Half Yearly Report

Tuesday 13 November 2012

SYNERGY HEALTH PLC

('Synergy', the 'Company' or the 'Group')

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2012

Synergy Health plc (LSE: SYR), a leading global provider of specialist outsourced support services to health-related markets in the UK & Ireland, Europe & Middle East, Asia & Africa and the Americas, announces its interim results for the six months ended 30 September 2012.

Financial Highlights

·; Strong reported revenue growth up 10.5% to £171.6 million

·; Underlying revenue growth, excluding currency effects, up 14.2%

·; Adjusted operating profit* up 15.2% to £26.6 million

·; Adjusted EBITDA up 11.2% to £46.5 million

·; Interim dividend up 15.8%, reflecting growth in underlying earlings

·; Net debt increased to £180.3 million from £173.5 million at 1 April 2012, reflecting the payment of deferred contingent consideration for BeamOne LLC ('BeamOne'), the acquisition of SRI/Surgical Express, Inc ('SRI') and capital investments in new facilities in Costa Rica and France

Operational Highlights

·; A solid first half with strong revenue growth in Asia & Africa and the Americas offsetting weaker growth in Europe & Middle East and UK & Ireland

·; UK & Ireland affected by a number of one-off events, including the Olympics

·; Good cost control has helped to lift Group operating margins by 0.6%

·; The integration of both the Swiss gamma and X-ray facilities and the small hospital sterilisation business in New York, has progressed well

·; In July 2012 the Group completed the acquisition of SRI for £25.5 million

·; The integration and turnaround of SRI is going well and is ahead of plan

·; The United States hospital sterilisation bid pipeline looks promising, with bids in progress for revenue in excess of $60 million per annum

Outlook

·; Although the economic environment in Europe & Middle East and UK & Ireland remains a challenge, we are increasing our investment in business development and strengthening the senior team

·; The Americas and Asia & Africa continue to show solid growth and we expect to see further developments over the coming 18 months that will increase the importance of these two regions

·; The Group is progressing in line with the Board's expectations for the full year

Richard Steeves, Chief Executive of Synergy Health, said:

"Despite the ongoing economic challenges, particularly in Europe, I am very pleased with the resilience of the Group, and the progress that it continues to make."

"Our strategy of bringing forward investment in the United States has been well timed and will support our global growth objectives. The acquisition of SRI has given Synergy a real presence and management depth, opening up a number of new business development opportunities."

* Note: Adjusted operating profit, adjusted profit before tax and adjusted basic earnings per share shown above exclude amortisation of acquired intangibles and non-recurring items, as shown in the Group's consolidated income statement and the accompanying notes. Operating cash flow excludes non-recurring items.

Analyst Presentation:

There will be a meeting for analysts at 9.30am today, 13 November 2012, at the Rubens Hotel, London SW1W 0PS.

For Further Information:

CHIEF EXECUTIVE'S REVIEW

Results

The Group has performed well despite a number of unique events affecting the UK and strong currency headwinds in Europe, whilst maintaining a high degree of focus on the integration of SRI in the United States.

Revenue for the period increased by 10.5% to £171.6 million (2011: £155.3 million). Strong cost control resulted in improved gross margins up 0.5% to 39.8% (2011: 39.3%) and improved adjusted operating margins by 0.6% to 15.5% (2011: 14.9%). As a result, adjusted operating profit increased 15.2% to £26.6 million (2011: £23.1 million).

Underlying revenue, excluding currency effects, increased by 14.2%, whilst underlying organic revenue (which also excludes acquisitions) increased by 2.2%. Underlying organic growth was strong in Asia & Africa and the Americas, up 18.7% and 10.2% respectively. Underlying organic growth in UK & Ireland increased by 2.2% whilst Europe & Middle East saw a decrease of 0.7%, reflecting price deflation in our Dutch Linen business. Operating margins however remain solid, with all regions maintaining or improving their performance.

On 13 July we acquired SRI for a total consideration of £25.5 million, funded through a combination of debt and a £22.4 million equity placing. The business serves hospitals in the United States by providing hospital sterilisation services, processing reusable surgical gowns, and distributing custom procedure trays. The business has been delisted from Nasdaq and is in the process of being fully integrated into our Americas region.

Cash flow has been characteristically strong during the period, increasing 18.9% to £43.3 million (2011: £36.4 million). Net debt increased by £6.8 million to £180.3 million, taking into account the partial funding of the SRI acquisition, payment of deferred consideration of £10.5 million to the vendors of BeamOne, and net capital expenditure of £23.6 million (2011: £27.6 million). We have a continued focus on lifting our operating returns on capital employed, and during the period we saw an increase to 11.7% (2011: 11.5%).

Adjusted basic EPS was 31.50p (2011: 28.42p), a rise of 10.8%.

Dividend

The Board has declared an interim dividend of 7.90 pence per share (2011: 6.82 pence), an increase of 15.8% and in line with Synergy's policy to increase dividends in line with underlying earnings. The dividend will be paid on 14 December 2012 to shareholders on the register on 23 November 2012.

Strategy and Business Review

Synergy is an international leader in the provision of outsourced sterilisation services for hospitals and medical device manufacturers. In addition, Synergy provides other niche outsourced services in related areas such as healthcare linen and laboratories, and manufactures a range of healthcare products. Our strategy is primarily based on cost leadership and ensuring that our services are delivered more efficiently than those of our competitors, including in-house operations. In addition to cost leadership, we have been expanding the Group internationally to increase our geographic reach.

Excluding the impact of currencies, globally Hospital Sterilisation Services ('HSS') grew at 24.4% with a contribution of approximately £3.9 million from SRI. Excluding SRI, HSS grew by 11.6%. UK growth was slower in the period, impacted by the Queen's Jubilee, industrial action at hospitals, and the Olympics.

Applied Sterilisation Technologies ('AST') grew at 18.6% and 10.0% excluding the acquisition of LEONI Studer Hard AG ('LSH'). Growth reduced slightly towards the end of last year, particularly in Europe, and this lower rate has persisted throughout the current financial year. In the UK and Europe we have seen a slowdown in non-healthcare work particularly in microelectronics, and this has continued into the second half of the year.

Healthcare linen services declined by 1.6% affected by the disruptive pricing behaviour of our main competitor in the Netherlands. The Dutch market remains difficult although we are maintaining our market share and protecting margins, albeit on a declining revenue base. Our UK product manufacturing business saw a reduction in revenue of 13.2% reflecting further rationalisation of the business. However, the core segments of patient hygiene, infection control, surgical and wound care performed in line with expectations and are achieving profitable growth.

Although the first half of the year has seen its challenges with a number of one-off events, the Group has performed well and in line with expectations. We continue to focus much of our effort on Asia and the United States, where we see significant growth opportunities. The potential outsourcing market in Europe and the UK remains significant, but in the post-recession period we have yet to unlock its potential.

Management

The Board has decided to expand the depth and experience of the leadership team below the senior executive board, with an emphasis on business development and risk management. A new business development director was recently recruited for the UK & Ireland region, and similar positions will be appointed in the remaining three regions during the second half of the year. Last year we appointed a Director of Risk to continue the evolution of our global risk management systems, and this role will now be supplemented with senior risk managers in each of the four regions.

Regions

Americas

The Americas region has been the focus of much attention this year, recognising an opportunity to develop the US HSS market. The Board brought forward our entry to this market through the acquisition of SRI, which is the largest provider of outsourced hospital sterilisation services, as well as providing sterile reusable surgical gowns. Although loss-making on acquisition, the integration and turnaround has gone well and we are considerably ahead of plan, which enables us to focus the management team's efforts on new business development.

Reported revenue for the region increased by 257% to £22.1 million (2011: £6.2 million) with underlying revenue up 247% before currency effects. Operating profits increased 82% to £2.4 million (2011: £1.3 million), but operating margins reduced to 10.8% as a result of margin dilution arising from the acquisition of SRI.

Good progress has been made with SRI, splitting the business into two operating units (HSS and Reprocessing of Surgical gown Packs ('RSP')) and re-engineering its operations to improve efficiency. As a result, operating margins rose from -1.6% on acquisition to 5.6%. The hospital sterilisation outsourcing market looks poised to open up in the United States. We are now the dominant player in the market with combined revenue of $36 million per annum including SRI and MSI Surgical Solutions LLC ('MSI'), which was acquired last year. The bid book has grown to in excess of $60 million per annum of potential business, and we expect to have first contract wins towards the end of the current fiscal year. Later this year, the RSP business will launch a new range of products combining improved performance with reduced cost. SRI is a well recognised service provider and leading advocate for environmentally supportive products and services in the surgical market. We are exploring whether the service could be extended to other surgical devices that could have a limited reusable life to reduce both the economic and environmental costs of surgery.

AST performed well, with growth of 16.5% on a constant currency basis. In the late summer a second electron beam facility and a new ethylene oxide facility were opened in Costa Rica, providing additional capacity. However, the primary customer for the additional capacity has experienced regulatory challenges and as a result the expected electron beam revenue growth will be delayed until early next year. Elsewhere our facilities are experiencing high levels of utilisation resulting in stable margins.

Asia & Africa

Asia & Africa, together with the Americas region, is one of Synergy's two high growth regions. Reported revenue for the region increased by 17.4% to £9.6 million (2011: £8.2 million) and by 18.7% on a constant currency basis. Operating profits were up 22.6% to £2.1 million (2011: £1.7 million) with margins up 0.9% to 21.3% (2011: 20.4%). 

Underlying HSS revenue in China increased by 24.3% with additional volumes being processed through the Suzhou facility. New contracts in Chengdu and Beijing are progressing towards implementation, with services expected to start in the new fiscal year. Design and project planning is underway for a new HSS unit that will service the healthcare campus in Hongqiao, with services expected to start in early 2015. During the period we have been advancing other opportunities, as well as discussing potential partnerships with larger Chinese healthcare suppliers. Although our intention is to continue to develop our network independently, we are exploring potential parallel joint ventures that could broaden our network more quickly.

AST in China has grown by 19.1% with further utilisation of the Suzhou facility. Growth was slower than expected because of reduced volumes from a customer that was experiencing regulatory challenges. These issues have been resolved and we expect to see much stronger growth in Q4. We have also received outline regulatory approval for a new radiation facility in China, but we are waiting for formal approval from local and regional authorities before acquiring land and committing further investment.

AST is performing well in Malaysia, Thailand and South Africa. In Malaysia, additional ethylene oxide capacity comes on line in Q4 and is largely pre-sold. In South Africa we have built a new microbiology lab to broaden the range of services we can offer in that country.

The new Regional CEO for the Asia & Africa region has recently completed a strategic review; we remain confident that the region will continue to be one of our two strong growth areas.

Europe & Middle East

The Europe & Middle East region presents a mixed picture, with AST growth offset by price compression in the Dutch linen business, and a weakening currency. Reported revenue decreased by 3.2% to £60.7 million (2011: £62.7 million), though on a constant currency basis revenue increased by 5.7%. Operating margins were unchanged at 15.5% but operating profit declined by 3.5% to £9.4 million (2011: £9.7 million) reflecting lower revenue. On a constant currency basis, operating profits grew 5.9%.

AST continues to operate well, although organic growth was 3.7% lower than our global average, attributed to the economic slowdown in Europe. The new gamma and X-ray facilities in Switzerland have continued to grow, with X-ray achieving 80% growth on last year, prior to acquisition, albeit from a low base. We are actively promoting the X-ray service, but to date have not progressed plans for a second facility elsewhere in the world.

Our European HSS service is a small but steady business operating in Holland and Belgium. We are bidding for new contracts in Germany, France and Holland, and in the period won €0.2 million per annum of new work. Although China and the USA are priority markets, we are steadily increasing the investment in our business development teams with a view towards the medium term.

The Dutch linen market has continued to deteriorate as a result of the pricing behaviour of our largest competitor and consequently we are continuing to see price deflation. Given that the market largely operates on five-year contracts, the value decline is likely to be of a long-term nature. We have continued to reduce costs in our business, mitigating the impact on margin.

UK & Ireland

The first half of the year was a difficult period for the UK & Ireland region with the impact of NHS industrial action, the Queen's Jubilee, and the Olympics resulting in reduced activity levels. Overall the region operated well under the circumstances, with reported revenue increasing by 1.2% to £79.2 million (2011: £78.2 million). On a constant currency basis, revenue increased by 2.2%. Margins were up 3.6% reflecting in part the removal of unprofitable work within the product manufacturing business, together with good cost control. Operating profits increased to £15.8 million (2011: £12.9 million).

HSS revenue growth slowed to 8.5% during the period, affected by the unusual events during the half year as well as a lack of contract wins. A large number of contracts were successfully renewed during the period. We are still progressing a number of bids worth more than £10 million per annum, but progress is very slow and is attributed to the broader issues the National Health Service is facing. Similarly, our UK linen business grew at 2.1% with steady margins. We recently appointed a new business development director, reaffirming our commitment to this market.

The AST business grew at just 2.9%, held back by currency effects as well as the impact of the economic slowdown affecting non-healthcare work. We are doubling our ethylene oxide processing capacity in the UK this year since our existing facility is full. For the foreseeable future, we will be focusing on cost control in this region until economic conditions improve.

Our UK-based product manufacturing business continues to make good progress through improving profitability at the expense of revenue growth. The new management structure and strategy implemented in December 2011 are working well, with underlying profitability now firmly established and revenue growth improving internationally.

Outlook

Despite somewhat challenging circumstances, particularly in Europe and the UK, Synergy finished the half year slightly ahead of the Board's expectations. The Board is not expecting to see dramatic change in our regional markets, and organic growth will continue to be held back by our Dutch linen business. However, the opportunity to build on our SRI acquisition in the United States, together with continued strong growth in Asia, leaves the Group in a strong position to meet the Board's full year expectations.

Dr Richard Steeves

Group CEO

13 November 2012

FINANCE DIRECTOR'S REPORT

Overview

Our business delivered a good first half financial performance with reported revenue growing 10.5% to £171.6 million and adjusted operating profit increasing by 15.2% to £26.6 million. Excluding currency effects, underlying revenue growth was 14.2% (2.2% organic). Our adjusted operating margin increased by 60 basis points to 15.5%. Adjusted basic earnings per share grew by 10.8% to 31.50p.

Cash generated from operations (before non-recurring items) increased by 18.9% to £43.3 million, reflecting a conversion of adjusted EBITDA into operating cash flow of 93.3%. Funding for acquisitions increased net debt to £180.3 million, representing a net debt to EBITDA ratio of 1.96 times, comfortably within our banking covenant of 3.25 times.

Adjusted operating returns on average capital employed, on an annualised basis, increased to 11.7% from 11.5% at the year end.

1. Income statement

Synergy's income statement is summarised below.

Table 1: Income statement

1 The effective tax rate is calculated excluding amortisation on acquired intangibles and non-recurring items

1.1 Revenue

Reported revenue of £171.6 million (2011: £155.3 million) grew by 10.5%, representing an underlying growth rate, excluding currency effects, of 14.2% over the previous year. The change in currency exchange rates over the last 6 months (notably the weakening of the Euro against Sterling), against the comparative period, has reduced reported revenue by £5.8 million.

Underlying revenue, excluding currency effects, grew across all our business segments, with the UK & Ireland at 2.2%, Europe & Middle East at 5.7%, Asia & Africa at 18.7% and the Americas AST business by 16.5%. Our total Americas business, with the inclusion of MSI from the beginning of the financial year and SRI from 13 July 2012, represented 12.9% (2011: 4.0%) of total half year revenue.

Underlying organic revenue, which excludes currency effects and the impact of acquisitions, increased by 2.2%. The UK & Ireland region grew by 2.2%, Europe & Middle East contracted by 0.7%, Asia & Africa and the Americas grew by 18.7% and 10.2% respectively. Our main service lines continue to experience good underlying organic growth with AST growing by 10.0% and HSS at 7.8%. A fall in Linen revenue in the Netherlands resulted in the small contraction of total Europe & Middle East revenue as well as causing a reduction in total Linen revenue of 1.6%.

1.2 Gross profit

Gross profit increased by 11.9% to £68.2 million (2011: £61.0 million), representing a gross profit margin of 39.8%, an increase of 50 basis points over the previous year.

1.3 Adjusted operating profit

Adjusted operating profit increased by 15.2% to £26.6 million, representing an adjusted operating profit margin of 15.5%, an increase of 60 basis points over last year (90 basis points excluding currency effects). Currency effects have reduced reported adjusted operating profit by £1.4 million.

1.4 Non-recurring items

Net non-recurring items during the period of £0.7 million include SRI acquisition transaction fees and restructuring costs, partially offset by a gain on the sale of an investment property. 

1.5 Net finance costs

The Group's net finance costs totalled £2.8 million (2011: £2.5 million), an increase of £0.3 million. The principal reason for this increase is additional loans raised to finance acquisition activity. The average interest rate of the Group's debt is approximately 2.4%.

1.6 Adjusted profit before tax

Adjusted profit before tax was £23.8 million (2011: £20.6 million), an increase of 15.7%. The adjusted profit before tax margin was 13.9% (2011: 13.2%), an increase of 70 basis points.

1.7 Amortisation of acquired intangibles

Amortisation of acquired intangibles relates to intangible assets identified on acquisitions, being the value of customer relationships and brands. The increase relates to intangibles recognised on the acquisitions of SRI, LSH and MSI.

1.8 Tax

The tax charge (excluding amortisation of acquired intangibles) of £5.7 million (2011: £4.8 million) represents an effective tax rate of 23.8% (2011: 23.1%). The increase in the effective tax rate over the comparative period primarily reflects a greater proportion of the Group's profits arising in the United States, which has a higher tax rate than the current Group average, following the acquisition of SRI.

1.9 Earnings per share (EPS)

Adjusted basic earnings per share and adjusted diluted earnings per share, after adjusting for amortisation of intangibles and non-recurring items, increased by 10.8% and 10.7% respectively. Afteramortisation of acquired intangibles, basic and diluted earnings per share increased by 7.9% and 7.8% respectively.

Undiluted weighted average shares have increased from 55.3 million to 57.1 million in the period, primarily due to the issue of 2.8 million shares in June 2012.

Synergy's policy is to increase the total dividend each year in line with the increase in underlying earnings. The Board has proposed an interim dividend of 7.90p (2011: interim dividend of 6.82p per share), representing an increase on the 2011 dividend of 15.8%.

3. Cash flow

The Group cash flow is summarised below.

Table 2: Cash flow

Note: Adjusted EBITDA is earnings before interest, tax, depreciation, intangible amortisation and other non-cash items

3.1 Cash generated from operations

Cash generated from operations (before non-recurring items) in the year increased by 18.9% to £43.3 million (2011: £36.4 million), reflecting a conversion of EBITDA into operating cash flow of 93.3% (2011: 87.1%).

3.2 Interest

Net interest paid was £2.8 million (2011: £2.6 million), in line with the charge in income statement.

3.3 Tax

Tax paid was £4.4 million (2011: £5.7 million). Cash tax is slightly lower than the equivalent income tax charge in the income statement as a result of timing differences on payments and a refund of tax paid by LSH prior to acquisition. In accordance with the acquisition agreement, the refund amount is owed to the previous owners, as it arose due to a change in ownership. The refund was included in the deferred contingent consideration recognised at the time of acquisition. Following the Swiss tax authorities' agreement of the final acquisition tax assessments, the deferred contingent consideration was paid in October.

3.4 Net expenditure on tangible and intangible assets

We analyse capital expenditure between 'maintenance' and 'investment' expenditure. Maintenance capital expenditure is the capital required to replace the existing capital base. Investment capital expenditure enhances the capacity or efficiency of the Group's capital base.

The main items of necessary ongoing capital expenditure are cobalt-60, the radiation source for AST gamma sterilisation plants, textiles for the linen business, and general replacement of plant and machinery around the Group. Total maintenance capital expenditure was £12.0 million of which £4.2 million and £5.7 million were spent on cobalt and textiles respectively.

Total investment capital expenditure was £11.6 million (2011: £15.5 million), of which £7.3 million relates to the construction of new AST facilities with the remaining balance spent on cobalt, property, plant and machinery, and IT (principally on our new ERP project). Of the £7.3 million incurred on the construction of new AST facilities and the expansion of existing ones, £3.1 million was spent on our new gamma facility in Marcoule, France, and £2.1 million on an additional electron beam facility in Costa Rica and the two new ethylene oxide facilities in Costa Rica and Oldsmar, Florida.

Our ERP project is progressing well, having started site-by-site implementation in the UK. The project will replace our financial systems across the Group with a new standardised platform. Additionally, we are also replacing the AST operating systems as part of the integrated ERP environment.

This level of capital expenditure is expected to increase in the second half of the year as we commence loading cobalt into Marcoule, begin expansion of the Thorne ethylene oxide plant in the UK and include a full six months of SRI's capital expenditure requirements.

3.5 Financing

The movement in financing resulted primarily from increased borrowing to fund the Group's acquisition of SRI.

3.6 Proceeds from Share Issue

On 7 June, the Group raised £22.4 million by way of an equity placing. The proceeds were used as part payment for the equity of SRI. A further £0.4 million was raised as proceeds arising from the exercise of share options.

4 Acquisitions

With effect from 13 July 2012, the Group acquired SRI, a Nasdaq-listed healthcare business for a cash consideration of £15.3 million (US$ 24.0 million). Including debt, total consideration paid was £25.5 million (US$ 40.0 million). Intangible assets arising on the acquisition have been recognised at £0.5 million and will be amortised on a straight-line basis over their expected lives. The acquisition gave rise to goodwill of £0.3 million.

On 19 March 2012, the Group acquired LSH from LEONI AG. During the period, deferred consideration of £0.3 million (CHF 0.4 million) was paid. Shortly after the period, deferred contingent consideration of £2.4 million (CHF 3.7 million) was paid, relating to a tax refund caused by the change in ownership.

On 7 April 2011, the Group acquired BeamOne. In the period, deferred contingent consideration of £10.5 million (US$ 16.4 million) was paid. The acquisition gave rise to goodwill of £14.4 million. This is £4.5 million higher than disclosed within our 2011 interim statements, due to the incorrect inclusion of Florida ethylene oxide start-up costs within our estimate of deferred consideration payable. The fair value of the acquisition consideration has been restated in the comparative figures of the financial statements, showing an increase to goodwill of £4.5 million over the previously reported balance at 2 October 2011.

5 Net debt and funding

5.1 Net debt

Net debt increased in the period from £173.5 million to £180.3 million. The increase in net debt is primarily a result of the Group's acquisitions in the period. The movement in the net debt is reconciled below:

Table 3: Movement in net debt

5.2 Funding

The Group has in place a 5 year unsecured multi-currency revolving facilities agreement ('the Agreement'), which was signed on 26 July 2011. The Agreement has been entered into with a group of 7 banks and comprises a Sterling denominated multi-currency facility of £105 million and a Euro denominated multi-currency facility of €130 million. On the 1 June 2012 the Group signed a two year Euro denominated multi-currency facility of €18 million with the same covenants as in the July 2011 Agreement.

On 13 September 2012, the Group issued a bilateral private placement note of €20.6 million. The Group has also put in place an uncommitted shelf facility with the same lender, allowing it to draw up to $48.5 million over a 2.5 year period. The financial covenants are broadly similar to those in the Agreement.

The Group remains comfortably within the financial covenants set out in the Agreement.

The debt is split between Sterling, Euros and US Dollars with the currency mix and level of fixed interest debt within each currency as follows:

Table 4: Composition of gross debt as at 30 September 2012

The Euro denominated debt, which is predominantly held in the UK, is held to hedge the Group's Euro denominated net assets (excluding goodwill and intangibles) of €137.5 million. The US Dollar denominated debt is held as a hedge of the Group's US Dollar denominated net assets (excluding goodwill and intangibles) of $124.6 million. As at 30 September, 22% of the total debt was held at fixed rates of interest.

6 Pensions

The Group operates three final salary schemes in the UK, one in the Netherlands, one in Germany, and one in Switzerland. The Group also operates several defined contribution schemes.

In the UK the Group is required to maintain a final salary pension scheme for employees who have transferred from the NHS, which has to be acceptable to the Government Actuary's Department. With the exception of NHS transferees, the Group's defined benefit schemes are closed to new entrants and future accruals; active members have been transferred to deferred status and invited to join the Group's UK defined contribution scheme.

At 30 September 2012, the net liability arising from our defined benefit scheme obligations was £15.5 million (2011: £16.0 million) on a pension scheme asset base of £56.1 million. A decrease in the deficit from the year end reflects a fall in the expected inflation rate that more than offsets a reduction in the discount rate. The latest triennial review is underway and we expect to agree any changes to funding levels with the Trustees by the end of March 2013.

Table 5: Defined benefit pension schemes

Gavin Hill

Group Finance Director

13 November 2012

Condensed consolidated income statement

For the period ended 30 September 2012

Condensed consolidated income statement

Consolidated statement of comprehensive income

For the period ended 30 September 2012

Consolidated statement of financial position

At 30 September 2012

Consolidated cash flow statement

For the period ended 30 September 2012

Condensed consolidated statement of changes in equity

For the period ended 30 September 2012

The accompanying accounting policies and notes form part of these financial statements.

Notes to the financial statements

1 General information

Synergy Health plc ('the Company') and its subsidiaries (together 'the Group') deliver a range of specialist outsourced services to health related markets. The Company is registered in England and Wales under company registration number 3355631 and its registered office is Ground Floor Stella, Windmill Hill Business Park, Whitehill Way, Swindon, Wilts, SN5 6NX.

These condensed consolidated interim financial statements were approved for issue by the Board of Directors on 13 November 2012.

2 Summary of significant accounting policies

Basis of preparation

These condensed consolidated interim financial statements of the Group are for the six months ended 30 September 2012.

The condensed consolidated interim financial statements have been prepared on the basis of the accounting policies set out in the Group's latest annual financial statements for the period ended 1 April 2012. These accounting policies are drawn up in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS) as adopted for use in the European Union.

The information for the period ended 1 April 2012 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that period has been delivered to the Registrar of Companies. The auditors' report on those accounts was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The condensed consolidated interim financial statements for the six months to 30 September 2012 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

The consolidated interim financial statements for the six months to 2 October 2011 incorporated a £4.5 million error understating both goodwill and deferred consideration payable on the acquisition of BeamOne. The error was caused by the incorrect inclusion of Florida ethylene oxide start-up costs within the calculation of deferred consideration payable. Both goodwill and deferred consideration payable have been restated in the comparative figures throughout these financial statements.

With the acquisition of SRI, the segmental information presented in note 6 contains fresh disclosure relating to the USA; comparative figures for prior periods have been restated to reflect this.

Going concern

The Directors have reviewed the Group's medium-term forecasts through to November 2013 along with reasonable possible changes in trading performance and foreign currencies, to determine whether the committed banking facilities are sufficient to support the Group's projected liquidity requirements, and whether the forecast earnings are sufficient to meet the covenants associated with the banking facilities.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and have continued to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

Significant accounting policies

The accounting policies adopted in the preparation of the condensed consolidated interim financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the period ended 1 April 2012. No new standards or interpretations have been adopted since the preparation of the Group's annual financial statements for the period ended 1 April 2012.

The condensed consolidated interim financial statements have been prepared under the historical cost convention except that derivative financial instruments are stated at their fair value.

3 Statement of compliance

These condensed consolidated interim financial statements have been prepared and approved by the Directors in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as adopted by the EU (adopted IAS 34) and with the Disclosure and Transparency Rules of the UK Financial Services Authority. These condensed consolidated interim financial statements have not been audited or reviewed by the Group's auditors in accordance with International Standard on Review Engagements 2410 issued by the Auditing Practices Board. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the period ended 1 April 2012.

4 Financial risk management

The primary risks arising from the Group's financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. These risks and the Group's financial risk management objectives and policies are consistent with that disclosed in the consolidated financial statements as at and for the period ended 1 April 2012.

5 Estimates

The preparation of the condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

Except as described below, in preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation and uncertainty were the same as those that applied to the consolidated financial statements as at and for the period ended 1 April 2012.

During the 6 months ended 30 September 2012, management reassessed its estimates in respect of actuarial assumptions in relation to the Group's defined benefit pension schemes using professional advice and relevant market benchmark data for discount rates and inflation.

6 Segmental information

The Group is organised into four operating segments, and information on these segments is reported to the chief operating decision maker ('CODM') for the purposes of resource allocation and assessment of performance. The chief operating decision maker has been identified as the Board of Directors. The four operating segments are: the UK & Ireland, Europe & Middle East, Asia & Africa, and the Americas.

The segments derive their revenue from the same range of products and services - being the provision of healthcare services, applied sterilisation technologies, and hospital sterilisation services. The CODM monitors the performance of the operating segments based on adjusted operating profit, being operating profit excluding the impact of amortisation on acquired intangibles and non-recurring items.

Segment information about these divisions is presented below:

6 Segmental information continued

The table below reconciles the total segment profit above, to the Group's operating profit and profit before tax:

The table below analyses the Group's revenue from external customers between the three principal product/service groups:

IFRS 8 Operating segments requires the group to disclose information about the extent of its reliance on its major customers. The Group has no single customer making up more than 10% of total revenue.

The table below analyses the Group's revenue from external customers, and non-current assets other than financial instruments, investment properties, and deferred taxation, by geography. With the acquisition of SRI, the table below now incorporates data for the USA; figures have been restated for the comparative periods to reflect this.

7 Non-recurring items

In the period to 30 September 2012, non-recurring items of £711,000 have been charged in arriving at operating profit. This charge is principally comprised of £780,000 of acquisition transaction costs and restructuring costs relating to the acquisition of SRI, offset by a gain realised on the disposal of an investment property.

In the period to 2 October 2011, non-recurring items of £331,000 were charged in arriving at operating profit. This charge was comprised of costs of acquisition, and restructuring costs at the Group's healthcare solutions business, offset by the final settlement of an insurance claim.

In the year to 1 April 2012, non-recurring items of £3,476,000 were charged in arriving at operating profit. This charge was comprised of costs of acquisition, and restructuring costs at the Group's healthcare solutions business.

8 Tax

The Group's effective tax rate for the period on earnings before non-recurring items and the amortisation of acquired intangibles was 23.8% (2011: 23.1%) and this should be sustainable over the full year.

UK corporation tax is calculated at 24% (2011: 26%) of the estimated assessable profit for the year. Taxation for overseas operations is calculated at the local prevailing rates.

The 2012 Budget on 21March 2012 announced that the Finance Bill 2012 would legislate for a reduction in UK corporation tax rate to 23% for the year commencing 1 April 2013 and that Finance Bill 2013 would include legislation to reduce the rate further to 22% in the year commencing 1 April 2014. Finance Bill 2012 was substantively enacted on 3 July 2012. These reductions in tax rate will further reduce the company's future current tax charge accordingly. The deferred tax liability has been calculated based on the rate of 23% substantively enacted at the balance sheet date.

The further 1% rate reduction due to take place in April 2014 will further reduce the Group's future current tax charge and reduce the Group's deferred tax liability accordingly, but as this has not yet been substantively enacted the impact of this has not been recognised.

Deferred tax

The reduction in the deferred tax liability is as a result of recognising deferred tax assets on the acquisition of SRI.

9 Dividends

A proposed interim dividend for the year ending 31 March 2013 of 7.90p per share was approved by the Board of Directors on 13 November 2012. 

10 Earnings per share

11 Provisions

The cobalt disposal provision recognises a potential decommissioning liability in respect of certain types of cobalt used in some of the Group's AST sites. It is anticipated that the provision will be utilised as the cobalt to which the provision relates reaches the end of its useful economic life.

The majority of the environmental provision relates to an amount agreed with the vendor of Lips Textielservice Holding BV as part of the acquisition completion accounts. To the extent that the environmental provision has not been utilised by 31 December 2012 it is to be paid to the vendor during January 2013, together with interest at the rate of Euribor plus 0.75%. All interest to date has been accrued and reflected in the income statement.

Other provisions include provisions against vacated properties and other restructuring costs.

12 Property, plant and equipment

During the period ended 30 September 2012, the Group purchased assets with a total cost of approximately £23.1 million (2 October 2011: £29.2 million).

13 Note to the consolidated statement of changes in equity

14(a) Acquisition of subsidiary - SRI

With effect from 13 July 2012, the Group acquired the entire issued share capital of SRI/Surgical Express Inc ('SRI'), a Nasdaq-listed healthcare business incorporated in Florida, as part of our strategy to enter the US HSS market.

The fair value of the net assets acquired and the related consideration were as follows:

The goodwill arising on the acquisition of SRI is attributable to the assembled workforce and the synergies generated following the integration of SRI into the Group.

In accordance with 'IFRS3 (revised) Business Combinations', management have made adjustments to the carrying value of net assets acquired to arrive at the fair values disclosed above. The most significant of these is a reduction in the carrying value of property, plant and machinery and circulating inventory, where book value on acquisition was higher than fair value.

Total transaction costs of £434,000 were incurred on the acquisition of SRI and have been expensed within non-recurring items.

The SRI business contributed £13,900,000 to revenue and £779,000 to operating profit during the period. Had the business been owned for the entire period, it would have contributed £33,000,000 to revenue, and losses of £411,000 to operating profit.

Summary of cash flows associated with the acquisition of SRI:

14(b) Acquisition of subsidiary - MSI

In the previous financial year, on 21 March 2012, the Group acquired the entire issued share capital of MSI Surgical Solutions LLC ('MSI'), a company incorporated in the US, as part of our strategy to enter the US hospital sterilisation market.

The fair value of the net assets acquired and the related consideration were as follows:

The goodwill arising on the acquisition of MSI is attributable to the assembled workforce and the synergies generated following the integration of MSI into the Group.

In accordance with 'IFRS 3 (revised) Business Combinations', management made adjustments to the book value of net assets acquired to arrive at the fair values disclosed above. The most significant of these were the recognition of intangible assets (customer lists). In the period, adjustments were made to provisional fair values, increasing previously reported goodwill by £51,000.

Total transaction costs of £32,000 were incurred in the acquisition of MSI and were expensed within non-recurring items.

The MSI business contributed £1,195,000 to revenue and £268,000 to operating profit for the period to 30 September 2012.

Summary of cash flows associated with the acquisition of MSI:

14(c) Acquisition of subsidiary - LSH

In the previous financial year, on 19 March 2012, the Group acquired the entire issued share capital of LEONI Studer Hard AG ('LSH'), an AST business incorporated in Switzerland, as part of our strategy to expand the geographic coverage of our AST business. Since acquisition the company has been renamed Synergy Health Daniken AG.

The fair value of the net assets acquired and the related consideration were as follows:

The goodwill arising on the acquisition of LSH is attributable to the assembled workforce and the synergies that can be generated following the integration of LSH into the Group, and to gaining access to new sterilisation technologies.

In accordance with 'IFRS 3 (revised) Business Combinations', management made adjustments to the book value of net assets acquired to arrive at the fair values disclosed above. The most significant of these were the recognition of intangible assets (customer lists), the recognition of prospective tax assets, and provisions for dividends declared prior to acquisition. In the period, adjustments were made to provisional fair values, increasing previously reported goodwill by £201,000.

On acquisition, the quantum of deferred contingent consideration was linked to the uncertain value of a non-operating tax asset recognised in deferred tax liabilities above. During the period, the value of the tax asset was determined, driving a revision of deferred contingent consideration, tax assets, and goodwill against figures previously reported. The deferred contingent consideration was settled during October 2012.

Total transaction costs of £193,000 were incurred in the acquisition of LSH and were expensed within non-recurring items.

The LSH business contributed £3,725,000 to revenue and £981,000 to operating profit for the period to 30 September 2012.

Summary of cash flows associated with the acquisition of LSH:

14(d) Acquisition of subsidiary - Sterilgamma

In the previous financial year, on 11 July 2011, the Group acquired the entire issued share capital of Sinagama II Technologies Sdn Bhd ('Sterilgamma'), a company incorporated in Malaysia, as part of our strategy to expand the geographic coverage of our AST business. Since acquisition the company has been renamed Synergy Sterilisation KL (M) Sdn Bhd. Sterilgamma operates from a number of AST plants across Malaysia.

The fair value of the net assets acquired and the related consideration were as follows:

The goodwill arising on the acquisition of Sterilgamma is attributable to the assembled workforce and the synergies that can be generated following the integration of Sterilgamma into the Group.

In accordance with 'IFRS 3 (revised) Business Combinations', management made adjustments to the book value of net assets acquired to arrive at the fair values disclosed above. The most significant of these were the recognition of intangible assets (customer lists) and adjustments to the carrying value of assets not deemed to be recoverable. In the period, no adjustments were made to previously reported fair values.

Total transaction costs of £34,000 were incurred in the acquisition of Sterilgamma and were expensed within non-recurring items.

The Sterilgamma business contributed £2,048,000 to revenue and £712,000 to operating profit for the period to 30 September 2012.

Summary of cash flows associated with the acquisition of Sterilgamma:

14(e) Acquisition of subsidiary - BeamOne

In the previous financial year, on 7 April 2011, the Group acquired all of the members' interests of BeamOne LLC ('BeamOne'), an AST business incorporated in the US, as part of our strategy to expand the geographic coverage of our AST business. Since acquisition the company has been renamed Synergy Health AST LLC. BeamOne operated from sites in San Diego, California; Denver, Colorado; Lima, Ohio; Saxonburg, Pennsylvania; and a fifth site in Costa Rica.

The fair value of the net assets acquired and the related consideration were as follows:

The acquisition of BeamOne was included as a post balance sheet event in the 3 April 2011 financial statements. When presenting this note, a number of estimates were made before the completion of a fair value exercise, which were subsequently replaced with fair value figures in the 2011 interim financial statements.

In accordance with IFRS 3 Business combinations (revised), management made adjustments to the book value of net assets acquired to arrive at the fair values disclosed above. The most significant of these were the recognition of intangible assets (customer lists) and adjustments to the carrying value of property restitution provisions.

The acquisition of BeamOne gave rise to goodwill of £14.4 million, attributable to the assembled workforce and the synergies that can be generated following the integration of BeamOne into the Group, and also to gaining access to the US market. This is £1.4 million higher than the goodwill disclosed within our 2011 interim statements, due to two factors; a £3.1 million increase to our calculation of fair value ascribed to customer relationship intangible assets, and a £4.5 million increase to total consideration due to the incorrect inclusion of Florida ethylene oxide start-up costs within the calculation of deferred consideration payable. The fair value of the acquisition consideration has been restated in the comparative figures throughout these financial statements, showing an increase to goodwill of £4.5 million over the previously reported balance at 2 October 2011.

In accordance with 'IFRS 3 (revised) Business Combinations', the amount of consideration due to be paid was been estimated at the balance sheet date. The movement in this estimate at each reporting date since the date of acquisition has been recognised in non-recurring items within the income statement. The deferred contingent consideration was settled during June 2012.

Total transaction costs in the prior period were covered by accruals booked within non-recurring items in the previous year.

The BeamOne business contributed £6,576,000 to revenue and £1,666,000 to operating profit for the period to 30 September 2012.

Summary of cash flows associated with the acquisition of BeamOne:

Forward-looking statementsCertain information included in this announcement is forward-looking and involves risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied by forward-looking statements. Forward-looking statements cover all matters which are not historical facts and include, without limitation, projections relating to results of operations and financial conditions and the Company's plans and objectives for future operations, including, without limitation, discussions of expected future revenues, financing plans, expected expenditures, risks associated with changes in economic conditions, the strength of the markets in the jurisdictions in which the Group operates, and changes in exchange and interest rates. Forward-looking statements can be identified by the use of forward-looking terminology including terms such as "believes", "estimates", "anticipates", "expects", "forecasts", "intends", "plans", "projects", "goal", "target", "aim", "may", "will", "would", "could", or "should" or, in each case, their negative or other variations or comparable terminology. Forward-looking statements are not guarantees of future performance. All forward-looking statements in this announcement are based upon information known to the Company on the date of this announcement Accordingly, no assurance can be given that any particular expectation will be met and readers are cautioned not to place undue reliance on forward-looking statements, which speak only at their respective dates. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Services Authority), the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

Statement of Directors' Responsibilities

We confirm that to the best of our knowledge:

• the condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and,

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

This report has been approved by the Board of Directors and signed on its behalf by:

Richard Steeves

Chief Executive

13 November 2012

The condensed consolidated interim financial statements for the six months ended 30 September 2012 will be available on the Company's website on 13 November 2012.

Financial Calendar

Registered office

Synergy Health plc

Ground Floor Stella, Windmill Hill Business Park

Swindon, Wiltshire SN5 6NX

Website: www.synergyhealthplc.com