Interim Results

Synectics plc

("Synectics" or the "Group")

Interim results for the six months ended 31 May 2013

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology, and networked security systems, reports its unaudited interim results for the six months ended 31 May 2013.

Highlights

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

"During the first half of 2013 we achieved a series of strategically significant goals which augur well for continued profitable growth of the Group. 

"In January we won a contract to protect the world's largest Gas-to-Liquids plant in Qatar; in February we won a major contract with Avon and Somerset Police and acquired full control of Indanet in Germany; in March we won a very large system contract for a major client in Singapore and our first CCTV control room outsourcing project with Luton Borough Council; in May we secured a three year maintenance contract with Stagecoach and in June we acquired Coex Services Asia Pte Ltd in Singapore. 

"We have also further integrated the Group's operations into two focused divisions - 'Systems' and 'Integration & Managed Services' with the aim of creating a more effective and scalable business. 

"The pace of positive change is increasing and this is reflected in the improved sales, profit and margins. I expect this momentum to continue in the second half."

* that is profit before tax, non-underlying items (restructuring costs, acquisition expenses, amortisation of intangibles and share-based payments charge) and IAS 39 charge on deferred and contingent consideration. Underlying earnings per ordinary share are based on profit after tax but before non-underlying items.

**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.

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Chairman's Statement

Introduction

Synectics' performance in the first half of 2013 continued the positive momentum of recent years. Revenue and profit from the Group's proprietary security technology activities saw substantial growth compared with the same period last year, particularly in the specialist global oil & gas and gaming security systems businesses serving customers in the Asia Pacific and Middle East regions.

These results also show a further improvement in profit margins. It is pleasing to report that the Group's consolidated underlying net operating margin has now moved into the medium term target range of 8-10% set by the Board three years ago.

As announced in Synectics' last Annual Report, the next stage of our objective of creating a more effective and scalable organisation has involved the integration of the Group's businesses into two divisions: Systems, incorporating our proprietary electronic security and network activities, and Integration & Managed Services, incorporating our security systems services activities. The Group's results are now presented to reflect this segmentation.

Results

Group revenue for the first half was £40.7 million, 6% up on the corresponding period of 2012. Consolidated underlying profit* grew by 26% to £3.6 million (2012: £2.8 million). Profit before tax increased 92% to £3.3 million (2012: £1.7 million), and fully-diluted underlying earnings per share* improved by 28% to 16.3 pence (2012: 12.7 pence).

Compared with recent periods, Synectics experienced a clearer split in performance between relatively subdued markets in Europe and the United States, and more buoyant conditions in the Far East and Middle East.

The Group's total firm order book at 31 May 2013 was £35 million, compared with £41 million a year earlier and £37 million at 30 November 2012.

Cash generation in this half year continued to be strong. Free cash flow (that is, cash generated from operations after capital expenditure but before non-underlying items) was £2.7 million (2012: £3.3 million). Net cash as at 31 May 2013 was £4.7 million (2012: £2.7 million).

Dividend

The Board has approved an increased interim dividend of 3.0 pence per share (2012: 2.5 pence), payable on 20 September 2013 to shareholders on the register as at 23 August 2013.

Operating Review

Systems

Synectics' Systems division provides proprietary video-based electronic surveillance systems and technology globally to end customers with large scale high security requirements, particularly for specialist markets within the oil & gas, gaming, critical infrastructure protection, transport and financial services industries.

*Underlying profit represents profit before tax, non-underlying items (restructuring costs, acquisition expenses, amortisation of intangibles and share-based payments charge) and IAS 39 charge on deferred and contingent consideration. Underlying earnings per ordinary share are based on profit after tax but before non-underlying items.

Systems had a strong first half, benefitting from continued growth in its oil & gas activities globally, and from a major project for a new customer in the Far East. Gross margins were lower than in the previous year, in part reflecting a larger average contract size, but the operational gearing effect from increased volumes led to a higher operating margin.

Consolidation of the Systems' businesses is a major task that has been underway since the beginning of the financial year. The main focus of this integration is to concentrate Synectics' UK technical development and operations functions, each in a single facility with a single organisation structure, while at the same time maintaining the independent specialist expertise of separate sales and support functions specific to our target customer sectors. The most significant action required to implement this objective will be to create a new unified Synectics operations centre from the merger of our two existing facilities in Sheffield and Brigg.

Following the substantial increase of Synectics' Systems' business in the Far East, the Group has been examining options to strengthen its sales and support capabilities in that region. On 21 June 2013 the Group acquired the outstanding 80% of the issued share capital of Coex Services Asia Pte Ltd, an organisation well known to Synectics for many years and which has acted in part as a reseller for certain elements of our oil & gas and marine security systems across Southeast Asia. The acquisition will greatly strengthen the local management and operational resources available to customers from our Singapore hub.

On 23 July 2013, we were able to announce the award to Synectics of major contracts, initially worth over £2.5 million, for security systems for a large Liquid Natural Gas project in Australia. This contract award further illustrates Synectics' leading global position in this specialist sector.

Overall, the Systems division is on track to deliver further good results.

Integration & Managed Services ('IMS')

Synectics' 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, mobile transportation 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 the Synectic Systems division as well as from third parties.

For some time now our integration and services businesses have been successfully pursuing an agreed objective of increasing gross margins and the quality of their earnings through targeting more specialised customer sectors and developing expertise and service offerings which are better differentiated from competitors. The decline in revenue and increase in gross margin from the division in the first half of this year in part reflect that process.

Much work has been done to strengthen the capabilities and focus of the IMS division, including substantial investment in new senior management and IT systems. The fruits of this investment are now beginning to emerge, with important contract wins in the first half of this year. Significantly, these include facilities management of local government CCTV control centres, initially for Luton Borough Council. We believe this business area offers great potential, in particular for adjacent authorities to save costs through sharing a professionally run outsourced facility.

Now that the elements of a higher margin, higher capability organisation are in place, the order book and pipeline of new business for the IMS division suggest that the second half of this year will produce growth in both revenue and profits.

Research and Development

Group expenditure on technology development during the six month period totalled £1.2 million (2012: £0.9 million) of which £0.3 million (2012: £0.3 million) was capitalised and the remainder expensed to profit and loss. £0.2 million of previously capitalised development was amortised in the period. These figures are included within the results of the Systems division.

One of the benefits of the recent reorganisation is that the Synectics Technology Centre has become an integral part of the new Systems division. This single management structure is capable of dealing more quickly and effectively with the day to day competition for scarce technical resources between customer projects and our longer term development roadmap. It remains a core element of Synectics' strategy to nurture our capabilities both as a technology innovator and developer, as well as a systems integrator with increasingly specialised expertise.

Outlook

Current indications are that Synectics will produce a further strong performance in the second half. There are risks to be overcome, notably to deliver on time one of the largest and most technically challenging systems in the Group's history and, more generally, to convert to firm orders the planned proportion of our new business pipeline in market environments where the timing of orders remains difficult to predict.

As noted above, the Group's key measure of profitability has now reached the target we set. That achievement is the result of good work from many people over several years, and is a significant milestone on which we believe the Group can now build further.

David Coghlan

24 July 2013

Condensed Consolidated Income Statement

For the 6 months ended 31 May 2013

Condensed Consolidated Statement of Comprehensive Income

For the 6 months ended 31 May 2013

Condensed Consolidated Statement of Financial Position

31 May 2013

Condensed Consolidated Statement of Changes in Equity

For the 6 months ended 31 May 2013

Condensed Consolidated Cash Flow Statement

For the 6 months ended 31 May 2013

Notes

1. General information

These consolidated interim financial statements were approved by the Board of Directors on 24 July 2013.

2. Basis of preparation

These consolidated interim financial statements of the Group are for the six months ended 31 May 2013.

The comparative figures for the financial year ended 30 November 2012 are not the Group's statutory accounts for that financial year. Those statutory accounts have been reported on by the Group's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 of the Companies Act 2006.

The condensed consolidated interim financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 30 November 2012.

The condensed consolidated interim financial statements for the six months to 31 May 2013 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.The condensed consolidated interim financial statements for the six months to 31 May 2013 have been prepared on the basis of the accounting policies expected to be adopted for the year ending 30 November 2013. These are anticipated to be consistent with those set out in the Group's latest annual financial statements for the year ended 30 November 2012. These accounting policies are drawn up in accordance with adopted International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and adopted by the EU.

Significant accounting policies

AIM-listed companies are not required to comply with IAS 34 'Interim Financial Reporting' and accordingly the Company has taken advantage of this exemption.

3. Segmental analysis

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Chief Executive as he is primarily responsible for the allocation of resources to the segments and the assessment of the performance of each of the segments. Segment information is presented in respect of the Group's strategic operating segments. As discussed in the Chairman's Statement, the business has been reorganised into two divisions, Systems and Integration & Managed Services. The operating segment information below reflects the new reporting format which was implemented on 1 December 2012.

The CODM uses underlying operating profit, before Central costs (segment result), as reviewed at Board meetings, as the key measure of the segments' results as it reflects the segments' underlying trading performance for the period under evaluation. Underlying operating profit is a consistent measure within the Group.

* Re-presented as explained above

* Re-presented as explained above

Underlying profit from operations is reconciled to total profit from operations as follows:

4. Non-underlying items

The acquisition costs arising during the period relate to costs incurred for the acquisition of the remaining share capital of Indanet (note 5).

In 2012 restructuring costs arose from the re-organisation and subsequent disposal of our UK defence activities, and included £0.4 million in respect of accelerated amortisation to fully write off goodwill and capitalised development costs relating to this activity.

5. 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.

In February 2013, it was agreed to vary the original acquisition terms so that the entire outstanding share capital of Indanet was purchased for a total consideration of €1.64 million in cash. Therefore total consideration paid for the entire share capital of Indanet was €3.64 million and no further deferred or contingent consideration payments are required to be made. €1.7 million was drawn on the Group's bank term loan facility in the period to fund this final payment (note 11). The acquisition has resulted in the following accounting adjustments to restate the liability in the balance sheet:

6. Tax charge

The tax charge for the period is based on the estimated rate of corporation tax that is likely to be effective for the year to 30 November 2013.

7. Dividends

An interim dividend of 3p per share, totalling approximately £500,000 will be paid on 20 September 2013 to shareholders on the register as at 23 August 2013.

8. Earnings per share

Earnings per ordinary share are as follows:

9. Other financial assets

Available-for-sale financial assets, which are included in the Statement of Financial Position at fair value, consist of equity investments in the unlisted shares of Coex Services Asia Pte Ltd ('CSA') and O&G Vision Pte Ltd ('O&G'). The fair value at 31 May 2013 has been estimated using assumptions regarding the assets and expected future earnings of the companies. The Group completed the acquisition of CSA in June 2013 (note 12) thus enabling a reliable estimate of the fair value of the equity investments to be made.

Changes in the fair value of the available-for-sale financial assets are recorded directly in equity as an unrealised gain or loss. The accumulated fair value adjustments recognised in equity will be reclassified to the income statement as part of the acquisition accounting.

10. Provisions

The Group has a number of properties where the Directors believe that dilapidation costs may be incurred or where the property is sublet and the Directors believe that they may not be able to fully recover future rental cost, and therefore appropriate cost provisions have been made. It is anticipated that the property cost provision carried forward at 31 May 2013 will be utilised within six years.

11. Loans and borrowings

Both loans related to the acquisition of Indanet. During the period €1.7 million was drawn against the bank term loan facility and the other loan was repaid as part of the acquisition of the remaining issued share capital of Indanet (note 5).

12. Events after the balance sheet date

On 21 June 2013 the Group completed the acquisition of the balance of the issued share capital of CSA for a maximum consideration of up to £2.1 million.

CSA is a private Singaporean company supplying surveillance systems in the Far East, primarily to the oil & gas sector.

Initial consideration of £1.8 million has been paid, comprising £1.3 million in cash, £0.4 million in ordinary shares in Synectics plc and the transfer of the Group's 20% interest in O&G valued at £0.1 million. Further consideration of up to £0.3 million will be payable in cash dependent on the profit performance of CSA in the two years following acquisition.

Due to the proximity of the acquisition to the balance sheet date, the purchase price allocation has not yet been completed.

13. Copies of this statement will be sent to shareholders and will be available on the Group's website (www.synecticsplc.com) and from Synectics plc, Haydon House, 5 Alcester Road, Studley, Warwickshire B80 7AN.

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