Earnings impact of major changes in operations Smith & Nephew plc, UK-based producer of medical devices, reorganised its operations in 2001. On 1 April that year it set up a joint venture (called BSN Medical) with Beiersdorf AG. S&N contributed its casting and bandaging and traditional woundcare businesses in return for a 50% equity stake in BSN Medical. (Beiersdorf contributed similar businesses to the joint venture for its 50% stake.) The results of these businesses prior to 1 April are shown in S&N’s income statement as ‘Operations contributed to the joint venture’. Exhibit 20.11 contains the group’s profit and loss account for 2001.

S&N also acquired and disposed of other businesses in 2001. As part of its deal with Beiersdorf, it acquired the German company’s advanced woundcare business. It sold its ear, nose and throat business during the year and made a £49 million gain on the disposal. The remaining businesses were grouped into four product areas – orthopaedics, endoscopy, advanced wound management and rehabilitation – and the company published segmental data for each of them in its 2001 accounts.

Exceptional items of 19.3 (£ million) shown under ‘Ongoing operations’ comprise:

l 2.9 of manufacturing rationalisation costs;

l 7.5 of rationalisation costs following the contribution of businesses to BSN Medical;

l 8.9 of integration costs in connection with the 2001 acquisition of the advanced woundcare business from Beiersdorf.

The exceptional items shown under ‘Operations contributed to the joint venture’ and ‘Share of operating profit of joint venture’ relate, in both cases, to manufacturing rationalisation costs. (The company also reported £4.3 million of such costs under exceptional items in the 2000 income statement.)

Management estimate that the taxation charge on profits in 2001 before exceptional items and discontinued operations is £52.3 million.

Required

(a) You wish to calculate S&N’s operating profitability (i.e. return on net operating assets) in 2001.

Calculate the group’s NOPAT (net operating profit after tax) that year. The UK statutory tax rate was 30% in 2001. (Note: RONOA cannot be calculated as no balance sheet information is given.)

(b) Calculate the 2001 turnover and operating profit figures you would use as the basis for forecasting S&N’s group turnover and operating profits for 2002. Explain the basis of your calculation.

AppenedixLO1