Synectics Regulatory News (SNX)

Synectics plc

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

Final Results for the year ended 30 November 2013

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 2013.

Financial highlights

Operational highlights

*Underlying profit represents profit before tax, non-underlying items (which comprise restructuring costs, acquisition costs, share-based payment charge, amortisation of acquired intangibles and reclassification of available-for-sale financial assets to profit or loss), impairment of goodwill and adjustments to deferred and contingent consideration. Underlying earnings per ordinary share are based on profit after tax but before non-underlying items, impairment of goodwill and adjustments to deferred and contingent consideration.

**Underlying operating margin represents underlying operating profit as a percentage of revenue, where underlying operating profit represents underlying profit before tax before charging finance income and finance costs.

Commenting on the results, John Shepherd, Chief Executive, said:

"2013 has been another good year of positive progress for Synectics which has resulted in us delivering our best underlying PBT to date. We achieved a series of strategic milestones and remain on course to deliver our plans for 2015 and beyond.

"In shaping the organisation we continued to increase investment in R&D and combined our UK operations to simplify the business and increase scalability. This should result in a far greater degree of cross Group collaboration, which is necessary to support our strategy of building our pipeline of large, complex, integrated system opportunities.

"I want to express my personal gratitude to everyone at Synectics. This has been a stretching and challenging year of change and our employees have dedicated themselves to their jobs in a way that I find remarkable. I am proud of the talented individuals we employ and expect Synectics to deliver an equally good performance in 2014."

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Chairman's Statement

Introduction

Synectics produced another good performance in 2013. Sales were buoyant in our core international specialist markets of oil & gas and gaming surveillance systems, particularly in the Far East and Middle East.

Early in the year we completed the final major step in re-organising our activities into two divisions. All of Synectics' proprietary technology-led activities were brought together into a single Systems division, and the services-led activities into our Integration & Managed Services division. The new structure has already shown significant benefits in increased co-operation between business sectors allowing the Group to pursue bigger, more integrated contracts.

Synectics has also been undertaking a major upgrade of its information technology systems. This upgrade was implemented in the Integration & Managed Services division in 2013 and will be continued across the Group's UK operations in 2014.

We expect the current year to be focused on consolidating these significant organisation and infrastructure investments. Therefore the Board expects results for the current financial year to be at a similar level to 2013. Further details are set out in the Outlook section below.

Results

For the year to 30 November 2013, Synectics' consolidated revenue grew by 7% to £82.4 million (2012: £77.0 million). The Group made an underlying profit before tax1 of £7.1 million, an increase of 26% compared with 2012. The underlying operating margin2 was 8.8% (2012: 7.4%). Underlying diluted earnings per share3 increased by 29% to 32.6p (2012: 25.2p).

Further details on operating performance are set out in the divisional business review below.

Group profit before tax was £6.6 million (2012: £4.7 million), after exceptional and non-underlying items totalling £0.5 million (2012: £0.9 million).

Net cash at 30 November 2013, after deducting all borrowings, was £1.2 million (2012: £4.6 million). The cash outflow for the year derived primarily from an increase in working capital from the timing of customer payments under major oil & gas and gaming contracts, acquisition payments and the purchase of new premises for the Systems division's new operations centre.

Dividend

In view of the increased profits for the year and our strong balance sheet, the Board has decided to recommend an increase in the final dividend from 5.0p to 5.5p, payable on 7 May 2014 to shareholders on the register on 28 March 2014. If approved by shareholders, this will bring the total dividend for the year to 8.5p, an increase of 13% over the prior year.

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 system 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 video-based electronic surveillance systems and technology globally to end customers with large scale highly complex security requirements, particularly for oil & gas operations, gaming and critical infrastructure protection. 

Revenue £44.8 million (2012: £38.9 million)

Gross Margin 38.5% (2012: 42.6%)

Operating Profit4 £7.0 million (2012: £6.0 million)

Operating Margin4 15.7% (2012: 15.3%)

At the beginning of 2013 all of the Group's proprietary Synectics branded surveillance systems activities were brought together under a single operating and management structure. This move has included the integration of Systems' two UK assembly, testing and system acceptance operations into one new facility near Scunthorpe, which will open in the first half of 2014.

Given this level of change and inevitable disruption, the division produced a good overall performance for the year.

The main highlight of the year was the award by a new customer in the Far East of the first phase of what we believe to be the largest and most technically demanding single-site physical surveillance system in the world. The system was delivered on time last November, and has since been operating successfully at the customer's location. Final acceptance testing is expected to be complete shortly. The contract provides for significant continuing maintenance and upgrade work, and we anticipate additional follow-on orders. We expect this system to act as a powerful reference site for future sales in the region and elsewhere.

Also in the Far East, Synectics completed the acquisition of the outstanding 80% shareholding of Coex Services Asia Pte Limited, based in Singapore. Coex Asia has acted for many years as Synectics' agent and partner in the region for the Oil & Gas sector. The very capable management team from Coex Asia are now taking the lead in integrating our sales and engineering personnel from other customer sectors to form a new Far East operating hub for all of Synectics' activities.

Further progress was made in cementing Synectics' position as the leading supplier of surveillance systems to the several massive LNG developments taking place off the coast of Australia. During the year, we delivered a further phase of the Chevron-managed Gorgon project, and were confirmed as the chosen video surveillance supplier for the £25 billion Ichthys project, led by the Japanese oil company Inpex.

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 help desk. The IMS division supplies proprietary products and technology from Synectics' Systems division as well as from third parties.

Revenue £38.4 million (2012: £39.5 million)

Gross Margin 24.7% (2012: 25.4%)

Operating Profit4 £2.2 million (2012: £2.7 million)

Operating Margin4 5.8% (2012: 6.7%)

The divisional re-organisation, management changes and new MIS systems implemented in 2013 had a significant impact on the IMS division, particularly in the critical infrastructure and public space systems integration sectors. Despite these changes, significant successes were delivered in winning a major new national multi-year supply and maintenance contract for Go-Ahead Group in the transport sector, expansion of our ongoing contract with Magnox for nuclear sites, and a number of contracts for UK prisons and police facilities.

Particularly pleasing was the success of our pilot local government CCTV control room management outsourcing project for Luton Borough Council. We believe this area offers substantial opportunities in the consolidation of adjacent local authority CCTV control rooms into single centres, generating substantial savings for the authorities and improved operating effectiveness.

Financial performance for the year was held back by the profile of our multi-year managed services contracts being more weighted towards early years, where lower margins are usual, and by delays in closing out a large integration project. The latter issue has been closely addressed as part of the organisational and MIS changes referred to above and should not recur.

As a result of the restructuring, the level of intra-Group co-operation within different sectors of the IMS division, and between the IMS division and the Systems division has already increased markedly. The ability of the organisation to act effectively in cross-selling and in combining customer offerings across system design, supply, integration, maintenance and outsourced management is a critical element of the Group's strategy.

We expect tangible benefits to flow from this approach in the current year, and an improved result from the IMS division for 2014.

Research & Development

Total Group expenditure on technology development in 2013 was £2.7 million (2012: £2.0 million). Of this, £1.0 million was capitalised, and the remainder expensed to the income statement. £0.3 million of previously capitalised development was amortised during 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. We aim for the Group's development roadmap to operate in a well-controlled environment that will enable us simultaneously both to deliver on time our planned new product introductions, and to support globally the bespoke, large scale and innovative projects that our customers are increasingly looking for. 

2013 was another year where organisational changes, consolidation of operating units, new systems and managing growth without necessarily having all the required resources in place at the outset, all placed considerable strain on the energy and goodwill of many of our employees.

Once again the commitment and talent shown by Synectics' people in dealing with these pressures successfully, for the benefit of the Group and our customers, was extraordinary. On behalf of the Board and of our shareholders, I pass on to them our very sincere thanks.

Strategy and Financial Objectives

Synectics' strategy remains as it has been for some time, that is to combine deep sector-specific market knowledge with proprietary technology, particularly software, to provide, maintain and manage sophisticated high-end electronic surveillance systems that are increasingly adapted to the specialist needs of the customer sectors we target - Oil & Gas, Gaming, Transport, Banking & Finance, Critical Infrastructure and Public Space.

Over the past three to four years the Group has implemented substantial organisational restructuring and internal process improvements to enable us to service our specialist target markets globally in an effective, scalable and profitable manner. We are now much better positioned to do that. One result has been that 45% of Synectics' revenues in 2013 were derived from outside the UK, up from 17% in 2008. More tellingly, 80% of last year's revenues within the higher margin Systems division came from customers outside the UK.

In 2010 the Board publicly set an objective for the Group to achieve a consolidated operating margin of 8-10%, within a reasonable time frame and given normal economic conditions. During 2013 Synectics achieved that objective, with an underlying operating profit margin of 8.8%. The subsidiary profitability objectives set for our different business areas have also largely been met. We believe that further progress in raising margins is achievable, though the Group's current financial priority is revenue growth in our core target customer sectors. Having reached the objectives laid out three years ago, the Board intends during 2014 to define goals for the next medium term phase of the Company's development.

Outlook

After strong order intake earlier in the year, several parts of the Group have subsequently been experiencing delays in receipt of anticipated large orders. The value of the Group's consolidated order book at 30 November 2013 was £28.1 million, compared with £36.9 million a year earlier. Delays are continuing to some extent, but bid activity for large projects in the oil & gas and gaming sectors remains solid, and an increased pace of sales is anticipated from several new products being launched in the second quarter of 2014, including an important new generation of Synectics' core command and control software.

As well as achieving rapid profits growth over the past two years, Synectics has implemented extensive strengthening of its management, organisation structure and information technology systems. Such improvements have been essential to provide the platform necessary to achieve the Group's future growth plans. The emphasis this year is on bedding in and consolidating the changes.

Taken together, these factors lead the Board to expect another good performance in 2014, with results likely to be at a similar level to 2013. The pattern of our current order pipeline suggests that trading will be significantly skewed towards the second half.

Last year's major Far East contract success and new operations hub, and the market leadership position Synectics has now secured within the global oil & gas surveillance market, have established clear opportunities that underpin the Board's expectation of substantial further growth over the coming two to three years.

David Coghlan

Chairman

26 February 2014

1 profit before tax, non-underlying items (which comprise restructuring costs, acquisition costs, share-based payment charge, amortisation of acquired intangibles and reclassification of available-for-sale financial assets to profit or loss), impairment of goodwill and adjustments to deferred and contingent consideration.

2 underlying operating profit as a percentage of revenue, where underlying operating profit represents underlying profit before tax before charging finance income and finance costs.

3 based on profit after tax but before non-underlying items, impairment of goodwill and adjustments to deferred and contingent consideration.

4 before non-underlying items and Group central costs.

Consolidated Income Statement

For the year ended 30 November 2013

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2013

Consolidated Statement of Financial Position

30 November 2013

Consolidated Statement of Changes in Equity

For the year ended 30 November 2013

Consolidated Cash Flow Statement

For the year ended 30 November 2013

Notes

1 Basis of preparation

The information contained within this announcement has been extracted from the 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 the year ended 30 November 2013 arise from the internal re-organisation of the Group's businesses into two divisions.

In 2012 restructuring costs related to the re-organisation and subsequent disposal of our UK defence activities, and included £0.4 million in respect of accelerated amortisation to fully write off goodwill and capitalised development costs relating to this activity.

b. Acquisition costs incurred during the year relate to the acquisition of the remaining 49% outstanding share capital of Indanet and the remaining 80% of Coex Services Asia Pte. Ltd ('CSA') (note 4).

c. The profit arising on the reclassification of available-for-sale assets to profit or loss relates to the equity investments in the unlisted shares of CSA and O&G Vision Ptd Ltd ('O&G') which were designated as available-for-sale assets immediately prior to the acquisition of the remaining issued share capital of CSA. £525,000 was reclassified to profit as part of the acquisition accounting (note 4).

4 Acquisitions

4a Indanet

In July 2011 Synectic Systems GmbH agreed to acquire 100% of the issued share capital of Indanet AG ('Indanet'), a leading German provider of integrated surveillance and security management systems to the transport industry, for a maximum total consideration of €10 million. Under the original terms of the acquisition, consideration of €2 million in cash was paid on completion for an initial tranche of shares equivalent to 51% of Indanet's issued share capital, and further consideration of between €1 million and €8 million for the remaining 49% of Indanet would be payable in three tranches between 2013 and 2015, dependent on Indanet's profits for the period from completion to 31 May 2015.

In February 2013, it was agreed to vary the original acquisition terms so that the entire outstanding share capital in Indanet was purchased for a total consideration of €1.64 million in cash. Therefore total consideration paid for the entire share capital of Indanet was €3.64 million and no further deferred or contingent consideration payments are required to be made. €1.7 million was drawn on the Group's bank term loan facility in the period to fund this final payment. The acquisition was accounted for during 2011 as a 100% acquisition as the agreement to acquire the remaining 49% of shares was irrevocable. Therefore, no further acquisition entries are required in respect of this transaction.

The acquisition has resulted in the following accounting adjustments:

In addition to the above adjustments to the deferred and contingent consideration, the Indanet goodwill was impaired in 2012 by £3,993,000.

4b Coex Services Asia Pte. Ltd

On 21 June 2013 the Group acquired the remaining 80% of the issued share capital of CSA, a private Singaporean company supplying surveillance systems in the Far East, primarily to the oil & gas sector, for a maximum total consideration of up to £2.1 million.

Initial consideration of £1.8 million has been paid, comprising £1.3 million cash, £0.4 million in ordinary shares in Synectics plc and the transfer of the Group's 20% interest in O&G valued at £0.1 million. Further consideration of up to £0.3 million in cash is dependent on the profit performance of CSA in the two years following acquisition.

The acquisition is expected to accelerate the Group's expansion into the Asia and Far East markets and should provide enhanced opportunities for the sale of Synectics' integrated surveillance control systems into this region.

Immediately prior to the date of acquisition, the Group held a 20% shareholding in CSA and O&G which was classified as available-for-sale financial assets held at fair value of £525,000. The movements in the fair value of the financial assets were recorded directly in equity as an unrealised gain and have been reclassified to the income statement, together with the associated deferred tax liability, as part of the acquisition accounting.

The fair value recognised, which is not materially different to the book value, in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:

The fair values shown are provisional and may be amended if information not currently available comes to light.

The fair value of the financial assets includes trade receivables with a fair value of £456,000.

The goodwill of £1.27 million arising from the acquisition can be attributed to the benefit of expansion into the Asia and Far East market and the synergy benefits to the Group of the acquisition.

The contingent consideration arrangement of up to S$500,000 is dependent on CSA's profits for the period from completion to 21 June 2015. S$100,000 has been provided for such consideration in the fair value assessment above.

In connection with the acquisition of the remaining 80% of the equity interest in CSA, Synectics plc issued 101,403 ordinary shares based on the market value at the effective date of acquisition on 1 June 2013 of £4.20. The fair value of these shares is the published price of the shares at this date.

Acquisition related costs (included in non-underlying operating expenses) amounted to £63,000.

CSA contributed £1.1 million revenue and £169,000 to the Group's operating profit for the period between the date of acquisition and the balance sheet date.

If the acquisition of CSA had been completed on the first day of the financial year, group revenues for the period would have been £84.3 million and Group profit from operations would have been £7.0 million.

5 Finance income

6 Finance costs

7 Taxation

Reconciliation of tax charge for the year

The corporation tax assessed for the year differs from the standard rate of corporation tax in the UK of 23.33% (2012: 24.67%). The differences are explained below:

The Group has tax losses available to be carried forward for offset against the future taxable profits of certain Group companies amounting to approximately £1.9 million (2012: £0.6 million). No deferred tax asset (2012: 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 (2012: £19 million) available for offset against future taxable gains. No deferred tax asset in respect of these losses, which would amount to £3.8 million, has been recognised in these financial statements as there is insufficient certainty that the asset will be recovered against future capital gains.

8 Earnings per ordinary share

9 Dividends

The Directors recommend the payment of a final dividend of 5.5p per share (2012: 5.0p per share), totalling £947,000. Subject to approval, this is expected to be paid on 7 May 2014 to shareholders registered on 28 March 2014. Together with the interim dividend of 3.0p per share, this brings the total dividend for the year to 8.5p per share (2012: 7.5p per share).

10 Provisions

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

11 Company information

Full Financial Statements

The auditors have issued an unqualified opinion on the full financial statements for the year ended 30 November 2013 which will be distributed to shareholders and delivered to the Registrar of Companies in due course. The financial information for 2013 and 2012 does not comprise statutory financial statements. Statutory financial statements for the year ended 30 November 2012, 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.