1st Quarter Results
Smith & Nephew Plc
01 May 2008
Smith & Nephew Q1 2008 results
1 May 2008
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,
announces its results for the quarter ended 29 March 2008.
3 months* to
______________________
reported underlying
29 March 31 March increase/ increase %
2008 2007 (decrease) %
$m $m
Revenue(1) 911 744 22 2
Trading profit(2) 182 148 23 6
Operating profit(2) 142 127 12 n/a
Trading margin(3) 20.0% 19.9% 10bps 60bps
EPSA (cents)(4) 12.8 11.2 14 n/a
EPS (cents) 9.3 9.7 (4) n/a
Business Unit Revenue(1)
Orthopaedic - Reconstruction 377 262 44 2
- Trauma & CT 151 136 11 -
Endoscopy 194 177 10 4
Advanced Wound Management 189 169 12 2
* Q1 2008 comprises 62 trading days (2007 64 trading days)
Q1 commentary
• Reported revenue up 22% to $911 million, underlying revenue up 2%, revenue
excluding Plus products up 5%
• Harmonisation of sales practices of Plus in Europe materially impacts
Reconstruction and Trauma revenues
- Group Q1 revenues 2% lower
- Group Q1 trading margin 50 basis points lower
- Ongoing impact for 2008
• Reported trading profit up 23%, underlying up 6% to $182 million
• Trading margin at 20% reflects the success of the Earnings Improvement
Programme
- Reconstruction up 240 basis points
- Trauma up 260 basis points
- Endoscopy up 230 basis points
- Wound margin held back by investment in Negative Pressure Wound Therapy
launch
• EPSA up by 14% to 12.8c
• Orthopaedic Reconstruction revenue up 8% excluding Plus products; up 7% in
the US driven by BIRMINGHAM HIP* Resurfacing System growth
• Orthopaedic Trauma Fixation revenues held back in the US by operational
issues - management actions underway
• Substantial investment by Advanced Wound Management in Negative Pressure
Wound Therapy launch
• Two reduced sales days compared to Q1 last year lowered Group sales by
between 2% to 3%.
Commenting on the first quarter, David Illingworth, Chief Executive of Smith &
Nephew, said:
'Our performance in the quarter was mixed. While we are pleased with our
performance across most of the business we did have one issue to deal with in
the former Plus business in Europe. Our US Reconstruction business continued to
outperform the market driven by our BIRMINGHAM HIP* Resurfacing product;
Endoscopy was robust with a particularly good performance from Europe; in Trauma
our European business performed well and we are re-energising our US business.
In Advanced Wound Management, we have successfully launched our Negative
Pressure Wound Therapy system, and I am confident that we have a very
competitive product to address this significant market.
We have taken prompt, decisive action to ensure that the sales practices we
uncovered within Plus in continental Europe have been stopped and this has
impacted our performance this quarter and will continue to do so for the rest of
the year. Looking forward, we are focused on achieving the significant benefits
of the Plus acquisition and on progressing our Earnings Improvement Programme
which continues to drive material margin enhancement across the group.'
An analyst presentation and conference call to discuss the Group's first quarter
results will be held at 12.00pm BST/7.00am EST today, Thursday 1 May. 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/Q108. An on demand replay
will be available shortly following the close of the call and a podcast will
also be available at the same address. A listen-only service is available by
calling +44 (0)20 7806 1955 in the UK or +1 718 354 1388 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 call details.
Notes
(1) Unless 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) A reconciliation from operating profit to trading profit is given in
note 4 to the financial statements. The underlying increase in trading
profit is the increase in trading profit after adjusting for the effects of
currency translation and acquisitions. Unless specified as 'reported' all
trading profit increases throughout this document are underlying.
(3) The underlying trading profit margin is the increase in trading profit
margin after adjusting for the effects of currency translation and
acquisitions. Unless specified as 'reported' all trading profit margin
increases throughout this document are underlying.
(4) Adjusted earnings per ordinary share ('EPSA') growth is as reported, not
underlying, and is stated before restructuring and rationalisation costs,
acquisition related costs, amortisation of acquisition intangibles and
taxation thereon. See note 2 to the financial statements.
Introduction
The markets in which we operate have generally been favourable in the first
quarter although the early Easter has had a seasonal effect across the
orthopaedics industry as a whole reducing our revenues by about 2% to 3%.
As part of the integration of Plus, we uncovered certain sales practices in
parts of Europe which are unacceptable to Smith & Nephew. We have undertaken a
thorough investigation, which has progressed a long way, but is not yet
complete. We have immediately moved to harmonise these practices with Smith &
Nephew's standards. This has impacted our Q1 performance, predominantly in
Greece, and will continue to impact performance over the course of the year.
Reconstruction performed well in the US this quarter as our BIRMINGHAM HIP*
Resurfacing ('BHR*') product continued to deliver good results. Trauma had a
difficult quarter in the US and we have initiated a range of actions to address
this performance. Reconstruction and Trauma in Europe have both been impacted
by our actions to harmonise the sales practices of parts of the former Plus
business. In Endoscopy revenue performance outside the US was strong and
Advanced Wound Management also had good performance outside the US and a
successful launch of Negative Pressure Wound Therapy ('NPWT').
Our Earnings Improvement Programme ('EIP') continues to deliver material margin
enhancement and we are pleased with the progress made this quarter.
This has been a challenging quarter. We have responded with clear, firm actions
and are confident that we are building a stronger business.
First Quarter Results
Revenue in the quarter was $911 million. This represents growth of 22% as
reported and an underlying growth rate of 2% after adjusting for movements in
currency (6%) and acquisitions (14%) when compared to the same period last year.
Excluding all Plus products, underlying revenue growth was 5%.
Trading profit in the quarter was $182 million, representing reported growth of
23%. The Group's trading margin increased by an underlying 60 basis points to
20% in the quarter. This reflected significant increases in the Reconstruction,
Trauma and Endoscopy divisions offset by a weaker margin of 9% in Advanced Wound
Management which was impacted by the costs of the launch of NPWT. The group
trading margin also reflects seasonally heavier expenses which are
characteristic of this quarter.
Net interest and finance expense was $16 million.
The tax charge was at the estimated effective rate for the full year of 31% on
profit before restructuring and rationalisation costs, acquisition related costs
and amortisation of acquisition intangibles. Attributable profit before
restructuring and rationalisation costs, acquisition related costs, amortisation
of acquisition intangibles and taxation thereon was $114 million.
Adjusted earnings per share increased 14% to 12.8c (64.0c per American
Depositary Share, 'ADS'). Basic earnings per share was 9.3c (46.5c per ADS)
compared with 9.7c (48.5c per ADS) in 2007.
Net debt increased by $146 million from the year end to $1,456 million in the
quarter. Our financial position remains strong and we expect working capital
funding and capital expenditure needs for 2008 to be met by existing resources
and facilities.
The Group purchased 7.2 million of its own shares during the quarter at a cost
of $91 million, in line with our target buy back of $400 million for the full
year.
Orthopaedic Reconstruction
Reconstruction revenues at $377 million grew by 2% compared to the first quarter
last year. Excluding all Plus products, growth at constant currencies was 8%.
Growth was reduced by about 2% from the fewer sales days in the quarter.
The harmonisation of the former Plus sales practices directly reduced revenue in
Europe in the quarter by about $10 million. In addition there was some impact
from the associated management disruption.
Reconstruction revenues in the US grew by 7% in the quarter as BHR* continued to
make an excellent contribution and to lead the market in hip re-surfacing
worldwide with a global market share of over 50%.
Knee revenue growth was 1% worldwide (7% excluding Plus products) for the
quarter, as the impact of the sales practice harmonisation in Europe masked the
increasing success of our JOURNEY* Bi-Cruciate Stabilised Knee System which was
introduced last year. Within the US, knee revenue growth increased by 5% and
outside the US revenues decreased 2%.
Hip revenues continued the underlying momentum seen in Q4 2007 growing by 4%
worldwide (9% excluding Plus products) in the quarter. In the US hip revenues
grew by 11% as BHR* continued to grow well. In Europe hip revenue decreased by
6%. In Japan we started to see the benefits of the Plus integration.
Trading margin in the quarter was 25.2% an underlying increase of 240 basis
points. This strong increase in margin was mainly attributable to EIP
activities, but also reflected in part delays in getting approval from the
Federally appointed Monitor for research and development.
Orthopaedic Trauma and Clinical Therapies
Trauma and Clinical Therapies revenues this quarter at $151 million were
impacted by the harmonisation of sales practices in Europe and by a
disappointing performance in the US.
In Europe very strong inherent growth was offset by the effect of the
harmonisation of sales practices. Sales practice changes led directly to a
reduction in revenue of about $6 million, or about 20 percentage points of
growth in Europe.
Growth in the US was 1% in the quarter. It has become clear that this business
would benefit from a change in structure, including the separation of Clinical
Therapies from Trauma. A series of actions are underway to increase the
collaboration between our Trauma and Reconstruction sales forces while retaining
the focus on developing the Trauma portfolio and supporting trauma surgeons. We
have a strong product range and expect the benefits of these actions to return
the business to market growth by the end of this year.
Fixation product revenues grew by 2% (6% excluding Plus products), below the
estimated market growth rate of 11%. We achieved strong growth in plates and
screws but this was offset by lagging revenues from nail and external fixation.
Clinical Therapies revenue growth decreased by 2% (a 3% increase excluding Plus
products) driven by the continued pricing weakness in the joint fluid therapy
market that we have seen for some quarters. EXOGEN* and DUROLANE(R) have
performed well this quarter markedly outgrowing the market and gaining from
their strong market positions.
Trading margin increased an underlying 260 basis points to 19.9% as the business
unit continues to realise significant benefits from the EIP.
Endoscopy
Endoscopy revenues grew by 4% to $194 million. Strong European growth of 10% and
the rest of the world growth of 14% was dampened by a 3% decline in US revenues.
In the US the new management team is taking action and making key changes in
operational management. Outside the US, performance continued to be strong with
growth of 11%.
Repair revenues grew strongly at 10%, driven by a number of products including
FASTFIX* Meniscal Repair System for the knee and BIORAPTOR* Suture Anchor for
shoulder.
Visualisation (including DOR) revenues continue to be volatile and decreased by
5%, in part due to management's intention to operate at a more profitable level
in this segment. Resection product sales increased by 4% in the quarter.
The trading margin of 20.6%, an underlying improvement of 230 basis points,
includes continued benefit from the facility closure completed in the second
quarter of last year.
Advanced Wound Management
Advanced Wound Management revenues grew to $189 million for the quarter. Growth
in Europe and the rest of the world was 6% and 7% respectively, a stronger
result than the previous quarter. In the US, which accounts for around 20% of
this business, revenues decreased by 13% reflecting the salesforce focus on the
launch of NPWT. The combined revenue growth was 2% globally.
NPWT was launched globally during March and we are pleased with progress at this
early stage.
ALLEVYN* dressings performed well in the quarter with revenues increasing by 9%,
helped by a wider product range, including the recently launched ALLEVYN* GENTLE
BORDER. ALLEVYN* Ag, a lower priced silver dressing launched late last year,
provides greater product options as ACTICOAT* antimicrobial silver dressings
continued to be affected by low price competition.
Advanced Wound Management achieved a reduced margin of 9% in the quarter as a
result of the investment in the launch of NPWT. Excluding these costs, the
margin would have fallen slightly when compared to the corresponding quarter
last year.
Outlook
Global market conditions continue to be favourable driven by underlying
demographic trends which are creating strong demand for our products.
The outlook for the year has been impacted by the changes we are making to
harmonise the Plus sales practices with Smith & Nephew policies.
We have undertaken a thorough investigation of these practices which has made
significant progress, but is not yet fully complete. We currently expect
revenues, in a full twelve month period, to be reduced by about $100 million.
Much of the reduction in sales relationships has been experienced in quarter one
and we expect some further reductions over the next two quarters, therefore we
expect the reduction in 2008 to be close to the twelve month level. We expect
about 70% of the reduction in revenues to be in the Reconstruction business, and
about 30% in Trauma. A large part of this issue relates to Greece where
pro-forma 2007 revenues were $60 million. We do not expect to recover these
lost revenues, but we see no ongoing impact on the continuing robust growth of
the business, including the Plus revenues unaffected by the changed sales
practices.
We expect the lost profit from the reduced sales to be at the Group net margin
once we have worked through the changes. In the short-term we expect to see a
somewhat higher impact on profit as it takes time to adjust the cost base, and
as we are bearing some additional costs associated with the investigation.
We expect that our Reconstruction business in the US will continue to grow at
above market rates. We believe that the actions that we are taking in our
Trauma business will lead to revenue growth returning to the market growth rate
by the end of the year. In Clinical Therapies we continue to expect to be
impacted by the declining market growth in the US.
In Endoscopy we continue to expect to grow slightly behind the market in 2008,
with visualisation revenues continuing to be volatile. Advanced Wound
Management, excluding NPWT, is expected to grow close to the market rate for the
full year. We are pleased with the NPWT launch and expect sales to grow
materially through 2008 and beyond.
Except for the temporary impact of the harmonisation of sales practices in
Europe, our Earnings Improvement Programme continues to be firmly on track.
Although this has been a challenging quarter in parts of our business in Europe,
we have taken firm action and we are confident that the overall business is in a
strong position for continued strong sustainable profitable growth.
Enquiries
Investors
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
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 operates in 32
countries around the world. Annual sales in 2007 were $3.4 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 trading margins
discussed under 'First Quarter Results', 'Orthopaedic Trauma and Clinical
Therapies' and '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 harmonisation of sales practices, 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.
*Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark
Office.
DUROLANE(R) is a trademark of Q-Med AB.
SMITH & NEPHEW plc
2008 QUARTER ONE RESULTS
Unaudited Group Income Statement for the 3 months to 29 March 2008
Notes 2008 2007
$m $m
Revenue 3 911 744
Cost of goods sold (256) (193)
_________ _________
Gross profit 655 551
Selling, general and administrative expenses (480) (392)
Research and development expenses (33) (32)
_________ _________
Operating profit 4 142 127
Interest receivable 1 4
Interest payable (17) (2)
Other finance income - 2
_________ _________
Profit before taxation 126 131
Taxation 9 (43) (40)
_________ _________
Attributable profit (A) 83 91
_________ _________
Earnings per share (A) 2
Basic 9.3c 9.7c
Diluted 9.3c 9.6c
A Attributable to the equity holders of the parent and wholly derived from continuing operations.
Unaudited Group Statement of Recognised Income and Expense for the 3 months to 29 March 2008
2008 2007
$m $m
Translation differences 43 4
Losses on cash flow hedges (6) (1)
Actuarial gains on defined benefit pension plans 15 20
Taxation on items taken directly to equity (2) (7)
_________ _________
Net income recognised directly in equity 50 16
Attributable profit 83 91
_________ _________
Total recognised income and expense (A) 133 107
_________ _________
Unaudited Group Balance Sheet as at 29 March 2008
31 Dec 29 March 31 March
2007 Notes 2008 2007
$m $m $m
ASSETS
Non-current assets
743 Property, plant and equipment 767 631
1,198 Goodwill 1,273 639
449 Intangible assets 463 192
9 Investments 8 10
11 Investment in associates 12 -
135 Deferred tax assets 140 108
_________ _________ _________
2,545 2,663 1,580
Current assets
837 Inventories 888 652
898 Trade and other receivables 949 636
170 Cash and bank 171 349
_________ _________ _________
1,905 2,008 1,637
_________ _________ _________
4,450 TOTAL ASSETS 4,671 3,217
_________ _________ _________
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
190 Called up equity share capital 190 189
356 Share premium account 365 341
(637) Treasury shares (727) (81)
1,907 Accumulated profits and other reserves 1,978 1,708
_________ _________ _________
1,816 Total equity 12 1,806 2,157
Non-current liabilities
36 Long-term borrowings 37 21
184 Retirement benefit obligation 173 134
47 Other payables due after one year 47 3
33 Provisions due after one year 31 31
63 Deferred tax liabilities 67 38
_________ _________ _________
363 355 227
Current liabilities
1,442 Bank overdrafts and loans due within one year 1,588 123
545 Trade and other payables 634 422
80 Provisions due within one year 72 52
204 Current tax payable 216 236
_________ _________ _________
2,271 2,510 833
_________ _________ _________
2,634 Total liabilities 2,865 1,060
_________ _________ _________
4,450 TOTAL EQUITY AND LIABILITIES 4,671 3,217
_________ _________ _________
Unaudited Condensed Group Cash Flow Statement for the 3 months to 29 March 2008
2008 2007
$m $m
Net cash inflow from operating activities
Profit before taxation 126 131
Less: Net interest payable/(receivable) 16 (2)
Depreciation, amortisation and impairment 62 45
Utilisation of Plus inventory stepped-up on 15 -
acquisition
Share based payment expense 5 7
Movement in working capital and provisions (72) (53)
_________ _________
Cash generated from operations (B) 152 128
Net interest (paid)/received (16) 2
Income taxes paid (33) (32)
_________ _________
Net cash inflow from operating activities 103 98
Cash flows from investing activities
Acquisitions (10) (4)
Capital expenditure (61) (38)
_________ _________
Net cash used in investing activities (71) (42)
Cash flow before financing activities 32 56
Cash flows from financing activities
Proceeds from issue of ordinary share capital 9 12
Cash movements in borrowings 49 5
Purchase of treasury shares (91) (65)
Settlement of currency swaps (5) (2)
_________ _________
Net cash used in financing activities (38) (50)
Net (decrease)/increase in cash and cash equivalents (6) 6
Cash and cash equivalents at beginning of period 109 291
Exchange adjustments 6 -
_________ _________
Cash and cash equivalents at end of period (C) 109 297
_________ _________
B After $3 million (2007 - $6 million) unreimbursed by insurers relating to macrotextured knee revisions, $13
million (2007 - $10 million) of acquisition related costs and $12 million (2007 - $5 million) of outgoings on
restructuring and rationalisation costs.
C Cash and cash equivalents at the end of the period are net of overdrafts of $62 million (2007 - $52 million).
NOTES
1. These interim financial statements have been prepared in conformity with IAS 34 Interim Financial Reporting.
The financial information herein has been prepared on the basis of the accounting policies set out in the
annual accounts of the Group for the year ended 31 December 2007, these policies are not expected to
significantly differ from those that will be used in the annual accounts of the Group for the year ended 31
December 2008. Smith & Nephew prepares its annual accounts on the basis of International Financial Reporting
Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB'), IFRS as adopted by the
European Union ('EU') and in accordance with the provisions of the Companies Act 1985. IFRS as adopted by the
EU differs in certain respects from IFRS as issued by the IASB. However, the differences have no impact for
the periods presented.
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 2007, which will be delivered to the Registrar of
Companies after approval by shareholders on 1 May 2008.
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.
EPSA has been calculated by dividing adjusted attributable profit by the weighted (basic) average number of
ordinary shares in issue of 892 million (2007 - 943 million). The diluted weighted average number of ordinary
shares in issue is 897 million (2007 - 947 million).
Notes 2008 2007
$m $m
Attributable profit 83 91
Adjustments:
Restructuring and rationalisation costs 5 8 17
Acquisition related costs 7 22 -
Amortisation of acquisition intangibles 10 4
Taxation on excluded items (9) (6)
_________ _________
Adjusted attributable profit 114 106
_________ _________
Adjusted earnings per share 12.8c 11.2c
Adjusted diluted earnings per share 12.7c 11.2c
3. Revenue by segment for the three months to 29 March 2008 was as follows:
Underlying
growth in
2008 2007 revenue
$m $m %
Revenue by business segment
Reconstruction 377 262 2
Trauma and Clinical Therapies 151 136 -
Endoscopy 194 177 4
Advanced Wound Management 189 169 2
_________ _________ _________
911 744 2
_________ _________ _________
Revenue by geographic market
United States 383 369 1
Europe (D) 355 240 (1)
Africa, Asia, Australasia and Other America 173 135 13
_________ _________ _________
911 744 2
_________ _________ _________
D Includes United Kingdom revenue of $81 million (2007 - $67 million).
Underlying revenue growth is calculated by eliminating the effects of translational currency and acquisitions.
For business combinations completed in the prior year, prior year revenue is adjusted to include a full year
of revenue from the sales of products acquired, calculated by adding back revenue from sales of products in the
period prior to the Group's ownership.
Reported growth reconciles to underlying growth as follows:
Constant
Reported currency Underlying
growth in exchange Acquisitions growth in
revenue effect effect Revenue
% % % %
Reconstruction 44 (7) (35) 2
Trauma and Clinical Therapies 11 (3) (8) -
Endoscopy 10 (6) - 4
Advanced Wound Management 12 (8) (2) 2
_________ _________ _________ _________
22 (6) (14) 2
_________ _________ _________ _________
4. Trading profit 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. Operating profit reconciles to
trading profit as follows:
Notes 2008 2007
$m $m
Operating profit 142 127
Restructuring and rationalisation costs 5 8 17
Acquisition related costs 7 22 -
Amortisation of acquisition intangibles 10 4
_________ _________
Trading profit 182 148
_________ _________
Trading and operating profit by segment for the three months to 29 March 2008 were as follows:
Trading Profit by business segment
Reconstruction 95 66
Trauma and Clinical Therapies 30 23
Endoscopy 40 33
Advanced Wound Management 17 26
_________ _________
182 148
_________ _________
Operating Profit by business segment
Reconstruction 63 58
Trauma and Clinical Therapies 29 21
Endoscopy 38 30
Advanced Wound Management 12 18
_________ _________
142 127
_________ _________
5. Restructuring and rationalisation costs comprise $8 million (2007 - $17 million) relating to the earnings
improvement programme, mainly redundancy and consultancy costs.
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 has
been integrated into the Group's Reconstruction and Trauma and Clinical Therapies business segments.
At 31 December 2007 the cost of the acquisition was allocated on a provisional basis to the assets acquired and
liabilities assumed on acquisition. In Quarter One 2008, fair value adjustments were revised to reflect
improved knowledge of the Plus business: goodwill was increased by $8 million, intangible assets were
decreased by $6 million and other assets decreased by $2 million. These adjustments did not have a significant
effect on the assets and liabilities recognised previously and so the balance sheet at 31 December 2007 has not
been restated.
The final allocation of the purchase price will be completed by 31 May 2008 in accordance with the time limit
stipulated in IFRS 3 Business Combinations.
7. Acquisition related costs comprise $7 million relating to Plus integration and $15 million relating to the
utilisation of the Plus inventory stepped-up to fair value on acquisition.
8. The cumulative number of revisions of the macrotextured knee product was 1,032 on 29 March 2008 compared with
1,029 at 31 December 2007. This represents 35% of the total implanted. Settlements with patients have been
achieved in respect of 987 revisions (31 December 2007 - 977 settlements). $38 million of provision remains to
cover future settlement costs.
9. Taxation of $52 million (2007 - $46 million) on the profit before restructuring and rationalisation costs,
acquisition related costs and amortisation of acquisition intangibles is at the full year estimated effective
rate. In 2008, a taxation benefit of $9 million arose on restructuring and rationalisation costs, acquisition
related costs and amortisation of acquisition intangibles (2007 - $6 million on restructuring and
rationalisation costs and amortisation of acquisition intangibles). Of the $43 million (2007 - $40 million)
taxation charge for the year $29 million (2007 - $28 million) relates to overseas taxation.
10. No dividends were paid in the quarter in 2008 or 2007. The second interim dividend for 2007 of 7.38 US cents
per ordinary share was declared by the Board on 7 February 2008 and is accrued within trade and other payables.
This is payable on 9 May 2008 to shareholders whose names appeared on the register at the close of business on
18 April 2008. The sterling equivalent per ordinary share was set on 18 April 2008 at 3.70 pence per ordinary
share. Shareholders may participate in the dividend re-investment plan.
11. As at 29 March 2008 59,184,000 (31 December 2007 - 51,955,000) ordinary shares had been purchased under the
share buy back programme that commenced in February 2007. The cost of the shares purchased in 2008 was $91
million (2007 - $80 million).
12. The movement in total equity for the three months to 29 March 2008 was as follows:
2008 2007
$m $m
Opening equity as at 1 January 1,816 2,174
Attributable profit 83 91
Equity dividends accrued (66) (63)
Exchange adjustments 43 4
Losses on cash flow hedges (6) (1)
Actuarial gains on defined benefit pension plans 15 20
Share based payment recognised in the income statement 5 7
Taxation on items taken directly to equity (2) (7)
Purchase of treasury shares (91) (80)
Issue of ordinary share capital 9 12
_________ _________
Closing total equity 1,806 2,157
_________ _________
13. (Net debt)/net cash as at 29 March 2008 comprises:
2008 2007
$m $m
Cash and bank 171 349
Long-term borrowings (37) (21)
Bank overdrafts and loans due within one year (1,588) (123)
Net currency swap liabilities (E) (2) (2)
_________ _________
(1,456) 203
_________ _________
The movements in the year were as follows:
Opening (net debt)/net cash as at 1 January (1,310) 210
Cash flow before financing activities 32 56
New finance leases - (7)
Proceeds from issue of ordinary share capital 9 12
Purchase of treasury shares (91) (65)
Exchange adjustments (96) (3)
__________ _________
Closing (net debt)/net cash (1,456) 203
__________ _________
E Net currency swap liabilities of $2 million (2007 - $2 million) comprise $2 million (2007 - $2 million)
of current liability derivatives within trade and other payables.
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc
Introduction
We have been engaged by the Company to review the interim financial information in the interim financial report for the
three months ended 29 March 2008 which comprises the Group Income Statement, Group Statement of Recognised Income and
Expense, Group Balance Sheet, Condensed Group Cash Flow Statement and the related notes 1 to 13. We have read the other
information contained in the interim financial report and considered whether it contains any apparent misstatements or
material inconsistencies with the interim financial information.
This report is made solely to the Company in accordance with guidance contained in ISRE 2410 (UK and Ireland) 'Review of
Interim Financial Information Performed by the Independent Auditor of the Entity' 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 financial report, is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International
Financial Reporting Standards as adopted by the European Union. The financial information included in this interim
financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting
', as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the interim financial information for the three months
ended 29 March 2008 based on our review.
Scope of Review
We conducted our review in accordance with ISRE 2410 (UK and Ireland) 'Review of Interim Financial Information Performed
by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A
review of interim financial information, consists of making enquires primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than
an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be identified in an
audit. Accordingly we do not express an audit opinion.
Review Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the interim financial information
for the three months ended 29 March 2008 is not prepared, in all material aspects, in accordance with International
Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United
Kingdom's Financial Services Authority.
Ernst & Young LLP
London
1 May 2008
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