12th Sep 2006 07:04
Gyrus Group PLC12 September 2006 12 September 2006 Gyrus Group PLC Successful acquisition of ACMI drives 82% operating profit increase at Gyrus Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical deviceswhich reduce trauma and complications in surgery, announces its interim resultsfor the six months ended 30 June 2006. Financial Highlights • Group revenues up 127% to £107.4m (H1 2005: £47.3m) - 116% on a constant currency basis • Legacy Gyrus business revenue up 17% to £55.3m (H1 2005: £47.3m) - 12% on a constant currency basis • Operating profit pre-restructuring costs and amortisation of acquired intangible assets up 200% to £17.1m (H1 2005: £5.7m) • Operating profit margin before restructuring costs and amortisation of acquired intangible assets rises to 15.9% (H1 2005: 12.1%) • Operating profit up 82% to £10.4m (H1 2005: £5.7m) • Basic EPS (including restructuring costs and amortisation of intangible assets) falls 51% to 2.5p (H1 2005: 5.1p) • Adjusted EPS (excluding restructuring costs, amortisation of acquired intangible assets and deferred taxation) rises 54% to 7.7p (H1 2005: 5.0p) Operating Highlights • Integration of ACMI business progresses well; target net savings increased from $22m to $25m by mid 2008 • Gross margin of 59.7 % (H1 2005 (proforma): 57.3%) exceeds expectations through volume, product mix and integration benefits • Introduction of the PlasmaCision platform to the surgical market makes a good start; 105 G400 General Surgery generators installed into US market by 30th June and approximately $1.9m of disposable PlasmaCision derived instrument revenues achieved (H1 2005: $0.3m) Commenting on the results, Brian Steer, Executive Chairman, said: "To have produced strong results during the integration phase of last year'smajor acquisition of ACMI shows the strength of our business. We are nowfocused on making the combination of our "See and Treat" technologies acommercial reality for surgeons, and, against the backdrop of a declining USdollar for the second half, we look ahead to the full year with cautiousoptimism and longer term confidence in the commercial potential of ourtechnology platform." Enquiries: Gyrus Group PLC Today:Brian Steer, Executive Chairman Tel: 0207 831 3113Simon Shaw, Chief Financial Officer Tel: 0207 831 3113 Financial DynamicsBen Atwell Tel: 0207 831 3113 A meeting for analysts will be held at the offices of Financial Dynamics,Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 9.00 am. Please callMo Noonan on 020 7269 7116 Overview Gyrus has performed well in the half year to 30th June 2006. Our reportedresults have been materially enhanced by the acquisition of American CystoscopeMakers Inc ("ACMI") in July 2005 with revenue growth of 127% to £107.4m (H12005: £47.3m). Operating profits, before restructuring costs and amortisationof acquired intangible assets, grew by 200% to £17.1m (H1 2005: £5.7m). Beneaththese results lies a strong performance on a proforma basis (i.e. assuming wehad owned ACMI throughout the first half of 2005), which was achieved againstthe backdrop of significant strategic change to the combined Group in theperiod. Revenue grew by 10% over the proforma H1 2005 figure of £97.5m (6.3% ona constant currency and continuing product portfolio basis) and operating profitbefore restructuring and amortisation expenses grew by 36% over the proforma H12005 figure of £12.5m. These results reflect our original expectations for the period of consolidationand restructuring post-acquisition; namely that the benefits of the potentialmanufacturing synergies and operational gearing would begin to show throughsoonest in the form of increased operating profitability, while the evolvingmarket focus on the "See and Treat" platform would take longer to emerge. Reported basic earnings per share (EPS) fell by 51% to 2.5p (H1 2005: 5.1p)principally due to restructuring costs and the amortisation of acquiredintangible assets associated with the acquisition of ACMI (which togetherrepresented approximately 4p per share in the period). The Board's preferredmeasure of performance, Adjusted EPS, which excludes integration, amortisationcosts and the effects of deferred taxation, grew 54% to 7.7p (H1 2005: 5.0p). Business Review The performance of each business unit during the first half of 2006 is shownbelow in its principal billing currency: Analysis of Revenues Business H12005 H12006 GrowthSurgical US $m 20.1 36.0 79.1% International £m 3.8 2.8 (26.3)%Urology & Gynaecology US $m 3.3 71.9 2078.8% International £m 1.1 10.2 827.3%ENT US $m 25.8 25.6 (0.8)% International £m 6.5 6.0 (7.7)%Partnered Technologies US $m 16.1 21.8 35.4% International £m 1.1 1.2 9.1%$/£ Rate 1.88 1.78 5.3%Total Revenue £m 47.3 107.4 127.1% SURGICAL DIVISION The Surgical division, representing 21% of Group turnover, is focused onlaparoscopic and minimally invasive abdominal surgery. In the US, the division's revenues grew by 79% to $36.0m partly through itsassumption of sales responsibility for a portfolio of minimally invasivesurgical equipment from ACMI. Underlying this, the US laparoscopic gynaecologybusiness continued to grow well on the back of strong performances across the PKproduct range, including over 20% sales growth in cutting forceps. In late March the PlasmaCision-based PlasmaTrissector and Plasma J-Hook wereintroduced into the general surgery market alongside the G400 generator and theexisting PlasmaSpatula for the gynaecology market. At the same time, and offthe same generator, the division introduced another PlasmaCision derivedinstrument, the PlasmaSeal, which electronically cuts and seals tissue in theopen abdominal surgery environment. This range of instruments represents thecore of our PlasmaCision portfolio for the large general surgery market. In thefirst few months since its introduction we have been evaluating performance ofthe technology and its embodiment in the form of these first products. Feedbackfrom general surgeons indicates that this technology is highly promising; thereare some design modifications to the PlasmaTrissector, which have beenidentified to ensure consistency of performance and are being effected in thesecond half. In addition the surgical team is developing its training modulesin the light of our introductory experiences in the field. In summary, thePlasmaCision portfolio generated approximately $1.9m in disposable instrumentsales during the period (H1 2005: $0.3m) and 105 G400 generators were installedinto the US market by 30th June. Of these, 51% were sold, generating additionalrevenues of $0.9m, rather than placed, a sale vs. placement ratio which isconsistent with our experience of recent times. Internationally, sales revenue in this relatively small part of the divisionfell by approximately 26% to £2.8m (H1 2005: £3.8m). The fall was due to strongsales to legacy ACMI distributors in the comparative period and the temporarystasis created by the integration of the combined Group's internationaldistribution network. UROLOGY & GYNAECOLOGY DIVISION The Urology & Gynaecology division, representing approximately 47% of Groupturnover, is focused primarily on endoscopic treatments of the urological tractand uterus. The acquisition of ACMI in July 2005 created the Division which generated USrevenues of $71.9m (H1 2005: $3.3m). Since the beginning of the year the division has begun to change its marketpositioning from primarily the sale of capital goods such as scopes andgenerators to focus increasingly on the selected placement of capital goods todrive revenues from disposable products and services. We agreed our firstsignificant contract of this type with an East Coast hospital chain at the endof the period. Commission structures have been altered for the second half of2006 to further encourage this shift in emphasis amongst the sales force. Inaddition, the division has discontinued selling certain peripheral products,which collectively had revenues of over $1m in H1 2005. Overall the division performed well in gynaecology, with approximately 17%revenue growth on the proforma comparative period to $9.4m including strongperformances in both disposable products and hysteroscopes. In the cysto-resection market (US sales revenue $31.5m), we began to see thebenefit of marketing the PK SuperPulse system to the legacy ACMI customer base.Revenue from the sale of disposable PK instruments in the US grew byapproximately 40% to $3.4m and 61 SuperPulse generators were installed into theUS market, of which 36% were sold and the remainder placed to encourageupgrading by the customer. The third area of principal focus for the division is the management of kidneystones, for which the Group has a full range of visualisation andinstrumentation products. US revenues from this area decreased by approximately6% on a proforma comparative basis to $27.8m. Two principal areas contributedto this shortfall: in the laser treatment market sales of high value lasergenerators were negatively affected by the strong performance of the previousyear in which significant capital sales were achieved; secondly there was asignificant shortfall in sales of flexible ureteroscopes, primarily as a resultof the anticipated launch of the digital ureteroscope in the second half of thisyear. This product appears to have great potential and was the subject ofstrong interest among urologists to whom it was introduced at the AmericanUrology Association meeting in May. We anticipate sales commencing early in thefourth quarter. Internationally, the Division achieved revenue of £10.2m, which representedgrowth of approximately 31% on the proforma comparative period. Much of thisgrowth was achieved as a result of the transfer from distributors to directbusiness in markets where the Group has a proprietary presence. ENT DIVISION The ENT division, a leader in the fields of otology, sinus & rhinology and headand neck surgical products, represented 19% of Group turnover in the first halfof 2006. The division had a flat performance during the period as it sought to repositionitself as a more "surgical" business while substantially increasing itsprofitability through restructuring. The US Otology business declined by 3% over the unusually strong comparativeperiod, which had itself grown by over 10%. The average revenue growth over theperiods concerned, at approximately 2% per annum is in line with our normalisedexpectations for this part of the business. The US Sinus and Rhinology business grew revenues by approximately 7% over thecomparable period. The continued performance of the PK Diego microdebridersystem was adversely affected by the implications of the patent litigationbrought by Medtronic Xomed against the ENT division, which was satisfactorilysettled after the period end. In total the Diego line of instruments grew byapproximately 9%. In the Head and Neck sector, the somnoplasty business continued itsreimbursement-related decline with revenues of $2.7m, approximately 16% lowerthan the comparable period. The remaining Head and Neck business grew byapproximately 12% to $2.1m, primarily as a result of sales of the TonsilPlasmaKnife at $0.4m (H1 2005: $0.03m). Since its launch in March 2005, marketfeedback on the original Tonsil PlasmaKnife had progressively indicated that,although the PlasmaCision technology was positively received, the originalinstrument was too bulky for widespread adoption. In response to this, thedivision successfully validated the use of an alternative PlasmaCision derivedinstrument, and in late August the jPlasmaKnife was commercially introduced forthe tonsillectomy procedure. In addition the division has progressed thedevelopment of the Dissector PlasmaKnife for surgical procedures of the neck,which is to be launched early in the fourth quarter. Internationally, divisional revenues declined by approximately 8% to £6.0m. Thebenefits of moving from distributor to direct sales in certain markets(Australia and China) were cancelled out by the negative effect on revenue ofthe sale of the non-core European ENT surgery furniture business in January,which contributed revenue of approximately £0.83m in the comparative period. Partnered Technologies DIVISION Gyrus's Partnered Technologies Division represented 13% of Group revenues duringthe period. The Division consists of technology licence, marketing and supplyrelationships with Johnson & Johnson (Depuy Mitek, Ethicon Endo-Surgery andGynecare), Guidant, Conmed and Rhytec. The Division's overall revenuesincreased substantially, by approximately 31% to $23.9m (H1 2005: $18.2m), withour principal partners showing sound growth. The H1 2005 comparative wassomewhat weak and therefore flatters the division's performance. The underlyinggrowth rate from long term partners, excluding the effect of the new cosmeticpartnership with Rhytec, was approximately 20%. Research & Development The Group's gross investment in R&D for the first half was £8.2m (7.6% of sales)an increase of 4% on the proforma comparative of approximately £7.9m. Duringthe period the Group expensed approximately £1.1m in respect of litigation costsassociated with the Medtronic claim against the ENT Division's Diegomicrodebrider product (H1 2005: £0.9m). There are some significant product launches scheduled for the second half of2006 in both the visualisation and instrumentation sides of the business,including the digital ureteroscope in the Urology & Gynaecology division and thejPlasmaKnife and the Dissector PlasmaKnife in the ENT division. In addition, the R&D team is focused on developing the next technology platformfor the Group, which will ultimately combine the capital elements of the Group's"See and Treat" to improve economics and functionality for laparoscopic/endoscopic suites and ultimately drive revenues from disposable products. Operations and integration During the first half of 2006 the Group has enjoyed a significant increase inoperating profitability through a combination of lean manufacturingimprovements, sourcing and overhead rationalisation and other integrationbenefits. Although the Group's reported gross margin dropped to 59.7% (H1 2005:61.3%) it has improved substantially on the proforma comparative gross margin ofapproximately 57.3% for H1 2005. The operating margin before amortisation of acquired intangible assets andrestructuring costs improved to 15.9% compared with 12.1% in the comparativeperiod and 14.2% for the last financial year. This represents a significantprogression towards the Group's target of a 20% annualised rate by mid 2008. The material integration initiatives commenced during the period are as follows: 1) The Group's plant at Racine, Wisconsin, is to be closed by mid 2007; 2) Establishment of a separate global distribution centre in Minneapolis for the Surgical and Urology & Gynaecology divisions. This centre is under final fit out and is expected to commence operations in the final quarter of 2006; 3) Establishment of an offshore manufacturing facility in Mexico to reduce the manufacturing cost of stable high volume products. The Group has recently entered an agreement with a provider of sheltered manufacturing facilities to achieve this before the end of the year; and 4) Implementation of a Group wide ERP system to replace the disparate systems in the legacy organisations. Oracle was selected at the end of 2005, and the detailed implementation process has progressed since then in order to implement in the customer service and distribution centre and the legacy ACMI plants in March 2007. In addition to the above principal initiatives, the Group has achievedsignificant integration benefits from operational improvement programmes,improved sourcing of both production and non-production products and servicesand removal of excess support and management staff. Of the target $22m inannualised savings by mid 2008, which was disclosed at the time of theacquisition last year, approximately 75% had been implemented by the end of Junewith programmes to deliver that benefit progressively between the acquisitiondate and mid 2008. The integration team has identified further opportunitiesfor improvement in excess of the original $22m and, taking into account the needto minimise integration risk, invest in business growth particularly in generalsurgery and, in certain circumstances share some cost benefits with ourcustomers, we have raised our final formal cost savings target to $25m in netsavings. Over the remaining reporting periods until mid 2008, it will becomeprogressively more difficult to establish the relative benefits associated withthe various contributory factors to operating performance such as volume growth,lean manufacturing, new product introduction, integration cost savings andshifts in strategy between capital and disposable revenues. Accordingly, fromhere on the Group will focus its reporting on the progression of the operatingmargin towards our target of c. 20%. Financial Review Operating expenses net of other operating income increased by 132% to £53.8m (H12005: £23.2m) primarily as a result of the acquisition of ACMI. On a proformacomparative basis and excluding both restructuring costs and intangible assetamortisation, underlying net operating expenses grew by approximately 11.4% to£48.1m, representing 44.8% of revenue (H1 2005: approximately £43.3m and 44.4%respectively). The principal contributor to this increase was selling anddistribution expenses which grew by 11% on a proforma basis as the Groupprepared for certain key product launches particularly into general surgery. Basic earnings per share (EPS) fell by 51% to 2.5p (H1 2005: 5.1p). AdjustedEPS, which excludes amortisation of acquired intangible assets, restructuringcosts including the costs of the special LTIP award and deferred tax increasedby 54% to 7.7p (H1 2005: 5.0p) despite a significant increase in the provisionfor current tax to 18% of profits before amortisation charges (H1 2005: 12%),reflecting the increased profits in predominantly EU jurisdictions where thereare limited tax losses to offset. During the period, the Group increased the installed base of generators in theUS market by 17% to 5694 units (H1 2005: 4861 units). 52% of new installationswere sold rather than placed. Sales of the related disposable instrumentsincreased 29% to $28.6m (H1 2005: $22.2m). The Group's working capital position improved marginally compared with theproforma combined comparative from 30th June 2005 with a 1% rise in the sterlingvalue of inventories being offset by an 8% reduction in trade receivables and a9% increase in trade creditors. Compared to the previous year-end position theapparent improvement is greater. However it is important to note that bothseasonality and particularly the devaluation of the dollar between 31st December2005 and 30th June 2006 had the effect of apparently decreasing the workingcapital of the Group. The effect of currency translation decreased the sterlingvalue of the Group's assets and liabilities as a whole, which are materiallydenominated in that currency. At the period end net debt, which ispredominantly US dollar denominated, stood at £110.4m (31st December 2005:£129.9m) representing a debt to equity gearing ratio of 39.2% (31st December2005: 43.1%) and reflecting the natural hedge of our financing structure. Outlook 2006 is an important year for Gyrus in which we are consolidating the combinedGroup, introducing several important new "See and Treat" products and launchingGyrus into the large general surgery market. At the same time the strategy ofcapital placement to drive incremental sales of disposable products is beingintroduced into the Group's largest division. These initiatives have startedwell and we look ahead to the full year with optimism, albeit with some cautionin the face of a declining US dollar in the second half. In the longer term welook with enhanced confidence at the commercial potential of our "See and Treat"platform. Brian SteerExecutive Chairman Gyrus Group PLCConsolidated Income StatementFor the six months ended 30 June 2006 Note 6 months Restructuring 6 months 6 months Year ended (Note 3) Ended Ended Ended 30 June 30 June 30 June 31 December 2006 2006 2005 2005 (unaudited) (unaudited) (unaudited) (audited) £000 £000 £000 £000 £000 Revenue 4 107,413 - 107,413 47,271 150,376 Cost of sales (42,219) (1,043) (43,262) (18,317) (66,749) ______ ______ ______ ______ ______ Gross profit 65,194 (1,043) 64,151 28,954 83,627 Other operating income 329 - 329 892 1,501 Selling and distributionexpenses - Selling and distribution (29,220) (879) (30,099) (13,335) (40,161) - Amortisation of acquired intangibles (1,516) - (1,516) - (2,524) Research and developmentexpenses - Research and development (8,169) (11) (8,180) (5,071) (13,091) - Amortisation of acquired intangibles (2,838) - (2,838) - (1,406) General and administrative expenses (11,082) (403) (11,485) (5,727) (17,528) ______ ______ ______ ______ ______ Operating profit 12,698 (2,336) 10,362 5,713 10,418 Financial income 859 - 859 80 3,227Financial expense (5,649) - (5,649) (1,080) (6,710) ______ ______ ______ ______ ______ Profit before taxation 7,908 (2,336) 5,572 4,713 6,935 Income tax expense 5 (2,747) 811 (1,936) (454) (659) ______ ______ ______ ______ ______ Profit for the period 5,161 (1,525) 3,636 4,259 6,276 ______ ______ ______ ______ ______ Earnings per ordinary shareBasic 8 2.5p 5.1p 5.6p _____ _____ _____Diluted 8 2.4p 5.0p 5.4p _____ _____ _____ Gyrus Group PLCStatement of recognised income and expenseFor the six months ended 30 June 2006 6 months 6 months Year Ended Ended Ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £000 £000 £000 Exchange differences arising on translation of foreign operations (26,783) 7,284 18,807 Deferred tax recognised on income and expenses directly in equity 404 130 663 Cash flow hedgesChanges in accounting policy relating to the first-time adoption of IAS 39 - 115 115Effective portion of changes in fair value of cash flow hedges net of recycling 1,009 (337) 579 Actuarial gain/(loss) on defined benefit pension plan 11 - (35) _____ _____ _____ (25,359) 7,192 20,129 Profit for the period 3,636 4,259 6,276 _____ _____ _____ Total recognised income and expense for the period (21,723) 11,451 26,405 _____ _____ _____ Gyrus Group PLCConsolidated Balance Sheet Note As at As at As at 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £000 £000 £000Assets Property, plant and equipment 6 19,992 11,003 20,057Goodwill 269,204 96,154 288,251Other intangible assets 90,413 755 110,288Deferred tax asset 5 - 4,643 - _____ _____ _____Total non-current assets 379,609 112,555 418,956 _____ _____ _____ Inventories 32,429 16,217 33,140Trade receivables 29,711 16,620 35,509Other current assets 8,007 3,920 8,849Cash and cash equivalents 28,756 7,524 20,194 _____ _____ _____Total current assets 98,903 44,281 97,692 _____ _____ _____ Total assets 478,512 156,836 516,288 _____ _____ _____ Equity Share capital 7 (2,789) (2,163) (2,785)Share premium 7 (304,536) (152,913) (303,699)Merger reserve (3,860) (3,860) (3,860)Hedging and translation reserves 15,306 2,029 (10,467)Retained earnings 14,437 23,053 19,306 _____ _____ _____ Total equity (281,442) (133,854) (301,505) _____ _____ _____ Liabilities Bank loan 9 (118,944) - (136,731)Obligations under finance leases and hire purchase (83) (215) (146)contractsDeferred tax liabilities 5 (20,842) - (22,801) Provisions (3,693) - (3,219) _____ _____ _____ Total non-current liabilities (143,562) (215) (162,897) _____ _____ _____ Bank overdrafts and loans due within one year 9 (20,028) (8,087) (13,123)Trade and other payables (31,209) (14,019) (37,700)Current tax payable (2,160) (527) (929)Obligations under finance leases and hire purchase contracts (111) (134) (134) _____ _____ _____ Total current liabilities (53,508) (22,767) (51,886) _____ _____ _____ Total liabilities (197,070) (22,982) (214,783) _____ _____ _____ Total equity and liabilities (478,512) (156,836) (516,288) _____ _____ _____ Gyrus Group PLCConsolidated Cash Flow Statement As at As at As at 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £000 £000 £000Cash flows from operating activities Profit for the period 3,636 4,259 6,276 Adjustments for:Depreciation of property, plant and equipment 2,747 1,735 4,316Amortisation of intangible assets 4,483 77 4,327Loss on disposal of property, plant and equipment 58 44 85Financial income and expense 4,790 1,000 5,463Exchange loss included in financial income and expense (290) (711) (1,062)Fair value adjustment on acquired inventory and option accounting - - 2,705Equity settled share based payment expense 1,199 281 1,570Taxation 1,936 454 659 _____ _____ _____Operating cash flows before movement in working capital 18,559 7,139 24,339 Increase in inventories (765) (3,850) (1,263)Decrease/(increase) in trade and other receivables 3,994 (2,736) (10,268)(Decrease)/increase in trade and other payables (3,093) 3,688 948 _____ _____ _____Cash generated from operations 18,695 4,241 13,756 Interest paid (4,772) (384) (3,227)Taxation paid (878) (631) (573) _____ _____ _____Net cash from operating activities 13,045 3,226 9,956 _____ _____ _____ Cash flows from investing activities Interest received 342 80 192Acquisition of property, plant and equipment (4,150) (1,656) (4,238)Acquisition of patents, trademarks and other intangibles (10) (296) (56)Expenditure on product development (267) - (253)Acquisition of subsidiaries (net of cash acquired) - (765) (289,775) _____ _____ _____Net cash from investment activities (4,085) (2,637) (294,130) _____ _____ _____ Cash flows from financing activities Proceeds from issue of share capital 841 469 155,660(Repayment)/increase in borrowings (546) (841) 141,259Repayment of obligations under finance leases (65) (59) (133) _____ _____ _____Net cash from financing activities 230 (431) 296,786 _____ _____ _____ Net increase in cash and cash equivalents 9,190 158 12,612 Cash and cash equivalents at beginning of period 20,194 7,263 7,263 Effect of foreign exchange rate fluctuations on cash held (628) 103 319 _____ _____ _____ Cash and cash equivalents at end of period 28,756 7,524 20,194 _____ _____ _____ Bank balances and cash 28,756 7,524 20,194 _____ _____ _____ Gyrus Group PLC Notes to the Preliminary AnnouncementFor the six months ended 30 June 2006 1. Basis of preparation Gyrus Group PLC is a company domiciled in the United Kingdom. The condensedconsolidated interim financial statements of the Company for the six monthsended 30 June 2006 comprise the Company and its subsidiaries (together referredto as the "Group"). The preliminary announcement for the period ended 30 June 2006 has been drawn upunder the same accounting policies as those used for the financial statementsfor the year ended 31 December 2005. The interim financial statements do not constitute statutory accounts as theyare unaudited. The comparative figures for the financial year ended 31 December 2005 are notthe Group's full audited statutory accounts for that financial year. Thoseaccounts, which were prepared under EU adopted International Financial ReportingStandards, have been reported on by the Group's auditor and delivered to theregistrar of companies. The report of the auditors was unqualified and did notcontain statements under section 237(2) or (3) of the Companies Act 1985. The condensed consolidated interim financial statements were authorised forissuance on 12 September 2006. 2. Adjustment to initial accounting for the acquisition of American CystoscopeMakers Inc 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 ofAmerican Cystoscope Makers Inc ("ACMI"). Fair values were assigned to ACMI'sidentifiable assets, liabilities and contingent liabilities on the basis ofinformation available. Subsequent to the initial accounting for this businesscombination, a liability of £224,000 has been identified that existed at thebalance sheet date but for which no fair value was attributed on acquisition.As permitted under IFRS 3 ("Business Combinations"), the liability has beenrecognised within twelve months of the acquisition date. Net assets andliabilities restated at the acquisition date are £14,711,000 and goodwillrestated at acquisition £180,217,000. There is no impact on either the profitor adjusted earnings per share for the year ended 31 December 2005 or for thesix months ended 30 June 2006. 3. Restructuring costs As a result of the acquisition of American Cystoscope Makers Inc in July 2005,the Group continues to incur restructuring costs arising from the integration ofthe legacy Gyrus business with that of ACMI. The total charge for the periodending 30 June 2006 was £2,336,000 (year ended 31 December 2005: £2,369,000 andsix months ended 30 June 2005: £nil). An analysis of these costs is shownbelow. As at As at As at 30 June 30 Jun 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £000 £000 £000 Severance costs 1,081 - 1,320Short-term sales commission - - 352Demonstration equipment write-off - - 148Alignment of global enterprise resource planning systems - - 456International distributor settlements 216 - -Manufacturing inefficiencies arising as a result of the relocation of production 276 - -Set up costs associated with the customer service and 95 - -distribution centreCore integration team expenses 413 - -Gyrus ACMI rebranding 66 - -Other costs 189 - 93 _____ _____ _____ 2,336 - 2,369 _____ _____ _____ 4. Segment reporting Segment information is presented in the condensed consolidated financialstatements in respect of the Group's business Divisions, which are the primarybasis of segment reporting. The business segment reporting format reflects theGroup's management and internal reporting structure. Inter-segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well 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 & rhinology and head & neck productsSurgical Design, development, manufacture, marketing and sales of laparoscopic surgery productsUrology & Design, development, marketing and sales of urology and gynaecology and visualisation productsGynaecologyPartnered Out-licensing of the Group's proprietary technology in conjunction with a manufacturing contractTechnologies for markets outside the Group's core sales and marketing competence For the six months ended 30 June 2006 (unaudited) ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000RevenueExternal sales 20,416 22,967 13,470 50,560 107,413Inter-segment sales - 438 3,439 - 3,877 _____ _____ _____ _____ _____ 20,416 23,405 16,909 50,560 111,290 _____ _____ _____ _____ _____Segment result before amortisation and restructuring charges 2,688 5,967 3,106 7,313 19,074Amortisation of acquired intangibles - (500) (30) (3,824) (4,354)Restructuring charges (75) (337) (135) (1,789) (2,336) _____ _____ _____ _____ _____Segment result after amortisation of acquired intangibles andrestructuring charges 2,613 5,130 2,941 1,700 12,384 _____ _____ _____ _____ _____ Unallocated corporate expenses (2,022) _____Profit from operations 10,362Net finance costs (4,790) _____Profit before tax 5,572Income tax expense (1,936) _____Profit for the period 3,636 _____ For the six months ended 30 June 2005(unaudited) ENT Surgical Partnered Urology & Total Technologies Gynaecology £000 £000 £000 £000 £000RevenueExternal sales 20,190 14,430 9,703 2,948 47,271Inter-segment sales - 505 2,246 - 2,751 _____ _____ _____ _____ _____ 20,190 14,935 11,949 2,948 50,022 _____ _____ _____ _____ _____ Segment result 1,572 3,566 2,035 909 8,082 _____ _____ _____ _____ _____ Unallocated corporate expenses (2,369) _____ Profit from operations 5,713Net finance costs (1,000) _____ Profit before tax 4,713Income tax expense (454) _____ Profit for the period 4,259 _____ 5. Tax expense The overall rate of tax for the period is 34.7% (30 June 2005: 9.6%) which ishigher than the standard rate of UK corporation tax of 30%. This is due, in particular, to the higher rates of tax in the overseasjurisdictions, the impact of IFRS 2 on the issue of long- term incentive awardsand significant non-deductible items such as the amortisation of intangibles. Current taxation As at 30 June 2006 As at 30 June 2005 (unaudited) (unaudited) £000 £000 - Domestic 1,267 197 - Foreign 515 367 _____ _____ 1,782 564 _____ _____ Deferred tax - Current year 154 (110) _____ _____ Taxation attributable to the Company and its subsidiaries 1,936 454 _____ _____ Deferred Taxation £000 Net deferred tax asset recognised at 30 June 2005 4,643Business combinations (28,152)Credit to income for the period 168Charged directly to equity 130Exchange differences 410 _____ Net deferred tax liability recognised at 31 December 2005 (22,801)Charge to income for the period (154)Charged directly to equity 404Exchange differences 1,709 _____ Net deferred tax liability recognised at 30 June 2006 (20,842) _____ The primary components of the Group's recognised deferred tax assets includeaccrued interest payments on loans to US subsidiaries and tax loss carryforwards. The primary components of the Group's deferred tax liabilities include temporarydifferences related to tax relief for goodwill obtained in relation to theacquisition of the assets of Smith & Nephew Inc's ENT division ("ENT") and onthe intangible assets acquired during the acquisitions made in 2005. As the Group has overseas entities, the sterling deferred tax position moves asa result of translation at the exchange rate prevailing at the period end. Thisforeign exchange difference has been recognised through reserves. 6. Property, plant and equipment Capital commitments As at 30 June 2006, the Group entered into contracts to purchase property, plantand equipment of £1,102,000 (six months ended 30 June 2005: £693,000). 7. Capital and reserves Share capital and share premium The Group recorded the following amounts within shareholder's equity as a resultof the issuance of ordinary shares. For the six months ended 30 June Share capital Share premium 2006 (unaudited) 2005 (unaudited) 2006 (unaudited) 2005 (unaudited) £000 £000 £000 £000Issuance of ordinary shares 4 3 837 466 Dividends The Directors do not propose the payment of a dividend (30 June 2005: £nil). 8. Earnings per share Basic earnings per share The calculation of basic earnings per share for the six months ended 30 June2006 was based on the profit attributable to ordinary shareholders of £3,636,000(year ended 31 December 2005:£6,276,000 and six months ended 30 June 2005:£4,259,000) and a weighted average number of ordinary shares outstanding duringthe six months ended 30 June 2006 of 146,287,927 (year ended 31 December 2005:111,601,948 and six months ended 30 June 2005: 83,766,128). Diluted earnings per share The calculation of diluted earnings per share for the six months ended 30 June2006 was based on the profit attributable to ordinary shareholders of £3,636,000(year ended 31 December 2005:£6,276,000 and six months ended 30 June 2005:£4,259,000) and a weighted average number of ordinary shares outstanding duringthe six months ended 30 June 2006 of 150,513,041 (year ended 31 December 2005:115,368,521 and six months ended 30 June 2005: 84,631,581). Earnings 6 months 6 months Year ended 31 ended 30 June ended 30 June December 2005 2006 2005 (audited) (unaudited) (unaudited) £000 £000 £000 Earnings for the purposes of basic and diluted earnings per share 3,636 4,259 6,276 6 months 6 months Year ended 31 ended 30 June ended 30 June December 2005 2006 2005 (audited) (unaudited) (unaudited) Number Number Number Weighted average number of shares for purposes of calculating basic earnings per share 146,287,927 83,766,128 111,601,948Effect of dilutive options 4,225,114 865,453 3,766,573 _____ _____ _____ Weighted average number of shares for purposes of calculating diluted earnings per share 150,513,041 84,631,581 115,368,521 _____ _____ _____ Basic earnings per share 2.5p 5.1p 5.6p _____ _____ _____ Diluted earnings per share 2.4p 5.0p 5.4p _____ _____ _____ Adjusted earnings per share In order to provide a clearer measure of the Group's underlying performance,profit attributable to ordinary shareholders is adjusted to exclude items 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 £11,252,000 (year ended31 December 2005: £15,835,000 and six months ended 30 June 2005: £4,149,000) bythe weighted average number of ordinary shares outstanding during the six monthsended 30 June 2006 of 146,287,927 (year ended 31 December 2005: 111,601,948 andsix months ended 30 June 2005: 83,766,128). Adjusted diluted earnings per share has been calculated by dividing adjustedprofit attributable to ordinary shareholders (see table below for adjustmentsmade) of £11,252,000 (year ended 31 December 2005: £15,835,000 and six monthsended 30 June 2005: £4,149,000) by the weighted average number of ordinaryshares outstanding during the six months ended 30 June 2006 of 150,513,041 (yearended 31 December 2005: 115,368,521 and six months ended 30 June 2005:84,631,581). Earnings on which adjusted earnings per share is based: 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £000 £000 £000 Basic earnings for the period 3,636 4,259 6,276Net impact of fair value adjustments on acquired inventory - - 2,706and option accountingRestructuring charges 2,336 - 2,369Amortisation of acquired intangible assets 4,354 - 3,873Charge relating to "special" LTIP award* 772 - 872Deferred taxation 154 (110) (261) _____ _____ _____ Earnings for the purposes of adjusted earnings per share 11,252 4,149 15,835 _____ _____ _____ Adjusted basic earnings per share 7.7p 5.0p 14.2p _____ _____ _____ Adjusted diluted earnings per share 7.5p 4.9p 13.7p _____ _____ _____ *As part of the acquisition of American Cystoscope Makers Inc, a "special" awardof conditional shares under the Group's LTIP scheme was approved by shareholdersand was made to retain and incentivise approximately 25 key executives tointegrate the business effectively. The award will create a charge overapproximately three years until the potential vesting date of July 2008. Thecharge relating to this is considered to be another form of integration/restructuring cost. 9. Interest-bearing loans and borrowings As at 30 June 2005 the Group had a loan of £8,087,000 under a revolving creditfacility of £15,000,000 which would have expired in December 2005. In order tofinance the acquisition of American Cystoscope Makers Inc, new bankingfacilities were agreed which comprised a term loan of $250m together with arevolving credit facility. The remaining balance on the previous loan facilityat 21 July 2005 was refinanced under the terms of the new facility. The $250m loan is for a fixed term of five years. The loan attracts a maximumrate of US LIBOR plus 1.75% provided that Total Net Debt to Consolidated EBITDA(as defined in the facility agreement) is less than 3.50 and a minimum rate ofUS dollar LIBOR plus 0.75% provided that Total Net Debt to Consolidated EBITDAis less than 1.00. Each advance drawn down under the $30m revolving credit facility is repaid onthe last business day of each fixed term interest period (typically three to sixmonths). As the term of the revolving credit facility is for a period of fiveyears from 21 July 2005, amounts drawn down under this facility are shown asnon-current liabilities where repayments are due in greater than one year. Theinterest rate for each advance drawn under the revolving facility is fixed onthe date of the advance for the agreed interest period at US dollar LIBOR plus1.75%. The margin added to US dollar LIBOR follows that of the term loanfacility. Amounts drawn down on this facility at 30 June 2006 were US$650,000and EUR€5,000,000. These loans are disclosed as current liabilities. The $250m loan and $30m revolving credit facility are secured by a fixed andfloating debenture on the assets of the Group. Repayments on the loan over the period from 1 January 2006 to 30 June 2006 wereas follows: Euro US dollar Total £000 £000 £000 Loan balance as at 1 January 2006 (audited) 3,435 146,419 149,854Repayments - (546) (546)Foreign exchange movement 21 (10,357) (10,336) _____ _____ _____Loan balance as at 30 June 2006 (unaudited) 3,456 135,516 138,972 _____ _____ _____ 10. Financial Instruments Interest rate risk The Group adopts a policy of ensuring that at least 50% of its exposure tochanges in interest rates on fixed term borrowings is hedged. At 30 June 2006,the Group had entered into two interest rate cap and collar transactions. Thecap on both financial instruments is US dollar LIBOR rate of 4.75% and thecollars are 4.19% and 3.96% respectively. The maturation of both instruments isconsistent with that of the $250m term loan. At 30 June 2006, the Group hadinterest rate hedges with a notional contract amount of $187,500,000 (30 June2005: $nil). The Group classifies interest rate hedges as cash flow hedges and states them atfair value. Foreign currency risk The Group incurs foreign currency risk on sales and purchases that aredenominated in currencies other than sterling. The currency primarily givingrise to this risk is the US dollar. The Group hedges at least 80% of the anticipated US dollar cash flows for netanticipated receivables/payables in the first three months forward, at least 50%in months four to six and at least 25% in months seven to twelve forward. TheGroup uses forward exchange contracts to hedge its foreign currency risk. Allof the forward exchange contracts have maturities of less than one year from thebalance sheet date. The Group designates its forward exchange contracts of the variability of cashflows of a recognised asset or liability, or highly probable forecastedtransaction as cash flow hedges and states them at fair value. Estimation of fair values The fair value of forward foreign exchange contracts is the mark to market valueof the contracts as at 30 June 2006. The fair value of forward foreign exchangecontracts at 30 June 2006 is an asset of £104,000 (six months ended 30 June 2005a liability of £83,000 and year ended 31 December 2005 a liability of £147,000).The fair value of the interest rate hedges as at 30 June 2006 is an asset of£1,712,000 (six months ended 30 June 2005 £nil and year ended 31 December 2005an asset of £864,000). Adjustments to the fair value of cash flow hedges are reported in equity whendesignated as effective hedges. The ineffective portion is immediatelyrecognised in the income statement. Otherwise the gains and losses will bereported in the income statement only when the forecasted transaction occurs andis recognised in the income statement. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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