Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date Issued: December 1, 2011
Reporting Period: The filing provides unaudited reconciliations for the full year 2010 and the first nine months of 2011 (Q1-Q3), alongside quarterly breakdowns. The primary purpose of this filing is to announce a change in financial reporting methodology effective Q1 2012.
Key Financial Metrics
The filing details the reconciliation between statutory ("Total results") and proposed "Core" earnings. Key metrics for the nine months ended September 30, 2011, are as follows:
- Turnover (Revenue): £20,409 million (Statutory) / £20,409 million (Core).
- Operating Profit: £5,928 million (Statutory) / £6,539 million (Core).
- Profit Before Taxation: £5,997 million (Statutory) / £6,025 million (Core).
- Profit Attributable to Shareholders: £4,009 million (Statutory) / £4,260 million (Core).
- Earnings Per Share (EPS): 79.4p (Statutory) / 84.4p (Core).
- Effective Tax Rate: 30.4% (Statutory) / 26.6% (Core).
Note: The filing does not provide specific data on cash flow, total debt, or liquidity ratios for the period.
Material Changes and Reporting Methodology
GSK announced a transition to a "core earnings" basis starting Q1 2012 to reduce volatility and improve peer comparability. The reconciliation highlights significant adjustments made to statutory figures to arrive at core figures:
- Intangible Assets: Exclusion of amortisation and impairment of intangible assets (excluding software) and goodwill. For the nine months ended Sept 2011, this added £341 million (amortisation) and £51 million (impairment) to operating profit.
- Restructuring: Exclusion of major restructuring costs. Approximately £0.7 billion remains to be charged from the current £4.5 billion programme.
- Legal Charges: Exclusion of legal charges related to product liability and anti-trust litigation. For the nine months ended Sept 2011, £81 million was excluded.
- Other Operating Income: Exclusion of items such as fair value adjustments and disposal profits. A significant £584 million profit on the disposal of an interest in associates in Q1 2011 was excluded from core results.
Performance Comparison (Nine Months 2011 vs. 2010):
- Turnover: Decreased by 3% (Constant Exchange Rate).
- Core Operating Profit: Decreased by 8% (Constant Exchange Rate).
- Core EPS: Decreased by 10% (Constant Exchange Rate).
Outlook, Risks, and Management Commentary
Management Commentary: The shift to core reporting is intended to provide a clearer view of underlying business performance by removing non-cash items and volatile one-off charges. A teleconference was held on December 1, 2011, to discuss the methodology.
Risks and Contingencies: The filing includes a standard cautionary statement regarding forward-looking statements, noting that actual results may differ due to risks described in the 2010 Annual Report on Form 20-F. Specific risks highlighted in the context of the reporting change include the volatility of legal charges, asset impairments, and restructuring costs.
Unusual Items: The Q1 2011 statutory results included a £584 million profit on the disposal of an interest in associates, which is excluded from the core measure. Additionally, Q2 2010 statutory results showed a loss before tax of £97 million, which was adjusted to a core profit of £2,164 million due to significant legal and restructuring charges.
Investor Verification Checklist
- Verify the specific components of the £4.5 billion restructuring programme and the timing of the remaining £0.7 billion charge.
- Review the detailed breakdown of legal charges excluded from core earnings to assess ongoing litigation exposure.
- Compare the new "Core EPS" metrics against peer group reporting standards to validate the claimed comparability.
- Monitor the impact of the £584 million disposal gain exclusion on future earnings volatility if similar disposals occur.
- Confirm the tax rate assumptions used in the core reconciliation (26.6% for 9M 2011) against statutory rates.