4th Aug 2005 11:00
Smith & Nephew Plc04 August 2005 Smith & Nephew Reports Strong Second Quarter Results, led by 18% Growth inOrthopaedics 4 August 2005 Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business,announced today its results for the second quarter and half year ended 2 July2005. Q2 Highlights H1 Highlights • Group revenue up 12%* to £351m • Group revenue up 12%* to £681m• Orthopaedics revenue up 18%*, US up 22%* • EPSA up 16%** to 11.22p• Endoscopy revenue up 7%* • Interim dividend up 10% to 2.10p• Wound Management revenue up 6%*• Trading profit up 18%, margin improves to 20%• EPSA up 16%** to 5.83p Commenting on the second quarter and the outlook for the year, Sir ChristopherO'Donnell, Chief Executive of Smith & Nephew, said: "Our revenue and earnings momentum continues to be driven by new productintroductions and investment in our sales force. Orthopaedics stronglyout-performed the market across its product areas and we expect its run rate tocontinue into the second half. Endoscopy performed in line with our expectationand Wound Management improved in the quarter. This revenue momentum, andcontinued margin expansion, makes us well placed to achieve our underlyingmid-teens EPSA growth goal for the full year." A presentation and conference call for analysts to discuss the company's interimresults will be held at 1:00 pm BST / 8:00 am EST today. The conference callwill be broadcast live on the web and will be available on demand shortlyfollowing the close of the meeting at http://www.smith-nephew.com/Q205. Ifinterested parties are unable to connect to the web, a listen-only service isavailable by calling 0800 559 3272 in the UK or 1866 239 0753 in the US.Analysts should contact Julie Allen on +44 (0) 20 7960 2254 or by email [email protected] for conference call details. * Unless otherwise specified as reported, all revenue increases throughoutthis document are underlying increases which adjust for the effects of currencytranslation, the acquisition of MMT in Q1 last year and the effect of two fewersales days in the first quarter and one more sales day in the second quarter.See note 3. ** EPSA is stated before amortisation of acquisition intangibles. See note 2. Enquiries Investors Peter Hooley Tel: +44 (0) 20 7401 7646Smith & Nephew Finance Director Investors / Media Liz Hewitt Tel: +44 (0) 20 7401 7646Smith & Nephew Group Director Corporate Affairs Financial Dynamics David Yates - London Tel: +44 (0) 20 7831 3113Jonathan Birt - New York Tel: +1 212 850 5634 Introduction In the first half of the year we continued to pursue our strategy of operatingin growing markets and in expanding the markets in which we operate. Thisstrategy continues to deliver revenue growth in all businesses as we have seenin the first half of the year. A commentary on the financial and operatingresults for the second quarter and the half year follows below. This is the second quarter that our results have been reported underInternational Financial Reporting Standards. Comparative figures have beenrestated and reconciliations from UK GAAP are provided in the appendices to thisannouncement. Second Quarter Results Underlying revenue growth in the quarter was 12%. Reported revenue growth inthe quarter benefited from 1/2% due to translational currency movements and 1 1/2% due to one extra sales day, resulting in reported second quarter revenueincreasing by 14% to £351m. Trading profit in the quarter was £70m, with margins improving to 20%. Interestincome and finance costs netted out to £1m positive, taxation amounted to £21mand the share of after tax results of the BSN joint venture was £4 1/2m,resulting in attributable profit before amortisation of acquisition intangiblesof £54 1/2m. Earnings per share before amortisation of acquisition intangibles ("EPSA") was5.83p (29.15p per American Depositary Share, "ADS"), a 16% increase on thesecond quarter last year. A reconciliation of EPSA to reported earnings pershare is given in note 2 to the accounts. Orthopaedics The orthopaedic market continues to exhibit strong growth and we again increasedour market share, with revenue up by 18% relative to the second quarter lastyear. Revenue growth in the US was 22% and outside the US 14%. Sales pricingin reconstruction and trauma increased by approximately 4% globally, comparedwith a year ago. In reconstruction our expanded global sales force generated growth in kneerevenues of 20% (18% in the US and 21% outside the US) and hip revenues of 16%(13% in the US and 20% outside the US). OXINIUMa and minimal incisioninstruments continue to drive revenues globally, and BHR hip resurfacing isaugmenting this outside the US. US trauma revenues increased by 24%, well ahead of the market, benefiting fromthe establishment of a dedicated sales force in the US last year and the launchof the PERI-LOCa locking compression plate system in the first quarter thisyear. Overall trauma revenue growth was 13%. Revenues outside the US were flatand this is being addressed by the roll-out of our trauma sales strategy. Clinical Therapy revenues, comprising EXOGENa ultrasound bone healing productsand SUPARTZa joint fluid therapy, benefited from further sales force investmentand grew 42% compared with the same quarter last year. Endoscopy Endoscopy's revenue growth was 7%, with growth in the US slower, as expected, at2% due to lower visualisation and digital operating room revenues in the USahead of the launch of the 400 Series camera in June. Outside the US revenuegrowth was 13%. Knee and shoulder repair revenues continued strongly, benefiting from newproduct introductions, with 23% growth. Visualisation and digital operatingroom revenues grew 3% and blade revenues grew 2%. Radio frequency, includingspine, declined 6%, with radio frequency continuing to be impacted by theinjunction over bi-polar products. In order to improve further the competitive position and to lower the overallcosts of production we will close one of our US manufacturing facilities. Amargin improvement of around 1% should accrue to Endoscopy at the end of theprogramme in 2007. A £9m restructuring charge will be taken in the thirdquarter. Advanced Wound Management Advanced Wound Management revenues grew 6% compared to the second quarter lastyear. Outside the US revenue growth was in line with the market at 8%.Revenues inside the US declined by 4%, compared to a decline of 7% in Q1,reflecting continued lower contracted supplies of intermediate products in theUS. The improvement reflects some stabilisation of third party distributorinventories, end user traced sales are growing at around 7%. Our sales forces globally continue to concentrate on ALLEVYNa and ACTICOATa,achieving revenue growth of 14% and 33% respectively in the quarter. Ourconcentration on major accounts for DERMAGRAFTa ahead of the anticipated venousleg ulcer approval in the US has resulted in a small decline in its quarterlyrevenues. Half Year Results Underlying and reported revenue growth in the first half was 12%, as one fewersales day was offset by the benefit from the acquisition of MMT in Q1 last year. Translational currency was neutral. Reported revenues were consequently£681m. Trading profit in the half year was £136m, with margins 1% ahead of a year agoat 20%. Interest income and finance costs netted to £3m positive, taxationamounted to £42m and the share of the after tax results of the BSN joint venturewas £8m, resulting in attributable profit before amortisation of acquisitionintangibles of £105m. Attributable profit after amortisation was £102m. EPSA was 11.22p (56.10p per ADS) for the half year, an increase of 16% comparedto the same period last year. Reported earnings per share were 10.88p (54.40pper ADS). A reconciliation of reported earnings per share to EPSA is providedin note 2 to the accounts. Operating cash flow, defined as cash generated from operations less capitalexpenditure, was £39m. This is a trading profit to cash conversion ratio of38%, before rationalisation and integration expenditure of £1m and £12m offunding of settlement payments to patients in respect of macrotextured revisionswhich are not being reimbursed by insurers, and compares with 41% a year ago. An interim dividend of 2.10p per share (10.50p per ADS) will be paid on 11November 2005 to shareholders on the register at the close of business on 21October 2005. Having increased our dividend cover over recent years, this is anincrease in the dividend of 10%. Had our results been reported in US dollars translated at average rates ofexchange, reported revenues and adjusted earnings per ADS would have been asfollows: Second Quarter Half Year Reported revenues $643m +15% $1270m +14%Adjusted earnings per ADS $0.54 +17% $1.05 +18% Outlook The orthopaedic market continues to grow strongly, particularly in the US. Wecontinue to take market share as we benefit from our sales force investment andnew product flow. We expect Orthopaedics to maintain its first half revenuegrowth momentum and achieve growth of around 18% for the full year. We expect Endoscopy to achieve revenue growth of around 8% for the full year.Wound Management should see its revenue growth improve across the second half,but we are reducing our previous guidance for revenue growth to around 6% forthe full year. Revenue growth should pick up slightly in the second half for the Group as awhole and translational currency (at today's rates) should add 1% - 2% torevenue for the full year. We expect trading margins to continue to improvefrom efficiency gains and approach 21% for the full year. Overall on anunderlying basis, excluding the Endoscopy restructuring charge, we are wellplaced to achieve our underlying mid teens EPSA growth goal for the full year. 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. a Trademark of Smith & Nephew. Certain names registered at the US Patent andTrademark Office. SMITH & NEPHEW plc 2005 QUARTER TWO AND HALF YEAR RESULTS Unaudited Group Income Statement for the 3 months and 6 months to 2 July 2005 3 Months 3 Months 6 Months 6 Months 2004 A 2005 Notes 2005 2004 A £m £m £m £m 307.2 350.9 Revenue 3 681.1 609.2 (82.5) (91.3) Cost of goods sold (173.4) (165.3) (148.8) (173.4) Selling, general and administrative expenses (340.0) (296.0) (16.6) (16.0) Research and development expenses (32.1) (32.6) _____ _____ _____ _____ 59.3 70.2 Trading profit 3 135.6 115.3 (1.2) (1.6) Amortisation of acquisition intangibles 5 (3.2) (1.6) _____ _____ _____ _____ 58.1 68.6 Profit before tax, financing & share of results 132.4 113.7 of the joint venture 3.0 3.7 Interest receivable 7.9 9.9 (2.1) (2.9) Interest payable (5.4) (7.7) (0.5) 0.5 Other finance income/(costs) 0.5 (0.9) _____ _____ _____ _____ 58.5 69.9 Profit before tax and share of results of the 135.4 115.0 joint venture (17.0) (21.3) Taxation 6 (41.3) (33.6) _____ _____ _____ _____ 41.5 48.6 Profit before share of results of the joint 94.1 81.4 venture 4.1 4.4 Share of results of the joint venture 7 7.8 7.5 _____ _____ _____ _____ 45.6 53.0 Attributable profit 101.9 88.9 _____ _____ _____ _____ Earnings per share 2 4.88p 5.66p Basic 10.88p 9.52p 4.85p 5.60p Diluted 10.79p 9.46p A As restated for the effect of the transition to International Financial Reporting Standards ("IFRS") - see Note 1. Unaudited Group Statement of Recognised Income & Expense for the 3 months and 6 months to 2 July 2005 3 Months 3 Months 6 Months 6 Months 2004 A 2005 2005 2004 A £m £m £m £m 45.6 53.0 Attributable profit 101.9 88.9 _____ _____ _____ _____ - 2.4 Translation differences on foreign currency net 2.4 (0.2) investments - 5.0 Gains on cash flow hedges 10.0 - - (21.6) Actuarial losses on defined benefit plans (21.6) - - 7.2 Taxation on items taken directly to equity 7.2 - _____ _____ _____ _____ - (7.0) Net expense recognised directly in equity (2.0) (0.2) - - Restatement for the effects of IAS 32 and 39 B (5.5) - _____ _____ _____ _____ 45.6 46.0 Total recognised income and expense 94.4 88.7 _____ _____ _____ _____ B As detailed in Note 1, on 1 January 2005 the balance sheet was restated for the effects of IAS 32 and 39. Unaudited Group Balance Sheet as at 2 July 2005 31 Dec 2 July 3 July 2004 A, B 2005 2004 A £m Notes £m £m ASSETS Non-current assets 290.3 Property, plant and equipment 326.2 276.1 375.3 Intangible assets 392.7 376.5 4.9 Investments 5.6 4.9 120.7 Investment in joint venture 122.8 118.9 25.6 Non-current receivables 0.8 22.4 67.6 Deferred tax assets 80.9 59.0 _____ _____ _____ 884.4 929.0 857.8 Current assets 284.9 Inventories 344.8 264.2 320.2 Trade and other receivables 335.1 309.1 32.6 Cash and bank 53.9 25.1 _____ _____ _____ 637.7 733.8 598.4 _____ _____ _____ 1,522.1 TOTAL ASSETS 1,662.8 1,456.2 _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equity holders of the parent 114.5 Called up equity share capital 114.7 114.3 159.6 Share premium account 164.1 156.0 (4.2) Own shares (2.2) (2.5) 1.4 Other reserves 6.0 1.1 430.7 Retained earnings 492.5 406.0 _____ _____ _____ 702.0 Total equity 9 775.1 674.9 Non-current liabilities 152.6 Long-term borrowings 116.6 209.6 146.8 Retirement benefit obligation 165.0 137.2 15.8 Other payables due after one year 4.4 18.6 31.8 Provisions - due after one year 26.6 - 40.9 Deferred tax liabilities 41.7 69.9 _____ _____ _____ 387.9 354.3 435.3 Current liabilities 244.2 Trade and other payables 259.0 214.3 32.3 Bank overdrafts and loans due within one year 116.3 34.0 49.9 Provisions - due within one year 43.9 15.3 105.8 Current tax payable 114.2 82.4 _____ _____ _____ 432.2 533.4 346.0 _____ _____ _____ 820.1 Total liabilities 887.7 781.3 _____ _____ _____ 1,522.1 TOTAL EQUITY AND LIABILITIES 1,662.8 1,456.2 _____ _____ _____ 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 liabilities of £1.1 million (2004 - £36.4 million assets) are included in the balance sheetas follows: £0.1 million (2004 - £20.9 million) in non-current receivables, £5.8 million (2004 - £26.1 million) intrade and other receivables, nil (2004 - £3.7 million) in other payables due after one year and £7.0 million (2004 -£6.9 million) in trade and other payables. Unaudited Condensed Group Cash Flow Statement for the 3 months and 6 months to 2 July 2005 3 Months 3 Months 6 Months 6 Months 2004 A 2005 2005 2004 A £m £m £m £m Net cash inflow from operating activities 58.1 68.6 Profit before tax, financing and share of results of the joint 132.4 113.7 venture 15.2 20.3 Depreciation and amortisation 38.8 29.8 1.3 2.0 Share based payment expense 4.0 2.9 (25.8) (31.5) Movement in working capital and provisions D (77.6) (57.6) _____ _____ _____ _____ 48.8 59.4 Cash generated from operations 97.6 88.8 0.8 1.1 Net interest received 2.5 2.2 (9.5) (22.8) Income taxes paid (32.3) (15.7) _____ _____ _____ _____ 40.1 37.7 Net cash inflow from operating activities 67.8 75.3 Cash flows from investing activities (6.7) (7.6) Acquisitions (9.1) (28.4) - - Cash acquired on acquisition - 1.8 - - Dividends received from the joint venture 5.7 5.9 (24.7) (33.1) Capital expenditure (58.7) (43.8) _____ _____ _____ _____ (31.4) (40.7) Net cash used in investing activities (62.1) (64.5) 8.7 (3.0) Cash flow before financing activities 5.7 10.8 Cash flows from financing activities 1.3 3.4 Proceeds from issue of ordinary share capital 4.7 4.2 (2.4) - Own shares purchased - (2.4) (28.9) (30.0) Equity dividends paid (30.0) (28.9) 7.1 12.8 Increase/(decrease) in borrowings and finance leases 7.2 (1.7) 12.5 0.5 Settlement of net currency swaps 2.7 23.4 _____ _____ _____ _____ (10.4) (13.3) Net cash used in financing activities (15.4) (5.4) (1.7) (16.3) Net (decrease)/increase in cash and cash equivalents (9.7) 5.4 20.8 28.4 Cash and cash equivalents at beginning of period 22.3 14.4 - - Exchange adjustments (0.5) (0.7) _____ _____ _____ _____ 19.1 12.1 Cash and cash equivalents at end of period E 12.1 19.1 _____ _____ _____ _____ A As restated for the effect of the transition to IFRS. D After £11.7 million (2004 - nil) unreimbursed by insurers relating to macrotextured knee revisions and £1.4million (2004 - £1.7 million) of outgoings on rationalisation and acquisition integration costs in the six months. E Cash and cash equivalents at the end of the period are net of overdrafts of £41.8 million (2004 - £6.0million). NOTES 1. Smith & Nephew plc has previously prepared its primary financial statements under UK generally accepted accounting principles ("UK GAAP"). From 2005 the Group is required to prepare its consolidated financial statements in accordance with IFRS as adopted by the European Union ("EU"). For the purposes of this document the term IFRS includes International Accounting Standards ("IAS"). The results for Quarter 2 2005 represent the second interim financial statements the 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 are affected by this change, including reconciliations from UK GAAP to IFRS for prior year results and the revised summary of significant accounting policies under IFRS, is published under Report and Results in the Investors section of the corporate website at www.smith-nephew.com/investors/archive.html. If required, printed copies are available from the Company Secretary. The Group is required to apply all relevant standards in force at the first reporting 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 International Financial Reporting Interpretation Committee ("IFRIC") interpretations, in particular the recently amended versions of IAS 19, Employee Benefits and IAS 39, Financial Instruments: Recognition and Measurement, will be adopted by the European Commission. The failure of the European Commission to adopt these amended standards in time for full year financial reporting in 2005, the issue of further interpretations by IFRIC in advance of the reporting date, or the development of other accepted practice, could result in the need to change the basis of accounting or presentation of certain financial information from that presented in this document. As permitted under IFRS 1, First Time Adoption of International Financial Reporting Standards, management has elected not to restate comparative information for the Financial Instrument standards IAS 32 and IAS 39. A restatement of the opening balance sheet at 1 January 2005 to present the Group's 2005 opening position under IAS 32 and 39 was included within the interim financial statements for Quarter 1 2005. Appendix A reconciles attributable profit for the three months and six months to 3 July 2004 as previously reported under UK GAAP to IFRS. Appendix B reconciles the balance sheet and equity for the six months to 3 July 2004 as previously reported under UK GAAP to IFRS. 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 under UK GAAP for the year ended 31 December 2004, which have been filed 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 will distort comparability, either due to their significant non-recurring nature or as a result of 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 937 million (2004 - 934 million). The diluted weighted average number of ordinary shares in issue is 944 million (2004 - 940 million). 3 Months 3 Months 6 Months 6 Months 2004 2005 2005 2004 £m £m £m £m 45.6 53.0 Attributable profit 101.9 88.9 1.2 1.6 Adjustment: Amortisation of acquisition intangibles 3.2 1.6 _____ _____ _____ _____ 46.8 54.6 Adjusted attributable profit 105.1 90.5 _____ _____ _____ _____ 5.01p 5.83p Adjusted basic earnings per share 11.22p 9.68p 4.98p 5.77p Adjusted diluted earnings per share 11.13p 9.63p 3. Segmental performance to 2 July 2005 was as follows: 3 Months 3 Months 6 Months 6 Months Underlying growth in 2005 2004 revenue 2004 2005 £m £m £m £m % 3 Months 6 Months Revenue by business segment 144.9 174.8 Orthopaedics 339.7 287.3 18 18 75.4 82.1 Endoscopy 161.3 150.1 7 9 86.9 94.0 Advanced Wound Management 180.1 171.8 6 5 _____ _____ _____ _____ _____ _____ 307.2 350.9 681.1 609.2 12 12 _____ _____ _____ _____ _____ _____ Trading Profit by business segment 33.4 41.8 Orthopaedics 81.4 65.8 14.3 16.4 Endoscopy 32.3 28.4 11.6 12.0 Advanced Wound Management 21.9 21.1 _____ _____ _____ _____ 59.3 70.2 135.6 115.3 _____ _____ _____ _____ Revenue by geographic market 101.9 112.0 Europe F 221.0 203.6 9 6 150.4 170.5 United States 331.7 296.8 13 15 54.9 68.4 Africa, Asia, Australasia, other 128.4 108.8 16 15 America _____ _____ _____ _____ _____ _____ 307.2 350.9 681.1 609.2 12 12 _____ _____ _____ _____ _____ _____ F Includes United Kingdom six months revenue of £64.4 million (2004 - £61.9 million) and three months revenue of £32.9 million (2004 - £32.5 million). Underlying revenue growth is calculated by eliminating the effects of translational currency, acquisitions and different numbers of sales days. Reported growth reconciles to underlying growth as follows: Foreign currency Reported growth translation Underlying in revenue effect growth in Acquisitions Sales days revenue effect effect % % % % %6 MonthsOrthopaedics 18 1 (2) 1 18Endoscopy 8 - - 1 9Advanced Wound Management 5 (1) - 1 5 _____ _____ _____ _____ _____ 12 - (1) 1 12 _____ _____ _____ _____ _____3 MonthsOrthopaedics 20 (1/2) - (1 1/2) 18Endoscopy 9 (1/2) - (1 1/2) 7Advanced Wound Management 8 (1/2) - (1 1/2) 6 _____ _____ _____ _____ _____ 14 (1/2) - (1 1/2) 12 _____ _____ _____ _____ _____ 4. The cumulative number of revisions of the macrotextured knee product was 882 on 2 July 2005 compared with 809 at the end of Quarter One 2005. This represents 30% of the total implanted. Settlements with patients have been achieved in respect of 609 revisions. Costs of £30.4 million are in dispute with insurers and are provided for in full. £56.3 million of provision remains to cover future settlement costs. At 30 July 2005 the cumulative number of revisions was 897. 5. Amortisation of acquisition intangibles for the six months of £3.2 million (2004 - £1.6 million) was incurred as follows: Orthopaedics £2.9 million (2004 - £1.2 million) and Endoscopy £0.3 million (2004 - £0.4 million). 6. Taxation of £41.3 million (2004 - £33.6 million) for the six months on the profit before amortisation of acquisition intangibles and the share of results of the joint venture is at the full year estimated effective rate of 30% (2004 - 29%). £32.0 million (2004 - £27.0 million) of the charge relates to overseas taxation. 7. The share of results of the joint venture is after interest payable of £0.7 million (2004 - £0.6 million) and taxation of £3.8 million (2004 - £3.2 million). The Group's share of revenue of the joint venture for the six months is £84.0 million (2004 - £82.1 million). 8. The 2004 final dividend of £30.0 million was paid on 13 May 2005. An interim dividend of 2.1 pence per ordinary share (2004 - 1.9 pence per ordinary share) was approved by the Board on 4 August 2005. This is payable on 11 November 2005 to shareholders whose names appear on the register at the close of business on 21 October 2005. Shareholders may participate in the dividend re-investment plan. 9. The movement in total equity for the six months to 2 July 2005 was as follows: 2005 2004 £m £m Opening equity as at 1 January 702.0 610.4Restatement for the effects of IAS 32 and 39 (see Note 1) (5.5) - _____ _____Restated opening equity as at 1 January 696.5 610.4Attributable profit for the period 101.9 88.9Equity dividends paid (30.0) (28.9)Exchange adjustments 2.4 (0.2)Gains on cash flow hedges (net of taxation) 9.0 -Actuarial losses on defined benefit plans (net of taxation) (13.4) -Share based payment recognised in the income statement 4.0 2.9Issue of ordinary share capital 4.7 4.2Own shares purchased - (2.4) _____ _____Closing equity 775.1 674.9 _____ _____ 10. Net debt as at 2 July 2005 comprises: 2005 2004 £m £m Cash and bank 53.9 25.1Long-term borrowings (116.6) (209.6)Bank overdrafts and loans due within one year (116.3) (34.0)Net currency swap (liabilities)/assets (1.1) 36.4 _____ _____ (180.1) (182.1) _____ _____ The movements in the six months were as follows: Opening net debt as at 1 January (120.7) (136.7)Cash flow before financing activities 5.7 10.8Loan notes issued on acquisition - (50.3)Proceeds from issue of ordinary share capital 4.7 4.2Own shares purchased - (2.4)Equity dividends paid (30.0) (28.9)Exchange adjustments (39.8) 21.2 _____ _____Closing net debt (180.1) (182.1) _____ _____ INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW plc Introduction We have been instructed by the company to review the financial information for the three months and six months ended 2July 2005 which comprises Group Income Statement, Group Statement of Recognised Income and Expense, Group Balance Sheet,Condensed Group Cash Flow Statement and the related notes 1 to 10. We have read the other information contained in theinterim report for quarter two and considered whether it contains any apparent misstatements or material inconsistencieswith the financial information. This report is made solely to the company in accordance with guidance contained in Bulletin 1999/4 'Review of interimfinancial information' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not acceptor assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we haveformed. Directors' Responsibilities The interim report for quarter two, including the financial information contained therein, is the responsibility of, andhas been approved by, the directors. The directors are responsible for preparing the interim report for quarter two inaccordance with the Listing Rules of the Financial Services Authority. As disclosed in Note 1, the next annual accounts of the Group will be prepared in accordance with those InternationalFinancial Reporting Standards ("IFRS") adopted for use by the European Union. The accounting policies are consistent with those that the directors intend to use in the next annual accounts. Thereis, however, a possibility that the directors may determine that some changes to these policies are necessary whenpreparing the full annual accounts for the first time in accordance with those IFRSs adopted for use by the EuropeanUnion. This is principally because, as disclosed in Note 1, the directors have anticipated that the revised versions ofIAS 39, Financial Instruments: Recognition and Measurement and IAS 19, Employee Benefits which have yet to be formallyadopted 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 financialinformation' issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally ofmaking enquiries of group management and applying analytical procedures to the financial information and underlyingfinancial data, and based thereon assessing whether the accounting policies have been applied. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially lessin scope than an audit performed in accordance with United Kingdom Auditing standards and therefore provides a lowerlevel of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modifications that should be made to the financialinformation as presented for the three months and six months ended 2 July 2005. Ernst & Young LLPLondon 4 August 2005 APPENDIX A - Reconciliation of Attributable Profit for the 3 months and 6 months to 3 July 2004 Accounting policy As reported Joint Venture changes under under UK presentation IFRS I GAAP G change H Restated IFRS6 Months £m £m £m £m Revenue 609.2 - - 609.2Cost of goods sold (165.3) - - (165.3)Selling, general and administrative expenses (295.3) - (0.7) (296.0)Research and development expenses (32.6) - - (32.6) _____ _____ _____ _____Trading profit (i) 116.0 - (0.7) 115.3 Amortisation of acquisition intangibles (ii) (9.8) - 8.2 (1.6) _____ _____ _____ _____Profit before tax, financing and share of results of the 106.2 - 7.5 113.7joint ventureInterest receivable 9.9 - - 9.9Interest payable (iii) (8.0) 0.6 (0.3) (7.7)Other finance costs (iv) - - (0.9) (0.9) _____ _____ _____ _____Profit before tax and share of results of the joint venture 108.1 0.6 6.3 115.0Taxation (v) (37.5) 3.2 0.7 (33.6) _____ _____ _____ _____Profit before share of results of the joint venture 70.6 3.8 7.0 81.4Share of results of the joint venture 11.3 (3.8) - 7.5 _____ _____ _____ _____Attributable profit 81.9 - 7.0 88.9 _____ _____ _____ _____ 3 Months Revenue 307.2 - - 307.2Cost of goods sold (82.5) - - (82.5)Selling, general and administrative expenses (148.4) - (0.4) (148.8)Research and development expenses (16.6) - - (16.6) _____ _____ _____ _____Trading profit (i) 59.7 - (0.4) 59.3Amortisation of acquisition intangibles (ii) (5.5) - 4.3 (1.2) _____ _____ _____ _____Profit before tax, financing and share of results of the 54.2 - 3.9 58.1joint ventureInterest receivable 3.0 - - 3.0Interest payable (iii) (2.3) 0.3 (0.1) (2.1)Other finance costs (iv) - - (0.5) (0.5) _____ _____ _____ _____Profit before tax and share of results of the joint venture 54.9 0.3 3.3 58.5Taxation (v) (19.4) 2.0 0.4 (17.0) _____ _____ _____ _____Profit before share of results of the joint venture 35.5 2.3 3.7 41.5Share of results of the joint venture 6.4 (2.3) - 4.1 _____ _____ _____ _____Attributable profit 41.9 - 3.7 45.6 _____ _____ _____ _____ G The order and description of items presented as "reported under UK GAAP" have been amended to enable a directcomparison with IFRS presentation. H Under IFRS the Group's share of the after tax results of the joint venture is included as a single line item afterthe Group's post tax results. I The accounting policy changes are as follows: (i) the trading profit reduction in the six months relates toshare based payment costs of £2.2 million (£1.0 million in the three months) and other costs of £0.2 million (£0.1million in the three months) partially offset by £1.7 million (£0.7 million in the three months) benefits on pensioncurrent service costs; (ii) there is no goodwill amortisation; (iii) interest payable is increased due toreclassification of a lease; (iv) finance costs represent pension financing; and (v) certain of these adjustments have aconsequential deferred tax effect. APPENDIX B - Reconciliation of Balance Sheet and Equity as at 3 July 2004 As reported Goodwill and under UK GAAP acquisition G accounting Post retirement Deferred benefits Restated tax Other J IFRS £m £m £m £m £m £mASSETSNon-current assetsProperty, plant and equipment 267.7 - - - 8.4 276.1Intangible assets 340.5 36.0 - - - 376.5Investments 4.9 - - - - 4.9Investment in joint venture 119.3 - - (0.4) - 118.9Non-current receivables 29.5 - - (7.1) - 22.4Deferred tax assets 4.4 - 11.2 43.4 - 59.0 _____ _____ _____ _____ _____ _____ 766.3 36.0 11.2 35.9 8.4 857.8Current assets Inventories 264.2 - - - - 264.2Trade and other receivables 309.1 - - - - 309.1Cash and bank 25.1 - - - - 25.1 _____ _____ _____ _____ _____ _____ 598.4 - - - - 598.4 _____ _____ _____ _____ _____ _____TOTAL ASSETS 1,364.7 36.0 11.2 35.9 8.4 1,456.2 _____ _____ _____ _____ _____ _____ EQUITY AND LIABILITIES Equity attributable to equityholders of the parentCalled up equity share capital 114.3 - - - - 114.3Share premium account 156.0 - - - - 156.0Own shares (2.5) - - - - (2.5)Other reserves 4.3 (1.4) (6.4) 4.4 0.2 1.1Retained earnings 435.8 26.8 23.4 (91.0) 11.0 406.0 _____ _____ _____ _____ _____ _____Total equity 707.9 25.4 17.0 (86.6) 11.2 674.9 Non-current liabilities Long-term borrowings 200.7 - - - 8.9 209.6Retirement benefit obligation 9.3 - - 127.9 - 137.2Other payables due after one 18.6 - - - - 18.6yearProvisions - due after one year - - - - - -Deferred tax liabilities 66.5 10.6 (5.8) (1.4) - 69.9 _____ _____ _____ _____ _____ _____ 295.1 10.6 (5.8) 126.5 8.9 435.3Current liabilities Trade and other payables 230.2 - - (4.0) (11.9) 214.3Bank overdrafts and loans due 33.8 - - - 0.2 34.0within one yearProvisions - due within one year 15.3 - - - - 15.3Current tax payable 82.4 - - - - 82.4 _____ _____ _____ _____ _____ _____ 361.7 - - (4.0) (11.7) 346.0 _____ _____ _____ _____ _____ _____Total Liabilities 656.8 10.6 (5.8) 122.5 (2.8) 781.3 _____ _____ _____ _____ _____ _____TOTAL EQUITY AND LIABILITIES 1,364.7 36.0 11.2 35.9 8.4 1,456.2 _____ _____ _____ _____ _____ _____ G The order and description of items presented as "reported under UK GAAP" have been amended to enable a directcomparison with IFRS presentation. J Other adjustments includes the reclassification into long-term borrowings of a lease of £8.9 million, thereversal of the interim dividend accrual of £17.8 million and the inclusion of an accrual for vacation pay of £5.9million. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith & Nephew