FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of
1934
July 31, 2003
Commission File Number 001-14978
SMITH & NEPHEW plc
(Registrant's name)
15 Adam Street
London, England WC2N 6LA
(Address of registrant's principal executive offices)
[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]
Form 20-F X Form 40-F
----- -----
[Indicate by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(1).]
Yes No X
----- -----
[Indicate by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(7).]
Yes No X
----- -----
[Indicate by check mark whether by furnishing the information contained
in this Form, the registrant is also thereby furnishing information to the
Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of
1934.]
Yes No X
----- -----
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2 (b) : 82- n/a.
Total Pages: 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Smith & Nephew plc
(Registrant)
Date: July 31, 2003 By: /s/ Paul Chambers
----------------------
Paul Chambers
Company Secretary
2
31 July 2003
Orthopaedics Drives Strong Performance at Smith & Nephew
Smith & Nephew plc, the global medical devices company, announces its interim
results for the half year ending 28 June 2003.
Key Points:
o Underlying sales growth 11%
o Margin targets again achieved
o EPS growth 11% before goodwill amortisation and exceptional items
o Excellent performance in Orthopaedics
o Outlook remains positive
Dudley Eustace, Chairman, said: "Smith & Nephew continues to deliver a strong
performance in attractive long-term growth markets. We are particularly
pleased with the excellent results achieved by our Orthopaedics business,
where our innovative technologies enabled us once again to make market share
gains. We are confident that we can deliver sustainable sales growth and
achieve our financial targets."
Enquiries
Peter Hooley, Finance Director Tel: +44 (0) 20 7401 7646
Smith & Nephew plc
Angie Craig, Corporate Affairs Director Tel: +44 (0) 20 7401 7646
Smith & Nephew plc
David Yates Tel: +44 (0) 20 7831 3113
Financial Dynamics
A presentation for analysts will be held at the City Presentation Centre,
4 Chiswell Street, Finsbury Square, London EC1Y 4UP at 9.30am GMT today.
The meeting will be webcast live and will be available on demand shortly
after the close of the meetings at http://www.smith-nephew.com/interims..
The presentation may also be heard by dialling +44 (0)20 7984 7569 (for
Europe); (913) 981 5507 (for US). The presentation can be found on our
website: http://www.smith-nephew.com/interims. High resolution
photographs are available to the media free of charge at
www.newscast.co.uk.
2
Trading results
In the first half of 2003 Smith & Nephew continued to achieve double-digit
underlying sales growth and turned in a particularly strong performance in its
largest and fastest-growing business, Orthopaedics. Advanced Wound Management
and Endoscopy experienced a slower start to the year but both businesses have
gained momentum at the half year - a trend we expect to continue.
Underlying sales growth for the half-year was 11%, with an additional 1% of
sales arising from acquisitions, less 3% of adverse currency translation. This
growth was fuelled by the company's continued commitment to developing
innovative new products and techniques that help the surgeon and clinical
community get people back to their normal lives faster.
Among operational highlights in the first half, the Orthopaedics business
formed two separate divisions - Reconstructive Implants and Trauma. The
Endoscopy business completed the integration of the radio frequency business,
ORATEC Interventions, acquired last year. Advanced Wound Management integrated
the Dermagraft venture acquired from Advanced Tissue Sciences, Inc., ("ATS")
at the end of last year.
Profit before goodwill amortisation, exceptional items and tax amounted to
GBP112m for the half-year, a 10% increase over first half 2002. This
comprised GBP103m of operating profit before goodwill amortisation,
GBP13m profit from our interests in BSN Medical and AbilityOne, less
GBP4m of interest costs.
EBITA margins before exceptional items were maintained at 17.9% despite the
increased cost of funding the pension deficit and the costs of Dermagraft,
following the acquisition of ATS's half share last year. These two expenses
impacted margins by 0.7% and 0.8% respectively.
Orthopaedics improved its operating margins by leveraging its sales growth
together with operational improvements. Endoscopy produced a substantial
improvement in its operating margins by accelerating the integration of ORATEC
and a focus on expense controls as sales growth slowed in the US. Wound
Management's margins were adversely impacted by the acquisition of the
additional half of the Dermagraft joint venture and a disproportionate share
of the increased pension funding.
EPS, tax, exceptional items and cash flow
After an ordinary tax charge of 29%, earnings per share before goodwill
amortisation and exceptional items were 8.59p, an increase on first half 2002
of 11%.
Exceptional costs of GBP5m were incurred in the half year, principally on
integrating Oratec's production and development facilities.
Operating cash flow was GBP53m, which is a profit to cash conversion ratio
of 56% before rationalisation and integration expenditure, compared to 49% a
year ago. Net debt closed at GBP289m.
3
Dividend
To conform with the terms of our offers for Centerpulse AG and InCentive
Capital AG, we have brought forward the record and payment date of our interim
dividend. An interim dividend of 1.85p per share (2002: 1.80p) will be paid on
12 September 2003 to shareholders on the register at the close of business on
15 August 2003. Shareholders may participate in the company's dividend
reinvestment plan.
Offers for Centerpulse and InCentive Capital
During the first half, we announced a recommended offer to combine our
business with that of Centerpulse AG, along with a parallel offer to acquire
its largest shareholder, InCentive Capital AG. Combining Smith & Nephew, one
of the fastest growing and most innovative medical devices companies, with
Centerpulse, the European leader, would create the world's No 3 orthopaedic
implant company. Zimmer Holdings Inc. has also made offers to acquire
Centerpulse and InCentive Capital, and the two companies' offers are running
concurrently. Smith & Nephew remains convinced it is the best partner for
Centerpulse and its shareholders and is currently reviewing its options.
Operating review
Orthopaedics
Orthopaedics sales rose by an underlying 16%, and its growth continued to be
among the best in the industry, with 26% of sales coming from new products.
The divisionalisation of the Orthopaedics business, announced earlier this
year, is progressing smoothly and has enabled us to take further advantage of
the opportunities within the reconstructive and trauma marketplaces. By the
end of the year, we will have in place a dedicated trauma sales force of more
than 60 to focus on key trauma centres in the United States.
Reconstructive sales grew by an impressive 20% boosted by a strong performance
by Oxinium products, where we continue to take both knee and hip market share.
Knee sales are growing at 23% and hip sales 14%. Trauma sales grew 11% in the
first half driven by external fixation devices and the Exogen ultrasound bone
healing and TriGen nail products.
Response to our unique Oxinium range of products continues to be exceptional,
with the use of Oxinium components in the US reaching 36% penetration of our
sales in knees and 24% in hips, the latter only introduced in February. The
unicompartmental knee incorporating Oxinium is being introduced this week and
we are in the process of launching a dynamic direct-to-consumer marketing
campaign for Oxinium implants in the US.
We have also launched Accuris instrumentation for the unicompartmental knee,
as well as instrumentation for minimally invasive surgery for total knee
replacement. We continue to make progress in the area of computer assisted
surgery, and have partnered with GE Medical Systems to develop applications
for reconstructive and trauma surgeries.
4
Endoscopy
Strong sales growth of 14% outside the Americas allowed us to achieve
underlying sales growth of 5% in the first half of the year - despite flat
sales in the US. The acquisition of ORATEC last year added to this a further
5% of sales.
The resection blades business in the US has suffered a 4% sales decline in the
first half due to a rise in the number of hospitals using reprocessed blades.
Endoscopy sales to HealthSouth, both of consumables and capital equipment,
were also disrupted as a result of its financial difficulties. US blade sales
will continue to experience some pressure in the second half; however, new
product launches are expected to improve overall Endoscopy sales growth.
While there is already a high level of penetration in the US market for
arthroscopic knee surgery, shoulder arthroscopic procedures and overall
business growth outside the US remain robust. Our outstanding developments in
cartilage and ligament repair for both shoulders and knees continue to drive
double digit growth globally for these products.
Advanced Wound Management
Sales of Advanced Wound Management products grew an underlying 8%. The US grew
strongly despite production start up delays, which have now been overcome.
Europe had a slower start to the year, principally due to reimbursement
changes in Germany. We have now fully integrated the Dermagraft La Jolla,
California, facility into the business.
Our lead product Allevyn has again maintained strong sales growth of 18% and
we are expanding its production in the US. Sales of Acticoat, the silver-based
dressing, are up 50% and the product continues to gain acceptance globally. We
are encouraged by the first half performance of Dermagraft, our bioengineered
skin replacement for diabetic foot ulcers, as well as TransCyte, used to treat
burn patients. Reimbursement coverage for Dermagraft in the US is now
virtually complete.
BSN Medical
BSN again improved operating margins as the programme of manufacturing
rationalisation continues.
New corporate brand
Smith & Nephew is today introducing a new corporate brand, modernising the
previous identity which has been unchanged for over twenty years. The new
brand reflects the energy and vitality in today's Smith & Nephew that has come
with the transformation of the company over the past four years. Adoption of
the new Smith & Nephew brand identity throughout the group will result in
heightened visibility and awareness of the company in the marketplace and
increase the value of the Smith & Nephew brand.
5
Outlook
Smith & Nephew has again delivered a strong overall performance in attractive
long-term growth markets. Our margin improvement programmes continue to
deliver positive results.
Looking forward to the remainder of the year, we are confident that our
innovative product technologies will allow us to sustain our strong growth
rate in Orthopaedics. In Endoscopy, new product launches and stronger
international sales are expected increasingly to offset weakening sales in the
US blades market. Advanced Wound Management has the momentum to deliver
improved growth in the second half.
Management will continue to focus on its successful margin improvement
programmes and we remain on track to achieve our financial targets.
United States of America
The offer for Centerpulse shares is being made in the United States only
through a prospectus/offer to exchange, which is part of a registration
statement filed with the SEC by Smith & Nephew Group. Centerpulse shareholders
who are US persons or are located in the United States are urged to read the
registration statement, including the prospectus/offer to exchange included
therein, and the other documents filed, or to be filed, with the SEC by Smith
& Nephew Group or Centerpulse relating to the Centerpulse offer, because they
contain important information about the Centerpulse offer. You may obtain a
free copy of these documents from the SEC's Web site at www.sec.gov. You may
also obtain this information from Morrow & Co., Inc., the US information agent
for the Centerpulse offer, at (800) 607-0088, or by e-mail at
centerpulse.info@morrowco.com
- 6 -
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Unaudited Group Profit and Loss Account
---------------------------------------
for the Half Year Ended 28 June 2003
------------------------------------
Year
2002 2003 2002
GBPm Notes GBPm GBPm
Turnover 1
1,083.7 Continuing operations 577.3 531.9
26.2 Discontinued operations 2 - 26.2
-------- ----- -----
1,109.9 Group turnover 577.3 558.1
155.0 Share of joint venture 81.0 79.3
-------- ------ -----
1,264.9 658.3 637.4
======= ====== =====
Operating profit 1
Continuing operations
196.0 - before goodwill amortisation and exceptional items 103.1 95.2
(17.5) - goodwill amortisation* (9.4) (8.1)
(29.9) - exceptional items* 3 (4.3) (15.3)
------ ----- ------
148.6 89.4 71.8
2.1 Discontinued operations 2 - 2.1
------ ------ -----
150.7 89.4 73.9
Share of operating profit of the joint venture
19.6 - before exceptional items 9.9 9.4
(2.6) - exceptional items* 4 (0.6) (1.3)
------- ----- -----
167.7 98.7 82.0
4.9 Share of operating profit of the associated undertaking 3.4 1.4
------ ------ ----
172.6 102.1 83.4
18.0 Discontinued operations - net profit on disposals* 2 - 19.0
------ ------ -----
190.6 Profit on ordinary activities before interest 102.1 102.4
(12.7) Interest payable 5 (4.0) (6.3)
------ ----- -----
177.9 Profit on ordinary activities before taxation 98.1 96.1
65.8 Taxation 6 30.9 45.5
------ ---- ----
112.1 Attributable profit 67.2 50.6
44.6 Ordinary dividends 7 17.2 16.7
---- ---- ----
67.5 Retained profit 50.0 33.9
==== ==== ====
12.11p Basic earnings per ordinary share 8 7.23p 5.46p
12.02p Diluted earnings per ordinary share 8 7.19p 5.42p
*Results before goodwill amortisation and exceptional items
GBP209.9m Profit before taxation 9 GBP112.4m GBP101.8m
16.02p Adjusted basic earnings per ordinary share 8 8.59p 7.76p
15.89p Adjusted diluted earnings per ordinary share 8 8.54p 7.71p
- 7 -
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Abridged Group Balance Sheet as at 28 June 2003
-----------------------------------------------
Year 2002
2002 2003 Restated(B)
GBPm GBPm GBPm
317.2 Intangible assets 304.1 332.8
255.8 Tangible assets 259.5 248.9
115.0 Investment in joint venture(A) 120.9 112.4
8.5 Investment in associated undertaking 10.6 7.5
8.2 Investments 5.7 17.7
------ ----- ------
704.7 700.8 719.3
----- ----- -----
229.5 Stocks 241.4 241.6
280.7 Debtors 327.7 293.4
22.5 Cash 36.4 56.2
(315.9) Creditors (295.9) (333.5)
------- ------- -------
216.8 309.6 257.7
(316.1) Borrowings (348.7) (407.1)
(56.0) Provisions - deferred taxation (59.1) (54.8)
(32.1) - other (30.1) (37.2)
------ ------ ------
517.3 Shareholders' funds 572.5 477.9
===== ===== =====
(A) Investment in joint venture comprises goodwill GBP71.6 million, share of
gross tangible assets GBP109.5 million less share of gross liabilities
GBP60.2 million.
(B) Half year 2002 comparative figures have been restated for the
reclassification of currency swap assets and liabilities from cash and
borrowings to debtors and creditors respectively.
Abridged Movement in Shareholders' Funds
----------------------------------------
for the Half Year Ended 28 June 2003
------------------------------------
Year
2002 2003 2002
GBPm GBPm GBPm
404.6 Opening shareholders' funds 517.3 404.6
112.1 Attributable profit 67.2 50.6
(44.6) Dividends (17.2) (16.7)
9.1 Exchange adjustments 2.9 6.0
30.0 Goodwill on disposals - 30.0
(2.3) Movements relating to the QUEST - (0.4)
8.4 Issue of shares 2.3 3.8
------ ----- -----
517.3 Closing shareholders' funds 572.5 477.9
===== ===== =====
- 8 -
SMITH & NEPHEW plc
2003 INTERIM RESULTS continued
Abridged Group Cash Flow for the Half Year Ended 28 June 2003
-------------------------------------------------------------
Year
2002 2003 2002
GBPm GBPm GBPm
150.7 Operating profit 89.4 73.9
94.4 Depreciation and amortisation(C) 37.2 43.9
(35.8) Working capital and provisions (44.7) (38.9)
------ ------ ------
209.3 Net cash inflow from operating activities(D) 81.9 78.9
(86.1) Capital expenditure and financial investment (29.2) (41.2)
------ ------ ------
123.2 Operating cash flow 52.7 37.7
3.9 Joint venture dividend 2.7 2.2
(10.2) Interest (2.6) (5.2)
(52.3) Taxation (23.3) (29.7)
(43.5) Dividends (27.9) (26.8)
(206.3) Acquisitions (3.6) (193.5)
- Centerpulse transaction costs (15.6) -
71.8 Disposals - 71.8
5.7 Joint venture formation - 5.7
6.1 Issues of ordinary share capital 2.3 3.4
------ ----- -------
(101.6) Net cash outflow (15.3) (134.4)
68.2 Exchange adjustments 3.7 27.8
(243.5) Opening net debt (276.9) (243.5)
------- ------- -------
(276.9) Closing net debt (288.5) (350.1)
======= ======= =======
54% Gearing 50% 73%
(C) Comparative figures include GBP8.0 million exceptional write-down of
the group's equity investment in Advanced Tissue Sciences, Inc. at the
half year and GBP17.5 million for full year 2002.
(D) After GBP5.3 million (GBP9.1 million at the half year and GBP19.3
million for full year 2002) of outgoings on rationalisation, acquisition
integration and divestment costs.
Net debt includes GBP23.8 million of net currency swap assets (GBP0.8
million at the half year and GBP16.7 million for full year 2002).
Statement of Total Recognised Gains and Losses
----------------------------------------------
for the Half Year Ended 28 June 2003
------------------------------------
Year
2002 2003 2002
GBPm GBPm GBPm
112.1 Attributable profit 67.2 50.6
9.1 Currency translation differences on foreign currency net investments 2.9 6.0
----- ----- -----
121.2 Total recognised gains and losses 70.1 56.6
===== ==== ====
- 9 -
SMITH & NEPHEW plc
NOTES TO THE 2003 INTERIM RESULTS
1. Segmental performance for the half year ended 28 June 2003 was as follows:
Group turnover by business segment
Year
2002 2003 2002 Underlying
GBPm GBPm GBPm sales growth
470.2 Orthopaedics 260.0 235.8 16%
291.8 Endoscopy 148.8 141.7 5%
321.7 Advanced Wound Management 168.5 154.4 8%
------- ----- ----- ----
1,083.7 Continuing operations 577.3 531.9 11%
======= ===== ===== ===
Group operating profit by business segment
Year
2002 2003 2002
GBPm GBPm GBPm
98.2 Orthopaedics 58.4 51.2
53.8 Endoscopy 27.9 21.4
44.0 Advanced Wound Management 16.8 22.6
----- ----- ----
196.0 103.1 95.2
(17.5) Goodwill amortisation (9.4) (8.1)
(29.9) Exceptional items (4.3) (15.3)
------ ----- -----
148.6 Continuing operations 89.4 71.8
===== ==== ====
Group turnover by geographic market
Year
2002 2003 2002 Underlying
GBPm GBPm GBPm sales growth
318.7 Europe* 182.0 155.6 9%
610.5 America 312.6 303.1 12%
154.5 Africa, Asia and Australasia 82.7 73.2 11%
------- ------ ----- ---
1,083.7 Continuing operations 577.3 531.9 11%
======= ===== ===== ===
* Includes United Kingdom sales of GBP46.2 million (GBP40.8
million at the half year and GBP87.3 million for full year 2002).
Underlying sales growth is sales growth adjusted to eliminate the
effects of translational currency, acquisitions and disposals.
- 10 -
SMITH & NEPHEW plc
NOTES TO THE 2003 INTERIM RESULTS continued
2. Discontinued operations in 2002 represent the results and net profit on
disposal of the rehabilitation business to AbilityOne.
3. Operating exceptional items within continuing operations comprise
GBP4.3 million of acquisition integration costs (2002 half year
GBP4.2 million; full year GBP8.4 million) and in half year 2002
GBP8.0 million write down against the group's equity investment in
Advanced Tissue Sciences, Inc. (full year GBP17.5 million) and GBP3.1
million costs of rationalisation consequent on the contribution of
businesses to BSN Medical and manufacturing rationalisation (full year
GBP4.0 million).
4. The group's share of exceptional items of the joint venture relates to
manufacturing rationalisation costs of BSN Medical.
5. Interest includes GBP0.9 million (2002 half year GBP0.8 million; full
year GBP1.6 million) in respect of the group's share of the net
interest charge of BSN Medical and GBP0.5 million (2002 half year
GBP0.3 million; full year GBP0.9 million) in respect of the group's
share of the net interest charge of AbilityOne.
6. Taxation of GBP32.6 million (2002 half year GBP29.9 million; full
year GBP61.6 million) arises on the profit before goodwill amortisation
and exceptional items, an estimated effective rate of 29% on the full
year's results before exceptional items and goodwill amortisation and a
credit of GBP1.7 million arises in respect of the net exceptional
items. Of the total, GBP32.3 million relates to overseas taxation,
GBP2.5 million relates to the group's share of the tax of BSN Medical
and GBP1.2 million relates to the group's share of the tax of
AbilityOne.
7. An interim dividend of 1.85 pence per ordinary share (2002 - 1.80 pence
per ordinary share) will be paid on 12 September 2003 to all shareholders
on the register at the close of business on 15 August 2003. Shareholders
may participate in the dividend reinvestment plan.
8. The basic average number of ordinary shares in issue was 929 million
(2002 - 926 million). The diluted average number of ordinary shares in
issue was 934 million (2002 - 933 million).
9. Results before goodwill amortisation and exceptional items states profit
on ordinary activities before taxation before charging goodwill
amortisation and exceptional items and before the net profit on the
disposal of discontinued operations. Earnings per ordinary share before
goodwill amortisation and exceptional items is based on the attributable
profit before accounting for these items and taxation on the exceptional
items.
10. On 23 June 2003 the 5 1/2% GBP1.00 cumulative preference shares in
Smith & Nephew plc were cancelled resulting in a reduction in share
capital of GBP268,501. In consideration, preference shareholders were
paid GBP1.38 per share on 7 July 2003.
11. The interim financial information 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 2002. The financial information contained in
this interim statement does not constitute statutory accounts as defined
in Section 240 of the Companies Act 1985.
- 11 -
SMITH & NEPHEW plc
NOTES TO THE 2003 INTERIM RESULTS continued
12. The financial information for the year ended 31 December 2002 has been
extracted from the full annual accounts of the group which have been
filed with the Registrar of Companies. The auditors' report on those
accounts was unqualified.
13. In April 2003, Smith & Nephew made a public offer to purchase Centerpulse
AG, a listed medical devices company incorporated under the laws of
Switzerland along with a parallel offer to acquire its largest
shareholder, InCentive Capital AG. In June 2003, Zimmer Holdings Inc.
made counter offers to purchase Centerpulse AG and InCentive Capital AG.
The offers and counter offers are still open. Until the offers are
resolved transaction costs relating to the offers to acquire Centerpulse
AG and InCentive Capital AG will be included in debtors. As at 28 June
2003 the amount was GBP15.6 million.
Independent Review Report to Smith & Nephew plc
-----------------------------------------------
Introduction
------------
We have been instructed by the company to review the financial information for
the six months ended 28 June 2003 which comprises the Group Profit and Loss
Account, Abridged Group Balance Sheet, Abridged Movement in Shareholders'
Funds, Abridged Group Cash Flow Statement, Statement of Total Recognised Gains
and Losses and the related notes 1 to 13. We have read the other information
contained in the interim report and considered whether it contains any
apparent misstatements or material inconsistencies with the financial
information.
This report is made solely to the company in accordance with guidance
contained in Bulletin 1999/4 `Review of interim financial information' issued
by the Auditing Practices Board. To the fullest extent permitted by the law,
we do not accept 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, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors
are responsible for preparing the interim report in accordance with the
Listing Rules of the Financial Services Authority which require that the
accounting policies and presentation applied to the interim figures should be
consistent with those applied in preparing the preceding annual accounts
except where any changes, and the reasons for them, are disclosed.
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 Board for use in the United Kingdom. A review consists principally
of making enquiries of group management and applying analytical procedures to
the financial information and underlying financial data, and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied, unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities
and transactions. It is substantially less in scope than an audit performed in
accordance with United Kingdom Auditing Standards and therefore provides a
lower level 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 financial information as presented for the six months
ended 28 June 2003.
Ernst & Young LLP
London 31 July 2003