Smith & Nephew

2009 Annual Report

Enabling people to live healthier, more active lives.

Shanghai is the head office of our 
China business, where we recently 
opened a new surgeon training 
institute, the first of five planned. 
During 2009, in nearby Suzhou, we 
completed our new Advanced Wound 
Management manufacturing facility and 
we have commenced construction of an 
Orthopedics facility near Beijing.

The emerging markets, which include 
China, are part of Smith & Nephew’s 
investing for growth initiative, one of our 
four strategic pillars for success. 

INTRODUCTION AND FINANCIAL SUMMARY

The Smith & Nephew Group (the “Group”) is a global medical devices business operating in the orthopaedics,
endoscopy and advanced wound management markets, with revenue of approximately $3.8 billion in 2009.
Smith & Nephew plc is the parent company (the “Company”) of the Group. It is an English public limited company
with its shares listed on the official list of the UK Listing Authority and traded on the London Stock Exchange. It is
also traded on the New York Stock Exchange in the form of American Depositary Shares (“ADSs”).

This report is the Annual Report of Smith & Nephew plc for the year ended 31 December 2009. It comprises in a
single document, the Annual Report and Accounts of the company in accordance with UK requirements and the
Annual Report on Form 20-F in accordance with the regulations of the United States Securities and Exchange
Commission (“SEC”).

A summary report on the year, the 2009 Summary Annual Review, intended for the investor who does not require
the full detail of
is available on Smith & Nephew’s corporate website at
www.smith-nephew.com/investors along with the electronic version of this Annual Report. The Summary Annual
Review includes a summary remuneration report and summary financial statements.

the Annual Report,

For the convenience of the reader, a Glossary of technical and financial terms used in this document is included
on page 164. The product names referred to in this document are identified by use of capital letters and are
trademarks owned by or licensed to members of the Smith & Nephew Group.

Financial Summary

Financial Highlights (i)

Revenue
Underlying growth in revenue (%)
Trading profit
Underlying growth in trading profit (%)
Trading profit margin (%)
Operating profit
Attributable profit for the year
Adjusted attributable profit
Basic earnings per Ordinary Share
EPSA
Growth in EPSA (%)
Dividends per Ordinary Share (ii)

2009
$ million

3,772

2008
$ million

3,801

2007
$ million

3,369

2%

857

15%
22.7%
723
472
580
53.4¢
65.6¢
18%
14.39¢

6%

776

6%
20.4%
630
377
493
42.6¢
55.6¢
7%
13.08¢

10%

706

17%
21.0%
493
316
480
34.2¢
52.0¢
15%
11.89¢

(i)
(ii)

Items shown in italics are non-GAAP measures.
The Board has declared a second interim dividend of 8.93 US cents per share which together with the first interim dividend of 5.46 US
cents makes a total for 2009 of 14.39 US cents. The second interim dividend will be paid on 12 May 2010 to shareholders on the
Register of Members at the close of business on 23 April 2010.

Key Performance Indicators
The Directors’ Report includes a number of measures that management use as key performance indicators. The
principal key performance indicators presented in the Annual Report are:

Underlyinggrowthinrevenue
Underlying growth in revenue is used to compare the revenue in a given year to the previous year on a
like-for-like basis. This is achieved by adjusting for the impact of sales of products acquired in material business
combinations and for movements in exchange rates. Underlying growth in revenue is not presented in the
accounts prepared in accordance with IFRS and is therefore not a Generally Accepted Accounting Principle (“non-
GAAP”) measure. An explanation of how this non-GAAP measure is calculated is presented in the “Business
Overview” on page 26.

The Group believes that the tabular presentation and reconciliation of revenue growth from reported to underlying
assists investors in their assessment of the Group’s performance in each business segment and for the Group as
a whole.

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Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of
local
local
functional currency since it excludes those items considered to be outside the influence of
management. The Group’s management uses this non-GAAP measure in its internal
financial reporting,
budgeting and planning to assess performance on both a business segment and a consolidated Group basis.
Revenue growth at constant currency is important in measuring business performance compared to competitors
and compared to the growth of the market itself.

The Group considers that revenue from sales of products acquired in material business combinations results in a
step-up in growth in revenue in the year of acquisition that cannot be wholly attributed to local management’s
efforts with respect to the business in the year of acquisition. Depending on the timing of the acquisition, there
will usually be a further step change in the following year. A measure of growth excluding the effects of business
combinations also allows senior management to evaluate the performance and relative impact of growth from the
existing business and growth from acquisitions. The process of making business acquisitions is directed,
approved and funded from the Group corporate centre in line with strategic objectives.

The Group’s annual bonus incentive plans include an element which relates to revenue growth performance.
Targets are set and performance measured in constant currency, excluding the step-change impact of
acquisitions.

The material limitation of the underlying growth in revenue measure is that it excludes certain factors, described
above, which ultimately have a significant impact on total revenues. The Group compensates for this limitation by
taking into account relative movements in exchange rates in its investment, strategic planning and resource
allocation. In addition, as the evaluation and assessment of business acquisitions is not within the control of local
management, performance of acquisitions is monitored centrally until the business is integrated. The Group’s
management considers that the non-GAAP measure of underlying growth in revenue and the GAAP measure of
growth in revenue are complementary measures neither of which management use exclusively.

Basicadjustedearningsperordinaryshare(“EPSA”),tradingprofitandadjustedattributableprofit
Growth in EPSA and trading profit are measures which present the trend growth in the long-term profitability of
the Group excluding the impact of specific transactions or events that management considers affect the Group’s
short-term profitability. The Group presents these measures to assist investors in their understanding of trends.
The Group’s internal financial reporting (budgets, monthly reporting, forecasts, long-term planning and incentive
plans), focuses primarily on profit and earnings before these items. EPSA and trading profit are not recognised
measures under IFRS.

The Group has identified the following items, where material, as those to be adjusted and identified separately:
acquisition and disposal related items including amortisation of acquisition intangible assets and impairments;
significant restructuring events; gains and losses arising from legal disputes and uninsured losses; and taxation
thereon. A reconciliation of attributable profit to adjusted attributable profit, which represents the numerator used
in the EPSA calculation, is presented in “Selected Financial Data” on page 154. An explanation of how trading
profit is calculated is presented in “Business Overview” on page 26.

EPSA growth, trading profit and trading profit margin (trading profit expressed as a percentage of revenue) are
also key measures used for remunerating senior management
in order to align the interests of senior
management with those of investors.

The material limitation of these measures is that they exclude significant income and costs that have a direct
impact on current and prior years’ profit attributable to shareholders. They do not, therefore, measure the overall
performance of the Group presented by the GAAP measures of earnings per share and operating profit. The
Group considers that no single measure enables it to assess overall performance and therefore it compensates
for the limitation of the adjusted earnings per share and trading profit measures by considering them in
conjunction with their GAAP equivalents. Gains or losses which are identified separately arise from irregular
events or transactions. Such events or transactions are authorised centrally and require a strategic assessment
which includes consideration of financial returns and generation of shareholder value. Amortisation of acquisition
intangibles will occur each year, whilst other excluded items arise irregularly depending on the events that give
rise to such items.

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Presentation
The Group’s fiscal year end is 31 December. References in this Annual Report to a particular year are to the fiscal
year unless otherwise indicated. Except as the context otherwise requires, “Ordinary Share” or “share” refer to
the Ordinary Shares of Smith & Nephew plc of 20 US cents each.

The results of the Group, as reported in US Dollars, are affected by movements in exchange rates between US
Dollars and other currencies. The Group applied the average exchange rates prevailing during the year to
translate the results of non-US companies into US Dollars. The currencies which most
influenced these
translations in the years covered by this report were Sterling, Swiss Franc and the Euro.

The Group Accounts of Smith & Nephew in this Annual Report are presented in US Dollars. Solely for the
convenience of the reader, certain parts of this Annual Report contain translations of amounts in US Dollars into
Sterling at specified rates. These translations should not be construed as representations that the US Dollar
amounts actually represent such Sterling amounts or could be converted into Sterling at the rate indicated. Except
as where stated otherwise, the translation of US Dollars and cents to Sterling and pence appearing in this Annual
Report has been made at the Noon Buying Rate in The City of New York for cable transfers in Sterling as certified
for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on the date indicated.
On 17 March 2010, the Noon Buying Rate was US$1.53 per £1.

The Accounts of the Group in this Annual Report are presented in millions (“m”) unless otherwise indicated.

information on the Group.
Smith & Nephew’s corporate website, www.smith-nephew.com, gives additional
Information made available on the website is not intended to be, and should not be regarded as being, part of
this Annual Report.

Special Note Regarding Forward-Looking Statements
The Group’s reports filed with, or furnished to, the US Securities and Exchange Commission (“SEC”), including this
document and written information released, or oral statements made, to the public in the future by or on behalf of
the Group, constitute “forward-looking statements” within the meaning of the US Private Securities Litigation Reform
Act of 1995. In particular, statements regarding planned growth in the Group’s business and trading margins
discussed under “Outlook and Trend Information” are forward-looking statements as are discussions of the Group’s
product pipeline and discussions of the costs of future revisions of the macrotextured knee product under “Legal
Proceedings”. When used in this Annual Report, the words “aim”, “anticipate”, “believe”, “consider”, “estimate”,
“expect”, “intend”, “plan”, “target”, “well-placed” and similar expressions are generally intended to identify forward-
looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other
important factors (including, but not limited to, the outcome of litigation and regulatory approvals) that could cause
the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such forward-looking statements. Specific
risks faced by the Group are described under “Risk Factors” on page 20 of this Annual Report.

All forward-looking statements in this Annual Report are based on information available to Smith & Nephew as of
17 March 2010. All written and oral forward-looking statements attributable to Smith & Nephew or any person
acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew
does not undertake any obligation to update or revise any forward-looking statement contained herein to reflect
any change in Smith & Nephew’s expectation with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.

Market Data
Market data and market share estimates throughout this report are derived from a variety of sources including
publicly available competitors’ information, internal management information and independent market research
reports.

Documents on Display
It is possible to read and copy documents referred to in this Annual Report at the Registered Office of the
Company. Documents referred to in this Annual Report that have been filed with the Securities and Exchange
Commission in the US may be read and copied at the SEC’s public reference room located at 450 Fifth Street,
NW, Washington DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges. The SEC also maintains a web site at www.sec.gov that contains reports
and other information regarding registrants that file electronically with the SEC. This Annual Report and some of
the other information submitted by the Group to the SEC may be accessed through the SEC website.

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CONTENTS

Directors’ Report

Description of the Group

Business Review (“BR”), Liquidity and Prospects (i)

Corporate Governance Statement

Directors’ Remuneration Report

Group Accounts

Directors’ responsibilities

Group auditors’ reports

Group income statement

Group statement of comprehensive income

Group balance sheet

Group cash flow statement

Group statement of changes in equity

Notes to the Group accounts

Parent Company Accounts

Parent Company auditors’ report

Parent Company balance sheet

Notes to the Parent Company accounts

Investor Information

Cross reference to Form 20-F

Glossary of Terms

Index

3 - 74, 145 - 153

3

25

47

61

75 - 136

76

78

82

82

83

84

85

86

137 - 144

137

139

140

145 - 167

162

164

167

This Annual Report including the Directors’ Report was approved by the Board of Directors on 18 March 2010.

(i)

A discussion of the Group’s Key Performance Indicators is given in “Introduction and Financial Summary” on pages i and ii.

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DESCRIPTION OF THE GROUP

This section discusses the activities, resources and operating environment of the business under the following
headings:

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The Business
History and development
Business description

Operating Activities
Sales, marketing and distribution
Seasonality
Manufacture and supply
Property, plant and equipment
Research and development
Intellectual property
Regulation

The Business and the Community
Corporate and social responsibility
Employees

Risk
Risk factors
Exchange and interest rate risk and financial instruments

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Discussion of the Group’s operating and financial performance, liquidity and financial resources for 2009 and
2008 is given in the “Business Review, Liquidity and Prospects” (pages 25 to 46).

Discussion of
“Corporate Governance Statement” section (pages 47 to 59).

the Group’s management structure and corporate governance procedures is set out in the

The “Directors’ Remuneration Report” gives details of the Group’s policies on senior management’s remuneration
in 2009 (pages 61 to 74).

Details of the structure of the Company’s share capital and securities, persons with significant shareholdings in
the Company and a summary of the memorandum and articles of association are incorporated into the Directors’
Report and are given in “Investor Information” (pages 145 to 153).

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THE BUSINESS

HISTORY AND DEVELOPMENT

Group Strategy
Smith & Nephew’s overall vision is to help improve people’s lives by repairing and healing the human body. To
achieve this, the Group is focused on continued delivery of sustainable profitable growth, through four strategic
pillars:

•

•

•

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‘Customer led’: outperforming our served markets by focusing on our customers; anticipating and
innovating to deliver on their needs.

‘Efficient’: delivering operating margin improvement and freeing up resources to invest in the business,
through streamlining process and systems re-engineering.

‘Investing for growth’: driving additional sales from new opportunities such as biologics, emerging markets
and adjacent technologies.

‘Aligned’: aligning objectives across the business and developing our talent and organisation for consistent
execution, through leveraging core functions and sharing best practices.

Group History
The Group has a history dating back over 150 years to the family enterprise of Thomas James Smith who opened
a small pharmacy in Hull, England in 1856. On his death in 1896, his nephew Horatio Nelson Smith took over the
management of the business.

By the late 1990s, Smith & Nephew had expanded into being a diverse healthcare conglomerate with operations
including various medical devices, personal care products and traditional and advanced
across the globe,
woundcare treatments.
In 1998, Smith & Nephew announced a major restructuring to focus management
attention and investment on three business units — wound management, endoscopy and orthopaedics — which
offered high growth and margin opportunities.

Smith & Nephew was incorporated and listed on the London Stock Exchange in 1937 and in 1999 the Group was
also listed on the New York Stock Exchange. In 2001, Smith & Nephew became a constituent member of the
FTSE-100 index in the UK. This means that Smith & Nephew is included in the top 100 companies traded on the
London Stock Exchange measured in terms of market capitalisation.

Today, Smith & Nephew is a public limited company incorporated and headquartered in the UK and doing
business in many countries around the world.

the Group acquired substantially all of

Recent Developments
On 22 December 2009,
the assets and liabilities of Nucryst
Pharmaceuticals Corp., which exclusively licenses and manufactures our range of ACTICOAT products, using its
nanocrystalline silver technology, SILCRYST. Under the agreement, the Group acquired the manufacturing assets
from Nucryst’s operations in Canada and intellectual property rights relating to the nanocrystalline silver
technology used in the manufacture of ACTICOAT product range. Nucryst had manufactured ACTICOAT products
for the Group since the Group’s acquisition of certain product rights in 2001.

During March 2009, the Deferred Prosecution Agreement
(“DPA”) with the United States Attorney’s Office
(“USAO”) for the district of New Jersey expired. The 18-month agreement was one of five similar agreements
entered into on 27 September 2007, between the USAO and the five largest companies that manufacture and
sell hip and knee replacement implants. Additionally, the USAO has dismissed the complaint it filed in connection
with the DPA. During the term of the DPA, Smith & Nephew operated under the oversight of a USAO appointed
monitor and worked to improve the ways in which it manages its relationships with healthcare providers. Smith &
Nephew will continue its compliance with the Corporate Integrity Agreement signed with the Department of
Health and Human Services, which has run concurrently with the DPA and will remain in effect until September
2012.

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In January 2009, the Group reached an agreement with the vendors of Plus Orthopedics Holdings AG (“Plus”) to
reduce the total original purchase price that the Group paid in 2007 for Plus by CHF159m. The original purchase
price for the acquisition was CHF1,086 ($889m) in cash, including assumed debt. The acquisition was financed
by bank borrowings and was integrated into the Group’s Orthopaedics business. As part of the amended
agreement the parties resolved their disputes on the contractual purchase price adjustments. In addition, the
Group released the vendors from substantially all of their warranties, including those relating to taxation, under
the original purchase agreement and dropped all existing claims under the original warranties.

BUSINESS DESCRIPTION

Organisation
Smith & Nephew reports and is organised into three Global Business Units (“GBUs”) of Orthopaedics, Endoscopy
and Advanced Wound Management. Included within the Orthopaedic segment are our biologics activities which
comprise research and development projects under the direction of a Committee representing all GBUs.

Smith & Nephew operates on a worldwide basis. In 21 of the 32 countries in which the Group operates, the GBUs
take direct responsibility for business operations. These are referred to as direct markets. The remaining markets
in which the Group has operations are managed by country managers, who are responsible for sales and
distribution of the Group’s product range and comprise the Emerging Markets unit.

A head office team in London, England directs the overall business and supports the business units, primarily in
the areas of business development, legal, company secretarial, finance, human resources and investor relations.

Orthopaedics
Overview
Orthopaedics comprises reconstruction, trauma and clinical therapies products.

The Orthopaedics business is managed worldwide from Memphis, Tennessee, the site of its main development
and manufacturing facility, with a European headquarters in Baar, Switzerland. Products are also manufactured at
smaller facilities in Switzerland, Germany, and the UK as well as by third-party manufacturers. A new facility is
being constructed in Beijing, China.

Products
Orthopaedic reconstruction implants include hip, knee and shoulder joints as well as ancillary products such as
bone cement and mixing systems used in cemented reconstruction joint surgery. Orthopaedic trauma fixation
fixation and
products consist of
orthobiological materials used in the stabilisation of severe fractures and deformity correction procedures. Clinical
therapies products are those that are applied in an orthopaedic office or clinical setting and include bone growth
stimulation, joint fluid therapies and outpatient pain management products.

internal and external devices and other products,

including shoulder

Knee Implant Systems — The Orthopaedics business offers a range of products for specialised knee
procedures. The LEGION/GENESIS II Total Knee Systems is a comprehensive system designed to allow surgeons
to address a wide range of knee procedures from primary to revision. The JOURNEY Active Knee Solutions, a
family of advanced, customised products designed to treat early to mid-stage osteoarthritis patients, provides
more normal feeling and motion through bone ligament preservation and anatomic replication. Other knee
systems include the PLUS Solution Knee Family and PROFIX Knee.

Hip Implant Systems — The Orthopaedics business offers a broad range of hip replacement systems. The
recently introduced R3 Acetabular System includes a modular acetabular cup that provides the widest variety of
advanced bearings available with a single system. The BIRMINGHAM HIP Resurfacing System is the market
leading system for hip resurfacing, a less-invasive, bone conserving approach, which utilises proven low wear
metal-on-metal bearing surface technology. Other hip systems include the SYNERGY Hip System, ANTHOLOGY
Hip System and the SL-PLUS Hip Family System.

Bearing surfaces — The Orthopaedics business utilises a range of bearing surfaces in its implant systems,
including its proprietary OXINIUM Technology. Oxidised zirconium, branded OXINIUM, combines the enhanced
wear resistance of a ceramic bearing with the superior durability of a metallic bearing. When combined with
highly cross-linked polyethylene (“XLPE”) it results in our industry leading VERILAST Technology.

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Trauma and Shoulder Implant Systems — The principal internal fixation products are the TRIGEN Intramedullary
Nailing system, the TRIGEN INTERTAN Intertrochanteric Antegrade nails for hip fractures and the PERI-LOC
Periarticular Locked Plating system which offers a comprehensive family of upper and lower extremity plate and
screw products.

For external fixation and limb restoration, Orthopaedics offers the leading TAYLOR SPATIAL FRAME Circular
Fixation System and JET-X Unilateral Fixator.

The PROMOS Modular Shoulder System offers a range of solutions for shoulder arthritis and upper extremity
fractures.

Clinical therapies — The principal clinical therapies products offered include the EXOGEN Ultrasound Bone
Healing System which utilises low-intensity ultrasound to accelerate the healing of fresh fractures. DUROLANE
Joint Fluid Therapy and SUPARTZ Joint Fluid Therapy are non-surgical, non-pharmacological pain-relieving
therapy for osteoarthritis of the knee that acts like a lubricant and shock absorber in healthy joints.

Strategy
The overall vision of the Orthopaedics business is to improve people’s lives by repairing and healing the human
body. The strategy to achieve this is summarised below.

Orthopaedics is committed to being customer-led by focusing on product innovation, sales support and surgeon
education. The aim of the Orthopaedics business is to continue to develop innovative, world class products and
technologies to meet the growing demands of patients and hospitals for tougher, longer-lasting orthopaedic
implants, and trauma products that improve quality and time to heal, as well as enhancing economic value for its
customers. Smith & Nephew’s leading innovations make its products suitable for younger, more active patients, a
market believed to be growing at twice the overall market rate. It will provide surgeons and healthcare providers
global sales excellence and comprehensive clinical education and training support. The KLEOS medical education
platform, which includes the world’s top orthopaedic surgeons and thought leaders, offers a wide range of
tailored educational options.

The Orthopaedics business efficiency programmes, encompass efforts to leverage infrastructure through better
sharing of information technology and procurement resources, creating more efficient sales and marketing teams,
developing lower-cost instrumentation, reducing the costs of sourcing and manufacturing and utilising assets,
such as inventory and capital equipment, more efficiently.

The Emerging Markets, such as China, have been identified as an important area for further investment to drive
long-term growth. In these Emerging Markets, the Orthopaedics business expects to continue to develop and
introduce products tailored to local needs, as well as to expand its infrastructure, including manufacturing
facilities, distribution hubs and training and service centres. The Orthopaedics business is also expanding into
fast-growing adjacent markets, including alternative therapies and biologics for pain management and fracture
healing. The Group intends to further penetrate these markets by expanding its sales force internationally.

The Orthopaedics business aligns its organisation and develops its talent for consistent execution on the Group’s
plans. Compensation for executives, managers and staff are carefully aligned to the execution of their objectives.

NewProducts
In 2009, the Orthopaedics business continued its global commercialisation of the industry leading R3 acetabular
system, which provides the surgeon with four bearing systems: OXINIUM, XLPE, metal, and ceramic in a single
cup system. The BIRMINGHAM Mid-Head Resection resurfacing system was launched in international markets
extending the proven advantages of the BHR system to patients with a greater degree of avascular necrosis.

The Orthopaedics business also introduced its VISIONAIRE Patient-Matched Instrumentation, a key new
technology platform of patient-matched cutting blocks for total knee procedures. With VISIONAIRE, the patient’s
MRI and X-rays are used to create customised cutting blocks that allow the surgeon to achieve optimal
mechanical axis alignment as well as to save time and instruments in the operating room.

Trauma completed development of the TRIGEN SURESHOT Distal Targeting System for Intramedullary Nailing,
designed to simplify intramedullary nailing. Targeting time is reduced by over 50%, reducing surgery time and
fluoroscopic X-ray exposure.

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RegulatoryApprovals
In 2009, several significant regulatory approvals were obtained around the globe. In Japan, the TRIGEN META-
NAIL system and the INTERTAN Nail system were approved providing significant enhancements to our trauma
portfolio. In Europe, approval was obtained for the MIS Hip stem, and the MDF revision hip stem. Additionally,
up-classification approvals were obtained for our Total Knee Arthroplasty and Total Hip Arthroplasty systems.

In the US, the Orthopaedics business received 510(k) clearance from the FDA for kinematics claims for the
JOURNEY BCS Knee System comparing its kinematic patterns to those of a normal knee. Additionally, 20
additional approvals and clearances were obtained around the globe, including amongst others: BHR instrument
upgrades, R3 Acitabular system additions, VLP FOOT Plating Screw System and Accessories, the JOURNEY Select
Knee System and LEGION Porous Plus HA primary Femoral Components.

MarketandCompetition
Smith & Nephew estimates that the worldwide orthopaedic market, excluding clinical therapies, served by the
Group grew by approximately 5% in 2009 and is currently worth approximately $16.8 billion per annum
worldwide. Management believes that the Smith & Nephew Orthopaedics business holds an 11% share of this
market by value. Principal global competitors in orthopaedics are Zimmer, Stryker, DePuy/Johnson & Johnson,
Synthes and Biomet.

In 2009, weaker economic conditions worldwide created several challenges for the overall orthopaedic market,
including increased deferrals of joint replacement procedures, heightened pricing pressures and significant
declines in capital equipment expenditures at hospitals. These factors reduced the overall growth of
the
worldwide orthopaedic market and may continue to impact growth in the future. Additionally, proposed
healthcare reform legislation may adversely impact the US orthopaedic market, which comprises a significant
portion of our sales. However, over the longer-term, several catalysts are expected to continue to drive
sustainable growth in orthopaedic device sales,
including the growing, ageing population, rising rates of
co-morbidities such as obesity and diabetes, and technology improvements allowing surgeons to treat younger,
more active patients, and the increasing strength of the demand for healthcare in Emerging Markets.

Management estimates that the worldwide market for clinical therapies increased by 7% in 2009 and is currently
worth more than $1.5 billion per annum. Smith & Nephew’s primary market for clinical therapies is in the US. In
the US long bone stimulation market management estimates Smith & Nephew’s share to be 40%. Principal
competitors are Biomet, DJ Ortho and Orthofix. In the US joint fluid therapies market, management estimates that
Smith & Nephew maintains a share of 17%. The principal competitors are Genzyme, Sanofi Aventis, DePuy/
Johnson & Johnson and Ferring Pharmaceuticals.

Endoscopy
Overview
Smith & Nephew’s Endoscopy business develops and commercialises endoscopic (minimally invasive surgery)
techniques, educational programmes and value-added services for surgeons to treat and repair soft tissue and
articulating joints. The business focuses on the arthroscopy sector of the endoscopy market. Arthroscopy is the
minimally invasive surgery of joints, in particular the knee, shoulder and hip.

Endoscopy is headquartered in Andover, Massachusetts and manufacturing facilities are currently located in
Mansfield, Massachusetts, and Oklahoma City, Oklahoma. Major service centres are located in the US, the UK,
Germany, Japan and Australia.

Products
The Endoscopy business offers surgeons endoscopic technologies for surgery of the joints and ligaments repair,
including: specialised devices and fixation systems to repair damaged tissue; fluid management equipment for
surgical access; digital cameras, digital
light sources and monitors to assist with
visualisation; and radiofrequency wands, electromechanical and mechanical blades, and hand instruments for
resecting damaged tissue.

image capture, scopes,

Key products in repair are FAST-FIX for meniscal repair, ENDOBUTTON for cruciate fixation, and the FOOTPRINT
Suture Anchor for rotator cuff repair. Key products in resection are the large range of DYONICS shaver blades,
ACUFEX handheld instruments, and a range of Radiofrequency probes. The key product in Visualisation is the
DYONICS 560 HD camera.

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Strategy
Smith & Nephew’s strategic intent is to grow the business as the leading provider of endoscopic techniques and
technologies for joint and ligament repair. Management believes that the business capitalises on the growing
acceptance of endoscopy as a preferred surgical choice among physicians, patients and payers.

The business is customer led, and has a focus on operational efficiency, growth and alignment.

To sustain growth and enhance its market position, the Endoscopy business supports its strategy with surgeon
education programmes, global fellowship support initiatives, partnerships with professional associations and
surgeon advisory boards. The Emerging Markets, especially China, are expected to be a major driver of growth in
future, and the business is investing funds to accelerate this growth.

NewProducts
In 2009, Smith & Nephew continued to expand its arthroscopic sports medicine portfolio with the launch of
several new repair and resection products.

The BICEPTOR Tenodesis System offers versatility for biceps tenodesis repairs with the option of either a fully
arthroscopic or mini-open repair. OSTEORAPTOR Suture Anchors for the shoulder are the only bioabsorbable
suture anchors to incorporate a bone mineral that is naturally occurring in the body — Hydroxyapatite (“HA”). Its
differing sizes give surgeons more repair options and allow them to position repairs precisely where required.
BIOSURE PK combines the advantages of the material PolyEtherEtherKetone (“PEEK”), which is strong, radiolucent,
and revisable, with the novel screw shape of BIOSURE, which has a unique taper for ease of insertion into the
knee.

The DYONICS RF System incorporates a compact generator with a family of probes for removing defects and
smoothing soft tissue during arthroscopic surgery, and the DYONICS Power II Control System offers soft tissue
resection and efficient bone resection with a powerful, high-torque handpiece that can increase procedure
efficiency. The DYONICS BONECUTTER ELECTROBLADE Resector
is an all-in-one device for subacromial
decompression procedures. The BONECUTTER ELECTROBLADE Resector combines the functions of a shaver
blade, burr and radiofrequency probe into one device. It simultaneously resects and coagulates soft tissue as
well as cutting bone.

RecentRegulatoryApprovals
During 2009, the Endoscopy business obtained regulatory clearances for the following products in most major
markets, except Japan where the approval process is more lengthy: PEEK Interference Screw, BioSure PK
Interference Screw, TwinFix Ultra PK FT Suture Anchor and Knotless Instability Anchor, all designed for the
reattachment of ligaments, tendons or soft tissues to bone in knees, shoulders or other articulating joints, and all
made of PEEK; and various other arthroscopy instruments, devices and sterilisation trays.

MarketandCompetition
Management estimates that the global arthroscopy market in which the business principally participates is worth
more than $2.7 billion a year and has been growing between 8% and 12% annually. In 2009, growth was
reduced due to due to broader economic conditions. In particular, these weaker economic conditions led to
hospitals deferring or reducing capital equipment purchases which significantly impacted revenues from
visualisation equipment such as cameras and light sources. Arthroscopy growth rates are driven by increasing
numbers of sports injuries, longer and more active lifestyles, patient desire for minimally invasive procedures,
innovative technological developments and a need for cost effective procedures.

the global arthroscopy market as at
Management believes that Smith & Nephew has a 24% share of
31 December 2009. Smith & Nephew’s main competitors in the global arthroscopy in 2009 were Arthrex, Mitek/
Johnson & Johnson, Stryker, Arthrocare and Linvatec/Conmed.

Advanced Wound Management
Overview
Smith & Nephew’s Advanced Wound Management business offers a range of products from initial wound bed
preparation through to full wound closure. These products are targeted at chronic wounds associated with the
older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of
wounds such as burns and invasive surgery that impact the wider population.

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Advanced Wound Management has its global headquarters in Hull, England and its North American headquarters
in St Petersburg, Florida. The products are manufactured at facilities in Hull and Gilberdyke, England, Suzhou in
China, and also by third party manufacturers around the world.
In 2009, Advanced Wound Management
completed the closure of manufacturing in Largo, Florida and transferred it to the new manufacturing facility in
Suzhou.

Products
The main products within the Advanced Wound Management business are for exudate management,
predominantly the ALLEVYN brand, infection management, including the ACTICOAT brand and negative pressure
wound therapy (“NPWT”).

The ALLEVYN hydrocellular dressings range has been considerably enhanced by new versions, introduced in
fluid management and an optimal moist wound
recent years,
environment that promotes faster healing of the wound, reduced risk of maceration and protection from infection.

that management believe provide efficient

The ACTICOAT range incorporates the smallest crystallised silver used in the treatment of wounds and burns. The
silver reduces the risk of bacterial colonisation and acts to kill micro-organisms that can cause infection and
prevent or delay healing. A range of dressings combining ALLEVYN with the infection management capabilities of
silver, ALLEVYN Ag, has also been introduced.

NPWT delivers vacuum-assisted pressure to help promote healing. NPWT consists of a wound dressing, a
drainage tube, and a transparent film that is connected to a suction device. Smith & Nephew offers the RENASYS
EZ and RENASYS GO pump systems together with a range of foam and gauze dressing kits.

Advanced Wound Management’s also has a range of other advanced products including films, such as OPSITE
and IV3000, skin care treatments and gels.

Strategy
Advanced Wound Management’s strategy for the business is to be customer-led and invest for growth by
focusing on high growth, high value segments, in particular those of exudate and infection management through
improved wound bed preparation, moist and active healing and penetration of the NPWT market.

Further efficiency improvement is expected to be delivered through continued focus on operational excellence.
Since 2007, efficiency improvements have been delivered through various projects including support function
consolidation, outsourcing of manufacturing to low cost suppliers, distribution rationalisation projects and the
commencement of manufacturing in Suzhou, China.

An aligned approach across the GBU ensures our talent is developed and working on common objectives to
deliver consistent execution of the Group’s plan.

In December 2009, the Advanced Wound Management business acquired the manufacturing assets of Nucryst
Pharmaceuticals which exclusively licenses and manufactures our range of ACTICOAT products, using its
nanocrystalline silver technology, SILCRYST. Under this agreement, the Group acquired the manufacturing assets
from Nucryst’s current operations in Canada and intellectual property rights relating to the nanocrystalline silver
technology used in the manufacture of the ACTICOAT product range. Nucryst has manufactured ACTICOAT
products for Smith & Nephew since the Group acquired certain product rights in 2001. We expect this acquisition
to deliver operational efficiencies.

NewProducts
Management estimates that the NPWT market is worth $1.5 billion in annual revenue. We have launched a range
of products which enhance wound healing using negative pressure.

the ALLEVYN hydrocellular dressings range was extended further with the development of
During 2009,
antimicrobial variants that
fluid
management of the existing ALLEVYN dressings and rapid, sustained antimicrobial action, whilst improving
comfort and reducing pain on dressing removal for the patient.

include soft gel adhesives. This new range of dressings has the efficient

The ACTICOAT range was enhanced during 2009 with the launch of additional ACTICOAT Flex dressings, a
conformable range of dressings designed to treat wounds in awkward anatomical areas with improved patient
comfort during use. A range of dressings specifically designed for use in Orthopaedic External Fixation
procedures was also launched.

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RecentRegulatoryApprovals
During 2009, Advanced Wound Management secured approvals for ACTICOAT Flex 7 and ACTICOAT Flex 3, in
the EU and the USA. New versions of ALLEVYN Gentle and ALLEVYN Gentle Border were also approved in the EU
and the USA, with the addition of silver to these variants and a new heel variant was also added to the ALLEVYN
Gentle Border range.

In Japan, there were eight approvals including new product approvals for CADEX Dressing, ALLEVYN Gentle
Border and the latest product variants for ALLEVYN Adhesive and Non-Adhesive. ALLEVYN products are sold
under the HYDROSITE trade name in Japan.

MarketandCompetition
Management estimates that
the sales value of the advanced wound management market worldwide was
$5.0 billion in 2009, an underlying increase of 4% from 2008. During 2009, the market growth rate slowed slightly
due to the weaker economic conditions. Growth is driven by an ageing population and by a steady advance in
technology and products that are more clinically efficient and cost effective than their conventional counterparts.
Management believes that the market will continue the trend towards advanced wound products with its ability to
accelerate healing rates, reduce hospital stay times and cut the cost of clinician and nursing time as well as
aftercare in the home.

Management estimates that Smith & Nephew had a 16% share of the advanced wound management market as
in 2009 include Kinetic
at 31 December 2009. Worldwide competitors in advanced wound management
Concepts, who are active exclusively in the NPWT segment, Convatec, Mölnlycke and Systagenix.

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OPERATING ACTIVITIES

SALES, MARKETING AND DISTRIBUTION

the world,

Smith & Nephew’s customers are the various providers of medical and surgical services worldwide. In certain
parts of
these are largely
including the UK, much of Continental Europe, Canada and Japan,
government organisations funded by tax revenues. In the US, the Group’s major customers are public and private
hospitals, which receive revenue from private health insurance and government reimbursement programmes. In
the US, Medicare is the major source of reimbursement for knee and hip reconstruction procedures and for
wound healing treatment regimes.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price.
Providers are under pressure to reduce the total cost of healthcare delivery. There has been some consolidation
in the Group’s customer base, as well as amongst the Group’s competitors, and these trends are expected to
continue in the long term. Smith & Nephew competes against both specialised and multinational corporations,
including those with greater financial, marketing and other resources.

The Group’s customers reflect the wide range of distribution channels, purchasing agents and buying entities in
over 90 countries worldwide. The largest single customers worldwide are the National Health Service in the UK
and HealthTrust in the US. These represented 6% and 6% respectively of the Group’s worldwide revenue in 2009.

In the US, the Group’s products are marketed directly to doctors, hospitals and other healthcare facilities with
each business unit operating a separate specialised sales force. The US sales forces consist of a mixture of
independent commissioned sales agents and direct employees. The independent agents are contractually not
permitted to sell products that compete with Smith & Nephew’s Orthopaedics and Endoscopy products are
principally shipped and invoiced directly to the ultimate customer. Advanced Wound Management products are
marketed directly to the ultimate customer. The products are shipped and invoiced to a number of wholesale
distributors. In most other direct markets, the business units typically manage employee sales forces directly, and
also ship and invoice products both directly to the ultimate customer and to wholesale distributors.

The Emerging Markets unit comprises direct selling and marketing operations directly and through distributors in
India, China, Hong Kong, South Korea, Malaysia, Singapore, Thailand, the United Arab Emirates, South Africa,
Mexico and Puerto Rico. In these markets, Orthopaedics and Endoscopy frequently share sales resources. The
Advanced Wound Management sales force may be separate where it calls on different customers. In other
countries, Smith & Nephew typically sells to third party distributors which market the Group’s products locally.
These other countries are also managed by the Emerging Markets unit, with some exceptions.

The Group operates a number of central distribution facilities in the key geographical areas in which it operates.
Orthopaedics and Endoscopy operate a facility in Baar, Switzerland which acts as the main holding and
consolidation point for markets in Europe. Hubs serving the US are located in Memphis for Orthopaedics and
Oklahoma for Endoscopy. Products are shipped to Group companies who hold small amounts of inventory locally
for immediate or urgent customer requirements. Advanced Wound Management distribution hubs include
Neunkirchen, Germany; Nottingham, UK; and Atlanta, US.

SEASONALITY

Smith & Nephew’s revenues are generally at their highest in the fourth quarter of any year. This is caused by the
relatively high number of accidents and sports injuries which occur in the North American and European autumn
and winter seasons which increase revenues of orthopaedic trauma and endoscopy products. Orthopaedic
reconstruction revenues are lower in the third quarter due to fewer elective surgeries in the summer and higher in
the fourth quarter as elective surgeries increase.

MANUFACTURE AND SUPPLY

The Group has a central Global Operations function which is implementing Lean manufacturing through the
factories and the supply chain to sustain and improve the high levels of quality, service and efficiency. Core
competencies include materials technology; high precision machining in Orthopaedics and Endoscopy; and high-
volume, automated manufacturing in Advanced Wound Management.

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Each business unit purchases raw materials, components, finished products and packaging materials from
certain key suppliers. These principally include metal forgings and stampings for Orthopaedics, optical and
electronic sub-components and finished goods for Endoscopy, active ingredients and finished goods for
Advanced Wound Management and packaging materials across all businesses. Suppliers are selected, and
contracts negotiated, by a centralised Group procurement team wherever possible, to ensure value for money
based on the total spending across the Group.

The Group outsources manufacturing where necessary to obtain specialised expertise or where it is possible to
gain lower cost without risk to intellectual property. Suppliers of outsourced products and services are selected
based on their ability to deliver products and services to specification, and establish and maintain a quality
system. Suppliers are trained and are monitored through on-site assessments and performance audits that
include quality, service and delivery. Finished goods purchased for resale include SUPARTZ joint and DUROLANE
fluid therapy products in the Orthopaedics business and screen displays, optical and electrical devices in the
Endoscopy business. During the year, Smith & Nephew purchased the supplier of ACTICOAT in Advanced
Wound Management.

PROPERTY, PLANT AND EQUIPMENT

Approximate area
(Square feet 000’s)

Group head office in London, England
Group research facility in York, England
Orthopaedics headquarters and manufacturing facilities in Memphis, Tennessee
Orthopaedics distribution facility in Memphis, Tennessee
Orthopaedics manufacturing facility in Aarau, Switzerland
Orthopaedics manufacturing facility in Beijing, China
Orthopaedics manufacturing facility in Beijing, China (currently under construction)
Orthopaedics manufacturing and warehouse facility in Warwick, England
Orthopaedics manufacturing and warehouse facility in Tüttlingen, Germany
Orthopaedics and Endoscopy distribution facility and Orthopaedics European headquarters

in Baar, Switzerland

Endoscopy headquarters in Andover, Massachusetts
Endoscopy manufacturing facility in Mansfield, Massachusetts
Endoscopy manufacturing and distribution facility in Oklahoma City, Oklahoma
Advanced Wound Management headquarters and manufacturing facility in Hull, England
Advanced Wound Management manufacturing facility in Gilberdyke, England
Advanced Wound Management manufacturing facility in Suzhou, China
Advanced Wound Management manufacturing facility in Largo, Florida (i)
Advanced Wound Management manufacturing facility in Alberta, Canada
Advanced Wound Management US headquarters in St. Petersburg, Florida
Biologics/ Global Operations headquarters in Durham, North Carolina

(i) As announced in 2008, the Largo facility was closed during 2009.

15
88
770
210
77
21
192
90
103

63
112
98
150
439
41
128
135
76
40
27

The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. Orthopaedics
the facilities in Aarau and the Advanced Wound
headquarters and manufacturing facilities in Memphis,
Management facilities in Hull and Gilberdyke are freehold while other principal
locations are leasehold. The
Group has freehold and leasehold interests in real estate in other countries throughout the world, but no other is
individually significant to the Group. Where required, the appropriate governmental authorities have approved the
facilities. In 2009, Orthopaedics relocated the European headquarters from Rotkreuz to Baar, Switzerland. In
addition, the old Memphis distribution facility was relocated to a new facility in Memphis, purchased in 2008. The
lease on the old site subsequently expired. In December 2009, Advanced Wound Management purchased the
ACTICOAT manufacturing facility in Canada (leasehold).

The Group closed the Largo manufacturing facility in 2009 and outsourced or relocated its manufacturing output.
The Advanced Wound Management business purchased land in Suzhou, China and has completed the build of a
new factory which is now shipping wound management products on a global basis. The Orthopaedics business

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has purchased land near Beijing, China, and construction of the new facility is expected to be complete in 2010.
It will supply implants to the local market and orthopaedic instruments for export.

RESEARCH AND DEVELOPMENT

During 2009, the Group appointed a Chief Science Officer. His role is to seek new products that yield the greatest
return for patients, healthcare professionals, shareholders and other stakeholders in the Group. As the senior
scientific figure in the Group, he will play a critical role in building the Group’s innovation and research and
development capability, developing and executing the scientific strategy and developing the Group’s
relationships with key opinion leaders.

The business units each manage a portfolio of short and long-term product development projects designed to
meet the future needs of their customers and continue to provide growth opportunities for their businesses. The
Group’s research and development is directed towards all three operating segments. Expenditure on research
and development amounted to $155m in 2009 (2008 — $152m, 2007 — $142m), representing approximately
4% of Group revenue (2008 — 4%, 2007 — 4%).

The Group continues to invest in future technology opportunities for clinical needs identified from across the
Smith & Nephew businesses. During 2009, the Group opened a new facility in Durham, North Carolina, focusing
on development of advanced, locally delivered biological therapies to promote healing and pain relief. The
Group’s principal research facility located in York, England is now managed in conjunction with the Durham facility
to provide research programmes that seek to underpin the longer-term technology requirements for its
businesses and to provide a flow of innovative products. In-house research is supplemented by work performed
by academic institutions and other external research organisations in Europe, America and Asia.

Product development is carried out at the Group’s principal locations, notably in Memphis, Tennessee and Aarau,
Switzerland (Orthopaedics), Mansfield, Massachusetts (Endoscopy) and Hull, England (Advanced Wound
Management).

INTELLECTUAL PROPERTY

Smith & Nephew has a policy of protecting, with patents, the results of research and development carried out by
the Group. Patents have been obtained in a wide range of fields, including orthopaedic reconstruction and
trauma, clinical therapies, endoscopy and advanced wound management. Patent protection for Group products is
sought routinely in the Group’s principal markets. Currently, the Group’s patent portfolio stands at over 3,800
patents in force and patent applications pending

Smith & Nephew also has a policy of protecting the Group’s products by registering trademarks under local laws
of markets in which such products are sold. The Group vigorously protects its trademarks against infringement.
Currently, the Group’s trademark portfolio consists of over 3,900 trademarks, trademark applications and design
rights.

Smith & Nephew’s goal is to provide a collection of intellectual property, which may include patents, trade secrets
and licenses, for each major product that reduces the risk associated with failure of any individual piece of
intellectual property. Most individual pieces of intellectual property protect a relatively small proportion of the
Group’s annual revenue. As a result, the Group tries to ensure that its overall business is not sensitive to the loss
(however caused) of any single piece of intellectual property.

In addition to protecting its market position by filing and enforcing patents and trademarks, Smith & Nephew may
oppose third party patents and trademark filings where appropriate in those areas that might conflict with the
Group’s business interests.

In the ordinary course of its business, the Group enters into a number of licensing arrangements with respect to
its products. None of these arrangements individually is considered material to the current operations and the
financial results of the Group.

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REGULATION

The international medical device industry is highly regulated. Regulatory requirements are a major factor in
determining whether substances and materials can be developed into marketable products and the amount of
time and expense that should be allotted to such development.

National regulatory authorities administer and enforce a complex series of laws and regulations that govern the
testing, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data
supporting the safety and efficacy of such products. Of particular importance is the requirement in many
countries that products be authorised or registered prior to manufacture, marketing or sale and that such
authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew’s
products are the Food and Drug Administration (“FDA”)
in the US, the Medicines and Healthcare products
Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the State Food and Drug
Administration in China. Payment for many medical device products is governed by reimbursement tariff agencies
in each individual country.

The trend in recent years continues to be towards regulation and higher standards of technical appraisal. In the
US, many of the Group’s products are brought to market following pre-market notification to the FDA under
Section 510(k) of the Food, Drug and Cosmetic Act, with a request that FDA clear the product as being
substantially equivalent in terms of safety and effectiveness to a previously approved device. The FDA is
considering changes in the 510(k) clearance process that could delay or increase the cost of clearance in some
circumstances, including requiring clearance for more minor modifications or requiring additional clinical studies
following clearance. Regulatory requirements may also entail lengthy inspections for compliance with appropriate
standards, including those relating to good manufacturing practices. All significant facilities within the Group are
subject to regular internal audit for medical device regulatory compliance with national and Group standards and
policies.

Management believes that the Group’s operations currently comply in all material respects with applicable
environmental
laws and regulations. Although the Group continues to make capital expenditures for
environmental compliance, it is not currently aware of any significant expenditure that would be required as a
result of such laws and regulations that would have a material adverse impact upon the Group’s financial
condition.

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THE BUSINESS AND THE COMMUNITY

CORPORATE AND SOCIAL RESPONSIBILITY

Approach
Smith & Nephew recognises that companies have a wide responsibility to the community, the environment and
the quality of life enjoyed by society at large. As a leader in its markets, Smith & Nephew believes it should also
be a leader in setting and meeting standards of sustainable development. The Group monitors progress and
views sustainable development as an integral part of the way the Group does business.

Smith & Nephew’s approach to sustainability is governed by the policies and principles it has developed to cover
four key areas of corporate and social responsibility, namely: corporate governance and business integrity,
health, safety and environment, social responsibility and economic contribution. These policies and principles are
available at www.smith-nephew.com.

The Group has published a Sustainability Report, annually, since 2001. The tenth Sustainability Report, which
gives detailed information on the actions and performance in the four key reporting areas during the last year, is
expected to be published on the Group’s website during May 2010 at www.smith-nephew.com.

Smith & Nephew’s progress is measured by leading organisations that assess sustainable development. In
the Group was again included in the Dow Jones Sustainability Index (“DJSI”) and is a member of
2009,
FTSE4Good.

Corporate Governance and Business Integrity
See the ‘Corporate Governance Statement’ section on pages 47 to 59 for a discussion of Smith & Nephew’s
governance structures and procedures, which include the principal duties and actions during the year of the
‘Ethics and Compliance Committee’ as well as details of the Group’s ‘Code of Conduct’ and ‘Code of Ethics for
Senior Financial Officers’.

Health, Safety and Environment Management
The Group’s health, safety and environmental (“HSE”) commitment is to:

•

•

•

•

•

give due regard to the effects of its operations on the environment and community to create a sustainable
business;

provide and maintain a safe and healthy work environment for employees, contractors and visitors;

require each of the Group’s businesses to achieve the HSE standards specified by the policy;

seek to improve HSE performance through continuous evaluation and development of measures to control
risk, conserve resources and minimise waste; and

recognise, promote and reinforce the responsibility of employees, contractors and visitors to work safely and
follow procedures.

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The Group’s manufacturing processes are relatively low in environmental impact. Particular emphasis is placed
on the control of energy, and waste in manufacturing and research and development. Improvement targets are
set and performance is measured against these targets. The Group’s key environmental measurements over the
last five years are as follows:

Energy Consumption
Non-hazardous waste
Total waste
Lost time accidents incident rate (iii)
OSHA recordable incident rate (iv)

2009 actual

156.8 GWh
4,456 tonnes
6,792 tonnes
0.57
1.20

2009 target
change

2009 actual
change

Change over
last 5 years

None (i)
None (ii)
-20%
-5%
-5%

+6%
+1.6%
-0.5%
+23%
-3%

-13%
-27%
-10%
-5%
-37%

(i)
(ii)
(iii)

There was no Group target for energy reduction. Each site prepares its own programme to achieve a saving.
There was no target for the reduction of non-hazardous waste. The Group target was for a 20% reduction in total waste.
Lost Time Accident Frequency Rate is measured as the number of accidents resulting in the loss of a day or more per 200,000 hours
worked.

(iv) Occupational Safety & Health Administration (“OSHA”) definition measured as the number of incidents resulting in lost time, medical

treatment (other than simple first aid), or modification to the persons work, per 200,000 hours worked.

In the 2009 Sustainability Report, Smith & Nephew published targets for the above environmental measurements
for the third year. These targets were based on figures normalised for changes in production levels (using 2009
as the base year) rather than the absolute figures. This ensures any impact arising from changes in production is
taken into account. The performance against the published targets is as follows:

•

•

•

•

•

•

•

Energy consumption increased by 6%, primarily because of an expansion in warehousing and distribution
within Orthopaedics. Endoscopy showed a 15% reduction in energy consumption when normalised for
production. The start up of a new factory in Suzhou, China and the stock build up in Largo, Florida from 2008
to enable the transfer of production to Suzhou, meant that energy consumption in Advanced Wound
Management increased by 3% when normalised for production.

The Group’s carbon emissions are calculated from its energy consumption. The Group’s emission of carbon
dioxide was 74,090 tonnes in 2009. Carbon emissions depend on the mix of energy consumed and, in the
case of electricity consumption, the emission factor of the local provider. It includes both direct emissions
from the combustion of
fuels on sites and secondary emissions from the generation by utility
companies of the electricity consumed. Changes in the site of manufacture and the mix of fuel meant that
carbon emissions remained static despite an increase in energy consumption.

fossil

There were 4,456 tonnes of non hazardous waste in 2009, representing an increase of 1.6%. An increase in
waste within Endoscopy and Orthopaedics resulted from building and development work, and the closure of
the Endoscopy site in San Antonio, US. This increase was off-set by progress in reducing waste and
improving recycling within Advanced Wound Management which led to an actual decrease in Group waste
of 3% in absolute terms. However, when normalised for production, Group non-hazardous waste rose by
1.6%.

There were 517 tonnes of hazardous waste in 2009, representing an increase of 8.3%. The Orthopaedics
site at Aarau, Switzerland and the Endoscopy site at Mansfield, US showed the largest increases as they
disposed of cutting fluids. The Orthopaedics sites at Aarau and Warwick, UK are the Group’s largest
producers of hazardous waste. Both manufactured fewer goods in 2009, which impact the figures when
normalised for production. Consequentially, Group hazardous waste normalised for production rose by 50%.

Exploration of new recycling options within Advanced Wound Management proved very successful and their
percentage of waste recycled rose from 29% to 44%, giving rise to an increase in the Group’s recycling from
30% to 32%.

There was a total (hazardous, non-hazardous, and recycled waste combined) of 6,792 tonnes of waste. This
represents a fall of 6% in absolute terms, virtually unchanged when normalised for production.

The Group’s lost time accident frequency rate rose from 0.47 to 0.57, principally due to an increase at the
Advanced Wound Management site at Hull, UK, as well as country specific incidents. In the case of Hull, the
total number of lost time accidents rose from three to six. However, an independent health and safety audit
in October 2009 gave the site a 93% rating and found no serious defects. The increase is not, therefore,
thought to reflect any underlying deterioration in performance. The rise in country specific incidents was
driven by Spain, which reported seven lost time accidents, and South Africa, which reported four.

A full analysis of these measurements and key health and safety performance measures will be included in the
2010 Sustainability Report.

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Business Partners
Smith & Nephew is committed to establishing mutually beneficial relationships with its suppliers, customers and
business partners. The Group seeks to work only with partners whom it believes adhere to principles and health,
safety, social and environmental standards consistent with that of the Group. Additional work continues each
year to improve the monitoring of supplier standards for service quality and activities relevant to their corporate
responsibility. Additional focus on supplier standards has been implemented in the manufacturing area to ensure
Smith & Nephew’s high standards are maintained throughout.

Social responsibility
Employees
The Human Resources (“HR”) Policy Framework introduced in 2006 continues to provide a framework of key HR
policies, values, behaviours and management principles that provide the structure within which the business
units and Global functions plan and deliver successful results. There is also an HR strategy which provides
direction on how the Group intends to attract, retain and develop the right talent to meet the business needs and
create a culture that is aligned to Smith & Nephew values and deliver the Group’s long term strategic plans.

The Group’s employment policies are based on equality of opportunity regardless of colour, creed, race, national
origin, sex, age, marital status, sexual orientation, mental or physical disability unrelated to the ability of the
person to perform the essential functions of the job.

Smith & Nephew is committed to providing a healthy and safe working environment and operates a set of policies
that ensure flexible, family-friendly practices and non-discrimination. It aims to provide an open environment
based on constructive relationships and regular and timely dissemination of Group information and encourages
feedback and ideas. An employee global opinion survey is conducted every two years and used as a catalyst for
improvements and plans with all employees and representative bodies.

The 2008 Global Opinion Survey was completed towards the end of 2008 and the results reported to employees
in early 2009. Across the Group, the response rate was good with nearly 6,500 employees taking the survey.
Overall, the results were positive and indicated continued high levels of employee engagement with the values
and direction of the Group. The feedback identified several areas where the Group needed to improve, including
the alignment and enhancement of systems and processes to enable better execution of plans and greater
visibility of results. During 2009, the Group has worked diligently to address the issues raised by employees and
reinforce the positive aspects of the feedback received.

Otheremployeeengagementindicators
In 2009, the Group continued to assess indicators of employee engagement. These measurements are a useful
monitoring tool and alert mechanism for action as well as giving trend indicators of improved performance.

The data below relates to the Group’s US and UK population (approximately 60% of the total employees) as these
regions have the most established and robust data collection processes in place.

•

•

the percentage of vacancies filled by internal applicants averaged 32%. The total

Positions filled by internal candidates through promotions — This measure is an indicator of how well
the Group believes it is developing its employees and the success of the Group’s internal recruitment policy.
In 2009,
for
non-management positions was 29% and for management positions was 51%. The Group target for all
(including management positions) which management believes is challenging but
employees is 40%,
achievable. The Group has a policy of open advertising and providing opportunities for existing employees
wherever possible, while recognising the need to bring in new ideas and approaches that external
recruitment brings.

Labour turnover — The Group measures various labour turnover rates. The average voluntary labour
turnover rate during 2009 was 6.5%, a decrease from the 2008 equivalent rate of 9%. The average
involuntary labour turnover rate was 10.7%, which management believe is indicative of
the Group’s
continuing programme of efficiency improvements. This is allied to continued investment in new markets and
skills. An indicator of this is that the Group’s headcount remained broadly unchanged on the prior year. In
addition, the Group measures labour turnover relating specifically to employees who have been with the
business less than two years. This measure is an indication of how well the Group recruits and then retains
its employees so that they can make a contribution to the business. The average voluntary turnover for
employees leaving the Group within two years of joining was 10.1%, a decrease on the 2008 equivalent
rates of 14% in the US and 11% in the UK.

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The Group is committed to providing training and information so that all employees can make the best
contribution possible. To ensure that the Group continues to improve in this important area, the central global
team continued expanding their programmes to lead talent management,
organisational development
performance management and learning and development across the whole of
the Group. Learning and
development programmes are used to attract, retain and develop employees. These programmes are linked to
formal performance appraisal and development planning. The Group operates training programmes under the
banner of
‘Management Excellence’. These provide the key management skills required to be successful
managers and leaders, covering the requirements of both new and experienced individuals. Further programmes
were added in 2009 and the Group has developed a common and comprehensive on-line learning resource for
global launch in the first quarter of 2010.

SocietyandCommunity
The Group works with national and local governments and other organisations to meet its legal and civic
obligations, manage its impact on the environment, and contribute to the development of laws and regulations
that affect its business. Smith & Nephew values community involvement and is an active member of its local
communities and supports employees who undertake community work.

The Group’s principles for charitable giving are based on criteria relevant to its business, with priority given to
medical education. Individual company sites support their local communities in a range of charitable causes
giving donations of money, gifts in kind and employee time.

The Group realises that its technologies and products do not reach everyone. To address this issue, the
orthopaedics business has created a relationship with a charitable and humanitarian organisation. This links up
with physicians and non-profit groups engaged in medical philanthropy that receive donations of Smith &
Nephew products through sponsorship and help from the Group’s employees. The Group considers that working
in collaboration with these individuals and organisations increases the impact of its charitable giving.

In 2009, direct donations to charitable and community activities totalled $1,866,000, of which $396,000 was
given to the Smith & Nephew Foundation. Smith & Nephew made no political contributions in 2009.

More examples of the programmes supported by the Group are given in the 2010 Sustainability Report.

Economic Contribution
The Group contributes economically in three principal ways: (i) its financial performance brings economic benefits
to shareholders, employees, suppliers, governments and local authorities; (ii) it aims to deliver overall cost
savings to healthcare systems by reducing the cost per episode of care, and (iii) through the provision of medical
education to surgeons and nurses.

Deliveringoverallcostsavingstohealthcaresystems
Smith & Nephew’s innovation is focused on designing products, instruments and techniques which provide
clinical and cost benefits. Efficiency benefits include reduced frequency of dressing changes, shorter operating
theatre times, reduced length of time spent in hospital, faster recovery and reduced infection rates. Examples of
such innovations that the Group has recently introduced include:

•

•

•

•

•

•

VISIONAIRE Patient Matched Instrumentation materially shortens procedure time by eliminating sizing and
alignment surgical steps.

BIRMINGHAM HIP Resurfacing System has significant cost advantages over alternative treatments which
consist of many years of traditional pain management followed by a total hip replacement, as well as giving
significant improvement in patient quality of life.

DYONICS BONECUTTER ELECTROBLADE Resector, which combines technologies to perform the work of three
separate resection devices, hence often resulting in shorter procedures.

BICEPTOR Tenodesis System to re-attach the biceps tendon in the shoulder simplifies and shortens
procedure times.

Negative Pressure Wound Therapy can significantly reduce wound healing times while reducing hospital
costs by permitting patients to be discharged earlier.

ALLEVYN Ag Gentle Border incorporates the anti-microbial protection of silver which reduces the incidence
of infection and hence the cost of treatment.

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Medicaleducation
The Group is committed to supporting surgeon, clinician and nurse training both associated directly with the
Group’s products and more generally.

Examples during 2009 include: Orthopaedics continued to expand its KLEOS programme, which is a medical
education platform which offers seminars, fellowships, instructional videos and literature reviews. Orthopaedics
also contributed by providing grant support for research, graduate medical education fellowships and continuing
medical education through the independent Orthopaedic Research and Education Foundation. Endoscopy hosted
a two-day fellowship meeting, “The Wider Scope of Arthroscopy”, that involved over 100 visiting surgeons,
including Fellows from some of the most prestigious programmes in North America.
In Advanced Wound
Management, much of the focus is on the training of nurses.

In addition, during 2009, the Group opened or commissioned surgeon training facilities in Shanghai, China;
Lucerne, Switzerland; York, UK; and Memphis, US.

More examples of the programmes supported by the Group to deliver medical education are given in the 2010
Sustainability Report.

Looking Ahead
Smith & Nephew’s vision is to be the best in helping people regain their lives by improving and healing the
human body. The Group believes that it can achieve this by setting and meeting ambitious performance targets,
by constant innovation in products and services and by earning the trust of its stakeholders. In all its business
activities,
the drive towards sustainability is an ongoing process and Smith & Nephew is committed to
maintaining a consistent effort to improve.

EMPLOYEES

The average number of full-time equivalent employees in 2009 was 9,764, of whom 1,639 were located in the
UK, 4,131 were located in the US and 3,994 were located in other countries. The Group does not employ a
significant number of temporary employees.

The average number of employees for the past three years by business segment:

Orthopaedics
Endoscopy
Advanced Wound Management

2009

4,853
1,888
3,023

9,764

2008

4,840
1,849
3,068

9,757

2007

4,405
1,798
2,987

9,190

Where the Group has collective bargaining arrangements in place with labour unions, these reflect local market
circumstances.

Smith & Nephew operates share option plans that are available to the majority of employees (for further
information see Note 26 of the Notes to the Group Accounts). The Group has no share plans in which shares
have rights with regard to control of the Company that are not exercisable directly by employees.

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RISK

RISK FACTORS

There are risks and uncertainties related to Smith & Nephew’s business. The factors listed below could cause the
Group’s financial condition or results of operations to differ materially from expected and historical levels. Factors
not listed here, that Smith & Nephew cannot presently identify or does not believe to be equally significant, could
also adversely affect Smith & Nephew’s business.

CurrencyFluctuations
The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith &
Nephew plc. In 2009, 44% (2008 — 44%) of Group revenue arose in the US, 27% (2008 — 28%) in Continental
in Africa, Asia, Australia, Canada, New Zealand and Latin America, and 8%
Europe, 21% (2008 — 20%)
(2008 — 8%)
fluctuations in the exchange rates used to translate the financial
statements of operations outside the US into US Dollars had the effect of decreasing Group revenue by 3%
(2008 — increasing Group revenue by 2%).

in the UK. During 2009,

The Group’s manufacturing cost base is situated principally in the US, the UK and Switzerland from where
finished products are exported to the Group’s selling operations worldwide. Thus, the Group is exposed to
fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and the currencies of the Group’s
selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or Swiss
Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Group’s trading margin
would be adversely affected.

In 2009, the Group managed $1bn of foreign currency transactions by using forward foreign exchange contracts,
of which the major transaction flows are from Euros into US Dollars and Sterling. The Group’s policy is for firm
commitments to be fully covered and forecast transactions to be covered between 50% and 90% for up to one
year.

Assuming the Group had not transacted forward foreign exchange contracts and ignoring delays in recognition of
exchange rate movements due to inventory-holding periods:

•

•

If the Euro were to have weakened on average over the year by 10% against all other currencies, Smith &
Nephew’s profit before taxation in 2009 would have decreased by an estimated $43m (2008 — decreased
by an estimated $45m) on account of transactional and translational movements;

If the US Dollar were to have weakened on average over the year by 10% against all other currencies, profit
before taxation in 2009 would have increased by an estimated $70m (2008 — increased by an estimated
$51m).

DependenceonGovernmentandOtherFunding
In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by
governments. Funds may be made available or withdrawn from healthcare budgets depending on government
policy. The Group is therefore largely dependent on future governments providing increased funds
commensurate with the increased demand arising from demographic trends.

Pricing of the Group’s products is governed in most major markets largely by governmental reimbursement
authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the
growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in
markets where the Group has operations. This control may be exercised by determining prices for an individual
product or for an entire procedure. The Group is exposed to changes in reimbursement policy, tax policy and
pricing which may have an adverse impact on sales and operating profit. Currently health care reform legislation
is under consideration in the US that would impose a significant tax on medical device manufacturers. There may
be an increased risk of other adverse changes to government funding policies arising from the deterioration in
macro-economic conditions in some of the Group’s markets.

The Group must adhere to the rules laid down by government agencies that fund or regulate health care,
including extensive and complex rules in the US. Failure to do so could result in fines or loss of future funding.

WorldEconomicConditions
Demand for the Group’s products is driven by demographic trends, including the ageing population and the
incidence of osteoporosis and obesity. Supply of, use of and payment for the Group’s products is influenced by

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world economic conditions which could place increased pressure on demand and pricing, adversely impacting
the Group’s ability to deliver revenue and margin growth. The conditions could favour larger, better capitalised
groups, with higher market shares and margins. As a consequence, the Group’s prosperity is linked to general
economic conditions and there is a risk of deterioration of the Group’s performance and finances during the
current macro-economic events.

including
In 2009, deteriorating economic conditions worldwide created several challenges for the Group,
deferrals of
joint replacement procedures, heightened pricing pressures and significant declines in capital
equipment expenditures at hospitals. These factors tempered the overall growth of the Group’s global markets
and may continue to impact growth in the future.

StockMarketValuations
As a growth industry, medical device companies have higher stock market valuations than many other industrial
companies. If market conditions change, other companies in its sector fail to perform, or if the Group is perceived
to be performing less well than the sector, then the share price of the Group may be adversely affected.

PoliticalUncertainties
The Group has operations in 32 countries. Political upheaval in some of those countries or in surrounding regions
may impact the Group’s results of operations. Political changes in a country could prevent the Group from
receiving remittances of profit from a member of the Group located in that country or from selling its investments
in that country. Furthermore, legislative measures in a country could result in changes in tariffs, import quotas or
taxation that could adversely affect the Group’s turnover and operating profit. Terrorist activities and ongoing
global political uncertainties could adversely impact the Group.

HighlyCompetitiveMarkets
The Group’s business units compete across a diverse range of geographic and product markets. Each market in
which the business units operate contain a number of different competitors,
including specialised and
international corporations. Significant product innovations, technical advances or the intensification of price
competition by competitors could adversely affect the Group’s operating results. Some of these competitors may
have greater financial, marketing and other resources than Smith & Nephew. These competitors may be able to
initiate technological advances in the field, deliver products on more attractive terms, more aggressively market
their products or invest larger amounts of capital and research and development into their businesses.

There is a possibility of further consolidation of companies, which could adversely affect the Group’s ability to
compete with larger companies due to insufficient financial resources. If any of the Group’s businesses were to
lose market share or achieve lower than expected sales growth, there could be a disproportionate adverse
impact on the Group’s share price and its strategic options.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price. There
has been some consolidation in the Group’s customer base, as well as among the Group’s competitors, and
these trends are expected to continue long term. Increased competition and unanticipated unanticipated actions
by competitors or customers could lead to downward pressure on prices and/or a decline in market share in any
of the Group’s business areas, which would adversely affect Smith & Nephew’s results of operations and hinder
its growth potential.

ProductLiabilityClaimsandLossofReputation
The development, manufacture and sale of medical devices entail risk of product liability claims or recalls. Design
and manufacturing defects with respect to products sold by the Group or by companies it has acquired could
damage, or impair the repair of, body functions. The Group may become subject to liability, which could be
substantial, because of actual or alleged defects in its products. In addition, product defects could lead to the
need to recall from the market existing products, which may be costly and harmful to the Group’s reputation.

There can be no assurance that customers, particularly in the US, the Group’s largest geographical market, will
not bring product liability or related claims that would have a material adverse effect on the Group’s financial
position or results of operations in the future, or that the Group will be able to resolve such claims within
insurance limits.

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RegulatoryComplianceintheHealthcareIndustry
Business practices in the healthcare industry are subject to regulation and review by various government
authorities.
In general, the trend in many countries in which the Group does business is towards higher
expectations and increased enforcement activity by governmental authorities. While the Group is committed to
doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group
and other companies in the industry have been subject to investigations and other enforcement activity that have
incurred and may continue to incur significant expense. See “Legal Proceedings”.

The Group has committed to ensuring the rigorous application of its Compliance Programme worldwide. In order
to achieve this, management has made changes to existing corporate structures and introduced additional
standards and procedures, including safeguards with respect to the sale of Group products through distributors,
sales representatives and other third parties. As the Group continues to enhance its compliance programs
globally, it is possible that operations in some regions may be disrupted.

RegulatoryApprovalsandControls
The medical device industry is highly regulated. Regulatory requirements are a major factor in determining
whether substances and materials can be developed into marketable products and the amount of time and
expense that should be allotted to such development. The Group is required to comply with a wide range of
regulatory controls over the manufacturing, testing, distribution, marketing and sale of its products, particularly in
the US, China and Europe. Such controls have become increasingly demanding and costly to comply with and
management believes that this trend will continue. At any time, the Group is awaiting a number of regulatory
approvals which,
if not received, could adversely affect results of operations. Regulatory approval of new
products and new materials is required in most countries in which the Group operates, although a single
approval may be obtained for all countries within the European Union. Regulatory approval of new products may
entail a lengthy process, particularly if materials are employed which have not previously been used in similar
products. In the US, the 510(k) process by which many of the Group’s products are cleared for sale may be
revised in ways that could lead to delays or increased costs. See “Regulation”.

Failure to comply with these regulatory requirements could have a number of adverse consequences, including
withdrawal of approval to sell a product in a country, temporary closure of a manufacturing facility, fines and
potential damage to company reputation.

ProprietaryRightsandPatents
Due to the technological nature of medical devices, the Group is subject to the potential for patent infringement
claims. Smith & Nephew attempts to protect its intellectual property and regularly opposes third party patents and
trademarks where appropriate in those areas that might conflict with the Group’s business interests. If Smith &
Nephew fails to enforce its intellectual property rights successfully, its competitive position could suffer, which
could harm its results of operations.

Claims asserted by third parties regarding infringement of their intellectual property rights, if successful, could
require the Group to expend time and significant resources to pay damages, develop non-infringing products or
to obtain licences to the products which are the subject of such litigation, thereby affecting the Group’s growth
and profitability.

ContinualDevelopmentandIntroductionofNewProducts
The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, each of
the Group’s business units must continue to develop innovative products that satisfy customer needs and
preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain
process. A potential product may not be brought to market for any number of reasons, including failure to work
optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other
intellectual property rights and changes in consumer demand. The Group’s products and technologies are also
subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the
Group’s competitors may affect price levels in the various markets in which the Group’s business units operate. If
the Group’s new products do not remain competitive with those of competitors, the Group’s sales revenue could
decline.

There is a risk that a major disruptive technology could be introduced into one or more of the Group’s markets
and adversely affect its ability to achieve business plans and targets.

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ManufacturingandSupply
The Group’s manufacturing production is concentrated at 11 main facilities in Memphis, Tennessee, Mansfield,
Massachusetts and Oklahoma City, Oklahoma in the US, Hull, Warwick and Gilberdyke in the UK, Aarau in
Switzerland, Tüttlingen in Germany, Alberta in Canada and Suzhou and Beijing in China. If major physical
disruption took place at any of these sites, it would adversely affect the results of operations. Physical loss and
consequential loss insurance is carried to cover such risks but is subject to limits and deductibles and may not be
sufficient to cover catastrophic loss.

Management of orthopaedic inventory is complex, particularly forecasting and production planning. There is a risk
that failures in operational execution could lead to excess inventory or individual product shortages.

Each of the business units is reliant on certain key suppliers of raw materials, components, finished products and
packaging materials. These suppliers must provide the materials and perform the activities to the Group’s
standard of quality requirements. If any of these suppliers is unable to meet the Group’s needs, compromises on
standards of quality or substantially increases its prices, Smith & Nephew would need to seek alternative
suppliers. There can be no assurance that alternative suppliers would provide the necessary raw materials on
favourable or cost-effective terms at the desired quality. Consequently, the Group may be forced to pay higher
prices to obtain raw materials, which it may not be able to pass on to its customers in the form of increased
prices for its finished products. In addition, some of the raw materials used may become unavailable, and there
can be no assurance that the Group will be able to obtain suitable and cost-effective substitutes. Any interruption
of supply caused by these or other factors could negatively impact Smith & Nephew’s revenue and operating
profit.

The Group is in the process of outsourcing to third parties or relocating to lower cost countries certain of its
manufacturing processes. As a result of these transfers, there is a risk of disruption to supply.

AttractingandRetainingKeyPersonnel
The Group’s continued development depends on its ability to hire and retain highly skilled personnel with
particular expertise. This is critical, particularly in general management, research, new product development and
in the sales forces. If Smith & Nephew is unable to retain key personnel in general management, research and
new product development or if its largest sales forces suffer disruption or upheaval, its sales and operating profit
would be adversely affected. Additionally, if the Group is unable to recruit, hire, develop and retain a talented,
competitive workforce, it may not be able to meet its strategic business objectives.

FailuretoMakeSuccessfulAcquisitions
A key element of the Group’s strategy for continued growth is to make strategic acquisitions or alliances to
complement its existing businesses. Failure to identify appropriate acquisition targets or failure to integrate them
successfully would have an adverse impact on the Group’s competitive position and profitability. In addition, the
contraction of available global capital may make financing less attainable or more expensive and could result in
the Group failing in its strategic aim of growth by acquisition or alliance.

OtherRiskFactors
The Board considers that Smith & Nephew is subject to a number of other risks which are common to most global
medical technology groups and which are reviewed as part of its risk management process.

In the financial area these include interest rate volatility, share price volatility, challenges by taxation authorities,
failures in reporting and internal financial controls and uninsured losses.

Adverse events in the areas of corporate social responsibility could also adversely impact Group operating
results.

23

EXCHANGE AND INTEREST RATE RISK AND FINANCIAL INSTRUMENTS

The Board of directors of the Company has established a set of policies to manage funding, currency and interest
rate risks. Derivative financial instruments are used only to manage the financial risks associated with underlying
business activities and their financing. See Note 21 of the Notes to the Group accounts for further details of these
risks.

rates. Financial

The Group’s financial instruments are subject to changes in fair values as a result of changes in market rates of
instruments entered into to hedge sales and purchase
exchange and forward interest
transactions in foreign currency and interest rate exposures are accounted for as hedges. Changes in fair values
of these financial instruments would not affect the Group’s income statement. The movements in the fair value of
financial instruments that are not accounted for as hedges offset movements in the values of assets and liabilities
and are recognised through the income statement. The net impact of these changes in fair value on the Group’s
income statement is not significant.

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BUSINESS REVIEW, LIQUIDITY AND PROSPECTS

The Business Review, Liquidity and Prospects discusses the operating and financial performance of the Group,
including the financial outlook and the financial resources of the Group, under the following headings:

Business overview
2009 Year
2008 Year
Financial position, liquidity and capital resources
Legal Proceedings
Outlook and trend information
Contractual obligations
Off-balance sheet arrangements
Related party transactions

The results for each year are compared primarily with the results for the preceding year.

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43
45
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BUSINESS OVERVIEW

Smith & Nephew’s operations are organised into three primary business units that operate globally:
Orthopaedics, Endoscopy and Advanced Wound Management. Smith & Nephew believes that its businesses
have the opportunities for strong growth due to its markets benefiting from an ageing population, an increase in
active lifestyles and trends toward less invasive medical procedures.

Revenue by business segment as a percentage of total revenue was as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

Total revenue

2009
%

57
21
22

100

Revenue by geographic market as a percentage of total revenue was as follows:

Europe (Continental Europe and United Kingdom)
United States
Africa, Asia and Australia and Other America

Total revenue

2009
%

35
44
21

100

2008
%

57
21
22

100

2008
%

36
44
20

100

2007
%

55
22
23

100

2007
%

35
46
19

100

Underlying Growth in Revenue
“Underlying growth in revenue” is a non-GAAP financial measure which is a key performance indicator used by
the Group’s management in order to compare the revenue in a given year to that of the previous year on a
like-for-like basis. This is achieved by adjusting for the impact both of sales of products acquired in material
business combinations and for movements in exchange rates. The Group’s management uses this non-GAAP
measure in its internal financial reporting, budgeting and planning to assess performance on both a business
segment and a consolidated Group basis.

“Underlying growth in revenue” reconciles to growth in revenue reported in accordance with IFRS by making two
adjustments, the “constant currency exchange effect” and the “acquisitions effect”, described below. The material
limitation of the underlying growth in revenue measure is that it excludes certain factors, described above, which
local
do ultimately have a significant impact on total revenues. The Group measures the performance of
managers using underlying growth in revenue whilst the Group’s management additionally considers GAAP
revenue each quarter and further assesses the excluded items by monitoring against internal budget amounts.

The “constant currency exchange effect” is a measure of the increase/decrease in revenue resulting from
currency movements on non-US Dollar sales. This is measured as the difference between the increase in
revenue translated into US Dollars on a GAAP basis (i.e. current year revenue translated at the current year
average rate, prior year revenue translated at the prior year average rate) and the increase measured by
translating current year revenue into US Dollars using the prior year average rate.

The “acquisitions effect” is the measure of the impact on revenue from newly acquired business combinations.
This is calculated by excluding the revenue from sales of products acquired as a result of a business combination
consummated in the current year, with non-US Dollar sales translated at the prior year average rate. Additionally,
prior year revenue is adjusted to include a full year of revenue from the sales of products acquired in those
business combinations consummated in the previous year, calculated by adding back revenue from sales of
products in the period prior to the Group’s ownership. These sales are separately tracked in the Group’s internal
reporting systems and are readily identifiable.

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Reported growth in revenue by business segment reconciles to underlying growth in 2009 as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

Total revenue

Constant
currency
exchange
effect
%

2
2
6

3

Underlying
growth
%

1
1
6

2

Reported
growth
%

(1)
(1)
–

(1)

Reported growth in revenue by business segment reconciles to underlying growth in 2008 as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

Total revenue

Constant
currency
exchange
effect
%

(2)
(1)
(1)

(2)

Reported
growth
%

16
9
8

13

Acquisitions
effect
%

Underlying
growth
%

(9)
–
–

(5)

5
8
7

6

Trading profit
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of
specific transactions that management considers affect the Group’s short-term profitability. 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 including amortisation of acquisition intangible assets and impairments; significant
restructuring events; and gains and losses resulting from legal disputes and uninsured losses.

Operating profit reconciles to trading profit in 2009 as follows:

Restructuring
and
rationalisation
costs
$ million

Amortisation
of acquisition
intangibles
and
impairments
$ million

Operating
profit
$ million

Acquisition
related costs
$ million

Orthopaedics
Endoscopy
Advanced Wound Management

Total

410
169
144

723

26
–
–

26

26
5
11

42

46
15
5

66

Operating profit reconciles to trading profit in 2008 as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

Total

Restructuring
and
rationalisation
costs
$ million

Amortisation
of acquisition
intangibles
and
impairments
$ million

Operating
profit
$ million

Acquisition
related costs
$ million

61
–
–

61

9
4
21

34

29
16
6

51

382
146
102

630

27

Trading profit
$ million

508
189
160

857

Trading profit
$ million

481
166
129

776

Trading profit by business segment as a percentage of total trading profit was as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

Total trading profit

2009
%

59
22
19

100

2008
%

62
21
17

100

Operating profit by business segment as a percentage of total operating profit was as follows.

Orthopaedics
Endoscopy
Advanced Wound Management

Total operating profit

2009
%

57
23
20

100

2008
%

61
23
16

100

2007
%

60
21
19

100

2007
%

49
29
22

100

Factors Affecting Smith & Nephew’s Results of Operations

SalesTrends
Smith & Nephew’s business units participate in the global medical devices market and share a common focus on
the repair of human tissue. Smith & Nephew’s principal geographic markets are in the well-developed healthcare
economies of the US, Europe, Japan and Australia.

These markets are characterised by an increase in the average age of the population caused by the immediate
post-World War II “baby boomer” generation approaching retirement, increased longevity, more active lifestyles,
obesity and increased affluence. Together these factors have created significant demand for more effective
healthcare products which deliver improved outcomes through technology advances. Furthermore, pressure to
resist increases in overall healthcare spending has led healthcare providers to demand products which minimise
the length of hospital stays and use of surgeon and nursing resources.

Increasing consumer awareness of available healthcare treatments through the Internet and direct-to-customer
advertising has led to increased consumer influence over product purchasing decisions.

In orthopaedic reconstruction, improvements in technology have lengthened the effective life of implants and
have facilitated the implantation of knees and hips in relatively young patients thereby improving the quality of life
for a new generation. Both the orthopaedic trauma and clinical therapies markets are expected to continue to
grow due to a global population increasingly at risk from fractures due to age, osteoporosis, obesity and diabetes
and also due to continuous advancements in the surgical treatment of fractures, and the need to manage pain in
younger, more active patients.

The endoscopy market is benefiting from the continued trend worldwide towards less invasive surgery but with
particular focus on arthroscopic repair of the knee and shoulder using a broad range of technology. The Group
also expects to benefit from the demand for less invasive approaches to arthroscopic hip repair.

The advanced wound management market is focused on the treatment of chronic wounds of the older population
and other hard-to-heal wounds such as burns and certain surgical wounds and is therefore also expected to
benefit from demographic trends. The market for advanced wound treatments is relatively unpenetrated and it is
estimated that the potential market is significantly larger than the current market. This increased penetration is
expected to be driven by improved outcomes from new technology, health economic benefits, increasing nursing
shortages, quality of life expectations and education of healthcare providers to convert from traditional to
advanced treatments.

Innovation
The Group must continually develop its existing and new technologies and bring new products to its customers to
in 2009 represented approximately 4%
drive sales growth. Expenditure on research and development

28

(2008 — 4%) of Group revenue. The focus of Smith & Nephew’s innovation is to create new products and
surgical techniques with distinct advantages in clinical performance and cost-effectiveness benefits for clinicians,
patients and healthcare providers. In particular, the Group has brought together various initiatives across its
businesses to focus on biologics, which are advanced, locally delivered biological therapies to promote healing
and pain relief.

CurrencyMovements
Smith & Nephew’s results of operations are affected by transactional exchange rate movements in that they are
subject to exposures arising from revenue in a currency different from the related costs and expenses. The
Group manages the impact of exchange rate movements on sales and cost of goods sold by a policy of
transacting forward foreign currency commitments when firm purchase orders are placed.
In addition, the
Group’s policy is for firm commitments to be fully covered and forecast transactions to be covered between 50%
and 90% for up to one year.

The Group’s revenues, profits and earnings are also affected by exchange rate movements on the translation of
results of operations in foreign subsidiaries for financial reporting purposes. This exposure is offset partly
because the Group incurs interest in currencies other than US Dollars on its indebtedness denominated in
currencies other than US Dollars. See “Financial Position, Liquidity and Capital Resources”.

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Other
Other than national governments seeking to control or reduce healthcare expenditure, (see “Risk Factor —
Dependence on Government and Other Funding”) management is not aware of any governmental economic,
fiscal, monetary or political policies or factors that have materially affected, directly or indirectly, the Group’s
operations or investments by shareholders.

Critical Accounting Policies
The Group’s significant accounting policies are set out in Note 2 of the Notes to the Group Accounts. Of those,
the policies which require the most use of management’s judgment are as follows:

Inventories
A feature of the Orthopaedics business (whose finished goods inventory makes up approximately 75% of the
Group total finished goods stock) 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 product, 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 involve
management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old
products and efficiency of manufacturing planning systems.

Impairment
In carrying out impairment reviews of goodwill, intangible assets and property, plant and equipment a number of
significant assumptions have to be made when preparing cash flow projections. These include the future rate of
market growth, 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.

RetirementBenefits
A number of key judgements have to be made in calculating the fair value of the Group’s defined benefit pension
plans. These assumptions impact the Balance Sheet liability, operating profit and other finance income/costs. The
most critical assumptions are the discount rate and mortality assumptions to be applied to future pension plan
liabilities. For example a 0.5% increase in discount rate would reduce the combined UK and US pension plan
deficit by $87m whilst a 0.5% decrease would increase the combined deficit by $97m. A 0.5% increase in
discount rate would decrease profit before taxation by $3m whilst a 0.5% decrease would increase it by $2m. A

29

one year increase in the assumed life expectancy of the average 60 year old male pension plan member in both
the UK and US would increase the combined deficit by $33m. In making these judgements, management takes
into account the advice of professional external actuaries and benchmarks its assumptions against external data.

The discount rate is determined by reference to market yields on high quality corporate bonds, with currency and
term consistent with those of the liabilities. In particular for the UK, the discount rate is derived by reference to an
AA yield curve derived by the Group’s actuarial advisers. The principal index used for setting the US discount rate
is the Citigroup Pension Liability Index.

See Note 35 of the Notes to the Group Accounts for a summary of how the assumptions selected in the last five
years have compared with actual results.

ContingenciesandProvisions
The recognition of provisions for legal disputes 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 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.

The Group operates in numerous tax jurisdictions around the world. Although it is Group policy to submit its tax
returns to the relevant tax authorities as promptly as possible, at any given time the Group has unagreed years
outstanding and is involved in disputes and tax audits. Significant issues may take several years to resolve. In
estimating the probability and amount of any tax charge, management takes into account the views of internal
and external advisors and updates the amount of provision whenever necessary. The ultimate tax liability may
differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in
legislation.

2009 YEAR

The following discussion and analysis is based upon, and should be read in conjunction with, the Group
Accounts of Smith & Nephew included elsewhere in this Annual Report.

Financial Highlights of 2009
Group revenue was $3,772m for the year ended 31 December 2009, representing a 1% decline compared to
2008. Unfavourable currency translation of -3% was partly offset by underlying revenue growth of 2%.

Profit before taxation was $670m in 2009, compared with $564m in 2008. Attributable profit was $472m
compared with $377m in 2008. Adjusted attributable profit (calculated as set out in “Selected Financial Data”),
rose 18% to $580m in 2009, from $493m in 2008.

Basic earnings per Ordinary Share were 53.4¢, compared to 42.6¢ for 2008. EPSA (as set out in “Selected
Financial Data”) was 65.6¢ in 2009 compared, to 55.6¢ for 2008, representing an 18% increase.

30

Fiscal 2009 Compared with Fiscal 2008
The following table sets out certain income statement data for the periods indicated:

Revenue (i)
Cost of goods sold (ii)

Gross profit
Marketing, selling and distribution expenses (iii)
Administrative expenses (iv)
Research and development expenses
BSN agency and management fees

Operating profit (i)
Net interest payable
Other finance costs
Share of results of associates

Profit before taxation
Taxation

Attributable profit for the year

2009
$ million

2008
$ million

3,772
(1,030)

2,742
(1,368)
(519)
(155)
23

723
(40)
(15)
2

670
(198)

472

3,801
(1,077)

2,724
(1,436)
(533)
(152)
27

630
(66)
(1)
1

564
(187)

377

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(i) Group revenue and operating profit are derived wholly from Continuing Operations and discussed on a segment basis on pages 34 to

(ii)

35.
2009 includes $15m of restructuring and rationalisation expenses and $12m of acquisition related costs (2008 — $15m in respect of
the utilisation of Plus inventory stepped-up to fair value on acquisition, $18m of restructuring and rationalisation expenses and $8m of
acquisition related costs).

(iii) 2009 includes $7m of acquisition related costs and $10m of restructuring and rationalisation expenses (2008 — $7m of acquisition

related costs and $3m of restructuring and rationalisation expenses).

(iv) 2009 includes $7m of acquisition related costs, $17m of restructuring and rationalisation expenses and $66m relating to amortisation of
acquisition intangibles and impairments (2008 — $31m of acquisition related costs, $13m of restructuring and rationalisation expenses
and $51m amortisation of acquisition intangibles and impairments).

TransactionalandTranslationalExchange
The Group’s principal markets outside the US are, in order of significance, Continental Europe, UK, Australia and
Japan. Revenues in these markets fluctuate when translated into US Dollars on consolidation. During the year, the
average rates of exchange against the US Dollar used to translate revenues and profits arising in these markets
changed compared to the previous year as follows: the Euro weakened from $1.46 to $1.39 (-5%), Sterling
weakened from $1.84 to $1.56 (-15%), the Swiss Franc remained flat at $0.92, the Australian Dollar weakened
from $0.84 to $0.78 (-7%) and the Japanese Yen strengthened from ¥103 to ¥94 (+9%).

The Group’s principal manufacturing locations are in the US (Orthopaedics and Endoscopy), Switzerland
(Orthopaedics) and UK (Advanced Wound Management and Orthopaedics). The majority of the Group’s selling
and distribution subsidiaries around the world purchase finished products from these locations. As a result of
currency movements compared with the previous year, purchases from the US became relatively more
expensive. The Group’s policy of purchasing forward a proportion of its currency requirements mitigates the
impact of these movements.

Revenue
Group revenue decreased by $29m (-1%) from $3,801m in 2008 to $3,772m in 2009. Underlying revenue growth
was 2%, offset by -3% attributable to unfavourable currency translation.

Orthopaedics revenues decreased by $23m (-1%), of which 1% was attributable to underlying growth, offset by
-2% due to unfavourable currency translation. Endoscopy revenues decreased by $9m (-1%), of which 1% was
attributable to underlying growth, offset by -2% due to unfavourable currency translation. Advanced Wound
Management revenues increased by $3m (nil%), of which 6% was attributable to underlying growth, offset by -6%
due to unfavourable currency translation.

A more detailed analysis is included within the Revenue sections of the individual business segments that follow
on pages 34 to 35.

31

Costofgoodssold
Cost of goods sold decreased by $47m to $1,030m from $1,077m in 2008. The main drivers of this decrease are
continuing focus on cost efficiency, cost effectiveness and the impact of currency. Other factors contributing to
the movement were the decrease of $15m in utilisation of the Plus inventory stepped up to fair value on the
acquisition, a decrease of $3m in restructuring and rationalisation expenses, offset by an increase of $4m in
other acquisition related costs.

Further margin analysis is included within the “Trading profit” sections of the individual business segments that
follow on pages 34 to 35.

Marketing,sellinganddistributionexpenses
These expenses decreased by $68m to $1,368m from $1,436m in 2008. The decrease was largely driven by
continuing focus on cost management, efficiencies achieved through the Earnings Improvement Programme and
the impact of currency. These were partly offset by an increase in restructuring and rationalisation expenses of
$7m.

Administrativeexpenses
Administrative expenses decreased by $14m to $519m from $533m in 2008, largely as a result of the focus on
cost management and efficiency and the impact of currency. Other factors contributing to the movement were the
decrease of $24m in other acquisition related costs, offset by an increase in the amortisation and impairment
charge of intangible assets by $15m and an increase of $4m in restructuring and rationalisation expenses.

Researchanddevelopmentexpenses
Expenditure as a percentage of revenue increased by 0.1% to 4.1% in 2009 (2008 — 4.0%). The Group
continues to invest in innovative technologies and products to differentiate itself from competitors.

BSNagencyandmanagementfees
Agency and management fees of $23m (2008 — $27m) were received in respect of services provided to BSN
Medical for sales force resource, physical distribution and logistics and administration in certain countries. The
calculation of the fees is designed to result in a neutral, cost-recovery position for Smith & Nephew.

Operatingprofit
Operating profit
Orthopaedics, $23m in Endoscopy and $42m in Advanced Wound Management.

increased by $93m to $723m from $630m in 2008 comprising,

increase of $28m in

Netinterestpayable
Net interest payable decreased by $26m from $66m in 2008 to $40m in 2009. This is a consequence of the
overall reduction of borrowings within the Group and a reduction in the applicable interest rates.

Otherfinancecost
Other finance costs in 2009 were $15m compared to $1m in 2008. This increase is attributable to a decrease in
the expected return on pension plan assets.

Taxation
The taxation charge increased by $11m to $198m from $187m in 2008. The effective rate of tax was 29.6%,
compared with 33.2% in 2008.

The tax charge was reduced by $26m in 2009 (2008 — $30m) as a consequence of restructuring and
rationalisation expenses, acquisition related costs, amortisation of acquisition intangibles and impairments. The
effective tax rate was 27.9% (2008 — 30.6%) after adjusting for these items and the tax thereon. This is a lower
rate than expected due to favourable progress in, and resolution of, certain historic issues.

32

GroupBalanceSheet
The following table sets out certain balance sheet data for the years ended indicated:

Non-current assets
Current assets
Assets held for sale

Total assets

Non-current liabilities
Current liabilities

Total liabilities
Total equity

Total equity and liabilities

2009
$ million

2008
$ million

2,480
2,071
14

4,565

1,523
863

2,386
2,179

4,565

2,523
1,985
–

4,508

1,841
968

2,809
1,699

4,508

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Non-current assets decreased by $43m to $2,480m from $2,523 in 2008. Intangible assets and goodwill
decreased by $60m of which $112m related to the Plus settlement, $92m to amortisation and impairments and
$4m to disposals. These were offset by $102m of additions, $15m relating to the acquisition of Nucryst and
$31m relating to favourable currency translation. Property, plant and equipment increased by $28m comprising
$216m of additions, $30m of favourable currency translation and $6m relating to the acquisition of Nucryst. This
was offset by $206m of depreciation charge, $10m of disposals and $8m of assets transferred to held for sale.
Deferred tax assets decreased by $12m in the year, primarily due to the decrease in post retirement obligations.

Current assets increased by $86m to $2,071m from $1,985m in 2008. This was due to an increase in inventory
of $54m and an increase in cash at bank of $47m. These increases were partially offset by a reduction in trade
and other receivables of $15m.

Non-current liabilities decreased by $318m from $1,841m in 2008 to $1,523m in 2009. $268m of this decrease
was due to the reduction of long-term borrowings. The net retirement benefit obligation decreased by $28m. This
was due to experience gains on plan assets and liabilities totalling $88m. These gains were offset by a $47m
increase in the defined obligation attributable to changes in actuarial assumptions and $16m of unfavourable
currency movements.

Current liabilities decreased by $105m from $968m in 2008 to $863m in 2009. This was primarily due to a
decrease in bank overdrafts and current borrowings of $70m, a decrease in trade and other payables of $11m
and decrease in current tax payable of $25m.

Total equity increased by $480m from $1,699m in 2008 to $2,179m in 2009. The principal movements were an
increase of $472m due to attributable profit, an increase in currency translation and hedging gains of $62m, an
increase of $41m relating to actuarial gains on retirement benefit obligations, offset by $10m relating to deferred
taxation and $120m due to dividends paid during the year.

33

BusinessSegmentAnalysis
Revenue by business segment and geographic market and trading and operating profit by business segment are
set out below:

Revenue by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total revenue

Revenue by geographic market
Europe (Continental Europe and United Kingdom)
United States
Africa, Asia, Australasia and other America

Total revenue

Trading profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total trading profit

Operating profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total operating profit

Orthopaedics

2009
$ million

2008
$ million

2,135
791
846

3,772

1,313
1,664
795

3,772

508
189
160

857

410
169
144

723

2,158
800
843

3,801

1,398
1,657
746

3,801

481
166
129

776

382
146
102

630

Revenue
Orthopaedics revenue decreased by 1% to $2,135m from $2,158m in 2008. Of this decrease, 1% is attributable
to underlying growth and -2% is due to unfavourable currency movements. The principal factors in the underlying
growth in revenue were the continuing expansion in global orthopaedic markets and the growth of recently
launched products.

In the US, revenue increased by $27m to $1,154m (2%), all of which was due to underlying growth. The main
factors were the continued growth of products launched in recent years including the LEGION and JOURNEY
knees.

Outside the US, revenue decreased by $50m to $981m (-5%), attributable to unfavourable foreign currency
translation of -5% and flat underlying revenue growth.

Global knee revenue increased by $3m to $761m (nil%), representing underlying revenue growth of 3% offset by
-3% of unfavourable foreign currency translation.

Global hip revenue decreased by $7m to $681m (-1%) of which 1% was due to underlying revenue growth offset
by -2% unfavourable foreign currency translation.

Tradingprofit
Trading profit increased by $27m (6%) to $508m from $481m in 2008. Trading profit margin increased from
22.3% to 23.8%. This increase is due to good cost management and further investment in improving the
efficiency and effectiveness of the main processes, primarily in the cost of sales area.

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Operatingprofit
Operating profit increased by $28m to $410m. This largely comprises the increases in trading profit of $27m. A
decrease in acquisition related costs of $35m were offset by increases of $17m in costs associated with Earnings
Improvement Programme (“EIP”) and $17m in the amortisation of acquisition intangibles and impairments.

Endoscopy

Revenue
Endoscopy revenue decreased by $9m, or 1%, to $791m from $800m in 2008, comprising -2% unfavourable
currency translation and 1% underlying growth.

In the US, revenue decreased by $23m to $349m (-6%), all of which represents negative underlying growth. This
is largely attributable to the decrease in demand for capital equipment due to the current economic market
conditions.

Outside the US, revenue increased by $14m to $442m (3%), of which 9% was underlying growth offset by -6% of
unfavourable foreign currency translation.

Global revenue of knee and shoulder repair products increased by $13m to $325m (4%), of which 12% was
underlying growth offset by -8% unfavourable foreign currency translation.

Revenue in the global resection products sector decreased by $29m to $248m (-11%), of which -2% represents
negative underlying revenue growth in addition to -9% of unfavourable foreign currency translation.

Global Visualisation revenue decreased by $29m to $121m (-19%), of which -20% represents negative
underlying growth offset by 1% of favourable foreign currency translation.

Tradingprofit
Trading profit increased by $23m (14%) to $189m from $166m in 2008 resulting in a trading profit margin
increase from 20.8% to 23.9%. This improvement was mainly due to a greater focus on managing costs and a
favourable product mix benefit.

Operatingprofit
Operating profit increased by $23m to $169m from $146m in 2008. This comprises the $23m increase in trading
profit.

Advanced Wound Management

Revenue
Revenue increased by $3m, or nil%, to $846m from $843m in 2008, comprising -6% unfavourable currency
translation and 6% underlying growth. Within the infection management and exudate management markets,
growth was driven by the extension of the Group’s ALLEVYN brand to new products.

In the US, revenue increased by $3m to $161m (2%), all of which is attributable to underlying revenue growth.

Outside the US, revenue remained constant at $685m. This is represented by an underlying growth of 7% offset
by -7% of unfavourable foreign currency translation. European revenue decreased by 2% of which -8% was
unfavourable currency translation and 6% was underlying growth.

Tradingprofit
Trading profit increased by $31m (24%) to $160m from $129m in 2008 and trading profit margin increased from
15.3% to 18.9%. This improvement was mainly due to a greater focus on cost management and overall process
improvement.

Operatingprofit
Operating profit increased by $42m to $144m. This largely comprises the increase in trading profit of $31m and a
reduction of $10m in restructuring and rationalisation costs.

35

2008 YEAR

The following discussion and analysis is based upon, and should be read in conjunction with, the Group
Accounts of Smith & Nephew included elsewhere in this Annual Report.

Financial Highlights of 2008
Group revenue was $3,801m for the year ended 31 December 2008, representing 13% growth compared to
2007. Underlying growth in revenue was 6%, translational currency added 2% and acquisitions added 5%.

Profit before taxation was $564m, compared with $469m in 2007. Attributable profit was $377m compared with
$316m in 2007. Adjusted attributable profit (calculated as set out in “Selected Financial Data”), rose 3% to $493m
in 2008 from $480m in 2007.

Basic earnings per Ordinary Share were 42.6¢ compared to 34.2¢ for 2007. EPSA (as set out in “Selected
Financial Data”) was 55.6¢ in 2008 compared to 52.0¢ for 2007, representing a 7% increase.

Fiscal 2008 Compared with Fiscal 2007
The following table sets out certain income statement data for the periods indicated:

Revenue (i)
Cost of goods sold (ii)

Gross profit
Marketing, selling and distribution expenses (iii)
Administrative expenses (iv)
Research and development expenses
BSN agency and management fees

Operating profit (i)
Net interest payable
Other finance (costs)/income
Share of results of associates

Profit before taxation
Taxation

Attributable profit for the year

2008
$ million

2007
$ million

3,801
(1,077)

2,724
(1,436)
(533)
(152)
27

630
(66)
(1)
1

564
(187)

377

3,369
(994)

2,375
(1,278)
(487)
(142)
25

493
(30)
6
–

469
(153)

316

(i) Group revenue and operating profit are derived wholly from Continuing Operations and discussed on a segment basis on pages 39 to

(ii)

40.
2008 includes $15m in respect of the utilisation of Plus inventory stepped-up to fair value on acquisition, $18m of restructuring and
rationalisation expenses and $8m of acquisition related costs (2007 — $64m in respect of the utilisation of the Plus inventory
stepped-up to fair value on acquisition, $7m of restructuring and rationalisation expenses and $6m of acquisition related costs).

(iii) 2008 includes $7m of acquisition related costs and $3m of restructuring and rationalisation expenses (2007 — $12m of acquisition

related costs, and $4m of restructuring and rationalisation expenses).

(iv) 2008 includes $31m of acquisition related costs and $13m of restructuring and rationalisation expenses and $51m of amortisation on
acquisition intangibles (2007 — $29m of acquisition related costs, $31m of restructuring and rationalisation expenses, $30m of legal
settlement, and $30m of amortisation of acquisition intangibles).

TransactionalandTranslationalExchange
The Group’s principal markets outside the US are, in order of significance, Continental Europe, UK, Australia and
Japan. Revenues in these markets fluctuate when translated into US Dollars on consolidation. During the year the
average rates of exchange against the US Dollar used to translate revenues and profits arising in these markets
changed compared to the previous year as follows: the Euro strengthened from $1.37 to $1.46 (+7%), Sterling
weakened from $2.00 to $1.84 (-8%), the Swiss Franc strengthened from $0.83 to $0.92 (+11%), the Australian
Dollar was flat at $0.84 and the Japanese Yen strengthened from ¥118 to ¥103 (+13%).

The Group’s principal manufacturing locations are in the US (Orthopaedics and Endoscopy), Switzerland
(Orthopaedics) and in the UK (Advanced Wound Management and Orthopaedics). The majority of the Group’s
selling and distribution subsidiaries around the world purchase finished products from these locations. As a
result of currency movements compared with the previous year, purchases from the US and Switzerland became
relatively less expensive. The Group’s policy of purchasing forward a proportion of its currency requirements
mitigates the impact of these movements.

36

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Revenue
Group revenue increased by $432m (13%) from $3,369m in 2007 to $3,801m in 2008. Underlying revenue
growth was 6%, an additional 5% as a result of acquisitions and 2% attributable to favourable currency
translation.

Orthopaedics revenues increased by $300m or 16%, of which 5% was attributable to underlying growth, 9% due
to the acquisition of Plus and 2% due to favourable currency translation. Endoscopy revenues increased by $68m
or 9%, of which 8% was attributable to underlying growth and 1% due to favourable currency translation.
Advanced Wound Management revenues increased by $64m or 8%, of which 7% was attributable to underlying
growth and 1% due to favourable currency translation.

A more detailed analysis is included within the Revenue sections of the individual business segments that follow
on pages 39 and 40.

Costofgoodssold
Cost of goods sold increased by $83m to $1,077m from $994m in 2007. The main driver of this increase was the
growth in revenues across the Group. Other factors contributing to the movement were the decrease of $49m in
the utilisation of the Plus inventory stepped up to fair value on the acquisition, offset by an increase of $2m in
other acquisition related costs and an increase of $11m in restructuring and rationalisation expenses.

Further margin analysis is included within the “Trading profit” sections of the individual business segments that
follow on pages 39 to 40.

Marketing,sellinganddistributionexpenses
These expenses increased by $158m to $1,436m from $1,278m in 2007. The increase was largely a result of
increased marketing, selling and distribution expenses across the Group in line with the increased revenues.

Administrativeexpenses
Administrative expenses increased by $46m to $533m from $487m in 2007, largely as a result of the growth in
the business. This increase includes $14m relating to impairment of acquisition intangibles, $7m due to a full
years amortisation charge on Plus intangibles in comparison to 2007, $18m reduction in restructuring and
rationalisation expenses from 2007 and the impact of $30m incurred in 2007 on the legal settlement.

Researchanddevelopmentexpenses
Expenditure as a percentage of revenue fell from 4.2% in 2007 to 4.0% in 2008. The Group continues to invest in
innovative technologies and products to differentiate itself from competitors.

BSNagencyandmanagementfees
Agency and management fees of $27m (2007 — $25m) were received in respect of services provided to BSN
Medical for sales force resource, physical distribution and logistics and administration in certain countries. The
calculation of the fees is designed to result in a neutral, cost-recovery position for Smith & Nephew.

Operatingprofit
Operating profit
Orthopaedics and $5m in Endoscopy, offset by a decline of $7m in Advanced Wound Management.

increased by $137m to $630m from $493m in 2007 comprising increases of $139m in

Netinterestpayable
Net interest payable increased by $36m from $30m in 2007 to $66m in 2008. This is a direct consequence of the
additional borrowings put in place to finance the Plus acquisition and the share buy-back programme.

Otherfinance(costs)/income
Other finance costs in 2008 were $1m down from $6m income in 2007. This is attributable to an increase in
interest costs on pension liabilities.

Taxation
The taxation charge increased by $34m to $187m from $153m in 2007. The effective rate of tax before
discontinued operations was 33.2%, compared with 32.6% in 2007. The tax charge was reduced by $30m in

37

2008 (2007 — $49m) as a consequence of restructuring and rationalisation expenses, acquisition related costs,
the legal settlement and amortisation of acquisition intangibles and impairment. The effective tax rate was 30.6%
(2007 — 29.6%) after adjusting for these items and the tax thereon.

Group Balance Sheet
The following table sets out certain balance sheet data for the years ended indicated:

Non-current assets
Current assets

Total assets

Non-current liabilities
Current liabilities

Total liabilities
Total equity

Total equity and liabilities

2008
$ million

2007
$ million

2,523
1,985

4,508

1,841
968

2,809
1,699

4,508

2,542
1,919

4,461

357
2,288

2,645
1,816

4,461

Non-current assets decreased by $19m to $2,523m from $2,542 in 2007. Intangible assets and goodwill
decreased by $79m of which $42m related to currency translation, $69m to amortisation and impairment and a
$2m adjustment to contingent consideration offset by an increase of $33m relating to additions and $1m relating
to acquisitions. Property, plant and equipment decreased by $17m comprising additions of $259m, less currency
translation of $57m, depreciation of $204m and disposals of $15m. Deferred tax assets increased by $78m in
the year, primarily due to the increase in the post retirement obligations.

Current assets increased by $66m to $1,985m from $1,919m in 2007. This was due to an increase in inventory
of $45m and an increase in trade and other receivables of $46m. These increases were partially offset by a
reduction in cash at bank of $25m.

Non-current liabilities increased by $1,484m from $357m in 2007 to $1,841m in 2008. $1,322m of this increase
was predominantly due to the reclassification of long-term borrowings from short-term borrowings following the
Group’s decision to exercise its option to extend the multicurrency loan facility for a further four years in May
2008. The retirement benefit obligation increased by $166m, which was mainly as a result of a reduction in asset
values, in line with falling share prices offset by an increase in the corporate bond rate. Deferred tax liabilities
decreased by $11m, other payables decreased by $11m and provisions increased by $18m.

Current liabilities decreased by $1,320m from $2,288m in 2007 to $968m in 2008. The primary cause of this
decrease was the reclassification of borrowings to long-term following the Group’s decision to exercise its option
to extend the multicurrency loan facility for a further four years in May 2008.

Total equity decreased by $117m from $1,816m in 2007 to $1,699m in 2008. The principal movements were an
increase of $377m due to attributable profit, offset by $99m from translation losses, $215m actuarial losses on
defined benefit pension plans which was offset by $71m of taxation charged to equity, $109m of equity
dividends paid in the year and $193m from the purchases of treasury shares.

38

BusinessSegmentAnalysis
Revenue by business segment and geographic market and trading and operating profit by business segment are
set out below:

Revenue by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total revenue

Revenue by geographic market
Europe (Continental Europe and United Kingdom)
United States
Africa, Asia, Australasia and other America

Total revenue

Trading profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total trading profit

Operating profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management

Total operating profit

Orthopaedics

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2008
$ million

2007
$ million

2,158
800
843

3,801

1,398
1,657
746

3,801

481
166
129

776

382
146
102

630

1,858
732
779

3,369

1,177
1,550
642

3,369

423
147
136

706

243
141
109

493

Revenue
Orthopaedics revenue increased by 16% to $2,158m from $1,858m in 2007. Of this increase, 5% is attributable
to underlying growth, 2% is due to favourable currency movements and 9% is due to the effect of the acquisition
of Plus. The principal factors in the underlying growth in revenue were the continuing expansion in global
orthopaedic markets, the growth of recently launched products and actions the Group has taken to align sales
forces.

In the US, revenue increased by $95m to $1,127m (9%) of which 8% was underlying growth and 1% as a result of
the Plus acquisition effected in 2007. The main factors were the continued growth of products launched in recent
years including the LEGION and JOURNEY knees, and BHR.

Outside the US, revenue increased by $205m to $1,031m (25%), of which 2% was underlying growth, 19% as a
result of acquisitions and 4% due to foreign currency translation.

Global knee revenue increased by $124m (20%) to $758m, of which 3% was due to foreign currency translation,
10% was due to acquisitions and 7% was underlying growth.

Global hip revenue increased by $121m to $688m (21%) of which 5% was due to underlying growth, 2% was due
to foreign currency translation and 14% due to acquisitions.

Tradingprofit
Trading profit rose by $58m (14%) to $481m from $423m in 2007. Trading profit margin decreased from 22.8% to
22.3%. This decrease reflects the consolidation of lower margin Plus sales, the margin impact of Plus lost sales
improvements the business has been
and increased compliance costs, together exceeding the operational
making.

39

Operatingprofit
Operating profit increased by $139m. This largely comprises the $58m increase in trading profit, a $50m
decrease in acquisition related costs and a $30m legal settlement in 2007.

Endoscopy

Revenue
Endoscopy revenue increased by $68m, or 9%, to $800m from $732m in 2007, comprising 1% favourable
currency translation and 8% underlying growth.

In the US, revenue increased by $11m to $372m (3%), all of which was underlying growth. This is largely
attributable to the actions taken to reinvigorate sales performance and drive further growth from the Group’s
portfolio of products, particularly in the repair segment of the arthroscopy market.

Outside the US, revenue increased by $57m to $428m (15%), of which 13% was underlying growth and 2% due
to favourable foreign currency translation.

Global revenue of knee and shoulder repair products increased by $48m to $312m (18%), of which 16% was
underlying growth and 2% due to foreign currency translation.

Revenue in the global resection products sector increased by $10m to $277m (4%), of which 3% was underlying
growth and 1% due to foreign currency translation.

Global Visualisation revenue increased by $9m to $150m (6%), all of which was underlying growth.

Tradingprofit
Trading profit increased by $19m (13%) to $166m from $147m in 2007 resulting in a trading profit margin
increase from 20.1% to 20.8%. This improvement was mainly due to a greater focus on managing costs.

Operatingprofit
Operating profit increased by $5m to $146m from $141m in 2007. The increase of $19m in trading profit was
offset by an impairment charge on acquisition intangibles of $14m relating to the OBI acquisition in 2006.

Advanced Wound Management

Revenue
Revenue increased by $64m, or 8%, to $843m from $779m in 2007, comprising 1% favourable currency
translation and 7% underlying growth. Within the infection management and exudate management markets,
growth was driven by the extension of the Group’s ALLEVYN brand to new products.

In the US, revenue increased by $1m to $158m (1%), of which 2% is attributable to the BlueSky acquisition made
in 2007 offset by a fall in underlying revenue of 1%.

Outside the US, revenue increased by $63m to $685m (10%), of which 9% was underlying growth and 1% due to
foreign currency translation. Continental Europe revenue increased by 15% of which 7% was favourable currency
translation and 8% was underlying growth. Underlying growth in the UK was 8%. Reported revenues in the UK
decreased by 1%, the difference of 9% representing unfavourable currency translation.

Tradingprofit
Trading profit fell by $7m (5%) to $129m from $136m in 2007 and trading profit margin decreased from 17.5% to
15.3%. This is largely attributable to investment in the launch of NPWT.

Operatingprofit
Operating profit decreased by $7m in line with the decrease in trading profit.

40

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flow and Net Debt
The main elements of Group cash flow and movements in net debt can be summarised as follows:

Cash generated from operations
Net interest paid
Income taxes paid

Net cash inflow from operating activities
Capital expenditure (net of disposal of property, plant and

equipment)

Acquisitions (net of cash acquired)
Plus settlement
Equity dividends paid
Proceeds from own shares
Issue of ordinary share capital
Treasury shares purchased

Change in net debt from net cash flow (see Note 29 of the Notes to

the Group Accounts)

New finance leases
Facility fee
Borrowings and finance leases acquired on acquisition
Exchange adjustment
Opening (net debt)/net cash

Closing net debt

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2009
$ million

2008
$ million

2007
$ million

1,030
(41)
(270)

719

(318)
(25)
137
(120)
10
7
–

410
–
–
–
(21)
(1,332)

(943)

815
(63)
(186)

566

(289)
(16)
–
(109)
4
19
(193)

(18)
–
2
–
(6)
(1,310)

(1,332)

693
(30)
(225)

438

(194)
(781)
–
(105)
–
28
(640)

(1,254)
(7)
(6)
(181)
(72)
210

(1,310)

The Group’s net cash decreased from $210m at the beginning of 2007 to a $943m net debt position at the end
of 2009, representing an overall decrease of $1,153m. Translation of foreign currency net debt into US Dollars
had the effect of increasing net debt by $99m in the three-year period ended 31 December 2009. Closing net
debt includes no currency swap liabilities (2008 — $4m, 2007 — $2m).

Net Cash Inflow from Operating Activities
Cash generated from operations in 2009 of $1,030m (2008 — $815m, 2007 — $693) is after paying out $5m
(2008 — $10m, 2007 — net $23m after receipt of $22m from a successful settlement) of macrotextured claim
settlements unreimbursed by insurers, $22m (2008 — $48m, 2007 — $33m) of acquisition related costs and
$32m (2008 — $28m, 2007 — $39m) of restructuring and rationalisation expenses. In 2007, the cash generated
from operations includes the legal settlement of $30m.

Capital Expenditure
The Group’s ongoing capital expenditure and working capital requirements have been financed through cash flow
generated by business operations and, where necessary, through short-term committed and uncommitted bank
In recent years, capital expenditure on tangible and intangible fixed assets has represented
facilities.
approximately 8% of continuing group revenue.

In 2009, gross capital expenditure amounted to $318m (2008 — $292m, 2007 — $200m). The principal areas of
investment were the placement of orthopaedic instruments with customers, patents and licenses, plant and
equipment and information technology.

At 31 December 2009, $7m (2008 — $27m, 2007 — $5m) of capital expenditure had been contracted but not
provided for which will be funded from cash inflows.

Acquisitions and Disposals
In the three-year period ended 31 December 2009, $822m was spent on acquisitions, funded from net debt and
cash inflows. This comprised Nucryst $25m, Plus $769m, BlueSky $16m and other acquisitions of $12m . During

41

the year, the Group reached an agreement with the vendors of Plus Orthopedics Holdings AG to reduce the total
original purchase price to CHF927. This resulted in an additional cash inflow of $137m.

Liquidity
The Group’s policy is to ensure that it has sufficient funding and facilities in place to meet foreseeable borrowing
requirements. In May 2007, the Group entered into a committed $2,500m revolving multicurrency loan facility.
This facility comprises a $1,000m 364 day facility, which was extended into a term loan for a further four years in
May 2008 by the giving of notice by the Group, and a five year $1,500m revolving loan facility.

At 31 December 2009, the Group held $192m (2008 — $145m, 2007 — $170m) in cash and balances at bank.
The Group has drawings under committed and uncommitted facilities of $2,503m and $415m, respectively. Of
the undrawn committed facilities totalling $1,436m, $1m expires in 2010 and $1,435m in 2012. In addition,
Smith & Nephew has finance lease commitments of $26m (of which $12m extends beyond five years). Smith &
Nephew intends to repay the amounts due within one year by using available cash and drawing down on the
longer-term facilities.

The principal variations in the Group’s borrowing requirements result from the timing of dividend payments,
acquisitions and disposals of businesses,
the share buy-back programme (announced as suspended in
November 2008), timing of capital expenditure and working capital fluctuations.

Smith & Nephew believes that its capital expenditure needs and its working capital funding for 2010, as well as
its other known or expected commitments or liabilities, can be met from its existing resources and facilities.

The Group’s planned future contributions are considered adequate to cover the current under funded position in
the Group’s defined benefit plans.

Further disclosure regarding borrowings, related covenants and the liquidity risk exposures is set out in Note 20
of the Notes to the Group Accounts. The Group believes that the borrowing facilities do not contain restrictions
that are expected to impact on funding or investment policy for the foreseeable future.

Going Concern
The Group’s business activities, together with the factors likely to affect its future development, performance and
position are set out in the “Group Description” section on pages 3 to 24. The financial position of the Group, its
cash flows,
liquidity position and borrowing facilities are described in the “Business Review, Liquidity and
Prospects” section set out on pages 41 to 42. In addition, the notes to the financial statements include the
Group’s objectives, policies and processes for managing its capital; its financial risk management objectives;
details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.

The Group has considerable financial resources and its customers and suppliers are diversified across different
geographic areas. As a consequence, the directors believe that the Group is well placed to manage its business
risk successfully despite the ongoing uncertain economic outlook.

The directors have a reasonable expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. Thus they continue to adopt the going concern basis for accounting in
preparing the annual financial statements.

Payment Policies
It is the Group’s policy to ensure that suppliers are paid within agreed terms. At the year-end the Parent
Company had no trade creditors.

42

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LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for
substantial damages. The outcome of these proceedings cannot readily be foreseen, but except as detailed
below, management believes none of them will result in a material adverse effect on the financial position of the
Group. The Group accrues for outcomes that are deemed to be probable and can be reasonably estimated.
There is no assurance that losses will not exceed accruals or will not have a significant impact on the Group’s
results of operations in the period in which they are realised.

Product Liability Claims
In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its OXINIUM
femoral knee components. A number of related claims have been filed, most of which have been settled. The
aggregate cost to date related to this matter is approximately $210m. The Group has sought recovery from its
insurers.

To date the primary insurance carrier has paid $60m in full settlement of its policy liability. An additional $22m
was received from a successful legal settlement. At 31 December 2009, at least $128m remains due, and the
Group has sought coverage from five excess insurance carriers. However, these excess carriers have denied
coverage, citing defences relating to the wording of the insurance policies and other matters. In December 2004,
the Group brought suit against them in federal district court in Memphis, Tennessee, and hearing is expected to
commence in late 2010 or early 2011.

A charge of $154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims. Most
of that amount has since been applied to settlements of such claims. Management believes that the $25m
provision remaining is adequate to cover remaining claims. Given the uncertainty inherent in such matters,
however, there can be no assurance on this point.

The Group faces other claims from time to time for alleged defects in its products and has on occasion recalled
products to minimise risk of harm or claims. The Group maintains product liability insurance subject to limits and
deductibles that are believed reasonable.

Business Practice Investigations
In March 2005 the US Attorney’s Office in Newark, New Jersey issued subpoenas to the five largest sellers of hip
and knee implants to US orthopaedic surgeons,
including the Group’s Orthopaedic business, asking for
information regarding arrangements with orthopaedic reconstructive surgeons. In September 2007, the Group
and the other four companies involved settled the criminal and (except for one other company) civil matters with
respect to any charges against the companies that could result from this investigation, without admitting any
wrongdoing as part of the settlement. The Group paid a civil restitution payment of $29m and entered into a
Deferred Prosecution Agreement with the US Attorney which obligated the Group to improve its existing
compliance program under the scrutiny of a monitor appointed to oversee its efforts. This agreement was for 18
months and expired in March, 2009, resulting in dismissal of charges. At the same time, the Group also entered
into a Corporate Integrity Agreement with the Office of the Inspector General (“OIG”) of the US Department of
Health and Human Services which requires certain compliance efforts. This agreement is in effect for five years,
until September 2012. If the Group meets its terms, the OIG will not attempt to exclude it from receiving Medicare
payments for its products. The Group has devoted substantial effort to comply with both agreements and has
applied the best practices developed in the process to the rest of its business units as well.

In September 2007, the SEC notified the Group that it was conducting an informal investigation of companies in
the medical devices industry, including the Group, regarding possible violations of the Foreign Corrupt Practices
Act (“FCPA”) in connection with the sale of products in certain foreign countries. The US Department of Justice
subsequently joined the SEC’s request. The Group is cooperating fully with the US Department of Justice and the
SEC regarding these matters, has conducted a broader review on its own initiative, and has disclosed to them
information indicating that at least one independent distributor of our products may have made payments that
could have FCPA implications. The Group is engaged in discussions to resolve these matters, but we cannot
predict the outcome of the investigation.

Patent Disputes
The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over
claims of patent infringement and, in some cases, breach of licence agreement. These disputes are being heard

43

in courts in the United States and other jurisdictions and also before agencies that examine patents. Outcomes
are rarely certain and costs are often significant.

Since the Group’s entry into the negative pressure wound therapy business in 2007, Kinetic Concepts, Inc. (“KCI”)
has pursued claims of patent infringement against the Group in the US, UK, Germany and other jurisdictions. In
one case in Texas a jury found that KCI’s patents were valid but not infringed by the gauze product acquired by
the Group. That ruling was upheld on appeal. In another case in Texas relating to the Group’s foam product, a
jury found in March 2010 that KCI’s patents were valid and infringed. If affirmed by the courts, the group may be
prevented from selling that foam product in the US until patent expiration in 2014. The group plans to ask the
court to disaffirm this finding and, depending on the outcome, may appeal the final decision. In cases brought by
KCI in Germany and the UK, the courts in 2009 invalidated the KCI patent at issue. The German decision is
subject to appeal; the UK decision is final.

In June 2008, the Group won a jury verdict in Portland, Oregon against Arthrex Inc., (“Arthrex”) for infringement of
a patent relating to suture anchors. Smith & Nephew was awarded approximately $15m in damages plus
approximately $6m interest and an injunction forbidding further sales of infringing suture anchors by Arthrex. On
appeal by Arthrex, the Court of Appeals reversed the decision and remanded the case to the trial court. A second
lawsuit against other Arthrex suture anchors is also pending in the Oregon court. In February 2010, the Group
won another jury verdict against Arthrex in a Texas court for infringement of a patent relating to femoral fixation
devices for ACL reconstruction. The Group was awarded approximately $4.7 million in damages. Further
proceedings in that case are underway.

Other Matters
In April 2009, the Group was served with a subpoena by the US Department of Justice in Massachusetts
requiring the production of documents from 1995 to 2009 associated with the marketing and sale of the Group’s
Exogen bone growth stimulator. Similar subpoenas have been served on a number of competitors in the bone
growth stimulator market. Around the same time a qui tam or “whistleblower” complaint concerning the industry’s
sales and marketing of those products, originally filed in 2005 against the primary manufacturers of bone growth
stimulation products (including Smith & Nephew), was unsealed in federal court in Boston. A motion to dismiss
that complaint was filed in December 2009.

44

OUTLOOK AND TREND INFORMATION

The discussion below contains statements that express management’s expectations about future events or
results rather than historical facts. These forward-looking statements involve known and unknown risks and
uncertainties that could cause the Group’s actual results, performance or achievements to differ materially from
those projected in forward-looking statements. Smith & Nephew cannot give assurance that such statements will
prove correct. These risks and uncertainties include factors related to: the medical devices industry in general;
product liability claims and related insurance coverage; the geographical markets in which the Group operates;
the nature and efficiency of the Group’s products; the Group’s ability to research, develop, manufacture and
distribute its products; and the translation of currencies and the values of international securities markets. For
additional information on factors that could cause the Group’s actual results to differ from estimates reflected in
these forward-looking statements, can be found under “Risk Factors” within this document.

Information regarding the recent and longer term market growth trends is given for each of the Group’s global
business units in the relevant ‘Market and Competition’ sections under Business Description on pages 5 to 10.

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remains cautious about

In the second half of 2009 there were signs that conditions in the Group’s markets were stabilising, although
management
the pricing
environment will remain a challenge, but that mix benefits will continue to be available for products which
demonstrate clinical and cost benefits. The long-term demand fundamentals underpinning the Group’s sector,
particularly demographics and emerging markets, remain favourable and substantial.

the recovery. Management believes that

the pace of

During 2010, management expects the Orthopaedics Reconstruction business to grow at around the market rate,
with the European business continuing to improve.
is committed to
achieving a sustainable market growth rate, but expects this to take some time to achieve. In Endoscopy,
management expects the business to achieve strong revenue growth in the repair segment. It is difficult to
predict when capital equipment sales will recover. In the Advanced Wound Management business, management
believes the business will continue to grow at above the market rate.

In Orthopaedic Trauma, management

The Group made strong trading margin progress during 2009. Management continues to be focused on longer
term improvements aimed at delivering efficiencies and facilitating increased investment in growth opportunities.

The Group had a strong finish to the year and management is pleased with the Group’s achievements in these
challenging conditions. Many areas of Smith & Nephew’s business have been improved and the Group is
working hard in the remaining areas, as well as identifying further opportunities. Management is confident that
the Group has the strategy, and people, to deliver continued sustainable long-term growth for its shareholders.

45

CONTRACTUAL OBLIGATIONS

Contractual obligations at 31 December 2009 were as follows:

Debt obligations
Finance lease obligations
Operating lease obligations
Retirement benefit obligation
Purchase obligations
Capital expenditure
Other

Total
$ million

Less than
1 year
$ million

Payments due by period

1-3 years
$ million

3-5 years
$ million

More than
5 years
$ million

1,109
26
156
67
3
7
76

1,444

42
3
53
67
3
7
49

224

1,067
6
61
–
–
–
27

1,161

–
5
25
–
–
–
–

30

–
12
17
–
–
–
–

29

Other contractual obligations consist of $6m of credit balances on interest rate swaps, $24m of foreign exchange
contracts and $46m of acquisition consideration. Provisions that do not relate to contractual obligations are not
included in the above table.

The agreed contributions for 2010 in respect of the Group’s defined benefits plans are: $40m for the UK
(including $30m of supplementary payments), $20m for the US plan and $7m for other funded defined benefit
plans. The table above does not include amounts payable in respect of 2011 and beyond as these are subject to
future agreement and amounts cannot be reasonably estimated.

There are a number of agreements that take effect, alter or terminate upon a change in control of the Parent
Company or the Group following a takeover, such as bank loan agreements and Company share plans. None of
these are deemed to be significant in terms of their potential impact on the business of the Group as a whole. In
addition, there are no service contracts between the Parent Company and any of its directors which provides for
compensation for loss of office or employment that occurs because of a successful takeover bid.

OFF-BALANCE SHEET ARRANGEMENTS

Management believes that the Group does not have any off-balance sheet arrangements, as defined by the SEC
in item 5E of Form 20-F, that have or are reasonably likely to have a current or future effect on the Group’s
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

RELATED PARTY TRANSACTIONS

Except for transactions with associates (see Note 36 of Notes to the Group Accounts), no other related party had
material transactions or loans with Smith & Nephew over the last three financial years.

46

CORPORATE GOVERNANCE STATEMENT

This section discusses Smith & Nephew’s structures and governance procedures.

The Board and Executive Officers
Governance and policy
Accountability, audit and internal control framework

48
50
57

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THE BOARD AND EXECUTIVE OFFICERS

The Board of directors of Smith & Nephew as at 17 March 2010 comprised:

Director

Position

Initially elected or
appointed

Term of appointment
expires at AGM in

John Buchanan
David J. Illingworth
Adrian Hennah
Ian E. Barlow
Geneviève B. Berger
Dr. Pamela J. Kirby
Warren D. Knowlton (i)
Brian Larcombe
Joseph C. Papa
Richard De Schutter
Dr. Rolf W. H. Stomberg

Independent Non-Executive Chairman
Executive Director, Chief Executive
Executive Director, Chief Financial Officer
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director

3 February 2005
8 February 2006
15 June 2006
5 March 2010
5 March 2010
1 March 2002
1 November 2000
1 March 2002
1 August 2008
1 January 2001
1 January 1998

(i)

Retiring from the Board on 6 May 2010

2011
2012
2010
2010
2010
2011
2010
2011
2012
2010
2010

Directors’ Biographies
John Buchanan, Independent non-executive Chairman. John was appointed independent non-executive Deputy
Chairman in 2005 and became Chairman in April 2006 and is Chairman of the Nominations Committee. He is
Deputy Chairman of Vodafone Group Plc and a non-executive director of AstraZeneca PLC and BHP Billiton. He
was formerly Group Chief Financial Officer of BP plc.

David J. Illingworth, Chief Executive, joined the Group in May 2002 as President of Orthopaedics and was
appointed a director and Chief Operating Officer in February 2006.
In July 2007 he was appointed Chief
Executive. He is a member of the Nominations Committee. Prior to joining the Group he held posts within GE
Medical, as Chief Executive Officer of a publicly traded medical devices company, President of a respiratory/
critical care company and President of a technology incubator company.

Adrian Hennah, Chief Financial Officer, joined the Group and was appointed a director in June 2006. He was
previously Chief Financial Officer of Invensys plc and held various senior positions within GlaxoSmithKline.

Ian E. Barlow, Independent non-executive director. Ian was appointed a director on 5 March 2010 and is a
member of the Audit Committee. He is a non-executive director and Chairman of the Audit Committees of the PA
Consulting Group and the Brunner Investment Trust, Chairman of Think London and a non-executive director of
Candy & Candy. Previously he was a Senior Partner and London Chairman at KPMG.

Prof. Geneviève B. Berger, Independent non-executive director. Geneviève was appointed a director on 5 March
2010. She is Unilever executive, Chief Research & Development Officer at Unilever PLC and NV having previously
served as a non-executive director. Previously, she has been Chairman of the Health Advisory Board for the
European Commission and a Professor at the University of Paris and Le Pitié-Sapêtrière Teaching Hospital and
Director General of the French Centre National de La Recherche Scientifique.

Dr. Pamela J. Kirby, Independent non-executive director. Pamela was appointed a director in March 2002 and is
a member of the Remuneration Committee and the Ethics and Compliance Committee. She is non-executive
Chairman of Scynexis Inc and a non-executive director of Informa plc and Novo Nordisk A/S.

Warren D. Knowlton, Independent non-executive director. Warren was appointed a director in November 2000
and is Chairman of the Audit Committee and a member of the Remuneration Committee. He served as Chairman
and CEO of Graham Packaging to 31 December 2009 and is a non-executive director of Ameriprise Financial Inc..
Previously he was Group Chief Executive Officer of Morgan Crucible plc.

Brian Larcombe, Independent non-executive director. Brian was appointed a director in March 2002 and is a
member of the Audit Committee. He is a non-executive director of F&C Asset Management plc, gategroup
Holding AG and Incisive Media Holdings Limited. Previously he was Chief Executive Officer of 3i Group plc.

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Joseph C. Papa, Independent non-executive director. Joe was appointed a director in August 2008 and is a
member of the Ethics and Compliance, Audit and Remuneration Committees. He is Chairman and Chief Executive
of Perrigo Company. Previously he was Chairman and Chief Executive Officer of
the Pharmaceutical and
Technology Services segment of Cardinal Health Inc. and President and Chief Operating Officer of Watson
Pharmaceuticals Inc.

Richard De Schutter, Independent non-executive director. Richard was appointed a director in January 2001 and
is Chairman of the Ethics and Compliance Committee and a member of the Audit and Remuneration Committees.
He is non-executive Chairman of Incyte Corporation and a non-executive director of Varian Inc., Ecolab Inc.,
Navicure Inc. and Slate Pharmaceuticals.

Dr. Rolf W. H. Stomberg,
Independent non-executive director and Senior Independent Director. Rolf was
appointed a director in 1998 and is Chairman of the Remuneration Committee and a member of the Audit and
Nominations Committees. He is Chairman of Lanxess AG and a non-executive director of Hoyer GmbH,
Biesterfeld AG and Severstal.

Executive Officers
The Chief Executive of Smith & Nephew and other senior executives are responsible for the day-to-day
management of the Group. In addition to the executive directors, the following are executive officers of Smith &
Nephew:

Naseem Amin, Chief Scientific Officer. Naseem joined the Group in 2009 prior to which he held a number of
senior business development and research posts, most recently Senior VP of Business Development at Biogen
Idec.

Mark Augusti, President of Biologics & Spine. Mark joined the Group in 2003 as Vice President of Global
Marketing for the Trauma Division, became President of Orthopaedic Trauma and Clinical Therapies in February
2006 and was appointed to his current role in January 2008. He previously worked for GE Medical Systems in the
US and Asia. In 2009, Mark was also appointed to the board of Hutchinson Technology Inc. as an independent
director.

Elizabeth Bolgiano, Chief Human Resources Officer. Elizabeth joined the Group in June 2004, as Senior Vice
President Human Resources for the Orthopaedics GBU. In August 2007, she was appointed Group Human
Resources Director. Previously, she was Vice President Human Resources with Bristol-Myers Squibb, where she
held a variety of human resources roles during her 15 year tenure.

John W. Campo, Chief Legal Officer. Jack joined the Group in June 2008. Prior to joining the Group he was
employed by General Electric Company for 14 years in a variety of roles,
including seven years with GE
Healthcare (successor to GE Medical Systems) in the US and Asia.

Joseph DeVivo, President of Orthopaedics. Joe joined the Group in June 2007 as President of Orthopaedic
Reconstruction and was appointed to his current role in May 2008. Prior to joining the Group, he held senior
executive positions with RITA Medical Systems Inc., Computer Motion Inc. and United States Surgical a division of
Tyco Healthcare.

Michael Frazzette, President of Endoscopy. Mike joined the Group as President of Endoscopy in July 2006.
Previously he was President and Chief Executive Officer of a US manufacturer of medical devices and spent 15
years at Tyco Healthcare becoming President of the Patient Care, THC Canada and Health Systems divisions.

R. Gordon Howe, Senior Vice President Global Planning and Development. Gordon joined the Group in 1998, and
served in planning and business development roles in the Orthopaedics division. He was appointed to his
current role in August 2007. Prior to joining the Group, he held management positions with United Technologies
Corporation.

Roger Teasdale, President of Advanced Wound Management. Roger joined the Group in 1989 and has held a
number of key roles in businesses within the Group, most recently as Senior Vice President of Advanced Wound
Management. Roger was appointed to his current role on 1 May 2009.

Company Secretary
Susan Henderson, Company Secretary. Susan joined the Group in May 2009, prior to which she held a number
of senior company secretarial positions most recently as Deputy Group Secretary of Prudential plc.

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GOVERNANCE AND POLICY

Introduction
The Board continues to be committed to the highest standards of Corporate Governance and this report together
the FSA Listing Rules,
with the Directors’ Remuneration Report explains how the provisions/principles of
Disclosure & Transparency Rules and the Combined Code on Corporate Governance (the “Code”) have been
applied throughout the year.

The Board considers that it has complied with all relevant provisions of the Code throughout the year, except that
no member of the Audit Committee had a qualification from one of the professional accountancy bodies as
recommended by the Smith Guidance. However, the Board considers that all members had relevant financial
experience as senior executives of large corporations and therefore had sufficient competence in accounting or
auditing in accordance with the Disclosure and Transparency Rules (“DTR”) 7.1.3R. The Board further considers
that the members of the Audit Committee have the skills and experience of corporate financial matters to
discharge the Committee’s responsibilities properly. All members of the Audit Committee are independent, as
defined by the NYSE, and meet the definition of ‘financial expert’ in the Sarbanes-Oxley Act in the US. Ian Barlow
was appointed a member of the Audit Committee on 5 March 2010. He has recent and relevant financial
experience in accordance with DTR7.1.3R and meets the definition of a financial expert.

The Company’s American Depositary Shares are listed on the NYSE and the Company is therefore subject to the
rules of the NYSE as well as the US securities laws and the rules of the SEC applicable to foreign private issuers.
The Board believes that it has complied throughout the year with both SEC and NYSE requirements related to
corporate governance except that, in accordance with the Code, the Nominations Committee consists of a
majority of independent directors and does not consist wholly of independent directors, as required by the NYSE.

In accordance with the Code, the following paragraphs describe Smith & Nephew’s Corporate Governance
policies and procedures and how it applies the main Principles set out in section one of the Code.

The Board
The Board of directors of Smith & Nephew consists of a non-executive Chairman, two executive directors and
eight independent non-executive directors, two of which were appointed since the year end. In 2009, the Board
met on 8 occasions and individual attendance together with attendance at Board Committee meetings, is shown
in the table on page 55. Warren Knowlton will be retiring from the Board at the annual general meeting (“AGM”)
having served as a non-executive director since 2000.

Geneviève Berger and Ian Barlow joined the Board as independent non-executive directors on 5 March 2010.

The Scope of the Board
The Board is responsible for the strategic direction and overall management of the Group and has a formal
schedule of matters reserved for its decisions which include the approval of certain policies, budgets, financing
plans, large capital expenditure projects, acquisitions, divestments and treasury arrangements. Otherwise, it
delegates the executive management of the Group to the Chief Executive and certain specific responsibilities to
Board Committees, as described on pages 52 to 55. It reviews the key activities and performance of the
businesses and considers and reviews the work undertaken by the Committees. Succession planning is regularly
reviewed and appropriate measures are taken to ensure the Board has the appropriate balance of skills and
experience necessary for a major global medical devices company.

Non-executive directors meet regularly prior to each Board meeting without management in attendance. The
Senior Independent Director meets with the other non-executive directors annually to evaluate the performance
of the Chairman. All directors have access to the advice and services of the Company Secretary, who is also
responsible to the Board for ensuring that board and governance procedures are complied with. The appointment
and removal of the Company Secretary is a matter for the Board as a whole. Board members individually and
Board Committees may obtain independent professional advice, at the Company’s expense, where they judge it
necessary in order to fulfill their responsibilities as directors. If directors are unable to attend a Board meeting or
Board Committee meeting, they are advised of matters to be discussed and have an opportunity to make their
views known to the Chairman or the Chairman of the relevant Committee prior to the meeting.

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The Role of Individual Directors
Whilst the Chairman and Chief Executive collectively are responsible for the leadership of the Group, there is a
clear division of respective responsibilities which have been agreed by the Board. The Chairman’s primary
responsibility is leading the Board including setting its agenda and ensuring its effectiveness. The Chief Executive
is responsible for the performance, management and supervision of the Group in accordance with the strategy,
policies, budgets and business plans approved by the Board. The Senior Independent Director is Rolf Stomberg,
whose role includes consulting with members of the Board on issues relating to the Chairman and chairing
meetings of the Nominations and Audit Committee in the absence of the Chairman or Chairman of the Audit
Committee. He is available to shareholders if they have concerns that cannot be resolved through the normal
channels of contact with the Chairman or Chief Executive.

Independence of Non-Executive Directors
The Board has determined that all the non-executive directors are independent in accordance with UK and US
requirements. None of
the non-executive directors or their immediate families has ever had a material
relationship with the Group either directly as an employee or as a partner, shareholder or officer of an
organisation that has a relationship with the Group. They do not receive additional remuneration apart from
directors’ fees, do not participate in the Group’s share option plans or performance related pay schemes, and are
not members of the Group’s pension schemes nor do they serve as a director of a company or an affiliate in
which any other director of Smith & Nephew is a director.

Rolf Stomberg, Warren Knowlton and Richard de Schutter have served on the Board as non-executive directors
since 1998, 2000 and 2001 respectively. The Board considers that they continued to remain independent and to
provide effective challenge to the executive team throughout 2009, notwithstanding their length of service. During
the year, the Board benefited from their skills and experience; in particular, Rolf Stomberg’s leadership of the
Board Evaluation process, his contribution in the search for new non-executive directors and the Chairmanship of
the Remuneration Committee, Warren Knowlton’s Chairmanship of
the Audit Committee and Richard De
Schutter’s Chairmanship of the Ethics and Compliance Committee. Recognising however that long service on the
Board may be considered to impact independence, the Board has undertaken a search for suitable additional
non-executive directors as explained in greater detail on page 54.

Management of Conflicts of Interest
None of the directors or their connected persons has any family relationship with any other director or officer nor
has a material interest in any contract to which the Company or any of its subsidiaries are or were a party during
the year or up to 17 March 2010.

Each director has a duty under the Companies Act 2006 (the “CA 2006”) to avoid a situation in which he or she
has or can have a direct or indirect interest that conflicts or possibly may conflict with the interests of the
Company. This duty is in addition to the existing duty that a director owes to the Company to disclose to the
Board any transaction or arrangement under consideration by the Company. The Company’s articles of
association permit directors to authorise conflicts and potential conflicts in accordance with the CA 2006 and to
approve such situations. Directors inform the Board of any situations which may give rise to a conflict of interest
as they arise and this information is recorded in the Company’s Register of Conflicts together with the date on
which authorisation was given. On an annual basis, directors certify that the information contained in the register
is correct. The Board has a procedure when deciding whether to authorise a conflict or potential conflict of
interest. Firstly, only directors who have no interest in the matter under consideration are able to take the relevant
decision. Secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most
likely to promote the Company’s success. In addition, the directors may impose limits or conditions when giving
authorisation if they think this is appropriate. During the year, three directors identified situations which could give
rise to conflicts of interest. Each of these situations was authorised by the Board, although no actual conflicts
were identified.

Re-appointment of Directors
Under the Company’s articles of association, any director who has been appointed by the Board since the previous
annual general meeting of shareholders, either to fill a casual vacancy or as an additional director, holds office only
until the next annual general meeting and then is eligible for reappointment by the shareholders. Geneviève Berger
and Ian Barlow, appointed on 5 March 2010, will retire at the AGM to be held on 6 May 2010 and will offer
themselves for re-election. Subsequently, directors retire and offer themselves for re-election at the third annual
general meeting after the meeting at which they were last reappointed. The directors are subject to removal with or
without cause by the Board or the shareholders. Executive officers serve at the discretion of the Board.

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Rolf Stomberg who has served 12 years as a director of the Company will retire at the AGM and, being eligible,
will offer himself for re-election. In accordance with the articles of association, Adrian Hennah and Richard De
Schutter, who has served more than nine years, will also retire and, being eligible, will offer themselves for
re-election at the AGM.

Board Development Programme
A number of training and development opportunities were identified for the Board during 2009. As in previous
years, the training focused mainly on increasing the Board’s understanding of the business and markets in which
the Company operates. Throughout the year, each GBU presented to the Board on its business and the current
challenges it faced. These themes were explored in greater depth during the two day Strategy Review held in
September. In November, the Board visited the European headquarters of the Orthopaedics business in Aarau,
Switzerland and the European Orthopaedics Distribution Centre in Baar, Switzerland, meeting with the senior
European management team and receiving presentations on our products and processes. Tailored development
programmes have also been developed to support non-executive directors in specific roles. For example, Richard
De Schutter has attended a number of briefing sessions to support him in his role of Chairman of the Ethics and
Compliance Committee and Joseph Papa has begun a briefing programme to assist him in his membership of the
Remuneration Committee.

Review into the Effectiveness of the Board
Towards the end of 2009, the Board undertook a review of its effectiveness and the effectiveness of its key
Committees. The review was led by Rolf Stomberg, the Senior Independent Director, assisted by the Company
Secretary and facilitated by Lintstock, an independent firm of corporate governance advisors. The review took the
form of an online questionnaire followed by a series of detailed confidential interviews with each director and the
Company Secretary. In February 2010, Lintstock presented the results of the review to the Board. Overall, the
review concluded that the Board and its Committees operate effectively, that individual directors bring a range of
skills and experiences to the Board and that the non-executive directors in particular provide effective challenge
to the Executive team. The Board concluded that during the year, progress had been made in a number of areas
relating to the effectiveness of the Board processes and identified further areas for improvement which could be
made in 2010.

Committees of the Board
The Board is assisted by the Audit, Remuneration, Nominations and Ethics and Compliance Committees, each of
which has its own terms of reference, which may be found on the Group’s website at www.smith-nephew.com.
The Company Secretary or her designate is secretary to each of the Committees. For each of the Committees the
Chairman of the Committee reports orally to the Board and minutes of the meetings are circulated to all members
of the Board.

AuditCommittee
The members of the Audit Committee are Warren Knowlton (Chairman), Brian Larcombe, Richard De Schutter, Rolf
Stomberg, Joseph Papa (appointed to the Audit Committee on 10 February 2009) and Ian Barlow (appointed to
the Audit Committee on 5 March 2010). All members of the Committee are considered to be independent in
accordance with the Code. The Chairman, Chief Executive and the Chief Financial Officer attend meetings of the
Audit Committee by invitation but are not members of the Committee. Warren Knowlton will be retiring at the
AGM and will be replaced as Chairman of the Audit Committee by Ian Barlow. The Audit Committee meets
without management in attendance, when appropriate, and meets with the auditors, without management
present, from time to time.

The Audit Committee met five times during the year. The principal duties of the Audit Committee are:

• monitoring the integrity of the Group’s accounts, ensuring that they meet statutory and associated legal and

regulatory requirements and reviewing significant financial reporting judgments contained in them;

• monitoring announcements relating to the Group’s financial performance;

•

reviewing reports on compliance with accounting standards, appropriate accounting policies and practices
and any changes to these, accounting and reporting issues; going concern assumptions; and anti fraud
programmes and controls;

• monitoring the effectiveness of
Sarbanes-Oxley Act 2002;

internal

financial controls and reviewing compliance with s404 of the

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•

reviewing the operation of the risk management process;

• monitoring and reviewing the effectiveness of the Group’s internal audit function;

•

•

recommending for shareholder approval the appointment, re-appointment and removal of the external
auditors, as appropriate;

approving the remuneration and terms of engagement of the external auditors;

• monitoring and reviewing the external auditors’ independence and the effectiveness of the audit process;

•

•

pre-approval of the external auditors to supply non-audit services; and

reviewing arrangements by which staff may raise complaints against the group regarding financial reporting
or other matters.

For 2009, the Audit Committee considered quarterly reporting, the preliminary results and the Annual Accounts.
Due consideration was given to compliance with accounting standards, appropriate accounting policies and
practices, accounting and reporting issues, going concern assumptions and Section 404 of the Sarbanes Oxley
Act.

During the year, no concerns were raised with the Committee about possible improprieties in matters of financial
reporting or other matters.

The Audit Committee reviewed the activities of the Internal Audit department,
its programme of work and
resourcing requirements. It reviewed the Group’s approach to internal financial control, its processes, outcomes
and disclosures and considered the Group’s risk management processes.

The Audit Committee also reviewed the work of the external auditors, Ernst & Young LLP and received reports on
the scope and outcome of the annual audit and management’s response. These reports included accounting
matters, governance and control and accounting developments. The Audit Committee also reviewed the audit,
audit-related, tax and other services provided by the external auditors and ensured that all services provided by
the external auditors were pre-approved in accordance with the Auditor Independence policy explained in
greater detail on page 57. As part of the review into the services provided by the auditors, the Audit Committee
reviewed the independence, objectivity and effectiveness of the external auditors and was satisfied that it was
appropriate to recommend to the Board their reappointment.

RemunerationCommittee
The members of the Remuneration Committee are Rolf Stomberg (Chairman), Pamela Kirby, Warren Knowlton,
Richard De Schutter and Joseph Papa (appointed to the Remuneration Committee on 4 November 2009). All
members of the Committee are considered to be independent in accordance with the Code and SEC and NYSE
requirements.

The Remuneration Committee met
Committee are reviewing:

three times during the year. The principal duties of

the Remuneration

•

•

•

•

•

•

The remuneration, including pension entitlements, of executive directors and executive officers;

The relationship between the remuneration of executive directors and that of other employees;

The competitiveness of executive remuneration using data from independent consultants on companies of
similar size, technologies and international complexity;

The performance targets for the bonus plan and long-term incentive plans and the performance against
these targets;

The operation of the long-term incentive plans, share option plans and performance related bonus plan,
determining the participants and overall grant levels; and

Proposals for management succession.

The activities of the Remuneration Committee throughout 2009 are described in greater detail in the Directors’
Remuneration Report on pages 61 to 74.

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NominationsCommittee
The members of the Nominations Committee are John Buchanan (Chairman), David Illingworth, Rolf Stomberg and
Richard De Schutter (appointed to the Nominations Committee on 9 December 2009). Rolf Stomberg and Richard
De Schutter are considered to be independent in accordance with the Code and SEC and NYSE requirements.

The Nominations Committee met once during the year and this meeting was attended by all members. In
addition, the Chairman held a number of detailed telephone calls and meetings with members of the Nominations
Committee both individually and collectively. Other members of the Board have also been consulted on their
views relating to Board refreshment and succession planning.

The principal duties of the Nominations Committee are:

•

•

•

•

•

To review the Board structure, size and composition and to make recommendations to the Board
accordingly;

To identify and nominate suitable candidates to the Board to fill any Board vacancies as they arise,
evaluating the balance of skills, knowledge and experience currently on the Board and which may be
required in the future;

To make recommendations to the Board on the continuation in office, or otherwise, of any executive director
or non-executive director;

To make recommendations to the Board regarding membership of the Board Committees and the fees paid
to non-executive directors; and

To consider and if thought fit approve the appointment of any executive director as a non-executive director
of another company.

During the year, the Nominations Committee recognised that three non-executive directors had served on the
Board for periods of time which could give rise to questions about their continued independence. Whilst the
Board considers that all the non-executive directors are sufficiently independent regardless of their length of
service, the Nominations Committee believed that it would be appropriate to consider plans for the Board’s
the Nominations Committee has undertaken the following activity,
refreshment. During the year therefore,
assisted by the Group Director of Human Resources,
firm of
headhunters:

the Company Secretary and an external

•

•

•

•

A matrix was prepared detailing the skills and experience required collectively by the non-executive
directors of the Company. This matrix was then compared to the skills and experience of the current
non-executive directors. The full Board contributed to this process and, as a result, profiles of potential
non-executive directors were prepared;

A firm of headhunters was instructed to commence a search for suitable non-executive directors based on
the profiles prepared. A number of candidates were identified and the Committee recommended to the
Board the appointment of Geneviève Berger and Ian Barlow on 5 March 2010;

It was agreed that Warren Knowlton who has served on the Board since 2000 and is currently Chairman of
the Audit Committee and a member of the Remuneration Committee would retire from the Board at the AGM
to be held on 6 May 2010; and

It was also agreed that Rolf Stomberg and Richard De Schutter, who have served on the Board since 1998
and 2001 respectively would continue to serve on the Board until such time as suitable replacements have
been found for them, in order to provide continuity in this period of transition.

During 2010, the Nominations Committee will continue this process.

Should the need arise, the Senior Independent Director would oversee the process for the appointment of a new
Chairman.

EthicsandComplianceCommittee
The members of the Ethics and Compliance Committee are Richard De Schutter (Chairman), Pamela Kirby and
Joseph Papa. All members of the Committee are considered to be independent in accordance with the Code.
David Illingworth, Chief Executive, attends every meeting.

The Ethics and Compliance Committee met four times during the year.

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The principal duties of the Ethics and Compliance Committee are:

•

•

•

•

•

•

•

•

•

To review and approve Group policies as they relate to ethical and compliance matters;

To receive reports and review activities from executive and specialist groups managing ethical and
compliance matters across the Group’s operations;

To review and approve implementation of ethical and compliance programmes;

To receive and review reports of audits and monitoring of ethical & compliance procedures and processes;

To review ethical and compliance best practice and continuous improvement programmes by reference to
appropriate external reports and benchmarking;

To review, where appropriate, the Group’s internal communications and training in relation to ethical and
compliance policies and procedures;

To review the Group’s external communication and reporting in respect of ethical and compliance
programmes and the operation of the Committee;

To review the integration of ethical and compliance procedures with the business risk management
programme; and

To review and approve ethical and compliance strategy and plans.

During the year, the Committee has:

• Monitored the roll-out of the Enhanced Global Compliance Programme;

•

•

•

•

Overseen the adoption of the Code of Conduct and Business Principles across the Group;

Overseen the transition of compliance processes under the Deferred Prosecution Agreement
Corporate Integrity Agreement;

to the

Appointed PricewaterhouseCoopers to undertake an Independent Compliance Assessment and received
their reports; and

Received reports from management in relation to progress made under the Enhanced Global Compliance
Programme, the activities of the US and Global Compliance programmes and concerns raised through the
Group’s hotline and other channels.

Board and Committee Attendance
The Table below details attendance of directors at Board and Committee meetings held throughout the year:

John Buchanan
David J. Illingworth
Adrian Hennah
Pamela J. Kirby (i)
Warren D. Knowlton
Brian Larcombe (i)
Joseph C. Papa (ii)
Richard De Schutter (i)
Rolf W. H. Stomberg

Board
8 meetings

Remuneration
Committee
3 meetings

Audit
Committee
5 meetings

Nominations
Committee
1 meeting

Ethics and
Compliance
Committee
4 meetings

8
8
8
7
8
8
8
7
8

–
–
–
3
3
–
1
3
3

–
–
–
–
5
4
5
5
5

1
1
–
–
–
–
–
1
1

–
–
–
4
–
–
4
4
–

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Unable to attend due to commitments arranged prior to the meeting.

(i)
(ii) Appointed to Remuneration Committee on 4 November 2009.
(iii)

From time to time directors also attend Committee Meetings at the invitation of the Committee Chairman even if they are not members of
the Committee in order to gain a better understanding of the activities of the Committee.

Liaison with Shareholders
The executive directors meet
regularly with investors to discuss the Company’s business and financial
performance both at the time of the announcement of results and at industry investor events. During 2009, the
executive directors held meetings with institutional investors, including investors representing approximately 60%

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of the share capital as at December 2009. As part of this programme of investor meetings, during 2009, John
Buchanan, the Chairman, met with investors representing 16% of the share capital. Over the last three years, he
has met investors representing in aggregate 50% of the share capital. In 2009, Rolf Stomberg, the Senior
Independent Director and Chairman of
the
investors holding approximately 24% of the share capital to
Remuneration Committee, met with institutional
discuss remuneration matters. The Company’s website (www.smith-nephew.com) contains information of interest
to both institutional
information and webcasts of the
results presentations to analysts for each quarter, as well as specific information for private shareholders relating
to the management of their shareholding.

the Remuneration Committee and Joseph Papa, member of

investors and private shareholders, including financial

Directors’ Indemnity Arrangements
Appropriate directors and officers liability insurance is in place and Deeds of Indemnity have been entered into
between the Company and directors. The Deeds of Indemnity allow for indemnification of directors in respect of
proceedings brought by third parties and for the Company to provide funds for directors’ ongoing costs in
defending a legal action as they are incurred rather than after judgement has been given. Individual directors
would still be liable to pay any damages awarded to the Company in an action against them and to repay their
defence costs to the extent funded by the Company if their defence is unsuccessful.

Share Capital
As at 17 March 2010,
issued share capital with voting rights consisted of
951,549,300 Ordinary Shares of 20 US cents each. 63,679,855 Ordinary Shares are held in treasury and are not
included in the above figure.

the Company’s total

As at 17 March 2010, notification had been received from the undernoted persons under the DTR in respect of
interests in 3% or more of the issued Ordinary Shares of the Company.

Newton Investment Management Limited
Thornburg Investment Management Inc.
Capital Group of Companies Inc.
Legal and General Group plc
FMR LLC

Number of Shares
‘000

45,129
44,852
44,594
35,329
34,101

%

5.1
5.1
5.0
4.0
3.8

Other than disclosed above, the Company is not aware of any person who has a significant direct or indirect
holding of securities in the Company and is not aware of any persons holding securities which may control the
Company. There are no securities in issue which have special rights as to the control of the Company.

Dividend
The Board has declared a second interim dividend of 8.93 US cents per share which, together with the first
interim dividend of 5.46 US cents, makes a total for 2009 of 14.39 US cents. The second interim dividend will be
paid on 12 May 2010 to shareholders on the register of Members at the close of business on 23 April 2010.

Annual General Meeting
The Company’s annual general meeting is to be held on 6 May 2010 at 11.00am at The Royal Society, 6-9
Carlton House Terrace, London SW1Y 5AG. Notice of the meeting has been sent to all registered shareholders
with an accompanying letter from the Chairman.

Corporate Headquarters and Registered Office
The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam
Street, London WC2N 6LA, UK. Registered in England and Wales No. 324357. Tel: +44 (0) 20 7401 7646.
Website: www.smith-nephew.com

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ACCOUNTABILITY, AUDIT AND INTERNAL CONTROL FRAMEWORK

Internal Control and Risk Management
The Board has overall responsibility for ensuring that the Group maintains an adequate system of internal control
and risk management and for reviewing its effectiveness. The Internal Audit function and the Group Risk
Committee consider and test effectiveness and report to the Audit Committee and to the Board respectively on
their findings. The Board has reviewed the system of internal control, including financial control for the year ended
31 December 2009 and up to the date of approval of this Annual Report and Accounts. The Group’s system of
internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives, and
can only provide reasonable and not absolute assurance against material misstatement or loss.

Risk Committee
The members of the Risk Committee are the executive directors, the executive officers and the Company
Secretary. The Chairman of the Committee is the Chief Executive. As an integral part of planning and review, the
management of each of the Global Business Units identifies the risks involved in their business, the probability of
those risks occurring, the impact if they do occur and the actions being taken to manage and mitigate those risks.
The Risk Committee meets twice a year to review the major risks identified by the Global Business Units and any
mitigating actions being taken. As appropriate, the Risk Committee may re-categorise risks or require further
information or mitigating action to be undertaken. The Risk Committee reports to the Board on an annual basis
detailing all principal risks categorised by potential financial impact on profit and share price. In addition, the most
significant Group risks are reported to the Board regularly. These reports include details of new, key or
significantly increased risks along with actions put in place to mitigate such risks. The principal risks identified
through this process are detailed in “Risk Factors” to be found on pages 20 to 24.

Audit Committee
The activities of the Audit Committee are described in greater detail in pages 52 to 53.

The Audit Committee reviews the Group’s approach to internal financial control and the operation of the risk
management process. During 2009, the effectiveness of the Global Business Units’ systems to identify and
manage material risks was evaluated and the findings were reported to the Audit Committee. No material
weaknesses were identified in these systems.

Auditor Independence Policy
The Audit Committee has adopted an Auditor Independence Policy which forms part of the Committee’s Terms of
Reference. This policy governs the conduct of non-audit work by the external auditors. This prohibits the auditors
from performing services which would result in the auditing of their own work, participating in activities normally
undertaken by management, acting as advocate for the Group and creating a mutuality of interest between the
auditors and the Group, for example being remunerated through a success fee structure. Each year, the Audit
Committee pre-approves the budget for fees relating to audit and non-audit work, including taxation services, in
accordance with a listing of particular services. In the event that limits for these services are expected to be
exceeded or the Group wants the external auditors to perform services that have not been pre-approved,
approval by the Chairman of the Audit Committee is required, together with a notification to the Audit Committee
of the service and the fees involved. All services provided by the independent auditors during the year were
pre-approved by the Audit Committee.

The Auditor Independence Policy also governs the policy regarding the audit partner rotation in accordance with
the Auditing Practices Board Ethical Standards in the UK and the SEC rules in the US. During 2009, the
Company’s lead audit partner rotated and was replaced by a new lead audit partner who had not been previously
involved in the Company’s audit. Partners and senior audit staff may not be recruited by the Group unless two
years have expired since their previous involvement with the Group.

Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

In addition, projections of any evaluation of effectiveness in future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

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In accordance with the requirement in the US under s404 of the Sarbanes-Oxley Act, management assessed the
effectiveness of the Group’s internal control over financial reporting as at 31 December 2009. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organisations of the
Treadway Commission in Internal Control-Integrated Framework. Based on its assessment, management has
concluded and hereby reports that, as at 31 December 2009, the Group’s internal control over financial reporting
is effective based on those criteria.

Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on the Group’s
internal control over financial reporting as of 31 December 2009. This report appears on page 81.

There has been no change in the Group’s internal control over financial reporting during the period covered by
this Annual Report that has materially affected, or is reasonably likely to materially affect, the Group’s internal
control over financial reporting.

Disclosures Committee and Evaluation of Disclosure Controls and Procedures
The Disclosures Committee is chaired by the Chief Executive and comprises the Chief Financial Officer and
various additional senior executives. The secretary is the Company Secretary or her designate. The Committee
meets as required and approves the release of all major communications to investors, to the UK Listing Authority
and the London and New York Stock Exchanges.

The Chief Executive and Chief Financial Officer have evaluated the effectiveness of the design and operation of
the Group’s disclosure controls and procedures as at 31 December 2009. Based upon, and as at the date of that
evaluation, the Chief Executive and Chief Financial Officer concluded that the disclosure controls and procedures
were effective.

Code of Conduct
The revised Code of Conduct approved by the Ethics and Compliance Committee was issued to all employees
during 2009. The Code of Conduct sets out the basic legal and ethical principles for carrying out business and
applies both to employees and those who act on the Group’s behalf. It sets out in detail how persons covered by
the Code of Conduct are expected to interact ethically with healthcare professionals and government officials. It
also covers the broader issues of ethics and compliance throughout the business and includes a code of
business principles. A copy of the Code of Conduct can be found on the Group’s website.

The Code of Conduct includes a whistle blowing policy which enables persons in most jurisdictions where the
Group operates to contact the Group anonymously through an independent provider. All calls and contacts are
investigated and the appropriate action taken, including reports to senior management or the Board where
warranted.

Code of Ethics for Senior Financial Officers
The Board of directors has adopted a Code of Ethics for senior financial officers, which is available on the Group’s
website (www.smith-nephew.com) and on request from the Company Secretary. It applies to the Chief Executive,
Chief Financial Officer, Group Financial Controller and the Group’s senior financial officers. There have been no
waivers to any of the Code’s provisions nor any amendments made to the Code during 2009 or up until 17 March
2010.

Principal Accountant Fees and Services
Fees for professional services provided by Ernst & Young LLP, the Group’s independent auditors in each of the
last two fiscal years, in each of the following categories were:

Audit
Audit related fees
Tax
Other

58

2009
$ million

2008
$ million

3
–
2
–

5

5
–
3
1

9

Audit fees include fees associated with the annual audit and local statutory audits required internationally. In
2008, other fees related to aborted acquisition costs. A more detailed breakdown of audit fees may be found in
Note 37 of the Notes to the Group Accounts.

Disclosure of Information to the Auditors
In accordance with Section 418 of the Companies Act 2006, the directors serving at the time of approving the
Directors’ Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of
which the auditors, Ernst & Young LLP, are unaware and the directors also confirm that they have taken
reasonable steps to be aware of any relevant audit information and, accordingly, to establish that the auditors are
aware of such information.

Auditors
Ernst & Young LLP have expressed their willingness to continue as auditors and resolutions proposing their
reappointment and to authorise the directors to determine their remuneration will be proposed at the AGM as
approved by the Audit Committee.

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DIRECTORS’ REMUNERATION REPORT

The Directors’ Remuneration Report (the “Report”) has been prepared in accordance with The Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”) and meets the
relevant requirements of the Financial Services Authority (“FSA”) Listing Rules. As required by the Regulations, a
resolution to approve the Report will be proposed at the annual general meeting (“AGM”) on 6 May 2010.

The Remuneration Committee Membership and Meetings
The members of the Remuneration Committee are Rolf Stomberg (Chairman), Pamela Kirby, Warren Knowlton,
Joseph Papa (appointed to the Remuneration Committee on 4 November 2009) and Richard de Schutter. All
members of the Committee are non-executive directors and are considered by the Board to be independent in
accordance with the UK Combined Code on Corporate Governance and the requirements of the SEC and the
NYSE. The Company Secretary acts as secretary to the Remuneration Committee.

The Remuneration Committee met three times during the year and each meeting was attended by all members. In
addition the Remuneration Committee agreed on certain resolutions by e-mail when unable to meet physically.
Joseph Papa joined the Remuneration Committee on 4 November 2009 and also attended one meeting prior to
his appointment.

At the request of the Remuneration Committee, the Chairman, John Buchanan, the Chief Executive, David
Illingworth and the Group Director of Human Resources, Elizabeth Bolgiano were invited to attend meetings of the
Remuneration Committee throughout the year. David Illingworth and Elizabeth Bolgiano advise the Remuneration
Committee on all aspects of the Group’s reward structures and policies and John Buchanan offers a valuable
perspective given his experience on the Boards of other companies. None of these directors or officers is present
for any discussion concerning their own remuneration.

During the year, the Remuneration Committee received information from a number of independent consultants
appointed by the Company: Deloitte LLP on a broad range of remuneration issues and on long-term incentive
plan comparative performance and Towers Watson and Mercer Limited on salary data when considering base
salaries of executive directors and executive officers. Deloitte LLP also provided taxation advice to the Group,
while Towers Watson and Mercer Limited have provided general salary data and advised on various
compensation matters below Board level. None of these advisors advised any director in respect of their own
remuneration.

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The Role of the Remuneration Committee
The terms of
www.smith-nephew.com.

reference of

the Remuneration Committee are available on the Group’s website at

The Remuneration Committee reviews:

•

•

•

•

•

•

The remuneration, including pension entitlements, of executive directors and executive officers;

The relationship between the remuneration of executive directors and that of other employees;

The competitiveness of executive remuneration using data from independent consultants on companies of
similar size, technologies and international complexity;

The performance targets for the bonus plan and long-term incentive plans and the performance against
these targets;

The operation of the long-term incentive plans, share option plans and performance related bonus plan,
determining the participants and overall grant levels; and

Proposals for management succession.

Remuneration Policy
The remuneration policy as approved by the Remuneration Committee and the Board, is designed to ensure that
remuneration is sufficiently competitive to attract, retain and motivate executive directors and executive officers of
a calibre that meets the Group’s needs to achieve its business objectives. The policy is designed to ensure that
remuneration is firmly linked with the success of the Company and achievement against the Company’s key
performance indicators, so that executive directors and executive officers are suitably incentivised to generate
long-term and sustainable value for shareholders.

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The Remuneration Committee has responsibility for determining the individual remuneration packages for the
Chief Executive, the Chief Financial Officer (the “executive directors”) and for the remaining executive officers of
the Company, as detailed on page 49 of this Annual Report. In determining these remuneration packages, the
Remuneration Committee has regard to the levels of pay and the structure of remuneration packages across the
entire Group. The shape of the remuneration packages for the executive directors and executive officers is
broadly similar to the remuneration packages for other executives in the Group. The salary levels and multiples
used in the various incentive plans differ according to level of seniority. This is explained in greater detail within
the discussion on each incentive plan.

Across the Group, base pay and benefits are referenced to median competitive levels for acceptable
performance whilst
incentive plans, both short and long-term, are designed to motivate and reward
out-performance. Total remuneration packages are benchmarked by reference to appropriate UK and US
companies and where relevant other local markets. Individual remuneration levels are based on measurable
performance against fair and open objectives and there are no automatic pay adjustments unless required by law
or local protocol.

The policies described in this Report have been applied throughout 2009 and it is intended that they will continue
to apply throughout 2010. The Remuneration Committee will however continue to monitor its policies against
evolving market practice and relevant guidance which is particularly relevant in the current economic climate.

The Remuneration Committee has a policy to consult with the Company’s major shareholders and relevant
stakeholders prior to implementing any significant change to the Remuneration Policy and places great value in
developing a transparent relationship on such matters. During 2009,
the
Remuneration Committee consulted with shareholders representing approximately 24% of the issued share
capital, as well as representatives of the Association of British Insurers and the National Association of Pension
Funds, to discuss remuneration issues.

the Company and members of

Principal Components of Remuneration
The remuneration package for the Company’s senior executive population, which includes the executive directors
and executive officers, comprises the following elements:

•

•

•

•

Basic salary and benefits;

Annual bonus with a deferred element under the Deferred Bonus Plan;

Long-term incentives, comprising 2004 Performance Share Plan Awards and share options; and

Pension entitlements.

the Remuneration Committee again undertook a thorough review of

the
During 2009,
remuneration arrangements. During the review, the Committee were mindful of the latest developments in the
economic and corporate governance environment, and also took on board specific feedback received from
certain shareholders. The purpose of the review was to ensure that the incentive arrangements continue to be
firmly linked to the long-term success of the business and are based on balanced measures of corporate
performance. The Committee believed that the principal focus of the review should be on the metrics used to
drive the performance of the business, and in particular, the weighting given to growth in EPSA (basic earnings
per share adjusted to exclude the amortisation of acquisition intangibles and exceptional
items) across the
package.

the structuring of

Whilst EPSA growth is an important measure, as it underscores many of the financial objectives the Company is
trying to achieve, the Remuneration Committee felt that incentives should be subject to a broader range of
performance measures more closely linked to the specific Strategic Imperatives of the Group as set out on
page 4 of
the following changes were made to the overall
remuneration package:

this Annual Report. During 2009 therefore,

•

•

As disclosed in last year’s Report, the 2009 bonus target reduced the reliance placed on EPSA growth,
moving from EPSA growth representing 75% of the total bonus to 50% and introducing an Earnings
Improvement target together with the existing personal objective targets.

In 2010, further changes will be made and the targets for the Bonus Plan will be linked specifically to the
Group’s Strategic Imperatives. This is explained in greater detail below.

62

•

•

The Company moved from an absolute EPSA growth performance measure for the 2004 Performance Share
Plan to a relative EPSA measure comparing EPSA growth to overall market growth.

The Company switched from an EPSA growth to a Total Shareholder Return (“TSR”) target for the 2004
Executive Share Option Plan for executive directors.

a) Base Salary and Benefits
Across the Group, base salary is determined both by the scope and the responsibility of the position and
performance potential of the individual. Salaries are reviewed annually with effect from 1 April each year. Base
salary is benchmarked by reference to the median for the relevant geographic market and employees are paid in
a currency related to their home market. The Group also provides certain benefits such as private healthcare and
a company car or allowance in line with competitive practice for the applicable geographic market. The
Remuneration Committee also considers any pension consequences and costs to the Company when
determining base salary increases for executive directors and executive officers.

With effect from 1 April 2009, the Remuneration Committee agreed the following base salaries for the executive
directors:

David Illingworth
Adrian Hennah

$1,407,000
£515,000

Following the annual review conducted in February 2010, the Remuneration Committee has determined that with
effect from 1 April 2010, David Illingworth’s base salary would remain unchanged and that Adrian Hennah’s base
salary would increase by 3%. The base salaries for the executive directors with effect from 1 April 2010 will be
therefore:

David Illingworth
Adrian Hennah

$1,407,000
£530,000

In common with our practice across the Group, the executive directors are each paid in their home currency.

b) Annual Bonus with Deferred element under the Deferred Bonus Plan
An Annual Bonus Plan is operated across the Group. The plan is designed to encourage outstanding
performance without promoting excessive risk taking in order to achieve a short term bonus opportunity.

Senior executives also participate in the Deferred Bonus Plan under which a proportion of their annual bonus
(dependent upon their seniority in the organisation) is compulsorily deferred into shares which vest in equal
annual tranches over three years, subject to the participant’s continued employment. No further performance
conditions apply to these deferred shares. The Deferred Bonus Plan is designed to encourage executives to build
up and maintain a significant shareholding in the Company to encourage them to behave and act
like
shareholders. The Deferred Bonus Plan replaced the 2004 Co-Investment Plan, which was last operated in
respect of the bonus earned in 2007 and paid in 2008.

Executive directors and officers participate in the same Annual Bonus Plan and Deferred Bonus Plan although the
targets and maximum levels are different reflecting their differing roles and levels of responsibility.

During 2009, the maximum annual bonus opportunity for executive directors was 150% of annual base salary
with a bonus of 100% for on target performance. One third of the annual bonus earned at and above target will
be compulsorily deferred into shares as explained above. The maximum cash bonus opportunity is therefore
100% of salary. There is no deferral of bonus for below target level performance. The maximum and target bonus
awards for executive directors will remain unchanged in 2010.

The annual bonus in 2009 for executive directors was subject to the following performance measures:

Annual growth in EPSA
Earnings Improvements targets (special programme designed to improve long-term earnings)
Personal Objectives

50%
25%
25%

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In respect of 2009, the annual bonus earned by David Illingworth was $1,235,346 cash and $617,673, which will
be deferred into shares and by Adrian Hennah was £442,900 cash and £221,450, which will be deferred into
shares. These amounts represented 88% and 86% of the maximum bonus opportunity for 2009. Over the same
period EPSA grew by 18% triggering 50% of the maximum bonus, earnings improvements triggered 21% of the
maximum bonus and achievement of personal objectives triggered 17% of the maximum bonus for David
Illingworth and 15% of the bonus for Adrian Hennah.

In 2009, the Remuneration Committee continued to review the performance measures set for the Annual Bonus
Plan to ensure that they were encouraging behaviour which would support the business and strategic objectives
of the Group. As explained on page 4 of the Annual Report, we have identified four strategic pillars for success:

•

•

•

•

‘Customer led’: outperforming our served markets by focusing on our customers; anticipating and innovating
to deliver on their needs.

‘Efficient’: delivering operating margin improvement and freeing up resources to invest in the business,
through streamlining process and systems re-engineering.

‘Investing for growth’: driving additional sales from new opportunities such as biologics, emerging markets
and adjacent technologies.

‘Aligned’: aligning objectives across the business and developing our talent and organisation for consistent
execution, through leveraging core functions and sharing best practices.

From these four strategic “pillars”, a scorecard has been developed for each GBU and function, which identifies
the strategic imperatives for each part of the business. Every employee across the Group has performance
objectives which link into the business scorecard and ultimately into these four strategic pillars. The bonus to be
earned in 2010 will depend upon performance against the financial measures underpinning these strategic
pillars, namely revenue, profit, margin and cash.

The 2010 annual bonus for executive directors will be subject to the following performance measures:

Performance against the Financial Measures underpinning the strategic pillars (revenue 40%,

trading profit/margin 40% and trading cash 20%)

Personal objectives

75%
25%

level or above in 2010 will be
the annual bonus earned at
For executive officers, one quarter of
compulsorily deferred into shares as explained above. The performance measures will be the same as for the
executive directors, except that, where relevant, the element attributable to the strategic pillars, will link into the
individual executive officer’s specific functional strategic objectives, which are derived from the Group strategic
pillars.

target

c) Long-Term Incentives
The Group operates two main Long-Term Incentive Plans for executive directors: the 2004 Performance Share
Plan and the 2004 Executive Share Option Plan. Annual awards of 150% of salary are made under the 2004
Performance Share Plan and annual grants of options at 100% of salary are made under the 2004 Executive
Share Option Plan. In addition, there are some outstanding awards that were made under legacy plans no longer
in operation.

(i)2004PerformanceSharePlan(PSP)
Under the 2004 Performance Share Plan, awards over shares are currently made to executive directors,
executive officers and other senior executives in the second half of the year. The vesting conditions and
performance measures for these shares are common to all participants, although the number of the shares
awarded depends on the seniority of the participants.

The initial market value of awards made to executive directors in 2009 was equivalent to 150% of their base
salary and the initial market value of the awards made to executive officers was 75% of their base salary. The
Remuneration Committee has agreed that for 2010 the level of these awards will remain the same.

Share awards under the 2004 Performance Share Plan will only vest if pre-determined levels of EPSA growth are
achieved. In addition, in order to drive enhanced shareholder value and maintain close alignment to executive
and shareholder interests, the number of shares delivered to executives may be increased subject to the

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achievement of superior Total Shareholder Return (“TSR”) measured against the major companies in the medical
devices industry. There is no retesting. The Remuneration Committee believes that the combination of EPSA and
TSR measures encourages executives to achieve outstanding performance both in absolute terms looking at the
EPSA measurement and also in relative terms compared to our peers looking at the TSR measurement.

The economic situation in the early part of 2009 made it increasingly difficult to establish realistic absolute EPSA
targets to apply to the 2004 Performance Share Plan. The Remuneration Committee therefore decided to adopt
relative EPSA measures instead of absolute measures. The targets for growth in EPSA will be related to growth of
relevant markets, taking into account both volume and price changes in each of our major markets, and weighted
according to our relative turnover in each of those markets to provide an estimate of “global market growth”
calculated on an annual basis for each year of the Plan. The actual EPSA growth over the three years will then be
compared to the compounded EPSA growth targets to calculate the level of vesting. Global market growth is
derived from a range of publicly available sources including individual competitor company press releases,
quarterly results and analyst reports, as well as data purchased from a variety of industry surveys.

Annual Growth in EPSA over the three years ending 31 December 2011

Percentage of award vesting

Market Growth +2% per annum
Market Growth +5% per annum
Market Growth +8% per annum

25% — Threshold
50% — Target
100% — Maximum

None of the award will vest if the growth in EPSA over three years is less than Threshold and the award will vest
pro rata on a straight line basis between the points given in the table above if growth in EPSA is between these
levels.

If the Company’s TSR is positioned above median when compared with the TSR of medical devices companies,
then the number of vested shares delivered to participants following the achievement of the EPSA targets will be
increased by a multiplier as follows:

TSR Ranking within comparator group

Below or at Median
Upper quartile
Upper decile or above

Multiplier

1.0x
1.3x
1.5x

The multiplier increases on a straight line basis between the above points.

TSR will be measured relative to a tailored sector peer group of medical devices companies. The companies in
the comparator group for the awards made in 2009 are:

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Arthrocare
Bard
Baxter
Becton Dickinson
Boston Scientific
Coloplast Group
Conmed
Covidien
Edwards Life Sciences Corp
Johnson & Johnson

KCI
Medtronic
Nobel Biocare
Nuvasive
Orthofix
Stryker
St Jude Medical
Synthes-Stratec
Wright Medical
Zimmer

The Group’s TSR performance and its performance relative to the comparator group is independently monitored
and reported to the Remuneration Committee by Deloitte LLP.

For awards made in 2007, which vested after the 2009 year end, performance was measured against the FTSE
100 and the group of medical device companies. These awards vested at 70% as the Company was ranked
22nd in the FTSE100 comparator group and 9th out of 21 companies in the medical devices group.

The performance measures to be used for the awards to be made in 2010 to executive directors under the 2004
Performance Share Plan will be on the same basis as in 2009.

In 2009, awards were made to executive officers and other senior executives below Board level under the 2004
Performance Share Plan. From 2010 onwards, whilst awards will continue to be awarded to executive directors

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under the 2004 Performance Share Plan, awards for executives below Board level will be awarded under the
Global Share Plan 2010, subject to shareholder approval at the AGM. The 2010 Global Share Plan is explained in
greater detail below.

ii)ExecutiveShareOptions
Under the 2004 Executive Share Option Plan, share options are granted to executive directors in the second half
of the year at the same time as awards are made under the 2004 Performance Share Plan. For participants in the
UK, the first £30,000 of the options is granted under the terms of the 2001 UK Approved Plan (or the Global
Share Plan 2010, subject to shareholder approval at the AGM) in order to take advantage of the UK taxation
provisions.

Under the rules of the 2004 Executive Share Option Plan, the maximum market value of options which may be
granted in each year is equivalent to the base salary of the participant.

Share options are exercisable up to ten years from the date of grant and are only exercisable if the performance
conditions over a three year performance period are achieved, beginning with the year in which the share option
is granted. Option granted to executive directors under the 2001 UK Approved Plan (or the Global Share Plan
2010) are subject to the same performance conditions.

During 2009, the Remuneration Committee reviewed the performance measures applicable to grants made under
the 2004 Executive Share Option Plan. Option grants made to executive directors prior to 2009 were based on
EPSA growth. The Remuneration Committee has concluded that overall there should be a re-weighting of how
EPSA is used across the range of short and long term incentive plans operated for executive directors.
Consequently, the performance measurement for grants made in 2009 was based on TSR.

If the Company’s TSR is positioned above median when compared with the TSR of certain medical devices
companies over a three year period commencing 1 January 2009, then the options shall become exercisable as
follows:

TSR Ranking within comparator group

Percentage of option vesting

Below or at Median
Median
Upper Quartile

Nil
35%
100%

Options shall vest on a straight line basis between these points. If the Company’s TSR performance is below
median, no options shall vest. The same comparator group as used for the 2004 Performance Share Plan,
outlined above, has been used.

The Company’s TSR performance and its performance relative to the comparator group is independently
monitored and reported to the Remuneration Committee by Deloitte LLP.

The same performance conditions will apply to grants to be made in 2010 under the 2004 Executive Share
Option Plan except that only 33% of the options will vest if the Company’s TSR performance is at median.

For options granted in 2007, 61% of the options granted under the 2004 Executive Share Option Plan will vest in
2010. This is as a consequence of EPSA growth over the three year period of 45%

iii)2004Co-InvestmentPlan
The 2004 Co-Investment Plan was replaced by the Deferred Bonus Plan described above in 2009. No awards
were therefore made in 2009 or will be made in future.

The 2004 Co-Investment Plan enabled executive directors, executive officers and certain senior executives to
take part of the annual bonus in the form of shares. Under this plan, the participant elected the level of bonus to
be used for this purpose up to a maximum of one half of the annual gross bonus capped at 20% of base salary.
The net amount of the gross amount elected was then used to purchase shares. The shares were matched by
the Company depending on growth in EPSA performance over a three year period, provided the shares are held
for three years and the participant remains employed. For awards made in 2007 which vested on 15 March
2010, the Remuneration Committee determined that one matching share will vest for each share acquired with
bonus as EPSA growth amounted to 45% over the three year performance period.

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iv)RestrictedStockAwards
No issues of restricted stock awards were made in 2009 to executive directors or to executive officers.

The restricted share award made to Adrian Hennah in 2006 vested as to 100% in June 2009.

The award of restricted shares made to David Illingworth in 2007 vested as to 100% on 11 February 2011 as the
trading margin targets applying to this award have been met in full.

v)OtherLong-TermIncentivePlans
Across the Group, there are other long-term incentive plans in which certain executives below executive director
level are eligible to participate. The Remuneration Committee determines the value of awards granted to these
executives.

Eligible UK participants, including executive officers may be granted options under the 2001 UK Approved Share
Option Plan and the 2001 UK Unapproved Share Option Plan. The exercise of the options is subject to EPSA
growth of not less than RPI plus 3% per annum on average over a three year performance period. There is no
retesting of the performance conditions. The awards made in 2007 will vest in their entirety in 2010 as EPSA
growth over the three year performance period exceeded the RPI plus 3% target.

Eligible US participants may be granted options under the 2001 US Share Plan. In line with market practice,
options granted under the 2001 US Share Plan are not subject to performance targets. Awards made prior to
2008 are exercisable cumulatively up to a maximum of 10% after one year, 30% after two years, 60% after 3
years and the remaining balance after four years. For awards made in 2008 and thereafter, options vest in equal
tranches over three years. Any awards of restricted stock under the 2001 US Share Plan are not subject to
performance targets but are subject to the executive remaining with the Group for a specified period, normally
two years.

Executive share options under all plans are offered at no less than the market value at the date of grant. These
options would vest on a change of control.

The 2001 UK Approved Share Option Plan, the 2001 UK Unapproved Share Option Plan and the 2001 US Share
Plan all expire in 2011. Authority will therefore be sought from shareholders at the AGM to be held on 6 May
2010 for the approval of a new Global Share Plan 2010 in which certain executives and key employees below
executive directors will be eligible to participate on the same basis. The Plan is explained fully in the notice of
AGM and a copy of the Plan Rules is available on request. Key features of this proposed plan are:

•

•

•

•

•

All participants will participate in the Plan on the same basis, regardless of where they are located within the
Group.

There will be separate schedules to cater for tax efficient variations within the UK and US, with the provision
to adopt further country specific schedules, if required at a later date.

The Plan will cater for the grant of share options and the award of performance shares and restricted shares.
It is intended that options will be granted and performance shares awarded on an annual basis to certain
participants, whilst restricted shares will be awarded on a “one-off” basis in particular circumstances to
attract, retain and motivate key employees.

The majority of eligible participants are US based and/or at a relatively junior level in the Group where they
are less likely to be in a position to influence key financial measures directly. In common therefore with US
practice, there will no performance conditions applying to options granted or restricted shares awarded
under the Global Share Plan 2010. There will however be performance conditions attaching to the
Initially these performance
performance share awards awarded under the Global Share Plan 2010.
conditions will mirror those of the 2004 Performance Share Plan.

Executive directors will not generally participate in the Global Share Plan 2010, as they receive options
under the 2004 Executive Share Option Plan, which are subject to performance conditions, as detailed
above. However, UK executive directors may receive options up to the value of £30,000 under the UK tax
approved section of the Global Share Plan 2010 in the event that they do not currently hold the maximum
value of UK tax approved options. These options will be subject to the same performance conditions
applying to UK unapproved share options awarded to them at the same time under the 2004 Executive
Share Option Plan.

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d) Pensions

Pensions—UK
UK based executive directors and executive officers have a normal retirement age of 62. Those in service
pre-2003 participate in the Smith & Nephew UK Pension Fund and the UK Executive Pension Scheme, under
which pensions have been accrued in the year at an annual rate of one-thirtieth of final pensionable salary up to
a limit based on service of two-thirds of final pensionable salary, subject to HM Revenue & Customs (“HMRC”)
constraints. Pensions in payment are guaranteed to increase by 5% per annum or the rate of inflation in the UK, if
lower. Death in service cover of four times salary and spouse’s pension at the rate of two thirds of the member’s
pension are provided on death. A salary supplement partially compensates for the HMRC earnings cap on final
pensionable salary which continues to apply in the defined benefit plans.

Those commencing employment post-2002 either participate in the defined contribution plan to which the
Company contributes 30% of basic salary or they receive a non-pensionable, non-bonusable salary supplement
of 30% of basic salary. Death in service cover of seven times basic salary, of which four times salary is payable as
a lump sum is also provided. The non-pensionable salary supplement is also available to any executive director
or executive officer who wishes to opt out of the defined pension plans for future service.

Pensions—US
US based executive directors and executive officers participate in either the defined benefit Smith & Nephew US
Pension Plan or the defined contribution US Savings plan 401 (K) Plus. Under the US Pension Plan, pensions
accrue at an annual rate of approximately one sixty-second of final pensionable salary up to a limit based on
service of 60% of final pensionable salary. The plan also provides for a spouse’s pension at the rate of one half of
the member’s pension on death. Normal retirement age under the plan is 65. For executives in the defined
benefit US pension plan, a supplementary plan is used to enable benefits to be payable from age 62 without
reduction for early retirement. A supplementary defined contribution plan is used to compensate for the earnings
cap imposed by the US Internal Revenue Code and to provide additional retirement benefits.

Shareholding Requirements
Across the group, senior executives are expected to build up and maintain a personal equity stake in the
Company. Executive directors are required to accumulate a personal holding equivalent to 2 times their base
salary and executive officers are required to accumulate a personal holding equivalent to 1.5 times their base
salary. Senior executives are also required to accumulate a personal holding at differing levels depending upon
their seniority. These holdings are expected to be accumulated within five years of the later of the date of their
joining the company or the date they became eligible to join the 2004 Performance Share Plan, 2004 Executive
Share Option Plan and 2004 Co-Investment Plan. The Remuneration Committee will take account of the extent to
which these guidelines have been met when making future awards. Non-executive directors are expected to
accumulate a personal holding in the Company equivalent to their annual basic fee within three years of their
appointment or the date that the shareholding guidelines were approved in July 2007.

Total Reward Composition
The split between fixed and variable pay for the executive directors and executive officers in 2009 was as
follows:

Executive directors
Executive officers

Base Pay (fixed)

Annual Bonus (variable)
earned in respect of 2009

Present economic value of
long-term incentives
(variable)

25%
33%

32%
32%

43%
35%

Service Contracts
Details of the service contracts for each of the executive directors, including their notice periods, are set out
below. The notice period under executive directors’ service contracts is twelve months.

The service contracts are terminable by the executive director on six months notice. There is no enhancement of
termination rights on a change of control of the Group. On termination of the contract by the Group, except for
“cause”, the Remuneration Committee has the discretion to pay executive directors a sum equivalent to the salary
and benefits, including (again at their discretion) a proportion of the bonus that would have been received if they
the Remuneration
had been required to work their 12 month notice period.

In exercising this discretion,

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Committee will take into account their policy of not rewarding failure and executive directors will be required
where possible to mitigate the loss. The Remuneration Committee may also enforce the non-compete clause in
the executive director contract.

On a change of control, however, the executive director shall be entitled to receive 12 months base salary and 12
months bonus at target plus benefits, in the event that employment is terminated within 12 months of the change
of control in circumstances where the executive director’s responsibilities or duties are materially diminished, or
there is a reduction in their overall salary and benefits package or a change in the location of their place of work.

Executive director

David Illingworth
Adrian Hennah

Date of Service
Contract

29 June 2007
1 February 2006

Effective Date

Expiry Date

1 July 2007
27 October 2015
1 June 2006 12 November 2019

Notice period from
company

12 months
12 months

Executive directors may serve as a non-executive director of a maximum of one company. Such appointments
are subject to the approval of the Nominations Committee and any fees earned are retained by the executive
director. Currently neither executive director holds such an appointment.

Non-Executive Directors
Non-executive directors do not have service contracts but instead have letters of appointment. Non-executive
directors are normally appointed for terms of three years, terminable at will, without notice by either the Group or
the director and without compensation. The Chairman has a six month notice period. The Nominations
Committee determines the remuneration of the non-executive directors and aims to set fees that are competitive
with other companies of equivalent size and complexity. Non-executive directors are not entitled to receive
awards under the Company’s long term incentive plans and no part of their fees are paid in shares.

Non-executive director fees were last increased in July 2007 and were reviewed again in December 2008, when
it was agreed that
in common with our practice of paying executive directors in their home currency,
non-executive directors would be paid in UK Sterling, US Dollars or Euros depending on their country of
residence. Non-executive directors are paid a basic annual fee and the Chairmen of the Audit, Remuneration and
Ethics and Compliance Committees and the Senior Independent Director receive an extra fee in recognition of
their additional responsibilities. An additional fee is also payable to non-executive directors in cases where
intercontinental
is necessary to attend Board and Committee meetings. The fees currently paid to
travel
non-executive directors are as follows.

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Basic Annual Fee
Committee Chairman and Senior Independent Director Fee
Intercontinental Travel fee (per meeting)

Fee in UK Sterling Fee in US Dollars Fee in Euros
€80,250
€12,750
€4,500

$110,000
$17,200
$6,000

£54,000
£8,500
£3,000

In 2009, Rolf Stomberg waived his extra fee entitlement due to him as Senior Independent Director.

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Directors’ Emoluments and Pensions
The following sections of the Report up to “Total Shareholder Return” have been audited by Ernst & Young LLP in
accordance with the Regulations.

a) Salaries and Fees

Thousands

Chairman (non-executive)
John Buchanan

Executive directors
David Illingworth
Adrian Hennah

Non-executive directors
Pamela Kirby
Warren Knowlton
Brian Larcombe
Joseph Papa (v)
Richard de Schutter
Rolf Stomberg

Salaries and
fees

Benefits (i)

Bonus (ii)

Salary
Supplement
in lieu of
pensions

Total 2009
(iv)

Total 2008
(iv)

£350

–

–

–

£350

£350

$1,407
£511

$25
£21

$1,853
£664

(iii) $0
£153

$3,285
£1,349

$2,960
£1,166

£54
$163
£54
$146
$158
€93

–
–
–
–
–
–

–
–
–
–
–
–

–
–
–
–
–
–

£54
$163
£54
$146
$158
€93

£57
$152
£57
$64
$141
€98

Benefits shown in the table above include cash allowances and benefits in kind.

(i)
(ii) One third of the total bonus shown above will be deferred by the purchase of shares on the open market, which will vest equally over

three years.

(iii) David Illingworth received no salary supplement in lieu of pensions, but $422,100 was provided under an international pension plan for

him, as disclosed below.

(iv) Total executive and non-executive directors’ emoluments for 2009 amounted to $6,703,000 (2008 — $6,450,000).
(v) Appointed on 1 August 2008.

b) Pensions

Accrued
Pension as
at 1 Jan
2009

Increase in
accrued
pension
excluding
inflation

Increase in
accrued
pension due
to inflation
$ thousands per annum

Accrued
pension at
31 Dec 2009

Transfer
value of
accrued
pension at
1 Jan 2009

Director’s
contribution
during 2009

Increase in
transfer
value over
year less
directors’
contribution

Transfer
value of
accrued
pension at
31 Dec 2009

$ thousands

David Illingworth

3

–

–

3

18

–

1

19

$422,100 (2008: £203,000) was provided under an International pension plan for David Illingworth.

No amounts have been paid to third parties in respect of directors’ services and no excess retirement benefits or
compensation has been paid to past directors.

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c) Directors’ Share Options

Options as
at 1 January
2009
(number)

Granted
during 2009
(number)

Exercise
price of
options
granted

Exercised
during 2009
(number)

Lapsed
during 2009
(number)

Options as at
31 December
2009
(number)

Average
exercise
price

Range of
exercisable
dates of
options held at
31 December
2009
(date)

David Illingworth
(i)
(ii)

450,527
100,000

–

–
177,875 (iv) US$39.55

Total

550,527

177,875

–
(100,000)

(100,000)

Adrian Hennah
(i)
(iii)

Total

255,898
2,107

107,515
–

258,005

107,515

479p
–

–
–

–

(30,662)
–

(30,662)

(42,512)
–

(42,512)

419,865
593p
177,875 (iv) US$39.55

01/08-08/18
08/12-08/19

597,740

320,901
2,107

323,008

539p
456p

06/09-08/19
11/10-04/11

–

All options above were granted at prices below the market price at 31 December 2009 of 639.5p.

(i) Options over Ordinary shares granted under 2004 Executive Share Option Plans.
(ii) Options over ADSs granted under 2004 Executive Share Option Plans.
(iii) Options granted under the UK ShareSave Scheme.
(iv) Per ADS.

The range in the market price of the Company’s Ordinary Shares during the year was 420p to 641.5p and the
market price at 31 December 2009 was 639.5p. The gain made by David Illingworth exercising share options in
the year was US$347,820 (2008: nil).

On 15 March 2010, 61% of the options granted to David Illingworth and Adrian Hennah under the 2004 Executive
Share Option plan vested in accordance with the performance criterion.

d) Long-Term Incentive Plan Awards

Maximum
number of
shares
awarded at
1 January
2009
(number)

Award type

(i) PSP
(ii) PSP
RSA

155,210
252,346
81,300

Awards
during the
year
(number)

Market price
on award

Vested
award
(number)

Market
price on
vesting

Lapsed
award
(number)

Number of
shares
awarded at
31 December
2009
(number)

Latest
performance
period
(date)

266,810 (iii) US$40.05 (34,200) US$37.04/ADS
–
–

–
–

–
–

–
–

(40,150)
–
–

347,670
252,346
81,300

2011
2010
2009

488,856

266,810

(34,200)

(40,150)

681,316

David Illingworth

Total

Adrian Hennah

(ii) PSP
RSA

332,004
57,603

161,273
–

469p (47,695)
(57,603)

–

469p
469p

(55,991)
–

389,591
–

2011
–

Total

389,607

161,273

(105,298)

(55,991)

389,591

Awards made over ADSs under the 2004 Performance Share Plan.

(i)
(ii) Awards made over ordinary shares under the 2004 Performance Share Plan.
(iii) Per ADS.

On 15 March 2010, 70% of the awards granted to David Illingworth and Adrian Hennah in 2007 under the 2004
Performance Share Plan vested in accordance with the performance criterion.

On 11 February 2010, the award over 81,300 shares to David Illingworth vested in accordance with the
performance criterion.

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e) 2004 Co-Investment Plan Awards
The number of matched shares to be allocated to each executive director is subject to growth in EPSA over a
three-year period. Details of the Plan can be found on page 66.

Total matched
awards as at
1 January 2009

Matched award
vested during the
year

Lapsed award

Total matched share
award at 2 x gross
bonus held at
31 December 2009

David Illingworth
Adrian Hennah

39,870
58,298

(23,700)
–

–
–

16,170
58,298

No awards were made under this plan in 2009.

Awards over 1,617 ADSs to David Illingworth and over 13,521 shares to Adrian Hennah made in 2007 under the
2004 Co-Investment Plan vested on 15 March 2010.

f) Deferred Bonus Plan
The vesting of awards under the Deferred Bonus Plan is dependent upon continued employment within the
Group throughout the three-year vesting period. Provided the condition of continued employment is met, one
third of the total award will vest in each of the three years, on the award’s anniversary.

Total as at
1 January 2009

Awarded during 2009

Lapsed during 2009

Total as at
31 December 2009

David Illingworth
Adrian Hennah

–
–

51,658
37,119

–
–

51,658
37,119

Senior Management Remuneration
The Group’s administrative, supervisory and management body (“the senior management”) is comprised, for US
reporting purposes, of executive directors and executive officers.

In respect of the financial year 2009, the total compensation (excluding pension emoluments but including
for the year was
payments under the performance related bonus plans) paid to the senior management
$13,093,000 (2008 — $11,059,000, 2007 — $14,818,000), the aggregate increase in accrued pension benefits
was $9,000 (2008 — increase of $12,000, 2007 — decrease of $4,000) as a number of executives took a lump
sum on retirement and the aggregate amounts provided for under the supplementary schemes was $1,179,000
(2008 — $507,000, 2007 — $544,000).

During 2009, senior management were granted options over 518,455 shares and 35,575 ADSs under the 2004
Executive Share Option Plans, 1,910 under the employee ShareSave plans, 480,633 shares and 51,197 ADSs
under the 2004 Performance Share Plan and awarded 88,777 shares and 12,318 ADSs under the Deferred
Bonus Plan. As of 17 March 2010, the Senior Management (10 persons) owned 190,583 shares and 71,951
ADSs, constituting less than 1% of the issued share capital of the Company. Senior Management also held as of
this date, options to purchase 1,842,127 shares; restricted stock awards over 13,152 ADSs; 598,242 shares and
143,680 ADSs awarded under the 2004 Performance Share Plan; 15,628 shares and 2,489 ADSs under the
2004 Co-Investment Plan; and 88,777 shares and 12,318 ADSs under the Deferred Bonus Plan.

72

Directors’ Interests
Beneficial interests of the directors in the Ordinary Shares of the Company are as follows:

Numbers

John Buchanan
David Illingworth (ii)
Adrian Hennah
Ian Barlow
Geneviève Berger
Pamela Kirby
Warren Knowlton
Brian Larcombe
Joseph Papa
Richard De Schutter
Rolf Stomberg

Total

1 January 2009
Options

Shares

31 December 2009
Options

Shares

17 March 2010 (i)
Options
Shares

151,792
144,690
16,990
–
–
8,500
59,501
20,000
–
250,000
13,100

664,573

–
550,527
258,005
–
–
–
–
–
–
–
–

808,532

154,531
172,005
78,898
–
–
8,500
59,501
20,000
5,000
250,000
13,100

761,535

–
597,740
323,008
–
–
–
–
–
–
–
–

920,748

154,531
257,824
131,187
10,000
–
8,500
59,501
20,000
5,000
250,000
13,100

–
576,362
294,995
–
–
–
–
–
–
–
–

909,643

871,627

(i)
(ii)

The latest practicable date for this Annual Report.
In addition, David Illingworth holds 50,000 Deferred Shares. Following the redenomination of Ordinary Shares into US dollars on
23 January 2006, the Company issued 50,000 Deferred Shares. These shares are normally held by the Chief Executive and are not listed
on any Stock Exchange and have extremely limited rights attached to them.

The total holdings of the directors represent less than 1% of the Ordinary Share Capital of the Company.

The register of directors’ interests, which is open to inspection at the Company’s registered office, contains full
details of directors’ shareholdings and share options.

Total Shareholder Return
Schedule 8 to the Regulations requires a graph to be published showing the Company’s TSR against the TSR
performance of a broad equity market index. As a component of the FTSE100 index, a graph of the Company’s
TSR performance compared to that of the TSR of the FTSE100 index is shown below.

Smith & Nephew - Five year Total Shareholder Return 
(measured in UK sterling)

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80%

60%

40%

20%

0%

-20%

-40%

31-Dec-04

31-Dec-05

31-Dec-06

31-Dec-07

31-Dec-08

31-Dec-09

Smith & Nephew

FTSE 100

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The Remuneration Committee, however, compares the company’s performance to a tailored sector peer group of
medical devices companies (see page 65), when considering TSR performance in the context of the 2004
Performance Share Plan. The following graph therefore also shows the TSR performance of this peer group over a
comparable period.

Smith & Nephew - Five year Total Shareholder Return 
(measured in US dollars)

80%

60%

40%

20%

0%

-20%

-40%

-60%

31-Dec-04

31-Dec-05

31-Dec-06

31-Dec-07

31-Dec-08

31-Dec-09

Smith & Nephew

Medical Devices (Median)

By order of the Board, 18 March 2010

Susan Henderson
Company Secretary

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ACCOUNTS

Directors’ responsibilities for the accounts
Directors’ responsibility statement pursuant to disclosure and transparency rule 4
Independent auditors’ UK report
Independent auditors’ US reports
Group income statement
Group statement of comprehensive income
Group balance sheet
Group cash flow statement
Group statement of changes in equity
Notes to the Group accounts
Parent Company auditors’ report
Parent Company balance sheet
Notes to the Parent Company accounts

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77
78
80
82
82
83
84
85
86
137
139
140

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DIRECTORS’ RESPONSIBILITIES FOR THE ACCOUNTS

The directors are responsible for preparing the Group and Parent Company accounts in accordance with
applicable United Kingdom law and regulations. As a consequence of the Parent Company’s Ordinary Shares
being traded on the New York Stock Exchange (in the form of American Depositary Shares) the directors are
responsible for the preparation and filing of an annual report on Form 20-F with the US Securities and Exchange
Commission.

The directors are required to prepare Group accounts for each financial year, in accordance with the International
Financial Reporting Standards (“IFRS”) as adopted by the European Union which present fairly the financial
position of the Group and the financial performance and cash flows of the Group for that period. In preparing
those Group accounts, the directors are required to:

•

•

•

•

Select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors and then apply them consistently;

Present information, including accounting policies, in a manner that provides relevant, reliable, comparable
and understandable information;

Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to
enable users to understand the impact of particular transactions, other events and conditions on the Group’s
financial position and financial performance; and

State that the Group has complied with IFRS, subject to any material departures disclosed and explained in
the accounts.

Under United Kingdom law the directors have elected to prepare the Parent Company accounts in accordance
with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and
applicable law), which are required by law to give a true and fair view of the state of affairs of the Parent Company
and of the profit or loss of the Parent Company for that period. In preparing the Parent Company accounts, the
directors are required to:

•

Select suitable accounting policies and then apply them consistently;

• Make judgements and estimates that are reasonable and prudent;

•

•

State whether applicable UK Accounting Standards have been followed, subject to any material departures
disclosed and explained in the accounts; and

Prepare the accounts on a going concern basis unless it is inappropriate to presume that the company will
continue in business.

The directors confirm that they have complied with the above requirements in preparing the accounts.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at
any time the financial position of the Group and the Parent Company and enable them to ensure that the
accounts comply with the Companies Act 2006 and, in the case of the Group accounts, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets of the Group and the Parent Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial
information
included on the Group’s website. It should be noted that information published on the internet is accessible in
many countries with different
requirements. Legislation in the UK governing the preparation and
legal
dissemination of accounts may differ from legislation in other jurisdictions.

76

DIRECTORS’ RESPONSIBILITY STATEMENT PURSUANT TO DISCLOSURE AND
TRANSPARENCY RULE 4

The directors confirm that, to the best of each person’s knowledge:

•

•

•

the Group accounts in this report, which have been prepared in accordance with IFRS as adopted by the
European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS,
give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole;

the Parent Company accounts in this report, which have been prepared in accordance with United Kingdom
Generally Accepted Accounting Practice and the Companies Act 2006, give a true and fair view of the
assets, liabilities, financial position and profit of the Parent Company; and

the “Business Review, Liquidity and Prospects” contained in the accounts includes a fair review of the
development and performance of the business and the financial position of the Parent Company and the
Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board, 18 March 2010

Susan Henderson
Company Secretary

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INDEPENDENT AUDITORS’ UK REPORT

Independent Auditors’ Report to the Members of Smith & Nephew plc

We have audited the group accounts of Smith & Nephew plc for the year ended 31 December 2009 which
comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Balance
Sheet, the Group Cash Flow Statement, the Group Statement of Changes in Equity and the related notes 1 to 38.
The financial reporting framework that has been applied in their preparation is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 76 the directors are
responsible for the preparation of the group accounts and for being satisfied that they give a true and fair view.
Our responsibility is to audit the group accounts in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s)
Ethical Standards for Auditors.

Scope of the audit of the accounts
An audit involves obtaining evidence about the amounts and disclosures in the accounts sufficient to give
reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies are appropriate to the group’s circumstances
and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the accounts.

Opinion on accounts
In our opinion the group accounts:

•

•

•

give a true and fair view of the state of the group’s affairs as at 31 December 2009 and of its profit for the
year then ended;

have been properly prepared in accordance with IFRSs as adopted by the European Union; and

have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the
IAS Regulation.

Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the group accounts are
prepared is consistent with the group accounts.

Matters on which we are required to report by exception
We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

•

•

certain disclosures of directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

•

•

the directors’ statement, set out on page 42, in relation to going concern; and

the part of the Corporate Governance Statement relating to the company’s compliance with the nine
provisions of the June 2008 Combined Code specified for our review.

78

Other matter
We have reported separately on the parent company accounts of Smith & Nephew plc for the year ended
31 December 2009 and on the information in the Directors’ Remuneration Report that is described as having
been audited.

Separate Opinion in Relation to IFRSs
As explained in Note 1 to the Group accounts, the Group in addition to complying with its legal obligation to
comply with IFRS as adopted by the European Union, has also compiled with IFRS as issued by the International
Accounting Standards Board.

In our opinion the group accounts give a true and fair view, in accordance with IFRS, of the state of the Group’s
affairs as at 31 December 2009 and of its profit for the year then ended.

Leslie Clifford (Senior Statutory Auditor)
for and behalf of Ernst & Young LLP Statutory Auditor
London
18 March 2010

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INDEPENDENT AUDITORS’ US REPORTS

Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of
Smith & Nephew plc

We have audited the accompanying Group balance sheets of Smith & Nephew plc as of 31 December 2009 and
2008, and the related Group income statements, Group statements of comprehensive income, Group cash flow
statements and Group statements of changes in equity for each of the three years in the period ended
31 December 2009. These accounts are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these accounts based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the accounts are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the accounts, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall account presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the accounts referred to above present fairly, in all material respects, the consolidated financial
position of Smith & Nephew plc at 31 December 2009 and 2008, and the consolidated results of its operations
in accordance with
and cash flows for each of the three years in the period ended 31 December 2009,
International Financial Reporting Standards as issued by the International Accounting Standards Board and
International Financial Reporting Standards as adopted by the European Union.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Smith & Nephew plc’s internal control over financial reporting as of 31 December 2009, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organisations of the Treadway Commission and our report dated 18 March 2010 expressed an unqualified
opinion thereon.

Ernst & Young LLP
London, England
18 March 2010

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Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of
Smith & Nephew plc

We have audited Smith & Nephew plc’s internal control over financial reporting as of 31 December 2009, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organisations of
is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on
Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.

the Treadway Commission (the COSO criteria). Smith & Nephew plc’s management

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect
(2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorisations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.

the transactions and dispositions of

the assets of

the company;

its inherent

Because of
reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

internal control over

limitations,

financial

In our opinion, Smith & Nephew plc maintained, in all material respects, effective internal control over financial
reporting as of 31 December 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Group balance sheets of Smith & Nephew plc as of 31 December 2009 and 2008, and the
related Group income statements, Group statements of comprehensive income, Group cash flow statements and
Group statements of changes in equity for each of the three years in the period ended 31 December 2009 and
our report dated 18 March 2010 expressed an unqualified opinion thereon.

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Ernst & Young LLP
London, England
18 March 2010

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GROUP INCOME STATEMENT

Revenue
Cost of goods sold

Gross profit
Selling, general and administrative expenses
Research and development expenses

Operating profit
Interest receivable
Interest payable
Other finance (costs)/income
Share of results of associates

Profit before taxation
Taxation

Attributable profit for the year (i)

Earnings per Ordinary Share (i)
Basic
Diluted

Notes

3

4

3 & 4
8
8
9
16

10

12

Years ended 31 December
2009
$ million

2008
$ million

2007
$ million

3,772
(1,030)

2,742
(1,864)
(155)

723
2
(42)
(15)
2

670
(198)

472

3,801
(1,077)

2,724
(1,942)
(152)

630
5
(71)
(1)
1

564
(187)

377

3,369
(994)

2,375
(1,740)
(142)

493
10
(40)
6
–

469
(153)

316

53.4¢
53.3¢

42.6¢
42.4¢

34.2¢
34.1¢

GROUP STATEMENT OF COMPREHENSIVE INCOME

Years ended 31 December
2009
$ million

2008
$ million

2007
$ million

Attributable profit for the year (i)

Other comprehensive income:

Cash flow hedges — interest rate swaps
— losses arising in the year
— losses transferred to income statement for the year
Cash flow hedges — forward foreign exchange contracts
— (losses)/gains arising in the year
— losses/(gains) transferred to inventories for the year
Exchange differences on translation
Exchange on borrowings classified as net investment hedges
Actuarial gains/(losses) on retirement benefit obligations
Taxation on items relating to components of other

comprehensive income

Other comprehensive income/(expense) for the year, net of

taxation

Total comprehensive income for the year (i)

472

377

316

(3)
13

(15)
7
63
(3)
41

(12)

91

563

(13)
2

21
(6)
(57)
(42)
(215)

71

(239)

138

(2)
–

(12)
–
94
(47)
(22)

8

19

335

(i)

Attributable to equity holders of the Parent Company and wholly derived from continuing operations.

The Notes on pages 86 to 136 are an integral part of these accounts.

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GROUP BALANCE SHEET

Notes

At 31 December

2009
$ million

2008
$ million

ASSETS
Non-current assets:
Property, plant and equipment
Goodwill
Intangible assets
Investments
Investments in associates
Deferred tax assets

Current assets:
Inventories
Trade and other receivables
Cash and bank

Assets held for sale

TOTAL ASSETS

EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent:
Share capital
Share premium
Treasury shares
Other reserves
Retained earnings

Total equity

Non-current liabilities:
Long-term borrowings
Retirement benefit obligations
Other payables due after one year
Provisions due after one year
Deferred tax liabilities

Current liabilities:
Bank overdrafts and loans due within one year
Trade and other payables due within one year
Provisions due within one year
Current tax payable

Total liabilities

TOTAL EQUITY AND LIABILITIES

13
17
14
15
16
24

18
19
20

32

25

27

20
35
22
23
24

20
22
23

753
1,093
412
7
13
202

2,480

933
946
192

725
1,189
376
7
12
214

2,523

879
961
145

2,071

1,985

14

4,565

–

4,508

190
382
(794)
63
2,338

2,179

1,090
322
27
53
31

1,523

45
596
55
167

863

2,386

4,565

190
375
(823)
1
1,956

1,699

1,358
350
36
51
46

1,841

115
607
54
192

968

2,809

4,508

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The accounts were approved by the Board and authorised for issue on 18 March 2010 and are signed on its
behalf by: John Buchanan Chairman David J. Illingworth Chief Executive Adrian Hennah Chief Financial Officer

The Notes on pages 86 to 136 are an integral part of these accounts.

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GROUP CASH FLOW STATEMENT

Net cash inflow from operating activities
Profit before taxation
Net interest payable
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment

and software

Share based payment expense
Utilisation of Plus inventory stepped-up on acquisition
Share of results of associates
Increase in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables and

provisions

Cash generated from operations (i) (ii)
Interest received
Interest paid
Income taxes paid

Net cash inflow from operating activities

Cash flows from investing activities
Acquisitions
Cash acquired with acquisitions
Cash received from Plus settlement
Capital expenditure
Proceeds on disposal of property, plant and

equipment and software

Net cash used in investing activities

Cash flows from financing activities
Proceeds from issue of ordinary share capital
Treasury shares purchased
Proceeds on borrowings due within one year
Settlement of borrowings due within one year
Repayment of Loan Notes
Proceeds on borrowings due after one year
Settlement of borrowings due after one year
Proceeds from own shares
Settlement of currency swaps
Equity dividends paid

Net cash (used in)/provided by financing activities

Net increase/(decrease) in cash and cash

equivalents

Cash and cash equivalents at beginning of year
Exchange adjustments

Cash and cash equivalents at end of year

Notes

31
31
31

29
29
29
29
29

29

29
29

29

Years ended 31 December
2009
$ million

2008
$ million

2007
$ million

670
40
298

14
18
–
(2)
(17)
46

(37)

1,030
2
(43)
(270)

719

(25)
–
137
(318)

–

(206)

7
–
–
(66)
–
526
(814)
10
(12)
(120)

(469)

44
122
8

174

564
66
275

12
24
15
(1)
(117)
(54)

31

815
5
(68)
(186)

566

(16)
–
–
(292)

3

(305)

19
(193)
–
(49)
–
1,108
(1,028)
4
5
(109)

(243)

18
109
(5)

122

469
30
228

9
23
64
–
(84)
(35)

(11)

693
10
(40)
(225)

438

(799)
18
–
(200)

6

(975)

28
(640)
1,812
(611)
(17)
–
(106)
–
(14)
(105)

347

(190)
291
8

109

(i)

Includes $32m (2008 — $28m, 2007 — $39m) of outgoings on restructuring and rationalisation expenses.

(ii) After $22m (2008 — $48m, 2007 — $33m) of acquisition related costs and $5m (2008 — $10m, 2007 — $23m) unreimbursed by
insurers relating to macrotextured knee revisions (offset by a receipt of $22m in 2007 from a successful legal settlement). In 2007, this
also includes the legal settlement of $30m.

The Notes on pages 86 to 136 are an integral part of these accounts.

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GROUP STATEMENT OF CHANGES IN EQUITY

Share
capital
$ million

Share
premium
$ million

Treasury
shares (ii)
$ million

Other
reserves (iii)
$ million

Retained
earnings
$ million

Total
equity
$ million

At 1 January 2007
Total comprehensive income (i)
Equity dividends declared and paid
Share based payment recognised
Treasury shares purchased
Cost of shares transferred to

beneficiaries

Issue of ordinary share capital (iv)

At 1 January 2008
Total comprehensive income (i)
Equity dividends declared and paid
Share based payment recognised
Treasury shares purchased
Cost of shares transferred to

beneficiaries

Issue of ordinary share capital (iv)

At 1 January 2009
Total comprehensive income (i)
Equity dividends declared and paid
Share based payment recognised
Deferred taxation on share based

payment

Cost of shares transferred to

beneficiaries

Issue of ordinary share capital (iv)

189
–
–
–
–

–
1

190
–
–
–
–

–
–

190
–
–
–

–

–
–

329
–
–
–
–

–
27

356
–
–
–
–

–
19

375
–
–
–

–

–
7

(1)
–
–
–
(640)

4
–

(637)
–
–
–
(193)

7
–

(823)
–
–
–

–

29
–

63
33
–
–
–

–
–

96
(95)
–
–
–

–
–

1
62
–
–

–

–
–

1,594
302
(104)
23
–

(4)
–

1,811
233
(109)
24
–

(3)
–

1,956
501
(120)
18

2

(19)
–

2,174
335
(104)
23
(640)

–
28

1,816
138
(109)
24
(193)

4
19

1,699
563
(120)
18

2

10
7

At 31 December 2009

190

382

(794)

63

2,338

2,179

(i)

(ii)

Attributable to equity holders of the Parent Company and wholly derived from continuing operations.

Refer to Note 27 of the Group Financial Statements for further information.

(iii) Other reserves comprise gains and losses on cash flow hedges, exchange differences on translation of foreign operations and the
difference arising as a result of translating share capital and share premium at the rate on the date of redenomination instead of the rate
at the balance sheet date. The cumulative translation adjustments within Other Reserves at 31 December 2009 were $71m (2008 —
$11m, 2007 — $110m).

(iv)

Issue of ordinary share capital as a result of options being exercised.

(v) As part of the acquisition of Plus Orthopedics Holdings AG, the group recognised $4m of minority interest. Subsequent to the acquisition
the group acquired the minority interests resulting in a reduction of minority interest of $4m. Both transactions occurred in the 2007
financial year.

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The Notes on pages 86 to 136 are an integral part of these accounts.

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NOTES TO THE GROUP ACCOUNTS

1. General Information

Smith & Nephew plc (the “Company”) is a public limited company incorporated in England and Wales. In
these accounts, “Group” means the Company and all its subsidiaries. The principal activities of the Group
are to develop, manufacture, market and sell medical devices in the sectors of Orthopaedics, Endoscopy
and Advanced Wound Management.

Presentationoffinancialinformation
As required by the European Union’s IAS Regulation and the Companies Act 2006, the Group has prepared
its accounts in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the
European Union (“EU”) effective as at 31 December 2009. 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 2009. IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB.
However, the differences have no impact for the periods presented.

2(a). Accounting Policies

the presentation and disclosure of

The Group has adopted IFRS 8 Operating Segments and the revised standard IAS 1 Presentation of Financial
Statements. These impact
the primary statements and disclosed
information by way of notes, and therefore no comparative amounts require restatement. In addition, the
Group has adopted the IFRS 2 Amendment regarding Vesting Conditions and Cancellations, the revised IAS
23 Borrowing Costs on capitalisation of interest; Amendments to IAS 32 Financial Instruments: Presentation
and IAS 1 Presentation of Financial Statements on financial instruments puttable at fair value and obligations
arising on liquidation; Amendments to IAS 27 Consolidated and Separate Financial Statements on cost of an
investment in a subsidiary or associate; and an Amendment to IAS 39 Financial Instruments: Recognition
and Measurement on eligible hedged items. None of the before mentioned standards nor any other
standard or interpretation coming into effect during the year had a significant effect on the reported results
or the financial position of the Group.

The significant accounting policies adopted in the preparation of the Group’s accounts are set out below:

BasisofPreparation
The preparation of accounts in conformity with IFRS requires management
to use estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the
reporting period. The accounting policies requiring management
to use significant estimates and
assumptions are discussed under Critical Accounting Policies within the “Business Review, Liquidity and
Prospects” section on pages 29 and 30. Although these estimates are based on management’s best
knowledge of current events and actions, actual results ultimately may differ from those estimates.

Consolidation
The Group accounts include the accounts of Smith & Nephew plc (the “Company”) and its subsidiaries for
the periods during which they were members of the Group.

A subsidiary is an entity controlled by the Group. Subsidiaries are included in the Group accounts from the
date that the Group obtains control. Intercompany transactions, balances and unrealised gains and losses
on transactions between group companies are eliminated on consolidation.

identifiable assets and liabilities (including contingent

BusinessCombinationsandGoodwill
On acquisition,
liabilities) of subsidiaries and
associates are measured at their fair values at the date of acquisition using the purchase method. The fair
value of assets includes the taxation benefits resulting from amortisation for income taxation purposes from
which a third party separately acquiring the assets would reasonably be expected to benefit. Goodwill,
representing the excess of purchase consideration over the Group’s share of the fair value of net assets

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2(a). Accounting Policies — (continued)

BusinessCombinationsandGoodwill(continued)
acquired, is capitalised. Goodwill is not amortised but is reviewed for impairment annually. For purposes of
impairment testing, goodwill is allocated to the related cash-generating units monitored by Management,
being the operating segment level.

InvestmentsinAssociates
Investments in associates, being those entities over which the Group has a significant influence and which
is neither a subsidiary or a joint venture, are accounted for using the equity method, with the Group
recording its share of the associate’s net income and equity. The Group’s share in the results of its
associates is included in one separate income statement line and is calculated after deduction of their
respective taxes.

Revenue
Revenue comprises sales of products and services to third parties at amounts invoiced net of trade
discounts and rebates, excluding taxes on revenue. Revenue from the sale of products is recognised upon
transfer to the customer of the significant risks and rewards of ownership. This is generally when goods are
delivered to customers. 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.
Appropriate provisions for returns,
trade discounts and rebates are deducted from revenue. Rebates
comprise retrospective volume discounts granted to certain customers on attainment of certain levels of
purchases from the Group. These are accrued over the course of the arrangement based on estimates of
the level of business expected and adjusted at the end of the arrangement to reflect actual volumes.

ForeignCurrencies
Balance sheet items of foreign operations and foreign currency borrowings are translated into US Dollars on
consolidation at year end rates of exchange. Income statement items and the cash flows of overseas
subsidiary undertakings and associated undertakings are translated at average rates as an approximation to
actual transaction rates, with actual transaction rates used for large one off transactions.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and
liabilities of the foreign entity and translated at the closing rate.

Transactions in foreign currencies are recorded at the exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange
ruling at the balance sheet date.

The following are recorded as movements in ‘Other reserves’ within other comprehensive income: exchange
differences on the translation at closing rates of exchange of non-US Dollar opening net assets; the
differences arising between the translation of profits into US Dollars at average and closing exchange rates;
to the extent that the hedging relationship is effective, the difference on translation of foreign currency
borrowings or swaps that are used to finance or hedge the Group’s net investments in foreign operations;
and the movement in the fair value of forward foreign exchange contracts used to hedge forecast foreign
exchange cash flows. All other exchange differences are taken to the income statement.

Taxation
The charge for current taxation is based on the results for the year as adjusted for items which are
non-assessable or disallowed. It is calculated using rates that have been enacted or substantively enacted
by the balance sheet date.

temporary
Deferred taxation is accounted for using the balance sheet
differences arising between the carrying amount of assets and liabilities in the accounts and the
corresponding tax bases used in computation of taxable profit.

liability method in respect of

Deferred tax liabilities are recognised for all taxable temporary differences except in respect of investments
in subsidiaries where the Group is able to control the timing of the reversal of the temporary difference and it

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2(a). Accounting Policies — (continued)

Taxation(continued)
is probable that this will not reverse in the foreseeable future; on the initial recognition of non-deductible
goodwill; and on the initial recognition of an asset or liability in a transaction that is not a business
combination and that, at the time of the transaction, does not affect the accounting or taxable profit.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available
against which the temporary difference can be utilised. Their carrying amount is reviewed at each balance
sheet date on the same basis.

Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or
substantively enacted by the balance sheet date that are expected to apply in the periods in which the asset
or liability is settled. It is recognised in the income statement except when it relates to items credited or
charged directly to other comprehensive income or equity, in which case the deferred tax is also dealt with
in other comprehensive income or equity respectively.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation
authority, when the Group intends to settle its current tax assets and liabilities on a net basis and that
authority permits the Group to make a single net payment.

AdvertisingCosts
Expenditure on advertising costs is expensed as incurred.

IntangibleAssets
Intangible assets acquired separately (including purchased patents, know-how, trademarks, licences and
distribution rights) are initially measured at cost. The cost of intangible assets acquired in a material
business combination (referred to as acquisition intangibles) is the fair value as at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any
accumulated impairment losses. All
intangible assets are amortised on a straight line basis over their
estimated useful economic lives. The estimated useful economic life of an intangible asset ranges between
three and 20 years depending on its nature. Internally generated intangible assets are expensed in the
income statement as incurred.

Purchased computer software and certain costs of
intangible assets. Software that is integral to computer hardware is capitalised as plant and equipment.

information technology projects are capitalised as

ResearchandDevelopment
The Group considers that the regulatory, technical and market uncertainties inherent in the development of
new products means that development costs should not be capitalised as intangible assets until products
from the appropriate regulatory body. Substantially all development expenditure is
receive approval
complete by the time the product
is submitted for regulatory approval. Consequently the majority of
expenditure on research and development is expensed as incurred.

Property,PlantandEquipment
Property, plant and equipment are stated at cost less depreciation and provision for impairment where
appropriate. Freehold land is not depreciated. Freehold buildings are depreciated on a straight-line basis at
between 2% and 5% per annum. Leasehold land and buildings are depreciated on a straight-line basis over
the shorter of their estimated useful economic lives and the terms of the leases.

Plant and equipment is depreciated over lives ranging between three and 20 years by equal annual
instalments to write down the assets to their estimated residual value at the end of their working lives.
Assets in course of construction are not depreciated until they are brought into use.

Finance costs relating to the purchase or construction of property, plant and equipment and intangible
assets that take longer than one year to complete are capitalised based on the Group weighted average
borrowing costs. All other finance costs are expensed as incurred.

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2(a). Accounting Policies — (continued)

Impairmentofassets
The recoverable amount of cash-generating units to which goodwill has been allocated is tested for
impairment annually or when events or changes in circumstances indicate that it might be impaired.

The carrying values of property, plant and equipment, and intangible assets are reviewed for impairment
when events or changes in circumstances indicate the carrying value may be impaired. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss.
Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the
recoverable amount of the cash-generating unit to which it belongs.

An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to
sell and its value-in-use. In assessing value-in-use, its estimated future cash flow is discounted to its
present value using a pre-tax discount rate that reflects the current market assessments of the time value of
money and the risks specific to the asset.

In carrying out impairment reviews of goodwill and intangible assets a number of significant assumptions
have to be made when preparing cash flow projections. These include annual sales growth, trading margins,
capital utilisation and anticipated volume and value growth in the markets served by the Group. If actual
results should differ, or changes in expectations arise, impairment charges may be required which would
adversely impact operating results.

Leases
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and
rewards of ownership to the Group. All other leases are classified as operating leases.

Assets held under finance leases are capitalised as property, plant or equipment and depreciated
accordingly. The capital element of future lease payments is included in borrowings and interest is charged
to profit before taxation on a reducing balance basis over the term of the lease.

Rentals payable under operating leases are expensed in the income statement on a straight line basis over
the term of the relevant lease.

InvestmentsandOtherFinancialAssets
Investments, other than those related to associates, are initially recorded at fair value plus transaction costs
on the trade date. The Group holds an investment in an entity that holds mainly unquoted equity securities,
which is classed as “available-for-sale” and carried at fair value. The fair value of the investment is based on
the underlying fair value of the equity securities: marketable securities are valued by reference to closing
prices in the market; non-marketable securities are estimated considering factors including the purchase
price, prices of recent significant private placements of securities of the same issuer and estimates of
liquidation value. Changes in fair value are recognised in other comprehensive income except where
management considers that there is objective evidence of an impairment of the underlying equity securities,
whereupon an impairment is recognised as an expense immediately.

Loans and receivables are carried at amortised cost, less any allowances for uncollectible amounts. They are
included in current assets, except for maturities greater than 12 months after the balance sheet date. These
are classified as non-current assets. Loans and other receivables are classified as ‘Trade and other
receivables’ in the balance sheet.

Inventories
Finished goods and work-in-progress are valued at factory cost, including appropriate overheads, on a
first-in first-out basis. Raw materials and bought-in finished goods are valued at purchase price. All
inventories are reduced to net realisable value where lower than cost. Inventory acquired as part of a
business acquisition is valued at selling price less costs of disposal and a profit allowance for selling efforts.

Orthopaedic instruments are generally not sold but provided to customers and distributors for use in
surgery. They are recorded as inventory until they are deployed at which point they are transferred to plant
and equipment and depreciated over their useful economic lives of between three and five years.

89

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2(a). Accounting Policies — (continued)

Inventories(continued)
A feature of the orthopaedic business is the high level of product inventory required, some of which is
located at customer premises and is available for customers’ immediate use (referred to as consignment
inventory). Complete sets of product, including large and small sizes, have to be made available in this way.
These outer 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 or forecast 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
involves
management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old
products and efficiency of manufacturing planning systems.

it

DerivativeFinancialInstruments
instruments are recorded initially at fair value and then for reporting purposes are
Derivative financial
remeasured to fair value at subsequent balance sheet dates. The fair value of forward currency contracts is
calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair
value of interest rate swap contracts is determined by reference to market values for similar instruments.

Changes in the fair value of derivative financial instruments that are designated and effective as cash flow
hedges of
forecast third party and intercompany transactions are recognised in other comprehensive
income until the associated asset or liability is recognised. Amounts taken to other comprehensive income
are transferred to the income statement when the hedged transaction affects profit and loss. Where the
hedged item is the cost of a non-financial asset, the amounts taken to other comprehensive income are
transferred to the initial carrying value of the asset.

Currency swaps to match foreign currency net assets with foreign currency liabilities are fair valued at year
end. Changes in the fair values of currency swaps that are designated and effective as net investment
hedges are matched in other comprehensive income against changes in value of the related net assets.

Interest rate swaps transacted to fix interest rates on floating rate borrowings are accounted for as cash flow
hedges and changes in the fair values resulting from changes in market interest rates are recognised in
other comprehensive income.

Any ineffectiveness on hedging instruments and changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in the income statement within other finance
income/(costs) as they arise.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised,
or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging
instrument recognised in other comprehensive income is retained there until the forecast transaction occurs.
If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other
comprehensive income is transferred to the income statement for the period.

RecognitionofFinancialAssetsandLiabilities
Financial assets and liabilities are recognised on a trade date basis in the Group’s balance sheet when the
Group becomes party to the contractual provisions of the instrument. The Group carries borrowings in the
Balance Sheet at amortised cost.

RetirementBenefits
The Group’s major pension plans are of the defined benefit type. For these plans, the employer’s portion of
past and current service cost is charged to operating profit, with the interest cost net of expected return on
assets in the plans reported within other finance income/(costs). Actuarial gains or losses are recognised in
full directly in other comprehensive income such that the balance sheet reflects the plan’s surpluses or
deficits as at the balance sheet date.

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2(a). Accounting Policies — (continued)

RetirementBenefits(continued)
The defined benefit obligation is calculated annually by external actuaries using the projected unit credit
method. The present value of the defined benefit obligation is determined by discounting the estimated
future cash flows using interest rates of high-quality corporate bonds that are denominated in the currency
in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related
pension liability.

A number of key assumptions have to be made in calculating the fair value of the Group’s defined benefit
pension plans. These assumptions impact the balance sheet assets and liabilities, operating profit and
finance income/(costs). The most critical assumptions are the discount
inflation and mortality
assumptions to be applied to future pension plan liabilities. The most critical assumption for the plan assets
is the future expected return. In determining these assumptions management takes into account the advice
of professional external actuaries and benchmarks its assumptions against external data.

rate,

Where defined contribution plans operate, the contributions to these plans are charged to operating profit as
they become payable.

ShareBasedPayments
The Group operates a number of equity-settled executive and employee share plans. For all grants of share
options and awards, the fair value at the grant date is calculated using appropriate option pricing models
and the corresponding expense is recognised over the vesting period.

ContingenciesandProvisions
In the normal course of business the Group is involved in numerous legal disputes. Provision is made for
loss contingencies when it is deemed probable that an adverse outcome will occur and the amount of the
loss can be reasonably estimated. Where the Group is the plaintiff in pursuing claims against third parties
legal and associated expenses are charged to the income statement as incurred. Contingent assets are not
recognised in the accounts.

The recognition of provisions for legal disputes is subject to a significant degree of estimation. 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
ultimate liability may differ from the amount provided depending on the outcome of court proceedings and
settlement negotiations or as new facts emerge.

The Group operates in multiple tax jurisdictions around the world and records provisions for taxation
liabilities and tax audits when it is considered probable that a tax charge will arise and the amount can be
reasonably estimated. Although Group policy is to submit its tax returns to the relevant tax authorities as
promptly as possible, at any time the Group has unagreed years outstanding and is involved in disputes and
tax audits. Significant issues may take many years to resolve. In estimating the probability and amount of
any tax charge management takes into account the views of internal and external advisors and updates the
amount of the provision whenever necessary. The ultimate tax liability may differ from the amount provided
depending on interpretations of tax law, settlement negotiations or changes in legislation.

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AdjustedEarningsPerShare
Adjusted earnings per share is a trend measure which presents the long-term profitability of the Group
excluding the impact of specific transactions that management considers affect the Group’s short-term
profitability. Adjusted attributable profit
is the numerator used for this measure. Reconciliation from
attributable profit to adjusted attributable profit is included in Note 12 of the Notes to the Group Accounts.
The Group has identified the following items, where material, as those to be excluded when arriving at
adjusted attributable profit: acquisition and disposal related items including amortisation of acquisition
intangible assets and impairments; significant restructuring events; gains and losses arising from legal
disputes and uninsured losses; and taxation thereon.

91

2(b). New Accounting Standards

New IFRS Accounting Standards
The following IFRS standards, which are relevant to the Group, have been issued by the International
Accounting Standards Board (“IASB”) but are not yet effective or have not yet been adopted by the Group.
Unless otherwise listed below, no other standard, amendment or interpretation is likely to have a material
effect on the Group’s results of operations or financial position.

In January 2008, the IASB issued a revised IFRS 3 Business Combinations standard and an amended IAS 27
Consolidated and Financial Statements standard. The Group will adopt these standards prospectively to all
business combinations on or after 1 January 2010. Whilst it is not possible to estimate the outcome of
adoption, the key features of the revised IFRS 3 include a requirement for acquisition-related costs to be
expensed and not included in the purchase price; and for contingent consideration to be recognised at fair
value on acquisition date (with subsequent changes recognised in the income statement and not as a
change to goodwill). The standard also changes the treatment of non-controlling interests (formerly minority
interests) with an option to recognise these at fair value as at the acquisition date and a requirement for
previously held non-controlling interests to be fair valued as at the date control is obtained, with gains and
losses recognised in the income statement.

IAS 27 revised no longer restricts the allocation to minority interest of losses incurred by a subsidiary to the
amount of the non-controlling equity investment in the subsidiary, as well as clarifying the accounting on
disposal of subsidiaries going forward. These revised standards have been endorsed by the EU.

In November 2009, the IASB issued IFRS 9 Financial Instruments. This standard specifies how the Group
should classify and measure financial assets. It requires all financial assets to be either classified on the
basis of the entity’s business model and the contractual cash flow characteristics of the financial asset or
initially measured at fair value. This standard has not been endorsed by the EU.

3(a). Operating Segment Information

For management purposes, the Group is organised into business units according to the nature of its
products and has three operating segments — Orthopaedics, Endoscopy and Advanced Wound
Management. The types of products and services offered by each operating unit are:

• Orthopaedic reconstruction implants include hip, knee and shoulder joints as well as ancillary products
such as bone cement and mixing systems used in cemented reconstruction joint surgery. Orthopaedic
trauma fixation products consist of internal and external devices and other products, including shoulder
fixation and orthobiological materials used in the stabilisation of severe fractures and deformity
correction procedures. Clinical therapies products are those that are applied in an orthopaedic office or
clinic setting and include bone growth stimulation, joint fluid therapies and outpatient spine products.

•

•

Smith & Nephew’s Endoscopy business develops and commercialises endoscopic (minimally invasive
surgery) techniques, educational programmes and value-added services for surgeons to treat and repair
soft tissue and articulating joints. The business focuses on the arthroscopy sector of the endoscopy
market. Arthroscopy is the minimally invasive surgery of joints, in particular the knee, shoulder and hip.

Smith & Nephew’s Advanced Wound Management business offers a range of products from initial
wound bed preparation through to full wound closure. These products are targeted at chronic wounds
associated with the older population, such as pressure sores and venous leg ulcers. There are also
products for the treatment of wounds such as burns and invasive surgery that impact the wider
population.

Management monitors the operating results of its business units separately for the purposes of making
decisions about resource allocation and performance assessment. Group financing (including interest
receivable and payable) and income taxes are managed on a group basis and are not allocated to operating
segments.

92

3(a). Operating Segment Information — (continued)

The following tables present revenue, profit, asset and liability information regarding the Group’s operating
segments.

Revenue by operating segment
Orthopaedics
Endoscopy
Advanced Wound Management

2009
$ million

2008
$ million

2007
$ million

2,135
791
846

3,772

2,158
800
843

3,801

1,858
732
779

3,369

There are no material sales between operating segments.

Trading profit is a trend measure which presents the long-term profitability of the Group excluding the
impact of specific transactions that management considers affect the Group’s short-term profitability. 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 including amortisation of acquisition intangibles and
impairments; significant restructuring events; gains and losses arising from legal disputes; and uninsured
losses. Operating profit reconciles to trading profit as follows:

Notes

2009
$ million

2008
$ million

2007
$ million

Operating profit
Acquisition related costs
Restructuring and rationalisation expenses
Legal settlement
Amortisation of acquisition intangibles and impairments

5
6
7
14 & 17

Trading profit

Trading profit by operating segment
Orthopaedics
Endoscopy
Advanced Wound Management

Operating profit by operating segment reconciled to attributable profit

for the year

Orthopaedics
Endoscopy
Advanced Wound Management

Operating profit
Net interest payable
Other finance (costs)/income
Share of results of associates
Taxation

Attributable profit for the year

723
26
42
–
66

857

508
189
160

857

410
169
144

723
(40)
(15)
2
(198)

472

630
61
34
–
51

776

481
166
129

776

382
146
102

630
(66)
(1)
1
(187)

377

493
111
42
30
30

706

423
147
136

706

243
141
109

493
(30)
6
–
(153)

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3(a). Operating Segment Information — (continued)

The share of results of associates is segmentally allocated to Orthopaedics.

2009

2007
$ million $ million $ million

2008

Capital expenditure
Orthopaedics
Endoscopy
Advanced Wound Management

Capital expenditure segmentally allocated above comprises:
Additions to property, plant and equipment
Additions to intangible assets

Capital expenditure as per cash flow statement
Capitalisation of finance leases
Transfers into property, plant and equipment from inventory
Acquisitions — Associates
Acquisitions — Goodwill
Acquisitions — Intangible assets
Acquisitions — Property, plant and equipment

Capital expenditure

Depreciation, amortisation and impairment
Orthopaedics
Endoscopy
Advanced Wound Management

235
41
63

339

216
102

318
–
–
–
3
12
6

339

206
52
40

298

219
29
45

293

259
33

292
–
–
–
–
1
–

293

177
57
41

275

946
46
85

1,077

184
16

200
7
11
10
532
239
78

1,077

157
40
31

228

Amounts comprise depreciation of property, plant and equipment, amortisation of other intangible assets,
impairment of investments and amortisation and impairment of acquisition intangibles as follows:

Impairment of intangibles and goodwill
Amortisation of acquisition intangibles

Depreciation of property, plant and equipment
Amortisation of other intangible assets
Impairment of investments

32
34

66
206
26
–

298

14
37

51
204
18
2

275

–
30

30
181
16
1

228

Impairments of $32m were recognised within operating profit in 2009 and included within the administrative
expenses line (2008 — $16m, 2007 — $1m). This is segmentally allocated as $19m Orthopaedics and
$13m Endoscopy (2008 — Orthopaedics $2m and Endoscopy $14m, 2007 — Orthopaedics $1m).

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3(a). Operating Segment Information — (continued)

Other significant non-cash expenses recognised within

operating profit

Orthopaedics
Endoscopy
Advanced Wound Management

2009
$ million

2008
$ million

2007
$ million

22
2
6
30

23
–
6
29

113
–
7
120

In 2008,

The $30m incurred in 2009 relates to acquisition related costs and restructuring and rationalisation
the $29m relates to the utilisation of Plus inventory stepped-up on acquisition,
expenses.
acquisition related costs and restructuring and rationalisation expenses. The $120m in 2007 relates to the
utilisation of Plus inventory stepped-up on acquisition, acquisition related costs,
restructuring and
rationalisation expenses and the increase in the macrotextured provision.

Average number of employees
Orthopaedics
Endoscopy
Advanced Wound Management

Balance Sheet
Assets:
Orthopaedics
Endoscopy
Advanced Wound Management
Operating assets by segment
Unallocated corporate assets
Total assets

Liabilities:
Orthopaedics
Endoscopy
Advanced Wound Management
Operating liabilities by segment
Unallocated corporate liabilities
Total liabilities

Unallocated corporate assets and liabilities comprise the following:

Deferred tax assets
Cash and bank
Unallocated corporate assets

Long-term borrowings
Retirement benefit obligations
Deferred tax liabilities
Current liability derivatives — credit balances on currency swaps
Bank overdrafts and loans due within one year
Current tax payable
Unallocated corporate liabilities

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2009
numbers

2008
numbers

2007
numbers

4,853
1,888
3,023
9,764

4,840
1,849
3,068
9,757

4,405
1,798
2,987
9,190

2009
$ million

2008
$ million

2007
$ million

2,656
705
810
4,171
394
4,565

426
111
194
731
1,655
2,386

202
192
394

1,090
322
31
–
45
167
1,655

2,755
690
704
4,149
359
4,508

448
107
189
744
2,065
2,809

214
145
359

1,358
350
46
4
115
192
2,065

2,668
705
782
4,155
306
4,461

404
105
211
720
1,925
2,645

136
170
306

36
184
57
2
1,442
204
1,925

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3(b). Geographic Information

Revenue by geographic market
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America

2009
$ million

2008
$ million

2007
$ million

286
1,027
1,664
795

3,772

321
1,077
1,657
746

3,801

309
868
1,550
642

3,369

Revenue has been allocated by basis of origin. No revenue from a single customer is in excess of 10% of
the group’s revenue.

Capital expenditure by geographic location
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America

46
45
174
74

339

30
64
149
50

293

33
842
170
32

1,077

Capital expenditure segmentally allocated above comprises additions of property, plant and equipment,
intangible assets, goodwill, investments and investments in associates. In 2007, additions are net of $7m of
assets capitalised under finance leases and $11m of assets transferred into property, plant and equipment
from inventory. No such adjustments were required in 2009 (2008 — nil).

Assets by geographic location
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America

326
864
899
189

283
978
908
140

405
969
906
126

Non-current operating assets by geographic location

2,278

2,309

2,406

United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America

455
609
575
254

271
518
753
298

282
495
690
282

Current operating assets by geographic location

1,893

1,840

1,749

Unallocated corporate assets (see page 95)

Total assets

394

4,565

359

4,508

306

4,461

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4. Operating Profit

Revenue
Cost of goods sold (i)

Gross profit

Research and development expenses
Selling, general and administrative expenses:
Marketing, selling and distribution expenses (ii)
Administrative expenses (iii) (iv)
BSN agency and management fees (vi)

Operating profit

2009
$ million

2008
$ million

2007
$ million

3,772
(1,030)

2,742

3,801
(1,077)

2,724

3,369
(994)

2,375

(155)

(152)

(142)

(1,368)
(519)
23

(1,864)

723

(1,436)
(533)
27

(1,942)

630

(1,278)
(487)
25

(1,740)

493

(i)

(ii)

2009 includes $15m of restructuring and rationalisation expenses and $12m of acquisition related costs (2008 — $15m in
respect of the utilisation of Plus inventory stepped-up to fair value on acquisition, $18m of restructuring and rationalisation
expenses and $8m of acquisition related costs, 2007 — $64m in respect of the utilisation of Plus inventory stepped-up to fair
value on acquisition, $7m of restructuring and rationalisation expenses and $6m of acquisition related costs).

2009 includes $7m of acquisition related costs and $10m of restructuring and rationalisation expenses (2008 — $7m of
acquisition related costs and $3m of restructuring and rationalisation expenses, 2007 — $12m of acquisition related costs and
$4m of restructuring and rationalisation expenses).

(iii)

Includes amortisation of intangible assets — other intangibles.

(iv) 2009 includes $7m of acquisition related costs and $17m of restructuring and rationalisation expenses and $66m of amortisation
acquisition intangibles and impairments (2008 — $31m of acquisition related costs, $13m of restructuring and rationalisation
expenses and $51m of amortisation of acquisition intangibles and impairments, 2007 — $29m of acquisition related costs, $31m
of restructuring and rationalisation expenses, $30m of legal settlement and $30m of amortisation of acquisition intangibles).

(v)

Items detailed in (i), (ii) and (iv) are excluded from the calculation of trading profit.

(vi) Agency fees of $23m (2008 — $27m, 2007 — $25m) were received in respect of services provided to BSN Medical for sales
force resource, physical distribution and logistics and administration in certain countries. The calculation of the fees is designed to
result in a neutral, cost-recovery position for the Group.

Operating Profit is stated after charging the following items:

Amortisation of acquisition intangibles
Amortisation of other intangible assets
Impairment of intangible assets and goodwill
Depreciation of property, plant and equipment
Loss on disposal of property, plant and equipment and software
Impairment of investments
Minimum operating lease payments for land and buildings
Minimum operating lease payments for other assets
Advertising costs

Staff costs during the year amounted to:

Wages and salaries
Social security costs
Pension costs (including retirement healthcare)
Share based payment

97

2009
$ million

2008
$ million

2007
$ million

34
26
32
206
14
–
27
28
39

37
18
14
204
12
2
28
29
56

30
16
–
181
9
1
26
26
48

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Notes

2009
$ million

2008
$ million

2007
$ million

35
26

768
86
64
18

936

795
87
53
24

959

691
79
42
23

835

5. Acquisition Related Costs

In 2009, “acquisition related costs” comprise $26m (2008 — $46m, 2007 — $51m) relating to the
integration of the Plus business. For 2008, this includes $15m (2007 — $64m) relating to the utilisation of
the stepped-up Plus inventory to fair value on acquisition. For 2007 this was reduced by a release of a $4m
accrual relating to the failed bid to purchase Biomet Inc.

6.

Restructuring and Rationalisation Expenses

In 2009, restructuring and rationalisation costs comprised $42m (2008 — $34m, 2007 — $42m) relating to
the Earnings Improvement Programme, mainly redundancy, consultancy and manufacturing rationalisation.

7.

Legal Settlement

The legal settlement of $30m in 2007 relates to the civil settlement agreed with the US Department of
Justice following an industry wide investigation.

8.

Interest (payable)/receivable

Interest receivable

Interest payable:
Bank borrowings
Other

Net interest payable

2009
$ million

2008
$ million

2007
$ million

2

5

10

(16)
(26)

(42)

(40)

(62)
(9)

(71)

(66)

(33)
(7)

(40)

(30)

Interest receivable includes net interest receivable of $nil (2008 — $1m, 2007 — $2m) on interest rate and
currency swaps and interest payable includes $23m (2008 — $7m, 2007 — $2m) of net interest payable on
currency and interest rate swaps. The gross interest receivable on these swaps was $14m (2008 — $5m,
2007 — $13m) and the gross interest payable was $37m (2008 — $11m, 2007 — $13m).

9. Other Finance (Costs)/Income

Retirement benefits: Interest cost
Retirement benefits: Expected return on plan assets
Other

35
35

Other finance (costs)/income

(61)
48
(2)

(15)

(66)
66
(1)

(1)

(56)
65
(3)

6

Notes

2009
$ million

2008
$ million

2007
$ million

Foreign exchange gains or losses recognised in the income statement arose primarily on the translation of
intercompany and third party borrowings and amounted to a net $14m gain in 2009 (2008 — net $4m loss,
2007 — net $14m gain). These amounts were fully matched in the income statement by the fair value gains
or losses on currency swaps (carried at fair value through profit and loss) held to manage this currency risk.

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10. Taxation

Current taxation:
UK corporation tax at 28% (2008 — 28%, 2007 — 30%)
Overseas tax

Current income tax charge
Adjustments in respect of prior periods

Total current taxation

Deferred taxation
Origination and reversal of temporary differences
Changes in tax rates
Adjustments to estimated amounts arising in prior periods

Total deferred taxation

Total taxation as per the income statement

Deferred taxation in other comprehensive income
Deferred taxation in equity

Taxation attributable to the Group

2009
$ million

2008
$ million

2007
$ million

50
189

239
(31)

208

(7)
–
(3)

(10)

198

12
(2)

208

45
178

223
(14)

209

(19)
–
(3)

(22)

187

(71)
–

116

69
147

216
(27)

189

(41)
4
1

(36)

153

(8)
–

145

The tax charge was reduced by $26m in 2009 (2008 — $30m, 2007 — $49m) as a consequence of
restructuring and rationalisation expenses, acquisition related costs, the legal settlement, amortisation of
acquisition intangibles and impairments.

The applicable tax for the year is based on the United Kingdom standard rate of corporation tax of 28%
(2008 — 28.5%, 2007 — 30%). Overseas taxation is calculated at the rates prevailing in the respective
jurisdictions. The average effective tax rate differs from the applicable rate as follows:

UK standard rate
Non-deductible/non-taxable items
Prior year items
Tax losses (utilised not previously recognised)/incurred not relieved
Overseas income taxed at other than UK standard rate

Total effective tax rate

2009
%

28.0
1.2
(4.8)
(0.1)
5.3

29.6

2008
%

28.5
1.4
(3.3)
1.1
5.5

33.2

2007
%

30.0
2.6
(5.7)
0.3
5.4

32.6

In 2008, the enacted UK tax rate applicable from 1 April 2009 was reduced to 28%. The Group resolved a
number of material disputes with various tax authorities in 2009. Following the resolution of these issues,
and progress on certain others, the Group released or amended relevant tax accruals.

11. Dividends

The following dividends were declared and paid in the year:
Ordinary second interim of 8.12¢ for 2008 (2007 — 7.38¢, 2006 —

6.71¢) paid 8 May 2009

Ordinary interim of 5.46¢ for 2009 (2008 — 4.96¢, 2007 — 4.51¢)

paid 3 November 2009

2009
$ million

2008
$ million

2007
$ million

72

48

120

66

43

109

63

41

104

99

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11. Dividends — (continued)

A second interim dividend for 2009 of 8.93 US cents per Ordinary Share was declared by the Board on
10 February 2010 and will be paid on 12 May 2010 to shareholders on the Register of Members on 23 April
2010. The estimated amount of this dividend on 17 March 2010 was $79m.

12. Earnings per Ordinary Share

The calculations of the basic, diluted and adjusted earnings per Ordinary Share are based on the following
earnings and numbers of shares:

Earnings
Attributable profit for the year
Adjusted attributable profit (see below)

2009
$ million

2008
$ million

2007
$ million

472
580

377
493

316
480

Adjusted attributable profit
Adjusted earnings per Ordinary Share is a trend measure which presents the long-term profitability of the
Group excluding the impact of specific transactions that management considers affect the Group’s short-
term profitability. The Group presents this measure to assist investors in their understanding of trends.
Adjusted attributable profit is the numerator used for this measure.

Attributable profit is reconciled to adjusted attributable profit as follows:

Attributable profit for the year
Acquisition related costs
Restructuring and rationalisation expenses
Legal settlement
Amortisation of acquisition intangibles and impairments
Taxation on excluded items

Adjusted attributable profit

Notes

2009
$ million

2008
$ million

2007
$ million

5
6
7
14 & 17
10

472
26
42
–
66
(26)

580

377
61
34
–
51
(30)

493

316
111
42
30
30
(49)

480

The numerators used for basic and diluted earnings per Ordinary Share are the same. The denominators
used for all categories of earnings for basic and diluted earnings per Ordinary Share are as follows:

Number of shares (millions)
Basic weighted average number of shares
Dilutive impact of share options outstanding

Diluted weighted average number of shares

Earnings per Ordinary share
Basic
Diluted
Adjusted: Basic
Adjusted: Diluted

2009

2008

2007

884
1

885

53.4¢
53.3¢
65.6¢
65.5¢

886
4

890

42.6¢
42.4¢
55.6¢
55.4¢

923
5

928

34.2¢
34.1¢
52.0¢
51.7¢

100

13. Property, Plant and Equipment

Cost
At 1 January 2008
Exchange adjustment
Additions
Disposals
Transfers

At 31 December 2008
Exchange adjustment
Acquisitions — (Note 31)
Additions
Disposals
Transfer to assets held for sale
Transfers

At 31 December 2009

Depreciation and Impairment
At 1 January 2008
Exchange adjustment
Charge for the year
Disposals

At 31 December 2008
Exchange adjustment
Charge for the year
Disposals
Transfer to assets held for sale
Transfers

At 31 December 2009

Net book amounts
At 31 December 2009
At 31 December 2008

Land and buildings

Plant and equipment

Freehold
$ million

Leasehold
$ million

Instruments
$ million

Other
$ million

Assets in
course of
construction
$ million

Total
$ million

147
(12)
18
–
–

153
5
–
4
–
(34)
1

129

44
(4)
4
–

44
1
10
–
(26)
–

29

100
109

53
(1)
4
(4)
2

54
2
–
3
(2)
–
(5)

52

18
–
3
(1)

20
1
4
(1)
–
(2)

22

30
34

706
(39)
140
(44)
4

767
35
–
133
(57)
–
11

889

403
(23)
123
(31)

472
22
131
(52)
–
2

575

314
295

723
(82)
55
(39)
12

669
32
6
75
(26)
–
28

784

461
(54)
74
(40)

441
22
61
(22)
–
–

502

282
228

39
(4)
42
–
(18)

59
2
–
1
–
–
(35)

27

–
–
–
–

–
–
–
–
–
–

–

1,668
(138)
259
(87)
–

1,702
76
6
216
(85)
(34)
–

1,881

926
(81)
204
(72)

977
46
206
(75)
(26)
–

1,128

27
59

753
725

Land and buildings includes land with a cost of $14m (2008 — $13m) that is not subject to depreciation.
Assets held under finance leases with a net book amount of $15m (2008 — $17m) are included in
leasehold land and buildings and $10m (2008 — $14m) are included in instruments, plant and equipment.

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14.

Intangible Assets

Cost
At 1 January 2008
Exchange adjustment
Acquisitions — (Note 31)
Disposals
Additions

At 31 December 2008
Exchange adjustment
Acquisitions — (Note 31)
Disposals
Additions

At 31 December 2009

Amortisation and Impairment
At 1 January 2008
Exchange adjustment
Charge for the year
Impairment
Disposals

At 31 December 2008
Exchange adjustment
Charge for the year
Impairment

At 31 December 2009

Net book amounts
At 31 December 2009

At 31 December 2008

Acquisition
intangibles
$ million

Software
$ million

Distribution
Rights
$ million

Patents &
Intellectual
Property
$ million

Total
$ million

403
(15)
1
(2)
–

387
18
12
–
–

417

67
(13)
37
14
(2)

103
9
34
13

159

258

284

47
(6)
–
–
27

68
3
–
(4)
44

111

7
(1)
9
–
–

15
1
13
–

29

82

53

29
(1)
–
–
5

33
–
–
–
34

67

24
(1)
3
–
–

26
1
8
–

35

32

7

67
(2)
–
–
1

66
1
–
–
24

91

29
(1)
6
–
–

34
–
5
12

51

40

32

546
(24)
1
(2)
33

554
22
12
(4)
102

686

127
(16)
55
14
(2)

178
11
60
25

274

412

376

In 2009, the Group incurred $25m (2008 — $14m) of impairment charges against certain intangible assets
arising from the acquisition of Osteobiologics Inc. and the pain management business.

15.

Investments

At 1 January
Impairment

At 31 December

2009
$ million

2008
$ million

7
–

7

9
(2)

7

The investment is an available-for-sale investment of a non-controlling interest in an entity that holds mainly
unquoted equity securities which by their very nature have no fixed maturity date or coupon rate. The fair
value of the unquoted equity securities has been estimated using a discounted cash flow model. At
year-end the Group assesses whether there is objective evidence that the investment is impaired. Any
objective evidence would include a significant or prolonged decline in the fair value of the investment below
its cost. The impairment in 2008 was recognised directly in the income statement.

102

16.

Investments in Associates

The Group holds 49% of the Austrian entities Plus Orthopedics GmbH and Intraplant GmbH and 20% of the
German entity Intercus GmbH. The following table summarises the financial position of
the Group’s
investment in these associates.

Share of results of associates:
Revenue
Operating costs and taxation

Profit after taxation recognised in the income statement
Dividends paid

Net profit attributable to the Group
Investments in associates at 1 January

Investments in associates at 31 December

Investments in associates is represented by:
Assets
Liabilities

Net assets
Goodwill

17. Goodwill

At 1 January
Exchange adjustment
Acquisitions
Impairment
Plus settlement
Adjustment to contingent consideration

At 31 December

2009
$ million

2008
$ million

10
(8)

2
(1)

1
12

13

14
(5)

9
4

13

11
(10)

1
–

1
11

12

10
(2)

8
4

12

Notes

2009
$ million

2008
$ million

31

31
31

1,189
20
3
(7)
(112)
–

1,093

1,225
(34)
–
–
–
(2)

1,189

Goodwill arising on acquisition is not amortised but reviewed for impairment on an annual basis. Goodwill is
allocated to the cash-generating unit that is expected to benefit from the acquisition. If the recoverable
amount of the cash-generating unit is less than its carrying amount then an impairment loss is determined to
have occurred. Any impairment losses that arise are recognised immediately in the income statement and
are allocated first to reduce the carrying amount of goodwill and then to the carrying amounts of the other
assets.

Each of the Group’s operating segments represent a cash-generating unit and include goodwill as follows:

Orthopaedics
Endoscopy
Advanced Wound Management

2009
$ million

2008
$ million

562
280
251

661
280
248

1,093

1,189

In September 2009 and 2008 impairment reviews were performed by comparing the recoverable amount of
each operating segment with its carrying amount, including goodwill. These are updated during December,
taking into account significant events that occurred between September and December.

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17. Goodwill — (continued)

During the year, an impairment was made for the goodwill relating to the pain management business
(contained within the Orthopaedics cash generating unit), which is held for sale.

(“CGU”)

For each cash generating unit
the recoverable amounts are based on value-in-use which is
calculated from pre-tax cash flow projections for five years using data from the Group’s budget and strategic
planning process, the results of which are reviewed and approved by the Board. These projections exclude
any estimated future cash inflows or outflows expected to arise from future restructurings. The five-year
period is in line with the Group’s strategic planning process. The growth rates used over the five year period
for the Orthopaedics business vary up to 8% (2008 — 10%), for the Endoscopy business up to 9% (2008 —
10%) and for the Advanced Wound Management business up to 8% (2008 — 12%).

The calculation of value-in-use for the three identified CGUs is most sensitive to discount and growth rates
as set out below:

The discount rate reflects management’s assessment of risks specific to the assets of each CGU. The
pre-tax discount rate used in the Orthopaedics business is 11% (2008 — 12%),
for the Endoscopy
businesses it is 12% (2008 — 12%) and for the Advanced Wound Management business it is 9% (2008 —
10%).

In determining the growth rate used in the calculation of the value-in-use, the Group considered the annual
sales growth and trading margins. Projections are based on anticipated volume and value growth in the
markets served by the Group and assumptions as to market share movements. Each year the projections for
the previous year are compared to actual results and variances are factored into the assumptions used in
the current year.

Specific considerations and strategies taken into account in determining the sales growth and trading
margin for each CGU are:

• Orthopaedics — In the Orthopaedic CGU management intends to deliver growth through continuing to
focus on the customer, high quality customer service, and innovative product development, and through
continuing to improve efficiencies.

•

Endoscopy — It is management’s intent to maintain and grow this CGU as the leading provider of
endoscopic techniques and technologies for joint and ligament repair. This is driven partly through the
growing acceptance of Endoscopy as a preferred surgical choice amongst physicians and patients,
product innovation, high quality customer service, and supporting surgeon educational programmes.

• Advanced Wound Management — Management intends to develop this CGU by focusing on the higher
added value sectors of exudate and infection management through improved wound bed preparation,
moist and active healing and negative pressure wound therapy, and by continuing to improve efficiency.

A growth rate of 4% (2008 — 4%) in pre-tax cash flows is assumed after five years in calculating a terminal
value for the Group’s CGUs. Management considers this to be an appropriate estimate based on the growth
rates of the markets in which the Group operates.

Capital expenditure represents the Group’s expected annual investment in property, plant and equipment
and other intangible assets. This is approximately 8% (2008 — 8%) of annual revenue.

Management has considered the following sensitivities:

• Growth of Market and Market Share — Management has considered the impact of a variance in market
growth and market share. The value-in-use calculation shows that if the assumed long-term growth rate
was reduced to nil, the recoverable amount of all of the CGUs independently would still be greater than
their carrying values.

• Discount Rate — Management has considered the impact of an increase in the discount rate applied to
the calculation. The value-in-use calculation shows that for the recoverable amount of the CGU to be
less than its carrying value, the discount rate would have to be increased to 31% for the Orthopaedics
business, 37% for the Endoscopy business and 39% for the Advanced Wound Management business.

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18.

Inventories

Raw materials and consumables
Work-in-progress
Finished goods and goods for resale

2009
$ million

2008
$ million

2007
$ million

157
28
748

933

131
32
716

879

124
36
674

834

In 2009 $92m (2008 — $69m, 2007 — $40m) was recognised as an expense resulting from the write down
of excess and obsolete inventory. $nil (2008 — $nil, 2007 — $23m) of inventory is carried at fair value less
costs to sell.

19. Trade and Other Receivables

Trade receivables
Less: provision for bad and doubtful debts

Trade receivables — net (loans and receivables)
Current asset derivatives — forward foreign exchange contracts
Other receivables
Amounts owed by associates
Prepayments and accrued income

2009
$ million

2008
$ million

2007
$ million

843
(47)

796
13
71
2
64

946

826
(40)

786
38
73
2
62

961

797
(22)

775
1
74
1
64

915

Management considers that the carrying amount of trade and other receivables approximates to the fair
value.

The provision for bad and doubtful debts is based on specific assessments of risk and reference to past
default experience. The bad debt expense (excluding the macrotextured claim) for the year was $33m
(2008 — $30m, 2007— $23m). Amounts due from insurers in respect of the macrotextured claim of $128m
(2008 — $124m, 2007— $114m) are included within other receivables and have been provided in full.

The Group manages credit risk through credit limits which require authorisation comensurate with the size of
the limit and which are regularly reviewed. Credit limit decisions are made based on available financial
information and the business case. Significant receivables are regularly reviewed and monitored at Group
level. The Group has no significant concentration of credit risk, with exposure spread over a large number of
customers. Furthermore the Group’s principal customers are backed by government and public or private
medical insurance funding, which represent a lower risk of default. The maximum exposure to credit risk at
the reporting date is the fair value of each class of receivable. The Group does not hold any collateral as
security.

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The amount of trade receivables that were past due but not impaired were as follows:

Past due not more than three months
Past due more than three months and not more than six months
Past due more than six months and not more than one year
Past due more than one year

Neither past due or impaired
Provision for bad and doubtful debts

Trade receivables — net

202
56
46
80

384
459
(47)

796

242
47
41
91

421
405
(40)

786

186
42
51
78

357
440
(22)

775

105

19. Trade and Other Receivables — (continued)

Movements in the provision for bad and doubtful debts were as follows:

2009
$ million

2008
$ million

2007
$ million

At 1 January
Exchange adjustment
Receivables provided for during the year
Utilisation of provision

At 31 December

40
1
33
(27)

47

Trade receivables include amounts denominated in the following major currencies:

US Dollar
Sterling
Euro
Other

Trade receivables — net

281
55
280
180

796

22
–
30
(12)

40

299
52
273
162

786

16
1
23
(18)

22

280
68
272
155

775

Trade receivables in the amount of $20m (2008 — $23m, 2007— $7m) are under a factoring agreement
with third parties. The arrangement does not qualify for de-recognition as the Group retains part of the credit
risks — the associated liability amounts to $12m (2008 — $20m, 2007 — $7m) and is accounted for as a
part of current payables.

20. Cash and Borrowings

Net debt comprises borrowings and credit balances on currency swaps less cash and bank.

Bank overdrafts and loans due within one year
Long-term borrowings

Borrowings
Cash and bank
Credit balances on currency swaps (current liability derivatives)
Net debt

Notes

2009
$ million

2008
$ million

45
1,090

1,135
(192)
–
943

115
1,358

1,473
(145)
4
1,332

22

106

20. Cash and Borrowings — (continued)

Borrowings are repayable as follows:

Within one
year or on
demand
$ million

Between
one and
two years
$ million

Between
two and
three years
$ million

Between
three and
four years
$ million

Between
four and
five years
$ million

After five
years
$ million

Total
$ million

24
18
3

45

86
23
5
1

115

1
–
3

4

1
–
4
–

5

1,066
–
3

1,069

1
–
3
1

5

–
–
3

3

1,329
–
3
–

1,332

–
–
2

2

–
–
2
–

2

–
–
12

12

–
–
14
–

14

1,091
18
26

1,135

1,417
23
31
2

1,473

At 31 December 2009:
Bank loans
Bank overdrafts
Finance lease liabilities

At 31 December 2008:
Bank loans
Bank overdrafts
Finance lease liabilities
Other loans

Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets
are as follows:

Secured bank overdrafts and loans
Secured long-term borrowings

Total amount of secured borrowings

Total net book value of assets pledged as security:
Trade receivables
Property, plant and equipment

2009
$ million

2008
$ million

4
24

28

–
28

28

37
28

65

31
34

65

All currency swaps are stated at fair value. Gross US Dollar equivalents of $95m (2008 — $95m) receivable
and $95m (2008 — $99m) payable have been netted and the difference of $nil (2008 — $4m) is reported
as a credit balance on currency swaps. Currency swaps comprise foreign exchange swaps and were used
in 2009 and 2008 to hedge intragroup loans.

Currency swaps mature as follows:

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Amount
receivable

$ million

28
17
35
6
1

87

Amount
payable
Currency
million

Aus$31
Yen1,500
C$37
CHF6
NZ$1

At 31 December 2009

Within one year:
Australian Dollar
Japanese Yen
Canadian Dollar
Swiss Franc
New Zealand Dollar

107

20. Cash and Borrowings — (continued)

At 31 December 2009

Sterling

At 31 December 2008

Australian Dollar
Euro
Japanese Yen
Canadian Dollar
Swiss Franc
New Zealand Dollar

At 31 December 2008

Euro
New Zealand Dollar

Amount
receivable

Currency
million

£5

Amount
receivable

$ million

13
14
15
17
12
9

80

Amount
receivable
Currency
million
€5
NZ$13

Amount
payable

$ million

8

Amount
payable

Currency
million

Aus$21
€10
Yen1,500
C$22
CHF13
NZ$16

Amount
payable

$ million

7
8

15

Liquidity Risk Exposures
The Board has established a set of policies to manage funding and currency risks. The Group uses
derivative financial
instruments only to manage the financial risks associated with underlying business
activities and their financing.

Liquidity risk is the risk that the Group is not able to settle or meet its obligations on time or at a reasonable
price. The Group’s policy is to ensure that
there is sufficient funding and facilities in place to meet
foreseeable borrowing requirements. The Group manages and monitors liquidity risk through regular
reporting of current cash and borrowing balances and periodic preparation and review of short and medium
term cash forecasts having regard to the maturities of investments and borrowing facilities.

Bank loans and overdrafts represent drawings under committed facilities of $2,503m and uncommitted
facilities of $415m. The Group has undrawn committed facilities of $1,436m. In 2008 the Group had
committed and uncommitted facilities of $2,512m and $340m respectively. Of the undrawn committed
facilities, $1m expires within one year and $1,435m after two but within five years (2008 — undrawn
committed facilities: $1,182m of which $10m expired within one year and $1,172m after two but within five
years). The interest payable on borrowings under committed facilities is at floating rate and is typically based
on the LIBOR interest rate relevant to the term and currency concerned. Borrowings are shown at book value
which is the same as fair value.

In May 2007, the Group entered into a committed $2,500m revolving multicurrency loan facility. This facility
comprises a $1,000m 364 day facility which was extended into a term loan for a further four years in May
2008 by the giving of notice by the Group and a five year $1,500m revolving loan facility. The term loan and
the drawings under the revolving facility are classified as borrowings due after one year. The margin payable
over LIBOR on the borrowings and the term loan is 25 basis points. The commitment fee on the undrawn
amount of the revolving facility is 7.5 basis points. The Group is subject to restrictive covenants under the
facility agreement requiring the Group’s ratio of net debt to EBITDA to not exceed 3.0 to 1 and the ratio of
EBITA to net interest to not be less than 3.0 to 1, with net debt (excluding derivatives), EBITDA, EBITA and net
interest all being calculated as defined in the agreement. These financial covenants are tested at the end of

108

20. Cash and Borrowings — (continued)

each half year for the 12 months ending on the last day of the testing period. As of 17 March 2010, the
Group was in compliance with these covenants. The facility is also subject to customary events of default,
none of which are currently anticipated to occur.

The table below analyses the Group’s year end financial liabilities by contractual maturity date, including
interest payments and excluding the impact of netting arrangements:

Within one
year or on
demand
$ million

Between one
and two
years
$ million

Between two
and five
years
$ million

After five
years
$ million

Total
$ million

At 31 December 2009:
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Acquisition consideration
Finance lease liabilities
Derivative financial liabilities:
Currency swaps/forward foreign
exchange contracts — outflow
Currency swaps/forward foreign
exchange contracts — inflow
Interest rate basis swaps — gross

outflow

Interest rate basis swaps — gross inflow

At 31 December 2008:
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Acquisition consideration
Finance lease liabilities
Other loans
Derivative financial liabilities:
Currency swaps/forward foreign
exchange contracts — outflow
Currency swaps/forward foreign
exchange contracts — inflow
Interest rate basis swaps — gross

outflow

Interest rate basis swaps — gross inflow

48
547
19
5

1,033

(1,023)

10
(5)

634

135
544
11
7
1

751

(747)

30
(16)

716

7
–
28
5

–

–

–
–

1,069
–
–
10

–

–

–
–

–
–
–
15

–

–

–
–

1,124
547
47
35

1,033

(1,023)

10
(5)

40

1,079

15

1,768

27
–
5
5
1

–

–

–
–

1,369
–
33
11
1

–

–

–
–

–
–
–
18
–

–

–

–
–

1,531
544
49
41
3

751

(747)

30
(16)

38

1,414

18

2,186

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The amounts in the tables above are undiscounted cash flows, which differ from the amounts included in the
balance sheet where the underlying cash flows have been discounted.

109

21. Financial Instruments and Risk Management

Foreign Exchange Exposures
The Group operates in 32 countries and as a consequence has transactional and translational foreign
exchange exposure. The Group’s policy is to limit the impact of foreign exchange movements on equity by
holding liabilities where practical
in the same currencies as the Group’s non US Dollar assets. These
liabilities take the form of either borrowings or currency swaps. The Group designates a portion of foreign
currency borrowings in non-operating units as net investment hedges. As at 31 December 2009, CHF261m
(2008 — CHF331m) of Group borrowings and CHF6m (2008 — $nil) of currency swaps were designated as
net investment hedges; the movement in the fair value of these hedges attributable to changes in exchange
rates is recognised directly in reserves. The fair value of these hedges at 31 December 2009 was $252m
(2008 — $311m). It is Group policy for operating units not to hold material unhedged monetary assets or
liabilities other than in their functional currencies.

Foreign exchange variations affect trading results in two ways. Firstly, on translation of overseas sales and
profits into US Dollars and secondly, transactional exposures arising where some or all of the costs of sale
are incurred in a different currency from the sale. The principal transactional exposures arise as the
proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion of sales in each of these
currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.

The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign
exchange contracts. The Group uses forward foreign exchange contracts, designated as cash flow hedges,
to hedge forecast third party and intercompany trading cash flows for forecast foreign currency inventory
purchases for up to one year. When a commitment is entered into, forward foreign exchange contracts are
used normally to increase the hedge to 100% of the exposure. Cash flows relating to cash flow hedges are
expected to occur within twelve months of inception and profits and losses on hedges are expected to enter
into the determination of profit (within cost of goods sold) within a further twelve month period. The principal
currencies hedged by forward foreign exchange contracts are US Dollars, Euros and Sterling. At
31 December 2009, the Group had contracted to exchange within one year the equivalent of $933m
(2008 — $652m).

Based on the Group’s borrowings as at 31 December 2009, if the US Dollar were to weaken against all
currencies by 10%, the Group’s net borrowings would increase by $52m (2008 — $78m). In respect of
borrowings held in the same currency as the relevant reporting entity, if the US Dollar were to weaken by
10% against all other currencies, the Group’s borrowings would increase by $63m (2008 — $52m).
Excluding borrowings designated as net investment hedges, the increase would be $37m (2008 — $21m),
this increase would be fully offset by corresponding movements in group loan values.

If the US Dollar were to weaken by 10% against all other currencies, then the fair value of the forward foreign
exchange contracts as at 31 December 2009 would have been $19m lower (2008 — $16m) which would be
recognised through the hedging reserve. Similarly,
if Euro were to weaken by 10% against all other
currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2009 would
have been $19m higher (2008 — $19m).

A 10% strengthening of the US Dollar against all other currencies at 31 December would have had the equal
but opposite effect to the amounts shown above, on the basis that all other variables remain constant.

Since it is the Group’s policy to hedge all actual foreign exchange exposures and the Group’s forward
foreign exchange contracts are designated as cash flow hedges, the net impact of transaction related
foreign exchange on the income statement from a movement in exchange rates is not significant.

Interest Rate Exposures
The Group is exposed to interest rate risk on cash, borrowings and currency swaps which are all at floating
rates. The Group uses floating to fixed interest swaps to meet its objective of protecting borrowing costs
within parameters set by the Board. Interest rate swaps are accounted for as cash flow hedges and, as
such, changes in fair value resulting from changes in market
interest rates are recognised in other
comprehensive income, with the fair value of the interest rate swaps recorded in the balance sheet. The
cash flows resulting from interest rate swaps match cash flows on the underlying borrowings so that there is

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21. Financial Instruments and Risk Management — (continued)

no net cash flow from movements in market interest rates on the hedged items. The Group had fixed future
interest rates on borrowings totalling $515m at 31 December 2009 (2008 — $819m) for a period of one
year.

Based on the Group’s borrowings as at 31 December 2009, if interest rates were to increase by 100 basis
points in all currencies then the annual net interest charge would increase by $4m (2008 — $5m). Excluding
the impact of the Group’s interest rate hedges, the increase in the interest charge would be $9m (2008 —
$13m). Similarly if interest rates were to increase by 100 basis points in all currencies, the fair value of the
Group’s interest rate swaps would increase equity by $5m (2008 — $7m). A decrease in interest rates by
100 basis points in all currencies would have had an equal but opposite effect to the amounts shown above.

limits which, with certain minor exceptions due to local market conditions,

Credit Risk Exposures
The Group limits exposure to credit risk on counterparties used for financial instruments through a system of
internal credit
require
counterparties to have a minimum “A” rating from one of the major ratings agencies. The financial exposure
of counterparty is determined as the total of cash and deposits, plus the risk on derivative instruments,
assessed as the fair value of the instrument plus a risk element based on the nominal value and the historic
volatility of
the instrument. The Group does not anticipate non-performance of
counterparties and believes it is not subject to material concentration of credit risk as the Group operates
within a policy of counterparty limits designed to reduce exposure to any single counterparty.

the market value of

The maximum credit risk exposure on derivatives at 31 December 2009 was $13m (2008 — $38m) being
the gross debit fair value on forward foreign exchange contracts, interest rate swaps and currency swaps.
The maximum credit risk exposure on cash and bank at 31 December 2009 was $192m (2008 — $145m).
The Group’s exposure to credit risk is not material as the amounts are held in a wide number of banks in a
number of different countries.

Credit risk on trade receivables is detailed in Note 19 of the Notes to the Group Accounts.

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21. Financial Instruments and Risk Management — (continued)

Currency and Interest Rate Profile of Interest Bearing Liabilities and Assets
In 2009, the Group entered into a series of interest rate swaps to fix the monthly interest payable on $515m
the Group’s floating rate borrowings for a period of one year. The swaps are
(2008 — $819m) of
denominated in US Dollars, Euros and Swiss Francs. Short-term debtors and creditors are excluded from the
following disclosures:

Currency and Interest Rate Profile of Interest Bearing Liabilities:

Gross
borrowings
$ million

Currency
swaps
$ million

Total
liabilities
$ million

Floating rate
liabilities
$ million

Fixed rate
liabilities
$ million

Fixed rate liabilities

Weighted
average
interest rate
%

Weighted
average time
for which
rate is fixed
Years

462
257
306
110

–
6
–
89

462
263
306
199

1,135

95

1,230

635
348
379
111

–
13
21
65

635
361
400
176

1,473

99

1,572

292
93
105
199

689

264
140
142
176

722

170
170
201
–

541

371
221
258
–

850

2.5
0.8
1.8
–

4.1
3.0
4.7
–

2
1
1
–

1
1
1
–

At 31 December 2009:
US Dollar
Swiss Franc
Euro
Other

Total interest bearing

liabilities

At 31 December 2008:
US Dollar
Swiss Franc
Euro
Other

Total interest bearing

liabilities

$26m (2008 — $31m) of fixed rate liabilities relate to finance leases and $515m (2008 — $819m) relates to
hedged borrowings under the $2,500m facility. In addition to the above, the Group has liabilities due for
deferred acquisition consideration (denominated in US Dollars, Euro and Yen) totalling $46m (2008 — $47m)
on which no interest is payable (see Note 22 of the Notes to the Group Accounts). There are no other
significant interest bearing financial liabilities.

Floating rates on liabilities are typically based on the one or three-month LIBOR interest rate relevant to the
currency concerned. The weighted average interest rate on short-term borrowings as at 31 December 2009
was 1% (2008 — 2%).

Currency and Interest Rate Profile of Interest Bearing Assets:

At 31 December 2009:
US Dollars
Other

Total interest bearing assets

At 31 December 2008:
US Dollars
Other

Total interest bearing assets

Cash and bank
$ million

Currency
swaps
$ million

Total assets
$ million

Floating rate
assets
$ million

41
151

192

20
125

145

87
8

95

95
–

95

128
159

287

115
125

240

128
159

287

115
125

240

Floating rates on assets are typically based on the short-term deposit rates relevant to the currency
concerned. There were no fixed rate assets at 31 December 2009 or 31 December 2008.

112

21. Financial Instruments and Risk Management — (continued)

Fair Value of Financial Assets and Liabilities

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.

Forward foreign exchange contracts that are taken out as hedges are fair valued. These are regarded as
Level 2 financial instruments measured at fair value. Level 2 financial investments are defined as: Valuation
techniques for which all observable inputs have a significant effect on the recorded fair values, either directly
or indirectly. The Group only has Level 2 financial instruments measured at fair value.

The Group enters into derivative financial instruments with financial institutions with investment grade credit
ratings. Derivatives valued using valuation techniques with market observable inputs are mainly interest rate
swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include
forward pricing and swap models, using present value calculations. The models incorporate various inputs
including the credit quality of counterparties, foreign exchange spot and forward rates, interest rate curves
and forward rate curves.

As at 31 December 2009, the mark-to-market value of a derivative asset position is net of a credit valuation
adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no
material effect on the hedge effectiveness for derivatives designated in hedge relationships and other
financial instruments recognised at fair value.

Long-term borrowings are measured in the balance sheet at amortised cost. As the Group’s long-term
borrowings are not quoted publicly and as market prices are not available 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. At 31 December 2009 and 31 December
2008, the fair value of the Group’s long-term borrowing was not materially different from amortised cost.

22. Payables

Notes

2009
$ million

2008
$ million

Trade and other payables due within one year
Trade and other payables
Current liability derivatives — currency swaps
Current liability derivatives — forward foreign exchange contracts
Current liability derivatives — interest rate swaps
Acquisition consideration

20

Other payables due after one year:
Acquisition consideration

547
–
24
6
19

596

544
4
34
14
11

607

27

36

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Amounts falling due after more than one year are payable as follows: $27m in 2011 (2008 — $4m in 2010
and $32m in 2011). Trade payables are not
their nominal value.
Management consider that the carrying amount of trade payables approximates the fair value.

interest bearing and are stated at

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23. Provisions

At 1 January 2009
Exchange adjustment
Charge to income statement
Utilisation

At 31 December 2009

Provisions — due within one year
Provisions — due after one year

At 31 December 2009

Provisions — due within one year
Provisions — due after one year

At 31 December 2008

Rationalisation
and integration
$ million

Liability
$ million

Total
$ million

33
(1)
17
(31)

18

16
2

18

23
10

33

72
–
24
(6)

90

39
51

90

31
41

72

105
(1)
41
(37)

108

55
53

108

54
51

105

The principal provisions within rationalisation and integration provisions relate to the rationalisation of
operational sites (mainly severance and legal costs) arising from the Earnings Improvement Programme,
integration expenses relating to severance, legal and onerous leases arising from the acquisition of Plus and
an onerous lease obligation on the exit from the tissue engineering operation. All provisions are expected to
be substantially utilised within four years of 31 December 2009 and none are treated as financial
instruments.

Included within the liability provision is $25m (2008 — $30m) relating to the declination of insurance
coverage for macrotextured knee revisions (see Note 34 of the Notes to the Group Accounts). The remaining
balance largely represents provisions for various litigation and patent disputes.

24. Deferred Taxation

Deferred tax assets
Deferred tax liabilities
Net position at 31 December

2009
$ million

2008
$ million

202
(31)
171

214
(46)
168

The movement in the year in the Group’s net deferred tax position was as follows:

At 1 January
Exchange adjustment
Movement in income statement — current year
Movement in income statement — prior years
Acquisitions
Other intangible assets
Movement in other comprehensive income
Movement in shareholders equity

At 31 December

Notes

2009
$ million

2008
$ million

31

168
4
7
3
1
(2)
(12)
2

171

79
(5)
19
3
1
–
71
–

168

114

24. Deferred Taxation — (continued)

Movements in the main components of deferred tax assets and liabilities were as follows:

Deferred tax assets:
At 1 January 2008
Exchange adjustment
Movement in income statement — current year
Movement in income statement — prior years
Movement in other comprehensive income
Acquisitions
Transfers

At 31 December 2008
Exchange adjustment
Movement in income statement — current year
Movement in income statement — prior years
Movement in other comprehensive income
Movement in shareholders equity
Acquisitions
Other intangible assets
Transfers

At 31 December 2009

Retirement
benefit
obligation
$ million

Macro-
textured
claim
$ million

Other
$ million

Total
$ million

14
–
–
–
52
–
–

66
2
(1)
1
(20)
–
–
–
6

54

53
–
(1)
–
–
–
–

52
–
–
–
–
–
–
–
–

52

69
(6)
24
5
–
1
3

96
3
2
3
–
1
1
(2)
(8)

96

136
(6)
23
5
52
1
3

214
5
1
4
(20)
1
1
(2)
(2)

202

The Group has unused tax losses of $25m (2008 — $34m) available for offset against future profits. A
deferred tax asset has been recognised in respect of $1m (2008 — $5m) of such losses. No deferred tax
asset has been recognised on the remaining unused tax losses as these are not expected to be realised in
the foreseeable future.

Deferred tax liabilities:
At 1 January 2008
Exchange adjustment
Movement in income statement — current year
Movement in income statement — prior years
Movement in other comprehensive income
Transfers

At 31 December 2008
Exchange adjustment
Movement in income statement — current year
Movement in income statement — prior years
Movement in other comprehensive income
Movement in shareholders equity
Transfers

At 31 December 2009

Accelerated
tax
depreciation
$ million

Intangible
assets
$ million

Other
$ million

Total
$ million

(44)
6
(3)
–
–
–

(41)
(1)
2
5
–
–
–

(35)

(37)
2
4
–
–
(3)

(34)
(2)
2
(2)
–
–
2

(34)

24
(7)
(5)
(2)
19
–

29
2
2
(4)
8
1
–

38

(57)
1
(4)
(2)
19
(3)

(46)
(1)
6
(1)
8
1
2

(31)

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25. Share Capital

Authorised
At 31 December 2007
At 31 December 2008
At 31 December 2009

Allotted, issued and fully paid
At 1 January 2007
Share options

At 31 December 2007
Share options

At 31 December 2008
Share options

At 31 December 2009

Ordinary Shares
(20¢)

Deferred Shares
(£1.00)

‘000

$ million

‘000

$ million

Total
$ million

1,223,591
1,223,591
1,223,591

943,483
4,025

947,508
2,382

949,890
1,131

951,021

245
245
245

189
1

190
–

190
–

190

50
50
50

50
–

50
–

50
–

50

–
–
–

–
–

–
–

–
–

–

245
245
245

189
1

190
–

190
–

190

The deferred shares were issued in 2006 in order to comply with English Company law. They are not listed
on any stock exchange and have extremely limited rights and effectively have no value. These rights are
summarised as follows:

•

•

•

•

The holder shall not be entitled to participate in the profits of the Company;

The holder shall not have any right to participate in any distribution of the Company’s assets on a
winding up or other distribution except that after the return of the nominal amount paid up on each
share in the capital of the company of any class other than the Deferred Shares and the distribution of a
further $1,000 in respect of each such share there shall be distributed to a holder of a Deferred Share
(for each Deferred Share held by him) an amount equal to the nominal value of the Deferred Share;

The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the
Company; and

The Company may create, allot and issue further shares or reduce or repay the whole or any part of its
share capital or other capital reserves without obtaining the consent of the holders of the Deferred
Shares.

The Group’s objectives when managing capital are to ensure the Group has adequate funds to continue as
a going concern and sufficient flexibility within the capital structure to fund the ongoing growth of the
business and to take advantage of business development opportunities including acquisitions.

The Group determines the amount of capital taking into account changes in business risks and future cash
requirements. The Group reviews its capital structure on an ongoing basis and uses share buy-backs,
dividends and the issue of new shares to adjust the retained capital.

The Group considers the capital that it manages to be as follows:

Share capital
Share premium
Treasury shares
Retained earnings and other reserves

2009
$ million

2008
$ million

2007
$ million

190
382
(794)
2,401

2,179

190
375
(823)
1,957

1,699

190
356
(637)
1,907

1,816

116

26(a). Share Based Payments — Share Options Plans

Employee Plans
The Smith & Nephew Sharesave Plan (2002) (adopted by shareholders on 3 April 2002) (the Save As You
Earn (“SAYE”) plan) is available to all employees in the UK employed by participating Group companies,
subject to three months’ service. The scheme provides for employees to save up to £250 per month and
gives them an option to acquire shares based on the committed amount to be saved. The option price is not
less than 80% of the average of middle market quotations of the Ordinary Shares on the three dealing days
preceding the date of invitation. The Smith & Nephew International Sharesave Plan (2002) is offered to
employees in Australia, Austria, Canada, Denmark, Finland, Germany, Hong Kong, Japan, South Korea,
Mexico, New Zealand, Norway, Poland, Portugal, Puerto Rico, Singapore, South Africa, Spain, Sweden,
Switzerland and the United Arab Emirates. Employees in Belgium, Italy, the Netherlands and France are able
to participate respectively in the Smith & Nephew Belgian Sharesave Plan (2002), the Smith & Nephew
Italian Sharesave Plan (2002), the Smith & Nephew Dutch Sharesave Plan (2002) and the Smith & Nephew
France Sharesave Plan (2002). Participants in Ireland are able to participate in the Smith & Nephew Irish
Employee Share Option Scheme. These plans operate on a substantially similar basis to the Smith &
Nephew Sharesave Plan (2002). Together all of the plans referred to above are termed the “Employee
Plans”.

Employees in the US are able to participate in the Employee Stock Purchase Plan, which gives them the
opportunity to acquire shares, in the form of ADSs, at a discount of 15% (or more if the shares appreciate in
value during the plan’s quarterly purchase period) to the market price, through a regular savings plan.

Executive Plans
The Smith & Nephew 1985 Share Option Scheme (adopted by shareholders on 9 May 1985), the Smith &
Nephew 1990 International Executive Share Option Scheme (adopted by shareholders on 15 May 1990), the
Smith & Nephew 2001 UK Approved Share Option Plan, the Smith & Nephew 2001 UK Unapproved Share
Option Plan, the Smith & Nephew 2001 US Share Plan (adopted by shareholders on 4 April 2001) and the
Smith & Nephew 2004 Executive Share Option Plan (adopted by shareholders on 6 May 2004) are together
termed the “Executive Plans”.

Under the terms of the Executive Plans, the Remuneration Committee, consisting of non-executive directors,
may approve the grant of options to employees of the Group to acquire Ordinary Shares in the Company.
Options granted under the Smith & Nephew 2001 US Share Plan (the “US Plan”) are to acquire ADSs or
Ordinary Shares. For options granted prior to 2001, the option price was not less than the market value of an
Ordinary Share, or the nominal value if higher (the market value being the quoted price on the business day
preceding the date of grant or the quoted price on the date of grant). For Executive Plans adopted in 2001
and 2004, the market value is the average quoted price of an Ordinary Share for the three business days
preceding the date of grant or the average quoted price of an ADS or Ordinary Share, for the three business
days preceding the date of grant or the quoted price on the date of grant if higher. With the exception of
to
options granted under the 2001 US Plan,
achievement of a performance condition. Options granted under the 2001 US Plan are not subject to any
performance conditions. Prior to 2008, the 2001 US Plan options became cumulatively exercisable as to
10% after one year, 30% after two years, 60% after three years and the remaining balance after four years.
With effect from 2008, options granted under the 2001 US Plan became cumulatively exercisable as to
33.3% after one year, 66.7% after two years and the remaining balance after the third year. The 2001 UK
Unapproved Share Option Plan is open to certain managers outside the US and the US Plan is open to
certain managers in the US, Canada, Mexico and Puerto Rico. The 2004 Plan is open to executive directors
only.

the exercise of options granted from 1997 is subject

The maximum term of options granted, under all plans, is 10 years from the date of grant. All share option
plans except for the Stock Appreciation Rights Plan (detailed on page 120) are settled in shares.

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26(a). Share Based Payments — Share Options Plans — (continued)

At 31 December 2009 23,383,000 (2008 — 21,681,000, 2007 — 21,028,000) options were outstanding
under share option plans as follows:

Number of shares
Thousand

Range of option
exercise prices
Pence

Weighted average
Exercise Price
Pence

Employee Plans:
Outstanding at 1 January 2007
Granted
Forfeited
Exercised
Expired

Outstanding at 31 December 2007
Granted
Forfeited
Exercised
Expired

Outstanding at 31 December 2008
Granted
Forfeited
Exercised
Expired

Outstanding at 31 December 2009

Options exercisable at 31 December 2009
Options exercisable at 31 December 2008
Options exercisable at 31 December 2007

Executive Plans:
Outstanding at 1 January 2007
Granted
Forfeited
Exercised

Outstanding at 31 December 2007
Granted
Forfeited
Exercised
Expired

Outstanding at 31 December 2008
Granted
Forfeited
Exercised
Expired

Outstanding at 31 December 2009

Options exercisable at 31 December 2009
Options exercisable at 31 December 2008
Options exercisable at 31 December 2007

3,937
1,077
(470)
(856)
(10)

3,678
906
(359)
(633)
(59)

3,533
1,563
(680)
(1,029)
(4)

3,383

109
168
602

16,912
5,209
(1,618)
(3,153)

17,350
5,129
(1,073)
(2,696)
(562)

18,148
5,849
(1,348)
(1,754)
(895)

20,000

6,668
5,049
5,012

289.2 – 526.0
455.5 – 600.5
296.0 – 498.0
289.2 – 526.0
296.0 – 348.0

296.0 – 600.5
507.0 – 640.0
296.0 – 581.0
296.0 – 526.0
296.0 – 498.0

321.0 – 640.0
380.0 – 519.0
321.0 – 640.0
321.0 – 507.0
321.0 – 600.5

348.0 – 640.0

348.0 – 498.0
321.0 – 526.0
296.0 – 498.0

145.0 – 582.9
615.0 – 637.7
409.5 – 637.7
145.0 – 514.0

145.0 – 637.7
465.5 – 680.5
409.5 – 637.5
265.0 – 637.5
145.0 – 637.7

183.5 – 680.5
448.0 – 595.0
409.5 – 680.5
183.5 – 637.8
185.8 – 574.5

265.0 – 637.5

265.0 – 637.5
183.5 – 672.5
145.0 – 581.5

369.4
459.7
379.5
353.0
335.8

397.9
509.3
408.7
368.2
379.9

427.4
381.6
436.1
362.7
427.9

422.7

362.4
398.3
362.9

478.1
629.5
554.5
340.0

525.0
615.1
559.5
584.1
575.3

592.5
477.0
565.9
428.3
492.8

547.1

532.0
593.2
444.0

The weighted average remaining contractual life of options outstanding at 31 December 2009 was 5.9 (2008
— 5.8 years, 2007 — 4.9 years) years for Executive Plans and 2.7 (2008 — 1.7 years, 2007 — 2.5 years)
years for Employee Plans.

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26(a). Share Based Payments — Share Options Plans — (continued)

Weighted average share price

Options granted during the year were as follows:

2009
pence

504.0

2008
pence

579.5

2007
pence

601.1

Weighted
average fair
value per option
at grant date
Pence

Weighted
average share
price at grant
date
Pence

Weighted average
exercise price
Pence

Options granted
Thousand

Employee Plans
Executive Plans

1,563
5,849

212.0
147.9

552.0
480.5

381.6
477.0

Weighted
average
option life
Years

3.9
6.8

The weighted average fair value of options granted under employee plans during 2008 was 192.0p (2007
— 195.9p) and those under executive plans during 2008 was 191.3p (2007 — 202.2p).

Options granted under the executive plans are valued using a binomial model. Options granted under
employee plans are valued using the Black-Scholes option model as management considered that options
granted under these plans are exercised within a short period of time after the vesting date. Options granted
under each plans are valued separately and a weighted average fair value calculated.

The binomial model was used for executive plans so that proper allowance is made for the possibility of
early exercise. At the 2009 grant management expected 95% of the options granted under the 2001
Executive Scheme to vest (2008 — 95%, 2007 — 95%) and 60% of the 2004 Executive Scheme to vest
(2008 — 60%, 2007 — 60%). Each year an assessment is made of the current vesting estimates and they
are updated to reflect revised expectations of the number of grants that will vest.

For all plans the inputs to the option pricing models are reassessed for each grant. The following
assumptions were used in calculating the fair value of options granted:

Employee plans
2008

2009

2007

Executive plans
2008

2009

2007

Dividend yield (%)
Expected volatility (%) (i)
Risk free interest rate (%) (ii)
Expected life in years (iii)

1.5
30.0
3.3
3.9

1.0
25.0
4.5
3.9

1.0
23.0
5.0
4.0

1.5
30.0
3.3
6.8

1.0
25.0
4.5
6.5

1.0
23.0
5.0
6.3

(i)

(ii)

Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options.

The risk free interest rate reflects the yields available on zero coupon government bonds over the option term and currency.

(iii) An assessment of an Executive Plan’s option life is based on an exercise model. This is based on a mixture of historic
experience and generally accepted behavioural traits. 5% (2008 — 5%, 2007 — 5%) of Executive Plan option holders are
assumed to leave and exercise their options (or forfeit them if under water) each year after vesting. In addition, 50% (2008 —
50%, 2007 — 50%) of Executive Plan option holders are assumed to exercise by choice per annum providing the gain available
is at least 50% for the 2004 Plan and 25% for the 2001 Plans (2008 — 50% for the 2004 Plan and 25% for the 2001 Plans, 2007
— 50% for the 2004 Plan and 25% for the 2001 Plans).

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26(a). Share Based Payments — Share Options Plans — (continued)

Summarised information about options outstanding under the share option plans at 31 December 2009 is
as follows:

Employee Plans:
348.0p to 504.0p*
504.0p* to 640.0p

Executive Plans:
265.0p to 504.0p*
504.0p* to 637.5p

Number outstanding
Thousand

Weighted average
remaining contract life
Years

2,690
693

3,383

6,588
13,412

20,000

2.7
2.6

2.7

7.3
5.2

5.9

*

The split has been determined based on the weighted average share price of 504.0p.

72,669 (2008 — 85,135, 2007 — 163,823) options remain outstanding under the 1999 and 2000 Stock
Appreciation Rights Plan and at 31 December 2009 these have a fair value liability of $nil (2008 — $nil,
2007 — $1m) which is materially the same as intrinsic value.

26(b). Share Based Payments — Long-Term Incentive Plans

In 2004, a new share based incentive plan was introduced for executive directors, executive officers and the
next level of senior executives, which replaced the Long-term Incentive Plan (LTIP). The plan includes a
Performance Share Plan (“PSP”) and a Bonus Co-Investment Plan (“CIP”).

Vesting of the PSP award shares is dependent upon performance relative to the FTSE 100 and an index
based on major international companies in the medical devices industry.

Under the CIP, participants could elect to use up to a maximum of one-half of their annual bonus to
purchase shares. If the shares are held for three years and the Group’s EPSA growth targets are achieved
participants receive an award of matching shares for each share purchased.

the CIP was replaced by the Deferred Bonus Plan. This plan is designed to encourage
From 2009,
executives to build-up and maintain a significant shareholding in the Company. Under the plan, up to one
third of any bonus earned at target level or above by an eligible employee will be compulsorily deferred into
shares which vest, subject to continued employment, in equal annual tranches over three years (i.e. one
third each year). No further performance conditions will apply to the deferred shares.

The fair values of awards granted under long term incentive plans are calculated using a binomial model.
The exercise price for all awards granted under the long term incentive plans is nil. The PSP contains vesting
conditions based on TSR versus a comparator group which represent market-based performance conditions
for valuation purposes and an assessment of vesting probability is therefore factored into the award date
calculations. The assumptions include the volatilities for the comparator groups. Given the wide range of
companies within the FTSE 100 a correlation of 30% (2008 — 15%, 2007 — 20%) has been assumed with
the constituents of the group. A correlation of 30% (2008 — 15%, 2007 — 20%) has also been assumed for
the companies in the medical devices sector as they are impacted by similar factors.

The other assumptions used are consistent with the executive scheme assumptions disclosed in Note 26
(a) of the Notes to the Group Accounts.

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26(b). Share Based Payments — Long-Term Incentive Plans — (continued)

At 31 December 2009 the maximum number of shares that could be awarded under the Group’s long-term
incentive plans were:

Number of shares in thousands
Outstanding at 1 January 2007
Awarded
Vested
Forfeited
Outstanding at 31 December 2007
Awarded
Vested
Forfeited
Outstanding at 31 December 2008
Awarded
Vested
Forfeited

Outstanding at 31 December 2009

PSP
2,979
1,793
–
(1,449)
3,323
1,588
(135)
(959)
3,817
2,372
(334)
(975)

4,880

Deferred
Bonus Plan
–
–
–
–
–
–
–
–
–
305
(7)
(6)

292

CIP
796
320
(235)
(121)
760
384
(89)
(305)
750
–
(99)
(206)

445

Total
3,775
2,113
(235)
(1,570)
4,083
1,972
(224)
(1,264)
4,567
2,677
(440)
(1,187)

5,617

The weighted average remaining contractual life of awards outstanding at 31 December 2009 was 1.8 years
(2008 — 1.5 years, 2007 — 1.3 years) for the PSP, 0.7 years (2008 — 1.3 years, 2007 — 1.2 years) for the
CIP and 2.2 years for the Deferred Bonus Plan.

26(c). Share Based Payments — Charge to Income Statement

The expense charged to the income statement for share based payments is as follows:

Granted in current year
Granted in prior years

Total share based expense for the year

2009
$ million
2
16

18

2008
$ million
4
20

24

2007
$ million
9
14

23

Under the Executive Plans, PSP and CIP the number of Ordinary Shares over which options may be granted
is limited so that the number of Ordinary Shares issued or that may be issued during the ten years
preceding the date of grant shall not exceed 5% of the Ordinary Share capital at the date of grant. The total
number of Ordinary Shares which may be issuable in any ten-year period under all share plans operated by
the Company may not exceed 10% of the Ordinary Share capital at the date of grant.

27. Treasury Shares

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In February 2007, the Group commenced a share buy back programme of up to $1.5 billion over an initial
two years. This followed an assessment of the medium term capital needs of the Group, both internally and
for acquisitions whereby management determined that shareholder value and balance sheet efficiency
would be enhanced by returning capital to shareholders. Shares bought back are held in treasury. In
November 2008 the Board reviewed the programme in the light of current conditions in the financial markets
and decided to suspend the share buy-back programme.

During 2008 16,285,200 (2007 — 51,955,000) Ordinary Shares were purchased at a cost of $193m (2007
— $640m). No Ordinary Shares were purchased during 2009. During 2009, 1,100,000 (2008 — 935,000,
2007 — 305,000)) Ordinary Shares were transferred out of treasury, at their weighted average cost, to the
Smith & Nephew Employees’ Share Trust. Shares totalling 805,000 (2008 — 365,000) were transferred out
of treasury following the exercise of the International UK and SAYE share options leaving 64,730,000 shares
(2008 — 66,635,000, 2007 — 51,650,000) in treasury at 31 December 2009.

Treasury shares represent the holding of the Parent Company’s own shares in respect of the Smith &
Nephew Employees’ Share Trust (Note 28 of the Notes to the Group Accounts) and the shares bought back
as part of the share buy-back programme.

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28. Smith & Nephew Employees’ Share Trust

At 1 January
Shares transferred from treasury
Shares transferred to group beneficiaries

At 31 December

2009
$ million
7
14
(20)

2008
$ million
1
13
(7)

1

7

The Smith & Nephew 2004 Employees’ Share Trust was established to hold shares relating to the long-term
incentive plans referred to in the “Directors’ Remuneration Report”. Holdings of the Parent Company’s Own
Shares in respect of the Trust are disclosed in Note 27 of the Notes to the Group Accounts. The Trust is
administered by an independent professional trust company resident in Jersey and is funded by a loan from
the Parent Company. The cost of the Trust is charged to the income statement as it accrues. A partial
dividend waiver is in place in respect of those shares held under the long-term incentive plans. The trust
only accepts dividends in respect of nil-cost options and deferred bonus plan shares. The waiver represents
less than 1% of the total dividends paid. During the year the Smith & Nephew Employees Share Trust,
principally dealing with the now closed Long-Term Incentive Plan, was wound down.

At 31 December 2009, the Trusts held 0.1m (2008 — 0.5m) Ordinary Shares at an aggregate cost of $1m
(2008 — $7m). Nil shares (2008 — 0.1m), with an original cost of $nil (2008 — $0.1m), have vested and
are held under option for the benefit of directors and employees. Shares totalling 0.1m (2008 — 0.5m), at an
aggregate cost of $1m (2008 — $7m), are included within equity on the Group balance sheet and
shareholders’
these shares at
31 December 2009 was $1m (2008 — $3m).

funds on the Parent Company balance sheet. The market value of

29. Cash Flow Statement

Analysisof(NetDebt)/NetCash

Borrowings

Notes

31

Cash Overdrafts
$ million
(55)
(5)
–
–
–
(1)

$ million
346
(185)
–
–
–
9

Net
currency
swaps

due after
one year

Loan
due within
one year
Total
Notes
$ million $ million $ million $ million $ million
210
(1,254)
(6)
(7)
(181)
(72)

(47)
(1,201)
(6)
(1)
(62)
(64)

(15)
106
–
(6)
(119)
(2)

(2)
14
–
–
–
(14)

(17)
17
–
–
–
–

170
(16)
–
–
(9)

145
38
9

192

(61)
34
–
–
4

(23)
6
(1)

(18)

(1,381)
49
1,248
–
(8)

(92)
66
(1)

(27)

(36)
(80)
(1,248)
2
4

(1,358)
288
(20)

(1,090)

–
–
–
–
–

–
–
–

–

(2)
(5)
–
–
3

(4)
12
(8)

–

(1,310)
(18)
–
2
(6)

(1,332)
410
(21)

(943)

At 1 January 2007
Net cash flow
Facility fee (ii)
New finance leases
Acquisitions
Exchange adjustment

At 31 December 2007
Net cash flow
Other non-cash changes (i)
Facility fee (ii)
Exchange adjustment

At 31 December 2008
Net cash flow
Exchange adjustment

At 31 December 2009

(i) Non-cash changes comprise transfers between categories of borrowings following the Group exercising its option to extend the

(ii)

term of its revolving multicurrency loan facilities (see Note 20 of the Notes to the Group Accounts).
In 2007 the facility fee of $6m was recognised as a prepayment and charged to income on a straight line basis over the term of the
facility. During 2008 $2m of this prepayment was reclassified as borrowings following the term out of the loan.

122

29. Cash Flow Statement — (continued)

ReconciliationofNetCashFlowtoMovementin(NetDebt)/NetCash

Notes

2009
$ million

2008
$ million

2007
$ million

Change in cash net of overdrafts in the year
Settlement of currency swaps
Change in borrowings (including Loan Notes)

Change in net debt from net cash flow
New finance leases
Facility fee paid
Borrowings and finance leases acquired on acquisition
Exchange adjustment

31

Change in net debt in the year
Opening (net debt)/net cash

Closing net debt

44
12
354

410
–
–
–
(21)

18
(5)
(31)

(18)
–
2
–
(6)

389
(1,332)

(943)

(22)
(1,310)

(1,332)

(190)
14
(1,078)

(1,254)
(7)
(6)
(181)
(72)

(1,520)
210

(1,310)

CashandCashEquivalents
For the purposes of the Group Cash Flow Statement cash and cash equivalents at 31 December comprise
cash at bank and in hand net of bank overdrafts.

Cash at bank and in hand
Bank overdrafts

Cash and cash equivalents

30. Currency Translation

2009
$ million

2008
$ million

2007
$ million

192
(18)

174

145
(23)

122

170
(61)

109

The exchange rates used for the translation of currencies into US Dollars that have the most significant
impact on the Group results were:

Sterling
Euro
Swiss Franc

Sterling
Euro
Swiss Franc

31. Acquisitions

Average rates

2008

1.84
1.46
0.92

Year-end rates

2008

1.44
1.39
0.94

2009

1.56
1.39
0.92

2009

1.61
1.43
0.97

2007

2.00
1.37
0.83

2007

1.99
1.46
0.88

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2009
PlusOrthopedicsHoldingsAG
In January 2009, the Group reached an agreement with the vendors of Plus to reduce the total original
purchase price by CHF159m. As part of the agreement the Group dropped all its claims and released the
vendors from substantially all of the remaining warranties under the original purchase agreement as well as
resolving the contractual price adjustments.

NucrystPharmaceuticals,Corp.
On 22 December 2009,
the assets and liabilities of Nucryst
Pharmaceuticals, Corp, which manufactures and licences exclusively to the Group our range of ACTICOAT
products, using its nanocrystalline silver technology, SILCRYST.

the Group acquired substantially all of

123

31. Acquisitions — (continued)

Under the agreement the Group acquired the manufacturing assets from Nucryst’s operations in Canada
and intellectual property rights relating to the nanocrystalline silver technology used in the manufacture of
ACTICOAT product range. Nucryst has manufactured ACTICOAT products for Smith & Nephew since the
Group’s acquisition of the product right in 2001.

Pre-acquisition
carrying amounts
$ million

Provisional fair value
adjustments
$ million

Fair value to Group
reported in 2009
$ million

Property, plant and equipment
Intangible assets — acquisition

intangibles

Inventories
Trade and other payables
Deferred taxation

Net assets
Goodwill on acquisition

Cost of acquisition

Discharged by:
Cash

10

–
4
(1)
–

13

(4)

12
–
–
1

9

6

12
4
(1)
1

22
3

25

25

Management believes that goodwill represents the value of the workforce and synergies that are expected
to arise from the combined group.

As the Group was the only material customer of Nucryst Pharmaceuticals, Corp., no contribution to revenue
was achieved in 2009. The post-acquisition contribution to attributable profit for 2009 was immaterial.

2008
The aggregate impact of acquisitions that occurred during 2008 is set out below. The acquisitions primarily
relate to minority interest and distributor buyouts, as a result of the Plus acquisition concluded in 2007.
There is no material difference between the fair value and book value of the net assets acquired.

Deferred taxation
Intangible assets

Assets acquired
Goodwill (i)

Cost of acquisition

Discharged by
Cash
Deferred consideration (i)

(i)

Relating to the reversal of goodwill allocated previously on the basis of contingent consideration.

$ million
1
1

2
(2)

–

2
(2)

–

124

31. Acquisitions — (continued)

In 2008, deferred consideration of $14m in respect of the previous years’ acquisitions was paid.

2007
PlusOrthopedicsHoldingAG
On 31 May 2007 the Group acquired 100% of the issued share capital of Plus Orthopedics Holding AG
(“Plus”), a private Swiss orthopaedic company for a total of CHF1,086m ($889m) in cash, including assumed
debt. This has been integrated into the Group’s Orthopaedics business segment. At 31 December 2007 the
cost of the Plus acquisition was allocated on a provisional basis to the assets acquired and liabilities
assumed on acquisition. In 2008, fair value adjustments were revised to reflect improved knowledge of the
Plus business. The final allocation of the purchase price that was completed by 31 May 2008 (in accordance
with the time line stipulated in IFRS 3 Business Combinations) and the balance sheet as at 31 December
2007 has been adjusted as follows:

Pre-acquisition
carrying
amounts
$ million

Provisional fair
value
adjustments
$ million

Fair value to
Group reported
in 2007
$ million

Final fair value
adjustments
$ million

Fair value to
Group reported
in 2008
$ million

81

–

10

6

19
106

128
(181)

(4)

(6)

(125)

34

(2)

240

(8)

4

(19)
66

–
–

(34)

(16)

(4)

227

Property, plant and

equipment

Intangible assets —

acquisition
intangibles

Intangible assets —

other

Investment in
associates
Deferred taxation

assets
Inventories
Trade and other
receivables

Loans and borrowings
Deferred taxation

liabilities

Retirement benefit

obligation
Trade and other
payables

Net assets
Equity attributable to minority

interests (i)

Goodwill on acquisition

Cost of acquisition

Discharged by:
Cash
Cash acquired in Plus
Costs associated with acquisition

79

240

2

10

–
172

128
(181)

(38)

(22)

(129)

261

(4)
463

720

726
(18)
12

720

(1)

(27)

–

–

–
(3)

15
–

7

–

(16)

(25)

–
25

–

–
–
–

–

78

213

2

10

–
169

143
(181)

(31)

(22)

(145)

236

(4)
488

720

726
(18)
12

720

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(i)

The pre acquisition carrying amount of the equity attributable to minority interests was $4m.

Management believes that goodwill represents the value of the workforce, the existing European corporate
structure and synergies that are expected to arise from the combined group.

In 2007, from the date of acquisition on 31 May 2007, Plus products contributed $200m to revenue. It was
not practical to calculate Plus’ contribution to attributable profit in 2007, since its acquisition by the Group, as
significant integration had occurred during the year.

125

31. Acquisitions — (continued)

As part of the acquisition of Plus, the Group assumed the following minority interests which were previously
minority interests under the Plus Group:

Minority Interests Acquired

Country

% acquired

Plus Orthopedics Italy Srl (iv)
XMedica Srl (iv)
Plus Orthopedics Netherlands BV (iv)
Plus Orthopedics Hellas S.A. (iv)
LifeTek LLC (i) (ii)
Biograft de Mexico, S.A. de C.V. (i)
Endoplant GmbH (iv)
Plus Orthopedics GmbH (ii)
Endocare Medizinische Geräte Vertriebs — GmbH (iii)

Italy
Italy
Netherlands
Greece
US
Mexico
Germany
Germany
Germany

10%
10%
49%
10%
10%
12.7%
6%
4%
23.2%

(i)

The minority interests in LifeTek LLC and Biograft de Mexico, S.A. de C.V. were disposed of in November 2008 generating a loss of
$0.6m.
These companies were consolidated with no related minority interest due to deferred purchase consideration agreement.

(ii)
(iii) Still held at 31 December 2009.
(iv) Acquired post acquisition.

Subsequent to the Plus acquisition the Group acquired Plus’ Australian distributor and the minority interests
in the Netherlands and Greece for a total of $13m in cash and $6m of contingent consideration. This was
allocated as inventory of $3m, goodwill of $12m and a reduction in minority interests by $4m.

In addition to the above, the Group acquired Plus’ minority interest in Plus Orthopedics GmbH (Germany)
and thereby settled deferred consideration accrued of $25m.

BlueSkyMedicalGroup,Inc
On 10 May 2007, the Group acquired 100% of the issued share capital of BlueSky Medical Group Inc.,
(“BlueSky”) for an initial payment of $15m with further milestone payments related to revenues and other
events. The company has developed products for treating chronic wounds using negative pressure wound
therapy and markets a range of negative pressure pumps and wound dressing kits. This was integrated into
the Group’s Advanced Wound Management business segment. BlueSky’s assets and liabilities were
included in the Group’s balance sheet at fair value at the date of acquisition as follows:

Pre-acquisition
carrying amounts
$ million

Fair value
adjustments
$ million

Fair value to
Group
$ million

Intangible assets — acquisition intangibles
Inventories
Trade and other receivables
Trade and other payables
Deferred taxation liabilities

Net assets
Goodwill on acquisition

Cost of acquisition

Discharged by:
Cash
Costs associated with acquisition
Present value of probable milestone payments

–
2
1
(3)
–

–

26
–
–
–
(10)

16

26
2
1
(3)
(10)

16
34

50

15
1
34

50

In addition to the cash consideration of $15m the Group was committed to paying future milestone
payments on the achievement of certain events. As at the date of acquisition, the Group assessed the
present value of the probable milestone payments to be $34m.

126

31. Acquisitions — (continued)

Management believes that the goodwill arising on the acquisition of BlueSky represents the synergies
expected to be achieved.

In 2007, from the date of acquisition on 10 May 2007, BlueSky contributed $6m to revenue and a loss of
$10m to attributable profit for the year.

Total2007acquisitions
Had all the acquisitions in 2007 occurred at the beginning of the year the revenue of the combined Group
would have been $3,526m and attributable profit, including the results of the acquired companies adjusted
for amortisation of acquisition intangibles, utilisation of inventory step-up, the interest expense on debt
incurred as result of the acquisition and tax thereon, would have been $295m.

In addition to the cash consideration of $792m, for the Plus and BlueSky acquisitions, deferred consideration
of $7m in respect of previous years’ acquisitions was paid in 2007.

32. Assets held for sale

The Group held the following assets as held for sale:

Property, plant and equipment
Inventory

2009
$ million

2008
$ million

8
6

14

–
–

–

As part of the Earnings Improvement Programme, the Group closed the Largo Manufacturing site. The
related freehold property is being held for disposal, which is expected in 2010. The property is valued at the
net realisable value less any costs to sell.

The Group has committed to the disposal of its pain management business at 31 December 2009, which is
expected to be completed in 2010. The related goodwill and intangible assets have been impaired by $19m
to their estimated net realisable value. As part of this disposal, inventory to the value of $6m is being held
for sale.

33. Financial Commitments

Group capital expenditure relating to property, plant and equipment contracted but not provided for
amounted to $7m (2008 — $27m).

The Group is contractually committed to four milestone payments, which total $60m (2008 — $60m), related
to the US approval and commercialisation of DUROLANE which may become payable under the terms of the
agreement with Q-MED AB signed in June 2006.

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33. Financial Commitments — (continued)

Future minimum lease payments under non-cancellable operating leases fall due as follows:

Land and buildings:
Within one year
After one and within two years
After two and within three years
After three and within four years
After four and within five years
After five years

Other assets:
Within one year
After one and within two years
After two and within three years
After three and within four years

2009
$ million

2008
$ million

28
20
17
12
11
17

105

25
18
6
2

51

26
16
12
8
6
17

85

21
15
7
2

45

Future minimum lease payments under finance leases together with the present value of the minimum lease
payments are as follows:

Within one year
After one and within two years
After two and within three years
After three and within four years
After four and within five years
After five years

Total minimum lease payments
Discounted by imputed interest

Present value of minimum lease payments

2009
$ million
5
5
4
3
3
15

35
(9)

26

2008
$ million
7
5
4
4
3
18

41
(10)

31

Present value of minimum lease payments can be split out as: $3m (2008 — $5m) due within one year,
$11m (2008 — $12m) due between one to five years and $12m (2008 — $14m) due after five years.

34. Contingencies

The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for
substantial damages. The outcome of these proceedings cannot readily be foreseen, but except as detailed
below, management believes none of them will result in a material adverse effect on the financial position of
the Group. The Group accrues for outcomes that are deemed to be probable and can be reasonably
estimated. There is no assurance that losses will not exceed accruals or will not have a significant impact on
the Group’s results of operations in the period in which they are realised.

In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its OXINIUM
femoral knee components. A number of related claims have been filed, most of which have been settled.
The aggregate cost to date related to this matter in approximately $210m. The Group has sought recovery
from its insurers.

To date the primary insurance carrier has paid $60m in full settlement of its policy liability. An additional
$22m was received from a successful legal settlement. At 31 December 2009, at least $128m remains due,
and the Group has sought coverage from five excess insurance carriers. However, these excess carriers
have denied coverage, citing defences relating to the wording of the insurance policies and other matters. In
December 2004, the Group brought suit against them in federal district court in Memphis, Tennessee, and
hearing is expected to commence in late 2010 or early 2011.

128

34. Contingencies — (continued)

A charge of $154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims.
Most of that amount has since been applied to settlements of such claims. Management believes that the
$25m provision remaining is adequate to cover remaining claims. Given the uncertainty inherent in such
matters, however, there can be no assurance on this point.

it was conducting an informal

the SEC notified the Group that

In September 2007,
investigation of
companies in the medical devices industry, including the Group, regarding possible violations of the Foreign
Corrupt Practices Act (“FCPA”) in connection with the sale of products in certain foreign countries. The US
Department of Justice subsequently joined the SEC’s request. The Group is cooperating fully with the US
Department of Justice and the SEC regarding these matters, has conducted a broader review on its own
initiative, and has disclosed to them information indicating that at least one independent distributor of our
products may have made payments that could have FCPA implications. The Group is engaged in
discussions to resolve these matters, but we cannot predict the outcome of the investigation.

The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over
claims of patent infringement and, in some cases, breach of licence agreement. These disputes are being
heard in courts in the United States and other jurisdictions and also before agencies that examine patents.
Outcomes are rarely certain and costs are often significant.

35. Retirement Benefit Obligations

The Group’s retirement benefit obligation comprises:

Funded Plans:
UK Plan
US Plan
Other Plans (i)

Unfunded Plans:
Other Plans (i)
Retirement Healthcare

2009
$ million

2008
$ million

134
109
28

271

22
29

322

100
157
46

303

19
28

350

(i)

The analysis in this note for “Other Plans” combines both the funded and unfunded retirement benefit obligations.

The Group sponsors pension plans for its employees in most of the countries in which it has major operating
companies. Pension plans are established under the laws of the relevant country. Funded plans are funded
by the payment of contributions to, and the assets held by, separate trust funds or insurance companies. In
those countries where there is no company-sponsored pension plan, state benefits are considered
adequate. Employees’ retirement benefits are the subject of regular management review. The Group’s major
defined benefit pension plans in the UK and US were closed to new employees in 2003 and replaced by
defined contribution plans.

Defined benefit plans provide employees with an entitlement to retirement benefits varying between 1.3%
and 66.7% of final salary on attainment of retirement age. The level of entitlement is dependent on the years
of service of the employee.

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35. Retirement Benefit Obligations — (continued)

Group Accounts

The present value of the defined benefit obligation and the related current service cost are measured using
the projected unit method. Under the projected unit method, the current service cost will increase as the
members of the defined benefit plans approach retirement. The principal actuarial assumptions used by the
independent qualified actuaries in valuing the major plans in the United Kingdom (“UK Plan”), the United
States (“US Plan”) and all other plans (“Other Plans”) including a breakdown of the pension costs charged to
income are as follows:

Principal actuarial assumptions:

UK Plan:
Discount rate
Expected return on plan assets (i)
Expected rate of salary increases
Future pension increases
Inflation
Life expectancy of male aged 60 (in years)
Life expectancy of male aged 60 in 20 years time (in years)

US Plan:
Discount rate
Expected return on plan assets (i)
Expected rate of salary increases
Future pension increases
Inflation
Life expectancy of male aged 60 (in years)
Life expectancy of male aged 60 in 20 years time (in years)

Other Plans:
Discount rate (ii)
Expected return on plan assets (i) (ii)
Expected rate of salary increases (ii)
Future pension increases (ii)
Inflation (ii)

2009

2008
% per annum

2007

5.7
6.4
5.6
3.6
3.6
28.1
31.3

6.0
7.5
4.7
Nil
2.7
23.0
25.8

4.6
5.0
3.3
1.9
1.0

6.1
6.5
5.2
3.2
3.2
28.6
31.9

5.9
8.2
5.0
Nil
2.7
23.0
25.8

3.5
5.2
2.2
0.8
1.0

5.8
6.5
5.3
3.3
3.3
28.4
31.7

6.5
8.2
5.0
Nil
2.7
23.0
25.8

4.3
4.9
3.4
1.4
2.0

(i)

The assumption for the expected return on plan assets has been determined using a combination of past experience and market
expectations.

(ii) Other Plans’ actuarial assumptions are presented on a weighted average basis and include all funded and unfunded plans.

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35. Retirement Benefit Obligations — (continued)

Pension costs (including retirement healthcare):

Current service cost — employer’s portion
Other finance cost
Expected return on assets in the plan

Net defined benefit pension costs
Net defined contribution pension costs

Total pension costs charged to profit before taxation

Actuarial gains/(losses) recognised in Group Statement of

Comprehensive Income:

Experience gains/(losses) in pension scheme assets
Experience gains on scheme liabilities
(Losses)/gains due to changes in assumptions underlying scheme

liabilities

2009
$ million

2008
$ million

2007
$ million

26
61
(48)

39
25

64

71
17

(47)

41

29
66
(66)

29
24

53

(236)
1

20

(215)

30
56
(65)

21
21

42

15
–

(37)

(22)

Of the $64m (2008 — $53m, 2007 — $42m) net cost for the year, $51m (2008 — $53m, 2007 — $51m)
was charged to operating profit. The interest cost and expected return on plan assets are reported as other
finance costs. Actuarial gains of $41m (2008 — loss of $215m, 2007 — loss of $22m) were reported in the
statement of other comprehensive income making the cumulative charge to date $259m (2008 — $295m,
2007 — $80m).

The contributions made in the year in respect of defined benefit plans were: UK Plan $19m (2008 — $23m,
2007 — $20m); US Plan $14m (2008 — $11m, 2007 — $11m); and Other Plans $8m (2008 — $9m, 2007
— $8m). The agreed contributions for 2010 in respect of the Group’s defined benefit plans are: $40m for
the UK (including $30m of supplementary payments), $20m for the US plan and $7m for other defined
benefit plans.

The total cost charged to income in respect of
the Group’s defined contribution plans represents
contributions payable to these plans by the Group at rates specified in the rules of the plans. As at
31 December 2009 there were nil outstanding payments due to be paid over to the plans (2008 — nil,
2007 — nil).

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35. Retirement Benefit Obligations — (continued)

The amount included in the balance sheet arising from the Group’s obligations in respect of its defined
benefit retirement plans and the expected rates of return on investments were:

31 December 2009
Equities
Bonds
Property
Other

Market value of assets
Present value of defined benefit

obligations

Deficit: non-current liability

recognised in the balance sheet

31 December 2008
Equities
Bonds
Property
Other

Market value of assets
Present value of defined benefit

obligations

Deficit: non-current liability

recognised in the balance sheet

UK Plan

US Plan

Other Plans

Rate of
Return
%

Value
$million

Rate of
Return
%

Value
$million

Rate of
Return
%

Value
$million

7.7
4.7
6.2
4.1

7.9
4.7
6.2
4.4

7.1
4.1
5.0
5.3

7.0
4.2
4.5
3.7

8.7
4.2
–
3.3

9.3
5.5
–
3.9

310
203
16
5

534

(668)

(134)

228
165
16
7

416

(516)

(100)

161
68
–
5

234

(343)

(109)

123
54
–
3

180

(337)

(157)

29
34
5
19

87

(137)

(50)

27
25
5
19

76

(141)

(65)

The following tables set out the pension plan asset allocations in the funded UK, US and Other Plans as at
31 December for the last two years:

Asset Category:
Equity securities
Debt securities
Property
Other

Total

UK Plan

US Plan

Other Plans

2009
%

2008
%

2009
%

2008
%

2009
%

2008
%

58
38
3
1

100

55
39
4
2

69
29
–
2

68
30
–
2

33
39
6
22

100

100

100

100

35
33
7
25

100

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35. Retirement Benefit Obligations — (continued)

A reconciliation of the present value of defined benefit obligations is shown in the following tables:

UK Plan
$ million

US Plan
$ million

Other
Plans
$ million

Retirement
Healthcare
$ million

Total
$ million

Present value of defined benefit
obligations at 1 January 2008

Current service cost
Other finance cost
Experience (gains)/losses on plan

liabilities

(Gains)/losses on change of assumptions
Plan participant contributions
Benefits paid
Exchange adjustment

Present value of defined benefit
obligations at 1 January 2009

Current service cost
Settlements to members
Other finance cost
Experience gains on liabilities
Losses/(gains) on change of assumptions
Plan participant contributions
Benefits paid
Exchange adjustment

Present value of defined benefit

obligations at 31 December 2009

753
12
40

(1)
(62)
3
(27)
(202)

516
8
–
34
(10)
73
2
(22)
67

668

283
8
18

5
31
–
(8)
–

337
9
–
20
–
(14)
–
(9)
–

343

145
9
6

(5)
9
2
(22)
(3)

141
9
(3)
6
(7)
(11)
3
(11)
10

137

A reconciliation of the fair value of plan assets is shown in the following tables:

30
–
2

–
2
–
(2)
(4)

28
–
–
1
–
(1)
–
(1)
2

29

1,211
29
66

(1)
(20)
5
(59)
(209)

1,022
26
(3)
61
(17)
47
5
(43)
79

1,177

UK Plan
$ million

US Plan
$ million

Other
Plans
$ million

Retirement
Healthcare
$ million

Total
$ million

Fair value of plan assets at 1 January

2008

Expected return on plan assets
Experience losses on plan assets
Plan participant contributions
Company contributions
Benefits paid
Exchange adjustment

Fair value of plan assets at 1 January

2009

Expected return on plan assets
Settlements to members
Experience gains on plan assets
Plan participant contributions
Company contributions
Benefits paid
Exchange adjustment

Fair value of plan assets at 31 December

2009

673
39
(126)
3
23
(27)
(169)

416
29
–
36
2
19
(22)
54

534

133

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256
21
(100)
–
11
(8)
–

180
15
–
34
–
14
(9)
–

234

98
6
(10)
2
9
(22)
(7)

76
4
(3)
1
3
8
(11)
9

87

–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–

1,027
66
(236)
5
43
(57)
(176)

672
48
(3)
71
5
41
(42)
63

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35. Retirement Benefit Obligations — (continued)

The history of experience adjustments is as follows:

Present
value of
Defined
benefit
obligations
$ million

Experience
losses/(gains) on plan
liabilities

Experience
gains/(losses) on plan
assets

Fair value
of plan
assets

Amount
— gain/
(loss)
$ million $ million $ million

Deficit in
plan

Percentage
of plan
liabilities

Amount
— gain/
(loss)
% $ million

Percentage
of plan
assets
%

At 31 December 2009:
UK Plan
US Plan
Other Plans
At 31 December 2008:
UK Plan
US Plan
Other Plans
At 31 December 2007:
UK Plan
US Plan
Other Plans
At 31 December 2006:
UK Plan
US Plan
Other Plans
At 31 December 2005:
UK Plan
US Plan
Other Plans

(668)
(343)
(137)

(516)
(337)
(141)

(753)
(283)
(145)

(661)
(295)
(60)

(559)
(285)
(48)

534
234
87

416
180
76

673
256
98

617
238
36

488
196
27

(134)
(109)
(50)

(100)
(157)
(65)

(80)
(27)
(47)

(44)
(57)
(24)

(71)
(89)
(21)

10
–
7

1
(5)
5

–
1
(1)

15
3
1

5
2
1

2
–
5

–
1
4

–
–
1

2
1
2

1
1
2

36
34
1

(126)
(100)
(10)

8
(5)
12

20
14
1

45
–
2

7
15
1

30
56
13

1
2
12

3
6
3

9
–
7

The Group recharges the UK pension plan with the costs of administration and independent advisers. The
amount recharged in the year was $2m (2008 — $3m, 2007 — $2m). The amount receivable at
31 December 2009 was $nil (2008 — $nil, 2007 — $nil).

Retirement Healthcare
The cost of providing healthcare benefits after retirement is determined by independent actuaries. The
principal actuarial assumptions in determining the cost of providing healthcare benefits are those in the UK
and the US and are as follows:

Discount rate
Medical cost inflation

2009

UK

US

2008

UK

US

% per annum

2007

UK

US

5.7
7.0

6.0
8.0

6.1
6.5

5.9
8.7

5.8
6.7

6.5
9.0

A one percentage point change in the rate of medical cost inflation would not affect the accumulated
retirement benefit obligations, or the aggregate of the current service and interest costs, of the UK or US
plans in 2009 by more than $2m (2008 and 2007 — by more than $1m).

The assumed retirement healthcare cost trend for 2010 and thereafter is expected to be approximately 1.5%
above the discount rate.

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36. Related Party Transactions

Trading Transactions
In the course of normal operations, the Group traded with its associates detailed in Note 16 of the Notes to
the Group Accounts, from 31 May 2007. The aggregated transactions, which have not been disclosed
elsewhere in the financial statements, are summarised below:

Sales to the associates
Purchases from the associates

All sale and purchase transactions occur on an arm’s length basis.

2009
$ million

2008
$ million

2007
$ million

7
4

4
4

9
3

Key Management Personnel
The remuneration of executive officers (including non-executive directors) during the year is summarised
below:

Short-term employee benefits
Share-based payment
Pension and post employment benefit entitlements
Termination benefits

2009
$ million

2008
$ million

2007
$ million

14
6
1
–

21

12
9
1
1

23

16
7
1
2

26

37.

Information About the Nature and Cost of Services Provided by Auditors

Audit services: Group accounts
Other services:

Local statutory audit pursuant to legislation
Other services pursuant to legislation
Taxation services:
Compliance services
Advisory services

Corporate finance transactions

Total auditors’ remuneration

Arising:

In the UK
Outside the UK

2009
$ million

2008
$ million

2007
$ million

1

2
–

1
1
–

5

2
3

5

1

3
1

1
2
1

9

5
4

9

1

2
1

1
2
1

8

5
3

8

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38. Principal Subsidiary Undertakings

The information provided below is given for principal trading and manufacturing subsidiary undertakings, all
of which are 100% owned, in accordance with Section 410 of the Companies Act 2006. A full list will be
appended to Smith & Nephew’s next annual return to Companies House:

Company Name
United Kingdom:
Smith & Nephew Healthcare Limited
Smith & Nephew Medical Limited
T. J. Smith & Nephew, Limited

Continental Europe:
Smith & Nephew GmbH
Smith & Nephew SA-NV
Smith & Nephew A/S
Smith & Nephew OY
Smith & Nephew SAS
Smith & Nephew Orthopaedics GmbH
Smith & Nephew Hellas SA
Smith & Nephew Srl
Smith & Nephew BV
Smith & Nephew A/S
Smith & Nephew Sp Zoo
Smith & Nephew Lda
Smith & Nephew SA
Smith & Nephew AB
Smith & Nephew Orthopaedics AG

USA:
Smith & Nephew Inc.

Activity

Country of operation and
incorporation

Medical Devices
Medical Devices
Medical Devices

England & Wales
England & Wales
England & Wales

Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Italy
Netherlands
Norway
Poland
Portugal
Spain
Sweden
Switzerland

Medical Devices

United States

Africa, Asia, Australasia and Other America:
Smith & Nephew Pty Limited
Smith & Nephew Inc.
Smith & Nephew Medical (Shanghai) Co Limited
Smith & Nephew Limited
Smith & Nephew Healthcare Private Limited
Smith & Nephew KK
Smith & Nephew Limited
Smith & Nephew Healthcare Sdn Berhad
Smith & Nephew SA de CV
Smith & Nephew Limited
Smith & Nephew Inc.
Smith & Nephew Pte Limited
Smith & Nephew (Pty) Limited
Smith & Nephew Limited
Smith & Nephew FZE

Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices

Australia
Canada
China
Hong Kong
India
Japan
Korea
Malaysia
Mexico
New Zealand
Puerto Rico
Singapore
South Africa
Thailand
United Arab Emirates

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PARENT COMPANY AUDITORS’ REPORT

Independent Auditors’ Report to the Members of Smith & Nephew plc
We have audited the parent company accounts of Smith & Nephew plc for the year ended 31 December 2009
which comprise the Parent company balance sheet and the related notes A to H. The financial reporting
framework that has been applied in their preparation is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respectiveresponsibilitiesofdirectorsandauditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 76, the directors are
responsible for the preparation of the parent company accounts and for being satisfied that they give a true and
fair view. Our responsibility is to audit the parent company accounts in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s (APB’s) Ethical Standards for Auditors.

Scopeoftheauditoftheaccounts
An audit involves obtaining evidence about the amounts and disclosures in the accounts sufficient to give
reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies are appropriate to the parent company’s
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall presentation of the accounts.

Opiniononaccounts
In our opinion the parent company accounts:

•

•

•

give a true and fair view of the state of the company’s affairs as at 31 December 2009;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice;
and
have been prepared in accordance with the requirements of the Companies Act 2006.

OpiniononothermattersprescribedbytheCompaniesAct2006
In our opinion:

•

•

the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with
the Companies Act 2006; and

the information given in the Directors’ Report for the financial year for which the accounts are prepared is
consistent with the parent company accounts.

Mattersonwhichwearerequiredtoreportbyexception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to
report to you if, in our opinion:

•

•

•

•

adequate accounting records have not been kept by the parent company, or returns adequate for our audit
have not been received from branches not visited by us; or

the parent company accounts and the part of the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or

certain disclosures of directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

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Othermatter
We have reported separately on the group accounts of Smith & Nephew plc for the year ended 31 December
2009.

Leslie Clifford (Senior Statutory Auditor)
for and behalf of Ernst & Young LLP Statutory Auditor
London
18 March 2010

138

PARENT COMPANY BALANCE SHEET

Notes

At 31 December

2009
$ million

2008
$ million

Fixed assets:
Investments

Current assets:
Debtors
Cash and bank

Creditors: amounts falling due within one year:
Borrowings
Other creditors

Net current assets

Total assets less current liabilities

Creditors: amounts falling due after one year:
Borrowings

Total assets less total liabilities

Capital and reserves
Equity shareholders’ funds:
Called up equity share capital
Share premium account
Capital reserve
Treasury shares
Exchange reserve
Profit and loss account

Shareholders’ funds

C

D
E

E
F

E

G
G
G
G
G
G

3,598

3,598

2,337
3

2,340

(8)
(1,086)

(1,094)

1,246

4,844

1,509
5

1,514

(2)
(228)

(230)

1,284

4,882

(1,065)

3,779

(1,131)

3,751

190
382
2,266
(794)
(52)
1,787

3,779

190
375
2,266
(823)
(52)
1,795

3,751

The accounts were approved by the Board and authorised for issue on 18 March 2010 and signed on its behalf
by: John Buchanan Chairman David J. Illingworth Chief Executive Adrian Hennah Chief Financial Officer

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NOTES TO THE PARENT ACCOUNTS

A. General Information

Presentationoffinancialinformation
The Company redenominated its share capital
into US Dollars on 23 January 2006 and will retain
distributable reserves and declare dividends in US Dollars. Consequently its functional currency became the
US Dollar. Financial information for prior periods was restated from Sterling into US Dollars in accordance
with FRS 23, The Effects of Changes in Foreign Exchange Rates.

Share capital and share premium in comparative periods were translated at the rate of exchange on the
date of redenomination.

B. Accounting Policies

The separate accounts of the Parent Company are presented as required by the Companies Act 2006. The
accounts have been prepared under the historical cost convention, modified to include revaluation to fair
value of certain financial instruments as described below, and in accordance with applicable UK accounting
standards. As consolidated financial information has been disclosed under IFRS 7, Financial Instruments:
Disclosures, the Parent Company is exempt from FRS 29, Financial Instruments: Disclosures. The Group
accounts have been prepared in accordance with International Financial Reporting Standards as adopted by
the European Union and are presented on pages 76 to 139.

The Parent Company has taken advantage of the exemption in FRS 8, Related Party Disclosures not to
present its related party disclosures as the Group accounts contain these disclosures. In addition, the Parent
Company has taken advantage of the exemption in FRS 1, Cash Flow Statements not to present its own cash
flow statement as the Group accounts contain a consolidated cash flow.

In applying these policies management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the accounts and the reported amounts of revenues and expenses during the reporting period. Although
these estimates are based on management’s best knowledge of current events and actions, actual results
ultimately may differ from those estimates.

ForeignCurrencies
Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of
exchange ruling at the balance sheet date. All exchange differences are dealt with in arriving at profit before
taxation.

Investments
Investments in subsidiaries are stated at cost less provision for impairment.

FinancialInstruments
Currency swaps are used to match foreign currency net assets with foreign currency liabilities. They are
initially recorded at fair value and then for reporting purposes remeasured to fair value at exchange rates
and interest rates at subsequent balance sheet dates.

Changes in the fair value of derivative financial instruments are recognised in the profit and loss account as
they arise.

DeferredTaxation
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at
the balance sheet date where transactions or events have occurred at that date that will result in an
obligation to pay more, or a right to pay less or to receive more, tax.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the
periods in which timing differences are expected to reverse. These are based on tax rates and laws
substantively enacted at the balance sheet date.

140

B. Accounting Policies — (continued)

ShareBasedPayments
The Parent Company operates a number of equity-settled executive and employee share plans. For all
grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate
option pricing model and the corresponding expense is recognised over the vesting period. Subsidiary
companies are recharged for the fair value of share options that relate to their employees.

The disclosure relating to the Parent Company is detailed in Note 26 of the Notes to the Group accounts.

C.

Investments

At 1 January 2009 and 31 December 2009

Investments represent holdings in subsidiary undertakings.

$ million

3,598

The information provided below is given for the principal direct subsidiary undertakings, all of which are
100% owned and, in accordance with Section 410 of the Companies Act 2006, a full list will be appended to
Smith & Nephew’s next annual return to Companies House.

Company Name

Smith & Nephew UK Limited
Smith & Nephew (Overseas) Limited

Activity

Country of operation and
incorporation

Holding Company
Holding Company

England & Wales
England & Wales

Refer to Note 38 of the Notes to the Group accounts for the principal trading and manufacturing subsidiary
undertakings of the Group.

D. Debtors

Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Prepayments and accrued income

E.

Cash and Borrowings

Bank loans and overdrafts due within one year or on demand
Bank loans due after one year

Borrowings
Cash and bank
Credit balances on derivatives — currency swaps

Net debt

2009
$ million

2008
$ million

2,335
2

2,337

1,508
1

1,509

Notes

2009
$ million

2008
$ million

8
1,065

1,073
(3)
–

1,070

2
1,131

1,133
(5)
4

1,132

F

All currency swaps are stated at fair value. Gross US Dollar equivalents of $95 (2008 — $95m) receivable
is reported as credit
and $95m (2008 — $99m) payable have been netted and the difference of $nil
balances on currency swaps (2008 — $4m). Currency swaps comprise foreign exchange swaps and were
used in 2009 and 2008 to hedge Intragroup loans.

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F. Other Creditors

Amounts falling due within one year:
Amounts owed to subsidiary undertakings
Other creditors
Current taxation
Credit liability derivatives — interest rate swaps
Credit liability derivatives — currency swaps

G.

Equity and Reserves

2009

At 1 January
Attributable profit for the year
Equity dividends paid in the

year

Share-based payments

recognised

Cost of shares transferred to

beneficiaries

New shares issued on

exercise of share options
Treasury shares purchased
Profit on disposal of

subsidiary undertaking

Share
Capital
$ million
190
–

Share
Premium
$ million
375
–

Capital
reserves
$ million
2,266
–

Treasury
Shares
$ million
(823)
–

Exchange
reserves
$ million
(52)
–

–

–

–

–
–

–

–

–

–

7
–

–

–

–

–

–
–

–

–

–

29

–
–

–

–

–

–

–
–

–

2009
$ million

2008
$ million

1,067
5
8
6
–

1,086

197
9
4
14
4

228

Profit and
loss
account
$ million
1,795
113

Total
share-
holders
funds
$ million
3,751
113

2008
Total
share-
holders
funds
$ million
1,674
66

(120)

(120)

(109)

18

(19)

–
–

–

18

10

7
–

–

24

4

19
(193)

2,266

3,751

At 31 December

190

382

2,266

(794)

(52)

1,787

3,779

Further information on the share capital of the Parent Company can be found in Note 25 of the Notes to the
Group Accounts. The treasury shares purchased during the year of $nil (2008 — $193m) relate to the share
buy-back programme detailed in Note 27 of the Notes to the Group accounts.

The total distributable reserves of the Parent Company are $941m (2008 — $920m). In accordance with the
exemption permitted by Section 408 of the Companies Act 2006, the Company has not presented its own
profit and loss account. The attributable profit for the year dealt with in the accounts of the Company is
$113m (2008 — $66m).

Fees paid to Ernst & Young LLP for audit and non-audit services to the Company itself are not disclosed in
the individual accounts because group financial statements are prepared which are required to disclose
such fees on a consolidated basis. The fees for the consolidated Group are disclosed in Note 37 of the
Notes to the Group Accounts.

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H. Contingencies

Guarantees in respect of subsidiary undertakings

2009
$ million

27

2008
$ million

221

The Company has given guarantees to banks to support liabilities under foreign exchange and other
contracts and cross guarantees to support overdrafts. Such guarantees are not considered to be liabilities
as all subsidiary undertakings are trading as going concerns.

The Company operated defined benefit pension plans in 2004 but at the end of 2005 its pension plan
obligations were transferred to Smith & Nephew UK Limited. In January 2006 the Company provided
guarantees to the Trustees of the pension plans to support future amounts due from participating employers
(see Note 35 of the Notes to the Group Accounts).

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[THIS PAGE INTENTIONALLY LEFT BLANK]

144

INVESTOR INFORMATION

Shareholder return (Dividends and share price movements)*
Information for shareholders
Share capital
Selected financial data
Taxation information for shareholders
Articles of association
Cross reference to Form 20-F
Glossary of terms
Index

146
148
152
154
156
159
162
164
167

*

A graph showing total shareholder return can be found in the Directors’ Remuneration Report on page 73.

The report and financial statements, share and ADR price information, company presentations, the financial
calendar, Corporate Governance Statement, contact details and other investor information on the Group are
available in the ‘Investor Centre’ section of the Company’s website at www.smith-nephew.com.

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Dividends

SHAREHOLDER RETURN

Dividend History
Following the capital restructuring and dividend reduction in 2000 the Group adopted a policy of increasing its
dividend cover (the ratio of EPSA, as set out in the “Selected Financial Data”, to ordinary dividends declared for
the year). This was intended to increase the financing capability of
the Group for acquisitions and other
investments. From 2000 to 2004 the dividend increased in line with inflation and, in 2004, dividend cover stood
at 4.1 times. Having achieved this level of dividend cover the Board changed its policy, from that of increasing
dividends in line with inflation, to that of
increasing dividends for 2005 and after by 10%. Following the
redenomination of the Company’s share capital into US Dollars the Board re-affirmed its policy of increasing the
dividend by 10% a year in US Dollar terms.

Smith & Nephew has paid dividends on its Ordinary Shares in each year since 1937. An interim dividend in
respect of each fiscal year is normally declared in August and paid in November. Up to 2004 a final dividend for
each year was recommended by the Board of Directors in the following February and paid in May after approval
by shareholders at the Company’s Annual General Meeting. Following shareholder approval in December 2005,
the directors may declare and pay interim dividends. The second interim dividend replaces the final dividend and
is usually payable in May. In 2007, 2008 and 2009 shareholders received two interim dividends and are
expected to receive two interim dividends in 2010.

Future dividends of Smith & Nephew will be dependent upon: future earnings; the future financial condition of the
Group; the Board’s dividend policy; and the additional factors that might affect the business of the Group set out
in “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.

Dividends per share
The table below sets out the dividends per Ordinary share in the last five years.

Pence per share:
Interim
Second interim

Total

US cents per share:
Interim
Second interim

Total

2009

3.650
6.488(i)

10.138

6.067
9.922

15.989

Years ended 31 December
2008

2007

2006

2005

3.194
6.194

9.741

5.511
9.022

14.533

2.450
4.059

6.509

5.011
8.200

13.211

2.456
3.789

6.425

2.333
3.889

6.222

4.556
7.456

12.012

4.067
6.778

10.845

(i)

Translated at the Noon Buying Rate on 17 March 2010.

Dividends above include the associated UK tax credit of 10%, but exclude the deduction of withholding taxes. All
dividends, up to the second interim dividend for 2005, were declared in pence per Ordinary Share and translated
into US cents per Ordinary Share at the Noon Buying Rate on the payment date. Since the second interim
dividend for 2005 all dividends have been declared in US cents per Ordinary Share.

The 2009 second interim dividend will be payable on 12 May 2010.

The Ordinary Shares and ADSs will trade ex-dividend on both the London and New York Stock Exchanges
respectively from 21 April 2010. In respect of the second interim dividend for the year ended 31 December 2009
of 8.93 US cents per Ordinary Share, the record date will be 23 April 2010 and the payment date will be 12 May
2010. The Sterling equivalent per Ordinary Share will be set following the record date. Shareholders may elect to
receive their dividend in either Sterling or US Dollars and the last day for election will be 23 April 2010.

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Share Prices
The table below sets out, for the periods indicated, the highest and lowest middle market quotations for the
Company’s Ordinary Shares (as derived from the Daily Official List of the UK Listing Authority) and the highest and
lowest sales prices of its ADSs (as reported on the New York Stock Exchange composite tape).

Year ended 31 December:
2005
2006
2007
2008
2009

Quarters in the year ended 31 December:
2008:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

2009:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter

2010:
1st Quarter (to 17 March 2010)

Last Six Months:
September 2009
October 2009
November 2009
December 2009
January 2010
February 2010
March 2010 (to 17 March 2010)

Ordinary Shares

High
£

5.58
5.71
6.50
6.91
6.42

6.91
6.91
6.68
5.84

5.53
4.84
5.66
6.42

Low
£

4.52
4.00
5.33
4.13
4.20

5.77
5.39
5.20
4.13

4.22
4.20
4.39
5.27

ADSs

High
US$

52.83
52.65
67.84
68.87
51.38

67.35
68.57
60.08
51.54

39.63
38.91
46.93
51.38

Low
US$

40.26
36.95
51.54
30.39
30.57

57.09
50.69
51.55
30.39

30.57
31.00
35.82
42.55

6.97

6.25

53.23

48.98

5.66
5.56
5.89
6.42
6.51
6.74
6.97

5.17
5.27
5.36
5.92
6.26
6.25
6.71

46.93
45.12
49.02
51.38
52.70
52.45
53.23

42.32
42.55
44.23
48.34
49.92
48.98
50.88

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INFORMATION FOR SHAREHOLDERS

Financial Calendar

Quarter One results and AGM
Payment of 2009 second interim dividend
Half year results announced
Quarter Three results announced
Payment of 2010 first interim dividend
Full year results announced
Annual Report available
Annual General Meeting

(i)

Dividend declaration dates.

Ordinary Shareholders

6 May 2010
12 May 2010
5 August 2010 (i)
5 November 2010
November 2010
February 2011 (i)
March 2011
April/May 2011

Registrar
All general enquiries concerning shareholdings, dividends, changes to shareholders’ personal details and the
AGM should be addressed to:

Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
Tel: 0871 384 2081 inside the UK*
Tel: +44 (0) 121 415 7072 outside the UK.
Website: www.shareview.co.uk

* Calls to this number are charged at 8p per minute from a BT landline; other telephony providers’ costs may vary.

Shareholderfacilities:

• Shareview

Equiniti’s online enquiry and portfolio management service for shareholders. To view information about your
shareholdings online, register at www.shareview.co.uk. Once registered for Shareview, you will also be able
to register your proxy instructions online and elect to receive future shareholder communications via the
Company’s website (www.smith-nephew.com).

• E-communications

In line with developing practice we encourage shareholders to elect to receive communications via email as
this has significant environmental and cost benefits. Shareholders may register for this service through
Equiniti, at www.shareview.co.uk. Shareholders will receive a confirmation letter from Equiniti at
their
registered address, containing an Activation Code for future use.

• Paymentofdividendsdirecttoyourbankorbuildingsocietyaccount

Shareholders who wish to avoid the risk of their dividend payments getting lost or mislaid can arrange to
have their cash dividends paid directly to a bank or building society account. This facility is available to UK
resident shareholders who receive sterling dividends. If you do not live in the UK you may be able to register
for the overseas payment service. Further Information is available at www.shareview.co.uk or by contacting
Equiniti (UK and overseas helpline numbers as above).

• Dividendre-investmentplan(DRIP)

The Company offers shareholders (except those in North America) the opportunity to participate in a DRIP.
This enables shareholders to reinvest their cash dividends in further Ordinary shares of Smith & Nephew
plc. These are purchased in the market at competitive dealing costs. For further details plus an application
form to re-invest future dividends, contact Equiniti (as above).

• Smith&NephewcorporateISA

Shareholders who are UK residents are offered the opportunity to hold Smith & Nephew plc shares in an
Individual Savings Account (ISA), which is administered by the Company’s registrar. For information about
this service please contact Equiniti (as above).

148

Shareholder Communications
The Company makes Quarterly financial announcements which are made available through Stock Exchange
announcements and on the Group’s website (www.smith-nephew.com). Copies of recent Annual Reports,
Summary Financial Statements, press releases, institutional presentations and audio webcasts are also available
on the website.

Following shareholder approval in 2007, the Company sends paper copies of the Annual Report only to those
shareholders that have elected to receive shareholder documentation by post. ADS holders will also not receive a
paper copy unless they have elected to do so. Electronic copies of the Annual Report and the Summary Annual
Review, are available on the Group’s website at www.smith-nephew.com. Both Ordinary shareholders and ADS
holders can request paper copies of the Annual Report and Summary Annual Review, which the Company
provides free of charge. The Company will continue to send to Ordinary shareholders by post the notice of the
Annual General Meeting and an accompanying letter. The letter states that the Annual Report is available on the
Group’s website. Shareholders who elect to receive the notice of Annual General Meeting electronically are
informed by e-mail of the documents’ availability on the Group’s website. ADS holders receive the form of proxy
by post but will not receive a paper copy of the notice of Annual General Meeting.

Investor Communications
The Company maintains regular dialogue with individual
together with results
presentations. To ensure that all members of the Board develop an understanding of the views of major
investors, the executive directors review significant issues raised by investors with the Board. Non-executive
directors are sent copies of analysts’ and brokers’ briefings. There is an opportunity for individual shareholders to
question the directors at the AGM and the Company regularly responds to letters from shareholders on a range
of issues.

institutional shareholders,

UK capital gains tax
For the purposes of UK capital gains tax the price of the Company’s Ordinary Shares on 31 March 1982 was
35.04p.

Smith & Nephew share price
The Company’s Ordinary Shares are quoted on the LSE under the symbol SN. The Company’s share price is
available on the Smith & Nephew website www.smith-nephew.com and at www.londonstockexchange.com
where it is updated at intervals throughout the day. It is also quoted daily in UK national newspapers.

ShareGift
Shareholders with only a small number of shares, which would cost more to sell than they are worth, may wish to
consider donating them to the charity ShareGift (registered charity 1052686) which specialises in accepting such
shares as donations. There may be no implications for Capital Gains Tax purposes (no gain or loss) and it may
also be possible to obtain income tax relief. The relevant stock transfer form may be obtained from Equiniti at the
above address.

Further information about ShareGift is available at www.sharegift.org or by contacting ShareGift at:
ShareGift, 17 Carlton House Terrace, London SW1Y 5AH. Tel: (+44) (0) 20 7930 3737.

American Depositary Shares (“ADSs”) and American Depositary Receipts (“ADRs”)
In the US, the Company’s Ordinary Shares are traded in the form of ADSs, evidenced by ADRs, on the NYSE
under the symbol SNN. Each American Depositary Share represents five Ordinary Shares. The Bank of New York
Mellon is the authorised depositary bank for the Company’s ADR programme.

ADSEnquiries
All enquiries regarding ADS holder accounts and payment of dividends should be addressed to: BNY Mellon
Shareholder Services, PO Box 358516, Pittsburgh, PA 15252-8516, USA;
Tel: +1-866-259-2287 inside the US (toll free)
Tel: +1-201-680-6825 internationally
Email: shrrelations@bnymellon.com.

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A Global BuyDIRECT plan is available for US residents, enabling investment directly in ADSs with reduced
brokerage commissions and service costs. For further information on Global BuyDIRECT contact: The Bank of New
York Mellon (as above) or visit www.bnymellon.com/shareowner.

The Company provides the Bank of New York Mellon, as depositary, with copies of Annual Reports containing
Consolidated Financial Statements and the opinion expressed thereon by its independent auditors. Such financial
statements are prepared under IFRS. The Bank of New York Mellon will send these reports to recorded ADS
holders who have elected to receive paper copies. The Company also provides to The Bank of New York Mellon
all notices of shareholders’ meetings and other reports and communications that are made generally available to
shareholders of the Company. The Bank of New York Mellon makes such notices, reports and communications
available for inspection by recorded holders of ADSs and sends forms of proxy by post to all recorded holders of
ADSs.

Smith&NephewADSprice
The Company’s ADS price can be obtained from the official New York Stock Exchange website at www.nyse.com,
the Smith & Nephew website www.smith-nephew.com and is quoted daily in the Wall Street Journal.

ADSpaymentinformation.
The Company hereby discloses ADS payment information for the year ended 31 December 2009 in accordance
with the Securities and Exchange Commission rules 12.D.3 and 12.D.4 relating to Form 20-F filings by foreign
private issuers.

The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or
surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects
fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for depository services
by deductions from cash distributions or by directly billing investors or by charging the book-entry system
accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services
until its fees for those services are paid.

Persons depositing or withdrawing shares must pay:

For:

$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

Issuance of ADSs, including issuances resulting from
a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates

$0.02 (or less) per ADS

Any cash distribution to ADS registered holders

A fee equivalent to the fee that would be payable if
securities distributed to holders had been shares and
the shares had been deposited for issuance of ADSs

Distribution of securities distributed to holders of
deposited securities which are distributed by the
depositary to ADS registered holders

$0.02 (or less) per ADS per calendar year

Depositary services

Registration or transfer fees

Transfer and registration of shares on our share
register to or from the name of the depositary or its
agent when shares are deposited or withdrawn

Taxes and other governmental charges the depositary or
the custodian have to pay on any ADS or share
underlying an ADS, for example, stock transfer taxes,
stamp duty or withholding taxes

As necessary

Any charges incurred by the depositary or its agents for
servicing the deposited securities

As necessary

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Feesincurredinpastannualperiod
From 1 January 2009 to 17 March 2010, the Company received from the depositary $201,267 for continuing
annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADSs (consisting of the
expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing
dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage,
facsimile and telephone calls), any applicable performance indicators relating to the ADS facility, underwriting
fees and legal fees.

Feestobepaidinthefuture
On 11 February 2010 the Company announced that it is implementing a dividend fee of up to 2 US cents per ADS
per dividend payment. The fee is being implemented to off-set some of the costs associated with administering
the ADS facility. It is anticipated that 2 US cents per share will be payable on the 2009 second interim dividend
payable in May 2010 and 1 US cents will be deducted from the 2010 first interim dividend likely to be in
November 2010. The Bank of New York Mellon, as depositary, will deduct this fee prior to paying the net dividend
and will reimburse 70% of such fee to the Company.

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SHARE CAPITAL

The principal trading market for the Ordinary Shares is the London Stock Exchange. The Ordinary Shares were
listed on the New York Stock Exchange on 16 November 1999, trading in the form of ADSs evidenced by ADRs.
Each ADS represents five Ordinary shares. The ADS facility is sponsored by The Bank of New York Mellon acting
as depositary.

All the Ordinary Shares, including those held by directors and executive officers, rank pari passu with each other.
On 23 January 2006 the Ordinary Shares of 12 2/9 pence were redenominated as Ordinary Shares of US 20
cents (following approval by shareholders at the extraordinary general meeting in December 2005). The new US
Dollar Ordinary Shares carry the same rights as the previous Ordinary Shares. The share price continues to be
quoted in Sterling and the ADSs continue to represent five Ordinary Shares. In 2006 the Company issued
£50,000 of shares in Sterling in order to comply with English law. These were issued as Deferred Shares, which
are not listed on any stock exchange. They have extremely limited rights and therefore effectively have no value.
These shares were allotted to the Chief Executive, although the Board reserves the right to transfer them to
another member of the Board should it so wish.

Shareholdings
As at 17 March 2010, 8,250,637 ADSs equivalent to 41,253,185 Ordinary Shares or approximately 4.6% of the
total Ordinary Shares in issue, were outstanding and were held by 100 registered holders.

As at 17 March 2010, to the knowledge of the Group, there were 21,184 registered holders of Ordinary Shares,
of whom 79 had registered addresses in the US and held a total of 208,314 Ordinary Shares (less than 1% of the
total
the number of
shareholders with registered addresses in the US is not representative of the number of beneficial owners of
Ordinary Shares resident in the US.

issued). Because certain Ordinary Shares are registered in the names of nominees,

Major Shareholders
As far as is known to Smith & Nephew, the Group is not directly or indirectly owned or controlled by another
corporation or by any government and the Group has not entered into arrangements, the operation of which may
at a subsequent date result in a change in control of the Group.

As at 17 March 2010, no persons are known to Smith & Nephew to have any interest (as defined in the
Disclosure and Transparency Rules of the FSA) in 3% or more of the Ordinary Shares, other than as shown below.
The following tables show changes over the last three years in the percentage and numbers of the issued share
capital owned by shareholders holding 3% or more of Ordinary Shares, as notified to the Company under the
Disclosure and Transparency Rules:

Newton Investment Management Limited
Thornburg Investment Management Inc.
Capital Group of Companies Inc.
Legal and General Group plc
FMR LLC
Prudential plc

Newton Investment Management Limited
Thornburg Investment Management Inc.
Capital Group of Companies Inc.
Legal and General Group plc
FMR LLC
Prudential

As at 31 December

2009
%

5.1
5.1
5.1
4.0
3.9
–

2008
%

5.0
–
5.1
4.5
3.9
3.1

As at 31 December

2009
‘000

45,129
44,852
44,594
35,329
34,101
–

2008
‘000

44,168
–
44,594
40,040
34,101
26,945

2007
%

–
–
9.8
5.2
–
–

2007
‘000

–
–
88,150
46,324
–
–

17 March
2010
%

5.1
5.1
5.1
4.0
3.9
–

17 March
2010
‘000

45,129
44,852
44,594
35,329
34,101
–

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The Company is not aware of any person who has a significant direct or indirect holding of securities in the
Company, and is not aware of any persons holding securities which may control the Company. There are no
securities in issue which have special rights as to the control of the Company.

Purchase of Ordinary Shares on behalf of the Company
The share buy-back programme was suspended in November 2008,
in light of conditions in the financial
markets. The programme is kept under review and, although there is no current intention to re-instate the
programme, the Company will seek a renewal of its permission from shareholders to purchase up to 10% of its
own shares at the AGM on 6 May 2010. As at 31 December 2009, 68,240,200 (2008 — 68,240,200) ordinary
shares had been purchased under the share buy-back programme that commenced in February 2007. No
shares were purchased in 2009. The cost of the shares purchased in 2008 was $193m.

Exchange Controls and Other Limitations Affecting Security Holders
There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that
affect the payment of dividends, interest or other payments to non-resident holders of Smith & Nephew’s
securities, except for certain restrictions imposed from time to time by Her Majesty’s Treasury of the United
Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964,
against the government or residents of certain countries.

There are no limitations, either under the laws of the UK or under the Articles of Association of Smith & Nephew,
restricting the right of non-UK residents to hold or to exercise voting rights in respect of Ordinary Shares, except
that where any overseas shareholder has not provided to the Company a UK address for the service of notices,
the Company is under no obligation to send any notice or other document to an overseas address. It is, however,
the current practice of the Company to send every notice or other document to all shareholders regardless of the
the Company’s dividend
country recorded in the register of members, with the exception of details of
re-investment plan, which are not sent to shareholders with recorded addresses in the US and Canada.

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SELECTED FINANCIAL DATA

Income Statement
Revenue
Cost of goods sold

Gross Profit
Selling, general and administrative expenses
Research and development expenses

Operating profit
Net interest (payable)/receivable
Other finance (costs)/income
Share of results of associates

Profit before taxation
Taxation

Profit from continuing operations
Discontinued operations — net profit on disposal and

share of results of joint venture

Attributable profit for the year

Earnings per Ordinary Share
Including discontinued operations:
Basic
Diluted
Continuing operations:
Basic
Diluted
Discontinued operations:
Basic
Diluted

Adjusted attributable profit
Attributable profit for the year
Acquisition related costs
Restructuring and rationalisation expenses
Legal settlement
Amortisation of acquisition intangibles and impairments
Loss/(gain) on hedge of the sale proceeds of the joint

venture

Net profit on disposal of the joint venture
Taxation on excluded items

Adjusted attributable profit

2009
$ million

2008
$ million

2007
$ million

2006
$ million

2005
$ million

3,772
(1,030)

2,742
(1,864)
(155)

3,801
(1,077)

2,724
(1,942)
(152)

3,369
(994)

2,375
(1,740)
(142)

2,779
(769)

2,010
(1,353)
(120)

2,552
(754)

1,798
(1,254)
(122)

723
(40)
(15)
2

670
(198)

472

–

472

53.4¢
53.3¢

53.4¢
53.3¢

–
–

472
26
42
–
66

–
–
(26)

580

630
(66)
(1)
1

564
(187)

377

–

377

42.6¢
42.4¢

42.6¢
42.4¢

–
–

377
61
34
–
51

–
–
(30)

493

493
(30)
6
–

469
(153)

316

–

316

34.2¢
34.1¢

34.2¢
34.1¢

–
–

316
111
42
30
30

–
–
(49)

480

537
10
3
–

550
(156)

394

351

745

79.2¢
78.9¢

41.9¢
41.7¢

37.3¢
37.2¢

745
20
–
–
14

3
(351)
(6)

425

422
9
(3)
–

428
(126)

302

31

333

35.5¢
35.3¢

32.2¢
32.0¢

3.3¢
3.3¢

333
–
84
–
11

(2)
–
(29)

397

Adjusted basic earnings per Ordinary Share ( “EPSA”) (i)
Adjusted diluted earnings per Ordinary Share (ii)

65.6¢
65.5¢

55.6¢
55.4¢

52.0¢
51.7¢

45.2¢
45.0¢

42.3¢
42.1¢

154

2009
$ million

2008
$ million

2007 (iv)
$ million

2006
$ million

2005
$ million

Group Balance Sheet
Non-current assets
Current assets
Held for sale

Total assets

Share capital
Share premium
Treasury shares
Returned earnings and other reserves

Total equity

Non-current liabilities
Current liabilities

Total liabilities

Total equity and liabilities

Group Cash Flow
Cash generated from operations
Net interest (paid)/received
Income taxes paid

Net cash inflow from operating activities
Capital expenditure (including trade investments and
net of disposals of property, plant and equipment)

Acquisitions and disposals
Cash received from Plus settlement
Loan Notes issued
New finance leases
Facility fee paid
Borrowings and finance leases acquired
Dividends received from joint venture
Proceeds from own shares
Equity dividends paid
Issue of ordinary capital and treasury shares

purchased

2,480
2,071
14

4,565

190
382
(794)
2,401

2,179

1,523
863

2,386

4,565

1,030
(41)
(270)

719

(318)
(25)
137
–
–
–
–
–
10
(120)

7

410

2,523
1,985
–

4,508

190
375
(823)
1,957

1,699

1,841
968

2,809

4,508

815
(63)
(186)

566

(289)
(16)
–
–
–
2
–
–
4
(109)

(174)

(16)

Exchange adjustments
Opening (net debt)/net cash

Closing (net debt)/net cash

(21)
(1,332)

(943)

(6)
(1,310)

(1,332)

2,542
1,919
–

4,461

190
356
(637)
1,907

1,816

357
2,288

2,645

4,461

693
(30)
(225)

438

(194)
(781)
–
–
(7)
(6)
(181)
–
–
(105)

(612)

(1,448)

(72)
210

(1,310)

1,586
1,645
–

3,231

189
329
(1)
1,657

2,174

241
816

1,057

3,231

506
10
(144)

372

(222)
454
–
(15)
–
–
–
–
–
(96)

16

509

7
(306)

210

1,420
1,338
218

2,976

203
299
(4)
937

1,435

529
1,012

1,541

2,976

372
9
(112)

269

(200)
(25)
–
–
–
–
–
25
–
(91)

19

(3)

(71)
(232)

(306)

Selected Financial Ratios
Gearing (closing net debt as a percentage of total

equity)

Dividends per Ordinary Share (iii)
Research and development costs to Revenue
Capital expenditure (including intangibles but

excluding goodwill) to Revenue

43%
14.39¢
4.1%

78%
13.08¢
4.0%

72%
11.89¢
4.2%

n/a
10.81¢
4.3%

21%
5.60p
4.8%

8.4%

7.7%

5.9%

8.3%

7.9%

(i)
Adjusted basic earnings per Ordinary Share is calculated by dividing adjusted attributable profit by the average number of shares.
(ii) Adjusted diluted earnings per Ordinary Share is calculated by dividing adjusted attributable profit by the diluted number of shares.
(iii) The board has declared a second interim dividend of 8.93 US cents per share which together with the first interim dividend of 5.16 US

cents makes a total for 2009 of 14.39 US cents. Prior to 2006 dividends were declared in pence.

(iv) Restated due to Plus opening balance sheet adjustments. See Note 31 of the Notes to the Group Accounts.

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TAXATION INFORMATION FOR SHAREHOLDERS

is a citizen or resident of

The comments below are of a general and summary nature and are based on the Group’s understanding of
certain aspects of current UK and US federal income tax law and practice relevant to the ADSs and Ordinary
in ADS form. The comments address the material US and UK tax consequences generally
Shares not
applicable to a person who is the beneficial owner of ADSs or Ordinary Shares and who, for US federal income
tax purposes,
the United States, a corporation (or other entity taxable as a
corporation) created or organised in or under the laws of the United States, or an estate or trust the income of
which is included in gross income for US federal income tax purposes regardless of its source (each a “US
Holder”). The comments set out below do not purport to address all tax consequences of the ownership of
ADSs or Ordinary Shares which may be material to a particular holder and in particular do not deal with the
position of shareholders who directly or indirectly own 10% or more of the Company’s issued Ordinary Shares.
This discussion does not apply to persons whose holding of ADSs or Ordinary Shares is effectively connected
with or pertains to either (i) a permanent establishment in the United Kingdom through which a US Holder
carries on a business in the United Kingdom, (ii) a fixed base from which a US Holder performs independent
personal services in the United Kingdom, or (iii) whose registered address is inside the UK. This discussion
does not apply to certain investors subject to special rules, such as certain financial institutions, tax-exempt
entities, insurance companies, broker-dealers, traders in securities that elect to mark to market, partnerships
or other entities treated as partnerships for US federal
income tax purposes, US Holders holding ADSs or
Ordinary Shares as part of a hedging, conversion or other integrated transaction or whose functional currency
for US federal income tax purposes is other than the US Dollar and investors liable for alternative minimum tax.
In addition, the comments below do not address US state, local or non-US (other than UK) taxes. The summary
deals only with US Holders who hold ADSs or Ordinary Shares as capital assets. The summary is based on
current UK and US law and practice which is subject to change, possibly with retroactive effect. US Holders are
recommended to consult
the
ownership of ADSs or Ordinary Shares.

their own tax advisors as to the particular tax consequences to them of

The Company believes, and this discussion assumes, that the Company was not a passive foreign investment
company for its taxable year ended 31 December 2009.

This discussion is based in part on representations by the depositary and assumes that each obligation under
the deposit agreement and any related agreement will be performed in accordance with its terms. For purposes
of US federal income tax law, US Holders of ADSs will generally be treated as owners of the Ordinary Shares
represented by the ADSs. However, the US Treasury has expressed concerns that parties to whom depositary
shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by
owners of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described
below, applicable to dividends received by certain non-corporate US Holders. Accordingly, the analysis of the
availability of the reduced tax rate for dividends received by certain non corporate US Holders could be affected
by actions that may be taken by parties to whom ADSs are pre-released.

Taxation of Dividends in the United Kingdom and the United States
The UK does not currently impose a withholding tax on dividends paid by a UK corporation, such as the
Company.

Distributions paid by the Company will be treated for US federal income tax purposes as foreign source ordinary
dividend income to a US Holder to the extent paid out of the Company’s current or accumulated earnings and
profits as determined for US federal income tax purposes. Such dividends will not be eligible for the dividends-
received deduction generally allowed to corporate US Holders.

Dividends paid to certain non-corporate US Holders of Ordinary Shares or ADSs in taxable years beginning
before 1 January 2011 may be subject to US federal income tax at lower rates than other types of ordinary
income if certain conditions are met. Non-corporate US Holders should consult their own tax advisors to
determine whether they are subject to any special rules that limit their ability to be taxed at these favourable
rates.

Taxation of Capital Gains
US Holders, who are not resident or ordinarily resident for tax purposes in the UK, will not generally be liable for
UK capital gains tax on any capital gain realised upon the sale or other disposition of ADSs or Ordinary Shares
unless held in connection with a trade carried on in the UK through a permanent establishment (or in the case of

156

individuals, through a branch or agency). Furthermore, UK resident individuals who acquire ADSs or Ordinary
Shares before becoming temporarily non-UK residents, may remain subject to UK taxation of capital gains on
gains realised while non-resident.

For US federal income tax purposes, gains or losses realised upon the sale or disposition of ADSs or Ordinary
Shares by US Holders generally will be US source capital gains or losses and will be long-term US source capital
gains or losses if the ADSs or Ordinary Shares were held for more than one year. The amount of the US Holder’s
gain or loss will be equal to the difference between the amount realised on the sale or disposition and such
holder’s tax basis in the ADSs, or Ordinary Shares, determined in US Dollars.

Inheritance and Estate Taxes
The HM Revenue & Customs imposes inheritance tax on capital transfers which occur on death, and in the seven
years preceding death. The HM Revenue & Customs considers that the US/UK Double Taxation Convention on
Estate and Gift Tax applies to inheritance tax. Consequently, a US citizen who is domiciled in the United States
and is not a UK national or domiciled in the United Kingdom will not be subject to UK inheritance tax in respect of
ADSs and Ordinary Shares. A UK national who is domiciled in the United States will be subject to both UK
inheritance tax and US federal estate tax but will be entitled to a credit for US federal estate tax charged in
respect of ADSs and Ordinary Shares in computing the liability to UK inheritance tax. Conversely, a US citizen
who is domiciled or deemed domiciled in the United Kingdom will be entitled to a credit for UK inheritance tax
charged in respect of ADSs and Ordinary Shares in computing the liability for US federal estate tax. Special rules
apply where ADSs and Ordinary Shares are business property of a permanent establishment of an enterprise
situated in the United Kingdom.

US Information Reporting and Backup Withholding Tax
A US Holder may be subject to US information reporting and backup withholding tax on dividends paid or the
proceeds of sales from ADSs or Ordinary Shares made within the US or through certain US-related financial
intermediaries, unless the US Holder is a corporation or other exempt recipient or, in the case of backup
withholding, provides a correct US taxpayer identification number and certain other conditions are met. US
backup withholding tax may also apply if there has been a notification from the US Internal Revenue Service of a
failure to report all interest or dividends.

Any backup withholding tax deducted may be credited against the US Holder’s US federal income tax liability,
and, where the withholding tax exceeds the actual liability, the US Holder may obtain a refund by timely filing the
appropriate refund claim with the US Internal Revenue Service.

UK Stamp Duty and Stamp Duty Reserve Tax
UK stamp duty is charged on documents and in particular instruments for the transfer of registered ownership of
Ordinary Shares. Transfers of Ordinary Shares in certificated form will generally be subject to UK stamp duty at
the rate of 1⁄ 2% of the consideration given for the transfer with the duty rounded up to the nearest £5.

UK stamp duty reserve tax (“SDRT”) arises when there is an agreement to transfer shares in UK companies “for
consideration in money or money’s worth”, and so an agreement to transfer Ordinary Shares for money or other
consideration may give rise to a charge to SDRT at the rate of 1⁄ 2% (rounded up to the nearest penny). The charge
of SDRT will be cancelled, and any SDRT already paid will be refunded, if within six years of the agreement an
instrument of transfer is produced to HM Revenue & Customs and the appropriate stamp duty paid.

Transfers of Ordinary Shares into CREST (an electronic transfer system) are exempt from stamp duty so long as
the transferee is a member of CREST who will hold the Ordinary Shares as a nominee for the transferor and the
transfer is in a form that will ensure that the securities become held in uncertificated form within CREST. Paperless
transfers of Ordinary Shares within CREST for consideration in money or money’s worth are liable to SDRT rather
than stamp duty. SDRT on relevant transactions will be collected by CREST at 1⁄ 2%, and this will apply whether or
not the transfer is effected in the United Kingdom and whether or not the parties to it are resident or situated in
the United Kingdom.

A charge of stamp duty or SDRT at the rates of 1 1⁄ 2% of the consideration (or, in some circumstances, the value
of the shares concerned) will arise on a transfer or issue of Ordinary Shares to the Depositary or to certain
persons providing a clearance service (or their nominees or agents) for the conversion into ADRs and will
generally be payable by the Depositary or person providing clearance service. In accordance with the terms of

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the Deposit Agreement, any tax or duty payable by the Depositary on deposits of Ordinary Shares will be charged
by the Depositary to the party to whom ADRs are delivered against such deposits.

No liability for stamp duty or SDRT will arise on any transfer of, or agreement to transfer, an ADS or beneficial
ownership of an ADS, provided that the ADS and any instrument of transfer or written agreement to transfer
remains at all times outside the United Kingdom, and provided further that any instrument of transfer or written
agreement to transfer is not executed in the United Kingdom and the transfer does not relate to any matter or
thing done or to be done in the United Kingdom (the location of the custodian as a holder of Ordinary Shares not
being relevant in this context). In any other case, any transfer of, or agreement to transfer, an ADS or beneficial
ownership of an ADS could, depending on all the circumstances of the transfer, give rise to a charge to stamp
duty or SDRT.

158

ARTICLES OF ASSOCIATION

The following summarises certain material rights of holders of the Company’s Ordinary Shares under the material
provisions of the Company’s memorandum and articles of association and English law. This summary is qualified
in its entirety by reference to the Companies Act and the Company’s memorandum and articles of association. In
the following description, a “shareholder” is the person registered in the Company’s register of members as the
holder of an Ordinary Share.

The Company is incorporated under the name Smith & Nephew plc and is registered in England and Wales with
registered number 324357.

The Company’s Ordinary Shares may be held in certificated or uncertificated form. No holder of the Company’s
shares will be required to make additional contributions of capital in respect of the Company’s shares in the
future. In accordance with English law the Company’s Ordinary Shares rank equally.

Directors
Under the Company’s articles of association, a director may not vote in respect of any contract, arrangement,
transaction or proposal in which he, or any person connected with him, has any material interest other than by
virtue of his interests in securities of, or otherwise in or through, the Company. This is subject to certain
exceptions relating to proposals (a) indemnifying him in respect of obligations incurred on behalf of the Company,
(b) indemnifying a third party in respect of obligations of the Company for which the director has assumed
responsibility under an indemnity or guarantee, (c) relating to an offer of securities in which he will be interested
as an underwriter, (d) concerning another body corporate in which the director is beneficially interested in less
than one percent of the issued shares of any class of shares of such a body corporate, (e) relating to an
employee benefit in which the director will share equally with other employees and (f) relating to any insurance
that the Company is empowered to purchase for the benefit of directors of the Company in respect of actions
undertaken as directors (and/or officers) of the Company.

A director shall not vote or be counted in any quorum present at a meeting in relation to a resolution on which he
is not entitled to vote.

The directors are empowered to exercise all the powers of the Company to borrow money, subject to the
limitation that the aggregate amount of all monies borrowed after deducting cash and current asset investments
by the Company and its subsidiaries shall not exceed the sum of $6,500,000,000.

Any director who has been appointed by the directors since the previous annual general meeting of
shareholders, either to fill a casual vacancy or as an additional director, holds office only until the next annual
general meeting and then shall be eligible for re-election by the shareholders. The other directors retire and are
eligible for re-appointment at the third annual general meeting after the meeting at which they were last
re-appointed. The directors are subject to removal with or without cause by the Board or the shareholders.
Directors are not required to hold any shares of the Company by way of qualification.

Rights Attaching to Ordinary Shares
Under English law, dividends are payable on the Company’s Ordinary Shares only out of profits available for
distribution, as determined in accordance with accounting principles generally accepted in the United Kingdom
and by the Companies Act 2006. Holders of the Company’s Ordinary Shares are entitled to receive final
dividends as may be declared by the directors and approved by the shareholders in general meeting, rateable
according to the amounts paid up on such shares, provided that the dividend cannot exceed the amount
recommended by the directors.

The Company’s Board of Directors may declare such interim dividends as appear to them to be justified by the
Company’s financial position. If authorised by an ordinary resolution of the shareholders, the Board may also
direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid up
shares or debentures of the Company).

Any dividend unclaimed after 12 years from the date the dividend was declared, or became due for payment, will
be forfeited and will revert to the Company.

There were no material modifications to the rights of shareholders under the Articles during 2009.

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Voting Rights of Ordinary Shares
Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly
demanded and held. On a show of hands, every shareholder who is present in person at a general meeting has
one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by
proxy has one vote for each Ordinary Share held by that shareholder. A poll may be demanded by any of the
following:

•

•

•

•

the chairman of the meeting;

at least five shareholders present or by proxy entitled to vote on the resolution;

any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting
rights of all shareholders entitled to vote on the resolution; or

any shareholder or shareholders holding shares conferring a right to vote on the resolution on which there
have been paid-up sums in aggregate equal to not less than one-tenth of the total sum paid up on all the
shares conferring that right.

A form of proxy will be treated as giving the proxy the authority to demand a poll, or to join others in demanding
one, as above.

The necessary quorum for a general meeting is two shareholders present in person or by proxy carrying the right
to vote upon the business to be transacted.

Matters are transacted at general meetings of the Company by the processing and passing of resolutions of
which there are two kinds; ordinary or special resolutions:

•

•

Ordinary resolutions include resolutions for the re-election of directors, the approval of financial statements,
the declaration of dividends (other than interim dividends), the appointment and re-appointment of auditors,
the increase of authorised share capital or the grant of authority to allot shares. An ordinary resolution
requires the affirmative vote of a majority of the votes of those persons voting at the meeting at which there
is a quorum.

Special resolutions include resolutions amending the Company’s memorandum and articles of association,
disapplying statutory pre-emption rights or changing the Company’s name; modifying the rights of any class
of the Company’s shares at a meeting of the holders of such class or relating to certain matters concerning
the Company’s winding up. A Special resolution requires the affirmative vote of not less than three-quarters
of the votes of the persons voting at the meeting at which there is a quorum.

Annual general meetings must be convened upon advance written notice of 21 days. Other general meetings
must be convened upon advance written notice at least 14 clear days. The days of delivery or receipt of notice
are not included. The notice must specify the nature of the business to be transacted. Meetings are convened by
the Board of directors. Members with 10% of the Ordinary Share capital of the Company may requisition the
Board to convene a meeting.

Variation of Rights
If, at any time, the Company’s share capital is divided into different classes of shares, the rights attached to any
class may be varied, subject to the provisions of the Companies Act, with the consent in writing of holders of
three-quarters in value of the shares of that class or upon the adoption of a special resolution passed at a
separate meeting of the holders of the shares of that class. At every such separate meeting, all the provisions of
the articles of association relating to proceedings at a general meeting apply, except that the quorum is to be the
number of persons (which must be two or more) who hold or represent by proxy not less than one-third in
nominal value of the issued shares of the class and at any such meeting a poll may be demanded in writing by
any five persons who hold or represent by proxy not less than one fortieth of the nominal value of the shares of
that class. Where a person is present by proxy or proxies, he is treated as holding only the shares in respect of
which the proxies are authorised to exercise voting rights.

Rights in a Winding-Up
Except as the Company’s shareholders have agreed or may otherwise agree, upon the Company’s winding up,
the balance of assets available for distribution:

•

•

after the payment of all creditors including certain preferential creditors, whether statutorily preferred
creditors or normal creditors; and

subject to any special rights attaching to any other class of shares;

160

is to be distributed among the holders of Ordinary Shares according to the amounts paid-up on the shares held
by them. This distribution is generally to be made in cash. A liquidator may, however, upon the adoption of any
extraordinary resolution of
the shareholders and any other sanction required by law, divide among the
shareholders the whole or any part of the Company’s assets in kind.

Limitations on Voting and Shareholding
There are no limitations imposed by English law or the Company’s memorandum or articles of association on the
right of non-residents or foreign persons to hold or vote the Company’s ordinary shares or ADSs, other than the
limitations that would generally apply to all of the Company’s shareholders.

Transfers of Shares
The Board may refuse to register the transfer of shares held in certificated form which:

•

•

•

•

are not fully paid (provided that it shall not exercise this discretion in such a way as to prevent stock market
dealings in the shares of that class from taking place on an open and proper basis);

are not duly stamped or duly certified or otherwise shown to the satisfaction of the Board to be exempt from
stamp duty, lodged at the Transfer Office or at such other place as the Board may appoint and (save in the
case of a transfer by a person to whom no certificate was issued in respect of the shares in question)
accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may
reasonably require to show the right of the transferor to make the transfer and, if the instrument of transfer is
executed by some other person on his behalf, the authority of that person so to do;

are in respect of more than one class of shares; or

are in favour of not more than four transferees.

Deferred Shares
Following the redenomination of share capital on 23 January 2006 the Ordinary Shares’ nominal value became 20
US cents each. There were no changes to the rights or obligations of the Ordinary Shares. In order to comply with
the Companies Act 2006, a new class of Sterling shares was created, Deferred Shares, of which £50,000 were
issued and allotted in 2006 as fully paid to the Chief Executive though the Board reserves the right to transfer
them to another member of the Board should it so wish. These Deferred Shares have no voting or dividend rights
and on winding up only are entitled to repayment at nominal value only if all ordinary shareholders have received
the nominal value of their shares plus an additional $1,000 each.

Amendments
The Company does not have any special rules about amendments to its articles of association beyond those
imposed by law.

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CROSS REFERENCE TO FORM 20F

This table has been provided as a cross reference from the information included in this Annual Report to the
requirements of Form 20-F.

Part I
Item 1
Item 2
Item 3

Item 4

Item 4A
Item 5

Item 6

Item 7

Item 8

Item 9

Item 10

Identity of Directors, Senior Management and Advisors
Offer Statistics and Expected Timetable
Key Information
A — Selected Financial Data
B — Capitalisation and Indebtedness
C — Reason for the Offer and Use of Proceeds
D — Risk Factors
Information on the Company
A — History and Development of the Company
B — Business Overview
C — Organisational Structure
D — Property, Plant and equipment
Unresolved Staff Comments
Operating and Financial Review and Prospects
A — Operating results
B — Liquidity and Capital Resources
C — Research and Development, patents and licenses, etc
D — Trend information
E — Off Balance Sheet Arrangements
F — Tabular Disclosure of Contractual Obligations
G — Safe Harbor
Directors, Senior Management and Employees
A — Directors and Senior Management
B — Compensation
C — Board Practices
D — Employees
E — Share Ownership
Major Shareholders and Related Party Transactions
A — Major Shareholders

— Host Country Shareholders
B — Related Party Transactions
C — Interests of experts and counsel
Financial information
A — Consolidated Statements and Other Financial Information

— Legal Proceedings
— Dividends

B — Significant Changes
The Offer and Listing
A — Offer and Listing Details
B — Plan and Distribution
C — Markets
D — Selling Shareholders
E — Dilution
F — Expenses of the Issue
Additional Information
A — Share capital
B — Memorandum and Articles of Association
C — Material Contracts
D — Exchange Controls
E — Taxation
F — Dividends and Paying Agents
G — Statement by Experts

162

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20 - 23

4-5, 41 - 42
i, 5 - 14, 22, 26,92 - 96
i, 5, 136
12 - 13
None

26 - 40
41 - 42
13
28, 45
46
46
iii

48 - 49
61 - 74
48 - 56, 68 - 69
19
19, 71 - 72, 117 - 122

152 - 153
152
46, 135
n/a

75 - 136
43 - 44
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147, 152
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4-5
153
156 - 158
n/a
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H — Documents on Display
I — Subsidiary Information
Quantitative and Qualitative Disclosure about Market Risk
Description of Securities Other than Equity Securities

Item 11
Item 12
Item 12D American Depository shares

Part II

(Reserved)

Defaults, Dividend Arrearages and Delinquencies

Item 13
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15A Controls and Procedures
Item 16
Item 16A Audit Committee Financial Expert
Item 16B Code of Ethics
Item 16C Principal Accountant Fees and Services
Item 16D Exemptions from the Listing Standards for Audit Committee
Item 16E
Item 16F Change in Registrants Certifying Accountant
Item 16G Corporate Governance Statement

Purchase of Equity Securities by the Issuer and Affiliated Purchase

Part III

Item 17
Item 18
Item 19

Financial Statements
Financial Statements
Exhibits

Page

iii
136
20 - 24, 106 - 113
n/a
149 - 151

None
None
57 - 58, 81
n/a
50
58
58 - 59
n/a
153
n/a
47 - 59

n/a
75 - 136

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GLOSSARY OF TERMS

Unless the context indicates otherwise, the following terms have the meanings shown below:

Term

Meaning

Adjusted attributable profit

ADR

ADS

Advanced Wound Management

AGM

Arthoscopy

Bandaging

Basis Point

Bio-absorbable

Chronic wounds

Company

Adjusted attributable profit is a trend measure which presents the long-
term profitability of the Group excluding the impact of specific transactions
that management considers affect the Group’s short-term profitability. The
Group has identified the following items, where material, as those to be
excluded from attributable profit when arriving at adjusted attributable
profit: acquisition and disposal related items including amortisation of
acquisition intangible assets and impairments; significant restructuring
events; gains and losses resulting from legal disputes and uninsured
losses; and taxation on excluded items. Adjusted attributable profit is the
numerator used in determining EPSA.

In the US, the Company’s Ordinary Shares are traded in the form of ADSs
evidenced by American Depository Receipts (“ADRs”).

In the US, the Company’s Ordinary Shares are traded in the form of
American Depositary Shares (“ADSs”).

A product group comprising products associated with the treatment of
skin wounds, ranging from products that provide moist wound healing
using breathable films and polymers to products providing active wound
healing by biochemical or cellular action.

Annual General Meeting of the Company.

Endoscopy of
applications being the knee and shoulder.

the joints is termed “arthroscopy”, with the principal

A product group comprising traditional adhesive and support bandaging

One hundredth of one percentage point.

Bio-absorbable material: Material used in surgical procedures which
degrade and are absorbed by the body after a period of time, thus
removing the need to surgically remove them.

Chronic wounds are those with long or unknown healing times including
leg ulcers, pressure sores and diabetic foot ulcers.

Smith & Nephew plc or, where appropriate, the Company’s Board of
Directors, unless the context otherwise requires.

Companies Act

Companies Act 2006, as amended, of England and Wales.

Digital Operating Room

EBITA

EBITDA

EIP

EPSA

The digital operating room is a custom-designed operating room solution
providing auto-video connectivity, medical device control, integration with
hospital
information systems and surgical documentation devices for
medical facilities to help improve efficiency, cost effectiveness and, by
extension, patient care.

Earnings before interest, tax and amortisation.

Earnings before interest, tax, depreciation and amortisation.

Earnings Improvement Programme, the objective of which is to enhance
short and medium term performance, to liberate resources for investment
and to establish a culture of continuous improvement.

Adjusted Earnings Per Share is a trend measure which presents the long-
term profitability of the Group excluding the impact of specific transactions
that management considers affect the Group’s short-term profitability. The
Group presents this measure to assist investors in their understanding of
trends. Adjusted attributable profit is the numerator used for this measure.

164

Term

Endoscopy

Endoscopy products

Euro or €

External fixation

Meaning

Endoscopy allows surgeons to operate through coin-sized openings in the
body, rather than large incisions.

A product group comprising specialised viewing and access devices,
surgical instruments and powered equipment used in minimally invasive
surgical procedures. Through a small incision surgeons are able to see
inside the body using a monitor and identify and repair defects.

References to the common currency used in the majority of the countries
of the European Union.

The use of wires or pins transfixed through bone to hold a frame to the
position of a fracture.

FDA

US Food and Drug Administration.

Financial statements

Refers to the consolidated Group Accounts of Smith & Nephew plc.

FTSE 100

Fracture casting

Index of the largest 100 listed companies on the London Stock Exchange
by market capitalisation.

A product group comprising products that are used externally to
immobilise a bone fracture or damaged joint, usually made of plaster of
paris or synthetic materials.

Group or Smith & Nephew

Used for convenience to refer to the Company and its consolidated
subsidiaries, unless the context otherwise requires.

IFRIC

IFRS

Insufflation

International Financial Reporting Interpretations as adopted by the EU and
as issued by the International Accounting Standards Board.

International Financial Reporting Standards as adopted by the EU and as
issued by the International Accounting Standards Board.

The use of carbon dioxide to inflate body cavities during endoscopic
surgery to enable surgeons to view internal organs.

Intramedullary nail system

Stainless steel or titanium implants shaped like a nail
intramedullary canal in diaphyseal fractures.

implanted in the

LSE

London Stock Exchange

Metal-on-metal hip resurfacing

Negative Pressure Wound Therapy

A less invasive surgical approach to treating arthritis in younger patients
whereby only the surfaces of the hip joint are replaced leaving the hip
head substantially preserved.

A technology used to treat chronic wounds such as diabetic ulcers,
pressure sores and post operative wounds through the application of sub-
atmospheric pressure to an open wound.

NYSE

New York Stock Exchange

Orthobiologic products

Orthopaedic products

Any product that is primarily intended to act as a scaffold and/or actively
stimulates bone growth.

Orthopaedic reconstruction products include joint replacement systems
for knees, hips and shoulders and support products such as computer
assisted surgery and minimally invasive surgery techniques. Orthopaedic
trauma devices are used in the treatment of bone fractures including rods,
pins, screws, plates and external
therapies products
comprise a joint fluid therapy for pain reduction of the knee and an
ultrasound treatment to accelerate the healing of bone fractures.

frames. Clinical

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Term

OXINIUM

Meaning

OXINIUM material is an advanced load bearing technology. It is created
through a proprietary manufacturing process that enables zirconium to
absorb oxygen and transform to a ceramic on the surface, resulting in a
material that incorporates the features of ceramic and metal. Management
believes that OXINIUM material used in the production of components of
knee and hip implants exhibits unique performance characteristics due to
its hardness, low-friction and resistance to roughening and abrasion.

Parent

Smith & Nephew plc

Pound Sterling, Sterling, £, pence

References to UK currency. 1p is equivalent to one hundredth of £1.

or p

Repair

Resection

Trading profit

Traditional woundcare

UK

UK GAAP

US

A product group within endoscopy comprising specialised devices,
fixation systems and bio-absorbable materials to repair
joints and
associated tissue.

Products that cut or ablate tissue within endoscopy comprising
mechanical blades, radio frequency wands, electromechanical and hand
instruments for resecting tissue.

Trading profit is a trend which presents the long-term profitability of the
Group excluding the impact of specific transactions that management
considers affect the Group’s short-term profitability. 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 including amortisation of acquisition intangible
assets and impairments; significant restructuring events; and gains and
losses resulting from legal disputes and uninsured losses.

Product group comprising medical textile products, adhesive tapes and
fixative sheets to secure wound management products to the body.

United Kingdom of Great Britain and Northern Ireland.

Accounting principles generally accepted in the United Kingdom

United States of America

US Dollars, US $ or cents

References to US currency. 1 cent is equivalent to one hundredth of US$1

US GAAP

Visualisation

Accounting principles generally accepted in the United States of America

Products within endoscopy comprising digital cameras,
monitors, scopes,
broadcasting systems for use in endoscopic surgery with visualisation.

light sources,
image capture, central control and multimedia

Wound bed

An area of healthy dermal and epidermal tissue of a wound.

166

INDEX

2008 Year Analysis
2009 Year Analysis
Accountability, Audit and Internal Control

Framework

Accounting Policies
Accounts Presentation
Acquisitions
Acquisition related costs
Advanced Wound Management —

Business Description

American Depository Shares
Assets held for sale
Audit Fees
Board and Executive Officers
Business Overview
Cash and Borrowings
Contingencies
Contractual Obligations
Corporate Governance Statement
Corporate and Social Responsibility
Critical Accounting Policies
Cross Reference to Form 20-F
Currency Translation
Deferred Taxation
Directors’ Remuneration Report
Directors’ Responsibilities for the

Accounts

Directors’ Responsibility Statement
Dividends
Earnings per share
Employees
Employees’ Share Trust
Endoscopy — Business Description
Exchange and Interest Rate Risk and

Financial Instruments

Factor’s Affecting Results of Operations
Financial Commitments
Financial Instruments
Financial Position, Liquidity and Capital

Resources

Financial highlights
Glossary of terms
Goodwill
Governance and Policy
Group Balance Sheet
Group Cash Flow Statement
Group Income Statement
Group Statement of Changes in Equity
Group Statement of Comprehensive

Income
Group History
Group Strategy

36
30

57
86
86
123
95

8
149
127
58, 135
48
26
106
128
46
47
15
29
162
123
114
61

76
77
99, 146
100
19
122
7

24
28
127
110

41
i
164
103
50
83
84, 122
82
85

82
4
4

Group Organisation
Impairment Testing of Goodwill
Independent Auditors’ Reports
Intangible Assets
Intellectual Property
Interest
Inventories
Investments
Investment in associates
Investor information
Key Performance Indicators
Legal proceedings
Manufacture and supply
Memorandum and Articles of

Association
Minority Interests
New Accounting Standards
Off-Balance Sheet Arrangements
Business Review, Liquidity and Prospects
Operating profit
Orthopaedics — Business Description
Other Finance (Costs)/Income
Outlook and Trend Information
Parent Company Auditors’ Report
Parent Company Balance Sheet
Parent Company Notes to the Accounts
Payables
Principal Subsidiary Undertakings
Provisions
Property, plant and equipment
Receivables
Recent Developments
Regulation
Related Party Transactions
Research and Development
Restructuring and Rationalisation

Expenses

Retirement Benefit Obligations
Risk
Sales, Marketing and Distribution
Seasonality
Selected Financial Data
Segmental Analysis
Share Based Payments
Share Capital
Taxation
Treasury Shares

5
103
78
102
13
98
105
102
103
145
i
43
11

159
85
92
46
25
97
5
98
45
137
139
140
113
136
114
12, 101
105
4
14
46, 135
13

98
129
20
11
11
154
92
117
116, 152
99, 156
121

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THIS PAGE INTENTIONALLY LEFT BLANK

168

www.smith-nephew.com

Smith & Nephew plc
15 Adam Street 
London WC2N 6LA 
United Kingdom

T +44 (0) 20 7401 7646 
F +44 (0) 20 7960 2350