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: +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 / Email: isabelp@buchanan.uk.com
Ben Romney
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 Restated
�'000 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 2 3,514 5,084
payments
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 3,730 5,314
payments
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
2008 2007
Notes �'000 �'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 2007
�'000 �'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 4,138 5,675
capital
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 5,596 8,940
period
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 2007
�'000 �'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 2007
�' �'
000 000
Bank interest receivable 218 233
Expected return on pension scheme assets 241 227
459 460
4 Finance costs
2008 2007
�' �'
000 000
Interest payable on bank overdrafts 2 3
Interest on pension scheme liabilities 241 227
243 230
5 Taxation
Tax charge
2008 2007
�'000 �'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 2007
�'000 �'000
Profit on ordinary activities before tax 4,394 4,410
Tax on profit on ordinary activities before tax at 1,304 1,323
standard rate of 29.7% (2007: 30%)
Effects of:
Expenses not deductible for tax purposes and timing 231 241
differences
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 2007
Penc Penc
e e
per per
shar shar
e e
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 Weighted Earnings per
tax average Ordinary
�'000 number of share
Ordinary p per share
shares
Year ended 31 May 2008
Basic earnings per Ordinary share 3,357 15,528,934 21.6
Dilutive potential Ordinary shares - 6,603 -
arising from share options
Diluted earnings per Ordinary 3,357 15,535,5377 21.6
share
Year ended 31 May 2007
Basic earnings per Ordinary share 3,273 15,494,999 21.1
Dilutive potential Ordinary shares - 8,697 -
arising from share options
Diluted earnings per Ordinary 3,273 15,503,696 21.1
share
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 Weighted Earnings per
after average Ordinary
tax number of share
�'000 Ordinary p per share
shares
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 249 - 1.6
tax charge for the year
Underlying basic earnings per Ordinary 2,942 15,528,934 18.9
share
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 (165) - (1.0)
tax charge for the year
Underlying basic earnings per Ordinary 4,012 15,494,999 25.8
share
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 Weighted Earnings per
after average Ordinary
tax number of share
�'000 Ordinary p per share
shares
Year ended 31 May 2008
Underlying earnings per Ordinary share 2,942 15,528,934 18.9
Dilutive potential Ordinary shares arising - 6,603 -
from share options
Underlying diluted earnings per Ordinary 2,942 15,535,537 18.9
share
Year ended 31 May 2007
Underlying earnings per Ordinary share 4,012 15,494,999 25.9
Dilutive potential Ordinary shares arising - 8,697 -
from share options
Underlying diluted earnings per Ordinary 4,012 15,503,696 25.9
share
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 2007
�'000 �'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 Merger Currency Total
share premiu reserv Other Translat Retained �'000
capital m e reserve -ion earnings
�'000 accoun �'000 s reserve �'000
t �'000 �'000
�'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 - - - - - 25 25
share-based payments
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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