27th Oct 2005 07:02
Smith & Nephew Plc27 October 2005 Positive outlook after slower quarter 27 October 2005 Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,announced today its results for the third quarter ended 1 October 2005. Q3 Highlights • Group revenue up 10%* to £341m • Orthopaedics revenue up 15%*, US up 16%* • Endoscopy revenue up 8%* • Wound Management revenue up 3%* • Trading profit up 11%, margin achieved of 19% • EPSA up 10%** to 5.41p • BSN Medical realisation underway • Decision to exit DERMAGRAFT(TM) • Dollar reporting in 2006 Commenting on the third quarter and the outlook for the year, Sir ChristopherO'Donnell, Chief Executive of Smith & Nephew, said: "Although our growth in revenue and profits slowed slightly in the thirdquarter, Orthopaedics continued to grow at a market leading rate. We areconfirming our guidance of EPSA growth for the year of 12% - 13% as ourbusinesses continue to introduce outstanding new products and to invest in theirsales channels. We have decided to exit DERMAGRAFT(TM) and related products and are announcing thisto affected employees today, and have therefore brought the timing of thisannouncement forward. The decision to exit DERMAGRAFT(TM), along with that torealise our investment in BSN Medical, will improve the growth profile of theGroup. Additionally we are looking to align our reporting currency with the maintrading currency of our business and accordingly are moving to US dollarreporting in 2006." A presentation and conference call for analysts to discuss the company's thirdquarter results will be held at 12.00 noon BST / 7.00am EST tomorrow, Thursday27 October. The conference call will be broadcast live on the web and will beavailable on demand shortly following the close of the meeting at http://www.smith-nephew.com/Q305. If interested parties are unable to connect to theweb, a listen-only service is available by calling 020 7365 1834 in the UK or718 354 1158 in the US. Analysts should contact Julie Allen on +44 (0) 20 79602254 or by email at [email protected] 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, the acquisition of MMT in Q1 last year and the effect of one less sales day in the first half of the year. See note 3. ** EPSA is stated before restructuring and rationalisation costs, taxation thereon and amortisation of acquisition intangibles. See note 2. Enquiries Investors Peter Hooley On 27 October Smith & Nephew Finance Director +1 (901) 399 1706 From 28 October +44 (0) 20 7401 7646 Investors / Media Liz Hewitt On 27 October Smith & Nephew Group Director Corporate Affairs +1 (901) 399 1985 From 28 October +44 (0) 7973 909 418 Financial Dynamics David Yates - London +44 (0) 20 7831 3113Jonathan Birt - New York +1 (212) 850 5634 Introduction As announced in our trading update on 13 September, trading conditions thisquarter have been tighter. Orthopaedics achieved 15% sales growth in thequarter, ahead of the market in all areas except knees in the US, despitetighter market conditions and the impact of Hurricane Katrina. Endoscopy hascontinued its momentum and generated 8% sales growth in the quarter, driven byshoulder and knee repair revenues. Advanced Wound Management revenues grew 3% asit continued to experience distributor de-stocking in the US. Encouragingly wehave seen no change in the overall pricing trends of our products and thefundamental drivers of our markets remain strong. During the quarter we announced our intention to divest BSN Medical, our jointventure with Beiersdorf AG. This is progressing well, with strong interestexpressed by a large number of potential buyers, and we anticipate completingthe sale in the early part of 2006. We are also announcing today that we have received a "non-approvable" letterfrom the FDA in relation to the marketing of DERMAGRAFT(TM) in the US for thetreatment of venous leg ulcers, as a result of which we have taken the decisionto exit from DERMAGRAFT(TM) and related products. This is expected to benefittrading profits in 2006 by approximately £7m. Third Quarter Results Underlying revenue growth in the quarter was 10% relative to the third quarterlast year. Translational currency added 1% to revenue growth, resulting inreported third quarter revenue increasing by 11% to £341m. Trading profit in the quarter was £65 1/2m, a trading margin of 19%. Tax thereonamounted to £19 1/2m, an effective tax rate of 30%, and the share of after taxresults of the BSN joint venture was £5m; resulting in attributable profitbefore restructuring and rationalisation costs, taxation thereon andamortisation of acquisition intangibles of £51m. Attributable profit afterrestructuring and rationalisation costs and related tax relief, and theamortisation of acquisition intangibles was £35m. Earnings per share, before restructuring and rationalisation costs, taxationthereon and amortisation of acquisition intangibles ("EPSA"), was 5.41p (27.05pper American Depositary Share, "ADS"), a 10% increase on the third quarter lastyear. A reconciliation of EPSA to reported earnings per share is given in note2 to the accounts. Restructuring and rationalisation costs in the quarter comprise £8 1/2m for therationalisation of manufacturing facilities at Endoscopy announced with theresults for the second quarter, and £15 1/2m of asset impairment following thedecision to exit from DERMAGRAFT(TM) and related products. Orthopaedics Orthopaedics revenues grew by 15% relative to the third quarter last year to£168m. Revenue growth in the US was 16% and outside the US 13%. In the US our knee products experienced competition ahead of the launch of twonew OXINIUM(TM) products; a revision knee (LEGION(TM)) in the fourth quarter and ananatomic knee (JOURNEY(TM)) in 2006. Knee revenues grew 13%, 10% in the US and 18%outside the US. Hip revenues grew by 10% both in and outside the US, ahead of the market, withthe BHR(TM) product continuing to provide momentum to revenues outside the US. TheFDA Advisory Panel review during the quarter of our BHRa product recommendedconditional approval to the FDA for use in the US. Trauma revenue growth was 15%. Within the US, trauma revenues increased by 19%,ahead of the market, and continued to benefit from the establishment of adedicated sales force and the launch of the PERI-LOC(TM) locking compression platesystem earlier this year. Outside the US, trauma growth improved to 10%. Clinical Therapy revenues, comprising the EXOGENa ultrasound bone healing andSUPARTZ(TM) joint fluid therapy products, continued to benefit from previous salesforce investment and grew 35% compared with the same quarter last year. Endoscopy Endoscopy revenue growth was 8% to £79m; with US growth of 5% and growth outsidethe US of 12%. Knee and shoulder repair revenues continued strongly with growth of 23%,benefiting from new product introductions. Blade revenues grew 6% andvisualisation and digital operating room revenues grew 2%, as did radiofrequency, including spine. Our patent dispute with ArthroCare was settled during the quarter enabling us tomarket again a full range of arthroscopic radiofrequency products. These,together with our new camera, pump and hip arthroscopy products, provide addedmomentum for growth next year. In order to improve our competitive position and lower the overall costs ofproduction we announced with our second quarter results the closure of one ofEndoscopy's US manufacturing facilities. A rationalisation charge of £8 1/2m hasbeen taken in this quarter and the project is progressing on schedule. Advanced Wound Management Advanced Wound Management revenues grew 3%, compared to the third quarter lastyear, to £94m. Our leading products ALLEVYN(TM) and ACTICOAT(TM) revenues grew by 12%and 25% respectively in the quarter. Revenues in the US declined by 6%,reflecting lower intermediate products sales and a continued contraction ofdistributors' inventories. Clearer supply chain visibility leads us to believethat this inventory contraction is nearing completion but not sufficiently tocompletely reverse the decline in the fourth quarter. Encouragingly end usertraced sales improved to 8% in the quarter. Outside the US revenue growth was6% reflecting healthcare spending pressures holding back market growth in partsof Europe. We recently received a 'non-approvable' letter from the FDA relating to our PreMarketing Approval supplement for the use of DERMAGRAFT(TM) for venous leg ulcerswhich would require further clinical work for re-submission. This work woulddelay approval for 18-24 months, with a consequent delay in achieving economicviability. On a global basis the lack of clear regulatory frameworks for tissueengineered products has resulted in delays that have become commerciallyunacceptable. After careful consideration we have now decided to exit themanufacture and sale of DERMAGRAFT(TM) and related products. We have thereforetaken a £15 1/2m asset impairment charge this quarter and will take a £25m chargein the fourth quarter to cover the cash cost of exit; both charges to be takenas restructuring costs. Revenues and trading profit of Advanced Wound Managementwill be largely unaffected in 2005. In 2006 we expect revenues will be adverselyaffected by around £14m, whereas we expect trading profits will benefit byapproximately £7m from cost elimination. Year to Date Results Underlying revenue growth for the year to date was 11%. Reported revenue growthwas 12%, after adjusting for the benefit of the acquisition of MMT in the firstquarter last year offset by one less sales day in the first half of the year,and the benefit of 1% positive translational currency in the year to date. Trading profit for the year to date was £201m, with margins 0.7% ahead of a yearago at 19.7% and interest income and finance costs net to £3m positive.Taxation thereon amounted to £60 1/2m and the share of the after tax results ofthe BSN joint venture was £12 1/2m, resulting in attributable profit beforerestructuring and rationalisation costs, taxation thereon and amortisation ofacquisition intangibles of £156m. Attributable profit after restructuring andrationalisation costs, and related tax relief thereon, and the amortisation ofacquisition intangibles was £137m. EPSA was 16.63p (83.15p per ADS) for the year to date, an increase of 14%compared to the same period last year. Reported earnings per share, includingdiscontinued operations, was 14.56p (72.80p per ADS). A reconciliation ofreported earnings per share to EPSA is provided in note 2 to the accounts. Restructuring and rationalisation costs comprise £8 1/2m for the rationalisationof manufacturing facilities at Endoscopy and £15 1/2m of asset impairmentfollowing the decision to exit from DERMAGRAFT(TM) and related products. Operating cash flow, defined as cash generated from operations less capitalexpenditure, was £74m. This is a trading profit to cash conversion ratio of47%, before rationalisation and integration expenditure of £2m and £19m offunding of settlement payments to patients in respect of macrotextured revisionswhich are not being reimbursed by insurers, and compares with 47% a year ago. Had our results been reported in US dollars translated at average rates ofexchange, reported revenues and adjusted earnings per ADS would have been asfollows: Third Quarter Year to DateReported revenues $612m +10% $1882m +13%Adjusted earnings per ADS $0.48 +9% $1.53 +15% Dollar reporting The international spread of the Group's businesses, with approximately 50% ofrevenues, trading profits and operating assets in US dollars, substantiallyexposes the Group to currency movements relative to its sterling capital base.We have decided therefore to redenominate the functional currency of the parentcompany into US dollars and produce group accounts in US dollars from thebeginning of 2006. Appendix C contains a restatement of this year's and last year's quarterlyresults as if they had been consolidated in US dollars at the average exchangerates then prevailing. An extraordinary general meeting will be convened inDecember to redenominate the share capital of the parent company into USdollars. Future dividends will be declared in US dollars, but paid to UKresidents in sterling. The Group's shares will continue to be listed on theLondon Stock Exchange, priced in sterling, and on the NYSE, priced in dollars. Outlook For the full year we expect Orthopaedics to achieve revenue growth of around17%, driven by sales force investment and our new product pipeline. We expectEndoscopy to achieve full year revenue growth of around 8% as new productscontinue to drive revenues. We expect revenue growth of around 5% for AdvancedWound Management as some of the adverse factors that have affected revenues inthe US abate. Translational currency should add 1 1/2% to revenue and we expect atrading margin of 20 1/2% for the full year. As previously indicated EPSA growthfor the year before restructuring and rationalisation costs is expected to be inthe range of 12% - 13%. The fundamentals for each of our businesses remain strong and we anticipatecontinuing growth in the orthopaedic market, particularly in the US. We view2006 positively with continued strong revenue growth in Orthopaedics andimproved revenue growth in Endoscopy. In Advanced Wound Management the exit fromDERMAGRAFT(TM) will reduce the revenue growth rate, but will contribute to anexpected Group margin enhancement of around 1 1/2% for 2006. Underlying EPSAgrowth for 2006 is expected to be around mid-teens, before any dilution arisingfrom the realisation of our investment in BSN Medical and the change to dollarreporting. About us Smith & Nephew is a global medical technology business, specialising inOrthopaedics, Endoscopy and Advanced Wound Management products. Smith & Nephewis a global leader in arthroscopy and advanced wound management and is one ofthe fastest growing global orthopaedics companies. Smith & Nephew is dedicated to helping improve people's lives. The companyprides itself on the strength of its relationships with its surgeons andprofessional healthcare customers, with whom its name is synonymous with highstandards of performance, innovation and trust. The company has over 8,500employees and operates in 33 countries around the world generating annual salesof £1.25 billion. Forward-Looking Statements This press release contains certain "forward-looking statements" within themeaning of the US Private Securities Litigation Reform Act of 1995. Inparticular, statements regarding expected revenue growth and operating marginsdiscussed under "Outlook" are forward-looking statements as are discussions ofour 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 identifyforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other important factors (including, but notlimited to, the outcome of litigation, claims and regulatory approvals) thatcould cause the actual results, performance or achievements of Smith & Nephew,or industry results, to differ materially from any future results, performanceor achievements expressed or implied by such forward-looking statements. Pleaserefer to the documents that Smith & Nephew has filed with the U.S. Securitiesand Exchange Commission under the U.S. Securities Exchange Act of 1934, asamended, including Smith & Nephew's most recent annual report on Form 20F, for adiscussion of certain of these factors. All forward-looking statements in this press release are based on informationavailable to Smith & Nephew as of the date hereof. All written or oralforward-looking statements attributable to Smith & Nephew or any person actingon behalf of Smith & Nephew are expressly qualified in their entirety by theforegoing. Smith & Nephew does not undertake any obligation to update or reviseany forward-looking statement contained herein to reflect any change in Smith &Nephew's expectation with regard thereto or any change in events, conditions orcircumstances on which any such statement is based. (TM) Trademark of Smith & Nephew. Certain names registered at the US Patent andTrademark Office. Unaudited Group Income Statement for the 3 months and 9 months to 1 October 2005 3 Months 3 Months 9 Months 9 Months 2004 A 2005 2005 2004 A Notes £m £m £m £m 307.1 341.2 Revenue 3 1,022.3 916.3 (81.1) (89.4) Cost of goods sold (262.8) (246.4) (150.1) (171.1) Selling, general and administrative expenses (511.1) (446.1) (16.8) (15.3) Research and development expenses (47.4) (49.4) _____ _____ _____ _____ 59.1 65.4 Trading profit 3 201.0 174.4 - (23.8) Restructuring and rationalisation costs 5 (23.8) - (1.5) (1.4) Amortisation of acquisition intangibles 6 (4.6) (3.1) _____ _____ _____ _____ 57.6 40.2 Profit before tax, financing & share of results of the 172.6 171.3 joint venture 5.1 6.0 Interest receivable 13.9 15.0 (4.8) (4.4) Interest payable (9.8) (12.5) (0.4) (1.5) Other finance costs (1.0) (1.3) _____ _____ _____ _____ 57.5 40.3 Profit before tax and share of results of the joint 175.7 172.5 venture (16.8) (10.4) Taxation 7 (51.7) (50.4) _____ _____ _____ _____ 40.7 29.9 Profit before share of results of the joint venture 124.0 122.1 3.9 4.8 Discontinued operations - Share of results of the joint 8 12.6 11.4 venture _____ _____ _____ _____ 44.6 34.7 Attributable profit 136.6 133.5 _____ _____ _____ _____ Earnings per share 2 Including discontinued operations: 4.76p 3.68p Basic 14.56p 14.28p 4.73p 3.68p Diluted 14.47p 14.19p Excluding discontinued operations: 4.34p 3.18p Basic 13.22p 13.06p 4.32p 3.17p Diluted 13.14p 12.98p A As restated for the effect of the transition to International FinancialReporting Standards ("IFRS") - see Note 1. Unaudited Group Statement of Recognised Income & Expense for the 3 months and 9months to 1 October 2005 3 Months 3 Months 9 Months 9 Months 2004 A 2005 2005 2004 A £m £m £m £m 44.6 34.7 Attributable profit 136.6 133.5 _____ _____ _____ _____ (0.1) 2.5 Translation differences on foreign currency net 4.9 (0.3) investments - (1.8) Gains/(losses) on cash flow hedges 8.2 - - 20.2 Actuarial (losses)/gains on defined benefit plans (1.4) - - (6.5) Taxation on items taken directly to equity 0.7 - _____ _____ _____ _____ (0.1) 14.4 Net income/(expense) recognised directly in equity 12.4 (0.3) - - Restatement for the effects of IAS 32 and 39 B (5.5) - _____ _____ _____ _____ 44.5 49.1 Total recognised income and expense 143.5 133.2 _____ _____ _____ _____ B As detailed in Note 1, on 1 January 2005 the balance sheet was restatedfor the effects of IAS 32 and 39. Unaudited Group Balance Sheet as at 1 October 2005 31 Dec Notes 1 October 2 October 2004 A, B 2005 2004 A £m £m £m ASSETS Non-current assets 290.3 Property, plant and equipment 327.4 285.8 375.3 Intangible assets 380.6 383.5 4.9 Investments 5.7 5.3 120.7 Available for sale - investment in joint venture 128.6 124.8 25.6 Non-current receivables 0.7 15.9 67.6 Deferred tax assets 77.9 59.2 _____ _____ _____ 884.4 920.9 874.5 Current assets 284.9 Inventories 357.5 291.6 320.2 Trade and other receivables 337.0 306.8 32.6 Cash and bank 67.8 39.3 _____ _____ _____ 637.7 762.3 637.7 _____ _____ _____ 1,522.1 TOTAL ASSETS 1,683.2 1,512.2 _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equity holders of the parent 114.5 Called up equity share capital 114.8 114.4 159.6 Share premium account 165.6 157.1 (4.2) Own shares (1.7) (2.5) 1.4 Other reserves 7.3 1.0 430.7 Retained earnings 521.8 434.5 _____ _____ _____ 702.0 Total equity 10 807.8 704.5 Non-current liabilities 152.6 Long-term borrowings 105.3 186.6 146.8 Retirement benefit obligation 144.6 136.9 15.8 Other payables due after one year 3.7 23.3 31.8 Provisions - due after one year 28.1 - 40.9 Deferred tax liabilities 32.1 74.6 _____ _____ _____ 387.9 313.8 421.4 Current liabilities 244.2 Trade and other payables 278.5 243.3 32.3 Bank overdrafts and loans due within one year 117.7 39.1 49.9 Provisions - due within one year 37.9 15.9 105.8 Current tax payable 127.5 88.0 _____ _____ _____ 432.2 561.6 386.3 _____ _____ _____ 820.1 Total liabilities 875.4 807.7 _____ _____ _____ 1,522.1 TOTAL EQUITY AND LIABILITIES 1,683.2 1,512.2 _____ _____ _____ A As restated for the effect of the transition to IFRS. B Before adjustment for the effects of IAS 32 and 39. C Net currency swap assets of £1.4 million (2004 - £16.0 million) are included in the balance sheet as follows: nil (2004 - £14.7 million) in non-current receivables, £13.7 million (2004 - £15.0 million) in trade and other receivables, nil (2004 - £8.4 million) in other payables due after one year and £12.3 million (2004 - £5.3 million) in trade and other payables. Unaudited Condensed Group Cash Flow Statement for the 3 months and 9 months to 1October 2005 3 Months 3 Months 9 Months 9 Months 2004 A 2005 2005 2004 A £m £m £m £m Net cash inflow from operating activities 57.6 40.2 Profit before tax, financing & share of results of the 172.6 171.3 joint venture 16.7 38.0 Depreciation, amortisation and impairment 76.8 46.5 1.7 1.9 Share based payment expense 5.9 4.6 (16.9) (20.1) Movement in working capital and provisions D (97.7) (74.5) _____ _____ _____ _____ 59.1 60.0 Cash generated from operations 157.6 147.9 0.3 1.6 Net interest received 4.1 2.5 (9.2) (10.7) Income taxes paid (43.0) (24.9) _____ _____ _____ _____ 50.2 50.9 Net cash inflow from operating activities 118.7 125.5 Cash flows from investing activities (0.9) (0.7) Acquisitions (9.8) (29.3) - - Cash acquired on acquisition - 1.8 - 0.5 Dividends received from the joint ventureF 6.2 5.9 (24.1) (24.5) Capital expenditure (83.2) (67.9) _____ _____ _____ _____ (25.0) (24.7) Net cash used in investing activities (86.8) (89.5) 25.2 26.2 Cash flow before financing activities 31.9 36.0 Cash flows from financing activities 1.2 1.6 Proceeds from issue of ordinary share capital 6.3 5.4 - - Own shares purchased - (2.4) - - Equity dividends paid (30.0) (28.9) (29.6) (11.5) Decrease in borrowings and finance leases (4.3) (31.3) 7.9 (5.0) Settlement of net currency swaps (2.3) 31.3 _____ _____ _____ _____ (20.5) (14.9) Net cash used in financing activities (30.3) (25.9) 4.7 11.3 Net increase in cash and cash equivalents 1.6 10.1 19.1 12.1 Cash and cash equivalents at beginning of period 22.3 14.4 0.6 0.2 Exchange adjustments (0.3) (0.1) _____ _____ _____ _____ 24.4 23.6 Cash and cash equivalents at end of period E 23.6 24.4 _____ _____ _____ _____ A As restated for the effect of the transition to IFRS. D After £18.6 million (2004 - nil) unreimbursed by insurers relating to macrotextured knee revisions and £2.0 million (2004 - £2.0 million) of outgoings on rationalisation and acquisition integration costs in the 9 months. E Cash and cash equivalents at the end of the period are net of overdrafts of £44.2 million (2004 - £14.9 million). F Discontinued operations accounted for £6.2 million (2004 - £5.9 million) of net cash flow from investing activities. NOTES 1. Smith & Nephew plc has previously prepared its primary financialstatements under UK generally accepted accounting principles ("UK GAAP"). From2005 the Group is required to prepare its consolidated financial statements inaccordance with IFRS as adopted by the European Union ("EU"). For the purposesof this document the term IFRS includes International Accounting Standards ("IAS"). The results for Quarter 3 2005 represent the third interim financial statementsthe Group has prepared in accordance with its accounting policies under IFRS.The first annual report under IFRS will be for the year ended 31 December 2005.A description of how the Group's reported performance and financial position areaffected by this change, including reconciliations from UK GAAP to IFRS forprior year results and the revised summary of significant accounting policiesunder IFRS, is published under Report and Results in the Investors section ofthe corporate website at www.smith-nephew.com/investors/reports_results.html.If required, printed copies are available from the Company Secretary. The Group is required to apply all relevant standards in force at the firstreporting date: for the Group this is at 31 December 2005. As a consequence,these results have been prepared on the basis that all IFRSs and InternationalFinancial Reporting Interpretation Committee ("IFRIC") interpretations, inparticular the recently amended versions of IAS 19, Employee Benefits and IAS39, Financial Instruments: Recognition and Measurement, will be adopted by theEuropean Commission. The failure of the European Commission to adopt theseamended standards in time for full year financial reporting in 2005, the issueof further interpretations by IFRIC in advance of the reporting date, or thedevelopment of other accepted practice, could result in the need to change thebasis of accounting or presentation of certain financial information from thatpresented in this document. As permitted under IFRS 1, First Time Adoption of International FinancialReporting Standards, management has elected not to restate comparativeinformation for the Financial Instrument standards IAS 32 and IAS 39. Arestatement of the opening balance sheet at 1 January 2005 to present theGroup's 2005 opening position under IAS 32 and 39 was included within theinterim financial statements for Quarter 1 2005. Appendix A reconciles attributable profit for the three months and nine monthsto 2 October 2004, as previously reported under UK GAAP to IFRS. Appendix Breconciles the balance sheet and equity, for the 9 months to 2 October 2004, aspreviously reported under UK GAAP to IFRS. The financial information contained in this document does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. Theauditors have issued an unqualified opinion on the Group's statutory financialstatements under UK GAAP for the year ended 31 December 2004, which have beenfiled with the Registrar of Companies. 2. In order to provide a trend measure of underlying performance,attributable profit is adjusted to exclude items which management consider willdistort comparability, either due to their significant non-recurring nature oras a result of specific accounting treatments. Adjusted earnings per share ("EPSA") has been calculated by dividing adjusted attributable profit by theweighted (basic) average number of ordinary shares in issue of 938 million (2004- 935 million). The diluted weighted average number of ordinary shares in issueis 944 million (2004 - 941 million). 3 Months 3 Months 9 Months 9 Months 2004 2005 2005 2004 £m £m £m £m 44.6 34.7 Attributable profit 136.6 133.5 Adjustments: 1.5 1.4 Amortisation of acquisition intangibles 4.6 3.1 - 23.8 Restructuring and rationalisation costs 23.8 - - (9.0) Taxation on restructuring and rationalisation costs (9.0) - _____ _____ _____ _____ 46.1 50.9 Adjusted attributable profit 156.0 136.6 _____ _____ _____ _____ 4.93p 5.41p Adjusted basic earnings per share 16.63p 14.61p 4.89p 5.40p Adjusted diluted earnings per share 16.53p 14.52p 3. Segmental performance to 1 October 2005 was as follows: 3 Months 3 Months 9 Months 9 Months Underlying growth in 2004 2005 2005 2004 revenue £m £m £m £m % 3 Months 9 Months Revenue by business segment 144.5 168.1 Orthopaedics 507.8 431.8 15 17 72.0 78.8 Endoscopy 240.1 222.1 8 8 90.6 94.3 Advanced Wound Management 274.4 262.4 3 4 _____ _____ _____ _____ _____ _____ 307.1 341.2 1,022.3 916.3 10 11 _____ _____ _____ _____ _____ _____ Trading Profit by business segment 32.1 37.0 Orthopaedics 118.4 97.9 13.0 14.2 Endoscopy 46.5 41.4 14.0 14.2 Advanced Wound Management 36.1 35.1 _____ _____ _____ _____ 59.1 65.4 201.0 174.4 _____ _____ _____ _____ Revenue by geographic market 97.5 103.4 Europe G 324.4 301.1 6 6 151.4 168.0 United States 499.7 448.2 10 13 58.2 69.8 Africa, Asia, Australasia, other America 198.2 167.0 14 15 _____ _____ _____ _____ _____ _____ 307.1 341.2 1,022.3 916.3 10 11 _____ _____ _____ _____ _____ _____ G Includes United Kingdom 9 months revenue of £96.8 million (2004 -£94.8 million) and 3 months revenue of £32.4 million (2004 - £32.9 million). Underlying revenue growth is calculated by eliminating the effects oftranslational currency, acquisitions and different numbers of sales days.Reported growth reconciles to underlying growth as follows: Reported growth Foreign Acquisitions Sales days Underlying in revenue currency effect effect growth in translation revenue effect % % % % %9 MonthsOrthopaedics 18 (1/2) (1) 1/2 17Endoscopy 8 (1/2) - 1/2 8Advanced Wound Management 5 (11/2) - 1/2 4 _____ _____ _____ _____ _____ 12 (1) (1/2) 1/2 11 _____ _____ _____ _____ _____3 MonthsOrthopaedics 16 (1) - - 15Endoscopy 9 (1) - - 8Advanced Wound Management 4 (1) - - 3 _____ _____ _____ _____ _____ 11 (1) - - 10 _____ _____ _____ _____ _____ 4. The cumulative number of revisions of the macrotextured knee productwas 923 on 1 October 2005 compared with 882 at the end of Quarter Two 2005.This represents 31% of the total implanted. Settlements with patients have beenachieved in respect of 685 revisions. Costs of £37.6 million are in disputewith insurers and are provided for in full. £49.3 million of provision remainsto cover future settlement costs. At 20 October 2005 the cumulative number of revisions was 928. 5. Restructuring and rationalisation costs comprise an impairment chargeagainst Advanced Wound Management of £15.4 million relating to the decision toexit DERMAGRAFT(TM) and related products and £8.4 million for the rationalisationof Endoscopy manufacturing facilities. 6. Amortisation of acquisition intangibles for the nine months of £4.6million (2004 - £3.1 million) was incurred as follows: Orthopaedics £4.1million (2004 - £2.4 million) and Endoscopy £0.5 million (2004 - £0.7 million). 7. Taxation of £60.7 million (2004 - £50.4 million) for the nine monthson the profit before restructuring and rationalisation costs, amortisation ofacquisition intangibles and the share of results of the joint venture is at thefull year estimated effective rate of 30% (2004 - 29%). A taxation benefit of£9.0 million arises on the restructuring and rationalisation costs. Of the£51.7 million (2004 - £50.4 million) taxation charge £37.1 million (2004 - £40.4 million) relates to overseas taxation. 8. In August 2005 the Group announced its intention to divest of itsjoint venture. The share of results of the joint venture is after interestpayable of £1.1 million (2004 - £1.0 million) and taxation of £6.3 million (2004- £5.1 million). The Group's share of revenue of the joint venture for the ninemonths is £127.4 million (2004 - £124.0 million). The Group's discontinuedoperations earnings per share for the nine months is: basic 1.34p (2004 -1.22p) and diluted 1.33p (2004 - 1.21p). 9. An interim dividend of 2.1 pence per ordinary share (2004 - 1.9 penceper ordinary share) was approved by the Board on 4 August 2005. This is payableon 11 November 2005 to shareholders whose names appear on the register at theclose of business on 21 October 2005. Shareholders may participate in thedividend re-investment plan. 10. The movement in total equity for the 9 months to 1 October 2005 was asfollows: 2005 2004 £m £m Opening equity as at 1 January 702.0 610.4Restatement for the effects of IAS 32 and 39 (5.5) - _____ _____Restated opening equity as at 1 January 696.5 610.4Attributable profit for the period 136.6 133.5Equity dividends paid or accrued (49.7) (46.7)Exchange adjustments 4.9 (0.3)Gains on cash flow hedges (net of taxation) 7.8 -Actuarial losses on defined benefit plans (net of taxation) (0.5) -Share based payment recognised in the income statement 5.9 4.6Issue of ordinary share capital 6.3 5.4Own shares purchased - (2.4) _____ _____Closing equity 807.8 704.5 _____ _____ 11. Net debt as at 1 October 2005 comprises: 2005 2004 £m £m Cash and bank 67.8 39.3Long-term borrowings (105.3) (186.6)Bank overdrafts and loans due within one year (117.7) (39.1)Net currency swap assets 1.4 16.0 _____ _____ (153.8) (170.4) _____ _____ The movements in the 9 months were as follows: Opening net debt as at 1 January (120.7) (136.7)Cash flow before financing activities 31.9 36.0Loan notes issued on acquisition - (50.3)Proceeds from issue of ordinary share capital 6.3 5.4Own shares purchased - (2.4)Equity dividends paid (30.0) (28.9)Exchange adjustments (41.3) 6.5 _____ _____Closing net debt (153.8) (170.4) _____ _____ INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc Introduction We have been instructed by the company to review the financial information forthe three months and nine months ended 1 October 2005 which comprises GroupIncome Statement, Group Statement of Recognised Income and Expense, GroupBalance Sheet, Condensed Group Cash Flow Statement and the related notes 1 to11. We have read the other information contained in the interim report forquarter three and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' Responsibilities The interim report for quarter three, including the financial informationcontained therein, is the responsibility of, and has been approved by, thedirectors. The directors are responsible for preparing the interim report forquarter three in accordance with the Listing Rules of the Financial ServicesAuthority. As disclosed in Note 1, the next annual accounts of the Group will be preparedin accordance with those International Financial Reporting Standards ("IFRS")adopted for use by the European Union. The accounting policies are consistent with those that the directors intend touse in the next annual accounts. There is, however, a possibility that thedirectors may determine that some changes to these policies are necessary whenpreparing the full annual accounts for the first time in accordance with thoseIFRSs adopted for use by the European Union. This is principally because, asdisclosed in Note 1, the directors have anticipated that the revised versions ofIAS 39, Financial Instruments: Recognition and Measurement and IAS 19, EmployeeBenefits which have yet to be formally adopted for use in the European Union,will be so adopted in time to be applicable to the next annual accounts. Review Work Performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data, and based thereon assessingwhether the accounting policies have been applied. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with United Kingdom Auditing standards and therefore provides a lowerlevel of assurance than an audit. Accordingly we do not express an auditopinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the three monthsand nine months ended 1 October 2005. Ernst & Young LLP London 26 October 2005 APPENDIX A - Reconciliation of Attributable Profit for the 3 months and 9 monthsto 2 October 2004 As reported Joint Venture Accounting Restated under UK presentation policy GAAP H change I changes IFRS under IFRS J9 Months £m £m £m £m Revenue 916.3 - - 916.3Cost of goods sold (246.4) - - (246.4)Selling, general and administrative expenses (445.0) - (1.1) (446.1)Research and development expenses (49.4) - - (49.4) _____ _____ _____ _____Trading profit (i) 175.5 - (1.1) 174.4 Amortisation of acquisition intangibles (ii) (15.3) - 12.2 (3.1) _____ _____ _____ _____Profit before tax, financing and share of results of the 160.2 - 11.1 171.3joint ventureInterest receivable 15.0 - - 15.0Interest payable (iii) (13.0) 1.0 (0.5) (12.5)Other finance costs (iv) - - (1.3) (1.3) _____ _____ _____ _____Profit before tax and share of results of the joint venture 162.2 1.0 9.3 172.5Taxation (v) (56.5) 5.1 1.0 (50.4) _____ _____ _____ _____Profit before share of results of the joint venture 105.7 6.1 10.3 122.1Share of results of the joint venture 17.5 (6.1) - 11.4 _____ _____ _____ _____Attributable profit 123.2 - 10.3 133.5 _____ _____ _____ _____ 3 Months Revenue 307.1 - - 307.1Cost of goods sold (81.1) - - (81.1)Selling, general and administrative expenses (149.7) - (0.4) (150.1)Research and development expenses (16.8) - - (16.8) _____ _____ _____ _____Trading profit (i) 59.5 - (0.4) 59.1 Amortisation of acquisition intangibles (ii) (5.5) - 4.0 (1.5) _____ _____ _____ _____Profit before tax, financing and share of results of the 54.0 - 3.6 57.6joint ventureInterest receivable 5.1 - - 5.1Interest payable (iii) (5.0) 0.4 (0.2) (4.8)Other finance costs (iv) - - (0.4) (0.4) _____ _____Profit before tax and share of results of the joint venture 54.1 0.4 3.0 57.5Taxation (v) (19.0) 1.9 0.3 (16.8) _____ _____ _____ _____Profit before share of results of the joint venture 35.1 2.3 3.3 40.7Share of results of the joint venture 6.2 (2.3) - 3.9 _____ _____ _____ _____Attributable profit 41.3 - 3.3 44.6 _____ _____ _____ _____ H The order and description of items presented as "reported under UK GAAP"have been amended to enable a direct comparison with IFRS presentation. I Under IFRS the Group's share of the after tax results of the jointventure is included as a single line item after the Group's post tax results. J The accounting policy changes are as follows: (i) the trading profitreduction in the nine months relates to share based payment costs of £3.2million (£1.0 million in the three months) and other costs of £0.5 million (£0.3million in the three months) partially offset by £2.6 million (£0.9 million inthe three months) benefits on pension current service costs; (ii) there is nogoodwill amortisation; (iii) interest payable is increased due toreclassification of a lease; (iv) finance costs represent pension financing;and (v) certain of these adjustments have a consequential deferred tax effect. APPENDIX B - Reconciliation of Balance Sheet and Equity as at 2 October 2004 As reported Goodwill and Deferred Post Other K Restated IFRS under UK acquisition tax retirement GAAP H accounting benefits £m £m £m £m £m £mASSETSNon-current assetsProperty, plant and equipment 277.8 - - - 8.0 285.8Intangible assets 343.3 40.2 - - - 383.5Investments 5.3 - - - - 5.3Investment in joint venture 125.2 - - (0.4) - 124.8Non-current receivables 23.0 - - (7.1) - 15.9Deferred tax assets 4.4 - 11.4 43.4 - 59.2 _____ _____ _____ _____ _____ _____ 779.0 40.2 11.4 35.9 8.0 874.5Current assets Inventories 291.6 - - - - 291.6Trade and other receivables 306.8 - - - - 306.8Cash and bank 39.3 - - - - 39.3 _____ _____ _____ _____ _____ _____ 637.7 - - - - 637.7 _____ _____ _____ _____ _____ _____TOTAL ASSETS 1,416.7 40.2 11.4 35.9 8.0 1,512.2 _____ _____ _____ _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equityholders of the parentCalled up equity share capital 114.4 - - - - 114.4Share premium account 157.1 - - - - 157.1Own shares (2.5) - - - - (2.5)Other reserves 5.6 (1.2) (8.0) 4.4 0.2 1.0Retained earnings 477.8 31.1 23.4 (90.5) (7.3) 434.5 _____ _____ _____ _____ _____ _____Total equity 752.4 29.9 15.4 (86.1) (7.1) 704.5 Non-current liabilities Long-term borrowings 178.0 - - - 8.6 186.6Retirement benefit obligation 9.5 - - 127.4 - 136.9Other payables due after one year 23.3 - - - - 23.3Provisions - due after one year - - - - - -Deferred tax liabilities 69.7 10.3 (4.0) (1.4) - 74.6 _____ _____ _____ _____ _____ _____ 280.5 10.3 (4.0) 126.0 8.6 421.4Current liabilities Trade and other payables 241.0 - - (4.0) 6.3 243.3Bank overdrafts and loans due 38.9 - - - 0.2 39.1within one yearProvisions - due within one year 15.9 - - - - 15.9Current tax payable 88.0 - - - - 88.0 _____ _____ _____ _____ _____ _____ 383.8 - - (4.0) 6.5 386.3 _____ _____ _____ _____ _____ _____Total liabilities 664.3 10.3 (4.0) 122.0 15.1 807.7 _____ _____ _____ _____ _____ _____TOTAL EQUITY AND LIABILITIES 1,416.7 40.2 11.4 35.9 8.0 1,512.2 _____ _____ _____ _____ _____ _____ H The order and description of items presented as "reported under UK GAAP"have been amended to enable a direct comparison with IFRS presentation. K Other adjustments includes the reclassification into long-termborrowings of a lease of £8.6 million and the inclusion of an accrual forvacation pay of £6.3 million. APPENDIX C - Unaudited Restatement to US$ Income Statement 2004 Q1 Q2 Q3 Q4 Year $m $m $m $m $mRevenue:Orthopaedics 262 264 261 298 1,085Endoscopy 138 137 130 157 562Wound Management 156 158 164 176 654 _____ _____ _____ _____ _____ 556 559 555 631 2,301 Trading profit:Orthopaedics 60 61 58 75 254Endoscopy 26 26 24 38 114Wound Management 17 21 25 29 92 _____ _____ _____ _____ _____ 103 108 107 142 460 Restructuring & rationalisation costs - - - - -Macrotextured claim - - - (154) (154)Amortisation of acquisition intangibles (1) (2) (3) (2) (8)Net interest and finance costs 2 1 - 1 4 _____ _____ _____ _____ _____Profit before tax and share of results of the joint 104 107 104 (13) 302ventureTaxation (31) (31) (30) 12 (80)Discontinued operations - Share of results of the 6 7 7 8 28joint venture _____ _____ _____ _____ _____Attributable profit 79 83 81 7 250 _____ _____ _____ _____ _____ Basic earnings per share 8.5c 8.9c 8.6c 0.7c 26.7c Adjusted earnings per share 2005 Q1 Q2 Q3 9 mths $m $m $m $mRevenue:Orthopaedics 313 320 302 935Endoscopy 151 150 141 442Wound Management 164 172 169 505 _____ _____ _____ _____ 628 642 612 1,882 Trading profit:Orthopaedics 75 77 66 218Endoscopy 30 30 25 85Wound Management 19 22 26 67 _____ _____ _____ _____ 124 129 117 370 Restructuring & rationalisation costs - - (44) (44)Macrotextured claim - - - -Amortisation of acquisition intangibles (3) (3) (2) (8)Net interest and finance costs 3 2 - 5 _____ _____ _____ _____Profit before tax and share of results of the joint 124 128 71 323ventureTaxation (38) (39) (18) (95)Discontinued operations - Share of results of the 7 8 9 24joint venture _____ _____ _____ _____Attributable profit 93 97 62 252 _____ _____ _____ _____ Basic earnings per share 9.9c 10.4c 6.6c 26.9c Adjusted earnings per share In order to provide a trend measure of underlying performance, attributableprofit is adjusted to exclude items which management consider will distortcomparability, either due to their significant non-recurring nature or as aresult of specific accounting treatments. Adjusted earnings per share ("EPSA")has been calculated by dividing adjusted attributable profit by the weighted(basic) average of ordinary shares. 2004 Q1 Q2 Q3 Q4 Year $m $m $m $m $m Attributable profit 79 83 81 7 250Adjustments:Amortisation of acquisition intangibles 1 2 3 2 8Macrotextured claim - - - 154 154Restructuring & rationalisation costs - - - - -Tax on excluded items - - - (54) (54) _____ _____ _____ _____ _____Adjusted attributable profit 80 85 84 109 358 _____ _____ _____ _____ _____ Adjusted basic earnings per share 8.6c 9.1c 8.9c 11.7c 38.3c Average Rate£ to $ 1.84 1.82 1.81 1.90 1.84• to $ 1.24 1.21 1.22 1.33 1.25 2005 Q1 Q2 Q3 9 mths $m $m $m $m Attributable profit 93 97 62 252Adjustments:Amortisation of acquisition intangibles 3 3 2 8Macrotextured claim - - - -Restructuring & rationalisation costs - - 44 44Tax on excluded items - - (17) (17) _____ _____ _____ _____Adjusted attributable profit 96 100 91 287 _____ _____ _____ _____ Adjusted basic earnings per share 10.2c 10.7c 9.7c 30.6c Average Rate£ to $ 1.90 1.83 1.80 1.84• to $ 1.30 1.24 1.23 1.26 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith & Nephew