Synectics Regulatory News (SNX)

Synectics plc

("Synectics" or "the Group" or "the Company")

Final Results for the year ended 30 November 2015

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, reports its audited final results for the year ended 30 November 2015.

Headlines

*Underlying profit/(loss) represents profit/(loss) before tax and non-underlying items (which comprise restructuring costs, share-based payment charge and amortisation of acquired intangibles). Underlying earnings per ordinary share are based on profit/(loss) after tax but before non-underlying items.

Commenting on the results, Paul Webb, Chief Executive, said:

"On the back of this hard fought year, I am really pleased we have been able to return the business to solid profitability and significantly strengthen its cash position. Collectively, we have worked hard to achieve this but it has not been without its challenges. Given the current uncertainty of some of the markets in which we operate, this is a good result and, on the back of recent contract wins, we look forward to a year of continued progress."

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Chairman's Statement

Overview

In 2015 Synectics achieved its expected return to profitability after the significant downturn of the previous year. The recovery plan put in place at the beginning of the year was successfully implemented and delivered across the Group. All areas of activity were profitable. In the case of our largest single end market sector, Oil & Gas, revenues recovered somewhat compared with last year, but profitability was still markedly lower than in 2013, reflecting the continued impact of delays and cancellations in industry infrastructure investment brought about by the 70% decline in the price of oil.

Within the Integration & Managed Services division, substantial improvements were achieved both through better management control over the delivery of large security integration projects, and through solid organic growth of revenues and margins. The mobile systems transport surveillance activities produced a particularly strong performance in the year.

Good progress was also made by management in further simplifying the Group's operating structure and in sharpening our focus on those specialist areas of the global electronic security and surveillance market where Synectics' technology and capabilities are among the best in the world.

Results

For the year to 30 November 2015, Synectics' consolidated revenue grew by 6.0% to £68.5 million (2014: £64.6 million). The Group made an underlying profit1 of £1.6 million (2014: loss £2.4 million). After charging £1.0 million (2014: £1.4 million) for exceptional restructuring and other non-underlying costs, the consolidated profit before tax for the year was £0.5 million (2014: loss £3.7 million). Underlying diluted earnings per share were 8.0p (2014: loss per share 14.0p).

In last year's Annual Report, I stated that Synectics was expecting to generate substantial positive cash flow during 2015, as exceptionally high working capital balances caused by project delays in 2014 were unwound. I am pleased to report that this was achieved, with net cash flow from operations for the financial year of £6.9 million, and a net cash position at 30 November 2015 of £0.5 million (2014: net debt £6.1 million).

Dividend

In light of Synectics' return to profitability and much improved cash position, the Board is recommending payment of a resumed final dividend of 1.0p per share, payable on 6 May 2016 to shareholders registered on 29 March 2016, for consideration by shareholders at the Company's Annual General Meeting on 27 April 2016.

Business Review

Synectics' business is to provide integrated electronic security systems and services to specialist high-end markets. Our systems are based on core proprietary technology, in particular systems integration and command and control software. This technology is adapted for the specific needs of our target customer sectors, and provides fundamental differentiation from mainstream suppliers in the wider electronic security market.

Systems Division

Synectics' Systems division provides specialist electronic surveillance systems, based on its own proprietary technology, globally to end customers with large-scale highly complex security requirements, particularly for oil & gas operations, gaming, infrastructure protection, high security and public spaces.

Revenue £32.7 million (2014: £31.9 million; 2013: £44.8 million)

Gross margin 37.5% (2014: 38.9%; 2013: 38.5%)

Operating profit2 £1.3 million (2014: £1.0 million; 2013: £7.0 million)

Operating margin2 4.1% (2014: 3.2%; 2013: 15.7%)

The Systems division began 2015 with the difficult combined task of bedding in its new organisation and expanded central operations facility opened the previous year, while at the same time completing significant overhead and direct cost reductions to adapt to changed market conditions in the oil & gas industry. The resulting challenges were addressed successfully, with a minimum of disruption.

The market for security and surveillance systems in the oil & gas sector continued to experience volatility and changing customer intentions but, against that difficult background, Synectics grew its revenues in the sector and increased its market share. The business remained profitable and is well positioned to benefit when more normal market conditions return. Synectics secured a number of projects for new customers during the year, most notably the TouatGaz project in Algeria and the Kaombo FPSO project in Angola. Significantly, there were no major lost bids in the period.

The Gaming sector performed well in 2015, both through strong repeat business from existing core customers and from securing new customers particularly in the Far East. Synectics' Synergy 3 command and control platform has been adopted by a significant number of new casinos, as well as being rolled out to many existing sites as part of upgrade projects. This was notably the case in the North American market where Synectics now supports around 100 gaming sites.

The Far East continues to be a focus for growth in this sector. As well as a major expansion programme for an existing client in Singapore, during the period Synectics also provided integrated surveillance solutions for major casinos in Malaysia, Korea and the Philippines. These new installations build on Synectics' strong base across the region and should provide significant follow-on opportunities.

Since the year end, Synectics has been awarded a further multi-million pound contract to provide an integrated surveillance solution for a new casino resort in Macau, currently under construction for a major international gaming operator. The Group's new office in Macau will play a key role in extending our sales and support capability at a local level in this market.

Within the transport & infrastructure sector, Synectics has a long track record of delivering solutions for complex and sensitive environments where protecting people and assets is critical. Increased focus on transport & infrastructure, which is a large and growing segment of the market, suits Synectics' core strengths and capabilities well. We are already seeing positive results from the re-alignment of our activities in this area, which will continue into 2016.

During 2015 our enterprise software platform, Synergy 3, was selected as the airport safety and security solution for Terminal 3 at Jakarta's Soekarno-Hatta International Airport. Other project wins included a situational awareness system for base operations of a top ten international airline, a government highways project in Asia, a major rail hub in Germany, and our first passenger counting solution in the German rail market.

Integration & Managed Services Division

Synectics' Integration & Managed Services ('IMS') division is one of the leading UK providers of design, integration, turnkey supply, monitoring and management of large-scale electronic security systems. Its main markets are in critical infrastructure, transport, public space and multi-site systems. Its capabilities include a nationwide network of service engineers, UK government security-cleared personnel and facilities, and an in-house 24-hour monitoring centre and helpdesk. The IMS division supplies proprietary products and technology from Synectics' Systems division as well as from third parties.

Revenue £36.8 million (2014: £33.7 million; 2013: £38.4 million)

Gross margin 24.8% (2014: 19.3%; 2013: 24.7%)

Operating profit/(loss)2 £2.2 million (2014: loss £1.1 million; 2013: profit £2.2 million)

Operating margin2 6.0% (2014: (3.4)%; 2013: 5.8%)

Within the IMS division, the managed services and mobile systems activities performed well during 2015, and the integration services activities completed a successful turnaround and return to profitability.

Mobile systems delivered exceptionally good results both in terms of organic revenue growth and increased operating margins, derived principally from improved operational efficiencies on a continuing long-term contract and a return to modest growth in new UK bus registrations. Notable successes during the year included contracts with ADL Plaxton for Hong Kong Citybus vehicles, as well as a major upgrade programme with Go-Ahead. In addition, Synectics secured a major new three-year service and support contract with Metroline, further consolidating our position as the UK and Ireland's leading on-vehicle CCTV and telematics provider to the bus and coach market.

The focus of the IMS division's managed services activities continues to be on delivering security and facilities management services for clients with large and complex multi-site estates. Recent investment in a bespoke operations system to accommodate a more interactive service tracking solution has significantly enhanced our core proposition and has opened up opportunities to secure new clients in adjacent sectors. Synectics achieved significant contract renewals in the period with Jewson, WH Smith, Aurum Group and Argos.

The UK security systems integration activities successfully transitioned during 2015 to a new operating structure. At the outset of the 2015 financial year, the Board tasked the new senior management team with delivering a rapid and sustainable recovery from the loss incurred in the previous year, which had arisen from the direct and indirect impacts of delays and cost overruns on a major project. Although some of the benefits of the changes introduced are still to come, losses were eliminated and a positive profit contribution was generated in the year. Much good work has been done by the IMS management team to put in place the improved sales and operational platform needed to deliver the levels of revenue and profit growth of which this business is capable.

More focus has been given to larger commercial, high security and infrastructure projects, where Synectics' businesses have traditionally done well. Examples include the successful retention of a power utility service contract for a further three-year term, and the first significant project with a large global construction company.

After the year end, Synectics also secured a major contract under which we will deliver and service a complex security and safety system for a new gas-fired power station that will supply electricity to a million UK homes.

We continued to win significant work in the public heritage sector, securing the initial stage of a five-year project to upgrade the entire security platform for the British Museum. This award also included a three-year service and maintenance contract. Other contracts were won for the Victoria and Albert Museum and the Royal Parks.

The IMS division as a whole achieved key milestones during 2015 in its objective of sales growth through active closer co-operation, both internally between the managed services and integration activities of IMS, and within the wider Synectics Group between IMS and the Systems division. There are clear benefits being achieved from this co-operation and cross-selling, and we expect these gains to increase markedly over time.

Synectics' IMS division remains one of the UK's largest and most capable providers of security systems and services, and the Board is confident the division will deliver further improvement in results in 2016.

Research & Development

Synectics continues to invest in its proprietary technology base. During 2015, the Group spent a total of £2.1 million on technology development (2014: £2.5 million). Of this total, £0.6 million was capitalised and the remainder expensed to the Income Statement. £0.9 million of previously capitalised development costs were amortised in the year.

The Synectics Technology Centre operates within the Systems division as a consolidated development unit for the Group as a whole. The focus continues to be on developing products that are specifically directed to the needs of Synectics' core target customer sectors. The Group's development roadmap operates in a well-controlled environment that enables us simultaneously both to deliver on time our planned new product introductions, and to support globally the bespoke, large-scale and innovative projects that an increasing proportion of our customers are looking for.

In 2015, the focus was on further sector-led enhancements of our Synergy 3 command and control platform; major upgrading of the capability of our T1600 mobile recording device and the introduction of other transport-focussed developments; development of the C3000 series HD camera primarily for use in the oil & gas sector; and continuation of our open systems philosophy.

I would once again like to pass on to all employees the sincere thanks of the Board and shareholders for their continued commitment and efforts last year.

During 2015 the Group significantly increased its focus on formally collating and acting on employee feedback in all areas of our activity. Senior management and the Board appreciate the valuable feedback and pay close attention to employees' comments. The results from the latest employee survey showed a desire for increased training in a number of areas, and this will be actively addressed in the current year.

Board Changes

Paul Webb, previously head of the Systems division, was appointed Chief Executive from 1 February 2015. He has already brought to the role the benefits of his considerable energy and talents, as well as his deep knowledge of Synectics' technology and markets.

As previously announced, Nigel Poultney retired as Group Finance Director, and from the Board, on 30 November 2015. He will remain with Synectics on a part-time basis, as Company Secretary and to effect an extended handover to his successor, for the remainder of this year. Nigel has been with Synectics for 24 years; throughout that time has served the Group with outstanding commitment, loyalty and skill, and I am pleased to acknowledge here the Board's most sincere gratitude to him.

Mike Stilwell was appointed to the Board as Group Finance Director on 1 December 2015, having previously served as Financial Controller. Mike joined Synectics in 2012, and we look forward to working with him now in his new role.

Finally, Michael Butler was appointed to the Board on 23 February 2016 as an independent Non-Executive Director. Michael has had a highly successful business career, most recently in the satellite communications sector where his appointments have included a substantial period as Chief Operating Officer and a main board director of Inmarsat plc. His background and skills are very relevant to Synectics' technology and markets, and are complementary to those of our other Non-Executive Directors.

Collectively, these are significant changes which should provide the Board with a positive combination of fresh viewpoints and continuity.

Strategy, Organisation and Financial Objectives

A critical review led by Paul Webb, the Group's new Chief Executive, over the past year has confirmed our strategy of creating leadership positions within specialised sectors of the electronic security and surveillance industry, through the combination of deep sector-specific market knowledge and, where appropriate, our own proprietary technologies. These proprietary technologies are based on open systems and built around Synectics' core integration software; they are developed specifically for our chosen specialist market sectors and must provide fundamental differentiation from the offerings of mainstream suppliers in the wider electronic security market.

The other main conclusions from the review will be set out in Synectics' upcoming Annual Report. In brief summary they include that:

- The Group's transport and critical infrastructure systems activities, some elements of which are currently in different divisions, should be much more closely integrated under the umbrella of the Systems division;

- There is considerable scope to increase revenues, margins and quality of earnings through closer alignment and co-operation across the Group's current range of activities;

- More of the Group's resources and energies should be directed at a smaller sub-set of activities that are strategically relevant to the development of our business; and

- The Group should creatively devise and exploit further opportunities to expand the scope of its supply in existing market sectors, with a clear focus on selling, wherever feasible, end-to-end packages of systems and services to increasingly sophisticated and demanding customers.

The reorganisation of the Group's transport and infrastructure activities will be coupled with additional investment in sales and technical capabilities during 2016. This area is a key thrust for the Group in which we see substantial opportunity for growing Synectics' revenues through an increasingly differentiated sector-specific approach, as has already been successfully applied to the gaming and oil & gas sectors.

Over the five years to 30 November 2013, Synectics grew its revenues and profits consistently and, at the end of that period, achieved the medium-term objective set by the Board in 2010 of a consolidated operating margin in the range of 8% - 10%. In 2013 the Group also invested significantly in its products, internal systems and facilities, and it is now a more sustainable and more scalable business, but with a consequent higher fixed cost base even after the recent overhead reductions.

Looking beyond the serious current dislocations in the oil & gas market, the Board's view is that Synectics remains well capable of achieving, in normal market conditions, consolidated operating profits in the same 8% - 10% range as previously set.

Outlook

Synectics' expectations for 2016 are not based on any assumption of improvement in the oil & gas market. However, market volatility means that short-term forecasts are subject to higher than usual levels of uncertainty. The gaming sector appears well positioned for a good year, especially in the second half, and we expect a continuation of the improving trend in integration & managed services.

For Synectics as a whole, the Board is looking forward to a year of continued progress, though subject in some areas to an abnormally uncertain macroeconomic environment.

David Coghlan

Chairman

24 February 2016

1 underlying profit/(loss) represents profit/(loss) before tax and non-underlying items (which comprise restructuring costs, share-based payment charge and amortisation of acquired intangibles).

2 before non-underlying items and Group central costs.

Consolidated Income StatementFor the year ended 30 November 2015

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2015

Consolidated Statement of Financial PositionAs at 30 November 2015

Consolidated Statement of Changes in EquityFor the year ended 30 November 2015

Consolidated Cash Flow Statement

For the year ended 30 November 2015

Notes

1 Basis of preparation

The information contained within this announcement has been extracted from the audited financial statements which have been prepared in accordance with IFRS as adopted by the European Union ('adopted IFRS'), and with those parts of the Companies Act 2006 applicable to companies reporting under adopted IFRS. They have been prepared using the historical cost convention except where the measurement of balances at fair value is required.

2 Segmental analysis

3 Non-underlying items

a. The restructuring costs incurred during 2015 and 2014 relate predominantly to severance costs arising from a review of the Group's cost base.

4 Taxation

Reconciliation of tax charge/(credit) for the year

The corporation tax assessed for the year differs from the standard rate of corporation tax in the UK of 20.33% (2014: 21.67%). The differences are explained below:

4 Taxation continued

Deferred tax assets of £0.5 million (2014: £0.6 million) have been recognised in relation to legal entities which suffered a tax loss in the preceding period. The assets are recognised based upon future taxable profit forecasts for the entities concerned.

The Group has further tax losses available to be carried forward for offset against the future taxable profits of certain Group companies amounting to approximately £2.6 million (2014: £2.7 million). No deferred tax asset (2014: £nil) in respect of these losses has been recognised at the year end as the Group does not currently anticipate being able to offset these against future profits in order to realise any economic benefit in the foreseeable future.

In addition to the above, the Group has capital losses of approximately £19 million (2014: £19 million) available for offset against future taxable gains. No deferred tax asset in respect of these losses, which would amount to £3.4 million, has been recognised in these financial statements as there is insufficient certainty that the asset will be recovered against future capital gains.

5 Dividends

The Directors recommend the payment of a final dividend of 1.0p per share (2014: nil per share), totalling around £173,000. Subject to approval, this is expected to be paid on 6 May 2016 to shareholders registered on 29 March 2016. No interim dividend was paid (2014: nil per share).

6 Earnings per ordinary share

1 Under IFRS no allowance is made for the dilutive impact of share options which reduce a loss. The basic and diluted EPS measures are therefore the same for the year ended 30 November 2014.

7 Cash and cash equivalents

For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents comprise the following:

8 Loans and borrowings

The terms and debt repayment details of the loans and borrowings are as follows:

9 Provisions

Provisions have been analysed between current and non-current as follows:

10 Company information

Full Financial Statements

The auditors have issued an unqualified opinion on the full financial statements for the year ended 30 November 2015 which will be distributed to shareholders and delivered to the Registrar of Companies in due course. The financial information for 2015 and 2014 does not comprise statutory financial statements. Statutory financial statements for the year ended 30 November 2014, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies. Further copies of these results, and the full financial statements when published, will be available at the Company's registered office: Synectics plc, Studley Point, 88 Birmingham Road, Studley, Warwickshire, B80 7AS or on the Company website at www.synecticsplc.com.

Forward-looking statements

This report may contain certain statements about the future outlook for Synectics plc. Although the Directors believe their expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.