Final Results
Smith & Nephew Plc
08 February 2007
New Products Drive Market Outperformance at Smith & Nephew
8 February 2007
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,
announces its results for the fourth quarter and full year ended 31 December
2006.
Q4 Highlights and Share Buy-Back Programme
• Q4 revenue up 11%* to $771 million, driven by new product launches
• Trading profit up 17% to $183 million
• EPSA** up by 23% to 15.1c**
• All businesses performing well;
- Orthopaedic Reconstruction revenue up 15%, significantly outperforming the market
- Orthopaedic Trauma and Clinical Therapies revenue further improving to 17% growth
- Endoscopy revenue up 9% after adjusting for acquisitions
- Advanced Wound Management revenue up 3%, and up 7% after adjusting for the dilutive
effect of DERMAGRAFT(R)
• Share buy-back programme announced today of up to $1.5 billion
Full Year Highlights
• Group revenue up 8%* to $2.8 billion
• Trading profit at $571 million up 10%
• EPSA** increased 7% to 45.2c**
• Business revenue growths;
- Orthopaedic Reconstruction up 10%
- Orthopaedic Trauma and Clinical Therapies up 13%
- Endoscopy up 9%
- Advanced Wound Management up 1%, 5% ex DERMAGRAFT(R)
• Second interim dividend up 10% to 6.71c per share
Commenting on the results for 2006, Sir Christopher O'Donnell, Chief Executive
of Smith & Nephew, said:
'All of our businesses have performed well in the fourth quarter and we closed
the year strongly. Innovative new products are driving our growth, enabling us
to outperform the market, particularly in Orthopaedic Reconstruction, where the
US market continued its modest recovery through the second half.
Our fundamental strategy for growth in all our businesses, including Advanced
Wound Management, remains unchanged; we aim to grow at above market growth rates
by continued product and business innovation, and it is our intention to couple
this with a major programme to enhance margins going forward. This project is
in the advanced planning stage and we will be making a further announcement with
our Q1 results when our plans are fully formed. We continue to energetically
seek acquisitions. We were disappointed that our discussions with Biomet did
not lead to a transaction which we believe would have enhanced shareholder value
for Smith & Nephew.
We are announcing today a share buy-back programme of up to $1.5 billion over
the next two years which makes our balance sheet more efficient whilst retaining
our acquisition capabilities.
We have a strong business going forward with new products providing an excellent
platform for continued growth.'
An analyst presentation and conference call to discuss the Company's fourth
quarter results will be held at 1.00pm GMT / 8.00am EST today, Thursday 8
February. 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/
Q406. 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 7138 0814 in the UK or +1 (718) 354 1158 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.
* 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 for a reconciliation of these
measures to results reported under IFRS.
** EPSA is stated before bid related costs, the fair value adjustment made on
hedging the proceeds from the disposal of the joint venture, taxation thereon,
amortisation of acquisition intangibles and the gain on the disposal of the
joint venture and in 2005 only restructuring and rationalisation costs and
taxation thereon. See note 2.
Percentage of new products to revenue is based on products launched within the
last three years.
Comparisons are against restated numbers. See note 13.
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
David Yates +44 (0) 20 7831 3113
Financial Dynamics - London
Jonathan Birt +1 (212) 850 5634
Financial Dynamics - New York
Introduction
All four of our businesses made good progress in the fourth quarter. The US
reconstructive market has continued to strengthen driven by increased numbers of
procedures. Outside the US the picture has been more mixed as a number of
countries continue to take action to constrain healthcare spending. Overall,
however, market conditions across our businesses continue to be characterised by
strong demand for our innovative products which offer both patient and
healthcare system benefits.
The creation of the two separate orthopaedic business units at the start of the
2006 is now proving beneficial for customers as well as strengthening our
revenue growth. Endoscopy has enjoyed a stronger year by delivering 9% revenue
growth for the year. Advanced Wound Management has completed a positive
transitional year with a new management team in place and underlying revenue
growth accelerating.
During the year we continued to acquire technologies complementary to our
businesses with the licensing agreement by Orthopaedic Trauma and Clinical
Therapies of DUROLANE(R) joint fluid therapy and the purchase of OsteoBiologics,
Inc ('OBI') by Endoscopy. We continue to see excellent opportunities, of
varying sizes, which fit within our strategy of sustained growth both
organically and by acquisition.
We have undertaken an assessment of our medium term capital needs both within
the business and for acquisitions. Following this assessment we believe that
shareholder value and the efficiency of our balance sheet will be enhanced by
returning capital to shareholders. In consequence we are announcing today our
intention to undertake a share buy back programme of up to $1.5 billion over the
next two years, dependent in particular on the acquisition programme.
Restatements
Prior period comparatives have been restated as set out in Note 13.
Fourth Quarter Results
Revenue in the quarter was $771 million. This represents growth of 15% as
reported and underlying growth of 11% after adjusting for movements in currency
when compared to the same period last year.
Trading profit in the quarter was $183 million, representing reported growth of
17% and 13% at constant exchange rates. The trading margin of 23.7% was 0.4%
above the comparable period last year after inventory write-offs relating to
obsolete stock, impacted trading margin by 1.3%.
Orthopaedic Reconstruction increased its margin in the quarter after an
additional $4 million inventory cost, equivalent to 1.6% of sales. Trauma and
Clinical Therapies' margins were slightly lower than Q4 last year, largely as a
result of the investment in the US sales force. Endoscopy's margins were
significantly lower in the quarter partly due to an extra $5 million inventory
expense, equivalent to 2.7% of sales. Advanced Wound Management's margins
increased in the quarter, a clear improvement.
The relatively low tax charge in Q4 reflects the adjustment of the full year
effective rate to 27.6% from 29.5%. Attributable profit before fair value loss,
amortisation of acquisition intangibles, gain on disposal of joint venture, bid
related costs and taxation thereon is $142 million. EPSA was 15.1c (75.5c per
American Depositary Share, 'ADS'), which was 22.8% higher than in the prior
year.
Orthopaedic Reconstruction
Reconstruction revenues at $251 million grew by 15% compared to the fourth
quarter last year, well ahead of the global market which grew by 7%. Our flow
of new product introductions contributed to another improved quarter in the US
with revenues growing at 16%. Outside the US, despite the continuation of
difficult market conditions in Europe, we further improved our growth with a 14%
increase through stronger results in a number of European markets and in Japan.
New products generated 24% of revenues.
Knee revenue grew at 12% compared to market growth of 8%. The new JOURNEY* Bi-
Cruciate Stabilised Knee System introduced earlier in 2006 had a particularly
strong quarter and our LEGION* Revision Knee System continued to make good
progress. Within the US, revenue growth increased at the market rate of 10% and
outside the US revenues grew by an improved 16%.
Hip revenues grew by an outstanding 19%, a further improvement on the strong
third quarter achievement of 11%. Outside the US growth was 15%, and within the
US hip revenues accelerated to an exceptional 24%, ahead of the market which
grew at 9%. The introduction of the BHR* system in the US is now running ahead
of plan with 336 surgeons having been trained to date and US revenues of $16m
for the year, exceeding our expectations.
Orthopaedic Trauma and Clinical Therapies
Trauma and Clinical Therapies revenues grew to $141 million in the quarter, an
increase of 17% over the same period last year. Growth in the US was 14% and
growth outside the US improved to 26%, with particularly strong growth in Europe
and Australia. New products generated 38% of revenues.
Fixation product revenues grew in the US by 5% and outside the US by 16%. In the
US, in common with the market, external fixator revenues were slow. We had
excellent revenues from our new products: TRIGEN* INTERTAN* nail for femoral
fractures and our upper extremity PERI-LOCa Periarticular Locked Plating System.
Clinical Therapies growth accelerated to 33% with a particularly strong quarter
from the improved EXOGEN 4000+* low frequency ultrasound bone-healing device
which was launched in the second quarter and a high growth rate for SUPARTZ(R)
Joint Fluid Therapy. The integration of the DUROLANE(R) Single Injection Joint
Fluid Therapy into the Smith & Nephew selling and marketing network outside the
US has been successful following the worldwide licensing agreement in June with
Q-Med AB in Sweden and we continue to work towards pre-market approval of the
product in the US.
We have decided that customers of our minimal intervention spinal products,
including IDET IntraDiscal ElectroThermal Therapy and discography, are better
served by the sales channels and increased resources available in our Clinical
Therapies business and the responsibility for this product group has been
transferred from our Endoscopy Division with effect from January 2007.
Endoscopy
Endoscopy revenues grew by 9% after adjusting for OBI to $187 million in the
quarter; a good performance given the strong 2005 comparator quarter. In the US
revenues grew by 4% and outside the US grew strongly by 16%, compared with a
year ago. New products accounted for 30% of revenues as a number of new
launches were well received in the marketplace.
Repair revenues again grew strongly at an improved 27% supported by the success
of shoulder, hip and knee repair product portfolios. The CALAXO*
Osteoconductive Interference Screw and the BIORAPTOR* Suture Anchor for the hip
launched earlier in the year made good contributions to revenues. The
integration of OBI, acquired in July 2006, has been completed.
The resection business increased by 5% in the quarter, driven by a new power
hand piece and an enhanced range of surgical blades and burrs but Digital
Operating Room sales and visualisation revenues declined marginally in the
quarter.
Advanced Wound Management
The new management team appointed during 2006 is successfully increasing both
the revenue growth rate and margins. Good progress has been made in the US and
we expect continued growth from this major market. After a challenging 18
months this performance is a strong and encouraging sign for the future.
Advanced Wound Management revenues grew to $192 million, up 3% relative to the
fourth quarter of last year, an increase of 7% after adjusting for DERMAGRAFT(R)
and its related products. Our new US management team has grown US revenues by
10%, after adjusting for DERMAGRAFT. Revenue growth outside the US was 6%
reflecting continued tight market conditions, particularly in the UK and
Germany. New products accounted for 21% of revenues.
ALLEVYN* dressings increased by 9% with strong revenue growth recorded for the
improved versions of ALLEVYN ADHESIVE dressings and ALLEVYN Heel. Wound bed
preparation had an excellent quarter with revenues increasing by 19% although
increased low price competition continues to restrict growth of ACTICOAT*
antimicrobial silver dressings.
Full Year Results
Reported revenues increased by 9% to $2,779 million compared to the same period
last year, with underlying growth at 8%.
Trading profit for the year was up 10% to $571 million. Trading margin was
higher at 20.5%. Interest and other finance income was $16 million. The tax
charge of $156 million reflects the effective rate for the year of 27.6%.
Attributable profit was $745 million. Adjusted attributable profit of $425
million is before fair value loss, amortisation of acquisition intangibles of
$14 million, the gain on the disposal of the joint venture, bid related costs
and taxation thereon.
EPSA was 45.2c (226c per ADS). This was 7% higher than last year, having been
negatively impacted by the dilution arising on disposal of our joint venture
with BSN and by the loss of net interest income deriving from the dollar/
sterling interest rate differences. The total impact on EPSA growth of these
one-off items was 7% for the year. Reported basic earnings per share were 79.2c
(396c per ADS). A reconciliation of EPSA to reported earnings per share is
provided in note 2 to the accounts.
Operating cash flow, defined as cash generated from operations less capital
expenditure, was $284 million. This is a trading profit to cash conversion
ratio of 64%, before $26 million of pension payments to reduce pension plan
deficits, rationalisation and restructuring expenditure of $21 million, $33
million of settlement payments to patients in respect of macrotexture revisions
which are not being reimbursed by insurers and $4 million of bid related costs.
This $284 million of cash flow compares with $172 million a year ago.
The financial year 2006 requires us to comply with s404 of the Sarbanes-Oxley
Act of 2002 and as a result we have reviewed our accounting treatments. Prior
period profits, earnings and balance sheets have been restated for the following
items:
1. a change in the method of calculating the elimination of intra-group profit
carried in inventory, the effect of which is to reduce the amount of
overhead expense included in inventory valuation;
2. a re-classification of certain indirect production overhead expenses from
Selling, general and administration expenses to Cost of goods sold; and
3. a change in accounting policy for the recognition of death-in-service
benefits liability in the UK pension plan.
The impact of the restatements is shown in Note 13.
Dividend
The second interim dividend has been declared in the amount of 6.71c per share,
a 10% increase in line with our current dividend policy, and will be paid on 11
May 2007 to shareholders on the register at the close of business on 20 April
2007. On this occasion the dividend will be paid as a sterling equivalent of
3.41 pence per share to all shareholders. Together with the first interim
dividend of 4.10c (20.5c per ADS) this makes a total declared dividend of 10.81c
per share (54.05c per ADS) for the year 2006. Shareholders may participate in
the company's dividend reinvestment plan.
Earnings Improvement Programme
At the time of our third quarter results we indicated our intention to increase
our focus on margin enhancement through a rigorous and systematic review to
identify areas for improvement across our businesses. This Earnings Improvement
Programme is now in the advanced planning stage and we expect to make a further
announcement with our Quarter 1 results.
Outlook
Global market conditions continue to be favourable driven by underlying
demographic trends which continue to create strong demand for our products. We
will continue to capitalise on this by focusing on innovative products that
create value for health services as well as delivering clinical benefits to
patients and we will seek good quality acquisitions which add value to our
businesses and to the group as a whole.
New products launched in 2006, together with further launches expected during
2007, give us a strong platform to outperform market growth in 2007 and beyond.
The growth rate in Q1 2007 is expected to be lower than that of Q4 2006 and is
expected to strengthen thereafter.
We will have a particular focus going forward on the delivery of margin
enhancement and we anticipate our Earnings Improvement Programme will have a
substantial impact across the business in 2008 and 2009.
About Us
Smith & Nephew is a global medical technology business, specialising in
Orthopaedic Reconstruction, Orthopaedic Trauma, 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 8,800 employees
and operates in 33 countries around the world generating annual sales
approaching $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 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.
* Trademark of Smith & Nephew. Certain marks registered US Patent and Trademark
Office.
DUROLANE(R) is a trademark of Q-Med AB.
DERMAGRAFT(R) is a trademark of Advanced BioHealing Inc.
SUPARTZ(R) is a Trademark of the Seikagaku Corporation
SMITH & NEPHEW plc
2006 QUARTER FOUR AND FULL YEAR RESULTS
Unaudited Group Income Statement for the 3 months and year ended 31 December
2006
3 Months 3 Months Notes Year Ended Year Ended
2005 A, B 2006 2005 A, B
2006
$m $m $m $m
670 771 Revenue 3 2,779 2,552
(180) (221) Cost of goods sold (769) (701)
(299) (336) Selling, general and administrative expenses (1,319) (1,212)
(35) (31) Research and development expenses (120) (122)
_____ _____ _____ _____
156 183 Trading profit 4 571 517
- (20) Bid related costs 5 (20) -
(40) - Restructuring and rationalisation costs 6 - (84)
(3) (6) Amortisation of acquisition intangibles (14) (11)
_____ _____ _____ _____
113 157 Operating profit 4 537 422
2 4 Interest receivable 19 27
- (2) Interest payable (9) (18)
(3) 2 Other finance income/(costs) 6 (5)
2 - (Loss)/gain on hedge of the sale proceeds of the joint (3) 2
venture
_____ _____ _____ _____
114 161 Profit before taxation 550 428
(34) (40) Taxation 8 (156) (126)
_____ _____ _____ _____
80 121 Profit from continuing operations 394 302
Discontinued operations:
- 19 Net profit on disposal of the joint venture 9 351 -
7 - Share of results of the joint venture 9 - 31
_____ _____ _____ _____
87 140 Attributable profit 745 333
_____ _____ _____ _____
Earnings per share
Including discontinued operations:
9.3c 14.9c Basic 79.2c 35.5c
9.2c 14.8c Diluted 78.9c 35.3c
Continuing operations:
8.5c 12.9c Basic 41.9c 32.2c
8.5c 12.8c Diluted 41.7c 32.0c
A As restated for the change in reporting currency from Sterling to US
Dollars on 1 January 2006 - see Note 1.
B As restated - see Note 13.
Unaudited Group Statement of Recognised Income & Expense
for the 3 months and year ended 31 December 2006
3 Months 3 Months Year ended Year ended
2005 A, B 2006 2006 2005 A, B
$m $m $m $m
(32) 16 Translation differences 59 (135)
- - Cumulative translation adjustment on disposal of the joint (14) -
venture
- (1) (Losses)/gains on cash flow hedges (4) 16
(11) (10) Actuarial gains/(losses) on defined benefit pension plans 30 (14)
2 2 Taxation on items taken directly to equity (11) 3
_____ _____ _____ _____
(41) 7 Net income/(expense) recognised directly in equity 60 (130)
87 140 Attributable profit 745 333
_____ _____ _____ _____
46 147 Total recognised income and expense 805 203
_____ _____ _____ _____
Unaudited Group Balance Sheet as at 31 December 2006
2006 2005 A, B
Notes $m $m
ASSETS
Non-current assets
Property, plant and equipment 635 589
Intangible assets 831 673
Investments 10 10
Deferred tax assets 110 148
_____ _____
1,586 1,420
Current assets
Inventories 619 557
Trade and other receivables 680 620
Current asset derivatives - 10
Cash and bank 346 151
_____ _____
1,645 1,338
Held for sale - investment in joint venture - 218
_____ _____
TOTAL ASSETS 3,231 2,976
_____ _____
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Called up equity share capital 189 203
Share premium account 329 299
Own shares (1) (4)
Accumulated profits and other reserves 1,657 937
_____ _____
Total equity 11 2,174 1,435
Non-current liabilities
Long-term borrowings 15 211
Retirement benefit obligation 154 206
Other payables due after one year 3 16
Provisions - due after one year 34 48
Deferred tax liabilities 35 48
_____ _____
241 529
Current liabilities
Bank overdrafts and loans due within one year 119 227
Trade and other payables 419 452
Provisions - due within one year 49 91
Current liability derivatives 2 29
Current tax payable 227 213
_____ _____
816 1,012
_____ _____
Total liabilities 1,057 1,541
_____ _____
TOTAL EQUITY AND LIABILITIES 3,231 2,976
_____ _____
A As restated for the change in reporting currency from Sterling to US
Dollars on 1 January - see Note 1.
B As restated - see Note 13.
Unaudited Condensed Group Cash Flow Statement for the 3 months and year ended 31
December 2006
3 Months 3 Months Year Ended Year Ended
2005 A, B 2006 2006 2005 A, B
$m $m $m $m
Net cash inflow from operating activities
114 161 Profit before taxation 550 428
(2) (2) Less: Net interest receivable (10) (9)
38 48 Depreciation, amortisation and impairment 169 180
2 1 Share based payment expense 14 13
(71) (32) Movement in working capital and provisions C (217) (240)
_____ _____ _____ _____
81 176 Cash generated from operations 506 372
2 2 Net interest received 10 9
(33) (48) Income taxes paid (144) (112)
_____ _____ _____ _____
50 130 Net cash inflow from operating activities 372 269
Cash flows from investing activities
(7) (3) Acquisitions (net of Loan Notes issued of $15 million in 2006) (85) (25)
- - Cash acquired with acquisition 2 -
- (4) Disposal of joint venture D 537 -
13 - Dividends received from the joint venture D - 25
(47) (37) Capital expenditure (222) (200)
_____ _____ _____ _____
(41) (44) Net cash used in investing activities 232 (200)
_____ _____ _____ _____
9 86 Cash flows before financing activities 604 69
Cash flows from financing activities
8 8 Proceeds from issue of ordinary share capital 16 19
(35) (39) Equity dividends paid (96) (91)
42 (18) Cash movements in borrowings (293) 34
1 (5) Settlement of currency swaps (10) (4)
_____ _____ _____ _____
16 (54) Net cash used in financing activities (383) (42)
25 32 Net increase in cash and cash equivalents 221 27
41 257 Cash and cash equivalents at beginning of period 65 44
(1) 2 Exchange adjustments 5 (6)
_____ _____ _____ _____
65 291 Cash and cash equivalents at end of period E 291 65
_____ _____ _____ _____
A As restated for the change in reporting currency from Sterling to US
Dollars on 1 January - see Note 1.
B As restated - see Note 13.
C After $33 million (2005 - $47 million) unreimbursed by insurers relating
to macrotextured knee revisions, $4 million (2005 - nil) of bid related costs,
$21 million (2005 - $7 million) of outgoings on restructuring, rationalisation
and acquisition integration costs and $26 million of pension funding in excess
of current service cost (2005 - $86 million of special pension contributions).
D Discontinued operations accounted for $537 million (2005 - $25 million) of
net cash flow from investing activities.
E Cash and cash equivalents at the end of the period are net of
overdrafts of $55 million (2005 - $86 million).
NOTES
1. Except as detailed below and in Note 13, the financial information for
the three months and year 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 2005.
As the Group's principal assets and operations are in the US and the majority of
its operations are conducted in US Dollars, the Group changed its reporting
currency from Pounds Sterling to US Dollars with effect from 1 January 2006.
This lowers the Group's exposure to currency translation risk on its revenue,
profits and equity. The Company redenominated its share capital into US Dollars
on 23 January 2006 and will retain distributable reserves and declare dividends
in US Dollars. Consequently, its functional currency became the US Dollar.
Financial information for prior periods has been restated from Pounds Sterling
into US Dollars in accordance with IAS 21.
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 2005, which have been delivered to the
Registrar of Companies. The financial information for the year ended 31
December 2006 has been extracted from the Group's unaudited financial statements
which will be delivered to the Registrar of Companies in due course.
2. In order to provide a trend measure of underlying performance,
attributable profit is adjusted to exclude items which management consider may
distort comparability. Such items arise from events or transactions that fall
within the ordinary activities of the Group but which management believes should
be separately identified to help explain trends as they are exceptional in
nature or derive from specific accounting treatments.
Adjusted earnings per share ('EPSA') has been calculated by dividing adjusted
attributable profit by the weighted (basic) average number of ordinary shares in
issue of 941 million (2005 - 938 million). The diluted weighted average number
of ordinary shares in issue is 944 million (2005 - 943 million).
3 Months 2005 3 Months 2006 Year Ended Year Ended
2006 2005
$m $m $m $m
87 140 Attributable profit 745 333
Adjustments:
3 6 Amortisation of acquisition intangibles 14 11
- 20 Bid related costs 20 -
40 - Restructuring and rationalisation costs - 84
- (19) Net profit on disposal of the joint venture (351) -
(2) - Loss/(gain) on hedge of the sale proceeds of the joint 3 (2)
venture
(12) (5) Taxation on excluded items (6) (29)
_____ _____ _____ _____
116 142 Adjusted attributable profit 425 397
_____ _____ _____ _____
12.3c 15.1c Adjusted earnings per share 45.2c 42.3c
12.3c 15.0c Adjusted diluted earnings per share 45.0c 42.1c
3. Revenue by segment for the three months and year to 31 December 2006
was as follows:
3 Months 3 Months Year Year Underlying growth
2005 2006 Ended Ended
2006 2005 in revenue
$m $m $m $m %
3 Months Year
Revenue by business segment
213 251 Reconstruction 919 829 15 10
119 141 Trauma and Clinical Therapies 497 438 17 13
164 187 Endoscopy 665 606 9 9
174 192 Advanced Wound Management 698 679 3 1
____ ____ ____ ____ ____ ____
670 771 2,779 2,552 11 8
____ ____ ____ ____ ____ ____
Revenue by geographic market
339 374 United States 1,365 1,259 10 8
203 243 Europe F 867 800 9 6
128 154 Africa, Asia, Australasia & Other America 547 493 18 12
____ ____ ____ ____ ____ ____
670 771 2,779 2,552 11 8
____ ____ ____ ____ ____ ____
F Includes United Kingdom twelve months revenue of $255 million (2005 -
$238 million) and three months revenue of $72 million (2005 - $60 million).
The Orthopaedics segment, that was reported in the full annual accounts of the
Group for the year ended 31 December 2005, has been split into two segments:
Reconstruction and Trauma and Clinical Therapies.
Underlying revenue growth is calculated by eliminating the effects of
translational currency and acquisitions. Reported growth reconciles to
underlying growth as follows:
Reported growth Constant Acquisitions Underlying
in revenue currency effect growth in
exchange effect revenue
% % % %
Year
Reconstruction 11 (1) - 10
Trauma and Clinical Therapies 13 - - 13
Endoscopy 10 (1) - 9
Advanced Wound Management 3 (2) - 1
_____ _____ _____ _____
9 (1) - 8
_____ _____ _____ _____
3 Months
Reconstruction 18 (3) - 15
Trauma and Clinical Therapies 18 (1) - 17
Endoscopy 14 (4) (1) 9
Advanced Wound Management 10 (7) - 3
_____ _____ _____ _____
15 (4) - 11
_____ _____ _____ _____
4. Trading and operating profit by segment for the three months and year to
31 December 2006 was as follows:
3 Months 2005 3 Months 2006 Year Ended Year Ended
2006 2005
$m $m $m $m
Trading Profit by business segment
54 69 Reconstruction 233 206
29 34 Trauma and Clinical Therapies 101 90
41 40 Endoscopy 123 125
32 40 Advanced Wound Management 114 96
_____ _____ _____ _____
156 183 571 517
_____ _____ _____ _____
Operating Profit by business segment
51 43 Reconstruction 200 196
29 34 Trauma and Clinical Therapies 101 90
41 40 Endoscopy 122 108
(8) 40 Advanced Wound Management 114 28
_____ _____ _____ _____
113 157 537 422
_____ _____ _____ _____
5. In 2006, $20 million was incurred in relation to the failed bid to
purchase Biomet Inc. This has been allocated in operating profit to the
Reconstruction business segment.
6. Restructuring and rationalisation costs in 2005 comprise a charge
against Advanced Wound Management of $68 million relating to the decision to
exit DERMAGRAFT(R) and related products and $16 million for the rationalisation
of Endoscopy manufacturing facilities.
7. The cumulative number of revisions of the macrotextured knee product was
999 on 31 December 2006 compared with 987 at the end of Quarter Three 2006.
This represents 34% of the total implanted. Settlements with patients have been
achieved in respect of 923 revisions (Quarter Three 2006 - 888 settlements).
Costs of $112 million are in dispute with insurers and are provided for in full.
$42 million of provision remains to cover future settlement costs.
8. Taxation of $162 million (2005 - $155 million) for the year on the
profit before restructuring and rationalisation costs, bid related costs,
amortisation of acquisition intangibles, the loss on hedge of the sale proceeds
of the joint venture and discontinued operations is at the full year effective
rate of 27.6% (2005 - 29.8%). In 2006, a taxation benefit of $6 million arose
on the bid related costs (2005 - $29 million on the restructuring and
rationalisation costs). Of the $156 million (2005 - $126 million) taxation
charge for the year $131 million (2005 - $101 million) relates to overseas
taxation.
9. On 23 February 2006 the Group sold its 50% interest in the BSN joint
venture for cash consideration of $562 million. The net profit of $351 million
on the disposal of the joint venture is after a credit of $14 million for
cumulative translation adjustments, $27 million of transaction costs, provision
for indemnity of $3 million and release of taxation provisions of $23 million.
In 2005 the share of results of the joint venture is after interest payable of
$2 million and taxation of $11 million in the nine months to 1 October 2005 and
a dividend in Quarter Four 2005 of $7 million. The Group's discontinued
operations earnings per share for the year is: basic 37.3c (2005 - 3.3c) and
diluted 37.2c (2005 - 3.3c).
10. The 2006 first interim dividend of $39 million being 4.10 US cents per
ordinary share was paid on 10 November 2006. A second interim dividend for 2006
of 6.71 US cents per ordinary share has been declared by the Board and will be
payable on 11 May 2007 to shareholders whose names appear on the register at the
close of business on 20 April 2007. All shareholders will receive the Sterling
equivalent of 3.41 pence per ordinary share. Shareholders may participate in
the dividend re-investment plan.
11. The movement in total equity for the year was as follows:
2006 2005
$m $m
Opening equity as at 1 January 1,435 1,291
Attributable profit 745 333
Equity dividends paid (96) (91)
Exchange adjustments 45 (135)
(Losses)/gains on cash flow hedges (4) 16
Actuarial gains/(losses) on defined benefit pension plans 30 (14)
Share based payment recognised in the income statement 14 13
Taxation on items taken directly to equity (11) 3
Issue of ordinary share capital 16 19
_____ _____
Closing equity 2,174 1,435
_____ _____
12. Net cash/(net debt) as at 31 December 2006 comprises:
2006 2005
$m $m
Cash and bank 346 151
Long-term borrowings (15) (211)
Bank overdrafts and loans due within one year (119) (227)
Net currency swap liabilities (2) (19)
_____ _____
210 (306)
_____ _____
The movements in the year were as follows:
Opening net debt as at 1 January (306) (232)
Cash flows before financing activities 604 69
Loan Notes issued on acquisition (15) -
Proceeds from issue of ordinary share capital 16 19
Equity dividends paid (96) (91)
Exchange adjustments 7 (71)
_____ _____
Closing net cash/(net debt) 210 (306)
_____ _____
13. The prior year Income Statements and Balance Sheets have been restated
for the following items:
a) A change in the method of calculating the elimination of intra-group
profit carried in inventory, the effect of which is to reduce the amount of
overhead expense included in inventory valuation. The impact of correcting this
error is to reduce inventory at 31 December 2005 by $53 million and trading
profit for the year ended 31 December 2005 by $9 million.
b) A reclassification of certain indirect production overhead expenses
from Selling, general and administration expenses to Cost of goods sold. There
is no effect on inventory or trading profit. In the year ended 31 December 2005
cost of goods sold is increased by $37 million and selling, general and
administrative expenses is reduced accordingly.
c) A change in accounting policy for the recognition of the
death-in-service benefits liability in the UK pension plan. Under IFRS
alternative treatments are permissable and a liability has been recorded in
order to bring the IFRS accounting policy into line with US GAAP and thereby
eliminate a reconciling item. There is an immaterial impact on trading profit
and finance income in the year ended 31 December 2005 and an increase of $16
million in Retirement benefit obligation at 31 December 2005.
A summary of the restatement to the 2005 full year and Quarter Four 2005 is as
follows:
3 Months Year Ended
2005 2005
($ m, except per share
values)
Group Income Statement
(Increase) in Cost of goods sold (9) (46)
Decrease in Selling, general and administrative expenses 9 37
_____ _____
(Decrease) in Trading profit - (9)
Decrease in Taxation - 3
_____ _____
(Decrease) in Attributable profit - (6)
_____ _____
Group Statement of Recognised Income and Expense
Decrease in Actuarial losses on defined benefit plans - 4
Increase in Translation differences - 3
(Decrease) in Taxation on items taken directly to equity - (1)
(Decrease) in Attributable profit - (6)
_____ _____
Increase in Total recognised income and expense - -
_____ _____
Earnings per Ordinary Share
Including discontinued operations:
Basic - (0.6c)
Diluted - (0.6c)
Continuing operations:
Basic - (0.6c)
Diluted - (0.6c)
Group Balance Sheet
(Decrease) in Inventories (53) (53)
(Increase) in Retirement benefit obligation (16) (16)
Increase in Deferred tax assets 17 17
Decrease in Deferred tax liabilities 5 5
_____ _____
(Decrease) in Equity (47) (47)
_____ _____
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