16th Mar 2007 07:01
Gyrus Group PLC16 March 2007 16 March 2007 Gyrus Group PLC Gyrus grows revenue by 42% and Adjusted EPS* by 20% Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical deviceswhich reduce trauma and complications in surgery, today announces itspreliminary results for the year ended 31 December 2006. Financial Highlights • Group revenues up 42% to £213.3 million (2005: £150.4 million) including full year of ACMI revenue • Underlying proforma** revenue growth of 7% from continuing operations as a result of a stronger performance in the second half of the year • Reported operating profit up 84% to £19.1 million (2005: £10.4 million); Underlying operating profit* up 65% to £35.2 million (2005: £21.3 million) • Adjusted EPS* rises 20% to 17.1p (2005: 14.2p) slightly ahead of market expectations and basic EPS increases 61% to 9.0p (2005: 5.6p) * Excluding, where relevant, material non-recurring items, amortisation ofacquired intangibles, restructuring costs and the separately disclosed IAS 12adjustment to goodwill and other deferred tax movements. **Proforma 2005 comparative assumes a full year effect of ACMI rather than fromthe date of acquisition (21st July 2005) Operational Highlights • Surgical Division sales up to £52.5 million with strong performance from PK(R) instrument portfolio; proforma** constant currency revenue grows by 19% in the US • Successful launches of PlasmaCision(R) products in Surgical Division produce disposable product sales of $4.6 million (2005: $1.3 million) and an installed base of 407 G400 Generators • Partnered Technologies Division grows revenue 14% on strong performances by the portfolio of partners • Urology & Gynaecology Division finishes year strongly to report 4% underlying proforma revenue growth after a flat first half. US sales of PK SuperPulse products reach $10.1 million (2005: $5.4 million) • ACMI integration programme on track for $25 million savings target overall and underlying operating margin* improves to 16.5% (2005: 14.2%) Brian Steer, Executive Chairman, said: "We have delivered earnings ahead of expectations reflecting the Group'simproved trading and leaner cost base. In 2006 we made excellent progress withthe integration of Gyrus ACMI, having reorganised and refocused the Group on our"See and Treat" technology. We are now seeing the strategic benefits of thecombined product portfolio and are encouraged by the developing momentum of ournew products. "Although the weakness of the US dollar remains a translation concern, weanticipate further improvement in our operating margin and the continuedstrengthening of our business in 2007." Enquiries: Gyrus Group PLC On 16 March 2007: Brian Steer, Executive Chairman Tel: 0207 831 3113 Simon Shaw, Chief Financial Officer Tel: 0207 831 3113 Financial Dynamics Ben Atwell / John Gilbert Tel: 0207 831 3113 Overview In our last annual report we concluded "...We look at 2006 as the foundationyear for significant integration and new product introductions, which willdetermine our future success...". This is a succinct summary of the Group'sstrong performance in 2006, a year in which we have progressed well with theoperational integration of Gyrus ACMI, having reorganised and refocused theGroup on the value of our "See and Treat" technology platform. In addition tobringing a large number of new products to market, we have continued to deliverstrong growth in the Group's revenue and earnings. The Group's reported sales revenue grew by 42% to £213.3 million (2005: £150.4million). The majority of this growth derived from the full year effect of theacquisition of ACMI in July 2005. Underlying proforma constant currency revenuegrew by approximately 7% year-on-year showing a slight improvement in the secondhalf compared with the first six months. The Group continued to improve its operating margin, which translated into basicearnings per share (EPS) growth of 61% to 9.0p (2005: 5.6p) and our underlyingmeasure of Adjusted EPS, which grew 20% to 17.1p (2005: 14.2p). The Surgical Division Global Surgical Division revenue increased on a reported basis by 40% to £52.5million (2005: £37.6 million) although this includes the effect of the transferof certain laparoscopic products from ACMI to the Surgical Division at the endof 2005. The Division posted 19% proforma revenue growth in the US on a constantcurrency basis, primarily due to the continued growth of the laparoscopichysterectomy market in the United States. In addition the early stage of theDivision's launch into the large general surgery market is encouraging. Overall US sales of the Division's PK disposable instrument range grew by over40% to $38.9 million (2005: $27.5 million). Of this PK Cutting forceps, theproduct through which the Division has grown consistently over the last fiveyears, continued their strong performance in 2006 posting sales of $27.3million in the US, representing growth of over 34% on the prior year (2005:$20.3 million). The Division continues to build its position in the laparoscopichysterectomy market and last year approximately 400 surgeons were trained inlaparoscopic gynaecological techniques under Gyrus ACMI's sponsored programmes. The G 400 Generator, which is now the Surgical Division's workstation and canpower the full range of conventional PK and newer PlasmaCision(R) instrumentsfor use in both gynaecology and general surgery performed well with 407 newgenerators installed into the US market since its launch in March 2006. In March 2006, the Division introduced its first laparoscopic instruments forgeneral surgery using PlasmaCision, our simultaneous "cut and seal" technology.The Plasma Trissector and Plasma J Hook joined the PlasmaSeal (for open surgery)and the PlasmaSpatula (gynaecology) to form the Surgical Division's PlasmaCisionportfolio which represented sales of $4.6 million in 2006, an increase ofapproximately 250% on the prior year (2005: $1.3 million). The two lead products, PlasmaSeal and Plasma Trissector (for open andlaparoscopic surgery respectively) underwent significant optimisation processesduring the period from launch to the end of the year. During this period theywere only available to the market on a restricted basis. The Urology & Gynaecology Division The Urology & Gynaecology Division's reported global revenue reached £96.1million, a 93% increase on the prior period (5.5 month period in 2005: £49.7million). On a proforma basis, US revenue grew 4% in constant currency whencompared against a strong pre-acquisition comparative. The Division wasrefocused onto the sale of single use products and several new product launchesresulted in encouraging signs of a pick up in revenue growth during the secondhalf of the year. In the US cysto-resection market, sales grew by approximately 7% in 2006 to justover $67 million. The PK SuperPulse products for prostate and bladder treatmentperformed increasingly strongly during the course of the year. Having posted$3.4 million in revenue in the first six months of the year, PK product salesaccelerated in the third quarter and finished the year at $10.1 million. The performance of the Division's stone management portfolio in the US was mixedwith overall sales down by just under 2% on the proforma full year comparativeto a total of $60 million. Some important products in the range performed well,with semi rigid ureteroscopes showing sales growth of 55% following the launchof the new MR6-A (autoclaveable) scope and laser fibres and accessories growingby over 7%. There was a decline in sales of the Division's conventional fibreoptic-based flexible ureteroscopes, primarily as a result of customers delayingcapital investment on replacement scopes until the launch of the Division's newdigital Invisio ureteroscope, the DUR-D. This scope was introduced to the marketlate in the year and is expected to generate significant revenue in 2007. The endoscopic gynaecology portfolio performed well with US sales growing byjust over 13% to $18.7 million supported by strong performances in fluidmanagement and disposable instruments. The ENT Division Whilst underlying revenue from continuing operations remained flat on a constantcurrency basis, the ENT Division increased its profit contribution substantiallyas it restructured to focus on the surgical aspects of its current and futureportfolio. In the last quarter the Division began a significant overhaul of itsmanagement and sales force to achieve this. Global Divisional revenue fell by 4%on a reported basis, due to the decline in the dollar, to £38.5 million (2005:£40.1 million). The Otology business contributed US sales revenue of approximately $23.2 millionin 2006, a decline of 3% on the previous year (2005: $23.8 million). Thisperformance is consistent with normal variations between periods for this maturemarket in which we hold the leading position. The Sinus and Rhinology business contributed US sales of $16.3 million in 2006,approximately 6% higher than the previous year (2005: $15.4 million). During thefirst nine months of the year revenue was adversely affected by litigationmounted against the Division by Medtronic Xomed in respect of the Division'sDiego(R) micro-debrider product. In September 2006, Medtronic dropped the caseand sales of the Diego range have improved since that time to record annualgrowth of 12% compared with 9% at the half-year stage. Head and Neck surgery comprises a number of different products but the primaryfocus for the future is on the Division's PlasmaCision derived products, the JPlasmaKnife for tonsils and the Dissector PlasmaKnife for radical proceduressuch as thyroidectomy, which were launched towards the end of the year. The Partnered Technologies Division The Partnered Technologies Division showed strong growth with each of itsprincipal partner relationships contributing well. The Division reported globalrevenue growth of 14% to £26.2 million (2005: £23.0 million). In addition itcommenced a potentially interesting new relationship in the area ofrobot-assisted surgery with Intuitive Surgical Inc. International Sales By the end of the year the International sales organisation had addressed theneed to rationalise its distribution partnerships around the world. The processof achieving this restricted revenue growth in the year, resulting in constantcurrency growth of 2% year-on-year. Overall the Group enjoyed a strong finish to the year and revenue growth for thesecond half began to improve towards the Group's target of 10% per annum. Gross Margin The Group's reported gross margin improved to 59.3% in 2006 (2005: 55.6%) andexcluding restructuring costs and material non-recurring item, the gross marginimproved to 60.5% (2005: 58.8%). This was achieved through a combination of volume, mix, lean manufacturing andintegration improvements. The legacy ACMI manufacturing plants benefitedsignificantly from both the continuation of the operating efficiency programmesstarted pre-acquisition and the implementation of lean manufacturing since then. Operating Expenses The Group's operating expenses, before restructuring costs, increased as aresult of the full year effect of the ACMI acquisition but decreased as apercentage of sales revenue to 44.3% (2005: 45.5%) following the removal ofduplicated overhead costs and improved purchasing power for non-stock expensessuch as insurance coverage. Selling and distribution expenses increased substantially to 27.8% of salesrevenue (2005: 25.9%). This was primarily due to increased expenditure on sales,marketing and training/support staff and associated resources to support newproduct launches. R&D and New Products During the year we focused our development resources primarily on the Group's "See and Treat" platform comprising the Group's Invisio(R) digital visualisationcapability and PK tissue management technology. During 2006 our expenditure on research and development, before restructuringcosts, increased 16% to £15.2 million (2005: £13.1m) but declined as apercentage of sales to 7.1% (2005: 8.7%). Overall R&D spend includingcapitalised costs represented 7.6% of revenue (2005: 8.9%). Of this,approximately £1.3 million (2005: £1.9 million) was expensed in the successfuldefence against an intellectual property infringement action brought against theENT division by Medtronic Xomed. In the visualisation field Gyrus ACMI introduced three new camera systems duringthe year, including the Titan, the first 3 chip digital camera, which canwithstand repeated sterilisation by autoclave, and two megapixel digital cameraheads. In addition, we introduced the DUR-D ureteroscope, our latest flexibleendoscope to incorporate Invisio digital technology. We have high expectationsfor this product's success in the market. In the tissue management field, Gyrus ACMI introduced the PlasmaCision range ofproducts for general abdominal surgery and, in the last quarter, for the ENTmarket. We now have seven separate disposable instruments incorporating theGroup's proprietary PlasmaCision simultaneous "cut and seal" technology. Weanticipate that the Surgical and ENT Divisions will make significant gains intheir respective markets with these instruments. Profitability The Group's reported operating profit for 2006 was £19.1 million (2005: £10.4million) representing an 84% increase on the prior year. Excluding materialnon-recurring items, amortisation of acquired intangibles, restructuring costsand the separately disclosed IAS 12 adjustment to goodwill, operating profitincreased by 65% to £35.2 million (2005: £21.3 million), representing anoperating margin of 16.5% of sales revenue (2005: 14.2%). Although restructuringcharges will continue to have an impact upon 2007 and 2008 the Group is well oncourse to meet its goal of substantially improving its underlying operatingmargin to 20%. Integration of Gyrus ACMI In 2006 the Group made substantial progress in integrating ACMI. This process,which involved significant restructuring programmes related to manufacturingcapacity and location, incurred restructuring costs of £5.8 million beforetaxation (2005: (23 weeks) £2.4 million). We are nearing completion of the closure of our facility in Racine, Wisconsin, aprocess that commenced in January 2006. In mid-year we announced the instigationof a sheltered manufacturing programme in Mexico, which is designed to take onthe manufacturing of products for which labour and overhead cost is asignificant barrier to success. The first product to have been manufactured atour new Saltillo site was despatched in February 2007. In addition we have setup the Gyrus ACMI Customer Service and Distribution Centre in Maple Grove,Minnesota and further increased our manufacturing capacity there. Finally, we have also been working on the implementation of a new OracleEnterprise Resource Planning (ERP) system throughout the Group. This isdesigned, over the next two years, to replace most of the multiple computersystems and manual processes which are currently in use throughout the Group.The Maple Grove Distribution Centre was the first site to go live on the newsystem in early March 2007. Earnings per share Basic EPS of 9.0p in 2006 increased by 61% on the prior year (2005: 5.6p).Adjusted EPS, which excludes the amortisation of acquired intangible assets, netrestructuring costs (including the cost of the one-off special LTIP award, butnot "normal" annual awards), material non-recurring items, the separatelydisclosed IAS 12 adjustment to goodwill and other movements on deferred taxationincreased 20% to 17.1p (2005: 14.2p). Installed base of Generators in the US In 2006 the installed base of generators in the US grew by 21% to 6,353 units(2005: 5,248 units). Sales of disposable instruments associated with thesegenerators increased by 30% to $60.2 million (2005: 22% and $46.3 millionrespectively). During 2006 the Group continued to sell approximately 50% of thegenerators which we supplied to the US market overall, with the remainder placedunder a variety of loan schemes. The Group's investment in placing generators in the year increased by 27% to£1.9 million (2005: £1.5 million) in line with placement volumes. Management and staff It is a testament to the capability and commitment of our staff around the worldthat we have been able to progress on all fronts this year whilst making therestructuring changes necessary to support our future success. During the year there have been some changes in personnel and responsibilitiesamongst the members of the Group Operating Board, which is the primary forum forthe day-to-day management of the Group's activities. Andy Zappas was appointedPresident of the Urology & Gynaecology Division with a particular brief to buildthe disposable product business. Following the departure of Frank D'Amelio asChief Technology Officer, Roy Davis, Chief Operating Officer, has taken overresponsibility for research and development activities alongside his existingoperational duties. Tom Murphy, Executive Vice President, has taken onresponsibility for the Group's Customer Service and Distribution Centre and, inaddition, he is responsible for the implementation of the Oracle ERP System.Finally, Simon Shaw, Chief Financial Officer, has assumed executiveresponsibility for the Partnered Technologies Division. Board In preparation for the next phase of the Group's development, the Boardappointed John Rennocks and Katherine Innes Ker as Non-Executive Directors inOctober 2006. Charles Goodson-Wickes will retire at this year's Annual GeneralMeeting and we thank him for his strong and wise support of the Group over the10 years he has held office. Michael Garner, Deputy Chairman has agreed to takeresponsibility for ensuring an orderly Chief Executive succession process during2007. During 2006 the Nominations Committee began its preparation for the ChiefExecutive succession programme and the selection process has now commenced. Itis anticipated that a decision will be made by the time of the Group's interimresults in September this year. Summary and Outlook We have delivered earnings ahead of expectations reflecting the Group's improvedtrading and leaner cost base. In 2006 we made excellent progress with theintegration of Gyrus ACMI, having reorganised and refocused the Group on our "See and Treat" technology. We are now seeing the strategic benefits of thecombined product portfolio and are encouraged by the developing momentum of ournew products. Although the weakness of the US dollar remains a translation concern, weanticipate further improvement in our operating margin and the continuedstrengthening of our business in 2007. Gyrus Group PLC Consolidated Income StatementYear ended 31 December 2006 Note Year ended 31 Restructuring IAS 12 Year ended December 2006 adjustment to 31 December pre-restructuring (note 4) goodwill (note 2006 costs and IAS 12 5) adjustment £000 £000 £000 £000 Revenue 2 213,342 - - 213,342 Cost of sales (84,351) (2,514) - (86,865) _____ _____ _____ _____ Gross profit 128,991 (2,514) - 126,477 Other operating income 695 - - 695 Selling and distribution expenses - Selling and distribution (59,334) (1,952) - (61,286) - Amortisation of acquired intangible (5,506) - - (5,506)assets Research and development expenses - Research and development (15,196) (308) - (15,504)- Amortisation of acquired intangible (2,942) - - (2,942)assets General and administrative expenses (19,982) (1,034) (1,773) (22,789) _____ _____ _____ _____ Operating profit 2 26,726 (5,808) (1,773) 19,145 Financial income 1,322 - - 1,322Financial expense (10,342) - - (10,342) _____ _____ _____ _____ Profit before taxation 17,706 (5,808) (1,773) 10,125 Taxation 5 940 2,128 - 3,068 _____ _____ _____ _____ Profit for the year 18,646 (3,680) (1,773) 13,193 _____ _____ _____ _____ Earnings per ordinary shareBasic 6 9.0pDiluted 6 8.7p All activities were in respect of continuing operations Gyrus Group PLCConsolidated Income StatementYear ended 31 December 2005 Note Year ended 31 Restructuring Impact of fair Year ended December 2005 value 31 December pre-restructuring (note 4) adjustments on 2005 costs and material acquired non-recurring items inventory and (notes (a) and (b) option below) accounting (notes (a) and (b) below) £000 £000 £000 £000 Revenue 2 150,376 - - 150,376 Cost of sales (62,006) (57) (4,686) (66,749) _____ _____ _____ _____ Gross profit 88,370 (57) (4,686) 83,627 Other operating income 1,501 - - 1,501 Selling and distribution expenses - Selling and distribution (38,955) (1,206) - (40,161) - Amortisation of acquired intangible (2,524) - - (2,524)assets Research and development expenses - Research and development (13,148) - - (13,148)- Amortisation of acquired intangible (1,349) - - (1,349)assets General and administrative expenses (16,422) (1,106) - (17,528) _____ _____ _____ _____ Operating profit 2 17,473 (2,369) (4,686) 10,418 Financial income 255 - 2,972 3,227Financial expense (5,718) - (992) (6,710) _____ _____ _____ _____ Profit before taxation 12,010 (2,369) (2,706) 6,935 Taxation 5 (3,340) 900 1,781 (659) _____ _____ _____ _____ Profit for the year 8,670 (1,469) (925) 6,276 _____ _____ _____ _____ Earnings per ordinary shareBasic 6 5.6pDiluted 6 5.4p a) Fair value adjustment on acquired inventory As required by IFRS 3 "Business Combinations", at the date of acquisition ofACMI finished goods were valued at the selling price less the costs of disposaland a reasonable profit allowance for the selling effort. Work in progress wasvalued at the selling price of the finished goods less costs to complete, costsof disposal and a reasonable profit allowance for completing and selling thegoods. Raw materials were valued at current replacement cost. The fair valueadjustment arising as a result of this valuation exercise amounted to anincrease in the value of inventories of £4,686,000. This inventory upliftreversed through the income statement over the inventory turn and the chargearising in the year ended 31 December 2005 was £4,686,000. b) Option accounting On 16 June 2005 Gyrus announced the proposed acquisition of ACMI for a totalconsideration of $497 million. On the same date it entered a placing agreementto raise £116 million (net). In order to ensure that £116 million proceeds ofthe sterling capital raised would buy at least USD$ 206 million required forsettlement, regardless of movements in the USD$:GBP£ exchange rate, Gyrusentered into an option agreement. The cost of the option was £992,000 and theterms of the option allowed for exercise up to the 15 August 2005. On completion, the sale of option generated proceeds of £2,972,000 (a net gainof £1,980,000). This is an ineffective hedge under the provisions of IAS 39, andtherefore the cost of the option and the sale proceeds thereof were taken tofinancial expense and financial income respectively in the year ended 31December 2005. Gyrus Group PLCStatement of recognised income and expenseYear ended 31 December 2006 2006 2005 £000 £000Exchange differences arising on translation of operations (32,864) 19,027 Deferred tax recognised on income and expenses directly in equity 451 443 Cash flow hedgesChanges in accounting policy relating to the first-time adoption of IAS - (115)39Effective portion of changes in fair value of cash flow hedges net of 75 809recycling Actuarial gain/(loss) on defined benefit pension plan 227 (35) _____ _____ (32,111) 20,129 Profit for the year 13,193 6,276 _____ _____ Total recognised income and expense for the year (18,918) 26,405 _____ _____ Gyrus Group PLCConsolidated Balance SheetAs at 31 December 2006 2006 2005 £000 £000 Assets Property, plant and equipment 20,784 20,057Goodwill 253,538 288,251Other intangible assets 89,831 110,288 _____ _____Total non-current assets 364,153 418,596 Inventories 32,353 33,140Trade receivables 33,713 35,509Other current assets 7,076 8,849Cash and cash equivalents 23,327 20,194 _____ _____Total current assets 96,469 97,692 _____ _____ Total assets 460,622 516,288 _____ _____ Equity Share capital (2,792) (2,785)Share premium (305,282) (303,699)Merger reserve (3,860) (3,860)Other reserves 22,102 (10,467)Retained earnings 2,999 19,306 _____ _____Total equity (286,833) (301,505) Liabilities Bank loan (99,633) (136,731)Obligations under finance leases and hire purchase contracts (44) (146)Deferred tax liabilities (13,778) (22,801) Provisions (1,400) (1,624) _____ _____Total non-current liabilities (114,855) (161,302) Bank overdrafts and loans due within one year (20,437) (13,123)Trade and other payables (34,846) (37,700)Current tax payable (540) (929)Obligations under finance leases and hire purchase contracts (99) (134)Provisions (3,012) (1,595) _____ _____Total current liabilities (58,934) (53,481) _____ _____Total liabilities (173,789) (214,783) _____ _____Total equity and liabilities (460,622) (516,288) _____ _____ Gyrus Group PLCConsolidated Cash Flow StatementFor the year ended 31 December 2006 2006 2005 £000 £000Cash flows from operating activitiesProfit for the year 13,193 6,276 Adjustments for:Depreciation of property, plant and equipment 4,784 4,316Amortisation of intangible assets 8,803 4,327IAS 12 adjustment to goodwill (note 5) 1,773 -Loss on disposal of property, plant and equipment 81 85Financial income and expense 9,020 5,463Exchange loss included in financial income and expense (423) (1,062)Fair value adjustment on acquired inventory and option accounting - 2,705Equity settled share based payment expense 2,656 1,570Taxation (3,068) 659 _____ _____Operating cash flows before movement in working capital 36,819 24,339 Increase in inventories (4,238) (1,263)Increase in trade and other receivables (263) (10,268)Increase in trade and other payables 3,176 948 _____ _____Cash generated from operations 35,494 13,756 Interest paid (9,595) (3,227)Tax paid (2,850) (573) _____ _____Net cash from operating activities 23,049 9,956 _____ _____ Cash flows from investing activities Interest received 742 192Proceeds on disposal of property, plant and equipment 306 -Acquisition of property, plant and equipment (7,685) (4,238)Acquisition of patents, trademarks and other intangibles (140) (56)Expenditure on product development (1,104) (253)Acquisition of subsidiaries (net of cash acquired) - (289,775) _____ _____Net cash from investment activities (7,881) (294,130) _____ _____ Cash flows from financing activities Proceeds from issue of share capital 1,590 155,660(Repayment)/proceeds from (decrease)/increase in borrowings (12,403) 141,259Repayment of obligations under finance leases (110) (133) _____ _____Net cash from financing activities (10,923) 296,786 _____ _____ Net increase in cash and cash equivalents 4,245 12,612 Cash and cash equivalents at beginning of year 20,194 7,263 Effect of foreign exchange rate fluctuations on cash held (1,112) 319 _____ _____ Cash and cash equivalents at end of year 23,327 20,194 _____ _____ Bank balances and cash 23,327 20,194 _____ _____ Gyrus Group PLCNotes to the Preliminary AnnouncementYear ended 31 December 2006 1. Basis of preparation These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards as adopted by the EU. As permitted under IFRS 3 and as disclosed in note 3, an adjustment has beenmade to the opening goodwill balance arising on the acquisition of ACMI. The financial information set out in this preliminary announcement does notconstitute the Company's statutory accounts for the years ended 31 December 2006or 31 December 2005. Statutory accounts for 2005 have been delivered to theregistrar of companies and 2006 will be delivered in due course. The auditorshave reported on those accounts; their reports were (i) unqualified, (ii) didnot include references to any matters to which the auditors drew attention bymeans of emphasis without qualifying their reports and (iii) did not containstatements under 237(2) or (3) of the Companies Act 1985. 2. Segment reporting Segment information is presented in respect of the Group's business divisions,which are the primary basis of segment reporting. The business segment reportingformat reflects the Group's management and internal reporting structures for2006. Inter-segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well asthose 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 and rhinology and head and neck productsSurgical Design, development, manufacture, marketing and sales of laparoscopic surgery productsUrology & Gynaecology Design, development, marketing and sales of urology and gynaecology and visualisation productsPartnered Technologies Out-licensing of the Group's proprietary technology in conjunction with a manufacturing contract for markets outside the Group's core sales and marketing competence The 2005 segmental comparative for the Urology & Gynaecology Division representsthe activities of ACMI between the date of acquisition (21 July 2005) and theyear ended 31 December 2005. As part of the Group restructuring, a number ofproducts were transferred between the Surgical, Urology & Gynaecology andPartnered Technologies Divisions. The effect of these changes is identified in areconciliation of the 2005 revenue comparative in the result by segment. For the year ended 31 December 2006 ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000RevenueExternal sales 38,532 52,465 26,238 96,107 213,342Inter-segment sales - 985 3,669 - 4,654 _____ _____ _____ _____ _____ 38,532 53,450 29,907 96,107 217,996 _____ _____ _____ _____ _____Segment result before 4,138 11,227 5,697 14,777 35,839amortisation, restructuringcharges and IAS 12 adjustmentAmortisation of acquired - (919) (56) (7,473) (8,448)intangiblesIAS 12 adjustment (1,542) (231) - - (1,773)Restructuring charges (335) (1,989) (47) (3,437) (5,808) _____ _____ _____ _____ _____Segment result after amortisation, 2,261 8,088 5,594 3,867 19,810restructuring charges and IAS 12adjustment _____ _____ _____ _____ _____Unallocated corporate expenses (665) _____Profit from operations 19,145Net finance costs (9,020) _____Profit before tax 10,125Taxation 3,068 _____Profit for the year 13,193 _____ As at 31 December 2006 ENT Surgical Partnered Urology & Unallocated Total Technologies Gynaecology £000 £000 £000 £000 £000 £000 Capital additions 990 3,488 1,339 3,095 17 8,929 _____ _____ _____ _____ _____ _____ Depreciation 1,497 1,390 640 1,200 57 4,784 _____ _____ _____ _____ _____ _____ Amortisation 110 927 124 7,642 - 8,803 _____ _____ _____ _____ _____ _____ Assets 96,032 55,389 26,824 279,179 3,198 460,622 _____ _____ _____ _____ _____ _____ Liabilities (56,917) (3,182) (4,890) (116,248) 7,448 (173,789) _____ _____ _____ _____ _____ _____ For the year ended 31 December 2005 ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000Revenue2005 revenue comparative on basis of 40,119 37,561 23,022 49,674 150,3762006 segmentsEffect of restructuring of segment - (387) (370) 757 -revenue ____ ____ ____ ____ ____External sales as previously 40,119 37,174 22,652 50,431 150,376reportedInter-segment sales 1,715 1,750 1,501 622 5,588 ____ ____ ____ ____ ____ 41,834 38,924 24,153 51,053 155,964 ____ ____ ____ ____ ____Segment result before amortisation, 1,946 7,967 4,172 7,736 21,821restructuring charges and materialnon-recurring itemAmortisation of acquired intangibles - - - (3,873) (3,873)Restructuring charges (846) (876) (34) (613) (2,369)Material non-recurring item - - - (4,686) (4,686) ____ ____ ____ ____ ____ Segment result after amortisation, 1,100 7,091 4,138 (1,436) 10,893restructuring charges and materialnon-recurring item ____ ____ ____ ____ ____ Unallocated corporate expenses (475) ____Profit from operations 10,418Net finance costs excluding material (5,463)non-recurring itemMaterial non-recurring item 1,980 ____Profit before tax 6,935Taxation (659) ____Profit for the year 6,276 ____ There was no material impact on segment result for the year ended 31 December2005 of the effect of restructuring of segment revenue. As at 31 December 2005 ENT Surgical Partnered Urology & Unallocated Total Technologies Gynaecology £000 £000 £000 £000 £000 £000 Capital additions 1,197 1,457 858 921 114 4,547 ____ ____ ____ ____ ____ ____ Depreciation 2,221 939 546 555 55 4,316 ____ ____ ____ ____ ____ ____ Amortisation 128 63 32 4,104 - 4,327 ____ ____ ____ ____ ____ ____ Assets 130,402 45,901 25,835 319,919 (5,769) 516,288 ____ ____ ____ ____ ____ ____ Liabilities (59,907) (3,910) (3,497) (145,651) (1,818) (214,783) ____ ____ ____ ____ ____ ____ The average number of employees for the year for each of the Group's principaldivisions was as follows: Year ended 31 Year ended 31 December 2006 December 2005 ENT 183 235Surgical 302 273Partnered Technologies 162 139Urology & Gynaecology 747 819Head office & administration 40 32 _____ _____ 1,434 1,498 _____ _____ Geographical Segments Turnover by destination Year ended 31 Year ended 31 December 2006 December 2005 £000 £000North America 168,139 111,361United Kingdom and rest of Europe 32,664 28,196Rest of world 12,539 10,819 _____ _____ 213,342 150,376 _____ _____ Assets 2006 2005 £000 £000North America 404,184 467,769United Kingdom and rest of Europe 55,280 47,234Rest of world 1,158 1,285 _____ _____ 460,622 516,288 _____ _____ Capital additions 2006 2005 £000 £000 North America 7,459 3,155United Kingdom and rest of Europe 1,434 1,298Rest of world 36 94 _____ _____ 8,929 4,547 _____ _____ 3. Adjustment to opening goodwill on acquisition of ACMI As disclosed in the Annual Report and Accounts for the year ended 31 December2005, on 21 July 2005, Gyrus Group PLC acquired 100% of the share capital ofACMI. Fair values were assigned to ACMI's identifiable assets and liabilities onthe basis of information available. Subsequent to the initial accounting forthis business combination, a liability of £224,000 was identified that existedat the balance sheet date but for which no fair value was attributed onacquisition. As permitted under IFRS 3 ("Business Combinations"), the liabilitywas recognised within twelve months of the acquisition date as an adjustment tothe opening goodwill arising on acquisition. Net assets and liabilities restatedat the acquisition are £14,711,000 and goodwill restated at acquisition£180,575,000. There was no impact on either profit or adjusted earnings pershare for the years ended 31 December 2005 or 31 December 2006. 4. Restructuring As a result of the acquisition of ACMI in 2005, a number of restructuring costshave been incurred across the Group. The total charge for the year ended 31December 2006 amounted to £5,808,000 (2005: £2,369,000). An analysis of thesecosts is shown below. 2006 2005 £000 £000 Severance costs 2,071 1,320Short-term sales commission alignment - 352Demonstration equipment write-off 80 148Alignment of global enterprise resource planning systems 58 456International distributor settlements 241 -Manufacturing inefficiencies and other duplicated costs arising from the 1,365 -relocation of productionSet up costs associated with the customer service and distribution centre 815 -and Mexico production facilityCore integration team expenses 881 -Gyrus ACMI rebranding 143 -Other costs 154 93 _____ _____ 5,808 2,369 _____ _____ 5. Income tax expense Current tax expense 2006 2005 £000 £000 UK corporation tax charge on profits for the year (1,790) (379) Adjustments in respect of previous periods 24 (54) ______ ______ (1,766) (433) Foreign tax on profits for the year (936) (487) Adjustments in respect of previous periods 181 - ______ ______Total current tax charge (2,521) (920) ______ ______ Deferred tax credit Origination and reversal of temporary differences 2,819 6,175 Benefit of tax losses recognised (1,616) (5,914) Net effect of IAS 12 adjustment (*) - - Adjustments in respect of previous periods 4,386 - ______ ______ 5,589 261 ______ ______ Total income tax credit/(expense) in income statement 3,068 (659) ______ ______ * As a result of previous acquisitions during 2000 and 2001 certain deferred taxassets were not recognised as it was considered unlikely that they would beutilised in future periods. The performance of these acquisitions is now betterthan originally anticipated thus, under IAS 12 ("Income Taxes"), the Group hasadjusted goodwill equal to the tax benefit of the subsequently recognisedlosses. Accordingly a deferred tax asset of £2,054,000 was recognised andutilised together with a corresponding adjustment to goodwill net of a credit of£281,000 in respect of over amortisation in the period before transition toIFRS's. The net charge to operating expense in the year of £1,773,000 (2005:£nil) is disclosed separately on the face of the income statement. Reconciliation of effective tax rate The total tax charge for the year is lower (2005: lower) than the standard rateof corporation tax in the UK. The differences are explained below. 2006 2005 £000 £000Profit before taxation 10,125 6,935 Profit before taxation multiplied by standard rate of corporation tax in 3,038 2,081the UK 30% (2005:30%)Effect of tax rates in foreign jurisdictions (rates higher than UK 34 456taxation)Expenses not deductible for tax purposes 569 216Other short-term temporary differences - (1,909)R&D tax credit (563) -Effect of tax losses utilised (1,760) (239)Prior year adjustments and changes to prior estimates (4,386) 54 _____ _____ Total tax (credit)/charge for the year (3,068) 659 _____ _____ Deferred tax recognised directly in equity Relating to foreign exchange gain on translation (2,983) (220)Relating to share option schemes (451) (443) _____ _____ (3,434) (663) _____ _____ In calculating the 2005 tax charge, certain legal and professional fees relatingto the acquisition of ACMI were treated as non-deductible items. However,following a detailed review of these expenses, £4.1 million has been treated asallowable resulting in a prior year adjustment of £1.5 million. Otheradjustments were in respect of depreciation, accrued interest and changes inestimates. 6. Earnings per share Basic earnings per share The calculation of basic earnings per share for the year ended 31 December 2006was based on the profit attributable to ordinary shareholders of £13,193,000(year ended 31 December 2005:£6,276,000) and a weighted average number ofordinary shares outstanding for the year ended 31 December 2006 of 146,492,872(year ended 31 December 2005:111,601,948). Diluted earnings per share The calculation of diluted earnings per share for the year ended 31 December2006 was based on the profit attributable to ordinary shareholders of£13,193,000 (year ended 31 December 2005:£6,276,000) and a weighted averagenumber of ordinary shares for the year ended 31 December 2006 of 150,785,514(year ended 31 December 2005:115,368,521). Earnings 2006 2005 £000 £000Earnings for the purposes of basic and diluted earnings per share 13,193 6,276 _____ _____ Weighted average number of ordinary shares 2006 2005 Number NumberIssued ordinary shares at 1 January 146,157,768 83,652,980Effect of share options exercised 282,963 289,121Effect of shares issued in connection with deferred consideration 52,141 -Effect of shares issued to acquire ACMI - 27,659,847 _____ _____Weighted average number of ordinary shares as at 31 December 146,492,872 111,601,948Dilutive effect of share options in issue 4,292,642 3,766,573 _____ _____Weighted average number of ordinary shares as at 31 December (diluted) 150,785,514 115,368,521 _____ _____ Basic earnings per share 9.0p 5.6p _____ _____ Diluted earnings per share 8.7p 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 whichmanagement consider will distort comparability. Adjusted basic earnings pershare has been calculated by dividing adjusted profit attributable to ordinaryshareholders (see table below for adjustments made) of £25,030,000 (year ended31 December 2005:£15,835,000) by the weighted average number of ordinary sharesoutstanding for the year ended 31 December 2006 of 146,492,872 (year ended 31December 2005:111,601,948). Adjusted diluted earnings per share has beencalculated by dividing adjusted profit attributable to ordinary shareholders of£25,030,000 (year ended 31 December 2005:£15,835,000) by the weighted averagenumber of ordinary shares outstanding for the year ended 31 December 2006 of150,785,514 (year ended 31 December 2005: 115,368,521). Earnings on which adjusted earnings per share is based: 2006 2005 £000 £000Earnings for the purpose of basic and diluted earnings per share 13,193 6,276Net impact of fair value adjustments on acquired inventory and option - 2,706accountingRestructuring charges 5,808 2,369Taxable benefit associated with restructuring charges** (201) -Amortisation of acquired intangible assets 8,448 3,873IAS 12 adjustment to goodwill 1,773 -Charge relating to "special" LTIP award* 1,598 872Deferred taxation (5,589) (261) _____ _____Earnings for the purposes of adjusted earnings per share 25,030 15,835 _____ _____ Adjusted basic earnings per share 17.1p 14.2p _____ _____ Adjusted diluted earnings per share 16.6p 13.7p _____ _____ *As part of the acquisition of ACMI, a "special" award of conditional sharesunder the Group's LTIP scheme was approved by shareholders and was made toretain and incentivise approximately 25 key executives to integrate the businesseffectively. The award will create a charge over approximately three years untilthe potential vesting date of July 2008. The charge relating to this award isconsidered to be another form of integration/restructuring cost. ** The tax credit of £2,128,000 associated with restructuring costs comprises adeferred taxation credit of £1,927,000 (2005: £900,000) and a current taxationbenefit of £201,000 (2005: £nil). The current taxation benefit has been deductedfrom adjusted earnings per share to correctly reflect the net impact ofrestructuring. The current taxation benefit is lower than the effective tax rateas the costs of integration have principally been incurred within the US wheretax losses are available to offset profits. In 2005, all integration costs wereincurred in the US and hence no tax benefit was added back in that year. 7. Dividend The Directors do not recommend the payment of a dividend. 8. Approval This statement was approved by the Board of Directors on 15 March 2007. 9. Copies of the Preliminary Announcement and Annual Report and Accounts This Preliminary Announcement will be sent to all shareholders and copies areavailable at the company's registered office, Fortran Road, St. Mellons,Cardiff, CF3 0LT. Copies of the Annual Report and Accounts will be sent to all shareholders andfurther copies will be available at the company's registered office, FortranRoad, St. Mellons, Cardiff, CF3 0LT. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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