Half-year Report - Part 2
28/07/2016 07:01
- Part 2: For the preceding part double click ID:nRSb4532Fa
(110)
Trading profitD 483 512
Non-trading itemsD (126) (73)
Operating profit 357 439
D The above financial measures are not prepared in accordance with IFRS. The reconciliation to the most directly comparable financial measures calculated in accordance with IFRS is presented in Note 8.
Underlying Acquisitions Currency Reported
growth & disposals impact growth
% % % %
Half Year
Revenue growth 3 1 (2) 2
Trading profit growth (3) (1) (2) (6)
Further description of why the ExCo focuses on the underlying revenue growth and trading measures, and how this reconciles to operating profit, is detailed in Note 8.
2b. The following table shows Group revenue by product franchise:
Half year Half year
2016 2015
$m $m
Sports Medicine, Trauma & Other 955 923
Sports Medicine Joint RepairE 288 266
Arthroscopic Enabling TechnologiesE 316 310
Trauma & Extremities 233 248
Other Surgical Businesses 118 99
Reconstruction 778 734
Knee Implants 472 430
Hip Implants 306 304
Advanced Wound Management 595 615
Advanced Wound Care 348 371
Advanced Wound Bioactives 165 164
Advanced Wound Devices 82 80
Total 2,328 2,272
E Included within the HY 2015 analysis is a reclassification of $28 million of product sales formerly included in the Sports Medicine Joint Repair franchise which have now been included in the Arthroscopic Enabling Technologies franchise in order to present consistent analysis to the HY 2016 results.
2c. The following table shows Group revenue by geographic area, including material countries. Sales are attributed to the country in which the entity that made the sale legally resides. No individual customer comprises more than 10% of the Group's external sales.
Half year Half year
2016 2015
$m $m
Revenue by geographic market
US 1,145 1,059
Other Established MarketsF 850 848
Emerging Markets 333 365
Total 2,328 2,272
F Other Established Markets comprises Australia, Canada, Europe, Japan and New Zealand. UK revenue for the half year was $138 million (2015: $141 million).
3. Taxation
The tax rate on Trading results for the 2016 half year was 26.3% (2015: 27.2%). The reported tax rate for the 2016 half year was 26.3% (2015: 28.2%). Details of the reconciliation between Trading results and reported results are set out in Note 8.
4. Dividends
The 2015 final dividend totalling $170 million was paid on 11 May 2016. The Interim Dividend of 2016 of 12.3 US cents per ordinary share was declared by the Board on 28 July 2016. This dividend is payable on 25 October 2016 to shareholders whose names
appear on the register at the close of business on 7 October 2016. The sterling equivalent per ordinary share will be set following the record date. Shareholders may elect to receive their dividend in either Sterling or US Dollars and the last day for
election will be 7 October 2016. Shareholders may participate in the dividend re-investment plan and elections must be made by 7 October 2016.
5. Acquisitions
Half year ended 2 July 2016During the half year ended 2 July 2016 the Group acquired two medical technology businesses deemed to be business combinations within the scope of IFRS 3. On 4 January 2016, the Group completed the acquisition of 100% of the
share capital of Blue Belt Holdings Inc, a business specialising in robotic technologies. The estimated fair value of consideration is $265 million and includes $51 million deferred consideration. The provisional fair values of assets acquired were: 2016
$m Identifiable assets acquired and liabilities assumed Intangible assets 70 Property, plant & equipment and inventory 13 Other net current liabilities (11) Provisions (10) Net deferred tax assets 14 Net assets 76 Goodwill 186 Consideration (net of $3m
cash acquired) 262 The goodwill is attributable to the revenue synergies of providing a full robotic surgery offering and future applications of the technological expertise. The goodwill is not expected to be deductible for tax purposes. On 8 January 2016
the Group completed the acquisition of all product and intellectual property assets related to BST-CarGel, a first-line cartilage repair product from Piramal Healthcare (Canada) Limited. The estimated fair value of the consideration is $41 million and
included $36 million of deferred and contingent consideration. The provisional fair values of net assets acquired is product intangible assets of $15 million, inventory of $1 million, and a deferred tax liability of $1 million. The provisional estimate of
goodwill, which is expected to be deductible for tax purposes, arising on the acquisition is $26 million. It is attributable to the future penetration into new markets expected from the transaction. If new information is obtained within the measurement
period about facts and circumstances that existed at the acquisition dates, the acquisition accounting will be revised. During the half year ended 2 July 2016, the contribution to revenue and attributable profit from these acquisitions is immaterial. If
the acquisitions had occurred at the beginning of the year, their contribution to revenue and attributable profit would have also been immaterial. Half year ended 27 June 2015During the half year ended 27 June 2015, the Group acquired the Colombian
distributor of its orthopaedic reconstruction, trauma and sports medicine products. This acquisition is deemed to be a business combination within the scope of IFRS 3. The total fair value of the consideration was $21 million and included $7 million of
deferred consideration. As at the acquisition date, the aggregated value of the net assets acquired was $11 million giving rise to goodwill on the acquisition of $10 million. There have been no adjustments made to the provisional fair values. This is
attributable to the additional economic benefits expected from the transaction, including the assembled workforces, which have been transferred as part of the acquisitions. The goodwill recognised is not expected to be deductible for tax purposes. During
the half year ended 27 June 2015, the contribution to revenue and attributable profit from this acquisition is immaterial. If this acquisition had occurred at the beginning of the year, its contribution to revenue and attributable profit would have also
been immaterial.
2016
$m
Identifiable assets acquired and liabilities assumed
Intangible assets 70
Property, plant & equipment and inventory 13
Other net current liabilities (11)
Provisions (10)
Net deferred tax assets 14
Net assets 76
Goodwill 186
Consideration (net of $3m cash acquired) 262
The goodwill is attributable to the revenue synergies of providing a full
robotic surgery offering and future applications of the technological
expertise. The goodwill is not expected to be deductible for tax purposes. On
8 January 2016 the Group completed the acquisition of all product and
intellectual property assets related to BST-CarGel, a first-line cartilage
repair product from Piramal Healthcare (Canada) Limited. The estimated fair
value of the consideration is $41 million and included $36 million of deferred
and contingent consideration. The provisional fair values of net assets
acquired is product intangible assets of $15 million, inventory of $1 million,
and a deferred tax liability of $1 million. The provisional estimate of
goodwill, which is expected to be deductible for tax purposes, arising on the
acquisition is $26 million. It is attributable to the future penetration into
new markets expected from the transaction. If new information is obtained
within the measurement period about facts and circumstances that existed at
the acquisition dates, the acquisition accounting will be revised. During the
half year ended 2 July 2016, the contribution to revenue and attributable
profit from these acquisitions is immaterial. If the acquisitions had occurred
at the beginning of the year, their contribution to revenue and attributable
profit would have also been immaterial. Half year ended 27 June 2015During the
half year ended 27 June 2015, the Group acquired the Colombian distributor of
its orthopaedic reconstruction, trauma and sports medicine products. This
acquisition is deemed to be a business combination within the scope of IFRS 3.
The total fair value of the consideration was $21 million and included $7
million of deferred consideration. As at the acquisition date, the aggregated
value of the net assets acquired was $11 million giving rise to goodwill on
the acquisition of $10 million. There have been no adjustments made to the
provisional fair values. This is attributable to the additional economic
benefits expected from the transaction, including the assembled workforces,
which have been transferred as part of the acquisitions. The goodwill
recognised is not expected to be deductible for tax purposes. During the half
year ended 27 June 2015, the contribution to revenue and attributable profit
from this acquisition is immaterial. If this acquisition had occurred at the
beginning of the year, its contribution to revenue and attributable profit
would have also been immaterial.
6. Net debt
Net debt as at 2 July 2016 comprises:
2 July 27 June
2016 2015
$m $m
Cash at bank 85 88
Long-term borrowings (1,708) (1,532)
Bank overdrafts and loans due within one year (71) (66)
Net currency swap liabilities (7) (1)
Net interest rate swap assets/(liabilities) 6 (2)
(1,695) (1,513)
The movements in the period were as follows:
Opening net debt as at 1 January (1,361) (1,613)
Cash flow before financing activities (119) 314
Proceeds from issue of ordinary share capital 5 7
Proceeds from own shares 1 1
Purchase of own shares (47) (51)
Equity dividends paid (170) (166)
Exchange adjustments (4) (5)
(1,695) (1,513)
7a. Financial instruments
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Carrying amount Fair value
2 July 31 Dec 2 July 31 Dec Fair
2016 2015 2016 2015 value
$m $m $m $m level
Financial assets at fair value
Forward foreign exchange contacts 33 31 33 31 Level 2
Investments 13 13 13 13 Level 3
Currency swaps - 1 - 1 Level 2
Interest rate swaps 6 1 6 1 Level 2
52 46 52 46
Financial assets not measured at fair value
Trade and other receivables 1,045 1,022 1,045 1,022
Cash at bank 85 120 85 120
1,130 1,142 1,130 1,142
Total financial assets 1,182 1,188 1,182 1,188
Financial liabilities at fair value
Contingent and deferred consideration 116 27 116 27 Level 3
Forward foreign exchange contracts 57 23 57 23 Level 2
Currency swaps 7 3 7 3 Level 2
Private placement debt 206 201 206 201 Level 2
386 254 386 254
Financial liabilities not measured at fair value
Bank overdrafts 32 18 32 18
Bank loans 606 326 606 326
Private placement debt 926 925 990 949
Finance lease liabilities 9 10 9 10
Trade and other payables 756 818 756 818
2,329 2,097 2,393 2,121
Total financial liabilities 2,715 2,351 2,779 2,375
With the exception of private placement debt as presented above, the carrying amount of financial assets and liabilities not measured at fair value is considered to be a reasonable approximation of fair value. The fair values of the Group's long-term
borrowings, which are not traded publicly, are estimated by discounting future contractual cashflows to net present values at the current market interest rates available to the Group for similar financial instruments. The fair values of contingent and
deferred consideration are estimated using discounted cash flow models. The valuation models consider the possible scenarios relating to the achievement of established milestones and targets, the amount to be paid under each scenario and the probability of
each scenario. The valuation model considers the present value of expected payments adjusted for risk and discounted using a risk-free discount rate.
7b. Retirement benefit obligations
The discount rates applied to the future pension liabilities of the UK and US pension plans are based on the yield on bonds that have a credit rating of AA denominated in the currency in which the benefits are expected to be paid with a maturity profile
approximately the same as the obligations. These have decreased since 31 December 2015 by 100bps to 2.8% and 70bps to 3.6% respectively. This decrease, offset by decreases in inflation rates and favourable asset performances, led to a re-measurement loss
of $62 million recognised in Other Comprehensive Income.
8. Definitions of and reconciliation to measures included within 'Trading results'
These Interim Financial Statements include financial measures that are not prepared in accordance with IFRS. These measures, which include trading profit, trading profit margin, EPSA, trading cash flow and underlying growth, exclude the effect of certain
cash and non-cash items that Group management believes are not related to the underlying performance of the Group. These non-IFRS financial measures are also used by management to make operating decisions because they facilitate internal comparisons of
performance to historical results. Non-IFRS financial measures are presented in these Interim Financial Statements as the Group's management believe that they provide investors with a means of evaluating performance of the business segment 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 or non-cash 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 growthUnderlying revenue growth is used to compare the revenue in a given period to the previous period on a like-for-like basis. Underlying revenue growth reconciles to reported
revenue growth (see Note 2), the most directly comparable financial measure calculated in accordance with IFRS, by making adjustments for the effect of acquisitions and disposals and the impact of movements in exchange rates (currency impact), as described
below. The effect of acquisitions and disposals measures the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue
(which include acquisitions and exclude disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year.
Currency impact measures 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 current year revenue translated into US Dollars at the current year
average rate and the prior year revenue translated at the prior year average rate; and 2) the increase/decrease being measured by translating current and prior year revenue into US Dollars using the constant fixed rate. Trading profit, trading profit
margin and trading cash flowTrading profit and trading cash flow are trend measures, which present the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group's short-term profitability
and cash flows. The Group has identified the following items, where material, as those to be excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectively: acquisition and disposal
related items arising in connection with business combinations, including amortisation of acquisition intangible assets, impairments and integration costs; restructuring events; gains and losses resulting from legal disputes and uninsured losses. In
addition to these items, gains or 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, respectively. Underlying growth in trading profit and trading profit margin (trading profit expressed as a percentage of revenue) are measures, which present the growth trend in the long-term profitability of the Group. Underlying growth in trading
profit is used to compare the period-on-period growth in trading profit on a like-for-like basis. This is achieved by adjusting for the impact of business combinations and disposals and for movements in exchange rates in the same manner as underlying
revenue growth is determined, as described above. Adjusted earnings per ordinary share ('EPSA')EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-tax impact of specific transactions that management
considers affects the Group's short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure and is determined by adjusting attributable
profit for the items that are excluded from operating profit when arriving at trading profit and items that are recognised below operating profit that affect the Group's short-term profitability. The most directly comparable financial measure calculated in
accordance with IFRS is basic earnings per ordinary share ('EPS').
For the half year to 2 July 2016 Trading Acquisition related Restructuring & rationalisation Amortisation Legal Capital Reported results 2016
results 2016 costs costs of acquisition & other expenditure
intangibles
$m $m $m $m $m $m $m
Revenue 2,328 - - - - - 2,328
Cost of goods sold (632) - - - - - (632)
Gross profit 1,696 - - - - - 1,696
Selling, general and administration expenses (1,100) (6) (35) (67) (18) (1,226)
Research and development expenses (113) - - - - - (113)
Trading/operating profit 483 (6) (35) (67) (18) - 357
Trading/operating profit margin 20.8% 15.3%
Interest receivable 2 - - - - - 2
Interest payable (26) - - - - - (26)
Other finance costs (6) - - - - - (6)
Profit before taxation 453 (6) (35) (67) (18) - 327
Taxation (119) 1 6 21 5 - (86)
Effective tax rate 26.3% 26.3%
Adjusted attributable/attributable profit 334 (5) (29) (46) (13) - 241
EPSA/EPS 37.4¢ (0.6¢) (3.2¢) (5.1¢) (1.5¢) - 27.0¢
Weighted average number of shares (m) 894 894
Trading cash flow/cash generated from operating activities 255 (10) (37) - (2) 174 380
Trading profit to cash conversion ratio (%) 53%
For the half year to 27 June 2015 Trading Acquisition related Restructuring & rationalisation Amortisation Legal Capital Reported results 2015
results 2015 costs costs of acquisition & other expenditure
intangibles
$m $m $m $m $m $m $m
Revenue 2,272 - - - - - 2,272
Cost of goods sold (566) - - - - - (566)
Gross profit 1,706 - - - - - 1,706
Selling, general and administration expenses (1,084) (13) (19) (78) 37 (1,157)
Research and development expenses (110) - - - - - (110)
Trading/operating profit 512 (13) (19) (78) 37 - 439
Trading/operating profit margin 22.5% 19.3%
Interest receivable 2 - - - 5 - 7
Interest payable (23) (2) - - - - (25)
Other finance costs (7) - - - - - (7)
Share of losses from associates (3) - - - - - (3)
Profit before taxation 481 (15) (19) (78) 42 - 411
Taxation (131) 4 5 23 (17) - (116)
Effective tax rate 27.2% 28.2%
Adjusted attributable/attributable profit 350 (11) (14) (55) 25 - 295
EPSA/EPS 39.1¢ (1.2¢) (1.6¢) (6.1¢) 2.8¢ - 33.0¢
Weighted average number of shares (m) 894 894
Trading cash flow/cash generated from operating activities 382 (20) (21) - 77 161 579
Trading profit to cash conversion ratio (%) 75%
Acquisition related costs and cash flows: For the half year to 2 July 2016, these costs primarily relate to the costs associated with the Blue Belt Technologies and other acquisitions. For the half year to 27 June 2015, these costs relate to ongoing ArthroCare integration costs. Restructuring and rationalisation costs: For the half year to 2 July 2016 and 27 June 2015, these costs relate to the ongoing implementation of the Group Optimisation plan that was announced in May 2014. The $35 million charge
includes redundancy amounts of $15 million and consultancy costs of $6 million. Amortisation of acquisition intangibles: For both the half years to 2 July 2016 and 27 June 2015, charges relate to the amortisation of intangible assets acquired in material business combinations. Legal and other:For the half year to 2 July 2016, the charge relates to the costs incurred to progress significant Arthrex and metal-on-metal legal claims. For the half year to 27 June 2015, the charge relates to a gain of $45 million
from the resolution of a historical legal claim against Arthrex, net of expenses and royalties, and a curtailment gain arising on post-retirement medical benefits in the US. These were partly offset by additional expenses primarily relating to the RENASYS distribution hold, which brings the total balance across both years to $35 million, and redundancies from the decision to cease production of HP802.
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:
2 July 31 Dec 27 June
2016 2015 2015
$m $m $m
Average rates
Sterling 1.43 1.53 1.52
Euro 1.12 1.11 1.12
Swiss Franc 1.02 1.04 1.06
Period-end rates
Sterling 1.33 1.48 1.57
Euro 1.11 1.09 1.12
Swiss Franc 1.03 1.00 1.07
10. Assets held for sale
On 18 May 2016, the Group announced it had signed an agreement to divest its Gynaecology business for $350 million. The sale is subject to normal clearance procedures and this disposal is expected to complete during the second half of 2016 and as such the
$10 million carrying value of the plant and equipment and inventory assets of this disposal group is presented as an asset held for sale. The Gynaecology business primarily comprises the TRUCLEAR System for the hysteroscopic resection and removal of
uterine tissue. Gynaecology delivered revenue of $56 million for the full year 2015, representing a little over 1% of Group revenue.
Directors' Responsibilities Statement
The Directors confirm that to the best of their knowledge: · this set of condensed consolidated Interim Financial Statements has been prepared in accordance with IAS 34 as adopted by the European Union; and · that the interim management report
herein includes a fair review of the information required by: a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place
in the first six months of the current financial year and that have materially affected the financial position or performance of the enterprise during that period, and any changes in the related party transactions described in the last annual report that
could do so. The Board of Directors of Smith & Nephew plc are as listed in the Smith & Nephew plc 2015 Annual Report. By order of the Board:
Olivier Bohuon Chief Executive Officer 28 July 2016
Julie Brown Chief Financial Officer 28 July 2016
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW PLC
Introduction
We have been engaged by the company to review the condensed set of financial statements in the interim report for the half year ended 2 July 2016 which comprises the Group Income Statement, Group Statement of Comprehensive Income, Group Balance Sheet, Group Cash Flow Statement, Group Statement of Changes in Equity and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company for our review work, for this report, or for the conclusions we have reached.
Directors' Responsibilities
The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1 the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this interim financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our Responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report for the half year ended 2 July 2016 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Stephen Oxley (Senior Statutory Auditor)for and on behalf of KPMG LLP Chartered Accountants 15 Canada SquareLondonE14 5GL
28 July 2016
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