Quadnetics Group Announcements

RNS Number : 5899C Quadnetics Group PLC 03 September 2008  
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For Immediate Release 
3 September 2008
 
Quadnetics Group plc

Preliminary Results for the year ended 31 May 2008
 
Quadnetics Group plc, a leader in the design, integration and control of advanced CCTV and networked video systems, reports its preliminary results for the year ended 31 May 2008.

 
Highlights
 

Revenue £79.2 million (2007: £66.1 million), with sales in North America increasing 27%
Underlying profit* before tax £ 3.7 million (2007: £5.3 million) 
Profit before tax £4.4 million (2007: £4.4 million)
Underlying EPS* 18.9p (2007: 25.9p) 
Basic EPS 21.6p (2007: 21.1p) 
Recurring revenue £14.1 million (2007: £11.5 million)
Proposed final dividend 4.5p per share making 7.0p for the full year
Significant increase in product development activities, with successful launch of new product range
Net Cash at 31 May 2008 £7.9 million (2007: £5.6 million)
* Underlying profit represents profit before tax, goodwill reduction and share-based payments (credit)/charge. Underlying earnings per Ordinary share is based on profit after tax but before goodwill reduction and share-based payments (credit)/charge.
Commenting on the results, Russ Singleton, Chief Executive, said:  
"This was a year of considerable progress in a number of areas, in particular in strengthening our portfolio of specialist product and service solutions for electronic surveillance in difficult or complex environments. With accelerated investment in our new technology platform, we continue to build a sustainable and growing position in this attractive market."
For further information, please contact:
Quadnetics Group plc
Tel: +44 (0) 1527 850080
Russ Singleton, Chief Executive

Email: russ.singleton@quadnetics.com
www.quadnetics.com

Brewin Dolphin Investment Banking 
Tel: +44 (0) 113 241 0130
Neil Baldwin

Media enquiries: 
Buchanan Communications Limited
Tel: +44 (0) 20 7466 5000
Isabel Podda / Tim Anderson /
Ben Romney
Email: isabelp@buchanan.uk.com
Chairman's Statement

Introduction

2007/8 was in many ways a challenging year for Quadnetics, as the Company made the transition to a new platform of core proprietary technology and products. This transition brought with it a necessary move to more structured development and operating disciplines to enable the Group to generate and manage continuing future growth.

In the event, Quadnetics produced underlying profits for the year that were somewhat down on the record results of the previous year, though still relatively solid against a testing market background. 

Results

In the year to 31 May 2008, Quadnetics recorded underlying profit (that is, profit before tax, goodwill reduction and share-based payment costs) of £3.7 million (2007: £5.3 million) on turnover that increased to £79.2 million (2007: £66.1 million). The primary reasons for the decrease in consolidated operating margin are set out in the business review below. Profit before tax was £4.4 million (2007: £4.4 million), reflecting the benefit of the write-back of previously expensed share-based payment costs.

Sales in the nature of recurring revenue, primarily maintenance and managed services, are a key measure targeted by the Group. These increased by 23% to £14.1 million (2007: £11.5 million).

Underlying earnings per share were 18.9p (2007: 25.9p).

The Group's balance sheet remained ungeared, with net cash at 31 May 2008 of £7.9 million (2007: £5.6 million). Cash inflow during the year was aided exceptionally by the £2.1 million sale and leaseback of Synectics' new building in Sheffield. Free cash flow, that is cash inflow from operations less capital expenditure, was solid at £2.5 million (2007: £(0.1) million), despite significantly increased development expenditure of £1.1 million on Synectics' new products.

Dividend

The Board is proposing a final dividend of 4.5p (2007: 4.0p) payable on 5 December 2008 to shareholders on the register on 7 November 2008. If approved by shareholders, this would bring the total dividend for the full year to 7.0p (2007: 6.0p). This total dividend cost of £1.1m is covered 3.1 times by earnings, and the proposed increase reflects the Board's confidence in the prospects of the Group.

Business Review

Quadrant Security
The Group's security services division, providing integrated security systems, security management support and mobile surveillance services

Turnover                                    £58 million
Underlying Operating Profit    £3.5 million

Quadrant Security Group ("QSG") achieved an overall increase of 24% in turnover for the year to £57.9 million (2007: £46.6 million). Of this growth, around half came from an increase in very low margin pass-through turnover within its security management activities, so a fairer measure of actual achieved growth would show an increase of 12%. Although operating profits from the division declined from £4.2 million to £3.5 million, this reduction was entirely due to the previously flagged expected decline in profits from the run-off of old contracts within the security management activities. The overall result for the division was in line with the Board's expectations for the year.
As reported at the interim stage, the UK systems integration activities suffered in the first half from delays in award of central government contracts in the high security area. This effect was largely reversed in the second half, with resulting much improved turnover and profit levels compared with both the first half and the second half of the prior year.
Of particular note was the good progress made in our on-vehicle CCTV activities, which enjoyed a strong year in almost all aspects of its operations. In July we announced we had signed a new £1.5m contract for the supply, installation and maintenance of CCTV on Stagecoach's new buses. The 12-month deal will ensure all new buses ordered by Stagecoach in 2008-09 are fitted with state-of-the-art digital CCTV systems from Look CCTV, a subsidiary of Quadnetics.

 
Synectics
The Group's security technology division, providing security network products and software, hazardous area systems and defence surveillance technology

Turnover                                    £23 million
Underlying Operating Profit    £1.6 million

Synectics' turnover for the year grew by 11% to £23.1 million (2007: £20.8 million), the most positive component of which was continued growth of network products and software in the North American gaming surveillance market where turnover grew by 27%. In the core security network products and software area overall, average gross margins increased notably, though overhead cost increases associated with the new products restricted the relative bottom line growth.

As previously announced in May, problems with two large contracts in the hazardous area and defence surveillance activities, and related knock-on operational effects, had a significant impact on the Synectics division expected profit. Although turnover from those areas rose, their combined contribution to operating profits was around £1.1 million lower than in the prior year.
 
Management changes have been made and process improvements implemented in both areas. The two contracts, which nevertheless have been profitable, are now close to finalisation and are not anticipated to have any further negative impacts. The defence surveillance sector generally, though, continues to be adversely affected by customer budget constraints and contract award delays. 

Towards the end of the year, Synectics launched its important new range of H.264 digital video products, benefiting from investment in research and development costs capitalised in the year. This level of capitalised investment will reduce in the current year. Deliveries of Synectics' mobile video recorder will begin shortly, following recent completion of successful trials, and they have already received an enthusiastic response from existing and potential new customers. The manufacture of these products will be largely sub-contracted. We are currently finalising manufacturing agreements to ensure that we successfully achieve the benefits of higher volume manufacture as sales growth feeds through.

People

Once again I would like to thank Quadnetics' employees on behalf of the Board for their continuing efforts and commitment to the success of the Group. I am regularly and pleasantly surprised by the extraordinary lengths many of our people go to in order better to serve our customers, and therefore build the value of our businesses.

Outlook

In my statement last year, I listed certain market trends the Company perceived as important to the future shape of the electronic security and surveillance systems market in which we operate. These were that:
-    an understanding of information technology and networking will continue to create             
     opportunities and ultimately be vital for success at any level;
-    margins available on most hardware sales will be heavily eroded over time;
-    sales and margins from software will grow and are likely to be sustainable;
-    security systems integrators will continue to consolidate, becoming bigger, more diverse
     and more global;
-    information technology companies will seek and gain an increasing share of the security
      market;
-    digital video surveillance is still sufficiently complex and demanding that it is unlikely to
      become simply a sub-set of the IT industry, at least not for many years;
-    certain specialist customer applications requirements are likely to diverge increasingly
     from mainstream high volume market offerings.

Our belief at the time was that Quadnetics was well positioned to address these trends, in particular because of its critical mass, extensive experience in the technologies of digital video, leading market positions in certain customer sectors, record of successful acquisitions, and its heritage of combining both technology development and customer applications integration.

That belief has not changed and, if anything, these trends now look to be accelerating.

The general economic background has deteriorated and Quadnetics clearly is not immune from these macro-economic effects. We are fortunate, however, in that many of the end users of our products and services are in sectors of the economy that are, currently at least, less exposed to the downturn. Although our financial services and defence customer sectors are showing signs of weakness, our markets overall, judged by the visible pipeline of future business we have won or expect to win imminently, look to be holding up well. The Company anticipates that position continuing, though with a lesser degree of confidence than we would ideally like. Our firm order book at 31 May 2008 was £22.5 million (31 May 2007: £26.9 million) but as at 31 July 2008 had risen to £31.1 million (31 July 2007: £26.7 million).

Despite a longer and more expensive development cycle than originally anticipated, we are increasingly confident of the prospects for Synectics' new products. In the current year Synectics expects to make substantial sales of these products; nevertheless, because of amortisation of capitalised development costs and lower margins on initial batches of low volume manufacture units, as well as launch marketing costs in the UK and other markets, their first net contribution to Group profits is likely to be in 2009/10. As a result of this continued investment, and uncertainties in the immediate future for the UK and global economies generally, Quadnetics' businesses are being managed in the expectation of fairly modest financial progress this year.

Overall, the Board remains confident in the quality and growth potential of the Group's business, and is reassured by the resilience Quadnetics enjoys from its profitability, diversified revenue base and ungeared balance sheet.
    

David Coghlan
Chairman

3 September 2008

  

Consolidated Income Statement
For the year ended 31 May 2008
Notes
2008
£'000
Restated
2007
£'000
Revenue
2
79,174
66,065
Cost of sales

(57,849)
(44,234)
Gross profit

21,325
21,831
Net operating expenses

(17,147)
(17,651)
Profit from operations

Excluding goodwill reduction and share-based payments
2
3,514
5,084
Goodwill reduction in respect of tax losses
9
(141)
(309)
Share-based payments credit/(charge)
10
805
(595)
Total profit from operations

4,178
4,180
Finance income
3
459
460
Finance costs
4
(243)
(230)
Profit before tax

Excluding goodwill reduction and share based payments

3,730
5,314
Goodwill reduction in respect of tax losses
9
(141)
(309)
Share-based payments credit/(charge)
10
805
(595)
Total profit before tax

4,394
4,410
Income tax expense
5
(1,037)
(1,137)
Profit for the period

3,357
3,273
Basic and diluted earnings per Ordinary share
7
21.6p
21.1p
Consolidated Statement of Recognised Income and Expense
For the year ended 31 May 2008

2008
 
2007
£'000
£'000
Profit for the period

3,357
3,273
Exchange differences on translation of foreign operations

-
(4)
Total recognised income and expense for the period

3,357
3,269
  
Consolidated Balance Sheet
As at 31 May 2008

Notes
2008
£'000  
2007
£'000  
Non-current assets

Property, plant and equipment

1,951
1,570
Intangible assets
8
17,938
16,874
Deferred tax assets

502
869
20,391
19,313
Current assets

Property held for resale

-
2,056
Inventories

4,249
5,074
Trade and other receivables

29,502
20,479
Cash and cash equivalents

7,940
5,596
41,691
33,205
Total assets

62,082
52,518
Current liabilities

Trade and other payables

(27,777)
(19,646)
Tax liabilities

(372)
(1,071)
Current provisions

(380)
(216)
(28,529)
(20,933)
Non-current liabilities

Non-current provisions

(691)
(1,096)
(691)
(1,096)
Total liabilities

(29,220)
(22,029)
Net assets

32,862
30,489
Equity attributable to equity holders of parent company

Called up share capital
11
3,382
3,382
Share premium account
11
14,851
14,851
Merger reserve
11
9,565
9,565
Other reserves
11
(2,486)
(2,486)
Currency translation reserve
11
(13)
(13)
Retained earnings
11
7,563
5,190
Total equity
11
32,862
30,489
  
Consolidated Cash Flow Statement
For the year ended 31 May 2008
Notes
2008
 £'000  
2007
£'000  
Cash flows from operating activities

Profit for the period

3,357
3,273
Income tax expense

1,037
1,137
Finance income

(459)
(460)
Finance costs

243
230
Depreciation and amortisation charge

611
571
Goodwill reduction in respect of tax losses

141
309
Loss on disposal of non-current assets

13
20
Share-based payments (credit)/charge

(805)
595
Operating cash flows before movement in working capital

4,138
5,675
Decrease/(increase) in inventories

825
(793)
Increase in receivables

(9,057)
(1,357)
Increase/(decrease) in payables and provisions

8,813
(2,913)
Cash generated from operations

4,719
612
Interest received

249
233
Tax paid

(1,368)
(712)
Net cash from operating activities

3,600
133
Cash flows from investing activities

Purchase of property, plant and equipment

(892)
(628)
Sale of property, plant and equipment

52
472
Capitalised development costs
8
(1,132)
(420)
Purchased software

(236)
(157)
Sale/(purchase) of property held for resale

2,060
(2,056)
Deferred consideration on acquisition made in 2005

(99)
-
Net cash used in investing activities

(247)
(2,789)
Cash flows from financing activities

Issue of shares

-
157
Payment of finance lease liabilities

-
(20)
Dividends paid
6
(1,009)
(825)
Net cash used in financing activities

(1,009)
(688)
Net increase/(decrease) in cash and cash equivalents

2,344
(3,344)
Cash and cash equivalents at the beginning of the period

5,596
8,940
Cash and cash equivalents at the end of the period

7,940
5,596

Notes to the Consolidated Financial Statements
For the year ended 31 May 2008
1    Basis of preparation
These financial statements have been prepared for the first time in accordance with IFRS as adopted by the European Union ("adopted IFRS"), and with those parts of the Companies Act 1985 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
Revenue and underlying profit from operations (operating profit before goodwill reduction and share-based payments (credit)/charge), derives from the Group's two operating segments as follows:

2008
£'000
2007
£'000
Revenue
Services
57,920
46,579
Products and software
23,140
20,765
Intra-group sales
(1,886)
(1,279)

79,174
66,065

Underlying profit from operations
Services
3,545
4,200
Products and software
1,584
2,456
Central costs
(1,615)
(1,572)

3,514
5,084

3    Finance income

2008
£'000
2007
£'000

Bank interest receivable 
218
233
Expected return on pension scheme assets
241
227

459
460

4    Finance costs

2008
£'000
2007
£'000

Interest payable on bank overdrafts
2
3
Interest on pension scheme liabilities
241
227

243
230

 
5    Taxation
Tax charge

2008
£'000

2007
£'000
Current taxation:

UK tax
525

1,023
Overseas tax
423

235
Adjustments in respect of prior years
(278)

-
Total current tax
670

1,258
Deferred taxation:

Origination and reversal of timing differences
532

(11)
Adjustments in respect of prior years
(165)

(110)
Total deferred tax
367

(121)

1,037

1,137
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 29.7% (2007: 30%). The differences are explained below:

2008
£'000

2007
£'000
Profit on ordinary activities before tax
4,394

4,410
Tax on profit on ordinary activities before tax at standard rate of 29.7% (2007: 30%)
1,304

1,323
Effects of:

Expenses not deductible for tax purposes and timing differences
231

241
Other timing differences
(72)

(227)
US profits taxed at higher rate
82

110
Goodwill reduction not qualifying for tax relief
42

93
Utilisation of tax losses
(146)

(293)
Rate change on deferred tax balance
39

-
Adjustment in respect of prior years
(443)

(110)
Total tax charge for the year
1,037

1,137

The Group has tax losses available to be carried forward for offset against the future taxable profits of certain group companies amounting to approximately £1.3 million (2007: £1.9 million). A deferred tax asset in respect of these losses, amounting to £0.4 million (2007: £0.4 million), has been recognised at the year end as the Group believes that there will be future taxable profits against which the losses will be relieved.

6    Dividends
The Directors recommend the payment of a final dividend of 4.5p per share totalling £699,000, and subject to approval this is expected to be paid on 5 December 2008 to shareholders on the register at 7 November 2008. This will give a total dividend for the year of 7.0p (2007: 6.0p).
7    Earnings per Ordinary share

2008
Pence
per
share
2007
Pence
per
share

Basic and diluted earnings per Ordinary share
21.6
21.1
Underlying basic and diluted earnings per Ordinary share
18.9
25.9

Basic and diluted earnings per Ordinary share
The calculation of basic earnings per Ordinary share is based on the profit after taxation for the year of £3,357,000 (2007: £3,273,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2007: 15,494,999).
The calculation of diluted earnings per Ordinary share is based on the profit after taxation for the year of £3,357,000 (2007: £3,273,000) and on 15,535,537 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 (2007: 15,503,696).
Profit after
tax
£'000
Weighted
average
number of
Ordinary
shares
Earnings per
Ordinary
share
p per share
Year ended 31 May 2008

Basic earnings per Ordinary share
3,357
15,528,934
21.6
Dilutive potential Ordinary shares arising from share options
-
6,603
-
Diluted earnings per Ordinary share
3,357
15,535,5377
21.6
Year ended 31 May 2007

Basic earnings per Ordinary share
3,273
15,494,999
21.1
Dilutive potential Ordinary shares arising from share options
-
8,697
-
Diluted earnings per Ordinary share
3,273
15,503,696
21.1
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 year, but before deducting the goodwill reduction and share-based payments charge (net of tax) of £2,942,000 (2007: £4,012,000) and on 15,528,934 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2007: 15,494,999).

 
Profit
after
tax
£'000
Weighted
average
number of
Ordinary
shares
Earnings per
Ordinary
share
p per share
Year ended 31 May 2008

Basic earnings per Ordinary share
3,357
15,528,934
21.6
Goodwill reduction
141
-
0.9
Share-based payments credit
(805)
-
(5.2)
Impact of share-based payments credit on tax charge for the year
249
-
1.6
Underlying basic earnings per Ordinary share
2,942
15,528,934
18.9
Year ended 31 May 2007

Basic earnings per Ordinary share
3,273
15,494,999
21.1
Goodwill reduction
309
-
2.0
Share-based payments charge
595
-
3.8
Impact of share-based payments charge on tax charge for the year
(165)
-
(1.0)
Underlying basic earnings per Ordinary share
4,012
15,494,999
25.8

The calculation of underlying diluted earnings per Ordinary share is based on the profit after taxation for the year, but before deducting the goodwill reduction and share-based payments credit/charge (net of tax) of £2,942,000 (2007: £4,012,000) and on 15,535,537shares being the weighted average number of shares that would be in issue after conversion of all the dilutive potential Ordinary shares into Ordinary shares (2007: 15,503,696).
Profit
after
tax
£'000
Weighted
average
number of
Ordinary
shares
Earnings per
Ordinary
share
p per share
Year ended 31 May 2008

Underlying earnings per Ordinary share
2,942
15,528,934
18.9
Dilutive potential Ordinary shares arising from share options
-
6,603
-
Underlying diluted earnings per Ordinary share
2,942
15,535,537
18.9

Year ended 31 May 2007

Underlying earnings per Ordinary share
4,012
15,494,999
25.9
Dilutive potential Ordinary shares arising from share options
-
8,697
-
Underlying diluted earnings per Ordinary share
4,012
15,503,696
25.9
8        Intangible Assets
Intangible assets include development costs of £1,537,000, which includes additions of £1,132,000 during the year and is net of amortisation charges of £15,000.
 
      9    Goodwill Reduction in respect of tax losses
The Goodwill reduction in respect of tax losses arises as a result of the recognition of tax losses that were not originally included in the acquisition balance sheet of Protec plc in November 2005.
 
    10    Share based payment (credit)/charge
The fair value of services received in return for share options granted or awards made under the Group's share schemes are measured by reference to the fair value of the share options granted or share scheme shares awarded.
The total (credit)/charge recognised for the year arising from share-based payments is as follows:
 

2008  
£'000  
2007 
£'000  

Equity-settled share-based payments
25
53
Cash-settled share-based payments
(830)
542

(805)
595

Total carrying value of liabilities
-
830

11    Reconciliation of movements in total equity

Called up
share
capital
£'000
Share
premium
account
£'000
Merger
reserve
£'000

Other
reserves
£'000 
Currency
Translat-ion
reserve
£'000

Retained
earnings
£'000  
Total
£'000
At 1 June 2007
3,382
14,851
9,565
(2,486)
(13)
5,190
30,489
Profit after tax for the year
-
-
-
-
-
3,357
3,357
Dividends paid (note 6)
-
-
-
-
-
(1,009)
(1,009)
Credit in relation to share-based payments
-
-
-
-
-
25
25
At 31 May 2008
3,382
14,851
9,565
(2,486)
(13)
7,563
32,862

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 2007 does not comprise statutory financial statements.  Statutory financial statements for 2007, 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. 

- Ends -

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