REG - Smith & Nephew Plc - Final Results
21/02/2023 07:00
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RNS Number : 5064Q Smith & Nephew Plc 21 February 2023
Smith+Nephew Fourth Quarter and Full Year 2022 Results
Exited year with good momentum as we transform to become a consistently higher
growth company
21 February 2023
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology business,
reports results for the fourth quarter and full year ended 31 December 2022:
31 Dec 31 Dec Reported Underlying
2022 2021 growth growth
$m $m % %
Fourth Quarter Results(1,2)
Revenue 1,365 1,346 1.4 6.8
Full Year Results(1,2)
Revenue 5,215 5,212 0.1 4.7
Operating profit 450 593
Operating profit margin (%) 8.6 11.4
EPS (cents) 25.5 59.8
Trading profit 901 936
Trading profit margin (%) 17.3 18.0
EPSA (cents) 81.8 80.9
Q4 Trading Highlights(1,2)
· Q4 revenue of $1,365 million (2021: $1,346 million) up 6.8% on an
underlying basis (1.4% reported growth after 540bps FX headwind)
· Strongest quarterly underlying revenue growth of 2022 with all
franchises and geographies contributing
Full Year Financial Highlights(1,2)
· Revenue of $5,215 million (2021: $5,212 million), up 4.7% on an
underlying basis (0.1% reported growth after 460bps FX headwind)
· Trading profit of $901 million (2021: $936 million) with 17.3%
trading profit margin (2021: 18.0%) reflecting higher inflation (operating
profit $450 million (2021: $593 million))
· Cash generated from operations of $581 million (2021: $1,048 million)
with trading cash flow of $444 million (2021: $828 million), primarily due to
increased inventory
· EPSA 81.8¢ (2021: 80.9¢), EPS 25.5¢ (2021: 59.8¢)
· $150 million of 2022 share buyback programme completed
· Full year dividend of 37.5¢ per share (2021: 37.5¢ per share)
2022 Strategic Highlights
· Transforming Smith+Nephew with our 12-point plan to improve execution
and drive Strategy for Growth, focused on fixing Orthopaedics, improving
productivity, and accelerating growth in Advanced Wound Management and Sports
Medicine
o Good early progress including reducing overdue orders and improving
order fulfilment
· Continued cadence of new product launches contributing to growth
Outlook(1,2)
· For 2023, we are targeting:
o Underlying revenue growth expected in the range of 5.0% to 6.0% (5.0% to
6.0% reported)
o Trading profit margin expected to be at least 17.5%
· Midterm targets updated:
o Targeting 5%+ underlying revenue growth driven by return on innovation
investments and execution of 12-point plan; and
o Trading profit margin expansion to at least 20% in 2025 driven by
productivity improvements
Deepak Nath, Chief Executive Officer, said:
"We made good progress during 2022 and ended the year in a much stronger
position than we started. We continued to outperform in Sports Medicine &
ENT and Advanced Wound Management and, even though we are early in our work to
fix Orthopaedics, performance improved here too.
"With our 12-point plan, we are fundamentally changing the way Smith+Nephew
operates to drive higher growth and improve productivity. It is starting to
deliver, and, as we progress through the two-year life of the plan, we expect
further operational and financial benefits, including a reduction in inventory
levels and cash conversion to return to historic levels. We are benefiting
from our increased investment in innovation, with more than 60% of growth in
2022 coming from products launched in the last five years.
"We will continue to face macroeconomic headwinds in 2023. However, I believe
the drivers of further growth are in place, including leading technologies
across all three franchises and a clear path to improved execution in
Orthopaedics. We expect to deliver both faster revenue growth and margin
expansion in the coming year, and are setting a solid foundation for our
midterm ambitions as we transform to a consistently higher growth company."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's fourth quarter and full
year results will be held 8.30am GMT / 3.30am EST on 21 February 2023, details
of which can be found on the Smith+Nephew website at
https://www.smith-nephew.com/en/about-us/investors/financial-resources#quarterly-reporting
(https://www.smith-nephew.com/en/about-us/investors/financial-resources#quarterly-reporting)
.
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 2021 period.
'Underlying revenue growth' reconciles to reported revenue growth, the most
directly comparable financial measure calculated in accordance with IFRS, by
making two adjustments, the 'constant currency exchange effect' and the
'acquisitions and disposals effect', described below. See Other Information on
pages 32 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 32
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 2022 Results
Group revenue in 2022 was $5,215 million, an increase of 4.7% on an
underlying basis (reported growth of 0.1% after 460bps headwind from foreign
exchange primarily due to the strength of the US Dollar).
We exited the year with good momentum, with fourth quarter revenue up 6.8% on
an underlying basis (reported growth of 1.4% including a 540bps foreign
exchange headwind). All three global franchises contributed to this strong
finish to the year, and all accelerated revenue growth over the first nine
months.
Trading profit for 2022 was $901 million (2021: $936 million) with the trading
profit margin of 17.3% (2021: 18.0%) reflecting the higher inflation that
impacted the business across the year and the previously disclosed China
volume-based-procurement (VBP) programme. The operating profit was $450
million (2021: $593 million).
In July 2022 we announced our new 12-point plan to accelerate delivery of our
Strategy for Growth and realise our ambition to transform to a consistently
higher-growth company. We are making good progress embedding the plan and are
seeing early improvements. We also continued to launch innovative new products
to drive future growth.
Delivering our Strategy for Growth
Smith+Nephew's Strategy for Growth, announced in December 2021, is based on
three pillars.
· First, Strengthen the foundations of Smith+Nephew. A solid base in
commercial and manufacturing will enable us to serve customers sustainably and
efficiently, and deliver the best from our core portfolio.
· Second, Accelerate our growth profitably, through more robust
prioritisation of resources and investment, and with continuing customer
focus.
· Third, continue to Transform ourselves for higher long-term growth,
through investment in innovation and acquisitions.
The 12-point plan supports the first two pillars of the Strategy for Growth
and will improve business performance by maximising the opportunities we have
built, and addressing the challenges. Through the 12-point plan we are
fundamentally changing the way we operate and deliver results.
The 12-point plan is focused on:
· Fixing Orthopaedics, to regain momentum across hip and knee implants,
robotics and trauma, and win share with our differentiated technology;
· Improving productivity, to support trading profit margin expansion;
and
· Further accelerating growth in our already well-performing Advanced
Wound Management and Sports Medicine & ENT franchises.
Since July we have embedded the teams and structures to drive this work,
established internal KPIs to drive accountability, and have made meaningful
early progress in delivery. We expect to continue to accumulate operational
and financial benefits as we progress through the two-year life of the plan
during which we are changing how we approach our customers, overhauling our
supply chain, managing costs differently and driving better accountability.
Looking beyond the 12-point plan, from 2025 we will have strengthened our
foundations and we expect to be delivering a consistently higher level of
revenue growth. This step change in performance has been the goal of our
strategy and investments in recent years. This will provide a platform from
which we can make choices regarding future levels of investment to drive
growth and/or further margin expansion.
Fixing Orthopaedics
In recent years our Orthopaedics performance has been held back by poor
operational systems and commercial execution. Through the 12-point plan we are
focused on addressing these challenges, including improving logistics and
updating our demand and supply planning process to bring a deeper level of
specificity and collaboration between our operations and commercial teams.
Commercially, we are focused on winning share with our current portfolio
through greater focus on differentiated products and procedural innovations,
such as the robotics assisted CORI(◊) Surgical System and our OXINIUM(◊)
portfolio of hip and knee implants.
While there is still much work to be done, we are pleased with our progress,
including reducing our overdue orders by 35% from the peak in the first half
of the year and improving the percentage of customer orders that are
completely filled, measured by line-item fill rates (LIFR). In the US we have
made a significant step to move non-instrument set LIFR towards a more normal
industry level, with 16 percentage points of progress year-on-year.
Improving Productivity
The efficiency and productivity elements of the 12-point plan bring in a range
of actions across the areas of cost of goods from our Global Operations and
sales & marketing and general & administrative costs from our
commercial and corporate activities.
In our global operations we opened a new high technology orthopaedics
manufacturing facility in Malaysia. We also announced plans for a new Advanced
Wound Management facility in the UK. Further benefits are expected to come
from driving lean methodologies across our manufacturing operations and
pursuing opportunities for additional network optimisation reducing
overcapacity and direct procurement savings.
Areas of commercial opportunity include market exits from some structurally
unattractive markets, such as trauma in China which we exited in 2022, causing
a one-year headwind to growth but improving our value creation as a result. We
are targeting efficiencies across our commercial and corporate structures as
well as savings from indirect procurement and distribution.
In aggregate, the benefits from these actions are expected to result in more
than $200 million of annual savings by 2025. The work to finalise the
associated cost is ongoing and will be reported alongside our Q1 results on 26
April 2023.
Further accelerating growth in Advanced Wound Management and Sports Medicine
& ENT
Our Advanced Wound Management franchise has delivered above market performance
since 2021 following extensive work to improve commercial execution, and we
expect to build on this strong position going forward. Growth drivers include
the depth of our portfolio and extensive evidence-base. Both are
differentiators and we see significant opportunities for further growth,
particularly in Negative Pressure Wound Therapy, where we are focusing
resource under the 12-point plan.
Our Sports Medicine franchise has delivered above market growth consistently
for many years, building on our reputation for innovation and breadth of
portfolio. Many of the drivers for further growth are already in place. In
Sports Medicine, these include expanding both our REGENETEN(◊) biologics
platform into new indications and our technology leadership by adding
capability onto our surgical tower. For ENT, we have a favourably positioned
tonsil and adenoid business and are in the early stages of the roll out of our
unique Tula(◊) System for in-office delivery of ear tubes.
Transforming through Innovation
Our commitment to innovation is central to our Strategy for Growth Transform
pillar. More than 60% of revenue growth in 2022 came from products launched in
the last five years. In 2022 we continued to launch new products and invest
behind our R&D programme and clinical evidence to support future growth.
In Orthopaedics, we expanded our robotics-enabled CORI Surgical System by
bringing both cementless total knee and total hip arthroplasty onto the
platform. We also became the first company to receive FDA 510(k) clearance for
a revision knee indication using a robotics-assisted platform and completed
the first cases on CORI. Revisions account for around 10% of all knee
procedures in the US.
In Sports Medicine, we announced encouraging evidence supporting our REGENETEN
Bioinductive Implant, which delivered an 86% reduction in rotator cuff re-tear
rates at 12 months in interim results from a randomised controlled trial.
In Advanced Wound Management, we introduced the WOUND COMPASS(◊) Clinical
Support App, a digital support tool for healthcare professionals that helps
reduce practice variation. We also launched our DURAMAX(◊) S Silicon Super
Absorbent Dressing for high exuding wounds in Europe, where superabsorbers are
one of the fastest growing categories of dressings.
We continued to make acquisitions, bringing novel and disruptive technologies
into our portfolio. In January 2022 we acquired Engage Surgical, owner of the
only cementless partial knee system commercially available in the US. The
system will have an application on CORI in the future.
Finally, we made further investment behind medical education, including
opening of a new Smith+Nephew Academy in Singapore. Our Academies in the US,
Europe and now Asia Pacific, as well as our online resources, provide tens of
thousands of surgeons and nurses with opportunities to evaluate the latest
evidence, and learn innovative clinical techniques and effective use of our
products through hands-on and state-of-the-art digital interactive learning
experiences each year.
Supporting Net Zero
Our Strategy for Growth also embraces sustainability, and in 2022 we made
progress against our commitment to achieve net zero carbon emissions by 2045.
Our Scope 1 and Scope 2 greenhouse gas emissions were independently assured in
2022 and we have reported our 2021 baseline Scope 3 emissions for eight
categories. We are developing our Scope 3 emissions reduction roadmap in
preparation for submitting this to the Science Based Target Initiative (SBTi)
for validation.
Fourth Quarter 2022 Trading Update
Our fourth quarter revenue was $1,365 million (2021: $1,346 million), up 6.8%
on an underlying basis (reported revenue growth of 1.4% after 540bps foreign
exchange headwind). There were the same number of trading days as in the
comparable period (2022: 60 trading days).
Fourth Quarter Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2022 2021 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 549 552 -0.4 4.1 - -4.5
Knee Implants 234 232 0.6 5.5 - -4.9
Hip Implants 150 151 -0.2 4.9 - -5.1
Other Reconstruction((ii)) 26 25 3.5 7.7 - -4.2
Trauma & Extremities 139 144 -3.0 0.6 - -3.6
Sports Medicine & ENT 430 416 3.2 9.2 - -6.0
Sports Medicine Joint Repair 235 223 5.2 11.5 - -6.3
Arthroscopic Enabling Technologies 154 157 -1.7 4.2 - -5.9
ENT (Ear, Nose and Throat) 41 36 12.3 17.0 - -4.7
Advanced Wound Management 386 378 1.9 8.0 - -6.1
Advanced Wound Care 179 181 -1.1 7.9 - -9.0
Advanced Wound Bioactives 133 128 3.8 4.3 - -0.5
Advanced Wound Devices 74 69 6.6 14.9 - -8.3
Total 1,365 1,346 1.4 6.8 - -5.4
Consolidated revenue by geography
US 742 708 4.8 4.8 - -
Other Established Markets((iii)) 385 409 -5.8 7.3 - -13.1
Total Established Markets 1,127 1,117 0.9 5.7 - -4.8
Emerging Markets 238 229 3.6 12.1 - -8.5
Total 1,365 1,346 1.4 6.8 - -5.4
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
navigation business and cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
Fourth Quarter Franchise Performance
Orthopaedics
Our Orthopaedics franchise delivered revenue growth of 4.1% underlying (-0.4%
reported) in the quarter. Excluding China, where growth continued to be
impacted by the implementation of the previously disclosed hip and knee VBP
programme, Orthopaedics grew by 5.3% underlying. This headwind to growth from
VBP will continue until Q2 2023.
Knee Implants grew 5.5% (0.6% reported) and Hip Implants returned to growth,
up 4.9% underlying (-0.2% reported). Knee performance was led by our JOURNEY
II(◊) knee system, and our new cementless total knee LEGION CONCELOC(◊)
continued to build momentum as we extended the launch to new customers. Hip
growth was led by our POLAR3(◊) Total Hip Solution and OR3O(◊) Dual
Mobility Hip System. Other Reconstruction revenue was up 7.7% underlying (3.5%
reported) although component supply constraints continued to impact this
segment. Trauma & Extremities delivered its first quarter of growth in
2022, with revenue up 0.6% underlying (-3.0% reported) despite the continuing
headwind from our decision not to participate in the broader roll-out of
provincial trauma tenders in China.
Sports Medicine & ENT
Our Sports Medicine & ENT franchise delivered underlying revenue growth of
9.2% (3.2% reported) in the quarter.
Within this, Sports Medicine Joint Repair delivered 11.5% underlying revenue
growth (5.2% reported) with double-digit growth from both our knee and
shoulder repair portfolios. Arthroscopic Enabling Technologies revenue was
up 4.2% underlying (-1.7% reported), representing improved performance on
recent quarters driven by double-digit growth from our COBLATION(◊)
resection range. Revenue from ENT was up 17.0% underlying (12.3% reported)
driven by our tonsil and adenoid business.
Advanced Wound Management
Our Advanced Wound Management franchise delivered underlying revenue growth of
8.0% (1.9% reported).
Advanced Wound Care revenue was up 7.9% underlying (-1.1% reported) with
growth coming from across product categories. Advanced Wound Bioactives
revenue was up 4.3% underlying (3.8% reported), with sustained good growth
from our skin substitutes portfolio. Advanced Wound Devices revenue was up
14.9% underlying (6.6% reported) driven by strong double-digit growth from our
PICO(◊) Single Use Negative Pressure Wound Therapy System.
Fourth Quarter Geographic Performance
Geographically, revenue from our Established Markets was up 5.7% (0.9%
reported). Within this, the US was up 4.8% underlying (4.8% reported) and
Other Established Markets was up 7.3% underlying against a weak comparable
period (-5.8% reported). Emerging Markets revenue was up 12.1% underlying
(3.6% reported).
Full Year 2022 Consolidated Analysis
Smith+Nephew results for the year ended 31 December 2022:
Reported
2022 2021 growth
$m $m %
Revenue 5,215 5,212 0.1
Operating profit 450 593
Acquisition and disposal related items 4 7
Restructuring and rationalisation costs 167 113
Amortisation and impairment of acquisition intangibles 205 172
Legal and other 75 51
Trading profit((i)) 901 936 -4
¢ ¢
Earnings per share ('EPS') 25.5 59.8 -57
Acquisition and disposal related items 15.1 (8.8)
Restructuring and rationalisation costs 15.8 10.3
Amortisation and impairment of acquisition intangibles 18.4 15.4
Legal and other 7.0 4.2
Adjusted Earnings per share ('EPSA')((i)) 81.8 80.9 1
(i) See Other Information on pages 32 to 36
Full Year 2022 Analysis
Our full year revenue was $5,215 million (2021: $5,212 million), up 4.7% on an
underlying basis. Reported growth was 0.1% including a foreign exchange
headwind of 460bps.
The reported gross profit was $3,675 million (2021: $3,669 million) with gross
margin 70.5% (2021: 70.4%). Operating profit was $450 million (2021: $593
million) after acquisition and disposal related items, restructuring and
rationalisation costs, amortisation and impairment of acquisition intangibles
and legal and other items (see Other Information on pages 32 to 36).
Trading profit was $901 million (2021: $936 million), with a trading profit
margin of 17.3% (2021: 18.0%). The margin decline reflects higher inflation in
freight and logistics, the impact of China VBP, as well as sales and marketing
expenditure levels returning to more normal levels (see Note 2 to the
Financial Statements for global franchise trading profit).
Restructuring costs, primarily related to the Operations and Commercial
Excellence programme and the other efficiency and productivity work underway,
totalled $167 million, with incremental benefits recognised of around $80
million.
Cash generated from operations was $581 million (2021: $1,048 million) and
trading cash flow was $444 million (2021: $828 million). This reflected
adverse working capital movements driven primarily by inventory, and capital
expenditure which included progressing changes to our manufacturing network.
Inventory included strategic raw material buys, as part of managing disruption
to certain global raw material and component supply, inflation raising the
average value of our inventory, and increased inventory to support growth
including new product launches, safety stock, or in markets where we expect
growth acceleration (see Other Information on pages 32 to 36 for a
reconciliation between cash generated from operations and trading cash flow).
As a result of the working capital movement, the trading profit to cash
conversion ratio deteriorated to 49% (2021: 88%). We expect a reduction in
inventory levels, and for cash conversion to return to historic levels, as we
deliver the 12-point plan.
The net interest charge within reported results was $66 million (2021: $74
million) which reflects higher interest on cash deposits and the maturity of
private placement debt in both 2022 and 2021. In 2022 the Group repaid its
€269 million, €223 million, and €265 million EUR term loan facilities.
Additionally, $125 million of private placement debt matured in 2022. The
repayment of the EUR term loan facilities was in part financed by the issuance
of a debut EUR seven-year Corporate Bond (€500 million at 4.565%) in October
2022. The Group's net debt, excluding lease liabilities, at 31 December 2022
was $2,339 million (see Note 7 to the Financial Statements) with committed
facilities of $3.7 billion.
Included within share of results of associates is an impairment charge of $109
million (2021: $nil) related to the Group's interest in Bioventus primarily
due to a significant decrease in its share price (see Note 3 to the Financial
Statements for further detail). In 2021 a $75 million gain on disposal of
interest in associate was recorded resulting from two dilution gains in the
Group's interest in Bioventus. Both the impairment charge and dilution gain
are excluded from trading results (see Other Information on pages 32 to 36 for
further detail).
Reported tax for the year to 31 December 2022 was a charge of $12 million
(2021: charge of $62 million) with the low charge being attributed to tax
credits on significant non-trading items such as the Bioventus impairment and
amortisation of acquisition intangibles. The tax rate on trading results for
the year to 31 December 2022 was 16.3% (2021: 17.2%) and this is lower than
guided due to adjustments in respect of prior periods (See Note 4 to the
Financial Statements and Other Information on pages 32 to 36 for further
details on taxation).
Adjusted earnings per share ('EPSA') was 81.8¢ (163.6¢ per ADS) (2021:
80.9¢). Basic earnings per share ('EPS') was 25.5¢ (51.0¢ per ADS) (2021:
59.8¢), reflecting restructuring costs, acquisition and disposal related
items, amortisation and impairment of acquisition intangibles and legal and
other items incurred.
Share Buyback
In December 2021 we announced an updated capital allocation policy to
prioritise the use of cash. The 2022 share buyback programme commenced on 23
February 2022 and $150 million was completed by 12 August 2022. As
macroeconomic conditions continued to be uncertain, including higher
inflation, the Board decided it was prudent to delay further buybacks until
conditions improved. We remain committed to returning surplus cash to
shareholders over time.
Dividend
The Board is recommending a Final Dividend of 23.1¢ per share (46.2¢ per
ADS) (2021: 23.1¢ per share). 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 2021. Subject to confirmation at our
Annual General Meeting, the Final Dividend will be paid on 17 May 2023 to
shareholders on the register at the close of business on 31 March 2023.
Outlook
The Group is today providing guidance for 2023 and updated midterm targets.
2023 Guidance
For 2023 we are targeting both revenue growth and trading profit margin above
2022 levels.
For revenue, we expect to deliver underlying revenue growth in the range of
5.0% to 6.0%. Within this, we expect continued strong growth from our Sports
Medicine & ENT and Advanced Wound Management franchises, and further
improvement in Orthopaedics as we continue to execute on the 12-point plan. On
a reported basis the guidance equates to a range of around 5.0% to 6.0% based
on exchange rates prevailing on 13 February 2023.
In terms of phasing, we expect the first quarter to be impacted by the renewed
Covid waves in China reducing surgical-volumes, as well as the continuing
headwind of VBP in Orthopaedics. We expect the business to accelerate from the
second quarter for the remainder of the year.
For trading profit margin, we expect to deliver at least 17.5% as the positive
operating leverage from revenue growth, productivity improvements and the
early benefits of our cost saving initiatives more than offset continuing
macroeconomic headwinds from raw material cost inflation, higher wages and a
100bps headwind from transactional foreign exchange.
The tax rate on trading results for 2023 is forecast to be around 19% subject
to any material changes to tax law or other one-off items.
Midterm targets
For the midterm, the Group is focused on consistently delivering higher
revenue growth while also expanding its trading profit margin.
Today we are updating our midterm targets, previously announced in December
2021, to reflect both our confidence in revenue growth and the actions
underway to offset the current macroeconomic pressures and drive performance.
We are now targeting underlying revenue growth consistently 5%+ (previously
4-6%), driven by return on innovation investments and execution of the
12-point plan, and trading profit margin expansion to at least 20% in 2025,
driven by productivity improvements (previously 21% in 2024).
Forward calendar
The Q1 Trading Report will be released on 26 April 2023.
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 19,000 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 2022. 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
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(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
and financial 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 cybersecurity; disruptions due to natural
disasters, weather and climate change related events; changes in customer and
other stakeholder sustainability expectations; changes in taxation
regulations; effects of foreign exchange volatility; 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, which is
available on the SEC's website at www. sec.gov, 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 in US Patent and
Trademark Office.
Full Year Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2022 2021 growth Growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 2,113 2,156 -2.0 1.9 - -3.9
Knee Implants 899 876 2.5 6.8 - -4.3
Hip Implants 584 612 -4.4 -0.2 - -4.2
Other Reconstruction((ii)) 87 92 -5.6 -1.8 - -3.8
Trauma & Extremities 543 576 -5.7 -2.6 - -3.1
Sports Medicine & ENT 1,590 1,560 1.9 6.7 - -4.8
Sports Medicine Joint Repair 870 839 3.6 8.7 - -5.1
Arthroscopic Enabling Technologies 567 590 -3.8 0.9 - -4.7
ENT (Ear, Nose and Throat) 153 131 17.1 20.4 - -3.3
Advanced Wound Management 1,512 1,496 1.1 6.4 - -5.3
Advanced Wound Care 712 731 -2.6 5.2 - -7.8
Advanced Wound Bioactives 520 496 4.9 5.4 - -0.5
Advanced Wound Devices 280 269 4.3 11.6 - -7.3
Total 5,215 5,212 0.1 4.7 - -4.6
Consolidated revenue by geography
US 2,764 2,658 4.0 4.0 - -
Other Established Markets((iii)) 1,504 1,638 -8.2 3.3 - -11.5
Total Established Markets 4,268 4,296 -0.7 3.7 - -4.4
Emerging Markets 947 916 3.5 9.1 - -5.6
Total 5,215 5,212 0.1 4.7 - -4.6
(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
2022 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Group Income Statement for the year ended 31 December 2022
2022 2021
Notes $m $m
Revenue 2 5,215 5,212
Cost of goods sold (1,540) (1,543)
Gross profit 3,675 3,669
Selling, general and administrative expenses (2,880) (2,720)
Research and development expenses (345) (356)
Operating profit 2 450 593
Interest income 14 6
Interest expense (80) (80)
Other finance costs (8) (17)
Share of results of associates 3 (141) 9
Gain on disposal of interest in associate 3 - 75
Profit before taxation 235 586
Taxation 4 (12) (62)
Attributable profit(A) 223 524
Earnings per share(A)
Basic 25.5¢ 59.8¢
Diluted 25.5¢ 59.7¢
Group Statement of Comprehensive Income for the year ended 31 December 2022
2022 2021
$m $m
Attributable profit(A) 223 524
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 30 79
Taxation on other comprehensive income (7) (22)
Total items that will not be reclassified to income statement 23 57
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (102) (53)
Net (gains)/losses on cash flow hedges (13) 41
Taxation on other comprehensive income 2 (5)
Total items that may be reclassified subsequently to income statement (113) (17)
Other comprehensive (loss)/income for the year, net of taxation (90) 40
Total comprehensive income for the year(A) 133 564
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Group Balance Sheet as at 31 December 2022
2022 2021
Notes $m $m
ASSETS
Non-current assets
Property, plant and equipment 1,455 1,513
Goodwill 3,031 2,989
Intangible assets 1,236 1,398
Investments 12 10
Investment in associates 46 188
Other non-current assets 12 15
Retirement benefit assets 141 182
Deferred tax assets 177 201
6,110 6,496
Current assets
Inventories 2,205 1,844
Trade and other receivables 1,264 1,184
Current tax receivable 37 106
Cash at bank 7 350 1,290
3,856 4,424
TOTAL ASSETS 9,966 10,920
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 175 177
Share premium 615 614
Capital redemption reserve 20 18
Treasury shares (118) (120)
Other reserves (459) (346)
Retained earnings 5,026 5,225
Total equity 5,259 5,568
Non-current liabilities
Long-term borrowings and lease liabilities 7 2,712 2,848
Retirement benefit obligations 70 127
Other payables 90 67
Provisions 84 35
Deferred tax liabilities 36 144
2,992 3,221
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 7 160 491
Trade and other payables 1,098 1,096
Provisions 243 322
Current tax payable 214 222
1,715 2,131
Total liabilities 4,707 5,352
TOTAL EQUITY AND LIABILITIES 9,966 10,920
Condensed Group Cash Flow Statement for the year ended 31 December 2022
2022 2021
$m $m
Cash flows from operating activities
Profit before taxation 235 586
Net interest expense 66 74
Depreciation, amortisation and impairment 628 581
Share of results of associates 141 (9)
Gain on disposal of interest in associate - (75)
Share-based payments expense (equity-settled) 40 41
Net movement in post-retirement obligations 6 -
Movement in working capital and provisions (535) (150)
Cash generated from operations 581 1,048
Net interest and finance costs paid (66) (74)
Income taxes paid (47) (97)
Net cash inflow from operating activities 468 877
Cash flows from investing activities
Acquisitions, net of cash acquired (113) (285)
Capital expenditure (358) (408)
Purchase of investments (2) (2)
Distribution from associate 1 4
Net cash used in investing activities (472) (691)
Net cash (outflow)/inflow before financing activities (4) 186
Cash flows from financing activities
Proceeds from issue of ordinary share capital 1 2
Proceeds from own shares 5 12
Purchase of own shares (158) -
Payment of capital element of lease liabilities (54) (59)
Equity dividends paid (327) (329)
Cash movements in borrowings (396) (267)
Settlement of currency swaps 3 (4)
Net cash used in financing activities (926) (645)
Net decrease in cash and cash equivalents (930) (459)
Cash and cash equivalents at beginning of year 1,285 1,751
Exchange adjustments (11) (7)
Cash and cash equivalents at end of year(B) 344 1,285
B Cash and cash equivalents at the end of the period are net of bank
overdrafts of $6m (2021: $5m).
Group Statement of Changes in Equity for the year ended 31 December 2022
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 2022 177 614 18 (120) (346) 5,225 5,568
Attributable profit(A) - - - - - 223 223
Other comprehensive income(A) - - - - (113) 23 (90)
Equity dividends paid - - - - - (327) (327)
Share-based payments recognised - - - - - 40 40
Taxation on share-based payments - - - - - (3) (3)
Purchase of own shares(C) - - - (158) - - (158)
Cost of shares transferred to beneficiaries - - - 31 - (26) 5
Cancellation of treasury shares(C) (2) - 2 129 - (129) -
Issue of ordinary share capital - 1 - - - - 1
At 31 December 2022 175 615 20 (118) (459) 5,026 5,259
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
A Attributable to the equity holders of the parent and wholly derived from
continuing operations.
C During the year ended 31 December 2022 a total of 10.1m ordinary
shares were purchased at a cost of $158m and 7.8m ordinary shares were
cancelled (2021: no ordinary shares were purchased or 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 2021. 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 2022. 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 2021.
The uncertainties as to the future impact on the financial performance and
cash flows of the Group as a result of the current challenging economic
environment have 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 a period of at least 12 months from
the date of approval of these financial statements. Having carefully reviewed
those forecasts, the Directors concluded that it was appropriate to adopt the
going concern basis of accounting in preparing these financial statements for
the reasons set out below.
The Group had access to $344m of cash and cash equivalents at 31 December
2022. The Group's net debt, excluding lease liabilities, at 31 December 2022
was $2,339m with access to committed facilities of $3.7bn with an average
maturity of 5.1 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 $105m of private placement debt due for repayment in 2023.
$1,160m of private placement debt is subject to financial covenants. The
principal covenant on the private placement debt is a leverage ratio of
<3.5 which is measured on a rolling 12-month basis at half year and year
end. There are no financial covenants in any of the Group's other facilities.
The Directors have considered various scenarios in assessing the impact of the
economic environment on future financial performance and cash flows, with the
key judgement applied being the speed and sustainability of the return to a
normal volume of elective procedures in key markets, including the impact of a
significant global economic recession, leading to lower healthcare spending
across both public and private systems. 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 a period of at least 12 months from the date of the approval of
the financial statements. The financial statements have therefore been
prepared on a going concern basis.
Accordingly, the Directors continue to adopt the going concern basis (in
accordance with the guidance 'Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting' issued by the FRC) in preparing
these financial statements.
The principal risks that the Group is exposed to will be disclosed in the
Group's 2022 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.
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 2022 or 2021 but is derived
from those accounts. Statutory accounts for 2021 have been delivered to the
registrar of companies and those for 2022 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 2022
A number of new amendments to standards are effective from 1 January 2022 but
they do not have a material effect on the Group's financial statements.
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 2022 and earlier application is permitted;
however, the Group has not early adopted them in preparing these financial
statements.
Critical judgements and estimates
The Group prepares its financial statements in accordance with IFRS as issued
by the IASB and IFRS adopted in the UK, the application of which often
requires judgements and estimates to be made by management when formulating
the Group's financial position and results. Under IFRS, the Directors are
required to adopt those accounting policies most appropriate to the
Group's circumstances for the purpose of presenting fairly the Group's
financial position, financial performance and cash flows. The Group's
accounting policies do not include any critical judgements. The Group's
accounting policies are set out in Notes 1-23 of the Notes to the Group
accounts. Of those, the policies which require the most use of management's
estimation are outlined below. The critical estimates are consistent with 31
December 2021. Management have considered the impact of the uncertainties
around the current challenging economic environment 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.
Current economic environment impact assessment: In assessing the increase in
provision for excess and obsolete inventory, management have considered the
impact of higher input cost inflation on increased inventory levels.
Management have not changed their accounting policy since 31 December 2021,
nor is a change in the key assumptions underlying the methodology expected in
the next 12 months. Primarily due to inventory growth, the provision has
increased from $430m at 31 December 2021 to $504m at 31 December 2022. The
provision for excess and obsolete inventory is not considered to have a range
of potential outcomes that is significantly different to the $504m at 31
December 2022 in the next 12 months. The provision has a high degree of
estimation uncertainty given the range of products and sizes, with a potential
range of reasonable outcomes that could be material over the longer term.
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 2023 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.
Current economic environment impact assessment: Management considered whether
there had been any changes to the number and value of claims due to current
challenging economic environment and to date have not identified any
significant changes in trends. If the experience changes in the future, the
value of provisions may require adjustment.
Impairment
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. There has been a decrease in the level of headroom
in relation to goodwill impairment testing for the Orthopaedics CGU which is
sensitive to a reasonably possible change in assumptions. For other intangible
assets and goodwill CGUs, this critical estimate is not considered to have a
significant risk of material adjustment in 2023 or thereafter based on
sensitivity analyses undertaken (as outlined below).
Current economic environment impact assessment: Management have assessed the
non-current assets held by the Group at 31 December 2022 to identify any
indicators of impairment as a result of current economic environment. 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. Impairments of $39m, related to immaterial product
intangible assets, were identified as a result of the impairment reviews
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 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.
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:
2022 2021
$m $m
Segment revenue
Orthopaedics 2,113 2,156
Sports Medicine & ENT 1,590 1,560
Advanced Wound Management 1,512 1,496
Revenue from external customers 5,215 5,212
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by product
franchise:
2022 2021
$m $m
Knee Implants 899 876
Hip Implants 584 612
Other Reconstruction 87 92
Trauma & Extremities 543 576
Orthopaedics 2,113 2,156
Sports Medicine Joint Repair 870 839
Arthroscopic Enabling Technologies 567 590
ENT (Ear, Nose & Throat) 153 131
Sports Medicine & ENT 1,590 1,560
Advanced Wound Care 712 731
Advanced Wound Bioactives 520 496
Advanced Wound Devices 280 269
Advanced Wound Management 1,512 1,496
Total 5,215 5,212
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 product 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.
2022 2021
Established Markets ((D)) Emerging Markets Total Established Markets ((D)) Emerging Markets Total
$m $m $m $m $m $m
Orthopaedics, Sports Medicine & ENT 2,949 754 3,703 2,969 747 3,716
Advanced Wound Management 1,319 193 1,512 1,327 169 1,496
Total 4,268 947 5,215 4,296 916 5,212
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 $2,764m (2021: $2,658m), China revenue for the year was $319m (2021:
$352m) and UK revenue for the year was $186m (2021: $189m).
No single 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; significant restructuring programmes;
amortisation and impairment of acquisition intangibles; gains and losses
arising from legal disputes; and other significant items.
Segment trading profit is reconciled to the statutory measure below:
2022 2021
$m $m
Segment profit
Orthopaedics 383 367
Sports Medicine & ENT 472 459
Advanced Wound Management 436 474
Segment trading profit 1,291 1,300
Corporate costs (390) (364)
Group trading profit 901 936
Acquisition and disposal related items (4) (7)
Restructuring and rationalisation expenses (167) (113)
Amortisation and impairment of acquisition intangibles (205) (172)
Legal and other (75) (51)
Group operating profit 450 593
Acquisition and disposal related items
For the year to 31 December 2022, costs primarily relate to the acquisition of
Engage 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 2021, costs primarily relate to the acquisition of
Extremity Orthopaedics business of Integra LifeSciences Holdings Corporation
and prior year acquisitions, partially offset by credits relating to
remeasurement of contingent consideration for prior year acquisitions.
Restructuring and rationalisation costs
For the year ended 31 December 2022, these costs include efficiency and
productivity elements of the 12-point plan.
For the years ended 31 December 2022 and 2021, these costs also relate to the
Operations and Commercial Excellence programme. For the year ended 31 December
2021, the costs also include the implementation of the Accelerating
Performance and Execution (APEX) programme that was announced in February
2018.
Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2022 and 2021 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 2022 charges primarily relate to legal expenses
for ongoing metal-on-metal hip claims and an increase of $19m in the provision
that reflects the present value of the estimated costs to resolve all other
known and anticipated metal-on-metal hip claims. These charges in the year to
31 December 2022 were partially offset by a credit of $7m relating to
insurance recoveries for ongoing metal-on-metal hip claims.
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.
The years ended 31 December 2022 and 2021 also include costs for implementing
the requirements of the EU Medical Device Regulation which came into effect in
May 2021 with a transition period to May 2024.
3. Investments in associates
Since its IPO in February 2021, Bioventus's trading share price has decreased
significantly and the company has disclosed a substantial doubt about their
ability to continue as a going concern. Given these impairment indicators,
management
performed an impairment review by comparing the fair value of Bioventus using
its market share price of $2.61 as at 30 December 2022 less costs of disposal
to its carrying amount and concluded that an impairment loss of $109m should
be charged (2021: $nil).
For the year ended 31 December 2021 a $75m gain on disposal of interest in
associate was recorded, resulting from the dilution gains which arose during
the year due to the Bioventus IPO and their acquisition of Misonix, Inc.
4. Taxation
Reported tax for the year to 31 December 2022 was a charge of $12m (2021:
$62m). The reported tax charge is low due to tax credits on significant
non-trading items such as the Bioventus impairment and amortisation of
acquisition intangibles.
OECD BEPS 2.0 - Pillar Two
The OECD Pillar Two Globe Rules introduce a global minimum corporate tax rate
of 15% applicable to multinational enterprise (MNE) groups with global revenue
over €750m. All participating OECD members are required to incorporate these
rules into national legislation. On 2 February 2023 the OECD published its
Agreed Administrative Guidance for the Pillar Two Globe Rules providing
greater detail on the application of the rules. The Group will be subject to
the Pillar Two Globe Rules which is likely to result in an increase in our
Group tax rate from 2024 onwards. The Group does not meet the threshold for
application of the Pillar One transfer pricing rules.
5. Dividends
The 2021 final dividend of 23.1 US cents per ordinary share totalling $202m
was paid on 11 May 2022. The 2022 interim dividend of 14.4 US cents per
ordinary share totalling $125m was paid on 26 October 2022.
A final dividend for 2022 of 23.1 US cents per ordinary share has been
proposed by the Board and will be paid, subject to shareholder approval, on 17
May 2023 to shareholders whose names appear on the Register of Members on 31
March 2023 (the record date). The sterling equivalent per ordinary share will
be set following the record date. The ex-dividend date is 30 March 2023 and
the final day for currency and dividend reinvestment plan ('DRIP') elections
is 24 April 2023.
6. Acquisitions
Year ended 31 December 2022
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.
The maximum consideration, all payable in cash, is $135m and the provisional
fair value consideration is $131m and includes $32m of contingent
consideration. The goodwill represents 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
The fair value of assets acquired and liabilities assumed are set out below:
Engage Surgical
$m
Intangible assets - Product-related 44
Property, plant & equipment 2
Inventory 2
Trade and other payables (1)
Net assets 47
Goodwill 84
Consideration (net of $nil cash acquired) 131
The product-related intangible assets were valued using a relief-from-royalty
methodology with the key inputs being revenue, profit and discount rate. The
cash outflow from acquisitions of $113m (2021: $285m) comprises payments of
consideration of $89m (2021: $236m) relating to acquisitions in the current
period and payments of deferred and contingent consideration of $24m
(2021: $49m) relating to acquisitions completed in prior periods.
The carrying value of goodwill increased from $2,989m at 31 December 2021 to
$3,031m at 31 December 2022. The acquisition in the year ended 31 December
2022 increased goodwill by $84m, this was partially offset by foreign exchange
movements of $42m.
For the year ended 31 December 2022 the contribution from Engage Surgical to
revenue 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 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.
For the year ended 31 December 2021, the contribution to revenue from
Extremity Orthopaedics was $82m and to profit was immaterial. If the business
combinations had occurred at the beginning of the year, the contribution to
revenue and profit would not have been materially different.
7. Net debt
Net debt as at 31 December 2022 is outlined below. The repayment of lease
liabilities is included in cash flows from financing activities in the cash
flow statement.
2022 2021
$m $m
Cash at bank 350 1,290
Long-term borrowings (2,565) (2,707)
Bank overdrafts, borrowings and loans due within one year (111) (435)
Net interest rate swap liability (13) -
Net debt (2,339) (1,852)
Non-current lease liabilities (147) (141)
Current lease liabilities (49) (56)
Net debt including lease liabilities (2,535) (2,049)
Reconciliation of net cash flow to movement in net debt including lease
liabilities
Net cash flow from cash net of overdrafts (930) (459)
Settlement of currency swaps (3) 4
Net cash flow from borrowings 396 267
Change in net debt from net cash flow (537) (188)
IFRS 16 lease liabilities 1 7
Exchange adjustment 47 59
Corporate bond issuance expense 3 (1)
Change in net debt in the year (486) (123)
Opening net debt (2,049) (1,926)
Closing net debt (2,535) (2,049)
The Group has available committed facilities of $3.7bn (2021: $4.1bn). During
2022, the Group issued its debut EUR Corporate Bond, in the form of a €500m
(before expenses and underwriting discounts) of notes bearing an interest
rate of 4.565% repayable in 2029. In addition, the Group repaid its €269m,
€223m and €265m EUR term loan facilities, as well as $125m of private
placement debt.
The Group has $105m of private placement debt due for repayment in the second
half of 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
2022 2021 2022 2021 Fair value
$m $m $m $m level
Financial assets at fair value
Forward foreign exchange contacts 46 37 46 37 Level 2
Investments 12 10 12 10 Level 3
Contingent consideration receivable 18 20 18 20 Level 3
Currency swaps 1 2 1 2 Level 2
77 69 77 69
Financial assets not measured at fair value
Trade and other receivables 1,123 1,046
Cash at bank 350 1,290
1,473 2,336
Total financial assets 1,550 2,405
Financial liabilities at fair value
Acquisition consideration (78) (84) (78) (84) Level 3
Forward foreign exchange contracts (42) (17) (42) (17) Level 2
Currency swaps (1) (2) (1) (2) Level 2
Interest rate swaps (13) - (13) - Level 2
(134) (103) (134) (103)
Financial liabilities not measured at fair value
Acquisition consideration (14) (7)
Bank overdrafts (6) (5)
Bank loans - (859)
Corporate bond not in a hedge relationship (994) (993)
Corporate bond in a hedge relationship (516) -
Private placement debt not in a hedge relationship (1,160) (1,285)
Trade and other payables (1,040) (1,053)
(3,730) (4,202)
Total financial liabilities (3,864) (4,305)
At 31 December 2022, the book value and market value of the USD corporate bond
were $994m and $783m respectively (2021: $993m and $962m), the book value
and market value of the EUR Corporate bond were $516m and $531m respectively.
The book value and fair value of the private placement debt were $1,160m and
$987m respectively (2021: $1,285m and $1,316m).
There were no transfers between Levels 1, 2 and 3 during the year ended 31
December 2022 and the year ended 31 December 2021. 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
bonds issued in October 2020 and October 2022 are 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 2022 and the year
ended 31 December 2021 for financial instruments measured using Level 3
valuation methods are presented below:
2022 2021
$m $m
Investments
At 1 January 10 9
Additions 2 2
Fair value remeasurement - (1)
12 10
Contingent consideration receivable
At 1 January 20 37
Remeasurements - 1
Receipts (2) (18)
18 20
Acquisition consideration liability
At 1 January (84) (128)
Arising on acquisitions (32) -
Payments 20 23
Remeasurements 19 21
Discount unwind (1) -
(78) (84)
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 2021 by 290bps to 4.8% and 260bps to 5.3% respectively. This
gain was accompanied by a remeasurement loss from 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:
2022 2021
Average rates
Sterling 1.23 1.38
Euro 1.05 1.18
Swiss Franc 1.05 1.09
Period end rates
Sterling 1.21 1.35
Euro 1.07 1.13
Swiss Franc 1.08 1.10
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, trading profit before tax, adjusted attributable profit, tax
rate on trading results (trading tax expressed as a percentage of trading
profit before tax), 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
2022 2021 growth growth & disposals impact
$m $m % % % %
Segment revenue
Orthopaedics 2,113 2,156 (2.0) 1.9 - (3.9)
Sports Medicine & ENT 1,590 1,560 1.9 6.7 - (4.8)
Advanced Wound Management 1,512 1,496 1.1 6.4 - (5.3)
Revenue from external customers 5,215 5,212 0.1 4.7 - (4.6)
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, the most directly comparable IFRS measures, 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 ¢
2022 Reported 5,215 450 235 (12) 223 581 25.5
Acquisition and disposal related items - 4 162 (31) 131 22 15.1
Restructuring and rationalisation costs - 167 168 (30) 138 120 15.8
Amortisation and impairment of acquisition intangibles - 205 205 (45) 160 - 18.4
Legal and other(7) - 75 82 (21) 61 133 7.0
Lease liability payments - - - - - (54) -
Capital expenditure - - - - - (358) -
2022 Adjusted 5,215 901 852 (139) 713 444 81.8
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1 ) tax(2 ) Taxation(3 ) profit(4 ) operations(5 ) per share(6 )
$m $m $m $m $m $m ¢
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
(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 2022, costs primarily relate to the acquisition of
Engage 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 losses of $158m
related to the Group's shareholding in Bioventus. This primarily relates to an
impairment charge of $109m and the Group's share of impairment recognised by
Bioventus in its financial statements.
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.
Restructuring and rationalisation costs
For the year ended 31 December 2022 these costs include efficiency and
productivity elements of the 12-point plan. For the years ended 31 December
2022 and 31 December 2021, these costs also relate to the Operations and
Commercial Excellence programme announced in February 2020. For the year ended
31 December 2021 the costs also include the implementation of the Accelerating
Performance and Execution (APEX) programme that was announced in February
2018.
For the year ended 31 December 2022 adjusted profit before tax additionally
excludes $1m of restructuring costs related to the Group's share of results of
associates.
Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2022 and 2021 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 2022, charges primarily relate to legal
expenses for ongoing metal-on-metal hip claims and an increase of $19m in the
provision that reflects the present value of the estimated costs to resolve
all other known and anticipated metal-on-metal hip claims. These charges in
the year to 31 December 2022 were partially offset by a credit of $7m relating
to insurance recoveries for ongoing metal-on-metal hip claims.
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 years ended 31 December 2022 and 2021 charges also include the costs
for implementing the requirements of the EU Medical Device Regulation that was
effective from May 2021 with a transition period to May 2024.
For the year ended 31 December 2021 trading cash flow additionally excludes
$7m of cash funding to closed defined benefit 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.
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 and impairment of property,
plant and equipment and amortisation and impairment of other intangible
assets. The calculation of the leverage ratio is set out below:
2022 2021
$m $m
Net debt including lease liabilities 2,535 2,049
Trading profit 901 936
Depreciation of property, plant and equipment 319 326
Amortisation of other intangible assets 56 65
Impairment of property, plant and equipment(1) 30 -
Impairment of other intangible assets(1) 7 -
Adjustment for items already excluded from trading profit (31) (11)
Adjusted EBITDA 1,282 1,316
Leverage ratio (x) 2.0 1.6
(1) Impairments in 2021 were immaterial and did not impact the leverage ratio.
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