TIDMSN.
RNS Number : 8314G
Smith & Nephew Plc
29 July 2021
Smith+Nephew Second Quarter and First Half 2021 Results
Starting to recapture pre-COVID momentum; on-track to meet
full-year guidance
29 July 2021
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology
business, reports results for the second quarter and first half
ended 3 July 2021:
3 July 27 June Reported Underlying
2021 2020 growth growth
$m $m % %
------ ------- -------- ----------
Second Quarter Results(1,2)
Revenue 1,335 901 48.2 40.3
------ ------- -------- ----------
Half Year Results(1,2)
Revenue 2,599 2,035 27.8 21.3
Operating profit/(loss) 239 (5)
Operating profit/(loss) margin (%) 9.2 (0.2)
EPS (cents) 23.4 11.5
Trading profit 459 172
Trading profit margin (%) 17.6 8.5
EPSA (cents) 38.8 13.4
Q2 Trading Highlights (1,2)
-- Q2 revenue of $1,335 million (2020: $901 million), up 48.2%
on a reported basis and 40.3% on an underlying basis
-- All franchises delivered strong growth on 2020 as COVID
restrictions eased and levels of elective surgery returned towards
normal in many markets
-- Relative to Q2 2019, Sports Medicine & ENT and Advanced
Wound Management, two of our three franchises, and the US, our
largest market, delivered positive underlying revenue growth
H1 Highlights (1,2)
-- H1 revenue of $2,599 million (2020: $2,035 million), up 27.8%
on a reported basis and 21.3% on an underlying basis
-- Operating profit of $239 million (2020: operating loss of -$5 million)
-- Trading profit of $459 million (2020: $172 million). Trading
profit margin of 17.6% (2020: 8.5%) reflects headwinds relative to
pre-COVID levels from increased investment, negative leverage from
fixed costs and higher logistics/freight costs
-- Significant contributions from recently launched products and acquired assets
-- Operational improvement programme across manufacturing, warehousing and distribution underway
-- Continuing to support employees with roll-out of flexible working programme
-- Interim dividend of 14.4c, in-line with prior year, supported by strong cash generation
Guidance Unchanged
-- Targeting underlying revenue growth in range of 10.0% to 13.0%; and
-- Trading profit margin in range of 18.0% to 19.0%
-- Guidance assumes surgery volumes largely unconstrained by COVID in second half of 2021
Roland Diggelmann, Chief Executive Officer, said:
"Our performance in the first half of 2021 demonstrates the
value of our continued investment in our portfolio, our pipeline
and our people. This has put us in a strong position as COVID
restrictions eased and levels of elective surgery began to return
to normal, with new products and recently acquired assets
performing well across the portfolio.
"Looking ahead, we believe we are well positioned to deliver on
our guidance for this year. We also remain focused on setting
ourselves up for sustainable success in the medium-term,
prioritising revenue growth from our R&D pipeline, unlocking
further value from acquisitions, and driving commercial and
operational excellence."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's second
quarter and first half results will be held at 8.30am BST / 3.30am
EDT, details of which are available on the Smith+Nephew website at
https://www.smith-nephew.com .
Enquiries
Investors
Andrew Swift +44 (0) 1923 477433
Smith+Nephew
Media
Charles Reynolds +44 (0) 1923 477314
Smith+Nephew
Susan Gilchrist / Ayesha Bharmal +44 (0) 20 7404 5959
Brunswick
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 2020 period or equivalent 2019 period
where specified.
'Underlying revenue growth' reconciles to reported revenue
growth, the most directly comparable financial measure calculated
in accordance with IFRS, by making two adjustments, the 'constant
currency exchange effect' and the 'acquisitions and disposals
effect', described below. See Other Information on pages 31 to 34
for a reconciliation of underlying revenue growth to reported
revenue growth.
The 'constant currency exchange effect' is a measure of 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 the current year revenue translated into
US Dollars at the current year average exchange rate and the prior
year revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior
year revenues into US Dollars using the prior year closing
rate.
The 'acquisitions and disposals effect' is the measure of 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 includes acquisitions and excludes 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.
These sales are separately tracked in the Group's internal
reporting systems and are readily identifiable.
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
Other Information on pages 31 to 34 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 Interim Financial Statements.
Smith+Nephew Second Quarter Trading and First Half 2021
Results
Delivering on our Priorities
Our three priorities for 2021 build on the work undertaken and
investments made in 2020 and are underpinned by our long-term
Strategic Imperatives.
1. Return to top-line growth and recapture pre-COVID
momentum
2. Deliver further operational improvement across the Group
3. Continue to respond effectively to COVID
We are encouraged by our progress in the first half of 2021
across all three priorities. First half revenue was $2,599 million
(2020: $2,035 million), up 27.8% on a reported basis and 21.3% on
an underlying basis, our operational improvement programmes are on
track, and we continue to adapt to respond effectively to
COVID.
1. Return to top-line growth and recapture pre-COVID
momentum
Our first priority for 2021 is to return to top-line growth and
recapture the momentum we were building prior to COVID, with the
consequence of increasing earnings through operating leverage. This
priority aligns with the first three of our Strategic Imperatives
targeted at improving revenue growth.
One area of focus is to drive higher returns from our
differentiated product portfolio. As we entered 2021 a number of
recent product launches were at early stages and we have made good
progress expanding these into new markets and to new customers. Our
OR3O Dual Mobility Hip System is helping to drive growth in Hip
Implants, and our new robotics platform the CORI Surgical System is
being well-received in the US and has been launched into other
markets including Australia and India, with Europe to follow later
this year. We have also continued to invest more into R&D, and
have launched a number of new products and are securing regulatory
approvals across our extensive pipeline of near-term
innovation.
We are also starting to see significant benefits from a number
of recent acquisitions. The Osiris acquisition is transforming the
growth profile of Advanced Wound Bioactives as we train the Osiris
and SANTYL focused sales forces to cross-sell the portfolio. In
Sports Medicine, REGENETEN and NOVOSTITCH are delivering strong
growth in the US, and are only at the start of their launch in
other markets. In Orthopaedics the collaboration with Brainlab for
robotics and digital surgery is achieving its milestones. The
Extremity Orthopaedics business acquired in January 2021 grew
strongly in the first half despite market conditions, and we are
excited by the potential for cross-selling our respective
portfolios and its new product pipeline. The Tula System, acquired
in January 2020, has the potential to transform tympanostomy tube
treatment of children as ENT surgery levels recover.
2. Deliver further operational improvement across the Group
Our second priority for 2021 is to drive further operational
improvement across the Group in order to provide more resources for
investment in the medium term, including in R&D. This priority
aligns to our Strategic Imperative to become the best owner.
During the first half we continued our programme to optimise our
manufacturing network. Preparations at our new manufacturing
facility in Malaysia are on track, and we expect first production
towards the end of 2022. We are consolidating our network and
continue to transfer our global warehousing and distribution
functions in the US and Europe to a specialist third party partner.
These and other changes are expected to deliver around $200 million
of annualised benefits by 2025 for a one-off cost of around $350
million, as previously announced. These efficiencies will help
offset the cost and price pressures that the business regularly
faces.
3. Continue to respond effectively to COVID
We continue to prioritise the health and wellbeing of employees.
As restrictions lift in our markets we are taking a measured
approach to reopening offices, and continue to encourage employees
to take advantage of flexible working arrangements where they can.
In some locations, such as India, we have worked to support
employees and their families as COVID infection levels rose
significantly, including organising vaccination drives. During the
period Smith+Nephew gifted raw materials and equipment and provided
ex-gratia consultancy to OxVent to support the manufacture of its
simple, low-cost ventilator in India. The OxVent ventilator was
developed in 2020 by University of Oxford and King's College London
in collaboration with Smith+Nephew.
S econd Quarter 2021 Trading Update
Our second quarter revenue was $1,335 million (2020: $901
million), representing revenue growth of 48.2% including a 140bps
benefit from acquisitions and 650bps benefit from foreign exchange
(primarily due to movements in the Euro, Renminbi, and Australian
Dollar). On an underlying basis revenue was up 40.3% year-on-year,
reflecting a weak comparator as Q2 2020 saw the peak impact of
COVID on our business. Compared to Q2 2019, our Q2 2021 revenue was
down -1.0% on an underlying basis.
The second quarter comprised 64 trading days, one more than the
equivalent period in 2020. Q2 2019 comprised 63 trading days.
All three franchises delivered strong year-on-year revenue
growth in the quarter, with Orthopaedics up 43.4% (53.0% reported),
Sports Medicine & ENT up 50.9% (58.5% reported) and Advanced
Wound Management up 27.2% (33.5% reported). Our performance
reflects the easing of COVID restrictions and increased levels of
elective surgery in many markets, as well as our decisions during
the last twelve months to maintain investment in our sales force,
new product development and launches, and focus on improving
commercial execution.
Encouragingly, two of our franchises delivered positive
underlying revenue growth over 2019 levels, with Sports Medicine
& ENT up 1.3% and Advanced Wound Management up 5.1%. Although
Orthopaedics revenue was down -6.2% underlying against Q2 2019, the
franchise built on its first quarter 2021 performance as
restrictions on elective surgery continued to ease, albeit held
back by near-term supply constraints in some product lines.
Geographically, revenue growth was 46.8% against Q2 2020 (53.9%
reported) in our Established Markets and 16.2% (26.4% reported) in
Emerging Markets.
In Established Markets, the US delivered 51.3% revenue growth
(54.1% reported) as elective surgery levels recovered strongly
across the majority of categories. Revenue from our Other
Established Markets was up 40.1% (53.7% reported), with surgery
volumes improving in Europe over the first quarter, although still
below pre-COVID levels, and Japan and Australia weakened as some
restrictions were reimposed.
In Emerging Markets performance from China was held back by
distributor ordering patterns ahead of the previously highlighted
new government tendering programme, and other markets including
India, Middle East and Latin America continued to be impacted by
COVID-related restrictions.
Second Quarter Consolidated Revenue Analysis
Q2 2021 to Q2 2020
3 July 27 June Reported Underlying Acquisitions Currency
2021 2020 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------ ------- -------- ---------- ------------ --------
Orthopaedics 557 364 53.0 43.4 3.5 6.1
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Knee Implants 226 137 65.5 58.8 - 6.7
Hip Implants 161 112 43.6 37.2 - 6.4
Other Reconstruction(ii) 21 12 72.1 64.0 - 8.1
Trauma & Extremities 149 103 44.3 28.2 11.4 4.7
Sports Medicine & ENT 391 247 58.5 50.9 - 7.6
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 211 129 63.6 55.9 - 7.7
Arthroscopic Enabling Technologies 147 96 53.0 45.5 - 7.5
ENT (Ear, Nose and Throat) 33 22 51.8 45.2 - 6.6
Advanced Wound Management 387 290 33.5 27.2 - 6.3
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Advanced Wound Care 186 144 29.4 20.6 - 8.8
Advanced Wound Bioactives 132 101 30.6 29.9 - 0.7
Advanced Wound Devices 69 45 52.6 42.8 - 9.8
Total 1,335 901 48.2 40.3 1.4 6.5
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------- ------ ------- -------- ---------- ------------ --------
US 677 440 54.1 51.3 2.8 -
Other Established Markets(iii) 422 274 53.7 40.1 0.7 12.9
Total Established Markets 1,099 714 53.9 46.8 1.8 5.3
Emerging Markets 236 187 26.4 16.2 - 10.2
Total 1,335 901 48.2 40.3 1.4 6.5
-------------------------------------- ------ ------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Other Reconstruction includes robotics capital sales, the
joint reconstruction business acquired from Brainlab and cement
(iii) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Q2 2021 to Q2 2019
3 July 29 June Reported Underlying Acquisitions Currency
2021 2019 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------ ------ ------- -------- ---------- ------------ --------
Orthopaedics 557 552 0.9 -6.2 5.3 1.8
Sports Medicine & ENT 391 379 3.3 1.3 - 2.0
Advanced Wound Management 387 352 10.1 5.1 2.1 2.9
Total 1,335 1,283 4.1 -1.0 3.0 2.1
------------------------------------- ------ ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------ ------ ------- -------- ---------- ------------ --------
US 677 635 6.8 2.3 4.5 -
Other Established Markets(ii) 422 402 4.9 -3.5 1.8 6.6
Total Established Markets 1,099 1,037 6.0 - 3.3 2.7
Emerging Markets 236 246 -4.1 -5.3 1.6 -0.4
Total 1,335 1,283 4.1 -1.0 3.0 2.1
------------------------------------- ------ ------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Orthopaedics
Knee Implants revenue was up 58.8% (65.5% reported) and Hip
Implants up 37.2% (43.6% reported) as volumes improved in our
Established Markets, with Knee Implants performance in particular
reflecting an especially weak Q2 2020 comparator. Hip Implants
included good performances from the REDAPT Revision Hip System and
OR3O Dual Mobility Hip System. We remain on track to launch our
cementless knee implant system later this year following required
regulatory clearances/approvals .
Other Reconstruction delivered revenue growth of 64.0% (72.1%
reported) driven by US sales of our new handheld robotics platform
the CORI Surgical System. We also announced a new study showing
that computer-guided technology for total hip arthroplasty, such as
Smith+Nephew's RI.HIP NAVIGATION, significantly reduces the risk of
revision and increases patient satisfaction when using our
implants.
In Trauma & Extremities revenue was up 28.2% (44.3%
reported, including 11.4% benefit from the Extremity Orthopaedics
acquisition). This included strong performances from our EVOS
Plating System as well as from the TAYLOR SPATIAL FRAME External
Fixator as elective limb deformity case volumes started to
recover.
Sports Medicine & ENT
Sports Medicine Joint Repair delivered revenue growth of 55.9%
(63.6% reported) in the quarter. Within this we delivered a good
performance across both meniscal and shoulder repair, driven by
technologies developed by Smith+Nephew and acquired assets. In July
we announced the launch of the FAST-FIX FLEX Meniscal Repair System
extending our leading meniscal repair portfolio.
Arthroscopic Enabling Technologies revenue was up 45.5% (53.0%
reported), with good growth from our COBLATION technologies and
high definition video portfolio. We launched the DOUBLEFLO
Inflow/Outflow Pump and 4KO (Optimized) Arthroscopes and
Laparoscopes in the quarter.
ENT revenue was up 45.2% (51.8% reported), although overall
paediatric procedures remain below historical levels with
tonsillectomies and ear tubes showing slow recovery. As a result
the introduction of Tula, a new system for in-office delivery of
ear tubes to treat recurrent or persistent ear infections,
continued to be impacted.
Advanced Wound Management
Advanced Wound Care revenue was up 20.6% (29.4% reported) driven
by good growth from our ALLEVYN Life range of foam dressings. All
regions contributed to the robust performance, including a strong
quarter in the US.
Advanced Wound Bioactives revenue was up 29.9% (30.6% reported)
including growth from our enzymatic debrider SANTYL and a strong
quarter from the acquired skin substitute products GRAFIX and
STRAVIX .
Advanced Wound Devices revenue was up 42.8% (52.6% reported),
reflecting strong demand for our negative pressure wound therapy
portfolio in the US and Europe, supported by recovering levels of
elective surgery.
First Half 2021 Consolidated Analysis
Smith+Nephew results for the first half ended 3 July 2021:
Half year Half year Reported
2021 2020 growth
$m $m %
--------------------------------------------------------- --------- --------- --------
Revenue 2,599 2,035 27.8
--------- --------- --------
Operating profit/(loss) 239 (5) n/m
Acquisition and disposal related items 12 5
Restructuring and rationalisation costs 77 56
Amortisation and impairment of acquisition intangibles 87 83
Legal and other 44 33
--------- --------- --------
Trading profit(i) 459 172 166
--------- --------- --------
c c
Earnings per share ('EPS') 23.4 11.5 104
Acquisition and disposal related items (2.2) 0.5
Restructuring and rationalisation costs 7.2 5.0
Amortisation and impairment of acquisition intangibles 7.7 7.3
Legal and other 2.7 3.1
UK tax litigation - (14.0)
--------- --------- --------
Adjusted Earnings per share ('EPSA')(i) 38.8 13.4 189
--------- --------- --------
(i) See Other Information on pages 31 to 34
First Half 2021 Analysis
Our first half revenue was $2,599 million (H1 2020: $2,035
million), up 27.8% on a reported basis including a foreign exchange
tailwind of 470bps and 180bps benefit from acquisitions. Revenue
was up 21.3% on an underlying basis. The first half comprised 128
trading days, three more than the equivalent period in 2020. H1
2019 comprised 126 trading days.
The Group reported an operating profit of $239 million (H1 2020:
operating loss of
-$5 million) after acquisition and disposal related items,
restructuring and rationalisation costs, amortisation of
acquisition intangibles and legal and other items incurred in the
first half (see Other Information on pages 31 to 34).
Trading profit was $459 million in the first half (H1 2020: $172
million), with a trading profit margin of 17.6% (H1 2020: 8.5%).
The margin expansion reflects improved trading compared to 2020,
along with discretionary cost control. Compared to pre-COVID
levels, there are still headwinds including from increased
investments in R&D, M&A and new launches; ongoing
COVID-related negative leverage from fixed costs; and higher
logistics and freight costs.
Restructuring costs, primarily related to the Operations and
Commercial Excellence programme, totalled $77 million in the first
half, with incremental benefits recognised of around $20
million.
Each of the three global franchises contributed to the
improvement in trading profit in the first half of 2021 (see Note 2
to the Interim Financial Statements).
Cash generated from operations was $459 million (H1 2020: $125
million) and trading cash flow was $404 million (H1 2020: $25
million) as we continued to invest in capital expenditure,
including progressing changes to our manufacturing network (see
Other Information on pages 31 to 34 for a reconciliation between
cash generated from operations and trading cash flow). The trading
profit to cash conversion ratio was 88% (H1 2020: 14%), reflecting
the improved trading performance.
The net interest charge within reported results was $39 million
(H1 2020: $21 million) including $4 million from the application of
IFRS 16 Leases (H1 2020: $3 million). The higher net interest
charge reflects interest on the corporate bond issued in October
2020 and a full half year of interest on the $550 million of
private placement notes drawn in June 2020. The Group's net debt,
excluding lease liabilities, at 3 July 2021 was $1,989 million (see
Note 7 to the Interim Financial Statements) with committed
facilities of $4.4 billion.
Our reported tax for the period ended 3 July 2021 was a charge
of $18 million (H1 2020 reported tax credit: $134 million). The tax
rate on trading results for the period ended 3 July 2021 was 18.3%
(H1 2020: 17.0%) (see Note 4 to the Interim Financial Statements
and Other Information on pages 31 to 34 for further details on
taxation).
Basic earnings per share ('EPS') was 23.4c (46.8c per ADS) (H1
2020: 11.5c per share). Adjusted earnings per share ('EPSA') was
38.8c (77.6c per ADS) (H1 2020: 13.4c per share).
On 4 January 2021 the Group completed the acquisition of the
Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation for a provisional fair value of consideration of $237
million. The provisional fair value of assets acquired included
$112 million for intangible assets and $85 million for
goodwill.
Interim Dividend
The interim dividend is 14.4c per share (28.8c per ADS), in line
with 2020. This equates to 10.5p per share at prevailing exchange
rates as of 23 July 2021. The interim dividend is payable on 27
October 2021 to shareholders whose names appear on the register at
the close of business on 1 October 2021 ( see Note 5 to the Interim
Financial Statements for further detail).
Outlook
Smith+Nephew's guidance is unchanged from that given with the
first quarter Trading Update on 29 April 2021.
We are targeting underlying revenue growth for 2021 in the range
of 10.0% to 13.0%. On a reported basis this equates to a range of
around 14.4% to 17.4%, with a foreign exchange benefit of 250bps
based on exchange rates prevailing on 23 July 2021 and completed
acquisitions adding around 190bps.
We expect our Hip Implants business to continue to outperform
Knee Implants, our Sports Medicine & ENT franchise to perform
strongly as markets recover, and for Advanced Wound Management's
growth trajectory to improve as commercial changes continue to
deliver benefits.
Our 2021 trading profit margin guidance range is 18.0% to 19.0%.
Consistent with our previous outlook, relative to 2019 (the year
before COVID) we continue to anticipate a temporary headwind from
the impact of reduced production volumes on gross margin as a
result of COVID, as well as dilution of around 100bps from the
increased investment in R&D and around 150bps from completed
acquisitions. Foreign exchange will be an additional headwind of
around 100bps. Finally, we expect to see a headwind in the second
half from continued higher logistics and freight costs.
The revenue and trading profit margin targets assume that
surgery volumes are largely unconstrained by COVID in the second
half.
We continue to expect the tax rate on trading results for 2021
to be in the range of 18.0% to 19.0%, subject to any material
changes to tax law, or other one-off items.
Looking ahead, we will continue to build for the medium-term,
prioritising revenue growth through investing behind R&D and
our exciting new product pipeline, unlocking further value from
recent acquisitions, and driving our commercial execution and
efficiency programmes.
Forward calendar
The Q3 Trading Report will be released on 4 November 2021.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology business that
exists to restore people's bodies and their self-belief by using
technology to take the limits off living. We call this purpose
'Life Unlimited'. Our 18,000 employees deliver this mission every
day, making a difference to patients' lives through the excellence
of our product portfolio, and the invention and application of new
technologies across our three global franchises of Orthopaedics,
Sports Medicine & ENT and Advanced Wound Management.
Founded in Hull, UK, in 1856, we now operate in more than 100
countries, and generated annual sales of $4.6 billion in 2020.
Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN).
The terms 'Group' and 'Smith+Nephew' are used to refer to Smith
& Nephew plc and its consolidated subsidiaries, unless the
context requires otherwise.
For more information about Smith+Nephew, please visit
www.smith-nephew.com and follow us on Twitter , LinkedIn ,
Instagram or Facebook .
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: risks
related to the impact of COVID, such as the depth and longevity of
its impact, government actions and other restrictive measures taken
in response, material delays and cancellations of elective
procedures, reduced procedure capacity at medical facilities,
restricted access for sales representatives to medical facilities,
or our ability to execute business continuity plans as a result of
COVID; economic and financial conditions in the markets we serve,
especially those affecting health care providers, payers and
customers (including, without limitation, as a result of COVID);
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
(including, without limitation, as a result of COVID); 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.
First Half Consolidated Revenue Analysis
H1 2021 to H1 2020
3 July 27 June Reported Underlying Acquisitions Currency
2021 2020 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------ ------- -------- ---------- ------------ --------
Orthopaedics 1,097 861 27.4 19.2 4.2 4.0
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Knee Implants 438 367 19.5 15.8 - 3.7
Hip Implants 315 249 26.6 21.9 - 4.7
Other Reconstruction(ii) 47 33 40.2 35.3 - 4.9
Trauma & Extremities 297 212 40.2 19.6 17.0 3.6
Sports Medicine & ENT 764 575 32.9 28.0 - 4.9
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 409 301 35.9 31.0 - 4.9
Arthroscopic Enabling Technologies 293 223 31.7 26.5 - 5.2
ENT (Ear, Nose and Throat) 62 51 20.5 16.6 - 3.9
Advanced Wound Management 738 599 23.2 18.0 - 5.2
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Advanced Wound Care 361 302 19.5 12.2 - 7.3
Advanced Wound Bioactives 247 192 29.0 28.4 - 0.6
Advanced Wound Devices 130 105 23.5 16.9 - 6.6
Total 2,599 2,035 27.8 21.3 1.8 4.7
-------------------------------------- ------ ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------- ------ ------- -------- ---------- ------------ --------
US 1,317 1,021 29.1 26.0 3.1 -
Other Established Markets(iii) 831 653 27.2 15.7 1.1 10.4
Total Established Markets 2,148 1,674 28.3 21.8 2.1 4.4
Emerging Markets 451 361 25.1 19.2 - 5.9
Total 2,599 2,035 27.8 21.3 1.8 4.7
-------------------------------------- ------ ------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Other Reconstruction includes robotics capital sales, the
joint reconstruction business acquired from Brainlab and cement
(iii) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
H1 2021 to H1 2019
3 July 29 June Reported Underlying Acquisitions Currency
2021 2019 growth Growth(i) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------ ------ ------- -------- ---------- ------------ --------
Orthopaedics 1,097 1,098 -0.1 -6.6 5.0 1.5
Sports Medicine & ENT 764 747 2.3 0.5 - 1.8
Advanced Wound Management 738 640 15.4 5.0 7.4 3.0
Total 2,599 2,485 4.6 -1.5 4.2 1.9
------------------------------------- ------ ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------ ------ ------- -------- ---------- ------------ --------
US 1,317 1,203 9.5 2.1 7.4 -
Other Established Markets(ii) 831 817 1.7 -5.7 1.4 6.0
Total Established Markets 2,148 2,020 6.3 -1.1 4.8 2.6
Emerging Markets 451 465 -3.0 -3.1 1.3 -1.2
------------------------------------- ------ ------- -------- ---------- ------------ --------
Total 2,599 2,485 4.6 -1.5 4.2 1.9
------------------------------------- ------ ------- -------- ---------- ------------ --------
(i) Underlying growth is defined in Note 1 on page 2
(ii) Other Established Markets are Europe, Canada, Japan, Australia and New Zealand
2021 HALF YEAR CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
Unaudited Group Income Statement for the Half Year ended 3 July
2021
Half year Half year
2021 2020
Notes $m $m
----------------------------------------------- ----- --------- ---------
Revenue 2 2,599 2,035
Cost of goods sold (806) (646)
------------------------------------------------ ----- --------- ---------
Gross profit 1,793 1,389
Selling, general and administrative expenses (1,383) (1,246)
Research and development expenses (171) (148)
------------------------------------------------ ----- --------- ---------
Operating profit/(loss) 2 239 (5)
Interest income 3 3
Interest expense (42) (24)
Other finance costs (9) (5)
Share of results of associates 10 (3)
Profit on disposal of interest in associate 3 22 -
------------------------------------------------ ----- --------- ---------
Profit/(loss) before taxation 223 (34)
Taxation 4 (18) 134
------------------------------------------------ ----- --------- ---------
Attributable profit(A) 205 100
------------------------------------------------ ----- --------- ---------
Earnings per share(A)
Basic 23.4c 11.5c
Diluted 23.3c 11.4c
------------------------------------------------ ----- --------- ---------
Unaudited Group Statement of Comprehensive Income for the Half
Year ended 3 July 2021
Half year Half year
2021 2020
$m $m
------------------------------------------------------------------------ --------- ---------
Attributable profit(A) 205 100
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 25 17
Taxation on other comprehensive income (11) (5)
------------------------------------------------------------------------- --------- ---------
Total items that will not be reclassified to income statement 14 12
------------------------------------------------------------------------- --------- ---------
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (23) (85)
Net gains/(losses) on cash flow hedges 33 (4)
Taxation on other comprehensive income (4) 1
------------------------------------------------------------------------- --------- ---------
Total items that may be reclassified subsequently to income statement 6 (88)
------------------------------------------------------------------------- --------- ---------
Other comprehensive income/(loss) for the period, net of taxation 20 (76)
------------------------------------------------------------------------- --------- ---------
Total comprehensive income for the period(A) 225 24
------------------------------------------------------------------------- --------- ---------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Unaudited Group Balance Sheet as at 3 July 2021
3 July 31 December 27 June
2021 2020 2020
Notes $m $m $m
----------------------------------------------------------- ----- ------- ----------- -------
ASSETS
Non-current assets
Property, plant and equipment 1,453 1,449 1,353
Goodwill 2,991 2,928 2,852
Intangible assets 1,494 1,486 1,546
Investments 10 9 10
Investment in associates 136 108 96
Other non-current assets 26 33 30
Retirement benefit assets 156 133 129
Deferred tax assets 225 202 224
------------------------------------------------------------ ----- ------- ----------- -------
6,491 6,348 6,240
----------------------------------------------------------- ----- ------- ----------- -------
Current assets
Inventories 1,750 1,691 1,721
Trade and other receivables(B) 1,305 1,211 1,231
Cash at bank 7 1,387 1,762 347
------------------------------------------------------------ ----- ------- ----------- -------
4,442 4,664 3,299
----------------------------------------------------------- ----- ------- ----------- -------
TOTAL ASSETS 10,933 11,012 9,539
------------------------------------------------------------ ----- ------- ----------- -------
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 177 177 177
Share premium 614 612 611
Capital redemption reserve 18 18 18
Treasury shares (140) (157) (177)
Other reserves (323) (329) (412)
Retained earnings 4,985 4,958 4,743
------------------------------------------------------------ ----- ------- ----------- -------
Total equity 5,331 5,279 4,960
------------------------------------------------------------ ----- ------- ----------- -------
Non-current liabilities
Long-term borrowings and lease liabilities 7 2,916 3,353 2,476
Retirement benefit obligations 151 163 149
Other payables 81 94 105
Provisions 197 294 170
Deferred tax liabilities 137 141 163
------------------------------------------------------------ ----- ------- ----------- -------
3,482 4,045 3,063
----------------------------------------------------------- ----- ------- ----------- -------
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 7 650 337 163
Trade and other payables 1,046 1,022 875
Provisions 209 123 236
Current tax payable 215 206 242
------------------------------------------------------------ ----- ------- ----------- -------
2,120 1,688 1,516
----------------------------------------------------------- ----- ------- ----------- -------
Total liabilities 5,602 5,733 4,579
------------------------------------------------------------ ----- ------- ----------- -------
TOTAL EQUITY AND LIABILITIES 10,933 11,012 9,539
------------------------------------------------------------ ----- ------- ----------- -------
B Trade and other receivables includes a current tax receivable
of $93 million (31 December 2020: $95 million, 27 June 2020: $100
million).
Unaudited Condensed Group Cash Flow Statement for the Half Year
ended 3 July 2021
Half year Half year
2021 2020
$m $m
------------------------------------------------------- --------- ---------
Cash flows from operating activities
Profit/(loss) before taxation 223 (34)
Net interest expense 39 21
Depreciation, amortisation and impairment 294 271
Share of results of associates (10) 3
Profit on disposal of interest in associate (22) -
Share-based payments expense (equity-settled) 23 15
Net movement in post-retirement obligations (4) 2
Movement in working capital and provisions (84) (153)
-------------------------------------------------------- --------- ---------
Cash generated from operations 459 125
Net interest and finance costs paid (38) (21)
Income taxes paid (58) (31)
-------------------------------------------------------- --------- ---------
Net cash inflow from operating activities 363 73
-------------------------------------------------------- --------- ---------
Cash flows from investing activities
Acquisitions, net of cash acquired (259) (139)
Capital expenditure (175) (188)
Purchase of investments (1) (3)
Distribution from associate 4 4
-------------------------------------------------------- --------- ---------
Net cash used in investing activities (431) (326)
-------------------------------------------------------- --------- ---------
Net cash outflow before financing activities (68) (253)
-------------------------------------------------------- --------- ---------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 2 1
Proceeds from own shares 4 2
Purchase of own shares - (16)
Payment of capital element of lease liabilities (28) (24)
Equity dividends paid (203) (202)
Cash movements in borrowings (73) 561
Settlement of currency swaps (4) 3
-------------------------------------------------------- --------- ---------
Net cash (used in)/from financing activities (302) 325
-------------------------------------------------------- --------- ---------
Net (decrease)/increase in cash and cash equivalents (370) 72
Cash and cash equivalents at beginning of year 1,751 257
Exchange adjustments (2) (3)
-------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period(C) 1,379 326
-------------------------------------------------------- --------- ---------
C Cash and cash equivalents at the end of the period are net of
overdrafts of $8 million (27 June 2020: $21 million).
Unaudited Group Statement of Changes in Equity for the Half Year
ended 3 July 2021
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 2021 177 612 18 (157) (329) 4,958 5,279
Attributable profit(A) - - - - - 205 205
Other comprehensive income(A) - - - - 6 14 20
Equity dividends paid - - - - - (203) (203)
Share-based payments recognised - - - - - 23 23
Taxation on share-based payments - - - - - 1 1
Cost of shares transferred to
beneficiaries - - - 17 - (13) 4
Issue of ordinary share capital - 2 - - - - 2
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 3 July 2021 177 614 18 (140) (323) 4,985 5,331
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
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 2020 177 610 18 (189) (324) 4,849 5,141
Attributable profit(A) - - - - - 100 100
Other comprehensive income(A) - - - - (88) 12 (76)
Equity dividends paid - - - - - (202) (202)
Share-based payments recognised - - - - - 15 15
Taxation on share-based payments - - - - - (5) (5)
Purchase of own shares(D) - - - (16) - - (16)
Cost of shares transferred to
beneficiaries - - - 17 - (15) 2
Cancellation of treasury shares(D) - - - 11 - (11) -
Issue of ordinary share capital - 1 - - - - 1
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 27 June 2020 177 611 18 (177) (412) 4,743 4,960
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly derived from continuing operations.
D During the half year ended 3 July 2021 no ordinary shares were
purchased or cancelled (2020: 0.6 million ordinary shares were
purchased at a cost of $16 million and 0.6 million ordinary shares
were cancelled).
Notes to the Condensed Consolidated Interim 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 interim financial statements ('Interim Financial
Statements'), 'Group' means the Company and all its
subsidiaries.
These Interim Financial Statements have been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted for
use in the UK. As required by the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority, these
Interim Financial Statements have been prepared applying the
accounting policies and presentation that were applied in the
preparation of the Company's annual accounts for the year ended 31
December 2020 which were prepared in accordance with International
Financial Reporting Standards (IFRS) adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union and in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006. The Group also
prepared these annual accounts in accordance with IFRS as issued by
International Accounting Standards Board ('IASB'). IFRS adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union differs in certain respects from IFRS as issued by
the IASB. However, the differences have no impact for the periods
presented. The annual accounts of the Group for the year ended 31
December 2021 will be prepared in accordance with UK-adopted
international accounting standards and in accordance with IFRS as
issued IASB.
The uncertainty as to the future impact on the financial
performance and cash flows of the Group as a result of the recent
COVID pandemic has been considered as part of the Group's adoption
of the going concern basis for its Interim Financial Statements for
the period ended 3 July 2021, in which context the Directors
reviewed cash flow forecasts prepared for a period of at least 12
months from the date of approval of these Interim Financial
Statements. Having carefully reviewed those forecasts, the
Directors concluded that it was appropriate to adopt the going
concern basis of accounting in preparing these Interim Financial
Statements for the reasons set out below.
The Group's net debt, excluding lease liabilities, at 3 July
2021 was $1,989 million (see Note 7) with committed facilities of
$4.4 billion. The Group has $190 million of private placement debt
due for repayment in the second half of 2021. A further $125
million of private placement debt and a $319 million Euro term loan
are due for repayment in 2022. $1,475 million of private placement
debt is subject to financial covenants. The principal covenant on
the private placement debt is a leverage ratio of <3.5x which is
measured on a rolling 12-month basis at half year and year end.
There are no financial covenants in any of the Group's other
facilities.
The Directors have considered various scenarios in assessing the
impact of COVID on future financial performance and cash flows,
with the key judgement applied being the speed and sustainability
of the return to a normal volume of elective procedures in key
markets, including the impact of further waves of restrictions on
elective procedures. Throughout these scenarios, which include a
severe but plausible outcome, the Group continues to have headroom
on its borrowing facilities and financial covenants. The Directors
believe that the Group is well placed to manage its financing and
other business risks satisfactorily and have a reasonable
expectation that the Group has sufficient resources to continue in
operational existence for the forecast period. Thus they continue
to adopt the going concern basis for accounting in preparing these
Interim Financial Statements.
The principal risks and uncertainties that the Group is exposed
to are consistent with those as at 31 December 2020. The principal
risks and uncertainties continue to be: business continuity and
business change; commercial execution; cybersecurity; finance;
global supply chain; legal and compliance risks; mergers and
acquisitions; new product innovation, design & development
including intellectual property; political and economic; pricing
and reimbursement; quality and regulatory and talent management.
Further detail on these risks can be found in the 2020 Annual
Report of the Group on pages 56-63.
Management continue to include COVID in a number of the risks
outlined above, particularly in the business continuity and
business change risk. Management's response to COVID continues to
be coordinated through a Crisis Management Team which was first
convened in 2020 within the existing business continuity and
incident management framework. COVID related uncertainty continues
to impact commercial execution, global supply chain and finance
principal risks. The ongoing impact of the COVID pandemic on
employees continues to be the highest risk on the HR risk
register.
The risks associated with the current uncertainty around global
trade are included under the political and economic risk. The
growing complexity in the relationship between the US and China may
increase the likelihood and impact of this risk.
The financial information contained in this document does not
constitute statutory financial statements as defined in sections
434 and 435 of the Companies Act 2006. The auditors issued an
unqualified opinion that did not contain a statement under section
498 of the Companies Act 2006 on the Group's statutory financial
statements for the year ended 31 December 2020. The Group's
statutory financial statements for the year ended 31 December 2020
have been delivered to the Registrar of Companies.
New accounting standards effective 2021
A number of new amendments to standards are effective from 1
January 2021 but they do not have a material effect on the Group's
financial statements. Refer to Note 8a for further details on the
impact of IBOR reform.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are
effective for annual periods beginning after 1 January 2021 and
earlier application is permitted; however, the Group has not early
adopted them in preparing these Interim Financial Statements.
Critical judgements and estimates
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 accounting policies do not
include any critical judgements. The Group's significant accounting
policies which required the most use of management's estimation in
the half year ended 3 July 2021 were: valuation of inventories;
liability provisioning and impairment. These are consistent with 31
December 2020 and there has been no change in the methodology of
applying these critical estimates since the year ended 31 December
2020.
Management have considered the impact of the continuing
uncertainty from COVID:
Valuation of inventories
Management have assessed the continuing impact of COVID on the
provision for excess and obsolete inventory, specifically
considering the impact of lower sales demand and increased
inventory levels. Management have not changed their methodology for
calculating the provision since 31 December 2020, nor is a change
in the key assumptions underlying the methodology expected in the
next 12 months. Primarily due to acquisitions, the provision has
increased from $377 million at 31 December 2020 to $431 million at
3 July 2021. The provision for excess and obsolete inventory is not
considered to have a range of potential outcomes that is
significantly different to the $431 million at 3 July 2021.
Liability provisioning
The recognition of provisions for legal disputes related to
metal-on-metal cases is subject to a significant degree of
estimation. Provision is made for loss contingencies when it is
considered probable that an adverse outcome will occur and the
amount of the loss can be reasonably estimated. In making its
estimates, management takes into account the advice of internal and
external legal counsel. Provisions are reviewed regularly and
amounts updated where necessary to reflect developments in the
disputes. The value of provisions may require future adjustment if
experience such as number, nature or value of claims or settlements
changes. Such a change may be material in the second half of 2021
or thereafter. The ultimate liability may differ from the amount
provided depending on the outcome of court proceedings and
settlement negotiations or if investigations bring to light new
facts. Management considered whether there had been any changes to
the number and value of claims since 31 December 2020 due to COVID
and to date have not identified any changes in trends. If the
experience changes in the future the value of provisions may
require adjustment.
Impairment
Management have assessed the non-current assets held by the
Group at 3 July 2021 to identify any indicators of impairment.
Where an impairment indicator has arisen, impairment reviews have
been undertaken by comparing the expected recoverable value of the
asset to the carrying value of the asset. The recoverable amounts
are based on cash flow projections using the Group's base case
scenario in its going concern models, which was reviewed and
approved by the Board. No material impairments were identified as a
result of the impairment reviews undertaken.
2. Business segment information
The Group's operating structure is organised around three global
franchises and the chief operating decision maker monitors
performance, makes operating decisions and allocates resources on a
global franchise basis. Franchise presidents have responsibility
for upstream marketing, driving product portfolio and technology
acquisition decisions, and full commercial responsibility for their
franchise in the US. Regional presidents in EMEA and APAC are
responsible for the implementation of the global franchise strategy
in their respective regions.
The Executive Committee ('ExCo'), comprises the Chief Financial
Officer ('CFO'), three franchise presidents, the two regional
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 for the
three franchises (Orthopaedics, Sports Medicine & ENT, and
Advanced Wound Management) and determines the best allocation of
resources to the franchises. Financial information for corporate
costs is presented on a Group-wide basis. The ExCo is not provided
with total assets and liabilities by segment, and therefore these
measures are not included in the disclosures below. The results of
the segments are shown below.
2a. Revenue by business segment and geography
Revenue is recognised as the performance obligations to deliver
products or services are satisfied and is recorded based on the
amount of consideration expected to be received in exchange for
satisfying the performance obligations. Revenue is recognised
primarily when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance
with the contract terms, with some transfer of services taking
place over time. Substantially all performance obligations are
performed within one year. There is no significant revenue
associated with the provision of discrete services.
P ayment terms to our customers are based on commercially
reasonable terms for the respective markets while also considering
a customer's credit rating. Appropriate provisions for returns,
trade discounts and rebates are deducted from revenue. Rebates
primarily comprise chargebacks and other discounts granted to
certain customers. Chargebacks are discounts that occur when a
third party purchases product from a wholesaler at its agreed price
plus a mark-up. The wholesaler in turn charges the Group for the
difference between the price initially paid by the wholesaler and
the agreed price. The provision for chargebacks is based on
expected sell-through levels by the Group's wholesalers to such
customers, as well as estimated wholesaler inventory levels.
Orthopaedics and Sports Medicine & ENT
Orthopaedics and Sports Medicine & ENT consists of the
following businesses: Knee Implants, Hip Implants, Other
Reconstruction, Trauma & Extremities, Sports Medicine Joint
Repair, Arthroscopic Enabling Technologies and ENT. Sales of
inventory located at customer premises and available for customers'
immediate use are recognised when notification is received that the
product has been implanted or used. Substantially all other revenue
is recognised when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance
with the contract terms. Revenue is recognised for the amount of
consideration expected to be received in exchange for transferring
the products or services.
In general our business in Established Markets is direct to
hospitals and ambulatory surgery centers whereas in the Emerging
Markets we generally sell through distributors.
Advanced Wound Management
Advanced Wound Management consists of the following businesses:
Advanced Wound Care, Advanced Wound Bioactives and Advanced Wound
Devices. Substantially all revenue is recognised when control is
transferred to the customer, which is generally when the goods are
shipped or delivered in accordance with the contract terms. Revenue
is recognised for the amount of consideration expected to be
received in exchange for transferring the products or services.
Appropriate provisions for returns, trade discounts and rebates are
deducted from revenue, as explained above.
The majority of our Advanced Wound Management business, and in
particular products used in community and homecare facilities, is
through wholesalers and distributors. When control is transferred
to a wholesaler or distributor, revenue is recognised accordingly.
The proportion of sales direct to hospitals is higher in our
Advanced Wound Devices business in Established Markets.
Segment revenue reconciles to statutory revenue from continuing
operations as follows:
Half year Half year
2021 2020
$m $m
---------------------------------- --------- ---------
Segment revenue
Orthopaedics 1,097 861
Sports Medicine & ENT 764 575
Advanced Wound Management 738 599
----------------------------------- --------- ---------
Revenue from external customers 2,599 2,035
----------------------------------- --------- ---------
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by
product franchise:
Half year Half year
2021 2020
$m $m
------------------------------------- --------- ---------
Knee Implants 438 367
Hip Implants 315 249
Other Reconstruction 47 33
Trauma & Extremities 297 212
-------------------------------------- --------- ---------
Orthopaedics 1,097 861
-------------------------------------- --------- ---------
Sports Medicine Joint Repair 409 301
Arthroscopic Enabling Technologies 293 223
ENT (Ear, Nose & Throat) 62 51
-------------------------------------- --------- ---------
Sports Medicine & ENT 764 575
-------------------------------------- --------- ---------
Advanced Wound Care 361 302
Advanced Wound Bioactives 247 192
Advanced Wound Devices 130 105
-------------------------------------- --------- ---------
Advanced Wound Management 738 599
-------------------------------------- --------- ---------
Total 2,599 2,035
-------------------------------------- --------- ---------
The following table shows the disaggregation of Group revenue by
geographic market and product category. The disaggregation of
revenue into the two product categories below reflects that in
general the products in the Advanced Wound Management franchises
are sold to wholesalers and intermediaries, while products in the
other franchises are sold directly to hospitals, ambulatory surgery
centers and distributors. The further disaggregation of revenue by
Established Markets and Emerging Markets reflects that in general
our products are sold through distributors and intermediaries in
the Emerging Markets while in the Established Markets, with the
exception of the Advanced Wound Care and Bioactives franchises,
products are in general sold direct to hospitals and ambulatory
surgery centers. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors
including volatility in growth and outlook.
Half year 2021 Half year 2020
Established Established
Markets (E) Emerging Markets Total Markets (E) Emerging Markets Total
$m $m $m $m $m $m
----------------- ---------------- ---------------- ------ ---------------- ---------------- ------
Orthopaedics,
Sports Medicine
& ENT 1,495 366 1,861 1,144 292 1,436
Advanced Wound
Management 653 85 738 530 69 599
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
Total 2,148 451 2,599 1,674 361 2,035
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
E Established Markets comprises US, Australia, Canada, Europe, Japan and New Zealand.
Sales are attributed to the country of destination. US revenue
for the half year was $1,317 million (2020: $1,021 million), China
revenue for the half year was $183 million (2020: $140 million) and
UK revenue for the half year was $91 million (2020: $75
million).
No individual customer comprises more than 10% of the Group's
external sales.
2b. Trading profit by business segment
Trading profit is a trend measure which presents the
profitability of the Group excluding the impact of specific
transactions that management considers affect the Group's
short-term profitability and the comparability of results. The
Group presents this measure to assist investors in their
understanding of trends. The Group has identified the following
items, where material, as those to be excluded from operating
profit when arriving at trading profit: acquisition and disposal
related items; amortisation and impairment of acquisition
intangibles; significant restructuring programmes; gains and losses
arising from legal disputes; and other significant items.
Segment trading profit is reconciled to the statutory measure
below:
Half year Half year
2021 2020
$m $m
--------------------------------------------------------- --------- ---------
Segment profit
Orthopaedics 204 120
Sports Medicine & ENT 214 107
Advanced Wound Management 228 107
---------------------------------------------------------- --------- ---------
Segment trading profit 646 334
Corporate costs (187) (162)
---------------------------------------------------------- --------- ---------
Group trading profit 459 172
Acquisition and disposal related items (12) (5)
Restructuring and rationalisation expenses (77) (56)
Amortisation and impairment of acquisition intangibles (87) (83)
Legal and other (44) (33)
---------------------------------------------------------- --------- ---------
Group operating profit/(loss) 239 (5)
---------------------------------------------------------- --------- ---------
Acquisition and disposal related items:
For the half year ended 3 July 2021 costs primarily relate to
the acquisition and integration of the Extremity Orthopaedics
business of Integra LifeSciences Holdings Corporation ('Extremity
Orthopaedics') and prior year acquisitions. For the half year ended
27 June 2020 costs primarily relate to the acquisition and
integration of Tusker and prior year acquisitions .
Restructuring and rationalisation costs:
For the half years ended 3 July 2021 and 27 June 2020 these
costs relate to the implementation of the Accelerating Performance
and Execution (APEX) programme that was announced in February 2018
and the Operations and Commercial Excellence programme that was
announced in February 2020.
Amortisation and impairment of acquisition intangibles:
For both the half years ended 3 July 2021 and 27 June 2020
charges relate to the amortisation of intangible assets acquired in
material business combinations.
Legal and other:
For the half years ended 3 July 2021 and 27 June 2020 charges
relate primarily to legal expenses for ongoing metal-on-metal hip
claims and costs for implementing the requirements of the EU
Medical Device Regulations (MDR) that apply from May 2021.
3. Profit on disposal of interest in associate
On 11 February 2021 Bioventus LLC ('Bioventus'), an associate
undertaking of the Group, commenced trading on the Nasdaq Global
Select Market via its holding company, Bioventus Inc., under the
symbol 'BVS'. As a consequence of this public offering and the
raising of $106 million after expenses through issuing new common
stock, the equity holding of the Smith+Nephew Group has decreased
from approximately 47.6% at 31 December 2020 to approximately 38.7%
at 11 February 2021.
In the half year ended 3 July 2021 there was a net (non-cash)
gain on the dilution of the Group's shareholding in Bioventus of
$22 million which reflects the net impact of the reduction in the
Group's equity holding and the Group's interest in the net
proceeds.
4. Taxation
Tax rate
Our reported tax for the period ended 3 July 2021 was a charge
of $18 million (H1 2020 reported tax credit: $134 million). The
relatively low effective rate of 8.1% is explained by the
non-taxable credit relating to the Bioventus investment referred to
above, and a one-off increase in deferred tax assets resulting from
the increase in the UK corporation tax rate due to take effect from
1 April 2023. The credit in H1 2020 was predominantly due to the
successful outcome of UK tax litigation relating to a 2008
reorganisation.
EU State Aid
We have previously disclosed the potential for a future effect
on our tax charge, of up to $155 million, as a result of the
European Commission (EC) decision that certain aspects of the UK
CFC financing exemption rules between 2013 and 2018 constituted
illegal State Aid.
On 29 June 2021 we received letters from HMRC confirming that
they do not consider us to have been beneficiaries of State Aid,
and therefore no liabilities will be assessed. The letters also
note that the EC has indicated its agreement with HMRC's
conclusion. No provision for this matter has been recognised in the
Group's Interim Financial Statements.
5. Dividends
The 2020 final dividend totalling $203 million was paid on 12
May 2021. The 2021 interim dividend of 14.4 US cents per ordinary
share was approved by the Board on 28 July 2021. This dividend is
payable on 27 October 2021 to shareholders whose names appear on
the register at the close of business on 1 October 2021. The
sterling equivalent per ordinary share will be set following the
record date. Shareholders may elect to receive their dividend in
either Sterling or US Dollars and the last day for election will be
11 October 2021. Shareholders may participate in the dividend
re-investment plan and elections must be made by 11 October
2021.
6. Acquisitions
Half year ended 3 July 2021
On 4 January 2021 the Group completed the acquisition of the
Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation ('Extremity Orthopaedics'). The acquisition
significantly strengthens the Group's extremities business by
adding a combination of a focused sales channel, complementary
shoulder replacement and upper and lower extremities portfolio, and
a new product pipeline.
The transaction comprised the acquisition of the entire issued
share capital of two wholly owned US subsidiaries of Integra
LifeSciences Holdings Corporation group and certain assets of the
Extremity Orthopaedics business held outside the US. The maximum
consideration is $240 million and the provisional fair value of
consideration is $237 million and includes no deferred or
contingent consideration. The consideration is subject to the
finalisation of certain customary adjusting items, which will not
take place until the second half of 2021.
The goodwill represents the control premium, the acquired
workforce and the synergies expected from integrating Extremity
Orthopaedics into the Group's existing business, and is expected to
be partly deductible for tax purposes.
The provisional fair value of assets acquired and liabilities
assumed are set out below:
Extremity Orthopaedics
$m
------------------------------------------- ----------------------
Intangible assets - Product-related 112
Property, plant & equipment 24
Inventory 41
Other payables (17)
Net deferred tax liability (8)
-------------------------------------------- ----------------------
Net assets 152
Goodwill 85
-------------------------------------------- ----------------------
Consideration (net of nil cash acquired) 237
-------------------------------------------- ----------------------
The cash outflow from acquisitions of $259 million for the half
year ended 3 July 2021 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
The carrying value of goodwill increased from $2,928 million at
31 December 2020 to $2,991 million at 3 July 2021. The acquisition
in the half year ended 3 July 2021 increased goodwill by $85
million, this was partially offset by foreign exchange movements of
$22 million.
For the half year ended 3 July 2021 the contribution from
Extremity Orthopaedics to revenue was $42 million and to profit was
immaterial. If the business combination had occurred at the
beginning of the year the contribution to revenue and profit would
not have been materially different.
Year ended 31 December 2020
On 23 January 2020 the Group completed the acquisition of 100%
of the share capital of Tusker Medical, Inc. ("Tusker"), a
developer of an innovative in-office solution for tympanostomy (ear
tubes) called Tula. The acquisition was deemed to be a business
combination within the scope of IFRS 3 Business Combinations. The
acquisition accounting was completed in 2021 with no adjustments to
the provisional fair values disclosed in the Group's 2020 Annual
Report.
The acquisition supports the Group's strategy to invest in
innovative technologies that address unmet clinical needs. The
maximum consideration is $140 million and the fair value of
consideration is $139 million and includes $6 million of deferred
consideration and $35 million of contingent consideration. The
goodwill represents the control premium, the acquired workforce and
the synergies expected from integrating Tusker into the Group's
existing business, and is not expected to be deductible for tax
purposes.
The fair value of assets acquired and liabilities assumed are
set out below:
Tusker
$m
------------------------------------------- ------
Intangible assets - Product-related 53
Property, plant & equipment 6
Other receivables 1
Trade and other payables (6)
Non-current liabilities (3)
Net deferred tax asset 5
-------------------------------------------- ------
Net assets 56
Goodwill 83
-------------------------------------------- ------
Consideration (net of nil cash acquired) 139
-------------------------------------------- ------
The cash outflow from acquisitions of $139 million for the half
year ended 27 June 2020 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
7. Net debt
Net debt as at 3 July 2021 is outlined below. The repayment of
lease liabilities is included in cash flows from financing
activities in the cash flow statement.
3 July 31 December 27 June
2021 2020 2020
$m $m $m
---------------------------------------------------------- -------- ----------- --------
Cash at bank 1,387 1,762 347
Long-term borrowings (2,781) (3,207) (2,328)
Bank overdrafts, borrowings and loans due within one year (596) (279) (113)
Net currency swap asset - - 1
Net interest rate swap asset 1 2 3
----------------------------------------------------------- -------- ----------- --------
Net debt (1,989) (1,722) (2,090)
----------------------------------------------------------- -------- ----------- --------
Non-current lease liabilities (135) (146) (148)
Current lease liabilities (54) (58) (50)
----------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,178) (1,926) (2,288)
----------------------------------------------------------- -------- ----------- --------
The movements in the period were as follows:
Opening net debt as at 1 January (1,926) (1,770) (1,770)
Cash flow before financing activities (68) 329 (253)
Non-cash additions to lease liabilities (12) (81) (51)
Proceeds from issue of ordinary share capital 2 2 1
Proceeds from own shares 4 9 2
Purchase of own shares - (16) (16)
Equity dividends paid (203) (328) (202)
Exchange adjustments 25 (71) 1
----------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,178) (1,926) (2,288)
----------------------------------------------------------- -------- ----------- --------
The Group has $190 million of private placement debt due for
repayment in 2021. A further $125 million of private placement debt
and a $319 million Euro term loan are due for repayment in
2022.
A EUR223 million ($264 million equivalent) Euro term loan has
been extended from May 2022 to mature in May 2023.
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
------------------------------- ----------------------------
3 July 31 December 27 June 3 July 31 December 27 June
2021 2020 2020 2021 2020 2020 Fair value
$m $m $m $m $m $m level
---------------------------- -------- ----------- -------- ------ ----------- ------- ----------
Financial assets at fair
value
Forward foreign exchange
contacts 24 20 20 24 20 20 Level 2
Investments 10 9 10 10 9 10 Level 3
Contingent consideration
receivable 35 37 36 35 37 36 Level 3
Currency swaps 2 2 1 2 2 1 Level 2
Interest rate swaps 1 2 3 1 2 3 Level 2
----------------------------- -------- ----------- -------- ------ ----------- -------
72 70 70 72 70 70
---------------------------- -------- ----------- -------- ------ ----------- -------
Financial assets not
measured at fair value
Trade and other receivables 1,054 986 997
Cash at bank 1,387 1,762 347
----------------------------- -------- ----------- --------
2,441 2,748 1,344
---------------------------- -------- ----------- --------
Total financial assets 2,513 2,818 1,414
----------------------------- -------- ----------- --------
Financial liabilities at
fair value
Acquisition consideration (121) (128) (133) (121) (128) (133) Level 3
Forward foreign exchange
contracts (21) (57) (20) (21) (57) (20) Level 2
Currency swaps (2) (2) - (2) (2) - Level 2
----------------------------- -------- ----------- -------- ------ ----------- -------
(144) (187) (153) (144) (187) (153)
---------------------------- -------- ----------- -------- ------ ----------- -------
Financial liabilities not
measured at fair value
Acquisition consideration (20) (37) (45)
Bank overdrafts (8) (11) (21)
Bank loans (900) (931) (867)
Corporate bond (993) (992) -
Private placement debt in a
hedge relationship (121) (122) (123)
Private placement debt not in
a hedge relationship (1,355) (1,430) (1,430)
Trade and other payables (963) (892) (782)
----------------------------- -------- ----------- --------
(4,360) (4,415) (3,268)
---------------------------- -------- ----------- --------
Total financial liabilities (4,504) (4,602) (3,421)
----------------------------- -------- ----------- --------
There were no transfers between Levels 1, 2 and 3 during the
half year ended 3 July 2021 and the year ended 31 December 2020.
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. Long-term borrowings are
measured in the balance sheet at amortised cost. The corporate bond
issued in October 2020 is publicly
listed and a market price is available. The Group's other long
term borrowings are not quoted publicly, their fair values are
estimated by discounting future contractual cash flows to net
present values at the current market interest rates available to
the Group for similar financial instruments as at the year end. The
fair value of the private placement notes is determined using a
discounted cash flow model based on prevailing market rates. The
fair value of currency swaps is determined by reference to quoted
market spot rates. As a result, foreign forward exchange contracts
and currency swaps are classified as Level 2 within the fair value
hierarchy.
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.
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.
The movements in the half year ended 3 July 2021 and the year
ended 31 December 2020 for financial instruments measured using
Level 3 valuation methods are presented below:
3 July 31 December
2021 2020
$m $m
------------------------------------ ------ -----------
Investments
At 1 January 9 7
Additions 1 2
------------------------------------ ------ -----------
10 9
------------------------------------ ------ -----------
Contingent consideration receivable
At 1 January 37 39
Receipts (2) (2)
------------------------------------ ------ -----------
35 37
------------------------------------ ------ -----------
Acquisition consideration liability
At 1 January (128) (141)
Arising on acquisitions - (49)
Payments 7 51
Remeasurements - 12
Discount unwind - (1)
------------------------------------ ------ -----------
(121) (128)
------------------------------------ ------ -----------
In 2020 the Group applied the interest rate benchmark reform
amendments retrospectively to hedging relationships that existed at
1 January 2020 or were designated thereafter and that are directly
affected by interest rate benchmark reform. The Group had a number
of interest rate swaps outstanding at 31 December 2020 which were
all due to mature in 2021 and for which published US Dollar LIBOR
rates were still available. The Group has a revolving credit
facility of $1,000 million and private placement notes of $25
million which will be subject to IBOR reform. In the half year
ended 3 July 2021 the Group changed the interest rates on its
revolving credit facility to SOFR (Secured Overnight Financing
Rate) with no material impact arising. The Group expects that the
interest rates for the private placement notes will also be changed
to SOFR and that no material gain or loss will arise as a
result.
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 increased
since 31 December 2020 by 60bps to 1.9% and 30bps to 2.7%
respectively. This remeasurement gain was partially offset by a
remeasurement loss from a decrease in asset performances.
9. 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:
Half year Full year Half year
2021 2020 2020
------------------- --------- --------- ---------
Average rates
------------------- --------- --------- ---------
Sterling 1.39 1.28 1.26
Euro 1.20 1.14 1.10
Swiss Franc 1.10 1.07 1.03
-------------------- --------- --------- ---------
Period-end rates
------------------- --------- --------- ---------
Sterling 1.38 1.37 1.24
Euro 1.18 1.23 1.12
Swiss Franc 1.08 1.14 1.05
-------------------- --------- --------- ---------
Directors' Responsibilities Statement
The Directors confirm that to the best of their knowledge:
-- this set of condensed consolidated Interim Financial
Statements has been prepared in accordance with IAS 34 Interim
Financial Statements as adopted for use in the UK and IAS 34
Interim Financial Statements as issued by the International
Accounting Standards Board; and
-- that the interim management report herein includes a fair
review of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first
six months of the financial year and their impact on the condensed
set of financial statements; and a description of the principal
risks and uncertainties for the remaining six months of the year;
and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the enterprise
during that period, and any changes in the related party
transactions described in the last annual report that could do
so.
There have been no changes in the Board of Directors of Smith
& Nephew plc to those listed in the Smith & Nephew plc 2020
Annual Report.
By order of the Board:
Roland Diggelmann Chief Executive Officer 29 July 2021
Anne-Françoise Nesmes Chief Financial Officer 29 July 2021
INDEPENT REVIEW REPORT TO SMITH & NEPHEW PLC
Conclusion
We have been engaged by the company to review the condensed
consolidated set of financial statements in the interim financial
report for the period ended 3 July 2021 which comprises the Group
Income Statement, Group Statement of Comprehensive Income, Group
Balance Sheet, Condensed Group Cash Flow Statement, Group Statement
of Changes in Equity and the related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed consolidated set of
financial statements in the interim financial report for the period
ended 3 July 2021 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted for
use in the UK, IAS 34 Interim Financial Reporting as issued by the
International Accounting Standards Board and the Disclosure
Guidance and Transparency Rules ("the DTR") of the UK's Financial
Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the interim
financial report and consider whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed consolidated set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The interim financial report is the responsibility of, and has
been approved by, the directors. The directors are responsible for
preparing the interim financial report in accordance with the DTR
of the UK FCA.
As disclosed in note 1, the latest annual financial statements
of the Group were prepared in accordance with International
Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union and in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006. The Group also prepared
those annual accounts in accordance with IFRS as issued by
International Accounting Standards Board ('IASB'). The next annual
financial statements will be prepared in accordance with UK-adopted
international accounting standards and in accordance with IFRS as
issued IASB.
The directors are responsible for preparing the condensed
consolidated set of financial statements included in the interim
financial report in accordance with IAS 34 as adopted for use in
the UK, and in addition to complying with their legal obligation to
do so, have also applied IAS 34 as issued by the IASB to them.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed consolidated set of financial statements in the
interim financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Zulfikar Walji
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
29 July 2021
Other information
Definitions of and reconciliation to measures included within
adjusted "trading" results
These Interim 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, ROIC, trading cash flow, free cash flow,
trading profit to trading cash conversion ratio, leverage ratio,
and underlying revenue 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 Interim
Financial Statements as the Group's management believe that they
provide investors with a means of evaluating performance of the
business segments 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,
the most directly comparable financial measure calculated in
accordance with IFRS, by making two adjustments, the 'constant
currency exchange effect' and the 'acquisitions and disposals
effect', described below.
The 'constant currency exchange effect' is a measure of 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 the current year revenue translated into
US Dollars at the current year average exchange rate and the prior
year revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior
year revenues into US Dollars using the prior year closing
rate.
The 'acquisitions and disposals effect' is the measure of 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 includes acquisitions and excludes 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.
These sales are separately tracked in the Group's internal
reporting systems and are readily identifiable.
Reported revenue growth, the most directly comparable financial
measure calculated in accordance with IFRS, reconciles to
underlying revenue growth as follows:
Reconciling Items
Half year Half year Reported Underlying Acquisitions Currency
2021 2020 growth growth & disposals impact
$m $m % % % %
---------------------------------- --------- --------- -------- ---------- ------------ --------
Segment revenue
Orthopaedics 1,097 861 27.4 19.2 4.2 4.0
Sports Medicine & ENT 764 575 32.9 28.0 - 4.9
Advanced Wound Management 738 599 23.2 18.0 - 5.2
----------------------------------- --------- --------- -------- ---------- ------------ --------
Revenue from external customers 2,599 2,035 27.8 21.3 1.8 4.7
----------------------------------- --------- --------- -------- ---------- ------------ --------
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
profitability of the Group. The adjustments made exclude the impact
of specific transactions that management considers affect the
Group's short-term profitability and cash flows, and the
comparability of results. 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;
and 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 are excluded from operating profit and
cash generated from operations when arriving at trading profit and
trading cash flow. The cash contributions to fund defined benefit
pension schemes that are closed to future accrual are excluded from
cash generated from operations when arriving at trading cash flow.
Payment of lease liabilities is included within trading cash
flow.
Adjusted earnings per ordinary share ('EPSA')
EPSA is a trend measure, which presents the profitability of the
Group excluding the post-tax impact of specific transactions that
management considers affect the Group's short-term profitability
and comparability of results. 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
Profit generated
Operating before Attributable from Earnings
Revenue profit(1) tax(2) Taxation(3) profit(4) operations(5) per share(6)
$m $m $m $m $m $m c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Half Year 2021
Reported 2,599 239 223 (18) 205 459 23.4
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 12 (19) (1) (20) 15 (2.2)
Restructuring and
rationalisation
costs - 77 77 (14) 63 43 7.2
Amortisation and
impairment of
acquisition
intangibles - 87 87 (19) 68 - 7.7
Legal and other(7) - 44 48 (24) 24 90 2.7
Lease liability
payments - - - - - (28) -
Capital
expenditure - - - - - (175) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Half Year 2021
Adjusted 2,599 459 416 (76) 340 404 38.8
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Cash
(Loss)/Profit generated
Operating before Attributable from Earnings
per
Revenue (loss)/profit(1) tax(2) Taxation(3) profit(4) operations(5) share(6)
$m $m $m $m $m $m c
------------------ ------- ---------------- ------------- ----------- ------------ ------------- --------
Half Year 2020
Reported 2,035 (5) (34) 134 100 125 11.5
------------------- ------- ---------------- ------------- ----------- ------------ ------------- --------
Acquisition and
disposal related
items - 5 5 (1) 4 9 0.5
Restructuring and
rationalisation
costs - 56 56 (12) 44 69 5.0
Amortisation and
impairment of
acquisition
intangibles - 83 83 (19) 64 - 7.3
Legal and
other(7) - 33 31 (4) 27 34 3.1
UK tax litigation - - - (122) (122) - (14.0)
Lease liability
payments - - - - - (24) -
Capital
expenditure - - - - - (188) -
------------------ ------- ---------------- ------------- ----------- ------------ ------------- --------
Half Year 2020
Adjusted 2,035 172 141 (24) 117 25 13.4
------------------- ------- ---------------- ------------- ----------- ------------ ------------- --------
(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
operations to trading cash flow.
(6) Represents a reconciliation of basic earnings per ordinary
share to adjusted earnings per ordinary share (EPSA).
(7) The ongoing funding of defined benefit pension schemes that
are closed to future accrual is not included in management's
definition of trading cash flow as there is no defined benefit
service cost for these schemes.
Acquisition and disposal related items: For the half year ended
3 July 2021 costs primarily relate to the acquisition and
integration of Extremity Orthopaedics and prior year acquisitions.
Profit before tax additionally excludes g ains associated with the
transaction resulting in the dilution of the Group's shareholding
in Bioventus as detailed in Note 3 to the Interim Financial
statements and acquisition costs incurred by Bioventus.
For the half year ended 27 June 2020 costs primarily relate to
the acquisition and integration of Tusker and prior year
acquisitions .
Restructuring and rationalisation costs: For the half years
ended 3 July 2021 and 27 June 2020 these costs relate to the
implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018 and the Operations
and Commercial Excellence programme that was announced in February
2020.
Amortisation and impairment of acquisition intangibles: For both
the half years ended 3 July 2021 and 27 June 2020 charges relate to
the amortisation of intangible assets acquired in material business
combinations.
Legal and other: For the half years ended 3 July 2021 and 27
June 2020 charges relate primarily to legal expenses for ongoing
metal-on-metal hip claims and costs for implementing the
requirements of the EU Medical Device Regulations (MDR) that apply
from May 2021.
For the half year ended 3 July 2021 taxation also includes the
effect of an increase in deferred tax assets on non-trading items
resulting from the prospective UK tax rate increase from 19% to 25%
effective from 1 April 2023. Trading cash flow additionally
excludes $7 million of cash funding to closed defined benefit
pension schemes.
UK tax litigation: For the half year ended 27 June 2020 the tax
credit includes $122 million in respect of recovered and
recoverable losses in relation to UK tax litigation as described in
Note 4 to the Interim Financial Statements.
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END
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