REG - Smith & Nephew Plc - Final Results
22/02/2022 07:00
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RNS Number : 3524C Smith & Nephew Plc 22 February 2022
Smith+Nephew Fourth Quarter and Full Year 2021 Results
Meeting our 2021 guidance with a clear Strategy for Growth
22 February 2022
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business,
reports results for the fourth quarter and full year ended 31 December 2021:
31 Dec 31 Dec Reported Underlying
2021 2020 growth growth
$m $m % %
Fourth Quarter Results(1,2)
Revenue 1,346 1,326 1.5 0.3
Full Year Results(1,2)
Revenue 5,212 4,560 14.3 10.3
Operating profit 593 295
Operating profit margin (%) 11.4 6.5
EPS (cents) 59.8 51.3
Trading profit 936 683
Trading profit margin (%) 18.0 15.0
EPSA (cents) 80.9 64.6
Full Year Financial Highlights(1,2)
· Revenue of $5,212 million (2020: $4,560 million), up 14.3% on a
reported basis and 10.3% on an underlying basis
o Sports Medicine & ENT and Advanced Wound Management revenue above
pre-COVID levels
o Performance in Orthopaedics impacted by supply chain constraints
· Operating profit of $593 million (2020: $295 million), up 101%
· Trading profit of $936 million (2020: $683 million) with trading
profit margin of 18.0% (2020: 15.0%)
o 300bps margin uplift reflects improved trading impact and discretionary
cost control offset by higher logistics costs
· Cash generated from operations of $1,048 million (2020: $972 million)
with trading cash flow of $828 million (2020: $690 million)
· EPS up 17% to 59.8¢, EPSA up 25% to 80.9¢
· Full year dividend of 37.5¢ per share, in line with 2020 and 2019
Appointment of New Chief Executive Officer
· Smith+Nephew today announced that Dr Deepak Nath has been appointed
as the Company's new Chief Executive Officer, succeeding Roland Diggelmann,
who will step down by mutual agreement. Deepak will take up the role on 1
April 2022 and Roland will leave on 31 March 2022. See separate announcement
issued today for further information.
2021 Strategic Highlights
· Strategy for Growth launched, driven by improved productivity and
commercial execution, innovation and acquisitions
· Increased investment in R&D enabled significant new product
launches, including cementless knee system, expansion of robotics platform,
meniscal repair system and sports medicine tower upgrade
· Strengthened commercial model with Orthopaedics and Sports Medicine
& ENT franchises brought under one leadership team to better address
higher growth opportunities
· Commitment to achieve net zero emissions across our operations
globally by 2045
· Updated capital allocation framework maintaining higher investment in
innovation to drive growth and returns to shareholders with a progressive
dividend policy and new regular annual share buy-backs commencing in 2022
Outlook(1,2)
· Through our Strategy for Growth we are targeting consistent 4% to 6%
underlying revenue growth by 2024, structurally ahead of historical levels,
and a trading profit margin of at least 21% by 2024 with further improvements
thereafter
· For 2022 we are targeting underlying revenue growth in the range 4.0%
to 5.0% (around 2.6% to 3.6% reported)
o Guidance assumes some ongoing impact from COVID, with Omicron a Q1
headwind and hospital staffing shortages likely to continue throughout 2022
o Global supply constraints also likely to continue
o Growth expected to be stronger in the second half than the first half of
2022
· For trading profit margin we are targeting around 50bps of expansion
in 2022, reflecting efficiencies from operating leverage, productivity and
improvement in the margin of acquired assets partially offset by headwinds of
around 125bps from input cost inflation and around 60bps from implementation
of volume-based procurement in China
· Tax rate on trading results expected to be in the range of 17% to 18%
Q4 Trading Highlights(1,2)
· Q4 revenue of $1,346 million (2020: $1,326 million), up 1.5% on a
reported basis and 0.3% on an underlying basis
· Q4 performance reflects four fewer trading days than Q4 2020 (2021:
60 days) and COVID Omicron variant impact on elective surgeries
· Growth in Sports Medicine & ENT and Advanced Wound Management
franchises offset by Orthopaedics, in line with recent quarters
Roland Diggelmann, Chief Executive Officer, said:
"We finished 2021 with a solid fourth quarter, despite nearly a week less
trading than in 2020 and the impact of Omicron, which affected the typical
quarter-end pick up in average daily sales.
"For the full year we delivered on our guidance commitments on both the top
and bottom line. We are beginning to see our step up in R&D investment
bear fruit, and all three franchises contributed to our double-digit revenue
growth. Pleasingly, our Sports Medicine & ENT and Advanced Wound
Management franchises delivered revenue above pre-COVID 2019 levels.
Performance was held back by global supply chain challenges, which
particularly impacted our Orthopaedics franchise.
"Looking to the future, we have set out our new Strategy for Growth with an
ambition to transform to a structurally higher growth company, including clear
medium-term revenue and trading profit margin targets. 2022 will be an
important step on this journey as we continue to strengthen the business and
invest behind innovation, while working to offset near-term
headwinds. Smith+Nephew is well placed to continue to take advantage of the
opportunities we see to drive shareholder returns, including through a new
share buy-back programme."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's fourth quarter and full
year results will be held at 8.30am BST / 3.30am EST on 22 February 2022,
details of which can be found on the Smith+Nephew website at
www.smith-nephew.com/financialresults
(http://www.smith-nephew.com/financialresults) .
Enquiries
Investors
Andrew Swift +44 (0) 1923 477433
Smith+Nephew
Media
Charles Reynolds +44 (0) 1923 477314
Smith+Nephew
Susan Gilchrist / Ayesha Bharmal +44 (0) 20 7404 5959
Brunswick
Notes
1. Unless otherwise specified as 'reported' all revenue growth throughout
this document is 'underlying' after adjusting for the effects of currency
translation and including the comparative impact of acquisitions and excluding
disposals. All percentages compare to the equivalent 2020 period or equivalent
2019 period where specified.
'Underlying revenue growth' reconciles to reported revenue growth, the most
directly comparable financial measure calculated in accordance with IFRS, by
making two adjustments, the 'constant currency exchange effect' and the
'acquisitions and disposals effect', described below. See Other Information on
pages 33 to 36 for a reconciliation of underlying revenue growth to reported
revenue growth.
The 'constant currency exchange effect' is a measure of the increase/decrease
in revenue resulting from currency movements on non-US Dollar sales and is
measured as the difference between: 1) the increase/decrease in the current
year revenue translated into US Dollars at the current year average exchange
rate and the prior revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior year
revenues into US Dollars using the prior year closing rate.
The 'acquisitions and disposals effect' is the measure of the impact on
revenue from newly acquired material business combinations and recent material
business disposals. This is calculated by comparing the current year, constant
currency actual revenue (which includes acquisitions and excludes disposals
from the relevant date of completion) with prior year, constant currency
actual revenue, adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year. These sales are
separately tracked in the Group's internal reporting systems and are readily
identifiable.
2. Certain items included in 'trading results', such as trading profit,
trading profit margin, tax rate on trading results, trading cash flow, trading
profit to trading cash conversion ratio, EPSA, leverage ratio and underlying
growth are non-IFRS financial measures. The non-IFRS financial measures
reported in this announcement are explained in Other Information on pages 33
to 36 and are reconciled to the most directly comparable financial measure
prepared in accordance with IFRS. Reported results represent IFRS financial
measures as shown in the Condensed Consolidated Financial Statements.
Smith+Nephew Fourth Quarter Trading and Full Year 2021 Results
Overview of 2021
Group revenue in 2021 was $5,212 million, an increase of 14.3% on a reported
basis and 10.3% on an underlying basis.
Whilst we saw some recovery, the COVID pandemic continued to impact the
business throughout the year. The US market is getting closer to pre-COVID
levels and other markets are recovering at varying paces, mostly depending on
their healthcare structure and COVID waves.
All three of our global franchises delivered revenue growth in 2021. Our
Sports Medicine & ENT and Advanced Wound Management franchises,
representing almost 60% of our 2021 revenue, also both achieved revenue above
pre-COVID levels. The growth in these franchises in 2021 was driven by strong
commercial execution, investment in innovation and acquisitions.
The performance of Sports Medicine & ENT and Advanced Wound Management
helped offset the near-term challenges in our Orthopaedics franchise. These
included supply chain constraints and channel adjustments ahead of the
volume-based procurement (VBP) implementation for hip and knee implants in
China. We are stabilising the Smith+Nephew-specific supply chain challenges
and closely managing the widely reported global shortages of some raw
materials and components which we expect to continue in 2022.
From a strategic perspective, we announced our Strategy for Growth, launched
multiple new products, refined our commercial model and updated our capital
allocation framework in 2021.
Fourth Quarter 2021 Trading Update
Our fourth quarter revenue was $1,346 million (2020: $1,326 million),
representing reported revenue growth of 1.5% including a 200bps benefit from
acquisitions and 80bps foreign exchange headwind.
On an underlying basis revenue was up 0.3% year-on-year, principally
reflecting four fewer trading days than the comparable period (2021: 60
trading days), resulting in nearly one week's less trading at a traditionally
busy time of the year than the comparable quarter last year.
Performance was also impacted by the Omicron variant. Infection levels rose in
Europe and the US as the quarter went on, with new restrictions in many
countries alongside widely reported staffing shortages in healthcare systems.
As a result, we saw a slow-down in elective procedures from November in
Europe, and December in the US, with the usual strong finish to the year
impacted across our surgical businesses, particularly in joint replacement.
Compared to 2019, revenue was down -6.7% on an underlying basis also
reflecting the impact of Omicron and two fewer trading days (2019: 62 trading
days).
Fourth Quarter Consolidated Revenue Analysis
Q4 2021 compared to Q4 2020
31 December 31 December Reported Underlying Acquisitions Currency
2021 2020 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 552 545 1.2 -2.6 4.6 -0.8
Knee Implants 232 237 -2.0 -1.1 - -0.9
Hip Implants 151 162 -7.0 -6.1 - -0.9
Other Reconstruction((ii)) 25 16 54.4 56.7 - -2.3
Trauma & Extremities 144 130 10.5 -7.4 18.4 -0.5
Sports Medicine & ENT 416 408 2.1 2.4 - -0.3
Sports Medicine Joint Repair 223 223 0.1 0.4 - -0.3
Arthroscopic Enabling Technologies 157 158 -0.4 0.1 - -0.5
ENT (Ear, Nose and Throat) 36 27 33.2 33.0 - 0.2
Advanced Wound Management 378 373 1.5 2.4 - -0.9
Advanced Wound Care 181 183 -0.7 0.7 - -1.4
Advanced Wound Bioactives 128 122 4.4 4.5 - -0.1
Advanced Wound Devices 69 68 2.1 3.4 - -1.3
Total 1,346 1,326 1.5 0.3 2.0 -0.8
Consolidated revenue by geography
US 708 689 2.8 -0.4 3.2 -
Other Established Markets((iii)) 409 425 -3.9 -2.4 0.9 -2.4
Total Established Markets 1,117 1,114 0.3 -1.2 2.3 -0.8
Emerging Markets 229 212 8.3 8.0 0.1 0.2
Total 1,346 1,326 1.5 0.3 2.0 -0.8
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
navigation business and bone cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
Q4 2021 compared to Q4 2019
31 December 31 December Reported Underlying Acquisitions Currency
2021 2019 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 552 600 -8.0 -12.1 3.7 0.4
Sports Medicine & ENT 416 424 -1.8 -2.7 - 0.9
Advanced Wound Management 378 383 -1.3 -2.2 - 0.9
Total 1,346 1,407 -4.3 -6.7 1.7 0.7
Consolidated revenue by geography
US 708 724 -2.2 -5.0 2.8 -
Other Established Markets((ii)) 409 431 -5.1 -8.6 1.0 2.5
Total Established Markets 1,117 1,155 -3.3 -6.4 2.1 1.0
Emerging Markets 229 252 -9.0 -8.0 - -1.0
Total 1,346 1,407 -4.3 -6.7 1.7 0.7
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
Fourth Quarter Franchise Performance
Orthopaedics
Revenue declined -2.6% (+1.2% reported) in our Orthopaedics franchise in the
quarter.
Within this Knee Implants declined -1.1% (-2.0% reported) and Hip Implants
declined -6.1% (-7.0% reported), reflecting the impact of Omicron and, as
previously disclosed, global supply constraints and distributor ordering
patterns in China. We launched our LEGION CONCELOC(◊) Cementless Total Knee
System in the US during the quarter, broadening our knee portfolio. Other
Reconstruction revenue was up 56.7% (54.4% reported), with sustained good
sales momentum from our robotics platform the CORI(◊) Surgical System. After
the quarter end we announced the expansion of CORI as we brought RI.HIP
NAVIGATION, our computer-guided technology for total hip arthroplasty, on
board. Trauma & Extremities declined
-7.4% (+10.5% reported including +18.4% benefit from the Extremity
Orthopaedics acquisition) as trading was impacted by the deferral of elective
surgeries, particularly in extremities and limb restoration.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered revenue growth of 2.4% (2.1%
reported) in the quarter.
Within this, Sports Medicine Joint Repair delivered 0.4% revenue growth (0.1%
reported) as this segment was also impacted by Omicron. Arthroscopic Enabling
Technologies revenue was up 0.1% (-0.4% reported). Across these segments
recent launches including the FAST-FIX(◊) FLEX Meniscal Repair System and
WEREWOLF FASTSEAL(◊) 6.0 Hemostasis Wand are being well received. Revenue
from ENT was up 33.0% (33.2% reported) driven by our tonsil and adenoid
business as adult procedure volumes continued to recover from the impact of
COVID.
Advanced Wound Management
Our Advanced Wound Management franchise delivered revenue growth of 2.4% (1.5%
reported).
Advanced Wound Care revenue was up 0.7% (-0.7% reported) with sustained good
growth in the US led by ALLEVYN(◊) Life foam dressings offset by a slower
quarter in Europe. Advanced Wound Bioactives revenue was up 4.5% (4.4%
reported), with consistent growth from our enzymatic debrider SANTYL(◊ )and
improved sequential growth from our skin substitute portfolio. Advanced Wound
Devices revenue was up 3.4% (2.1% reported) driven by our PICO(◊) Single
Use Negative Pressure Wound Therapy System, particularly in the US.
Fourth Quarter Geographic Performance
Geographically, revenue from our Established Markets was down -1.2% (+0.3%
reported). Within this, the US was down -0.4% (+2.8% reported) and Other
Established Markets was down -2.4% (-3.9% reported). Emerging Markets revenue
was up 8.0% (8.3% reported).
Full Year 2021 Consolidated Analysis
Smith+Nephew results for the year ended 31 December 2021:
Reported
2021 2020 growth
$m $m %
Revenue 5,212 4,560 14.3
Operating profit 593 295 101
Acquisition and disposal related items 7 4
Restructuring and rationalisation costs 113 124
Amortisation and impairment of acquisition intangibles 172 171
Legal and other 51 89
Trading profit((i)) 936 683 37
¢ ¢
Earnings per share ('EPS') 59.8 51.3 17
Acquisition and disposal related items (8.8) (0.1)
Restructuring and rationalisation costs 10.3 9.6
Amortisation and impairment of acquisition intangibles 15.4 14.3
Legal and other 4.2 5.7
UK tax litigation - (16.2)
Adjusted Earnings per share ('EPSA')((i)) 80.9 64.6 25
(i) See Other Information on pages 33 to 36
Full Year 2021 Analysis
Our full year revenue was $5,212 million (2020: $4,560 million), up 14.3% on a
reported basis including a foreign exchange tailwind of 210bps and 190bps
benefit from acquisitions. Revenue was up 10.3% on an underlying basis.
The reported gross profit was $3,669 million (2020: $3,164 million). Gross
margin improved from 69.4% to 70.4%. This reflects improved operating leverage
from revenue growth partially offset by higher input costs, supply chain costs
and channel adjustments ahead of China VBP implementation. The prior year also
included the impact of COVID with lower gross margins resulting from factory
underutilisation and an increase in inventory provisions.
The Group reported an operating profit of $593 million (2020: $295 million)
after acquisition and disposal related items, restructuring and
rationalisation costs, amortisation and impairment of acquisition intangibles
and legal and other items incurred in the first half (see Other Information on
pages 33 to 36).
Trading profit was $936 million (2020: $683 million), with a trading profit
margin of 18.0% (2020: 15.0%). The margin expansion reflects improved trading
compared to 2020, along with discretionary cost control resulting in positive
leverage on both cost of goods sold and selling, general and administrative
expense. Compared to pre-COVID levels, there were headwinds from higher
logistics and freight costs, ongoing COVID-related negative leverage from
fixed costs and China VBP. In addition, we have made clear strategic choices
to invest in R&D, bolt-on acquisitions and new product launches.
Our Sports Medicine & ENT and Advanced Wound Management franchises
delivered higher trading profit than 2020; with Advanced Wound Management also
showing significant growth over 2019. The trading profit of our Orthopaedics
franchise is below 2020 as a result of the headwinds noted above and our
investment choices which impacted the trading profit margin in Orthopaedics
proportionally more (see Note 2 to the Condensed Consolidated Financial
Statements (Financial Statements) for further detail).
Restructuring costs, primarily related to the Operations and Commercial
Excellence programme, totalled $113 million, with incremental benefits
recognised of around $40 million.
The net interest charge within reported results was $74 million (2020: $56
million). The higher net interest charge reflects interest on the corporate
bond issued in October 2020 and a full year of interest on the $550 million of
private placement notes drawn in June 2020.
A $75 million (2020: $nil) gain on disposal of interest in associate was
recorded in 2021 resulting from two dilution gains in the Group's interest in
Bioventus, which commenced trading on the Nasdaq Global Select Market on 11
February 2021 via its holding company, Bioventus Inc. (see Note 3 to the
Financial Statements for further detail). This gain on disposal has been
excluded from trading results (see Other Information on pages 33 to 36 for
further detail).
Reported tax for the year to 31 December 2021 was a charge of $62 million
(2020: credit of $202 million which reflected lower profits, the successful UK
tax litigation outcome, and provision releases following tax audit closures).
The tax rate on trading results for the year to 31 December 2021 was 17.2%
(2020: 11.3% including a one-off benefit from the releases of tax provisions).
(See Note 4 to the Financial Statements and Other Information on pages 33 to
36 for further details on taxation).
Adjusted earnings per share ('EPSA') was 80.9¢ (161.8¢ per ADS) (2020:
64.6¢). Basic earnings per share ('EPS') was 59.8¢ (119.6¢ per ADS) (2020:
51.3¢), reflecting restructuring costs, acquisition and disposal related
items, amortisation and impairment of acquisition intangibles and legal and
other items incurred.
Cash generated from operations was $1,048 million (2020: $972 million) and
trading cash flow was $828 million (2020: $690 million) as we continued to
invest in capital expenditure, including progressing changes to our
manufacturing network (see Other Information on pages 33 to 36 for a
reconciliation between cash generated from operations and trading cash flow).
The trading profit to trading cash conversion ratio was 88% (2020: 101%).
At 31 December 2021, the Group had net debt of $1,852 million (excluding lease
liabilities), compared to committed facilities of $4.1 billion (see Note 7 to
the Financial Statements for a reconciliation of net debt). The leverage ratio
was 1.6x (2020: 1.8x) (see Other Information on pages 33 to 36).
On 4 January 2021 the Group completed the acquisition of the Extremity
Orthopaedics business of Integra LifeSciences Holdings Corporation for $236
million (see Note 6 to the Financial Statements for further detail). On 18
January 2022 the Group completed the acquisition of Engage Uni, LLC (doing
business as Engage Surgical) for a provisional fair value of consideration of
$132 million (see Note 10 to the Financial Statements for further detail).
Dividend
The Board is recommending a Final Dividend of 23.1¢ per share (46.2¢ per
ADS). Together with the Interim Dividend of 14.4¢ per share (28.8¢ per ADS),
this will give a total distribution of 37.5¢ per share (75.0¢ per ADS),
unchanged from 2020 and 2019. Subject to confirmation at our Annual General
Meeting, the Final Dividend will be paid on 11 May 2022 to shareholders on the
register at the close of business on 1 April 2022.
Strategy for Growth
In December we announced our Strategy for Growth. Through this we will
compound our outperformance in Advanced Wound Management and Sports Medicine
& ENT, and regain momentum in Orthopaedics. Our ambition is to transform
to a structurally higher growth company.
Our Strategy for Growth is based on three pillars.
· First we will Strengthen the foundations of Smith+Nephew. A solid
base in commercial and manufacturing will enable us to serve customers
sustainably and simply, and deliver the best from our core portfolio.
· Second, we will Accelerate our growth profitably, through more robust
prioritisation of resources and investment, and with continuing customer
focus.
· Third we will continue to Transform ourselves for higher long-term
growth, through investment in innovation and acquisitions.
The Strategy for Growth will be delivered through the four key value builders
of productivity, commercial execution, innovation and acquisitions.
Productivity
Our actions to drive productivity include optimising manufacturing and supply
and driving ongoing commercial efficiencies through simplification.
We expect our industry to continue to be impacted by the widely reported
global shortages of some raw materials and components, such as electronics. We
are closely managing such supply issues on a case-by-case basis, and have
simplified our processes to be more agile when additional supply becomes
available. We are also stabilising the Smith+Nephew-specific supply-chain
challenges.
Beyond this we are building long-term efficiency, including through the
Operations and Commercial Excellence programme. The transfer to a specialist
third-party logistics partner in Europe is complete, and Memphis is due to
complete later this year. The new orthopaedics manufacturing facility in
Malaysia is on track to supply ahead of our previous target of the end of
2022, and Costa Rica will shortly move to become a multi-franchise
manufacturing facility. These changes will create a more efficient and more
resilient network for supplying our customers.
In terms of efficiencies we are working to focus our commercial resources to
better balance growth and margins. Smith+Nephew sells into more than 100
countries, but over 80% of revenue comes from the ten largest. Going forward
global launches will focus more narrowly on the largest markets first. We also
intend to simplify our portfolio, addressing multiple product lines serving
the same clinical need as a result of previous acquisitions or legacy products
in some categories. Through this we expect to reduce costs, simplify
distribution and enable better control of inventory.
Commercial execution
Our actions to drive commercial execution are focused on maximising the value
of our strong portfolio, where we already have leading technology across the
franchises.
We have a successful track record to build on, including in Advanced Wound
Management where we have returned the European business to growth despite the
maturity of the market and competition from low-cost regional players.
In Sports Medicine & ENT 'selling the procedure' rather than individual
products has already been a core part of our strategy and we intend to
replicate that success in Orthopaedics. For instance the launch of our
uncemented knee gives us a strong suite of primary and revision knee implants
supported by enabling technologies.
Innovation
Our commitment to innovation is central to our Strategy for Growth. In recent
years we have stepped up our level of investment in R&D from 4.7% of sales
in 2017 to more than 6% in 2021.
In 2021 we launched multiple new products across the franchises and segments.
In addition to the LEGION CONCELOC Cementless Total Knee System noted above,
these included the SMART TSF(◊) Circular Fixator introducing digital
connectivity to our leading external fixation TAYLOR SPATIAL FRAME(◊), the
WEREWOLF FASTSEAL 6.0 Hemostasis Wand bringing our leading radio-frequency
technology to orthopaedic reconstruction, the FAST-FIX FLEX Meniscal Repair
System, building on our leading position in this segment, and new enabling
technologies for our INTELLIO(◊) Connected Tower Solution with the
introduction of the DOUBLEFLO(◊) Inflow/Outflow Pump and 4KO(◊)
(Optimised) Arthroscopes and Laparoscopes.
The delivery in 2021 reflects only the early positive impact of our increased
R&D investment. From here, we intend to accelerate our business by
launching flawlessly and to scale, and transform our longer-term outlook with
investments in disruptive platform technologies with cross-franchise
applications such as robotics, biologics and digital surgery.
Acquisitions
The final key value builder is acquisitions. Over recent years we have
acquired assets that move a number of our segments to structurally higher
growth potential, including adding the Osiris skin substitutes to Advanced
Wound Bioactives, the Tula◊ System for in-office delivery of ear tubes to
our ENT business, and an Extremity Orthopaedics business to Trauma. We will
continue to use bolt-on acquisitions to enhance our portfolio and pipeline.
In January 2022 we acquired Engage Surgical, owner of the only cementless
partial knee system commercially available in the US. This acquisition
strongly supports our Strategy for Growth and gives us a unique position as
the only company offering total and partial cemented and cementless knees in
the US, our largest market. The partial knee market is currently worth
approximately $300 million in the US (SmartTRAK) and is expected to grow
faster than the total knee market and by around 4% per annum through 2029
(Millennium Research Group, Inc). We expect cementless partial knees will grow
ahead of overall partial knees, in line with recent patterns seen in the total
knee segment.
New commercial model
Changing customer and market dynamics have created new high-growth
opportunities. To take advantage of these, in Q4 2021 we brought our surgical
franchises under one leadership team mandated with driving excellence in
execution and identifying efficiencies across the franchises. With this new
approach we will build on our consistently strong performance in Sports
Medicine & ENT and return our Orthopaedics franchise to a growth
trajectory reflecting its strong portfolio.
Commitment to net zero
In September 2021 we announced our commitment to achieve net zero emissions
across our operations globally by 2045. Our roadmap is to achieve net zero
Scope 1 and Scope 2 greenhouse gas emissions (GHGs) by 2040 and Scope 3 GHGs
by 2045. We are on track to achieve a 70% reduction in Scope 1 and Scope 2
GHGs by 2025 compared to a 2019 baseline.
Capital allocation framework
In December 2021 we also announced our updated capital allocation framework.
This will support delivery of our strategy, whilst also maintaining greater
balance sheet efficiency and shareholder returns.
Under the framework we will continue to invest in innovation, our
sustainability agenda and in acquisitions. These are in line with our
strategic goal to drive revenue, and are essential for the sustainable growth
of earnings and free cash flow. We will do this while maintaining our current
commitments to our equity and debt holders, with investment grade credit
metrics, and continuing our progressive dividend policy.
Our confidence in our growth outlook and strong cash generation means that
even after these investments and commitments we expect to have excess
financing capacity. We have therefore made a new commitment to return the
surplus to shareholders in the form of a regular annual buyback, expected to
be between $250 million and $300 million in 2022.
Outlook
In December 2021 we announced a new mid-term financial performance commitment,
targeting consistent 4-6% organic revenue growth by 2024, structurally ahead
of historical levels, and rebuilding trading margin, targeting at least 21% by
2024 with further improvements thereafter. We will deliver this through our
Strategy for Growth by improving productivity and commercial execution,
launching new innovative products, and making successful bolt-on acquisitions,
as described above.
2022 is an important stage in this journey.
For revenue, for 2022 we are targeting underlying growth of 4.0% to 5.0%.
Within this, we expect Orthopaedics momentum to improve through the year, for
our Sports Medicine & ENT franchise to again perform strongly including
recovery in ENT, and for Advanced Wound Management to deliver growth against a
strong comparator. On a reported basis the guidance equates to a range of
around 2.6% to 3.6%, with a foreign exchange headwind of 140bps based on
exchange rates prevailing on 11 February 2022. Our guidance assumes some
ongoing impact from COVID, with Omicron a headwind in Q1 and the hospital
staffing shortages likely to continue throughout the year. The global supply
constraints are also likely to continue. We expect revenue growth to be
stronger in the second half than the first half of 2022.
For trading profit margin we are targeting around 50bps of expansion in 2022.
This will be driven by efficiencies from operating leverage and productivity
and improvement in the margin of acquired assets that will more than offset
significant anticipated headwinds of around 125bps from input cost inflation
and around 60bps from China VBP implementation.
The tax rate on trading results for 2022 is forecast to be in the range of 17%
to 18% subject to any material changes to tax law or other one-off items.
Forward calendar
The Q1 Trading Report will be released on 28 April 2022.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology business focused on the repair,
regeneration and replacement of soft and hard tissue. We exist to restore
people's bodies and their self-belief by using technology to take the limits
off living. We call this purpose 'Life Unlimited'. Our 18,000 employees
deliver this mission every day, making a difference to patients' lives
through the excellence of our product portfolio, and the invention and
application of new technologies across our three global franchises of
Orthopaedics, Sports Medicine & ENT and Advanced Wound Management.
Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and
generated annual sales of $5.2 billion in 2021. 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
(http://www.smith-nephew.com/) and follow us on Twitter
(http://www.twitter.com/smithnephewplc) , LinkedIn
(http://www.linkedin.com/company/smith-%26-nephew) , Instagram
(https://www.instagram.com/smithnephewmeded/) or Facebook
(http://www.facebook.com/smithnephewplc) .
Forward-looking Statements
This document may contain forward-looking statements that may or may not prove
accurate. For example, statements regarding expected revenue growth and
trading margins, market trends and our product pipeline are forward-looking
statements. Phrases such as "aim", "plan", "intend", "anticipate",
"well-placed", "believe", "estimate", "expect", "target", "consider" and
similar expressions are generally intended to identify forward-looking
statements. Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual results to
differ materially from what is expressed or implied by the statements. For
Smith+Nephew, these factors include: risks related to the impact of COVID,
such as the depth and longevity of its impact, government actions and other
restrictive measures taken in response, material delays and cancellations of
elective procedures, reduced procedure capacity at medical facilities,
restricted access for sales representatives to medical facilities, or our
ability to execute business continuity plans as a result of COVID; economic
and financial conditions in the markets we serve, especially those affecting
healthcare providers, payers and customers (including, without limitation, as
a result of COVID); price levels for established and innovative medical
devices; developments in medical technology; regulatory approvals,
reimbursement decisions or other government actions; product defects or
recalls or other problems with quality management systems or failure to comply
with related regulations; litigation relating to patent or other claims; legal
compliance risks and related investigative, remedial or enforcement actions;
disruption to our supply chain or operations or those of our suppliers
(including, without limitation, as a result of COVID); competition for
qualified personnel; strategic actions, including acquisitions and
dispositions, our success in performing due diligence, valuing and integrating
acquired businesses; disruption that may result from transactions or other
changes we make in our business plans or organisation to adapt to market
developments; relationships with healthcare professionals; reliance on
information technology and cyber security; and numerous other matters that
affect us or our markets, including those of a political, economic, business,
competitive or reputational nature. Please refer to the documents that
Smith+Nephew has filed with the U.S. Securities and Exchange Commission under
the U.S. Securities Exchange Act of 1934, as amended, including Smith+Nephew's
most recent annual report on Form 20-F, for a discussion of certain of these
factors. Any forward-looking statement is based on information available to
Smith+Nephew as of the date of the statement. All written or oral
forward-looking statements attributable to Smith+Nephew are qualified by this
caution. Smith+Nephew does not undertake any obligation to update or revise
any forward-looking statement to reflect any change in circumstances or in
Smith+Nephew's expectations.
(◊ )Trademark of Smith+Nephew. Certain marks registered US Patent and
Trademark Office.
Full Year Consolidated Revenue Analysis
2021 compared to 2020
31 December 31 December Reported Underlying Acquisitions Currency
2021 2020 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 2,156 1,917 12.5 6.4 4.3 1.8
Knee Implants 876 822 6.6 5.1 - 1.5
Hip Implants 612 567 7.8 5.8 - 2.0
Other Reconstruction((ii)) 92 68 34.1 32.2 - 1.9
Trauma & Extremities 576 460 25.4 5.6 18.0 1.8
Sports Medicine & ENT 1,560 1,333 17.0 14.6 - 2.4
Sports Medicine Joint Repair 839 710 18.2 15.9 - 2.3
Arthroscopic Enabling Technologies 590 517 14.1 11.7 - 2.4
ENT (Ear, Nose and Throat) 131 106 23.3 20.6 - 2.7
Advanced Wound Management 1,496 1,310 14.2 11.8 - 2.4
Advanced Wound Care 731 647 12.9 9.5 - 3.4
Advanced Wound Bioactives 496 431 15.1 14.8 - 0.3
Advanced Wound Devices 269 232 16.0 13.0 - 3.0
Total 5,212 4,560 14.3 10.3 1.9 2.1
Consolidated revenue by geography
US 2,658 2,339 13.6 10.5 3.1 -
Other Established Markets((iii)) 1,638 1,450 12.9 7.7 1.0 4.2
Total Established Markets 4,296 3,789 13.4 9.4 2.3 1.7
Emerging Markets 916 771 18.7 14.6 - 4.1
Total 5,212 4,560 14.3 10.3 1.9 2.1
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
navigation business and bone cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
2021 to 2019
31 December 31 December Reported Underlying Acquisitions Currency
2021 2019 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 2,156 2,222 -2.9 -8.3 4.2 1.2
Sports Medicine & ENT 1,560 1,536 1.5 - - 1.5
Advanced Wound Management 1,496 1,380 8.4 2.8 3.4 2.2
Total 5,212 5,138 1.4 -2.9 2.8 1.5
Consolidated revenue by geography
US 2,658 2,551 4.2 -0.6 4.8 -
Other Established Markets((ii)) 1,638 1,630 0.5 -5.6 1.2 4.9
Total Established Markets 4,296 4,181 2.8 -2.6 3.3 2.1
Emerging Markets 916 957 -4.3 -4.2 0.6 -0.7
Total 5,212 5,138 1.4 -2.9 2.8 1.5
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
2021 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Group Income Statement for the year ended 31 December 2021
2021 2020
Notes $m $m
Revenue 2 5,212 4,560
Cost of goods sold (1,543) (1,396)
Gross profit 3,669 3,164
Selling, general and administrative expenses (2,720) (2,562)
Research and development expenses (356) (307)
Operating profit 2 593 295
Interest income 6 6
Interest expense (80) (62)
Other finance costs (17) (7)
Share of results of associates 9 14
Gain on disposal of interest in associate 3 75 -
Profit before taxation 586 246
Taxation 4 (62) 202
Attributable profit(A) 524 448
Earnings per share(A)
Basic 59.8¢ 51.3¢
Diluted 59.7¢ 51.2¢
Group Statement of Comprehensive Income for the year ended 31 December 2021
2021 2020
$m $m
Attributable profit(A) 524 448
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 79 10
Taxation on other comprehensive income (22) (4)
Total items that will not be reclassified to income statement 57 6
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (53) 21
Net gains/(losses) on cash flow hedges 41 (30)
Taxation on other comprehensive income (5) 4
Total items that may be reclassified subsequently to income statement (17) (5)
Other comprehensive income for the year, net of taxation 40 1
Total comprehensive income for the year(A) 564 449
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Group Balance Sheet as at 31 December 2021
2021 2020
Notes $m $m
ASSETS
Non-current assets
Property, plant and equipment 1,513 1,449
Goodwill 2,989 2,928
Intangible assets 1,398 1,486
Investments 10 9
Investment in associates 188 108
Other non-current assets 15 33
Retirement benefit assets 182 133
Deferred tax assets 201 202
6,496 6,348
Current assets
Inventories 1,844 1,691
Trade and other receivables 1,184 1,116
Current tax receivable 106 95
Cash at bank 7 1,290 1,762
4,424 4,664
TOTAL ASSETS 10,920 11,012
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 177 177
Share premium 614 612
Capital redemption reserve 18 18
Treasury shares (120) (157)
Other reserves (346) (329)
Retained earnings 5,225 4,958
Total equity 5,568 5,279
Non-current liabilities
Long-term borrowings and lease liabilities 7 2,848 3,353
Retirement benefit obligations 127 163
Other payables 67 94
Provisions 35 294
Deferred tax liabilities 144 141
3,221 4,045
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 7 491 337
Trade and other payables 1,096 1,022
Provisions 322 123
Current tax payable 222 206
2,131 1,688
Total liabilities 5,352 5,733
TOTAL EQUITY AND LIABILITIES 10,920 11,012
Condensed Group Cash Flow Statement for the year ended 31 December 2021
2021 2020
$m $m
Cash flows from operating activities
Profit before taxation 586 246
Net interest expense 74 56
Depreciation, amortisation and impairment 581 596
Share of results of associates (9) (14)
Gain on disposal of interest in associate (75) -
Share-based payments expense (equity-settled) 41 26
Net movement in post-retirement obligations - 1
Movement in working capital and provisions (150) 61
Cash generated from operations 1,048 972
Net interest and finance costs paid (74) (59)
Income taxes (paid)/refunded (97) 22
Net cash inflow from operating activities 877 935
Cash flows from investing activities
Acquisitions, net of cash acquired (285) (170)
Capital expenditure (408) (443)
Purchase of investments (2) (2)
Distribution from associate 4 9
Net cash used in investing activities (691) (606)
Net cash inflow before financing activities 186 329
Cash flows from financing activities
Proceeds from issue of ordinary share capital 2 2
Proceeds from own shares 12 9
Purchase of own shares - (16)
Payment of capital element of lease liabilities (59) (55)
Equity dividends paid (329) (328)
Cash movements in borrowings (267) 1,545
Settlement of currency swaps (4) 7
Net cash (used in)/from financing activities (645) 1,164
Net (decrease)/increase in cash and cash equivalents (459) 1,493
Cash and cash equivalents at beginning of year 1,751 257
Exchange adjustments (7) 1
Cash and cash equivalents at end of year(B) 1,285 1,751
B Cash and cash equivalents at the end of the period are net of bank
overdrafts of $5m (2020: $11m).
Group Statement of Changes in Equity for the year ended 31 December 2021
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
At 1 January 2021 177 612 18 (157) (329) 4,958 5,279
Attributable profit(A) - - - - - 524 524
Other comprehensive income(A) - - - - (17) 57 40
Equity dividends paid - - - - - (329) (329)
Share-based payments recognised - - - - - 41 41
Taxation on share-based payments - - - - - (1) (1)
Cost of shares transferred to beneficiaries - - - 37 - (25) 12
Issue of ordinary share capital - 2 - - - - 2
At 31 December 2021 177 614 18 (120) (346) 5,225 5,568
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
At 1 January 2020 177 610 18 (189) (324) 4,849 5,141
Attributable profit(A) - - - - - 448 448
Other comprehensive income(A) - - - - (5) 6 1
Equity dividends paid - - - - - (328) (328)
Share-based payments recognised - - - - - 26 26
Taxation on share-based payments - - - - - (4) (4)
Purchase of own shares(C) - - - (16) - - (16)
Cost of shares transferred to beneficiaries - - - 37 - (28) 9
Cancellation of treasury shares(C) - - - 11 - (11) -
Issue of ordinary share capital - 2 - - - - 2
At 31 December 2020 177 612 18 (157) (329) 4,958 5,279
A Attributable to the equity holders of the parent and wholly derived from
continuing operations.
C During the year ended 31 December 2020 a total of 0.6m ordinary shares
were purchased at a cost of $16m and 0.6m ordinary shares were cancelled.
Notes to the Condensed Consolidated Financial Statements
1. Basis of preparation and accounting policies
Smith & Nephew plc (the 'Company') is a public limited company
incorporated in England and Wales. In these condensed consolidated financial
statements ('Financial Statements'), 'Group' means the Company and all its
subsidiaries. The financial information herein has been prepared on the basis
of the accounting policies as set out in the Annual Report of the Group for
the year ended 31 December 2020. The Group has prepared its accounts in
accordance with UK-adopted International Accounting Standards. The Group has
also prepared its accounts in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB) effective as at 31 December 2021. IFRS as adopted in the UK
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;
liability provisioning; and impairment. There has been no change in the
methodology of applying management estimation in these policies since the year
ended 31 December 2020.
The continued uncertainty as to the future impact on the financial performance
and cash flows of the Group as a result of the COVID pandemic has been
considered as part of the Group's adoption of the going concern basis in these
financial statements, in which context the Directors reviewed cash flow
forecasts prepared for the period to 1 July 2023. The going concern period has
been extended beyond 12 months to include scheduled and committed debt
repayments in Q2 2023. Having carefully reviewed those forecasts, the
Directors concluded that it was appropriate to adopt the going concern basis
of accounting in preparing these financial statements for the reasons set out
below.
The Group had access to $1,285m of cash and cash equivalents at 31 December
2021. The Group's net debt, excluding lease liabilities, at 31 December 2021
was $1,852m (see Note 7) with access to committed facilities of $4.1bn with an
average maturity of 4.6 years. At the date of approving these financial
statements the funding position of the Group has remained unchanged and the
cash position is not materially different.
The Group has a €269m term loan and $125m of private placement debt due for
repayment in 2022. $1,285m of private placement debt is subject to financial
covenants. The principal covenant on the private placement debt is a leverage
ratio of <3.5x which is measured on a rolling 12-month basis at half year
and year end. Our leverage ratio including lease liabilities was 1.6x adjusted
EBITDA for the 12 months
to 31 December 2021. There are no financial covenants in any of the Group's
other facilities.
The Directors have considered various scenarios in assessing the impact of
COVID on future financial performance and cash flows, with the key judgement
applied being the sustainability of the return to a normal volume of elective
procedures in key markets, including the impact of a further extended wave of
restrictions on elective procedures in 2022 and the subsequent recovery.
Throughout these scenarios, which include a severe but plausible outcome, the
Group continues to have headroom on its borrowing facilities and financial
covenants.
The Directors have a reasonable expectation that the Company and the Group are
well placed to manage their business risks, have sufficient funds to continue
to meet their liabilities as they fall due and to continue in operational
existence for the period to 1 July 2023. The financial statements have
therefore been prepared on a going concern basis.
The principal risks that the Group is exposed to will be disclosed in the
Group's 2021 Annual Report. These are: business continuity and business
change; commercial execution; cybersecurity; global supply chain; legal and
compliance; mergers and acquisitions; new product innovation, design and
development including intellectual property; political and economic; pricing
and reimbursement; quality and regulatory; talent management; and taxation and
foreign exchange.
Management has not identified a principal risk for COVID, because the business
continuity and business change risk includes a risk for widespread outbreaks
of infectious diseases. In addition, management coordinated its response to
COVID through a Crisis Management Team that was convened within the existing
business continuity and incident management framework. Management also noted
that COVID is changing the nature of other principal risks. Examples of these
changes include, but are not limited to: government restrictions on exports
during a pandemic increase supply risk; increased levels of remote working may
increase cybersecurity risk; financial pressure on governments and hospitals
caused by COVID increases the likelihood of pricing and reimbursement risk;
restrictions on elective surgery increase commercial execution risk; and COVID
has increased the risk to our people's health and wellbeing.
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 for the years ended 31 December 2021 or 2020 but is derived
from those accounts. Statutory accounts for 2020 have been delivered to the
registrar of companies and those for 2021 will be delivered in due course. The
auditor has reported on those accounts; their report was (i) unqualified, (ii)
did not include a reference to any matters to which the auditor drew attention
by way of emphasis without qualifying their report and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
New accounting standards effective 2021
A number of new standards are effective from 1 January 2021 but they do not
have a material effect on the Group's financial statements. Refer to Note 8a
for further details on the impact of IBOR reform.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual
periods beginning after 1 January 2021 and earlier application is permitted;
however, the Group has not early adopted them in preparing these consolidated
financial statements.
Critical judgements and estimates
In determining and applying accounting policies, judgement is often required
in respect of items where the choice of specific policy, accounting estimate
or assumption to be followed could materially affect the reported results or
net asset position of the Group; it may later be determined that a different
choice would have been more appropriate. The Group's significant accounting
policies which required the most use of management's estimation are outlined
below. The critical estimates are consistent with 31 December 2020.
Management's assessment of the impact of COVID on critical and other estimates
is also outlined below:
Valuation of inventories
A feature of the Orthopaedics franchise (which accounts for approximately 60%
of the Group's total inventory and approximately 80% of the total provision
for excess and obsolete inventory) is the high level of product inventory
required, some of which is located at customer premises and is available for
customers' immediate use. Complete sets of products, including large and small
sizes, have to be made available in this way. These sizes are used less
frequently than standard sizes and towards the end of the product life cycle
are inevitably in excess of requirements. Adjustments to carrying value are
therefore required to be made to orthopaedic inventory to anticipate this
situation. These adjustments are calculated in accordance with a formula based
on levels of inventory compared with historical usage. This formula is applied
on an individual product line basis and typically is first applied when a
product group has been
on the market for two years. This method of calculation is considered
appropriate based on experience, but it does require management estimate in
respect of customer demand, effectiveness of inventory deployment, length of
product lives and phase-out of old products and efficiency of manufacturing
planning systems.
COVID impact assessment: Management have assessed the continuing impact of
COVID on the provision for excess and obsolete inventory, specifically
considering the impact of lower sales demand and increased inventory levels.
Where possible, management have taken steps to reduce manufacturing output and
purchase levels to respond to actual demand. Management have not changed their
accounting policy since 31 December 2020, nor is a change in the key
assumptions underlying the methodology expected in the next 12 months.
Primarily due to acquisitions, the provision has increased from $377m at 31
December 2020 to $430m at 31 December 2021. The provision for excess and
obsolete inventory is not considered to have a range of potential outcomes
that is significantly different to the $430m at 31 December 2021 barring
unforeseen changes in sales demand like those experienced in 2020.
Liability provisioning
The recognition of provisions for legal disputes related to metal-on-metal
cases is subject to a significant degree of estimation. Provision is made for
loss contingencies when it is considered probable that an adverse outcome will
occur and the amount of the loss can be reasonably estimated. In making its
estimates, management takes into account the advice of internal and external
legal counsel. Provisions are reviewed regularly and amounts updated where
necessary to reflect developments in the disputes. The value of provisions may
require future adjustment if experience such as number, nature or value of
claims or settlements changes. Such a change may be material in 2022 or
thereafter. The ultimate liability may differ from the amount provided
depending on the outcome of court proceedings and settlement negotiations or
if investigations bring to light new facts.
COVID impact assessment: Management considered whether there had been any
changes to the number and value of claims due to COVID and to date have not
identified any changes in trends. If the experience changes in the future the
value of provisions may require adjustment.
Impairment: Non-current assets
In carrying out impairment reviews of intangible assets and goodwill, a number
of significant assumptions have to be made when preparing cash flow
projections. These include the future rate of market growth, discount rates,
the market demand for the products acquired, the future profitability of
acquired businesses or products, levels of reimbursement and success in
obtaining regulatory approvals. If actual results should differ or changes in
expectations arise, impairment charges may be required which would adversely
impact operating results. This critical estimate is not considered to have a
significant risk of material adjustment in 2022 or thereafter based on
sensitivity analyses undertaken (as outlined below).
COVID impact assessment: Management have assessed the non-current assets held
by the Group at 31 December 2021 to identify any indicators of impairment as a
result of COVID. Where an impairment indicator has arisen, impairment reviews
have been undertaken by comparing the expected recoverable value of the asset
to the carrying value of the asset. The recoverable amounts are based on cash
flow projections using the Group's base case scenario in its going concern
models, which was reviewed and approved by the Board. No material impairments
were identified as a result of the impairment reviews and sensitivity analyses
undertaken.
Climate change considerations
The impact of climate change has been considered as part of the assessment of
estimates and judgements in preparing the Group accounts. The climate change
scenario analyses undertaken this year in line with TCFD recommendations did
not identify any material financial impact.
The following considerations were made in respect of the financial statements:
• The impact of climate change on the going concern assessment and the
viability of the Group over the next three years
• The impact of climate change on the cash flow forecasts used in the
impairment assessments of non-current assets including goodwill
• The impact of climate change on the carrying value and useful economic
lives of property, plant and equipment
2. Business segment information
The Group's operating structure is organised around three global franchises
and the chief operating decision maker monitors performance, makes operating
decisions and allocates resources on a global franchise basis. Accordingly,
the Group has concluded that there are three reportable segments. Franchise
presidents have responsibility for upstream marketing, driving product
portfolio and technology acquisition decisions, and full commercial
responsibility for their franchises in the US. Regional presidents in EMEA and
APAC are responsible for the implementation of the global franchise strategy
in their respective regions. During 2021, the Group transitioned from three
franchise presidents to two; with the franchise president of the Sports
Medicine & ENT franchise also assuming responsibility for the Orthopaedics
franchise. There was no change to the manner in which the chief operating
decision maker monitors performance, makes operating decisions or allocates
resources and accordingly the Group continues to have three reportable
segments.
The Executive Committee ('ExCo') comprises the Chief Financial Officer
('CFO'), the franchise presidents, the regional presidents and certain heads
of function, and is chaired by the Chief Executive Officer ('CEO'). ExCo is
the body through which the CEO uses the authority delegated to him by the
Board of Directors to manage the operations and performance of the Group. All
significant operating decisions regarding the allocation and prioritisation of
the Group's resources and assessment of the Group's performance are made by
ExCo, and whilst the members have individual responsibility for the
implementation of decisions within their respective areas, it is at the ExCo
level that these decisions are made. Accordingly, ExCo is considered to be the
Group's chief operating decision maker as defined by IFRS 8 Operating
Segments.
In making decisions about the prioritisation and allocation of the Group's
resources, ExCo reviews financial information for the three franchises
(Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management) and
determines the best allocation of resources to the franchises. Financial
information for corporate costs is presented on a Group-wide basis. The ExCo
is not provided with total assets and liabilities by segment, and therefore
these measures are not included in the disclosures below. The results of the
segments are shown below.
2a. Revenue by business segment and geography
Revenue is recognised as the performance obligations to deliver products or
services are satisfied and is recorded based on the amount of consideration
expected to be received in exchange for satisfying the performance
obligations. Revenue is recognised primarily when control is transferred to
the customer, which is generally when the goods are shipped or delivered in
accordance with the contract terms, with some transfer of services taking
place over time. Substantially all performance obligations are performed
within one year. There is no significant revenue associated with the provision
of 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
third party purchases product from a wholesaler at its agreed price plus a
mark-up. The wholesaler in turn charges the Group for the difference between
the price initially paid by the wholesaler and the agreed price. The provision
for chargebacks is based on expected sell-through levels by the Group's
wholesalers to such customers, as well as estimated wholesaler inventory
levels.
Orthopaedics and Sports Medicine & ENT (Ear, Nose & Throat)
Orthopaedics and Sports Medicine & ENT consists of the following
businesses: Knee Implants, Hip Implants, Other Reconstruction, Trauma &
Extremities, Sports Medicine Joint Repair, Arthroscopic Enabling Technologies
and ENT. Sales of inventory located at customer premises and available for
customers' immediate use are recognised when notification is received that the
product has been implanted or used. Substantially all other revenue is
recognised when control is transferred to the customer, which is generally
when the goods are shipped or delivered in accordance with the contract terms.
Revenue is recognised for the amount of consideration expected to be received
in exchange for transferring the products or services.
In general our business in Established Markets is direct to hospitals and
ambulatory surgery centers whereas in the Emerging Markets we generally sell
through distributors.
Advanced Wound Management
Advanced Wound Management consists of the following businesses: Advanced Wound
Care, Advanced Wound Bioactives and Advanced Wound Devices. Substantially all
revenue is recognised when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance with the
contract terms. Revenue is recognised for the amount of consideration expected
to be received in exchange for transferring the products or services.
Appropriate provisions for returns, trade discounts and rebates are deducted
from revenue, as explained above.
The majority of our Advanced Wound Management business, and in particular
products used in community and homecare facilities, is through wholesalers and
distributors. When control is transferred to a wholesaler or distributor,
revenue is recognised accordingly. The proportion of sales direct to hospitals
is higher in our Advanced Wound Devices business in Established Markets.
Segment revenue reconciles to statutory revenue from continuing operations as
follows:
2021 2020
$m $m
Segment revenue
Orthopaedics 2,156 1,917
Sports Medicine & ENT 1,560 1,333
Advanced Wound Management 1,496 1,310
Revenue from external customers 5,212 4,560
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by product
franchise:
2021 2020
$m $m
Knee Implants 876 822
Hip Implants 612 567
Other Reconstruction 92 68
Trauma & Extremities 576 460
Orthopaedics 2,156 1,917
Sports Medicine Joint Repair 839 710
Arthroscopic Enabling Technologies 590 517
ENT (Ear, Nose & Throat) 131 106
Sports Medicine & ENT 1,560 1,333
Advanced Wound Care 731 647
Advanced Wound Bioactives 496 431
Advanced Wound Devices 269 232
Advanced Wound Management 1,496 1,310
Total 5,212 4,560
The following table shows the disaggregation of Group revenue by geographic
market and product category. The disaggregation of revenue into the two
product categories below reflects that in general the products in the Advanced
Wound Management franchises are sold to wholesalers and intermediaries, while
products in the other franchises are sold directly to hospitals, ambulatory
surgery centers and distributors. The further disaggregation of revenue by
Established Markets and Emerging Markets reflects that in general our products
are sold through distributors and intermediaries in the Emerging Markets while
in the Established Markets, with the exception of the Advanced Wound Care and
Bioactives franchises, products are in general sold direct to hospitals and
ambulatory surgery centers. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors including
volatility in growth and outlook.
2021 2020
Established Markets ((D)) Emerging Markets Total Established Markets ((D)) Emerging Markets Total
$m $m $m $m $m $m
Orthopaedics, Sports Medicine & ENT 2,969 747 3,716 2,619 631 3,250
Advanced Wound Management 1,327 169 1,496 1,170 140 1,310
Total 4,296 916 5,212 3,789 771 4,560
D Established Markets comprises US, Australia, Canada, Europe, Japan and
New Zealand.
Sales are attributed to the country of destination. US revenue for the year
was $2,658m (2020: $2,339m), China revenue for the year was $352m (2020:
$318m) and UK revenue for the year was $189m (2020: $166m).
No individual customer comprises more than 10% of the Group's external sales.
2b. Trading profit by business segment
Trading profit is a trend measure which presents the profitability of the
Group excluding the impact of specific transactions that management considers
affect the Group's short-term profitability and the comparability of results.
The Group presents this measure to assist investors in their understanding of
trends. The Group has identified the following items, where material, as those
to be excluded from operating profit when arriving at trading profit:
acquisition and disposal related items; amortisation and impairment of
acquisition intangibles; significant restructuring programmes; gains and
losses arising from legal disputes; and other significant items.
Segment trading profit is reconciled to the statutory measure below:
2021 2020
$m $m
Segment profit
Orthopaedics 367 389
Sports Medicine & ENT 459 306
Advanced Wound Management 474 316
Segment trading profit 1,300 1,011
Corporate costs (364) (328)
Group trading profit 936 683
Acquisition and disposal related items (7) (4)
Restructuring and rationalisation expenses (113) (124)
Amortisation and impairment of acquisition intangibles (172) (171)
Legal and other (51) (89)
Group operating profit 593 295
Acquisition and disposal related items:
For the year to 31 December 2021 costs primarily relate to the acquisition of
Extremity
Orthopaedics and prior year acquisitions, partially offset by credits relating
to remeasurement of deferred and contingent consideration for prior year
acquisitions.
For the year to 31 December 2020 costs primarily relate to the acquisition of
Tusker and prior year acquisitions, partially offset by credits relating to
remeasurement of contingent consideration for prior year acquisitions.
Restructuring and rationalisation costs:
For the years ended 31 December 2021 and 31 December 2020, these costs relate
to the implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018 and the Operations and
Commercial Excellence programme announced in February 2020.
Amortisation and impairment of acquisition intangibles:
For the years ended 31 December 2021 and 31 December 2020, these costs relate
to the amortisation and impairment of intangible assets acquired in material
business combinations.
Legal and other:
For the year ended 31 December 2021 charges primarily relate to legal expenses
for ongoing metal-on-metal hip claims. These charges in the year to 31
December 2021 were partially offset by a credit of $35m relating to insurance
recoveries for ongoing metal-on-metal hip claims.
For the year ended 31 December 2020 charges primarily relate to legal expenses
for ongoing metal-on-metal hip claims and an increase of $17m in the provision
that reflects the present value of the estimated costs to resolve all other
known and anticipated metal-on-metal hip claims.
The years ended 31 December 2021 and 2020 also include costs for implementing
the requirements of the EU Medical Device Regulation which came into effect in
May 2021.
3. Gain on disposal of interest in associate
For the year ended 31 December 2021 a $75m (2020: $nil) gain on disposal of
interest in associate was recorded, resulting from the two dilution gains
which arose during the year as outlined below.
On 11 February 2021, Bioventus commenced trading on the Nasdaq Global Select
Market via its holding company, Bioventus Inc., under the symbol 'BVS'. As a
consequence of this public offering and the raising of $106m after expenses
through issuing new common stock, the equity holding of the Smith+Nephew Group
decreased from approximately 47.6% at 31 December 2020 to approximately 38.7%
at 11 February 2021. Accordingly, there was a net (non-cash) gain on the
dilution of the Group's shareholding in Bioventus of $22m reflecting the net
impact of the reduction in the Group's equity holding and the Group's interest
in the net proceeds.
On 29 October 2021, Bioventus acquired Misonix, Inc. in a cash-and-share
transaction. As a consequence, the equity holding of the Smith+Nephew Group
decreased from 38.7% to 29.3% while the overall value of the investment
increased. Accordingly, there was a net (non-cash) gain on the dilution of the
Group's shareholding in Bioventus of $53m reflecting the net impact of the
reduction in the Group's equity holding and the higher overall value of the
associate undertaking.
4. Taxation
Reported tax for the year to 31 December 2021 was a charge of $62m (2020:
credit of $202m), being an effective rate of 10.6%. This is significantly
lower than the statutory UK tax rate predominantly due to non-taxable
accounting gains recognised in relation to UK-owned investments in Bioventus.
The 2020 tax credit reflected lower profits, the successful UK tax litigation
outcome, and provision releases following tax audit closures.
EU state aid
We have previously disclosed, but not provided for, the potential for a future
effect on our tax charge, of up to $155m, as a result of the European
Commission (EC) decision that certain aspects of the UK CFC financing
exemption rules between 2013 and 2018 constituted illegal State Aid.
On 29 June 2021, we received letters from HMRC confirming that they do not
consider us to have been beneficiaries of State Aid, and therefore no
liabilities will be assessed. The letters also note that the EC has indicated
its agreement with HMRC's conclusion.
5. Dividends
The 2020 final dividend of 23.1 US cents per ordinary share totalling $203m
was paid on 12 May 2021. The 2021 interim dividend of 14.4 US cents per
ordinary share totalling $126m was paid on 27 October 2021.
A final dividend for 2021 of 23.1 US cents per ordinary share has been
proposed by the Board and will be paid, subject to shareholder approval, on 11
May 2022 to shareholders whose names appear on the Register of Members on 1
April 2022 (the record date). The sterling equivalent per ordinary share will
be set following the record date. The ex-dividend date is 31 March 2022 and
the final day for currency and dividend reinvestment plan ('DRIP') elections
is 19 April 2022.
6. Acquisitions
Year ended 31 December 2021
On 4 January 2021, the Group completed the acquisition of the Extremity
Orthopaedics business of Integra LifeSciences Holdings Corporation ('Extremity
Orthopaedics'). The acquisition significantly strengthens the Group's
extremities business by adding a
combination of a focused sales channel, complementary shoulder replacement and
upper and lower extremities portfolio, and a new product pipeline. The
transaction comprised the acquisition of the entire issued share capital of
two wholly owned US subsidiaries of Integra LifeSciences Holdings Corporation
group and certain assets of the Extremity Orthopaedics business held both in
and outside the US. The maximum consideration is $240m and the fair value of
consideration is $236m and includes no deferred or contingent consideration.
The goodwill represents the control premium, the acquired workforce and the
synergies expected from integrating Extremity Orthopaedics into the Group's
existing business, and is expected to be partly deductible for tax purposes.
The fair value of assets acquired and liabilities assumed are set out below:
Extremity Orthopaedics
$m
Intangible assets - Product-related 101
Intangible assets - Customer-related 11
Property, plant & equipment 22
Inventory 41
Other payables (23)
Net deferred tax liability (12)
Net assets 140
Goodwill 96
Consideration (net of nil cash acquired) 236
The product-related intangible assets were valued using an excess earnings
methodology with the key inputs being revenue, profit and discount rate. The
cash outflow from acquisitions of $285m (2020: $170m) comprises payments of
consideration of $236m (2020: $117m) relating to the acquisition which
completed in the current year and payments of deferred and contingent
consideration of $49m (2020: $53m) relating to acquisitions completed in prior
years.
The carrying value of goodwill increased from $2,928m at 31 December 2020 to
$2,989m at 31 December 2021. The acquisition in the year ended 31 December
2021 increased goodwill by $96m, this was partially offset by foreign exchange
movements of $35m.
For the year ended 31 December 2021 the contribution from Extremity
Orthopaedics to revenue was $82m and to profit was immaterial. If the business
combination had occurred at the beginning of the year the contribution to
revenue and profit would not have been materially different.
Year ended 31 December 2020
On 23 January 2020, the Group completed the acquisition of 100% of the share
capital of Tusker Medical, Inc. ('Tusker'), a developer of an innovative
in-office solution for tympanostomy (ear tubes) called Tula. The acquisition
was deemed to be a business combination within the scope of IFRS 3 Business
Combinations. The acquisition supports the Group's strategy to invest in
innovative technologies that address unmet clinical needs. The maximum
consideration is $140m and the fair value of consideration is $139m and
includes $6m of deferred consideration and $35m of contingent consideration.
The goodwill represents the control premium, the acquired workforce and the
synergies expected from integrating Tusker into the Group's existing business,
and is not expected to be deductible for tax purposes. The acquisition
accounting was completed in 2021 with no adjustments to the fair value
disclosed in the Group's 2020 Annual Report.
The fair value of assets acquired and liabilities assumed are set out below:
Tusker
$m
Intangible assets - Product-related 53
Property, plant & equipment 6
Other receivables 1
Trade and other payables (6)
Non-current liabilities (3)
Net deferred tax asset 5
Net assets 56
Goodwill 83
Consideration (net of nil cash acquired) 139
During the year ended 31 December 2020, the Group also completed two other
smaller acquisitions in the spheres of remote physical therapy and
arthroscopic enabling technology. The maximum aggregated consideration is $41m
and the fair value of consideration is $26m and includes $3m of deferred
consideration and $17m of contingent consideration. The fair value of
aggregate assets acquired is: intangible assets of $8m, property and other net
assets of $2m. The goodwill arising on these acquisitions is $16m, which is
not expected to be deductible for tax purposes, and is attributable to future
iterations of the technologies and the synergies that can be expected from
integrating these acquisitions into the Group's existing business.
The carrying value of goodwill increased from $2,789m to $2,928m as a result
of acquisitions ($99m) and foreign exchange movements ($43m) which were
partially offset by an IFRS 3 measurement period adjustment ($3m) relating to
the Osiris Therapeutics, Inc. acquisition in 2019.
For the year ended 31 December 2020, the contribution to revenue and profit
from the 2020 acquisitions was immaterial. If the business combinations had
occurred at the beginning of the year, the contribution to revenue and profit
would have been immaterial.
7. Net debt
Net debt as at 31 December 2021 is outlined below. The repayment of lease
liabilities is included in cash flows from financing activities in the cash
flow statement.
2021 2020
$m $m
Cash at bank 1,290 1,762
Long-term borrowings (2,707) (3,207)
Bank overdrafts, borrowings and loans due within one year (435) (279)
Net interest rate swap asset - 2
Net debt (1,852) (1,722)
Non-current lease liabilities (141) (146)
Current lease liabilities (56) (58)
Net debt including lease liabilities (2,049) (1,926)
The movements in the year were as follows:
Opening net debt as at 1 January (1,926) (1,770)
Cash flow before financing activities 186 329
Non-cash additions to lease liabilities (53) (81)
Proceeds from issue of ordinary share capital 2 2
Proceeds from own shares 12 9
Purchase of own shares - (16)
Equity dividends paid (329) (328)
Exchange adjustments 59 (71)
Net debt including lease liabilities (2,049) (1,926)
The Group has available committed facilities of $4.1bn (2020: $4.5bn). During
2020, the Group issued its first corporate bond, in the form of $1bn (before
expenses and underwriting discounts) of notes bearing an interest rate of
2.032% repayable in 2030. In December 2019 the Group signed a new senior notes
agreement totalling $550m, which was drawn down in June 2020. The senior notes
are due to mature between 2027 and 2032. $265m of private placement debt
matured in 2021.
Part of the Group's net investment in its Euro subsidiaries is hedged by
€757m ($859m equivalent) of term loans which mitigate the foreign currency
risk arising from the subsidiaries' net assets. €223m ($253m equivalent) of
the total term loans has been extended from May 2022 to mature in May 2023.
8a. Financial instruments
The following table shows the carrying amounts and fair values of financial
assets and financial liabilities, including their levels in the fair value
hierarchy.
Carrying amount Fair value
2021 2020 2021 2020 Fair value
$m $m $m $m level
Financial assets at fair value
Forward foreign exchange contacts 37 20 37 20 Level 2
Investments 10 9 10 9 Level 3
Contingent consideration receivable 20 37 20 37 Level 3
Currency swaps 2 2 2 2 Level 2
Interest rate swaps - 2 - 2 Level 2
69 70 69 70
Financial assets not measured at fair value
Trade and other receivables 1,046 986
Cash at bank 1,290 1,762
2,336 2,748
Total financial assets 2,405 2,818
Financial liabilities at fair value
Acquisition consideration (84) (128) (84) (128) Level 3
Forward foreign exchange contracts (17) (57) (17) (57) Level 2
Currency swaps (2) (2) (2) (2) Level 2
(103) (187) (103) (187)
Financial liabilities not measured at fair value
Acquisition consideration (7) (37)
Bank overdrafts (5) (11)
Bank loans (859) (931)
Corporate bond (993) (992)
Private placement debt in a hedge relationship - (122)
Private placement debt not in a hedge relationship (1,285) (1,430)
Trade and other payables (1,053) (892)
(4,202) (4,415)
Total financial liabilities (4,305) (4,602)
At 31 December 2021, the book value and market value of the corporate bond
were $993m and $962m respectively (2020: $992m and $1,017m). At 31 December
2021, the book value and fair value of the private placement debt were $1,285m
and $1,316m respectively (2020: $1,552m and $1,642m).
In 2020 the Group applied the interest rate benchmark reform amendments
retrospectively to hedging relationships that existed at 1 January 2020 or
were designated thereafter and that are directly affected by interest rate
benchmark reform. The Group had a number of interest rate swaps outstanding at
31 December 2020 which were all due to mature in 2021 and for which published
US Dollar LIBOR rates were still available. The Group has a revolving credit
facility of $1,000m and private placement notes of $25m which are subject to
IBOR reform. In 2021 the Group changed the interest rates on its revolving
credit facility to SOFR (Secured Overnight Financing Rate) with no material
impact arising. The Group expects that the interest rates for the private
placement notes will also be changed to SOFR and that no material gain or loss
will arise as a result.
There were no transfers between Levels 1, 2 and 3 during the year ended 31
December 2021 and the year ended 31 December 2020. For cash and cash
equivalents, short-term loans and receivables, overdrafts and other short-term
liabilities which have a maturity of less than three months, the book values
approximate the fair values because of their short term nature. Long-term
borrowings are measured in the balance sheet at amortised cost. The corporate
bond issued in October 2020 is publicly listed and a market price is
available. The Group's other long term borrowings are not quoted publicly,
their fair values are estimated by discounting future contractual cash flows
to net present values at the current market interest rates available to the
Group for similar financial instruments as at the year end. The fair value of
the private placement notes is determined using a discounted cash flow model
based on prevailing market rates. The fair value of currency swaps is
determined by reference to quoted market spot rates. As a result, foreign
forward exchange contracts and currency swaps are classified as Level 2 within
the fair value hierarchy.
The fair value of contingent acquisition consideration is estimated using a
discounted cash flow model. The valuation model considers the present value of
expected payment, discounted using a risk-adjusted 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 year ended 31 December 2021 and the year
ended 31 December 2020 for financial instruments measured using Level 3
valuation methods are presented below:
2021 2020
$m $m
Investments
At 1 January 9 7
Additions 2 2
Fair value remeasurement (1) -
At 31 December 10 9
Contingent consideration receivable
At 1 January 37 39
Remeasurements 1 -
Receipts (18) (2)
At 31 December 20 37
Acquisition consideration liability
At 1 January (128) (141)
Arising on acquisitions - (49)
Payments 23 51
Remeasurements 21 12
Discount unwind - (1)
At 31 December (84) (128)
8b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of the UK and US
pension plans are based on the yield on bonds that have a credit rating of AA
denominated in the currency in which the benefits are expected to be paid with
a maturity profile approximately the same as the obligations. These have risen
since 31 December 2020 by 60bps to 1.9% and 30bps to 2.7% respectively. This
gain was accompanied by a remeasurement gain from increased asset
performances.
9. Exchange rates
The exchange rates used for the translation of currencies into US Dollars that
have the most significant impact on the Group results were:
2021 2020
Average rates
Sterling 1.38 1.28
Euro 1.18 1.14
Swiss Franc 1.09 1.07
Year end rates
Sterling 1.35 1.37
Euro 1.13 1.23
Swiss Franc 1.10 1.14
10. Subsequent events
On 18 January 2022, the Group completed the acquisition of 100% of the share
capital of Engage Uni, LLC (doing business as Engage Surgical), owner of the
only cementless unicompartmental (partial) knee system commercially available
in the US. This acquisition strongly supports Smith+Nephew's Strategy for
Growth by transforming our business through innovation and acquisition, while
also providing differentiation for our customers.
This acquisition will be treated as a business combination under IFRS 3. The
maximum consideration, all payable in cash, is $135m and the provisional fair
value consideration is $132m and includes $32m of contingent consideration.
The provisional value of acquired net tangible assets is not material and is
not expected to have material fair value adjustments. The remaining
consideration will be allocated between identifiable intangible assets
(product-related) and goodwill, with the majority expected to be goodwill
representing the control premium, the acquired workforce and the synergies
expected from integrating Engage Surgical into the Group's existing business.
The majority of the consideration is expected to be deductible for tax
purposes.
Other information
Definitions of and reconciliation to measures included within adjusted
"trading" results
These Financial Statements include financial measures that are not prepared in
accordance with IFRS. These measures, which include trading profit, trading
profit margin, tax rate on trading results, Adjusted Earnings Per Ordinary
Share (EPSA), trading cash flow, trading profit to trading cash conversion
ratio, leverage ratio, and underlying revenue growth, exclude the effect of
certain cash and non-cash items that Group management believes are not related
to the underlying performance of the Group. These non-IFRS financial measures
are also used by management to make operating decisions because they
facilitate internal comparisons of performance to historical results.
Non-IFRS financial measures are presented in these 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 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 two adjustments, the
'constant currency exchange effect' and the 'acquisitions and disposals
effect', described below.
The 'constant currency exchange effect' is a measure of the increase/decrease
in revenue resulting from currency movements on non-US Dollar sales and is
measured as the difference between: 1) the increase/decrease in the current
year revenue translated into US Dollars at the current year average exchange
rate and the prior year revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior year
revenues into US Dollars using the prior year closing rate.
The 'acquisitions and disposals effect' is the measure of the impact on
revenue from newly acquired material business combinations and recent material
business disposals. This is calculated by comparing the current year, constant
currency actual revenue (which includes acquisitions and excludes disposals
from the relevant date of completion) with prior year, constant currency
actual revenue, adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year. These sales are
separately tracked in the Group's internal reporting systems and are readily
identifiable.
Reported revenue growth, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to underlying revenue growth as
follows:
Reconciling Items
Reported Underlying Acquisitions Currency
2021 2020 growth growth & disposals impact
$m $m % % % %
Segment revenue
Orthopaedics 2,156 1,917 12.5 6.4 4.3 1.8
Sports Medicine & ENT 1,560 1,333 17.0 14.6 - 2.4
Advanced Wound Management 1,496 1,310 14.2 11.8 - 2.4
Revenue from external customers 5,212 4,560 14.3 10.3 1.9 2.1
Trading profit, trading profit margin, trading cash flow and trading profit to
trading cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a
percentage of revenue), trading cash flow and trading profit to trading cash
conversion ratio (trading cash flow expressed as a percentage of trading
profit) are trend measures, which present the profitability of the Group. The
adjustments made exclude the impact of specific transactions that management
considers affect the Group's short-term profitability and cash flows, and the
comparability of results. The Group has identified the following items, where
material, as those to be excluded from operating profit and cash generated
from operations when arriving at trading profit and trading cash flow,
respectively: acquisition and disposal related items arising in connection
with business combinations, including amortisation of acquisition intangible
assets, impairments and integration costs; restructuring events; and gains and
losses resulting from legal disputes and uninsured losses. In addition to
these items, gains and losses that materially impact the Group's profitability
or cash flows on a short-term or one-off basis are excluded from operating
profit and cash generated from operations when arriving at trading profit and
trading cash flow. The cash contributions to fund defined benefit pension
schemes that are closed to future accrual are excluded from cash generated
from operations when arriving at trading cash flow. Payment of lease
liabilities is included within trading cash flow.
Adjusted earnings per ordinary share ('EPSA')
EPSA is a trend measure which presents the profitability of the Group
excluding the post-tax impact of specific transactions that management
considers affect the Group's short-term profitability and comparability of
results. The Group presents this measure to assist investors in their
understanding of trends. Adjusted attributable profit is the numerator used
for this measure and is determined by adjusting attributable profit for the
items that are excluded from operating profit when arriving at trading profit
and items that are recognised below operating profit that affect the Group's
short-term profitability. The most directly comparable financial measure
calculated in accordance with IFRS is basic earnings per ordinary share
('EPS').
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1 ) tax(2 ) Taxation(3 ) profit(4 ) operations(5 ) per share(6 )
$m $m $m $m $m $m ¢
2021 Reported 5,212 593 586 (62) 524 1,048 59.8
Acquisition and disposal related items - 7 (73) (3) (76) 28 (8.8)
Restructuring and rationalisation costs - 113 113 (22) 91 108 10.3
Amortisation and impairment of acquisition intangibles - 172 172 (38) 134 - 15.4
Legal and other(7) - 51 59 (22) 37 111 4.2
Lease liability payments - - - - - (59) -
Capital expenditure - - - - - (408) -
2021 Adjusted 5,212 936 857 (147) 710 828 80.9
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 ¢
2020 Reported 4,560 295 246 202 448 972 51.3
Acquisition and disposal related items - 4 4 (5) (1) 24 (0.1)
Restructuring and rationalisation costs - 124 124 (40) 84 117 9.6
Amortisation and impairment of acquisition intangibles - 171 171 (46) 125 - 14.3
Legal and other(7) - 89 91 (41) 50 75 5.7
UK tax litigation - - - (142) (142) - (16.2)
Lease liability payments - - - - - (55) -
Capital expenditure - - - - - (443) -
2020 Adjusted 4,560 683 636 (72) 564 690 64.6
(1 )Represents a reconciliation of operating profit to
trading profit.
(2 )Represents a reconciliation of reported profit before
tax to trading profit before tax.
(3 )Represents a reconciliation of reported tax to trading
tax.
(4 )Represents a reconciliation of reported attributable
profit to adjusted attributable profit.
(5 )Represents a reconciliation of cash generated from
operations to trading cash flow.
(6 )Represents a reconciliation of basic earnings per
ordinary share to adjusted earnings per ordinary share (EPSA).
(7 )The ongoing funding of defined benefit pension schemes
that are closed to future accrual is not included in management's definition
of trading cash flow as there is no defined benefit service cost for these
schemes.
Acquisition and disposal related items: For the year to 31 December 2021 costs
primarily relate to the acquisition of Extremity Orthopaedics and prior year
acquisitions, partially offset by credits relating to remeasurement of
deferred and contingent consideration for prior year acquisitions. Adjusted
profit before tax additionally excludes gains of $75m associated with the two
transactions resulting in the dilution of the Group's shareholding in
Bioventus and $5m of other gains relating to the Bioventus IPO.
For the year to 31 December 2020 costs primarily relate to the acquisition of
Tusker and prior year acquisitions, partially offset by credits relating to
remeasurement of contingent consideration for prior year acquisitions.
Restructuring and rationalisation costs: For the years ended 31 December 2021
and 31 December 2020, these costs relate to the implementation of the
Accelerating Performance and Execution (APEX) programme that was announced in
February 2018 and the Operations and Commercial Excellence programme announced
in February 2020.
Amortisation and impairment of acquisition intangibles: For the years ended 31
December 2021 and 31 December 2020, these costs relate to the amortisation and
impairment of intangible assets acquired in material business combinations.
Legal and other:
For the year ended 31 December 2021 charges primarily relate to legal expenses
for ongoing metal-on-metal hip claims. These charges in the year to 31
December 2021 were partially offset by a credit of $35m relating to insurance
recoveries for ongoing metal-on-metal hip claims. Trading cash flow
additionally excludes $7m of cash funding to closed defined benefit pension
schemes. Taxation also includes the effect of an increase in deferred tax
assets on non-trading items resulting from the prospective UK tax rate
increase from 19% to 25% effective from 1 April 2023.
For the year ended 31 December 2020 charges primarily relate to legal expenses
for ongoing metal-on-metal hip claims and an increase of $17m in the provision
that reflects the present value of the estimated costs to resolve all other
known and anticipated metal-on-metal hip claims.
The years ended 31 December 2021 and 2020 also include costs for implementing
the requirements of the EU Medical Device Regulation which came into effect in
May 2021.
UK tax litigation: For the year ended 31 December 2020 the $142m tax credit
relates to the successful outcome of the UK tax litigation matter.
Leverage ratio
The leverage ratio is net debt including lease liabilities to adjusted EBITDA.
Net debt is reconciled in Note 7 to the Financial Statements. Adjusted EBITDA
is defined as trading profit before depreciation of property, plant and
equipment and amortisation of other intangible assets. The calculation of the
leverage ratio is set out below:
2021 2020
$m $m
Net debt including lease liabilities 2,049 1,926
Trading profit 936 683
Depreciation of property, plant and equipment 326 311
Amortisation of other intangible assets 65 63
Adjustment for items already excluded from trading profit (11) (7)
Adjusted EBITDA 1,316 1,050
Leverage ratio (x) 1.6 1.8
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