Preliminary Results

Quadnetics Group PLC 05 September 2007 For Immediate Release 5 September 2007 Quadnetics Group plc Preliminary Results for the year ended 31 May 2007 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 2007. Highlights Turnover Â£66.1m (2006: Â£49.6m) - up 33% Sales in North America increase 111% Underlying profit* before tax Â£5.3m (2006: Â£3.6m) - up 47% Profit before tax Â£3.8m (2006: Â£1.3m) - up 199% Underlying* EPS 26.1p (2006: 24.2p) - up 8% Basic EPS 17.4p (2006: 8.6p) - up 102% Recurring revenue Â£12.8m (2006: Â£11.0m) - up 16% Proposed final dividend 4.0p per share making 6.0p for the full year - up 20% Significant increase in product development activities Overall, a year of good growth and sound financial results Strong order intake in current year *Underlying profit represents profit before tax, exceptional items, goodwill amortisation, and share based payment costs Commenting on the results, Russ Singleton, Chief Executive, said: 'Quadnetics has been consistently beating competitors by demonstrating the value and strength of its products and services to produce a 33% increase in turnover and a 47% increase in underlying profit before tax. We are now making real progress in the important electronic surveillance markets in North American, the Middle East and the Far East.' 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 Securities Tel: +44 (0) 113 241 0130 Neil Baldwin Media enquiries: Buchanan Communications Limited Tel: +44 (0) 20 7466 5000 Isabel Podda Email: isabelp@buchanan.uk.com Chairman's Statement Overview I am pleased to report that last year Quadnetics achieved another year of good growth and sound financial results, most notably realising substantial growth and profitability from its North American activities, and successfully completing the integration of the businesses acquired in 2005/6. We have also made significant progress in defining more rigorously the road ahead for Quadnetics. Results In the year ended 31 May 2007, Quadnetics achieved a 47% increase in underlying profit (that is, profit before tax, exceptional items, goodwill amortisation and share-based payment costs) to Â£5.3 million (2005/6: Â£3.6 million), on turnover up 33% to Â£66.1 million (2005/6: Â£49.6 million). These results include the first full year of the businesses acquired the previous year, however a true like for like comparison is not possible following the integration of the acquired activities into the existing Group. Group consolidated operating margins for the year increased to 7.7%, up from 7.0% in 2005/6. Underlying earnings per share increased by 8% to 26.1p (2005/6: 24.2p). The Group's underlying corporation tax rate for 2006/7 is 24%, compared with 8% in the prior year; therefore, a more valid comparison of performance would be on a notional like-for-like full tax basis, where underlying earnings per share were up by 31% to 24.1p (2005/6: 18.4p). Consolidated net cash at 31 May 2007 was Â£5.6 million, compared with Â£8.9 million at the previous year end. Approximately Â£2.1 million of the net cash outflow resulted from the purchase of a new building to accommodate the growth and consolidation of Synectics' activities in Sheffield. We expect that most of the cash impact of the purchase will be reversed in the current year, once a sale and leaseback of the building is agreed and completed. There was also a significant increase in working capital during the year, part of which came from the previously anticipated resolution of creditor provisions within the businesses acquired in 2005/6. Dividend The Board is proposing a final dividend of 4.0p (2005/6: 3.5p), payable on 7 December 2007 to shareholders registered on 9 November 2007, making a total of 6.0p for the full year (2005/6: 5.0p). Business Review Quadnetics is currently organised into two primary business areas: Quadrant Security Group ('QSG'), which designs, installs, maintains and manages integrated electronic security systems for customers primarily in the UK and Middle East; and Synectics, which designs, manufactures and supports software and hardware products for sale worldwide both through security systems integrators and direct to end users in a limited number of specialist market sectors. QSG grew turnover in the year by 29% to Â£46.6 million, on which it recorded underlying operating profits up by 31% to Â£4.2 million. Growth was mainly driven by inclusion of a full year of contribution and integration benefits from the former Protec businesses acquired in November 2005. This acquisition was a major step for QSG, and the integration of the two sets of activities has proceeded well on plan, much to the credit of the management teams and employees from both sides of what is now a fully combined business. Within the various customer and geographical sectors, contribution from the managed security services business area was exceptionally strong, benefiting from higher than anticipated profits achieved in managing the run-off of large, low margin historical contracts as the activity is transitioned to a higher margin business model where it provides more comprehensive outsourced security management to its multi-site retail clients. We believe the potential in this new area is substantial, particularly in its ability to generate contracted recurring revenues, but it will require investment in systems and personnel over the next couple of years. Elsewhere, contributions were below plan in our Middle East activities, as certain major projects experienced customer delays prior to contract award, and in on-bus CCTV. Both these areas regained their order intake momentum towards the end of the year, and have carried on the improvement into the current period. Synectics achieved turnover up by 42% in the year to Â£20.8 million, and underlying operating profit up by 68% to Â£2.5 million. The most significant contribution was organic growth from our US casino surveillance systems activities, which delivered turnover more than double that of the previous year and good profit margins. Given the risks inherent in any ambitious growth plan for a UK company in North America, this was an excellent result and gives confidence for the development of our wider activities in that very large market. Product development activities were stepped up significantly during the year, in particular focused on transition to the next generation of digital video compression technology and on development of Synectics' ruggedised digital video recorder for the on-vehicle transport market, where QSG has a leading UK market share as a systems integrator. This new suite of products will be launched in autumn 2007. Group Direction and Objectives The electronic security and surveillance market is large, growing and in the process of fundamental structural change. Advances in technology over the past 3-5 years have allowed digital recording, transmission, storage and networking of real-time video images to become viable and economic in mainstream surveillance applications for the first time. This shift to underlying digital technology will continue for some while yet to create substantial opportunities and threats within the established competitive order of security equipment and systems suppliers. Current manifestations include the raft of new market entrants offering the latest and best digital recorder, camera, analytic software or 'end-to-end IP video solution'. A small number of these new entrants may succeed; most will fail. Quadnetics' approach is based on certain assumptions about where these market trends are leading, including 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. We believe Quadnetics is 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. Our primary objective is to build a sizeable, broadly-based company, with sustainable long term growth prospects, providing integrated security and surveillance applications and managed services to specialist customer sectors. To achieve this objective, we aim to: - focus on a small number of customer sectors whose requirements will be sufficiently and sustainably different from the mainstream, and in which we can achieve a significant market share; - maintain our core of increasingly software-based proprietary technology, adapted to the specialist needs of our target customer sectors; - expand the scope of applications and innovative services provided to these customers to maximise recurring revenues and market share; - seek further bolt-on acquisitions to add market share, specialist capabilities and/or geographical position in our chosen sectors; The primary characteristics of the customer sectors we target are that they have either a very high cost-of-failure in their security systems, or highly demanding environmental or usage conditions, in both cases limiting the degree of competition from non-specialist suppliers. Since 2001/2 when Quadnetics moved to AIM and focused exclusively on the electronic security market, total revenues have grown at a compound rate of 38% per year, of which 15% per year has been organic growth and the remainder from acquisitions. Over the last four years, underlying profits before tax have grown at 38% per year and, more tellingly, underlying earnings per share on a like-for-like tax basis have grown at 18% per year. This is a sustained performance that the Board feels justifies its confidence in the Company's ability to continue to deliver value to shareholders from the direction that has been laid out. People I would like once again to express the Board's very genuine thanks to the Group's employees for a year of considerable effort and achievement. As alluded to above, the task of integrating two similar sized activities within QSG was always going to be difficult and at times painful, and it has therefore been especially gratifying to see how effectively and professionally it has been carried out by all concerned. Across the Group we have seen evidence from our people of flexibility, common sense and dedication to the interests of our business and customers that have underpinned the continued strengthening of Quadnetics' position in its market. During the year we have had one change on the Board, resulting from the retirement of Bob Westcott. As I noted at the time, Bob was the founder and inspiration behind the SDA business that formed the core of Protec Group plc that we acquired in 2005. Our Board much appreciated his insightful contributions during his time with us. Outlook The pace of order intake activity in most of our business sectors increased towards the latter stages of last financial year and this has continued into the first few months of this year, in particular with the award of significant contracts for integrated systems in the UK and Middle East that had been anticipated for some time, and additional casinos in North America. Prior to the award of these contracts, the Group's total outstanding firm order book at 31 May 2007 was Â£24 million, a small decrease on the corresponding point last year. Of this figure, Â£12.8 million represented orders in the nature of recurring revenue, an increase of 16% on last year and a positive indication of progress in this important area. During the year just started, we expect to see increased investment in new product development and a reduced contribution from historical elements of our managed services activities, together more than offset by continued revenue growth and margin improvements elsewhere. Overall, the Board is looking forward to another year of good progress for the Group. David Coghlan Chairman 5 September 2007 Consolidated Profit & Loss Account For the year ended 31 May 2007 Notes 2007 Restated Total 2006 Â£'000 Total Â£'000 Turnover 3 66,065 49,642 Cost of sales (44,234) (34,495) ------- ------- Gross profit 21,831 15,147 Net operating expenses (18,242) (13,715) ------- ------- ------- ------- Operating profit before goodwill amortisation, exceptional items and share-based payments charge 3 5,095 3,467 Goodwill amortisation (911) (740) Exceptional items - restructuring costs - (965) Share-based payments charge (595) (330) ------- ------- Total operating profit 3,589 1,432 Exceptional item in respect of a subsidiary disposed of in a previous year - (300) Net interest receivable 230 147 ------- ------- ------- ------- Profit before tax, goodwill amortisation, exceptional items and share-based payments charge 5,325 3,614 Goodwill amortisation (911) (740) Exceptional items - (1,265) Share-based payments charge (595) (330) ------- ------- Profit on ordinary activities before taxation 3,819 1,279 Tax charge on ordinary activities 4 (1,117) (92) ------- ------- Profit for the financial year 2,702 1,187 ------- ------- Basic and diluted earnings per Ordinary share 6 17.4p 8.6p ------- ------- Underlying basic and diluted earnings per Ordinary share 6 26.1p 24.2p ------- ------- All activities are continuing. Consolidated Balance Sheet At 31 May 2007 Notes 2007 Restated Â£'000 2006 Â£'000 Fixed assets Intangible assets 7 16,344 16,925 Tangible assets 1,780 2,049 -------- ------- 18,124 18,974 -------- ------- Current assets Property held for resale 8 2,056 - Stocks 5,074 4,281 Debtors 21,508 19,990 Cash at bank and in hand 5,596 8,940 -------- ------- 34,234 33,211 Creditors: amounts falling due within one year (20,587) (22,046) -------- ------- Net current assets 13,647 11,165 -------- ------- Total assets less current liabilities 31,771 30,139 Provisions for liabilities and charges (1,312) (1,763) -------- ------- Net assets 30,459 28,376 -------- ------- Capital and reserves Called up share capital 3,382 3,263 Share premium account 14,851 13,634 Merger reserve 9,565 9,565 Other reserves (2,486) (1,307) Profit and loss account 5,147 3,221 -------- ------- Equity shareholders' funds 9 30,459 28,376 -------- ------- Consolidated Cash Flow Statement For the year ended 31 May 2007 2007 2006 Â£'000 Â£'000 Net cash inflow from operating activities 612 3,246 Returns on investments and servicing of finance 233 132 Taxation (712) (299) Net capital expenditure and financial investment (2,789) (238) Acquisitions - 3,220 Equity dividends paid (825) (573) -------- -------- Cash (outflow)/inflow before use of liquid resources and financing (3,481) 5,488 Financing 137 (110) -------- -------- (Decrease)/increase in cash (3,344) 5,378 -------- -------- Reconciliation of Net Cash Flow to Movements in Net Funds For the year ended 31 May 2007 2007 2006 Â£'000 Â£'000 (Decrease)/increase in cash in the year (3,344) 5,378 Decrease in debt and lease financing 20 395 -------- -------- Change in net funds resulting from cash flows (3,324) 5,773 Acquisitions - (53) -------- -------- Movement in net funds in the year (3,324) 5,720 Opening net funds 8,920 3,200 -------- -------- Closing net funds 5,596 8,920 -------- -------- Statement of Total Recognised Gains and Losses For the year ended 31 May 2007 2007 Restated 2006 Â£'000 Â£'000 Profit for the financial year 2,702 1,187 ------- ------- Other recognised gains and losses relating to the year - (4) (9) currency translation adjustment ------- ------- Total recognised gains and losses relating to the year 2,698 1,178 ------- Prior year adjustment in respect of FRS 20 (note 2) (244) ------- Total recognised gains and losses recognised since last annual report 2,454 ------- Reconciliation of Movements in Shareholders' Funds For the year ended 31 May 2007 2007 2006 Â£'000 Â£'000 Profit for the financial year 2,702 1,187 Dividends (825) (573) ------- ------- 1,877 614 Other recognised gains and losses relating to the year - (4) (9) currency translation adjustment Credit in relation to share-based payments 53 42 Issue of shares 157 9,477 Share buy-back - (77) ------- ------- Net movement in shareholders' funds 2,083 10,047 ------- ------- Opening shareholders' funds as originally stated in year ended 31 May 2006 28,578 18,329 Prior year adjustment in respect of FRS 20 (note 2) (202) - ------- ------- Restated opening shareholders' funds 28,376 18,329 ------- ------- Closing shareholders' funds 30,459 28,376 ------- ------- Notes to the Accounts For the year ended 31 May 2007 1. These preliminary results for the year have not been audited by the Group's auditors and do not constitute statutory accounts. The comparative figures for 2006 have been abridged from the statutory accounts for the year ended 31 May 2006, as amended by the prior year adjustment as set out in note 2. The auditors' opinion on these accounts was unqualified and did not contain any statements under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 May 2006 have been filed with the Registrar of Companies, and those for the year ended 31 May 2007 will be delivered following the Company's Annual General Meeting. The Company's auditors have reported on the full accounts for the year ended 31 May 2007 and have issued an unqualified report. 2. The Group issues equity-settled share-based payments and cash-settled share-based payments to certain employees, in the form of share options and awards under the Quadnetics Group Employee Share Scheme, which fall within the scope of FRS20 which is applicable for years commencing on or after 1 January 2006 Therefore the Group has applied FRS 20 for the first time and as this constitutes a change in accounting policy, it has been treated as a prior period adjustment and comparative figures have been restated to reflect the new policy. The effects of the change in policy are set out below: 2007 2006 Â£'000 Â£'000 Profit and loss account Net operating expenses (595) (330) Tax charge on ordinary activities - Deferred taxation 165 86 -------- -------- Loss for the financial year (430) (244) -------- -------- Balance sheet 137 120 Debtors: Amounts falling due in less than one year - deferred taxation 165 86 Creditors: Amounts falling due in less than one year - other creditors (542) (288) -------- -------- Net assets (377) (202) -------- -------- Profit and loss account reserve Credit in relation to share-based payments 53 42 -------- -------- 3. Turnover and underlying profit (operating profit before goodwill amortisation, exceptional items and share-based payments charges) derives from the Group's two business segments as follows: 2007 2006 Â£'000 Â£'000 Turnover Services 46,579 36,241 Products and software 20,765 14,595 Intra-group sales (1,279) (1,194) -------- -------- 66,065 49,642 -------- -------- Underlying profit Services 4,200 3,198 Products and software 2,468 1,466 Central costs (1,573) (1,197) -------- -------- 5,095 3,467 -------- -------- 4. The Group has tax losses available to be carried forward for offset against the future taxable profits of certain group companies amounting to approximately Â£1.9 million (2006: Â£3.1 million). A deferred tax asset in respect of part of these losses, amounting to Â£0.4 million (2006: Â£0.5 million), has been recognised in the year as the Group believes that there will be future taxable profits against which the losses will be relieved. 5. The Directors recommend a final dividend of 4.0p per share amounting to Â£621,000 and, subject to approval, this is expected to be paid on 7 December 2007 to shareholders on the register at 9 November 2007. This will give a total dividend for the year of 6.0p (2006: 5.0p). 6. Earnings per Ordinary share are as follows: 2007 Restated Pence 2006 per Pence share per share Basic and diluted earnings per Ordinary share 17.4 8.6 -------- -------- Underlying basic and diluted earnings per Ordinary share 26.1 24.2 -------- -------- The calculation of basic earnings per Ordinary share is based on the profit after taxation for the year of Â£2,702,000 (2006: Â£1,187,000) and on 15,494,999 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2006: 13,781,617). The calculation of diluted earnings per Ordinary share is based on the profit after taxation for the year of Â£2,702,000 (2006: Â£1,187,000) and on 15,503,696 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 (2006: 13,789,163). Profit after Weighted Earnings per tax average Ordinary Â£'000 number of share Ordinary p per share shares Year ended 31 May 2007 Basic earnings per Ordinary share 2,702 15,494,999 17.4 Dilutive potential Ordinary shares arising from share options - 8,697 - -------- -------- ------- Diluted earnings per Ordinary share 2,702 15,503,696 17.4 -------- -------- ------- Year ended 31 May 2006 Basic earnings per Ordinary share 1,187 13,781,617 8.6 Dilutive potential Ordinary shares arising from share options - 7,546 - -------- -------- ------- Diluted earnings per Ordinary share 1,187 13,789,163 8.6 -------- -------- ------- The calculation of underlying 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 exceptional items (net of tax), amortisation of goodwill and share-based payments charge (net of tax) of Â£4,043,000 (2006: Â£3,338,000) and on 15,494,999 shares, being the weighted average number of shares in issue and ranking for dividend during the year (2006: 13,781,617). Profit after Weighted Earnings per tax average Ordinary Â£'000 number of share Ordinary p per share shares Year ended 31 May 2007 Basic earnings per Ordinary share 2,702 15,494,999 17.4 Exceptional items - - Impact of exceptional items on tax - - charge for the year Goodwill amortisation 911 5.9 Share-based payments charge 595 3.8 Impact of share-based payments charge on tax charge for the year (165) (1.0) ------- -------- -------- Underlying earnings per Ordinary share 4,043 15,494,999 26.1 ------- -------- -------- Year ended 31 May 2006 Basic earnings per Ordinary share 1,187 13,781,617 8.6 Exceptional items 1,265 9.1 Impact of exceptional items on tax charge for the year (98) (0.7) Goodwill amortisation 740 5.4 Share-based payments charge 330 2.4 Impact of share-based payments charge on tax charge for the year (86) (0.6) ------- -------- -------- Underlying earnings per Ordinary share 3,338 13,781,617 24.2 ------- -------- -------- The calculation of underlying diluted earnings per Ordinary share is based on the profit after taxation for the year, but before deducting exceptional items (net of tax), amortisation of goodwill and share-based payments charge (net of tax) of Â£4,043,000 (2006: Â£3,338,000) and on 15,503,696 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 (2006: 13,789,163). Profit after Weighted Earnings per tax average Ordinary Â£'000 number of share Ordinary p per share shares Year ended 31 May 2007 Underlying earnings per Ordinary share 4,043 15,494,999 26.1 Dilutive potential Ordinary shares arising from share options - 8,697 - ------- -------- -------- Underlying diluted earnings per Ordinary share 4,043 15,503,696 26.1 ------- -------- -------- Year ended 31 May 2006 Underlying earnings per Ordinary share 3,338 13,781,617 24.2 Dilutive potential Ordinary shares arising from share options - 7,546 - ------- -------- -------- Underlying diluted earnings per Ordinary share 3,338 13,789,163 24.2 ------- -------- -------- 7. Intangible fixed assets includes development costs of Â£420,000, which are capitalised in accordance with Statement of Standard Accounting Practice No. 13 'Accounting for research and development'. 8. During the year, the Group acquired a property for Â£2,056,000, using existing funds, to facilitate the growth and consolidation of Synectics' activities. Subsequent to the year end, it is intended to sell and lease back the property, and accordingly this asset has been classified as a current asset. 9. Movements in shareholders' funds during the year were as follows: Share Share Merger Other Profit Total capital premium reserve reserves and loss Â£'000 Â£'000 account Â£'000 Â£'000 account Â£'000 Â£'000 Group At 31 May 2006 3,263 13,634 9,565 (1,307) 3,423 28,578 Prior period adjustment (note 1) - - - - (202) (202) ------- ------- ------- ------- ------- ------- At 1 June 2006 (as restated) 3,263 13,634 9,565 (1,307) 3,221 28,376 Issue of shares to employee share scheme 108 1,071 - (1,179) - - Issue of shares to share option holders 11 146 - - - 157 Profit after tax for the year - - - - 2,702 2,702 Dividends paid - - - - (825) (825) Credit in relation to share-based payments - - - - 53 53 Foreign exchange translation adjustment - - - - (4) (4) ------- ------- ------- ------- ------- ------- At 31 May 2007 3,382 14,851 9,565 (2,486) 5,147 30,459 ------- ------- ------- ------- ------- ------- 10. Copies of this preliminary statement are available from Quadnetics Group plc, Haydon House, 5 Alcester Road, Studley, Warwickshire B80 7AN or on the Company website at www.quadnetics.com. - Ends - This information is provided by RNS The company news service from the London Stock Exchange

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