TIDMSN.
RNS Number : 2505E
Smith & Nephew Plc
08 February 2018
Smith & Nephew Fourth Quarter and Full Year 2017 Results
8 February 2018
Smith & Nephew plc (LSE:SN, NYSE:SNN) results for the Fourth
Quarter and Full Year to 31 December 2017:
Reported Trading(2)
------------------------ --------------------------
31 Dec 31 Dec Reported 31 Dec 31 Dec Underlying
2017 2016 growth 2017 2016 growth
$m $m % $m $m %
------ ------ -------- ------ ------ ----------
Fourth Quarter Results(1)
Revenue 1,278 1,222 5 1,278 1,222 2
------ ------ -------- ------ ------ ----------
Full Year Results(1)
Revenue 4,765 4,669 2 4,765 4,669 3
Operating profit 934 801
Trading profit 1,048 1,020
Operating/trading profit margin (%) 19.6 17.2 22.0 21.8
EPS/ EPSA (cents) 87.8 88.1 94.5 82.6
--------------------------------------- ------ ------ -------- ------ ------ ----------
2017 Full Year Highlights(1)
-- Underlying revenue up 3% and trading profit margin up 20bps to 22.0%, in line with guidance
o Reported revenue growth of 2% is after -1% reduction from the
disposal of Gynaecology business in 2016 and no FX impact
o Operating profit margin of 19.6%, up 240bps from more
favourable non-trading items
-- Performance driven by market-beating growth from Knee
Implants and double-digit growth in Emerging Markets, offset by
softness in AET and European Advanced Wound Care
-- Trading cash flow of $940 million, up from $765 million in
2016, with higher trading profit to cash conversion ratio of
90%
-- Tax rate on trading results reduced by 670bps to 17.1%,
including benefit from one-off US tax settlement (12.7% reported
tax rate)
-- EPSA up 14% to 94.5c reflecting improved trading and tax rate (EPS flat at 87.8c)
-- ROIC(4) improved 280bps to 14.3%
-- Full year dividend up 14% to 35.0c per share
Guidance(1)
-- Revenue expected to increase 3%-4% underlying (around 7%-8% reported(3) )
-- Trading profit margin expected to improve by a further 30-70bps
-- Tax rate on trading results expected to be 20%-21% following US tax reform
-- Accelerating Performance and Execution (APEX) programme
initiated to drive an annualised benefit of $160 million by 2022
through better execution and efficiency for a one-off cost of $240
million
Olivier Bohuon, Chief Executive Officer of Smith & Nephew,
said:
"We delivered on our promises to improve the top and bottom line
in 2017. Our Knee Implants franchise delivered a standout
performance and we returned to double-digit growth in the Emerging
Markets. Our healthy balance sheet, good cash generation and
increased dividend demonstrate the robust foundations underpinning
our business.
"In 2018 I expect Smith & Nephew to build on 2017 by
delivering another year of improved performance driven by our
strong product portfolio and pipeline of innovative products.
"Looking further ahead, our greater focus on commercial
execution gives us confidence we will outgrow our markets and the
new APEX programme supports our expectation of improved trading
profit margin."
Analyst conference call
An analyst meeting and conference call to discuss Smith &
Nephew's results for the year ended 31 December 2017 will be held
today, Thursday 8 February 2018 at 9:00am GMT / 4:00am EST. This
will be webcast live and available for replay shortly after. The
details can be found on the Smith & Nephew website at
www.smith-nephew.com/results.
Enquiries
Investors
Ingeborg Øie +44 (0) 20 7960 2285
Smith & Nephew
Media
Charles Reynolds +44 (0) 20 7401 7646
Smith & Nephew
Ben Atwell / Simon Conway +44 (0) 20 3727 1000
FTI Consulting
Notes
1. Unless otherwise specified as 'reported' all revenue growth
throughout this document is 'underlying' after adjusting for the
effects of currency translation and including the comparative
impact of acquisitions and excluding disposals. All percentages
compare to the equivalent 2016 period.
Underlying revenue growth is used to compare the revenue in a
given period to the comparative period on a like-for-like basis.
Underlying revenue growth reconciles to reported revenue growth,
the most directly comparable financial measure calculated in
accordance with IFRS, by making adjustments for the effect of
acquisitions and disposals and the impact of movements in exchange
rates (currency impact), as described below.
The effect of acquisitions and disposals measures the impact on
revenue from newly acquired business combinations and recent
business disposals. This is calculated by comparing the current
year, constant currency actual revenue (which include acquisitions
and exclude disposals from the relevant date of completion) with
prior year, constant currency actual revenue, adjusted to include
the results of acquisitions and exclude disposals for the
commensurate period in the prior year.
Currency impact measures the increase/decrease in revenue
resulting from currency movements on non-US Dollar sales and is
measured as the difference between: 1) the increase/decrease in
current year revenue translated into US Dollars at the current year
average rate and the prior year revenue translated at the prior
year average rate; and 2) the increase/decrease being measured by
translating current and prior year revenue into US Dollars using a
constant fixed rate.
2. Certain items included in 'trading results', such as trading
profit, trading profit margin, tax rate on trading results, trading
cash flow, trading profit to cash conversion ratio, EPSA and
underlying growth are non-IFRS financial measures. The non-IFRS
financial measures reported in this announcement are explained in
Note 9 and are reconciled to the most directly comparable financial
measure prepared in accordance with IFRS. Reported results
represent IFRS financial measures as shown in the Condensed
Consolidated Financial Statements.
3. Reported growth rate assumes exchange rates prevailing at 2 February 2018.
4. Return On Invested Capital (ROIC) is defined on page 95 of
Smith & Nephew's 2016 Annual Report.
Smith & Nephew Fourth Quarter Trading and Full Year 2017
Results
Review of 2017
Group revenue for the Full Year 2017 was $4,765 million (2016:
$4,669 million), an increase of 3% on an underlying basis, in line
with guidance. The 2% reported growth rate includes a -1% reduction
from the disposal of the Gynaecology business in 2016 and there was
no impact from foreign exchange.
In 2011 we set five strategic priorities that have shaped a
fundamental management and operational restructuring of the Group
as a foundation to improving its growth and profit profile. Through
these priorities we seek to drive our commercial execution in the
Established and Emerging Markets, invest in innovation that drives
value, simplify and improve our operating model, and supplement
organic growth through acquisitions.
Commercial execution
At a global franchise level, the highlights were Knee Implants,
with revenue up 5% beating the 2% market growth rate, and Trauma
and Extremities, up 4%, a notable improvement on 2016. Advanced
Wound Management revenue was up 2%, with 13% revenue growth from
Advanced Wound Devices partially offset by soft European Advanced
Wound Care performance. Arthroscopic Enabling Technologies (AET)
revenue was down -3%, but we expect performance to gradually
improve during 2018 as we complete the full market rollout of new
COBLATION and camera systems.
In our Established Markets revenue was up 1% in 2017. Within
this, our business in the United States, representing 48% of global
revenue, grew 2%. Other Established Markets growth was flat.
Our Emerging Markets business, which now represent 16% of global
revenue, delivered 12% revenue growth in 2017, a significant
improvement over the flat performance of 2016. In China, our
largest Emerging Markets country, we delivered double-digit revenue
growth through better execution and channel management. In the
oil-dependent Gulf States we returned to growth by focusing on
securing more private healthcare business to compensate for the
reduction in government tenders. We are well positioned to continue
to drive strong growth from the Emerging Markets over the medium
term.
Innovating for Value
Our strong new product portfolio reflects our decision of a few
years ago to increase investment in R&D and technology
acquisitions.
In robotics, NAVIO is a unique and compelling proposition and we
are successfully extending its indications and taking it to new
geographies, such as India. We launched the total knee arthroplasty
(TKA) application and completed the world's first robotics-assisted
bi-cruciate retaining total knee replacement procedures using the
new JOURNEY II XR.
In the Emerging Markets we continued to build our mid-tier
portfolio. We extended the ANTHEM Total Knee System and ORTHOMATCH
Universal Instrumentation Platform into more markets, including
Russia and Saudi Arabia, and introduced a new Cruciate Retaining
(CR) variant.
We are also focusing on building a greater evidence-base to
demonstrate the clinical and health economic effectiveness of our
products. In 2017 PICO benefited from new clinical evidence showing
its effectiveness at reducing the incidence of surgical site
infections. Our TRIGEN INTERTAN hip fracture system also performed
strongly supported by new clinical evidence.
The new EU Medical Device Regulations came into force in 2017
and will apply from May 2020 after a transitional period of three
years. We are working to implement the requirements, notably as
regards clinical evidence and other data to support existing
products and new product launches. We expect to incur costs
associated with implementation during this period which will be
recorded outside trading profit owing to their scale and one-off
nature.
Finally, we continue to develop new business models to address
changing or unmet customer needs. During 2017 we ran the first
study of our innovative Episode of Care Assurance Program (eCAP )
that combines our hip and knee implants with PICO and ACTICOAT Flex
7 Antimicrobial Barrier Dressings. The first results showed eCAP
delivering a 97% decrease in hospital readmission rates following
total joint replacement surgery (based on 1,380 joint
arthroplasties with only two readmissions, a readmission rate of
only 0.145% as compared to published rates of 5.3% or more).
Delivering compelling acquisitions
During the year we strengthened our technology and product
portfolio further with the acquisition of Rotation Medical, the
developer of a novel tissue regeneration technology for shoulder
rotator cuff repair. Its bioinductive implant is highly
complementary to our Sports Medicine portfolio, serving an unmet
clinical need and providing a compelling new treatment option for
our customers.
In addition to this acquisition, in 2017 we also signed
agreements to distribute two exciting technologies: a unique
wireless patient monitoring system for pressure ulcer/injury
prevention in the US from Leaf Healthcare; and MolecuLight i:X(TM)
, a handheld point-of-care imaging device that uses fluorescence
imaging to display potentially harmful concentrations of bacteria
in wounds in real-time.
Accelerating Performance and Execution programme (APEX)
As announced with our Third Quarter 2017 Results, we believe
that we now have the appropriate Group structure to allow us to
strengthen our competitive position by driving further
opportunities to accelerate performance through better execution,
while at the same time realising more savings through greater
efficiency.
We have completed our assessment of these opportunities and
started to implement a programme called APEX - Accelerating
Performance and Execution.
APEX is expected to deliver an annualised benefit of $160
million by 2022, with around three-quarters of this expected by
2020, for a one-off cash cost of up to $240 million, of which a
charge of around $100 million is expected in 2018.
APEX has three workstreams:
1. Manufacturing, Warehousing and Distribution
We have already made significant improvements over the last two
years, and see further opportunities to simplify in line with best
practices to reduce overall cost, while improving quality and
delivery through:
-- A best practice facility footprint with larger manufacturing
hubs supported by speciality facilities where appropriate
-- A product portfolio that meets the needs of our customers and
complies with regulations, while minimising cost, complexity and
inventory
-- A supply chain that is streamlined and efficient so that we
are positioned to achieve the highest levels of delivery at
benchmark cost
2. General and Administrative (G&A) Expenses
We have improved our G&A expense ratio over the last five
years, but with our global function structure we are now able to
identify additional areas of opportunity to reduce costs and
improve service through:
-- Best-in-class Global Business Services that includes a
full-spectrum of support services delivered quickly and
efficiently, enabling full focus on our customers and business
objectives
-- Service hubs in locations that align to our regional needs
and deliver the best value for money
-- System infrastructure that drives maximum efficiency,
including rationalisation of legacy IT systems and adopting a
'cloud-first' strategy
3. Commercial Effectiveness
Whilst the commercial opportunities and competitive environment
continue to evolve with changing customer expectations, new
go-to-market approaches and price pressure, we expect to improve
overall productivity and accelerate top line growth through:
-- Increased sales and marketing effectiveness
-- Selective refinement of structures and territories to meet customer and market demands
-- Being more responsive to customers' use of tenders and changing service level demands
-- More accurate demand forecasting to improve inventory management
Fourth Quarter Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2017 2016 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine, Trauma & Other 519 495 5 2 1 2
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 173 159 9 6 1 2
Arthroscopic Enabling Technologies 167 168 -1 -3 - 2
Trauma & Extremities 128 120 7 5 - 2
Other Surgical Businesses(ii) 51 48 5 4 - 1
Reconstruction 423 400 6 4 - 2
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 266 247 8 6 - 2
Hip Implants 157 153 3 1 - 2
Advanced Wound Management 336 327 3 - - 3
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 187 186 1 -3 - 4
Advanced Wound Bioactives 97 97 1 - - 1
Advanced Wound Devices 52 44 18 14 - 4
Total 1,278 1,222 5 2 - 3
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by geography
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 624 614 2 1 1 -
Other Established Markets(iii) 445 428 4 -1 - 5
Emerging Markets 209 180 16 14 - 2
Total 1,278 1,222 5 2 - 3
-------------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Reported growth reflects the divestment of the Gynaecology business in August 2016
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
Fourth Quarter 2017 Trading Update
Our Q4 revenue was $1,278 million (2016: $1,222 million), up 5%
on a reported basis including a foreign exchange tailwind of 3%.
Excluding this, underlying revenue growth was 2% in the
quarter.
The fourth quarter 2017 comprised 60 trading days, in line with
the same period of 2016.
Fourth Quarter 2017 Franchise Highlights
Sports Medicine Joint Repair delivered 6% revenue growth in the
quarter driven by a good performance from our shoulder repair
portfolio. Revenue from Arthroscopic Enabling Technologies was down
-3% as the softness in resection seen in previous quarters
continued. We expect growth from the newer WEREWOLF COBLATION and
LENS visualisation systems to offset the drag from legacy resection
increasingly through 2018.
In Trauma & Extremities we grew revenue by 5%. This included
strong growth from the Emerging Markets, despite not benefitting
from Middle East tenders, as our recently launched ATLAS nail was
well received. The INTERTAN nail continues to attract new customers
in Established Markets, supported by its excellent clinical
evidence.
Our Other Surgical Businesses franchise delivered revenue growth
of 4% in the quarter. This included another good quarter from our
Ear, Nose & Throat (ENT) business and continued growth in our
robotics NAVIO Surgical System, including further sales in the US,
Asia-Pacific and Europe.
We delivered 4% revenue growth across our Reconstruction
business in the quarter, completing an excellent second half of
2017. This was led by Knee Implants, where revenue was up 6% as
JOURNEY II continued to drive growth, as did recent additions to
the LEGION Revision Knee System. Our Hip Implants franchise
delivered consecutive quarters of growth, up 1%, as we benefited
from the new REDAPT Revision and POLARSTEM Cementless Stem
systems.
Advanced Wound Care revenue was down -3%. End-market demand
remained broadly consistent with previous quarters, with the
exception of the UK, where we have subsequently adapted our
business.
Advanced Wound Bioactives revenue was flat in the quarter. As
expected SANTYL delivered growth in the second half of the year and
the reimbursement environment for OASIS(R) remained a headwind for
the franchise.
Advanced Wound Devices finished the year strongly, as we
delivered 14% revenue growth in the quarter driven by the continued
success of our single-use disposable negative pressure wound
therapy (sNPWT) device PICO.
Fourth Quarter Regional Performance
In the US revenue was up 1% in fourth quarter, but down -1%
across our Other Established Markets. Revenue growth was 14% across
the Emerging Markets.
Full Year 2017 Results
Smith & Nephew results for the Full Year ended 31 December
2017:
Reported
2017 2016 growth
$m $m %
--------------------------------------------------------- ------ ------- --------
Revenue 4,765 4,669 2
------ ------- --------
Operating profit 934 801 17
Acquisition and disposal related items (10) 9
Restructuring and rationalisation costs - 62
Amortisation and impairment of acquisition intangibles 140 178
Legal and other (16) (30)
------ ------- --------
Trading profit (non-IFRS) 1,048 1,020 3
------ ------- --------
c c
Earnings per share "EPS" 87.8 88.1 -
Acquisition and disposal related items (0.9) (22.2)
Restructuring and rationalisation costs - 5.4
Amortisation and impairment of acquisition intangibles 11.4 13.4
Legal and other (0.1) (2.1)
US tax reform (3.7) -
------ ------- --------
Adjusted Earnings per share "EPSA" 94.5 82.6 14
------ ------- --------
Full Year 2017 Analysis
Trading profit for the year was $1,048 million (2016: $1,020
million), and the trading profit margin was 22.0% (2016: 21.8%), up
20bps, in-line with guidance.
Reported operating profit for 2017 of $934 million, up from $801
million in 2016, was after integration and acquisition costs, as
well as amortisation and impairment of acquisition intangibles and
legal and other items (see Note 9 to the Condensed Consolidated
Financial Statements). The year-on-year increase primarily
reflected a gain of $54 million from the settlement of an
intellectual property matter, no restructuring charges and lower
amortisation and impairment of acquired intangibles in 2017.
The net interest charge within reported results was $51 million
(2016: $46 million). Net debt was $1,281 million at year-end, a
decrease of $269 million from $1,550 million at 31 December 2016,
mainly reflecting our free cash flow from improved cash conversion
(see Note 7 for a reconciliation of net debt).
The tax rate on trading results for the year to 31 December 2017
was 17.1% (2016: 23.8%). This was lower than the originally guided
rate of around 26% mainly due to a one-off benefit following the
conclusion of a US tax audit, further progress in improving our tax
rate, tax provision releases following expiry of statute of
limitations and a beneficial geographical mix of profits. The
reduction in the reported tax rate to 12.7% (2016: 26.2%) included
the $32 million net benefit in 2017 from US tax reform, the lower
tax rate on trading results and the impact of the disposal of the
Gynaecology business in 2016.
Adjusted earnings per share ('EPSA') was up 14% at 94.5c (189.0c
per ADS) (2016: 82.6c) as a result of the one-off tax benefits
along with improvements in trading profit margin and the tax rate
on trading. Basic earnings per share ('EPS') was 87.8c (175.6c per
ADS), in line with the previous year (2016: 88.1c).
Cash generated from operating activities was $1,273 million
(2016: $1,035 million), reflecting the higher profit-before-tax in
the period. Trading cash flow was $940 million (2016: $765 million)
(see Note 9 for a reconciliation between cash generated from
operating activities and trading cash flow). The trading profit to
cash conversion ratio was 90% (2016: 75%), an improvement driven
primarily by working capital management.
As the result of the improved operating profit and a stable
asset base we saw an increase in Return On Invested Capital (ROIC)
from 11.5% in 2016 to 14.3% in 2017.
Dividend
The Board is pleased to recommend a Final Dividend of 22.7c per
share (45.4c per ADS). This, together with an Interim Dividend of
12.3c per share (24.6c per ADS), will give a total distribution of
35.0c per share (70.0c per ADS) in 2017. The 14% year-on-year
growth in the declared full year dividend reflects the strong
growth in adjusted earnings per share. The Final Dividend will be
paid on 9 May 2018 to shareholders on the register at the close of
business on 6 April 2018.
Outlook
We expect the overall dynamics in our markets to be similar in
2018 to those seen in 2017. Against this backdrop, the Group
expects to continue to build on 2017 and again deliver an improved
performance in 2018 driven by our strong product portfolio and
pipeline of innovative products.
In terms of revenue, we expect our underlying growth to be in
the range of 3% to 4%. On a reported basis this equates to a range
of around 7% to 8% at exchange rates prevailing on 2 February 2018
and including the impact of the Rotation Medical acquisition.
In terms of trading profit margin, in 2018 we expect to drive a
further 30-70bps improvement over the previous year.
As a result of the recently enacted US tax reform, we expect a
tax rate on trading results in the range 20% to 21%, barring any
changes to tax legislation or other one-off items.
Our healthy balance sheet, good cash generation and increased
dividend demonstrate the robust foundations underpinning our
business. Looking further ahead, our greater focus on commercial
execution gives us confidence we will outgrow our markets and the
new APEX programme supports our expectation of improved trading
profit margin.
Forward calendar
The Q1 Trading Report will be released on 3 May 2018.
About Smith & Nephew
Smith & Nephew is a global medical technology business
dedicated to supporting healthcare professionals in their daily
efforts to improve the lives of their patients. With leadership
positions in Orthopaedic Reconstruction, Advanced Wound Management,
Sports Medicine and Trauma & Extremities, Smith & Nephew
has more than 15,000 employees and a presence in more than 100
countries. Annual sales in 2017 were $4.8 billion. Smith &
Nephew is a member of the FTSE100 (LSE:SN, NYSE:SNN).
For more information about Smith & Nephew, please visit our
corporate website www.smith-nephew.com, follow @SmithNephewplc on
Twitter or visit SmithNephewplc on Facebook.com.
Forward-looking Statements
This document may contain forward-looking statements that may or
may not prove accurate. For example, statements regarding expected
revenue growth and trading margins, market trends and our product
pipeline are forward-looking statements. Phrases such as "aim",
"plan", "intend", "anticipate", "well-placed", "believe",
"estimate", "expect", "target", "consider" and similar expressions
are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual
results to differ materially from what is expressed or implied by
the statements. For Smith & Nephew, these factors include:
economic and financial conditions in the markets we serve,
especially those affecting health care providers, payers and
customers; price levels for established and innovative medical
devices; developments in medical technology; regulatory approvals,
reimbursement decisions or other government actions; product
defects or recalls or other problems with quality management
systems or failure to comply with related regulations; litigation
relating to patent or other claims; legal compliance risks and
related investigative, remedial or enforcement actions; disruption
to our supply chain or operations or those of our suppliers;
competition for qualified personnel; strategic actions, including
acquisitions and dispositions, our success in performing due
diligence, valuing and integrating acquired businesses; disruption
that may result from transactions or other changes we make in our
business plans or organisation to adapt to market developments; and
numerous other matters that affect us or our markets, including
those of a political, economic, business, competitive or
reputational nature. Please refer to
the documents that Smith & Nephew has filed with the U.S.
Securities and Exchange Commission under the U.S. Securities
Exchange Act of 1934, as amended, including Smith & Nephew's
most recent annual report on Form 20-F, for a discussion of certain
of these factors. Any forward-looking statement is based on
information available to Smith & Nephew as of the date of the
statement. All written or oral forward-looking statements
attributable to Smith & Nephew are qualified by this caution.
Smith & Nephew does not undertake any obligation to update or
revise any forward-looking statement to reflect any change in
circumstances or in Smith & Nephew's expectations.
Trademark of Smith & Nephew. Certain marks registered US
Patent and Trademark Office.
Full Year Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2017 2016 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine, Trauma & Other 1,926 1,907 1 3 -2 -
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 627 587 7 6 - 1
Arthroscopic Enabling Technologies 615 631 -3 -3 - -
Trauma & Extremities 495 475 4 4 - -
Other Surgical Businesses(ii) 189 214 -11 7 -19 1
Reconstruction 1,583 1,529 4 3 - 1
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 984 932 6 5 - 1
Hip Implants 599 597 - - - -
Advanced Wound Management 1,256 1,233 2 2 - -
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 720 719 - - - -
Advanced Wound Bioactives 342 342 - - - -
Advanced Wound Devices 194 172 13 13 - -
Total 4,765 4,669 2 3 -1 -
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 2,306 2,299 - 2 -2 -
Other Established Markets(iii) 1,678 1,679 - - - -
Emerging Markets 781 691 13 12 - 1
Total 4,765 4,669 2 3 -1 -
------------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Reported growth reflects the divestment of the Gynaecology business in August 2016
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
2017 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Group Income Statement for the year to 31 December
2017
2017 2016
Notes $m $m
----------------------------------------------- ----- -------- --------
Revenue 2 4,765 4,669
Cost of goods sold (1,248) (1,272)
------------------------------------------------ ----- -------- --------
Gross profit 3,517 3,397
Selling, general and administrative expenses (2,360) (2,366)
Research and development expenses (223) (230)
------------------------------------------------ ----- -------- --------
Operating profit 9 934 801
Interest income 6 6
Interest expense (57) (52)
Other finance costs (10) (16)
Share of results of associates 6 (3)
Profit on disposal of business 6 - 326
------------------------------------------------ ----- -------- --------
Profit before taxation 879 1,062
Taxation 3 (112) (278)
------------------------------------------------ ----- -------- --------
Attributable profit(A) 767 784
------------------------------------------------ ----- -------- --------
Earnings per share(A)
Basic 9 87.8c 88.1c
Diluted 87.7c 87.8c
------------------------------------------------ ----- -------- --------
Unaudited Group Statement of Comprehensive Income for the year
to 31 December 2017
2017 2016
$m $m
------------------------------------------------------------------------ ----- ------
Attributable profit(A) 767 784
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 64 (81)
Taxation on other comprehensive income (9) 10
------------------------------------------------------------------------- ----- ------
Total items that will not be reclassified to income statement 55 (71)
------------------------------------------------------------------------- ----- ------
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations 181 (134)
Fair value remeasurement of available for sale asset (10) 10
Net (gains)/losses on cash flow hedges (24) 5
------------------------------------------------------------------------- ----- ------
Total items that may be reclassified subsequently to income statement 147 (119)
------------------------------------------------------------------------- ----- ------
Other comprehensive income/(loss) for the year, net of taxation 202 (190)
------------------------------------------------------------------------- ----- ------
Total comprehensive income for the year(A) 969 594
------------------------------------------------------------------------- ----- ------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Unaudited Group Balance Sheet as at 31 December 2017
31 Dec 31 Dec
2017 2016
Notes $m $m
----- ------ ------
ASSETS
Non-current assets
Property, plant and equipment 1,049 982
Goodwill 2,371 2,188
Intangible assets 1,371 1,411
Investments 21 25
Investment in associates 118 112
Other non-current assets 16 -
Retirement benefit assets 62 -
Deferred tax assets 127 97
------------------------------------------------------- ----- ------ ------
5,135 4,815
------------------------------------------------------ ----- ------ ------
Current assets
Inventories 1,304 1,244
Trade and other receivables 1,258 1,185
Cash at bank 7 169 100
------------------------------------------------------- ----- ------ ------
2,731 2,529
------------------------------------------------------ ----- ------ ------
TOTAL ASSETS 7,866 7,344
------------------------------------------------------- ----- ------ ------
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital 178 180
Share premium 605 600
Capital redemption reserve 17 15
Treasury shares (257) (432)
Other reserves (228) (375)
Retained earnings 4,329 3,970
------------------------------------------------------- ----- ------ ------
Total equity 4,644 3,958
------------------------------------------------------- ----- ------ ------
Non-current liabilities
Long-term borrowings 7 1,423 1,564
Retirement benefit obligations 131 164
Other payables 128 82
Provisions 97 134
Deferred tax liabilities 97 94
------------------------------------------------------- ----- ------ ------
1,876 2,038
------------------------------------------------------ ----- ------ ------
Current liabilities
Bank overdrafts and loans 7 27 86
Trade and other payables 957 884
Provisions 129 147
Current tax payable 233 231
------------------------------------------------------- ----- ------ ------
1,346 1,348
------------------------------------------------------ ----- ------ ------
Total liabilities 3,222 3,386
------------------------------------------------------- ----- ------ ------
TOTAL EQUITY AND LIABILITIES 7,866 7,344
------------------------------------------------------- ----- ------ ------
Unaudited Condensed Group Cash Flow Statement for the year to 31
December 2017
2017 2016
$m $m
------ ------
Cash flows from operating activities
Profit before taxation 879 1,062
Net interest payable 51 46
Depreciation, amortisation and impairment 460 478
Share of results from associates (6) 3
Profit on disposal of business - (326)
Share-based payments expense 31 27
Net movement on post-retirement obligations (40) (85)
Movement in working capital and provisions (102) (170)
-------------------------------------------------------------------- ------ ------
Cash generated from operating activities 1,273 1,035
Net interest and finance costs paid (48) (45)
Income taxes paid (135) (141)
-------------------------------------------------------------------- ------ ------
Net cash inflow from operating activities 1,090 849
-------------------------------------------------------------------- ------ ------
Cash flows from investing activities
Acquisitions, net of cash acquired (159) (214)
Capital expenditure (376) (392)
Purchase of investments (8) (2)
Proceeds on disposal of business net of tax (2016: tax of $118m) - 225
-------------------------------------------------------------------- ------ ------
Net cash used in investing activities (543) (383)
-------------------------------------------------------------------- ------ ------
Net cash inflow before financing activities 547 466
-------------------------------------------------------------------- ------ ------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 5 10
Proceeds from own shares 5 6
Purchase of own shares (52) (368)
Equity dividends paid (269) (279)
Cash movements in borrowings (147) 127
Settlement of currency swaps 24 (25)
-------------------------------------------------------------------- ------ ------
Net cash used in financing activities (434) (529)
-------------------------------------------------------------------- ------ ------
Net increase/(decrease) in cash and cash equivalents 113 (63)
Cash and cash equivalents at beginning of period 38 102
Exchange adjustments 4 (1)
-------------------------------------------------------------------- ------ ------
Cash and cash equivalents at end of period(B) 155 38
-------------------------------------------------------------------- ------ ------
B Cash and cash equivalents at the end of the period are net of
overdrafts of $14 million (31 December 2016: $62 million).
Unaudited Group Statement of Changes in Equity for the year to
31 December 2017
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2017 180 600 15 (432) (375) 3,970 3,958
Attributable profit(A) - - - - - 767 767
Other comprehensive income(A) - - - - 147 55 202
Equity dividends paid - - - - - (269) (269)
Share-based payments recognised - - - - - 31 31
Taxation on share-based payments - - - - - (3) (3)
Purchase of own shares(C) - - - (52) - - (52)
Cost of shares transferred to
beneficiaries - - - 26 - (21) 5
Cancellation of treasury shares(C) (2) - 2 201 - (201) -
Issue of ordinary share capital - 5 - - - - 5
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2017 178 605 17 (257) (228) 4,329 4,644
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2016 183 590 12 (294) (256) 3,731 3,966
Attributable profit(A) - - - - - 784 784
Other comprehensive income(A) - - - - (119) (71) (190)
Equity dividends paid - - - - - (279) (279)
Share-based payments recognised - - - - - 27 27
Taxation on share-based payments - - - - - 2 2
Purchase of own shares(C) - - - (368) - - (368)
Cost of shares transferred to
beneficiaries - - - 40 - (34) 6
Cancellation of treasury shares(C) (3) - 3 190 - (190) -
Issue of ordinary share capital - 10 - - - - 10
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2016 180 600 15 (432) (375) 3,970 3,958
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
C Shares issued in connection with the Group's share incentive
plans are bought back on a quarterly basis. During the year ended
31 December 2017, a total of 3.2 million ordinary shares were
purchased at a cost of $52 million and 13.5 million ordinary shares
were cancelled (2016: 24.0 million ordinary shares were purchased
at a cost of $368 million and 13.0 million ordinary shares were
cancelled).
Notes to the Condensed Consolidated Financial Statements
1. Basis of preparation and accounting policies
Smith & Nephew plc (the 'Company') is a public limited
company incorporated in England and Wales. In these condensed
consolidated financial statements ('Financial Statements'), 'Group'
means the Company and all its subsidiaries. The financial
information herein has been prepared on the basis of the accounting
policies as set out in the annual accounts of the Group for the
year ended 31 December 2016. The Group prepares its annual accounts
on the basis of International Financial Reporting Standards
('IFRS') as adopted by the European Union ('EU') and in accordance
with the provisions of the Companies Act 2006. IFRS as adopted by
the EU differs in certain respects from IFRS as issued by the
International Accounting Standards Board. However, the differences
have no impact for the periods presented. Under IFRS, the Directors
are required to adopt those accounting policies most appropriate to
the Group's circumstances for the purpose of presenting fairly the
Group's financial position, financial performance and cash flows.
In determining and applying accounting policies, judgement is often
required in respect of items where the choice of specific policy,
accounting estimate or assumption to be followed could materially
affect the reported results or net asset position of the Group; it
may later be determined that a different choice would have been
more appropriate. The Group's significant accounting policies which
require the most use of management's judgement are: valuation of
inventories, impairment, liability provisioning, taxation and
business combinations. There has been no change in the methodology
of applying management estimation in these policies since the year
ended 31 December 2016.
The Group has adequate financial resources and its customers and
suppliers are diversified across different geographic areas. The
Directors believe that the Group is well placed to manage its
business risk appropriately. The Directors have a reasonable
expectation that the Group has sufficient resources to continue in
operational existence for the foreseeable future. Thus they
continue to adopt the going concern basis for accounting in
preparing these Financial Statements.
The principal risks and uncertainties that the Group is exposed
to will be disclosed in the Group's 2017 annual report. These are
pricing and re-imbursement pressures; risk associated with product
innovation, design and development; operational risks - quality and
business continuity; cyber security; mergers and acquisitions;
talent management; and legal, regulatory and compliance risks.
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 December 2017
or 2016. The financial information for 2016 is derived from the
statutory accounts for 2016 which have been delivered to the
registrar of companies. The auditor has reported on the 2016
accounts; their report was (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report and (iii) did not
contain a statement under section 498 (2) or (3) of the Companies
Act 2006. The statutory accounts for 2017 will be finalised on the
basis of the financial information presented by the directors in
this announcement and will be delivered to the registrar of
companies in due course.
2. Business segment information
The Group is engaged in a single business activity, being the
development, manufacture and sales of medical technology products
and services.
Development, manufacturing, supply chain and central functions
are managed globally for the Group as a whole. Sales are managed
through two geographical selling regions, US and International,
with a president for each who is responsible for the commercial
review of that region. The Executive Committee ('ExCo'), comprises
geographical presidents and certain heads of function and is
chaired by the Chief Executive Officer ('CEO'). ExCo is the body
through which the CEO uses the authority delegated to him by the
Board of Directors to manage the operations and performance of the
Group. All significant operating decisions regarding the allocation
and prioritisation of the Group's resources and assessment of the
Group's performance are made by ExCo, and whilst the members have
individual responsibility for the implementation of decisions
within their respective areas, it is at the ExCo level that these
decisions are made. Accordingly, ExCo is considered to be the
Group's chief operating decision maker as defined by IFRS 8
Operating Segments.
In making decisions about the prioritisation and allocation of
the Group's resources, ExCo reviews financial information on an
integrated basis for the Group as a whole and determines the best
allocation of resources to Group-wide projects. This information is
prepared substantially on the same basis as the Group's IFRS
financial statements aside from the adjustments described in Note
9. In assessing performance, ExCo also considers financial
information presented on a geographical selling region and product
franchise basis for revenue. Financial information for corporate
and functional costs is presented on a Group-wide basis.
The results of the single segment are shown below.
2a. ExCo evaluates the performance of the single operating
segment by considering its underlying revenue growth and trading
profit, which is reconciled to the statutory measure for the Group
below:
Reconciling Items
Reported Underlying Acquisitions Currency
growth growth & disposals impact
% % % %
----------------- -------- ---------- ------------ --------
Full Year
Revenue growth 2 3 -1 -
------------------ -------- ---------- ------------ --------
2017 2016
$m $m
----------------------------------------------- -------- --------
Revenue 4,765 4,669
------------------------------------------------ -------- --------
Cost of goods sold (1,248) (1,272)
Selling, general and administrative expenses (2,360) (2,366)
Research and development expenses (223) (230)
------------------------------------------------ -------- --------
Operating profit 934 801
------------------------------------------------ -------- --------
Non-trading items(D) 114 219
------------------------------------------------ -------- --------
Trading profit(D) 1,048 1,020
------------------------------------------------ -------- --------
D The above financial measures are not prepared in accordance
with IFRS. The reconciliation to the most directly comparable
financial measures calculated in accordance with IFRS is presented
in Note 9.
Further description of why ExCo focuses on the underlying
revenue growth and trading measures, and how this reconciles to
operating profit, is detailed in Note 9.
2b. The following table shows Group revenue by product franchise:
2017 2016
$m $m
------------------------------------- ------ ------
Sports Medicine, Trauma & Other 1,926 1,907
-------------------------------------- ------ ------
Sports Medicine Joint Repair 627 587
Arthroscopic Enabling Technologies 615 631
Trauma & Extremities 495 475
Other Surgical Businesses 189 214
-------------------------------------- ------ ------
Reconstruction 1,583 1,529
-------------------------------------- ------ ------
Knee Implants 984 932
Hip Implants 599 597
-------------------------------------- ------ ------
Advanced Wound Management 1,256 1,233
-------------------------------------- ------ ------
Advanced Wound Care 720 719
Advanced Wound Bioactives 342 342
Advanced Wound Devices 194 172
-------------------------------------- ------ ------
Total 4,765 4,669
-------------------------------------- ------ ------
2c. The following table shows Group revenue by geographic area,
including material countries. Sales are attributed to the country
of destination. No individual customer comprises more than 10% of
the Group's external sales.
2017 2016
$m $m
------------------------------- ------ ------
Revenue by geographic market
------------------------------- ------ ------
US 2,306 2,299
Other Established Markets(E) 1,678 1,679
Emerging Markets 781 691
-------------------------------- ------ ------
Total 4,765 4,669
-------------------------------- ------ ------
E Other Established Markets comprises Australia, Canada, Europe,
Japan and New Zealand. UK revenue for the full year was $222
million (2016: $247 million).
3. Taxation
The tax rate on trading results for the year to 31 December 2017
was 17.1% (2016: 23.8%) with the reduction due to a one-off benefit
following the conclusion of a US tax audit, further progress in
improving our tax rate, tax provision releases following expiry of
statute of limitations and a beneficial geographical mix of
profits. The reduction in the reported tax rate to 12.7% (2016:
26.2%) included the $32 million net benefit in 2017 from US tax
reform, the lower tax rate on trading results and the impact of the
disposal of the Gynaecology business in 2016. Details of the
reconciliation between trading results and reported results are set
out in Note 9.
4. Dividends
The 2016 final dividend of 18.5 US cents per ordinary share
totalling $162 million was paid on 10 May 2017. The interim
dividend of 2017 of 12.3 US cents per ordinary share totalling $107
million was paid on 1 November 2017.
A final dividend for 2017 of 22.7 US cents per ordinary share
has been proposed by the Board and will be payable, subject to
shareholder approval, on 9 May 2018 to shareholders whose names
appear on the register at the close of business on 6 April 2018
(the record date). The sterling equivalent per ordinary share will
be set following the record date. The ex-dividend date is 5 April
2018 and the final day for currency and dividend reinvestment plan
('DRIP') elections is 20 April 2018.
5. Acquisitions
Year ended 31 December 2017
On 5 December 2017 the Group completed the acquisition of 100%
of the share capital of Rotation Medical, Inc., a developer of
novel tissue regeneration technology for shoulder rotator cuff
repair. The maximum consideration payable of $210 million has a
fair value of $196 million, including $89 million of deferred and
contingent consideration.
The provisional fair value of identifiable assets acquired and
liabilities assumed are set out below:
2017
$m
-------------------------------------------- ----
Intangible assets 61
Property, plant & equipment and inventory 3
Other current assets 2
Other current liabilities (3)
Net deferred tax assets 1
--------------------------------------------- ----
Net assets 64
Goodwill 132
--------------------------------------------- ----
Consideration 196
--------------------------------------------- ----
The goodwill is attributable to the control premium, the
acquired workforce and the synergies that can be expected from
integrating Rotation Medical, Inc. into the Group's existing
business. The goodwill is not expected to be deductible for tax
purposes.
During the year ended 31 December 2017, the contribution to
revenue and attributable profit from this acquisition is
immaterial. If the acquisition had occurred at the beginning of the
year, the contribution to revenue and attributable profit would
have also been immaterial.
Year ended 31 December 2016
During the year ended 31 December 2016, the Group acquired two
medical technology businesses deemed to be business combinations
within the scope of IFRS 3. The acquisition accounting was
completed during 2017 with no measurement adjustments made.
On 4 January 2016, the Group completed the acquisition of 100%
of the share capital of Blue Belt Holdings Inc., a business
specialising in robotic technologies. The fair value of
consideration is $265 million and includes $51 million deferred
consideration. The fair values of assets acquired were:
2016
$m
------------------------------------------------------- -----
Identifiable assets acquired and liabilities assumed
Intangible assets 70
Property, plant & equipment and inventory 13
Other net current liabilities (11)
Provisions (10)
Net deferred tax assets 16
-------------------------------------------------------- -----
Net assets 78
Goodwill 184
-------------------------------------------------------- -----
Consideration (net of $3m cash acquired) 262
-------------------------------------------------------- -----
The goodwill is attributable to the revenue synergies of
providing a full robotic surgery offering and future applications
of the technological expertise. The goodwill is not expected to be
deductible for tax purposes.
On 8 January 2016 the Group completed the acquisition of all
product and intellectual property assets related to BST-CarGel, a
first-line cartilage repair product from Piramal Healthcare
(Canada) Limited. The fair value of the consideration was $42
million and included $37 million of deferred and contingent
consideration. The fair values of net assets acquired was product
intangible assets of $15 million, inventory of $1 million, and a
deferred tax liability of $1 million. The goodwill, which is
expected to be deductible for tax purposes, arising on the
acquisition is $27 million. It is attributable to the future
penetration into new markets expected from the transaction.
During the year ended 31 December 2016, the contribution to
revenue and attributable profit from these acquisitions is
immaterial. If the acquisitions had occurred at the beginning of
the year, their contribution to revenue and attributable profit
would have also been immaterial.
6. Disposal of business
On 8 August 2016 the Group disposed of its Gynaecology business
to Medtronic plc for cash consideration of $350 million, resulting
in a pre-tax gain on disposal of $326 million.
7. Net debt
Net debt as at 31 December 2017 comprises:
31 December 31 December
2017 2016
$m $m
---------------------------------------------- ----------- -----------
Cash at bank 169 100
Long-term borrowings (1,423) (1,564)
Bank overdrafts and loans due within one year (27) (86)
Net currency swap assets 2 1
Net interest rate swap liabilities (2) (1)
----------------------------------------------- ----------- -----------
(1,281) (1,550)
---------------------------------------------- ----------- -----------
The movements in the period were as follows:
Opening net debt as at 1 January (1,550) (1,361)
Cash flow before financing activities 547 466
Proceeds from issue of ordinary share capital 5 10
Proceeds from own shares 5 6
Purchase of own shares (52) (368)
Equity dividends paid (269) (279)
Termination of finance lease 5 -
Exchange adjustments 28 (24)
----------------------------------------------- ----------- -----------
(1,281) (1,550)
---------------------------------------------- ----------- -----------
8a. Financial instruments
The following table shows the carrying amounts and fair values
of financial assets and financial liabilities, including their
levels in the fair value hierarchy.
Carrying amount Fair value
----------------- --------------
31 Dec 31 Dec 31 Dec 31 Dec Fair
2017 2016 2017 2016 value
$m $m $m $m level
---------------------------------------------------- -------- ------- ------ ------ ---------
Financial assets at fair value
Forward foreign exchange contacts 25 45 25 45 Level 2
Investments 21 25 21 25 Level 3
Currency swaps 3 3 3 3 Level 2
----------------------------------------------------- -------- ------- ------ ------
49 73 49 73
---------------------------------------------------- -------- ------- ------ ------
Financial assets not measured at fair value
Trade and other receivables 1,148 1,064
Cash at bank 169 100
----------------------------------------------------- -------- -------
1,317 1,164
---------------------------------------------------- -------- -------
Total financial assets 1,366 1,237
----------------------------------------------------- -------- -------
Financial liabilities at fair value
Acquisition consideration (deferred and contingent) 160 120 160 120 Level 2&3
Forward foreign exchange contracts 45 36 45 36 Level 2
Currency swaps 1 2 1 2 Level 2
Interest rate swaps 2 1 2 1 Level 2
Private placement debt 198 199 198 199 Level 2
----------------------------------------------------- -------- ------- ------ ------
406 358 406 358
---------------------------------------------------- -------- ------- ------ ------
Financial liabilities not measured at fair value
Bank overdrafts 14 62
Bank loans 313 457
Private placement debt 925 925 931 935 Level 2
Finance lease liabilities - 7
Trade and other payables 877 807
----------------------------------------------------- -------- -------
2,129 2,258
---------------------------------------------------- -------- -------
Total financial liabilities 2,535 2,616
----------------------------------------------------- -------- -------
There were no transfers between Levels 1, 2 and 3 during the
year ended 31 December 2017 and the year ended 31 December 2016.
With the exception of private placement debt as presented above,
the carrying amount of financial assets and liabilities not
measured at fair value is considered to be a reasonable
approximation of fair value. For cash and cash equivalents,
short-term loans and receivables, overdrafts and other short-term
liabilities which have a maturity of less than three months, the
book values approximate the fair values because of their short term
nature. The fair values of long-term borrowings, which are not
traded publicly, are estimated by discounting future contractual
cashflows to net present values at the current market interest
rates available to the Group for similar financial instruments. The
fair value of currency swaps and foreign exchange contracts is
determined by reference to quoted market rates. As a result,
foreign forward exchange contracts and currency swaps are
classified as Level 2 within the fair value hierarchy.
During the year ended 31 December 2017, acquisition
consideration increased by $89 million due to the acquisition of
Rotation Medical, Inc. which was partially offset by remeasurements
and payments of $49 million for acquisitions made in prior years.
The fair value of contingent acquisition consideration is estimated
using a discounted cash flow model. The valuation model considers
the present value of risk adjusted expected payments, discounted
using a risk-free discount rate. The expected payment is determined
by considering the possible scenarios, which relate to the
achievement of established milestones and targets, the amount to be
paid under each scenario and the probability of each scenario. As a
result, contingent acquisition consideration is classified as Level
3 within the fair value hierarchy. Deferred consideration, which is
classified as Level 2, is discounted for the time value of money to
reflect the period of time between the acquisition date and the
agreed payment date.
The fair value of investments is based upon third party pricing
models for share issues. As a result, investments are considered
Level 3 in the fair value hierarchy. During the year ended 31
December 2017, there were additions to investments of $8 million
and a fair value loss of $10 million recognised in Other
Comprehensive Income.
8b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of
the UK and US pension plans are based on the yield on bonds that
have a credit rating of AA denominated in the currency in which the
benefits are expected to be paid with a maturity profile
approximately the same as the obligations. These have decreased
since 31 December 2016 by 20bps to 2.4% and 50bps to 3.5%
respectively. This was more than offset by a change in mortality
assumptions in the UK plan to reflect revisions to long term
mortality expectations, decrease in inflation rates and favourable
asset performances that led to a remeasurement gain of $64 million
recognised in Other Comprehensive Income.
9. Definitions of and reconciliation to measures included within
adjusted "trading" results
These Financial Statements include financial measures that are
not prepared in accordance with IFRS. These measures, which include
trading profit, trading profit margin, tax rate on trading results,
EPSA, trading cash flow, trading profit to trading cash conversion
ratio, and underlying growth, exclude the effect of certain cash
and non-cash items that Group management believes are not related
to the underlying performance of the Group. These non-IFRS
financial measures are also used by management to make operating
decisions because they facilitate internal comparisons of
performance to historical results.
Non-IFRS financial measures are presented in these Financial
Statements as the Group's management believe that they provide
investors with a means of evaluating performance of the business
segment and the consolidated Group on a consistent basis, similar
to the way in which the Group's management evaluates performance,
that is not otherwise apparent on an IFRS basis, given that certain
non-recurring, infrequent, non-cash and other items that management
does not otherwise believe are indicative of the underlying
performance of the consolidated Group may not be excluded when
preparing financial measures under IFRS. These non-IFRS measures
should not be considered in isolation from, as substitutes for, or
superior to financial measures prepared in accordance with
IFRS.
Underlying revenue growth
Underlying revenue growth is used to compare the revenue in a
given period to the previous period on a like-for-like basis.
Underlying revenue growth reconciles to reported revenue growth
(see Note 2), the most directly comparable financial measure
calculated in accordance with IFRS, by making adjustments for the
effect of acquisitions and disposals and the impact of movements in
exchange rates (currency impact), as described below.
The effect of acquisitions and disposals measures the impact on
revenue from newly acquired material business combinations and
recent material business disposals. This is calculated by comparing
the current year, constant currency actual revenue (which include
acquisitions and exclude disposals from the relevant date of
completion) with prior year, constant currency actual revenue,
adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year.
Currency impact measures the increase/decrease in revenue
resulting from currency movements on non-US Dollar sales and is
measured as the difference between: 1) the increase/decrease in
current year revenue translated into US Dollars at the current year
average rate and the prior year revenue translated at the prior
year average rate; and 2) the increase/decrease being measured by
translating current and prior year revenue into US Dollars using
the constant fixed rate.
Trading profit, trading profit margin, trading cash flow and
trading profit to cash conversion ratio
Trading profit, trading profit margin (trading profit expressed
as a percentage of revenue, trading cash flow and trading profit to
cash conversion ratio (trading cash flow expressed as a percentage
of trading profit) are trend measures, which present the long-term
profitability of the Group excluding the impact of specific
transactions that management considers affect the Group's
short-term profitability and cash flows. The Group has identified
the following items, where material, as those to be excluded from
operating profit and cash generated from operations when arriving
at trading profit and trading cash flow, respectively: acquisition
and disposal related items arising in connection with business
combinations, including amortisation of acquisition intangible
assets, impairments and integration costs; restructuring events;
gains and losses resulting from legal disputes and uninsured
losses. In addition to these items, gains and losses that
materially impact the Group's profitability or cash flows on a
short-term or one-off basis and the cash cost to fund defined
benefit pension schemes that are closed to future accrual are
excluded from operating profit and cash generated from operations
when arriving at trading profit and trading cash flow,
respectively.
Adjusted earnings per ordinary share ('EPSA')
EPSA is a trend measure, which presents the long-term
profitability of the Group excluding the post-tax impact of
specific transactions that management considers affect the Group's
short-term profitability and the one-off impact of US tax reform.
The Group presents this measure to assist investors in their
understanding of trends. Adjusted attributable profit is the
numerator used for this measure and is determined by adjusting
attributable profit for the items that are excluded from operating
profit when arriving at trading profit and items that are
recognised below operating profit that affect the Group's
short-term profitability. The most directly comparable financial
measure calculated in accordance with IFRS is basic earnings per
ordinary share ('EPS').
Cash
generated
Profit from
Operating before Attributable operating Earnings
Revenue profit(1) tax(2) Taxation(3) profit(4) activities(5) per share(6)
$m $m $m $m $m $m c
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2017 Reported 4,765 934 879 (112) 767 1,273 87.8
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition-related costs and
profit on disposal - (10) (10) 2 (8) 3 (0.9)
Restructuring and
rationalisation costs - - - - - 15 -
Amortisation and impairment of
acquisition intangibles - 140 140 (40) 100 - 11.4
Legal and other(7) - (16) (13) 12 (1) 25 (0.1)
US tax reform - - - (32) (32) - (3.7)
Capital expenditure - - - - - (376) -
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2017 Adjusted 4,765 1,048 996 (170) 826 940 94.5
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Cash
generated
Profit from
Operating before Attributable operating Earnings
Revenue profit(1) tax(2) Taxation(3) profit(4) activities(5) per share(6)
$m $m $m $m $m $m c
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2016 Reported 4,669 801 1,062 (278) 784 1,035 88.1
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition-related costs and
profit on disposal - 9 (317) 120 (197) 24 (22.2)
Restructuring and
rationalisation costs - 62 62 (14) 48 62 5.4
Amortisation and impairment of
acquisition intangibles - 178 178 (59) 119 - 13.4
Legal and other - (30) (20) 1 (19) 36 (2.1)
Capital expenditure - - - - - (392) -
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2016 Adjusted 4,669 1,020 965 (230) 735 765 82.6
---------------------------------- ------- --------- ------ ----------- ------------ ------------- ------------
1 Represents a reconciliation of operating profit to trading profit.
2 Represents a reconciliation of reported profit before tax to
trading profit before tax.
3 Represents a reconciliation of reported tax to trading tax.
4 Represents a reconciliation of reported attributable profit to
adjusted attributable profit.
5 Represents a reconciliation of cash generated from operating
activities to trading cash flow.
6 Represents a reconciliation of basic earnings per ordinary
share to adjusted earnings per ordinary share (EPSA).
7 From 1 January 2017, the ongoing funding of closed defined
benefit pension schemes is not included in management's definition
of trading cash flow as there is no defined benefit service cost
for these schemes.
Acquisitions and disposal related items: For the year to 31
December 2017 the credit relates to a remeasurement of contingent
consideration for a prior year acquisition partially offset by
costs associated with the acquisition of Rotation Medical, Inc.
For the year to 31 December 2016 these costs relate to the costs
associated with the integration of Blue Belt Technologies and other
acquisitions. Profit before tax includes a $326 million gain
arising on the disposal of the Gynaecology business.
Restructuring and rationalisation costs: For the year to 31
December 2016, these costs relate to the implementation of the
Group Optimisation plan that was announced in May 2014 and
completed at the end of 2016.
Amortisation and impairment of acquisition intangibles: For both
the years to 31 December 2017 and 31 December 2016 charges relate
to the amortisation of intangible assets acquired in material
business combinations. The year to 31 December 2017 includes an
impairment charge of $10 million (2016: $48 million).
Legal and other: For both the years to 31 December 2017 and 31
December 2016 charges relate primarily to legal expenses for patent
litigation with Arthrex and ongoing metal-on-metal hip claims and
in the year to 31 December 2017 an increase of $10 million in the
provision that reflects the present value of the estimated costs to
resolve all other known and anticipated metal-on-metal hip claims.
A $54 million credit has been recognised in the year to 31 December
2017 following a settlement payment received from Arthrex relating
to patent litigation. The year to 31 December 2016 includes a $44
million curtailment credit on post-retirement benefits in the UK
pension scheme.
For the year to 31 December 2017 $44 million of cash funding to
closed defined benefit pension schemes is excluded from trading
cash flow following the closure of the UK scheme to future accrual
in December 2016.
10. Exchange rates
The exchange rates used for the translation of currencies into
US Dollars that have the most significant impact on the Group
results were:
31 December 31 December
2017 2016
------------------- ----------- -----------
Average rates
------------------- ----------- -----------
Sterling 1.29 1.35
Euro 1.13 1.11
Swiss Franc 1.02 1.02
-------------------- ----------- -----------
Period-end rates
------------------- ----------- -----------
Sterling 1.35 1.23
Euro 1.20 1.05
Swiss Franc 1.02 0.98
-------------------- ----------- -----------
11. Subsequent events
Subsequent to the year end the Group announced its Accelerating
Performance and Execution ("APEX") programme. This is a five-year
effort to make key enhancements to the Group's business and ways of
working in Manufacturing, Warehousing and Distribution, General and
Administrative Expenses and Commercial Effectiveness. No provisions
have been recorded in respect of the restructuring programme as at
31 December 2017.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UBOURWOAURUR
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From May 2023 to May 2024