RNS Number:8030I
Gyrus Group PLC
12 September 2006
12 September 2006
Gyrus Group PLC
Successful acquisition of ACMI drives 82% operating profit increase at Gyrus
Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical devices
which reduce trauma and complications in surgery, announces its interim results
for the six months ended 30 June 2006.
Financial Highlights
* Group revenues up 127% to #107.4m (H1 2005: #47.3m) - 116% on a constant
currency basis
* Legacy Gyrus business revenue up 17% to #55.3m (H1 2005: #47.3m) - 12%
on a constant currency basis
* Operating profit pre-restructuring costs and amortisation of acquired
intangible assets up 200% to #17.1m (H1 2005: #5.7m)
* Operating profit margin before restructuring costs and amortisation of
acquired intangible assets rises to 15.9% (H1 2005: 12.1%)
* Operating profit up 82% to #10.4m (H1 2005: #5.7m)
* Basic EPS (including restructuring costs and amortisation of intangible
assets) falls 51% to 2.5p (H1 2005: 5.1p)
* Adjusted EPS (excluding restructuring costs, amortisation of acquired
intangible assets and deferred taxation) rises 54% to 7.7p (H1 2005: 5.0p)
Operating Highlights
* Integration of ACMI business progresses well; target net savings
increased from $22m to $25m by mid 2008
* Gross margin of 59.7 % (H1 2005 (proforma): 57.3%) exceeds expectations
through volume, product mix and integration benefits
* Introduction of the PlasmaCision platform to the surgical market makes a
good start; 105 G400 General Surgery generators installed into US market by
30th June and approximately $1.9m of disposable PlasmaCision derived
instrument revenues achieved (H1 2005: $0.3m)
Commenting on the results, Brian Steer, Executive Chairman, said:
"To have produced strong results during the integration phase of last year's
major acquisition of ACMI shows the strength of our business. We are now
focused on making the combination of our "See and Treat" technologies a
commercial reality for surgeons, and, against the backdrop of a declining US
dollar for the second half, we look ahead to the full year with cautious
optimism and longer term confidence in the commercial potential of our
technology platform."
Enquiries:
Gyrus Group PLC Today:
Brian Steer, Executive Chairman Tel: 0207 831 3113
Simon Shaw, Chief Financial Officer Tel: 0207 831 3113
Financial Dynamics
Ben Atwell Tel: 0207 831 3113
A meeting for analysts will be held at the offices of Financial Dynamics,
Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 9.00 am. Please call
Mo Noonan on 020 7269 7116
Overview
Gyrus has performed well in the half year to 30th June 2006. Our reported
results have been materially enhanced by the acquisition of American Cystoscope
Makers Inc ("ACMI") in July 2005 with revenue growth of 127% to #107.4m (H1
2005: #47.3m). Operating profits, before restructuring costs and amortisation
of acquired intangible assets, grew by 200% to #17.1m (H1 2005: #5.7m). Beneath
these results lies a strong performance on a proforma basis (i.e. assuming we
had owned ACMI throughout the first half of 2005), which was achieved against
the backdrop of significant strategic change to the combined Group in the
period. Revenue grew by 10% over the proforma H1 2005 figure of #97.5m (6.3% on
a constant currency and continuing product portfolio basis) and operating profit
before restructuring and amortisation expenses grew by 36% over the proforma H1
2005 figure of #12.5m.
These results reflect our original expectations for the period of consolidation
and restructuring post-acquisition; namely that the benefits of the potential
manufacturing synergies and operational gearing would begin to show through
soonest in the form of increased operating profitability, while the evolving
market focus on the "See and Treat" platform would take longer to emerge.
Reported basic earnings per share (EPS) fell by 51% to 2.5p (H1 2005: 5.1p)
principally due to restructuring costs and the amortisation of acquired
intangible assets associated with the acquisition of ACMI (which together
represented approximately 4p per share in the period). The Board's preferred
measure of performance, Adjusted EPS, which excludes integration, amortisation
costs and the effects of deferred taxation, grew 54% to 7.7p (H1 2005: 5.0p).
Business Review
The performance of each business unit during the first half of 2006 is shown
below in its principal billing currency:
Analysis of Revenues
Business H12005 H12006 Growth
Surgical US $m 20.1 36.0 79.1%
International #m 3.8 2.8 (26.3)%
Urology & Gynaecology US $m 3.3 71.9 2078.8%
International #m 1.1 10.2 827.3%
ENT US $m 25.8 25.6 (0.8)%
International #m 6.5 6.0 (7.7)%
Partnered Technologies US $m 16.1 21.8 35.4%
International #m 1.1 1.2 9.1%
$/# Rate 1.88 1.78 5.3%
Total Revenue #m 47.3 107.4 127.1%
SURGICAL DIVISION
The Surgical division, representing 21% of Group turnover, is focused on
laparoscopic and minimally invasive abdominal surgery.
In the US, the division's revenues grew by 79% to $36.0m partly through its
assumption of sales responsibility for a portfolio of minimally invasive
surgical equipment from ACMI. Underlying this, the US laparoscopic gynaecology
business continued to grow well on the back of strong performances across the PK
product range, including over 20% sales growth in cutting forceps.
In late March the PlasmaCision-based PlasmaTrissector and Plasma J-Hook were
introduced into the general surgery market alongside the G400 generator and the
existing PlasmaSpatula for the gynaecology market. At the same time, and off
the same generator, the division introduced another PlasmaCision derived
instrument, the PlasmaSeal, which electronically cuts and seals tissue in the
open abdominal surgery environment. This range of instruments represents the
core of our PlasmaCision portfolio for the large general surgery market. In the
first few months since its introduction we have been evaluating performance of
the technology and its embodiment in the form of these first products. Feedback
from general surgeons indicates that this technology is highly promising; there
are some design modifications to the PlasmaTrissector, which have been
identified to ensure consistency of performance and are being effected in the
second half. In addition the surgical team is developing its training modules
in the light of our introductory experiences in the field. In summary, the
PlasmaCision portfolio generated approximately $1.9m in disposable instrument
sales during the period (H1 2005: $0.3m) and 105 G400 generators were installed
into the US market by 30th June. Of these, 51% were sold, generating additional
revenues of $0.9m, rather than placed, a sale vs. placement ratio which is
consistent with our experience of recent times.
Internationally, sales revenue in this relatively small part of the division
fell by approximately 26% to #2.8m (H1 2005: #3.8m). The fall was due to strong
sales to legacy ACMI distributors in the comparative period and the temporary
stasis created by the integration of the combined Group's international
distribution network.
UROLOGY & GYNAECOLOGY DIVISION
The Urology & Gynaecology division, representing approximately 47% of Group
turnover, is focused primarily on endoscopic treatments of the urological tract
and uterus.
The acquisition of ACMI in July 2005 created the Division which generated US
revenues of $71.9m (H1 2005: $3.3m).
Since the beginning of the year the division has begun to change its market
positioning from primarily the sale of capital goods such as scopes and
generators to focus increasingly on the selected placement of capital goods to
drive revenues from disposable products and services. We agreed our first
significant contract of this type with an East Coast hospital chain at the end
of the period. Commission structures have been altered for the second half of
2006 to further encourage this shift in emphasis amongst the sales force. In
addition, the division has discontinued selling certain peripheral products,
which collectively had revenues of over $1m in H1 2005.
Overall the division performed well in gynaecology, with approximately 17%
revenue growth on the proforma comparative period to $9.4m including strong
performances in both disposable products and hysteroscopes.
In the cysto-resection market (US sales revenue $31.5m), we began to see the
benefit of marketing the PK SuperPulse system to the legacy ACMI customer base.
Revenue from the sale of disposable PK instruments in the US grew by
approximately 40% to $3.4m and 61 SuperPulse generators were installed into the
US market, of which 36% were sold and the remainder placed to encourage
upgrading by the customer.
The third area of principal focus for the division is the management of kidney
stones, for which the Group has a full range of visualisation and
instrumentation products. US revenues from this area decreased by approximately
6% on a proforma comparative basis to $27.8m. Two principal areas contributed
to this shortfall: in the laser treatment market sales of high value laser
generators were negatively affected by the strong performance of the previous
year in which significant capital sales were achieved; secondly there was a
significant shortfall in sales of flexible ureteroscopes, primarily as a result
of the anticipated launch of the digital ureteroscope in the second half of this
year. This product appears to have great potential and was the subject of
strong interest among urologists to whom it was introduced at the American
Urology Association meeting in May. We anticipate sales commencing early in the
fourth quarter.
Internationally, the Division achieved revenue of #10.2m, which represented
growth of approximately 31% on the proforma comparative period. Much of this
growth was achieved as a result of the transfer from distributors to direct
business in markets where the Group has a proprietary presence.
ENT DIVISION
The ENT division, a leader in the fields of otology, sinus & rhinology and head
and neck surgical products, represented 19% of Group turnover in the first half
of 2006.
The division had a flat performance during the period as it sought to reposition
itself as a more "surgical" business while substantially increasing its
profitability through restructuring.
The US Otology business declined by 3% over the unusually strong comparative
period, which had itself grown by over 10%. The average revenue growth over the
periods concerned, at approximately 2% per annum is in line with our normalised
expectations for this part of the business.
The US Sinus and Rhinology business grew revenues by approximately 7% over the
comparable period. The continued performance of the PK Diego microdebrider
system was adversely affected by the implications of the patent litigation
brought by Medtronic Xomed against the ENT division, which was satisfactorily
settled after the period end. In total the Diego line of instruments grew by
approximately 9%.
In the Head and Neck sector, the somnoplasty business continued its
reimbursement-related decline with revenues of $2.7m, approximately 16% lower
than the comparable period. The remaining Head and Neck business grew by
approximately 12% to $2.1m, primarily as a result of sales of the Tonsil
PlasmaKnife at $0.4m (H1 2005: $0.03m). Since its launch in March 2005, market
feedback on the original Tonsil PlasmaKnife had progressively indicated that,
although the PlasmaCision technology was positively received, the original
instrument was too bulky for widespread adoption. In response to this, the
division successfully validated the use of an alternative PlasmaCision derived
instrument, and in late August the jPlasmaKnife was commercially introduced for
the tonsillectomy procedure. In addition the division has progressed the
development of the Dissector PlasmaKnife for surgical procedures of the neck,
which is to be launched early in the fourth quarter.
Internationally, divisional revenues declined by approximately 8% to #6.0m. The
benefits of moving from distributor to direct sales in certain markets
(Australia and China) were cancelled out by the negative effect on revenue of
the sale of the non-core European ENT surgery furniture business in January,
which contributed revenue of approximately #0.83m in the comparative period.
Partnered Technologies DIVISION
Gyrus's Partnered Technologies Division represented 13% of Group revenues during
the period. The Division consists of technology licence, marketing and supply
relationships with Johnson & Johnson (Depuy Mitek, Ethicon Endo-Surgery and
Gynecare), Guidant, Conmed and Rhytec. The Division's overall revenues
increased substantially, by approximately 31% to $23.9m (H1 2005: $18.2m), with
our principal partners showing sound growth. The H1 2005 comparative was
somewhat weak and therefore flatters the division's performance. The underlying
growth rate from long term partners, excluding the effect of the new cosmetic
partnership with Rhytec, was approximately 20%.
Research & Development
The Group's gross investment in R&D for the first half was #8.2m (7.6% of sales)
an increase of 4% on the proforma comparative of approximately #7.9m. During
the period the Group expensed approximately #1.1m in respect of litigation costs
associated with the Medtronic claim against the ENT Division's Diego
microdebrider product (H1 2005: #0.9m).
There are some significant product launches scheduled for the second half of
2006 in both the visualisation and instrumentation sides of the business,
including the digital ureteroscope in the Urology & Gynaecology division and the
jPlasmaKnife and the Dissector PlasmaKnife in the ENT division.
In addition, the R&D team is focused on developing the next technology platform
for the Group, which will ultimately combine the capital elements of the Group's
"See and Treat" to improve economics and functionality for laparoscopic/
endoscopic suites and ultimately drive revenues from disposable products.
Operations and integration
During the first half of 2006 the Group has enjoyed a significant increase in
operating profitability through a combination of lean manufacturing
improvements, sourcing and overhead rationalisation and other integration
benefits. Although the Group's reported gross margin dropped to 59.7% (H1 2005:
61.3%) it has improved substantially on the proforma comparative gross margin of
approximately 57.3% for H1 2005.
The operating margin before amortisation of acquired intangible assets and
restructuring costs improved to 15.9% compared with 12.1% in the comparative
period and 14.2% for the last financial year. This represents a significant
progression towards the Group's target of a 20% annualised rate by mid 2008.
The material integration initiatives commenced during the period are as follows:
1) The Group's plant at Racine, Wisconsin, is to be closed by mid 2007;
2) Establishment of a separate global distribution centre in Minneapolis for
the Surgical and Urology & Gynaecology divisions. This centre is under final
fit out and is expected to commence operations in the final quarter of 2006;
3) Establishment of an offshore manufacturing facility in Mexico to reduce
the manufacturing cost of stable high volume products. The Group has
recently entered an agreement with a provider of sheltered manufacturing
facilities to achieve this before the end of the year; and
4) Implementation of a Group wide ERP system to replace the disparate systems
in the legacy organisations. Oracle was selected at the end of 2005, and
the detailed implementation process has progressed since then in order to
implement in the customer service and distribution centre and the legacy
ACMI plants in March 2007.
In addition to the above principal initiatives, the Group has achieved
significant integration benefits from operational improvement programmes,
improved sourcing of both production and non-production products and services
and removal of excess support and management staff. Of the target $22m in
annualised savings by mid 2008, which was disclosed at the time of the
acquisition last year, approximately 75% had been implemented by the end of June
with programmes to deliver that benefit progressively between the acquisition
date and mid 2008. The integration team has identified further opportunities
for improvement in excess of the original $22m and, taking into account the need
to minimise integration risk, invest in business growth particularly in general
surgery and, in certain circumstances share some cost benefits with our
customers, we have raised our final formal cost savings target to $25m in net
savings.
Over the remaining reporting periods until mid 2008, it will become
progressively more difficult to establish the relative benefits associated with
the various contributory factors to operating performance such as volume growth,
lean manufacturing, new product introduction, integration cost savings and
shifts in strategy between capital and disposable revenues. Accordingly, from
here on the Group will focus its reporting on the progression of the operating
margin towards our target of c. 20%.
Financial Review
Operating expenses net of other operating income increased by 132% to #53.8m (H1
2005: #23.2m) primarily as a result of the acquisition of ACMI. On a proforma
comparative basis and excluding both restructuring costs and intangible asset
amortisation, underlying net operating expenses grew by approximately 11.4% to
#48.1m, representing 44.8% of revenue (H1 2005: approximately #43.3m and 44.4%
respectively). The principal contributor to this increase was selling and
distribution expenses which grew by 11% on a proforma basis as the Group
prepared for certain key product launches particularly into general surgery.
Basic earnings per share (EPS) fell by 51% to 2.5p (H1 2005: 5.1p). Adjusted
EPS, which excludes amortisation of acquired intangible assets, restructuring
costs including the costs of the special LTIP award and deferred tax increased
by 54% to 7.7p (H1 2005: 5.0p) despite a significant increase in the provision
for current tax to 18% of profits before amortisation charges (H1 2005: 12%),
reflecting the increased profits in predominantly EU jurisdictions where there
are limited tax losses to offset.
During the period, the Group increased the installed base of generators in the
US market by 17% to 5694 units (H1 2005: 4861 units). 52% of new installations
were sold rather than placed. Sales of the related disposable instruments
increased 29% to $28.6m (H1 2005: $22.2m).
The Group's working capital position improved marginally compared with the
proforma combined comparative from 30th June 2005 with a 1% rise in the sterling
value of inventories being offset by an 8% reduction in trade receivables and a
9% increase in trade creditors. Compared to the previous year-end position the
apparent improvement is greater. However it is important to note that both
seasonality and particularly the devaluation of the dollar between 31st December
2005 and 30th June 2006 had the effect of apparently decreasing the working
capital of the Group. The effect of currency translation decreased the sterling
value of the Group's assets and liabilities as a whole, which are materially
denominated in that currency. At the period end net debt, which is
predominantly US dollar denominated, stood at #110.4m (31st December 2005:
#129.9m) representing a debt to equity gearing ratio of 39.2% (31st December
2005: 43.1%) and reflecting the natural hedge of our financing structure.
Outlook
2006 is an important year for Gyrus in which we are consolidating the combined
Group, introducing several important new "See and Treat" products and launching
Gyrus into the large general surgery market. At the same time the strategy of
capital placement to drive incremental sales of disposable products is being
introduced into the Group's largest division. These initiatives have started
well and we look ahead to the full year with optimism, albeit with some caution
in the face of a declining US dollar in the second half. In the longer term we
look with enhanced confidence at the commercial potential of our "See and Treat"
platform.
Brian Steer
Executive Chairman
Gyrus Group PLC
Consolidated Income Statement
For the six months ended 30 June 2006
Note 6 months Restructuring 6 months 6 months Year
ended (Note 3) Ended Ended Ended
30 June 30 June 30 June 31 December
2006 2006 2005 2005
(unaudited) (unaudited) (unaudited) (audited)
#000 #000 #000 #000 #000
Revenue 4 107,413 - 107,413 47,271 150,376
Cost of sales (42,219) (1,043) (43,262) (18,317) (66,749)
______ ______ ______ ______ ______
Gross profit 65,194 (1,043) 64,151 28,954 83,627
Other operating income 329 - 329 892 1,501
Selling and distribution
expenses
- Selling and distribution (29,220) (879) (30,099) (13,335) (40,161)
- Amortisation of acquired
intangibles (1,516) - (1,516) - (2,524)
Research and development
expenses
- Research and development (8,169) (11) (8,180) (5,071) (13,091)
- Amortisation of acquired
intangibles (2,838) - (2,838) - (1,406)
General and administrative
expenses (11,082) (403) (11,485) (5,727) (17,528)
______ ______ ______ ______ ______
Operating profit 12,698 (2,336) 10,362 5,713 10,418
Financial income 859 - 859 80 3,227
Financial expense (5,649) - (5,649) (1,080) (6,710)
______ ______ ______ ______ ______
Profit before taxation 7,908 (2,336) 5,572 4,713 6,935
Income tax expense 5 (2,747) 811 (1,936) (454) (659)
______ ______ ______ ______ ______
Profit for the period 5,161 (1,525) 3,636 4,259 6,276
______ ______ ______ ______ ______
Earnings per ordinary share
Basic 8 2.5p 5.1p 5.6p
_____ _____ _____
Diluted 8 2.4p 5.0p 5.4p
_____ _____ _____
Gyrus Group PLC
Statement of recognised income and expense
For the six months ended 30 June 2006
6 months 6 months Year
Ended Ended Ended
30 June 30 June 31 December
2006 2005 2005
(unaudited) (unaudited) (audited)
#000 #000 #000
Exchange differences arising on translation of foreign operations (26,783) 7,284 18,807
Deferred tax recognised on income and expenses directly in equity 404 130 663
Cash flow hedges
Changes in accounting policy relating to the first-time adoption
of IAS 39 - 115 115
Effective portion of changes in fair value of cash flow hedges
net of recycling 1,009 (337) 579
Actuarial gain/(loss) on defined benefit pension plan 11 - (35)
_____ _____ _____
(25,359) 7,192 20,129
Profit for the period 3,636 4,259 6,276
_____ _____ _____
Total recognised income and expense for the period (21,723) 11,451 26,405
_____ _____ _____
Gyrus Group PLC
Consolidated Balance Sheet
Note As at As at As at
30 June 30 June 31 December
2006 2005 2005
(unaudited) (unaudited) (audited)
#000 #000 #000
Assets
Property, plant and equipment 6 19,992 11,003 20,057
Goodwill 269,204 96,154 288,251
Other intangible assets 90,413 755 110,288
Deferred tax asset 5 - 4,643 -
_____ _____ _____
Total non-current assets 379,609 112,555 418,956
_____ _____ _____
Inventories 32,429 16,217 33,140
Trade receivables 29,711 16,620 35,509
Other current assets 8,007 3,920 8,849
Cash and cash equivalents 28,756 7,524 20,194
_____ _____ _____
Total current assets 98,903 44,281 97,692
_____ _____ _____
Total assets 478,512 156,836 516,288
_____ _____ _____
Equity
Share capital 7 (2,789) (2,163) (2,785)
Share premium 7 (304,536) (152,913) (303,699)
Merger reserve (3,860) (3,860) (3,860)
Hedging and translation reserves 15,306 2,029 (10,467)
Retained earnings 14,437 23,053 19,306
_____ _____ _____
Total equity (281,442) (133,854) (301,505)
_____ _____ _____
Liabilities
Bank loan 9 (118,944) - (136,731)
Obligations under finance leases and hire purchase (83) (215) (146)
contracts
Deferred tax liabilities 5 (20,842) - (22,801)
Provisions (3,693) - (3,219)
_____ _____ _____
Total non-current liabilities (143,562) (215) (162,897)
_____ _____ _____
Bank overdrafts and loans due within one year 9 (20,028) (8,087) (13,123)
Trade and other payables (31,209) (14,019) (37,700)
Current tax payable (2,160) (527) (929)
Obligations under finance leases and hire purchase
contracts (111) (134) (134)
_____ _____ _____
Total current liabilities (53,508) (22,767) (51,886)
_____ _____ _____
Total liabilities (197,070) (22,982) (214,783)
_____ _____ _____
Total equity and liabilities (478,512) (156,836) (516,288)
_____ _____ _____
Gyrus Group PLC
Consolidated Cash Flow Statement
As at As at As at
30 June 30 June 31 December
2006 2005 2005
(unaudited) (unaudited) (audited)
#000 #000 #000
Cash flows from operating activities
Profit for the period 3,636 4,259 6,276
Adjustments for:
Depreciation of property, plant and equipment 2,747 1,735 4,316
Amortisation of intangible assets 4,483 77 4,327
Loss on disposal of property, plant and equipment 58 44 85
Financial income and expense 4,790 1,000 5,463
Exchange loss included in financial income and expense (290) (711) (1,062)
Fair value adjustment on acquired inventory and option
accounting - - 2,705
Equity settled share based payment expense 1,199 281 1,570
Taxation 1,936 454 659
_____ _____ _____
Operating cash flows before movement in working capital 18,559 7,139 24,339
Increase in inventories (765) (3,850) (1,263)
Decrease/(increase) in trade and other receivables 3,994 (2,736) (10,268)
(Decrease)/increase in trade and other payables (3,093) 3,688 948
_____ _____ _____
Cash generated from operations 18,695 4,241 13,756
Interest paid (4,772) (384) (3,227)
Taxation paid (878) (631) (573)
_____ _____ _____
Net cash from operating activities 13,045 3,226 9,956
_____ _____ _____
Cash flows from investing activities
Interest received 342 80 192
Acquisition of property, plant and equipment (4,150) (1,656) (4,238)
Acquisition of patents, trademarks and other intangibles (10) (296) (56)
Expenditure on product development (267) - (253)
Acquisition of subsidiaries (net of cash acquired) - (765) (289,775)
_____ _____ _____
Net cash from investment activities (4,085) (2,637) (294,130)
_____ _____ _____
Cash flows from financing activities
Proceeds from issue of share capital 841 469 155,660
(Repayment)/increase in borrowings (546) (841) 141,259
Repayment of obligations under finance leases (65) (59) (133)
_____ _____ _____
Net cash from financing activities 230 (431) 296,786
_____ _____ _____
Net increase in cash and cash equivalents 9,190 158 12,612
Cash and cash equivalents at beginning of period 20,194 7,263 7,263
Effect of foreign exchange rate fluctuations on cash held (628) 103 319
_____ _____ _____
Cash and cash equivalents at end of period 28,756 7,524 20,194
_____ _____ _____
Bank balances and cash 28,756 7,524 20,194
_____ _____ _____
Gyrus Group PLC
Notes to the Preliminary Announcement
For the six months ended 30 June 2006
1. Basis of preparation
Gyrus Group PLC is a company domiciled in the United Kingdom. The condensed
consolidated interim financial statements of the Company for the six months
ended 30 June 2006 comprise the Company and its subsidiaries (together referred
to as the "Group").
The preliminary announcement for the period ended 30 June 2006 has been drawn up
under the same accounting policies as those used for the financial statements
for the year ended 31 December 2005.
The interim financial statements do not constitute statutory accounts as they
are unaudited.
The comparative figures for the financial year ended 31 December 2005 are not
the Group's full audited statutory accounts for that financial year. Those
accounts, which were prepared under EU adopted International Financial Reporting
Standards, have been reported on by the Group's auditor and delivered to the
registrar of companies. The report of the auditors was unqualified and did not
contain statements under section 237(2) or (3) of the Companies Act 1985.
The condensed consolidated interim financial statements were authorised for
issuance on 12 September 2006.
2. Adjustment to initial accounting for the acquisition of American Cystoscope
Makers Inc
As disclosed in the Annual Report and Accounts for the year ended 31 December
2005, on 21 July 2005, Gyrus Group PLC acquired 100% of the share capital of
American Cystoscope Makers Inc ("ACMI"). Fair values were assigned to ACMI's
identifiable assets, liabilities and contingent liabilities on the basis of
information available. Subsequent to the initial accounting for this business
combination, a liability of #224,000 has been identified that existed at the
balance sheet date but for which no fair value was attributed on acquisition.
As permitted under IFRS 3 ("Business Combinations"), the liability has been
recognised within twelve months of the acquisition date. Net assets and
liabilities restated at the acquisition date are #14,711,000 and goodwill
restated at acquisition #180,217,000. There is no impact on either the profit
or adjusted earnings per share for the year ended 31 December 2005 or for the
six months ended 30 June 2006.
3. Restructuring costs
As a result of the acquisition of American Cystoscope Makers Inc in July 2005,
the Group continues to incur restructuring costs arising from the integration of
the legacy Gyrus business with that of ACMI. The total charge for the period
ending 30 June 2006 was #2,336,000 (year ended 31 December 2005: #2,369,000 and
six months ended 30 June 2005: #nil). An analysis of these costs is shown
below.
As at As at As at
30 June 30 Jun 31 December
2006 2005 2005
(unaudited) (unaudited) (audited)
#000 #000 #000
Severance costs 1,081 - 1,320
Short-term sales commission - - 352
Demonstration equipment write-off - - 148
Alignment of global enterprise resource planning systems - - 456
International distributor settlements 216 - -
Manufacturing inefficiencies arising as a result of the
relocation of production 276 - -
Set up costs associated with the customer service and 95 - -
distribution centre
Core integration team expenses 413 - -
Gyrus ACMI rebranding 66 - -
Other costs 189 - 93
_____ _____ _____
2,336 - 2,369
_____ _____ _____
4. Segment reporting
Segment information is presented in the condensed consolidated financial
statements in respect of the Group's business Divisions, which are the primary
basis of segment reporting. The business segment reporting format reflects the
Group's management and internal reporting structure.
Inter-segment pricing is determined on an arm's length basis.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis.
Business segments
The Group is comprised of the following main business segments:
ENT Design, development, manufacture, marketing and sales of otology, sinus & rhinology and head &
neck products
Surgical Design, development, manufacture, marketing and sales of laparoscopic surgery products
Urology & Design, development, marketing and sales of urology and gynaecology and visualisation products
Gynaecology
Partnered Out-licensing of the Group's proprietary technology in conjunction with a manufacturing contract
Technologies for markets outside the Group's core sales and marketing competence
For the six months ended 30 June 2006 (unaudited)
ENT Surgical Partnered Urology & Total
Technologies Gynaecology
#000 #000 #000 #000 #000
Revenue
External sales 20,416 22,967 13,470 50,560 107,413
Inter-segment sales - 438 3,439 - 3,877
_____ _____ _____ _____ _____
20,416 23,405 16,909 50,560 111,290
_____ _____ _____ _____ _____
Segment result before amortisation
and restructuring charges 2,688 5,967 3,106 7,313 19,074
Amortisation of acquired intangibles - (500) (30) (3,824) (4,354)
Restructuring charges (75) (337) (135) (1,789) (2,336)
_____ _____ _____ _____ _____
Segment result after amortisation
of acquired intangibles and
restructuring charges 2,613 5,130 2,941 1,700 12,384
_____ _____ _____ _____ _____
Unallocated corporate expenses (2,022)
_____
Profit from operations 10,362
Net finance costs (4,790)
_____
Profit before tax 5,572
Income tax expense (1,936)
_____
Profit for the period 3,636
_____
For the six months ended 30 June 2005
(unaudited)
ENT Surgical Partnered Urology & Total
Technologies Gynaecology
#000 #000 #000 #000 #000
Revenue
External sales 20,190 14,430 9,703 2,948 47,271
Inter-segment sales - 505 2,246 - 2,751
_____ _____ _____ _____ _____
20,190 14,935 11,949 2,948 50,022
_____ _____ _____ _____ _____
Segment result 1,572 3,566 2,035 909 8,082
_____ _____ _____ _____ _____
Unallocated corporate expenses (2,369)
_____
Profit from operations 5,713
Net finance costs (1,000)
_____
Profit before tax 4,713
Income tax expense (454)
_____
Profit for the period 4,259
_____
5. Tax expense
The overall rate of tax for the period is 34.7% (30 June 2005: 9.6%) which is
higher than the standard rate of UK corporation tax of 30%.
This is due, in particular, to the higher rates of tax in the overseas
jurisdictions, the impact of IFRS 2 on the issue of long- term incentive awards
and significant non-deductible items such as the amortisation of intangibles.
Current taxation
As at 30 June 2006 As at 30 June 2005
(unaudited) (unaudited)
#000 #000
- Domestic 1,267 197
- Foreign 515 367
_____ _____
1,782 564
_____ _____
Deferred tax
- Current year 154 (110)
_____ _____
Taxation attributable to the Company and its
subsidiaries 1,936 454
_____ _____
Deferred Taxation
#000
Net deferred tax asset recognised at 30 June 2005 4,643
Business combinations (28,152)
Credit to income for the period 168
Charged directly to equity 130
Exchange differences 410
_____
Net deferred tax liability recognised at 31 December 2005 (22,801)
Charge to income for the period (154)
Charged directly to equity 404
Exchange differences 1,709
_____
Net deferred tax liability recognised at 30 June 2006 (20,842)
_____
The primary components of the Group's recognised deferred tax assets include
accrued interest payments on loans to US subsidiaries and tax loss carry
forwards.
The primary components of the Group's deferred tax liabilities include temporary
differences related to tax relief for goodwill obtained in relation to the
acquisition of the assets of Smith & Nephew Inc's ENT division ("ENT") and on
the intangible assets acquired during the acquisitions made in 2005.
As the Group has overseas entities, the sterling deferred tax position moves as
a result of translation at the exchange rate prevailing at the period end. This
foreign exchange difference has been recognised through reserves.
6. Property, plant and equipment
Capital commitments
As at 30 June 2006, the Group entered into contracts to purchase property, plant
and equipment of #1,102,000 (six months ended 30 June 2005: #693,000).
7. Capital and reserves
Share capital and share premium
The Group recorded the following amounts within shareholder's equity as a result
of the issuance of ordinary shares.
For the six months ended 30 June
Share capital Share premium
2006 (unaudited) 2005 (unaudited) 2006 (unaudited) 2005
(unaudited)
#000 #000 #000 #000
Issuance of ordinary shares 4 3 837 466
Dividends
The Directors do not propose the payment of a dividend (30 June 2005: #nil).
8. Earnings per share
Basic earnings per share
The calculation of basic earnings per share for the six months ended 30 June
2006 was based on the profit attributable to ordinary shareholders of #3,636,000
(year ended 31 December 2005:#6,276,000 and six months ended 30 June 2005:
#4,259,000) and a weighted average number of ordinary shares outstanding during
the six months ended 30 June 2006 of 146,287,927 (year ended 31 December 2005:
111,601,948 and six months ended 30 June 2005: 83,766,128).
Diluted earnings per share
The calculation of diluted earnings per share for the six months ended 30 June
2006 was based on the profit attributable to ordinary shareholders of #3,636,000
(year ended 31 December 2005:#6,276,000 and six months ended 30 June 2005:
#4,259,000) and a weighted average number of ordinary shares outstanding during
the six months ended 30 June 2006 of 150,513,041 (year ended 31 December 2005:
115,368,521 and six months ended 30 June 2005: 84,631,581).
Earnings
6 months 6 months Year ended 31
ended 30 June ended 30 June December 2005
2006 2005 (audited)
(unaudited) (unaudited)
#000 #000 #000
Earnings for the purposes of basic and diluted earnings per
share 3,636 4,259 6,276
6 months 6 months Year ended 31
ended 30 June ended 30 June December 2005
2006 2005 (audited)
(unaudited) (unaudited)
Number Number Number
Weighted average number of shares for purposes of calculating
basic earnings per share 146,287,927 83,766,128 111,601,948
Effect of dilutive options 4,225,114 865,453 3,766,573
_____ _____ _____
Weighted average number of shares for purposes of calculating
diluted earnings per share 150,513,041 84,631,581 115,368,521
_____ _____ _____
Basic earnings per share 2.5p 5.1p 5.6p
_____ _____ _____
Diluted earnings per share 2.4p 5.0p 5.4p
_____ _____ _____
Adjusted earnings per share
In order to provide a clearer measure of the Group's underlying performance,
profit attributable to ordinary shareholders is adjusted to exclude items which
management consider will distort comparability. Adjusted basic earnings per
share has been calculated by dividing adjusted profit attributable to ordinary
shareholders (see table below for adjustments made) of #11,252,000 (year ended
31 December 2005: #15,835,000 and six months ended 30 June 2005: #4,149,000) by
the weighted average number of ordinary shares outstanding during the six months
ended 30 June 2006 of 146,287,927 (year ended 31 December 2005: 111,601,948 and
six months ended 30 June 2005: 83,766,128).
Adjusted diluted earnings per share has been calculated by dividing adjusted
profit attributable to ordinary shareholders (see table below for adjustments
made) of #11,252,000 (year ended 31 December 2005: #15,835,000 and six months
ended 30 June 2005: #4,149,000) by the weighted average number of ordinary
shares outstanding during the six months ended 30 June 2006 of 150,513,041 (year
ended 31 December 2005: 115,368,521 and six months ended 30 June 2005:
84,631,581).
Earnings on which adjusted earnings per share is based:
6 months ended 6 months ended Year ended
30 June 2006 30 June 2005 31 December 2005
(unaudited) (unaudited) (audited)
#000 #000 #000
Basic earnings for the period 3,636 4,259 6,276
Net impact of fair value adjustments on acquired inventory - - 2,706
and option accounting
Restructuring charges 2,336 - 2,369
Amortisation of acquired intangible assets 4,354 - 3,873
Charge relating to "special" LTIP award* 772 - 872
Deferred taxation 154 (110) (261)
_____ _____ _____
Earnings for the purposes of adjusted earnings per share 11,252 4,149 15,835
_____ _____ _____
Adjusted basic earnings per share 7.7p 5.0p 14.2p
_____ _____ _____
Adjusted diluted earnings per share 7.5p 4.9p 13.7p
_____ _____ _____
*As part of the acquisition of American Cystoscope Makers Inc, a "special" award
of conditional shares under the Group's LTIP scheme was approved by shareholders
and was made to retain and incentivise approximately 25 key executives to
integrate the business effectively. The award will create a charge over
approximately three years until the potential vesting date of July 2008. The
charge relating to this is considered to be another form of integration/
restructuring cost.
9. Interest-bearing loans and borrowings
As at 30 June 2005 the Group had a loan of #8,087,000 under a revolving credit
facility of #15,000,000 which would have expired in December 2005. In order to
finance the acquisition of American Cystoscope Makers Inc, new banking
facilities were agreed which comprised a term loan of $250m together with a
revolving credit facility. The remaining balance on the previous loan facility
at 21 July 2005 was refinanced under the terms of the new facility.
The $250m loan is for a fixed term of five years. The loan attracts a maximum
rate of US LIBOR plus 1.75% provided that Total Net Debt to Consolidated EBITDA
(as defined in the facility agreement) is less than 3.50 and a minimum rate of
US dollar LIBOR plus 0.75% provided that Total Net Debt to Consolidated EBITDA
is less than 1.00.
Each advance drawn down under the $30m revolving credit facility is repaid on
the last business day of each fixed term interest period (typically three to six
months). As the term of the revolving credit facility is for a period of five
years from 21 July 2005, amounts drawn down under this facility are shown as
non-current liabilities where repayments are due in greater than one year. The
interest rate for each advance drawn under the revolving facility is fixed on
the date of the advance for the agreed interest period at US dollar LIBOR plus
1.75%. The margin added to US dollar LIBOR follows that of the term loan
facility. Amounts drawn down on this facility at 30 June 2006 were US$650,000
and EUREuro5,000,000. These loans are disclosed as current liabilities.
The $250m loan and $30m revolving credit facility are secured by a fixed and
floating debenture on the assets of the Group.
Repayments on the loan over the period from 1 January 2006 to 30 June 2006 were
as follows:
Euro US dollar Total
#000 #000 #000
Loan balance as at 1 January 2006 (audited) 3,435 146,419 149,854
Repayments - (546) (546)
Foreign exchange movement 21 (10,357) (10,336)
_____ _____ _____
Loan balance as at 30 June 2006 (unaudited) 3,456 135,516 138,972
_____ _____ _____
10. Financial Instruments
Interest rate risk
The Group adopts a policy of ensuring that at least 50% of its exposure to
changes in interest rates on fixed term borrowings is hedged. At 30 June 2006,
the Group had entered into two interest rate cap and collar transactions. The
cap on both financial instruments is US dollar LIBOR rate of 4.75% and the
collars are 4.19% and 3.96% respectively. The maturation of both instruments is
consistent with that of the $250m term loan. At 30 June 2006, the Group had
interest rate hedges with a notional contract amount of $187,500,000 (30 June
2005: $nil).
The Group classifies interest rate hedges as cash flow hedges and states them at
fair value.
Foreign currency risk
The Group incurs foreign currency risk on sales and purchases that are
denominated in currencies other than sterling. The currency primarily giving
rise to this risk is the US dollar.
The Group hedges at least 80% of the anticipated US dollar cash flows for net
anticipated receivables/payables in the first three months forward, at least 50%
in months four to six and at least 25% in months seven to twelve forward. The
Group uses forward exchange contracts to hedge its foreign currency risk. All
of the forward exchange contracts have maturities of less than one year from the
balance sheet date.
The Group designates its forward exchange contracts of the variability of cash
flows of a recognised asset or liability, or highly probable forecasted
transaction as cash flow hedges and states them at fair value.
Estimation of fair values
The fair value of forward foreign exchange contracts is the mark to market value
of the contracts as at 30 June 2006. The fair value of forward foreign exchange
contracts at 30 June 2006 is an asset of #104,000 (six months ended 30 June 2005
a liability of #83,000 and year ended 31 December 2005 a liability of #147,000).
The fair value of the interest rate hedges as at 30 June 2006 is an asset of
#1,712,000 (six months ended 30 June 2005 #nil and year ended 31 December 2005
an asset of #864,000).
Adjustments to the fair value of cash flow hedges are reported in equity when
designated as effective hedges. The ineffective portion is immediately
recognised in the income statement. Otherwise the gains and losses will be
reported in the income statement only when the forecasted transaction occurs and
is recognised in the income statement.
This information is provided by RNS
The company news service from the London Stock Exchange
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