REG - ConvaTec Group PLC - ConvaTec full year 2016 results <Origin Href="QuoteRef">CTEC.L</Origin> - Part 3
02/03/2017 07:06
- Part 3: For the preceding part double click ID:nRSB2939Yb
)
Basic weighted average ordinary shares in issue 1,376,365,276 1,261,343,801
Dilution - -
Diluted weighted average ordinary shares in issue 1,376,365,276 1,261,343,801
Basic loss per share ($ per share) (0.15 ) (0.07 )
Diluted loss per share ($ per share) (0.15 ) (0.07 )
In 2016, all share awards granted on 11 November 2016 were excluded from the calculation of diluted loss per share, as the
effect of including them would have been anti-dilutive. The dilutive effect of potential shares issuable for share awards
on the weighted average ordinary shares in issue would have been as follows:
2016 2015
Basic weighted average ordinary shares in issue 1,376,365,276 1,261,343,801
Dilutive effect of share awards 282,672 -
Diluted weighted average ordinary shares in issue 1,376,647,948 1,261,343,801
In 2016, share options granted on 11 November 2016 to purchase approximately 3,120,000 ordinary shares of the Group were
not included in the computation of diluted loss per share because the exercise prices of the share options were greater
than the average market price of the Group's ordinary shares and, therefore, the effect would have been anti-dilutive.
3. Segment Information
The Group's management considers its business to be a single segment entity, being engaged in the development, manufacture
and sales of medical products and technologies. The Group is a global medical products and technologies group focused on
therapies for the management of chronic conditions, including products used for advanced chronic and acute wound care,
ostomy care and management, continence and critical care, and infusion devices used in the treatment of diabetes and other
conditions. The Group sells a broad range of products to a wide range of customers, including healthcare providers,
patients and manufacturers. The R&D, manufacturing and central functions are managed globally for the Group. The revenues
are managed both on a franchise and regional basis. The Group's CEO, who is the Group's Chief Operating Decision Maker
evaluates the Group's global product portfolios on a revenue basis and generally evaluates profitability and associated
investment on an enterprise-wide basis due to shared geographic infrastructures between the franchises. In making these
decisions, the CEO evaluates the financial information on a Group wide basis to determine the most appropriate allocation
of resources. This financial information relating to revenues provided to the CEO for decision making purposes is made on a
combination of a franchise and regional basis, however profitability measures are presented on a global basis.
Revenue by franchise
The Group generates revenue across four major market franchises:
Advanced Wound Care. The Advanced Wound Care franchise includes advanced wound dressings and skin care products. These
dressings and products are used for the management of chronic wounds resulting from ongoing conditions such as diabetes,
immobility and venous disease, as well as acute conditions resulting from traumatic injury, burns, invasive surgery and
other causes.
Ostomy Care. The Ostomy Care franchise includes devices, accessories and services for people with an ostomy or stoma (a
surgically-created opening where bodily waste is discharged), commonly resulting from colorectal cancer, inflammatory bowel
disease, bladder cancer, obesity and other causes.
Continence and Critical Care ("CCC"). The CCC franchise includes products for people with urinary continence issues
related to spinal cord injuries, multiple sclerosis, spina bifida and other causes. The franchise also includes devices and
products used in intensive care units and hospital settings.
Infusion Devices. The Infusion Devices franchise provides disposable infusion sets to manufacturers of insulin pumps for
diabetes and similar pumps used in continuous infusion treatments for other conditions. In addition, the franchise supplies
a range of products to hospitals and the home healthcare sector.
The following table sets forth the Group's revenue for the years ended 31 December 2016 and 2015 by market franchise:
2016 2015
$M $M
Revenue by market franchise
Advanced Wound Care 559.5 536.1
Ostomy Care 512.1 515.5
Continence & Critical Care 356.5 348.2
Infusion Devices 260.2 250.6
1,688.3 1,650.4
Geographic information
Geographic markets
The following table sets forth the Group's revenue for the years ended 31 December 2016 and 2015 in each geographic market
in which customers are located:
2016 2015
$M $M
Geographic markets
EMEA 726.4 735.5
Americas 829.4 787.8
APAC 132.5 127.1
1,688.3 1,650.4
Geographic regions
The following table sets forth the Group's revenue for the years ended 31 December 2016 and 2015 on the basis of geographic
regions where the legal entity resides and from which those revenues were made:
2016 2015
$M $M
Geographic regions
U.S. 543.8 509.2
Denmark 293.5 289.7
U.K. 157.0 170.8
Switzerland 110.8 110.9
France 90.1 84.6
Other(1) 493.1 485.2
1,688.3 1,650.4
_______________________________
(1) Other consists primarily of countries in Europe, APAC, Latin America and Canada.
The following table sets forth the Group's long-lived assets at 31 December 2016 and 2015 by geographic regions:
2016 2015
$M $M
Long-lived assets(1)
U.S. 1,125.0 1,232.8
U.K. 432.9 558.6
Denmark 124.8 132.8
Slovakia 45.0 17.5
Other(2) 58.5 38.9
Total long-lived assets 1,786.2 1,980.6
_______________________________
(1) Long-lived assets consist of property, plant and equipment and intangible assets.
(2) Other consists primarily of countries in Europe and Latin America.
Major Customers
In 2016, and 2015, no single customer generated more than 10% of the Group's revenue.
4. Long-term Borrowings
A summary of the Group's consolidated long-term borrowings at 31 December 2016 and 2015 is outlined in the table below:
2016 2015
$M $M
Credit Facilities Agreement(1):
Revolving Credit Facility - -
US Dollar Term A Loan Facility 760.5 -
Euro Term A Loan Facility 567.5 -
US Dollar Term B Loan Facility 424.6 792.5
Euro Term B Loan Facility - 814.6
Total Credit Facilities 1,752.6 1,607.1
Senior Notes:
10.5% US Dollar Senior Notes - 736.4
10.875% Euro Senior Notes - 268.3
8.25% PIK Notes - 886.5
Finance Lease Obligations 23.0 0.2
Total long-term borrowings 1,775.6 3,498.5
Less: Current portion of long-term borrowings 38.5 21.5
Total non-current long-term borrowings 1,737.1 3,477.0
_______________________________
(1) On 25 October 2016, the Group entered into the Credit Agreement which consists of (i) US dollar and euro term loans,
(ii) a revolving credit facility, and (iii) incremental unfunded term facilities (collectively, the "Credit Facilities").
The terms and conditions of total long-term borrowings outstanding at 31 December 2016 and 2015 are as follows:
2016 2015
Currency Year of maturity Face value Carrying amount Face value Carrying amount
$M $M $M $M
Revolving Credit Facilities(1) 2021 - - - -
US Dollar Term A Loan Facility(1) USD 2021 770.0 760.5 - -
Euro Term A Loan Facility(1)(2) EURO 2021 574.2 567.5 - -
US Dollar Term B Loan Facility(1)(3) USD 2023 430.0 424.6 796.0 792.5
Euro Term B Loan Facility(2)(3) EURO - - - 816.0 814.6
10.5% US Dollar Senior Notes(3) USD - - - 745.0 736.4
10.875% Euro Senior Notes(3) EURO - - - 271.6 268.3
PIK Notes(3) USD - - - 900.0 886.5
Finance lease obligations EURO/USD - 23.0 23.0 0.2 0.2
Total interest-bearing liabilities 1,797.2 1,775.6 3,528.8 3,498.5
_______________________________
(1) The current nominal interest rates for the Credit Facilities included in the table above are described below.
(2) Total face value of the borrowings outstanding under the Euro Term A Loan Facility denominated in euros was E546.0
million ($574.2 million) at 31 December 2016. Total face value of the borrowings outstanding under the Euro Term B Loan
Facility denominated in euro was E751.2 million ($816.0 million) at 31 December 2015.
(3) The net proceeds from the issue of share capital, together with approximately $1,795 million drawn under the Credit
Facilities were used to redeem immediately following the listing all of the outstanding Payment-in-Kind Notes ("PIK
Notes"), all of the existing Senior Notes (as defined below) then outstanding, and to repay all amounts outstanding under
the existing credit facilities and cancel the available revolving commitments. As a result, for the year ended 31 December
2016, the Group recognised a loss on extinguishment of debt of $21.9 million, in the aggregate. Refer to the discussion
below for detailed information related to these transactions.
The Group's Credit Facilities contain customary operating and negative covenants, including, among other things, covenants
limiting: (i) incurrence of indebtedness; (ii) incurrence of liens; (iii) mergers, consolidations, liquidations,
dissolutions and other fundamental changes; (iv) sales of assets; (v) dividends and other payments in respect of capital
stock or junior debt subject to an available amount built by consolidated net income; (vi) acquisitions; (vii) transactions
with affiliates; (viii) changes in fiscal year; (ix) negative pledge clauses and clauses restricting subsidiary
distributions; and (x) holding companies.
The Group's Credit Facilities also contain a financial covenant, various customary affirmative covenants and specified
events of default.
At 31 December 2016 and 2015, the Group was in compliance with all financial covenants associated with the Group's
outstanding debt.
Credit Facilities
On 15 June 2015, the Group executed the amendment to the existing Credit Facility Agreement dated 22 December 2010 (the
"Amended Credit Facility Agreement") to refinance the Group's previous US dollar and euro term B loans and the revolving
credit facility (the "Refinancing"). The Amended Credit Facility Agreement provided for (i) US dollar and euro term B
loans of $800.0 million (issued for a discount of $2.0 million) and E755.0 million ($851.9 million at 15 June 2015),
respectively, (the "Pre-IPO Term Loan Facilities") and (ii) a $200.0 million revolving credit facility (the "Pre-IPO
Revolving Credit Facility"). The Pre-IPO Term Loan Facilities were amortised quarterly at an annual rate of 1%. The
Pre-IPO Revolving Credit Facility was not amortised. The net proceeds from the Refinancing were used to (i) repay amounts
outstanding prior to the Refinancing under the US dollar term B loans of $744.1 million and the euro term B loans of E436.4
million ($492.4 million) and (ii) redeem all of the outstanding E300.0 million ($338.5 million) aggregate principal amount
of 7.375% senior secured notes due 15 December 2017 (the "Secured Notes") for E322.1 million ($363.4 million), including a
call premium of E11.1 million ($12.5 million), plus accrued and unpaid interest, and satisfied and discharged the Secured
Notes indenture. As a result, for the year ended 31 December 2015, the Group recognised a loss on extinguishment of debt of
$27.8 million, in the aggregate.
On 25 October 2016, the Group entered into the Credit Agreement (the "Credit Agreement") with various financial
institutions (the "Financing").The Credit Agreement provides for (i) term A loans denominated in USD of $770.0 million and
euros of E546.0 million ($594.7 million at 25 October 2016) (the ''Term A Loan Facilities''), (ii) term B loans denominated
in USD of $430.0 million (issued at an offering price of 99.5%, after adjustment for a discount of $2.2 million) (the
''Term B Loan Facility'' and together with the Term A Loan Facilities, the ''Term Loan Facilities'') and (iii) a $200.0
million revolving credit facility (the "Revolving Credit Facility", and together with the Term Loan Facilities, the "Credit
Facilities"). The Term A Loan Facilities are repayable in semi-annual installments (commencing 30 June 2017) in aggregate
annual amounts equal to (i) 2.5% in year one, (ii) 5.0% in year two, (iii) 7.5% in year three, (iv) 10.0% in year four, and
(v) 7.5% in year five, in each case of the original principal amount of the Term A Loan Facilities. The Term B Loan
Facility is repayable in semi-annual installments (commencing 30 June 2017) in an aggregate annual amount equal to 1.0% of
the original principal amount of the Term B Loan Facility. Interest on outstanding principal under the Credit Facilities is
payable quarterly in arrears, providing that no interest payment date shall occur prior to 31 March 2017. In connection
with the Financing, the Group entered into a commitment letter dated 30 September 2016 with various financial institutions
and incurred $3.5 million in fees, which were expensed to Finance costs in the unaudited Consolidated Statement of Profit
or Loss.
The net proceeds from the Financing, together with the net proceeds from the issue of share capital, were used to (i) repay
all amounts outstanding prior to the Financing under the US dollar and euro term B loans of $785.5 million and E741.3
million ($807.3 million), respectively, and (ii) redeem all of the outstanding PIK Notes and all of the existing Senior
Notes further discussed below. As a result, for the year ended 31 December 2016, the Group recognised (i) a loss on
extinguishment of debt of $21.9 million, in the aggregate, of which $2.6 million was recognised with respect to the Pre-IPO
Term Loan Facilities and was comprised of $1.9 million of unamortised deferred financing fees and $0.7 million of
unamortised original issue discount ("OID") and (ii) a write off of deferred financing fees of $3.8 million related to the
Pre-IPO Revolving Credit Facility. The Group incurred fees of approximately $23.9 million, in the aggregate, of which $21.3
million were deferred and capitalised over the term of the Term Loan Facilities and $2.5 million were deferred and
capitalised over the term of the Revolving Credit Facility (recorded in Other assets).
The Revolving Credit Facility of $200.0 million is available through its termination date in certain currencies (USD, euro
and sterling) at the borrower's option and is used to provide for ongoing working capital requirements, letters of credit,
and general corporate purposes of the Group. The Revolving Credit Facility allows for up to $50.0 million of letter of
credit issuances as well as $25.0 million for borrowings on same-day notice, referred to as the swingline loans. There were
no borrowings outstanding under each revolving credit facility at 31 December 2016 and 2015. Availability under each
revolving credit facility, after deducting letters of credit of $1.3 million and $2.6 million, was $198.7 million and
$197.4 million at 31 December 2016 and 2015, respectively.
The Credit Agreement also provides for the ability of the Group to enter into incremental term facilities (the "Incremental
Term Facilities") and incremental revolving facilities (the "Incremental Revolving Credit Facilities") and to issue senior
secured, senior unsecured, senior subordinated or subordinated notes (the "Incremental Notes" and together with the
Incremental Term Facilities and the Incremental Revolving Credit Facilities, the "Incremental Facilities").
The Incremental Term Facilities and Incremental Revolving Credit Facilities are subject to certain conditions and are
available in (i) a cash-capped amount equal to the greater of $475 million and consolidated EBITDA as of the end of the
most recently ended two half-fiscal year period, provided that the consolidated total net leverage ratio (as defined in the
Credit Agreement) does not exceed 4.00 to 1.00, (ii) an unlimited amount so long as the maximum total leverage requirement
(as defined in the Credit Agreement) is satisfied, and (iii) an amount equal to all voluntary prepayments or repurchases
under the Term Loan Facilities and voluntary prepayments under the Revolving Credit Facility (to the extent accompanied by
a corresponding permanent reduction in the revolving commitments) (such sum, the ''Incremental Amount''), in US dollars
and/or euro (and, in the case of the Incremental Revolving Credit Facilities, pounds sterling), provided that the Group
satisfies certain other requirements, including: no default or event of default, minimum borrowing amounts of $15.0 million
and, in respect of Incremental Term Facilities, a maturity date and weighted average life to maturity of each individual
loan within the Incremental Term Facilities that is greater than the weighted average maturity date of the Term Loan
Facilities and if shorter, shall not have an amortisation of greater than 5.0% per annum. Additionally, should the yield on
any Incremental Term Facility exceed the interest margin on the Term Loan Facilities denominated in the same currency by
more than 0.50%, then the yield on the applicable Term Loan Facilities will automatically increase such that the yield on
such Term Loan Facilities denominated in the same currency shall be 0.50% below the yield on the applicable Incremental
Term Facilities. Any loan advances made under the Incremental Term Facilities will rank pari passu with or junior to the
Term Loan Facilities and the Revolving Credit Facility.
The Incremental Notes shall not exceed the Incremental Amount and are available in US dollars and euro, provided that the
Group satisfies certain other requirements, including: no default or event of default and the issuance shall be in an
amount of no more than $15.0 million (or its equivalent).
Subject to certain conditions, the Group may voluntarily prepay their utilisations under the Credit Facilities in a minimum
amount of $1.0 million (or its equivalent) for term loans or revolving facilities. Amounts repaid under the Term Loan
Facilities may not be re-borrowed. In addition to voluntary prepayments, the Credit Agreement requires mandatory prepayment
in full or in part in certain circumstances including, in relation to the Term Loan Facilities and subject to certain
criteria, from the proceeds of asset sales in excess of $20.0 million and the issuance or incurrence of debt and from
excess cash flow. In 2016, the Group made payments of $21.5 million, in the aggregate, related to the Pre-IPO Term Loan
Facilities as follows: (i) mandatory prepayment of $17.4 million for excess cash retained in the business and (ii)
scheduled March 2016 amortisation payment of $4.1 million. In 2015, the Group made payments of $55.9 million, in the
aggregate, related to the Pre-IPO Term Loan Facilities as follows: (i) mandatory prepayment of $43.6 million for excess
cash retained in the business, (ii) scheduled September and December 2015 amortisation payments of $8.2 million, in the
aggregate, and (iii) principal payment of $4.1 million in May 2015.
Borrowings under the Credit Facilities bear interest at either EURIBOR rate, Eurodollar rate, or an Alternate Base Rate
(''ABR''), in each case, plus an applicable margin. Under the Term Loan Facilities, EURIBOR interest is associated with the
borrowings in euros; while LIBOR and ABR interest is associated with borrowings in USD. EURIBOR, Eurodollar or ABR interest
rates may apply to any outstanding borrowings under the Revolving Credit Facility. ABR, as defined in the Credit Agreement,
is the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.50% or (c) the Eurodollar Rate for a one
month interest period plus 1.00%, provided that the ABR for the Term Loan Facilities may not be less than 1.00%. The
Eurodollar rate is subject to a floor of 0.75% per annum in respect of the Term B Loan Facility and 0.00% per annum in
respect of all other loans. The margins applicable to the Term A Loan Facilities denominated in euro range from 2.0% to
2.25% and the margins applicable to the Term A Loan Facilities denominated in USD range from 1.0% to 1.25% if using ABR and
2.0% to 2.25% if using the Eurodollar rate and the margins applicable to the Term B Loan Facility range from 1.25% to 1.50%
if using ABR and 2.25% to 2.50% if using the Eurodollar rate, in each case, with the relevant step-down in margin occurring
depending on the relevant first lien net leverage ratio.
Borrowings under the Credit Agreement are secured by substantially all of the Group's assets. Pursuant to the Credit
Agreement, the Group pledged certain property, plant and equipment as collateral with an aggregate net carrying amount of
$12.6 million at 31 December 2016.
Senior Notes
The Senior Notes consisted of $745.0 million (the "US Dollar Senior Notes") and E250.0 million ($271.6 million at 31
December 2015) senior notes (the "Euro Senior Notes") each due 15 December 2018 (collectively, the "Senior Notes"). The US
Dollar Senior Notes and the Euro Senior Notes bore interest at the rate of 10.5% and 10.875% per annum, respectively, which
was payable semi-annually on 15 June and 15 December of each year.
As discussed above, the Group redeemed all $745.0 million and E250.0 million ($272.3 million) of the outstanding principal
amount of the US Dollar Senior Notes and Euro Senior Notes, respectively, plus accrued and unpaid interest of $39.1 million
and E13.6 million ($14.8 million), respectively. In connection with these transactions, the Group recognised a loss on
extinguishment of debt related to unamortised deferred financing fees of $9.1 million, in the aggregate, in the year ended
31 December 2016.
PIK Notes
On 12 August 2013, the Group issued $900.0 million principal amount of the PIK Notes. The PIK Notes accrued cash interest
at a rate of 8.25% per annum and PIK Notes interest (if cash interest was not elected to be paid) at a rate of 9.00% per
annum.
As discussed above, the Group redeemed all $900.0 million of the outstanding principal amount of the PIK Notes, plus
accrued and unpaid interest of $22.1 million. In connection with this transaction, the Group recognised a loss on
extinguishment of debt of $10.2 million, comprised of $6.8 million of unamortised deferred financing fees and $3.4 million
of OID.
Interest Related Information
Accrued interest related to the Group's long-term borrowings was $8.7 million and $39.2 million at 31 December 2016 and
2015, respectively, and is recorded in Accrued expenses and other current liabilities. Interest expense for the years
ended 31 December 2016 and 2015 associated with the Group's long-term borrowings was as follows:
2016 2015
$M $M
Revolving Credit Facility(a) 1.4 1.7
US Dollar Term A Loan Facility 3.9 -
Euro Term A Loan Facility 2.3 -
US Dollar Term B Loan Facility 30.7 32.9
Euro Term B Loan Facility 29.8 29.5
10.5% US Dollar Senior Notes 74.7 78.2
10.875% Euro Senior Notes 28.9 30.2
8.25% PIK Notes 62.1 74.3
7.375% Secured Notes - 11.2
Total interest expense on long-term borrowings 233.8 258.0
_______________________________
(a) Represents the commitment fees in respect of the unutilised commitments under the Revolving Credit Facility.
The weighted average interest rate for borrowings under the Group's outstanding long-term borrowings was 6.9% and 7.2% for
the years ended 31 December 2016 and 2015, respectively.
Finance Lease Obligations
The table below presents total obligations under finance leases at 31 December 2016 and 2015:
Minimum lease payments Present value of lease payments
2016 2015 2016 2015
$M $M $M $M
Amount payable:
Within 1 year 2.2 0.1 0.6 0.1
1 to 5 years inclusive 10.0 0.1 3.7 0.1
After 5 years 26.2 - 18.7 -
38.4 0.2 23.0 0.2
Less future finance charges 15.4 - - -
Total obligations under finance leases 23.0 0.2 23.0 0.2
5. Legal Proceedings
In accordance with the accounting guidance related to contingencies, the Group records provisions for liabilities when it
is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Legal costs related to
litigation matters are expensed as incurred.
Corrections and Removals
In May 2015, the Group initiated a voluntary recall of certain batches of its Steel cannula infusion set devices, including
the Sure-T, Sure-T Paradigm, contact detach, contact, Sub Q, neria, neria detach, neria multi and thalaset models, due to
an increase in reported needle breakage. The recall is currently limited to affected devices in Germany and certain other
European countries, and in some other countries, such as the U.S., a Field Safety notification has been issued. The Group
also initiated a voluntary recall of its Suction Catheter devices in June 2015 after an increase in reported complaints of
splitting of the connector portion. The recall has been initiated in Australia and the Czech Republic and is a precaution
to ensure that distributed products are of the highest quality. The Group has completed destruction of the affected devices
that have been returned and the recall has been closed.
In January 2016, the Group initiated a recall of a range of nebulizer products in Europe, the U.S., Canada and China due to
an increase in complaints related to the products' failure to generate an atomized spray as intended. Following an
investigation, the Group determined that the issue was due to variability in a molding process during manufacturing. The
FDA classified this recall as a Class II recall, reflecting a determination that exposure to the device may cause temporary
or reversible adverse health consequences or that the probability of serious health consequences is remote. The Group is in
the process of completing destruction of the affected devices that have been returned and anticipates closing out this
recall shortly.
In April 2016, post-market reports identified a limited issue with the Instructions for Use ("IFU") on the Group's Italian
models for the Flexiseal Catheter system where the local language requirements were missing. As a precautionary measure,
shipments were held for a short period of time to update the IFU and the Group supplied Italian language instructions to
the customers. The device is now back in production.
In June 2013, Medtronic MiniMed, Inc. ("Medtronic"), issued a recall of certain infusion sets, including the Quick-Set® and
Silhouette® infusion sets, which include P-Cap connectors designed by Medtronic and manufactured for Medtronic by the Group
for use with Medtronic insulin infusion pumps in diabetes care. Medtronic issued this recall due to a potential safety
issue that can occur if insulin or other fluids come in contact with the inside of the tubing/P-Cap connector. This recall
has resulted in pending or threatened litigation against various of the Group's entities. These lawsuits allege that the
infusion sets are defective and have caused injuries or death to various plaintiffs. All of these cases also include claims
against Medtronic, and allegations that their insulin pumps (which the Group does not make or sell) are defective. To the
best of the Group's knowledge, as of this report date, approximately twenty-one product liability lawsuits had been filed.
The Group's entities have been voluntarily dismissed without prejudice from eleven of these lawsuits and dismissed with
prejudice from one lawsuit that was settled by Medtronic. In one other lawsuit the parties have agreed upon settlement
terms and are preparing a settlement. The Group has sent a demand to Medtronic seeking indemnification for these lawsuits
consistent with the terms of the agreements between them. To date, Medtronic has rejected this demand. The Group also
carries product liability insurance, subject to a self-insured retention, and has notified the insurance carrier about
these lawsuits. The remaining pending lawsuits are all in their early stages. At this point the Group is unable to predict
the likelihood of an unfavorable outcome or estimate any potential loss.
Smith & Nephew / Patent Litigations and Settlement
The Group and its competitor Smith & Nephew ("S&N") have engaged in a series of multi-year litigations related to patents
concerning various wound care products. In one of these matters, the defendants (including S&N) agreed to not market the
product (Durafiber) during the pendency of the litigation provided that in the event the Group lost at trial it would pay
for the defendants' lost profits. The Group lost at trial and on appeal and had been engaged in litigation with the
defendants as to the amount of their lost profits. The parties entered into a confidential settlement agreement dated 5
December 2015, which resolved this litigation.
6. Related Party Transactions
Prior to listing, the Group maintained an agreement with its equity sponsors (the "Management Agreement"), whereby the
equity sponsors provided certain management advisory services. For services rendered by the equity sponsors, an annual fee
of $3.0 million was payable in equal quarterly installments. The Group also paid other specified fees, in accordance with
the Management Agreement. For the years ended 31 December 2016 and 2015, the Group incurred $2.5 million ($1.8
million-Nordic Capital and $0.7 million-Avista Capital Partners) and $3.0 million ($2.1 million-Nordic Capital and $0.9
million-Avista Capital Partners), respectively, in contractual fees to the equity sponsors for services rendered in
accordance with the Management Agreement. Upon completion of the IPO, the Management Agreement was terminated.
The Group's revenue included $7.4 million and $7.6 million for the years ended 31 December 2016 and 2015, respectively, of
revenue to a related party (customers affiliated with Nordic Capital, former equity sponsor and principal shareholder). The
accompanying unaudited Consolidated Statement of Financial Position includes a receivable from the Group's related party
revenue recorded in Trade and other receivables in the amount of $1.2 million and $0.8 million at 31 December 2016 and
2015, respectively. In addition, during the year ended 31 December 2016, the Group purchased inventory product totaling
$0.7 million from a related party (vendors affiliated with Nordic Capital, former equity sponsor and principal
shareholder). These purchases were fully paid at 31 December 2016. The Group did not make purchases from a related party
during the year ended 31 December 2015.
Key management personnel compensation
Key management personnel are those persons who have the authority and responsibility for planning, directing and
controlling the activities of the Group. The definition of key management personnel includes directors (both executive and
non-executive) and other executives from the management team with significant authority and responsibility for planning,
directing and controlling the entity's activities.
Key management personnel compensation for the years ended 31 December 2016 and 2015 comprised the following:
2016 2015
$M $M
Short-term employee benefits 7.2 . 9.3
Share-based expense 38.2 8.7
Post-employment benefits 0.7 1.0
Total 46.1 19.0
The above table does not include an outstanding loan of $0.3 million and $0.4 million at 31 December 2016 and 2015,
respectively, to the Group's CEO. The amounts of share-based compensation to the key management personnel disclosed in the
table above are based on the expense recognised under IFRS 2.
7. Subsequent Events
The Group has evaluated subsequent events through the date of this release.
Post year end ConvaTec Group plc carried out a capital reduction, converting share premium of $1,713.7 million to
distributable reserves. As part of this capital reduction, expenses of issue of equity shares which had been offset
against the same share premium balance has also been taken to retained earnings. The net impact of the capital reduction
exercise has resulted in distributable earnings being increased by $1,674.1 million.
On 3 January 2017, the Group acquired the entire share capital of Eurotec Beheer B.V. ("EuroTec") for approximately E30
million in cash. EuroTec manufactures ostomy care systems and commercialises its products directly in the Benelux region
and through distributor partners in other markets. The transaction will be accounted for as a business combination under
the acquisition method of accounting. The Group will record the assets and liabilities assumed at their fair values as of
the respective acquisition date. Due to the limited time since the closing of the acquisition, the valuation efforts and
related acquisition accounting are incomplete at the time the Financial Statements are authorised for issue. As a result,
the Group is unable to provide amounts recognised as of the acquisition date for major classes of assets and liabilities
acquired, including goodwill.
Non-IFRS Financial Information
This release contains certain financial measures that are not defined or recognised under IFRS. These measures are
referred to as "Adjusted" measures and include: Adjusted Cost of goods sold, Adjusted Gross margin, Adjusted Selling and
distribution expenses, Adjusted General and administrative expenses, Adjusted Research and development expenses, Adjusted
Operating profit ("Adjusted EBIT"), Adjusted Profit before tax, Adjusted Finance costs, Adjusted Other expense net,
Adjusted Net income; Adjusted Earnings per share (shown collectively in the reconciliation to adjusted earnings, below),
Adjusted EBITDA (defined below), and Cash conversion. These measures are not measurements of financial performance or
liquidity under IFRS and should not replace measures of liquidity or operating profit that are derived in accordance with
IFRS.
The Group believes these measures are useful supplemental indicators that may be used to assist in evaluating the Group's
operating performance, which management uses to assess and measure the Group's operating performance. Accordingly, this
information has been disclosed to permit a more complete and comprehensive analysis of the Group's operating performance,
consistent with how the Group's business performance is evaluated by management. Items adjusted for include
acquisition-related amortisation, restructuring and other costs primarily related to the MIP programme, and costs incurred
in connection with the Group's refinancing and initial public offering.
Reconciliation to adjusted earnings - for the years ended 31 December 2016 and 2015
2016 Reported Adjustments Adjusted
(a) (b) (c) (d) (e) (f) (g)
$M
Revenue 1,688.3 - - - - - - - 1,688.3
Cost of goods sold (821.0 ) 136.8 23.8 - - - - 0.2 (660.2 )
Gross profit 867.3 136.8 23.8 - - - - 0.2 1,028.1
Gross Margin % 51.4% 60.9%
Selling and distribution expenses (357.0 ) - 0.9 - - - - 0.9 (355.2 )
General and administrative expenses (318.2 ) 18.1 5.0 11.7 0.8 - 90.2 28.0 (164.4 )
Research and development expenses (38.1 ) 0.2 1.2 - - - - 0.4 (36.3 )
Operating profit 154.0 155.1 30.9 11.7 0.8 - 90.2 29.5 472.2
Operating Profit % 9.1% 28.0%
Finance costs (271.4 ) - - - - 29.2 - - (242.2 )
Other expense, net (8.4 ) - - - - 8.4 - - -
(Loss) profit before income taxes (125.8 ) 155.1 30.9 11.7 0.8 37.6 90.2 29.5 230.0
Income tax expense(h) (77.0 ) (51.2 )
Net (loss) profit (202.8 ) 178.8
Net (Loss) Profit % (12.0)% 10.6%
Basic Earnings Per Share ($ per share) (0.15 ) 0.13
Diluted Earnings Per Share ($ per share) (0.15 ) 0.13
2015 Reported Adjustments Adjusted
(a) (b) (c) (d) (e) (f) (g)
$M
Revenue 1,650.4 - - - - - - - 1,650.4
Cost of goods sold (799.9 ) 130.0 2.5 - - - - - (667.4 )
Gross profit 850.5 130.0 2.5 - - - - - 983.0
Gross Margin % 51.5% 59.6%
Selling and distribution expenses (346.7 ) - - - - - - - (346.7 )
General and administrative expenses (233.1 ) 15.5 7.6 12.1 13.8 - 18.6 4.1 (161.4 )
Research and development expenses (40.3 ) - 0.2 2.0 - - - - (38.1 )
Operating profit 230.4 145.5 10.3 14.1 13.8 - 18.6 4.1 436.8
Operating Profit % 14.0% 26.5%
Finance costs (303.6 ) - - - - 27.8 - - (275.8 )
Other expense, net (37.1 ) - - - - 37.1 - - -
(Loss) profit before income taxes (110.3 ) 145.5 10.3 14.1 13.8 64.9 18.6 4.1 161.0
Income tax benefit (expense)(h) 16.9 (36.6 )
Net (loss) profit (93.4 ) 124.4
Net (Loss) Profit % (5.7)% 7.5%
Basic Earnings Per Share ($ per share) (0.07 ) 0.10
Diluted Earnings Per Share ($ per share) (0.07 ) 0.10
_______________________________
(a) Represents an adjustment to exclude (i) acquisition-related amortisation expense of $136.1 million and $143.5
million in 2016 and 2015, respectively, (ii) accelerated depreciation of $11.1 million and $0.6 million in 2016 and 2015,
respectively, related to the closure of certain manufacturing facilities, and (iii) impairment charges and assets write
offs related to property, plant and equipment and intangible assets of $7.9 million and $1.4 million, in the aggregate, in
2016 and 2015, respectively.
(b) Represents restructuring costs and other-related costs (excluding accelerated depreciation described above
under (a)) primarily incurred in connection with the MIP.
(c) Represents remediation costs which include regulatory compliance costs related to FDA activities, IT
enhancement costs, and professional service fees associated with activities that were undertaken in respect of the Group's
compliance function and to strengthen its control environment within finance.
(d) Represents costs primarily related to (i) corporate development activities and (ii) a settlement of ordinary
course multi-year patent-related litigations in 2015 (refer to Note 5 - Legal Proceedings for further information).
(e) Represents adjustments to exclude (i) loss on extinguishment of debt and write-off of deferred financing fees
(refer to Note 4 - Long-term Borrowings for further information) and (ii) foreign exchange related transactions.
(f) Represents an adjustment to exclude (i) share-based compensation expense of $85.9 million and $12.5 million in
2016 and 2015, respectively, arising from pre-IPO employee equity grants and (ii) pre-IPO ownership structure related
costs, including management fees to Nordic Capital and Avista (refer to Note 6 - Related Party Transactions for further
information).
(g) Represents IPO related costs, primary advisory fees.
(h) Adjusted income tax expense/benefit is income tax (expense) benefit net of tax adjustments.
Pro Forma Earnings per Share
Pro forma basic earnings per share is computed as pro forma adjusted net profit allocated to each outstanding share of
common stock as if the Group's shares outstanding at 31 December 2016 were outstanding for the entire year for both 2016
and 2015. Pro forma diluted earnings per share is computed as pro forma adjusted net profit allocated to each outstanding
share of common stock and dilutive awards outstanding at 31 December 2016 as if they were outstanding for the entire year
for both 2016 and 2015.
2016 2015
$M $M
Adjusted net profit 178.8 124.4
Pro forma interest adjustment 185.5 218.8
Tax effect of pro forma interest adjustment (7.8 ) (8.9 )
Pro forma adjusted net profit(1) 356.5 334.3
Pro forma basic and diluted earnings per share ($ per share) 0.18 0.17
Pro forma effective tax rate 14.2% 12.0%
_______________________________
(1) Pro forma adjusted net profit is computed as adjusted net profit further adjusted to reflect the post-IPO debt
structure as if it had been in place as of 1 January 2016 and 2015.
Adjusted EBITDA
Adjusted EBITDA is defined as Adjusted EBIT (defined above) further adjusted to exclude (i) software and R&D amortisation,
(ii) depreciation and (iii) post-IPO share-based compensation.
The following table reconciles the Group's Adjusted EBIT to Adjusted EBITDA.
2016 2015
$M $M
Adjusted EBIT 472.2 436.8
Software and R&D amortisation 6.7 6.6
Depreciation 27.9 30.4
Post-IPO share-based compensation 0.8 -
Adjusted EBITDA 507.6 473.8
Cash conversion
The Group believes that cash conversion is a useful supplemental metric that provides a measure of efficiency by which the
Group is able to turn profit from operations into cash flow to service the requirements of debt and equity investors, as
well as paying for the Group's tax obligations, re-investing in the business for growth and enhancing dividend capacity.
Cash conversion is computed as the ratio of Adjusted EBITDA less change in working capital and capital expenditure to
Adjusted EBITDA.
The computation of cash conversion for 2016 and 2015 is as follows:
2016 2015
$M $M
Adjusted EBITDA 507.6 473.8
Working capital increase (37.0 ) (22.1 )
PP&E purchases (66.5 ) (36.7 )
404.1 415.0
Cash conversion 79.6% 87.6%
Cash conversion is also computed as the ratio of net cash generated from operating activities adjusted for (i) cash
interest payments, (ii) cash tax payments, (iii) payments related to cash-settled AEP and MIP awards, and (iv) other
payments within operating activities, less capital expenditure to Adjusted EBITDA. The resulting cash conversion figures
are the same under either definition.
The computation of cash conversion for 2016 and 2015 is as follows:
2016 2015
$M $M
Net cash generated from operating activities 74.9 100.3
Add:
Cash interest payments 270.6 257.9
Cash tax payments 39.0 42.2
Cash-settled AEP and MEP awards 30.2 -
Other payments(1) 55.9 51.3
Less:
PP&E purchases (66.5 ) (36.7 )
404.1 415.0
Adjusted EBITDA 507.6 473.8
Cash conversion 79.6% 87.6%
_______________________________
(1) Other payments represent payments related to the IPO-related costs, restructuring and other related costs, a
settlement payment made in 2015 related to multi-year patent-related litigations (refer to Note 5 - Legal Proceedings for
further information), remediation costs, ownership structure costs and corporate development costs.
Principal risks and uncertainties
Set out below is an overview of the principal risks we believe could threaten our strategy, performance and reputation and
the actions we are taking to respond and mitigate those risks. These risks are supported by the robust risk management and
internal control systems and procedures noted in the Annual Report and Accounts 2016.
Risk Potential impact Response / mitigation
Macroeconomic and Foreign Exchange Risk We could be exposed to negative global economic trends in certain of our geographic markets. ● Movements in exchange rates between foreign currencies and the US dollar (our reporting currency) could have a negative effect on our results of operations and ● We maintain an operational presence in a diversity of geographic markets, reducing our economic exposure. ● We have implemented economic forecasting and management reporting processes enabling us to detect the development of unfavourable trends and formulate mitigation strategies. ● We have a robust strategic planning process that provides a vehicle for contemplating market and regulatory developments in a manner allowing for the development of economic mitigation strategies. ● We maintain a model that allows us to run sensitivity analyses based on FX movements in order to provide management with FX predictions/estimates for the year.
financial conditions. ● A negative economic climate in the key markets in which we sell our products could contribute to reduced demand for our products and negatively
impact revenue from those markets. ● Negative market conditions may reduce the number of patients with access to care resulting in decreased demand for our products.●
Reductions in government spending and/or individual income could impact patients' purchases of our products. ● Disruptions in the financial markets could adversely
affect our suppliers and vendors and negatively impact our operations through increased purchasing costs.
Risk Potential impact
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