TIDMSN.
RNS Number : 3979U
Smith & Nephew Plc
29 July 2020
Smith+Nephew Second Quarter and First Half 2020 Results
Group well-positioned as markets recover
29 July 2020
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology
business, reports results for the second quarter and first half
ended 27 June 2020:
Reported Trading(2)
-------------------------- ----------------------------
27 June 29 June Reported 27 June 29 June Underlying
2020 2019 growth 2020 2019 growth
$m $m % $m $m %
------- ------- -------- ------- ------- ----------
Second Quarter Results(1)
Revenue 901 1,283 -29.8 901 1,283 -29.3
------- ------- -------- ------- ------- ----------
Half Year Results(1)
Revenue 2,035 2,485 -18.1 2,035 2,485 -18.7
Operating/trading (loss)/profit (5) 419 172 532
Operating/trading (loss)/profit margin (%) (0.2) 16.8 8.5 21.4
Cash generated from operations/trading cash
flow 125 543 25 405
EPS/ EPSA (cents) 11.5 35.3 13.4 45.8
Highlights (1,2)
-- Trading in line with 1 July update as business was impacted
by government-led restrictions to control COVID-19
-- Performance improved across Q2 as elective surgeries
restarted, with underlying revenue declines of c. -47% in April,
-27% in May, and -12% in June
o By quarter-end, elective procedures had resumed across the US
and in most European countries
o China returned to growth for the second quarter
-- Operating and trading profit margin lower year-on-year, in line with previous announcements
o COVID-impact reflected in lower gross margins including from
increase in provisions and factory underutilisation, and negative
leverage from fixed SG&A costs
o Discretionary cost saving measures of approximately $150
million delivered in the first half, out of programme to deliver up
to $200 million in 2020
-- Recently launched products performing strongly, including
OR3O Dual Mobility Hip System and EVOS in Trauma
-- Investment in R&D maintained, with significant new
product introductions including new robotics platform
-- Interim dividend of 14.4c in line with prior year
-- Strong balance sheet and good liquidity, with net debt
(excluding lease liabilities) of $2.1 billion versus $3.4 billion
of committed facilities
-- 2020 guidance remains withdrawn due to continuing uncertainty regarding impact of COVID-19
Roland Diggelmann, Chief Executive Officer, said:
"I am proud of the way all at Smith+Nephew have managed the
pressure of the COVID-19 crisis. We have continued to serve our
customers throughout, and were ready as lockdown restrictions
eased, delivering an improving performance across the second
quarter.
"At the same time, we have taken measures to ensure the Group
emerges from this crisis as strongly as possible. These include
maintaining our R&D investment, launching new products,
protecting jobs, and managing our cost base.
"There remain many uncertainties as countries continue to battle
COVID-19, but with our unique portfolio, proven strategy, strong
balance sheet and motivated workforce we are ready to take
advantage as markets recover. "
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
EST on 29 July 2020, details of which can be found on the
Smith+Nephew website at http://www.smith-nephew.com/results .
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 2019 period.
'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
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 2020
Results
S econd Quarter 2020 Trading Update
Our second quarter revenue was $901 million (2019: $1,283
million). On a reported basis revenue declined -29.8%, including a
100bps benefit from acquisitions and
-150bps foreign exchange headwind. On an underlying basis
revenue was down
-29.3%, in line with our announcement of 1 July 2020, as
COVID-19 impacted our major markets.
Q2 2020 comprised 63 trading days, in line with Q2 2019.
Second Quarter Consolidated Revenue Analysis
27 June 29 June Reported Underlying Acquisitions Currency
2020 2019(i) growth Growth(ii) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------- ------- -------- ---------- ------------ --------
Orthopaedics 364 552 -34.1 -34.0 1.2 -1.3
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Knee Implants 137 262 -47.8 -46.9 - -0.9
Hip Implants 112 156 -28.1 -26.9 - -1.2
Other Reconstruction(iii) 12 16 -23.9 -51.5 29.1 -1.5
Trauma 103 118 -12.8 -11.1 - -1.7
Sports Medicine & ENT 247 379 -34.8 -33.3 - -1.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 129 194 -33.6 -32.0 - -1.6
Arthroscopic Enabling Technologies 96 146 -33.8 -32.1 - -1.7
ENT (Ear, Nose and Throat) 22 39 -44.9 -44.0 - -0.9
Advanced Wound Management 290 352 -17.6 -17.6 1.8 -1.8
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Advanced Wound Care 144 174 -17.2 -14.6 - -2.6
Advanced Wound Bioactives 101 117 -13.9 -18.7 5.1 -0.3
Advanced Wound Devices 45 61 -25.8 -23.7 0.2 -2.3
Total 901 1,283 -29.8 -29.3 1.0 -1.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------- ------- ------- -------- ---------- ------------ --------
US 440 635 -30.7 -31.8 1.1 -
Other Established Markets(iv) 274 402 -31.7 -30.8 0.6 -1.5
Total Established Markets 714 1,037 -31.1 -31.4 0.9 -0.6
Emerging Markets 187 246 -24.1 -20.2 1.3 -5.2
Total 901 1,283 -29.8 -29.3 1.0 -1.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
(i) Included within the Q2 2019 analysis is a reclassification
of $3 million of revenue formerly included in the Advanced Wound
Care franchise which is now included in the Advanced Wound
Bioactives franchise in order to present consistent analysis to the
Q2 2020 results. There has been no change in total revenue for the
quarter ended 29 June 2019
(ii) Underlying growth is defined in Note 1 on page 2
(iii) Other Reconstruction includes robotics capital sales, the
joint reconstruction business acquired from Brainlab and cement
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Overview of the second quarter
Performance improved across the quarter, with underlying revenue
declines of approximately -47% in April, -27% in May, and -12% in
June. Performance correlated strongly with the easing of lockdown
restrictions as we stepped back up to serve customers as elective
surgeries resumed across our markets.
Geographically, by the quarter-end elective procedures had
resumed across the US and in most European countries. Overall our
Established Markets declined -31.4%
(-31.1% reported) in the second quarter, with the US down -31.8%
(-30.7% reported) and Other Established Markets down -30.8% (-31.7%
reported).
China, the first market impacted by COVID-19, returned to growth
for the quarter. Overall, Emerging Markets revenue was down -20.2%
(-24.1% reported).
By franchise, the impact of the COVID-19 pandemic was most
pronounced on our Orthopaedic Reconstruction, Sports Medicine and
ENT businesses, driven by lower levels of elective surgery. Our
Advanced Wound Management and Trauma businesses were more
resilient.
Orthopaedics
Revenue declined -34.0% (-34.1% reported) in our Orthopaedics
franchise in the second quarter. Within this, Knee Implants was
down -46.9% (-47.8% reported) and Hip Implants down -26.9% (-28.1%
reported). We saw a good performance from our recently launched
OR3O Dual Mobility Hip System, and are now starting to make this
system available outside of the US. Other Reconstruction revenue
was down -51.5% (-23.9% reported) as non-COVID-related capital
investment was placed on hold in many healthcare facilities. The
reported decline included the benefit of acquisitions. Trauma,
which is less exposed to elective surgery, experienced an
-11.1% decline in revenue (-12.8% reported), with the EVOS
System generating double-digit growth.
Sports Medicine & ENT
Revenue from our Sports Medicine & ENT franchise was down
-33.3% (-34.8% reported) in the quarter as procedures were
deferred, with Sports Medicine Joint Repair -32.0% (-33.6%
reported), Arthroscopic Enabling Technologies
-32.1% (-33.8% reported) and ENT -44.0% (-44.9% reported).
During the quarter we signed an agreement with Fiagon, a technology
leader in electromagnetic surgical navigation solutions, to
distribute its ENT portfolio in the Asia Pacific region.
Advanced Wound Management
Revenue from our Advanced Wound Management franchise declined
-17.6%
(-17.6% reported) driven in part by the deferral of elective
surgery, but also by the temporary closures of wound clinics and
falling numbers in long term care facilities as they closed to new
residents during the crisis. Advanced Wound Care declined by
-14.6% (-17.2% reported), Advanced Wound Bioactives by -18.7%
(-13.9% reported) and Advanced Wound Devices by -23.7% (-25.8%
reported).
First Half 2020 Consolidated Analysis
Smith+Nephew results for the first half ended 27 June 2020:
Half year Half year Reported
2020 2019 growth
$m $m %
--------------------------------------------------------- --------- --------- --------
Revenue 2,035 2,485 -18.1
--------- --------- --------
Operating (loss)/profit (5) 419 -101
Acquisition and disposal related items 5 8
Restructuring and rationalisation costs 56 48
Amortisation and impairment of acquisition intangibles 83 61
Legal and other 33 (4)
--------- --------- --------
Trading profit(i) 172 532 -68
--------- --------- --------
c c
Earnings per share ('EPS') 11.5 35.3 -67
Acquisition and disposal related items 0.5 0.7
Restructuring and rationalisation costs 5.0 4.5
Amortisation and impairment of acquisition intangibles 7.3 5.4
Legal and other 3.1 (0.1)
UK tax litigation (14.0) -
--------- --------- --------
Adjusted Earnings per share ('EPSA')(i) 13.4 45.8 -71
--------- --------- --------
(i) See Other Information on pages 31 to 34
First Half 2020 Analysis
Our first half revenue was $2,035 million (H1 2019: $2,485
million), down 18.1% on a reported growth basis including a foreign
exchange headwind of 140bps and 200bps benefit from acquisitions.
Revenue was down 18.7% on an underlying basis.
The Group reported an operating loss of -$5 million (H1 2019:
operating profit of $419 million) after restructuring and
rationalisation costs, as well as acquisition and disposal related
items, 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 $172 million in the first half (H1 2019: $532
million). The trading profit margin, at 8.5% (H1 2019: 21.4%), was
down significantly year-on year as previously guided.
The trading profit margin reflected a number of COVID-related
factors, including negative leverage effect from the fixed
components of our cost base and the impact of reduced production
volumes, as well as additional charges of approximately $50 million
to provisions for inventory excess and obsolescence and trade
receivables (see Note 1 to the Interim Financial Statements).
These factors were partially offset by approximately $150
million of discretionary cost saving measures achieved in the first
half, from our programme to realise up to $200 million of savings
in 2020 to offset the impact of COVID-19.
The Accelerating Performance and Execution (APEX) programme and
the Operations and Commercial Excellence programme incurred
restructuring costs of $56 million in the first half, with
incremental benefits recognised of around $20 million compared to
H1 2019.
Each of the three global franchises contributed to the 2020
trading profit (see Note 2 to the Interim Financial
Statements).
Cash generated from operations was $125 million (H1 2019: $543
million) and trading cash flow was $25 million (H1 2019: $405
million) (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 14% (H1
2019: 76%). We continued to invest in capital expenditure as we
improve our manufacturing site base. The working capital outflow of
$153 million includes higher inventory, partially offset by lower
growth in receivables due to the decline in revenue in the
period.
The net interest charge within reported results was $21 million
(H1 2019: $25 million) including $3 million from the application of
IFRS 16 Leases (H1 2019: $2 million).
Our reported tax for the period ended 27 June 2020 was a credit
of $134 million (H1 2019 reported tax charge: $74 million)
predominantly due to the successful outcome of a legal tax case in
the UK. The tax rate on trading results for the period ended 27
June 2020 was 17.0% (H1 2019: 19.7%) (see Note 3 to the Interim
Financial Statements and Other Information on pages 31 to 34 for
further details on taxation).
Basic earnings per share ('EPS') was 11.5c (23.0c per ADS) (H1
2019: 35.3c per share). Adjusted earnings per share ('EPSA') was
13.4c (26.8c per ADS) (H1 2019: 45.8c per share).
Smith+Nephew has a strong balance sheet with access to
significant liquidity and continues to adopt the going concern
basis in preparing these Interim Financial Statements (see Note 1
and Note 6 to the Interim Financial Statements for further detail).
At the end of the first half, the Group had net debt of $2.1
billion (excluding lease liabilities), compared to committed
facilities of $3.4 billion, including $550 million of Senior Notes
drawn down in June 2020. The Group has no debt maturing in 2020.
The $490 million increase in net debt since the year-end reflects
acquisitions, dividend payments, decline in trading performance and
working capital movements.
Responding to COVID-19
Smith+Nephew has been responding to COVID-19 since January 2020,
first in China, and then across all of our markets globally.
Throughout this period we have prioritised the health and safety of
employees and protecting jobs, supporting our customers and
communities, and ensuring the business is in the best position to
respond as elective surgeries return.
Supporting our employees and communities
As restrictions have been eased we have been reopening our
offices globally, enabling those employees who need to work from
the office to do so. However, we continue to encourage employees to
work remotely where they can, and are keeping office occupancy
levels low, typically less than 30%.
At all our sites precautionary safety measures are in place and
follow requirements of local city, state and country governments
and health authorities. This includes social distancing measures,
temperature checks, availability of hand sanitisers and other PPE
equipment. We also continue to limit business travel and in-person
meetings.
We recognise that our duty of care also extends to the broader
welfare of employees. Measures taken include enhancing our Employee
Assistance Program to make it easier for employees to access
resources to support their emotional, mental, physical and
financial wellbeing, as well as reviewing all objectives to ensure
expectations are achievable and aligned with the business
deliverables in the second half.
We have also continued to use our resources to support the fight
against COVID-19. Since April our facilities in Memphis and Costa
Rica have assembled more than one million faceshields, and in Hull
we are supporting the trial of a technology used to minimise close
contact between employees working in manufacturing and laboratory
environments.
Delivering new innovation
We remain committed to delivering meaningful innovation to our
customers with a number of important launches since the start of
the second quarter.
In Orthopaedics this was led by a new handheld robotics
platform, the CORI Surgical System, available for both
unicompartmental knee arthroplasty and total knee arthroplasty.
CORI is the vanguard of our Real Intelligence digital ecosystem
which, following applicable regulatory clearance and approval
pathways, will include patient engagement, pre-operative planning,
digital and robotic surgery, post-operative assessment and outcomes
measurement solutions. We also launched the JOURNEY II
Unicompartmental Knee (UK) System, building on the heritage of our
partial knees now paired with proprietary OXINIUM Technology.
In Sports Medicine we introduced the INTELLIO Connected Tower
Solution, which wirelessly connects and remotely controls multiple
Sports Medicine systems from outside the sterile field, an ideal
solution for both hospitals and Ambulatory Surgery Centers (ASCs)
where space is at a premium. We also completed requirements to CE
Mark our REGENETEN Bioinductive Implant and completed the first
cases in Europe.
And in ENT we announced the market introduction and first
commercial procedure of the Tula System, an in-office solution for
placement of tympanostomy tubes (commonly known as ear tubes),
following our acquisition of Tusker Medical, Inc. in January
2020.
We also continued to invest in evidence to support the use of
our products, including a new publication further validating the
performance of our proprietary OXINIUM on XLPE (highly cross-linked
polyethylene) for total hip arthroplasty, and another demonstrating
the cost effectiveness of PICO Single Use Negative Pressure Wound
Therapy System (sNPWT) when compared with traditional NPWT.
We have also continued to develop new service offerings,
including for the ASC segment, which we view as a strategic
cross-franchise opportunity. We are seeing an increase in the
proportion of joint replacement procedures taking place in ASCs and
believe that part of the US healthcare system's response to COVID
has been to accelerate the shift. Smith+Nephew is well positioned
to benefit from this trend through our Positive Connections service
offering, and with our enabling technology including the launch of
CORI.
Cost control measures
Smith+Nephew is on track to deliver discretionary cost savings
of up to $200 million in 2020 in response to COVID-19, with
approximately $150 million realised by the end of the first half.
These savings are coming from areas such as travel, events,
advertising, promotion, consultancy, freezing all but crucial new
hires, temporarily reducing production at some manufacturing
facilities to manage stock levels and slowing some planned capital
expenditure. We are protecting the majority of R&D investment
and remain committed to developing and launching meaningful
innovation this year and beyond.
We continue to monitor market developments, have identified
additional potential savings in 2020 if they become required, and
retain the option to reinvest the savings back into the business in
the second half to accelerate recovery. We have also assessed and
continue to monitor the impact of COVID-19 on the Group's principal
risks (see Note 1 to the Interim Financial Statements for further
detail).
Interim Dividend
The interim dividend is 14.4c per share (28.8c per ADS), in line
with 2019. This equates to 11.2p per share at prevailing exchange
rates as of 27 July 2020. The interim dividend will be paid on 28
October 2020 to shareholders on the register at the close of
business on 2 October 2020.
The Board remains committed to Smith+Nephew's progressive
dividend policy, whereby the dividend increases over time broadly
in line with underlying earnings, and we look forward to returning
to growing the dividend when performance allows.
Outlook
Whilst we are encouraged by the improved performance dynamic
across the second quarter, there continues to be significant
uncertainty and geographical variation as COVID-19 continues to
impact our major markets. As a result, we will not provide updated
2020 guidance at this time.
Looking to the medium-term, we have a proven strategy, strong
management team and robust balance sheet. We remain committed to
our ambition to consistently outgrow our markets at the same time
as delivering ongoing improvements to our trading profit
margin.
Forward calendar
The Q3 Trading Report will be released on 29 October 2020.
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 17,500+ 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 $5.1 billion in 2019.
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-19, 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-19; 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-19);
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-19);
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
27 June 29 June Reported Underlying Acquisitions Currency
2020 2019(i) growth Growth(ii) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------- ------- -------- ---------- ------------ --------
Orthopaedics 861 1,098 -21.6 -21.4 1.0 -1.2
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Knee Implants 367 523 -29.9 -28.8 - -1.1
Hip Implants 249 308 -19.2 -17.9 - -1.3
Other Reconstruction(iii) 33 30 11.1 -23.1 36.0 -1.8
Trauma 212 237 -10.6 -9.1 - -1.5
Sports Medicine & ENT 575 747 -23.1 -21.6 - -1.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 301 382 -21.3 -19.8 0.1 -1.6
Arthroscopic Enabling Technologies 223 290 -23.3 -21.7 - -1.6
ENT (Ear, Nose and Throat) 51 75 -31.3 -30.3 - -1.0
Advanced Wound Management 599 640 -6.4 -11.1 6.5 -1.8
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Advanced Wound Care 302 347 -13.0 -10.7 - -2.3
Advanced Wound Bioactives 192 178 7.9 -14.2 22.3 -0.2
Advanced Wound Devices 105 115 -8.4 -6.7 0.5 -2.2
Total 2,035 2,485 -18.1 -18.7 2.0 -1.4
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Consolidated revenue by geography
------------------------------------- ------- ------- -------- ---------- ------------ --------
US 1,021 1,203 -15.1 -18.6 3.5 -
Other Established Markets(iv) 653 817 -20.1 -18.5 0.4 -2.0
Total Established Markets 1,674 2,020 -17.1 -18.6 2.3 -0.8
Emerging Markets 361 465 -22.4 -19.1 1.1 -4.4
Total 2,035 2,485 -18.1 -18.7 2.0 -1.4
-------------------------------------- ------- ------- -------- ---------- ------------ --------
(i) Included within the half year 2019 analysis is a
reclassification of $6 million of revenue formerly included in the
Advanced Wound Care franchise of which $5 million is now included
in the Advanced Wound Bioactives franchise and $1 million in the
Advanced Wound Devices franchise in order to present consistent
analysis to the half year 2020 results. There has been no change in
total revenue for the half year ended 29 June 2019
(ii) Underlying growth is defined in Note 1 on page 2
(iii) Other Reconstruction includes robotics capital sales, the
joint reconstruction business acquired from Brainlab and cement
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
2020 HALF YEAR CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
Unaudited Group Income Statement for the Half Year ended 27 June
2020
Half year Half year
2020 2019
Notes $m $m
----------------------------------------------- ----- --------- ---------
Revenue 2 2,035 2,485
Cost of goods sold (646) (648)
------------------------------------------------ ----- --------- ---------
Gross profit 1,389 1,837
Selling, general and administrative expenses (1,246) (1,279)
Research and development expenses (148) (139)
------------------------------------------------ ----- --------- ---------
Operating (loss)/profit 2 (5) 419
Interest income 3 5
Interest expense (24) (30)
Other finance costs (5) (8)
Share of results of associates (3) (3)
------------------------------------------------ ----- --------- ---------
(Loss)/profit before taxation (34) 383
Taxation 3 134 (74)
------------------------------------------------ ----- --------- ---------
Attributable profit(A) 100 309
------------------------------------------------ ----- --------- ---------
Earnings per share(A)
Basic 11.5c 35.3c
Diluted 11.4c 35.2c
------------------------------------------------ ----- --------- ---------
Unaudited Group Statement of Comprehensive Income for the Half
Year ended 27 June 2020
Half year Half year
2020 2019
$m $m
------------------------------------------------------------------------ --------- ---------
Attributable profit(A) 100 309
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 17 -
Taxation on other comprehensive income (5) -
------------------------------------------------------------------------ --------- ---------
Total items that will not be reclassified to income statement 12 -
------------------------------------------------------------------------ --------- ---------
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (85) (5)
Net losses on cash flow hedges (4) (13)
Taxation on other comprehensive income 1 1
------------------------------------------------------------------------- --------- ---------
Total items that may be reclassified subsequently to income statement (88) (17)
------------------------------------------------------------------------- --------- ---------
Other comprehensive loss for the period, net of taxation (76) (17)
------------------------------------------------------------------------- --------- ---------
Total comprehensive income for the period(A) 24 292
------------------------------------------------------------------------- --------- ---------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Unaudited Group Balance Sheet as at 27 June 2020
27 June 31 December 29 June
2020 2019 2019
Notes $m $m $m
----------------------------------------------------------- ----- ------- ----------- -------
ASSETS
Non-current assets
Property, plant and equipment 1,353 1,323 1,226
Goodwill 2,852 2,789 2,751
Intangible assets 1,546 1,567 1,640
Investments 10 7 9
Investment in associates 96 103 100
Other non-current assets 30 35 33
Retirement benefit assets 129 106 104
Deferred tax assets 224 150 134
------------------------------------------------------------ ----- ------- ----------- -------
6,240 6,080 5,997
----------------------------------------------------------- ----- ------- ----------- -------
Current assets
Inventories 1,721 1,614 1,532
Trade and other receivables(B) 1,231 1,328 1,280
Cash at bank 6 347 277 137
------------------------------------------------------------ ----- ------- ----------- -------
3,299 3,219 2,949
----------------------------------------------------------- ----- ------- ----------- -------
TOTAL ASSETS 9,539 9,299 8,946
------------------------------------------------------------ ----- ------- ----------- -------
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 177 177 177
Share premium 611 610 609
Capital redemption reserve 18 18 18
Treasury shares (177) (189) (204)
Other reserves (412) (324) (357)
Retained earnings 4,743 4,849 4,709
------------------------------------------------------------ ----- ------- ----------- -------
Total equity 4,960 5,141 4,952
------------------------------------------------------------ ----- ------- ----------- -------
Non-current liabilities
Long-term borrowings and lease liabilities 6 2,476 1,975 1,980
Retirement benefit obligations 149 136 124
Other payables 105 102 116
Provisions 170 214 143
Deferred tax liabilities 163 167 157
------------------------------------------------------------ ----- ------- ----------- -------
3,063 2,594 2,520
----------------------------------------------------------- ----- ------- ----------- -------
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 6 163 72 199
Trade and other payables 875 1,046 906
Provisions 236 203 138
Current tax payable 242 243 231
------------------------------------------------------------ ----- ------- ----------- -------
1,516 1,564 1,474
----------------------------------------------------------- ----- ------- ----------- -------
Total liabilities 4,579 4,158 3,994
------------------------------------------------------------ ----- ------- ----------- -------
TOTAL EQUITY AND LIABILITIES 9,539 9,299 8,946
------------------------------------------------------------ ----- ------- ----------- -------
B Trade and other receivables includes a current tax receivable
of $100 million (31 December 2019: $21 million, 29 June 2019:
$nil).
Unaudited Condensed Group Cash Flow Statement for the Half Year
ended 27 June 2020
Half year Half year
2020 2019
$m $m
------------------------------------------------------- --------- ---------
Cash flows from operating activities
(Loss)/profit before taxation (34) 383
Net interest expense 21 25
Depreciation, amortisation and impairment 271 248
Share of results of associates 3 3
Share-based payments expense (equity settled) 15 17
Net movement in post-retirement obligations 2 (5)
Movement in working capital and provisions (153) (128)
-------------------------------------------------------- --------- ---------
Cash generated from operations 125 543
Net interest and finance costs paid (21) (24)
Income taxes paid (31) (68)
-------------------------------------------------------- --------- ---------
Net cash inflow from operating activities 73 451
-------------------------------------------------------- --------- ---------
Cash flows from investing activities
Acquisitions, net of cash acquired (139) (837)
Capital expenditure (188) (153)
Net (purchase)/proceeds from sale of investments (3) 23
Distribution from associate 4 2
-------------------------------------------------------- --------- ---------
Net cash used in investing activities (326) (965)
-------------------------------------------------------- --------- ---------
Net cash outflow before financing activities (253) (514)
-------------------------------------------------------- --------- ---------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 1 1
Proceeds from own shares 2 2
Purchase of own shares (16) (43)
Equity dividends paid (202) (192)
Payment of capital element of lease liabilities (24) (23)
Cash movements in borrowings 561 559
Settlement of currency swaps 3 (1)
-------------------------------------------------------- --------- ---------
Net cash from financing activities 325 303
-------------------------------------------------------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 72 (211)
Cash and cash equivalents at beginning of year 257 333
Exchange adjustments (3) -
------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period(C) 326 122
-------------------------------------------------------- --------- ---------
C Cash and cash equivalents at the end of the period are net of
overdrafts of $21 million (29 June 2019: $15 million).
Unaudited Group Statement of Changes in Equity for the Half Year
ended 27 June 2020
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 expense(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
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
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 2019 177 608 18 (214) (340) 4,625 4,874
Attributable profit(A) - - - - - 309 309
Other comprehensive expense(A) - - - - (17) - (17)
Equity dividends paid - - - - - (192) (192)
Share-based payments recognised - - - - - 17 17
Taxation on share-based payments - - - - - 1 1
Purchase of own shares(D) - - - (43) - - (43)
Cost of shares transferred to
beneficiaries - - - 19 - (17) 2
Cancellation of treasury shares(D) - - - 34 - (34) -
Issue of ordinary share capital - 1 - - - - 1
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 29 June 2019 177 609 18 (204) (357) 4,709 4,952
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly derived from continuing operations.
D During the half year ended 27 June 2020, a total of 0.6
million ordinary shares were purchased at a cost of $16 million and
0.6 million ordinary shares were cancelled (2019: 2.1 million
ordinary shares were purchased at a cost of $43 million and 2.1
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 conformity
with IAS 34 Interim Financial Reporting as adopted by the European
Union ('EU') and IAS 34 Interim Financial Reporting as issued by
the International Accounting Standards Board. The financial
information herein has been prepared on the basis of the accounting
policies as set out in the annual accounts of the Group for the
year ended 31 December 2019. A number of new standards are
effective from 1 January 2020 but they do not have a material
effect on the Group's financial statements.
The Group prepares its annual accounts on the basis of
International Financial Reporting Standards ('IFRS') as adopted by
the European Union ('EU') and in accordance with the provisions of
the Companies Act 2006. The Group also prepares its annual accounts
in accordance with IFRS as issued by the International Accounting
Standards Board ('IASB'). IFRS as adopted by the EU differs in
certain respects from IFRS as issued by the IASB. However, the
differences have no impact for the periods presented. Under IFRS,
the Directors are required to adopt those accounting policies most
appropriate to the Group's circumstances for the purpose of
presenting fairly the Group's financial position, financial
performance and cash flows.
The uncertainty as to the future impact on the financial
performance and cash flows of the Group as a result of the recent
COVID-19 pandemic has been considered as part of the Group's
adoption of the going concern basis in these Interim Financial
Statements. The Directors have prepared cash flow scenarios for the
12 month period from the date of approval of these Interim
Financial Statements.
The Group's net debt, excluding lease liabilities, at 27 June
2020 was $2,090 million (see Note 6) with access to committed
facilities of $3.4 billion. The Group has no debt maturities in
2020 and $265 million of private placement debt is due for
repayment in 2021. $1,550 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-19 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 a second wave 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 foreseeable future. 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 2019. The principal
risks and uncertainties continue to be: business continuity and
business change; supply; cybersecurity; quality and regulatory; new
product innovation, design and development including intellectual
property; talent management; pricing and reimbursement; mergers and
acquisitions; legal and compliance risks; commercial execution;
political and economic; and finance. Further detail on these risks
can be found in the 2019 Annual Report of the Group on pages
42-48.
Management has not identified a new principal risk for COVID-19,
particularly because the business continuity and change risk
includes a risk for widespread outbreaks of infectious diseases. In
addition, management coordinated its response to COVID-19 through a
Crisis Management Team that was convened within the existing
business continuity and incident management framework. Management
also noted that COVID-19 is changing the nature, likelihood and
potential impact of other principal risks. Examples of these
changes include, but are not limited to: government restrictions on
exports during a pandemic increase supply risk; increased levels of
remote working may increase cybersecurity risk; financial pressure
on governments and hospitals caused by COVID-19 increases the
likelihood of pricing and reimbursement risk; restrictions on
elective surgery increase commercial execution risk; and declining
revenue increases finance risk.
The risks associated with the current uncertainty around global
trade and the UK's decision to leave the European Union are
included under the political and economic risk. The Group has
prepared for various scenarios and the Directors do not believe the
UK's decision to leave the EU will have a significant impact on the
Group's long-term ability to conduct business into and out of the
EU or UK. Like many other companies we have planned for the impact
of a range of eventualities, particularly in continuity assessment
and how our products will continue to be appropriately registered
for trade around the EU.
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 2019. The Group's
statutory financial statements for the year ended 31 December 2019
have been delivered to the Registrar of Companies.
New accounting standards effective 2020
A number of new standards and amendments to standards are
effective for annual periods beginning after 1 January 2020 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 significant accounting
policies which required the most use of management's estimation in
the half year ended 27 June 2020 were: valuation of inventories;
impairment; taxation; and liability provisions. These are
consistent with 31 December 2019 except for business combinations
which was not a critical estimate in the half year ended 27 June
2020 as there were no significant acquisitions in the period. There
has been no change in the methodology of applying these critical
estimates since the year ended 31 December 2019.
Management have considered the following in light of
COVID-19:
Impairment: Non-current assets
Management have assessed the non-current assets held by the
Group at 27 June 2020 to identify any indicators of impairment as a
result of COVID-19. 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. Additionally, severe
downside sensitivity analyses have been undertaken on the base case
scenario. No material impairments were identified as a result of
the impairment reviews and sensitivity analyses undertaken.
Trade receivables
Management have assessed the impact of COVID-19 on the expected
credit loss allowance against trade receivables. Current and
expected collection of trade receivables since the start of the
COVID-19 pandemic has been reflected in country-specific expected
credit loss models on a reasonable and supportable basis where
possible, taking into account macroeconomic factors such as
government support. In some instances, it was not possible to
incorporate the specific effects of COVID-19 and macroeconomic
factors on a reasonable and supportable basis. Where the effects of
COVID-19 could not be reflected in expected credit loss models,
further adjustments to the models were considered. These
adjustments were based on the most recent information on the
expected recoverability of trade receivable balances. The Group's
expected credit loss allowance increased from $59 million at 31
December 2019 to $70 million at 27 June 2020.
Valuation of inventories
Management have assessed the impact of COVID-19 on the provision
for excess and obsolete inventory, specifically considering the
impact of lower sales demand and increased inventory levels. Where
possible, management have taken steps to reduce manufacturing
output and inventory levels. Management have not changed their
methodology for calculating the provision since 31 December 2019,
nor is a change in the key assumptions underlying the methodology
expected in the next 12 months. As a result of decreased sales
demand and increased inventory levels, of which COVID-19 was a
significant contributing factor, the provision has increased from
$308 million at 31 December 2019 to $354 million at 27 June 2020.
The provision for excess and obsolete inventory is not considered
to have a range of potential outcomes that is significantly
different to the $354 million at 27 June 2020.
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, 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. 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
2020 2019
$m $m
---------------------------------- --------- ---------
Segment revenue
Orthopaedics 861 1,098
Sports Medicine & ENT 575 747
Advanced Wound Management 599 640
----------------------------------- --------- ---------
Revenue from external customers 2,035 2,485
----------------------------------- --------- ---------
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by
product franchise:
Half year Half year
2020 2019 (E)
$m $m
------------------------------------- --------- ---------
Knee Implants 367 523
Hip Implants 249 308
Other Reconstruction 33 30
Trauma 212 237
-------------------------------------- --------- ---------
Orthopaedics 861 1,098
-------------------------------------- --------- ---------
Sports Medicine Joint Repair 301 382
Arthroscopic Enabling Technologies 223 290
ENT (Ear, Nose & Throat) 51 75
-------------------------------------- --------- ---------
Sports Medicine & ENT 575 747
-------------------------------------- --------- ---------
Advanced Wound Care 302 347
Advanced Wound Bioactives 192 178
Advanced Wound Devices 105 115
-------------------------------------- --------- ---------
Advanced Wound Management 599 640
-------------------------------------- --------- ---------
Total 2,035 2,485
-------------------------------------- --------- ---------
E Included within the half year 2019 analysis is a
reclassification of $6 million of revenue formerly included in the
Advanced Wound Care franchise of which $5 million is now included
in the Advanced Wound Bioactives franchise and $1 million in the
Advanced Wound Devices franchise in order to present consistent
analysis to the half year 2020 results. There has been no change in
total revenue for the half year ended 29 June 2019.
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 2020 Half year 2019
Established Established
Markets (F) Emerging Markets Total Markets (F) Emerging Markets Total
$m $m $m $m $m $m
----------------- ---------------- ---------------- ------ ---------------- ---------------- ------
Orthopaedics,
Sports Medicine
& ENT 1,144 292 1,436 1,468 377 1,845
Advanced Wound
Management 530 69 599 552 88 640
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
Total 1,674 361 2,035 2,020 465 2,485
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
F 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 $1,021 million (2019: $1,203 million), China
revenue for the half year was $140 million (2019: $165 million) and
UK revenue for the half year was $75 million (2019: $101
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
2020 2019
$m $m
--------------------------------------------------------- --------- ---------
Segment profit
Orthopaedics 120 330
Sports Medicine & ENT 107 224
Advanced Wound Management 107 156
---------------------------------------------------------- --------- ---------
Segment trading profit 334 710
Corporate costs (162) (178)
---------------------------------------------------------- --------- ---------
Group trading profit 172 532
Acquisition and disposal related items (5) (8)
Restructuring and rationalisation expenses (56) (48)
Amortisation and impairment of acquisition intangibles (83) (61)
Legal and other (33) 4
---------------------------------------------------------- --------- ---------
Group operating (loss)/profit (5) 419
---------------------------------------------------------- --------- ---------
Acquisition and disposal related items:
For the half year ended 27 June 2020 costs primarily relate to
the acquisition of Tusker and prior year acquisitions. For the half
year ended 29 June 2019 costs primarily relate to the acquisitions
of Ceterix, Osiris, Leaf and Brainlab OJR.
Restructuring and rationalisation costs:
For the half year ended 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. For the half year ended 29
June 2019 costs relate to the APEX programme.
Amortisation and impairment of acquisition intangibles:
For both the half years ended 27 June 2020 and 29 June 2019,
charges relate to the amortisation of intangible assets acquired in
material business combinations.
Legal and other:
For the half year ended 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 will apply from May 2021.
For the half year ended 29 June 2019 charges relate primarily to
legal expenses for ongoing metal-on-metal hip claims and costs for
implementing the requirements of MDR. These charges were offset by
a credit of $45 million relating to insurance recoveries for
ongoing metal-on-metal hip claims.
3. Taxation
Tax rate
Our reported tax for the period ended 27 June 2020 was a credit
of $134 million, predominantly due to the successful outcome of our
UK tax litigation - see below (H1 2019 reported tax charge: $74
million).
UK tax litigation
In December 2016, the Group appealed to the First Tier Tribunal
against a decision by HM Revenue and Customs (HMRC) relating to the
UK tax deductibility of historical foreign exchange losses
totalling GBP675 million. The decision of the First Tier Tribunal
upheld the Group's appeal. HMRC's subsequent appeal was heard by
the Upper Tribunal in June 2018 which upheld the decision of the
First Tier Tribunal. HMRC was granted leave to appeal in the Court
of Appeal, which was heard in October 2019 and (following
adjournment) in January 2020. In March 2020, the Court of Appeal
published its decision again upholding the Group's position. In
June 2020, the Group received confirmation that HMRC will not
appeal to the Supreme Court, making the Group's right to the
deductions conclusive.
As a result a $122 million benefit for these deductions has been
recognised in the Group's Interim Financial Statements (no tax
benefit for these losses was recognised in previous periods),
within current tax, and within deferred tax to the extent that
losses not yet utilised are reasonably expected to be realised in
the future. The Group expects to receive a cash tax refund of
approximately $102 million, including accrued interest, in respect
of tax previously overpaid during the third quarter of 2020.
There is an unrecognised deferred tax credit of $59 million in
relation to losses arising from the decision which are not
considered to have a realistically foreseeable potential to be
utilised at the current time.
EU state aid
A factor that may have a future effect on our tax charge is the
decision by the European Commission (EC), published in its Official
Journal in August 2019, that certain aspects of the UK CFC
financing exemption rules between 2013 and 2018 constituted illegal
State Aid. The UK government and many potentially affected
taxpayers, including Smith+Nephew, have applied to the European
Court of Justice (ECJ) for annulment of the decision of the EC.
HMRC is under a legal obligation to collect potentially
underpaid tax ahead of the determination of the appeals by the ECJ
and has requested certain information and facts from affected
taxpayers in order to determine the possible quantum of State Aid
(and resulting corporation tax), in respect of which we are
currently in correspondence, in the event that the application to
annul the EC decision is unsuccessful. If the EC decision were
ultimately to be upheld on generic technical legislative grounds,
subject to relief based on company-specific facts and circumstances
and other technical interpretation, we calculate our maximum
potential liability as at 27 June 2020 to be approximately $140
million (this differs from the $150 million in the Group's 2019
Annual Report due to foreign exchange movements).
Based on current information, we do not consider it can
reasonably be concluded that it is more likely than not that any
liability would arise which would increase our tax charge, or that
any such additional liability could be quantified with sufficient
accuracy, in order to recognise a provision in respect of this
matter at the present time.
4. Dividends
The 2019 final dividend totalling $202 million was paid on 6 May
2020. The 2020 interim dividend of 14.4 US cents per ordinary share
was approved by the Board on 28 July 2020. This dividend is payable
on 28 October 2020 to shareholders whose names appear on the
register at the close of business on 2 October 2020. 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 12
October 2020. Shareholders may participate in the dividend
re-investment plan and elections must be made by 12 October
2020.
5. Acquisitions
Half year ended 27 June 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 supports the Group's strategy to invest in innovative
technologies that address unmet clinical needs. The maximum
consideration is $140 million and the provisional 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 provisional 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 assets 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 29 June 2020 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
The carrying value of goodwill increased from $2,789 million at
31 December 2019 to $2,852 million at 27 June 2020. Acquisitions in
the half year 27 June 2020 increased goodwill by $83 million, this
was partially offset by adjustments to the Osiris opening balance
sheet of $3 million (as outlined below) and foreign exchange
movements of $17 million.
For the half year ended 27 June 2020, the contribution to
revenue and profit from Tusker was immaterial. If the business
combination had occurred at the beginning of the year the
contribution to revenue and profit would also have been
immaterial.
Year ended 31 December 2019
The Group acquired five medical technology businesses deemed to
be business combinations within the scope of IFRS 3 Business
Combinations during the year ended 31 December 2019. The
acquisition accounting for these business combinations was
completed in 2020 with no adjustments to the provisional fair value
disclosed in the Group's 2019 Annual Report other than in relation
to the Osiris Therapeutics, Inc. acquisition as outlined below.
On 22 January 2019, the Group completed the acquisition of 100%
of the share capital of Ceterix Orthopaedics, Inc. ("Ceterix"), a
developer of a meniscus repair system. The acquisition supports the
Company's strategy to invest in innovative technologies that meet
unmet clinical needs. The maximum consideration payable of $105
million has a fair value of $96 million, which includes deferred
consideration of $5 million and contingent consideration of $47
million. The fair value of the contingent consideration is
determined from the acquisition agreement, the risk adjusted cash
flows from the Board-approved acquisition model and a risk-free
discount rate of 3.3%. The maximum contingent consideration is $55
million. The goodwill is attributable to the control premium, the
acquired workforce and the synergies expected from integrating
Ceterix into the Group's existing business.
On 17 April 2019, the Group completed the acquisition of 100% of
the share capital of Osiris Therapeutics, Inc. ("Osiris"), a fast
growing company delivering regenerative medicine products including
skin, bone graft and articular cartilage substitutes that will
further expand and differentiate the Group's Advanced Wound
Management portfolio. This acquisition provides the Group with a
fast growing portfolio with strong clinical evidence addressing
critical needs in the skin substitute marketplace. It is one of the
highest growth and high potential markets in wound management,
filling an important need not previously adequately addressed in
our portfolio. Cash consideration was $660 million with no deferred
or contingent consideration payable. The goodwill is attributable
to the control premium, the acquired workforce and the synergies
that can be expected from integrating Osiris into the Group's
existing business. During the half year ended 27 June 2020,
adjustments were made to the fair value of the provisions, net
deferred tax liability and trade and other payables. These
adjustments were made during the one year measurement period in
accordance with the requirements of IFRS 3. The net impact of these
adjustments was $3 million and has been reflected in the fair value
of goodwill, reducing it from $301 million to $298 million.
Also on 17 April 2019, the Group completed the acquisition of
85.5% of the share capital of Leaf Healthcare, Inc. ("Leaf"), a
developer of the unique Leaf Patient Monitoring System for pressure
injury prevention and patient mobility monitoring, which is highly
complementary to the Group's existing wound portfolio. This
acquisition brings the Group's total shareholding in Leaf to 100%.
The Group's existing holding of 14.5% of the share capital, with a
carrying value of $6 million, was remeasured to fair value
resulting in a $1 million gain which is included in selling,
general and administrative expenses in the income statement. The
maximum consideration payable of $75 million for 100% of the share
capital has a fair value of $52 million, which includes deferred
consideration of $4 million and contingent consideration of $12
million. The fair value of the contingent consideration is
determined from the acquisition agreement, the risk adjusted cash
flows from the Board-approved acquisition model and a risk-free
discount rate of 3.0%. The maximum contingent consideration is $35
million. The goodwill is attributable to the control premium, the
acquired workforce, future iterations of the technology and the
synergies that can be expected from integrating Leaf into the
Group's existing business.
On 31 May 2019, the Group completed the acquisition of the
Brainlab Orthopaedic Joint Reconstruction business ("Brainlab
OJR"). The acquisition supports the Group's strategy to invest in
best-in-class technologies that further its multi-asset digital
surgery and robotic ecosystem. The maximum consideration payable of
$108 million has a fair value of $107 million, which includes
contingent consideration of $57 million. The fair value of the
contingent consideration is determined from the acquisition
agreement, the risk adjusted cash flows from the Board-approved
acquisition model and a risk-free discount rate of 2.3%. The
maximum contingent consideration is $58 million. The goodwill is
attributable to the control premium, the acquired workforce, future
iterations of the technology and the synergies that can be expected
from integrating the orthopaedic joint reconstruction business into
the Group's existing business.
On 1 July 2019, the Group completed the acquisition of 100% of
the share capital of Atracsys Sàrl ("Atracsys"), a
Switzerland-based provider of optical tracking technology used in
computer-assisted surgery. The acquisition supports the Group's
long-term commitment to develop its multi-asset digital surgery and
robotics ecosystem to empower surgeons and improve clinical
outcomes. The fair value of consideration is $42 million which
includes $14 million of deferred consideration and $5 million of
contingent consideration. The fair value of contingent
consideration is determined from the acquisition agreement, the
risk-adjusted cash flows from the Board approved acquisition model
and a risk-free discount rate of 2.3%. The maximum contingent
consideration is $6 million. The goodwill represents the control
premium, the acquired workforce and the synergies expected from
integrating Atracsys into the Group's existing business.
The fair value of assets acquired and liabilities assumed are
set out below:
Ceterix Osiris Leaf Brainlab OJR Atracsys
$m $m $m $m $m
------------------------------------------- ------- ------ ---- ------------ --------
Intangible assets - Product-related 43 284 14 - 9
Intangible assets - Technology - - - 75 -
Intangible assets - Customer-related - 80 - 9 1
Property, plant & equipment 2 6 - - 1
Investments - 17 - - -
Other non-current assets - 4 - - -
Inventory 2 9 1 - 1
Trade and other receivables 1 49 1 - 1
Trade and other payables (4) (34) (1) - (1)
Provisions - (14) - - -
Non-current liabilities - (7) - - -
Net deferred tax asset/(liability) 1 (56) 1 - (1)
-------------------------------------------- ------- ------ ---- ------------ --------
Net assets 45 338 16 84 11
Goodwill 49 298 37 23 31
-------------------------------------------- ------- ------ ---- ------------ --------
Consideration (net of cash acquired(G) ) 94 636 53 107 42
-------------------------------------------- ------- ------ ---- ------------ --------
G Cash acquired is as follows: Ceterix: $2 million; Osiris: $24
million, Leaf: $1 million; Brainlab OJR: $nil; and Atracsys:
$nil.
The cash outflow from acquisitions of $837 million for the half
year ended 29 June 2019 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
6. Net debt
Net debt as at 27 June 2020 is outlined below. The repayment of
lease liabilities is included in cash flows from financing
activities in the cash flow statement.
27 June 31 December 29 June
2020 2019 2019
$m $m $m
---------------------------------------------------------- -------- ----------- --------
Cash at bank 347 277 137
Long-term borrowings (2,328) (1,851) (1,862)
Bank overdrafts, borrowings and loans due within one year (113) (26) (155)
Net currency swap asset 1 - -
Net interest rate swap asset 3 - -
---------------------------------------------------------- -------- ----------- --------
Net debt (2,090) (1,600) (1,880)
----------------------------------------------------------- -------- ----------- --------
Non-current lease liabilities (148) (124) (118)
Current lease liabilities (50) (46) (44)
----------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,288) (1,770) (2,042)
----------------------------------------------------------- -------- ----------- --------
The movements in the period were as follows:
Opening net debt as at 1 January (1,770) (1,104) (1,104)
Recognition of lease liability on transition to IFRS 16 - (164) (164)
Cash flow before financing activities (253) (83) (514)
Non-cash additions to lease liabilities (51) (46) (19)
Proceeds from issue of ordinary share capital 1 2 1
Proceeds from own shares 2 9 2
Purchase of own shares (16) (63) (43)
Equity dividends paid (202) (318) (192)
Exchange adjustments 1 (3) (9)
----------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,288) (1,770) (2,042)
----------------------------------------------------------- -------- ----------- --------
The Group has no debt repayments due in 2020 and $265 million of
private placement debt is due for repayment in 2021.
In December 2019 the Group signed a new senior notes agreement
totalling $550 million, which was drawn down in June 2020. The
senior notes are due to mature between 2027 and 2032. Part of the
Group's net investment in its Euro subsidiaries is hedged by EUR757
million ($850 million equivalent) of term loans which mitigate the
foreign currency risk arising from the subsidiaries' net assets.
EUR492 million ($552 million equivalent) of the total term loans
have been extended from May 2021 to mature in May 2022.
7a. Financial instruments
The following table shows the carrying amounts and fair values
of financial assets and financial liabilities, including their
levels in the fair value hierarchy.
Carrying amount Fair value
------------------------------------- --------------------------------
31 31
27 June December 29 June 27 June December 29 June
2020 2019 2019 2020 2019 2019 Fair value
$m $m $m $m $m $m level
-------------- -------- --------- -------- ------- --------- ------- --------------
Financial
assets at fair
value
Forward foreign
exchange contacts 20 25 18 20 25 18 Level 2
Investments 10 7 9 10 7 9 Level 3
Contingent
consideration
receivable 36 39 36 36 39 36 Level 3
Currency swaps 1 1 - 1 1 - Level 2
Interest rate
swaps 3 - - 3 - - Level 2
------------------ -------- --------- -------- ------- --------- -------
70 72 63 70 72 63
----------------- -------- --------- -------- ------- --------- -------
Financial
assets not
measured at
fair value
Trade and other
receivables 997 1,184 1,167
Cash at bank 347 277 137
------------------ -------- --------- --------
1,344 1,461 1,304
----------------- -------- --------- --------
Total financial
assets 1,414 1,533 1,367
------------------ -------- --------- --------
Financial
liabilities at
fair value
Acquisition
consideration (133) (141) (134) (133) (141) (134) Level 3
Forward foreign
exchange
contracts (20) (22) (21) (20) (22) (21) Level 2
Currency swaps - (1) - - (1) - Level 2
------------------ -------- --------- -------- ------- --------- -------
(153) (164) (155) (153) (164) (155)
----------------- -------- --------- -------- ------- --------- -------
Financial
liabilities
not measured
at fair value
Acquisition
consideration (45) (40) (36)
Bank overdrafts (21) (20) (15)
Bank loans (867) (857) (877)
Private placement
debt in a hedge
relationship (123) (120) (200)
Private placement
debt not in a
hedge
relationship (1,430) (880) (925)
Trade and other
payables (782) (944) (831)
------------------ -------- --------- --------
(3,268) (2,861) (2,884)
----------------- -------- --------- --------
Total financial
liabilities (3,421) (3,025) (3,039)
------------------ -------- --------- --------
There were no transfers between Levels 1, 2 and 3 during the
half year ended 27 June 2020 and the year ended 31 December 2019.
For cash and cash equivalents, short-term loans and receivables,
overdrafts and other short-term liabilities which have a maturity
of less than three months, the book values approximate the fair
values because of their short term nature. The fair values of
long-term borrowings, which are not traded publicly, are estimated
by discounting future contractual cash flows to net present values
at the current market interest rates available to the Group for
similar financial instruments. 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 27 June 2020 and the year
ended 31 December 2019 for financial instruments measured using
Level 3 valuation methods are presented below:
27 June 31 December
2020 2019
$m $m
------------------------------------ ------- -----------
Investments
At 1 January 7 34
Acquisitions - 17
Additions 3 1
Fair value remeasurement - 12
Distributions received - (2)
Disposals - (46)
Transfers - (9)
------------------------------------ ------- -----------
10 7
------------------------------------ ------- -----------
Contingent consideration receivable
At 1 January 39 -
Arising on acquisitions - 22
Arising on disposals - 17
Transfers (2) -
Receipts (1) -
------------------------------------ ------- -----------
36 39
------------------------------------ ------- -----------
Acquisition consideration liability
At 1 January (141) (99)
Arising on acquisitions (34) (103)
Payments 39 51
Transfers 1 13
Discount unwind 2 (3)
------------------------------------ ------- -----------
(133) (141)
------------------------------------ ------- -----------
7b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of
the UK and US pension plans are based on the yield on bonds that
have a credit rating of AA denominated in the currency in which the
benefits are expected to be paid with a maturity profile
approximately the same as the obligations. These have decreased
since 31 December 2019 by 30bps to 1.6% and 60bps to 2.6%
respectively. This remeasurment loss was more than offset by a
remeasurement gain from an increase in asset performances.
8. 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
2020 2019 2019
------------------- --------- --------- ---------
Average rates
------------------- --------- --------- ---------
Sterling 1.26 1.28 1.29
Euro 1.10 1.12 1.13
Swiss Franc 1.03 1.01 1.00
-------------------- --------- --------- ---------
Period-end rates
------------------- --------- --------- ---------
Sterling 1.24 1.32 1.27
Euro 1.12 1.12 1.14
Swiss Franc 1.05 1.04 1.03
-------------------- --------- --------- ---------
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 by the European Union 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.
Changes in the Board of Directors of Smith & Nephew plc to
those listed in the Smith & Nephew plc 2019 Annual Report
include: the resignation of Graham Baker as Chief Financial Officer
and Executive Director with effect from 9 April 2020 and the
appointment of Anne-Francoise Nesmes to that position on 27 July
2020. Rick Medlock and Bob White were also appointed to the Board
of Smith & Nephew plc on 9 April 2020 and 1 May 2020
respectively.
By order of the Board:
Roberto Quarta Chair 29 July 2020
Roland Diggelmann Chief Executive Officer 29 July 2020
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 27 June 2020 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 27 June 2020 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU, 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 annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. As explained in the
accounting policies set out in the annual financial statements of
the Group, the Group, in addition to complying with its legal
obligation to apply IFRS as adopted by the EU, also applies IFRS as
issued by the International Accounting Standards Board (IASB) for
its annual financial statements of the Group.
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 by the EU,
and in addition to complying with its legal obligation to do so,
has 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 2020
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, Adjusted Earnings Per Ordinary Share (EPSA),
trading cash flow, trading profit to trading cash conversion ratio,
leverage ratio, and underlying growth, exclude the effect of
certain cash and non-cash items that Group management believes are
not related to the underlying performance of the Group. These
non-IFRS financial measures are also used by management to make
operating decisions because they facilitate internal comparisons of
performance to historical results.
Non-IFRS financial measures are presented in these 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
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
2020 2019 growth growth & disposals impact
$m $m % % % %
---------------------------------- --------- --------- -------- ---------- ------------ --------
Segment revenue
Orthopaedics 861 1,098 -21.6 -21.4 1.0 -1.2
Sports Medicine & ENT 575 747 -23.1 -21.6 - -1.5
Advanced Wound Management 599 640 -6.4 -11.1 6.5 -1.8
----------------------------------- --------- --------- -------- ---------- ------------ --------
Revenue from external customers 2,035 2,485 -18.1 -18.7 2.0 -1.4
----------------------------------- --------- --------- -------- ---------- ------------ --------
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 contribution to fund defined benefit
pension schemes that are closed to future accrual and IFRS 16 lease
payments are also excluded from cash generated from operations when
arriving at 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
(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
------------------- ------- ---------------- ------------- ----------- ------------ ------------- --------
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 2019
Reported 2,485 419 383 (74) 309 543 35.3
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 8 8 (2) 6 11 0.7
Restructuring and
rationalisation
costs - 48 48 (9) 39 59 4.5
Amortisation and
impairment of
acquisition
intangibles - 61 61 (14) 47 - 5.4
Legal and other(7) - (4) (2) 1 (1) (32) (0.1)
Lease liability
payments - - - - - (23) -
Capital
expenditure - - - - - (153) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Half Year 2019
Adjusted 2,485 532 498 (98) 400 405 45.8
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
(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
27 June 2020 costs primarily relate to the acquisition of Tusker
and prior year acquisitions. For the half year ended 29 June 2019
costs primarily relate to the acquisitions of Ceterix, Osiris, Leaf
and Brainlab OJR.
Restructuring and rationalisation costs: For the half year ended
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. For the half year ended 29 June 2019 costs
relate to the APEX programme.
Amortisation and impairment of acquisition intangibles: For both
the half years ended 27 June 2020 and 29 June 2019, charges relate
to the amortisation of intangible assets acquired in material
business combinations.
Legal and other: For the half year ended 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 will apply from May 2021.
For the half year ended 29 June 2019 charges relate primarily to
legal expenses for ongoing metal-on-metal hip claims and costs for
implementing the requirements of MDR. These charges were offset by
a credit of $45 million relating to insurance recoveries for
ongoing metal-on-metal hip claims. Trading cash flow additionally
excludes $6 million of cash funding to closed defined benefit
pension schemes and a $35 million receipt (held as a receivable as
at 31 December 2018) relating to settlements with insurers related
to product liability claims involving macrotextured components
withdrawn from the market in 2003.
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 detailed in
Note 3 to the Interim Financial Statements.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FFFSIDIITFII
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