Finance Review

Consort Medical plc had a successful year ended 30 April 2011, delivering strong revenue and profit growth

After a challenging three years of repositioning the Group, we believe we now have a strong platform to drive sustained revenue and earnings growth. The three year restructuring charges relating to this repositioning are also largely complete and we do not anticipate a net charge for restructuring in the coming year. The Group operates in defensive markets with resilient end customer demand and it further benefits from a strong balance sheet and cash flows. Moreover, we are now expecting to see the benefits of our focus on investment in research and development through the economic downturn with a range of product launches due over the next three to four years. Our strategy of diversification reduces the risk of being exposed to any single market and in the past two years we have positioned ourselves to benefit from higher growth markets such as biologic drug delivery by autoinjector and Point-of-Care diagnostics. We have been pleased in the past year also to take advantage of low interest rate swap rates and to fix substantially the whole of the Group’s borrowings until the end of 2013 at a rate of between 1.48% and 1.78% plus bank margin.

Income statement

Revenue from products and services in 2010/11 rose by 7% to £126.8m (2010: £118.6m), with both divisions generating growth. Bespak revenues rose by 8% to £83.8m, driven in particular by strong valve sales. Revenue in King Systems grew by 6% to £43.4m (3% at constant exchange rate (CER)).

Operating profit (before special items) rose 10% to £20.5m. Bespak contributed an operating profit before special items of £15.6m, up 11% on prior year. The operating margin of 18.7% was up (2010: 18.1%) for a third year in a row (2009 operating margin: 16.6%). King Systems contributed an operating profit before special items of £4.8m, with an operating margin of 11.1% (2010: 11.1%).

Profit before tax and special items rose by 3% to £17.4m (2010: £16.9m). Finance charges increased as forecast due to the higher margins payable on the Group’s borrowing facilities that were refinanced at the higher margins prevailing in the market as at April 2010. Profit before tax of £12.7m was 21% up on the prior period (2010: £10.5m).

Profit after tax and special items increased by 29% to £10.4m. Basic earnings per share therefore increased by 29% to 36.0p while adjusted basic earnings per share increased by 7% to 45.5p.

Taxation

The taxation charge for the year was £2.3m. The underlying tax charge of £4.3m reflects a rate of 24.5% (2010: 27.2%), a little lower than anticipated due to a higher balance of UK rather than US earnings and falling UK corporation tax rates. We continue to anticipate an increase in underlying tax rate as we have used up losses that were sheltering our US taxable income.

Dividend

The Board is recommending a final dividend per share of 12.1p (2010: 12.1p) such that the total dividend for the period amounts to 19.1p (2010: 19.1p). The final dividend will be paid on 28 October 2011 to shareholders on the register on 23 September 2011. Dividend cover, based on earnings before special items, was 2.4 times (2010: 2.2 times).

Special items

Special items of £4.7m included £2.7m of continuing amortisation of intangible assets following the acquisition of King Systems in 2005 and TMH in 2009, £0.1m relating to costs associated with the investment in Atlas Genetics Ltd and £1.9m relating primarily to the transformation programme, progress on which is described in more detail below.

The transformation programme has now removed over £5.0m of costs from the business and is expected to deliver a further £2.5m once the automation programme at King Systems is complete. The restructuring charge taken in this third year of the programme totalled £1.9m, in line with the £2.0m previously forecast. This charge was primarily relating to the proposed closure of the H&M Rubber facility based in Kent, Ohio. The majority of the charges relate to expected employee severance costs. No further net restructuring charges are anticipated in the 2011/12 year.

Investment in Atlas Genetics Ltd

In February 2011, Consort Medical plc invested £1.1m to acquire 19.3% of the equity of Atlas Genetics Ltd, a company that has developed an innovative new technology for Point-of-Care diagnostics. At the same time, Bespak paid £0.2m to secure long-term manufacturing rights to the disposable cartridge used in the Atlas Genetics system and entered into an arm’s length development contract to design for manufacture and scale up production of the disposable card. The investment will be treated as an equity investment in the accounts of Consort Medical plc, and will be subject to annual impairment review.

Balance sheet

The Group continued to maintain a strong balance sheet, with £7.2m of cash and net debt of £33.8m which was just 1.3 times EBITDA before cash special items of £27.0m. Gross assets were £166.9m (2010: £173.3m). The pension deficit fell to £6.4m (2010: £13.3m) and is reviewed separately below. Provisions rose from £6.3m at the beginning of the period to £7.5m at 30 April 2011.

Cash flow, financing and liquidity

The Group’s divisions are strongly cash-generative. EBITDA after special items rose to £25.0m (2010: £21.6m) and cash generated from operations was £21.3m (2010: £21.1m). Capital expenditure of £9.0m was higher than the previous period (2010: £5.9m). The majority of capital expenditure was at King Systems to support the automation programme and in Bespak to install capacity to manufacture dose counters. A further £0.4m was capitalised with regard to development of the King Vision. Loan repayments totalled £8.8m (2010: £4.4m) and pension deficit payments £2.9m (2010: £2.8m). A substantial portion of the Group’s borrowings are currently held in US dollars and qualify as an investment hedge against movements in the King Systems assets which they were used to acquire – hence all gains and losses are taken to exchange reserves within equity. Net debt rose very slightly to £33.8m (2010: £33.2m), a rise of £2.9m at constant currency. Term loan repayments on the US dollar term loan, now fully repaid, and interest are met by US dollar income from King Systems and Bespak.

In April 2010 the Group refinanced its principal facilities with the Royal Bank of Scotland (RBS) and introduced HSBC as the minority partner in a syndicated credit facility. In order to eliminate the risk of volatile currency movements affecting our headroom, we split our main facilities into two revolving credit facilities (RCFs) and one term loan in GBP. The first RCF is for $56m, against which we had drawn $48m as at 30 April 2011. The second RCF is for £25m, against which we had drawn £3m at year end. An additional £10m term loan was established which will commence amortisation on 1 July 2011. All of these facilities will expire in October 2013. Margins are variable with a cost of between 2% and 3% over LIBOR depending upon the level of net debt prevailing at the time. A non-utilisation fee of half the margin is applicable to unused headroom and arrangement fees of around 1.7% (including advisors’ fees) are being amortised over three years. The interest rate on the entire USD borrowings and the GBP term loan has been fixed using swaps that fix the interest rate at between 1.48% and 1.78% plus bank margin.

The Group completed its repayment in December 2010 of the final $5m of a USD term loan with RBS during the year and additionally redeemed the vast majority of its £5.5m loan notes which were issued to shareholders of TMH as acquisition consideration in May 2010. The Group maintains levels of sterling cash sufficient to meet imminent obligations and to be a reserve in case of an adverse event. These funds are invested with a range of reputable financial institutions approved by the Board.

With net debt at 1.3 times adjusted EBITDA, the Group remains comfortably within both its headroom and its covenants. Taking into account the cash balances available, the total headroom at the period end was £35m (2010: £42m). The decrease in headroom was largely as a result of the repayment of the loans as described above.

Foreign currency

The Group monitors its foreign currency exposures carefully and seeks to mitigate all material transactional exposures. The Group currently has low exposure to movements in the euro and only a modest exposure to US dollar movements. Where necessary we buy or sell forward currency to protect current period transactions. The Group has a translational exposure with its King Systems Division which is to some extent mitigated by maintaining borrowings in US dollars.

Pension scheme

Bespak operates a defined benefit pension scheme in the UK that is closed to new employees, who are eligible to join a defined contribution pension scheme. As at 30 April 2011, the deficit was £6.4m compared with £13.3m as at 30 April 2010. The movement was primarily as a result of gross liabilities increasing to £71.4m due to declining discount rates, offset by a recovery in asset values, a £3m benefit from the switch to CPI calculation in some aspects of the scheme and the ongoing annual cash contribution by the Group of £2.9m. The Group will conduct its triennial revaluation of the pension scheme as at 30 April 2011 and will enter into discussions with the Trustees concerning further repayments of the deficit based on this valuation.

Risk management

The Group considers effective risk management to be a high priority. Specific risk management activities are reviewed on pages 24 and 25 of the Directors’ Report.

Toby Woolrych
Group Finance Director
15 June 2011

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