Final Results
Smith & Nephew Plc
07 February 2008
Smith & Nephew 2007 Preliminary Results
'Another quarter of sustained growth completing a good year. Margin improvement
on track.'
7 February 2008
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,
announces its results for the fourth quarter ended 31 December 2007.
3 months to 31 December 07 12 months to 31 December 07
$m underlying reported $m underlying reported
increase % increase/ increase % increase/
(decrease) (decrease)
% %
Revenue 1 967 8 25 3,369 10 21
Operating profit 2 154 (2) 493 (8)
Trading profit 2 222 14 21 706 17 24
EPS (cents) 3 11.1 (26) 34.2 (57)
EPSA (cents) 4 16.6 10 52.0 15
Business Unit Revenue 1
Orthopaedic - Reconstruction 374 11 49 1,240 13 35
- Trauma & CT 176 9 21 618 13 20
Endoscopy 201 7 10 732 10 13
Advanced Wound Management 216 4 13 779 5 12
Full Year Highlights
• Group revenue of $3.4 billion, double digit revenue growth for the year
• Trading profit at $706 million up 17%
• Over 1% margin improvement delivered by Earnings Improvement Programme - programme firmly on track
• EPSA increased 15% to 52.0c
• Orthopaedic Reconstruction revenue growth of 13% leads the market, for the 5th consecutive year
• Orthopaedic Trauma and Clinical Therapies revenues up 13% as our EXOGEN* Ultrasound Bone Healing System
outpaces the market
• Investment outside the US drives Endoscopy revenues up 10%
• Advanced Wound Management trading margin up 120 basis points in response to restructuring
• Second interim dividend up 10% to 7.38c per share
Q4 Highlights
• Orthopaedic Reconstruction delivers above market global growth for the 7th consecutive quarter
• US BHR* System momentum strong, US knee revenue growth recovers as salesforce focus delivers
• Endoscopy sustained growth driven by investment outside the US
• Earnings Improvement Programme achieves continued benefits
Commenting on the full year, David Illingworth, Chief Executive of Smith &
Nephew, said;
'Smith & Nephew had a strong 2007 generating double digit revenue growth for the
year. Orthopaedic Reconstruction grew 13%, with good performance in the US in
knees and the BHR System. Additionally, our Endoscopy business grew in double
digits and our Clinical Therapies business grew very substantially ahead of the
market. I am very pleased with the progress of the Earnings Improvement
Programme which is firmly on track. The outlook for 2008 is good as growth
continues across all four divisions and our focus on high growth segments and
new product launches gives us confidence for the future.'
Analyst presentation
An analyst presentation to discuss the Company's fourth quarter results will be
held at 12.30pm GMT/ 7.30am EST today, Thursday 7 February. There will be a
live webcast of this presentation on the Smith & Nephew website at
http://www.smith-nephew.com. An on demand replay will be available shortly
following the close of the call at http://www.smith-nephew.com/Q407. 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 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 presentation 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 EPS for the twelve months in the comparable period included 37.3 cents
from the gain on sale of BSN Medical.
4 Adjusted earnings per ordinary share ('EPSA') growth is as reported, not
underlying, and is stated before restructuring and rationalisation costs,
acquisition related costs, the legal settlement with the US Department of
Justice, ('the legal settlement'), 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.
5 Trading cash flow is cash generated from operations less capital expenditure
but before the Macrotextured settlements, acquisition related costs, the
legal settlement and restructuring costs.
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
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 '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.
Introduction
The fourth quarter marked a successful completion of 2007 for Smith & Nephew.
It has been a very active year across the business.
We had a very successful year in Reconstruction with the BIRMINGHAM HIP*
Resurfacing System ('BHR*') in the US, following its launch there last year, and
saw our US knee business recover in the fourth quarter. Reconstruction
continues to deliver above market growth as it has done for 5 consecutive years.
Advanced Wound Management returned to growth after several difficult years and
did so while the business was being restructured. Endoscopy earned double digit
revenue growth for the first time in five years benefiting from investment in
its business outside the US. In Trauma we now have a good product range and the
salesforce to deliver continued growth.
We launched the Earnings Improvement Programme ('EIP') in the first quarter and
by the end of the year had improved our trading margin, before the two
acquisitions made in the year, by over one per cent. We have made good progress
in the operational management of the company. We have centralised functions
within and across the four businesses in areas such as IT and procurement and
made substantial changes in manufacturing and sales force management.
As we move into 2008, our long term strategy is to concentrate on high growth
segments in our four businesses, with emphasis on meeting the needs of our
customers and acquiring businesses which fit within this strategy. Our
innovative products which enable good outcomes for patients, medical
professionals and healthcare providers alike are expected to generate continued
growth in 2008 and beyond.
Full Year Results
We grew Group revenues in the year to $3,369 million (a 21% increase in reported
revenues) with particularly strong growth in Reconstruction. Reconstruction
revenues were $1,240 million for the year, benefiting particularly from hip
resurfacing in the US and a recovery in US knee revenues in the fourth quarter.
Reported trading profit for the year was up 24% to $706 million with a 21.0%
trading margin, 50 basis points higher than 2006 as the benefits of the EIP
become clear. EIP has good momentum going into 2008.
Net interest and finance charges were $24 million as the gearing of the balance
sheet takes effect. The tax charge of $202 million reflects the effective rate
for the year of 29.6% on profit before restructuring costs, acquisition related
costs, the legal settlement and amortisation of acquisition intangibles.
Adjusted attributable profit of $480 million is before the costs of
restructuring, acquisition related costs, the legal settlement and amortisation
of acquisition intangibles and taxation thereon. Attributable profit was $316
million.
EPSA rose by 15% to 52.0c (260.0c per American Depositary Share, ('ADS')).
Reported basic earnings per share were 34.2c (171.0c per ADS). A calculation of
EPSA is provided in note 2 to the financial statements.
Trading cash flow (see note 5 above) was $602 million compared with $342 million
a year ago. This is a trading profit to cash conversion ratio of 85% compared
with 60% a year ago reflecting stronger working capital management and a
reduction in the working capital and capital expenditure requirements of the US
launches of JOURNEY* Bi-Cruciate Stabilised Knee System, LEGION* Revision Knee
System and BHR.
Fourth Quarter Results
We grew Group revenues in the quarter to $967 million (25% growth on a reported
basis), including a full quarter of Plus revenues of $98 million. This
represents underlying growth of 8% on the same period last year after adjusting
for movements in currency of 5% and acquisitions of 12%.
Trading profit in the quarter was $222 million, representing underlying growth
of 14%. Trading margin of 24.8% was 110 basis points above the same quarter
last year on a like for like basis reflecting the substantial progress in the
EIP in all four businesses. Reported trading margin at 23.0% was 70 basis
points below the comparable quarter after the expected dilution of 180 basis
points from acquisitions.
Net interest and finance charges were $13 million, reflecting the borrowings
following the Plus acquisition and the share repurchases. $45 million was
charged in the quarter in respect of the Plus integration and the utilisation of
Plus inventory stepped-up on acquisition and $15 million in respect of EIP
costs.
The tax charge, on profit before restructuring costs, acquisition related costs,
the legal settlement and amortisation of acquisition intangibles, was 28.2%.
Adjusted attributable profit, which is before the costs of restructuring,
acquisition related costs, the legal settlement and the amortisation of
acquisition intangibles and taxation thereon, was $150 million.
EPSA increased by 10% to 16.6c (83.0c per ADS) in the quarter. Basic earnings
per share was 11.1c (55.5c per ADS) compared with 14.9c (74.5c per ADS) in 2006,
which reflected the sale in the fourth quarter of 2006 of BSN Medical.
Trading cash flow of $200 million in the quarter, reflects a higher trading
profit to cash conversion rate of 90%, compared with 85% a year ago.
Orthopaedic Reconstruction
We grew Reconstruction revenues to $374 million in the quarter, an increase of
11% compared to the fourth quarter last year. This is ahead of the global market
which grew by an estimated 10%. Growth for the year was 13%, at total revenues
of $1,240 million, making this the 5th consecutive year of above market growth.
The active informed patient segment is the clear focus of this business and the
segment in which we continue to have a clear competitive advantage.
Reconstruction revenues in the US at $163 million grew by 16% in the quarter
benefiting from continued BHR* procedure adoption and a recovery in the growth
of knee revenues. Outside the US Reconstruction revenues grew by 5% as a result
of some disruption from the knee recall.
Hip revenue growth remained strong at 14% worldwide for the quarter. In the US
hip revenues grew by 27% as BHR enjoyed a continuing high level of acceptance
and benefited from the publication of the Australian registry data which showed
that the BHR has superior survival rates to all other hip resurfacing products.
Worldwide knee revenue growth was 10%, with knee growth in the US of 10% as the
balancing of the salesforce's focus in the US drove the recovery of knee
revenues. JOURNEY* Bi-Cruciate Stabilised Knee System and JOURNEY DEUCE*
Bi-Compartmental Knee System revenues both grew well in the quarter. Outside
the US knee revenues grew 10%.
A small number of Plus knee products were voluntarily recalled in the quarter as
a result of a supplier's manufacturing error which resulted in some knees being
produced with a higher than specified iron content. The results to date of
intensive testing are positive and show no clinically significant degradation of
the wear characteristics of the implants and no indications of toxicity. There
are no current findings which indicate the need for revision surgery and there
have been no reported patient incidents.
The fourth quarter's trading margin of 27% excluding Plus represents a decline
of 50 basis points. Included in the fourth quarter are a number of expenses
incurred in relation to the legal settlement with the Department of Justice.
The trading margin including Plus is 22.2%. Trading margin for the year was
23.8%, 160 basis points lower than in 2006.
In September 2007 an industry wide settlement was agreed with the US Department
of Justice. As part of the settlement a Monitor was put in place for 18 months.
We continue to work closely and co-operatively with him and his team. We are
co-operating fully with the Securities and Exchange Commission in their informal
investigation into industry wide relationships with surgeons in some European
countries.
Orthopaedic Trauma and Clinical Therapies
We grew Trauma and Clinical Therapies revenues by 9% in the quarter to $176
million (13% for the year), with growth in the US of 10% and 6% outside the US.
Fixation product revenues grew by 7% worldwide, compared to estimated market
growth of 9%, and by 9% in the US, and 5% outside the US. Revenues from TRIGEN*
INTERTAN* Nails and the PERI-LOC* Locked Plating System, including the new VLP
ranges, drove the quarter's revenue growth. We are determined to improve this
level of growth, which lags the market. We are focused on measures to improve
the quality of our service to customers, especially in the US.
Clinical Therapies revenue growth was 11% in the quarter with a strong
contribution from the EXOGEN 4000+* Ultrasound Bone Healing System which grew
revenues at three times the market growth rate. The joint fluid therapies
market continued to be impacted by reimbursement pricing pressure causing a
slowing of revenue growth in this market segment. Clinical Therapies as a whole
continued to gain market share throughout 2007.
Trading margin for the year was 20.7%, 110 basis points over 2006, as the
benefits of the EIP driven reorganisation begin to be realised. In the quarter
trading margin was 26.4% excluding Plus (26.7% including Plus).
Endoscopy
We grew Endoscopy revenues to $201 million in the fourth quarter, an increase of
7%, which resulted in full year growth of 10%. This is the first year of double
digit revenue growth in Endoscopy for five years. This growth has been fuelled
by investment outside the US in the sales force and marketing, and by the
increasing focus on arthroscopy. Revenues in the quarter grew by 10% outside the
US and 4% in the US. We continue to see very good opportunities in the markets
in Europe and Asia.
Arthroscopy revenues grew in the quarter by 7%, with strong growth in all
segments, behind our current estimate of market growth. Repair revenues at 9%
continue to outpace resection growth where revenues grew by mid single digits
this quarter.
Digital Operating Room (DOR) and Visualisation revenues grew by 6% in the
quarter. The new HD camera, launched earlier in the year, has been well received
in the market.
The trading margin of 23.9% earned in the fourth quarter is a just under two
percent improvement on the same quarter last year, reflecting the enduring
benefit of the successful manufacturing reorganisation completed earlier in the
year. Trading margin for the year was 20.1%, 110 basis points over 2006.
Advanced Wound Management
In 2007 a series of management actions have been taken to restructure Advanced
Wound Management. These actions include the announcement of the move to China
of a significant proportion of manufacturing, the renegotiation of supply
contracts and the elimination of layers of management. Momentum is now building
in this business and we continue to see substantial potential.
We grew revenues by 4% in the quarter (5% for the year) to $216 million. US
revenue growth was 5%. Outside the US revenues grew by 4% against a background
of tighter European healthcare budgets.
Revenues in the exudate management segment grew well above the market at 14% in
the quarter benefiting from the launch of ALLEVYN* Ag Absorbent Silver Barrier
Dressing. Infection management grew more slowly as a result of lower US demand.
The surgical segment continued to grow strongly, from a small base, driven by
the VERSAJET* Hydrosurgery System and achieved over 50% growth in the quarter.
BlueSky has continued to make good progress ahead of the planned launch in the
first quarter of 2008.
The trading margin of 21.6%, excluding the impact of BlueSky, is 80 basis points
ahead of the same quarter in 2006. Trading margin including Bluesky is 20.4%.
Trading margin for the year was 17.5%, 120 basis points over last year as
management actions taken as part of the EIP realise benefits.
Share buy-back programme
Under the two year share buy-back programme of up to $1.5 billion announced last
year we had bought back a total of 52 million shares at a cost of $640 million
at the end of the year. The board has reviewed this programme in the light of
current market conditions and opportunities. In order to preserve flexibility
the Board currently expects to complete the programme over a total of three
years.
Outlook
The revenue outlook for 2008 for both the individual businesses and for the
business as a whole continues to be favourable. Underlying demographic trends
are creating strong demand and our innovative products and customer focussed
approach to the market enables us to meet this demand.
In addition the EIP is progressing well and we continue to expect to achieve, on
average, at least a 1% improvement in trading margin per annum, before the
impact of acquisitions and any change in pricing environment, between the start
of the programme and the end of 2010.
There are several factors driving our confidence in Smith & Nephew's continued
growth, including the growth in demand for our current products, our continued
emphasis on new products, the Plus and BlueSky acquisitions and the good
momentum from our EIP. Smith & Nephew faces 2008 and beyond with confidence.
SMITH & NEPHEW plc
2007 QUARTER FOUR AND FULL YEAR RESULTS
Unaudited Group Income Statement for the 3 months and year ended 31 December 2007 (A)
Year Year
3 Months 3 Months Ended Ended
2006 2007 Notes 2007 2006
$m $m $m $m
771 967 Revenue 3 3,369 2,779
(221) (292) Cost of goods sold (994) (769)
(362) (479) Selling, general and administrative expenses (1,740) (1,353)
(31) (42) Research and development expenses (142) (120)
______ ______ ______ ______
157 154 Operating profit 4 493 537
4 2 Interest receivable 10 19
(2) (18) Interest payable (40) (9)
2 3 Other finance income 6 3
______ ______ ______ ______
161 141 Profit before taxation 469 550
(40) (40) Taxation 11 (153) (156)
______ ______ ______ ______
121 101 Profit from continuing operations 316 394
Discontinued operations: Net profit on disposal of
the joint venture
19 - 12 - 351
______ ______ ______ ______
140 101 Attributable profit (B) 316 745
______ ______ ______ ______
Earnings per share (B) 2
Including discontinued operations:
14.9c 11.1c Basic 34.2c 79.2c
14.8c 11.1c Diluted 34.1c 78.9c
Continuing operations:
12.9c 11.1c Basic 34.2c 41.9c
12.8c 11.1c Diluted 34.1c 41.7c
A The presentation of the income statement has been changed - see Note 1. Trading profit is now included in
Note 4 and adjusted earnings per ordinary share is included in Note 2.
B Attributable to the equity holders of the parent.
Unaudited Group Statement of Recognised Income & Expense for the 3 months and year ended 31 December 2007
Year Year
3 Months 3 Months Ended Ended
2006 2007 2007 2006
$m $m $m $m
18 9 Translation differences 47 59
- - Cumulative translation adjustment on disposal of the joint - (14)
venture
(1) (2) Losses on cash flow hedges (14) (4)
(10) (66) Actuarial (losses)/gains on defined benefit pension plans (22) 30
2 22 Taxation on items taken directly to equity 8 (11)
______ ______ ______ ______
9 (37) Net income/(expense) recognised directly in equity 19 60
140 101 Attributable profit 316 745
______ ______ ______ ______
149 64 Total recognised income and expense(B) 335 805
______ ______ ______ ______
Unaudited Group Balance Sheet as at 31 December 2007
Notes 2007 2006
$m $m
ASSETS
Non-current assets
Property, plant and equipment 743 635
Goodwill 1,198 640
Intangible assets 449 191
Investments 9 10
Investment in associates 11 -
Deferred tax assets 135 110
_______ _______
2,545 1,586
Current assets
Inventories 837 619
Trade and other receivables 898 680
Cash and bank 170 346
_______ _______
1,905 1,645
_______ _______
TOTAL ASSETS 4,450 3,231
_______ _______
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Called up equity share capital 190 189
Share premium account 356 329
Treasury shares 14 (637) (1)
Accumulated profits and other reserves 1,907 1,657
_______ _______
Total equity 15 1,816 2,174
Non-current liabilities
Long-term borrowings 36 15
Retirement benefit obligation 184 154
Other payables due after one year 47 3
Provisions due after one year 33 34
Deferred tax liabilities 63 35
_______ _______
363 241
Current liabilities
Bank overdrafts and loans due within one year 1,442 119
Trade and other payables 545 421
Provisions due within one year 80 49
Current tax payable 204 227
_______ _______
2,271 816
_______ _______
Total liabilities 2,634 1,057
_______ _______
TOTAL EQUITY AND LIABILITIES 4,450 3,231
_______ _______
Unaudited Condensed Group Cash Flow Statement for the 3 months and year ended 31 December 2007
Year Year
3 Months 3 Months Ended Ended
2006 2007 2007 2006
$m $m $m $m
Net cash inflow from operating activities
161 141 Profit before taxation 469 550
(2) 16 Net interest payable/(receivable) 30 (10)
48 71 Depreciation, amortisation and impairment 237 169
- 19 Utilisation of Plus inventory stepped-up on 64 -
acquisition
1 4 Share based payment expense 23 14
(32) (29) Movement in working capital and provisions (130) (217)
_______ _______ _______ _______
176 222 Cash generated from operations (C) 693 506
2 (16) Net interest (paid)/received (30) 10
(48) (57) Income taxes paid (225) (144)
_______ _______ _______ _______
130 149 Net cash inflow from operating activities 438 372
Cash flows from investing activities
(3) (44) Acquisitions (D) (781) (83)
(4) - Disposal of joint venture (E) - 537
(37) (55) Capital expenditure (194) (222)
_______ _______ _______ _______
(44) (99) Net cash used in investing activities (975) 232
86 50 Cash flow before financing activities (537) 604
Cash flows from financing activities
8 7 Proceeds from issue of ordinary share capital 28 16
(39) (42) Equity dividends paid (105) (96)
(18) 200 Cash movements in borrowings 1,078 (293)
- (164) Purchase of treasury shares (640) -
(5) (4) Settlement of currency swaps (14) (10)
_______ _______ _______ _______
(54) (3) Net cash used in financing activities 347 (383)
32 47 Net (decrease)/increase in cash and cash equivalents (190) 221
257 59 Cash and cash equivalents at beginning of period 291 65
2 3 Exchange adjustments 8 5
_______ _______ _______ _______
291 109 Cash and cash equivalents at end of period (F) 109 291
_______ _______ _______ _______
C After a net $1 million (2006 - $33 million) unreimbursed by insurers relating to macrotextured knee revisions,
$33 million (2006 - $4 million) of acquisition related costs, $39 million (2006 - $21 million) of outgoings on
restructuring and rationalisation costs and a legal settlement of $30 million (2006 - nil).
D Net of $18 million of cash and overdrafts acquired with Plus in 2007 (2006 - $2 million cash acquired with
acquisitions) and Loan Notes issued of $15 million in 2006.
E Discontinued operations accounted for nil (2006 - $537 million) of net cash flow from investing activities.
F Cash and cash equivalents at the end of the period are net of overdrafts of $61 million (2006 - $55 million).
NOTES
1. 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 2006.
In the current year, the Group has altered the presentation of its income statement to present items by
function as permitted by IAS 1. Previously reported quarters in 2007 and 2006 have been shown in this
format in Appendix 1.
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. The financial information for the year ended 31 December 2007 has been
extracted from the Group's unaudited financial statements which will be delivered to the Registrar of
Companies in due course.
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 923 million (2006 - 941 million). The diluted weighted average number of
ordinary shares in issue is 928 million (2006 - 944 million).
Year Year
3 Months 3 Months Ended Ended
2006 2007 Notes 2007 2006
$m $m $m $m
140 101 Attributable profit 316 745
Adjustments:
- 15 Restructuring and rationalisation costs 5 42 -
20 45 Acquisition related costs 7 111 20
- - Legal settlement 9 30 -
6 8 Amortisation of acquisition intangibles 30 14
(19) - Net profit on disposal of the joint venture - (351)
- - Loss on hedge of the sale proceeds of the joint venture - 3
(5) (19) Taxation on excluded items (49) (6)
_______ _______ _______ _______
142 150 Adjusted attributable profit 480 425
_______ _______ _______ _______
15.1c 16.6c Adjusted earnings per share 52.0c 45.2c
15.0c 16.4c Adjusted diluted earnings per share 51.7c 45.0c
3. Revenue by segment for the three months and year to 31 December 2007 was as follows:
Year Year Underlying
3 Months 3 Months Ended Ended growth
2006 2007 2007 2006 in revenue
$m $m $m $m %
3 Months Year
Revenue by business segment
251 374 Reconstruction 1,240 919 11 13
146 176 Trauma and Clinical Therapies 618 514 9 13
182 201 Endoscopy 732 648 7 10
192 216 Advanced Wound Management 779 698 4 5
_________ _________ _________ _________ _________ _________
771 967 3,369 2,779 8 10
_________ _________ _________ _________ _________ _________
Revenue by geographic market
374 418 United States 1,550 1,365 10 12
243 359 Europe (G) 1,177 867 7 8
154 190 Africa, Asia, Australasia & Other 642 547 5 9
America
_________ _________ _________ _________ _________ _________
771 967 3,369 2,779 8 10
_________ _________ _________ _________ _________ _________
G Includes United Kingdom twelve months revenue of $309 million (2006 - $255 million) and three months
revenue of $90 million (2006 - $72 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:
Constant
Reported currency Underlying
growth in exchange Acquisitions growth in
revenue effect effect revenue
% % % %
Year
Reconstruction 35 (4) (18) 13
Trauma and Clinical Therapies 20 (2) (5) 13
Endoscopy 13 (3) - 10
Advanced Wound Management 12 (6) (1) 5
_______ _______ _______ _______
21 (4) (7) 10
_______ _______ _______ _______
3 Months
Reconstruction 49 (7) (31) 11
Trauma and Clinical Therapies 21 (4) (8) 9
Endoscopy 10 (3) - 7
Advanced Wound Management 13 (7) (2) 4
_______ _______ _______ _______
25 (5) (12) 8
_______ _______ _______ _______
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:
Year Year
Ended Ended
3 Months 3 Months 2007 2006
2006 2007
Notes
$m $m $m $m
157 154 Operating profit 493 537
- 15 Restructuring and rationalisation costs 5 42 -
20 45 Acquisition related costs 7 111 20
- - Legal settlement 9 30 -
6 8 Amortisation of acquisition intangibles 30 14
_______ _______ _______ _______
183 222 Trading profit 706 571
_______ _______ _______ _______
Trading and operating profit by segment for the three months and year to 31 December 2007 were as
follows:
Trading Profit by business segment
69 83 Reconstruction 295 233
34 47 Trauma and Clinical Therapies 128 101
40 48 Endoscopy 147 123
40 44 Advanced Wound Management 136 114
_______ _______ _______ _______
183 222 706 571
_______ _______ _______ _______
Operating Profit by business segment
43 37 Reconstruction 131 200
34 41 Trauma and Clinical Therapies 112 101
40 47 Endoscopy 141 122
40 29 Advanced Wound Management 109 114
_______ _______ _______ _______
157 154 493 537
_______ _______ _______ _______
5. Restructuring and rationalisation costs comprise $45 million relating to the earnings improvement
programme, mainly redundancy and consultancy costs less $3 million relating to the write back of
prior year's 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
is being 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 were $200 million and $23
million respectively. The cost of the acquisition has been allocated on a provisional basis to the assets
acquired and liabilities assumed on acquisition.
Book Provisional Net Book
value adjustments value
$m $m $m
Property, plant and equipment 81 (2) 79
Intangible assets 10 232 242
Deferred tax assets 19 (19) -
Other non-current assets 6 4 10
Inventories 105 67 172
Other current assets 128 - 128
Deferred tax liabilities (4) (34) (38)
Non-current liabilities (160) (18) (178)
Current liabilities (152) (2) (154)
Less: Equity attributable to minority interests (4) - (4)
_______ _______ _______
29 228 257
_______ _______
Goodwill on acquisition 463
_______
720
_______
Cash consideration 726
Acquisition costs 12
Net cash acquired in Plus (18)
_______
Total purchase consideration 720
Add: net debt acquired with Plus (reported in liabilities 181
above)
Less: acquisition costs (12)
_______
889
_______
In Quarter Four 2007 $39 million was paid to acquire certain Plus minority interests and distributors.
7. In 2007, acquisition related costs comprise $51 million relating to Plus integration, $64 million relating
to the utilisation of the Plus inventory stepped-up to fair value on acquisition less a release of $4
million relating to an over provision of bid related costs from 2006. In 2006, acquisition related costs
comprised a charge of $20 million relating to the failed bid to purchase Biomet Inc.
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 $50 million, being the fair value of probable consideration of $49 million and $1 million of
acquisition costs. Of the $50 million, $26 million has been provisionally allocated to intangible assets,
$10 million to deferred taxation liabilities and $34 million to goodwill. The $26 million of intangible
assets represents unpatented technology.
9. The legal settlement of $30 million in 2007 relates to the civil settlement agreed with the US Department
of Justice following an industry wide investigation.
10. The cumulative number of revisions of the macrotextured knee product was 1,029 on 31 December 2007
compared with 1,026 at the end of Quarter Three 2007. This represents 35% of the total implanted.
Settlements with patients have been achieved in respect of 977 revisions (Quarter Three 2007 - 958
settlements). The provision increased in Quarter Two 2007 by $22 million, offset in the income statement
by a recovery of $22 million. $40 million of provision remains to cover future settlement costs.
11. Taxation of $202 million (2006 - $162 million) for the year on the profit before restructuring and
rationalisation costs, acquisition related costs, the legal settlement, the loss on hedge of the sale
proceeds of the joint venture, discontinued operations and amortisation of acquisition intangibles is at
the full year effective rate of 29.6% (2006 - 27.6%). In 2007, a taxation benefit of $49 million arose
on restructuring and rationalisation costs, acquisition related costs, the legal settlement and
amortisation of acquisition intangibles (2006 - $6 million on acquisition related costs). Of the $153
million (2006 - $156 million) taxation charge for the year $114 million (2006 - $131 million) relates to
overseas taxation.
12. 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 $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 a release of taxation provisions of $23 million. The Group's
discontinued operations earnings per share for the year in 2006 was basic 37.3c and diluted 37.2c.
13. The 2007 first interim dividend of $42 million being 4.51 US cents per ordinary share was paid on 9
November 2007. A second interim dividend for 2007 of 7.38 US cents per ordinary share has been declared
by the Board and will be payable on 9 May 2008 to shareholders whose names appear on the register at the
close of business on 18 April 2008. The Sterling equivalent per ordinary share will be set on 18 April
2008. Shareholders may elect to receive their dividend in either Sterling or US Dollars and the last day
for election will be 16 April 2008. Shareholders may participate in the dividend re-investment plan.
14. As at 31 December 2007, 51,955,000 ordinary shares had been purchased, under the share buy back programme
that commenced in February 2007, at a cost of $640 million.
15. The movement in total equity for the year was as follows:
2007 2006
$m $m
Opening total equity as at 1 January 2,174 1,435
Attributable profit 316 745
Equity dividends paid (104) (96)
Exchange adjustments 47 45
Losses on cash flow hedges (14) (4)
Actuarial (losses)/gains on defined benefit pension plans (22) 30
Share based payment recognised in the income statement 23 14
Taxation on items taken directly to equity 8 (11)
Purchase of treasury shares (640) -
Issue of ordinary share capital 28 16
_______ _______
Closing total equity as at 31 December 1,816 2,174
_______ _______
16. (Net debt)/net cash as at 31 December 2007 comprises:
2007 2006
$m $m
Cash and bank 170 346
Long-term borrowings (36) (15)
Bank overdrafts and loans due within one year (1,442) (119)
Net currency swap liabilities (H) (2) (2)
_________ _______
(1,310) 210
_________ _______
The movements in the year were as follows:
Opening net cash/(net debt) as at 1 January 210 (306)
Cash flow before financing activities (537) 604
Loan Notes issued on acquisition - (15)
New finance leases (7) -
Facility fee paid (6) -
Debt and finance leases acquired with Plus (181) -
Proceeds from issue of ordinary share capital 28 16
Purchase of treasury shares (640) -
Equity dividends paid (105) (96)
Exchange adjustments (72) 7
________ _____
Closing (net debt)/net cash as at 31 December (1,310) 210
________ _____
H Net currency swap liabilities of $2 million (2006 - $2 million) comprise $2 million (2006 - $2
million) of current liability derivatives within trade and other payables.
APPENDIX 1
Unaudited Group Income Statement for each Quarter of 2006 and up to Quarter Three of 2007
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2006 2006 2006 2007 2007 2007
$m $m $m $m $m $m $m
Revenue 643 686 679 771 744 813 845
Cost of goods sold (175) (188) (185) (221) (193) (227) (282)
Selling, general and administrative expenses (317) (338) (336) (362) (392) (395) (474)
Research and development expenses (29) (30) (30) (31) (32) (32) (36)
_______ _______ _______ _______ _______ _______ _______
Operating profit 122 130 128 157 127 159 53
Interest receivable 7 4 4 4 4 3 1
Interest payable (4) (1) (2) (2) (2) (6) (14)
Other finance income/(costs) (2) 2 1 2 2 2 (1)
_______ _______ _______ _______ _______ _______ _______
Profit before taxation 123 135 131 161 131 158 39
Taxation (38) (39) (39) (40) (40) (47) (26)
_______ _______ _______ _______ _______ _______ _______
Profit from continuing operations 85 96 92 121 91 111 13
Discontinued operations: Net profit on disposal of
the joint venture 332 - - 19 - - -
_______ _______ _______ _______ _______ _______ _______
Attributable profit (J) 417 96 92 140 91 111 13
_______ _______ _______ _______ _______ _______ _______
Earnings per share (J)
Including discontinued operations:
Basic 44.3c 10.2c 9.8c 14.9c 9.7c 11.8c 1.6c
Diluted 44.1c 10.2c 9.8c 14.8c 9.6c 11.8c 1.6c
Continuing operations:
Basic 9.0c 10.2c 9.8c 12.9c 9.7c 11.8c 1.6c
Diluted 8.9c 10.2c 9.8c 12.8c 9.6c 11.8c 1.6c
J Attributable to the equity holders of the parent.
Operating profit reconciles to trading profit (as defined in Note 4) as follows:
Operating profit 122 130 128 157 127 159 53
Restructuring and rationalisation costs - - - - 17 6 4
Acquisition related costs - - - 20 - (1) 67
Legal settlement - - - - - - 30
Amortisation of acquisition intangibles 2 2 4 6 4 3 15
_______ _______ _______ _______ _______ _______ _______
Trading profit 124 132 132 183 148 167 169
_______ _______ _______ _______ _______ _______ _______
This information is provided by RNS
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