Business Context and Reporting Period
Company: Smith & Nephew plc
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: A global medical devices company operating in three primary segments: Orthopaedics (reconstruction, trauma, clinical therapies), Endoscopy, and Advanced Wound Management. The company is incorporated in England and Wales, with shares listed on the London Stock Exchange and American Depositary Shares (ADSs) on the New York Stock Exchange.
Accounting Basis: International Financial Reporting Standards (IFRS) as issued by the IASB. Reporting currency is US Dollars.
Key Financial Metrics
| Metric ($ million) | 2008 | 2007 |
|---|---|---|
| Revenue | 3,801 | 3,369 |
| Trading Profit (Non-GAAP) | 776 | 706 |
| Operating Profit | 630 | 493 |
| Profit Before Taxation | 564 | 469 |
| Attributable Profit | 377 | 316 |
| Adjusted Attributable Profit (Non-GAAP) | 493 | 480 |
| Basic EPS (cents) | 42.6 | 34.2 |
| Basic EPSA (cents) | 55.6 | 52.0 |
| Dividends per Share (cents) | 13.08 | 11.89 |
| Net Debt | 1,332 | 1,310 |
| Cash Generated from Operations | 815 | 693 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13% to $3.8 billion. Underlying growth was 6%, with acquisitions contributing 5% and favorable currency translation adding 2%.
- Segment Performance:
- Orthopaedics: Revenue up 16% (driven by 9% acquisition impact from Plus Orthopedics and 5% underlying growth). Operating profit increased significantly due to lower acquisition-related costs compared to 2007.
- Endoscopy: Revenue up 9% (8% underlying growth). Operating profit rose slightly despite a $14m impairment charge on acquisition intangibles.
- Advanced Wound Management: Revenue up 8% (7% underlying growth). Operating profit declined $7m due to investments in Negative Pressure Wound Therapy (NPWT).
- Profitability: Operating profit rose 28% to $630m. This was aided by a $50m decrease in acquisition-related costs and the absence of the $30m legal settlement recorded in 2007.
- Balance Sheet: Net debt increased slightly to $1.332 billion. Long-term borrowings increased significantly due to the reclassification of a $1.322 billion facility from short-term to long-term following an extension in May 2008.
- Share Buy-back: The company purchased 16 million shares for $193m in 2008. The buy-back program was suspended in November 2008 due to financial market conditions.
Guidance, Outlook, and Risks
- Outlook: Management expects continued market growth driven by aging populations and active lifestyles. The company targets an annualized trading margin exit rate of 24.5% by 2010 through its Earnings Improvement Programme (EIP).
- Macro-Economic Impact: Management believes the Endoscopy business (specifically capital sales) is most likely to be impacted by the global economic slowdown. Orthopaedics is expected to remain strong.
- Legal Proceedings:
- Macrotextured Knee Components: A voluntary withdrawal in 2003 led to ongoing claims. As of Dec 31, 2008, $206m had been paid in settlements and costs. A $30m provision remains for future claims, with $124m sought from excess insurers who have denied coverage.
- US DOJ/SEC Investigations: The company settled a civil matter with the US DOJ in 2007 ($29m restitution) and entered a Deferred Prosecution Agreement. An informal SEC investigation regarding the Foreign Corrupt Practices Act is ongoing.
- Acquisition Adjustments: In January 2009, the company reached an agreement to reduce the purchase price of Plus Orthopedics by CHF159m ($159m), resolving disputes on price adjustments and warranties.
Key Facts for Investor Verification
- Insurance Coverage Dispute: Verify the status of the litigation against five excess insurers regarding the macrotextured knee component claims, as $124m in coverage is currently denied.
- Plus Acquisition Price Adjustment: Confirm the accounting treatment and cash flow impact of the CHF159m reduction in the Plus Orthopedics purchase price agreed in January 2009.
- Share Buy-back Suspension: Monitor the status of the suspended share buy-back program and the company's capital allocation strategy in light of the 2008 financial market conditions.
- Regulatory Investigations: Track the progress of the ongoing SEC and DOJ investigations regarding the Foreign Corrupt Practices Act and the outcome of the Deferred Prosecution Agreement.
- Non-GAAP Reconciliations: Review the reconciliation of Operating Profit to Trading Profit and Attributable Profit to Adjusted Attributable Profit to understand the impact of acquisition costs, restructuring, and legal settlements on reported earnings.