REG - GlaxoSmithKline PLC - 3rd Quarter Results <Origin Href="QuoteRef">GSK.L</Origin> - Part 5
25/10/2017 12:06
- Part 5: For the preceding part double click ID:nRSY5880Ud
(670) (925) (848)
Total current liabilities (27,438) (18,137) (19,001)
Non-current liabilities
Long-term borrowings (14,294) (15,401) (14,661)
Deferred tax liabilities (1,916) (1,755) (1,934)
Pensions and other post-employment benefits (3,652) (4,620) (4,090)
Other provisions (671) (566) (652)
Derivative financial instruments (1) - -
Contingent consideration liabilities (5,000) (4,797) (5,335)
Other non-current liabilities (982) (9,513) (8,445)
Total non-current liabilities (26,516) (36,652) (35,117)
TOTAL LIABILITIES (53,954) (54,789) (54,118)
NET ASSETS 4,829 3,998 4,963
EQUITY
Share capital 1,343 1,341 1,342
Share premium account 3,011 2,905 2,954
Retained earnings (5,349) (6,550) (5,392)
Other reserves 2,289 2,442 2,220
Shareholders' equity 1,294 138 1,124
Non-controlling interests 3,535 3,860 3,839
TOTAL EQUITY 4,829 3,998 4,963
Statement of changes in equity
Sharecapital£m Sharepremium£m Retainedearnings£m Otherreserves£m Share-holder'sequity£m Non-controllinginterests£m Totalequity£m
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January 2017 1,342 2,954 (5,392) 2,220 1,124 3,839 4,963
Profit for the period 2,078 2,078 454 2,532
Other comprehensive income/(expense) for the period 876 (32) 844 (147) 697
------------ ------------ ------------ ------------ ------------
Total comprehensive income for the period 2,954 (32) 2,922 307 3,229
------------ ------------ ------------ ------------ ------------
Distributions to non-controlling interests (621) (621)
Contribution from non-controlling interests 21 21
Dividends to shareholders (2,977) (2,977) (2,977)
Changes in non-controlling interests (11) (11)
Shares issued 1 47 48 48
Shares acquired by ESOP Trusts 10 70 (140) (60) (60)
Write-down on shares held by ESOP Trusts (241) 241 -
Share-based incentive plans 237 237 237
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 September 2017 1,343 3,011 (5,349) 2,289 1,294 3,535 4,829
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January 2016 1,340 2,831 (1,397) 2,340 5,114 3,764 8,878
Profit for the period 655 655 90 745
Other comprehensive income for the period 27 55 82 555 637
------------ ------------ ------------ ------------ ------------
Total comprehensive income for the period 682 55 737 645 1,382
------------ ------------ ------------ ------------ ------------
Distributions to non-controlling interests (300) (300)
Dividends to shareholders (3,925) (3,925) (3,925)
Recognition of liabilities with non-controlling interests (2,013) (2,013) (159) (2,172)
Changes in non-controlling interests 2 2 (90) (88)
Shares issued 1 74 75 75
Shares acquired by ESOP Trusts (70) (70) (70)
Write-down on shares held by ESOP Trusts (117) 117 - -
Share-based incentive plans 218 218 218
------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 September 2016 1,341 2,905 (6,550) 2,442 138 3,860 3,998
------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash flow statement - nine months ended 30 September 2017
9 months 2017£m 9 months 2016£m
Profit after tax 2,532 745
Tax on profits 551 771
Share of after tax profits of associates and joint ventures (11) (4)
Profit on disposal of interest in associates (28) -
Net finance expense 531 491
Depreciation and other adjusting items 2,097 1,150
Increase in working capital (1,553) (1,322)
Contingent consideration paid (427) (238)
Increase in other net liabilities (excluding contingent consideration paid) 1,250 3,052
Cash generated from operations 4,942 4,645
Taxation paid (893) (1,139)
Net cash inflow from operating activities 4,049 3,506
Cash flow from investing activities
Purchase of property, plant and equipment (1,011) (943)
Proceeds from sale of property, plant and equipment 142 11
Purchase of intangible assets (513) (648)
Proceeds from sale of intangible assets 24 286
Purchase of equity investments (64) (71)
Proceeds from sale of equity investments 55 192
Contingent consideration paid (65) (47)
Purchase of businesses, net of cash acquired - (24)
Disposal of businesses 223 63
Proceeds from disposal of interest in associates 54 -
Investment in associates and joint ventures (8) (5)
Interest received 49 48
Dividends from associates and joint ventures 6 43
Net cash outflow from investing activities (1,108) (1,095)
Cash flow from financing activities
Issue of share capital 48 75
Shares acquired by ESOP Trusts (60) (70)
Increase in long-term loans 2,233 -
Increase in short-term loans 100 1,358
Repayment of short-term loans (1,544) (899)
Net repayment of obligations under finance leases (18) (14)
Interest paid (423) (398)
Dividends paid to shareholders (2,977) (3,925)
Contributions from non-controlling interests 21 -
Distributions to non-controlling interests (611) (300)
Other financing items 108 (276)
Net cash outflow from financing activities (3,123) (4,449)
Decrease in cash and bank overdrafts in the period (182) (2,038)
Cash and bank overdrafts at beginning of the period 4,605 5,486
Exchange adjustments (77) 203
Decrease in cash and bank overdrafts (182) (2,038)
Cash and bank overdrafts at end of the period 4,346 3,651
Cash and bank overdrafts at end of the period comprise:
Cash and cash equivalents 4,743 4,614
Overdrafts (397) (963)
4,346 3,651
Segment information
Operating segments are reported based on the financial information provided to the Chief Executive Officer and the responsibilities of the Corporate Executive Team (CET). GSK reports results under four segments: Pharmaceuticals; Pharmaceuticals R&D; Vaccines and Consumer Healthcare, and individual members of the CET are responsible for each segment. The Pharmaceuticals R&D segment is the responsibility of the President, Pharmaceuticals R&D and is reported as a separate segment. The Group's management
reporting process allocates intra-Group profit on a product sale to the market in which that sale is recorded, and the profit analyses below have been presented on that basis. From Q1 2017, Adjusted results have been amended to exclude, instead of all legal charges, only significant legal charges, as set out in 'Accounting policies and basis of preparation' on page 48. Comparative information has been revised accordingly.
Turnover by segment
Q3 2017£m Q3 2016£m Growth£% GrowthCER%
Pharmaceuticals 4,190 4,061 3 2
Vaccines 1,689 1,613 5 -
Consumer Healthcare 1,964 1,868 5 2
Total turnover 7,843 7,542 4 2
Operating profit by segment
Q3 2017£m Q3 2016(revised)£m Growth£% GrowthCER%
Pharmaceuticals 2,083 2,008 4 2
Pharmaceuticals R&D (657) (617) 6 5
Pharmaceuticals including R&D 1,426 1,391 2 1
Vaccines 698 641 9 5
Consumer Healthcare 392 301 30 19
Segment profit 2,516 2,333 8 4
Corporate and other unallocated costs (48) (35)
Adjusted operating profit 2,468 2,298 7 5
Adjustments (591) (867)
Total operating profit 1,877 1,431 31 27
Finance income 13 16
Finance costs (194) (179)
Profit on disposal of associates 8 -
Share of after tax profits of associates and joint ventures 7 6
Profit before taxation 1,711 1,274 34 30
Turnover by segment
9 months 2017£m 9 months 2016£m Growth£% GrowthCER%
Pharmaceuticals 12,736 11,529 10 3
Vaccines 3,952 3,455 14 5
Consumer Healthcare 5,859 5,319 10 2
Total turnover 22,547 20,303 11 3
Operating profit by segment
9 months 2017£m 9 months 2016(revised)£m Growth£% GrowthCER%
Pharmaceuticals 6,353 5,632 13 3
Pharmaceuticals R&D (2,023) (1,747) 16 10
Pharmaceuticals including R&D 4,330 3,885 11 -
Vaccines 1,413 1,151 23 14
Consumer Healthcare 1,071 842 27 10
Segment profit 6,814 5,878 16 4
Corporate and other unallocated costs (284) (234)
Adjusted operating profit 6,530 5,644 16 5
Adjustments (2,955) (3,641)
Total operating profit 3,575 2,003 78 52
Finance income 49 52
Finance costs (580) (543)
Profit on disposal of associates 28 -
Share of after tax profits of associates and joint ventures 11 4
Profit before taxation 3,083 1,516 >100 69
Legal matters The Group is involved in significant legal and administrative proceedings, principally product liability, intellectual property, tax, anti-trust and governmental investigations as well as related private litigation, which are more fully described in the 'Legal Proceedings' note in the Annual Report 2016. At 30 September 2017, the Group's aggregate provision for legal and other disputes (not including tax matters described under 'Taxation' below) was £0.2 billion (31 December 2016: £0.3
billion). The Group may become involved in significant legal proceedings in respect of which it is not possible to make a reliable estimate of the expected financial effect, if any, that could result from ultimate resolution of the proceedings. In these cases, the Group would provide appropriate disclosures about such cases, but no provision would be made. The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations
and possible settlement negotiations. The Group's position could change over time, and, therefore, there can be no assurance that any losses that result from the outcome of any legal proceedings will not exceed by a material amount the amount of the provisions reported in the Group's financial accounts. There have been no significant developments since the Q2 2017 Results Announcement. Developments with respect to tax matters are described in 'Taxation' below.
Taxation Issues related to taxation are described in the 'Taxation' note in the Annual Report 2016. The Group's tax rate on Total profits of 17.9% has been influenced by transaction-related charges arising on the Group's put option liabilities, costs associated with the withdrawal of Tanzeum and the reassessment of estimates of uncertain tax positions following the settlement of a number of open issues with tax authorities in various jurisdictions. The Group continues to believe it has made adequate
provision for the liabilities likely to arise from periods which are open and not yet agreed by tax authorities. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with relevant tax authorities. In the quarter, tax on Adjusted profits amounted to £482 million and represented an effective Adjusted tax rate of 21.0% (Q3 2016: 20.8%). The tax on Total profits amounted to £316 million and represented an effective tax rate of 18.5% (Q3
2016: 30.5%). In the 9 months 2017, tax on Adjusted profits amounted to £1,286 million and represented an Adjusted tax rate of 21.4% (2016: 21.1%). The charge for taxation on Total profits amounted to £551 million and represented an effective tax rate of 17.9% (2016: 50.9%). The Adjusted tax rate for the full year is expected to be in the range of 21-22%. The Group's balance sheet at 30 September 2017 included a tax payable liability of £1,061 million and a tax recoverable asset of £239 million.
Additional information
Accounting policies and basis of preparation
This unaudited Results Announcement contains condensed financial information for the three and nine months ended 30 September 2017 and should be read in conjunction with the Annual Report 2016, which was prepared in accordance with International Financial Reporting Standards as adopted by the European Union. This Results Announcement has been prepared applying consistent accounting policies to those applied by the Group in the Annual Report 2016. As detailed in the definition of Adjusted results on page
33, from Q1 2017 core results has been renamed Adjusted results and only significant legal charges and expenses are excluded, together with the other Adjusting items, in order to present Adjusted results. A reconciliation of Total to the revised Adjusted results for Q3 2016 and the 9 months 2016 are presented on pages 56 and 58. The revision had the effect of decreasing Adjusted operating profit for the 9 months 2016 by £65 million due to the inclusion of non-significant legal charges and expenses in the
Pharmaceuticals segment (£19 million) and in Corporate & other unallocated costs (£46 million). From Q1 2017, adjusted free cash flow is no longer being reported and the free cash flow definition has been amended to include all contingent consideration payments made during the period. The impact of the change on the free cash flow for the 9 months 2016 was to reduce the free cash flow by £47 million. The Group is required to implement a new accounting standard, IFRS 15 'Revenue from contracts with
customers', from 1 January 2018. Although GSK continues to assess the impact of IFRS 15 on the results of the Group, it does not expect that the new standard will have a material impact on revenue. The Group is also required to implement IFRS 9 'Financial instruments' from 1 January 2018. The new standard requires all fair value movements on equity investments to be recognised either in the income statement or in other comprehensive income, on a case-by-case basis, and also introduces a new impairment
model for financial assets based on expected losses rather than incurred losses. Although GSK continues to assess the impact of IFRS 9, it does not expect that the new impairment approach will have a material impact on the results of the Group. IFRS 16 'Leases' is required to be implemented by the Group from 1 January 2019. The Group is assessing the potential impact of the new standard. This Results Announcement does not constitute statutory accounts of the Group within the meaning of sections 434(3)
and 435(3) of the Companies Act 2006. The full Group accounts for 2016 were published in the Annual Report 2016, which has been delivered to the Registrar of Companies and on which the report of the independent auditors was unqualified and did not contain a statement under section 498 of the Companies Act 2006.
Exchange rates
GSK operates in many countries, and earns revenues and incurs costs in many currencies. The results of the Group, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates, as modified by specific transaction rates for large transactions, prevailing during the period, are used to translate the results and cash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period-end rates are used to translate the net
assets of those entities. The currencies which most influenced these translations and the relevant exchange rates were:
Q3 2017 Q3 2016 9 months 2017 9 months 2016 2016
Average rates:
US$/£ 1.30 1.33 1.28 1.39 1.36
Euro/£ 1.13 1.17 1.15 1.25 1.23
Yen/£ 148 139 144 153 149
Period-end rates:
US$/£ 1.34 1.30 1.34 1.30 1.24
Euro/£ 1.13 1.16 1.13 1.16 1.17
Yen/£ 151 132 151 132 144
During Q3 2017, average Sterling exchange rates were weaker against the US Dollar and the Euro but stronger against the Yen, compared with the same period in 2016. During the 9 months 2017 average Sterling exchange rates were weaker against the US Dollar, the Euro and the Yen compared with the same period in 2016. Period-end Sterling exchange rates were stronger against the US Dollar and the Yen, but weaker against the Euro.
Weighted average number of shares
Q3 2017millions Q3 2016millions
Weighted average number of shares - basic 4,890 4,865
Dilutive effect of share options and share awards 45 37
Weighted average number of shares - diluted 4,935 4,902
Weighted average number of shares
9 months 2017millions 9 months 2016millions
Weighted average number of shares - basic 4,884 4,857
Dilutive effect of share options and share awards 47 36
Weighted average number of shares - diluted 4,931 4,893
At 30 September 2017, 4,890 million shares were in free issue (excluding Treasury shares and shares held by the ESOP Trusts). This compares with 4,866 million shares at 30 September 2016.
Net assets
The book value of net assets decreased by £134 million from £4,963 million at 31 December 2016 to £4,829 million at 30 September 2017. This primarily reflects the impact of the dividends paid in the period exceeding the operating profits and favourable exchange movements. The carrying value of investments in associates and joint ventures at 30 September 2017 was £175 million, with a market value of £355 million. At 30 September 2017, the net deficit on the Group's pension plans was £1,636 million compared
with £2,084 million at 31 December 2016. The decrease in the net deficit primarily arose from asset gains during the period partly offset by a decrease in the rate used to discount US pension liabilities from 3.9% to 3.7%. At 30 September 2017, the post-retirement benefits provision was £1,594 million compared with £1,693 million at 31 December 2016. The decrease in the provision was primarily due to a weaker US Dollar at the period end. At 30 September 2017, the estimated present value of the potential
redemption amount of the Consumer Healthcare Joint Venture put option recognised in Other payables in Current liabilities was £8,243 million (31 December 2016: £7,420 million reported within Other non-current liabilities). The estimated present value of the potential redemption amount of the Pfizer put option related to ViiV Healthcare was £1,221 million (31 December 2016: £1,319 million), which is also recorded in Other payables in Current liabilities. Contingent consideration amounted to £5,917 million
at 30 September 2017 (31 December 2016: £5,896 million), of which £5,224 million (31 December 2016: £5,304 million) represented the estimated present value of amounts payable to Shionogi relating to ViiV Healthcare and £648 million (31 December 2016: £545 million) represented the estimated present value of contingent consideration payable to Novartis related to the Vaccines acquisition. The liability due to Shionogi included £213 million in respect of preferential dividends. The liability for preferential
dividends due to Pfizer at 30 September 2017 was £27 million (31 December 2016: £23 million). An explanation of the accounting for the non-controlling interests in ViiV Healthcare is set out on page 53. Of the contingent consideration payable (on a post-tax basis) at 30 September 2017, £917 million (31 December 2016: £561 million) is expected to be paid within one year. The consideration payable for the acquisition of the Shionogi-ViiV Healthcare joint venture and the Novartis Vaccines business is
expected to be paid over a number of years. As a result, the total estimated liabilities are discounted to their present values, on a post-tax basis using post-tax discount rates. The Shionogi-ViiV Healthcare contingent consideration liability is discounted at 8.5% and the Novartis Vaccines contingent consideration liability is discounted partly at 8% and partly at 9%. The liabilities for the put options and the contingent consideration at 30 September 2017 have been calculated based on the closing
exchange rates, primarily US$1.34/£1 and Euro E1.13/£1. The sensitivities to these exchange rates for Consumer Healthcare and ViiV Healthcare put options and the Shionogi-ViiV Healthcare and Novartis Vaccines contingent consideration liabilities are set out below.
Increase/(decrease) in liability ConsumerHealthcareJoint Ventureput option ViiV Healthcareput option Shionogi-ViiV Healthcarecontingentconsideration NovartisVaccinescontingentconsideration
£m £m £m £m
5 cent appreciation of US Dollar 46 33 158 13
5 cent depreciation of US Dollar (43) (31) (146) (12)
10 cent appreciation of US Dollar 95 69 328 27
10 cent depreciation of US Dollar (82) (59) (282) (23)
5 cent appreciation of Euro 132 20 43 10
5 cent depreciation of Euro (121) (19) (37) (9)
10 cent appreciation of Euro 276 42 89 21
10 cent depreciation of Euro (231) (36) (73) (18)
Movements in contingent consideration are as follows:
9 months 2017£m 9 months 2016£m
Contingent consideration at beginning of the period 5,896 3,855
Additions - 194
Amount reversed - (41)
Re-measurement through income statement 513 1,552
Cash payments: operating cash flows (427) (238)
Cash payments: investing activities (65) (47)
Other movements - (4)
Contingent consideration at end of the period 5,917 5,271
The additions in 2016 reflected the recognition of the preferential dividend payable to Shionogi in relation to ViiV Healthcare and contingent consideration on the acquisition of the BMS HIV programmes. The amount reversed in 2016 relates to a provision that had been made in respect of a small acquisition in 2012 but that was no longer required. The re-measurement increases in contingent consideration in the period primarily reflected the unwind of the discount on the liabilities and updated forecasts.
The cash settlement in the period included £485 million (2016: £280 million) of payments to Shionogi in relation to ViiV Healthcare. These payments are deductible for tax purposes.
At 30 September 2017, the ESOP Trusts held 28.6 million GSK shares against the future exercise of share options and share awards. The carrying value of £183 million has been deducted from other reserves. The market value of these shares was £425 million. At 30 September 2017, the company held 453.2 million Treasury shares at a cost of £6,381 million, which has been deducted from retained earnings.
Contingent liabilities
There were contingent liabilities at 30 September 2017 in respect of guarantees and indemnities entered into as part of the ordinary course of the Group's business. No material losses are expected to arise from such contingent liabilities. Provision is made for the outcome of legal and tax disputes where it is both probable that the Group will suffer an outflow of funds and it is possible to make a reliable estimate of that outflow. Descriptions of the significant legal and tax disputes to which the
Group is a party are set out on page 47.
Reconciliation of cash flow to movements in net debt
9 months 2017£m 9 months 2016£m
Net debt at beginning of the period (13,804) (10,727)
Decrease in cash and bank overdrafts (182) (2,038)
Increase in long-term loans (2,233) -
Net repayment of short-term loans 1,444 (459)
Net repayment of obligations under finance leases 18 14
Exchange adjustments 571 (1,449)
Other non-cash movements (23) (4)
Increase in net debt (405) (3,936)
Net debt at end of the period (14,209) (14,663)
Net debt analysis
30 September 2017£m 30 September 2016£m 31 December 2016£m
Liquid investments 82 85 89
Cash and cash equivalents 4,743 4,614 4,897
Short-term borrowings (4,740) (3,961) (4,129)
Long-term borrowings (14,294) (15,401) (14,661)
Net debt at end of the period (14,209) (14,663) (13,804)
Free cash flow reconciliation
Q3 2017£m 9 months 2017£m 9 months 2016(revised)£m
Net cash inflow from operating activities 1,897 4,049 3,506
Purchase of property, plant and equipment (372) (1,011) (943)
Proceeds from sale of property, plant and equipment 17 142 11
Purchase of intangible assets (124) (513) (648)
Net finance costs (25) (374) (350)
Dividends from joint ventures and associates 4 6 43
Contingent consideration paid (reported in investing activities) (25) (65) (47)
Contribution from non-controlling interests 21 21 -
Distributions to non-controlling interests (117) (611) (300)
Free cash flow 1,276 1,644 1,272
Non-controlling interests in ViiV Healthcare
Trading profit allocationsBecause ViiV Healthcare is a subsidiary of the Group, 100% of its operating results (turnover, operating profit, profit after tax) are included within the Group income statement and then a portion of the earnings is allocated to the non-controlling interests owned by the other shareholders, in line with their respective equity shareholdings (Pfizer 11.7% and Shionogi 10%). Each of the shareholders, including GSK, is also entitled to preferential dividends determined by the
performance of certain products that each shareholder contributed. As the relative performance of these products changes over time, the proportion of the overall earnings of ViiV Healthcare allocated to each shareholder will change. In particular, the increasing sales of Tivicay and Triumeq have a favourable impact on the proportion of the preferential dividends that is allocated to GSK. GSK was entitled to approximately 80% of the core earnings of ViiV Healthcare for 2016. Re-measurements of the
liabilities for the preferential dividends allocated to Pfizer and Shionogi are included within other operating income. Acquisition-related arrangementsAs part of the agreement reached to acquire Shionogi's interest in the former Shionogi-ViiV Healthcare joint venture in 2012, the Group agreed to pay additional consideration to Shionogi contingent on the performance of the products being developed by that joint venture, principally dolutegravir. The liability for this contingent consideration was estimated
and recognised in the balance sheet at the date of acquisition. Subsequent re-measurements are reflected within Adjusting items in the income statement. Cash payments are made to Shionogi by ViiV Healthcare each quarter which reduce the balance sheet liability and are hence not recorded in the income statement. The payments are calculated based on the sales performance of the relevant products in the previous quarter and are reflected in the cash flow statement partly in operating cash flows and partly
within investing activities. The tax relief on these payments is reflected in the Group's Adjusting items and total tax charge. The part of each payment relating to the original estimate of the fair value of the contingent consideration on the acquisition of the Shionogi-ViiV Healthcare joint venture in 2012 of £659 million is reported within investing activities in the cash flow statement and the part of each payment relating to the increase in the liability since the acquisition is reported within
operating cash flows.
Movements in contingent consideration payable to Shionogi are as follows:
9 months 2017£m 9 months 2016£m
Contingent consideration at beginning of the period 5,304 3,409
Additions - 154
Re-measurement through income statement 405 1,489
Cash payments: operating cash flows
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