REG - Smith & Nephew Plc - Half-year Report
28/07/2022 07:16
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RNS Number : 0015U Smith & Nephew Plc 28 July 2022
Smith+Nephew Second Quarter and First Half 2022 Results
28 July 2022
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology company,
reports results for the second quarter and first half ended 2 July 2022:
2 July 3 July Reported Underlying
2022 2021 growth growth
$m $m % %
Second Quarter Results(1,2)
Revenue 1,293 1,335 -3.1 1.2
Half Year Results(1,2)
Revenue 2,600 2,599 - 3.5
Operating profit 242 239
Operating profit margin (%) 9.3 9.2
EPS (cents) 20.2 23.4
Trading profit 440 459
Trading profit margin (%) 16.9 17.6
EPSA (cents) 38.1 38.8
Q2 Trading Highlights(1,2)
· Q2 revenue of $1,293 million (2021: $1,335 million), up 1.2% on an
underlying basis (down 3.1% on a reported basis including 430bps FX headwind)
with one fewer trading day than equivalent prior-year period
· Orthopaedics revenue declined -1.1% (-4.9% reported) reflecting
execution and supply chain challenges, and China VBP
· Sports Medicine & ENT up 1.9% (-2.4% reported) with growth
significantly impacted by the COVID-related lockdown in China
· Advanced Wound Management up 3.8% (-1.3% reported) with all regions
and segments contributing
H1 Highlights(1,2)
· H1 revenue of $2,600 million (2021: $2,599 million), up 3.5% on an
underlying basis (flat on a reported basis including 350bps FX headwind)
· Operating profit of $242 million (2021: $239 million)
· Trading profit of $440 million (2021: $459 million). Trading profit
margin of 16.9% (2021: 17.6%) reflects higher input inflation
· $125 million of 2022 share buyback programme completed to date
· Interim dividend of 14.4¢, in-line with prior year
2022 Full Year Outlook(1,2)
· Unchanged full-year underlying revenue growth guidance of 4.0% to
5.0%
· Trading profit margin now expected to be around 17.5%, reflecting
prolonged impact of the inflationary environment and continued external supply
challenges
Strategic Highlights(1,2)
· Comprehensive action plan underway to drive excellence in execution
supporting Strategy for Growth, focused on:
o Fixing Orthopaedics
o Improving productivity
o Accelerating growth in Advanced Wound Management and
Sports Medicine & ENT
· Continued cadence of new product launches and investment in R&D
pipeline
Deepak Nath, Chief Executive Officer, said:
"After only a few months at Smith+Nephew it is clear to me that we have many
more opportunities than challenges. Our fundamental competitive position is
strong, and we have a clear right to win in all three franchises through
product differentiation and proprietary platform technologies. And,
importantly, delivery is well on-track in two of the three franchises,
providing 60% of our revenue.
"Orthopaedics continues to be held back by execution and supply chain
challenges. In the last three months, I have reviewed the business and,
together with the team, we have developed a comprehensive plan to drive better
execution at pace.
"Our focus is on delivering our transformational strategy. We will drive
operational benefits in Orthopaedics, as soon as this year, and build on our
strong positions in Advanced Wound Management and Sports Medicine & ENT. I
am confident in our ability to transform Smith+Nephew into a structurally
higher-growth business delivering greater value for all our stakeholders."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's second quarter and first
half results will be held at 8.30am BST / 3.30am EDT, details of which are
available on the Smith+Nephew website at https://www.smith-nephew.com/results/
(https://www.smith-nephew.com/investor-centre/reporting/current-quarterly-results/)
.
Enquiries
Investors
Andrew Swift +44 (0) 1923 477433
Smith+Nephew
Media
Charles Reynolds +44 (0) 1923 477314
Smith+Nephew
Susan Gilchrist / Ayesha Bharmal +44 (0) 20 7404 5959
Brunswick
Notes
1. Unless otherwise specified as 'reported' or 'organic' 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.
'Organic revenue growth' reconciles to reported revenue growth, the most
directly comparable financial measure calculated in accordance with IFRS, by
only making the 'constant currency exchange effect' adjustment described
below.
'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 35 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 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.
2. Certain items included in 'trading results', such as trading profit,
trading profit margin, tax rate on trading results, trading cash flow, trading
profit to cash conversion ratio, EPSA and underlying growth are non-IFRS
financial measures. The non-IFRS financial measures reported in this
announcement are explained in Other Information on pages 32 to 35 and are
reconciled to the most directly comparable financial measure prepared in
accordance with IFRS. Reported results represent IFRS financial measures as
shown in the Condensed Consolidated Interim Financial Statements.
Smith+Nephew Second Quarter Trading and First Half 2022 Results
Delivering our Transformational Strategy for Growth
Smith+Nephew has a clear Strategy for Growth. Through this we will compound
our outperformance in Advanced Wound Management and Sports Medicine & ENT,
and regain momentum in Orthopaedics. Our ambition is to transform to a
structurally higher-growth company.
Our Strategy for Growth is based on three pillars.
· First, Strengthen the foundations of Smith+Nephew. A solid base in
commercial and manufacturing will enable us to serve customers sustainably and
simply, and deliver the best from our core portfolio.
· Second, 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.
Better Execution at Pace
In recent years we have consistently demonstrated successful execution across
Sports Medicine and improved performance from Advanced Wound Management.
Following investment, Orthopaedics has a strong portfolio with differentiated
products and enabling technologies, but recent performance has been held back
by execution and supply chain challenges.
To take the business forward and deliver on our Strategy for Growth pillars to
Strengthen and Accelerate, we have in the last three months developed a
comprehensive plan to drive better execution at pace, focused on:
· Fixing Orthopaedics
· Improving productivity
· Accelerating growth in Advanced Wound Management and Sports Medicine
& ENT
Among the actions to address these are the following:
· Rewiring Orthopaedics commercial delivery and winning share with our
current portfolio through greater focus on differentiated products and
procedural innovations and more detailed customer segmentation, aligning sales
resources and incentives with the greatest growth opportunities
· Streamlining the reconstruction portfolio to reduce the number of
implant systems in each category and focus sales on lead brands
· Improving asset utilisation by establishing clear principles on where
instrument sets are placed, along with use of digital planning tools
· Rebuilding demand planning process through closer collaboration
between operations and commercial, improving short and long-term planning
signals
Along with strengthening Orthopaedics, we see significant opportunities to
invest further behind our well performing Advanced Wound Management and Sports
Medicine & ENT franchises.
Our actions are focused on maximising the value of our strong portfolio, where
we already have leading technology across the franchises. The plan includes
clear accountability to ensure sustained impact. We have a refreshed
leadership team across Orthopaedics and Global Operations with area specific
experience and track record. There is a high cadence of interactions for the
responsible teams under the oversight of the Chief Executive Officer. Each
area has specific action plans with meaningful KPIs to track progress and
ensure accountability.
First Half Delivery of Strategy
We continue to invest behind our manufacturing and supply chain operations to
drive productivity. During the first half we opened our new high technology
orthopaedics manufacturing facility in Malaysia and announced plans for a new
R&D and manufacturing facility for Advanced Wound Management in the UK. We
are also closely managing the impact of the widely reported global shortages
of some raw materials and components.
Our commitment to innovation is central to our Strategy for Growth and we
continue to invest behind recent product launches and in our R&D
programme. New product launches in the first half included expanding the
robotics-enabled CORI(◊) Surgical System by bringing both cementless total
knee and total hip arthroplasty onto the platform. Other new innovations
include the WOUND COMPASS(◊) Clinical Support App, a comprehensive digital
support tool for health care professionals that aids wound assessment and
decision-making to help reduce practice variation.
We have continued to deliver successful acquisitions, bringing novel and
disruptive technologies into our portfolio. In January 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.
Second Quarter 2022 Trading Update
Our second quarter revenue was $1,293 million (2021: $1,335 million), up 1.2%
year-on-year on an underlying basis. On a reported basis this represented a
decline of -3.1%, including a 430bps headwind from foreign exchange (primarily
due to the strength of the US Dollar). The second quarter comprised 63 trading
days, one less than the equivalent period in 2021.
Two of our three franchises delivered revenue growth in the quarter, with
Sports Medicine & ENT up 1.9% (-2.4% reported) and Advanced Wound
Management up 3.8% (-1.3% reported). Growth from Sports Medicine was
significantly impacted by the recent COVID-related lockdowns in China.
Advanced Wound Management delivered growth across all regions and segments.
Revenue from Orthopaedics declined -1.1% (-4.9% reported). This performance
reflects the implementation of the previously disclosed hip and knee
volume-based-procurement (VBP) programme in China.
Revenue growth in our Established Markets was up 1.2% (-3.2% reported). Within
this, the US delivered 2.0% revenue growth (2.0% reported) while Other
Established Markets was flat (-11.4% reported) reflecting a weak quarter in
Asia-Pacific. Emerging Markets revenue was up 0.8% (-3.0% reported) with the
expected China performance offset by strong growth in India, Middle East and
Latin America as COVID-related restrictions eased.
Second Quarter Consolidated Revenue Analysis
2 July 3 July Reported Underlying Acquisitions Currency
2022 2021 growth growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 530 557 -4.9 -1.1 - -3.8
Knee Implants 223 226 -1.3 2.7 - -4.0
Hip Implants 149 161 -7.7 -3.7 - -4.0
Other Reconstruction((ii)) 23 21 6.0 10.8 - -4.8
Trauma & Extremities 135 149 -8.9 -6.0 - -2.9
Sports Medicine & ENT 381 391 -2.4 1.9 - -4.3
Sports Medicine Joint Repair 206 211 -2.3 2.1 - -4.4
Arthroscopic Enabling Technologies 140 147 -5.0 -0.5 - -4.5
ENT (Ear, Nose and Throat) 35 33 8.4 11.2 - -2.8
Advanced Wound Management 382 387 -1.3 3.8 - -5.1
Advanced Wound Care 178 186 -4.4 3.3 - -7.7
Advanced Wound Bioactives 134 132 1.8 2.4 - -0.6
Advanced Wound Devices 70 69 0.9 7.9 - -7.0
Total 1,293 1,335 -3.1 1.2 - -4.3
Consolidated revenue by geography
US 690 677 2.0 2.0 - -
Other Established Markets((iii)) 374 422 -11.4 - - -11.4
Total Established Markets 1,064 1,099 -3.2 1.2 - -4.4
Emerging Markets 229 236 -3.0 0.8 - -3.8
Total 1,293 1,335 -3.1 1.2 - -4.3
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
reconstruction business and cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
Orthopaedics
Revenue from our Orthopaedics franchise declined -1.1% (-4.9% reported) in the
second quarter. Excluding China, Orthopaedics grew by around 2%.
Knee Implants revenue was up 2.7% (-1.3% reported) and Hip Implants revenue
was down -3.7% (-7.7% reported). Our performance was impacted by execution and
supply chain challenges, and China VBP. We delivered modest growth across our
primary cemented total knee systems, driving benefit from the recovery in
elective surgery volumes. We also continued to roll-out the launch of the
LEGION(◊) CONCELOC(◊) Cementless Total Knee System.
Other Reconstruction revenue growth was 10.8% (6.0% reported) with strong
demand for the CORI Surgical System.
In Trauma & Extremities revenue declined -6.0% (-8.9% reported) with
growth in hip fracture offset by our decision not to participate in the
broader roll-out of provincial trauma tenders in China. We continue to
invest behind the EVOS(◊) Plating System, including launching EVOS Large in
the second half of the year.
Sports Medicine & ENT
Sports Medicine & ENT delivered revenue growth of 1.9% (-2.4% reported).
Excluding China, growth would have been around 5%.
Sports Medicine Joint Repair revenue was up 2.1% (-2.3% reported) in the
quarter, reflecting the previously mentioned COVID-lockdown impact in China
offsetting performance elsewhere, which was led by good growth from our knee
repair portfolio in Established Markets, as levels of physical activity
normalise.
Arthroscopic Enabling Technologies revenue declined -0.5% (-5.0% reported)
with growth across fluid management and video offset by continued softness in
core COBLATION(◊) and patient positioning.
ENT revenue was up 11.2% (8.4% reported) reflecting the continued recovery in
procedure volumes from the impact of COVID and successful price increases in
the US.
Advanced Wound Management
Advanced Wound Management revenue growth was 3.8% (-1.3% reported).
Advanced Wound Care revenue was up 3.3% (-4.4% reported) including good growth
from our infection management portfolio and a strong quarter in Emerging
Markets and Japan, Australia and New Zealand.
Advanced Wound Bioactives revenue was up 2.4% (1.8% reported) driven by our
skin substitutes portfolio.
Advanced Wound Devices revenue was up 7.9% (0.9% reported), reflecting
continued strong growth from our PICO(◊) single-use Negative Pressure Wound
Therapy System.
First Half 2022 Consolidated Analysis
Smith+Nephew results for the first half ended 2 July 2022:
Reported
2022 2021 growth
$m $m %
Revenue 2,600 2,599 -
Operating profit 242 239 1
Acquisition and disposal related items 1 12
Restructuring and rationalisation costs 63 77
Amortisation and impairment of acquisition intangibles 105 87
Legal and other 29 44
Trading profit((i)) 440 459 -4
¢ ¢
Earnings per share ('EPS') 20.2 23.4 -14
Acquisition and disposal related items (0.2) (2.2)
Restructuring and rationalisation costs 5.8 7.2
Amortisation and impairment of acquisition intangibles 9.4 7.7
Legal and other 2.9 2.7
Adjusted Earnings per share ('EPSA')((i)) 38.1 38.8 -2
(i) See Other Information on pages 32 to 35
First Half 2022 Analysis
Our first half revenue was $2,600 million (H1 2021: $2,599 million), up 3.5%
on an underlying basis and flat on a reported basis, including a foreign
exchange headwind of 350bps. The first half comprised 127 trading days, one
fewer than the equivalent period in 2021.
The Group reported an operating profit of $242 million (H1 2021: $239 million)
after acquisition and disposal related items, restructuring and
rationalisation costs, amortisation and impairment of acquisition intangibles
and legal and other items incurred in the first half (see Other Information on
pages 32 to 35).
Trading profit was $440 million in the first half (H1 2021: $459 million),
with a trading profit margin of 16.9% (H1 2021: 17.6%). The margin decline
reflects higher input 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 Interim Financial Statements for global
franchise trading profit).
Restructuring costs, primarily related to the Operations and Commercial
Excellence programme, totalled $63 million in the first half, with incremental
benefits recognised of around $25 million.
Cash generated from operations was $227 million (H1 2021: $459 million) and
trading cash flow was $154 million (H1 2021: $404 million) as we saw adverse
working capital movements, driven primarily from inventory including from spot
buying of raw materials and components to secure supply and mitigate the risk
of shortages, and as we continued to invest in capital expenditure, including
progressing changes to our manufacturing network (see Other Information on
pages 32 to 35 for a reconciliation between cash generated from operations and
trading cash flow). The trading profit to cash conversion ratio was 35% (H1
2021: 88%), which is expected to improve in the second half of 2022 as
inventory balances stabilise and other working capital movements phase out.
The net interest charge within reported results was $32 million (H1 2021: $39
million) with the charge lower than prior year due to debt repayments made in
the second half of 2021 and the first half of 2022. The Group's net debt,
excluding lease liabilities, at 2 July 2022 was $2,197 million (see Note 7 to
the Interim Financial Statements) with committed facilities of $3.7 billion.
On 18 January 2022 the Group completed the acquisition of Engage Uni, LLC
(operating as Engage Surgical) for a provisional fair value consideration of
$131 million (see Note 6 to the Financial Statements for further detail). The
provisional fair value of assets acquired included $44 million for intangible
assets and $84 million for goodwill.
Our reported tax for the period ended 2 July 2022 was a charge of $27 million
(H1 2021: $18 million). The tax rate on trading results for the period ended 2
July 2022 was 17.6% (H1 2021: 18.3%) (see Note 4 to the Interim Financial
Statements and Other Information on pages 32 to 35 for further details on
taxation).
Basic earnings per share ('EPS') was 20.2¢ (40.4¢ per ADS) (H1 2021: 23.4¢
per share). Adjusted earnings per share ('EPSA') was 38.1¢ (76.2¢ per ADS)
(H1 2021: 38.8¢ per share).
Share Buyback
In December 2021 we announced an updated capital allocation policy to
prioritise the use of cash as follows:
1. Invest in innovation to drive organic growth, and to meet our
sustainability targets and further embed our ESG agenda
2. Acquire new technologies and expand in higher growth segments, that have
a strong strategic fit and meet our financial criteria
3. Maintain investment grade credit metrics, our existing progressive
dividend policy, and an optimal balance sheet position
4. Return surplus capital to shareholders through a regular annual buyback,
with circa $250 million to $300 million of buybacks proposed in 2022
The share buyback commenced on 22 February 2022. To date $125 million of the
2022 buyback has been completed, with the 7.8 million shares repurchased
representing 0.9% of our year end 2021 share count.
Interim Dividend
Consistent with previous periods, the interim dividend is set by a formula and
is equivalent to 40% of the total dividend for the previous year. The interim
dividend for the first half of 2022 is therefore 14.4¢ per share (28.8¢ per
ADS), in line with last year (H1 2021: 14.4¢ per share). This equates to
12.0p per share at prevailing exchange rates as of 22 July 2022. This dividend
is payable on 26 October 2022 to shareholders whose names appear on the
register at the close of business on 30 September 2022 (see Note 5 to the
Interim Financial Statements for further detail).
2022 Full Year Outlook
In February we announced our guidance for 2022 targeting underlying revenue
growth of 4.0% to 5.0% with an expansion in trading profit margin of around
50bps for the full year.
Our revenue growth guidance for 2022 is unchanged at 4.0% to 5.0% (around
-0.2% to +0.8% on a reported basis, including a foreign exchange headwind of
420bps based on exchange rates prevailing on 22 July 2022). As previously
disclosed we expect revenue growth to be stronger in the second half than the
first half of 2022.
In terms of trading profit margin, we now expect the trading profit margin to
be around 17.5%, reflecting prolonged impact of the inflationary environment
and continued external supply challenges.
We expect the tax rate on trading results for 2022 to be around 18%, subject
to any material changes to tax law, or other one-off items.
Forward calendar
The Q3 Trading Report will be released on 3 November 2022.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology company that exists to restore
people's bodies and their self-belief by using technology to take the limits
off living. We call this purpose 'Life Unlimited'. Our 18,000 employees
deliver this mission every day, making a difference to patients' lives
through the excellence of our product portfolio, and the invention and
application of new technologies across our three global franchises of
Orthopaedics, Sports Medicine & ENT and Advanced Wound Management.
Founded in Hull, UK, in 1856, we now operate in more than 100 countries, and
generated annual sales of $5.2 billion in 2021. Smith+Nephew is a constituent
of the FTSE100 (LSE:SN, NYSE:SNN). The terms 'Group' and 'Smith+Nephew' are
used to refer to Smith & Nephew plc and its consolidated subsidiaries,
unless the context requires otherwise.
For more information about Smith+Nephew, please visit www.smith-nephew.com
(http://www.smith-nephew.com/) and follow us on Twitter
(http://www.twitter.com/smithnephewplc) , LinkedIn
(http://www.linkedin.com/company/smith-%26-nephew) , Instagram
(https://www.instagram.com/smithnephewmeded/) or Facebook
(http://www.facebook.com/smithnephewplc) .
Forward-looking statements
This document may contain forward-looking statements that may or may not prove
accurate. For example, statements regarding expected revenue growth and
trading margins, market trends and our product pipeline are forward-looking
statements. Phrases such as "aim", "plan", "intend", "anticipate",
"well-placed", "believe", "estimate", "expect", "target", "consider" and
similar expressions are generally intended to identify forward-looking
statements. Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual results to
differ materially from what is expressed or implied by the statements. For
Smith+Nephew, these factors include: risks related to the impact of COVID,
such as the depth and longevity of its impact, government actions and other
restrictive measures taken in response, material delays and cancellations of
elective procedures, reduced procedure capacity at medical facilities,
restricted access for sales representatives to medical facilities, or our
ability to execute business continuity plans as a result of COVID; economic
and financial conditions in the markets we serve, especially those affecting
health care providers, payers and customers (including, without limitation, as
a result of COVID); price levels for established and innovative medical
devices; developments in medical technology; regulatory approvals,
reimbursement decisions or other government actions; product defects or
recalls or other problems with quality management systems or failure to comply
with related regulations; litigation relating to patent or other claims; legal
compliance risks and related investigative, remedial or enforcement actions;
disruption to our supply chain or operations or those of our suppliers
(including, without limitation, as a result of COVID); competition for
qualified personnel; strategic actions, including acquisitions and
dispositions, our success in performing due diligence, valuing and integrating
acquired businesses; disruption that may result from transactions or other
changes we make in our business plans or organisation to adapt to market
developments; and numerous other matters that affect us or our markets,
including those of a political, economic, business, competitive or
reputational nature. Please refer to the documents that Smith+Nephew has filed
with the U.S. Securities and Exchange Commission under the U.S. Securities
Exchange Act of 1934, as amended, including Smith+Nephew's most recent annual
report on Form 20-F, for a discussion of certain of these factors. Any
forward-looking statement is based on information available to Smith+Nephew as
of the date of the statement. All written or oral forward-looking statements
attributable to Smith+Nephew are qualified by this caution. Smith+Nephew does
not undertake any obligation to update or revise any forward-looking statement
to reflect any change in circumstances or in Smith+Nephew's expectations.
(◊) Trademark of Smith+Nephew. Certain marks registered US Patent and
Trademark Office.
First Half Consolidated Revenue Analysis
2 July 3 July Reported Underlying Acquisitions Currency
2022 2021 growth Growth((i)) /disposals impact
Consolidated revenue by franchise $m $m % % % %
Orthopaedics 1,071 1,097 -2.3 0.7 - -3.0
Knee Implants 454 438 3.8 7.3 - -3.5
Hip Implants 298 315 -5.5 -2.2 - -3.3
Other Reconstruction((ii)) 43 47 -8.3 -5.3 - -3.0
Trauma & Extremities 276 297 -7.1 -4.9 - -2.2
Sports Medicine & ENT 778 764 1.8 5.2 - -3.4
Sports Medicine Joint Repair 426 409 4.1 7.7 - -3.6
Arthroscopic Enabling Technologies 281 293 -4.1 -0.6 - -3.5
ENT (Ear, Nose and Throat) 71 62 14.2 16.1 - -1.9
Advanced Wound Management 751 738 1.7 5.8 - -4.1
Advanced Wound Care 360 361 -0.4 5.7 - -6.1
Advanced Wound Bioactives 252 247 2.0 2.3 - -0.3
Advanced Wound Devices 139 130 7.2 12.9 - -5.7
Total 2,600 2,599 - 3.5 - -3.5
Consolidated revenue by geography
US 1,350 1,317 2.5 2.5 - -
Other Established Markets((iii)) 778 831 -6.4 2.6 - -9.0
Total Established Markets 2,128 2,148 -0.9 2.6 - -3.5
Emerging Markets 472 451 4.5 7.8 - -3.3
Total 2,600 2,599 - 3.5 - -3.5
(i) Underlying growth is defined in Note 1 on page 3
(ii) Other Reconstruction includes robotics capital sales, our joint
reconstruction business and cement
(iii) Other Established Markets are Europe, Canada, Japan, Australia and New
Zealand
2022 HALF YEAR CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Unaudited Group Income Statement for the Half Year ended 2 July 2022
Half year Half year
2022 2021
Notes $m $m
Revenue 2 2,600 2,599
Cost of goods sold (773) (806)
Gross profit 1,827 1,793
Selling, general and administrative expenses (1,411) (1,383)
Research and development expenses (174) (171)
Operating profit 2 242 239
Interest income 3 3
Interest expense (35) (42)
Other finance costs (5) (9)
Share of results of associates (1) 10
Gain on disposal of interest in associate 3 - 22
Profit before taxation 204 223
Taxation 4 (27) (18)
Attributable profit(A) 177 205
Earnings per share(A)
Basic 20.2¢ 23.4¢
Diluted 20.2¢ 23.3¢
Unaudited Group Statement of Comprehensive Income for the Half Year ended 2
July 2022
Half year Half year
2022 2021
$m $m
Attributable profit(A) 177 205
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 60 25
Taxation on other comprehensive income (15) (11)
Total items that will not be reclassified to income statement 45 14
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations (99) (23)
Net gains on cash flow hedges 12 33
Taxation on other comprehensive income (1) (4)
Total items that may be reclassified subsequently to income statement (88) 6
Other comprehensive income for the period, net of taxation (43) 20
Total comprehensive income for the period(A) 134 225
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Unaudited Group Balance Sheet as at 2 July 2022
2 July 31 December 3 July
2022 2021 2021
Notes $m $m $m
ASSETS
Non-current assets
Property, plant and equipment 1,460 1,513 1,453
Goodwill 3,022 2,989 2,991
Intangible assets 1,316 1,398 1,494
Investments 10 10 10
Investment in associates 185 188 136
Other non-current assets 15 15 26
Retirement benefit assets 170 182 156
Deferred tax assets 168 201 225
6,346 6,496 6,491
Current assets
Inventories 1,990 1,844 1,750
Trade and other receivables 1,219 1,184 1,212
Current tax receivable 34 106 93
Cash at bank 7 516 1,290 1,387
3,759 4,424 4,442
TOTAL ASSETS 10,105 10,920 10,933
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 175 177 177
Share premium 615 614 614
Capital redemption reserve 20 18 18
Treasury shares (106) (120) (140)
Other reserves (434) (346) (323)
Retained earnings 5,125 5,225 4,985
Total equity 5,395 5,568 5,331
Non-current liabilities
Long-term borrowings and lease liabilities 7 2,281 2,848 2,916
Retirement benefit obligations 67 127 151
Other payables 91 67 81
Provisions 41 35 197
Deferred tax liabilities 113 144 137
2,593 3,221 3,482
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 7 612 491 650
Trade and other payables 1,013 1,096 1,046
Provisions 287 322 209
Current tax payable 205 222 215
2,117 2,131 2,120
Total liabilities 4,710 5,352 5,602
TOTAL EQUITY AND LIABILITIES 10,105 10,920 10,933
Unaudited Condensed Group Cash Flow Statement for the Half Year ended 2 July
2022
Half year Half year
2022 2021
$m $m
Cash flows from operating activities
Profit before taxation 204 223
Net interest expense 32 39
Depreciation, amortisation and impairment 309 294
Share of results of associates 1 (10)
Gain on disposal of interest in associate - (22)
Share-based payments expense (equity-settled) 23 23
Net movement in post-retirement obligations 2 (4)
Movement in working capital and provisions (344) (84)
Cash generated from operations 227 459
Net interest and finance costs paid (33) (38)
Income taxes refunded/(paid) 13 (58)
Net cash inflow from operating activities 207 363
Cash flows from investing activities
Acquisitions, net of cash acquired (97) (259)
Capital expenditure (173) (175)
Purchase of investments - (1)
Distribution from associate 2 4
Net cash used in investing activities (268) (431)
Net cash outflow before financing activities (61) (68)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 1 2
Proceeds from own shares 5 4
Purchase of own shares (133) -
Payment of capital element of lease liabilities (27) (28)
Equity dividends paid (202) (203)
Cash movements in borrowings (357) (73)
Settlement of currency swaps 9 (4)
Net cash used in financing activities (704) (302)
Net decrease in cash and cash equivalents (765) (370)
Cash and cash equivalents at beginning of year 1,285 1,751
Exchange adjustments (8) (2)
Cash and cash equivalents at end of period(B) 512 1,379
B Cash and cash equivalents at the end of the period are net of
overdrafts of $4m (3 July 2021: $8m).
Unaudited Group Statement of Changes in Equity for the Half Year ended 2 July
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) - - - - - 177 177
Other comprehensive income(A) - - - - (88) 45 (43)
Equity dividends paid - - - - - (202) (202)
Share-based payments recognised - - - - - 23 23
Taxation on share-based payments - - - - - (1) (1)
Purchase of own shares(C) - - - (133) - - (133)
Cost of shares transferred to beneficiaries - - - 18 - (13) 5
Cancellation of treasury shares(C) (2) - 2 129 - (129) -
Issue of ordinary share capital - 1 - - - - 1
At 2 July 2022 175 615 20 (106) (434) 5,125 5,395
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) - - - - - 205 205
Other comprehensive income(A) - - - - 6 14 20
Equity dividends paid - - - - - (203) (203)
Share-based payments recognised - - - - - 23 23
Taxation on share-based payments - - - - - 1 1
Cost of shares transferred to beneficiaries - - - 17 - (13) 4
Issue of ordinary share capital - 2 - - - - 2
At 3 July 2021 177 614 18 (140) (323) 4,985 5,331
A Attributable to the equity holders of the parent and wholly derived from
continuing operations.
C During the half year ended 2 July 2022 8.2m ordinary shares were
purchased at a cost of $133m and 7.8m shares were cancelled (2021: no ordinary
shares were purchased or cancelled).
Notes to the Condensed Consolidated Interim Financial Statements
1. Basis of preparation and accounting policies
Smith & Nephew plc (the 'Company') is a public limited company
incorporated in England and Wales. In these condensed consolidated interim
financial statements ('Interim Financial Statements'), 'Group' means the
Company and all its subsidiaries.
These Interim Financial Statements have been prepared in accordance with IAS
34 Interim Financial Reporting as adopted for use in the UK. As required by
the Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority, these Interim Financial Statements have been prepared applying the
accounting policies and presentation that were applied in the preparation of
the Company's annual accounts for the year ended 31 December 2021 which were
prepared in accordance with UK-adopted International Accounting Standards. The
Group has also prepared its accounts in accordance with IFRS as issued by the
International Accounting Standards Board (IASB) effective as at 31 December
2021. IFRS as adopted in the UK differs in certain respects from IFRS as
issued by the IASB. However, the differences have no impact for the
periods presented.
The continued uncertainty as to the future impact on the financial performance
and cash flows of the Group as a result of the COVID pandemic has been
considered as part of the Group's adoption of the going concern basis for its
Interim Financial Statements for the period ended 2 July 2022, 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 Interim 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 Interim Financial Statements for the reasons set out below.
The Group's net debt, excluding lease liabilities, at 2 July 2022 was $2,197
million (see Note 7) with committed facilities of $3.7 billion. The Group has
$50 million of private placement debt due for repayment in the second half of
2022. €488 million of term loans are due for repayment in the first half of
2023 and $105 million of private placement debt is due for repayment in the
second half of 2023. $1,210 million of private placement debt is subject to
financial covenants. The principal covenant on the private placement debt is a
leverage ratio of <3.5x which is measured on a rolling 12-month basis at
half year and year end. There are no financial covenants in any of the Group's
other facilities.
The Directors have considered various scenarios in assessing the impact of
COVID or other downturns 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
further waves of restrictions on elective procedures. Throughout these
scenarios, which include a severe but plausible outcome, the Group continues
to have headroom on its borrowing facilities and financial covenants. The
Directors believe that the Group is well placed to manage its financing and
other business risks satisfactorily and have a reasonable expectation that the
Group has sufficient resources to continue in operational existence for the
forecast period. Thus they continue to adopt the going concern basis for
accounting in preparing these Interim Financial Statements.
The principal risks and uncertainties that the Group is exposed to are
consistent with those as at 31 December 2021. The principal risks and
uncertainties continue to be: 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. Further detail on these risks can be found in the 2021
Annual Report of the Group on pages 60-67.
Management has not identified a principal risk for COVID, because the business
continuity and business change risk includes a risk for widespread outbreaks
of infectious diseases. In addition, management coordinated its response to
COVID through a Crisis Management Team that was convened within the existing
business continuity and incident management framework. Management also noted
that COVID is changing the nature of other principal risks. Examples of these
changes include, but are not limited to: government restrictions on exports
during a pandemic increase supply risk; increased levels of remote working may
increase cybersecurity risk; financial pressure on governments and hospitals
caused by COVID increases the likelihood of pricing and reimbursement risk;
restrictions on elective surgery increase commercial execution risk; and COVID
has increased the risk to our people's health and wellbeing.
The financial information contained in this document does not constitute
statutory financial statements as defined in sections 434 and 435 of the
Companies Act 2006. The auditors issued an unqualified opinion that did not
contain a statement under section 498 of the Companies Act 2006 on the Group's
statutory financial statements for the year ended 31 December 2021. The
Group's statutory financial statements for the year ended 31 December 2021
have been delivered to the Registrar of Companies.
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 2023 and earlier application is permitted;
however, the Group has not early adopted them in preparing these Interim
Financial Statements.
Critical judgements and estimates
In determining and applying accounting policies, judgement is often required
in respect of items where the choice of specific policy, accounting estimate
or assumption to be followed could materially affect the reported results or
net asset position of the Group; it may later be determined that a different
choice would have been more appropriate. The Group's significant accounting
policies which required the most use of management's estimation in the half
year ended 2 July 2022 were: valuation of inventories; liability provisioning
and impairment. These are consistent with 31 December 2021 and there has been
no change in the methodology of applying these critical estimates since the
year ended 31 December 2021.
Management have considered the impact of the continuing uncertainty from
COVID:
Valuation of inventories
Management have assessed the continuing impact of COVID on the provision for
excess and obsolete inventory, specifically considering the impact of lower
sales demand and increased inventory levels. Management have not changed their
methodology for calculating the provision since 31 December 2021, nor is a
change in the key assumptions underlying the methodology expected in the next
12 months. Primarily due to higher inventory levels, the provision has
increased from $430 million at 31 December 2021 to $483 million at 2 July
2022. The provision for excess and obsolete inventory is not considered to
have a range of potential outcomes that is significantly different to the $483
million at 2 July 2022.
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 the second
half of 2022 or thereafter. The ultimate liability may differ from the amount
provided depending on the outcome of court proceedings and settlement
negotiations or if investigations bring to light new facts. Management
considered whether there had been any changes to the number and value of
claims since 31 December 2021 due to COVID and to date have not identified any
changes in trends. If the experience changes in the future the value of
provisions may require adjustment.
Impairment
Management have assessed the non-current assets held by the Group at 2 July
2022 to identify any indicators of impairment. Where an impairment indicator
has arisen, impairment reviews have been undertaken by comparing the expected
recoverable value of the asset to the carrying value of the asset. The
recoverable amounts are based on cash flow projections using the Group's base
case scenario in its going concern models, which was reviewed and approved by
the Board. No material impairments were identified as a result of the
impairment reviews 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 interim financial
statements:
. The impact of climate change on the going concern assessment and the
viability of the Group over the next three years;
a. The impact of climate change on the cash flow forecasts used in the
impairment assessments of non-current assets including goodwill; and
b. 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 discrete services.
Payment terms to our customers are based on commercially reasonable terms for
the respective markets while also considering a customer's credit rating.
Appropriate provisions for returns, trade discounts and rebates are deducted
from revenue. Rebates primarily comprise chargebacks and other discounts
granted to certain customers. Chargebacks are discounts that occur when a
third party purchases product from a wholesaler at its agreed price plus a
mark-up. The wholesaler in turn charges the Group for the difference between
the price initially paid by the wholesaler and the agreed price. The provision
for chargebacks is based on expected sell-through levels by the Group's
wholesalers to such customers, as well as estimated wholesaler inventory
levels.
Orthopaedics and Sports Medicine & ENT
Orthopaedics and Sports Medicine & ENT consists of the following
businesses: Knee Implants, Hip Implants, Other Reconstruction, Trauma &
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:
Half year Half year
2022 2021
$m $m
Segment revenue
Orthopaedics 1,071 1,097
Sports Medicine & ENT 778 764
Advanced Wound Management 751 738
Revenue from external customers 2,600 2,599
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by product
franchise:
Half year Half year
2022 2021
$m $m
Knee Implants 454 438
Hip Implants 298 315
Other Reconstruction 43 47
Trauma & Extremities 276 297
Orthopaedics 1,071 1,097
Sports Medicine Joint Repair 426 409
Arthroscopic Enabling Technologies 281 293
ENT (Ear, Nose & Throat) 71 62
Sports Medicine & ENT 778 764
Advanced Wound Care 360 361
Advanced Wound Bioactives 252 247
Advanced Wound Devices 139 130
Advanced Wound Management 751 738
Total 2,600 2,599
The following table shows the disaggregation of Group revenue by geographic
market and product category. The disaggregation of revenue into the two
product categories below reflects that in general the products in the Advanced
Wound Management franchises are sold to wholesalers and intermediaries, while
products in the other franchises are sold directly to hospitals, ambulatory
surgery centers and distributors. The further disaggregation of revenue by
Established Markets and Emerging Markets reflects that in general our products
are sold through distributors and intermediaries in the Emerging Markets while
in the Established Markets, with the exception of the Advanced Wound Care and
Bioactives franchises, products are in general sold direct to hospitals and
ambulatory surgery centers. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors including
volatility in growth and outlook.
Half year 2022 Half year 2021
Established Markets ((D)) Emerging Markets Total Established Markets ((D)) Emerging Markets Total
$m $m $m $m $m $m
Orthopaedics, Sports Medicine & ENT 1,474 375 1,849 1,495 366 1,861
Advanced Wound Management 654 97 751 653 85 738
Total 2,128 472 2,600 2,148 451 2,599
D Established Markets comprises US, Australia, Canada, Europe, Japan and
New Zealand.
Sales are attributed to the country of destination. US revenue for the half
year was $1,350 million (2021: $1,317 million), China revenue for the half
year was $166 million (2021: $183 million) and UK revenue for the half year
was $95 million (2021: $91 million).
No individual customer comprises more than 10% of the Group's external sales.
2b. Trading profit by business segment
Trading profit is a trend measure which presents the profitability of the
Group excluding the impact of specific transactions that management considers
affect the Group's short-term profitability and the comparability of results.
The Group presents this measure to assist investors in their understanding of
trends. The Group has identified the following items, where material, as those
to be excluded from operating profit when arriving at trading profit:
acquisition and disposal related items; amortisation and impairment of
acquisition intangibles; significant restructuring programmes; gains and
losses arising from legal disputes; and other significant items.
Segment trading profit is reconciled to the statutory measure below:
Half year Half year
2022 2021
$m $m
Segment profit
Orthopaedics 193 204
Sports Medicine & ENT 227 214
Advanced Wound Management 217 228
Segment trading profit 637 646
Corporate costs (197) (187)
Group trading profit 440 459
Acquisition and disposal related items (1) (12)
Restructuring and rationalisation expenses (63) (77)
Amortisation and impairment of acquisition intangibles (105) (87)
Legal and other (29) (44)
Group operating profit 242 239
Acquisition and disposal related items:
For the half year ended 2 July 2022 costs primarily relate to the acquisition
and integration of Engage Surgical and prior year acquisitions. These costs
were partially offset by credits relating to remeasurement of deferred and
contingent consideration for prior year acquisitions.
For the half year ended 3 July 2021 costs primarily relate to the acquisition
and integration of the Extremity Orthopaedics business of Integra LifeSciences
Holdings Corporation ('Extremity Orthopaedics') and prior year acquisitions.
Restructuring and rationalisation costs:
For the half year ended 2 July 2022 these costs primarily relate to the
Operations and Commercial Excellence programme that was announced in February
2020.
For the half year ended 3 July 2021 these costs relate to the implementation
of the Accelerating Performance and Execution (APEX) programme that was
announced in February 2018 and the Operations and Commercial Excellence
programme that was announced in February 2020.
Amortisation and impairment of acquisition intangibles:
For both the half years ended 2 July 2022 and 3 July 2021 charges relate to
the amortisation and impairment of intangible assets acquired in material
business combinations.
Legal and other:
For the half years ended 2 July 2022 and 3 July 2021 charges relate to legal
expenses for ongoing metal-on-metal hip claims. These charges for the half
year to 2 July 2022 were partially offset by a credit of $7 million relating
to insurance recoveries for ongoing metal-on-metal hip claims.
The half years ended 2 July 2022 and 3 July 2021 also include costs for
implementing the requirements of the EU Medical Device Regulation (MDR) which
came into effect in May 2021.
3. Gain on disposal of interest in associate
For the half year ended 2 July 2022 no gain on disposal of interest in
associate was separately recorded (half year to 3 July 2021: $22 million) as
no significant transactions took place which impacted the Group's equity
holding. At the period end, the Group's shareholding was approximately 28.5%,
slightly reduced from the 29.3% at 31 December 2021 due to the exercise of
employee share options.
4. Taxation
Tax rate
Our reported tax for the period ended 2 July 2022 was a charge of $27 million,
with an effective tax rate of 13.2% (H1 2021: $18 million, effective tax rate
of 8.1%). The relatively low effective rate of 8.1% in H1 2021 is explained by
the non-taxable credit relating to the Bioventus investment, and a one-off
increase in deferred tax assets resulting from the increase in the UK
corporation tax rate due to take effect from 1 April 2023.
OECD BEPS 2.0 - Pillar Two
The OECD Pillar Two Model Rules introduce a global minimum corporate tax rate
of 15% applicable to multinational enterprise (MNEs) groups with global
revenue over €750 million. All participating OECD members are required to
incorporate these rules into national legislation. Substantial work remains
to be completed by the OECD and national governments on detailed
implementation but these rules are 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 totalling $202 million was paid on 11 May 2022. The
2022 interim dividend of 14.4 US cents per ordinary share was approved by the
Board on 27 July 2022. This dividend is payable on 26 October 2022 to
shareholders whose names appear on the register at the close of business on 30
September 2022. 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 10 October
2022. Shareholders may participate in the dividend re-investment plan and
elections must be made by 10 October 2022.
6. Acquisitions
Half year ended 2 July 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 $135 million and the
provisional fair value consideration is $131 million and includes $32 million
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 provisional 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 in H1 2022 of $97 million (H1 2021: $259
million) comprises payments of consideration of $89 million (H1 2021: $237
million) relating to acquisitions in the current period and payments of
deferred and contingent consideration of $8 million (H1 2021: $22 million)
relating to acquisitions completed in prior periods.
The carrying value of goodwill increased from $2,989 million at 31 December
2021 to $3,022 million at 2 July 2022. The acquisition in the half year ended
2 July 2022 increased goodwill by $84 million, this was partially offset by
foreign exchange movements of $51 million.
For the half year ended 2 July 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 $240 million and the fair
value of consideration is $236 million 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.
7. Net debt
Net debt as at 2 July 2022 is outlined below. The repayment of lease
liabilities is included in cash flows from financing activities in the cash
flow statement.
2 July 31 December 3 July
2022 2021 2021
$m $m $m
Cash at bank 516 1,290 1,387
Long-term borrowings (2,154) (2,707) (2,781)
Bank overdrafts, borrowings and loans due within one year (562) (435) (596)
Net currency swap asset 3 - -
Net interest rate swap asset - - 1
Net debt (2,197) (1,852) (1,989)
Non-current lease liabilities (127) (141) (135)
Current lease liabilities (50) (56) (54)
Net debt including lease liabilities (2,374) (2,049) (2,178)
The movements in the period were as follows:
Opening net debt as at 1 January (2,049) (1,926) (1,926)
Cash flow before financing activities (61) 186 (68)
Non-cash additions to lease liabilities (8) (53) (12)
Proceeds from issue of ordinary share capital 1 2 2
Proceeds from own shares 5 12 4
Purchase of own shares (133) - -
Equity dividends paid (202) (329) (203)
Exchange adjustments 73 59 25
Net debt including lease liabilities (2,374) (2,049) (2,178)
The Group has $50 million of private placement debt due for repayment in the
second half of 2022. €488 million of term loans are due for repayment in the
first half of 2023 and $105 million of private placement debt is 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
2 July 31 December 3 July 2 July 31 December 3 July
2022 2021 2021 2022 2021 2021 Fair value
$m $m $m $m $m $m level
Financial assets at fair value
Forward foreign exchange contacts 64 37 24 64 37 24 Level 2
Investments 10 10 10 10 10 10 Level 3
Contingent consideration receivable 20 20 35 20 20 35 Level 3
Currency swaps 3 2 2 3 2 2 Level 2
Interest rate swaps - - 1 - - 1 Level 2
97 69 72 97 69 72
Financial assets not measured at fair value
Trade and other receivables 1,057 1,046 1,054
Cash at bank 516 1,290 1,387
1,573 2,336 2,441
Total financial assets 1,670 2,405 2,513
Financial liabilities at fair value
Acquisition consideration (100) (84) (121) (100) (84) (121) Level 3
Forward foreign exchange contracts (34) (17) (21) (34) (17) (21) Level 2
Currency swaps - (2) (2) - (2) (2) Level 2
(134) (103) (144) (134) (103) (144)
Financial liabilities not measured at fair value
Acquisition consideration (16) (7) (20)
Bank overdrafts (4) (5) (8)
Bank loans (508) (859) (900)
Corporate bond (993) (993) (993)
Private placement debt in a hedge relationship - - (121)
Private placement debt not in a hedge relationship (1,210) (1,285) (1,355)
Trade and other payables (954) (1,053) (963)
(3,685) (4,202) (4,360)
Total financial liabilities (3,819) (4,305) (4,504)
At 2 July 2022 the book value and market value of the corporate bond were $993
million and $800 million respectively (31 December 2021: $993 million and $962
million). At 2 July 2022 the book value and fair value of the private
placement debt were $1,210 million and $1,141 million respectively (31
December 2021: $1,285 million and $1,316 million).
In 2020 the Group applied the interest rate benchmark reform amendments
retrospectively to hedging relationships that existed at 1 January 2020 or
were designated thereafter and that are directly affected by interest rate
benchmark reform. The Group has a revolving credit facility of $1,000 million
and private placement notes of $25 million which are subject to IBOR reform.
In 2021 the Group changed the interest rates on its revolving credit facility
to SOFR (Secured Overnight Financing Rate) with no material impact arising.
The Group expects that the interest rates for the private placement notes will
also be changed to SOFR and that no material gain or loss will arise as a
result.
There were no transfers between Levels 1, 2 and 3 during the half year ended 2
July 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 bond issued in
October 2020 is publicly
listed and a market price is available. The Group's other long term borrowings
are not quoted publicly, their fair values are estimated by discounting future
contractual cash flows to net present values at the current market interest
rates available to the Group for similar financial instruments as at the year
end. The fair value of the private placement notes is determined using a
discounted cash flow model based on prevailing market rates. The fair value of
currency swaps is determined by reference to quoted market spot rates. As a
result, foreign forward exchange contracts and currency swaps are classified
as Level 2 within the fair value hierarchy.
The fair value of contingent acquisition consideration is estimated using a
discounted cash flow model. The valuation model considers the present value of
risk adjusted expected payments, discounted using a risk-free discount rate.
The expected payment is determined by considering the possible scenarios,
which relate to the achievement of established milestones and targets, the
amount to be paid under each scenario and the probability of each scenario. As
a result, contingent acquisition consideration is classified as Level 3 within
the fair value hierarchy.
The fair value of investments is based upon third party pricing models for
share issues. As a result, investments are considered Level 3 in the fair
value hierarchy.
The movements in the half year ended 2 July 2022 and the year ended 31
December 2021 for financial instruments measured using Level 3 valuation
methods are presented below:
2 July 31 December
2022 2021
$m $m
Investments
At 1 January 10 9
Additions - 2
Fair value remeasurement - (1)
10 10
Contingent consideration receivable
At 1 January 20 37
Remeasurements - 1
Receipts - (18)
20 20
Acquisition consideration liability
At 1 January (84) (128)
Arising on acquisitions (32) -
Payments 8 23
Remeasurements 8 21
(100) (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
increased since 31 December 2021 by 180bps to 3.7% and 200bps to 4.7%
respectively. The remeasurement gain of $353m was partially offset by a
remeasurement loss of $293m from a decrease in 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:
Half year Full year Half year
2022 2021 2021
Average rates
Sterling 1.30 1.38 1.39
Euro 1.09 1.18 1.20
Swiss Franc 1.06 1.09 1.10
Period end rates
Sterling 1.20 1.35 1.38
Euro 1.04 1.13 1.18
Swiss Franc 1.04 1.10 1.08
Directors' Responsibilities Statement
The Directors confirm that to the best of their knowledge:
· this set of condensed consolidated Interim Financial Statements
has been prepared in accordance with IAS 34 Interim Financial Statements as
adopted for use in the UK and IAS 34 Interim Financial Statements as issued by
the International Accounting Standards Board; and
· that the interim management report herein includes a fair review
of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the enterprise during that period, and any changes
in the related party transactions described in the last annual report that
could do so.
There have been no changes in the Board of Directors of Smith & Nephew plc
to those listed in the Smith & Nephew plc 2021 Annual Report.
By order of the Board:
Chief Executive Officer 28 July 2022
Deepak Nath
Anne-Françoise Nesmes Chief Financial Officer 28 July 2022
INDEPENDENT REVIEW REPORT TO SMITH & NEPHEW PLC
Conclusion
We have been engaged by the company to review the condensed consolidated set
of financial statements in the interim financial report for the period ended 2
July 2022 which comprises the Group Income Statement, Group Statement of
Comprehensive Income, Group Balance Sheet, Condensed Group Cash Flow
Statement, Group Statement of Changes in Equity and the related explanatory
notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed consolidated set of financial statements in the
interim financial report for the period ended 2 July 2022 is not prepared, in
all material respects, in accordance with IAS 34 Interim Financial Reporting
as adopted for use in the UK, IAS 34 Interim Financial Reporting as issued by
the International Accounting Standards Board and the Disclosure Guidance and
Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the
UK FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the UK.
A review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. We read the other information
contained in the interim financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the information in the
condensed consolidated set of financial statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the Group to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the Group will continue in operation.
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 latest annual financial statements of the Group
are prepared in accordance with UK-adopted international accounting standards.
The Group also prepared those annual accounts in accordance with IFRS as
issued by International Accounting Standards Board ('IASB').
The directors are responsible for preparing the condensed consolidated set of
financial statements included in the interim financial report in accordance
with IAS 34 as adopted for use in the UK and in addition to complying with
their legal obligation to do so, have also applied IAS 34 as issued by the
IASB to them.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the Group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
consolidated set of financial statements in the interim financial report based
on our review. Our conclusion, including our conclusions relating to going
concern, are based on procedures that are less extensive than audit
procedures, as described in the Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company for our review work, for this
report, or for the conclusions we have reached.
Paul Nichols
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
28 July 2022
Other information
Definitions of and reconciliation to measures included within adjusted
"trading" results
These Interim Financial Statements include financial measures that are not
prepared in accordance with IFRS. These measures, which include trading
profit, trading profit margin, tax rate on trading results, EPSA, ROIC,
trading cash flow, free 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 Interim Financial
Statements as the Group's management believe that they provide investors with
a means of evaluating performance of the business segments and the
consolidated Group on a consistent basis, similar to the way in which the
Group's management evaluates performance, that is not otherwise apparent on an
IFRS basis, given that certain non-recurring, infrequent, non-cash
and other items that management does not otherwise believe are indicative of
the underlying performance of the consolidated Group may not be excluded when
preparing financial measures under IFRS. These non-IFRS measures should not be
considered in isolation
from, as substitutes for, or superior to financial measures prepared in
accordance with IFRS.
Underlying revenue growth
'Underlying revenue growth' is used to compare the revenue in a given period
to the previous period on a like-for-like basis. Underlying revenue growth
reconciles to reported revenue growth, the most directly comparable financial
measure calculated in accordance with IFRS, by making two adjustments, the
'constant currency exchange effect' and the 'acquisitions and disposals
effect', described below.
The 'constant currency exchange effect' is a measure of the increase/decrease
in revenue resulting from currency movements on non-US Dollar sales and is
measured as the difference between: 1) the increase/decrease in the current
year revenue translated into US Dollars at the current year average exchange
rate and the prior 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
Half year Half year Reported Underlying Acquisitions Currency
2022 2021 growth growth & disposals impact
$m $m % % % %
Segment revenue
Orthopaedics 1,071 1,097 (2.3) 0.7 - (3.0)
Sports Medicine & ENT 778 764 1.8 5.2 - (3.4)
Advanced Wound Management 751 738 1.7 5.8 - (4.1)
Revenue from external customers 2,600 2,599 - 3.5 - (3.5)
Trading profit, trading profit margin, trading cash flow and trading profit to
cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a
percentage of revenue), trading cash flow and trading profit to trading cash
conversion ratio (trading cash flow expressed as a percentage of trading
profit) are trend measures, which present the profitability of the Group. The
adjustments made exclude the impact of specific transactions that management
considers affect the Group's short-term profitability and cash flows, and the
comparability of results. The Group has identified the following items, where
material, as those to be excluded from operating profit and cash generated
from operations when arriving at trading profit and trading cash flow,
respectively: acquisition and disposal related items arising in connection
with business combinations, including amortisation of acquisition intangible
assets, impairments and integration costs; restructuring events; and gains and
losses resulting from legal disputes and uninsured losses. In addition to
these items, gains and losses that materially impact the Group's profitability
or cash flows on a short-term or one-off basis are excluded from operating
profit and cash generated from operations when arriving at trading profit and
trading cash flow. The cash contributions to fund defined benefit pension
schemes that are closed to future accrual are excluded from cash generated
from operations when arriving at trading cash flow. Payment of lease
liabilities is included within trading cash flow.
Adjusted earnings per ordinary share ('EPSA')
EPSA is a trend measure, which presents the profitability of the Group
excluding the post-tax impact of specific transactions that management
considers affect the Group's short-term profitability and comparability of
results. The Group presents this measure to assist investors in their
understanding of trends. Adjusted attributable profit is the numerator used
for this measure and is determined by adjusting attributable profit for the
items that are excluded from operating profit when arriving at trading profit
and items that are recognised below operating profit that affect the Group's
short-term profitability. The most directly comparable financial measure
calculated in accordance with IFRS is basic earnings per ordinary share (EPS).
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1 ) tax(2 ) Taxation(3 ) profit(4 ) operations(5 ) per share(6 )
$m $m $m $m $m $m ¢
Half year 2022 Reported 2,600 242 204 (27) 177 227 20.2
Acquisition and disposal related items - 1 - (2) (2) 11 (0.2)
Restructuring and rationalisation costs - 63 63 (13) 50 59 5.8
Amortisation and impairment of acquisition intangibles - 105 105 (23) 82 - 9.4
Legal and other(7) - 29 32 (6) 26 57 2.9
Lease liability payments - - - - - (27) -
Capital expenditure - - - - - (173) -
Half year 2022 Adjusted 2,600 440 404 (71) 333 154 38.1
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 ¢
Half year 2021 Reported 2,599 239 223 (18) 205 459 23.4
Acquisition and disposal related items - 12 (19) (1) (20) 15 (2.2)
Restructuring and rationalisation costs - 77 77 (14) 63 43 7.2
Amortisation and impairment of acquisition intangibles - 87 87 (19) 68 - 7.7
Legal and other(7) - 44 48 (24) 24 90 2.7
Lease liability payments - - - - - (28) -
Capital expenditure - - - - - (175) -
Half year 2021 Adjusted 2,599 459 416 (76) 340 404 38.8
(1 ) Represents a reconciliation of operating profit to
trading profit.
(2 ) Represents a reconciliation of reported profit before
tax to trading profit before tax.
(3 ) Represents a reconciliation of reported tax to trading
tax.
(4 ) Represents a reconciliation of reported attributable
profit to adjusted attributable profit.
(5 ) Represents a reconciliation of cash generated from
operations to trading cash flow.
(6 ) Represents a reconciliation of basic earnings per
ordinary share to adjusted earnings per ordinary share (EPSA).
(7 ) The ongoing funding of defined benefit pension schemes
that are closed to future accrual is not included in management's definition
of trading cash flow as there is no defined benefit service cost for these
schemes.
Acquisition and disposal related items: For the half year ended 2 July 2022
costs primarily relate to the acquisition and integration of Engage Surgical
and prior year acquisitions. These costs were partially offset by credits
relating to remeasurement of deferred and contingent consideration for prior
year acquisitions.
For the half year ended 3 July 2021 costs primarily relate to the acquisition
and integration of the Extremity Orthopaedics business of Integra LifeSciences
Holdings Corporation ('Extremity Orthopaedics') and prior year acquisitions.
Adjusted profit before tax for the half year ended 3 July 2021 additionally
excludes gains associated with the transaction resulting in the dilution of
the Group's shareholding in Bioventus as detailed in Note 3 to the Interim
Financial statements and acquisition costs incurred by Bioventus.
Restructuring and rationalisation costs: For the half year ended 2 July 2022
these costs primarily relate to the Operations and Commercial Excellence
programme that was announced in February 2020.
For the half year ended 3 July 2021 these costs relate to the implementation
of the Accelerating Performance and Execution (APEX) programme that was
announced in February 2018 and the Operations and Commercial Excellence
programme that was announced in February 2020.
Amortisation and impairment of acquisition intangibles: For both the half
years ended 2 July 2022 and 3 July 2021 charges relate to the amortisation and
impairment of intangible assets acquired in material business combinations.
Legal and other: For the half years ended 2 July 2022 and 3 July 2021 charges
relate to legal expenses for ongoing metal-on-metal hip claims. These charges
for the half year to 2 July 2022 were partially offset by a credit of $7
million relating to insurance recoveries for ongoing metal-on-metal hip
claims.
For the half year ended 3 July 2021 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.
Trading cash flow additionally excludes $7 million of cash funding to closed
defined benefit pension schemes.
The half years ended 2 July 2022 and 3 July 2021 also include costs for
implementing the requirements of the EU Medical Device Regulation (MDR) which
came into effect in May 2021.
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