NCFC Accounts for year ending June 2018

[shefcanary 2,402]

[quote user="dylanisabaddog"][quote user="shefcanary"]A couple of further points to note. The drop in average attendance is equal to the drop in season ticket sales. The waiting list has gone!

Why did the club spend £176 m with the auditors on tax advice? That''s a significant figure and must have summat to do with the large tax payment the board were wittering on about. I just hope they have not entered into some dodgy offshore tax avoidance scheme. It was probably linked to the bond scheme but still a good question for someone at the AGM?[/quote]

As you''ve said in a subsequent post, the figure is £176,000. That is still a significant amount and I''ll ask about it at the AGM.[/quote]

Thanks Dylan - appreciate it!

[Jack Barak 46]

[quote user="shefcanary"]A couple of further points to note. The drop in average attendance is equal to the drop in season ticket sales. The waiting list has gone!

Why did the club spend £176 m with the auditors on tax advice? That''s a significant figure and must have summat to do with the large tax payment the board were wittering on about. I just hope they have not entered into some dodgy offshore tax avoidance scheme. It was probably linked to the bond scheme but still a good question for someone at the AGM?[/quote]

I would assume it will be linked to structuring the bond issue. Expert advice is not cheap.

[Bonzo 198]

The bill for tax advice could well be for advice on the impairment entries. Almost certainly other posters correctly note that these relate to players whose contract values cannot be recognised as assets due to issues in selling them. A big impairment hit cuts our tax bill significantly and because it is in essence a judgement call maybe the Directors want a lot of reassuring from our advisors that HMRC are ok with this accounting ploy (but it could also relate to a multitude of other things too). On the plus side next year may be free from this one off impairment cost. Furthermore some of the salaries related to players with impaired contracts may be off the books a break even outcome is within reach assuming we can grow the commercial revenues and sell Nelson. Obviously a promotion would be lovely.

[Andrew Spanton 1]

With the AGM fast approaching, now seemed to be a good time to post this.

Explanation of some of the key features in the 2018 accounts and also look ahead at the impact of loss of parachute payments.

Impairment and Onerous Contracts

The two key features in the year ending 30^th June 2018 were player cost write-offs and player trading. There are two aspects to the write-offs, ‘impairment’ and ‘onerous contracts’.

Both impairment and onerous contract write-offs relate to players that will not feature for the club in future for various reasons such as career ending injury or falling out of favour with management. I would hazard a guess that the players concerned are Steven Naismith, Russell Martin, Nelson Oliveira and Matt Jarvis. Another candidate could be Yanic Wildschut.

Impairment means writing off the remaining book value of the player’s original transfer fee. For example if we sign a player for £3m on a 3 year contract an ‘intangible asset’ of £3m is created in the balance sheet and ‘amortised’ over the length of the contract, so amortisation would be £1m per year and the player’s book value would be £2m after 1 year and so on. If the player’s career with the club ends after the second year for example, an impairment entry of the £1m remaining on his book value would be appropriate.

The 2018 accounts include an impairment entry of £9,373,000 which represents the remaining book value of the players concerned.

Onerous contract write-offs relate to the remaining financial liabilities contained within the contracts of those players deemed to have no future with the club. In simple terms this is the wages remaining on the player’s contract.

The 2018 accounts include a £11,228,000 provision for onerous contracts.

The combined effect of impairment and onerous contracts on the 2018 profit and loss account is £20,601,000. This is a one-off ‘hit’ and it makes sense to get rid of this bad news in a year in which there are sufficient profits to do so. Getting this out of the way now will help wages to appear more manageable in future as there will be no more costs relating to those players.

Player Trading

The player trading figure in the accounts is often misunderstood to be the cost of buying players less the income from selling players. This is not the case. The figure reported in the accounts represents book ‘profit’ on player sales less amortisation. The up-front cost of buying players is not included in the accounts ‘player trading’ figure.

The 2018 accounts tell us that player trading added £24,027,000 to profit. If we strip out impairment and amortisation (as described above) it leaves us with the book ‘profit’ on player sales of £48,023,000. By ‘book profit’ I mean proceeds from player sales less the residual book value of those players at the time of sale. The accounts tell us that the residual value of players sold was £6,746,000, so we therefore know that the proceeds from player sales in the year was £54,769,000.

It is not possible to assign sale proceeds to individual players from the information available but we can break it down a bit more. The post balance sheet events section of the 2017 accounts tells us that the club had sold Andreu, Dorrans, Howson and Jacob Murphy for a combined £16,900,000.

That leaves £37,869,000 for the other player sales, which I reckon is Pritchard, Jerome, Watkins, Josh Murphy and Maddison.

Further breakdown of these figures is pure speculation but we can compare to sales figures reported in the press.

Players sold during year ending 30th June 2018	Estimated sale value £K	Proceeds per accounts	Notes
Andreu	0		Agreed to terminate contract upon agreeing a deal with Coventry
Dorrans	900		Reported in EDP 4/7/17 as less than £1.5m
Howson	6,000		Reported in EDP 4/7/17 as “£5m chase for the player”
Jacob Murphy	10,000		Reported in EDP 19/7/17 as £10m plus £2.5m contingent add-ons
Sub-total of players sold per 2017 post balance sheet events	16,900	16,900
Pritchard	9,000		Reported in EDP 12/1/18 as in the region of £11m. Spurs have a sell-on clause.
Jerome	1,500		Reported in EDP 16/1/18 as around £2m.
Watkins	850		Reported in EDP 15/2/18 as around £1m.
Josh Murphy	8,000		Reported in EDP 12/6/18 as worth in excess of £10m.
Maddison	18,519		Reported in EDP 20/6/18 as worth up to £24m. Coventry have £2.2m+ sell-on clause.
Sub-total of all other players sold in 2017-18	37,869	37,869

 

Player purchases in 2017-18

The cost of players signed for a fee is reported in the accounts as player registration additions in the intangible assets section of the balance sheet. This cost does not affect the club’s profit and loss other than amortisation as previously described.

The 2018 accounts tell us that the cost of player registration additions was £15,450,000.

From the post balance sheet note in the 2017 accounts we know that the club had agreed to purchase the registrations of Franke, Hanley, Husband, Raggett, Stiepermann, Trybull, Watkins and Zimmerman for a combined total of £8,800,000.

That leaves a balance of £6,650,000 for McLean, Hernandez, Srbeny and Marshall.

In summary I would say that the transfer fees received seem to be generally lower than reported and transfer fees paid are higher than reported. There may be reasons for these discrepancies (player signing-on fees, agent fees, etc.) but the oft-quoted payments by instalments is not one of those reasons.

Profit & Loss summary 2018 and forecast 2019, 2020

NCFC P&L	Actual	Forecast	Forecast
	Champ	Champ	Champ
Year ending	Jun-18	Jun-19	Jun-20
Championship TV revenue	2100	2600	3536
Premier league solidarity payments	0	4464	4464
Premier league TV revenue	36399	0	0
Gate receipts	9803	9800	9800
Media	223	200	200
Catering	4085	4250	4250
Commercial	7228	7500	7500
UEFA solidarity & prizes	1085	800	800
Other	744	750	750
Total operating turnover	61667	30364	30564
Other operating income	2050	2000	1000
Player wages % of t/o	50%	55%	55%
Player wages	30834	16700	17215
Other wages	12191	10500	10500
Onerous contracts (wages w/off)	11228	0	0
Impairment (player cost w/off)	9373	0	0
Net player trading	-33430	0	0
Operating expenses	14487	11500	11000
Total costs	44682	38700	38715
JV profit and asset disposals	-52
Profit before interest and tax	18983	-6336	-6415
Net Interest (payable)/receivable	-502

The 2018 results make good reading. The club’s finances have been well managed in a climate of drastically reducing revenues.

The sale of James Maddison in particular transformed the results for the year but if we exclude the ‘exceptional’ items of player-related write-offs and player trading the underlying financial performance is still good. Underlying profit before interest and tax was £6,154,000 without these items.

Football staff wages (excluding cost of onerous contracts) reduced from £37.6m to £30.8m and were maintained at 50% of turnover.

Non-football wages reduced from £13.1m to £12.2m and operating expenses fell from £18.8m to £14.5m.

2018/19 season and beyond

The forecasts for 2019 and 2020 in the above table make the assumption that we will be playing in the Championship (obviously promotion would be a game-changer) and that player wages are maintained at 55% of turnover.

The table illustrates just how difficult it will be to balance the books in 2019 and beyond against a background of a further £31m+ reduction in turnover (from £61m to £30m). The player wage budget would need to fall from £31m to less than £17m.

Non-player wages and operating expenses would also need to be cut and perhaps £5m of savings could be found as a result. Even with these dramatic cost reductions a loss of £6m would result based on the assumptions made. In other words £6m would need to be generated from player sales in order to be self-funding.

Summary

The club has done well to manage the first phase of downsizing, which was clearly facilitated by the sale of Maddison, but there is an equally big challenge in the current year and ahead.

The player wage budget must have already been reduced to something like £17m for the current season which makes the team’s achievements even more remarkable.

Long may the on-field success continue. OTBC

[PurpleCanary 5,557]

Andrew, thanks for that. Based on the recent interview with Ben Kensell, and on the idea that the trip to Tampa was at least partly to so with forging overseas partnerships of some kind, my guess is that the aim now is to significantly drive up income from the commercial side. Perhaps the forecasts for that segment  - and particularly for the 2019-20 season - might turn out to be on the low side.

[splendidrush 700]

.... and then you read the comments on TWTD they'll tell us that our world is coming to an end. 

[wooster 134]

Small point - but I'm surprised the accounts ended up so healthily that a significant tax payment was triggered.

 

Surely more impairment costs (or similar ruses) could have been used to minimise the corporate tax liability?  Or  am I being naive?

[Andrew Spanton 1]

The tax payment was an inevitable consequence of good financial performance. The player write-offs (which are an accounting requirement, rather than a tax ruse) would have helped reduce the tax bill and is another reason why it was a good idea to deal with that issue in the same year as selling Maddison.

I agree that paying £5m corporate tax is undesirable in a climate of scarce financial resources but I would expect some of this to be clawed back in the following year (2019), when a large loss may well be reported (ignoring any promotion-related bonuses).

On a separate point, whilst there is much focus on profits, cash flow is of greater importance. The accounts suggest that instalment payments from previous player sales and purchases will add £11m to the coffers in the year to June 2019. This is derived from player debtors due within one year per the accounts of £19.8m and £8.7m player creditors outgoing in the same period. This should help relieve pressure to sell any further players during that year. Alternatively the cash could be swallowed up by an unsustainably high player wage bill but I guess we'll only find out next year.

On commercial income I hope that Purple is correct. The club has previously reported commercial sales of up to £9.9m (in the 2015-16 Premier League season) so there would appear to be scope for improvement especially if the on-field success continues.