- Full 2007 Annual Report
- Annual Report
Summary Financial Statement
Notes
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In the current year, the Group has altered the presentation of its income statement to present items by function as permitted by IAS 1. The presentation of prior years has been amended to conform to the current year presentation.
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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).
Notes 2007 $million 2006 $million Attributable profit for the year 316 745 Acquisition related costs 7 111 20 Restructuring and rationalisation expenses 5 42 – Legal settlement 9 30 – Amortisation of acquisition intangibles 30 14 Loss on hedge of the sale proceeds of the joint venture – 3 Net profit on disposal of the joint venture 12 – (351) Taxation on excluded items 11 (49) (6) Adjusted attributable profit 480 425 Adjusted basic earnings per ordinary share 52.0¢ 45.2¢ Adjusted diluted earnings per ordinary share 51.7¢ 45.0¢ -
Revenue by segment for the year to 31 December 2007 was as follows:
2007 $million 2006 $million Underlying growth in revenue % Revenue by business segment Reconstruction 1,240 919 13 Trauma and Clinical Therapies 618 514 13 Endoscopy 732 648 10 Advanced Wound Management 779 698 5 3,369 2,779 10 Revenue by geographic market United States 1,550 1,365 Europe (g) 1,177 867 Africa, Asia, Australasia & Other America 642 547 3,369 2,779 - Includes United Kingdom revenue of $309 million (2006 – $255 million).
Responsibility for the Group’s spinal products was transferred from the Endoscopy business to the Trauma and Clinical Therapies business with effect from 1 January 2007. Spinal products are now reported within the Trauma and Clinical Therapies segment and comparative periods have been amended to conform to current year presentation.
Underlying revenue growth is calculated by eliminating the effects of translational currency and acquisitions. Reported growth in revenue by business segment reconciles to underlying growth in 2007 as follows:
Reported growth in revenue % Constant currency exchange effect % Acquisitions effect % Underlying growth in revenue % Reconstruction 35 (4) (18) 13 Trauma and Clinical Therapies 20 (2) (5) 13 Endoscopy 13 (3) – 10 Advanced Wound Management 12 (6) (1) 5 Total revenue 21 (4) (7) 10 -
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers as affect the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Operating profit reconciles to trading profit as follows:
Notes 2007 $million 2006 $million Operating profit 493 537 Acquisition related costs 7 111 20 Restructuring and rationalisation expenses 5 42 – Legal settlement 9 30 – Amortisation of acquisition intangibles 30 14 Trading profit 706 571 Trading and operating profit by business segment for the year to 31 December 2007 were as follows:
2007 $million 2006 $million Trading Profit Reconstruction 295 233 Trauma and Clinical Therapies 128 101 Endoscopy 147 123 Advanced Wound Management 136 114 706 571 2007 $million 2006 $million Operating Profit Reconstruction 131 200 Trauma and Clinical Therapies 112 101 Endoscopy 141 122 Advanced Wound Management 109 114 493 537 -
In 2007, restructuring and rationalisation expenses comprised $45 million relating to the earnings improvement programme less $3 million relating to the write back of prior year’s provisions.
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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. In 2007, from the date of acquisition on 31 May 2007, Plus products contributed $200 million to revenue. The cost of the acquisition has been allocated on a provisional basis to the assets acquired and liabilities assumed on acquisition as follows:
Pre-acquisition carrying amounts $million Provisional fair-value adjustments $million Fair-value to Group $million Property, plant and equipment 81 (2) 79 Intangible assets 10 232 242 Investments in associates 6 4 10 Deferred taxation assets 19 (19) – Inventories 106 66 172 Trade and other receivables 128 – 128 Loans and borrowings (181) – (181) Deferred taxation liabilities (4) (34) (38) Retirement benefit obligation (6) (16) (22) Trade and other payables (125) (4) (129) Net assets 34 227 261 Equity attributable to minority interests (4) Goodwill on acquisition 463 Cost of acquisition 720 Discharged by: Cash 726 Cash acquired in Plus (18) Costs associated with acquisition 12 720 In 2007 $38 million was paid to acquire certain Plus minority interests and distributors.
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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 $4 million of accrual relating to the failed bid to purchase Biomet Inc., in 2006 that was reversed. In 2006, $20 million of adviser’s fees were incurred in relation to the failed bid to purchase Biomet Inc.
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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 present value of probable consideration of $49 million and $1 million of costs associated with the acquisition. Of the $50 million, $26 million has been allocated to intangible assets, $10 million to deferred taxation liabilities and $34 million to goodwill.
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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.
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The cumulative number of revisions of the macrotextured knee product was 1,029 on 31 December 2007. This represents 35% of the total implanted. Settlements with patients have been achieved in respect of 977 of these revisions. In 2007, the provision increased by $22 million to reflect an increase in anticipated costs to settle outstanding and future claims, offset in the income statement by a receipt of $22 million from a successful legal settlement. A provision of $41 million remains available to cover the estimated cost of settlements pending and future claims by patients assuming that insurance cover continues to be declined.
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Taxation of $153 million (2006 – $156 million) for the year is at the full year effective rate of 32.6% (2006 –28.9% before discontinued operations). The tax charge was reduced by $49 million in 2007 as a consequence of restructuring and rationalisation expenses, acquisition related costs, the legal settlement and amortisation of acquisition intangibles. The tax charge was reduced by $6 million in 2006 as a consequence of the acquisition related costs.
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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 and associated costs, indemnity provision of $3 million and a release of taxation provisions of $23 million. The Group’s discontinued operations earnings per ordinary share for the year in 2006 was basic 37.3¢ and diluted 37.2¢.
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The 2007 first interim dividend of 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 was declared by the Board on 7 February 2008 and will be paid on 9 May 2008 to shareholders on the Register of Members on 18 April 2008.
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In February 2007, the Group commenced a share buy back programme of up to $1.5 billion over an initial two years. As at 31 December 2007, 51,955,000 ordinary shares had been purchased at a cost of $640 million.
In February 2008, the Board reviewed the programme in the light of current market conditions and opportunities and in order to preserve flexibility the Board currently expects to complete the programme over a total of three years.
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(Net debt)/net cash as at 31 December 2007 comprises:
2007 $million 2006 $million 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 (2) (2) (1,310) 210