Synectics PLC

Final Results

RNS Number : 9743D
Synectics PLC
25 February 2020
 

 

25 February 2020

 

 

Synectics plc

('Synectics or the 'Group' or the 'Company')

 

Final Results for the year ended 30 November 2019

 

Synectics plc (AIM: SNX), a leader in the design, integration and support of advanced security and surveillance systems, reports its audited final results for the year ended 30 November 2019.

 

Headlines

 

·

Revenue £68.5 million (2018: 71.2 million)

·

Underlying profit1 £2.5 million (2018: £2.9 million)

·

Profit before tax  £1.6 million (2018: £2.1 million) 

·

Underlying diluted EPS1 13.9p (2018: 12.6p)

·

Diluted EPS 9.6p (2018: 9.1p)

·

Net cash at 30 November 2019 £3.6 million (2018: £8.1 million)

·

Year-end order book £32.7 million (2018: £21.0 million)

·

Recommended maintained final dividend 3.5 p per share (2018: 3.5p)

 

1 Underlying profit represents profit before tax and non-underlying items (which comprise provision for costs on settlement of a legal claim (see Note 4), and amortisation of acquired intangibles).  Underlying earnings per share are based on profit after tax but before non-underlying items.

 

Commenting on the results, Paul Webb, Chief Executive, said:

 

"Our investments continue to deliver good progress in our international systems business. However, difficult market conditions for our UK integration business meant that results overall were in line with revised market expectations following the Company's trading update on 30 October 2019."

 

 

For further information, please contact:

Synectics plc

Tel: +44 (0) 114 280 2828

David Coghlan, Chairman

 

Paul Webb, Chief Executive

 

David Bedford, Finance Director

 

email: [email protected]

www.synecticsplc.com

 

 

Shore Capital

Tel: +44 (0) 20 7408 4050

Tom Griffiths / Henry Willcocks

 

 

 

Media enquiries:

 

Intelligent Conversation

Tel: +44 (0) 161 212 1613

Claire Evans

 

email: [email protected]

 

 

 

Chairman's Statement

 

Overview

 

As announced on 30 October 2019, Synectics' results for the year under review fell short of the Company's original expectations. This position, however, masked a widening divergence between continued satisfactory growth in the Group's global surveillance systems products business, and a decline in its UK-focused integration and managed services activities.

 

The reasons behind these very different outcomes are set out in more detail below, but the primary factors were a continued contraction in the UK passenger bus market and a frustrating slowdown in contract awards in the UK security integration sector. In contrast, the Group's leadership position in global casino surveillance systems continued to produce strong sales and profit contribution, and excellent progress was made in the high end infrastructure sector that is a key target market for Synectics' evolving products.

 

As described previously, Synectics has been implementing a programme of substantially increased expenditure on the development of Synergy, its core software command and control product. This programme continued to gather pace on plan during the year. Spending on R&D has increased over the past two years from £2.6 million in 2016/17 to £3.8 million in 2018/19, with the vast majority expensed direct to the income statement as incurred. This investment is critical for future growth. It was therefore particularly pleasing to see the fruits of those efforts in the award by Deutsche Bahn in July 2019 of a multi-million euro revenue contract for the supply, implementation and support of an innovative integrated surveillance and workflow system for the S-Bahn network in Berlin.

 

2018/19 was thus a mixed year for the Group. We have, however, entered the current financial year with a firm order book up by over 50% compared with the same stage last year, the prospect of reduced uncertainty in the UK economy, and expanding opportunities in our target markets.

 

Results

 

For the year to 30 November 2019, Synectics' consolidated revenue was £68.5 million (2018: £71.2 million). Underlying profit before tax was £2.5 million (2018: £2.9 million).

 

This was the first year for which Synectics applied the new IFRS 15 accounting standard on revenue recognition.  The net impact of applying the new standard was relatively immaterial, resulting in a 1.9% increase in reported revenues and a benefit of £0.2 million to post-tax profits.

 

After charging £0.9 million for non-underlying costs arising from an employment related legal claim in the US which has been subsequently settled since the year end as separately announced today, and as described in Notes 4 and 9 below, profit before tax was £1.6 million (2018: £2.1 million).  Underlying diluted earnings per share were 13.9p (2018: 12.6p) and diluted earnings per share were 9.6p (2018: 9.1p). The improved EPS numbers are a result of significant movements in taxation charges. A tax credit has been recognised in 2019 as the Group benefitted from the utilisation of previously unrecognised losses combined with the recognition of current year losses. This compares with a particularly high tax charge in 2018.

 

The impact on these results of foreign exchange movements during the year was not material. Net cash at 30 November 2019 was £3.6 million (2018: £8.1 million). Whereas last year we commented that the cash position was somewhat flattered by favourable working capital flows around the year end, the opposite was true as at 30 November 2019, with working capital levels this time higher than normal at the year end point due to significant trading late in the year.

 

The consolidated firm order book at 30 November 2019 was £32.7 million (2018: £21.0 million). The primary sources of this increase were the large, multi-year contract for Deutsche Bahn (referred to above) and a 100% success rate with recurring contract renewals in our managed services sector, with smaller percentage improvements in most other areas.

 

Dividend

 

The Board is recommending payment of a final dividend of 3.5p per share (2018: 3.5p), payable on 7 May 2020 to shareholders registered on 3 April 2020. If approved by shareholders, this will bring the total dividend payable for the year to 4.8p (2018: 4.7p).

 

Business Review

 

Synectics' business is to provide integrated electronic surveillance systems and services to specialist high-end markets.  Our systems are based on core proprietary technology, in particular systems integration and command and control software. This technology is adapted for the specific needs of our target customer sectors, and provides fundamental differentiation from mainstream suppliers in the wider electronic security market.

 

During 2019, the Board determined that Synectics would change the way it manages the business and structures its segmental reporting, both internally and externally. The changes are twofold:

 

First, the Systems Division has been reorganised to operate as a single business unit on a regional basis. This represents the culmination of a transition over several years towards a more efficient, and more scalable, single Systems business unit, rather than the historical sector-based, multi-business structure.

 

Second, Synectics' UK on-vehicle surveillance activities, previously reported within the Systems Division, will be included from now on in the Integration & Managed Services Division. This change follows naturally from both the underlying, integration-oriented characteristics of the on-vehicle activities, and the new management structure of our Systems business.

 

The segmental commentary below reflects these changes. Prior year numbers have been re-presented to provide proper comparability.

 

 

Systems Division

 

Synectics' Systems division provides specialist electronic surveillance systems, based on its own proprietary technology, to global end customers with large-scale highly complex security requirements, particularly for gaming, oil & gas operations, transport & infrastructure, and high security & public space applications.

 

Revenue  £40.5 million (2018: £37.8 million)

Gross margin  42.0% (2018: 42.4%)

Operating profit1                      £4.7 million (2018: £4.0 million)

Operating margin 11.6% (2018: 10.5%)

 

1  after research & development expenditure, but before non-underlying legal settlement and Group central costs.

 

The Systems division delivered its fourth successive year of solid profit growth, despite the oil & gas surveillance sector still showing only a tentative recovery from the post-2014 oil market collapse. Operating profits in the year grew by 18% on revenues up by 7%. The compound annual  growth in divisional operating profit over the past three years has been 20% pa.

 

The principal drivers of the profit growth for the division over that three-year period have been the revenue growth and margin improvement achieved in the transport and infrastructure sector in Europe, and continued strong performance in the global Gaming sector. High end surveillance command and control solutions within the transport and infrastructure sector represent Synectics' largest target market, so building on and accelerating the success delivered in that area over the past few years is a key priority for the Group.

 

Asia Pacific (Revenue £17.7 million (2018: £13.2 million))

Synectics' strong growth in the Asia Pacific region in 2018/19 was led principally by increased business from gaming customers, and a modest upturn in the oil, gas & marine sector. The increased orders from casino operators included both new systems and repeat revenue for upgrades to existing installations. In addition to established territories, significant new sales were made for gaming premises in the Philippines, including the award at the end of the year of a major hotel expansion and new casino complex, for delivery in 2020.

 

Other notable new contracts in the year included a new 9,000 channel system for a major casino operator in Macau, and continued additional work with established customers in Singapore and Malaysia.

 

Within the oil, gas & marine sector, the market has remained challenging in this region, however new business was won to protect natural gas projects in Indonesia, as well as follow-on work for the RAPID refinery in Malaysia. Surveillance systems for several new build LNG vessels were secured with Asian shipyards, showing some recovery in a segment that has been particularly challenging in recent years.

 

Europe, Middle East & Africa (Revenue £15.7 million (2018: £14.3 million))

Synectics made a significant breakthrough with the award by Deutsche Bahn in July 2019 of a large, multi-year contract for the supply, implementation and support of an innovative integrated surveillance and operational management system for the S-Bahn network in Berlin. Delivery will be over two years and the contract also includes an eight-year support agreement. This award is based on the latest version of our Synergy command and control system, incorporating expanded capabilities for managing all of the functions of a modern transport security control room, including data analysis, communications and workflows. These expanded capabilities will increase Synectics' capacity to address what we believe is a large and growing market for similar intelligent command and control systems.

 

In the UK, we continued to deliver surveillance system upgrades to a number of London boroughs, as well as securing a major project to protect nationally important sites for the City of London Corporation. We continued to roll out our central monitoring system across remote sites for a major national utilities network, and also commenced work on a similar scheme with another utilities company. 

 

A new-build oil and gas project across multiple sites in the Middle East for a major national oil company gave the first signs of recovery of new energy investments in this region. Further projects during the year were centred on expansions and upgrades to facilities across the whole EMEA region, with upgrades to Synergy 3 implemented for existing platform installations in the North Sea, the Middle East, and off the coast of Africa.

 

North America (Revenue £7.2 million (2018: £10.4 million))

 

Synectics delivered reduced revenues in the North American region in 2019 primarily because the prior year's figures included an exceptionally large project for a new casino resort in Boston.

 

Following on from the 2018 contract success with Harrah's Las Vegas, in 2019 we secured a further two Harrah's properties, Harrah's Hoosier Park Racing & Casino in Indiana and Harrah's Northern California. The growing relationship with Harrah's - part of the Caesars Entertainment Corporation - is a clear example of our emphasis on building long-term customer partnerships, with a corporate portfolio now totalling five Caesars properties.

 

We also secured additional work from established customers, including Penn National Gaming across the US, and Wynn Resorts in Las Vegas and Boston.

 

In the oil and gas sector, we delivered an offshore platform for Shell in the Gulf of Mexico, following on from similar projects in the previous year, and supplied COEX camera stations for a number of land rig facilities in the US.

 

In 2020 and beyond, Synectics will be increasing business development resources in North America to cover a wider range of the Group's products and capabilities beyond the casino/gaming sector. These resources will be particularly focussed on the launch in this region of Synectics' enhanced command and control capabilities for the transport and infrastructure sector. 

 

Research & Development

 

Continued investment in our intellectual property and technology base within the Systems division remains an important priority for the Group.  During the 2019 financial year, Synectics spent a total of £3.8 million on technology development (2018: £3.1 million).  Of this total, £0.8 million was capitalised, and the remainder expensed to the Income Statement. £0.3 million of previously capitalised development costs were amortised in the year.

During the year we have been able to embed the changes to our development methodology embarked on last year, and we have significantly strengthened our product management organisation, enabling us to connect our product development roadmap even more closely with the rapidly-evolving needs of the market.

Our substantial increase in R&D spend has allowed us to make significant progress in developing the next-generation of our Synergy software platform, to develop significant further exploitable capability within that platform, and to continuously enhance our portfolio of Cyber Security features.

Major product extensions include a Workforce Management module - which will be deployed by Deutsche Bahn in Berlin in 2020, further development of our cloud-based evidence management solution, and deep integrations to class-leading AI-based innovations such as facial recognition. Further advances in our mobile device applications will be delivered during the next year, expanding the connection of the control room to field operations for our customers.

Integration & Managed Services Division

 

Synectics' Integration & Managed Services ('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 transport 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 helpdesk.  The IMS division supplies proprietary products and technology from Synectics' Systems division as well as from third parties.

 

Revenue  £28.6 million (2018: £35.3 million)

Gross margin  21.9% (2018: 22.4%)

Operating (loss)/profit2             (0.0)million (2018: £0.8 million)

Operating margin (0.1)% (2018: 2.3%)

 

2  before Group central costs.

 

 

The IMS division, focused on UK markets, suffered unexpectedly persistent declines in new business in most areas in 2018/19.

 

In the Integrated Systems business, the pipeline of anticipated contract wins remained generally consistent with budgets across the financial year. In both the government and civil sectors, however, the business experienced continued delays and project cancellations well beyond normal levels, such that revenue finished 19% below the previous year. This outcome broke a four-year trend of increasing revenues and profit contribution from this area, and may have been at least in part a result of the unusual UK macroeconomic and political environment last year.

 

Repeat business continued to be won for prisons, critical national infrastructure and public space security system upgrades, including sales of products from Synectics' Systems division. The quality of high visibility, high sophistication customers and landmark sites remains a great strength.

 

The UK market for sophisticated, high quality security systems integration and support is growing.  Technology is advancing at an increasing pace and Synectics' activities in this area are increasingly directed towards customers who need and value expertise, and are prepared to invest in a longer term relationship rather than rely on one-off lowest-price tenders.  Having access to the resources of a parent company at the forefront of surveillance technology development is a clear competitive advantage in succeeding with such customers.

 

Synectics' UK mobile systems business had another difficult year, with its main end-market experiencing the third straight year of significant decline in new UK bus registrations. Management have done a creditable job in reducing costs to a minimum sustainable level, maintaining both customer service delivery, and staff engagement. For the first time in several years there are indications from a significant customer of emerging upwards revisions in orders.

 

The focus of the division's managed services activities continues to be on delivering security and facilities management services for UK clients with large multi-site estates.  During 2018/19, Synectics' managed service activities secured a 100% renewal rate on its six multi-year contracts that expired in the year. The pipeline of new business also expanded, leading to several new client wins by and just after the year end.

 

People

 

Synectics has recently announced several changes to its board. First, David Bedford joined as Finance Director in January 2020. David qualified as a Chartered Accountant with Deloitte, and has spent the past 15 years in increasingly senior finance and commercial management roles within IMI plc. David will be based in Sheffield, as part of the process of consolidating all head office functions there at the Group's principal base. He takes over from Amanda Larnder, who has done an exemplary job as Interim Finance Director since April last year, and to whom sincere thanks are also owed for skilfully managing the difficult transition of the central finance function from Studley, Warwickshire to Sheffield.

 

Second, also in January 2020, Alison Vincent was appointed as an Independent Non-Executive Director. Alison is a highly-qualified technology leader in technical fields very relevant to Synectics, and brings wide experience from senior international roles at Cisco and HSBC. She will add breadth and specific expertise to the board's assessment of Synectics' evolving strategy.

 

Finally, I would like to add a special word of thanks and appreciation to Peter Rae, who has retired from the board this month. Peter was chairman of Synectics from 1999 to 2005, and has served as a non-executive director since. Although longevity of NED service is sometimes criticised, no doubt on occasion rightly so, anyone who knows Peter will understand that the experience, intelligence, originality of thought and, above all, robust independence he brings to business deliberations are not attributes to be easily replicated nor willingly given up. For Synectics, as a relatively small quoted company in a complex strategic environment, his incisive questioning has been invaluable.

 

Sincere thanks are also due once again to Synectics' employees at all levels for another year of outstanding commitment and effort. For the fourth year running, the Company's independently-assessed metric of overall customer satisfaction has risen. The board believes that such a trend, down solely to our people's collective efforts, is critical to the long-term success and sustainability of the business.

 

Strategy

 

Synectics' primary strategy remains to develop and capitalise on market-leading positions within a few relevant sectors of the global surveillance and security market where customers value high-performance, sector-specific capability. We achieve cost competitiveness and scalability in these quasi-bespoke markets by maintaining a standard modular core technology engine, with user interfaces, functionality and workflows tailored as required for specific sectors or customers.

 

As the volume of digital data generated by video-centric surveillance systems continues to grow exponentially, the complexity of extracting actionable intelligence from that data is opening up growing scope for innovation. Rapidly evolving technology platforms, a new generation of customers brought up on intuitive graphical interfaces, emerging self-learning software systems, and increasingly sophisticated cyber threats are all adding to the potential for solving the problems of high end surveillance customers in new and effective ways.

 

Throughout its 30-year history, Synectics has consistently demonstrated the combination of deep technical capability and practical, expertise-based sales approach needed to benefit from such evolving markets. Synectics' heritage and instincts are entrepreneurial, while its long list of high profile reference sites and reputation for reliability provide reassurance.

 

The Board has confidence that the opportunities Synectics has created are real and deliverable, and that the Group's increased investment levels will generate good returns for shareholders.

 

Outlook

 

As noted above, Synectics has entered the current financial year with a firm order book up over 50% compared to the same point last year. This gives confidence that the investment and hard work put into building the business are paying dividends. However, much of the uplift involves multi-year contracts, so the immediate impact on monthly revenues will be less than the scale of the order book increase might imply.

There are some signs that the sustained period of decline in the UK bus market is beginning to reverse, and also that a measure of optimism is returning regarding the closure of contracts for delayed government security projects in the UK. These factors should lead to a recovery in profitability of the IMS division in the second half of this financial year.

We are closely monitoring the developing situation with the coronavirus epidemic. At present, this is not expected to have any material direct effect on Synectics' businesses. If it worsens, it is possible that a decline in levels of business in Asian casinos and gaming resorts could result in reductions or delays in new orders later in the year for Synectics' surveillance systems in the Asian gaming sector. That potential qualification apart, the Systems division is expected to continue its recent growth trajectory, and to deliver another strong result this year, even after expensing a further increase in technology development investment.

For the Group as a whole, the Board is currently expecting a solid improvement in results in 2019/20, though somewhat weighted to the second half.

 

David Coghlan

Chairman

 

25 February 2020

 

 

Consolidated Income Statement

For the year ended 30 November 2019

 

 

 

 

2019

 

 

 

2018

 

 

Note

 

Before non-

underlying

items

£000

Non-

underlying

items (Note 4)

£000

Total

£000

 

Before non-

underlying

items

£000

Non-

underlying

items (Note 4)

£000

Total

£000

Revenue

2,3

 

68,511

-

68,511

 

71,249

-

71,249

Cost of sales

 

 

(45,215)

-

(45,215)

 

(47,322)

(510)

(47,832)

Gross profit

 

 

23,296

-

23,296

 

23,927

(510)

23,417

Operating expenses

 

 

(20,714)

(931)

(21,645)

 

(20,972)

(214)

(21,186)

Profit from operations

2

 

2,582

(931)

1,651

 

2,955

(724)

2,231

Finance income

 

 

165

-

165

 

167

-

167

Finance costs

 

 

(263)

-

(263)

 

(266)

-

(266)

Profit before tax

 

 

2,484

(931)

1,553

 

2,856

(724)

2,132

Income tax credit/(expense)

5

 

(122)

199

77

 

(738)

141

(597)

Profit for the year attributable to equity holders of the Parent

 

 

2,362

(732)

1,630

 

2,118

(583)

1,535

Basic earnings per share

7

 

14.0p

 

9.7p

 

12.7p

 

9.2p

Diluted earnings per share

7

 

13.9p

 

 9.6p

 

12.6p

 

9.1p

 

 

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2019

 

 

2019
£000

2018
£000

Profit for the year

1,630

1,535

Items that will not be reclassified subsequently to profit or loss:

 

 

Re-measurement gain/(loss) on defined benefit pension scheme, net of tax

414

(97)

 

414

(97)

Items that may be reclassified subsequently to profit or loss:

 

 

Exchange differences on translation of foreign operations

(211)

286

(Losses)/gains on a hedge of a net investment taken to equity

(134)

25

 

(345)

311

Total comprehensive income for the year attributable to equity holders of the Parent

1,699

1,749

 

 

Consolidated Statement of Financial Position

As at 30 November 2019

 

 


 


Note


2019
£000


20181
£000

Non-current assets

 

 

 

 

Property, plant and equipment

 

 

2,904

2,728

Intangible assets

 

 

21,712

21,488

Retirement benefit asset

 

 

687

182

Deferred tax assets

 

 

1,259

659

 

 

 

26,562

25,057

Current assets

 

 

 

 

Inventories

 

 

7,076

7,632

Trade and other receivables

 

 

17,536

20,395

Contract assets2

 

3

7,933

-

Tax assets

 

 

35

87

Cash and cash equivalents

 

8

3,580

8,114

 

 

 

36,160

36,228

Total assets

 

 

62,722

61,285

Current liabilities

 

 

 

 

Trade and other payables

 

 

(14,821)

(18,475)

Contract liabilities2

 

3

(4,062)

-

Tax liabilities

 

 

(384)

(467)

Current provisions

 

9

(1,366)

(656)

 

 

 

(20,633)

(19,598)

Non-current liabilities

 

 

 

 

Non-current provisions

 

9

(321)

(321)

Deferred tax liabilities

 

 

(807)

(646)

 

 

 

(1,128)

(967)

Total liabilities

 

 

(21,761)

(20,565)

Net assets

 

 

40,961

40,720

 

 

 

 

 

Equity attributable to equity holders of the Parent Company

 

 

 

 

Called up share capital

 

 

3,559

3,559

Share premium account

 

 

16,043

16,043

Merger reserve

 

 

9,971

9,971

Other reserves

 

 

(1,499)

(1,748)

Currency translation reserve

 

 

720

1,065

Retained earnings

 

 

12,167

11,830

Total equity

 

 

40,961

40,720

 

1Re-presented for the reclassification of the warranty provision from accruals to provisions. See note 1.

2Contract assets and contract liabilities arise following the adoption of IFRS 15 on 1 December 2018. See note 10.
 

Consolidated Statement of Changes in Equity

For the year ended 30 November 2019

 

 

 

 

Called up

share

capital

£000

Share

premium

account

£000

Merger

reserve

£000

 

Other

reserves

£000

Currency

translation

reserve

£000

 

Retained

earnings

£000 

Total

£000

At 30 November 20181

3,559

16,043

9,971

(1,748)

1,065

11,830

40,720

IFRS 15 opening balance adjustment (note 10)

-

-

-

-

-

(808)

(808)

At 1 December 20182

3,559

16,043

9,971

(1,748)

1,065

11,137

40,027

Profit for the year

-

-

-

-

-

1,630

1,630

At 30 November 2019

3,559

16,043

9,971

(1,499)

720

12,167

40,961

 

1Prepared under IAS 18 and IAS 11

2Prepared under IFRS 15
 

Consolidated Cash Flow Statement

For the year ended 30 November 2019

 


Note

 2019
£000

 2018
£000

Cash flows from operating activities

 

 

 

Profit for the year

 

1,630

1,535

Income tax (credit)/expense

5

(77)

597

Finance income

 

(165)

(167)

Finance costs

 

263

266

Depreciation and amortisation charge

 

941

1,378

Loss on disposal of non-current assets and impairment

 

16

13

Net foreign exchange differences

 

60

(16)

Net movement in provisions

 

(198)

(123)

Non-underlying items

 

908

701

Other inventory write-down

 

37

669

Cash flow relating to non-underlying items

 

-

(191)

Other non-cash movements

 

(204)

(354)

Share-based payment charge

 

45

66

Operating cash flows before movement in working capital

 

3,256

4,374

Decrease in inventories

 

886

678

(Increase)/decrease in receivables

 

(8,315)

4,147

Increase/(decrease) in payables

 

2,529

(2,911)

Cash (used in)/generated from operations

 

(1,644)

6,288

Tax paid

 

(356)

(459)

Net cash (used in)/from operating activities

 

(2,000)

5,829

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment

 

(706)

  (426)

Capitalised development costs

 

(762)

(461)

Purchased software

 

(29)

(68)

Net cash used in investing activities

 

(1,497)

(955)

Cash flows from financing activities

 

 

 

Repayment of borrowings

 

-

(900)

Share scheme interests realised in the year

 

-

33

Interest paid

 

(103)

(107)

Dividends paid

 

(810)

(699)

Net cash used in financing activities

 

(913)

(1,673)

Effect of exchange rate changes on cash and cash equivalents

 

(124)

192

Net (decrease)/increase in cash and cash equivalents

 

(4,534)

3,393

Cash and cash equivalents at the beginning of the year

 

8,114

4,721

Cash and cash equivalents at the end of the year

8

3,580

8,114

 

Notes

1  Basis of preparation

 

The information contained within this announcement has been extracted from the audited financial statements which have been prepared in accordance with IFRS as endorsed by the European Union ('adopted IFRS'), and with those parts of the Companies Act 2006 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.

 

New and amended standards adopted by the Group

 

The following new standards became applicable for the current reporting period and the Group changed its accounting policies and, where applicable, made retrospective adjustments as a result of adopting:

-  IFRS 15 'Revenue from Contracts with Customers'; and

-  IFRS 9 'Financial Instruments'.

The impact of adoption of these standards is set out in note 10.

Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. 

  Prior year re-presentation of warranty provision

The Group has reclassified its warranty provision from accruals to provisions; the amount reclassified at 30 November 2018 of £849,000 is shown in note 9.

 

2  Segmental analysis

 

Revenue

2019
£000

 

 

20181

 000

Systems

40,529

 

37,840

Integration & Managed Services

28,603

 

35,332

Total segmental revenue

69,132

 

73,172

Reconciliation to consolidated revenue:

 

 

 

Intra-Group sales

(621)

 

(1,923)

 

68,511

 

71,249

 

 

Underlying operating profit

2019
£000

 

 

20181

£000

 

Systems

4,691

 

3,961

Integration & Managed Services

(27)

 

796

Total segmental underlying operating profit

4,664

 

4,757

Reconciliation to consolidated underlying operating profit:

 

 

 

Central costs

(2,082)

 

(1,802)

 

2,582

 

2,955

 

1 Represented to show Synectics' UK on-vehicle surveillance activities, previously reported within the Systems Division, within the Integration & Managed Services Division, as highlighted in the Chairman's Statement.

 

 



Underlying operating profit 2019

 

 

Underlying

operating

profit2

£000

Legal

provision

£000

Amortisation of acquired intangibles

£000

Total profit

from
operations

£000

Systems

 

4,691

(908)

-

3,783

Integration & Managed Services

 

(27)

-

-

(27)

Total segmental underlying operating profit

 

4,664

(908)

-

3,756

Reconciliation to consolidated underlying operating profit:

 

 

 

 

 

Central costs

 

(2,082)

-

(23)

(2,105)

 

 

2,582

(908)

(23)

1,651

 

 

2 Underlying operating profit represents operating profit before non-underlying items (provision for costs on settlement of a legal claim, and amortisation of acquired intangibles).

 

 

3  Revenue from contracts with customers

 

 

  Disaggregated revenue information

  Set out below, is the disaggregation of the Group's revenue from contracts with customers:


 


Revenue by contract location 2019

 

 

NAM

£000

 

Systems

APAC

£000

 

 

EMEA

£000

 

IMS

 

£000

 


2019

£000

UK & Europe

-

-

10,720

28,415

39,135

North America

7,183

-

479

17

7,679

Middle  East

-

13

3,050

-

3,063

Africa

Asia Pacific

-

-

-

17,668

521

287

-

158

521

18,113

 

 

7,183

 

17,681

 

15,057

 

28,590

 

68,511

 

Set out below, is the reconciliation of the revenue from contracts with customers with the amounts disclosed in the segment information:



Reconciliation to segment revenue 2019

 

 

NAM

£000

 

Systems

APAC

£000

 

 

EMEA

£000

 

IMS

 

£000

 


2019

£000

External

7,183

17,681

15,057

28,590

68,511

Intra-group

-

-

608

13

621

 

 

7,183

 

17,681

 

15,665

 

28,603

 

69,132

 

Contract balances

 

 

2019

2018

£000

 

£000

Contract assets

7,933

5,433

Contract liabilities

(4,062)

(3,001)

 

 

Contract assets relate to revenue earned from ongoing projects.  As such, the balance of this account varies and depends on the number of ongoing projects at the end of the year. Contract liabilities relate to short-term advances received to deliver ongoing projects.

£2.1 million of the contract liabilities balance recognised at 1 December 2018 was recognised as revenue during the year. No revenue was recognised in the current year in relation to performance obligations satisfied, or partially satisfied in previous years.

Performance obligations

The transaction price allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) as at 30 November 2019, that are expected to be recognised over more than one year is £21.7 million.  These performance obligations relate predominantly to the provision of service and maintenance contracts.

The Group has taken advantage of the practical expedient within IFRS 15 not to disclose the amount of the remaining performance obligations for contracts with original expected duration of less than one year.

 

4  Non-underlying items

 

 

 

 

2019

£000

 

2018

£000

Provision for costs on settlement of a legal claim

 

908

 

-

UK mobile systems restructuring costs

 

-

 

701

Amortisation of acquired intangible assets

 

23

 

23

 

 

931

 

724

 

The provision for costs on settlement of a legal claim relates to an employment related dispute in the US which has been settled subsequent to the year end.

The restructuring costs incurred during the prior year related to the severance costs incurred from the review of the cost base in the UK mobile systems business (£0.2 million) and a stock write down (£0.5 million) in this business.

 

 

Taxation

 

 

Tax (credit)/charge

 

 

2019

£000

 

 

2018

£000

Current taxation

 

 

 

UK tax

8

 

14

Overseas tax

310

 

567

Adjustments in respect of prior periods

22

 

(62)

Total current tax

340

 

519

Deferred taxation

 

 

 

Origination and reversal of temporary differences

(287)

 

174

Adjustments in respect of prior periods

(130)

 

(96)

Total deferred tax

(417)

 

78

Total tax (credit)/charge for the year

(77)

 

597

 

Further analysed as tax relating to:

 

 

 

2019

£000

 

2018

£000

Underlying profit

 

122

 

738

Non-underlying items

 

(199)

 

(141)

 

Reconciliation of tax (credit)/charge for the year

The corporation tax assessed for the year differs from the standard rate of corporation tax in the UK of 19% (2018: 19%).  The differences are explained below:

 

2019

£000

 

2018
£000

Profit on ordinary activities before tax

1,553

 

2,132

Tax on profit on ordinary activities before tax at standard rate of 19%
(2018: 19%)

295

 

405

Effects of:

 

 

 

Net effect of different rates of tax in overseas businesses

(43)

 

(20)

Utilisation of previously unrecognised tax losses

(67)

 

-

Tax losses not recognised

-

 

244

Net permanent differences

(136)

 

(60)

Effect of changes in tax rates and tax laws

(4)

 

131

Other differences and (income)/expenses not deductible for tax purposes

(14)

 

55

Adjustment in respect of prior periods

(108)

 

(158)

Total tax (credit)/charge for the year

(77)

 

597

 

The Group's tax rate is sensitive to a geographic mix of profits and reflects a combination of higher rates in the US and lower rates in Singapore and Macau. The Group's effective tax rate in 2019 has been impacted by R&D tax relief and current year losses, as well as utilisation of previous years' losses that had not been recognised.

Deferred tax assets of £1.2 million (2018: £0.5 million) have been recognised in relation to legal entities which suffered a tax loss in the current or preceding periods.  The assets are recognised based upon future taxable profit forecasts for the entities concerned.

The Group has further losses which may be available to be carried forward for offset against the future taxable profits of certain Group companies amounting to approximately £4.8 million (2018: £5.0 million).  No deferred tax asset (2018: £nil) in respect of these losses has been recognised at the year end as the Group does not currently anticipate being able to offset these against future profits.

 

6  Dividends

The Directors recommend the payment of a final dividend of 3.5p per share (2018: 3.5p per share), totalling around £601,000.  Subject to shareholders' approval at the Company's Annual General Meeting to be held on 23 April 2020, this is expected to be paid on 7 May 2020 to shareholders on the register as at close of business on 3 April 2020.  An interim dividend of 1.3p per share was paid during 2019 (2018: 1.2p per share).

 

7  Earnings per share
 

 

2019

 

2018

 

Pence per share

Pence per share

Basic earnings per share

9.7

 

9.2

Diluted earnings per share

9.6

 

9.1

Underlying basic earnings per share

14.0

 

12.7

Underlying diluted earnings per share

13.9

 

12.6

 

The calculations of basic and underlying earnings per share are based upon:

 

 

 

 

2019

£000

 

2018

£000

Earnings for basic and diluted earnings per share

1,630

 

1,535

Non-underlying items

931

 

724

Impact of non-underlying items on tax (credit)/charge for the year

(199)

 

(141)

Earnings for underlying basic and underlying diluted earnings per share

2,362 

 

2,118

 

 

 

 

 

000

 

000

Weighted average number of ordinary shares - basic calculation

16,814

 

16,643

Dilutive potential ordinary shares arising from share options

139

 

221

Weighted average number of ordinary shares - diluted calculation

16,953

 

16,864

 

 

Cash and cash equivalents

 

2019

£000

 

2018

£000

Cash at bank and in hand

3,580

 

8,114

 

The fair value of cash and cash equivalents approximates to their book value. Cash at bank earns interest at the daily bank base rate.

 

 

9  Provisions

 

 

 

Restructuring

£000

 

 

Property

£000

 

 

Warranty

£000

 

 

Legal

  £000

 

 

Total

£000

At 1 December 2017

-

251

555

-

806

Utilised in the year

(191)

(125)

(343)

-

(659)

Charged to the Income Statement

191

2

637

-

830

At 30 November 2018

-

128

849

-

977

Utilised in the year

-

-

(482)

-

(482)

Released in the year

-

(64)

-

-

(64)

Charged to the Income Statement

-

2

346

908

1,256

At 30 November 2019

-

66

  713

908

1,687

 

During the year, a provision was made for costs on settlement of a legal claim relating to an employment related dispute in the US which has been settled subsequent to the year end.

Costs of warranty include the cost of labour, material and related overhead necessary to repair a product during the warranty period. The standard warranty periods are usually one to three years. The Group accrues for the estimated cost of the warranty on its products shipped in the provision for warranty, upon recognition of the sale of the product. The costs are estimated based on actual historical expenses incurred and on estimated future expenses related to current sales, and are updated periodically. Actual warranty costs are charged against the provision for warranty.

Provisions have been analysed between current and non-current as follows:

 

 

2019

£000

 

2018
£000

Current

1,366

656

Non-current

321

321

 

1,687

977

10  Changes in accounting policies

 

IFRS 15 'Revenue from Contracts with Customers' - impact of adoption

 

As disclosed in our 2018 Annual Report and Accounts the Group has adopted the standard on a modified retrospective basis and has recognised the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at 1 December 2018. Under this transition method:

the standard has been applied only to contracts in progress but not completed at the date of initial application;

for contracts that were modified before 1 December 2018, the Group has reflected the aggregate effect of all of the modifications that occurred before this date at 1 December 2018;

prior year comparatives have not been restated for the effect of IFRS 15 but, instead, opening retained earnings at 1 December 2018 have been restated for the full cumulative impact of adopting this standard; and

for the period ended 30 November 2019 a reconciliation has been provided of the primary financial statements under IFRS 15 to those that would have been reported under IAS 18 and IAS 11.

 

The accounting policy in respect of revenue applied from 1 December 2018 is set out in note 1 of the full financial statements.

 

Financial Impact and changes to accounting policies

Applying the modified retrospective method, a cumulative catch-up adjustment of £0.7m was recognised as a reduction to the opening balance of retained earnings in the Consolidated Statement of Changes in Equity for the year ended 30 November 2018.

 

Input method - uninstalled goods

Prior to the adoption of IFRS 15, where revenue and profits attributable to contracts were recognised as the contracts proceeded in proportions relevant to their stage of completion based on costs incurred as a proportion of estimated total contract costs, revenue and profits could be recognised on costs that did not necessarily transfer control of the goods or services to the customer.

Under IFRS 15, inputs that do not represent the entity's performance in transferring control of goods or services to the customer must be excluded from the input method calculation of the stage of completion.  This means that revenues and related profits have been reversed in the cumulative catch-up adjustment. 

 

The following line items in the Consolidated Statement of Financial Position as at 30 November 2018 have been impacted as a result of the adjustment:

 

 

 

At 30 Nov 2018

as re-presented

£000

 

Cumulative

catch-up adjustment

£000

 

 

At 1 December

2018

£000

Non-current assets

 

 

 

Deferred tax assets 

659

115

774

Current assets and liabilities

 

 

 

Trade and other receivables

20,395

(3,221)

17,174

Inventories

7,632

375

8,007

Trade and other payables

(18,475)

2,038

(16,437)

Net assets

40,720

(693)

40,027

Equity attributable to equity holders of the Parent Company

 

 

 

Retained earnings

11,830

(693)

11,137

Total equity

40,720

(693)

40,027

 

The impact of adoption on the group's retained earnings at 1 December 2018 is as follows:

Retained earnings - at 30 November 2018 (as published)

 

 

11,830

Uninstalled goods - profit not recognised

 

 

(808)

Tax on adjustment for uninstalled goods

 

 

115

Adjustment to retained earnings upon adoption of IFRS 15

 

 

(693)

Retained earnings - at 1 December 2018 (IFRS 15)

 

 

11,137

 

Revenue and profit recognition

The Group has determined that most of its contracts include a single performance obligation recognised over time. This does not change the previously adopted accounting treatment and therefore the change is not material.  There was no transition impact at 1 December 2018.

 

Balance sheet reclassification - contract assets and contract liabilities

At the date of initial application, the following presentation and classification changes were made to the Consolidated Statement of Financial Position as a result of applying IFRS 15:

· 'Amounts recoverable on contracts' of £5.4 million (after applying the cumulative catch-up adjustment) classified within 'Trade and other receivables' representing conditional rights to consideration were reclassified to 'Contract assets'.

· 'Deferred income' of £3.0 million classified within 'Trade and other payables' was reclassified to 'Contract liabilities'.

 

Software licences

The Group has determined that sales of software licences are not distinct within the context of the contract and are not the predominant component of the combined performance obligation.  Therefore, revenue in relation to software licences is recognised as part of the single performance obligation.  There was no transition impact at 1 December 2018.

 

Consolidated Income Statement restatement under IFRS 15

The following shows a reconciliation of the Consolidated Income Statement for the period ended 30 November 2019 under IFRS 15 to those results that would have been reported under IAS 18 and IAS 11.

 

 

 

 

 

2019

(IAS 18 & 11)

 000

 

 

 

Impact of

IFRS 15

£000

 

 

 

2019

(IFRS 15)

 000

Revenue

 

67,265

1,246

68,511

Cost of sales

 

(44,241)

(974)

(45,215)

Gross profit

 

23,024

272

23,296

Operating expenses

 

(20,714)

-

(20,714)

Profit from operations, before non-underlying items

 

2,310

272

2,582

Non-underlying items

 

(931)

-

(931)

Profit from operations

 

1,379

272

1,651

Finance income

 

165

-

165

Finance costs

 

(263)

-

(263)

Profit before tax

 

1,281

272

1,553

Income tax credit/(expense)

 

126

(49)

77

Profit for the period attributable to equity holders of the Parent Company

 

1,407

223

1,630

 

The increase to revenue of £1,246,000 and resulting profit before tax of £272,000 relates to the change in accounting treatment in relation to inputs that do not represent the entity's performance in transferring control of goods or services to the customer being excluded from the input method calculation of the stage of completion, as described above.

 

IFRS 9 'Financial instruments' - impact of adoption

 

IFRS 9 replaces the provisions of IAS 39 that relate to recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting.  The adoption of IFRS 9 Financial Instruments from 1 December 2018 resulted in changes to accounting policies; however, no adjustments were required to the amounts recognised in the financial statements in previous periods.  The accounting policies applied from 1 December 2018 are set out in note 1 of the full financial statements.

 

Classification and measurement

On 1 December 2018, the group has classified its financial instruments in the appropriate IFRS 9 categories.

Trade receivables, previously classified within the trade and other receivables category and measured at amortised cost under IAS 39, continue to be classified in the amortised cost category under IFRS 9 as they are held within a business model to collect contracted cash flows and these cash flows consist solely of payments of principal and interest.

Trade payables, previously classified with the trade and other payables category and measured at amortised cost under IAS 39, continue to be classified in the amortised cost category under IFRS 9 as they relate to contracted cash flows that consist solely of payments of principal and interest.

 

Impairment of financial assets

The Group has two types of financial assets that are subject to IFRS 9's new expected credit loss model: trade receivables and contract receivables.  Trade receivables and contract receivables do not contain a significant financing element and therefore expected credit losses are measured using the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from the initial recognition of the receivables.  The Group has measured credit risk associated with its financial assets and believes it to be extremely low; therefore, the provision for expected credit losses is immaterial.

 

While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

 

The overall impact to the Group on transition to IFRS 9 was not material and there was no impact to retained earnings.

 

 

11  Company information

 

Full Financial Statements

 

The auditors have issued an unqualified opinion on the full financial statements for the year ended 30 November 2019 which will be made available to shareholders and delivered to the Registrar of Companies in due course.  The financial information for 2019 and 2018 does not comprise statutory financial statements.  Statutory financial statements for the year ended 30 November 2018, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies.  Further copies of these results, and the full financial statements when published, will be available on the Company website at www.synecticsplc.com and at the Company's registered office: Synectics plc, Synectics House, 3-4 Broadfield Close, Sheffield, S8 0XN.

 

Forward-looking statements


This report may contain certain statements about the future outlook for Synectics plc.  Although the Directors believe their expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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