TIDMSN.
RNS Number : 2821H
Smith & Nephew Plc
31 July 2019
Smith+Nephew Second Quarter and First Half 2019 Results
Positive momentum across the business; full year revenue
guidance upgraded
31 July 2019
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology
business, reports results for the second quarter and first half
ended 29 June 2019:
Reported Trading(2)
-------------------------- ----------------------------
29 June 30 June Reported 29 June 30 June Underlying
2019 2018 growth 2019 2018 growth
$m $m % $m $m %
------- ------- -------- ------- ------- ----------
Second Quarter Results(1)
Revenue 1,283 1,245 3.1 1,283 1,245 3.5
------- ------- -------- ------- ------- ----------
First Half Results(1)
Revenue 2,485 2,440 1.8 2,485 2,440 3.9
Operating/trading profit 419 372 532 507
Operating/trading profit margin (%) 16.8 15.3 21.4 20.8
Cash generated from operations/trading cash
flow 543 418 405 387
EPS/ EPSA (cents) 35.3 31.4 45.8 43.7
Namal Nawana, Chief Executive Officer, said:
"The positive momentum across the business globally in the first
half of 2019 has led us to upgrade our full year revenue growth
guidance.
"Organic revenue growth has been solid across all three
franchises, with strong performance in Emerging Markets and global
Sports Medicine. At the same time, we expanded our margin.
"We are delivering on our commitments to accelerate revenue
growth, improve profitability and importantly make investments that
support the long-term success of Smith+Nephew."
Delivering stronger revenue growth in the quarter
-- Q2 revenue up 3.5% on an underlying basis; reported growth
was 3.1% despite the impact of a 2.9% currency headwind
-- Strong mid-teens growth from the Emerging Markets, led by China up more than 30%
Improved trading profit margin, cash generation and earnings in
the first half
-- Trading profit margin up 60bps to 21.4%; operating profit margin up 150bps to 16.8%
-- Strong cash generated from operations at $543 million
-- Adjusted EPS ('EPSA') up 5%; EPS up 13%
Full year revenue guidance upgraded
-- Expected underlying revenue growth guidance range raised
50bps to 3.0% to 4.0%; expected trading profit margin guidance
unchanged, in the range of 22.8% to 23.2%
Analyst conference call
An analyst meeting and conference call to discuss Smith+Nephew's
second quarter and first half results will be held at 8.30am BST /
3.30am EST on 31 July 2019, 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
Charis Gresser / 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 2018 period.
Underlying revenue growth is used to compare the revenue in a
given period to the comparative period on a like-for-like basis.
Underlying revenue growth reconciles to reported revenue growth,
the most directly comparable financial measure calculated in
accordance with IFRS, by making adjustments for the effect of
acquisitions and disposals and the impact of movements in exchange
rates (currency impact), as described below.
The effect of acquisitions and disposals measures the impact on
revenue from newly acquired material business combinations and
recent material business disposals. This is calculated by comparing
the current year, constant currency actual revenue (which include
acquisitions and exclude disposals from the relevant date of
completion) with prior year, constant currency actual revenue,
adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year.
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.
2. Certain items included in 'trading results', such as trading
profit, trading profit margin, tax rate on trading results, trading
cash flow, trading profit to cash conversion ratio, EPSA and
underlying growth are non-IFRS financial measures. The non-IFRS
financial measures reported in this announcement are explained in
Note 8 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.
3. Following the Group's announcement that from 1 January 2019
it would report quarterly revenue for three global franchises of
Orthopaedics, Sports Medicine & ENT, and Advanced Wound
Management, replacing the previous structure, on 25 March 2019
Smith+Nephew published its Re-presented Historical Quarterly
Revenue Analysis to assist comparability with historical data.
Smith+Nephew Second Quarter Trading and First Half 2019
Results
Second Quarter 2019 Trading Update
Our second quarter revenue was $1,283 million (2018: $1,245
million), up 3.5% on an underlying basis. Reported growth of 3.1%
includes a 290bps foreign exchange headwind and a 250bps benefit
from acquisitions.
Unless specified as 'reported' all revenue growth rates
throughout this document are underlying increases/decreases after
adjusting for the effects of currency translation and the impact of
acquisitions and disposals. All percentages compare to the
equivalent 2018 period.
Q2 2019 comprised 63 trading days, one fewer than the comparable
Q2 2018 period.
Second Quarter Consolidated Revenue Analysis
29 June 30 June Reported Underlying Acquisitions Currency
2019 2018(i) growth Growth(ii) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------- ------- -------- ---------- ------------ --------
Orthopaedics 552 548 0.9 3.6 - -2.7
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Knee Implants 262 258 1.7 4.3 - -2.6
Hip Implants 156 156 0.1 2.9 - -2.8
Other Reconstruction(iii) 16 16 1.9 3.5 - -1.6
Trauma 118 118 0.3 2.8 - -2.5
Sports Medicine & ENT 379 368 2.8 5.6 0.3 -3.1
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 194 177 9.3 11.9 0.8 -3.4
Arthroscopic Enabling Technologies 146 153 -4.8 -2.1 - -2.7
ENT (Ear, Nose and Throat) 39 38 3.9 6.3 - -2.4
Advanced Wound Management 352 329 6.9 1.2 9.0 -3.3
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Advanced Wound Care 177 187 -5.7 -1.7 - -4.0
Advanced Wound Bioactives 114 87 31.0 -1.2 32.5 -0.3
Advanced Wound Devices 61 55 11.9 16.0 0.5 -4.6
Total 1,283 1,245 3.1 3.5 2.5 -2.9
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Consolidated revenue by geography
----------------------------------------------- ------- -------- ---------- ------------ --------
US 635 590 7.5 2.3 5.2 -
Other Established Markets(iv) 402 429 -6.2 -1.3 - -4.9
Total Established Markets 1,037 1,019 1.7 0.9 3.0 -2.2
Emerging Markets 246 226 9.1 16.2 - -7.1
Total 1,283 1,245 3.1 3.5 2.5 -2.9
-------------------------------------- ------- ------- -------- ---------- ------------ --------
(i) Revenue by franchise for the quarter ended 30 June 2018 has
been re-presented to align with the new global franchise structure
effective from 1 January 2019. There has been no change in total
revenue for the quarter ended 30 June 2018
(ii) Underlying growth is defined in Note 1 on page 2
(iii) Other Reconstruction includes capital sales from robotics
and cement sales
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Franchise Highlights for the Second Quarter
Smith+Nephew's franchise-led operating model, introduced at the
start of 2019, is driving growth by bringing a greater focus to
serving customers with our portfolio of leading technologies. Our
three global franchises are Orthopaedics, Sports Medicine &
ENT, and Advanced Wound Management.
Orthopaedics
Our Orthopaedics franchise delivered 3.6% revenue growth in Q2,
led by strong global growth in Knee Implants and Hip Implants, both
accelerating from Q1 2019.
Revenue from Knee Implants was up 4.3%, ahead of market growth,
led by demand for our JOURNEY II and LEGION Revision knee systems.
The roll-out of JOURNEY II outside the US is being well
received.
Hip Implants revenue was up 2.9%, also ahead of market growth.
The POLAR3 Total Hip Solution, with its class-leading survivorship
data, and the REDAPT Revision Hip System, continued to drive our
growth. During the quarter we presented new US outcomes data for
our proprietary OXINIUM (Oxidized Zirconium alloy) bearing surface.
The data showed that OXINIUM, when compared with all other bearing
surfaces for total hip replacement surgery, reduced post-acute
average cost per 90-day episode of care by 9.88%, and patients
implanted with OXINIUM demonstrated lower readmission and revision
rates in the first 90 days.
Other Reconstruction (which comprises capital sales from
robotics and cement sales) delivered revenue growth of 3.5%. During
the quarter we continued to develop our multi-asset digital surgery
and robotic ecosystem.
We completed the purchase of the Brainlab Orthopaedic Joint
Reconstruction ('Brainlab OJR') business in the quarter, and are
working to integrate this with our robotics-assisted NAVIO Surgical
System, as well as initiating a research and development
partnership with Brainlab in the areas of digital surgery,
augmented reality and robotics.
We also announced the acquisition of Atracsys Sàrl, which was
completed on 1 July 2019. Atracsys' fusionTrack 500 optical
tracking camera will be a core enabling technology for our next
generation robotics-assisted surgical platform.
In July, we initiated the launch of the latest version of our
robotics-assisted surgical system. NAVIO 7.0 is designed to improve
efficiency, overall usability and reduce the learning curve. This
software release incorporates improvements that reduce the number
of steps from the current work flow by over 40%.
Trauma revenue growth was 2.8%. Demand for our EVOS System
continued to build as we expand this product family. During the
quarter we launched the CONQUEST FN System, a new implant solution
to treat femoral neck fractures and promote bone preservation.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered 5.6% revenue
growth, completing a first half of good, consistent growth.
Sports Medicine Joint Repair delivered 11.9% revenue growth,
accelerating further from the strong Q1 performance. Once again,
all regions contributed, with the US delivering mid-teens growth
driven by our shoulder repair portfolio. Within this, demand for
the REGENETEN Bioinductive Implant for rotator cuff repair remained
strong.
Arthroscopic Enabling Technologies declined -2.1% as the
softness in resection seen in previous quarters continued. During
the quarter we launched the WEREWOLF FLOW 90 Wand with FLOWIQ
Technology and new mechanical resection blades. Together with the
LENS 4K Surgical Imaging System, we expect these products to help
return this business to growth during the second half of 2019.
ENT delivered 6.3% growth as we continued to successfully
convert surgeons conducting tonsil and adenoid procedures with
traditional surgery approaches to using our COBLATION
technology.
Advanced Wound Management
Our Advanced Wound Management franchise delivered 1.2% revenue
growth, with the performance from Advanced Wound Devices again a
highlight.
Advanced Wound Care declined 1.7%, principally due to the
ongoing weakness in some European markets, along with wholesaler
destocking.
Advanced Wound Bioactives revenue declined -1.2% against a
stronger comparator than in the first quarter. In April we
completed the acquisition of Osiris Therapeutics, Inc., a
fast-growing company delivering regenerative medicine products,
including skin, bone-graft and articular cartilage substitutes. The
Osiris portfolio delivered double-digit growth in the quarter and
we expect it to improve the overall growth outlook for Advanced
Wound Bioactives.
Advanced Wound Devices delivered another quarter of double-digit
growth, with revenue up 16.0%. Performance was driven by our PICO
Single Use Negative Pressure Wound Therapy System plus an
increasing contribution from our traditional system RENASYS in the
US.
During the quarter, the UK National Institute for Health and
Care Excellence (NICE) issued guidance recognising that PICO
provides better outcomes than standard dressings in patients at
high risk of surgical site infections, at similar overall cost.
We completed the acquisition of the LEAF Patient Monitoring
System in April, supporting our pressure injury prevention
strategy.
Regional Performance in the Second Quarter
We delivered revenue growth of 0.9% from Established Markets in
the second quarter. Within this, revenue from the US, our largest
single market, was up 2.3%, partially offset by revenue decline of
-1.3% in Other Established Markets.
Performance in the Emerging Markets, which now account for 19%
of all sales, continued to be good, with revenue up 16.2%. China
again performed strongly, delivering revenue growth of more than
30%.
First Half 2019 Consolidated Analysis
Smith+Nephew results for the first half ended 29 June 2019:
Half year Half year Reported
2019 2018 growth
$m $m %
--------------------------------------------------------- --------- --------- --------
Revenue 2,485 2,440 1.8
--------- --------- --------
Operating profit 419 372 12
Acquisition and disposal related items 8 2
Restructuring and rationalisation costs 48 58
Amortisation and impairment of acquisition intangibles 61 57
Legal and other (4) 18
--------- --------- --------
Trading profit (non-IFRS) 532 507 5
--------- --------- --------
c c
Earnings per share ('EPS') 35.3 31.4 13
Acquisition and disposal related items 0.7 0.2
Restructuring and rationalisation costs 4.5 5.0
Amortisation and impairment of acquisition intangibles 5.4 5.1
Legal and other (0.1) 2.0
--------- --------- --------
Adjusted Earnings per share ('EPSA') 45.8 43.7 5
--------- --------- --------
First Half 2019 Analysis
Our first half revenue was $2,485 million (H1 2018: $2,440
million), up 3.9% on an underlying basis. Reported growth of 1.8%
includes a foreign exchange headwind of 350bps and 140bps benefit
from acquisitions.
Trading profit was up to $532 million in the first half (H1
2018: $507 million). The trading profit margin was 21.4% (H1 2018:
20.8%), up 60 basis points, reflecting savings realised under the
APEX programme and a foreign exchange tailwind, partially offset by
re-investment in the business, including more in R&D. From 1
January 2019 the Group has three reportable segments, being the
global franchises - Orthopaedics, Sports Medicine & ENT and
Advanced Wound Management. Each of these global franchises made a
strong contribution to the Group's trading profit for the first
half (see Note 2 to the Interim Financial Statements for further
detail).
Reported operating profit of $419 million (H1 2018: $372
million) was 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
year (see Note 8 to the Interim Financial Statements). The ongoing
APEX programme incurred restructuring costs of $48 million in the
first half, with incremental benefits against the first half of
2018 recognised in the income statement of around $40 million.
Cash generated from operations was $543 million (H1 2018: $418
million) and trading cash flow was $405 million (H1 2018: $387
million) (see Note 8 to the Interim Financial Statements for a
reconciliation between cash generated from operations and trading
cash flow). The trading profit to cash conversion ratio was 76% (H1
2018: 76%).
The net interest charge within reported results was $25 million
(H1 2018: $25 million) including $2 million from the adoption of
IFRS 16 Leases.
The tax rate on trading results for the 2019 half year was 19.7%
(H1 2018: 20.1%) in line with our guided rate of between 19% and
21%. The reported tax rate for the 2019 half year was 19.3% (H1
2018: 19.6%) (see Note 3 to the Interim Financial Statements for
further details on taxation).
Adjusted earnings per share ('EPSA') was up 5% at 45.8c (91.6c
per ADS) (H1 2018: 43.7c). Basic earnings per share ('EPS') was
35.3c (70.6c per ADS) (H1 2018: 31.4c), including the impact of
acquisitions completed during the first half.
Acquisitions resulted in goodwill and intangible assets
increasing by $844 million from 31 December 2018 to $4,391 million
at the 2019 half year. Net debt also increased from $1,104 million
at 31 December 2018 to $1,880 million at 29 June 2019 with the
increase primarily due to the impact of acquisitions. We adopted
IFRS 16 Leases on 1 January 2019 which initially resulted in $164
million of assets and lease liabilities being recognised on the
balance sheet.
Interim Dividend
Consistent with previous periods, the interim dividend is set by
a formula and is equivalent to 40% of the total dividend for the
previous year. The interim dividend for the first half of 2019 is
therefore 14.4c per share (28.8c per ADS), a 2.9% increase on last
year (H1 2018: 14.0c per share). This equates to 11.5p per share at
prevailing exchange rates as of 25 July 2019. The interim dividend
will be paid on 30 October 2019 to shareholders on the register at
the close of business on 4 October 2019.
Full Year Revenue Guidance Upgraded
We have accelerated the Group's revenue growth in the first half
of 2019 to 3.9%. As a result of this improved momentum across the
business, we now expect to deliver underlying revenue growth
between 3.0% and 4.0% for the full year, a 50bps increase over
previous guidance.
The reported revenue growth rate is expected to be in the range
of 3.6% to 4.6% including a 200bps reduction from foreign exchange
rates prevailing on 25 July 2019 and a 260bps increase from the
Ceterix, Osiris, Leaf, Brainlab OJR and Atracsys acquisitions.
We continue to expect 2019 trading profit margin to be in the
range of 22.8% to 23.2%, including the impact of dilution from
acquisitions.
We continue to expect the tax rate on trading results for 2019
to be in the range of 19% to 21%, subject to any material changes
to tax law, or other one-off items.
Forward calendar
The Q3 Trading Report will be released on 31 October 2019.
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 16,000+ employees deliver this mission every
day, making a difference to patients' lives through the excellence
of our product portfolio, and the invention and application of new
technologies across our three global franchises of Orthopaedics,
Advanced Wound Management and Sports Medicine & ENT. Founded in
Hull, UK, in 1856, we now operate in more than 100 countries, and
generated annual sales of $4.9 billion in 2018. 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: economic
and financial conditions in the markets we serve, especially those
affecting health care providers, payers and customers; price levels
for established and innovative medical devices; developments in
medical technology; regulatory approvals, reimbursement decisions
or other government actions; product defects or recalls or other
problems with quality management systems or failure to comply with
related regulations; litigation relating to patent or other claims;
legal compliance risks and related investigative, remedial or
enforcement actions; disruption to our supply chain or operations
or those of our suppliers; competition for qualified personnel;
strategic actions, including acquisitions and dispositions, our
success in performing due diligence, valuing and integrating
acquired businesses; disruption that may result from transactions
or other changes we make in our business plans or organisation to
adapt to market developments; and numerous other matters that
affect us or our markets, including those of a political, economic,
business, competitive or reputational nature. Please refer to the
documents that Smith+Nephew has filed with the U.S. Securities and
Exchange Commission under the U.S. Securities Exchange Act of 1934,
as amended, including Smith+Nephew's most recent annual report on
Form 20-F, for a discussion of certain of these factors. Any
forward-looking statement is based on information available to
Smith+Nephew as of the date of the statement. All written or oral
forward-looking statements attributable to Smith+Nephew are
qualified by this caution. Smith+Nephew does not undertake any
obligation to update or revise any forward-looking statement to
reflect any change in circumstances or in Smith+Nephew's
expectations.
Trademark of Smith+Nephew. Certain marks registered US Patent
and Trademark Office.
First Half Consolidated Revenue Analysis
29 June 30 June Reported Underlying Acquisitions Currency
2019 2018(i) growth Growth(ii) /disposals impact
Consolidated revenue by franchise $m $m % % % %
------------------------------------- ------- ------- -------- ---------- ------------ --------
Orthopaedics 1,098 1,092 0.6 3.7 - -3.1
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Knee Implants 523 517 1.2 4.2 - -3.0
Hip Implants 308 310 -0.7 2.7 - -3.4
Other Reconstruction(iii) 30 30 1.2 5.0 - -3.8
Trauma 237 235 0.8 3.8 - -3.0
Sports Medicine & ENT 747 729 2.4 5.4 0.4 -3.4
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 382 352 8.5 11.5 0.7 -3.7
Arthroscopic Enabling Technologies 290 305 -4.9 -1.6 - -3.3
ENT (Ear, Nose and Throat) 75 72 2.8 5.3 - -2.5
Advanced Wound Management 640 619 3.4 2.4 5.0 -4.0
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Advanced Wound Care 353 370 -4.6 0.1 - -4.7
Advanced Wound Bioactives 173 146 18.5 -0.6 19.5 -0.4
Advanced Wound Devices 114 103 11.2 16.2 0.3 -5.3
Total 2,485 2,440 1.8 3.9 1.4 -3.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
Consolidated revenue by geography
----------------------------------------------- ------- -------- ---------- ------------ --------
US 1,203 1,135 5.9 3.1 2.8 -
Other Established Markets(iv) 817 875 -6.5 -0.7 - -5.8
Total Established Markets 2,020 2,010 0.5 1.5 1.6 -2.6
Emerging Markets 465 430 8.0 15.8 - -7.8
Total 2,485 2,440 1.8 3.9 1.4 -3.5
-------------------------------------- ------- ------- -------- ---------- ------------ --------
(i) Revenue by franchise for the half year ended 30 June 2018
has been re-presented to align with the new global franchise
structure effective from 1 January 2019. There has been no change
in total revenue for the half year ended 30 June 2018
(ii) Underlying growth is defined in Note 1 on page 2
(iii) Other Reconstruction includes capital sales from robotics
and cement sales
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
2019 HALF YEAR CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
Unaudited Group Income Statement for the Half Year to 29 June
2019
Half year Half year
2019 2018
Notes $m $m
----------------------------------------------- ----- --------- ---------
Revenue 2 2,485 2,440
Cost of goods sold (648) (653)
------------------------------------------------ ----- --------- ---------
Gross profit 1,837 1,787
Selling, general and administrative expenses (1,279) (1,299)
Research and development expenses (139) (116)
------------------------------------------------ ----- --------- ---------
Operating profit 8 419 372
Interest income 5 4
Interest expense 1 (30) (29)
Other finance costs (8) (8)
Share of results of associates (3) 2
------------------------------------------------ ----- --------- ---------
Profit before taxation 383 341
Taxation 3 (74) (67)
------------------------------------------------ ----- --------- ---------
Attributable profit(A) 309 274
------------------------------------------------ ----- --------- ---------
Earnings per share(A)
Basic 8 35.3c 31.4c
Diluted 35.2c 31.2c
------------------------------------------------ ----- --------- ---------
Unaudited Group Statement of Comprehensive Income for the Half
Year to 29 June 2019
Half year Half year
2019 2018
$m $m
------------------------------------------------------------------------ --------- ---------
Attributable profit(A) 309 274
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations - 8
Taxation on other comprehensive income - (8)
------------------------------------------------------------------------- --------- ---------
Total items that will not be reclassified to income statement - -
------------------------------------------------------------------------ --------- ---------
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (5) (78)
Net (losses)/gains on cash flow hedges (13) 23
Taxation on other comprehensive income 1 -
------------------------------------------------------------------------ --------- ---------
Total items that may be reclassified subsequently to income statement (17) (55)
------------------------------------------------------------------------- --------- ---------
Other comprehensive loss for the period, net of taxation (17) (55)
------------------------------------------------------------------------- --------- ---------
Total comprehensive income for the period(A) 292 219
------------------------------------------------------------------------- --------- ---------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Unaudited Group Balance Sheet as at 29 June 2019
29 June 31 December 30 June
2019 2018 2018
Notes $m $m $m
----------------------------------------------------------- ----- ------- ----------- -------
ASSETS
Non-current assets
Property, plant and equipment 1 1,226 1,062 1,056
Goodwill 2,751 2,337 2,348
Intangible assets 1,640 1,210 1,290
Investments 9 34 21
Investment in associates 100 105 119
Other non-current assets 33 16 13
Retirement benefit assets 104 92 81
Deferred tax assets 134 126 129
------------------------------------------------------------ ----- ------- ----------- -------
5,997 4,982 5,057
----------------------------------------------------------- ----- ------- ----------- -------
Current assets
Inventories 1,532 1,395 1,352
Trade and other receivables 1,280 1,317 1,205
Cash at bank 6 137 365 99
------------------------------------------------------------ ----- ------- ----------- -------
2,949 3,077 2,656
----------------------------------------------------------- ----- ------- ----------- -------
TOTAL ASSETS 8,946 8,059 7,713
------------------------------------------------------------ ----- ------- ----------- -------
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 177 177 178
Share premium 609 608 607
Capital redemption reserve 18 18 17
Treasury shares (204) (214) (234)
Other reserves (356) (340) (283)
Retained earnings 4,708 4,625 4,358
------------------------------------------------------------ ----- ------- ----------- -------
Total equity 4,952 4,874 4,643
------------------------------------------------------------ ----- ------- ----------- -------
Non-current liabilities
Long-term borrowings and lease liabilities 1, 6 1,980 1,301 1,420
Retirement benefit obligations 124 114 131
Other payables 116 53 94
Provisions 143 153 63
Deferred tax liabilities 157 99 115
------------------------------------------------------------ ----- ------- ----------- -------
2,520 1,720 1,823
----------------------------------------------------------- ----- ------- ----------- -------
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 1, 6 199 164 86
Trade and other payables 906 957 831
Provisions 138 121 137
Current tax payable 231 223 193
------------------------------------------------------------ ----- ------- ----------- -------
1,474 1,465 1,247
----------------------------------------------------------- ----- ------- ----------- -------
Total liabilities 3,994 3,185 3,070
------------------------------------------------------------ ----- ------- ----------- -------
TOTAL EQUITY AND LIABILITIES 8,946 8,059 7,713
------------------------------------------------------------ ----- ------- ----------- -------
Unaudited Condensed Group Cash Flow Statement for the Half Year
to 29 June 2019
Half year Half year
2019 2018
$m $m
-------------------------------------------------------- --------- ---------
Cash flows from operating activities
Profit before taxation 383 341
Net interest expense 25 25
Depreciation, amortisation and impairment 248 228
Share of results of associates 3 (2)
Share-based payments expense (equity settled) 17 18
Net movement in post-retirement obligations (5) (9)
Movement in working capital and provisions (128) (183)
--------------------------------------------------------- --------- ---------
Cash generated from operations 543 418
Net interest and finance costs paid (24) (26)
Income taxes paid (68) (95)
--------------------------------------------------------- --------- ---------
Net cash inflow from operating activities 451 297
--------------------------------------------------------- --------- ---------
Cash flows from investing activities
Acquisitions, net of cash acquired (837) (20)
Capital expenditure (153) (178)
Net proceeds from sale/(purchase) of investments 23 (1)
Distribution from associate 2 -
-------------------------------------------------------- --------- ---------
Net cash used in investing activities (965) (199)
--------------------------------------------------------- --------- ---------
Net cash (outflow)/inflow before financing activities (514) 98
--------------------------------------------------------- --------- ---------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 1 2
Proceeds from own shares 2 1
Purchase of own shares (43) (32)
Equity dividends paid (192) (198)
Payment of lease liabilities (23) -
Cash movements in borrowings 559 54
Settlement of currency swaps (1) 4
--------------------------------------------------------- --------- ---------
Net cash from/(used in) financing activities 303 (169)
--------------------------------------------------------- --------- ---------
Net decrease in cash and cash equivalents (211) (71)
Cash and cash equivalents at beginning of period 333 155
Exchange adjustments - (3)
--------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period(B) 122 81
--------------------------------------------------------- --------- ---------
B Cash and cash equivalents at the end of the period are net of
overdrafts of $15 million (30 June 2018: $18 million).
Unaudited Group Statement of Changes in Equity for the Half Year
to 29 June 2019
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 income(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(C) - - - (43) - - (43)
Cost of shares transferred to
beneficiaries - - - 19 - (17) 2
Cancellation of treasury shares(C) - - - 34 - (34) -
Issue of ordinary share capital - 1 - - - - 1
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 29 June 2019 177 609 18 (204) (357) 4,709 4,952
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 31 December 2017 178 605 17 (257) (228) 4,329 4,644
Adjustment on initial application
of IFRS 9 (net of tax) - - - - - (11) (11)
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
Adjusted balance as at 1 January
2018 178 605 17 (257) (228) 4,318 4,633
Attributable profit(A) - - - - - 274 274
Other comprehensive income(A) - - - - (55) - (55)
Equity dividends paid - - - - - (198) (198)
Share-based payments recognised - - - - - 18 18
Purchase of own shares(C) - - - (32) - - (32)
Cost of shares transferred to
beneficiaries - - - 18 - (17) 1
Cancellation of treasury shares(C) - - - 37 - (37) -
Issue of ordinary share capital - 2 - - - - 2
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 30 June 2018 178 607 17 (234) (283) 4,358 4,643
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
C Shares issued in connection with the Group's share incentive
plans are bought back on a quarterly basis. During the half year
ended 29 June 2019, a total of 2.1 million ordinary shares were
purchased at a cost of $43 million and 2.1 million ordinary shares
were cancelled (2018: 1.8 million ordinary shares were purchased at
a cost of $32 million and 2.4 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'). 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 2018 except as
noted below for new accounting standards effective from 1 January
2019.
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. In determining and applying accounting
policies, judgement is often required in respect of items where the
choice of specific policy, accounting estimate or assumption to be
followed could materially affect the reported results or net asset
position of the Group; it may later be determined that a different
choice would have been more appropriate. The Group's significant
accounting policies which require the most use of management's
estimation are: valuation of inventories; impairment; taxation; and
liability provisions. There has been no change in the methodology
of applying management estimation in these policies since the year
ended 31 December 2018 except as described below.
The Group has adequate financial resources and its customers and
suppliers are diversified across different geographic areas. The
Directors believe that the Group is well placed to manage its
business risk appropriately. The Directors have a reasonable
expectation that the Group has sufficient resources to continue in
operational existence for the foreseeable future. Thus they
continue to adopt the going concern basis for accounting in
preparing these Interim Financial Statements.
The principal risks and uncertainties that the Group is exposed
to are consistent with those as at 31 December 2018. These continue
to be: business continuity and business change; cyber security;
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; and political and economic.
The risks associated with the current uncertainty around global
trade and the UK's decision to leave the European Union are
included under political and economic. The uncertainty from the
UK's decision to leave the EU is expected to continue until the
negotiations and parliamentary ratification processes are complete.
The Group has prepared for the 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. Further detail on these
risks can be found in the 2018 Annual Report of the Group on pages
42-47.
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 2018. The Group's
statutory financial statements for the year ended 31 December 2018
have been delivered to the Registrar of Companies.
New accounting standards effective 2019
The Group has adopted IFRS 16 Leases from 1 January 2019. A
number of other new standards, including IFRIC 23 Uncertainty Over
Income Tax Treatments, are effective from 1 January 2019 but they
do not have a material effect on the Group's financial
statements.
On 1 January 2019, the Group adopted IFRS 16 Leases using the
modified retrospective approach and the right of use asset on
transition equalled the lease liability. The cumulative effect of
initially adopting the IFRS 16 is recognised as an adjustment at 1
January 2019 with no restatement of comparative information. The
Group applied the practical expedient to grandfather the definition
of a lease on transition. The Group applied IFRS 16 only to
contracts that were previously identified as containing a lease.
Contracts that were not identified as containing a lease under IAS
17 or IFRIC 4 were not reassessed. The new definition of a lease
has only been applied to contracts entered into from 1 January
2019.
Previous accounting policy
Previously the Group determined if an arrangement was or
contained a lease under IFRIC 4 Determining Whether an Arrangement
Contains a Lease. As a lessee the Group previously classified
leases as operating or finance leases based on whether the lease
arrangement substantially transferred all risks and rewards of
ownership.
New accounting policy - IFRS 16 Leases
The assessment of whether a contract is or contains a lease
takes place at the inception of the contract. The assessment
involves whether the Group obtains substantially all the economic
benefits from the use of that asset and whether the Group has the
right to direct the use of the asset. The Group allocates the
consideration in the contract to each lease and non-lease
component. The non-lease component, where it is separately
identifiable, is not included in the right-of-use asset.
The Group leases many assets including properties, motor
vehicles and office equipment. The Group availed itself of the
exemptions for short-term leases and leases of low-value items for
leases other than those for properties and motor vehicles.
The Group recognises a right-of-use asset and a lease liability
at the commencement of the lease. The right-of-use asset is
initially measured based on the present value of lease payments
that are not paid at the commencement date, plus initial direct
costs and the cost of obligations to refurbish the asset, less any
incentives received. The lease payments are discounted using the
interest rate implicit in the lease or, if that rate cannot be
readily determined, the Group's incremental borrowing rate.
Generally, the Group uses its incremental borrowing rate as the
discount rate. The right-of-use asset is depreciated over the
shorter of the lease term or the useful life of the underlying
asset. The right-of-use asset is subject to impairment testing if
there is an impairment indicator. The right-of-use assets are
included in the balance sheet heading 'Property, plant and
equipment'.
The lease liability is initially measured at the present value
of lease payments, as outlined above, and is subsequently increased
by the interest cost on the lease liability and decreased by lease
payments made. The lease liability is remeasured when there is a
change in future lease payments arising from a change in an index
or rate, or as appropriate, changes in the assessment of whether an
extension option is reasonably certain to be exercised or a
termination option is reasonably certain not to be exercised. The
lease liabilities are included in the balance sheet headings
'Long-term borrowings and lease liabilities' and 'Bank overdrafts,
borrowings, loans and lease liabilities'.
The accounting policies that would be applicable to the Group as
a lessor are not different to those under IAS 17.
Impact of applying IFRS 16
On transition to IFRS 16 on 1 January 2019, the Group recognised
additional right-of-use assets and additional lease liabilities.
The impact on transition is outlined below:
1 January
2019
$m
--------------------------------------------------------------- ---------
Right-of-use assets presented in property, plant and equipment 159
Rent-free period accrual presented in trade and other payables 5
Lease liabilities (164)
---------------------------------------------------------------- ---------
In relation to these leases, the Group has recognised
depreciation and interest expenses instead of operating lease
expenses. During the six month period ended 29 June 2019 the Group
has recognised $25 million of depreciation on right-of-use assets
and $2 million of interest cost from these lease liabilities. The
total interest expense for the six month period ended 29 June 2019
comprises:
$m
------------------------ ---
Bank borrowings 10
Private placement notes 18
Lease liability 2
------------------------- ---
30
------------------------ ---
A reconciliation from the operating lease commitment at 31
December 2018 as disclosed in the Group's statutory financial
statements for the year ended 31 December 2018 to the lease
liabilities recognised at 1 January 2019 is outlined below:
$m
----------------------------------------------- ------
Operating lease commitment at 31 December 2018 (218)
Non-lease components 28
Short-term exemption availed of on transition 2
Impact of discounting lease payments 24
------------------------------------------------ ------
Lease liabilities recognised at 1 January 2019 (164)
------------------------------------------------ ------
When measuring lease liabilities for leases that were classified
as operating leases, the Group discounted lease payments using its
incremental borrowing rate at 1 January 2019. The weighted average
rate applied is 3.6%.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are
effective for annual periods beginning after 1 January 2019 and
earlier application is permitted; however, the Group has not early
adopted them in preparing these Interim Financial Statements.
2. Business segment information
Previously the Group was engaged in a single business activity,
being the development, manufacture and sale of medical technology
products and services.
From 1 January 2019 onwards, with the Group's operating
structure organised around three global franchises, the chief
operating decision maker began to monitor performance, make
operating decisions and allocate resources on a global franchise
basis in contrast with 2018 and prior, where these were done on a
Group-wide basis. The new operating structure led to the
appointment of three global franchise presidents. The global
franchise presidents have global 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 became responsible
for the implementation of the global franchise strategy in their
respective regions.
Based on the aforementioned changes, the Group has concluded
that there are three reportable segments from January 2019. The
Group will not restate comparative information in 2019, other than
revenue, as the Group was managed as one operating segment in 2018
and 2017, and historical financial information is not available on
a franchise basis.
The Executive Committee ('ExCo'), comprises the three global
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. This information is prepared
substantially on the same basis as the Group's IFRS financial
statements aside from the adjustments described in Note 8.
Financial information for corporate costs is presented on a
Group-wide basis. The ExCo are 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. ExCo evaluates the performance of the operating segments by
considering their underlying revenue growth and trading profit,
which are reconciled to the statutory measure for the Group
below:
Reconciling Items
Half year Half year Reported Underlying Acquisitions Currency
2019 2018 growth growth & disposals impact
$m $m % % % %
---------------------------- --------- --------- -------- ---------- ------------ --------
Segment revenue
Orthopaedics 1,098 1,092 0.6 3.7 - -3.1
Sports Medicine & ENT 747 729 2.4 5.4 0.4 -3.4
Advanced Wound Management 640 619 3.4 2.4 5.0 -4.0
----------------------------- --------- --------- -------- ---------- ------------ --------
Total 2,485 2,440 1.8 3.9 1.4 -3.5
----------------------------- --------- --------- -------- ---------- ------------ --------
Half year
2019
Segment profit $m
Orthopaedics 330
Sports Medicine & ENT 224
Advanced Wound Management 156
----------------------------- ---------
Segment trading profit 710
Corporate costs (178)
----------------------------- ---------
Group trading profit(D) 532
----------------------------- ---------
Non-trading items(D) (113)
----------------------------- ---------
Group operating profit 419
----------------------------- ---------
Half year
2018
Segment profit $m
Group trading profit(D) 507
Non-trading items(D) (135)
----------------------------- ---------
Group operating profit 372
----------------------------- ---------
D The above financial measures are not prepared in accordance
with IFRS. The reconciliation to the most directly comparable
financial measures calculated in accordance with IFRS is presented
in Note 8.
Further description of why ExCo focuses on the underlying
revenue growth and trading measures, and how these reconcile to
IFRS measures, is detailed in Note 8.
2b. Revenue by product franchise 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. In the half year ended 29 June 2019,
there was no significant revenue associated with the provision of
discrete services.
Payment 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
contracted customer purchases directly through an intermediary
wholesaler. The contracted customer generally purchases product at
its contracted price plus a mark-up from the wholesaler. The
wholesaler in turn charges the Group for the difference between the
price initially paid by the wholesaler and the contract price paid
to the wholesaler by the customer. The provision for chargebacks is
based on expected sell-through levels by the Group's wholesale
customers to contracted customers, as well as estimated wholesaler
inventory levels.
Orthopaedics, Sports Medicine & ENT
Orthopaedics, 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 Orthopaedics, Sports Medicine & ENT business
in Established Markets is direct to hospitals and ambulatory
surgery centres 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.
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by
product franchise:
Half year Half year
2019 2018 (E)
$m $m
------------------------------------- --------- ---------
Knee Implants 523 517
Hip Implants 308 310
Other Reconstruction 30 30
Trauma 237 235
-------------------------------------- --------- ---------
Orthopaedics 1,098 1,092
-------------------------------------- --------- ---------
Sports Medicine Joint Repair 382 352
Arthroscopic Enabling Technologies 290 305
ENT (Ear, Nose & Throat) 75 72
-------------------------------------- --------- ---------
Sports Medicine & ENT 747 729
-------------------------------------- --------- ---------
Advanced Wound Care 353 370
Advanced Wound Bioactives 173 146
Advanced Wound Devices 114 103
-------------------------------------- --------- ---------
Advanced Wound Management 640 619
-------------------------------------- --------- ---------
Total 2,485 2,440
-------------------------------------- --------- ---------
E Revenue by franchise for the half year ended 30 June 2018 has
been re-presented to align with the new global franchise structure
effective from 1 January 2019. There has been no change in total
revenue for the half year ended 30 June 2018. Other Reconstruction
includes $30 million previously in Other Surgical Businesses;
Trauma includes $235 million previously in Trauma &
Extremities; Sports Medicine Joint Repair includes $8 million and
$1 million previously in Trauma & Extremities and Other
Surgical Businesses respectively; and ENT includes $72 million
previously in Other Surgical Businesses.
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
centres 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 centres. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors
including volatility in growth and outlook.
Half year 2019 Half year 2018
Established Established
Markets (F) Emerging Markets Total Markets (F) Emerging Markets Total
$m $m $m $m $m $m
----------------- ---------------- ---------------- ------ ---------------- ---------------- ------
Orthopaedics,
Sports Medicine
& ENT 1,468 377 1,845 1,477 344 1,821
Advanced Wound
Management 552 88 640 533 86 619
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
Total 2,020 465 2,485 2,010 430 2,440
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
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 $1,203 million (2018: $1,135 million), China
revenue for the half year was $165 million (2018: $133 million) and
UK revenue for the half year was $101 million (2018: $106
million).
No individual customer comprises more than 10% of the Group's
external sales.
3. Taxation
The tax rate on trading results for the 2019 half year was 19.7%
(H1 2018: 20.1%). The reported tax rate for the 2019 half year was
19.3% (H1 2018: 19.6%). Details of the reconciliation between
trading results and reported results are set out in Note 8 to the
Interim Financial Statements.
As referenced in our 2018 Annual Report, a factor that may have
a future effect on our tax charge is the review by the European
Commission (EC) into whether the UK CFC financing exemption (FCPE)
rules between 2013 and 2018 constituted illegal State Aid. The EC
issued its final decision in April 2019 confirming that it
considers the UK FCPE, before it was amended with effect from 1
January 2019 (which broadly aligns to the EC interpretation), to be
partly contrary to EU State Aid rules. However, the UK government
disagrees with the conclusion that the UK FCPE rules were partially
in breach of EU law, and has applied to the EU courts for annulment
of the Commission's decision.
The deadline for affected taxpayers to appeal is not yet
determined. At the EC's request, HM Revenue and Customs (HMRC) has
written to all companies which it believes to have taken advantage
of the FCPE, including us, requesting various information and facts
in order to review whether there may be a potential liability, were
the EC's position to be upheld, to which we intend to reply within
HMRC's specified deadline.
If the EC decision were ultimately to be upheld, we calculate
our maximum potential liability as at 29 June 2019 to be
approximately $148 million. However we consider that it remains
sufficiently unclear that it is more likely than not that any
liability would arise, or that any such liability could be
quantified with sufficient accuracy, in order to recognise any
provision in respect of this matter at the present time.
In December 2016, the Group appealed to the First Tier Tribunal
against a decision by HMRC relating to the UK tax deductibility of
historic foreign exchange losses. The decision of the Tribunal was
released on 8 February 2017, which upheld the Group's appeal. HMRC
appealed against this decision, and their appeal was heard by the
Upper Tribunal in June 2018. The decision was released on 29
November 2018, which upheld the decision of the First Tier
Tribunal. HMRC has been granted leave to appeal in the Court of
Appeal, for which we have been informed that the hearing date will
be in late October 2019. If HMRC was ultimately unsuccessful in the
litigation process, the Group's tax charge would be reduced in the
year of success.
No tax benefit for these losses has been taken to date. Should
the case become final and be decided in the Group's favour in 2019,
we estimate that we would receive a tax refund of approximately
$100 million. In addition, remaining losses would be potentially
available to offset future profits, the benefit of which would
depend on future facts and circumstances.
4. Dividends
The 2018 final dividend totalling $192 million was paid on 8 May
2019. The 2019 interim dividend of 14.4 US cents per ordinary share
was declared by the Board on 30 July 2019. This dividend is payable
on 30 October 2019 to shareholders whose names appear on the
register at the close of business on 4 October 2019. 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 14
October 2019. Shareholders may participate in the dividend
re-investment plan and elections must be made by 14 October
2019.
5. Acquisitions
Half year ended 29 June 2019
The Group acquired four medical technology businesses deemed to
be business combinations within the scope of IFRS 3 Business
Combinations during the half year ended 29 June 2019.
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 will gain the Group 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, filling an important
need not addressed in our current 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.
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 $1m 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.
The provisional fair value of assets acquired and liabilities
assumed are set out below:
Ceterix Osiris Leaf Brainlab OJR
$m $m $m $m
------------------------------------------- ------- ------ ---- ------------
Intangible assets - Product-related 43 284 14 -
Intangible assets - Technology - - - 75
Intangible assets - Customer-related - 80 - 9
Property, plant & equipment 2 6 - -
Investments - 17 - -
Other non-current assets - 4 - -
Inventory 2 9 1 -
Trade and other receivables 1 48 1 -
Trade and other payables (4) (31) (1) -
Provisions - (18) - -
Non-current liabilities - (7) - -
Net deferred tax asset/(liability) 1 (57) 1 -
------------------------------------------- ------- ------ ---- ------------
Net assets 45 335 16 84
Goodwill 49 301 37 23
------------------------------------------- ------- ------ ---- ------------
Consideration (net of cash acquired(G) ) 94 636 53 107
------------------------------------------- ------- ------ ---- ------------
G Cash acquired is as follows: Ceterix: $2m; Osiris: $24m, Leaf: $1m; and Brainlab OJR: $nil.
The carrying value of goodwill increased from $2,337 million to
$2,751 million as a result of acquisitions ($410 million) and
foreign exchange movements ($4 million) during the half year ended
29 June 2019. Amounts allocated to goodwill arising on acquisitions
during the half year ended 29 June 2019 in the table above are not
expected to be deductible for tax purposes, except in the case of
the Brainlab OJR acquisition.
For the half year ended 29 June 2019, the contribution to
revenue from the Ceterix, Leaf and Brainlab OJR business
combinations was immaterial and the contribution from the Osiris
business combination was $33 million. For the half year ended 29
June 2019, the contribution to profit from the Ceterix, Leaf,
Brainlab OJR and Osiris business combinations was immaterial.
If the business combinations had occurred at the beginning of
the year, the contribution to revenue from the Ceterix, Leaf and
Brainlab OJR business combinations would have been immaterial and
the contribution from the Osiris business combination would have
been $79 million. If the business combinations had occurred at the
beginning of the year, the contribution to profit from the Ceterix,
Leaf, Brainlab OJR and Osiris business combinations would have been
immaterial.
Half Year ended 30 June 2018
The Group made no acquisitions deemed to be business
combinations within the scope of IFRS 3 in the half year ended 30
June 2018. The cash outflow of $20 million relates to acquisitions
completed in prior periods.
6. Net debt
Net debt as at 29 June 2019 is outlined below. The impact of the
transition to IFRS 16 on 1 January 2019 is outlined in Note 1. The
repayment of lease liabilities in the half year ended 29 June 2019
is included in cash flows from financing activities in the cash
flow statement.
29 June 31 December 30 June
2019 2018 2018
$m $m $m
---------------------------------------------------------- -------- ----------- --------
Cash at bank 137 365 99
Long-term borrowings (1,862) (1,301) (1,420)
Bank overdrafts, borrowings and loans due within one year (155) (164) (86)
Net currency swap (liabilities)/assets - (1) 1
Net interest rate swap liabilities - (3) (5)
----------------------------------------------------------- -------- ----------- --------
Net debt (1,880) (1,104) (1,411)
----------------------------------------------------------- -------- ----------- --------
Non-current lease liabilities (118) - -
Current lease liabilities (44) - -
---------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,042) (1,104) (1,411)
----------------------------------------------------------- -------- ----------- --------
The movements in the period were as follows:
Opening net debt as at 1 January (1,104) (1,281) (1,281)
Recognition of lease liability on transition to IFRS 16 (164) - -
Cash flow before financing activities (514) 553 98
Non-cash additions to lease liabilities (19) - -
Proceeds from issue of ordinary share capital 1 3 2
Proceeds from own shares 2 10 1
Purchase of own shares (43) (48) (32)
Equity dividends paid (192) (321) (198)
Exchange adjustments (9) (20) (1)
----------------------------------------------------------- -------- ----------- --------
Net debt including lease liabilities (2,042) (1,104) (1,411)
----------------------------------------------------------- -------- ----------- --------
In May 2019 the Group signed two new term loan facilities of
EUR269 million and EUR223 million respectively. Both facilities
mature in May 2021.
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
------------------------------- -----------------------------
29 June 31 December 30 June 29 June 31 December 30 June
2019 2018 2018 2019 2018 2018 Fair value
$m $m $m $m $m $m level
--------------------------- -------- ----------- -------- ------- ----------- ------- ----------
Financial assets at fair
value
Forward foreign exchange
contacts 18 36 31 18 36 31 Level 2
Investments 9 34 21 9 34 21 Level 3
Contingent consideration
receivable 36 - - 36 - - Level 3
Currency swaps - 1 1 - 1 1 Level 2
---------------------------- -------- ----------- -------- ------- ----------- -------
63 71 53 63 71 53
--------------------------- -------- ----------- -------- ------- ----------- -------
Financial assets not
measured at fair value
Trade and other receivables 1,167 1,211 1,112
Cash at bank 137 365 99
---------------------------- -------- ----------- --------
1,304 1,576 1,211
--------------------------- -------- ----------- --------
Total financial assets 1,367 1,647 1,264
---------------------------- -------- ----------- --------
Financial liabilities at
fair value
Acquisition consideration (134) (99) (105) (134) (99) (105) Level 3
Forward foreign exchange
contracts (21) (20) (20) (21) (20) (20) Level 2
Currency swaps - (2) - - (2) - Level 2
Interest rate swaps - (3) (5) - (3) (5) Level 2
---------------------------- -------- ----------- -------- ------- ----------- -------
(155) (124) (130) (155) (124) (130)
--------------------------- -------- ----------- -------- ------- ----------- -------
Financial liabilities not
measured at fair value
Acquisition consideration (36) (28) (37)
Bank overdrafts (15) (32) (18)
Bank loans (877) (311) (369)
Private placement debt in a
hedge relationship (200) (197) (195)
Private placement debt not
in a hedge relationship (925) (925) (925)
Trade and other payables (831) (858) (758)
---------------------------- -------- ----------- --------
(2,884) (2,351) (2,302)
--------------------------- -------- ----------- --------
Total financial liabilities (3,039) (2,475) (2,432)
---------------------------- -------- ----------- --------
There were no transfers between Levels 1, 2 and 3 during the
half year ended 29 June 2019 and the year ended 31 December 2018.
With the exception of private placement debt as presented above,
the carrying amount of financial assets and liabilities not
measured at fair value is considered to be a reasonable
approximation of fair value. For cash and cash equivalents,
short-term loans and receivables, overdrafts and other short-term
liabilities which have a maturity of less than three months, the
book values approximate the fair values because of their short term
nature. The fair values of long-term borrowings, which are not
traded publicly, are estimated by discounting future contractual
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 29 June 2019 and 30 June
2018 for financial instruments measured using Level 3 valuation
methods are presented below:
29 June 30 June
2019 2018
$m $m
-------------------------------------------- ------- -------
Investments
At 1 January 34 21
Acquisitions 17 -
Additions - 1
Gains/(losses) recognised in profit or loss 12 (1)
Distributions received (1) -
Disposals (46) -
Transfers (7) -
-------------------------------------------- ------- -------
9 21
-------------------------------------------- ------- -------
Contingent consideration receivable
At 1 January - -
Arising on acquisitions in the period 22 -
Additions 14 -
-------------------------------------------- ------- -------
36 -
-------------------------------------------- ------- -------
Acquisition consideration liability
At 1 January (99) (104)
Arising on acquisitions in the period (98) -
Payments in the period 51 -
Transfers 13 -
Discount unwind (1) (2)
Exchange movements - 1
-------------------------------------------- ------- -------
(134) (105)
-------------------------------------------- ------- -------
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 2018 by 50bps to 2.2% and 80bps to 3.4%
respectively. This remeasurment loss was fully offset by a
remeasurement gain from an increase in asset performances.
8. 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
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
(see Note 2), the most directly comparable financial measure
calculated in accordance with IFRS, by making adjustments for the
effect of acquisitions and disposals and the impact of movements in
exchange rates (currency impact), as described below.
The effect of acquisitions and disposals measures the impact on
revenue from newly acquired material business combinations and
recent material business disposals. This is calculated by comparing
the current year, constant currency actual revenue (which include
acquisitions and exclude disposals from the relevant date of
completion) with prior year, constant currency actual revenue,
adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year.
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.
Trading profit, trading profit margin and trading cash flow
Trading profit, trading profit margin (trading profit expressed
as a percentage of revenue), trading cash flow and trading profit
to cash conversion ratio (trading cash flow expressed as a
percentage of trading profit) are trend measures, which present the
long-term profitability of the Group. The adjustments made exclude
the impact of specific transactions that management considers
affect the Group's short-term profitability and cash flows. The
Group has identified the following items, where material, as those
to be excluded from operating profit and cash generated from
operations when arriving at trading profit and trading cash flow,
respectively: acquisition and disposal related items arising in
connection with business combinations, including amortisation of
acquisition intangible assets, impairments and integration costs;
restructuring events; gains and losses resulting from legal
disputes and uninsured losses; capital expenditure and payment of
lease liabilities. 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 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 long-term
profitability of the Group excluding the post-tax impact of
specific transactions that management considers affect the Group's
short-term profitability. The Group presents this measure to assist
investors in their understanding of trends. Adjusted attributable
profit is the numerator used for this measure and is determined by
adjusting attributable profit for the items that are excluded from
operating profit when arriving at trading profit and items that are
recognised below operating profit that affect the Group's
short-term profitability. The most directly comparable financial
measure calculated in accordance with IFRS is basic earnings per
ordinary share ('EPS').
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1) tax(2) Taxation(3) profit(4) operations(5) per share(6)
$m $m $m $m $m $m c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Half Year 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
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
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 2018
Reported 2,440 372 341 (67) 274 418 31.4
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 2 2 - 2 2 0.2
Restructuring and
rationalisation
costs - 58 58 (14) 44 46 5.0
Amortisation and
impairment of
acquisition
intangibles - 57 57 (13) 44 - 5.1
Legal and other(7) - 18 19 (2) 17 99 2.0
Capital
expenditure - - - - - (178) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Half Year 2018
Adjusted 2,440 507 477 (96) 381 387 43.7
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
(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 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 to 29
June 2019 costs primarily relate to the acquisitions of Ceterix,
Osiris, Leaf and Brainlab OJR. For the half year to 30 June 2018
costs primarily relate to the remeasurement of contingent
consideration for a prior year acquisition.
Restructuring and rationalisation costs: For both the half years
to 29 June 2019 and 30 June 2018 these costs relate to the
implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018.
Amortisation and impairment of acquisition intangibles: For both
the half years to 29 June 2019 and 30 June 2018, charges relate to
the amortisation of intangible assets acquired in material business
combinations.
Legal and other: For the half year to 29 June 2019 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 that will apply from May 2020. 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.
For the half year to 30 June 2018 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
that will apply from May 2020. Additionally, $13 million of cash
funding to closed defined benefit pension schemes is excluded from
trading cash flow.
9. Exchange rates
The exchange rates used for the translation of currencies into
US Dollars that have the most significant impact on the Group
results were:
Half year Full year Half year
2019 2018 2018
------------------- --------- --------- ---------
Average rates
------------------- --------- --------- ---------
Sterling 1.29 1.33 1.38
Euro 1.13 1.18 1.21
Swiss Franc 1.00 1.02 1.03
-------------------- --------- --------- ---------
Period-end rates
------------------- --------- --------- ---------
Sterling 1.27 1.28 1.31
Euro 1.14 1.14 1.16
Swiss Franc 1.03 1.02 1.01
-------------------- --------- --------- ---------
10. Subsequent events
On 1 July 2019 the Group completed the acquisition of 100% of
the share capital of Atracsys Sàrl, 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.
This acquisition will be treated as a business combination under
IFRS 3. The maximum consideration is $43 million and the
provisional 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%. Acquired net assets have a
provisional value of $1 million which is not expected to have
material fair value adjustments. The remaining $41 million will be
allocated between identifiable intangible assets including
technology and goodwill, with the majority expected to be goodwill.
Goodwill represents the control premium, the acquired workforce and
the synergies expected from integrating Atracsys Sàrl into the
Group's existing business, and is not expected to be deductible for
tax purposes. The contribution to revenue and attributable profit
from this acquisition is expected to be immaterial for the year
ending 31 December 2019.
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
-- 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.
Apart from the retirements of Ian Barlow and Michael Friedman
with effect from 11 April 2019 the Board of Directors of Smith
& Nephew plc are as listed in the Smith & Nephew plc 2018
Annual Report.
By order of the Board:
Namal Nawana Chief Executive Officer 31 July 2019
Graham Baker Chief Financial Officer 31 July 2019
INDEPENDENT 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 29 June 2019 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 29 June 2019 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU 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. 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.
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.
Stephen Oxley
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
31 July 2019
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 LFFVLDEIIVIA
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