Finance Director's Report

Finance Director's report

The Finance Director's Report is extracted from
the 2015 Annual Report and Financial Statements (PDF).

Although the overall results are disappointing in the context of recent years, favourable indicators underpin the Board’s confidence that this was a temporary reversal, predominantly affecting the first six months of 2015. Notable highlights of the year include:

•  The closure of the problem project well within anticipated bounds
•  The rebound in Group profitability and operating cashflow in the second half year
•  The record order book and healthy pipeline at year-end
•  The demonstrably supportive relationships with the Group’s bankers

Additionally, I am pleased to report that SCISYS bounced back to deliver its strongest second half-year profit performance on record.

Revenues

Revenues for the year of £36.1m (2014: £40.4m) were particularly depressed by the weak euro. On a constant currency basis total revenue would have been £2.5m higher. The component relating to professional fees was £29.8m (2014: £32.5m) or £31.9m in constant currency.

Sales to the Eurozone comprise roughly half of SCISYS’ revenues so the Group’s trading results are exposed to a decline in the value of the euro. Management adopts a combination of measures to mitigate this risk:

•  Maximising the benefit from natural hedges in intra-Group cross-border trading
•  Using currency derivatives to protect the sterling value of future euro receipts
•  Holding surplus cash in sterling-denominated deposit accounts
•  Maintaining euro overdrafts in UK working capital facilities

The euro/sterling exchange rate was remarkably volatile during the year, varying in a range between €1.28/£ to €1.42/£. The average rate for the year was €1.39/£ (2014: 1.25), representing a 10% devaluation in the sterling value of revenues and profits denominated in euros compared with 2014.

Operating profit

As anticipated in our Interim Report and the profits warning that preceded it, operating profit for the full year was severely impacted by the problems encountered in the opening six months. The underlying measure of trading performance, adjusted operating profit, which excludes costs of the Group’s long term share incentive schemes, exceptional charges and any amortisation of intangible assets arising on business acquisition, dropped sharply to £0.8m (2014: £3.4m). The adjusted operating margin reduced to 2.2% (2014: 8.3%).

In view of the extent of losses revealed in the Interim Report, the revival in the last six months’ period was remarkable. However, an element of caution should be exercised before interpreting the second-half performance as a basis for extrapolation of expectations into 2016. Part of the loss reported in the first half year reflected provisions taken for expected losses on our problem project after 30 June 2015. The successful close out of this project in October proved our downside-case estimates to be overly cautious and the subsequent release of surplus provisions boosted the figures for the latter part of the year.

Statutory operating profit closely followed the adjusted profit measure as there were no exceptional or amortisation charges in the year and share-based payments were at a negligible level because prior period charges were credited following a failure to achieve performance criteria for vesting of share option awards (2014: combined adjustments £0.2m). Consequently, statutory operating profit represented 99% (2014: 95%) of the adjusted operating profit measure for the year.

All operating divisions contributed less well than in 2014 although the second half year saw improved trading across the board. The Space division mounted a powerful comeback in the second half after a slow start to the year and the Enterprise Solutions & Defence division staged an impressive turnaround from its loss-making first six months. The Media & Broadcast division’s year was more balanced but the division continued to suffer from the deferral of anticipated orders from key customers and battled against strong foreign currency headwinds alongside the Space division.

Central overheads were 3% lower than the prior year due to a combination of factors. The sterling value of euro-denominated central costs in Germany was depressed when translated at the average 2015 exchange rate, partially offsetting the adverse impact of the weak euro on revenues. In the UK, establishment costs were offset by income from a newly-secured tenant for surplus office space in the freehold Chippenham headquarters. As the year closed, the euro began to strengthen against sterling, resulting in the recognition of an unrealised loss of £0.1m (2014: £0.1m gain) from the valuation of future hedging contracts at 31 December. While this impact is reflected in 2015’s results, the associated benefit on translation of trading at a stronger exchange rate will not be felt until 2016.

Earnings per share

Basic EPS were down 83% at 1.3p (2014: 7.7p). Adjusted basic EPS, calculated on the profit for the year before post-tax exceptional charges, share based payments and amortisation of acquisition-related intangible assets were 1.3p (2014: 8.2p).

Cash

Group net debt at the year end stood at £1.0m (2014: £0.3m net cash), an improvement of £0.9m on the June 2015 position in the Interim Report. In the light of our troubled trading year this represents a relatively favourable outcome, particularly when considering that the period included non-operating outflows of £0.8m for deferred consideration relating to the December 2014 Xibis acquisition and £0.1m for the investment in ToMM Apps. Suspension of the interim dividend helped to conserve cash prior to the closure of the problem project.

The Group closed the year with bank deposits (net of overdrafts) of £3.6m (2014: £5.8m), while Group borrowings amounted to £4.6m (2014: £5.5m). Unutilised working capital facilities at the year end totalled £3.6m (2014: £4.5m).

As announced in September 2015, SCISYS successfully renegotiated the borrowing covenants with its principal UK bankers to accommodate downgraded 2015 trading expectations, subject to the Group achieving a minimum level of EBITDA for the year of £0.5m. This threshold was exceeded by £1.0m and both lenders have reiterated their intention to provide competitive offers to renew or refinance the current £1.8m property loan when its term expires in May 2016.

Tax

Although overall profits declined markedly due to losses in UK-based operations, taxable profits in Germany were maintained, causing an escalation in the effective Group tax rate for the year to 39% (2014: 25%). Profits from the Group‘s German operations suffer tax at over 30% whereas UK trading benefits from R&D tax credits which create substantial taxable losses that are surrendered for cash rebates from HM Revenue & Customs.

Accounting standards

No material changes in accounting standards have impacted the Group accounts for 2015 but the separate parent company accounts for SCISYS PLC have been prepared under FRS 101 (reduced disclosure IFRS) for the first time, having previously complied with UK GAAP. Transition adjustments to 2014’s comparative figures are detailed in the notes to the company accounts.

Order book

The year-end order book was 23% higher than the prior year at £37.2m (2014: £30.3m), of which £25.8m (2014: £22.5m) is deliverable within one year. Of the total order book, 51% (2014: 61%) was denominated in euros and the closing order book would have been £1.2m higher in constant currency.
Despite 2015 proving a challenging year overall, the second half resurgence and a record closing order book provide an encouraging platform for a return to expected levels of performance in 2016.

Chris Cheetham,
Finance Director

The Finance Director's Report is extracted from
the 2015 Annual Report and Financial Statements (PDF).