UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
August 2, 2007
Commission File Number 001-14978
SMITH & NEPHEW plc
(Registrant’s name)
15 Adam Street
London, England WC2N 6LA
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ü Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).
Yes No ü
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).
Yes No ü
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of 1934.
Yes No ü
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2 (b) : 82- n/a.
Total Pages: 19
Smith & Nephew plc
INDEX TO EXHIBITS
| Item 1. | Press release entitled “Smith & Nephew Interim Results – Focus on attractive growth segments is delivering strong performance”, dated August 2, 2007. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Smith & Nephew plc | ||||||
| (Registrant) | ||||||
| Date: August 2, 2007 | By: | /s/ Paul Chambers | ||||
| Paul Chambers | ||||||
| Company Secretary | ||||||
Item 1
| Smith & Nephew plc | T 44 (0) 207 401 7646 |
 | ||
| 15 Adam Street | F 44 (0) 207 960 2350 | |||
| London WC2N 6LA | www.smith-nephew.com | |||
| England |
Smith & Nephew Interim Results – Focus on attractive growth segments is delivering strong performance
2 August 2007
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, announces its results for the second quarter and first half ended 30 June 2007.
| Quarter 2 | Half year | |||||||
| $m | Underlying increase % |
$m | Underlying increase % | |||||
| Revenues ¹ |
813 | 12 | 1,557 | 12 | ||||
| Trading profit |
167 | 22 | 315 | 18 | ||||
| EPSA (cents) ² |
12.4 | 19 | 23.6 | 19 | ||||
| Business Unit Revenues ¹ |
||||||||
| Orthopaedic - Reconstruction |
291 | 15 | 553 | 15 | ||||
| - Trauma & CT |
150 | 15 | 286 | 17 | ||||
| Endoscopy |
178 | 11 | 355 | 12 | ||||
| Advanced Wound Management |
194 | 6 | 363 | 4 | ||||
| • | Orthopaedic Reconstruction significantly outperformed the market with particularly strong growth in hip revenues |
| • | Clinical Therapies has grown to become global number 1 in bone stimulation treatments |
| • | Endoscopy generated revenue growth in double digits benefiting from new product introductions |
| • | Advanced Wound Management improved performance as US continued to perform well |
| • | Earnings Improvement Programme on track with tangible benefits coming through in enhanced margins |
| • | Integration of Plus Orthopedics and BlueSky going well |
| • | Reported results |
| - | Reported revenue growth Q2 up 19%, H1 17% |
| - | Reported profit before tax Q2 up 17%, H1 12% |
| - | EPS Q2 11.8 cents up 16%, H1 21.5 cents compared with 54.5 cents in the comparable period which included 35.3 cents from the gain on sale of BSN Medical |
Commenting on the second quarter, David Illingworth, Chief Executive of Smith & Nephew, said:
“The second quarter has seen strong revenue growth across the business. Our focus on innovation in the attractive growth market segments in each business is delivering excellent results. This is particularly so in Orthopaedic Reconstruction, where the BIRMINGHAM HIPà Resurfacing System drove growth well above market rates. Margin improvement across the businesses shows that our Earnings Improvement Programme is working well.”
News
1
Analyst presentation
An analyst presentation and conference call to discuss the Company’s second quarter results will be held at 1.00pm BST / 8.00am EST today, Thursday 2 August. This will be broadcast live on the web and will be available on demand shortly following the close of the call at http://www.smith-nephew.com/Q207. A podcast will also be available at the same address. If interested parties are unable to connect to the web, a listen-only service is available by calling +44 (0)20 7806 1960 in the UK or +1 (718) 354 1389 in the US. Analysts should contact Samantha Hardy on +44 (0)20 7960 2257 or by email at samantha.hardy@smith-nephew.com for conference details.
Notes
| ¹ | Unless otherwise specified as ‘reported’, all revenue increases throughout this document are underlying increases after adjusting for the effects of currency translation and acquisitions. See note 3 to the financial statements for a reconciliation of these measures to results reported under IFRS. |
| ² | EPSA growth is reported, not underlying, and is stated before restructuring and rationalisation costs, acquisition related costs, amortisation of acquisition intangibles and taxation thereon, and in 2006 the gain on the disposal of the joint venture and the related fair value adjustment. See note 2 to the financial statements. |
| ³ | Percentage of new products to revenue is based on products launched within the last three years. |
| 4 |
Comparisons are against restated numbers, see note 1 to the financial statements. |
Enquiries
| Investors | ||
| Adrian Hennah | +44 (0) 20 7401 7646 | |
| Chief Financial Officer | ||
| Smith & Nephew | ||
| Liz Hewitt | +44 (0) 20 7401 7646 | |
| Group Director Corporate Affairs | ||
| Smith & Nephew | ||
| Media | ||
| Jon Coles | +44 (0) 20 7404 5959 | |
| Justine McIlroy | ||
| Brunswick – London | ||
| Cindy Leggett-Flynn | +1 (212) 333 3810 | |
| Brunswick – New York | ||
2
Introduction
Second quarter performance has been strong with Group revenues increasing by 12% to $813 million. This revenue growth has been driven by new product sales, such as the BIRMINGHAM HIPà Resurfacing System (“BHRà”), JOURNEYà Bi-cruciate Stabilised Knee, PERI-LOCà Locked Plating System and FASTFIXà Meniscal Repair System. Market conditions on balance in the quarter continued to be favourable across the business with continued pricing pressures in some geographies.
The Group trading margin of 20.5% in the quarter reflected the early benefits from the Earnings Improvement Programme (“EIP”) in all businesses, and especially in Advanced Wound Management.
The acquisitions of Plus Orthopedics Holding AG (“Plus”) and BlueSky Medical Group Inc (“BlueSky”) completed in the quarter and the integration of both these businesses is progressing well.
The share buy-back programme announced on 8 February 2007 continued with 12 million shares bought back in the quarter at a cost of $156 million.
Second Quarter Results
Revenue in the quarter increased by 19% on a reported basis to $813 million, including one month of Plus revenues of $28 million. This represents underlying growth of 12% on the same period last year after adjusting for movements in currency of 3% and acquisitions of 4%.
Trading profit in the quarter was $167 million, representing underlying growth of 22%. Trading margin of 20.5% was an encouraging 1.3% above the comparable period last year. The margin before Plus and BlueSky is 21%. The net interest charge was $3 million, reflecting the borrowings following the Plus acquisition and the share repurchases.
The tax charge reflects the estimated effective rate for the full year of 30%. Attributable profit before the costs of restructuring and rationalisation, acquisition related costs and amortisation of acquisition intangibles and taxation thereon was $116 million.
Adjusted earnings per share increased by 19% to 12.4¢ (62.0¢ per American Depositary Share, “ADS”). Basic earnings per share was 11.8¢ (59.0¢ per ADS) compared with 10.2¢ (51.0¢ per ADS) in 2006.
Trading cash flow, defined as cash generated from operations less capital expenditure but before the costs of macrotextured settlements, acquisition related costs and restructuring and rationalisation, of $136 million in the quarter reflects a higher trading profit to cash conversion rate of 81%, compared with 62% a year ago.
Orthopaedic Reconstruction
Reconstruction revenues at $291 million grew by 15% compared to the second quarter last year and well ahead of the global market which grew at 9%. Reconstruction revenues in the US grew by 20% in the quarter powered by continued BHRà procedure adoption. Outside the US revenue improved to a growth rate of 10%. New products generated 20% of revenues reflecting the success of last year’s product launches.
Hip revenue growth accelerated to 29% in the quarter. In the US hip revenues grew by 50% as the broad acceptance of BHRà by the market continues to develop faster than expected. This product has generated a strong following of newly trained BHRà surgeons who are using it regularly. Our
3
present market share in hip resurfacing is now estimated to be in excess of 50% outside the US. Revenues from hip products other than BHRà grew at an improved 6%.
Worldwide knee revenue growth was 7%. Outside the US revenues grew 13%, the third successive quarter of above average growth as new product introductions continue to gain market penetration. In the US knee revenues grew by a slower 3% reflecting our decision to focus our sales force on BHRà . The JOURNEYà DEUCEà Bi-Compartmental Knee System which broadens the JOURNEYà knee range was launched at the end of the quarter.
We were delighted to complete the acquisition of Plus in the quarter which significantly enhances our product range and presence in Europe, and adds to our growth capabilities in Japan and China. A comprehensive, world-wide integration programme is in place and on track.
Trading margin at 25.1% includes the impact of Plus. The margin of 26.2% before Plus represents an underlying improvement of approaching one per cent deriving mainly from EIP.
Orthopaedic Trauma and Clinical Therapies
Trauma revenues at $150 million grew by 15% driven by volumes and our programmes to improve salesforce effectiveness. Growth in the US was 13% and 21% outside the US maintaining the strong progress made in the first quarter. New products generated 38% of revenues.
Fixation product revenues grew by 10% worldwide, 11% in the US, and 8% outside the US. The quarter’s revenue growth again benefited from the continued progress of our PERI-LOCà Periarticular Locked Plating System and the TRIGENà INTERTANà nail for hip fractures.
Clinical Therapies revenue growth was 25% with a strong contribution from the EXOGEN 4000+à unit introduced last year. The DUROLANE® Single Injection Joint Fluid Therapy product is benefiting from Smith & Nephew’s strength and market reach across Europe, and we continue to work with Q-Med AB to gain pre-market approval of the product in the US.
Clinical Therapies has grown to become global number 1 in the bone stimulation market. This is a substantial achievement resulting from innovative products and our sales channel effectiveness.
Trading margin at 20.0% is a one per cent increase over the same quarter last year driven by our salesforce effectiveness programme as the benefits of the EIP driven reorganisation are delivered.
Endoscopy
Endoscopy continued its double digit revenue growth from the first quarter with revenues up 11% to $178 million. US revenues grew by 7% and outside the US grew by an outstanding 16% with Europe and Australia performing strongly and Japan experiencing price deflation.
Arthroscopic repair (knee, shoulder and hip) revenues grew by 19% in the quarter, making a very strong contribution. Knee and shoulder products, including FASTFIXà Meniscal Repair System and BIORAPTORà Suture Anchor for the shoulder, led this growth. Repair revenues continue to outpace resection revenue growth. Resection revenues grew by 6%, an increase in pace over the first quarter. New product revenues were 29% in the quarter.
Visualisation and Digital Operating Room (“DOR”) revenues grew at 9%, with early sales of the new high definition camera system in the US in line with our expectations.
4
The trading margin of 18% earned in the second quarter is a more than one percent improvement on the same quarter last year, reflecting the benefit of the successful manufacturing rationalisation and factory moves completed earlier this year.
Advanced Wound Management
Revenues grew by 6% to $194 million, still slightly below market growth but improving as this business starts to realise its potential. US revenue growth at 11% continued the improved performance seen in the last two quarters. Outside the US revenues grew by 5%. We have invested in 18 new products launches in the year to date, the benefits of which will build progressively over the coming quarters.
ALLEVYNà dressings grew at 8% in the quarter. Infection management products, including ACTICOATà antimicrobial silver dressings, returned to growth in a segment impacted by low price competition. IODOSORBà Cadexomer Iodine grew strongly. Total infection management revenues however currently lag market growth rates. The VERSAJETà Hydrosurgery Wound Debridement System had a strong quarter particularly in the US.
During the second quarter we announced the acquisition of BlueSky, a negative pressure wound therapy business. BlueSky provides us with a very valuable entry into this $1.1 billion fast growing segment of the woundcare market. We have completed the first stage of the integration and are on schedule for a worldwide launch early in 2008.
Advanced Wound Management has made a strong start to the implementation of its EIP programme ahead of the other businesses. Actions across the business include the rationalisation of European infrastructure and some country salesforces, factory streamlining and increased outsourcing. Headcount reduced by around 100 prior to the BlueSky acquisition. A substantial improvement in margin this quarter, by over 300 basis points, to 17.1% was achieved before accounting for BlueSky.
Half Year Results
Reported revenues increased by 17% to $1,557 million compared to the same period last year, with underlying growth at 12%.
Trading profit for the half year was up 23% to $315 million with trading margin higher at 20.2%. The net interest charge was $1 million. The tax charge of $87 million reflects the estimated effective rate for the year of 30%. Adjusted attributable profit of $222 million is before the costs of restructuring and rationalisation, acquisition related costs and amortisation of acquisition intangibles and taxation thereon. Attributable profit was $202 million.
EPSA rose by 19% to 23.6¢ (118.0¢ per ADS). Reported basic earnings per share were 21.5¢ (107.5¢ per ADS). A reconciliation of EPSA to reported earnings per share is provided in note 2 to the financial statements.
Trading cash flow was $247 million compared with $129 million a year ago. This is a trading profit to cash conversion ratio of 78% compared with 50% a year ago.
A first interim dividend of 4.51¢ per share (22.55¢ per ADS) will be paid on 9 November 2007 to shareholders on the register at the close of business on 19 October 2007. This represents a 10% increase on the 2006 first interim dividend in line with our current dividend policy.
5
Earnings Improvement Programme
The earnings improvement programme to deliver on average at least 1% margin improvement each year for the four years of the programme is progressing according to plan across all activity areas. We have made three senior appointments in this quarter with responsibility for operational effectiveness, IT and procurement. Within the businesses the reorganisation of the US Trauma salesforce has been completed and Advanced Wound Management, which is a major contributor to the EIP, achieved margin improvement of over 3%.
Board changes
Sir Christopher O’Donnell retired just after the close of the second quarter. David Illingworth, Chief Operating Officer was appointed as Chief Executive Officer from 1st July. The Board would like to formally thank Sir Christopher for his efforts and leadership which, in his 10 years as Chief Executive, have delivered outstanding growth and built a platform for the future success of Smith & Nephew.
Outlook
Global market conditions continue to be favourably driven by underlying demographic trends which are creating strong demand for our innovative products. The revenue outlook for the year for the individual businesses and for the business as a whole continues to be favourable and is unchanged from the first quarter.
We continue to expect the EIP to increase trading margin by an average of at least 1% per annum until the end of 2010, including a significant increase in 2007, followed by larger increases in subsequent years. In 2010 this margin improvement is expected to equate to at least an additional $150 million in trading profit. We expect the cash costs of the programme to be incurred broadly evenly over three years, but we expect provisions charged to the income statement are likely to be earlier and more uneven.
We continue to expect the Plus acquisition to be broadly EPSA neutral this year and to become accretive thereafter. We continue to expect the BlueSky acquisition to dilute earnings by about 1% in 2007, to be broadly neutral in 2008 and to be accretive thereafter. We continue to expect the BlueSky and the Plus acquisitions together to dilute margins by about 1% in the full year.
The underlying growth in the business, coupled with the EIP and the Plus and BlueSky acquisitions, means that Smith & Nephew is well positioned for strong revenue performance and trading margin improvement for 2007 and beyond.
About Us
Smith & Nephew is a global medical technology business, specialising in Orthopaedic Reconstruction, Orthopaedic Trauma and Clinical Therapies, Endoscopy and Advanced Wound Management products. Smith & Nephew is a global leader in arthroscopy and advanced wound management and is one of the leading global orthopaedics companies.
Smith & Nephew is dedicated to helping improve people’s lives. The Company prides itself on the strength of its relationships with its surgeons and professional healthcare customers, with whom its name is synonymous with high standards of performance, innovation and trust. The Company has 9,600 employees and operates in 31 countries around the world. Annual sales in 2006 were nearly $2.8 billion.
Forward-Looking Statements
This press release contains certain “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding expected revenue growth and
6
trading margins discussed under “Outlook” are forward-looking statements as are discussions of our product pipeline. These statements, as well as the phrases “aim”, “plan”, “intend”, “anticipate”, “well-placed”, “believe”, “estimate”, “expect”, “target”, “consider” and similar expressions, are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors (including, but not limited to, the outcome of litigation, claims and regulatory approvals) that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Please refer to the documents that Smith & Nephew has filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, including Smith & Nephew’s most recent annual report on Form 20F, for a discussion of certain of these factors.
All forward-looking statements in this press release are based on information available to Smith & Nephew as of the date hereof. All written or oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect any change in Smith & Nephew’s expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
à Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark Office.
DUROLANE® is a trademark of Q-Med AB.
7
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS
Unaudited Group Income Statement for the 3 months and 6 months to 30 June 2007
| 3 Months 2006 |
3 Months 2007 |
Notes | 6 Months 2007 |
6 Months 2006 |
||||||||||
| $m | $m | $m | $m | |||||||||||
| 686 | 813 | Revenue |
3 | 1,557 | 1,329 | |||||||||
| (188 | ) | (229 | ) | Cost of goods sold |
(421 | ) | (363 | ) | ||||||
| (336 | ) | (385 | ) | Selling, general and administrative expenses |
(757 | ) | (651 | ) | ||||||
| (30 | ) | (32 | ) | Research and development expenses |
(64 | ) | (59 | ) | ||||||
| 132 | 167 | Trading profit |
4 | 315 | 256 | |||||||||
| — | (6 | ) | Restructuring and rationalisation costs |
5 | (23 | ) | — | |||||||
| — | 1 | Acquisition related costs |
7 | 1 | — | |||||||||
| (2 | ) | (3 | ) | Amortisation of acquisition intangibles |
(7 | ) | (4 | ) | ||||||
| 130 | 159 | Operating profit |
4 | 286 | 252 | |||||||||
| 4 | 3 | Interest receivable |
7 | 11 | ||||||||||
| (1 | ) | (6 | ) | Interest payable |
(8 | ) | (5 | ) | ||||||
| 2 | 2 | Other finance income |
4 | 3 | ||||||||||
| — | — | Loss on hedge of the sale proceeds of the joint venture |
— | (3 | ) | |||||||||
| 135 | 158 | Profit before taxation |
289 | 258 | ||||||||||
| (39 | ) | (47 | ) | Taxation |
10 | (87 | ) | (77 | ) | |||||
| 96 | 111 | Profit from continuing operations |
202 | 181 | ||||||||||
| — | — | Discontinued operations: Net profit on disposal of the joint venture |
11 | — | 332 | |||||||||
| 96 | 111 | Attributable profit A |
202 | 513 | ||||||||||
| Earnings per share A |
2 | |||||||||||||
| Including discontinued operations: |
||||||||||||||
| 10.2 | ¢ | 11.8 | ¢ | Basic |
21.5 | ¢ | 54.5 | ¢ | ||||||
| 10.2 | ¢ | 11.8 | ¢ | Diluted |
21.4 | ¢ | 54.3 | ¢ | ||||||
| Continuing operations: |
||||||||||||||
| 10.2 | ¢ | 11.8 | ¢ | Basic |
21.5 | ¢ | 19.2 | ¢ | ||||||
| 10.2 | ¢ | 11.8 | ¢ | Diluted |
21.4 | ¢ | 19.2 | ¢ | ||||||
| A |
Attributable to the equity holders of the parent. |
Unaudited Group Statement of Recognised Income & Expense for the 3 months and 6 months to 30 June 2007
| 3 Months 2006 |
3 Months 2007 |
6 Months 2007 |
6 Months 2006 |
|||||||||
| $m | $m | $m | $m | |||||||||
| 17 | 6 | Translation differences |
10 | 43 | ||||||||
| — | — | Cumulative translation adjustment on disposal of the joint venture |
— | (14 | ) | |||||||
| (4 | ) | (2 | ) | Losses on cash flow hedges |
(3 | ) | (6 | ) | ||||
| 6 | 34 | Actuarial gains on defined benefit pension plans |
54 | 43 | ||||||||
| (1 | ) | (12 | ) | Taxation on items taken directly to equity |
(19 | ) | (13 | ) | ||||
| 18 | 26 | Net income recognised directly in equity |
42 | 53 | ||||||||
| 96 | 111 | Attributable profit |
202 | 513 | ||||||||
| 114 | 137 | Total recognised income and expense A |
244 | 566 | ||||||||
8
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
Unaudited Group Balance Sheet as at 30 June 2007
| 31 Dec 2006 |
Notes | 30 June 2007 |
1 July 2006 |
||||||||
| $m | $m | $m | |||||||||
| ASSETS |
|||||||||||
| Non-current assets |
|||||||||||
| 635 | Property, plant and equipment |
736 | 627 | ||||||||
| 831 | Intangible assets |
1,590 | 723 | ||||||||
| 10 | Investments |
15 | 10 | ||||||||
| 110 | Deferred tax assets |
118 | 130 | ||||||||
| 1,586 | 2,459 | 1,490 | |||||||||
| Current assets |
|||||||||||
| 619 | Inventories |
777 | 614 | ||||||||
| 680 | Trade and other receivables |
844 | 638 | ||||||||
| 346 | Cash and bank |
153 | 377 | ||||||||
| 1,645 | 1,774 | 1,629 | |||||||||
| 3,231 | TOTAL ASSETS |
4,233 | 3,119 | ||||||||
| EQUITY AND LIABILITIES |
|||||||||||
| 189 | Called up equity share capital |
189 | 189 | ||||||||
| 329 | Share premium account |
346 | 318 | ||||||||
| — | Treasury shares |
2 | (229 | ) | — | ||||||
| (1 | ) | Own shares |
— | (1 | ) | ||||||
| 1,657 | Accumulated profits and other reserves |
1,850 | 1,452 | ||||||||
| 2,174 | Equity attributable to equity holders of the parent |
13 | 2,156 | 1,958 | |||||||
| — | Minority interest in equity |
4 | — | ||||||||
| 2,174 | Total equity |
13 | 2,160 | 1,958 | |||||||
| Non-current liabilities |
|||||||||||
| 15 | Long-term borrowings |
42 | 16 | ||||||||
| 154 | Retirement benefit obligation |
118 | 172 | ||||||||
| 3 | Other payables due after one year |
67 | 4 | ||||||||
| 34 | Provisions – due after one year |
49 | 53 | ||||||||
| 35 | Deferred tax liabilities |
46 | 28 | ||||||||
| 241 | 322 | 273 | |||||||||
| Current liabilities |
|||||||||||
| 119 | Bank overdrafts and loans due within one year |
1,012 | 131 | ||||||||
| 421 | Trade and other payables |
485 | 440 | ||||||||
| 49 | Provisions – due within one year |
52 | 60 | ||||||||
| 227 | Current tax payable |
202 | 257 | ||||||||
| 816 | 1,751 | 888 | |||||||||
| 1,057 | Total liabilities |
2,073 | 1,161 | ||||||||
| 3,231 | TOTAL EQUITY AND LIABILITIES |
4,233 | 3,119 | ||||||||
9
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
Unaudited Condensed Group Cash Flow Statement for the 3 months and 6 months to 30 June 2007
| 3 Months 2006 |
3 Months 2007 |
6 Months 2007 |
6 Months 2006 |
|||||||||
| $m | $m | $m | $m | |||||||||
| Net cash inflow from operating activities |
||||||||||||
| 135 | 158 | Profit before taxation |
289 | 258 | ||||||||
| (3 | ) | 3 | Less: Net interest payable/(receivable) |
1 | (6 | ) | ||||||
| 41 | 50 | Depreciation, amortisation and impairment |
95 | 77 | ||||||||
| 5 | 6 | Share based payment expense |
13 | 9 | ||||||||
| (37 | ) | (36 | ) | Movement in working capital and provisions |
(89 | ) | (108 | ) | ||||
| 141 | 181 | Cash generated from operations B |
309 | 230 | ||||||||
| 3 | (3 | ) | Net interest (paid)/received |
(1 | ) | 6 | ||||||
| (36 | ) | (79 | ) | Income taxes paid |
(111 | ) | (63 | ) | ||||
| 108 | 99 | Net cash inflow from operating activities |
197 | 173 | ||||||||
| Cash flows from investing activities |
||||||||||||
| (3 | ) | (733 | ) | Acquisitions (net of $18 million of cash acquired with Plus in 2007) |
(737 | ) | (7 | ) | ||||
| (8 | ) | — | Disposal of joint venture C |
— | 543 | |||||||
| (72 | ) | (67 | ) | Capital expenditure |
(105 | ) | (130 | ) | ||||
| (83 | ) | (800 | ) | Net cash used in investing activities |
(842 | ) | 406 | |||||
| 25 | (701 | ) | Cash flow before financing activities |
(645 | ) | 579 | ||||||
| Cash flows from financing activities |
||||||||||||
| 2 | 5 | Proceeds from issue of ordinary share capital |
17 | 5 | ||||||||
| (57 | ) | (63 | ) | Equity dividends paid |
(63 | ) | (57 | ) | ||||
| 7 | 703 | Cash movements in borrowings |
708 | (263 | ) | |||||||
| — | (156 | ) | Purchase of treasury shares |
(221 | ) | — | ||||||
| (5 | ) | (6 | ) | Settlement of currency swaps |
(8 | ) | (3 | ) | ||||
| (53 | ) | 483 | Net cash used in financing activities |
433 | (318 | ) | ||||||
| (28 | ) | (218 | ) | Net (decrease)/increase in cash and cash equivalents |
(212 | ) | 261 | |||||
| 360 | 297 | Cash and cash equivalents at beginning of period |
291 | 65 | ||||||||
| (3 | ) | 1 | Exchange adjustments |
1 | 3 | |||||||
| 329 | 80 | Cash and cash equivalents at end of period D |
80 | 329 | ||||||||
| B |
After $9 million (2006 – $16 million) unreimbursed by insurers relating to macrotextured knee revisions, $12 million (2006 – nil) of acquisition related costs and $22 million (2006 – $13 million) of outgoings on restructuring and rationalisation costs. |
| C |
Discontinued operations accounted for nil (2006 – $543 million) of net cash flow from investing activities. |
| D |
Cash and cash equivalents at the end of the period are net of overdrafts of $73 million (2006 – $48 million). |
10
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
NOTES
| 1. | The financial information for the three months and six months has been prepared on the basis of the accounting policies set out in the full annual accounts of the Group for the year ended 31 December 2006. |
The 2006 full annual accounts were restated to correct for a change in the method of calculating the elimination of intra-group profit carried in inventory, reclassification of certain indirect production overhead expenses from selling, general and administrative expenses to cost of goods sold and a voluntary change in accounting policy for death-in-service benefits. These restatements have been reflected in the 2006 three month and six month Unaudited Group Income Statement, Unaudited Group Statement of Recognised Income and Expense, Unaudited Group Balance Sheet and Unaudited Condensed Group Cash Flow Statement.
The financial information contained in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The auditors have issued an unqualified opinion on the Group’s statutory financial statements for the year ended 31 December 2006, which have been delivered to the Registrar of Companies.
| 2. | Adjusted earnings per ordinary share (“EPSA”) is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers as affect the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure. |
On 8 February 2007, the Group announced its intention to undertake a share buy back programme of up to $1.5 billion over the next two years. This followed an assessment of the medium term capital needs of the Group both internally and for acquisitions in which management determined that shareholder value and balance sheet efficiency would be enhanced by returning capital to shareholders. As at 30 June 2007, 18,443,000 ordinary shares had been purchased at a cost of $229 million.
EPSA has been calculated by dividing adjusted attributable profit by the weighted (basic) average number of ordinary shares in issue of 939 million (2006 – 941 million). The diluted weighted average number of ordinary shares in issue is 943 million (2006 – 945 million).
| 3 Months 2006 |
3 Months 2007 |
6 Months 2007 |
6 Months 2006 |
|||||||||
| $m | $m | $m | $m | |||||||||
| 96 | 111 | Attributable profit |
202 | 513 | ||||||||
| Adjustments: |
||||||||||||
| — | 6 | Restructuring and rationalisation costs |
23 | — | ||||||||
| — | (1 | ) | Acquisition related costs |
(1 | ) | — | ||||||
| 2 | 3 | Amortisation of acquisition intangibles |
7 | 4 | ||||||||
| — | — | Net profit on disposal of the joint venture |
— | (332 | ) | |||||||
| — | — | Loss on hedge of the sale proceeds of the joint venture |
— | 3 | ||||||||
| — | (3 | ) | Taxation on excluded items |
(9 | ) | (1 | ) | |||||
| 98 | 116 | Adjusted attributable profit |
222 | 187 | ||||||||
| 10.4 | ¢ | 12.4 | ¢ | Adjusted earnings per share |
23.6 | ¢ | 19.9 | ¢ | ||||
| 10.4 | ¢ | 12.3 | ¢ | Adjusted diluted earnings per share |
23.5 | ¢ | 19.8 | ¢ | ||||
11
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
NOTES
| 3. | Revenue by segment for the three months and six months to 30 June 2007 was as follows: |
| 3 Months |
3 Months 2007 |
6 Months 2007 |
6 Months 2006 |
Underlying growth in revenue | ||||||||
| $m | $m | $m | $m | % | ||||||||
| 3 Months | 6 Months | |||||||||||
| Revenue by business segment |
||||||||||||
| 228 | 291 | Reconstruction |
553 | 449 | 15 | 15 | ||||||
| 127 | 150 | Trauma and Clinical Therapies |
286 | 239 | 15 | 17 | ||||||
| 156 | 178 | Endoscopy |
355 | 309 | 11 | 12 | ||||||
| 175 | 194 | Advanced Wound Management |
363 | 332 | 6 | 4 | ||||||
| 686 | 813 | 1,557 | 1,329 | 12 | 12 | |||||||
| Revenue by geographic market |
||||||||||||
| 335 | 384 | United States |
753 | 654 | 14 | 14 | ||||||
| 217 | 274 | Europe E |
514 | 420 | 9 | 9 | ||||||
| 134 | 155 | Africa, Asia, Australasia & Other America |
290 | 255 | 12 | 11 | ||||||
| 686 | 813 | 1,557 | 1,329 | 12 | 12 | |||||||
| E |
Includes United Kingdom six months revenue of $140 million (2006 – $118 million) and three months revenue of $73 million (2006 – $64 million). |
| Responsibility for the Group’s spinal products was transferred from the Endoscopy business segment to the Trauma and Clinical Therapies business segment with effect from 1 January 2007. Revenue, trading profit and operating profit relating to spinal products is now reported within the Trauma and Clinical Therapies business segment and comparative figures have been restated. |
| Underlying revenue growth is calculated by eliminating the effects of translational currency and acquisitions. Reported growth reconciles to underlying growth as follows: |
| Reported growth in revenue |
Constant currency |
Acquisitions effect |
Underlying growth in revenue | |||||||
| % | % | % | % | |||||||
| 6 Months |
||||||||||
| Reconstruction |
23 | (3 | ) | (5 | ) | 15 | ||||
| Trauma and Clinical Therapies |
20 | (1 | ) | (2 | ) | 17 | ||||
| Endoscopy |
15 | (2 | ) | (1 | ) | 12 | ||||
| Advanced Wound Management |
9 | (5 | ) | — | 4 | |||||
| 17 | (3 | ) | (2 | ) | 12 | |||||
| 3 Months |
||||||||||
| Reconstruction |
28 | (2 | ) | (11 | ) | 15 | ||||
| Trauma and Clinical Therapies |
18 | — | (3 | ) | 15 | |||||
| Endoscopy |
14 | (2 | ) | (1 | ) | 11 | ||||
| Advanced Wound Management |
11 | (4 | ) | (1 | ) | 6 | ||||
| 19 | (3 | ) | (4 | ) | 12 | |||||
12
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
NOTES
| 4. | Trading and operating profit by segment for the three months and six months to 30 June 2007 was as follows: |
| 3 Months 2006 |
3 Months 2007 |
6 Months 2007 |
6 Months 2006 | |||||
| $m | $m | $m | $m | |||||
| Trading Profit by business segment |
||||||||
| 58 | 73 | Reconstruction |
139 | 114 | ||||
| 24 | 30 | Trauma and Clinical Therapies |
53 | 43 | ||||
| 26 | 32 | Endoscopy |
65 | 56 | ||||
| 24 | 32 | Advanced Wound Management |
58 | 43 | ||||
| 132 | 167 | 315 | 256 | |||||
| Operating Profit by business segment |
||||||||
| 56 | 69 | Reconstruction |
127 | 110 | ||||
| 24 | 28 | Trauma and Clinical Therapies |
49 | 43 | ||||
| 26 | 32 | Endoscopy |
62 | 56 | ||||
| 24 | 30 | Advanced Wound Management |
48 | 43 | ||||
| 130 | 159 | 286 | 252 | |||||
| 5. | Restructuring and rationalisation costs comprise $26 million relating to the earnings improvement programme in 2007 comprising redundancy costs and consultancy fees and a release of $3 million relating to the write back of previous restructuring and rationalisation provisions. |
| 6. | On 31 May 2007 the Group completed the acquisition of Plus Orthopedics Holding AG (“Plus”), a private Swiss orthopaedic company for a total of CHF 1,091 million ($889 million) in cash, including assumed debt. This will be integrated into the Group’s Reconstruction and Trauma and Clinical Therapies business segments. Plus reported revenues of CHF 380 million ($305 million) in 2006 and profit before interest and taxation of CHF 44 million ($35 million). Revenue and trading profit since acquisition was $28 million and $3 million respectively. The assets and liabilities as of 31 May 2007 arising from the acquisition are as follows: |
| Book value | |||
| $m | |||
| Property, plant and equipment |
82 | ||
| Intangible assets |
10 | ||
| Other non-current assets |
25 | ||
| Inventories |
106 | ||
| Other current assets |
128 | ||
| Non-current liabilities |
(163 | ) | |
| Current liabilities |
(154 | ) | |
| Less: Equity attributable to minority interests |
(4 | ) | |
| 30 | |||
| Goodwill on acquisition |
688 | ||
| 718 | |||
| Cash consideration |
726 | ||
| Acquisition costs |
10 | ||
| Net cash acquired in Plus |
(18 | ) | |
| Total purchase consideration |
718 | ||
| Add: net debt acquired with Plus (reported in liabilities above) |
181 | ||
| Less: acquisition costs |
(10 | ) | |
| 889 | |||
13
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
NOTES
| 6. | The Group has allocated provisionally the difference between the purchase consideration and the book value of net assets to goodwill. An exercise to align accounting policies and to measure the acquired assets and liabilities at fair value is in progress. This will result in significant changes to the value attributable to goodwill, intangible assets, inventories and deferred tax. |
| 7. | Acquisition related costs comprise $2 million relating to Plus integration and a release of $3 million relating to an over provision of bid related costs from 2006. |
| 8. | On 10 May 2007 Smith & Nephew acquired BlueSky Medical Group, Inc. for an initial payment of $15 million with further milestone payments of up to $95 million related to revenues and other events. The cost is assessed as $60 million, being the fair value of probable consideration of $59 million and $1 million of acquisition costs. The difference between the purchase consideration and the book value of net assets ($60 million) has been allocated provisionally to goodwill. |
| 9. | The cumulative number of revisions of the macrotextured knee product was 1,017 on 30 June 2007 compared with 1,006 at the end of Quarter One 2007. This represents 34% of the total implanted. Settlements with patients have been achieved in respect of 940 revisions (Quarter One 2007 – 937 settlements). The provision has been increased in the quarter by $22 million. This has been offset in the income statement by a recovery of $22 million. $55 million of provision remains to cover future settlement costs. |
| 10. | Taxation of $96 million (2006 – $78 million) for the six months on the profit before restructuring and rationalisation costs, acquisition related costs, the loss on hedge of the sale proceeds of the joint venture, discontinued operations and amortisation of acquisition intangibles is at the full year estimated effective rate. Of the $87 million (2006 – $77 million) taxation charge for the six months $64 million (2006 – $60 million) relates to overseas taxation. |
| 11. | On 23 February 2006 the Group sold its 50% interest in the BSN Medical joint venture for cash consideration of $562 million. The net profit of $332 million on the disposal of the joint venture is after a credit of $14 million for cumulative translation adjustments and $26 million of transaction costs. A further $1 million of transaction costs, $3 million of indemnity provision and a $23 million release of taxation provisions relating to this transaction was recorded in the year ended 31 December 2006. The Group’s discontinued operations earnings per share for the six months in 2006 was basic 35.3¢ and diluted 35.1¢. |
| 12. | The 2006 second interim dividend of $63 million was paid on 11 May 2007. The first interim dividend for 2007 of 4.51 US cents per ordinary share was declared by the Board on 2 August 2007. This is payable on 9 November 2007 to shareholders whose names appear on the register at the close of business on 19 October 2007. Shareholders may participate in the dividend re-investment plan. |
14
SMITH & NEPHEW plc
2007 QUARTER TWO AND HALF YEAR RESULTS continued
NOTES
| 13. | The movement in total equity for the six months to 30 June 2007 was as follows: |
| 2007 | 2006 | |||||
| $m | $m | |||||
| Opening equity as at 1 January |
2,174 | 1,435 | ||||
| Attributable profit |
202 | 513 | ||||
| Equity dividends paid |
(63 | ) | (57 | ) | ||
| Exchange adjustments |
10 | 29 | ||||
| Losses on cash flow hedges |
(3 | ) | (6 | ) | ||
| Actuarial gains on defined benefit pension plans |
54 | 43 | ||||
| Share based payment recognised in the income statement |
13 | 9 | ||||
| Taxation on items taken directly to equity |
(19 | ) | (13 | ) | ||
| Purchase of treasury shares |
(229 | ) | — | |||
| Issue of ordinary share capital |
17 | 5 | ||||
| Closing equity attributable to equity holders of the parent |
2,156 | 1,958 | ||||
| Minority interest arising on business combination |
4 | — | ||||
| Closing total equity |
2,160 | 1,958 | ||||
| 14. | (Net debt)/net cash as at 30 June 2007 comprises: |
| 2007 | 2006 | |||||
| $m | $m | |||||
| Cash and bank |
153 | 377 | ||||
| Long-term borrowings |
(42 | ) | (16 | ) | ||
| Bank overdrafts and loans due within one year |
(1,012 | ) | (131 | ) | ||
| Net currency swap liabilities F |
(2 | ) | (1 | ) | ||
| (903 | ) | 229 | ||||
| The movements in the six months were as follows: |
||||||
| Opening net cash/(net debt) as at 1 January |
210 | (306 | ) | |||
| Cash flow before financing activities |
(645 | ) | 579 | |||
| New finance leases |
(7 | ) | — | |||
| Debt and finance leases acquired with Plus |
(181 | ) | — | |||
| Proceeds from issue of ordinary share capital |
17 | 5 | ||||
| Purchase of treasury shares |
(221 | ) | — | |||
| Equity dividends paid |
(63 | ) | (57 | ) | ||
| Exchange adjustments |
(13 | ) | 8 | |||
| Closing (net debt)/net cash |
(903 | ) | 229 | |||
| F |
Net currency swap liabilities of $2 million (2006 – $1 million) comprises $1 million (2006 – nil) of current asset derivatives within trade and other receivables and $3 million (2006 – $1 million) of current liability derivatives within trade and other payables. |
15
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc
Introduction
We have been instructed by the company to review the financial information for the three months and six months ended 30 June 2007 which comprises Group Income Statement, Group Statement of Recognised Income and Expense, Group Balance Sheet, Condensed Group Cash Flow Statement and the related notes 1 to 14. We have read the other information contained in the interim report for quarter two and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.
This report is made solely to the company in accordance with guidance contained in Bulletin 1999/4 ‘Review of interim financial information’ issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors’ Responsibilities
The interim report for quarter two, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report for quarter two in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. The accounting policies are consistent with those that the director’s intend to use in the next annual accounts.
Review Work Performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4 ‘Review of interim financial information’ issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data, and based thereon assessing whether the accounting policies and presentation have been consistently applied, unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information.
Review Conclusion
On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the three months and six months ended 30 June 2007.
Ernst & Young LLP
London
2 August 2007
16