TIDMSN.
RNS Number : 5017P
Smith & Nephew Plc
18 February 2021
Smith+Nephew Fourth Quarter and Full Year 2020 Results
Building on our investments and focused on growth
18 February 2021
Smith+Nephew (LSE:SN, NYSE:SNN), the global medical technology
business, reports results for the fourth quarter and full year
ended 31 December 2020:
31 Dec 31 Dec Reported Underlying
2020 2019 growth growth
$m $m % %
------ ------ -------- ----------
Fourth Quarter Results(1,2)
Revenue 1,326 1,407 -5.8 -7.1
------ ------ -------- ----------
Full Year Results(1,2)
Revenue 4,560 5,138 -11.2 -12.1
Operating profit 295 815
Operating profit margin (%) 6.5 15.9
EPS (cents) 51.3 68.6
Trading profit 683 1,169
Trading profit margin (%) 15.0 22.8
EPSA (cents) 64.6 102.2
2020 Full Year Highlights
-- Full Year revenue $4,560 million, down -11.2% reported and -12.1% underlying
-- Trading profit margin 15.0% reflected lower gross margins,
negative leverage from SG&A costs and increased R&D
investment
-- Operating profit margin of 6.5% included restructuring costs related to efficiency programmes
-- Cash generated from operations $972 million (2019: $1,370
million), trading cash flow $690 million (2019: $970 million),
trading profit to cash conversion ratio 101% (2019: 83%)
-- Increased R&D investment, with recent product launches performing well
-- Delivered acquisitions in extremities, ENT and ASC segments,
securing new innovation to support sustainable growth
-- Full Year 2020 dividend distribution of 37.5c per share,
unchanged from 2019, reflecting confidence in the business and
strength of the balance sheet
2021 Priorities
-- Return to top-line growth and recapture momentum, driven by
our differentiated product portfolio and pipeline, additional
investment in R&D, and recent acquisitions
-- Deliver further operational improvement across the Group,
including in manufacturing and supply chain, freeing up resources
for future investment
-- Continue to respond effectively to COVID-19, enhancing
flexible working for employees, supporting customers and
maintaining cost control measures
2021 Outlook
-- The outlook reflects the likely continuation of COVID-19
impact during the first half of 2021 and the uncertainty regarding
the timing and pace of recovery
Q4 2020 Highlights
-- Q4 revenue $1,326 million, down -5.8% reported and -7.1%
underlying, as new COVID-19 restrictions impacted elective
surgeries in many markets
-- Q4 slowdown less severe than Q2 decline as healthcare systems
adapted to manage COVID-19 patients while maintaining some level of
elective surgeries
-- Decisions to maintain investment and focus on recovery
readiness drove momentum across the Group
o Hip Implant outperformance in US as OR3O roll-out
continues
o Positive reception to CORI robotics system in first full
quarter post-launch
o Sports Medicine Joint Repair included strong growth from
REGENETEN
o Improved underlying trajectory in Advanced Wound Management in
US and Europe
Roland Diggelmann, Chief Executive Officer, said:
"In 2020 we continued to strengthen Smith+Nephew through
increased investment in R&D, new product launches and strategic
acquisitions in our higher growth segments. We achieved this while
also managing unprecedented disruption from COVID-19. The
resilience of the business and strength of the balance sheet also
meant we are able to maintain our progressive dividend policy.
"We start 2021 with three clear priorities: to return to
top-line growth and recapture momentum; to drive further
operational improvement; and to continue to respond effectively to
COVID-19. We will build on the progress we are starting to make in
areas where we have recently invested and introduced innovation. We
will again invest more in R&D and I am excited by the pipeline
of new technologies approaching launch, and by the potential of our
recent acquisitions."
Analyst conference call
An analyst conference call to discuss Smith+Nephew's fourth
quarter and full year results will be held at 8.30am BST / 3.30am
EST on 18 February 2021, details of which can be found on the
Smith+Nephew website at http://www.smith-nephew.com/results .
Enquiries
Investors
Andrew Swift, +44 (0) 1923 477433
Smith+Nephew
Media
Charles Reynolds +44 (0) 1923 477314
Smith+Nephew
Susan Gilchrist / Ayesha Bharmal +44 (0) 20 7404 5959
Brunswick
Notes
1. Unless otherwise specified as 'reported' all revenue growth
throughout this document is 'underlying' after adjusting for the
effects of currency translation and including the comparative
impact of acquisitions and excluding disposals. All percentages
compare to the equivalent 2019 period.
'Underlying revenue growth' reconciles to reported revenue
growth, the most directly comparable financial measure calculated
in accordance with IFRS, by making two adjustments, the 'constant
currency exchange effect' and the 'acquisitions and disposals
effect', described below. See Other Information on pages 36 to 39
for a reconciliation of underlying revenue growth to reported
revenue growth.
The 'constant currency exchange effect' is a measure of the
increase/decrease in revenue resulting from currency movements on
non-US Dollar sales and is measured as the difference between: 1)
the increase/decrease in the current year revenue translated into
US Dollars at the current year average exchange rate and the prior
revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior
year revenues into US Dollars using the prior year closing
rate.
The 'acquisitions and disposals effect' is the measure of the
impact on revenue from newly acquired material business
combinations and recent material business disposals. This is
calculated by comparing the current year, constant currency actual
revenue (which includes acquisitions and excludes disposals from
the relevant date of completion) with prior year, constant currency
actual revenue, adjusted to include the results of acquisitions and
exclude disposals for the commensurate period in the prior year.
These sales are separately tracked in the Group's internal
reporting systems and are readily identifiable.
2. Certain items included in 'trading results', such as trading
profit, trading profit margin, tax rate on trading results, trading
cash flow, trading profit to cash conversion ratio, EPSA, leverage
ratio and underlying growth are non-IFRS financial measures. The
non-IFRS financial measures reported in this announcement are
explained in Other Information on pages 36 to 39 and are reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS. Reported results represent IFRS financial
measures as shown in the Condensed Consolidated Financial
Statements.
Smith+Nephew Fourth Quarter Trading and Full Year 2020
Results
Overview of 2020
In 2020 the Group faced unprecedented challenges as COVID-19
disrupted our business in every market. Trading across the year was
impacted, with the second quarter being particularly badly affected
as healthcare systems shut down elective procedures to focus on
providing treatment to COVID-19 patients.
Throughout the year we prioritised the health and safety of
employees, continued to support our customers and communities, and
at the same time undertook important work to strengthen the Group.
This included record investment in R&D, launching multiple new
products including digital and robotic surgical systems, and making
strategic acquisitions in higher growth segments such as
extremities.
The combination of the lower revenue and the sustained
commitment to investment, including the increase in R&D, had an
impact on margin, and consequently earnings, for the year.
Fourth Quarter 2020 Trading Update
Our fourth quarter (Q4) revenue was $1,326 million (2019: $1,407
million), a -7.1% decline on an underlying basis. Revenue was down
-5.8% on a reported basis, including a 130bps benefit from foreign
exchange.
Unless specified as 'reported' all revenue growth rates
throughout this document are underlying increases/decreases after
adjusting for the effects of currency translation and the impact of
acquisitions and disposals. All percentages compare to the
equivalent 2019 period. Q4 2020 comprised 64 trading days, two more
than the comparable Q4 2019 period.
Overview of the Fourth Quarter 2020
Q4 revenue performance reflected the impact of increased rates
of COVID-19 infection from mid-October onwards. This was felt
particularly in the US and Europe, where more procedures were
postponed following the reintroduction of restrictions.
Encouragingly, the overall effect on our business was less severe
than seen earlier in the year as healthcare systems maintained
non-COVID care at a higher rate than in Q2.
Our Established Markets declined -5.4% (-3.5% reported) in Q4.
Within this, the US, our largest market globally, was down -4.9%
(-4.9% reported) and Other Established Markets was down -6.2%
(-1.3% reported).
Emerging Markets revenue was down -14.9% (-16.0% reported) as
significant COVID-related restrictions in India and many Latin
American markets impacted performance. In China we continued to
generate strong end-user demand although this was offset by some
shifts in stocking patterns in the quarter.
As in previous months, the impact of COVID was most pronounced
on our Orthopaedic Reconstruction, Sports Medicine and ENT
businesses, driven by lower levels of elective surgery. Our
Advanced Wound Management and Trauma businesses remained more
resilient.
Fourth Quarter Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2020 2019(i) growth Growth(ii) /disposals impact
Consolidated revenue by
franchise $m $m % % % %
------------------------------- ----------- ----------- -------- ---------- ------------ --------
Orthopaedics 545 600 -9.1 -10.2 - 1.1
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 237 279 -15.1 -16.2 - 1.1
Hip Implants 162 160 1.2 -0.5 - 1.7
Other Reconstruction(iii) 16 30 -44.6 -45.6 - 1.0
Trauma 130 131 -0.7 -1.3 - 0.6
Sports Medicine & ENT 408 424 -3.9 -5.2 - 1.3
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 223 221 1.0 -0.3 - 1.3
Arthroscopic Enabling
Technologies 158 163 -3.5 -5.0 - 1.5
ENT (Ear, Nose and Throat) 27 40 -32.0 -33.1 - 1.1
Advanced Wound Management 373 383 -2.8 -4.4 - 1.6
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 183 182 0.6 -2.1 - 2.7
Advanced Wound Bioactives 122 135 -9.8 -9.9 - 0.1
Advanced Wound Devices 68 66 2.4 0.2 - 2.2
Total 1,326 1,407 -5.8 -7.1 - 1.3
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by
geography
------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 689 724 -4.9 -4.9 - -
Other Established Markets(iv) 425 431 -1.3 -6.2 - 4.9
Total Established Markets 1,114 1,155 -3.5 -5.4 - 1.9
Emerging Markets 212 252 -16.0 -14.9 - -1.1
Total 1,326 1,407 -5.8 -7.1 - 1.3
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Included within the Q4 2019 analysis is a reclassification
of $2 million of revenue formerly included in the Advanced Wound
Care franchise which is now included in the Advanced Wound
Bioactives franchise in order to present consistent analysis to the
Q4 2020 results. There has been no change in total revenue for the
quarter ended 31 December 2019
(ii) Underlying growth is defined in Note 1 on page 3
(iii) Other Reconstruction includes robotics capital sales, the
OJR business acquired from Brainlab and bone cement
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
Fourth Quarter Franchise Performance
Orthopaedics
Revenue declined -10.2% (-9.1% reported) in our Orthopaedics
franchise in the quarter. Within this, Knee Implants was down
-16.2% (-15.1% reported) and Hip Implants down -0.5% (+1.2%
reported). The robust Hip Implant performance included good growth
from the REDAPT Revision Hip System and a growing contribution from
the recently launched OR3O Dual Mobility Hip System, helping us
outperform the market in the US during the quarter. The pattern we
saw earlier in the year of Hip Implants outperforming Knee Implants
continued as hip procedures were prioritised since they are often m
ore debilitating and there are more emergency cases, as well as the
on-going drag on knee performance ahead of the launch of our
cementless knee . Other Reconstruction revenue was down -45.6%
(-44.6% reported). This includes the first full quarter of sales of
our new handheld robotics platform, the CORI Surgical System,
following the US launch. We saw encouraging uptake from both new
and existing customers with reported revenue reflecting early
prioritisation of upgrades, contract structures, and timing of
shipping orders. In Trauma revenue declined -1.3% (-0.7% reported),
similar to Q3, with the EVOS System again performing strongly and
generating double-digit growth in the quarter.
Sports Medicine & ENT
Revenue from our Sports Medicine & ENT franchise was down
-5.2% (-3.9% reported) in the quarter, with Sports Medicine Joint
Repair -0.3% (+1.0% reported), Arthroscopic Enabling Technologies
-5.0% (-3.5% reported) and ENT
-33.1% (-32.0% reported). Sports Medicine Joint Repair was
driven by our continued strength in shoulder repair, including
strong growth for REGENETEN and a good start from HEALICOIL
KNOTLESS Suture Anchor launched in September. ENT continued to be
impacted by caution over restarting procedures and lower rates of
ENT infections.
Advanced Wound Management
Revenue from our Advanced Wound Management franchise declined
-4.4%
(-2.8% reported). Advanced Wound Care (AWC) declined by -2.1%
(+0.6% reported). Our focus on commercial execution led to an
improved performance across most regions, offset by a slow quarter
in Asia Pacific related to the stocking-patterns described above.
The Advanced Wound Bioactives (AWB) decline of -9.9% (-9.8%
reported) reflected the phasing of sales of SANTYL around year-end.
End-market demand for the acquired skin substitute products GRAFIX
and STRAVIX grew in the quarter. Advanced Wound Devices (AWD)
delivered revenue growth of +0.2% (+2.4% reported), led by growth
from our traditional negative pressure product RENASYS in the
US.
Full Year 2020 Consolidated Analysis
Smith+Nephew results for the year ended 31 December 2020:
Reported
2020 2019 growth
$m $m %
--------------------------------------------------------- ------- ------ --------
Revenue 4,560 5,138 -11.2
------- ------ --------
Operating profit 295 815 -64
Acquisition and disposal related items 4 32
Restructuring and rationalisation costs 124 134
Amortisation and impairment of acquisition intangibles 171 143
Legal and other 89 45
------- ------ --------
Trading profit(i) 683 1,169 -42
------- ------ --------
c c
Earnings per share ('EPS') 51.3 68.6 -25
Acquisition and disposal related items (0.1) 3.4
Restructuring and rationalisation costs 9.6 12.5
Amortisation and impairment of acquisition intangibles 14.3 12.6
Legal and other 5.7 5.1
UK tax litigation (16.2) -
------- ------ --------
Adjusted Earnings per share ('EPSA')(i) 64.6 102.2 -37
------- ------ --------
(i) See Other Information on pages 36 to 39
Full Year 2020 Analysis
Our full year revenue was $4,560 million (2019: $5,138 million),
down -12.1% on an underlying basis. On a reported basis revenue
declined -11.2%, including a foreign exchange headwind of -20bps
and 110bps benefit from acquisitions.
Group trading profit was $683 million in 2020 (2019: $1,169
million). The trading profit margin was 15.0% (2019: 22.8%). This
reflects the impact of COVID-19 with lower gross margins resulting
from factory underutilisation and an increase in provisions, and
negative leverage from SG&A costs, as well as increased
investment in R&D and dilution from foreign exchange and
acquisitions, offset by savings realised from short term mitigating
actions and our efficiency programmes.
Global franchise trading profit performance was impacted by
COVID-19, with each franchise profit declining year-on-year. The
impact was greatest in our Orthopaedics and Sports Medicine &
ENT franchises as they were more exposed to the postponement of
elective procedures (see Note 2 to the Condensed Consolidated
Financial Statements (Financial Statements) for further
detail).
The APEX efficiency programme, initiated at the end of 2017,
incurred restructuring costs of $49 million in 2020. APEX is now
substantially complete and, when finalised, will have delivered
annualised benefits of around $190 million, $30 million more than
originally guided, for a one-off cost of around $290 million, $50
million more than originally planned.
A new programme focused mostly on driving efficiencies in our
operations and supply chain and, to a lesser extent, on
improvements in our commercial organisation, is now under way, as
discussed below. This incurred costs of $75 million in 2020.
Reported operating profit of $295 million (2019: $815 million)
was after restructuring costs, as well as acquisition and disposal
related items, amortisation and impairment of acquisition
intangibles and legal and other items incurred in the year (see
Other Information on pages 36 to 39).
Cash generated from operations was $972 million (2019: $1,370
million) and trading cash flow was $690 million (2019: $970
million) (see Other Information on pages 36 to 39 for a
reconciliation between cash generated from operations and trading
cash flow). The trading profit to cash conversion ratio was 101%
(2019: 83%) as a result of working capital movements.
Smith+Nephew has a strong balance sheet with access to
significant liquidity and continues to adopt the going concern
basis in preparing these Financial Statements (see Note 1 and Note
6 to the Financial Statements for further detail).
In October we closed our debut USD bond with proceeds of $1
billion (before expenses and underwriting discounts). This provided
attractive long-term funding which will be used to invest in
delivering the Group's strategic imperatives.
At 31 December 2020, the Group had net debt of $1.7 billion
(excluding lease liabilities), compared to committed facilities of
$4.5 billion (see Note 6 to the Financial Statements for a
reconciliation of net debt) . The leverage ratio was 1.8x at
year-end (see Other Information on pages 36 to 39).
Reported tax for the year to 31 December 2020 was a credit of
$202 million (2019: charge of $143 million). This reflects refunds
and tax credits due to the successful UK tax litigation outcome
(see Note 3 to the Financial Statements), releases of provisions
following the conclusion of tax audits and other settlements, and
deductibility of non-trading items partially offsetting trading
profits. The tax rate on trading results for the year to 31
December 2020 was 11.3% and included a one-off benefit from the tax
provision releases (2019: 19.1%) (See Note 3 to the Financial
Statements and Other Information on pages 36 to 39 for further
details on taxation).
Adjusted earnings per share ('EPSA') was 64.6c (129.2c per ADS)
(2019: 102.2c). Basic earnings per share ('EPS') was 51.3c (102.6c
per ADS) (2019: 68.6c), reflecting restructuring costs, acquisition
and disposal related items, amortisation and impairment of
acquisition intangibles and legal and other items incurred,
partially offset by the reported tax credit of $202 million.
Dividend
The Board, having reflected upon the resilience of the business
and the strength of our balance sheet, is recommending a Final
Dividend of 23.1c per share (46.2c per ADS). Together with the
Interim Dividend of 14.4c per share (28.8c per ADS), this will give
a total distribution of 37.5c per share (75.0c per ADS), unchanged
from 2019 and in line with our progressive dividend policy. Subject
to confirmation at our Annual General Meeting, the Final Dividend
will be paid on 12 May 2021 to shareholders on the register at the
close of business on 6 April 2021.
2020 Strategic Highlights
Launching New Innovation
Smith+Nephew is an innovation-led business. In 2020 we invested
a record $307 million in R&D, up 5.1% year-on-year, and
delivered several important product launches.
In Orthopaedics this included a new handheld robotics platform,
the CORI Surgical System, available for both unicompartmental and
total knee arthroplasty. We launched RI.HIP NAVIGATION for total
hip arthroplasty, designed to help maximise accuracy and
reproducibility by delivering patient-specific component alignment.
We also launched the JOURNEY II Unicompartmental Knee System, an
important option as partial knee procedures are less invasive and
reduce the amount of natural bone removed.
In Sports Medicine we introduced the INTELLIO Connected Tower
Solution, which wirelessly connects and remotely controls multiple
Sports Medicine systems from outside the sterile field. We believe
this is an ideal solution for both hospitals and Ambulatory Surgery
Centers (ASC) where space is at a premium. The HEALICOIL KNOTLESS
Suture Anchor, featuring our advanced biocomposite REGENESORB
Material, expanded our advanced healing solutions for rotator cuff
repair.
We also developed new offerings for the growing ASC segment,
which we view as a strategic cross-franchise opportunity where we
are well-positioned as an established leader through our Sports
Medicine franchise. In 2020 we launched Positive Connections, a
unique combination of leading technologies, partnerships,
programmes and training to benefit patients and healthcare
providers. This includes ARIA, a digital care management platform
that promotes engagement between patients and providers to support
the overall patient experience before and after surgery.
Acquisitions
Investing in businesses and technologies in higher-growth
segments is at the core of our acquisition strategy.
In September 2020 we announced the $240 million acquisition of
the Extremity Orthopaedics business of Integra LifeSciences
Holdings Corporation. This acquisition, which was completed in
January 2021, will significantly strengthen our extremities
business by adding a combination of a focused sales channel,
complementary shoulder replacement and upper and lower extremities
portfolio, and an exciting new product pipeline.
In Q1 2020 we acquired Tusker Medical, Inc., the developer of
Tula , a new system for in-office delivery of ear tubes to treat
recurrent or persistent ear infections. This FDA-approved
'Breakthrough-designated Device' is the first system that can be
used to place ear tubes in young children using local anaesthesia
in the physician-office setting. Tula is highly complementary to
our existing ENT portfolio, with the same customer and patient
populations. Other acquisitions in 2020 included two digital
technology products that formed the basis for ARIA.
Delivering Record-levels Of Medical Education
In 2020 a record 185,000 healthcare professionals attended our
courses globally during the year, with nearly 80% delivered
virtually compared to just 11% during 2019. Our new online global
medical education programme was accredited by the Royal College of
Surgeons of England. Launched in response to COVID-19, the
programme was designed to support the development of surgeons by
providing educational webinars on the safe and effective use of
Smith+Nephew products as well as surgical techniques.
2021 Priorities
Our three priorities for 2021 build on the work undertaken and
investments made in 2020 and are underpinned by our long-term
Strategic Imperatives.
1. Return to top-line growth and recapture momentum
2. Deliver further operational improvement across the Group
3. Continue to respond effectively to COVID-19
Return to Top-line Growth and Recapture Momentum
Our first priority for 2021 is to return to top-line growth and
recapture the momentum we were building prior to COVID-19, with the
ultimate aim of increasing earnings through operating leverage.
This priority aligns with the first three of our Strategic
Imperatives targeted at improving revenue growth.
Our focus is to drive higher returns from our differentiated
product portfolio. Our recent experience of launching innovative
products demonstrates that our emphasis on commercial excellence
can enhance growth. Many of our recent new product launches are at
early stages, and there is considerable scope to expand them both
to new customers, and into new markets. As an example, later this
year our new robotics platform CORI will launch in Europe and
India, important markets for surgical robotics.
In 2021 we expect to again invest more in R&D as we continue
to develop innovation that improves outcomes for patients and
customers and meets unmet clinical needs. We have a strong pipeline
across the franchises with many launches planned, including further
digital technologies, subject to completion of necessary regulatory
reviews, clearances and approvals. These include a cementless knee,
a next-generation single-use negative pressure wound therapy system
and upgrades to our robotics and connected tower platforms. We also
have a significant programme of innovation planned for China,
including new products made in China for China.
We also expect to make progress in delivering value from
recently acquired assets. In particular there are opportunities to
drive synergistic growth in Trauma & Extremities, Sports
Medicine Joint Repair, ENT and Advanced Wound Bioactives. For
instance, the acquired Sports Medicine products REGENETEN and
NOVOSTITCH , which have been well received in the US, are only at
the start of their launch in other markets. The Extremity
Orthopaedics business, acquired in January 2021, is expected to
deliver strong growth, and the Tula System has the potential to
transform tympanostomy tube treatment of children as ENT surgeries
restart.
Our business development team continues to seek further
value-creating opportunities focused on high growth segments.
Deliver Further Operational Improvement Across The Group
Our second priority for 2021 is to drive further operational
improvement across Smith+Nephew in order to provide more resources
for investment in the mid-term, including in R&D. This priority
aligns to our Strategic Imperative to become the best owner.
We are now taking the next step in improving our long-term
efficiency, continuing a programme to transform our operations.
This is expected to deliver around $200 million of annualised
benefits by 2025 for a one-off cost of around $350 million.
One major component of the programme is to continue to optimise
our manufacturing network, including introducing digital
technologies and lean manufacturing. As previously announced, we
are building a new facility in Malaysia, which will provide
additional capacity in a low-cost location to support future
growth. We have expanded our site in Costa Rica and are
transforming it into a multi-franchise facility to manufacture PICO
sNPWT for the US market. We have also completed the transfer of
Bioactives manufacturing from Curaçao to our facility in Texas,
US.
A second component under way is the outsourcing of our global
warehousing and distribution functions in the US and Europe to a
specialist third party partner. We expect to benefit from the
greater scale and expertise of our partner, including their
advanced warehouse automation.
We will also focus on other process efficiencies. We have
already made progress on commercial optimisation, having completed
buy-outs of a number of third-party sellers in some markets. Doing
this brings us closer to our individual sales representatives and
to our customers, as well as removing an additional layer of cost.
In addition, we aim to simplify end-to-end processes in all parts
of our business.
Continue To Respond Effectively To COVID-19
Protecting and supporting our employees remains our priority in
our response to COVID-19. We are developing new ways to work, and
have initiated a Workplace Unlimited programme to address
employees' needs for flexible working. We continue to invest in
safety at our sites, such as wearable sensor technology to
encourage social distancing.
We are also focused on how we can best support our customers in
person and virtually. This includes innovating in how we deliver
medical education for customers to support the safe and effective
use of our products. In 2021 we will launch Education Unlimited, a
new global website platform with medical education resources
spanning all our franchises.
We remain determined to balance discretionary costs while at the
same time preparing for recovery. As examples, travel remains
restricted and company meetings have been moved online.
Outlook
The impact of COVID-19 is likely to continue during the first
half of 2021, and while there is still uncertainty on the timing of
recovery, we have maintained our readiness and ability to
respond.
In terms of revenue, we expect to deliver substantial underlying
growth in 2021 compared to 2020. Within this, we expect our Hip
Implants business to continue to outperform Knee Implants, our
Sports Medicine & ENT franchise to perform strongly as markets
recover, and for Advanced Wound Management's growth trajectory to
improve as recent commercial changes continue to deliver
benefits.
In terms of profit margin, we expect an improved performance in
2021 over the prior year. Relative to 2019 (the year before
COVID-19), we anticipate a headwind from the continuing impact of
reduced production volumes on gross margin as well as dilution of
around 100bps from the increased investment in R&D and around
150bps from the acquisitions completed in 2020 and so far in 2021.
Foreign exchange will be an additional headwind of around
100bps.
The tax rate on trading results for 2021 is forecast to be in
the range of 18-19%. This is subject to any material changes to tax
law or other one-off items.
Forward calendar
The Q1 Trading Report will be released on 11 May 2021.
About Smith+Nephew
Smith+Nephew is a portfolio medical technology business that
exists to restore people's bodies and their self-belief by using
technology to take the limits off living. We call this purpose
'Life Unlimited'. Our 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 $4.6 billion in 2020.
Smith+Nephew is a constituent of the FTSE100 (LSE:SN, NYSE:SNN).
The terms 'Group' and 'Smith+Nephew' are used to refer to Smith
& Nephew plc and its consolidated subsidiaries, unless the
context requires otherwise.
For more information about Smith+Nephew, please visit
www.smith-nephew.com and follow us on Twitter , LinkedIn ,
Instagram or Facebook .
Forward-looking Statements
This document may contain forward-looking statements that may or
may not prove accurate. For example, statements regarding expected
revenue growth and trading margins, market trends and our product
pipeline are forward-looking statements. Phrases such as "aim",
"plan", "intend", "anticipate", "well-placed", "believe",
"estimate", "expect", "target", "consider" and similar expressions
are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual
results to differ materially from what is expressed or implied by
the statements. For Smith+Nephew, these factors include: risks
related to the impact of COVID-19, 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-19; 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-19);
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-19);
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.
Full Year Consolidated Revenue Analysis
31 December 31 December Reported Underlying Acquisitions Currency
2020 2019(i) growth Growth(ii) /disposals impact
Consolidated revenue by
franchise $m $m % % % %
------------------------------- ----------- ----------- -------- ---------- ------------ --------
Orthopaedics 1,917 2,222 -13.7 -14.0 0.6 -0.3
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Knee Implants 822 1,042 -21.1 -21.0 - -0.1
Hip Implants 567 613 -7.5 -7.4 - -0.1
Other Reconstruction(iii) 68 79 -12.9 -26.1 13.1 0.1
Trauma 460 488 -5.7 -5.1 - -0.6
Sports Medicine & ENT 1,333 1,536 -13.2 -13.0 - -0.2
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Sports Medicine Joint Repair 710 794 -10.5 -10.2 - -0.3
Arthroscopic Enabling
Technologies 517 591 -12.6 -12.4 - -0.2
ENT (Ear, Nose and Throat) 106 151 -29.9 -29.7 - -0.2
Advanced Wound Management 1,310 1,380 -5.1 -8.1 3.1 -0.1
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Advanced Wound Care 647 701 -7.7 -7.5 - -0.2
Advanced Wound Bioactives 431 436 -1.1 -10.5 9.5 -0.1
Advanced Wound Devices 232 243 -4.8 -4.8 0.2 -0.2
Total 4,560 5,138 -11.2 -12.1 1.1 -0.2
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
Consolidated revenue by
geography
------------------------------- ----------- ----------- -------- ---------- ------------ --------
US 2,339 2,551 -8.3 -10.1 1.8 -
Other Established Markets(iv) 1,450 1,630 -11.0 -12.3 0.2 1.1
Total Established Markets 3,789 4,181 -9.4 -11.0 1.2 0.4
Emerging Markets 771 957 -19.4 -16.8 0.5 -3.1
Total 4,560 5,138 -11.2 -12.1 1.1 -0.2
-------------------------------- ----------- ----------- -------- ---------- ------------ --------
(i) Included within the full year 2019 analysis is a
reclassification of $13 million of revenue formerly included in the
Advanced Wound Care franchise of which $12 million is now included
in the Advanced Wound Bioactives franchise and $1 million in the
Advanced Wound Devices franchise in order to present consistent
analysis to the full year 2020 results. There has been no change in
total revenue for the year ended 31 December 2019
(ii) Underlying growth is defined in Note 1 on page 3
(iii) Other Reconstruction includes robotics capital sales, the
OJR business acquired from Brainlab and bone cement
(iv) Other Established Markets are Europe, Canada, Japan,
Australia and New Zealand
2020 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Group Income Statement for the year ended 31 December 2020
2020 2019
Notes $m $m
----------------------------------------------- ----- -------- --------
Revenue 2 4,560 5,138
Cost of goods sold (1,396) (1,338)
------------------------------------------------ ----- -------- --------
Gross profit 3,164 3,800
Selling, general and administrative expenses (2,562) (2,693)
Research and development expenses (307) (292)
------------------------------------------------ ----- -------- --------
Operating profit 2 295 815
Interest income 6 10
Interest expense (62) (65)
Other finance costs (7) (18)
Share of results of associates 14 1
------------------------------------------------ ----- -------- --------
Profit before taxation 246 743
Taxation 3 202 (143)
------------------------------------------------ ----- -------- --------
Attributable profit(A) 448 600
------------------------------------------------ ----- -------- --------
Earnings per share(A)
Basic 51.3c 68.6c
Diluted 51.2c 68.4c
------------------------------------------------ ----- -------- --------
Group Statement of Comprehensive Income for the year ended 31
December 2020
2020 2019
$m $m
------------------------------------------------------------------------ ----- -----
Attributable profit(A) 448 600
Other comprehensive income
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations 10 (14)
Taxation on other comprehensive income (4) 2
------------------------------------------------------------------------- ----- -----
Total items that will not be reclassified to income statement 6 (12)
------------------------------------------------------------------------- ----- -----
Items that may be reclassified subsequently to income statement
Exchange differences on translation of foreign operations 21 21
Net losses on cash flow hedges (30) (5)
Taxation on other comprehensive income 4 -
------------------------------------------------------------------------ ----- -----
Total items that may be reclassified subsequently to income statement (5) 16
------------------------------------------------------------------------- ----- -----
Other comprehensive income for the year, net of taxation 1 4
------------------------------------------------------------------------- ----- -----
Total comprehensive income for the year(A) 449 604
------------------------------------------------------------------------- ----- -----
A Attributable to the equity holders of the parent and wholly
derived from continuing operations.
Group Balance Sheet as at 31 December 2020
2020 2019
Notes $m $m
----------------------------------------------------------- ----- ------- ------
ASSETS
Non-current assets
Property, plant and equipment 1,449 1,323
Goodwill 2,928 2,789
Intangible assets 1,486 1,567
Investments 9 7
Investment in associates 108 103
Other non-current assets 33 35
Retirement benefit assets 133 106
Deferred tax assets 202 150
------------------------------------------------------------ ----- ------- ------
6,348 6,080
----------------------------------------------------------- ----- ------- ------
Current assets
Inventories 1,691 1,614
Trade and other receivables(B) 1,211 1,328
Cash at bank 6 1,762 277
------------------------------------------------------------ ----- ------- ------
4,664 3,219
----------------------------------------------------------- ----- ------- ------
TOTAL ASSETS 11,012 9,299
------------------------------------------------------------ ----- ------- ------
EQUITY AND LIABILITIES
Equity attributable to owners of the Company
Share capital 177 177
Share premium 612 610
Capital redemption reserve 18 18
Treasury shares (157) (189)
Other reserves (329) (324)
Retained earnings 4,958 4,849
------------------------------------------------------------ ----- ------- ------
Total equity 5,279 5,141
------------------------------------------------------------ ----- ------- ------
Non-current liabilities
Long-term borrowings and lease liabilities 6 3,353 1,975
Retirement benefit obligations 163 136
Other payables 94 102
Provisions 294 214
Deferred tax liabilities 141 167
------------------------------------------------------------ ----- ------- ------
4,045 2,594
----------------------------------------------------------- ----- ------- ------
Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities 6 337 72
Trade and other payables 1,022 1,046
Provisions 123 203
Current tax payable 206 243
------------------------------------------------------------ ----- ------- ------
1,688 1,564
----------------------------------------------------------- ----- ------- ------
Total liabilities 5,733 4,158
------------------------------------------------------------ ----- ------- ------
TOTAL EQUITY AND LIABILITIES 11,012 9,299
------------------------------------------------------------ ----- ------- ------
B Trade and other receivables includes a current tax receivable
of $95 million (2019: $21 million).
Condensed Group Cash Flow Statement for the year ended 31
December 2020
2020 2019
$m $m
-------------------------------------------------------- ------ --------
Cash flows from operating activities
Profit before taxation 246 743
Net interest expense 56 55
Depreciation, amortisation and impairment 596 518
Share of results of associates (14) (1)
Share-based payments expense (equity-settled) 26 32
Net movement in post-retirement obligations 1 (4)
Movement in working capital and provisions 61 27
--------------------------------------------------------- ------ --------
Cash generated from operations 972 1,370
Net interest and finance costs paid (59) (52)
Income taxes refunded/(paid) 22 (150)
--------------------------------------------------------- ------ --------
Net cash inflow from operating activities 935 1,168
--------------------------------------------------------- ------ --------
Cash flows from investing activities
Acquisitions, net of cash acquired (170) (869)
Capital expenditure (443) (408)
Net (purchase)/proceeds from sale of investments (2) 23
Distribution from associate 9 3
--------------------------------------------------------- ------ --------
Net cash used in investing activities (606) (1,251)
--------------------------------------------------------- ------ --------
Net cash inflow/(outflow) before financing activities 329 (83)
--------------------------------------------------------- ------ --------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 2 2
Proceeds from own shares 9 9
Purchase of own shares (16) (63)
Payment of capital element of lease liabilities (55) (46)
Equity dividends paid (328) (318)
Cash movements in borrowings 1,545 425
Settlement of currency swaps 7 (2)
--------------------------------------------------------- ------ --------
Net cash from financing activities 1,164 7
--------------------------------------------------------- ------ --------
Net increase/(decrease) in cash and cash equivalents 1,493 (76)
Cash and cash equivalents at beginning of year 257 333
Exchange adjustments 1 -
-------------------------------------------------------- ------ --------
Cash and cash equivalents at end of year(C) 1,751 257
--------------------------------------------------------- ------ --------
C Cash and cash equivalents at the end of the period are net of
bank overdrafts of $11 million (2019: $20 million).
Group Statement of Changes in Equity for the year ended 31
December 2020
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2020 177 610 18 (189) (324) 4,849 5,141
Attributable profit(A) - - - - - 448 448
Other comprehensive income(A) - - - - (5) 6 1
Equity dividends paid - - - - - (328) (328)
Share-based payments recognised - - - - - 26 26
Taxation on share-based payments - - - - - (4) (4)
Purchase of own shares(D) - - - (16) - - (16)
Cost of shares transferred to
beneficiaries - - - 37 - (28) 9
Cancellation of treasury shares(D) - - - 11 - (11) -
Issue of ordinary share capital - 2 - - - - 2
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2020 177 612 18 (157) (329) 4,958 5,279
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
Capital
Share Share redemption Treasury Other Retained Total
capital premium reserve shares reserves earnings equity
$m $m $m $m $m $m $m
----------------------------------- ------- ------- ---------- -------- -------- -------- ------
At 1 January 2019 177 608 18 (214) (340) 4,625 4,874
Attributable profit(A) - - - - - 600 600
Other comprehensive income(A) - - - - 16 (12) 4
Equity dividends paid - - - - - (318) (318)
Share-based payments recognised - - - - - 32 32
Taxation on share-based payments - - - - - 1 1
Purchase of own shares(D) - - - (63) - - (63)
Cost of shares transferred to
beneficiaries - - - 38 - (29) 9
Cancellation of treasury shares(D) - - - 50 - (50) -
Issue of ordinary share capital - 2 - - - - 2
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
At 31 December 2019 177 610 18 (189) (324) 4,849 5,141
------------------------------------ ------- ------- ---------- -------- -------- -------- ------
A Attributable to the equity holders of the parent and wholly derived from continuing operations.
D During the year ended 31 December 2020, a total of 0.6 million
ordinary shares were purchased at a cost of $16 million and 0.6
million ordinary shares were cancelled (2019: 3.1 million ordinary
shares were purchased at a cost of $63 million and 3.1 million
ordinary shares were cancelled).
Notes to the Condensed Consolidated Financial Statements
1. Basis of preparation and accounting policies
Smith & Nephew plc (the 'Company') is a public limited
company incorporated in England and Wales. In these condensed
consolidated financial statements ('Financial Statements'), 'Group'
means the Company and all its subsidiaries. The financial
information herein has been prepared on the basis of the accounting
policies as set out in the Annual Report of the Group for the year
ended 31 December 2019. The Group has prepared its accounts in
accordance with International Accounting Standards in conformity
with the requirements of the Companies Act 2006 and in accordance
with International Financial Reporting Standards (IFRS) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union. 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 2020. IFRSs as
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union differs in certain respects from IFRS as issued
by the IASB. However, the differences have no impact for the
periods presented. Under IFRS, the Directors are required to adopt
those accounting policies most appropriate to the Group's
circumstances for the purpose of presenting fairly the Group's
financial position, financial performance and cash flows. In
determining and applying accounting policies, judgement is often
required in respect of items where the choice of specific policy,
accounting estimate or assumption to be followed could materially
affect the reported results or net asset position of the Group; it
may later be determined that a different choice would have been
more appropriate. The Group's significant accounting policies which
require the most use of management's estimation are: valuation of
inventories; liability provisions; and impairment. There has been
no change in the methodology of applying management estimation in
these policies since the year ended 31 December 2019.
The uncertainty as to the future impact on the financial
performance and cash flows of the Group as a result of the COVID-19
pandemic has been considered as part of the Group's adoption of the
going concern basis in these financial statements. The
Directors
have prepared detailed cash flow scenarios to 31 December 2022
for going concern purposes.
The Group had access to $1,751 million of cash and cash
equivalents at 31 December 2020. The Group's net debt, excluding
lease liabilities, at 31 December 2020 was $1,722 million (see Note
6) with access to committed facilities of $4.5 billion with an
average maturity of 5.2 years. At the date of approving these
financial statements the funding position of the Group has remained
unchanged and the cash position is not materially different other
than the payment associated with the acquisition of the Extremity
Orthopaedics business of Integra LifeSciences Holdings Corporation
as described in Note 9.
The Group has $265 million of private placement debt due for
repayment in 2021. $1,550 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-19 on future financial performance and cash flows,
with the key judgement applied being the speed and sustainability
of the return to a normal volume of elective procedures
in key markets, including the impact of a further extended wave
of restrictions on elective procedures in the first half of 2021
and the subsequent recovery. Throughout these scenarios, which
include a severe but plausible outcome, the Group continues to have
headroom on its borrowing facilities and financial covenants.
The Directors have a reasonable expectation that the Group is
well placed to manage their business risks, have sufficient funds
to continue to meet their liabilities as they fall due and to
continue in operational existence for a period of at least 22
months from the date of the approval of the financial statements.
The financial statements have therefore been prepared on a going
concern basis.
The principal risks that the Group is exposed to will be
disclosed in the Group's 2020 Annual Report. These are: business
continuity and business change; commercial execution;
cybersecurity; finance; global supply chain; legal and compliance
risks; mergers and acquisitions; new product innovation, design and
development including intellectual property; political and
economic; pricing and reimbursement; quality and regulatory; and
talent management.
Management has not identified a new principal risk for COVID-19,
because the business continuity and change risk includes a risk for
widespread outbreaks of infectious diseases. In addition,
management coordinated its response to COVID-19 through a Crisis
Management Team that was convened within the existing business
continuity and incident management framework. Management also noted
that COVID-19 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-19 increases the likelihood of pricing and
reimbursement risk; restrictions on elective surgery increase
commercial execution risk; and COVID-19 has increased the risk to
our people's health and wellbeing.
The risks associated with the current uncertainty around global
trade and the UK's decision to leave the European Union are
included under the political and economic risk. The Directors do
not believe the UK's decision to leave the EU will have a
significant impact on the Group's long-term ability to conduct
business into and out of the EU or UK. The UK has now exited from
the EU, including a new trade agreement between the UK and Europe.
Remaining risks relate to the introduction of new Medicines and
Healthcare products Regulatory Agency (MHRA) legislation in the UK,
effective 1 January 2021 with future demands to be clari ed. Supply
chain risks, specifically border delays, continue into 2021. The
Group has a Brexit Council which meets regularly and addresses all
affected areas including regulation and supply chain.
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 2006 for the years ended 31
December 2020 or 2019 but is derived from those accounts. Statutory
accounts for 2019 have been delivered to the registrar of companies
and those for 2020 will be delivered in due course. The auditor has
reported on those accounts; their report was (i) unqualified, (ii)
did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under section 498 (2) or (3)
of the Companies Act 2006.
New accounting standards effective 2020
A number of new standards are effective from 1 January 2020 but
they do not have a material effect on the Group's financial
statements. 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.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are
effective for annual periods beginning after 1 January 2021 and
earlier application is permitted; however, the Group has not early
adopted them in preparing these consolidated financial statements.
The Group had a number of interest rate swaps outstanding at 31
December 2020 which all mature in 2021 and for which published US
Dollar LIBOR rates will still be available. The Group has a
revolving credit facility of $1,000 million and private placement
notes of $25 million which will be subject to IBOR reform. The
Group expects that the interest rates for both will be changed to
SOFR (Secured Overnight Financing Rate) in 2021 and that no
significant modification gain or loss will arise as a result. The
other new standards and amendments to standards are not expected to
have a significant impact on adoption.
Critical judgements and estimates
In determining and applying accounting policies, judgement is
often required in respect of items where the choice of specific
policy, accounting estimate or assumption to be followed could
materially affect the reported results or net asset position of the
Group; it may later be determined that a different choice would
have been more appropriate. The Group's significant accounting
policies which required the most use of management's estimation are
outlined below. The critical estimates are consistent with 31
December 2019 except for business combinations, which was not a
critical estimate in the year ended 31 December 2020 as there were
no significant acquisitions in the year, and taxation, which is not
a critical estimate at 31 December 2020 following the conclusion of
tax audits leading to a significant release of provisions.
Management's assessment of the impact of COVID-19 on critical and
other estimates is also outlined below:
Valuation of inventories
A feature of the Orthopaedics franchise (which accounts for
approximately 60% of the Group's total inventory and approximately
80% of the total provision for excess and obsolete inventory) is
the high level of product inventory required, some of which is
located at customer premises and is available for customers'
immediate use.
Complete sets of products, including large and small sizes, have
to be made available in this way. These sizes are used less
frequently than standard sizes and towards the end of the product
life cycle are inevitably in excess of requirements. Adjustments to
carrying value are therefore required to be made to orthopaedic
inventory to anticipate this situation. These adjustments are
calculated in accordance with a formula based on levels of
inventory compared with historical usage. This formula is applied
on an individual product line basis and is first applied when a
product group has been on the market for two years. This method of
calculation is considered appropriate based on experience, but it
does require management estimate in respect of customer demand,
effectiveness of inventory deployment, length of product lives and
phase-out of old products.
COVID-19 impact assessment: Management have assessed the impact
of COVID-19 on the provision for excess and obsolete inventory,
specifically considering the impact of lower sales demand and
increased inventory levels. Where possible, management have taken
steps to reduce manufacturing output and inventory levels.
Management have not changed their policy for calculating the
provision since 31 December 2019, nor is a change in the key
assumptions underlying the methodology expected in the next 12
months. As a result of decreased sales demand and increased
inventory levels, of which COVID-19 was a significant contributing
factor, the provision has increased from $308 million at 31
December 2019 to $377 million at 31 December 2020. The provision
for excess and obsolete inventory is not considered to have a range
of potential outcomes that is significantly different to the $377
million at 31 December 2020 barring unforeseen changes in sales
demand like those experienced in 2020.
Liability provisioning
The recognition of provisions for legal disputes related to
metal-on-metal cases is subject to a significant degree of
estimation. Provision is made for loss contingencies when it is
considered probable that an adverse outcome will occur and the
amount of the loss can be reasonably estimated. In making its
estimates, management takes into account the advice of internal and
external legal counsel. Provisions are reviewed regularly and
amounts updated where necessary to reflect developments in the
disputes. The value of provisions may require future adjustment if
experience such as number, nature or value of claims or settlements
changes. Such a change may be material in 2021 or thereafter. The
ultimate liability may differ from the amount provided depending on
the outcome of court proceedings and settlement negotiations or if
investigations bring to light new facts.
COVID-19 impact assessment: Management considered whether there
had been any changes to the number and value of claims due to
COVID-19 and to date have not identified any changes in trends. If
the experience changes in the future the value of provisions may
require adjustment.
Impairment: Non-current assets
In carrying out impairment reviews of intangible assets and
goodwill, a number of significant assumptions have to be made when
preparing cash flow projections. These include the future rate of
market growth, discount rates, the market demand for the products
acquired, the future profitability of acquired businesses or
products, levels of reimbursement and success in obtaining
regulatory approvals. If actual results should differ or changes in
expectations arise, impairment charges may be required which would
adversely impact operating results. This critical estimate is not
considered to have a significant risk of material adjustment in
2021 or thereafter based on sensitivity analyses undertaken (as
outlined below).
COVID-19 impact assessment: Management have assessed the
non-current assets held by the Group at 31 December 2020 to
identify any indicators of impairment as a result of COVID-19.
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. Additionally, severe downside sensitivity
analyses have been undertaken on the base case scenario. No
material impairments were identified as a result of the impairment
reviews and sensitivity analyses undertaken.
Other estimates
Management have also considered the impact of COVID-19 on other
estimates:
Trade receivables
Management have assessed the impact of COVID-19 on the expected
credit loss allowance against trade receivables. Current and
expected collection of trade receivables since the start of the
COVID-19 pandemic has been reflected in country-specific expected
credit loss models on a reasonable and supportable basis where
possible, taking into account macroeconomic factors such as
government support. In some instances, it was not possible to
incorporate the specific effects of COVID-19 and macroeconomic
factors on a reasonable and supportable basis. Where the effects of
COVID-19 could not be reflected in expected credit loss models,
further adjustments to the models were considered. These
adjustments were based on the most recent information on the
expected recoverability of trade receivable balances. The Group's
expected credit loss allowance increased from $59 million at 31
December 2019 to $71 million at 31 December 2020. This estimate is
not considered to have a significant risk of material adjustment in
2021 or thereafter.
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. Franchise presidents have responsibility
for upstream marketing, driving product portfolio and technology
acquisition decisions, and full commercial responsibility for their
franchise in the US. Regional presidents in EMEA and APAC 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 three franchise presidents, the two regional
presidents and certain heads of function, and is chaired by the
Chief Executive Officer ('CEO'). ExCo is the body through which the
CEO uses the authority delegated to him by the Board of Directors
to manage the operations and performance of the Group. All
significant operating decisions regarding the allocation and
prioritisation of the Group's resources and assessment of the
Group's performance are made by ExCo, and whilst the members have
individual responsibility for the implementation of decisions
within their respective areas, it is at the ExCo level that these
decisions are made. Accordingly, ExCo is considered to be the
Group's chief operating decision maker as defined by IFRS 8
Operating Segments.
In making decisions about the prioritisation and allocation of
the Group's resources, ExCo reviews financial information for the
three franchises (Orthopaedics, Sports Medicine & ENT, and
Advanced Wound Management) and determines the best allocation of
resources to the franchises. Financial information for corporate
costs is presented on a Group-wide basis. The ExCo is not provided
with total assets and liabilities by segment, and therefore these
measures are not included in the disclosures below. The results of
the segments are shown below.
2a. Revenue by business segment and geography
Revenue is recognised as the performance obligations to deliver
products or services are satisfied and is recorded based on the
amount of consideration expected to be received in exchange for
satisfying the performance obligations. Revenue is recognised
primarily when control is transferred to the customer, which is
generally when the goods are shipped or delivered in accordance
with the contract terms, with some transfer of services taking
place over time. Substantially all performance obligations are
performed within one year. There is no significant revenue
associated with the provision of services.
P ayment terms to our customers are based on commercially
reasonable terms for the respective markets while also considering
a customer's credit rating. Appropriate provisions for returns,
trade discounts and rebates are deducted from revenue. Rebates
primarily comprise chargebacks and other discounts granted to
certain customers. Chargebacks are discounts that occur when a
third party purchases product from a wholesaler at its agreed price
plus a mark-up. The wholesaler in turn charges the Group for the
difference between the price initially paid by the wholesaler and
the agreed price. The provision for chargebacks is based on
expected sell-through levels by the Group's wholesalers to such
customers, as well as estimated wholesaler inventory levels.
Orthopaedics and Sports Medicine & ENT (Ear, Nose &
Throat)
Orthopaedics and Sports Medicine & ENT consists of the
following businesses: Knee Implants, Hip Implants, Other
Reconstruction, Trauma, 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:
2020 2019
$m $m
---------------------------------- ------ ------
Segment revenue
Orthopaedics 1,917 2,222
Sports Medicine & ENT 1,333 1,536
Advanced Wound Management 1,310 1,380
----------------------------------- ------ ------
Revenue from external customers 4,560 5,138
----------------------------------- ------ ------
Disaggregation of revenue
The following table shows the disaggregation of Group revenue by
product franchise:
2020 2019(E)
$m $m
------------------------------------- ------ -------
Knee Implants 822 1,042
Hip Implants 567 613
Other Reconstruction 68 79
Trauma 460 488
-------------------------------------- ------ -------
Orthopaedics 1,917 2,222
-------------------------------------- ------ -------
Sports Medicine Joint Repair 710 794
Arthroscopic Enabling Technologies 517 591
ENT (Ear, Nose & Throat) 106 151
-------------------------------------- ------ -------
Sports Medicine & ENT 1,333 1,536
-------------------------------------- ------ -------
Advanced Wound Care 647 701
Advanced Wound Bioactives 431 436
Advanced Wound Devices 232 243
-------------------------------------- ------ -------
Advanced Wound Management 1,310 1,380
-------------------------------------- ------ -------
Total 4,560 5,138
-------------------------------------- ------ -------
E Included within the 2019 analysis is a reclassification of $13
million of revenue formerly included in the Advanced Wound Care
franchise of which $12 million is now included in the Advanced
Wound Bioactives franchise and $1 million in the Advanced Wound
Devices franchise in order to present consistent analysis to the
2020 results. There has been no change in total revenue for the
year ended 31 December 2019.
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.
2020 2019
Established Established
Markets (F) Emerging Markets Total Markets (F) Emerging Markets Total
$m $m $m $m $m $m
----------------- ---------------- ---------------- ------ ---------------- ---------------- ------
Orthopaedics,
Sports Medicine
& ENT 2,619 631 3,250 2,986 772 3,758
Advanced Wound
Management 1,170 140 1,310 1,195 185 1,380
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
Total 3,789 771 4,560 4,181 957 5,138
------------------ ---------------- ---------------- ------ ---------------- ---------------- ------
F Established Markets comprises US, Australia, Canada, Europe, Japan and New Zealand.
Sales are attributed to the country of destination. US revenue
for the year was $2,339 million (2019: $2,551 million), China
revenue for the year was $318 million (2019: $336 million) and UK
revenue for the year was $166 million (2019: $211 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:
2020 2019
$m $m
--------------------------------------------------------- ------ ------
Segment profit
Orthopaedics 389 666
Sports Medicine & ENT 306 489
Advanced Wound Management 316 370
---------------------------------------------------------- ------ ------
Segment trading profit 1,011 1,525
Corporate costs (328) (356)
---------------------------------------------------------- ------ ------
Group trading profit 683 1,169
Acquisition and disposal related items (4) (32)
Restructuring and rationalisation expenses (124) (134)
Amortisation and impairment of acquisition intangibles (171) (143)
Legal and other (89) (45)
---------------------------------------------------------- ------ ------
Group operating profit 295 815
---------------------------------------------------------- ------ ------
Acquisition and disposal related items:
For the year to 31 December 2020 costs primarily relate to the
acquisition of Tusker and prior year acquisitions, partially offset
by credits relating to remeasurement of contingent consideration
for prior year acquisitions.
For the year to 31 December 2019 costs primarily relate to the
acquisitions of Ceterix, Osiris, Leaf, Brainlab OJR and
Atracsys.
Restructuring and rationalisation costs:
For the year ended 31 December 2020 these costs relate to the
implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018 and the Operations
and Commercial Excellence programme announced in February 2020. For
the year ended 31 December 2019 costs relate to the APEX
programme.
Amortisation and impairment of acquisition intangibles:
For the years ended 31 December 2020 and 31 December 2019, these
costs relate to the amortisation and impairment of intangible
assets acquired in material business combinations.
Legal and other:
For the year ended 31 December 2020 charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims and an
increase of $17 million in the provision that reflects the present
value of the estimated costs to resolve all other known and
anticipated metal-on-metal hip claims. The year to 31 December 2020
also includes costs for implementing the requirements of the EU
Medical Device Regulations that will apply from May 2021.
For the year ended 31 December 2019 charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims and an
increase of $121 million in the provision that reflects the present
value of the estimated costs to resolve all other known and
anticipated metal-on-metal hip claims. The year to 31 December 2019
also includes costs for implementing the requirements of the EU
Medical Device Regulations that will apply from May 2021. These
charges in the year to 31 December 2019 were partially offset by a
credit of $147 million relating to insurance recoveries for ongoing
metal-on-metal hip claims.
3. Taxation
Reported tax for the year to 31 December 2020 was a credit of
$202 million (2019: charge of $143 million). This reflects refunds
and tax credits due to the successful UK tax litigation outcome
(see below), releases of provisions following the conclusion of tax
audits and other settlements, and lower profits.
UK tax litigation
In December 2016, the Group appealed to the First Tier Tribunal
against a decision by HM Revenue & Customs (HMRC) relating to
the UK tax deductibility of historic foreign exchange losses
totalling GBP675 million. The decision of the First Tier Tribunal
upheld the Group's appeal. HMRC's subsequent appeal was heard by
the Upper Tribunal in June 2018 which upheld the decision of the
First Tier Tribunal. HMRC was granted leave to appeal in the Court
of Appeal, which was heard in October 2019 and (following
adjournment) in January 2020. In March 2020, the Court of Appeal
published its decision again upholding the Group's position. In
June 2020, the Group received confirmation that HMRC had not
appealed to the Supreme Court, making the Group's right to the
deductions conclusive. As a result full benefit for these
deductions has been recognised in the Group's Financial Statements
(no tax benefit for these losses was recognised in previous
periods), within current tax, and within deferred tax to the extent
that losses not yet utilised are reasonably expected to be realised
in the future. In the second half of 2020 the Group has received a
cash tax refund of $100 million (GBP78 million) in addition to
accrued interest of $6 million, in respect of tax previously
overpaid; and a
deferred tax asset of $42 million has been recognised in respect
of the losses not yet utilised. There is an unrecognised deferred
tax credit of $47 million in relation to losses arising from the
decision which are not considered to have a realistically
foreseeable potential to be utilised at the current time.
EU state aid
A factor that may have a future effect on our tax charge is the
decision by the European Commission (EC), published in April 2019,
that the UK CFC financing exemption (FCPE) rules between 2013 and
2018 partially constituted illegal State Aid. The UK government and
many potentially affected taxpayers, including us, have applied to
the Court of Justice of the European Union (CJEU) for annulment of
the EC's decision. At the EC's request, HMRC requested, from
potentially affected companies, certain information and facts in
order to review whether there may be a potential liability, were
the EC's position to be upheld, to which we fully responded within
HMRC's specified timeframe. The amount of tax ultimately due, if
any, will depend both on generic technical legislative
interpretation and company-specific facts and circumstances. HMRC
is under a legal obligation to collect potentially underpaid tax
ahead of the determination of the appeals by the CJEU, and by
virtue of a recent law change, any assessment raised by HMRC could
be appealed but the tax charged under it could not be
postponed.
As of 17 February 2021, we had received no assessment or other
demand, nor any other communication from HMRC following our most
recent information submission. If the EC decision were ultimately
to be upheld on generic technical legislative grounds, subject to
any relief based on company-specific facts and circumstances, we
calculate our maximum potential liability as at 31 December 2020 to
be approximately $155 million. Based on current information, we do
not consider it can reasonably be concluded that it is more likely
than not that any liability would arise, and therefore no provision
has been recognised.
4. Dividends
The 2019 final dividend of 23.1 US cents per ordinary share
totalling $202 million was paid on 6 May 2020. The 2020 interim
dividend of 14.4 US cents per ordinary share totalling $126 million
was paid on 28 October 2020.
A final dividend for 2020 of 23.1 US cents per ordinary share
has been proposed by the Board and will be payable, subject to
shareholder approval, on 12 May 2021 to shareholders whose names
appear on the register at the close of business on 6 April 2021
(the record date). The sterling equivalent per ordinary share will
be set following the record date. The ex-dividend date is 1 April
2021 and the final day for currency and dividend reinvestment plan
('DRIP') elections is 20 April 2021.
5. Acquisitions
Year ended 31 December 2020
On 23 January 2020, the Group completed the acquisition of 100%
of the share capital of Tusker Medical, Inc. ('Tusker'), a
developer of an innovative in-office solution for tympanostomy (ear
tubes) called Tula. The acquisition was deemed to be a business
combination within the scope of IFRS 3 Business Combinations. The
acquisition supports the Group's strategy to invest in innovative
technologies that address unmet clinical needs. The maximum
consideration is $140 million and the provisional fair value of
consideration is $139 million and includes $6 million of deferred
consideration and $35 million of contingent consideration. The
goodwill represents the control premium, the acquired workforce and
the synergies expected from integrating Tusker into the Group's
existing business, and is not expected to be deductible for tax
purposes.
The provisional fair value of assets acquired and liabilities
assumed are set out below:
Tusker
$m
-------------------------------------------- ------
Intangible assets - Product-related 53
Property, plant & equipment 6
Other receivables 1
Trade and other payables (6)
Non-current liabilities (3)
Net deferred tax assets 5
------------------------------------------------ ------
Net assets 56
Goodwill 83
------------------------------------------------ ------
Consideration (net of $nil cash acquired) 139
------------------------------------------------ ------
During the year ended 31 December 2020, the Group also completed
two other smaller acquisitions in the spheres of remote physical
therapy and arthroscopic enabling technology. The maximum
aggregated consideration is $41 million and the provisional fair
value of consideration is $26 million and includes $3 million of
deferred consideration and $17 million of contingent consideration.
The fair value of aggregate assets acquired is: intangible assets
of $8 million, property and other net assets of $2 million. The
goodwill arising on these acquisitions is $16 million, which is not
expected to be deductible for tax purposes, and is attributable to
future iterations of the technologies and the synergies that can be
expected from integrating these acquisitions into the Group's
existing business.
For the year ended 31 December 2020, the contribution to revenue
and profit from the 2020 acquisitions was immaterial. If the
business combinations had occurred at the beginning of the year,
the contribution to revenue and profit would also have been
immaterial.
The cash outflow from acquisitions of $170 million for the year
ended 31 December 2020 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
The carrying value of goodwill increased from $2,789 million to
$2,928 million as a result of acquisitions ($99 million) and
foreign exchange movements ($43 million) which were partially
offset by an IFRS 3 measurement period adjustments ($3 million) in
relation to the Osiris Therapeutics, Inc. acquisition as outlined
below.
Year ended 31 December 2019
The Group acquired five medical technology businesses deemed to
be business combinations within the scope of IFRS 3 Business
Combinations during the year ended 31 December 2019. The
acquisition accounting for these business combinations was
completed in 2020 with no adjustments to the provisional fair value
disclosed in the Group's 2019 Annual Report other than in relation
to the Osiris Therapeutics, Inc. acquisition as outlined below.
On 22 January 2019, the Group completed the acquisition of 100%
of the share capital of Ceterix Orthopaedics, Inc. ('Ceterix'), a
developer of a meniscus repair system. The acquisition supports the
Company's strategy to invest in innovative technologies that meet
unmet clinical needs. The maximum consideration payable of $105
million has a fair value of $96 million, which includes deferred
consideration of $5 million and contingent consideration of $47
million. The fair value of the contingent consideration is
determined from the acquisition agreement, the risk adjusted cash
flows from the Board-approved acquisition model and a risk-free
discount rate of 3.3%. The maximum contingent consideration is $55
million. The goodwill is attributable to the control premium, the
acquired workforce and the synergies expected from integrating
Ceterix into the Group's existing business.
On 17 April 2019, the Group completed the acquisition of 100% of
the share capital of Osiris Therapeutics, Inc. ('Osiris'), a fast
growing company delivering regenerative medicine products including
skin, bone graft and articular cartilage substitutes that will
further expand and differentiate the Group's Advanced Wound
Management portfolio. This acquisition provides the Group with a
fast growing portfolio with strong clinical evidence addressing
critical needs in the skin substitute marketplace. It is one of the
highest growth and high potential markets in wound management,
filling an important need not previously adequately addressed in
our portfolio. Cash consideration was $660 million with no deferred
or contingent consideration payable. The goodwill is attributable
to the control premium, the acquired workforce and the synergies
that can be expected from integrating Osiris into the Group's
existing business. During the year ended 31 December 2020,
adjustments were made to the fair value of the provisions, net
deferred tax liability and trade and other payables. These
adjustments were made during the one year measurement period in
accordance with the requirements of IFRS 3. The net impact of these
adjustments was $3 million and has been reflected in the fair value
of goodwill, reducing it from $301 million to $298 million.
Also on 17 April 2019, the Group completed the acquisition of
85.5% of the share capital of Leaf Healthcare, Inc. ('Leaf'), a
developer of the unique Leaf Patient Monitoring System for pressure
injury prevention and patient mobility monitoring, which is highly
complementary to the Group's existing wound portfolio. This
acquisition brings the Group's total shareholding in Leaf to 100%.
The Group's existing holding of 14.5% of the share capital, with a
carrying value of $6 million, was remeasured to fair value
resulting in a $1 million gain which is included in selling,
general and administrative expenses in the income statement. The
maximum consideration payable of $75 million for 100% of the share
capital has a fair value of $52 million, which includes deferred
consideration of $4 million and contingent consideration of $12
million. The fair value of the contingent consideration is
determined from the acquisition agreement, the risk adjusted cash
flows from the Board-approved acquisition model and a risk-free
discount rate of 3.0%. The maximum contingent consideration is $35
million. The goodwill is attributable to the control premium, the
acquired workforce, future iterations of the technology and the
synergies that can be expected from integrating Leaf into the
Group's existing business.
On 31 May 2019, the Group completed the acquisition of the
Brainlab Orthopaedic Joint Reconstruction business ('Brainlab
OJR'). The acquisition supports the Group's strategy to invest in
best-in-class technologies that further its multi-asset digital
surgery and robotic ecosystem. The maximum consideration payable of
$108 million has a fair value of $107 million, which includes
contingent consideration of $57 million. The fair value of the
contingent consideration is determined from the acquisition
agreement, the risk adjusted cash flows from the Board-approved
acquisition model and a risk-free discount rate of 2.3%. The
maximum contingent consideration is $58 million. The goodwill is
attributable to the control premium, the acquired workforce, future
iterations of the technology and the synergies that can be expected
from integrating the orthopaedic joint reconstruction business into
the Group's existing business.
On 1 July 2019, the Group completed the acquisition of 100% of
the share capital of Atracsys Sàrl ('Atracsys'), a
Switzerland-based provider of optical tracking technology used in
computer-assisted surgery. The acquisition supports the Group's
long-term commitment to develop its multi-asset digital surgery and
robotics ecosystem to empower surgeons and improve clinical
outcomes. The fair value of consideration is $42 million which
includes $14 million of deferred consideration and $5 million of
contingent consideration. The fair value of contingent
consideration is determined from the acquisition agreement, the
risk-adjusted cash flows from the Board approved acquisition model
and a risk-free discount rate of 2.3%. The maximum contingent
consideration is $6 million. The goodwill represents the control
premium, the acquired workforce and the synergies expected from
integrating Atracsys into the Group's existing business.
The fair value of assets acquired and liabilities assumed are
set out below:
Ceterix Osiris Leaf Brainlab OJR Atracsys
$m $m $m $m $m
------------------------------------------- ------- ------ ---- ------------ --------
Intangible assets - Product-related 43 284 14 - 9
Intangible assets - Technology - - - 75 -
Intangible assets - Customer-related - 80 - 9 1
Property, plant & equipment 2 6 - - 1
Investments - 17 - - -
Other non-current assets - 4 - - -
Inventory 2 9 1 - 1
Trade and other receivables 1 49 1 - 1
Trade and other payables (4) (34) (1) - (1)
Provisions - (14) - - -
Non-current liabilities - (7) - - -
Net deferred tax asset/(liability) 1 (56) 1 - (1)
-------------------------------------------- ------- ------ ---- ------------ --------
Net assets 45 338 16 84 11
Goodwill 49 298 37 23 31
-------------------------------------------- ------- ------ ---- ------------ --------
Consideration (net of cash acquired(G) ) 94 636 53 107 42
-------------------------------------------- ------- ------ ---- ------------ --------
G Cash acquired is as follows: Ceterix: $2 million; Osiris: $24
million, Leaf: $1 million; Brainlab OJR: $nil; and Atracsys:
$nil.
The cash outflow from acquisitions of $869 million for the year
ended 31 December 2019 also includes payments of deferred and
contingent consideration relating to acquisitions made in prior
years.
6. Net debt
Net debt as at 31 December 2020 is outlined below. The repayment
of lease liabilities is included in cash flows from financing
activities in the cash flow statement.
2020 2019
$m $m
---------------------------------------------------------- -------- --------
Cash at bank 1,762 277
Long-term borrowings (3,207) (1,851)
Bank overdrafts, borrowings and loans due within one year (279) (26)
Net interest rate swap asset 2 -
---------------------------------------------------------- -------- --------
Net debt (1,722) (1,600)
----------------------------------------------------------- -------- --------
Non-current lease liabilities (146) (124)
Current lease liabilities (58) (46)
----------------------------------------------------------- -------- --------
Net debt including lease liabilities (1,926) (1,770)
----------------------------------------------------------- -------- --------
The movements in the year were as follows:
Opening net debt as at 1 January (1,770) (1,104)
Recognition of lease liability on transition to IFRS 16 - (164)
Cash flow before financing activities 329 (83)
Non-cash additions to lease liabilities (81) (46)
Proceeds from issue of ordinary share capital 2 2
Proceeds from own shares 9 9
Purchase of own shares (16) (63)
Equity dividends paid (328) (318)
Exchange adjustments (71) (3)
----------------------------------------------------------- -------- --------
Net debt including lease liabilities (1,926) (1,770)
----------------------------------------------------------- -------- --------
The Group has $265 million of private placement debt due for
repayment in 2021.
The Group has available committed facilities of $4.5 billion
(2019: $2.9 billion). During 2020, the Group issued its first
corporate bond, in the form of $1 billion (before expenses and
underwriting discounts) of notes bearing an interest rate of 2.032%
repayable in 2030. In December 2019 the Group signed a new senior
notes agreement totalling $550 million, which was drawn down in
June 2020. The senior notes are due to mature between 2027 and
2032. Part of the Group's net investment in its Euro subsidiaries
is hedged by EUR757 million ($930 million equivalent) of term loans
which mitigate the foreign currency risk arising from the
subsidiaries' net assets. EUR492 million ($604 million equivalent)
of the total term loans have been extended from May 2021 to mature
in May 2022.
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
------------------ --------------
2020 2019 2020 2019 Fair value
$m $m $m $m level
--------------------------------------------------- -------- -------- ------ ------ ----------
Financial assets at fair value
Forward foreign exchange contacts 20 25 20 25 Level 2
Investments 9 7 9 7 Level 3
Contingent consideration receivable 37 39 37 39 Level 3
Currency swaps 2 1 2 1 Level 2
Interest rate swaps 2 - 2 - Level 2
---------------------------------------------------- -------- -------- ------ ------
70 72 70 72
--------------------------------------------------- -------- -------- ------ ------
Financial assets not measured at fair value
Trade and other receivables 986 1,184
Cash at bank 1,762 277
---------------------------------------------------- -------- --------
2,748 1,461
--------------------------------------------------- -------- --------
Total financial assets 2,818 1,533
---------------------------------------------------- -------- --------
Financial liabilities at fair value
Acquisition consideration (128) (141) (128) (141) Level 3
Forward foreign exchange contracts (57) (22) (57) (22) Level 2
Currency swaps (2) (1) (2) (1) Level 2
---------------------------------------------------- -------- -------- ------ ------
(187) (164) (187) (164)
--------------------------------------------------- -------- -------- ------ ------
Financial liabilities not measured at fair value
Acquisition consideration (37) (40)
Bank overdrafts (11) (20)
Bank loans (931) (857)
Corporate bond (992) -
Private placement debt in a hedge relationship (122) (120)
Private placement debt not in a hedge relationship (1,430) (880)
Trade and other payables (892) (944)
---------------------------------------------------- -------- --------
(4,415) (2,861)
--------------------------------------------------- -------- --------
Total financial liabilities (4,602) (3,025)
---------------------------------------------------- -------- --------
At 31 December 2020, the market value of the corporate bond
($992 million) was $1,017 million. At 31 December 2020, the fair
value of the private placement debt ($1,552 million) was $1,642
million. At 31 December 2019, the fair value of the private
placement debt was not materially different to the carrying
value.
There were no transfers between Levels 1, 2 and 3 during the
year ended 31 December 2020 and the year ended 31 December 2019.
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 year
ended 31 December 2020 and the year ended 31 December 2019 for
financial instruments measured using Level 3 valuation methods are
presented below:
2020 2019
$m $m
------------------------------------ ------ ------
Investments
At 1 January 7 34
Acquisitions - 17
Additions 2 1
Fair value remeasurement - 12
Distributions received - (2)
Disposals - (46)
Transfers - (9)
------------------------------------ ------ ------
9 7
------------------------------------ ------ ------
Contingent consideration receivable
At 1 January 39 -
Arising on acquisitions - 22
Arising on disposals - 17
Transfers - -
Receipts (2) -
------------------------------------ ------ ------
37 39
------------------------------------ ------ ------
Acquisition consideration liability
At 1 January (141) (99)
Arising on acquisitions (49) (103)
Payments 51 51
Transfers - 13
Remeasurements 12 -
Discount unwind (1) (3)
------------------------------------ ------ ------
(128) (141)
------------------------------------ ------ ------
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 2019 by 60bps to 1.3% and 80bps to 2.4%
respectively. This remeasurment loss was more than offset by a
remeasurement gain from an increase in asset performances.
8. 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:
2020 2019
------------------- ----- -----
Average rates
------------------- ----- -----
Sterling 1.28 1.28
Euro 1.14 1.12
Swiss Franc 1.07 1.01
-------------------- ----- -----
Period-end rates
------------------- ----- -----
Sterling 1.37 1.32
Euro 1.23 1.12
Swiss Franc 1.14 1.04
-------------------- ----- -----
9. Subsequent events
On 4 January 2021 the Group completed the acquisition of the
Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation ('Integra Extremities'). 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. This acquisition will be treated as a business
combination under IFRS 3. The maximum consideration is $240 million
with no deferred or contingent consideration payable. The
provisional value of acquired net tangible assets is $91 million
and is not expected to have material fair value adjustments. The
remaining consideration will be allocated between identifiable
intangible assets and goodwill. Intangible assets will primarily
comprise product-related and customer and distribution related
assets. Goodwill will represent the control premium, the acquired
workforce and the synergies expected from integrating Integra
Extremities into the Group's existing business, and is expected to
be largely deductible for tax purposes.
On 11 February 2021 Bioventus LLC ('Bioventus'), an associate
undertaking of the Group, commenced trading on the Nasdaq Global
Select Market via its holding company, Bioventus Inc., under the
symbol 'BVS'. As a consequence of this public offering and the
raising of approximately $96.7 million before expenses through
issuing new common stock, the equity holding of the Smith+Nephew
Group has decreased from approximately 47.6% at 31 December 2020 to
approximately 38% at 11 February 2021. The carrying value of the
investment in Bioventus at 31 December 2020 was $105 million and
the fair value of the approximately 38% shareholding at the market
value on 12 February 2021 was $380 million. Smith+Nephew continues
to have the ability to appoint two Board members of Bioventus Inc.
and is subject to customary post-IPO selling restrictions that
restrict the sale of Bioventus Inc. stock by Smith+Nephew for 180
days after the listing.
Other information
Definitions of and reconciliation to measures included within
adjusted "trading" results
These Financial Statements include financial measures that are
not prepared in accordance with IFRS. These measures, which include
trading profit, trading profit margin, tax rate on trading results,
Adjusted Earnings Per Ordinary Share (EPSA), trading cash flow,
trading profit to trading cash conversion ratio, leverage ratio,
and underlying revenue growth, exclude the effect of certain cash
and non-cash items that Group management believes are not related
to the underlying performance of the Group. These non-IFRS
financial measures are also used by management to make operating
decisions because they facilitate internal comparisons of
performance to historical results.
Non-IFRS financial measures are presented in these Financial
Statements as the Group's management believe that they provide
investors with a means of evaluating performance of the business
segments and the consolidated Group on a consistent basis, similar
to the way in which the Group's management evaluates performance,
that is not otherwise apparent on an IFRS basis, given that certain
non-recurring, infrequent, non-cash and other items that management
does not otherwise believe are indicative of the underlying
performance of the consolidated Group may not be excluded when
preparing financial measures under IFRS. These non-IFRS measures
should not be considered in isolation from, as substitutes for, or
superior to financial measures prepared in accordance with
IFRS.
Underlying revenue growth
'Underlying revenue growth' is used to compare the revenue in a
given period to the comparative period on a like-for-like basis.
Underlying revenue growth reconciles to reported revenue growth,
the most directly comparable financial measure calculated in
accordance with IFRS, by making two adjustments, the 'constant
currency exchange effect' and the 'acquisitions and disposals
effect', described below.
The 'constant currency exchange effect' is a measure of the
increase/decrease in revenue resulting from currency movements on
non-US Dollar sales and is measured as the difference between: 1)
the increase/decrease in the current year revenue translated into
US Dollars at the current year average exchange rate and the prior
year revenue translated at the prior year rate; and 2) the
increase/decrease being measured by translating current and prior
year revenues into US Dollars using the prior year closing
rate.
The 'acquisitions and disposals effect' is the measure of the
impact on revenue from newly acquired material business
combinations and recent material business disposals. This is
calculated by comparing the current year, constant currency actual
revenue (which includes acquisitions and excludes disposals from
the relevant date of completion) with prior year, constant currency
actual revenue, adjusted to include the results of acquisitions and
exclude disposals for the commensurate period in the prior year.
These sales are separately tracked in the Group's internal
reporting systems and are readily identifiable.
Reported revenue growth, the most directly comparable financial
measure calculated in accordance with IFRS, reconciles to
underlying revenue growth as follows:
Reconciling Items
Reported Underlying Acquisitions Currency
2020 2019 growth growth & disposals impact
$m $m % % % %
---------------------------------- ------ ------ -------- ---------- ------------ --------
Segment revenue
Orthopaedics 1,917 2,222 (13.7) (14.0) 0.6 (0.3)
Sports Medicine & ENT 1,333 1,536 (13.2) (13.0) - (0.2)
Advanced Wound Management 1,310 1,380 (5.1) (8.1) 3.1 (0.1)
----------------------------------- ------ ------ -------- ---------- ------------ --------
Revenue from external customers 4,560 5,138 (11.2) (12.1) 1.1 (0.2)
----------------------------------- ------ ------ -------- ---------- ------------ --------
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 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 c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2020 Reported 4,560 295 246 202 448 972 51.3
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 4 4 (5) (1) 24 (0.1)
Restructuring and
rationalisation
costs - 124 124 (40) 84 117 9.6
Amortisation and
impairment of
acquisition
intangibles - 171 171 (46) 125 - 14.3
Legal and other(7) - 89 91 (41) 50 75 5.7
UK tax litigation - - - (142) (142) - (16.2)
Lease liability
payments - - - - - (55) -
Capital
expenditure - - - - - (443) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2020 Adjusted 4,560 683 636 (72) 564 690 64.6
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Cash
Profit generated
Operating before Attributable from Earnings
Revenue profit(1) tax(2) Taxation(3) profit(4) operations(5) per share(6)
$m $m $m $m $m $m c
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2019 Reported 5,138 815 743 (143) 600 1,370 68.6
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
Acquisition and
disposal related
items - 32 34 (6) 28 36 3.4
Restructuring and
rationalisation
costs - 134 134 (25) 109 123 12.5
Amortisation and
impairment of
acquisition
intangibles - 143 143 (32) 111 - 12.6
Legal and other(7) - 45 50 (5) 45 (105) 5.1
Lease liability
payments - - - - - (46) -
Capital
expenditure - - - - - (408) -
------------------- ------- --------- ------ ----------- ------------ ------------- ------------
2019 Adjusted 5,138 1,169 1,104 (211) 893 970 102.2
-------------------- ------- --------- ------ ----------- ------------ ------------- ------------
(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: F or the year to 31
December 2020 costs primarily relate to the acquisition of Tusker
and prior year acquisitions, partially offset by credits relating
to remeasurement of contingent consideration for prior year
acquisitions. For the year to 31 December 2019 costs primarily
relate to the acquisitions of Ceterix, Osiris, Leaf, Brainlab OJR
and Atracsys.
Restructuring and rationalisation costs: For the year ended 31
December 2020 these costs relate to the implementation of the
Accelerating Performance and Execution (APEX) programme that was
announced in February 2018 and the Operations and Commercial
Excellence programme announced in February 2020. For the year ended
31 December 2019 costs relate to the APEX programme.
Amortisation and impairment of acquisition intangibles: For both
the years ended 31 December 2020 and 31 December 2019, charges
relate to the amortisation and impairment of intangible assets
acquired in material business combinations.
Legal and other: For the year ended 31 December 2020 charges
primarily relate to legal expenses for ongoing metal-on-metal hip
claims and an increase of $17 million in the provision that
reflects the present value of the estimated costs to resolve all
other known and anticipated metal-on-metal hip claims. The year to
31 December 2020 also includes costs for implementing the
requirements of the EU Medical Device Regulations that will apply
from May 2021.
For the year ended 31 December 2019 charges primarily relate to
legal expenses for ongoing metal-on-metal hip claims and an
increase of $121 million in the provision that reflects the present
value of the estimated costs to resolve all other known and
anticipated metal-on-metal hip claims. The year to 31 December 2019
also includes costs for implementing the requirements of the EU
Medical Device Regulations that will apply from May 2021. These
charges in the year to 31 December 2019 were partially offset by a
credit of $147 million relating to insurance recoveries for ongoing
metal-on-metal hip claims.
UK tax litigation: The $142 million tax credit relates to the UK
tax litigation matter as detailed in Note 3 to the Financial
Statements.
Leverage ratio
The leverage ratio is net debt including lease liabilities to
adjusted EBITDA. Net debt is reconciled in Note 6 to the Financial
Statements. Adjusted EBITDA is defined as trading profit before
depreciation of property, plant and equipment and amortisation of
other intangible assets.
The calculation of the leverage ratio is set out below:
2020
$m
---------------------------------------------------------- ------
Net debt including lease liabilities 1,926
Trading profit 683
Depreciation of property, plant and equipment 311
Amortisation of other intangible assets 63
Adjustment for items already excluded from trading profit (7)
----------------------------------------------------------- ------
Adjusted EBITDA 1,050
----------------------------------------------------------- ------
Leverage ratio (x) 1.8
----------------------------------------------------------- ------
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END
FR EAAAXFFEFEAA
(END) Dow Jones Newswires
February 18, 2021 02:00 ET (07:00 GMT)
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