Synectics Regulatory News (SNX)

Quadnetics Group plc

Preliminary Results for the 18 months ended 30 November 2010

Quadnetics Group plc, a leader in advanced surveillance technology and security networks, reports its preliminary results for the 18 months ended 30 November 2010.

Financial highlights

Operational highlights

Figures quoted are unaudited figures for the 12 month periods to 30 November 2010 and 30 November 2009 unless otherwise stated.

* Underlying profit represents profit before tax, exceptional costs and share-based payments charge. Underlying earnings per ordinary share is based on profit after tax but before exceptional costs and share-based payments charge.

John Shepherd, Chief Executive, commented:

"It is pleasing to see the results of integrating and refocusing the business starting to bear fruit. The significant profit improvement compared to the prior year has been delivered in spite of a 5% reduction in sales. This is in line with our stated aims of striving to increase both absolute profit and return on sales. As we continue to focus on selling higher margin integrated systems in our chosen niche markets, we expect this profit trend to continue. The significantly reduced overhead cost means that we will be able to take advantage of improving global market conditions to deliver higher profit margins.

"In our July statement I promised that we would increase our pace of innovation and this has resulted in the launch of three new market leading product families. The establishment of the Synectics Group Technology Centre at our Sheffield facility will enable us to develop more common-core hardware and software products which we can exploit in many different market opportunities. The higher order book gives confidence for further improved performance in 2011."

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Chairman's Statement

Introduction

As previously announced, Quadnetics has changed its year end from 31 May to 30 November, and the latest financial year therefore covers the 18 months ended 30 November 2010. The accompanying financial statements provide audited figures for the full 18 month period, as well as unaudited figures for the 12 months ended 30 November 2010. Comparable unaudited figures are provided for the 12 months ended 30 November 2009. Unless otherwise stated, this narrative report refers to figures for the 12 months to 30 November 2010, comparing them with those for the same period in 2009.

Quadnetics demonstrated solid progress on most fronts during 2009/10. Results improved markedly and, as importantly, there are clear signs that the Group is benefitting from the major organisation changes implemented across the period.

Results

In the 12 months to 30 November 2010, Quadnetics recorded underlying profit (that is, profit before tax, exceptional costs and share-based payment costs) up 77% to £2.6 million (2009: £1.5 million), on revenue of £61.3 million (2009: £64.7 million). Underlying operating margin was 4.2% (2009: 2.0%). This major improvement in operating margin reflects primarily the initial benefits from implementation of the Group restructuring initiated last year, and a significant turnaround within the defence activities of the Synectics Mobile Systems division. Further details on operating performance are set out in the divisional business review below.

Group profit before tax was £1.4 million (2009: loss £(0.2) million), after charging final exceptional costs of

£1.1 million (2009: £1.6 million) arising from the restructuring, and share-based payment costs of £0.2 million (2009: £0.1 million). Underlying earnings per share increased by 92% to 12.5p (2009: 6.5p).

Quadnetics' balance sheet remains ungeared, with net cash at 30 November 2010 of £3.3 million

(2009: £3.4 million). Free cash flow, that is cash generated from operations less capital expenditure, was

£2.1 million (2009: £1.0 million outflow), before cash payments in respect of exceptional restructuring charges of £1.5 million (2009: £1.1 million).

For the 18 month period ended 30 November 2010 profit before tax was £1.2 million (12 months ended 31 May 2009: £0.5 million) and basic earnings per share were 5.5p (12 months ended 31 May 2009: 1.7p).

Dividend

The Board is recommending a final dividend of 4.5p (2009: 4.5p) payable on 9 May 2011 to shareholders on the register on 18 March 2011. If approved by shareholders, this would bring the total dividend for the final 12 months of the period to 7.0p (2009: 7.0p).

Business Review

Quadnetics' 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 integration software. This technology is developed for our specific target customer sectors, and provides fundamental differentiation from mainstream suppliers in the wider electronic security market.

Our business is organised in four divisions.

Integration & Managed Services

Quadnetics' 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, 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 other Quadnetics divisions as well as from third parties.

Revenue £32.0 million (2009: £38.0 million)

Gross Margin 24.0% (2009: 24.2%)

Operating Profit** £1.3 million (2009: £2.3 million)

Operating Margin 4.2% (2009: 5.9%)

In the 12 months to 30 November 2010, revenue declined by 16% to £32 million. This was primarily due to the continuing planned transition of the managed services activities towards fee-for-service and away from the direct sale of third party systems and components and, to a lesser extent, to the exit of the division from activities outside the UK.

The IMS division suffered considerable disruption during the period from the Group restructuring, involving the consolidation of operational and overhead functions between sites, and consequent significant staff redundancies. The benefits of the restructuring should become more apparent during 2011.

Important contract wins in the period included the first phase of security upgrades for a major new UK bank customer, using Synectics' Simplicity hybrid digital video recorder, as well as orders for an increasing number of UK prisons and Young Offenders' Institutions under the Home Office framework agreement won by Quadrant Security Group last financial year.

The IMS division has made a number of new senior management appointments, and we believe is now better positioned to bid for and win larger-scale contracts. It continues to work more closely with other Quadnetics divisions to exploit operating and marketing synergies from increased focus on our core target markets. The IMS division remains an important outlet for Synectics' products and systems.

The current financial year has begun positively for this division, in line with plan. However, the full benefit of the significant changes implemented last year will take time to come through, and we do not expect IMS to report meaningful margin improvement or growth overall until the 2011/12 financial year.

Synectics Network Systems

The SNS Division provides specialist video-based electronic surveillance systems and technology globally to end customers with large scale high security requirements, particularly for critical infrastructure protection. It is co-located in our Sheffield facility with the Synectics Technology Centre, which provides R&D, products and systems expertise to each of the other divisions.

Revenue £12.7 million (2009: £10.7 million)

Gross Margin 45.5% (2009: 47.5%)

Operating Profit** £1.9 million (2009: £1.5 million)

Operating Margin 15.3% (2009: 14.4%)

Synectics Network Systems' revenue for the year rose by 18% to £12.7 million, on which the division increased its operating margin to just over 15%. The primary source of growth was the North American gaming market, which had been significantly affected by the recession but recovered well during 2010.

The re-organisation of Quadnetics' activities in the Middle East under this division, and increased resource dedicated to the region, held back the division's profits in the period. This is an important market for Quadnetics, and the increased investment is expected to bear fruit in the current financial year.

The Group's research and development capabilities, many of them from within Synectics Networks, were consolidated during the year into a separate organisation unit, allowing SNS to concentrate on efficient delivery of systems and products, and on servicing customer needs.

Synectics continues to win projects and deliver systems for protecting important high security assets around the world, including the London Borough of Lambeth, Durban City (World Cup), the Stratosphere Las Vegas Casino,

the Atlantis Hotel Dubai and a major UK bank. Further growth is expected in the current financial year.

Synectics Mobile Systems

Synectics Mobile Systems provides specialist ruggedised surveillance systems and products for transport and defence customers.

Revenue £11.9 million (2009: £12.1 million)

Gross Margin 35.0% (2009: 27.6%)

Operating Profit** £1.2 million (2009: £0.1 million)

Operating Margin 10.1% (2009: 1.1%)

Revenue in the 12 month period was slightly down at £11.9 million (2009: £12.1 million) but operating profit was substantially ahead at £1.2 million (2009: £0.1 million). Both the lower sales and increased profit were principally due to restructuring of the defence business, which was profitable in the period after two loss-making years.

The UK bus market remained somewhat subdued, as operators delayed orders for replacement new vehicles. We believe this trend is unlikely to continue, since additional running costs for extending the life of older vehicles soon become uneconomic. Similarly, light rail projects in the UK have been subject to extended sales cycles. Synectics Mobile Systems won its first contract for a bus/rail surveillance system in Germany, which is likely to become a large market for mobile CCTV. 

Synectics' defence operations moved into new security-approved premises, with its core manufacturing activities consolidated within the Group's main manufacturing site at Brigg. Shortly after the year end, Synectics acquired Persides, its joint venture partner in developing the Chili radio frequency surveillance suite of products just launched, for a total consideration of £230,000 in cash. Persides brings with it a small and highly capable technical team who should contribute significantly to the growth of this specialist area within the Group.

While the degree of progress which the mobile systems division makes in 2011 will in part be a function of the timing of recovery in the UK new bus market, we nevertheless expect the division to deliver continued improvement in performance for the year.

Synectics Industrial Systems

Synectics Industrial Systems designs, manufactures and supplies surveillance systems for extreme or hazardous environments. Applications include offshore and onshore oil & gas facilities, ships and industrial process control.

Revenue £6.3 million (2009: £6.5 million)

Gross Margin 33.3% (2009: 32.2%)

Operating Profit** £0.7 million (2009: £0.8 million)

Operating Margin 11.9% (2009: 12.1%)

SIS achieved results just slightly down from the record revenues and profits of the previous period. The division continued to make progress on its objective to increase the proportion of Synectics' proprietary technology in its systems sales.

Of particular importance, SIS completed the successful development and launch of its new explosion-protected camera head, which has already won a major order for the Jasmine North Sea oil platform.

Oil & gas and process control markets continue to be strong. We anticipate an excellent year for this division in 2011, in particular as work comes on stream for phase 1 of the Gorgon natural gas project in Australia.

Research and Development

Group expenditure on technology development during the 12-month period totalled £1.4 million

(2009: £1.6 million). Of this, £0.7 million was capitalised, and the remaining £0.7 million expensed to the profit and loss account.

The creation during the year of the Synectics Technology Centre as a separate development unit for the Group as a whole has allowed a more organised and scalable approach to development priorities. Clear benefits to schedule and cost adherence are already being achieved.

Three major new Synectics products were launched during the period:

- COEX 3000, a new, market-leading explosion-rated camera head for use in hazardous environments, such as oil rigs;

- Simplicity, a high-reliability, top-of-the-range hybrid digital video recorder which will become a central component in Synectics' surveillance systems for multi-site applications; and

- Chili, a suite of man-portable radio frequency surveillance systems for mobile defence applications.

During the year Russ Singleton, founder of Synectics and Chief Executive of Quadnetics from 2002 to 2008, left the Board to focus his entrepreneurial flair on a new venture. Quadnetics owes him a debt of gratitude for the critical role he played in building the Company. We miss his unique talents and insight, and wish him every success for the future.

Throughout the recent period of restructuring, Quadnetics' employees have shown time and again their commitment to meeting customer expectations, solving problems and simply getting things done. I would like to record the Board's sincere thanks to all of them.

Strategy and Financial Objectives

In our last interim report, I set out on behalf of the Board a summary of the Group's strategy and medium term operating profitability objectives. I propose now to repeat that summary in a slightly updated version.

Quadnetics' strategy is to invest to grow our technology base and market share in three security and surveillance end markets with complex or highly critical needs: critical infrastructure, mobile surveillance and oil & gas/marine. The specialist requirements of these market niches will enable us increasingly to exploit and expand the differentiation of our systems solutions from competitor product offerings developed for higher volume applications.

These three markets are regional or global in scope and are specifically addressed by our three Synectics divisions: Synectics Network Systems, Synectics Mobile Systems and Synectics Industrial Systems respectively. We believe that each of these divisions has good revenue growth opportunities and is capable of reaching and sustaining operating profit margins in the mid-to-high teens per cent (before R&D and Group central costs).

The Integration and Managed Services division is complementary to the three Synectics divisions though different in its scope and business characteristics. Its core skills are in security systems integration, project management and engineering services. It is people-intensive and operates in a UK national, or sometimes even local, competitive arena. Its primary target market is medium-to-large scale critical infrastructure security projects in the UK and, as such, we believe it can increasingly benefit from, and contribute to, the success of the Synectics divisions' solutions in that market. Given the high bought-in content of sales in this division, we believe a sustainable target operating profit margin is in the range of 6-8% (before Group central costs).

Each of our divisions has, and will continue to have, profitable sales outside the Group's core target markets. Currently these sales amount in total to around 15-20% of Group revenues, the majority in the Integration and Managed Services division. Our expectation is that the proportion of such ancillary sales within the Group will reduce over time as growth efforts and investment are directed towards the higher margin target market niches.

Progress towards the Group's objectives should flow in part from continuing the closer integration and focus of our overall business, including management and administration, technology development and co-operation between divisions. A lot of good work has been done in the past 18 months in creating the current divisions and moving them collectively much more to a "single company" culture. In addition to providing a more efficient and scalable organisation, this platform will also allow the Group to manage bolt-on acquisitions effectively, as and when we find the right opportunities in line with our strategy.

We believe that Quadnetics can and will progress towards delivering consolidated underlying operating profit margins (after all R&D and central costs) in the range of 8-10%, within a reasonable time frame and given normal economic conditions. Of course, any action to improve the operating profit margin will only be taken if it is also consistent with Group's overriding financial objectives, the most important of which is sustainable growth in earnings per share.

Outlook

As the Group continues to emerge from the recent organisational changes, progress against our objectives in the current year is broadly on track.

The Group's order book at 30 November 2010 was £27.3 million, up from £22.1 million a year earlier. The delivery timetable for these orders suggests a more even spread of work across this year, in contrast to last year when profits were heavily skewed to the first half. On the basis of the improved year end order book, and an encouraging pipeline of potential new business, the Board expects Quadnetics to make further good progress in the current financial year.

David Coghlan

Chairman

4 March 2011

**before research & development and Group central costs

Consolidated Income Statement

For the 18 months ended 30 November 2010

Consolidated Statement of Comprehensive Income

For the 18 months ended 30 November 2010

Consolidated Statement of Financial Position30 November 2010

Consolidated Statement of Changes in EquityFor the 18 months ended 30 November 2010

Consolidated Cash Flow Statement

For the 18 months ended 30 November 2010

Notes to the Consolidated Financial Statements

For the 18 months ended 30 November 2010

1 Basis of preparation

The information contained within this Preliminary 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 Proforma information

Following the change in the Company's year-end date to November the results in this statement cover the extended accounting period for the 18 months to 30 November 2010 compared with the last reported results for the 12 months ended 31 May 2009.

Therefore in order to provide meaningful comparability of data, unaudited proforma results for the 12 months to 30 November 2010, with comparatives showing results for the 12 months to 30 November 2009, are presented on both the Income Statement, the Cash Flow Statement and the segmental analysis in note 3 below.

3 Segmental analysis

Revenue and underlying profit from operations (operating profit before exceptional costs and share-based payments charge), derives from the Group's four operating segments as follows:

4 Exceptional reorganisation costs

The above costs relate to the reorganisation of operations in Watford, Guildford and Tewkesbury in the UK and certain operations in the Middle East. This has included the cost of integrating these operations into other Group sites. The nature of the costs incurred principally relate to redundancy and related costs, property, systems and certain one off contract costs.

5 Share based payment charge

A new Group Executive Shared Ownership Plan (the 'ExSOP') was introduced in July 2009 and awards were made under this scheme in July and September 2009 and the previous Long Term Incentive Plan has been discontinued. Accordingly a share-based payment charge of £249,000 arises in respect of the ExSOP during the 18-month period.

6 Finance income

7 Finance costs

8 Taxation

Reconciliation of tax charge for the period

The corporation tax assessed for the period differs from the standard rate of corporation tax in the UK of 28% (12 months ended 31 May 2009: 28%). 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 £1.4 million (31 May 2009: £1.5 million). A deferred tax asset in respect of these losses, amounting to £0.2 million (31 May 2009: £0.2 million), has been recognised at the period end as the Group believes that there will be future taxable profits against which the losses will be relieved.

In addition to the above, the Group has capital losses of approximately £19 million (31 May 2009: £19 million) available for offset against future taxable gains. No deferred tax asset in respect of these losses, which would amount to £5 million, has been recognised in these financial statements as there is insufficient certainty that the asset will be recovered against future capital gains. 

9 Earnings per Ordinary share

Basic and diluted earnings per Ordinary share

The calculation of basic earnings per Ordinary share is based on the profit after taxation for the period of £860,000 (12 months to 31 May 2009: £259,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the period (12 months to 31 May 2009: 15,528,934).

The calculation of diluted earnings per Ordinary share is based on the profit after taxation for the period of £860,000 (12 months to 31 May 2009: £259,000) and on 15,612,180 shares, being the weighted average number of shares that would be in issue after conversion of all the dilutive potential Ordinary shares into Ordinary shares (12 months to 31 May 2009: 15,528,934).

Underlying basic and diluted earnings per Ordinary share

The calculation of underlying basic earnings per Ordinary share, which the Directors consider gives a useful additional indication of the underlying performance of the Group, is based on the profit after taxation for the period, but before deducting exceptional reorganisation costs and share-based payments charge (net of tax) of £2,059,000 (12 months to 31 May 2009: £1,272,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the period (12 months to 31 May 2009: 15,528,934).

The calculation of underlying diluted earnings per Ordinary share is based on the profit after taxation for the period, but before deducting exceptional reorganisation costs and share-based payments charge (net of tax) of £2,059,000 (12 months to 31 May 2009: £1,272,000) and on 15,612,180 shares being the weighted average number of shares that would be in issue after conversion of all the dilutive potential Ordinary shares into Ordinary shares (12 months to 31 May 2009: 15,528,934).

10 Dividends

The Directors recommend the payment of a final dividend of 4.5p per share totalling £791,000, and subject to approval, this is expected to be paid on 9 May 2011 to shareholders on the register at 18 March 2011. This will give a total dividend for the 18 month period of 9.5p (12 months to 31 May 2009: 7.0p).

11 Provisions

In May 2005, the Group acquired the trade and net assets of AlphaPoint LLC, a specialist provider of digital surveillance technology in North America, for a total consideration of up to $3.3 million, made up of $1.3 million in cash and Ordinary shares of the Company, plus a further amount in cash, capped at $2 million, which was dependent on the future profits of the business. Following the conclusion of the earn-out period surplus provisions for deferred consideration of £0.7 million have been credited back to goodwill.

12 Full financial statements

The auditors have issued an unqualified opinion on the full financial statements which will be distributed to shareholders and delivered to the Registrar of Companies in due course. The financial information for 2009 does not comprise statutory financial statements. Statutory financial statements for 2009, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies. Further copies of these preliminary results will be available at the Company's registered office: Quadnetics Group plc, Haydon House, 5 Alcester Road, Studley, Warwickshire, B80 7AN or on the Company website at www.quadnetics.com.

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