Preliminary Results

RNS Number : 5899C

Quadnetics Group PLC

03 September 2008

 



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: [phone]
Russ Singleton, Chief Executive
Email: [e-mail]	www.quadnetics.com

Brewin Dolphin Investment Banking	Tel: [phone]
Neil Baldwin

Media enquiries: 

Buchanan Communications Limited	Tel: [phone]
Isabel Podda / Tim Anderson / Ben Romney	Email: [e-mail]

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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