Depreciation of £nil (2021: £43,000) and net impairment of £2,065,000
(2021: £546,000) due to leases being classified as onerous is included in
non-underlying operating costs.
See note 28 for further details of right of use assets.
23. Contract assets and liabilities
Contract assets Trade receivables Contract liabilities
£'000
£'000
£'000
As at 30 April 2022 31,777 26,643 (237)
As at 30 April 2021 28,530 25,951 (216)
As at 1 May 2020 21,507 22,450 (177)
The movement during the year is not separately identifiable.
Contract assets
Contract assets consist of unbilled revenue in respect of legal and
professional services performed to date.
Contract assets in respect of fee-for-service and fixed fee arrangements are
billed at appropriate intervals, normally on a monthly basis in arrears, in
line with the performance of the services. Where such matters remain unbilled
at the period end the asset is valued on a contract-by-contract basis at its
expected recoverable amount.
The Group undertakes some matters based on contingent fee arrangements.
These matters are billed when the claim is successfully settled. For matters
ongoing at the period end, each matter is valued based on its specific
circumstances. If the matter has agreed funding arrangements in place,
then it is valued based on the estimated amount recoverable from the funding
depending on the stage of completion of the matter.
If the liability of a matter has been admitted and performance obligations
satisfied, such that it is no longer contingent, these matters are valued
based on the expected recoverable amount. Due to the complex nature of these
matters, they can take a considerable time to be finalised therefore
performance obligations may be settled in one period but the matter not billed
until a later financial period. The amount of contingent fee work in progress
at 30 April 2022 was £7,804,445 (2021: £5,781,000).
If the performance obligations for contingent matters have not been satisfied
at the reporting date, these assets are valued on a contract-by-contract basis
taking into account the expected recoverable amount and the likelihood of
success. Where the likelihood of success of a contingent fee arrangement is
less than highly probable, the amount recognised in contract assets is further
reduced to reflect this uncertainty.
During the year, contract assets of £3,731,000 (2021: £4,196,000) were
acquired in business combinations.
An impairment loss of £41,000 has been recognised in relation to contract
assets in the year (2021: £30,000). This is based on the expected credit loss
under IFRS 9 of these types of assets. The contract asset loss is estimated at
0.2% (2021: 0.2%) of the balance.
Trade receivables
Trade receivables are recognised when a bill has been issued to the client, as
this is the point in time that the consideration is unconditional because only
the passage of time is required before the payment is due. Trade receivables
also includes disbursements.
Bills are payable within thirty days of date of issue unless otherwise agreed
with the client.
Contract liabilities
When matters are billed in advance or on the basis of a monthly retainer, this
is recognised in contract liabilities and released over time as the services
are performed.
24. Trade and other receivables
30 April 2022 30 April 2021
£'000
£'000
Trade receivables 27,908 26,953
Impairment provision - trade receivables (1,265) (1,002)
Prepayments and other receivables 5,666 5,570
32,309 31,521
Trade receivables
The average credit period taken on sales is 31 days as at 30 April 2022 (2021:
36 days). No interest is charged on trade receivables. The Group uses
appropriate methods to recover all balances once overdue. Once the expectation
of recovery is deemed remote a debt may be written off.
The Group measures the loss allowance for trade receivables at an amount equal
to 12 months expected credit losses ('ECL'). The Group applies the simplified
approach to providing for expected credit losses prescribed by IFRS 9, which
permits the use of the expected loss provision for all trade receivables. As
the Group's historical credit loss experience does not show significantly
different loss patterns for different client segments, the provision for loss
allowance is based on past due status.
The following table details the risk profile of trade receivables (excluding
disbursements) based on the Group's provision matrix:
30 April 2022 2022 2021
Gross carrying amount Expected credit losses Expected credit loss rate Gross carrying amount Expected credit losses Expected credit loss rate
£'000 £'000 % £'000 £'000 %
Not past due 14,553 52 0.36 12,925 27 0.21
31-60 days past due 3,077 14 0.45 3,958 9 0.22
61-90 days past due 1,231 4 0.34 1,362 3 0.24
91-120 days past due 496 11 2.29 827 10 1.17
>120 days past due 2,861 854 29.88 2,696 625 23.20
12 month ECL £'000 22,218 935 4.21 21,768 674 3.1
In addition to the above on trade receivables a further £330,000 (2021:
£328,000) impairment loss has been recognised against disbursement
balances. This is based on 100% impairment against all disbursements with no
activity on the matter for over 12 months and 0.2% against the remainder of
the balance based upon the expected credit loss of this type of asset.
The movement in the allowance for impairment in respect of trade receivables
and contract assets during the year was as follows:
2022 2021
£'000 £'000
Balance at 1 May 1,002 553
Increase in loss allowance recognised in profit of loss during the year 1,200 1,165
Receivables written off during the year as uncollectable (937) (716)
Balance at 30 April 1,265 1,002
25. Share capital
Ordinary shares
Number £'000
As at 1 May 2020 82,076,332 164
Changes during the period
Ordinary shares of 0.2p each issued in respect of exercised share options 75,798 -
Ordinary shares of 0.2p each issued in respect of exercised share options 418 -
equivalent to dividend entitlement
Ordinary shares of 0.2p each issued as consideration in the purchase of 454,244 1
subsidiaries
At 30 April 2021 (allotted, called up and fully paid) 82,606,792 165
Changes during the period
Ordinary shares of 0.2p each issued in respect of exercised share options 844,347 2
Ordinary shares of 0.2p each issued in respect of exercised share options 2,137 -
equivalent to dividend entitlement
Ordinary shares of 0.2p each issued as consideration in the purchase of 1,187,050 2
subsidiaries
At 30 April 2022 (allotted, called up and fully paid) 84,640,326 169
Included in the consideration is the purchase of subsidiaries is 791,990
shares in respect of the purchase of Keebles LLP. The remaining amount is for
the purchase of Archers Law LLP (see note 21).
26. Finance lease receivable
The group sub-leases a floor in an office building that was an acquired lease
in previous periods. The group has classified the sub-lease as a finance lease
because the sub-lease is for the whole of the remaining term of the head
lease.
Finance lease receivable 30 April 2022 30 April 2021
£'000
£'000
> 1 year 1,091 -
< 1 year 76 -
1,167 -
The following table sets out a maturity analysis of lease receivables, showing
the undiscounted lease payments to be received after the reporting date.
30 April 2022 30 April 2021
£'000 £'000
Less than one year 137 -
One to five years 986 -
More than five years 164 -
Unearned finance income (120)
1,167 -
Total lease payments received for the year ended 30 April 2022 was £30,000
(2021:£nil)
27. Disposal of subsidiary - held for sale
On 25 March 2022 the Group completed the acquisition of HPL, an entity that
provides volume conveyancing services. At the time of acquisition, it was
noted that the strategic options for this subsidiary were under review.
Following a period of internal review, in April 2022, management committed to
a plan to sell HPL. Accordingly, all assets and liabilities are presented as
a disposal of subsidary held for sale. Efforts to sell HPL have started and on
5 July 2022, the Group exchanged contracts to dispose of HPL, subject to
regulatory approval. Completion is expected later in July 2022.
No fair value gains or losses have been recognised on reclassification as fair
values of assets and liabilities are deemed to be equal to the carrying value
at the period end.
At 30 April 2022, HPL was stated at fair value less cost to sell and comprised
the following assets and liabilities.
30 April 2022
£'000
Intangible assets 111
Contract assets 526
Trade and other receivables 428
Cash and cash equivalents 130
Assets held for sale 1,195
Trade and other payables 430
Liabilities held for sale 430
Assets held for sale do not include £69,765 due from other Group entities
which have been eliminated on consolidation.
28. Lease liabilities
Incremental borrowing rates applied to individual leases ranged between 1.68%
and 6.30%.
The table below sets out the Consolidated Statement of Financial Position as
at 30 April 2022 and 30 April 2021:
30 April 2022 30 April 2021
£'000 £'000
Right-of-use assets
Property 39,691 39,420
Equipment 972 986
40,663 40,406
Lease liability
> 1 year 41,183 39,020
< 1 year 5,345 3,620
46,528 42,640
Right of use assets include additions of £7,452,000 (2021: £20,768,000) for
property and £916,000 (2021: £232,000) for equipment. There is also
depreciation of £4,397,000 (2021: £3,398,000) for property and £402,000
(2021: £329,000) for equipment.
The table below shows lease liabilities maturity analysis - contractual
undiscounted cash flows at 30 April 2022:
30 April 2022 30 April 2021
Property Equipment Total Property Equipment Total
£'000
£'000
£'000
£'000
£'000
£'000
Less than one year 6,213 496 6,709 4,594 349 4,943
One to five years 21,313 506 21,819 18,313 709 19,022
More than five years 22,701 1 22,702 24,834 - 24,834
50,227 1,003 51,230 47,741 1,058 48,799
Less unaccrued future interest (4,663) (39) (4,702) (6,025) (134) (6,159)
45,564 964 46,528 41,716 924 42,640
The table below shows amounts recognised in the Consolidated Statement of
Comprehensive Income for short term and low value leases as at 30 April
2022:
30 April 2022 30 April 2021
Property Equipment Total Property Equipment Total
£'000
£'000
£'000
£'000
£'000
£'000
Expenses relating to short - term leases 146 41 187 244 47 291
For right-of-use asset depreciation and lease interest charges on leases see
note 11 and 14. Total lease payments, including for short term and low value
leases, for the year ended 30 April 2022 were £5,488,000 (2021: £4,340,000).
29. Borrowings
30 April 2022 30 April 2021
£'000
£'000
Secured borrowings at amortised cost:
Bank loans 32,400 24,064
Other loans 753 -
Total borrowings 33,153 24,064
Amount due for settlement within 12 months 355 414
Amount due for settlement after 12 months 32,798 23,650
The above excludes lease liabilities.
All of the Group's borrowings are denominated in sterling.
The Group has a credit facility of £60,000,000 in total (2021: £40,000,000).
The facility remains available until 29 October 2024.
The facility is a revolving credit facility and has the ability to roll on a
monthly or quarterly basis and is due for final repayment in October 2024. The
facility is secured by a fixed and floating charge over the Group's assets.
The facility carries an interest margin above SONIA of between 1.65% and 2.40%
depending on the leverage level. A commitment fee of one third of the
applicable margin is payable on the undrawn amounts.
30. Deferred consideration
30 April 2022 30 April 2021
£'000
£'000
Non-current liabilities
Deferred consideration 2,421 -
Current liabilities
Deferred consideration 1,210 1,095
Deferred consideration as at 30 April 2022 relates to the acquisition of
Langleys Solicitors LLP and is not contingent.
In addition, the Group has accrued contingent consideration relating to
acquisitions within trade and other payables. This is contingent based upon
continued employment and is being accrued on a monthly basis in the
Consolidated Statement of Comprehensive Income in accordance with the terms of
the agreements. It is expected that employment will continue for the terms of
the agreements and, therefore, the contingent consideration will be payable in
full.
31. Deferred tax
The following are the major deferred tax liabilities and (assets) recognised
by the Group and movements thereon during the current and prior reporting
period.
Accelerated Intangible Share-based IFRS 16 Total
capital allowances
assets
payments
£'000
£'000
£'000
£'000
£'000
As at 1 May 2020 396 5,547 (207) (307) 5,429
Acquisitions of subsidiaries - 704 - - 704
Charge/(credit) for the year 148 (411) (242) 27 (478)
As at 30 April 2021 544 5,840 (449) (280) 5,655
Acquisitions of subsidiaries - 454 - - 454
Adjustments 125 (11) 114
Effect of change in tax rate 244 1,611 (37) (71) 1,747
Charge/(credit) for the year 479 (112) (33) 28 362
As at 30 April 2022 1,392 7,782 (519) (323) 8,332
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:
30 April 2022 30 April 2021
£'000
£'000
Deferred tax assets (842) (729)
Deferred tax liabilities 9,174 6,384
8,332 5,655
32. Trade and other payables
30 April 2022 30 April 2021
£'000
£'000
Bank overdraft - 1,852
Trade payables 4,664 3,715
Other taxation and social security 7,370 6,564
Other payables 1,978 2,293
Accrued consideration - 8,310
Accruals 7,350 9,569
21,362 32,303
Trade payables and accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. The average credit period taken for trade
purchases is 26 days (2021: 26 days). No interest is charged on the trade
payables.
The directors consider that the carrying amount of trade payables approximates
to their fair value.
Accrued consideration at 30 April 2021 relates the acquisition of Keebles LLP
where contracts were exchanged as at 30 April 2021 but did not formally
complete until 11 June 2021.
The bank overdraft is secured by a debenture over all of the assets of Keebles
LLP. The debenture was released on 14 June 2021 and the overdraft was fully
repaid.
33. Provisions
Dilapidation provision Onerous contract provision Professional indemnity provision
£'000
£'000
£'000
Total
£'000
As at 1 May 2020 1,548 - 598 2,146
Acquisitions of subsidiaries 768 - 296 1,064
Additional provision in the year 1,828 133 195 2,156
Utilisation of provision (145) (127) (220) (492)
As at 30 April 2021 3,999 6 869 4,874
Acquisitions of subsidiaries 507 - 171 678
Additional provision in the year 289 448 550 1,287
Utilisation of provision (333) (28) (375) (736)
As at 30 April 2022 4,462 426 1,215 6,103
Consisting of:
Non-current liabilities 3,998 333 - 4,331
Current liabilities 464 93 1,215 1,772
The dilapidations provision relates to the potential rectification of
leasehold sites upon expiration of the leases. This has been based on internal
estimates of the schedule of works included in the lease.
The onerous contract provision relates to services and other charges on vacant
offices where the Group is the lessee. The Group is actively marketing these
leases for reassignment. The provision represents the Directors' estimate of
the future lease payments and other associated property costs to be paid by
the Group prior to reassignment of the leases. The onerous contracts provision
also includes contracts acquired via acquisition that are non-cancellable. The
provision represents the remaining payments and other associated property
costs under the terms of the lease. Future lease payments are offset against
the provision.
The professional indemnity provision relates to a number of disputes in the
ordinary course of business for all claims where costs are likely to be
incurred and represents the cost of defending and concluding claims and any
excess that may become payable. The Group carries professional indemnity
insurance and no separate disclosure is made of the cost of claims covered by
insurance as to do so could seriously prejudice the position of the Group.
34. Financial instruments
Categories of financial instruments
30 April 2022 30 April 2021
£'000
£'000
Financial assets
Amortised cost
Contract assets 31,777 28,530
Trade and other receivables (excluding prepayments) 26,919 26,421
Lease receivable 1,167 -
Cash and cash equivalents 4,097 4,783
Financial liabilities
Amortised cost
Borrowings 33,153 24,064
Bank overdraft - 1,852
Deferred consideration 3,631 1,095
Trade and other payables 13,992 23,887
Leases 46,528 42,640
Financial risk management objectives
The Group's finance function monitors and manages the financial risks relating
to the operations of the Group. These risks include market risk (interest rate
risk), credit risk, liquidity risk and cash flow interest rate risk.
Market risk
The Group's activities expose it primarily to the financial risks of changes
in interest rates (see below). Market risk exposures are measured using
sensitivity analysis.
There has been no change to the Group's exposure to market risks or the manner
in which these risks are managed and measured.
Interest rate risk management
The Group is exposed to interest rate risk because the Group borrows funds at
floating interest rates. The risk is managed by the Group by keeping the level
of borrowings at a manageable level.
Interest rate sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to
interest rates for financial instruments at the end of the reporting period.
For floating rate liabilities, the analysis is prepared assuming the amount of
the liability outstanding at the end of the reporting period was outstanding
for the whole year.
If interest rates had been 0.5% higher/lower and all other variables were held
constant, the Group's profit for the year ended 30 April 2022 would
decrease/increase by £166,000 (2021: decrease/increase by £120,000). This is
attributable to the Group's exposure to interest rates on its variable rate
borrowings.
The Group's sensitivity to interest rates has increased during the current
year mainly due to the increase in the borrowings of the Group.
Credit risk management
Note 24 details the Group's maximum exposure to credit risk and the
measurement bases used to determine expected credit losses.
The risk of bad debts is mitigated by the Group having a policy of performing
credit checks or receiving payments on account for new clients when practical
and ensuring that the Group's exposure to any individual client is tightly
controlled, through credit control policies and procedures.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the
financial charges on its debt instruments and repayments of principal. There
is a risk that the Group will encounter difficulty in meeting its financial
obligations as they fall due or not meet its required covenants. The Group
manages this risk and its cash flow requirements through detailed annual,
monthly and daily cash flow forecasts. These forecasts are reviewed
regularly to ensure that the Group has sufficient working capital to enable it
to meet all of its short-term and long-term cash flow needs. In addition,
during the year the Group extended its facility to £60,000,000.
The tables below analyse the Group's financial liabilities into relevant
maturity groupings based on their contractual maturities. The amounts
disclosed in the table are the contractual undiscounted cash flows.
Contractual maturities of financial liabilities
30 April 2022 < 1 year 1-2 years 2-5 years Total
£'000
£'000
£'000
£'000
Borrowings 355 - 32,798 33,153
Deferred consideration 1,210 1,210 1,211 3,631
Trade and other payables 13,992 - - 13,992
30 April 2021 < 1 year 1-2 years 2-5 years Total
£'000
£'000
£'000
£'000
Borrowings 414 - 23,650 24,064
Deferred consideration 1,095 - - 1,095
Bank overdraft 1,852 - - 1,852
Trade and other payables 23,887 - - 23,887
The Group has met its covenant tests during the year.
For lease maturity see note 28.
Capital management
The capital structure of the Group consists of borrowings (as disclosed in
note 29) and equity of the Group (comprising issued capital, reserves, and
retained earnings as disclosed in the Statement of Changes in Equity).
In managing its capital, the Group's primary objective is to provide a return
for its equity shareholders through capital growth and future dividend
income. The Group seeks to maintain a gearing ratio that balances risk and
returns at an acceptable level and also to maintain a sufficient funding base
to enable the Group to meet its working capital and strategic investment needs
and objectives.
Gearing ratio
The gearing ratio at the year end is as follows:
30 April 2022 30 April 2021
£'000
£'000
Borrowings (note 29) 33,153 24,064
Cash and cash equivalents (4,097) (4,783)
Asset held for sale (note 27) (130) -
Bank overdraft - 1,852
Net debt 28,926 21,133
Equity 85,659 82,689
% %
Net debt to equity ratio 34 26
Significant accounting policies
Details of the significant accounting policies and methods adopted (including
the criteria for recognition, the basis of measurement and the bases for
recognition of income and expenses) for each class of financial asset,
financial liability and equity instrument are disclosed in note 2.
35. Reconciliation of profit before taxation to net cash generated from
operations
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Profit before taxation 1,056 5,509
Adjustments for:
Amortisation 3,936 2,704
Depreciation - property, plant and equipment 2,027 1,309
Depreciation - right-of-use assets (net of £nil (2021: £43,000) included in 4,799 3,684
non-underlying costs)
Loss on disposal (net of £967,000 (2021: £284,000) included in 16 33
non-underlying costs)
Contingent consideration expense 6,267 5,933
Non-underlying operating costs 6,572 3,755
Share based payments 835 1,387
Interest income (296) (398)
Interest expense 2,364 1,881
Operating cash flows before movements in working capital 27,576 25,797
Decrease/(increase) in contract assets 628 (2,827)
Decrease/(increase) in trade and other receivables 570 (135)
Increase/(decrease) in provisions 469 (263)
Increase in contract liabilities 21 39
Decrease in trade and other payables (4,204) (2,233)
Cash generated from operations 25,060 20,378
36. Changes in liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from
financing activities, including both cash and non-cash changes. Liabilities
arising from financing activities are those for which cash flows were, or
future cash flows will be, classified in the Group's Consolidated Statement of
Cash Flows as cash flows from financing activities.
Borrowings Leases
£'000
£'000
As at 1 May 2020 28,650 23,844
New borrowings and leases 19,000 16,763
Acquired 2,801 4,657
Interest charged (net of £22,000 included in non-underlying) 704 1,177
Interest paid (573) (1,199)
Non-cash movement (131) 22
Disposals - (60)
Repayments (net of £308,000 included in non-underlying) (26,387) (2,564)
As at 1 May 2021 24,064 42,640
New borrowings/leases 47,350 3,083
Acquired borrowings/leases 3,239 4,695
Interest charged (net of £25,000 included in non-underlying) 952 1,412
Interest paid (648) (1,412)
Non-cash movement (301) -
Repayments (net of £296,000 included in non-underlying) (41,503) (3,890)
As at 30 April 2022 33,153 46,528
37. Alternative performance measures
This Annual Report contains both statutory measures and alternative
performance measures. In management's view the underlying performance of the
business provides a more meaningful comparison of how the Group's business is
managed and measured on a day-to-day basis.
The Group's alternative performance measures and key performance indicators
are aligned to the Group's strategy and together are used to measure the
performance of the business.
Alternative performance measures are non-GAAP (Generally Accepted Accounting
Practice) measures and provide supplementary information to assist with the
understanding of the Group's financial results and with the evaluation of
operating performance for all the periods presented. Alternative performance
measures, however, are not a measure of financial performance under UK-adopted
International Financial Reporting Standards ('IFRS') and should not be
considered as a substitute for measures determined in accordance with IFRS. As
the Group's alternative performance measures are not defined terms under IFRS
they may therefore not be comparable with similarly titled measures reported
by other companies.
Reconciliations of alternative performance measures to the most directly
comparable measures reported in accordance with IFRS are provided below.
a) Underlying EBITDA
Underlying EBITDA is presented as an alternative performance measure to show
the underlying operating performance of the Group excluding the effects of
depreciation, amortisation and non-underlying items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Operating profit 3,398 7,390
Depreciation and amortisation charges (note 11) 10,778 7,730
Non-underlying costs (note 13) 13,260 10,288
Underlying EBITDA 27,436 25,408
b) Underlying profit before tax (PBT)
Underlying PBT is presented as an alternative performance measure to show the
underlying performance of the Group excluding the effects of amortisation of
intangible assets and non-underlying items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Profit before tax 1,056 5,509
Amortisation (adjusted for amortisation on computer software) 3,815 2,622
Non-underlying costs (note 13) 13,260 10,288
Underlying profit before tax 18,131 18,419
c) Underlying profit after tax (PAT) and adjusted earnings per share (EPS)
Underlying PAT and EPS are presented as alternative performance measures to
show the underlying performance of the Group excluding the effects of
amortisation of intangible assets, share-based payments and non-underlying
items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
(Loss)/profit after tax (2,531) 3,402
Effect of change in deferred tax rate 1,747 -
Amortisation (adjusted for amortisation on computer software) 3,815 2,622
Non-underlying operating costs (note 13) 13,260 10,288
Tax in respect of the above (1,869) (1,272)
Underlying profit after tax 14,422 15,040
Underlying earnings per share Pence Pence
Basic underlying earnings per share 17.23 18.30
Diluted underlying earnings per share 17.14 18.07
Tax has been calculated at the corporation tax rate of 19% (2021:19%) and
deferred tax rate of 25% (2021:19%)
d) Free cash flow and cash conversion %
Free cash flow measures the Group's underlying cash generation. Cash
conversion % measures the Group's conversion of its underlying PAT into free
cash flows. Free cash flow is calculated as the total of net cash from
operating activities after adjusting for tax paid and the impact of IFRS 16.
Cash conversion % is calculated by dividing free cash flow by underlying PAT,
which is reconciled to profit after tax above.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Cash generated from operations (note 35) 25,060 20,378
Tax paid (4,095) (2,125)
Total cash outflow for IFRS16 leases (5,302) (3,741)
Free cashflow 15,663 14,512
Underlying profit after tax 14,422 15,040
Cash conversion (%) 109% 96%
(e) Net debt
Net debt is presented as an alternative performance measure to show the net
position of the Group after taking account of bank borrowings and cash at bank
and in hand.
30 April 2022 30 April 2021
£'000
£'000
Borrowings (note 29) 33,153 24,064
Cash and cash equivalents (4,097) (4,783)
Asset held for sale (note 27) (130) -
Bank overdraft - 1,852
Net debt 28,926 21,133
38. Capital commitments
As at 30 April 2022 there is a capital commitment of £72,000 (2021: £71,000)
in relation to an ongoing office refurbishment.
39. Defined benefit pension schemes
The Stonehams Pension Scheme
The Group operates a defined benefit pension arrangement, the Stonehams
Pension Scheme (the "Scheme"). The Scheme provides benefits based on salary
and length of service on retirement, leaving service, or death. The following
disclosures exclude any allowance for any other pension schemes operated by
the Group.
The Scheme was acquired as part of the acquisition of ASB Law where contracts
were exchanged on 5 March 2020. Therefore, the disclosures below represent the
period of ownership from 5 March 2020 to 30 April 2022. The scheme is closed
and provides benefits for 43 legacy employees (now pensioners and deferred
members).
The Scheme is subject to the Statutory Funding Objective under the Pensions
Act 2004. A valuation of the Scheme is carried out at least once every three
years to determine whether the Statutory Funding Objective is met. As part of
the process the Group must agree with the Trustees of the Scheme the
contributions to be paid to address any shortfall against the Statutory
Funding Objective.
The most recent comprehensive actuarial valuation of the Scheme was carried
out as at 31 December 2018. The results of that valuation were updated to 30
April 2022 allowing for cashflows in and out of the Scheme and changes to
assumptions over the period. An actuarial valuation as at 31 December 2021
is currently underway, but has not been finalised as at the date of these
accounts.
From January 2020 the Employer started to make annual contributions of
£35,000 per annum towards administration expenses. No change in this is
expected for the next financial year. Administration expenses from 1 November
2017 to 31 December 2019 have been met directly from the assets of the Scheme.
The Group will separately meet the cost of the PPF levy.
The Scheme typically exposes the Group to actuarial risks such as: investment
risk, interest rate risk and longevity risk.
Investment risk The present value of the defined benefit plan liability is calculated using a
discount rate determined by reference to high quality corporate bond yields;
if the return on plan assets is below this rate, it will create a plan
deficit.
Currently assets are invested in a variety of funds, which will reduce
volatility. The investment approach is reviewed every three years as part of
the valuation process.
Interest risk There is some hedging in the asset portfolio, but at a low level.
A decrease in the bond interest rate will increase the plan liability but this
will be partially offset by an increase in the return on the plan's debt
investments.
Longevity risk The present value of the defined benefit plan liability is calculated by
reference to the best estimate of the mortality of plan participants both
during and after their employment. An increase in the life expectancy of the
plan participants will increase the plan's liability.
The average duration of the Scheme's obligations is 16 years.
Actuarial assumptions
Principal actuarial assumptions
30 April 2022 30 April 2021
%
%
Discount rate 3.05 1.83
Retail Prices Index ("RPI") Inflation 4.00 3.53
Consumer Price Index ("CPI") Inflation 3.30 2.83
Pension increase (LPI 5%) 3.72 3.36
Pension increase (LPI 2.5%)
2.34
2.24
Post retirement mortality 90%/100% (m/f) S2PA CMI_2020 projections (with standard smoothing parameter of 90%/100% (m/f) S2PA CMI_2020 projections (with standard smoothing parameter of
7.5) using a long-term improvement rate of 1.0% pa 7.5) using a long-term improvement rate of 1.0% pa
Commutation 80% of members are assumed to take the maximum tax free cash possible using 80% of members are assumed to take the maximum tax free cash possible using
current commutation factors current commutation factors
Life expectancy at age 65 of male aged 45 22.6 22.6
Life expectancy at age 65 of male aged 65 24.2 24.1
Life expectancy at age 65 of female aged 45 23.6 23.5
Life expectancy at age 65 of female aged 65 25.3 25.3
The average duration of the Scheme's obligations is 16 years.
The current asset split is as follows
Asset allocation at Asset allocation
30 April 2022
at 30 April 2021
Equities and growth assets 70% 78%
Bonds, LDI and cash 30% 22%
Value as at Value as at
30 April 2022
30 April 2021
£'000
£'000
Fair value of assets 3,047 3,255
Present value of funded obligations (2,355) (2,791)
Surplus in scheme 692 464
Deferred tax - -
Net defined benefit surplus after deferred tax 692 464
The fair value of the assets can be analysed as follows:
Value as at Value as at
30 April 2022
30 April 2021
£'000
£'000
Low risk investment funds 625 720
Credit Investment funds 1,513 1,673
Matching funds - 691
Cash 909 171
Fair value of assets 3,047 3,255
30 April 2022 30 April 2021
£'000
£'000
Administration 28 29
costs
Net interest on liabilities (8) (10)
Total charge to the Statement of Comprehensive Income 20 19
Remeasurements over the period since acquisition
30 April 2022 30 April 2021
£'000
£'000
Loss on assets in excess of interest (115) (17)
Gain/ (loss) on scheme obligation from assumptions and experience 361 (157)
Gain on scheme obligations due to scheme experience 2 5
Total remeasurements 248 (169)
The change in value of assets
30 April 2022 30 April 2021
£'000
£'000
Fair value of assets brought forward 3,255 3,384
Interest on assets 58 50
Benefits paid (123) (133)
Administration costs (28) (29)
Loss on assets in excess of interest (115) (17)
Fair value of assets carried forward 3,047 3,255
Actual return on assets (57) 33
Change in value of liabilities
30 April 2022 30 April 2021
£'000
£'000
Value of liabilities brought forward 2,791 2,732
Interest cost 50 40
Benefits paid (123) (133)
Actuarial gain (363) 152
Value of liabilities carried forward 2,355 2,791
Sensitivity of the value placed on the liabilities
Approximate effect on liability
30 April 2022 30 April 2021
£'000
£'000
Discount rate
Minus 0.50% 191 229
Inflation
Plus 0.50% 139 164
Life Expectancy
Plus 1.0 years 102 113
Significant actuarial assumptions for the determination of the defined benefit
obligation are discount rate, inflation rate and mortality. The sensitivity
analysis above has been determined based on reasonably possible changes of the
respective assumptions occurring at the end of the reporting period, while
holding all other assumptions constant.
The sensitivity analysis presented above may not be representative of the
actual change in the defined benefit obligation as it is unlikely that the
changes in assumptions would occur in isolation of one another as some of the
assumptions may be correlated.
The With Profits Section of the Cheviot pension
Allocation of liabilities between employers
The With Profits Section was acquired as part of the acquisition of ASB Law
where contracts were exchanged on 5 March 2020 and the transaction completed
on 17April 2020.
The Trustee has discretion under the contribution rule on how the cost of
providing the benefits of the With Profits Section is allocated between
employers. The contribution rule applies until the earlier of the discharge of
the employer by the Trustee and the termination of the With Profits Section.
The Trustee's current policy is not to discharge employers. Employers
therefore remain liable under the contribution rule even if their last member
dies or transfers out.
The Trustee has been considering how best to ensure all employers bear an
appropriate share of the With Profits Section's obligations whilst ensuring
fairness between employers and a practical and transparent methodology for the
future.
As discussed at the Employers' Meeting on 5 July 2017, the Trustee has decided
to fix the allocation between employers on the basis of the promised benefits
just before the Section was re-classified in 2014 (the valuation as at 31
December 2013). The allocation to each employer will be expressed as a
percentage of the total Scheme liabilities. The intention is to apply this
percentage to any funding, buyout or IFRS deficit in the future to calculate
any contribution that may be due or any accounting liability.
The estimated percentage in relation to Knights Professional Services Limited
is 0.790%.
This approach enables each employer to calculate the extent of their
obligation to the Section on the basis of the funding level at any time.
Cheviot will publish funding updates on the website: quarterly, on the scheme
funding basis, which includes an allowance for future investment returns; and
annually, on an estimated buyout basis, which looks at the position should all
benefits be secured with an external provider.
Estimated funding position as at 30 April:
Scheme funding basis
30 April 2022 30 April 2021
£'000 £'000
Total assets 80,100 92,200
Total liabilities excluding expenses (78,500) (88,600)
Surplus 1,600 3,600
Funding level 102% 104%
Allocation to the Group
The estimated share of the Scheme liabilities is 0.790%.
Over the year to 30 April 2022, the Section's funding position remained as a
small surplus.
30 April 2022 30 April 2021
£'000 £'000
Estimated cost of providing benefits (620) (700)
Value of assets 633 728
Resulting surplus 13 28
Funding level 102% 104%
The surplus has not been recognised as management consider this to be
temporary and not material.
The Trustee continues to monitor the funding position.
The Trustee reserves the right to withdraw, replace or amend the policy for
the allocation between employers in the future.
40. Related party transactions
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. Transactions between the Group and its other related parties are
disclosed below.
KPV Propco Ltd is a company controlled by Mr DA Beech, a person with
significant influence over the Group and a member of key management personnel.
The Group leases a property from KPV Propco Ltd. During the year rents of
£376,000 (2021: £376,000) were charged by KPV Propco Ltd to the Group. A FRI
lease of The Brampton, Newcastle-under-Lyme was granted for a term of 25 years
from and including 24 July 2017 to 24 July 2039 at a current rent of £376,000
per annum (excluding VAT).
The Group received a contribution for repair work in the year from KPV Propco
Ltd of £nil (2021: £26,000). These repairs relate to the building and site
and were therefore paid by KPV Propco Ltd.
During the year Knights Professional Services Limited charged KPV Propco Ltd
for professional services totalling £1,000 (2021: £126,000).
At 30 April 2022, there was an amount of £55,000 owed by the Group to KPV
Propco Ltd (2021: £3,000 owed to KPV Propco Ltd by the Group).
During the year Knights Professional Services Limited provided legal services
to the Directors in an individual capacity of £77,000 (2021: £154,000). At
30 April 2022, there was an amount of £nil (2021: £1,000) owed to the Group
from the Directors.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group is set out below
in aggregate for each of the categories specified in IAS 24 Related Party
Disclosures.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Short-term employee benefits and social security costs 1,424 1,193
Gains on exercise of options 913 -
Pension costs 25 22
Share-based payments (132) 209
2,230 1,424
Key management personnel includes Board members and directors of the Group and
the main trading company Knights Professional Services Limited.
Transactions with directors
Dividends totalling £250,000 (2021: £nil) were paid in the year in respect
of ordinary shares held by the Company's directors.
41. Post balance sheet events
On 19 May 2022 the Group exchanged contracts to acquire 100% of the voting
rights of Coffin Mew LLP, an independent law firm based primarily in
Portsmouth with offices in Southampton, Brighton and Newbury. Total
consideration payable is £11.5million subject to working capital adjustments
at the time of completion. This comprises £5.5 in cash, £1m of new
ordinary shares in the Group, along with deferred cash consideration of £5m
to be paid on over three years. The acquisition of Coffin Mew, provides
Knights with entry into new markets and provides scale to the Group's existing
service offerings. The transaction completed on 8 July 2022 and the assets and
liabilities of Coffin Mew LLP were hived up into Knights Professional Services
Limited.
Initial accounting for the business combination is not yet complete and the
fair value of net assets acquired has not yet been determined; accordingly,
details of the assets acquired and liabilities assumed, and goodwill arising
on the acquisition, cannot be given.
In its unaudited accounts for the year ended 31 March 2022, Coffin Mew
reported revenue of £11.3m with a corporatised PBT margin of circa 8%.
Following full integration and realisation of all synergies, the Board expect
Coffin Mew to contribute a PBT margin of circa 16% which, combined with a
typical level of revenue churn post-acquisition, means the acquisition is
expected to be immediately earnings enhancing.
On 5 July 2022, contracts were exchanged in relation to the sale of HPL. The
sale is expected to complete later in July 2022, subject to regulatory
approval.
Glossary of Terms
Financial Performance Measure
This document contains certain financial measures that are not defined or
separately recognised under IFRS. These measures are used by the Board and
other users of the accounts to evaluate the Group's underlying trading
performance excluding the impact of any non-recurring items and items that do
not reflect the underlying day-to-day trading of the Group. These measures are
not audited and are not standard measures of financial performance under IFRS.
There are no generally accepted principles governing the calculation of these
measures and the criteria upon which these measures are based can vary from
company to company. Accordingly, these measures should be viewed as
supplemental to, not as a substitute for, the financial measures calculated
under IFRS.
Underlying EBITDA
Underlying EBITDA is presented as an alternative performance measure to show
the underlying operating performance of the Group excluding the effects of
depreciation, amortisation, and non-underlying items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Operating profit 3,398 7,390
Depreciation and amortisation charges 10,778 7,730
Non-underlying costs (note 13) 13,260 10,288
Underlying EBITDA 27,436 25,408
Underlying Profit Before Tax (PBT)
Underlying PBT is presented as an alternative performance measure to show the
underlying performance of the Group excluding the effects of amortisation of
acquired intangible assets, and non-underlying items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Profit before tax 1,056 5,509
Amortisation of acquired intangibles 3,815 2,622
Non-underlying costs (note 13) 13,260 10,288
Underlying profit before tax 18,131 18,419
Underlying Operating profit to Underlying Profit Before Tax (PBT)
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Operating profit before non-underlying charges 16,658 17,678
Less: Finance costs (2,364) (1,881)
Add: Amortisation of acquired intangibles 3,815 2,622
Add: Finance income 22 -
Underlying profit before tax 18,131 18,419
Underlying Profit After Tax (PAT) and Underlying Earnings per Share (EPS)
Underlying PAT and underlying EPS are presented as alternative performance
measures to show the underlying performance of the Group excluding the effects
of amortisation of acquired intangible assets and non-underlying items.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
(Loss)/Profit after tax (2,531) 3,402
Effect of change in deferred tax rate 1,747 -
Amortisation of acquired intangibles 3,815 2,622
Non-underlying operating costs (note 13) 13,260 10,288
Tax in respect of the above (1,869) (1,272)
Underlying profit after tax 14,422 15,040
Underlying earnings per share Pence Pence
Basic underlying earnings per share 17.23 18.30
Diluted underlying earnings per share 17.14 18.07
Free Cash Flow and Cash Conversion %
Free cash flow measures the Group's underlying cash generation.
Cash conversion % measures the Group's conversion of its underlying PAT into
free cash flows. Free cash flow is calculated as the total of net cash from
operating activities, tax paid and cash outflows for IFRS 16 leases. Cash
conversion % is calculated by dividing free cash flow by underlying PAT, which
is reconciled to profit after tax above.
Year ended Year ended
30 April 2022
30 April 2021
£'000
£'000
Cash generated from operations (note 35) 25,060 20,378
Tax paid (4,095) (2,125)
Total cash outflow for IFRS16 leases (5,302) (3,741)
Free cashflow 15,663 14,512
Underlying profit after tax 14,422 15,040
Cash conversion (%) 109% 96%
Net debt
Net debt is presented as an alternative performance measure to show the net
position of the Group after taking account of bank borrowings and cash at bank
and in hand.
30 April 2022 30 April 2021
£'000
£'000
Borrowings (note 29) 33,153 24,064
Cash and cash equivalents (4,097) (4,783)
Asset held for sale (note 27) (130) -
Bank overdraft - 1,852
Net debt 28,926 21,133
Working Capital
Working capital is calculated as:
30 April 2022 30 April 2021
£'000
£'000
Current assets
Contract assets 31,777 28,530
Trade and other receivables 32,309 31,521
Corporation tax receivable 1,815 -
Total current assets 65,901 60,051
Current liabilities
Trade and other payables 21,362 32,303
Overdraft included in payables - (1,852)
Less accrued consideration included within trade and other payables - (8,310)
Contract liabilities 237 216
Corporation tax liability - 765
Total current liabilities 21,599 23,122
Net working capital 44,302 36,929
Other Definitions
Colleague/Talent Retention/Employee Turnover
Churn is calculated based on the number of qualified fee earners who had been
employed by the Group for more than one year. Churn is calculated taking the
number of leavers in the above group over the financial year as a percentage
of the average number of colleagues for the year. Retention is 100% less the
churn rate.
Fee Earner Concentration
This is calculated taking the largest fees allocated to an individual fee
earner as a percentage of the total turnover for the year and demonstrates the
Group's reliance on the fee earning potential of an individual fee earner.
Client Concentration
On an individual basis this is calculated as the percentage of total turnover
for the financial year that arises from fees of the largest client. For the
top 10 client concentration calculation this takes the fee income from the 10
largest clients for the year as a percentage of the total turnover for the
year.
Client Satisfaction
Net Promoter Score (NPS) measures the loyalty of a client to a company and can
be used to gauge client satisfaction. NPS scores are measured with a single
question survey and reported with a number from -100 to +100, the higher the
score, the higher the client loyalty/satisfaction.
Colleague Satisfaction
Employee Net Promoter Score (ENPS) measures the loyalty of employees to a
company and how likely they are to recommend their employer as a place to
work, which can also be used to gauge employee satisfaction. ENPS scores are
measured with a single question survey and reported with a number from -100 to
+100, the higher the score the higher the employee loyalty.
Fee Earners
When referring to the number of fee earners in the Group we include all
individuals working in the Group on a mainly fee earning basis. This includes
professionals (legal and non-legal) of all levels including paralegals,
trainees and legal assistants. When referring to the number of fee earners in
the business this will refer to the absolute number of individuals working in
the Group. When using the number of fee earners to calculate the average fees
or profit per fee earner or the ratio of fee earners to support staff these
calculations are based on the number of full-time equivalent (FTE) individuals
to reflect that a number of individuals choose to work on a part-time basis.
Non-Fee Earners/Support Staff
This includes all employees that are not fee earning.
Recurring Revenue
This is calculated based on the amount of revenue in a year that reoccurs in
the following year from the same clients.
Lock Up
This is calculated as the combined debtor and WIP days as at a point in time.
Debtor days are calculated on a count back basis using the gross debtors at
the period end and compared with the total fees raised over prior months. WIP
(work in progress) days are calculated based on the gross work in progress
(excluding that relating to clinical negligence claims, insolvency, highways
and ground rents as these matters operate on a mainly conditional fee
arrangement and a different profile to the rest of the business) and
calculating how many days billing this relates to, based on average fees
(again excluding clinical negligence highways and ground rents fees) per month
for the last 3 months.
Lock up days excludes the impact of acquisitions in the last quarter of the
financial year.
Organic growth
Organic growth excludes revenue growth from acquisitions in the year of their
acquisition, and for the first full financial year following acquisition,
based on the fees generated by the individuals joining the Group from the
acquired entity. Recruitment of individuals into the acquired offices post
acquisition is treated as part of the organic growth of the business.
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