Synectics Regulatory News (SNX)

Synectics plc

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

Preliminary Results for the year ended 30 November 2012

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, reports its preliminary results for the year ended 30 November 2012.

Financial highlights

Operational highlights

*Underlying profit represents profit before tax, restructuring costs, amortisation of acquired intangibles, share-based payment charges, impairment of goodwill and adjustments to deferred and contingent consideration. Underlying earnings per ordinary share are based on profit after tax but before restructuring costs, amortisation of acquired intangibles, share-based payment charges, 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 interest costs.

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

"The momentum we created in the first half has continued throughout the year enabling us to deliver a significantly improved performance compared with last year. It is pleasing to report that we have achieved a further significant improvement in underlying profit as well as generating £3.4 million of cash. This result is testament to the hard work and ingenuity of our very capable employees to whom I express my personal gratitude.

"In spite of the continuing global economic uncertainties, we have grown our sales of large integrated electronic security systems around the world, capitalising on our increasing brand recognition and investment in proprietary software and hardware technology.

"Our current order book and pipeline give us confidence of achieving a strong performance in 2013."

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Chairman's Statement

Introduction

Synectics produced a strong performance in 2012. Virtually all areas of the Group recorded results at or ahead of prior year levels and also showed good progress towards the achievement of longer term objectives.

During the year we continued to see increased demand for our proprietary large scale surveillance systems, particularly for oil & gas applications in the Far East and Middle East and for critical infrastructure in the UK. Internally, the continuing process of operational efficiency improvements and cost control across the Group led to margins and profits increasing at well beyond the rate of revenue growth.

Results

For the year to 30 November 2012, Synectics' consolidated revenue grew by 12% to £77.0 million (2011: £69.1 million). The Group made an underlying profit before tax* of £5.7 million, an increase of 61% compared with the prior year. The underlying operating margin was 7.4% (2011: 5.1%). Underlying diluted earnings per share increased by 56% to 25.2p (2011: 16.2p).

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

Group profit before tax was £4.7 million (2011: £2.5 million), after exceptional and non-underlying items totalling £0.9 million (2011: £1.0 million), comprising mainly costs on disposal of the Group's defence activities, and a net gain of £0.3 million from adjustments to the deferred consideration estimate and carrying value of the Group's German subsidiary, Indanet AG.

Synectics generated positive net cash flow of £3.4 million during the year, bringing net cash at 30 November 2012, after deducting all borrowings, to £4.6 million (2011: £1.3 million).

Dividend

In view of the higher profits for the year and our strong balance sheet, the Board has decided to recommend an increase in the final dividend from 4.5p to 5.0p, payable on 8 May 2013 to shareholders on the register on 15 March 2013. If approved by shareholders, this would bring the total dividend for the year to 7.5p (2011: 7.0p).

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 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.

Integration & Managed Services

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, 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 Synectics divisions as well as from third parties.

Revenue £30.0 million (2011: £32.6 million)

Gross Margin 24.6% (2011: 22.2%)

Operating Profit** £1.9 million (2011: £1.5 million)

Operating Margin** 6.2% (2011: 4.5%)

In the year to 30 November 2012, the IMS division continued to concentrate on higher margin business opportunities in its areas of core competence: critical infrastructure, financial services and large scale multi-site clients. While the tighter focus resulted in somewhat lower revenues, it enabled both increased gross margins and reduced overhead costs, producing an overall 27% increase in operating profits to £1.9 million, compared with £1.5 million in 2011. The achieved operating margin of 6.2% has brought the division's profitability into the range of our stated medium term goal of 6-8%.

Against a background of continued tight public sector spending in the UK, this was a creditable performance.

Important new business won in the period included a six year contract to provide service and maintenance at Magnox nuclear reactor sites across the UK and a new data centre for a large UK corporate customer.

Subsequent to the year end the IMS division won a contract to provide an integrated security solution for a major new custody suite complex for Avon and Somerset Police. In addition the division has also secured an innovative outsourcing contract from a UK local authority to take over the equipping, operation and maintenance of its wide area surveillance control room. This multi-year contract incorporates expertise from across different businesses of the Synectics group in technology supply, systems integration and maintenance, and facilities management. This contract is the culmination of a number of years' work, and highlights the benefits in service quality and cost reduction Synectics can bring to local authorities. It follows on from the work done in 2011 for Chester West and Chester unitary authority, amalgamating three town centre control rooms into one and a 2012 Southampton control room consolidation project. The end goal of the strategy is to maximise efficiencies and lower costs significantly by combining the surveillance networks of neighbouring local authorities into a single larger scale outsourced control room as well as adding other innovative revenue generating monitoring services.

Synectics Network Systems

Synectics Network Systems (SNS) provides specialist video-based electronic surveillance systems and technology globally to end customers with large scale high security requirements, particularly for critical infrastructure protection and gaming. 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 £17.8 million (2011: £16.2 million)

Gross Margin 50.5% (2011: 47.8%)

Operating Profit** £4.8 million (2011: £3.8 million)

Operating Margin** 26.8% (2011: 23.2%)

SNS produced another excellent performance for the year, achieving record results in revenues, profits and margins.

The division benefitted from continued strength in the US gaming market, particularly in the first half, and from solid growth within most of its core customer sectors in the UK and the Middle East.

SNS is beginning to open up substantial opportunities for further growth in the Far East. Following significant business and sales activity generated in the region last year, we have recently opened a new operating hub for Synectics in Singapore. We are close to finalising an important contract for this new Singapore subsidiary and expect to report on further developments shortly.

Synectics Transport Systems

Synectics Transport Systems (STS) provides specialist surveillance systems and products for integrated transport hubs, and rail, bus and haulage operators, primarily in the UK and continental Europe.

Revenue £14.7 million (2011: £13.5 million)

Gross Margin 31.1% (2011: 29.7%)

Operating Profit** £0.2 million (2011: £0.3 million)

Operating Margin** 1.2% (2011: 2.1%)

After reporting a loss of £0.2 million in the first half of 2012, STS's results recovered to a profit of £0.4 million in the second half.

The first half loss was principally due to deteriorating sales in our UK Defence business. In light of the difficult outlook for UK defence spending, the Board concluded that we could not justify further support of those activities, and the business was sold to its management for a relatively nominal sum in September 2012. Included in the underlying operating results for STS in 2011/12 is a first half loss of £0.2 million.

Indanet, our German transportation systems business, lost £0.5 million in the first half, a result that was in line with our investment plan at the time of acquisition in 2011. The business broke even in the second half. Indanet is an important element in Synectics' strategy, both because of its leading position in surveillance control systems for integrated transport hubs and as an operating base for expansion of Synectics' systems into the German and other continental European markets. The technical and operational teams from the two companies are working well together, and we continue to be optimistic about the prospects for growth in this area.

As announced on 19 February 2013, Synectics has renegotiated the terms of the Indanet acquisition to enable us to take full control of the business at an earlier date than originally envisaged. The rate of progress of Indanet in the second half of 2011/12 was slower than originally anticipated, particularly in the speed of introducing Synectics' products into the German market. We have now acquired 100% of the shares of Indanet for a total consideration of €3.6 million in cash, with no further earn out payments to be made. This has resulted in a net credit of £4.3 million to the income statement. A new managing director has been appointed in place of one of the former shareholders, who has decided to leave the company. Among other benefits, the ownership of 100% of Indanet will enable us to simplify the operating structure and to increase our investment in accelerating the sale of Synectics' branded systems into Germany and other markets.

Consequent on the slower rate of progress at Indanet the Board has assessed the carrying value of goodwill in the business and recognised an impairment of £4.0 million in these financial statements. The net impact of the two adjustments in respect of the gain on deferred and contingent consideration and the goodwill impairment is a gain of £0.3 million as referred to above.

In the UK, Synectics' on-vehicle surveillance system activities for local and export markets performed well in 2012. With a focus on operational improvements and efficiencies, margins increased towards target levels on sales that grew steadily in line with budget. Several long term contracts have been either won or renewed, including with Abellio and National Express. The Synectics T-Series surveillance and recording systems continued to gain market acceptance for their robustness, features and reliability, and further product releases are due in 2013.

The Board is anticipating improved results from this division in the current year.

Synectics Industrial Systems

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

Revenue £15.9 million (2011: £7.9 million)

Gross Margin 35.5% (2011: 38.1%)

Operating Profit** £3.2 million (2011: £1.3 million)

Operating Margin** 20.4% (2011: 15.8%)

SIS had an excellent year, achieving a doubling of revenue and an increase in operating profit of 158%. This performance resulted from continued success in expanding the scope and capability of the systems Synectics offers to its specialist oil, gas and marine customer base worldwide. The new COEX3000, 2000 and 1000 families of cameras have been well received by customers and further product developments are in the pipeline.

Important contracts won in the period included the TAKREER (Abu Dhabi Oil Refining Company) Inter Refinery Pipeline (IRP-II) and the Abu Dhabi National Oil Company's (ADNOC) Shah Gas projects, valued at more than £6 million in total.

Such a growth rate inevitably placed strain on the operations of the business, including a move to additional premises. It is greatly to the credit of the team at SIS that they managed the rapid expansion in so capable and successful a manner.

To facilitate the next stage of growth, SIS has recently opened a sales office in Houston and expects to receive US certification for its EX-rated camera housings this year. Globally, the division's markets remain healthy and we confidently anticipate further good results in 2013.

Research & Development

Group expenditure on technology development in 2012 totalled £2.0 million (2011: £1.8 million). Of this, £0.6 million was capitalised, and the remaining £1.4 million expensed to the profit and loss account. £0.4 million of previously capitalised development was amortised during the year.

The Synectics Technology Centre operates 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. The inherent tension, and often conflict, between those two objectives requires skilled management. Extraordinary efforts from the Synectics Technology Centre team underpinned the Group's success in 2012.

Synectics' employee base grew from 456 to 493 over the course of our last financial year. An important means of maintaining communication across our expanding Group is our annual formal employee survey process. The high response rate and quality of constructive written feedback received demonstrates a consistently high level of commitment and thoughtfulness.

Over many years Synectics has developed a culture founded on openness, integrity and on striving never to let a customer down. 2012 provided numerous examples of that culture in action, and of our people going well beyond what might normally be expected. It is ultimately this commitment that builds long term value for customers and the business. On behalf of the Board and shareholders, I once again record our sincere thanks.

Strategy and Financial Objectives

In summary, Synectics' strategy 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 needs of the specialist customer sectors we target - oil & gas, gaming, transport, banking, critical infrastructure and public space.

There are, and likely will always be, portions of our revenues that fall outside those core target sectors; the Board encourages managers to be pragmatic, entrepreneurial business people, not strategic purists. Nevertheless, we are absolutely clear that our investments and the increasing majority of our total activities will lie in those areas.

In 2010 the Board 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 2012 Synectics raised its performance on this measure to 7.4%, up from 5.1% in the previous year. The actions taken by management towards achieving that goal have continued to improve the quality of Synectics' earnings, and the Board is pleased with the pace of progress.

Corporate Governance

In the Company's annual report to be published shortly, I will report on the conclusions of a review that the Board has been undertaking of Synectics' corporate governance, and address in some detail our position on specific governance issues affecting the Company that we judge to be of most importance and potential interest to shareholders.

One of the positive changes resulting from the review is that we will from now on be submitting our annual remuneration report to shareholders for approval, beginning with our next Annual General Meeting.

Organisation

Four years ago, we initiated a process of consolidating Synectics' operations into fewer, larger units. The objective is to increase the scalability of the overall business. The latest stage in that process was implemented in December 2012, when all of Synectics' proprietary technology-led activities were brought together into a single division (Synectics Systems), and the services-led activities into another (Integration & Managed Services). As from 2013, our segmental reporting will follow that new divisional structure.

Outlook

The Group's consolidated order book at 30 November 2012 stood at £36.9 million, compared with £35.9 million the previous year. Recent new contract awards and a substantial pipeline of expected orders underpin our confidence in the continuing momentum of the business. On this basis, the Board expects that Synectics will deliver another good result in the current financial year.

David Coghlan

Chairman

27 February 2013

*profit before tax, exceptional costs, amortisation of acquired intangibles, share-based payment charges, impairment of goodwill and adjustments to deferred and contingent consideration.

**before research & development, non-underlying items and Group central costs.

Consolidated Income Statement

For the year ended 30 November 2012

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2012

Consolidated Statement of Financial Position

30 November 2012

Consolidated Statement of Changes in Equity

For the year ended 30 November 2012

Consolidated Cash Flow Statement

For the year ended 30 November 2012

Notes

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 Segmental analysis

3 Non-underlying items

The restructuring costs incurred during the year ended 30 November 2012 arise from the re-organisation and subsequent disposal of our UK defence activities, and includes £0.4 million in respect of accelerated amortisation to fully write off goodwill and capitalised development costs relating to this activity.

In 2011 restructuring costs related to reorganisation of the Transport division, and acquisition costs related to the acquisition of Persides Technology Limited in December 2010 and Indanet AG in July 2011.

4 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.

Subsequent to the year end, 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 at the date of this announcement Synectic Systems GmbH owns 100% of the shares of Indanet which it has acquired for a total consideration of €3.64 million, with no further earn out payments to be made.

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 following accounting adjustments have been made:

As a result of renegotiating the Indanet acquisition agreement, no further deferred or contingent consideration payments are required to be made other than the €1.64 million (sterling equivalent £1.41 million) noted above. This has resulted in a net credit to the profit and loss account of £4,252,000 to restate this liability in the balance sheet as follows.

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 24.67% (2011: 26.67%). 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 £0.6 million (2011: £1.0 million). No deferred tax asset (2011: £0.1 million) 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 (2011: £19 million) available for offset against future taxable gains. No deferred tax asset in respect of these losses, which would amount to £4.4 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 5.0p per share (2011: 4.5p per share), totalling £858,000. Subject to approval, this is expected to be paid on 8 May 2013 to shareholders registered on 15 March 2013. Together with the interim dividend of 2.5p per share, this brings the total dividend for the year to 7.5p per share (2011: 7.0p 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 2012 which will be distributed to shareholders and delivered to the Registrar of Companies in due course. The financial information for 2012 and 2011 does not comprise statutory financial statements. Statutory financial statements for the year ended 30 November 2011, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies. Further copies of these preliminary results, and the full financial statements when published, will be available at the Company's registered office: Synectics plc, Haydon House, 5 Alcester Road, Studley, Warwickshire, B80 7AN 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.