A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
1
Annual Report 2011
Smith & Nephew plc
15 Adam Street
London WC2N 6LA
United Kingdom
T +44 (0) 20 7401 7646
F +44 (0) 20 7960 2350
www.smith-nephew.com
262189_cover.indd 1
24/02/2012 20:27
Every day each one of us at smith&nephew
helps improve the life of someone, somewhere
in the world. That’s something to be proud of.
Front Cover:
Smith & Nephew is a world leader in sports medicine and joint
replacement technology to relieve pain and heal the body.
Important information on Smith & Nephew, Presentation, Special note regarding
forward-looking statements, Segment data and Documents on display are set out on
page 156.
Smith & Nephew Annual Report 2011
262189_pp001_pp07.indd 1
24/02/2012 21:11
Contents
Overview
Every day each one of us at smith&nephew
helps improve the life of someone, somewhere
in the world. That’s something to be proud of.
For over 150 years, Smith & Nephew has developed
advanced medical devices for healthcare professionals
around the world. Our pioneering technologies
enable nurses, surgeons and other medical
practitioners to provide effective treatment more
quickly and economically.
Overview
Smith & Nephew at a glance
Where we operate
Chairman’s statement
Strategy, KPIs & Risk management
Chief Executive Officer’s statement
Our strategic priorities and key performance indicators
Risk management
Business Review
Our business, marketplace and other factors that could affect us
Risk factors
Financial review
Business segment reviews
Outlook and trend information
Sustainability
Corporate Governance
Chairman’s introduction to Corporate Governance
The Board of Directors
Executive Officers
Corporate Governance Statement
Directors’ Remuneration Report
Accounts and other information
Directors’ responsibilities for the accounts
Independent auditor’s UK Report
Independent auditor’s US Reports
Group accounts
Notes to the Group accounts
Independent auditor’s report for the Company
Company Balance Sheet
Notes to the Company accounts
Group information
Investor information
2
4
6
8
10
12
14
16
19
30
41
42
46
48
50
52
64
78
80
82
84
88
129
130
131
134
137
1
i
i
w
e
v
r
e
v
O
w
e
v
r
e
v
O
I
i
k
t
n
s
e
R
m
&
e
g
s
a
P
n
K
a
m
,
y
g
k
s
e
i
t
R
a
r
&
t
S
s
P
K
I
,
y
g
e
t
a
r
t
S
i
i
w
w
e
e
v
v
e
e
R
R
s
s
s
s
e
e
n
n
s
s
u
u
B
B
i
i
e
e
c
c
n
n
a
a
n
n
r
r
e
e
v
v
o
o
G
G
e
e
t
t
a
a
r
r
o
o
p
p
r
r
o
o
C
C
n
n
o
o
i
i
t
t
a
a
m
m
r
r
o
o
n
n
f
f
i
i
r
r
e
e
h
h
t
t
o
o
d
d
n
n
a
a
s
s
t
t
n
n
u
u
o
o
c
c
c
c
A
A
262189_pp001_pp07.indd 1
24/02/2012 21:11
Smith & Nephew Annual Report 2011
Smith & Nephew at a glance
Smith & Nephew is a global medical technology business
dedicated to helping improve people’s lives. With
leadership positions in Orthopaedic Reconstruction and
Trauma, Advanced Wound Management and Endoscopy
(sometimes referred to as Arthroscopy or sports medicine).
Our strategic priorities Read more about our strategic priorities on page 10.
Established Markets
Emerging Markets
Innovate for value
Simplify and improve our operating model
Supplement the organic growth through acquisitions
Our performance
Revenue2
$4.3bn
Trading profit1,2
Trading profit margin1
+4%
$961m
-4%
22.5%
2011
2010
2009
2008
2007
4,270
3,962
3,772
3,801
3,369
2011
2010
2009
2008
2007
Adjusted earnings per share1 (“EPSA”)
Operating profit
74.5 cents
+1%
$862m
2011
2010
2009
2008
2007
74.5
73.6
65.6
2011
2010
2009
2008
2007
55.6
52.0
961
969
857
776
706
-6%
862
920
723
630
493
Earnings per share (“EPS”)
Dividend per share
65.3 cents
-6%
17.4 cents
2010
Trading profit to cash conversion1
2009
857
2011
87%
2008
2007
2011
961
969
961
969
776
706
857
776
2010
Operating profit margin
2009
20.2%
2008
2007
2011
00.0
Operating profit as a percentage of cash
2010
generated from operations
2009
0.00
00.0
706
00.0
2008
76%
2007
2011
Research & development expenditure
2010
00.0
00.0
00.0
65.3
69.3
53.4
2011
2010
2009
2008
2007
42.6
34.2
+10%
17.40
15.82
14.39
13.08
11.89
2009
$167m
2008
2011
2007
2010
2009
2008
2007
0.00
+11%
167
00.0
00.0
151
155
152
142
1 Explanations of these non-GAAP financial measures are provided on pages 20 to 22.
2 Underlying increase/decrease after adjusting for the effect of currency translation.
2011
2010
2009
2008
2007
2
262189_pp001_pp07.indd 2
24/02/2012 21:11
OverviewSmith & Nephew Annual Report 2011 In August 2011, the Group announced its new strategic priorities. Part of this framework was
the implementation of an organisational change. Smith & Nephew has brought together the
Orthopaedics and Endoscopy business segments, creating the Advanced Surgical Devices
division, which will sit alongside the Advanced Wound Management division. These two
divisions will serve the Established Markets and will support our newly created Emerging
Markets (focusing on China, India, Brazil and Russia) and International Markets organisations.
For reporting purposes, the two division structure will replace the three business segment
structure during 2012.
Our business segments in 2011
Revenue by business
$4.3bn
A Orthopaedics
B Endoscopy
C Advanced Wound Management
$m
2,312
939
1,019
A
C
B
Orthopaedics
Endoscopy
Advanced Wound Management
The Orthopaedics business segment
comprises reconstruction (primarily implants
including hip, knee and shoulder joints),
trauma (internal and external fixation devices)
and Clinical Therapies (bone growth
stimulation and joint fluid therapies).
The Endoscopy business segment develops
and commercialises arthroscopy (minimally
invasive surgery) techniques, educational
programmes and value-added services for
surgeons to treat and repair soft tissue and
articulating joints.
The Advanced Wound Management business
segment offers a range of products from initial
wound bed preparation through to full wound
closure and Negative Pressure Wound
Therapy. These products are targeted at
chronic wounds associated with the older
population and for the treatment of wounds
such as burns and from invasive surgery.
Global segment size3
Revenue
Global segment size3
Revenue
Global segment size3
Revenue
$17.8bn
Global segment growth2,3
+2%
Trading profit
$492m
Operating profit
$415m
Segment share3
11%
$2.3bn
Revenue growth2
+2%
Trading profit margin
21.3%
$3.8bn
$0.9bn
$5.5bn
$1.0bn
Global segment growth2,3,4
Revenue growth2
Global segment growth2,3
Revenue growth2
+8%
Trading profit
$222m
+6%
Trading profit margin
23.6%
+3%
Trading profit
$247m
Operating profit margin
Operating profit
Operating profit margin
Operating profit
17.9%
22.9%
$215m
Segment share3
21%
$232m
Segment share3
18%
+7%
Trading profit margin
24.3%
Operating profit margin
22.8%
VERILAST’s use of OXINIUM, oxidized Zirconium, results in a knee
which has been proven to last 30 years, twice the current industry
standard of 15 years.
The FAST-FIX 360 Meniscal Repair System offers exceptional fixation
strength and enhanced control to optimise the chances of a
successful meniscus repair.
PICO is a small portable pump, providing 7 days effective
Negative Pressure Wound Therapy yet is small enough to fit
discreetly into a pocket.
Read more about our Orthopaedics
business on page 31.
3These are estimates generated by Smith & Nephew based upon public sources and internal analysis.
4Global segment data represents the Arthroscopy market which is a combination of repair and resection products. The Endoscopy business includes additional product categories.
Read more about our Endoscopy
business on page 35.
Read more about our Advanced Wound
Management business on page 38.
3
262189_pp001_pp07.indd 3
24/02/2012 21:11
OverviewSmith & Nephew Annual Report 2011OverviewStrategy, KPIs & Risk managementBusiness ReviewCorporate GovernanceAccounts and other information
Where we operate
Smith & Nephew has nearly 11,000 employees
and a presence in more than 90 countries.
UK
1,670
Employees
Europe
2,203
Employees
North America
4,694
Employees
Total Group employees
10,743
4
262189_pp001_pp07.indd 4
24/02/2012 21:11
OverviewSmith & Nephew Annual Report 2011 Revenue by geography
$4.3bn
A US
B UK
C Continental Europe
D Other
A
$m
1,756
291
1,118
1,105
D
C
Key
B
Established Markets
Emerging Markets
International Markets
Japan
458
Employees
China
691
Employees
Australia and
New Zealand
331
Employees
5
24/02/2012 21:11
South Africa
236
Employees
262189_pp001_pp07.indd 5
OverviewSmith & Nephew Annual Report 2011OverviewStrategy, KPIs & Risk managementBusiness ReviewCorporate GovernanceAccounts and other information
Chairman’s statement
Sir John Buchanan
Chairman
“ We are striving to build a
successful, sustainable
business”
6
262189_pp001_pp07.indd 6
24/02/2012 21:11
OverviewSmith & Nephew Annual Report 2011 Dear shareholder,
Smith & Nephew is in a transition phase. The external environment
is a challenge for all businesses. With CEO succession we have taken
the opportunity to review the fundamentals of what we do.
Led by our new CEO, Olivier Bohuon, the Group is embracing a new
set of strategic priorities which build on established strengths, recent
successes and emerging opportunities. To stimulate sales growth
we are enhancing our innovation processes in both established and
new markets.
The Group focuses both on what we do to create long-term sustainable
value, and on how we do it. Matters of health, safety, environment,
compliance, ethics and the treatment of employees, customers,
suppliers and the communities in which we operate are all important
to Smith & Nephew.
Financial & business review
We are building from a strong and stable financial base, a foundation
that has strengthened despite the challenges of the last three years.
In 2011, we increased revenue by 4% on an underlying basis to
$4,270m and delivered a trading profit of $961m. Free cash flow, a key
indicator of the health of any business, was good and we increased our
adjusted earnings per share. The Board is pleased to recommend a
proposed final dividend for the year of 10.8 cents per share,
up 10% on 2010.
All of our businesses contributed to the revenue uplift. In Orthopaedics
we led the market in knee growth amongst our major competitors,
Endoscopy generated double-digit growth in our sports medicine
repair franchise and Advanced Wound Management grew at more
than double the market rate and exceeded $1 billion in revenue for
the first time.
We don’t assume that the external environment will be easier in the
year ahead. Nor do we expect competitive pressures to diminish. We
are well positioned to deal with these challenges, building upon our
performance in 2011, and we continue to seek ways to further enhance
our competitive positions.
Board changes
We were very pleased to welcome our new CEO, Olivier Bohuon,
in April 2011, following the retirement of David Illingworth.
David’s numerous contributions, from putting the customer-relationship
at the heart of the business to the earnings and margin achievements,
leave a good platform for the next stage of our journey. I am sure you
will join the Board in thanking David for his important contribution.
Olivier, with his healthcare background, leadership skills and notable
record, is well placed to take the Group forward. The Board is confident
that we will evolve as a fitter, more focused business, ready to tackle
new opportunities and challenges.
We were also delighted to welcome Ajay Piramal to the Board in
January 2012. He is one of India’s most respected businessmen.
Ajay’s global healthcare experience and emerging markets expertise
will further strengthen the Board.
Thank you
With so much change there can be unsettling effects. The Board has
been constantly impressed by the passion to serve customers and the
determination to compete which our management and employees
continue to exhibit wherever they are in the world.
We recognise that change can also engender uncertainties for
shareholders. We will continue to enhance our record of long-term
value creation and thank you for your support over recent times.
I have had the opportunity to meet many of our institutional and private
shareholders and have appreciated greatly their ideas and input.
We are your Group, and we strive to build a sustainable, successful
business.
Sir John Buchanan
Chairman
262189_pp001_pp07.indd 7
7
24/02/2012 21:11
OverviewSmith & Nephew Annual Report 2011OverviewStrategy, KPIs & Risk managementBusiness ReviewCorporate GovernanceAccounts and other information Chief Executive Officer’s statement
Olivier Bohuon
Chief Executive Officer
“ We are building a business
that is stronger, growing
faster, better balanced
and is fit and effective for
the future”
8
8
262189_pp008_pp013.indd 8
24/02/2012 21:11
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011 Dear shareholder,
Smith & Nephew delivered strong results in 2011, despite the prevailing
difficult macro-economic climate. The market is not getting any easier,
and we are not resting on the successes of the past. We have great
ambitions for the future and are taking active measures to transform
your Group.
I believe that many growth opportunities exist; that we can secure
greater market-share in our Established Markets and be market leaders
in the Emerging Markets. Our success will be built through innovation
and efficiency, driving permanent improvements across the Group.
These principles are at the heart of our new strategic priorities,
announced in August 2011, which we are working tirelessly to embed
across the Group.
New strategic priorities
First, in our Established Markets, we believe we can build upon
existing strong positions and win market share. We will do this through
greater innovation and being more efficient, liberating resources for
investment in those areas that will maximise both revenue and margins.
Second, in Emerging Markets, we will build upon our initial success in
China and expand to create sustainable businesses in India, Brazil and
Russia. These Emerging Markets are enjoying good GDP growth and
there is an increasing demand for high quality medical products from
amongst the population and an expanding surgical infrastructure to
deliver these safely, the key features required to make a new market
attractive to Smith & Nephew.
Our performance in the Established and Emerging Markets will be
driven by an unremitting focus to Innovate for Value, our third strategic
priority. Our future success depends upon offering new technologies
designed for each market where we operate. We are accelerating our
rate of innovation by increasing the research & development budget
and prioritising projects that will deliver maximum value.
Next, we will Simplify and Improve our Operating Model,
streamlining the business and reducing our cost of goods through
actions such as optimising our manufacturing footprint.
Finally, we will Augment our Organic Growth through Acquisitions.
We will continue with our successful strategy of adding complementary
technologies. We will also now seek to support our Emerging Markets
ambitions by acquiring local manufacturing and/or distribution
businesses and we remain alert to larger opportunities to support
our ambitions in advanced woundcare, minimally invasive surgery
and extremities.
Sustainability
Through our new strategic priorities we are seeking to maximise
growth and revenue through building a sustainable business. We
embrace the wider responsibilities this brings, and will work to protect
the environment, our employees and the communities in which we
work, as well as to meet our customers’ high expectations and global
compliance obligations, as we deliver on our action plans.
Progress in delivery
We have made considerable progress reshaping the business in line
with these priorities.
Our management teams in our Advanced Surgical Devices and
Advanced Wound Management divisions are now focused exclusively
on meeting the needs of our customers in the Established Markets.
We have strong leadership to drive us into the Emerging and other
International Markets. We are investing an additional $300m over
the next five years into R&D to drive our innovation agenda. And our
programmes to realise efficiencies, liberate resources and reduce
the cost of goods are well underway.
We are building momentum every day and I am confident that the result
will be a business that is stronger, growing faster, better balanced and
is fit and effective for the future.
Olivier Bohuon
Chief Executive Officer
262189_pp008_pp013.indd 9
9
24/02/2012 21:11
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011Strategy, KPIs & Risk managementOverviewBusiness ReviewCorporate GovernanceAccounts and other information Our strategic priorities and key performance indicators (“KPIs”)
Smith & Nephew use a range of measures to monitor
progress against our five strategic priorities and against
our overall financial goal. While their relative importance
changes as market conditions evolve, progress against
all five priorities continues to drive our growth.
Financial goal
To deliver a higher return to shareholders
than our peer group over the longer term.
Strategic priorities
Established Markets
Emerging Markets
Innovate for value
In Established Markets (US, Europe, Australia, New Zealand, Canada and Japan),
Smith & Nephew sees opportunities to build upon existing strong positions, to win
market share through greater innovation and drive efficiencies to liberate resources.
Through these actions the Group seeks to meet the challenges of subdued markets
and maximise both revenue growth and profit margins.
Smith & Nephew believes it can secure market leadership in the Emerging Markets,
building upon its initial success in China and expanding to create sustainable
businesses in India, Brazil and Russia. In particular, the Group sees significant
opportunities to build value through augmenting its existing portfolio with new
products specifically designed for and manufactured in these markets.
The Group’s future success depends upon continuing to offer new technologies to
customers around the world. Smith & Nephew is accelerating its rate of innovation
by increasing the research & development budget and identifying and investing in
the projects that will deliver maximum value.
Simplify and improve
our operating model
Smith & Nephew will work to ensure the business structure and processes support
our innovation agenda and the Group seeks to maximise efficiency in everything it
does. There are opportunities to streamline the Group’s operations and
manufacturing processes and to remove duplication. Smith & Nephew is building
strong global functions – human capital, regulatory, quality, sustainability and legal
affairs – to support its management teams in their quest to better serve the Group’s
markets and customers.
Waste/Recycling – normalised metric
Reduce amount of waste for the Group, our customers,
Energy use – normalised metric
Total energy consumption (volumetrically)
Track our underlying trading profit growth
Monitor underlying trading profitability
and the environment
Supplement organic
growth through
acquisitions
The Group aims to augment its organic growth through acquisitions. Smith &
Nephew will continue with its successful strategy of acquiring complementary
technologies, seek to support our Emerging Markets ambitions by acquiring local
manufacturing and distribution businesses and remain alert to larger opportunities
to support expansion in the advanced woundcare, extremities or minimally invasive
surgery sectors.
10
262189_pp008_pp013.indd 10
24/02/2012 21:11
What we will measure (“KPIs”)
Why we will measure
Total Shareholder Return
Monitor the value created for shareholders
over the longer term
Growth in statutory and adjusted earnings per share
Demonstrate the improvement in underlying
Growth in the Established Markets versus the market
Track the relative strength of our market positions
earnings per share for our shareholders
Measure the long-term cash generation of the Group excluding
the impact of specific transactions or events that management
considers affect the Group’s short-term performance
Emerging Markets % of Group revenue
Track underlying growth of Emerging Markets to global growth
Growth of individual Emerging Markets
Monitor progress in key market segments
% of Group revenue from products launched in the
Monitor impact from innovation
R&D expense as % of Group revenue
Monitor underlying investment in R&D
Trading cash flow
versus the market
last 36 months
Trading profit growth
Trading profit margin
Return on cash invested
Monitor value created for shareholders
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011 Financial goal
To deliver a higher return to shareholders
than our peer group over the longer term.
Strategic priorities
Established Markets
Emerging Markets
Innovate for value
In Established Markets (US, Europe, Australia, New Zealand, Canada and Japan),
Smith & Nephew sees opportunities to build upon existing strong positions, to win
market share through greater innovation and drive efficiencies to liberate resources.
Through these actions the Group seeks to meet the challenges of subdued markets
and maximise both revenue growth and profit margins.
Smith & Nephew believes it can secure market leadership in the Emerging Markets,
building upon its initial success in China and expanding to create sustainable
businesses in India, Brazil and Russia. In particular, the Group sees significant
opportunities to build value through augmenting its existing portfolio with new
products specifically designed for and manufactured in these markets.
The Group’s future success depends upon continuing to offer new technologies to
customers around the world. Smith & Nephew is accelerating its rate of innovation
by increasing the research & development budget and identifying and investing in
the projects that will deliver maximum value.
What we will measure (“KPIs”)
Why we will measure
Total Shareholder Return
Growth in statutory and adjusted earnings per share
Monitor the value created for shareholders
over the longer term
Demonstrate the improvement in underlying
earnings per share for our shareholders
Trading cash flow
Measure the long-term cash generation of the Group excluding
the impact of specific transactions or events that management
considers affect the Group’s short-term performance
Growth in the Established Markets versus the market
Track the relative strength of our market positions
Emerging Markets % of Group revenue
Track underlying growth of Emerging Markets to global growth
Growth of individual Emerging Markets
versus the market
Monitor progress in key market segments
% of Group revenue from products launched in the
last 36 months
Monitor impact from innovation
R&D expense as % of Group revenue
Monitor underlying investment in R&D
Simplify and improve
our operating model
Smith & Nephew will work to ensure the business structure and processes support
our innovation agenda and the Group seeks to maximise efficiency in everything it
does. There are opportunities to streamline the Group’s operations and
manufacturing processes and to remove duplication. Smith & Nephew is building
strong global functions – human capital, regulatory, quality, sustainability and legal
affairs – to support its management teams in their quest to better serve the Group’s
markets and customers.
Trading profit growth
Trading profit margin
Waste/Recycling – normalised metric
Track our underlying trading profit growth
Monitor underlying trading profitability
Reduce amount of waste for the Group, our customers,
and the environment
Energy use – normalised metric
Total energy consumption (volumetrically)
Supplement organic
The Group aims to augment its organic growth through acquisitions. Smith &
Nephew will continue with its successful strategy of acquiring complementary
growth through
acquisitions
technologies, seek to support our Emerging Markets ambitions by acquiring local
manufacturing and distribution businesses and remain alert to larger opportunities
to support expansion in the advanced woundcare, extremities or minimally invasive
surgery sectors.
Return on cash invested
Monitor value created for shareholders
262189_pp008_pp013.indd 11
11
24/02/2012 21:11
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011Strategy, KPIs & Risk managementOverviewBusiness ReviewCorporate GovernanceAccounts and other information Risk management
Smith & Nephew is focused on managing
the principal risks facing the Group.
As an integral part of planning and review, Group management
and management of each of the business segments seek to
identify the risks involved in the business, the probability of
those risks materialising, the impact if they do materialise and
the actions being taken, and to be taken, to manage and
mitigate those risks. Internal audit reviews and reports on the
effectiveness of the operation of the risk management process.
The Group Risk Committee meets twice a year to review the
major risks identified by the business segment and Group
management 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 risks considered to be most significant to the Group are
reported to the Board on a regular basis. These reports include
details of new, key or significantly increased risks, the senior
Risk
Disruptive
technologies
Government action,
pricing and
reimbursement
pressure
Supply, system and
site disruption
Product regulation,
compliance and
litigation
Compliance
with laws and
regulations
12
Context
Specific risks we face
Possible impacts include Mitigation
Link to strategic priority
The medical devices industry has a rapid rate of new product
introduction. The Group must be adept at monitoring the
landscape for technological advances, make good investment/
acquisition choices, have an efficient and valuable product
development pipeline and secure protection for its intellectual
property.
In most markets throughout the world, expenditure on medical
devices is controlled to a large extent by governments, many of
which are facing increasingly intense budgetary constraints.
Funds may be made available or withdrawn from healthcare
budgets depending on government policy budgetary and other
considerations. The Group is therefore largely dependent on
governments providing increased funds commensurate with the
increased demand arising from demographic trends.
Reimbursement rates may be set in response to perceived
economic value of the devices, based on clinical and other data
relating to cost, patient outcomes and comparative effectiveness.
Unexpected events could disrupt the business by affecting
either a key facility or system or a large number of employees.
The business is also reliant on certain key suppliers of raw
materials, components, finished products and packaging
materials.
The medical device industry is highly regulated. National
regulatory authorities administer and enforce a complex series
of laws and regulations that govern the design, development,
approval, manufacture, labelling, marketing and sale of
healthcare products. Such controls have become increasingly
stringent and costly to comply with and the Group believe this
trend will continue. They also review data supporting the safety
and efficacy of such products and regulatory requirements
may entail inspections for compliance with appropriate
standards, including those relating to Quality Management
Systems (“QMS”) or Good Manufacturing Practice (“GMP”)
regulations.
Business practices in the healthcare industry are subject to
increasing regulation and review by various government
authorities. In general, the trend in many countries is towards
higher expectations and increased enforcement activity by
governmental authorities. The Group is also subject to
increased regulation of personal information. Expansion into
emerging markets could also pose additional compliance risks.
– Competitors may introduce a disruptive technology,
or obtain patents or other intellectual property
rights, that affect the Group’s competitive position
– Lack of innovation due to low R&D investment,
R&D skills gap or poor product development
execution
– Failure to successfully commercialise a pipeline
product, failure to receive regulatory approval,
or changes in consumer demand
– Reduced reimbursement levels and increasing
pricing pressures
– Reduced demand for elective surgery
– Increased focus on health economics
– Changes in medical device tax policy
– Competitors with higher market share
and lower costs
– Catastrophe could render one of the Group’s
production facilities out of action
– A significant event could impact key leadership
or a large number of employees
– Issues with a single source supplier of a key
component and failure to secure critical supply
– A severe IT fault could disable critical systems
– Non-compliance with regulatory policies and
standards could result in fines, penalties, and
prosecutions.
– Product recalls, lost sales and inventory write-offs
– Third party liability claims
– Damage to reputation
– Violation of healthcare, data privacy or anti-
corruption laws could result in fines, loss of
reimbursement and impact reputation.
– Serious breaches could potentially prevent the
Group from doing business.
Loss of market share, profit
– R&D Model: increasing productivity, prioritisation and allocation of funds
Innovate for value
and long-term growth
– Increasing R&D investment in order to enhance clinical capability, invest in biomaterials,
stregthen intellectual property rights and support an Emerging Market portfolio
– Business development to augment the portfolio
– Speed to market of new products
Simplify and improve
our operating model
Supplement the organic
growth through acquisitions
Loss of revenue, profit
– Enhanced expertise supporting reimbursement strategy and guidance
and cash flows
– Develop innovative economic product and service solutions for both Established and
Simplify and improve
our operating model
Emerging Markets
– Incorporate health economic component into design and development of new products
Established Markets
– Optimise cost to serve to protect margins and liberate funds for investment
– Streamline cost of goods sold and inventory
Loss of revenue, profit
– Ensure crisis response/business continuity plans at all major facilities and for key
and cash flows
products
Simplify and improve
our operating model
– Audit programme for critical suppliers and second sources for critical components
– Regular review of supply contracts with supplier consolidation and vertical integration
Established Markets
– IT disaster and data recovery plans are in place and support overall business continuity
where beneficial
plans
Loss of revenue, reduction
– Enhanced leadership and resources
in share price and negative
– Standardise the Group’s management review practice
impact on brand/reputation
– Maintain internal auditing programmes to assure compliance
Simplify and improve
our operating model
– Group-wide robust validation practices to drive true production line performance and
Innovate for value
dependability
– Group-wide objectives for quality, operational and process yield improvements
Loss of profit and reduction
– Board and Executive oversight committees supported by Compliance experts and
in share price
infrastructure
– Code of Conduct/Global Policies and Procedures (“GPPs”) providing controls for
– Training and e-resources to guide employees and third parties with compliance
– Monitoring and auditing programmes to verify implementation and compliance
– Independent reporting channels for employees and third parties to report concerns
significant compliance risks
responsibilities
with confidentiality
Simplify and improve
our operating model
Emerging Markets
Established Markets
262189_pp008_pp013.indd 12
24/02/2012 21:11
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011
Risk
Context
Specific risks we face
Possible impacts include Mitigation
Link to strategic priority
management who have primary responsibility for managing
each of these risks along with selected actions they have put
in place to mitigate such risks. In addition, the Board considers
risk as part of the development of strategy.
There are known and unknown risks and uncertainties relating
to Smith & Nephew’s business. The table below provides an
overview of what the Board considers to be the most significant
risks that could cause the Group’s business, financial position
and results of operations to differ materially and adversely from
expected and historical levels, and how these risks relate to
the Group’s strategic priorities. A more detailed discussion of
the Group’s risks and uncertainties can be found in the “Risk
factors” section on pages 16 to 18. In addition, other factors not
listed here, that Smith & Nephew cannot presently identify or
does not believe to be equally significant, could also materially
adversely affect Smith & Nephew’s business, financial position
or results of operations.
Disruptive
technologies
The medical devices industry has a rapid rate of new product
– Competitors may introduce a disruptive technology,
introduction. The Group must be adept at monitoring the
or obtain patents or other intellectual property
landscape for technological advances, make good investment/
rights, that affect the Group’s competitive position
acquisition choices, have an efficient and valuable product
– Lack of innovation due to low R&D investment,
development pipeline and secure protection for its intellectual
R&D skills gap or poor product development
property.
execution
– Failure to successfully commercialise a pipeline
product, failure to receive regulatory approval,
or changes in consumer demand
Government action,
pricing and
reimbursement
pressure
In most markets throughout the world, expenditure on medical
– Reduced reimbursement levels and increasing
devices is controlled to a large extent by governments, many of
pricing pressures
which are facing increasingly intense budgetary constraints.
– Reduced demand for elective surgery
Funds may be made available or withdrawn from healthcare
– Increased focus on health economics
budgets depending on government policy budgetary and other
– Changes in medical device tax policy
considerations. The Group is therefore largely dependent on
– Competitors with higher market share
governments providing increased funds commensurate with the
and lower costs
increased demand arising from demographic trends.
Reimbursement rates may be set in response to perceived
economic value of the devices, based on clinical and other data
relating to cost, patient outcomes and comparative effectiveness.
Supply, system and
site disruption
Unexpected events could disrupt the business by affecting
– Catastrophe could render one of the Group’s
either a key facility or system or a large number of employees.
production facilities out of action
The business is also reliant on certain key suppliers of raw
– A significant event could impact key leadership
materials, components, finished products and packaging
or a large number of employees
materials.
– Issues with a single source supplier of a key
component and failure to secure critical supply
– A severe IT fault could disable critical systems
Product regulation,
compliance and
litigation
The medical device industry is highly regulated. National
– Non-compliance with regulatory policies and
regulatory authorities administer and enforce a complex series
standards could result in fines, penalties, and
of laws and regulations that govern the design, development,
prosecutions.
approval, manufacture, labelling, marketing and sale of
– Product recalls, lost sales and inventory write-offs
healthcare products. Such controls have become increasingly
– Third party liability claims
stringent and costly to comply with and the Group believe this
– Damage to reputation
trend will continue. They also review data supporting the safety
and efficacy of such products and regulatory requirements
may entail inspections for compliance with appropriate
standards, including those relating to Quality Management
Systems (“QMS”) or Good Manufacturing Practice (“GMP”)
regulations.
Compliance
with laws and
regulations
Business practices in the healthcare industry are subject to
– Violation of healthcare, data privacy or anti-
increasing regulation and review by various government
corruption laws could result in fines, loss of
authorities. In general, the trend in many countries is towards
reimbursement and impact reputation.
higher expectations and increased enforcement activity by
– Serious breaches could potentially prevent the
governmental authorities. The Group is also subject to
Group from doing business.
increased regulation of personal information. Expansion into
emerging markets could also pose additional compliance risks.
Loss of market share, profit
and long-term growth
– R&D Model: increasing productivity, prioritisation and allocation of funds
– Increasing R&D investment in order to enhance clinical capability, invest in biomaterials,
Innovate for value
stregthen intellectual property rights and support an Emerging Market portfolio
– Business development to augment the portfolio
– Speed to market of new products
Simplify and improve
our operating model
Supplement the organic
growth through acquisitions
Loss of revenue, profit
and cash flows
– Enhanced expertise supporting reimbursement strategy and guidance
– Develop innovative economic product and service solutions for both Established and
Simplify and improve
our operating model
Emerging Markets
– Incorporate health economic component into design and development of new products
– Optimise cost to serve to protect margins and liberate funds for investment
– Streamline cost of goods sold and inventory
Established Markets
Loss of revenue, profit
and cash flows
– Ensure crisis response/business continuity plans at all major facilities and for key
products
– Audit programme for critical suppliers and second sources for critical components
– Regular review of supply contracts with supplier consolidation and vertical integration
where beneficial
– IT disaster and data recovery plans are in place and support overall business continuity
plans
Simplify and improve
our operating model
Established Markets
Loss of revenue, reduction
in share price and negative
impact on brand/reputation
– Enhanced leadership and resources
– Standardise the Group’s management review practice
– Maintain internal auditing programmes to assure compliance
– Group-wide robust validation practices to drive true production line performance and
Simplify and improve
our operating model
Innovate for value
dependability
– Group-wide objectives for quality, operational and process yield improvements
Loss of profit and reduction
in share price
– Board and Executive oversight committees supported by Compliance experts and
infrastructure
– Code of Conduct/Global Policies and Procedures (“GPPs”) providing controls for
significant compliance risks
– Training and e-resources to guide employees and third parties with compliance
responsibilities
– Monitoring and auditing programmes to verify implementation and compliance
– Independent reporting channels for employees and third parties to report concerns
with confidentiality
Simplify and improve
our operating model
Emerging Markets
Established Markets
262189_pp008_pp013.indd 13
13
24/02/2012 21:11
Strategy, KPIs & Risk managementSmith & Nephew Annual Report 2011Strategy, KPIs & Risk managementOverviewBusiness ReviewCorporate GovernanceAccounts and other information
Our business, marketplace and other factors that could affect us
We look at our business in relation to issues
in the wider marketplace in which we operate.
Sales and marketing
Smith & Nephew’s customers are the providers of medical and surgical
services worldwide. In certain parts of the world, including the UK,
much of Continental Europe, Canada and Japan, these are largely
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. Medicare is the major source of
reimbursement in the US, 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 local and
multinational corporations, including some with greater financial,
marketing and other resources.
The Group’s business reflects a wide range of distribution channels,
purchasing agents and buying entities in over 90 countries worldwide.
The largest single customers worldwide are purchasing groups in the
US and the UK that represented 6% and 5% respectively of the Group’s
worldwide revenue in 2011.
In the US, the Group’s products are marketed directly to healthcare
providers, hospitals and other healthcare facilities with each business
segment operating dedicated sales forces. The US sales forces consist
of a mixture of independent contract workers and employees. Sales
agents are contractually prohibited from selling products that compete
with Smith & Nephew products. Orthopaedics and Endoscopy
products are principally shipped and invoiced to healthcare providers,
hospitals and other healthcare facilities. Certain Advanced Wound
Management products are shipped and invoiced to wholesale
distributors, others are consigned to distributors that lease the devices
to healthcare providers, hospitals and other healthcare facilities and
end-users. In most other Established Markets, each business segment
typically manages employee sales forces directly, and also ships and
invoices products both directly to healthcare providers, hospitals and
other healthcare facilities and to wholesale distributors.
In Emerging Markets and International Markets the Group operates
through direct selling and marketing operations, and through
distributors. 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.
Sales trends
Smith & Nephew’s business segments participate in the global medical
devices market and share a common focus on the repair of the human
body. Smith & Nephew’s principal geographic markets are in the
established healthcare economies of the US, Europe, Japan, Canada,
Australia and New Zealand.
These markets are characterised by increased longevity, more active
lifestyles, obesity, increased affluence and an increase in the average
age of the population caused by the immediate post-World War II “baby
boomer” generation approaching retirement. 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 patient awareness of available healthcare treatments
through the internet and direct-to-customer advertising has led to
some increased patient influence over product purchasing decisions.
For a description of the impact on each business segment refer to the
Market and competition sections under ‘Business segment reviews’ on
pages 30 to 40.
Manufacturing, supply & distribution
The Group has a central Global Operations function which continues to
implement Lean Manufacturing throughout the factories and the supply
chain which is designed to improve and sustain higher levels of
productivity, 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.
Each business segment 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, with a view to
ensure value for money based on the total spending across the Group.
14
262189_pp014_pp041.indd 14
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011 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.
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 16 of the
Notes to the Group accounts for further details of these risks.
The Group’s financial instruments are subject to changes in fair values
as a result of changes in market rates of exchange and forward interest
rates. Financial instruments entered to hedge sales and purchase
transactions in foreign currency and interest rate exposures are
accounted for as hedges. Changes in fair values of effective financial
instruments would not affect the Group’s income statement
immediately. 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 Group outsources manufacturing where necessary to obtain
specialised expertise or where it is possible to gain lower cost without
undue 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 screen displays, optical
and electrical devices in the Endoscopy business and skincare
products in the Advance Wound Management business.
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 City 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.
Research and development
Smith & Nephew manage a portfolio of short and long-term product
development projects designed to meet the future needs of customers
and continue to provide growth opportunities for the business. The
Group’s research and development is directed towards each business
segment. Expenditure on research and development amounted to
$167m in 2011 (2010 – $151m, 2009 – $155m), representing
approximately 3.9% of Group revenue (2010 – 3.8%, 2009 – 4.1%).
The Group continues to invest in future technology opportunities for
clinical needs identified from across the Smith & Nephew businesses.
Research and development is primarily carried out at the Group’s
principal locations, notably in Memphis, US (Orthopaedics), Mansfield,
US (Endoscopy) and Hull, UK (Advanced Wound Management). There
are a number of other smaller research and developments units
situated at other locations around the Group. In-house research is
supplemented by work performed by academic institutions and other
external research organisations in Europe, America and Asia.
Intellectual property
Smith & Nephew has a policy of protecting 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,
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 approximately 4,000
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.
262189_pp014_pp041.indd 15
15
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationStrategy, KPIs & Risk managementOverview Our business, marketplace and other factors that could affect us
continued
Risk factors
There are known and unknown risks and uncertainties relating to
Smith & Nephew’s business. The factors listed below could cause the
Group’s business, financial position and results of operations to differ
materially and adversely from expected and historical levels. In addition,
other factors not listed here that Smith & Nephew cannot presently
identify or does not believe to be equally significant could also
materially adversely affect Smith & Nephew’s business, financial
position or results of operations.
Highly competitive markets
The Group’s business segments compete across a diverse range of
geographic and product markets. Each market in which the business
segments operate contains 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 competitors, 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 and this trend is expected to continue.
Increased competition and 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 could
adversely affect Smith & Nephew’s results of operations and hinder its
growth potential.
Continual development and introduction of new products
The medical devices industry has a rapid rate of new product
introduction. In order to remain competitive, each of the Group’s
business segments 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 or not
succeed in the 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 segments operate. If the Group’s new
products do not remain competitive with those of competitors, the
Group’s revenue could decline.
The Group maintains reserves for excess and obsolete inventory
resulting from the potential inability to sell its products at prices in
excess of current carrying costs. Marketplace changes resulting from
the introduction of new products or surgical procedures may cause
some of the Group’s products to become obsolete. The Group makes
estimates regarding the future recoverability of the costs of these
products and records a provision for excess and obsolete inventories
based on historical experience, expiration of sterilisation dates and
expected future trends. If actual product life cycles, product demand or
acceptance of new product introductions are less favourable than
projected by management, additional inventory write-downs may be
required.
Dependence on government and other funding
In most established 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 largely governed in most established
markets 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 on-going 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. In particular, changes to the healthcare legislation in the US are
due to impose significant taxes on medical device manufacturers from
2013. There may be an increased risk of 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 healthcare, including extensive and complex rules
in the US. Failure to do so could result in fines or loss of future funding.
World economic conditions
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 are also
influenced by 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 adverse macro-economic conditions.
16
262189_pp014_pp041.indd 16
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011 During 2011, economic conditions worldwide continued to create
several challenges for the Group, including deferrals of joint
replacement procedures, heightened pricing pressure, significant
declines in capital equipment expenditures at hospitals and increased
uncertainty over the collectability of European government debt,
particularly those in certain parts of southern Europe. These factors
tempered the overall growth of the Group’s global markets and could
have an increased impact on growth in the future.
Political uncertainties
The Group operates on a worldwide basis and has distribution
channels, purchasing agents and buying entities in over 90 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
products or investments in that country. Furthermore, changes in
government policy regarding import quotas, taxation or other matters
could adversely affect the Group’s turnover and operating profit. War,
terrorist activities or other conflict could also adversely impact the Group.
Currency fluctuations
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’s manufacturing cost base is situated principally
in the US, the UK, China and Switzerland, from which 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 currency 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 could be adversely affected.
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 forecast transactions to be covered
between 50% and 90% for up to one year.
The Group uses the US Dollar as its reporting currency and the US
Dollar is the functional currency of Smith & Nephew plc. 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. See “Financial position,
liquidity and capital resources” on page 25.
Manufacturing and supply
The Group’s manufacturing production is concentrated at 11 main
facilities in Memphis, Mansfield and Oklahoma City 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 could 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 segments 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 uses a variety of information systems to conduct its
manufacturing, supply and selling operations. An unrecoverable fault in
one of these systems could disrupt trading in certain markets and
locations.
The Group is in the process of outsourcing to third parties or relocating
to lower cost countries certain of its manufacturing and other
processes. As a result of these transfers, there is a risk of disruption to
supply.
Attracting and retaining key personnel
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.
Proprietary rights and patents
Due to the technological nature of medical devices and the Group’s
emphasis on serving its customers with innovative products, the Group
has been subject to patent infringement claims and is subject to the
potential for additional claims.
Claims asserted by third parties regarding infringement of their
intellectual property rights, if successful, could require the Group to
262189_pp014_pp041.indd 17
17
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationStrategy, KPIs & Risk managementOverview Our business, marketplace and other factors that could affect us
continued
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 include 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. At any time, the Group is awaiting a
number of regulatory approvals which, if not received, could adversely
affect results of operations.
The trend is towards more stringent regulation and higher standards of
technical appraisal. Such controls have become increasingly
demanding to comply with and management believes that this trend
will continue. 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 might
lengthen or modify the path to clearance in some circumstances.
Regulatory requirements may also entail inspections for compliance
with appropriate standards, including those relating to Quality
Management Systems or Good Manufacturing Practices regulations. All
manufacturing and other significant facilities within the Group are
subject to regular internal and external audit for compliance with
national and Group medical device regulation and policies.
Payment for medical devices may be governed by reimbursement tariff
agencies in a number of countries. Reimbursement rates may be set in
response to perceived economic value of the devices, based on clinical
and other data relating to cost, patient outcomes and comparative
effectiveness. They may also be affected by overall government
budgetary considerations. The Group believes that its emphasis on
innovative products and services should contribute to success in this
environment.
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.
Other risk factors
Smith & Nephew is subject to a number of other risks, which are
common to most global medical technology groups and are reviewed
as part of the Group’s risk management process.
expend time and significant resources to pay damages, develop
non-infringing products or obtain licences to the products which are the
subject of such litigation, thereby affecting the Group’s growth and
profitability. 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 protect and enforce its intellectual
property rights successfully, its competitive position could suffer, which
could harm its results of operations.
Product liability claims and loss of reputation
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.
Regulatory compliance in the healthcare industry
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. In the UK, a new Bribery Act was passed in 2010 and
became effective in 2011, increasing the risk for companies that allow
improper conduct on their behalf. 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” on page 28. Under certain
circumstances, if the Group were found to have violated the law, its
ability to sell its products to certain customers could be restricted.
Regulatory approval
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 design, development, approval,
manufacture, labelling, marketing and sale of healthcare products. They
also review data supporting the safety and efficacy of such products. Of
18
262189_pp014_pp041.indd 18
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011 Financial review
Adrian Hennah
Chief Financial Officer
262189_pp014_pp041.indd 19
19
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Business Review
Financial review continued
Chief Financial Officer highlights
Group revenue was $4,270m for the year ended 31 December 2011,
representing an 8% growth compared to 2010. This comprised of
underlying revenue growth of 4% and favourable currency translation
of 4%.
Profit before taxation was $848m in 2011, compared with $895m in
2010. Attributable profit in 2011 was $582m compared to $615m in
2010. Adjusted attributable profit (calculated as set out in “Selected
financial data” on pages 145 to 146) rose 2% to $664m in 2011, from
$654m in 2010.
Basic earnings per Ordinary Share were 65.3¢, compared to 69.3¢ for
2010. EPSA (as set out in “Selected financial data”) was 74.5¢ in 2011
compared to 73.6¢ for 2010, representing a 1% increase.
2011
$ million
2010
$ million
2009
$ million
Financial highlights (i) (iii)
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)
Cash generated from operations
Trading cash flow
Trading profit to cash conversion (%)
4,270
4%
961
(4)%
3,772
3,962
2%
4%
857
969
11%
15%
22.5% 24.5% 22.7%
723
920
472
615
580
654
53.4¢
69.3¢
65.6¢
73.6¢
18%
12%
14.39¢
15.82¢
1,030
1,111
771
825
90%
85%
862
582
664
65.3¢
74.5¢
1%
17.40¢
1,135
838
87%
(i)
(ii)
Items shown in italics are non-GAAP measures. Reconciliations to reported figures are on pages
21 to 22.
The Board has proposed a final dividend of 10.80 US cents per share which together with the first
interim dividend of 6.60 US cents makes a total for 2011 of 17.40 US cents. The final dividend is
expected to be paid, subject to shareholder approval, on 9 May 2012 to shareholders on the
Register of Members at the close of business on 20 April 2012.
(iii) All items are $ million unless otherwise indicated.
Measuring performance
Revenue
“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 International Financial Reporting
Standards (“IFRS”) and is therefore a measure not in accordance with
Generally Accepted Accounting Principles (a “non-GAAP” measure).
The Group believes that the tabular presentation and reconciliation of
reported revenue growth to underlying revenue growth assists investors
in their assessment of the Group’s performance in each business
segment and for the Group as a whole.
Underlying growth in revenue is considered by the Group to be an
important measure of performance in terms of local functional currency
since it excludes those items considered to be outside the influence of
local 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 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
uses exclusively.
“Underlying growth in revenue” reconciles to growth in revenue
reported, the most directly comparable financial measure calculated in
accordance with IFRS by making two adjustments, the “constant
currency exchange effect” and the “acquisitions effect”, described
below.
The “constant currency exchange effect” is a measure of the increase/
decrease in revenue resulting from currency movements on non-US
Dollar sales. 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 and prior year revenue into US Dollars using the prior
year closing rate.
20
Smith & Nephew Annual Report 2011
262189_pp014_pp041.indd 20
24/02/2012 21:12
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.
Reported revenue growth, the most directly comparable financial
measure calculated in accordance with IFRS, reconciles to underlying
growth in revenue as follows:
Reported revenue growth
Constant currency exchange effect
Underlying revenue growth
2011
%
2010
%
2009
%
8
(4)
4
5
(1)
4
(1)
3
2
A reconciliation of reported revenue growth to underlying revenue
growth, by business segment, can be found on pages 30 to 40.
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 affects 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.
Growth in “trading profit” and “trading profit margin” (trading profit
expressed as a percentage of revenue) are measures which present
the growth trend 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 the trends. The
Group’s international financial reporting (budgets, monthly reporting,
forecasts, long-term planning and incentive plans) focusses primarily
on profit and earnings before these items. Trading profit and trading
profit margin are not recognised measures under IFRS and are
therefore non-GAAP financial measures.
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 financial
measure of operating profit. The Group considers that no single
measure enables it to assess overall performance and therefore it
compensates for the limitation of the trading profit measure by
considering it in conjunction with its GAAP equivalent. The 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.
Operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to trading profit as
follows:
Operating profit
Acquisition related costs
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
and impairments
Legal provision (see page 29)
2011
$ million
2010
$ million
2009
$ million
862
920
723
–
40
36
23
–
15
34
–
26
42
66
–
Trading profit
961
969
857
A reconciliation of operating profit to trading profit, by business
segment, can be found on pages 30 to 40.
Adjusted earnings per Ordinary Share
Growth in “adjusted earnings per Ordinary Share (“EPSA”)” is another
measure which presents the trend in the long-term profitability of the
Group. EPSA is not a recognised measure under IFRS and is therefore a
non-GAAP financial measure. The most directly comparable financial
measure calculated in accordance with IFRS is earnings per Ordinary
Share.
EPSA excludes the same impact of specific transactions or events that
management considers affect the Group’s short-term profitability, is
used by the Group for similar purposes, and is subject to the same
material limitations, as set out and discussed in the above section on
trading profit.
Adjusted attributable profit represents the numerator used in the EPSA
calculation. Adjusted attributable profit is reconciled to attributable
profit, the most directly comparable financial measure in accordance
with IFRS, as follows:
2011
$ million
2010
$ million
2009
$ million
Attributable profit for the year
582
615
472
Acquisition related costs
Restructuring and rationalisation
expenses
Amortisation of acquisition intangibles
and impairments
Legal provision (see page 29)
Taxation on excluded items
Adjusted attributable profit
–
40
36
23
(17)
664
–
15
34
–
26
42
66
–
(10)
654
(26)
580
Earnings per Ordinary share
Basic
Diluted
Adjusted: Basic
Adjusted: Diluted
65.3¢
65.0¢
74.5¢
74.2¢
69.3¢
69.2¢
73.6¢
73.6¢
53.4¢
53.3¢
65.6¢
65.5¢
262189_pp014_pp041.indd 21
21
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Trading cash flow and trading profit to
cash conversion ratio
Growth in trading cash flow and improvement in the trading profit to
cash conversion ratio are measures which present the trend growth in
the long-term cash generation of the Group excluding the impact of
specific transactions or events that management considers affect the
Group’s short-term performance.
Trading cash flow is defined as cash generated from operations less
net capital expenditure but before acquisition related cash flows,
restructuring and rationalisation cash flows and cash flows arising from
legal disputes and uninsured losses. Trading profit to cash conversion
ratio is trading cash flow expressed as a percentage of trading profit.
The nature and material limitations of these adjusted items are
discussed above.
The Group presents those 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 on cash generation before these items. Trading
cash flow and trading profit to cash conversion ratio are not recognised
measures under IFRS and are therefore considered non-GAAP financial
measures.
The material limitation of this measure is that it could exclude significant
cash flows that have had a direct impact on the current and prior years’
financial performance of the Group. It does not, therefore, measure the
financial performance of the Group presented by the GAAP measure of
cash generated from operations. The Group considers that no single
measure enables it to assess financial performance and therefore it
compensates for the limitation of the trading cash flow measure by
considering it in conjunction with the GAAP equivalents. Cash flows
excluded relate to irregular events or transactions including acquisition
related costs, restructuring and rationalisation costs and cash flows
arising from legal disputes and uninsured losses.
Trading cash flow reconciles to cash generated from operations, the
most directly comparable financial measure calculated in accordance
with IFRS, as follows:
2011
$ million
2010
$ million
2009
$ million
Cash generated from operations
1,135
1,111
1,030
Less: Capital expenditure
(321)
(315)
(318)
Add: Cash received on disposal of fixed
assets
Add: Acquisition related expenditure
Add: Restructuring and rationalisation
related expenditure
Add: Macrotexture expenditure
Trading cash flow
Trading Profit
–
1
20
3
838
961
8
–
16
5
–
22
32
5
825
771
969
857
Trading profit to cash conversion ratio
87%
85%
90%
Recent developments
On 4 January 2012, the Group announced it had entered into an
agreement with Essex Woodlands for the disposal of the Group’s
Clinical Therapies business. After disposal, the Group will retain a 49%
investment in the newly formed company, Bioventus LLC, which will be
reported as an associate. At 31 December 2011, the assets and
liabilities of the Clinical Therapies business, $125m and $19m
respectively, are disclosed as held for sale. In 2011, the Clinical
Therapies business contributed $237m to revenue and $48m to trading
profit. The Group expects to recognise a profit before tax in excess of
$250m on the transaction on completion.
2011 Financial highlights
The following table sets out certain income statement data for the
periods indicated:
Revenue (i)
Cost of goods sold (ii)
Gross profit
2011
$ million
2010
$ million
4,270
3,962
(1,140)
(1,031)
3,130
2.931
Marketing, selling and distribution expenses (iii)
(1,526)
(1,414)
Administrative expenses (iv, v, vi)
Research and development expenses
Operating profit (i)
Net interest payable
Other finance costs
Profit before taxation
Taxation
Attributable profit for the year
(575)
(167)
862
(8)
(6)
848
(266)
582
(446)
(151)
920
(15)
(10)
895
(280)
615
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Group revenue and operating profit are derived wholly from continuing operations and discussed
on a segment basis on pages 30 to 40.
In 2011, $7m of restructuring and rationalisation expenses were charged to cost of goods sold
(2010 – $nil).
In 2011, no restructuring and rationalisation expenses were charged to marketing, selling and
distribution expenses (2010 – $3m).
2011 includes $42m of amortisation of other intangible assets (2010 – $34m).
2011 includes $23m relating to legal provision (2010 – $nil).
2011 includes $33m of restructuring and rationalisation expenses and $36m relating to
amortisation of acquisition intangibles (2010 – $12m of restructuring and rationalisation expenses
and $34m relating to amortisation of acquisition intangibles).
Revenue
Group revenue increased by $308m (8%) from $3,962m in 2010 to
$4,270m in 2011. Underlying revenue growth was 4% and 4% growth
was attributable to favourable currency translation.
Orthopaedics revenues increased by $117m (5%), of which 2% was
attributable to underlying growth, and 3% due to favourable currency
translation. Endoscopy revenues increased by $84m (10%), of which 6%
was attributable to underlying growth, and 4% due to favourable
currency translation. Advanced Wound Management revenues
increased by $107m (12%), of which 7% was attributable to underlying
growth and 5% due to favourable currency translation.
A more detailed analysis is included within the “Revenue” sections of
the individual business segments that follow on pages 30 and 40.
22
262189_pp014_pp041.indd 22
24/02/2012 21:12
Financial review continuedBusiness ReviewSmith & Nephew Annual Report 2011 Cost of goods sold
Cost of goods sold increased by $109m to $1,140m from $1,031m in
2010 which represents an 11% increase. Of this movement, 4% is due
to adverse translation movements leaving an underlying movement of
7% compared to an increase in underlying revenue of 4%. The residual
movement is largely attributable to continued pricing pressure across all
of the Group’s markets which Smith & Nephew was not able to pass on
to suppliers and an adverse movement in the mix of products sold,
towards lower gross margin product.
Further margin analysis is included within the “Trading profit” sections of
the individual business segments that follow on pages 30 to 40.
Marketing, selling and distribution expenses
Marketing, selling and distribution expenses increased by $112m (8%)
to $1,526m from $1,414m in 2010. After adjusting for an unfavourable
currency movement of 3% the underlying movement of 5% is broadly in
line with increased Group revenues.
Administrative expenses
Administrative expenses increased by $129m (29%) to $575m from
$446m in 2010. Unfavourable currency movements contributed
towards 5% of this increase. The factors contributing to the underlying
movement of 24% were; the non-recurrence of the one-off benefit of
$25m arising from the BlueSky settlement in 2010, a charge of $23m
relating to legal provision, an increase of $21m in restructuring and
rationalisation expenses, an increase of $12m in the bad debt expense
and an $8m increase in the amortisation charge on intangible assets.
Other factors contributing to this increase included the additional
investment in China and Emerging Markets during the year.
Research and development expenses
Expenditure as a percentage of revenue increased by 0.1% to 3.9% in
2011 (2010 – 3.8%). Actual expenditure was $167m in 2011 compared
to $151m in 2010. The Group continues to invest in innovative
technologies and products to differentiate it from competitors.
Operating profit
Operating profit decreased by $58m to $862m from $920m in 2010
comprising a decrease of $88m in Orthopaedics, offset by increases of
$18m in Endoscopy and $12m in Advanced Wound Management.
Net interest payable
Net interest payable reduced by $7m from $15m in 2010 to $8m in
2011. This is a consequence of the overall reduction of borrowings
within the Group and a reduction in the applicable interest rates.
Other finance cost
Other finance costs in 2011 were $6m compared to $10m in 2010. This
decrease is attributable to an increase in the expected return on
pension plan assets.
Taxation
The taxation charge decreased by $14m to $266m from $280m in
2010. The effective rate of tax was 31.4%, compared with 31.3% in 2010.
The tax charge was reduced by $17m in 2011 (2010 – $10m) as a
consequence of restructuring and rationalisation expenses,
amortisation of acquisition intangibles and legal provision. The effective
tax rate was 29.9% (2010 – 30.8%) after adjusting for these items and
the tax thereon.
Group balance sheet
The following table sets out certain balance sheet data as at
31 December of the years indicated:
Non-current assets
Current assets
Assets held for sale
Total assets
Non-current liabilities
Current liabilities
Liabilities directly associated with assets
held for sale
Total liabilities
Total equity
Total equity and liabilities
2011
$ million
2010
$ million
2,542
2,080
125
2,579
2,154
–
4,747
4,733
422
1,046
1,119
914
19
–
1,560
3,187
4,747
1,960
2,773
4,733
Non-current assets
Non-current assets decreased by $37m to $2,542m in 2011 from
$2,579m in 2010. This is attributable to the following:
–
–
–
–
–
Goodwill decreased by $5m from $1,101m in 2010 to $1,096m in
2011. Goodwill totalling $37m was transferred to assets held for
sale. Following the acquisition of Tenet Medical Engineering during
2011, an amount of $44m was capitalised as goodwill. The balance
relates to unfavourable currency movements totalling $12m.
Intangible assets decreased by $3m from $426m in 2010 to $423m
in 2011. Intangible assets totalling $14m were transferred to assets
held for sale. Amortisation of $78m was charged during the year
and assets with a net book value of $2m were written-off. A total of
$92m relates to the addition of intellectual property and software.
The balance relates to unfavourable currency movements
totalling $1m.
Property, plant and equipment decreased by $4m from $787m in
2010 to $783m in 2011. Property, plant and equipment totalling
$3m were transferred to assets held for sale. Depreciation of
$217m was charged during 2011 and assets with a net book value
of $7m were written-off. These movements were largely offset by
$229m of additions relating primarily to instruments and other plant
& machinery. The balance relates to unfavourable currency
movements totalling $6m.
Trade and other receivables decreased by $22m to $nil in 2011
from $22m in 2010 due to non-current receivables switching to
current receivables during the year.
Deferred tax assets and other non-current assets decreased by
$3m in the year.
262189_pp014_pp041.indd 23
23
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Liabilities directly associated with assets held for sale
Liabilities held for sale totalling $19m relate to the underlying liabilities of
the Clinical Therapies business, the proposed sale of which was
announced on 4 January 2012.
Total equity
Total equity increased by $414m from $2,773m in 2010 to $3,187m in
2011. The principal movements were:
1 January 2011
Attributable profit
Currency translation losses
Hedging reserves
Actuarial loss on retirement benefit obligations
Dividends paid during the year
Taxation benefits on Other Comprehensive Income and
equity items
Net share based transactions
31 December 2011
Total equity
$ million
2,773
582
(36)
14
(70)
(146)
22
48
3,187
Transactional and translational exchange
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 $1.32 to $1.39 (5%), Sterling strengthened from
$1.54 to $1.60 (4%), the Swiss Franc strengthened from $0.96 to $1.13
(18%), the Australian Dollar strengthened from $0.92 to $1.03 (12%) and
the Japanese Yen strengthened from ¥88 to ¥80 (9%).
The Group’s principal manufacturing locations are in the US
(Orthopaedics and Endoscopy), Switzerland (Orthopaedics), UK
(Advanced Wound Management and Orthopaedics) and China
(Orthopaedics and Advanced Wound Management). 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, sales from the
US became relatively less profitable to all of these countries. The
Group’s policy of purchasing forward a proportion of its currency
requirements and the existence of an inventory pipeline reduce the
short-term impact of currency movements.
Current assets
Current assets decreased by $74m to $2,080m from $2,154m in 2010.
The movement relates to the following:
–
–
–
Inventories fell by $64m to $859m in 2011 from $923m in 2010.
Inventories totalling $15m were transferred to assets held for sale.
Of the remaining movement, $10m related to unfavourable
currency movements.
The level of trade and other receivables increased by $13m to
$1,037m in 2011 from $1,024m in 2010. Trade and other
receivables totalling $49m were transferred to assets held for sale.
Of the movement in the year, $18m related to unfavourable
currency movements.
Cash and bank has fallen by $23m to $184m from $207m in 2010.
Of the movement, $2m related to unfavourable currency
movements.
Assets held for sale
Assets held for sale totalling $125m relate to the underlying assets of
Clinical Therapies business, the proposed sale of which was
announced on 4 January 2012.
Non-current liabilities
Non-current liabilities decreased by $624m from $1,046m in 2010 to
$422m in 2011. This movement relates to the following items:
–
–
–
–
Long-term borrowings have fallen from $642m in 2010 to $16m in
2011. This decrease of $626m is mainly attributable to the
long-term loan repayable in May 2012 switching to a current liability.
The net retirement benefit obligation increased by $25m to $287m
in 2011 from $262m in 2010. This was largely due to actuarial
losses of $70m which were only partly offset by pension
contributions.
Deferred acquisition consideration was $8m at the end of 2011, an
increase of $8m from $nil at the end of 2010 as a result of the
acquisition of Tenet Medical Engineering during the year.
Provisions decreased from $73m in 2010 to $45m in 2011 which is
largely due to a number of settlements during the year.
– Deferred tax liabilities decreased by $3m in the year.
Current liabilities
Current liabilities increased by $205m from $914m in 2010 to $1,119m
in 2011. This movement is attributable to:
–
–
–
–
Bank overdrafts and current borrowings have increased by $249m
from $57m in 2010 to $306m in 2011 mainly as a result of the
long-term loan repayable in May 2012 switching to a current liability.
Trade and other payables have decreased by $53m to $564m in
2011 from $617m in 2010. Trade and other payables totalling $19m
were transferred to liabilities directly associated with assets held for
sale. An amount of $8m is attributable to favourable currency
movements.
Provisions have increased by $41m from $37m in 2010 to $78m in
2011. The most significant item contributing to this increase is the
$23m legal provision (see Note 3).
Current tax payable is $171m at the end of 2011 compared to
$203m in 2010. Of the $32m reduction, $1m is attributable to
favourable currency movements.
24
262189_pp014_pp041.indd 24
24/02/2012 21:12
Financial review continuedBusiness ReviewSmith & Nephew Annual Report 2011 Acquisitions and disposals
In the three-year period ended 31 December 2011, $58m was spent on
acquisitions, funded from net debt and cash inflows. This comprised,
$33m for Tenet Medical Engineering during 2011 and $25m for Nucryst
in 2009. During 2009, the Group reached an agreement with the
vendors of Plus Orthopedics Holdings AG to reduce the total original
purchase price to CHF927m. This resulted in a 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
December 2010, the Group reviewed and replaced its principal banking
facilities ahead of the maturity in May 2012. The Group reduced its
$1,000m 5 year term loan to $500m with effect from 20 December
2010. As at 31 December 2011 the balance outstanding was $245m.
Smith & Nephew also cancelled its $1,500m multi-currency revolving
loan facility and replaced it with a new 5 year $1,000m multi-currency
revolving loan facility.
At 31 December 2011, the Group held $184m (2010 – $207m, 2009
– $192m) in cash and balances at bank. The Group has committed and
uncommitted facilities of $1.3bn and $0.3bn respectively. The undrawn
committed facilities totalling $1.0bn expires after two but within 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. In addition, Smith & Nephew has finance lease commitments
of $18m (of which $8m extends beyond five years).
The principal variations in the Group’s borrowing requirements result
from the timing of dividend payments, acquisitions and disposals of
businesses, timing of capital expenditure and working capital
fluctuations.
Smith & Nephew believes that its capital expenditure needs and its
working capital funding for 2012, 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 underfunded position in the Group’s defined benefit
plans.
Further disclosure regarding borrowings, related covenants and the
liquidity risk exposures is set out in Note 15 of the Notes to the Group
accounts. The Group believes that its borrowing facilities do not contain
restrictions that would have significant impact on its funding or
investment policy for the foreseeable future.
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
1,135
1,111
1,030
2011
$ million
2010
$ million
2009
$ million
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 Orthopedics 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 21 of the Notes to the Group
accounts)
Exchange adjustment
Opening net debt
Closing net debt
(8)
(285)
842
(17)
(235)
859
(41)
(270)
719
(321)
(307)
(318)
(33)
–
–
–
(146)
(132)
7
17
(6)
8
15
(5)
(25)
137
(120)
10
7
–
360
438
410
(6)
(492)
(138)
13
(943)
(492)
(21)
(1,332)
(943)
The Group’s net debt decreased from $1,332m at the beginning of
2009 to $138m at the end of 2011, representing an overall decrease of
$1,194m. Translation of foreign currency net debt into US Dollars had
the effect of increasing net debt by $14m in the three-year period
ended 31 December 2011.
Net cash inflow from operating activities
Cash generated from operations in 2011 of $1,135m (2010 – $1,111m,
2009 – $1,030m) is after paying out $3m (2010 – $5m, 2009 – $5m) of
macrotextured claim settlements unreimbursed by insurers, $1m (2010
– $nil, 2009 – $22m) of acquisition related costs and $20m (2010 –
$16m, 2009 – $32m) of restructuring and rationalisation expenses.
Capital expenditure
The Group’s on-going capital expenditure and working capital
requirements were financed through cash flow generated by business
operations and, where necessary, through short-term committed and
uncommitted bank facilities. In recent years, capital expenditure on
tangible and intangible fixed assets represented approximately 8% of
continuing Group revenue.
In 2011, gross capital expenditure amounted to $321m (2010 – $315m,
2009 – $318m). The principal areas of investment were the placement
of orthopaedic instruments with customers, patents and licences, plant
and equipment and information technology.
At 31 December 2011, $9m (2010 – $15m, 2009 – $7m) of capital
expenditure had been contracted but not provided for which will be
funded from cash inflows.
262189_pp014_pp041.indd 25
25
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management 2010 Financial highlights
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
Operating profit (i)
Net interest payable
Other finance costs
Share of results of associates
Profit before taxation
Taxation
Attributable profit for the year
2010
$ million
2009
$ million
3,962
3,772
(1,031)
(1,030)
2.931
2,742
(1,414)
(1,351)
(446)
(151)
920
(15)
(10)
–
895
(280)
615
(513)
(155)
723
(40)
(15)
2
670
(198)
472
(i)
(ii)
(iii)
(iv)
Group revenue and operating profit are derived wholly from continuing operations and discussed
on a segment basis on pages 30 to 40.
In 2010 no restructuring and rationalisation expenses and no acquisition related costs were
charged to cost of goods sold (2009 – $15m of restructuring and rationalisation expenses and
$12m of acquisition related costs).
2010 includes $3m of restructuring and rationalisation expenses. No acquisition related costs were
charged to marketing, selling and distribution expenses in 2010. (2009 – $7m of acquisition related
costs and $10m of restructuring and rationalisation expenses).
2010 includes $12m of restructuring and rationalisation expenses and $34m relating to
amortisation of acquisition intangibles and impairments (2009 – $7m of acquisition related costs,
$17m of restructuring and rationalisation expenses and $66m relating to amortisation of
acquisition intangibles and impairments).
Revenue
Group revenue increased by $190m (5%) from $3,772m in 2009 to
$3,962m in 2010. Underlying revenue growth was 4%, and a further 1%
growth was attributable to favourable currency translation.
Orthopaedics revenues increased by $60m (3%), of which 2% was
attributable to underlying growth, and 1% due to favourable currency
translation. Endoscopy revenues increased by $64m (8%), of which 7%
was attributable to underlying growth, and 1% due to favourable
currency translation. Advanced Wound Management revenues
increased by $66m (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 30 and 40.
Cost of goods sold
Cost of goods sold increased by $1m to $1,031m from $1,030m in
2009. This represents 26% of revenue compared to 27% in 2009.
During 2010, the Group has continued to deliver on its efficiency
commitments, including the new Advanced Wound Management
manufacturing facility in China and improved inventory management in
Orthopaedics. Other factors contributing to the movement were the
decrease of $15m in restructuring and rationalisation expenses and
decrease of $12m in other acquisition related costs. Currency had little
impact on the year on year movement.
Further margin analysis is included within the “Trading profit” sections
of the individual business segments that follow on pages 30 to 40.
Marketing, selling and distribution expenses
These expenses increased by $63m (5%) to $1,414m from $1,351m in
2009. In line with increased revenue there has been a 4% underlying
increase in advertising, marketing and selling costs. Unfavourable
currency movements have contributed to the remaining 1% movement.
Administrative expenses
Administrative expenses decreased by $67m (-13%) to $446m from
$513m in 2009. The principal factors contributing to the underlying
movement of -14% were a $32m reduction in the amortisation and
impairment charge of intangible assets, a $7m reduction in acquisition
related costs and a decrease of $5m in restructuring and rationalisation
expenses. This was partially offset by a 1% unfavourable movement in
currency.
Research and development expenses
Expenditure as a percentage of revenue decreased by 0.3% to 3.8%
in 2010 (2009 – 4.1%). The Group continues to invest in innovative
technologies and products to differentiate itself from competitors.
Operating profit
Operating profit increased by $197m to $920m from $723m in 2009
comprising increases of $93m in Orthopaedics, $28m in Endoscopy
and $76m in Advanced Wound Management.
Net interest payable
Net interest payable reduced by $25m from $40m in 2009 to $15m
in 2010. This is a consequence of the overall reduction of borrowings
within the Group and a reduction in the applicable interest rates.
Other finance cost
Other finance costs in 2010 were $10m compared to $15m in 2009.
This decrease is attributable to an increase in the expected return on
pension plan assets.
Taxation
The taxation charge increased by $82m to $280m from $198m in 2009.
The effective rate of tax was 31.3%, compared with 29.6% in 2009.
The tax charge was reduced by $10m in 2010 (2009 – $26m) as a
consequence of restructuring and rationalisation expenses, acquisition
related costs, amortisation of acquisition intangibles and impairments.
The effective tax rate was 30.8% (2009 – 27.9%) after adjusting for
these items and the tax thereon.
26
262189_pp014_pp041.indd 26
24/02/2012 21:12
Financial review continuedBusiness ReviewSmith & Nephew Annual Report 2011 Group balance sheet
The following table sets out certain balance sheet data as at
31 December of the years 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
4,733
4,565
1 January 2010
2010
$ million
2009
$ million
2,579
2,154
2,480
2,071
–
14
1,046
914
1,960
2,773
4,733
1,523
863
2,386
2,179
4,565
Total equity
Total equity increased by $594m from $2,179m in 2009 to $2,773m
in 2010. The principal movements were an increase of $615m due to
attributable profit, currency translation and hedging gains of $53m,
an increase of $26m relating to actuarial gains on retirement benefit
obligations, offset by a decrease of $7m relating to deferred taxation
and a decrease of $132m due to dividends paid during the year.
Attributable profit
Currency translation gains
Hedging gains
Actuarial gain on retirement benefit obligations
Dividends paid during the year
Taxation on Other Comprehensive Income and equity
items
Net share based transactions
31 December 2010
Total equity
$ million
2,179
615
52
1
26
(132)
(7)
39
2,773
Non-current assets
Non-current assets increased by $99m to $2,579m from $2,480 in
2009. Intangible assets and goodwill increased by $22m of which
$65m related to additions of intangibles, $28m related to favourable
currency translation and $2m of transfers. These were partially offset
by $68m of amortisation and a $4m adjustment to contingent
consideration. Property, plant and equipment increased by $34m
comprising $250m of additions and $3m of favourable currency
translation, partially offset by $203m of depreciation charge, $14m of
disposals and $2m of transfers. Deferred tax assets and other
non-current assets increased by $43m in the year.
Current assets
Current assets increased by $83m to $2,154m from $2,071m in 2009.
This was due to an increase in trade and other receivables of $78m and
an increase in cash at bank of $15m. These increases were partially
offset by a reduction in inventories of $10m.
Non-current liabilities
Non-current liabilities decreased by $477m from $1,523m in 2009 to
$1,046m in 2010. $448m of this decrease was due to the reduction of
long-term borrowings. The net retirement benefit obligation decreased
by $60m. This was largely due to the excess of pension contributions
totalling $65m over the charge to the income statement in the year of
$35m which gave rise to a net $30m reduction in the liability. In
addition, there were actuarial gains totalling $26m. Other movements in
non-current liabilities related to a reduction in deferred acquisition
consideration of $27m due to settlement of the BlueSky Medical Group
Inc. (“BlueSky”) deferred consideration, an increase of $38m in the
deferred tax liability and an increase in provisions of $20m due to a
change in the expected time frame to settlement which has resulted in
a reclassification from current liabilities.
Current liabilities
Current liabilities increased by $51m from $863m in 2009 to $914m in
2010. This was due to an increase in bank overdrafts and current
borrowings of $12m, an increase in trade and other payables of $21m
and an increase in current tax payable of $36m, offset by a decrease in
provisions of $18m.
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
“Business Review” section on pages 30 to 40. The financial position of
the Group, its cash flows, liquidity position and borrowing facilities are
described under “Financial position, liquidity and capital resources”
within the “Business Review” section set out on page 25. 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 on-going 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.
Management also believes that the Group has sufficient working capital
for its present requirements.
Payment policies
It is the Group’s and Company’s policy to ensure that suppliers are paid
within agreed terms. At the year-end the Company had no trade
creditors.
262189_pp014_pp041.indd 27
27
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Factors affecting Smith & Nephew’s results of operations
Government economic, fiscal, monetary and political policies are all
factors that materially affect the Group’s operation or investments of
shareholders. Other factors include sales trends, currency fluctuations
and innovation. Each of these factors is discussed in further in “Our
business, marketplace and other factors that could affect us” on pages
14 to 18 and “Taxation information for shareholders” on pages 147 to 148.
Critical accounting policies
The Group’s significant accounting policies are set out in Notes 1 to 24
of the Notes to the Group accounts. Of those, the policies which require
the most use of management’s judgement are as follows:
Inventories
A feature of the Orthopaedics business segment (whose finished
goods inventory makes up approximately 74% of the Group total
finished goods inventory) is the high level of product inventory required,
some of which is located at customer premises and is available for
customers’ immediate use. Complete sets of 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 customer demand, 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, discount rates, the market demand for
the products acquired, the future profitability of acquired businesses or
products, levels of reimbursement and success in obtaining regulatory
approvals. If actual results should differ or changes in expectations
arise, impairment charges may be required which would adversely
impact operating results.
Retirement benefits
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 as of 31 December 2011, a 0.5% increase in discount rate
would have reduced the combined UK and US pension plan deficit by
$96m whilst a 0.5% decrease would have increased the combined
deficit by $109m. A 0.5% increase in discount rate would have
decreased profit before taxation by $5m whilst a 0.5% decrease would
have increased it by $5m. A 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 have increased the combined deficit by
$36m. 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 and US, the discount rate is
derived by reference to an AA yield curve derived by the Group’s
actuarial advisers.
See Note 19 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.
Contingencies and provisions
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.
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
management believes none of them will result in a material adverse
effect on the financial position of the Group. The Group provides for
outcomes that are deemed to be probable and can be reliably
estimated. There is no assurance that losses will not exceed the
provision or will not have a significant impact on the Group’s results
of operations or financial condition 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 at 31 December 2011 related to this matter
is approximately $214m. The Group has sought recovery from its
primary and excess insurers for costs of resolving the claims. The
primary insurance carrier has paid $60m in full settlement of its policy
liability. However, the 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 the
US District Court for the Western District of Tennessee, and trial is
expected to commence in 2013. An additional $22m was received from
a successful settlement with a third party.
28
262189_pp014_pp041.indd 28
24/02/2012 21:12
Financial review continuedBusiness ReviewSmith & Nephew Annual Report 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 $17m provision remaining is adequate to cover remaining claims.
Given the uncertainty inherent in such matters, 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 management believes are 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 charges that could have resulted
from this investigation, without admitting any wrongdoing as part of the
settlement. At the same time, the Group 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 this agreement and to
enhance its compliance programme across all of its business segments.
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
countries outside of the US. The US Department of Justice (“DOJ”)
subsequently joined the SEC’s request.
During quarter four of 2011, the Group established a provision of $23m
in relation to this investigation.
On 6 February 2012, Smith & Nephew announced that it had reached
settlement with the SEC and DOJ in connection with this matter.
Smith & Nephew has committed to pay slightly less than $23m in fines
and profit disgorgement, and committed to maintain an enhanced
compliance programme and appoint an independent monitor for at
least 18 months to review and report on its compliance programme to
both the SEC and DOJ. The settlement agreements impose detailed
reporting, compliance and other requirements on Smith & Nephew for
a three-year term. Failure to comply with these requirements, or any
other violation of law, could have severe consequences for the Group.
Intellectual property 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 in courts in the United States and other jurisdictions and also
before agencies that examine patents. Outcomes are rarely certain and
costs and settlements 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 the US District Court for the Western
District of Texas a jury found that patents exclusively licensed to KCI by
Wake Forest University (“Wake Forest”) were valid but not infringed by
the Group. That ruling was upheld on appeal in February 2009. In a
subsequent case in the same court, relating to the Group’s foam
product, a jury concluded in March 2010 that asserted Wake Forest
patents were valid and infringed. But the court determined the relevant
patent claims were invalid and entered judgement in favour of the
Group. Wake Forest has appealed the court’s judgement. If Wake Forest
were to prevail, the Group could be prevented from selling that foam
product in the US until patent expiration in 2014. KCI has also pursued
patent infringement claims in certain countries relating to pumps,
canisters and other negative pressure wound therapy accessories.
The Group has won jury verdicts against Arthrex Inc., (“Arthrex”) for
infringement of the Group’s patents relating to suture anchors (in the
US District Court for Oregon) and femoral fixation devices for ACL
reconstruction (in the US District Court for the Eastern District of Texas).
Arthrex appealed both decisions. The Texas case was reversed on
appeal with judgement entered in favour of Arthrex. The Oregon
decision was reversed on appeal and remanded to the District Court for
a new trial. The Group secured a jury verdict in its favour that was
subsequently reversed by the Oregon court post-trial. The Group plans
to proceed with an appeal of the Oregon court’s ruling.
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, Massachusetts. A motion to
dismiss that complaint was denied in December 2010.
In June 2010, the Group was served with a subpoena by the
US Department of Justice in Massachusetts requiring the production
of documents relating to the distribution of samples of the Group’s
SUPARTZ joint fluid therapy product.
The Group is subject to country of origin requirements under the
US Buy American and Trade Agreements Acts with regard to sales to
certain US government customers. The Group has voluntarily disclosed
to the US Veterans Administration and the US Department of Defence
that a small percentage of the products sold to the US government in
the past, primarily from the Orthopaedics business, may have
originated from countries that are not eligible for such sales except with
government consent. Government auditors subsequently conducted
an on-site visit at the Group’s Orthopaedics business. In December
2008, three months after Smith & Nephew’s initial voluntary disclosure,
a whistleblower suit was filed in the US District Court for the Western
District of Tennessee alleging these violations. Smith & Nephew’s
motion to dismiss the suit was denied in November 2010.
262189_pp014_pp041.indd 29
29
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management
Business segment reviews
In August 2011, the Group announced its new strategic priorities. Part of this framework was the
implementation of an organisational change. Smith & Nephew has brought together the Orthopaedics
and Endoscopy business segments, creating the Advanced Surgical Devices division (“ASD”), which
will sit alongside the Advanced Wound Management division (“AWM”). These two divisions will serve
the Established Markets and will support our newly created Emerging Markets (focusing on China,
India, Brazil and Russia) and International Markets organisations. For reporting purposes, the two division
structure will replace the current three business segment structure during 2012.
Business segment analysis
Organisation
During 2011, internally the Group has reported as three business
segments: Orthopaedics, Endoscopy and Advanced Wound
Management. Included within the Orthopaedics business
segment are biologics activities, which comprise research and
development projects under the direction of a committee
representing all operating segments.
Revenue by business segment and geographic market and
trading and operating profit by business segment are set out
below:
Business segment revenue
B
C
A
2011
$m
2010
$m
2009
$m
Geographic revenue
A Orthopaedics
B Endoscopy
C Advanced wound management
Revenue by business segment
Orthopaedics
Endoscopy
Advanced Wound Management
Total revenue
Revenue by geographic market
2,312
939
1,019
2,195 2,135
791
846
855
912
4,270 3,962 3,772
C
B
A US
B
C Rest of World
Europe
A
$m
2,312
939
1,019
$m
1,756
1,409
1,105
A head office team in London, UK directs the overall business and
supports the business segments, primarily in the areas of business
development, legal, company secretarial, finance, human resources
and investor relations.
United States
1,756
1,707 1,664
Europe (Continental Europe
and United Kingdom)
Africa, Asia, Australasia
and other America
1,409
1,315 1,313
1,105
940
795
Total revenue
4,270 3,962 3,772
Trading profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management
Total trading profit
492
222
247
961
Operating profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management
Total operating profit
415
215
232
862
536
200
233
969
503
197
220
920
508
189
160
857
410
169
144
723
30
262189_pp014_pp041.indd 30
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011
VERILAST’s use of OXINIUM, oxidized Zirconium, results in a knee
which has been proven to last 30 years, twice the current industry
standard of 15 years.
Orthopaedics
Overview
During 2011, the Orthopaedics business was 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, China and the UK as well as by third-party
manufacturers.
Products
Orthopaedic reconstruction implants include hip, knee and shoulder
joints as well as ancillary products such as bone cement. Orthopaedic
trauma fixation products consist of internal and external devices and
other products, including various 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 a clinic setting, in particular bone growth
stimulation and joint fluid therapies.
Knee implant systems
The Orthopaedics business offers a range of products for specialised
knee procedures. The LEGION/GENESIS II Total Knee System is a
comprehensive system designed to allow surgeons to address a wide
range of knee procedures from primary to revision. LEGION TKS features
VERILAST Technology, an advanced bearing surface. 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. LEGION/GENESIS II and JOURNEY also utilise
VISIONAIRE Patient-Matched Instrumentation, a technology platform of
patient-matched cutting blocks for total knee procedures.
Hip implant systems
The Orthopaedics business offers a broad range of hip replacement
systems. In particular, the R3 Acetabular System includes a modular
acetabular cup that provides a variety of advanced bearings within a
single system. The BIRMINGHAM HIP Resurfacing System is a system
for hip resurfacing, a 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.
Oxidized 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 the Group’s VERILAST Technology. The LEGION Primary
Knee, with VERILAST Technology, is the only knee system with a 30
year wear performance claim approved by the United States Food and
Drug Administration (“FDA”) – more than double the performance
expectation for wear compared to conventional technologies.
Trauma implant systems
The principal fixation products are the TRIGEN Intramedullary Nailing
system, TRIGEN META-NAIL with expanded fixation and technique
options, TRIGEN INTERTAN Intertrochanteric Antegrade nails for hip
fractures, TRIGEN SURESHOT Distal Targeting System for Intramedullary
Nailing and PERI-LOC Periarticular Locked Plating system which offers a
comprehensive family of fracture specific plate and screw products for
the upper and lower extremities.
For external fixation and limb restoration, Orthopaedics offers the
TAYLOR SPATIAL FRAME Circular Fixation System and JET-X BAR
Unilateral Fixator.
Clinical Therapies
The principal clinical therapies products offered include the EXOGEN
Ultrasound Bone Healing System which utilises low-intensity pulsed
ultrasound to accelerate the healing of fresh fractures and to heal non
unions. DUROLANE Joint Fluid Therapy and SUPARTZ Joint Fluid
Therapy are non-surgical, non-pharmacological pain-relieving
therapies for osteoarthritis of the knee.
Strategy
Under the new ASD structure, the Group will continue to focus on
product innovation, sales excellence and physician education. Whether
through extending the life of implants, improving operating room
efficiency, or promoting faster healing and other clinical outcomes,
Smith & Nephew’s innovations differentiate it and provide solutions to
active patients seeking to regain quality of life while enhancing
economic value for customers. For its ASD products, Smith & Nephew
provides peer-to-peer medical education, through KLEOS, tailored to
individual surgeon needs utilising the world’s top orthopaedic
specialists and key opinion leaders.
The emerging markets continue to be an important growth opportunity.
China remains a focus, with further progress and growth achieved
during 2011. Outside China, ASD is investing in sales teams in other
emerging markets, extending physician training via KLEOS, developing
tailored products to meet local needs and improving local infrastructure
and logistics.
Under the ASD structure, the 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.
On 4 January 2012, the Group announced it had entered into an
agreement with Essex Woodlands for the disposal of the Group’s
Clinical Therapies business. After disposal, the Group will retain a 49%
investment in the newly formed company, Bioventus LLC, which will be
reported as an associate. At 31 December 2011, the assets and
liabilities of the Clinical Therapies business, $125m and $19m
respectively, are disclosed as held for sale. In 2011, the Clinical
Therapies business contributed $237m to revenue and $48m to trading
profit. The Group expects to recognise a profit before tax in excess of
$250m on the transaction on completion.
262189_pp014_pp041.indd 31
31
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Orthopaedics continued
New products
In Trauma, Orthopaedics launched STRUCSURE CP, an advanced
injectable, hard-setting bone graft substitute designed to gradually
resorb while being replaced by natural bone.
Reconstructive Orthopaedics continued the extension of its VISIONAIRE
Patient-Matched Instrumentation into its knee portfolio, with its roll-out
of VISIONAIRE for the TC-PLUS knee system. 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 saving time and reducing instruments in the operating room.
Also launched was the SMF Short Modular Femoral Hip System, a
primary hip stem that is substantially shorter than traditional length
stems, yet maintains optimal fixation and stability. The SMF Hip
complements the newly launched Direct Anterior retractor set, an
instrument set and technique that allows orthopaedic surgeons to enter
the hip socket through the front, or anterior, which results in far less soft
tissue disruption and post-operative pain than traditional techniques.
Market and competition
Smith & Nephew estimates that the global orthopaedic segment,
excluding clinical therapies, served by the Group grew by
approximately 2% in 2011 and is currently worth approximately $17.8
billion per annum. Management believes that the Smith & Nephew
Orthopaedics business holds an 11% share of this segment by value.
Principal global competitors in orthopaedics are Zimmer, Stryker,
Johnson & Johnson and Biomet.
Global orthopaedics competitor share (i) (ii)
G
A
F
E
D
B
C
A Smith & Nephew
B Zimmer
C
Stryker
D DePuy/Johnson & Johnson (iii)
E Synthes (iii)
F Biomet
G Others
%
11
19
18
17
12
9
14
Regulatory approvals
During 2011, the Orthopaedics business obtained regulatory
clearances/approvals for several key products.
(i) The global orthopaedics segment served by the Group consists of orthopaedic reconstruction and
orthopaedic trauma.
(ii) Competitor shares are based on estimates for selected segments and competitors, and may not
be comprehensive.
(iii) Synthes is the subject of a takeover from Johnson & Johnson which is expected to complete in 2012.
In the US, 510(k) clearance was obtained for the TAYLOR SPATIAL
FRAME V4.1 Software, TRIGEN SURESHOT Distal Targeting System V2.1,
and the SMF Hip Stem Line Additions.
Several products were approved in Japan, which included the 10/12 TAPER
OXINIUM Femoral Heads, LARGE COCR Femoral Heads, REFLECTION XLPE
Acetabular Liners, BHR Resurfacing Hip System, BHR Modular Head
System with 10/12 Taper Sleeves, SL-PLUS Hip Stems, SLR-PLUS Hip
Stems, and SL-PLUS Mia Hip Stems.
Seasonality
Orthopaedic reconstruction and trauma procedures tend to be higher in
the winter months (quarter one and quarter four) where accidents and
sports related injuries are highest. Conversely, elective procedures tend
to slow down in the summer months due to holidays.
In 2011, weaker economic conditions worldwide continued to create
several challenges for the overall orthopaedic market, including
continued deferrals of joint replacement procedures and heightened
pricing pressures. These factors contributed to the lower overall growth
of the worldwide orthopaedic market compared to historic
comparables. However, over the medium-term, several catalysts are
expected to continue to drive sustainable growth in orthopaedic device
sales, including the growing and ageing population, rising rates of
co-morbidities such as obesity and diabetes, technology improvements
allowing surgeons to treat younger, more active patients, and the
increasing strength of the demand for healthcare in emerging markets.
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.
32
262189_pp014_pp041.indd 32
24/02/2012 21:12
Business segment reviews continuedBusiness ReviewSmith & Nephew Annual Report 2011
Orthopaedics – financial performance
Revenue
Orthopaedics revenue
C
B
A
A Orthopaedic Reconstruction
B Orthopaedic Trauma
C Clinical Therapies
$m
1,618
457
237
2011
Orthopaedics revenue increased by 5% to $2,312m from $2,195m in
2010. Of this increase, 2% is attributable to underlying growth and 3% is
due to favourable currency movements.
Underlying growth in Orthopaedic revenue reconciles to reported
growth, the most directly comparable financial measure calculated in
accordance with IFRS, as follows:
Reported growth
Constant currency exchange effect
Underlying growth
2011
%
5
(3)
2
2010
%
3
(1)
2
Global knee revenue increased by $63m to $869m (8%), representing
underlying revenue growth of 5% and favourable foreign currency
translation of 3%. There has been continued pressure from the
challenging environment on higher specification and early intervention
hip and knee implant systems. Nevertheless, the Group’s knee
franchise and in particular the LEGION Knee Systems delivered strong
growth. This was driven by VERILAST and by VISIONAIRE Patient
Matched Instrumentation sets.
Global hip revenue increased by $16m to $704m (2%), representing a
1% underlying revenue decline and 3% due to favourable foreign
currency translation. Both traditional and new products have continued
to perform well, led by the R3 Acetabular System. Sales of
BIRMINGHAM HIP Resurfacing System have continued to decline.
Global trauma revenue increased by $23m to $457m (5%), representing
underlying revenue growth of 3% and 2% favourable foreign currency
translation. Trauma underperformed in the second half of the year and
the Group has taken actions to address this. The expiry of an
agreement under which Smith & Nephew received royalties in the US
has also had a negative impact on Trauma revenue in the second half
of the year.
In Clinical Therapies, revenue grew from $223m to $237m (7%) which
was represented by underlying growth of 6% and favourable currency
movements of 1%.
Underlying revenue growth for key product lines is:
In the US, revenue increased by $28m to $1,204m (2%), all of which
was due to underlying growth. The main factor was the continued
growth of the Group’s knee products including VERILAST and
VISIONAIRE.
Outside the US, revenue increased by $89m to $1,108m (9%). This
movement is attributable to underlying growth of 2% and favourable
foreign currency translation of 7%.
Reconstruction
Knees
Hips
Trauma
Clinical therapies
262189_pp014_pp041.indd 33
2011
%
2010
%
5
(1)
3
6
5
–
3
(5)
33
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management
Orthopaedics continued
2010
Orthopaedics revenue increased by 3% to $2,195m from $2,135m in
2009. Of this increase, 2% is attributable to underlying growth and 1% is
due to favourable currency movements.
In the US, revenue increased by $22m to $1,176m (2%), all of which was
due to underlying growth. The main factors were the growth of products
launched in the year including VERILAST and VISIONAIRE.
Outside the US, revenue increased by $38m to $1,019m (4%). This
movement is attributable to underlying growth of 2% and favourable
foreign currency translation of 2%.
Global knee revenue increased by $45m to $806m (6%), representing
underlying revenue growth of 5% and favourable foreign currency
translation of 1%. There was continued pressure from the challenging
environment on higher specification and early intervention hip and
knee implant systems. Nevertheless, the Group’s knee franchise and in
particular the LEGION Knee Systems delivered strong growth. This was
driven by the FDA clearance to claim that VERILAST bearing technology
for knee replacement provides wear performance sufficient for 30
years of actual use under typical conditions and by VISIONAIRE Patient
Matched Instrumentation sets.
Global hip revenue increased by $7m to $688m (1%), all of which was
due to favourable foreign currency translation. In the Group’s hip
franchise, both traditional and new products continued to perform well,
led by the R3 Acetabular System. Sales of BIRMINGHAM HIP
Resurfacing Systems were weaker.
Global trauma revenue increased by $20m to $434m (5%), representing
underlying revenue growth of 3% and 2% favourable foreign currency
translation. This improvement is attributable to management’s actions to
provide additional support and training to the sales force.
In Clinical Therapies, EXOGEN Ultrasound Bone Healing System
achieved double digit revenue growth for the year. The joint fluid
therapies franchise continued to perform well despite the increased
competitive environment in the US. Early in 2010 the Group sold its
niche pain management business and terminated the small spine
distribution business in Germany, which reduced Orthopaedics
revenue growth by approximately 1%.
Trading profit
2011
Trading profit decreased by $44m (8%) to $492m from $536m in 2010.
Trading profit margin decreased from 24.4% to 21.3%. This decrease is due
to continuing pricing pressure, adverse mix and some delay in the
execution of our efficiency programme.
2010
Trading profit increased by $28m (6%) to $536m from $508m in 2009.
Trading profit margin increased from 23.8% to 24.4%. This increase is due
to cost management and further investment in improving the efficiency and
effectiveness of the main processes.
Operating profit
2011
Operating profit decreased by $88m to $415m. This comprises the
decrease in trading profit of $44m discussed above, an increase of
$3m in the amortisation of acquisition intangibles, an $18m increase
in restructuring and rationalisation costs and $23m in respect of the
legal provision.
Operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to trading profit as follows:
Operating profit
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
Legal provision
Trading profit
2011
$ million
415
26
28
23
492
2010
$ million
503
8
25
–
536
Orthopaedics trading profit and operating profit as a percentage of
Group trading profit and operating profit was as follows:
Trading profit
Operating profit
2011
%
51
48
2010
%
55
55
2009
%
59
57
2010
Operating profit increased by $93m to $503m. This comprises the
increase in trading profit of $28m discussed above, a $26m reduction
in acquisition related costs, a reduction of $21m in the amortisation of
acquisition intangibles and impairments and an $18m reduction in
costs associated with the Earnings Improvement Programme (“EIP”).
34
262189_pp014_pp041.indd 34
24/02/2012 21:12
Business segment reviews continuedBusiness ReviewSmith & Nephew Annual Report 2011 The FAST-FIX 360 Meniscal Repair System offers exceptional fixation
strength and enhanced control to optimise the chances of a successful
meniscus repair.
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 (sometimes referred to as sports medicine) sector of the
endoscopy market. Arthroscopy is the minimally invasive surgery of
joints, in particular the knee, shoulder and hip.
In 2011, the Endoscopy business was headquartered in Andover,
Massachusetts and manufacturing facilities are located in Mansfield,
Massachusetts, and Oklahoma City, Oklahoma. Major service centres
are located in the US, UK, Germany, Japan and Australia.
Products
The Endoscopy business offers surgeons endoscopic technologies for
surgery of the joints and ligament repair, including: specialised devices
and fixation systems to repair damaged tissue; fluid management
equipment for surgical access; digital cameras, digital image capture,
scopes, light sources and monitors to assist with visualisation;
radiofrequency wands, electromechanical and mechanical blades, and
hand instruments for resecting damaged tissue.
Key products in repair are the FAST-FIX family of meniscal repair
systems, ENDOBUTTON for cruciate fixation, and the FOOTPRINT PK
and TWINFIX Suture Anchors for rotator cuff repair. Key products in
resection are the wide range of DYONICS shaver blades, ACUFEX
handheld instruments, and a range of radiofrequency (“RF”) probes.
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 surgeons, patients and payors, enhanced by a customer-led
approach to growing the arthroscopy market.
To sustain growth and enhance its market position, the ASD business
supports its strategy with investment in 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.
The business has a commitment to, and track record of, driving
efficiencies, through a formal operational excellence programme as
well as a culture of continuous process improvement.
The Endoscopy business aligns its organisation to ensure all employees
are working on common objectives, and to ensure consistent execution
against the Group’s wider objectives.
New products
In 2011, Smith & Nephew continued to expand its arthroscopic sports
medicine portfolio with the launch of new repair, resection and
visualisation products.
The FAST-FIX 360 Meniscal Repair System is designed to optimise the
chances of a successful repair with exceptional fixation strength, small
insertion points, convenient implant deployment and a built-in depth
limiter. It is the built on the proven FAST-FIX platform which set the
standard for minimally invasive, all-inside meniscal repair.
The DYONICS PLATINUM Series Shaver Blades are single-use blades
that provide superior resection, debris evacuation and sharpness.
BIORAPTOR and OSTEORAPTOR CURVED Guide Systems for Shoulder
optimise anchor placement helping surgeons to overcome the
challenges associated with instability repair. The systems provide
increased access to the repair site in the glenohumeral joint, improve
the trajectory of drilling and lead to optimised anchor placement in
glenoid bone which helps surgeons operate with confidence.
Recent regulatory approvals
During 2011, the Endoscopy business obtained regulatory clearances
for the following products in most major markets, except Japan where
the approval process is more lengthy: ULTRABRAID II Suture,
ENDOBUTTON DIRECT, OSTEORAPTOR and BIORAPTOR CURVED
Guide Systems and the ACUFEX DIRECTOR Guide System, all designed
for use in the reattachment of ligaments, tendons or soft tissues to
bone in knees, shoulders or other articulating joints; and various other
arthroscopy instruments, devices and sterilisation trays. In addition, the
Endoscopy business obtained regulatory clearance in the United States
and Europe for the TRUCLEAR Operative Hysteroscopy System for use
in office based procedures. In Japan, regulatory approvals included
TWINFIX AB, TWINFIX TI, TWINFIX Ultra PK and FOOTPRINT Ultra PK
Suture Anchors as well as BONECUTTER ELECTROBLADE and various
arthroscopy surgical instruments.
262189_pp014_pp041.indd 35
35
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Endoscopy continued
Seasonality
Arthroscopy procedures tend to be higher in the winter months (quarter
one and quarter four) where accidents and sports related injuries are
highest. Conversely, elective procedures tend to slow down in the
summer months due to holidays.
Market and competition
Smith & Nephew estimates that the global arthroscopy segment (the
combination of repair and resection products) in which the business
principally participates is worth approximately $3.8 billion per annum
and has recently been growing at approximately 8% annually.
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 arthroscopy segment has a
particular focus on arthroscopic repair of the knee and shoulder using a
broad range of technologies. The Group also expects to benefit from
the demand for less invasive approaches to arthroscopic hip repair.
Management believes that Smith & Nephew has a 21% share of the
global arthroscopy segment as at 31 December 2011. Smith &
Nephew’s main competitors were Arthrex, Mitek/Johnson & Johnson,
Stryker, Arthrocare and Linvatec/ConMed.
Global arthroscopy competitor share (i)
G
A
F
E
D
B
C
Mitek/Johnson & Johnson
A Smith & Nephew
B Arthrex
C
D Stryker
E
F
G Others
Linvatec/ConMed
Arthrocare
%
21
25
16
11
6
5
16
(i) Competitor shares are based on estimates for selected segments and competitors, and may not
be comprehensive.
Endoscopy – financial performance
Revenue
Endoscopy revenue
A Arthroscopy
B Visualisation
C Other
$m
807
107
25
C
B
A
A
2011
Endoscopy revenue increased by $84m, or 10%, to $939m in 2011 from
$855m in 2010, comprising 4% favourable currency translation and 6%
underlying growth.
Underlying growth in Endoscopy revenue reconciles to reported growth,
the most directly comparable financial measure calculated in
accordance with IFRS, as follows:
Reported growth
Constant currency exchange effect
Underlying growth
2011
%
10
(4)
6
2010
%
8
(1)
7
In the US, revenue increased by $10m to $363m in 2011 (3%), all of
which represents underlying growth.
Outside the US, revenue increased by $74m to $576m in 2011 (15%), of
which 8% was underlying growth and 7% was due to favourable foreign
currency translation.
Global revenue of sports medicine repair products increased by $57m
to $448m (15%), of which 10% was underlying growth and 5%
favourable foreign currency translation. The repair business benefited
from launch of the FAST-FIX 360 Meniscal Repair System and
BIORAPTOR CURVED guide systems during the year.
Revenue in the global resection products sector increased by $21m to
$303m (7%), of which 4% represents underlying revenue growth and
3% of favourable foreign currency translation. The resection franchise
benefited from sales of the Group’s new DYONICS PLATINUM range of
speciality blades.
36
262189_pp014_pp041.indd 36
24/02/2012 21:12
Business segment reviews continuedBusiness ReviewSmith & Nephew Annual Report 2011
Global Visualisation revenue reduced by $5m to $107m (-4%), of which
-7% represents negative underlying growth, partially offset by 3% of
favourable foreign currency translation. This decrease reflects the
Group’s strategy to focus only on those capital items which are closely
aligned with the core resection and repair businesses.
Underlying revenue growth for key product lines is:
Arthroscopy
Visualisation
2011
%
7
(7)
2010
%
9
(9)
Operating profit
2011
Operating profit increased by $18m to $215m from $197m in 2010. This
comprises the $22m increase in trading profit set out above, offset by
an increase of $4m in restructuring and rationalisation costs.
Operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to trading profit as
follows:
2010
Endoscopy revenue increased by $64m, or 8%, to $855m from $791m
in 2009, comprising 1% favourable currency translation and 7%
underlying growth.
Operating profit
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
Trading profit
2011
$ million
215
6
1
222
2010
$ million
197
2
1
200
In the US, revenue increased by $4m to $353m (1%), all of which
represents underlying growth.
Endoscopy trading profit and operating profit as a percentage of Group
trading profit and operating profit was as follows:
Trading profit
Operating profit
2011
%
23
25
2010
%
21
21
2009
%
22
23
2010
Operating profit increased by $28m to $197m from $169m in 2009. This
comprises the $11m increase in trading profit set out above, a reduction
of $14m in amortisation of acquisition intangibles and impairments and
a $3m reduction in restructuring costs.
Outside the US, revenue increased by $60m to $502m (14%), of which
11% was underlying growth and 3% was due to favourable foreign
currency translation.
Global revenue of sports medicine repair products increased by $46m
to $391m (13%), of which 11% was underlying growth and 2%
favourable foreign currency translation.
Revenue in the global resection products sector increased by $17m to
$282m (7%), of which 6% represents underlying revenue growth and
1% of favourable foreign currency translation. The resection franchise
benefited from the introduction of a new range of radio-frequency
ablation probes early in the year.
Global Visualisation revenue reduced by $9m to $112m (-7%), of which
-9% represents negative underlying growth, partially offset by 2% of
favourable foreign currency translation. This decrease reflects the
Group’s strategy to focus only on those capital items which are closely
aligned with the core resection and repair businesses.
Trading profit
2011
Trading profit increased by $22m (11%) to $222m from $200m in 2010.
Trading profit margin increased from 23.3% to 23.6%. This is driven by
strong sales and good cost-control.
2010
Trading profit increased by $11m (6%) to $200m from $189m in 2009.
Trading profit margin decreased from 23.9% to 23.3%. This reflects the
increased investment in product development and in the sales force,
particularly in the US.
262189_pp014_pp041.indd 37
37
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management PICO is a small portable pump, providing 7 days effective Negative
Pressure Wound Therapy yet is small enough to fit discreetly into a
pocket.
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 from invasive surgery that impact the wider
population.
The Advanced Wound Management business has its global
headquarters in Hull, UK and its North American headquarters in St
Petersburg, Florida. The products are manufactured at facilities in Hull
and Gilberdyke, UK, Suzhou in China, and also by third party
manufacturers around the world.
Products
The main products within the Advanced Wound Management business
are for exudate management, predominantly the ALLEVYN brand and
the recently added DURAFIBER products, 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 recent years, which
management believes provide efficient fluid management and an
optimal moist wound environment that promotes faster healing of the
wound, reduced risk of maceration and protection from infection. The
range includes ALLEVYN Ag, a range of dressings combining the
infection management capabilities of silver with ALLEVYN.
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.
NPWT delivers vacuum-assisted pressure to help promote healing.
It 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. The NPWT range was enhanced with the
introduction of PICO, the first of its kind – a fully disposable NPWT
system.
Advanced Wound Management also offers a range of other advanced
products including films, such as OPSITE and IV3000, skin care
treatments and gels.
38
Strategy
Advanced Wound Management’s strategy is to be customer-led and
invest for growth by focusing on high growth, high value segments, in
particular exudate and infection management, through improved
wound bed preparation, moist and active healing and penetration of
the NPWT market.
There has been a continued focus on operational efficiency and
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 start of manufacturing in Suzhou, China.
Advanced Wound Management’s strategic focus builds from an
understanding of the increasing tensions between clinical and financial
imperatives – and looks for the ground that resolves them optimally.
Advanced Wound Management is committed to improving wound
outcomes for patients, and at the same time conserve resources for
health care systems.
An aligned approach across Advanced Wound Management is
designed to ensure that employees are developed and work on
common objectives to deliver consistent execution of the Group’s plan.
New products
New in 2011 was the introduction of PICO, the first fully disposable
NPWT system. The innovative design provides the clinical benefits of
NPWT while simplifying the functionality and presentation of the
product, allowing for an entirely disposable and cost effective system.
The design allows greater access to therapy, reduces service and
support costs, and significantly improved cost effectiveness compared
to traditional NPWT therapy.
In addition, the NPWT range was enhanced with the launch of
RENASYS Soft Port to improve application and administration of
therapy. Further line extensions were introduced to support customer
requests for broader application of therapy.
VERSAJET II (hydro-surgery debridement) was introduced as a next
generation upgrade, incorporating improved ease of use and
functionality to the existing system. VERSAJET II enhances the Group’s
unique position in the hydro-surgical debridement market segment.
2011 saw the launch of DURAFIBER a gelling fibre dressing, which
expands the footprint of the exudate management portfolio.
DURAFIBER has category leading performance and was designed to
manage moderate to heavily exuding cavity wounds, working in
synergy with the ALLEVYN hydrocellular dressing range.
The ALLEVYN range was further expanded with anatomically shaped
dressings designed to address multiple wound sites reducing the
number of products a customer needs to stock, making dressing
choice simpler with the opportunity to reduce costs. This further
reinforces Advanced Wound Management’s position as the supplier
with the most comprehensive foam dressing solution.
262189_pp014_pp041.indd 38
24/02/2012 21:12
Business segment reviews continuedBusiness ReviewSmith & Nephew Annual Report 2011 Recent regulatory approvals
During 2011, Advanced Wound Management secured approval in US,
Europe and Australia for PICO, single use Negative Pressure Wound
Therapy System. In the US clearance was also gained for DURAFIBER
Ag. Regulatory approvals were received in the EU and US for a range of
NPWT dressing kits, including RENASYS Soft Port and the hydro-
surgery debridement product, VERSAJET II.
Approval was received in Europe for a number of significant product
changes including ALLEVYN Silver Non Adhesive for Germany and
ACTICOAT Surgical. Pro Two, a two layer compression bandaging
system was also cleared for sale.
Approval was secured in China for a number of existing marketed
products – OPSITE Incise, OPSITE Flexigrid, OPSITE POST OP, ALLEVYN
Thin and ALLEVYN Adhesive.
Seasonality
Due to the nature of its product range there is little seasonal impact on
the Advanced Wound Management business.
Market and competition
Management estimates that the sales value of the advanced wound
management segment worldwide was $5.5 billion in 2011, an
underlying increase of around 3% from 2010. During 2011, the segment
growth rate slowed slightly due to the weaker economic conditions. 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. 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. The market for advanced wound versus
traditional wound treatments is relatively un-penetrated and it is
estimated that the potential for advanced wound management is
significantly larger than the current market suggests. 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 an 18% share of the
advanced wound management segment as at 31 December 2011.
Worldwide competitors in advanced wound management in 2011
include Convatec, Mölnlycke, Systagenix and Kinetic Concepts, who
are active exclusively in the NPWT market.
Global advanced wound management competitor share (i)
A
B
F
E
D
C
A Smith & Nephew
B Kinectic Concepts
C
Mölnlycke
D Convatec
E 3M
F Others
%
18
26
11
9
6
30
(i) Competitor shares are based on estimates for selected segments and competitors, and may not
be comprehensive.
Advanced Wound Management – financial performance
Revenue
2011
Revenue increased by $107m, or 12%, to $1,019m from $912m in 2010,
comprising 5% favourable currency translation and 7% underlying
growth. Exudate management grew in underlying terms by 2% and
infection management by 4%, as targeted marketing investments in
Europe delivered good returns. The Group’s NPWT portfolio has had
another good year with excellent feedback since the launch of PICO
during 2011. This was launched in the US during January 2012.
Underlying growth in Advanced Wound Management revenue
reconciles to reported growth, the most directly comparable financial
measure calculated in accordance with IFRS, as follows:
Reported growth
Constant currency exchange effect
Underlying growth
2011
%
12
(5)
7
2010
%
8
(1)
7
In the US, revenue increased by $11m to $189m (6%), all of which is
attributable to underlying revenue growth.
Outside the US, revenue increased by $96m to $830m (13%). This is
represented by an underlying growth of 7% and 6% of favourable
foreign currency translation. European revenue increased by $39m to
$493m (9%) of which 4% was underlying growth coupled with 5% of
favourable currency translation.
262189_pp014_pp041.indd 39
39
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management
Advanced Wound Management continued
Operating profit
2011
Operating profit increased by $12m to $232m. This comprises an
increase in trading profit of $14m and a reduction of $1m in the
amortisation of acquisition intangibles. These were offset by an
increase of $3m in restructuring and rationalisation costs.
Operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, reconciles to trading profit as
follows:
Operating profit
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
Trading profit
2011
$ million
232
8
7
247
2010
$ million
220
5
8
233
Advanced Wound Management trading profit and operating profit as a
percentage of Group trading profit and operating profit was as follows:
Trading profit
Operating profit
2011
%
26
27
2010
%
24
24
2009
%
19
20
2010
Operating profit increased by $76m to $220m. This comprises the
increase in trading profit of $73m and a reduction of $6m in
restructuring and rationalisation costs partially offset by an increase
of $3m in the amortisation of acquisition intangibles following the
acquisition of Nucryst in December 2009.
Underlying revenue growth for key product lines is:
Exudate management
Infection management
2011
%
2
4
2010
%
2
3
2010
Revenue increased by $66m, or 8%, to $912m from $846m in 2009,
comprising 1% favourable currency translation and 7% underlying
growth. A significant portion of the growth came from the Group’s
NPWT product range, which continued to expand to offer customers a
wide range of clinical options. The Exudate and Infection Management
franchises continue to benefit from new products and line extensions.
In the US, revenue increased by $17m to $178m (11%), all of which is
attributable to underlying revenue growth.
Outside the US, revenue increased by $49m to $734m (7%). This is
represented by an underlying growth of 6% and 1% of favourable
foreign currency translation. European revenue increased by $6m to
$454m (1%) of which 5% was underlying growth partly offset by 4% of
unfavourable currency translation.
Trading profit
2011
Trading profit increased by $14m (6%) to $247m from $233m in 2010
and trading profit margin decreased from 25.6% to 24.3%. As set out
below, the comparative was assisted by a $25m settlement in respect
of BlueSky. Ignoring the impact of this in the comparatives, the
equivalent margin for 2010 was 22.8%. The increase in margin in 2011
is driven by the increase in underlying revenues.
2010
Trading profit increased by $73m (46%) to $233m from $160m in 2009
and trading profit margin increased from 18.9% to 25.6%. The
settlement in the year with the vendors of BlueSky Medical Group, Inc.
with regard to legal expenses in defending the NPWT intellectual
property position increased trading profit by $25m. During the year,
Advanced Wound Management also benefited from a full year’s
production at the new manufacturing facility in China, reducing
manufacturing costs.
40
262189_pp014_pp041.indd 40
24/02/2012 21:12
Business segment reviews continuedBusiness ReviewSmith & Nephew Annual Report 2011 Outlook and trend information
Smith & Nephew expects Orthopaedic Reconstruction to grow at close
to the market rate. Strong growth in the sales of premium knee implant
products will continue to annualise and on-going negative metal-on-
metal perceptions will affect hip implant sales.
In Orthopaedic Trauma, the Group expects the continuing 2%
headwind from the reduction in royalty income in the US to lead to
growth slightly below market growth.
Finally, Smith & Nephew expects to complete the transaction to create
Bioventus LLC in the first half of 2012. This will be modestly earnings
dilutive.
The Group delivered on its trading profit margin expectation for the last
quarter of 2011 and consequently the full year Group trading profit
margin was 22.5%. Smith & Nephew expects to achieve a modest
increase in trading profit margin in 2012.
In August 2011, Smith & Nephew set out the five strategic priorities
designed to drive the Group’s future success. Smith & Nephew is
reshaping its business to deliver against these priorities. The Group
is targeting structural efficiency savings of at least $150 million per
annum as part of this process. The costs of achieving this are
anticipated to be approximately $160 million in cash and $40 million in
non-cash costs. It is expected that more than half the costs and
approximately half the benefits will be achieved by the end of 2012,
with the full costs and benefits being realised within three years.
From the first quarter of 2012, Smith & Nephew intends to report as two
divisions, Advanced Surgical Devices global and Advanced Wound
Management global. Advanced Surgical Devices global will comprise
the current Orthopaedics and Endoscopy business units. This structure
will provide visibility on progress in the Emerging and International
Markets, as well as the performance of its product franchises in the
Established Markets.
The discussion below contains certain forward-looking statements that
may or may not prove accurate. For example, statements regarding
expected revenue growth and trading margins, market trends and our
product pipeline are forward looking statements. Phrases such as “aim”,
“plan”, “intend”, “anticipate”, “well placed”, “believe”, “estimate”, “target”,
“consider”, and similar expressions are generally intended to identify
forward looking statements. Forward-looking statements involve known
and unknown risks and uncertainties and other important factors that
could cause actual results to differ materially from those projected in
forward-looking statements. For Smith & Nephew, these factors
include: economic and financial conditions in the markets we serve,
especially those affecting health care providers, payors and customers;
price levels for established and innovative medical devices;
developments in medical technology; regulatory approvals;
reimbursement decisions or other government actions; products
defects or recalls; litigation relating to patent or other claims; legal
compliance risks and related investigative, remedial or enforcement
actions; strategic actions, including acquisitions and depositions and
our success in integrating acquired businesses; and numerous other
matters which affect us or our markets, including those of a political,
economic business or competitive nature.
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 the “Business
Review” section on pages 16 to 18.
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 segment reviews”
on pages 30 to 40.
Smith & Nephew delivered a good revenue performance in 2011, set
against a challenging market backdrop. The Group expects that the
macro-economic climate will continue to influence both patient and
payor behaviour and, as a result, it seems likely that tough market
conditions will persist throughout the year ahead.
During 2012, the Group expects its sports medicine franchises to
slightly outperform the market. It also expects to continue to grow at
above the market rate in Advanced Wound Management. This will be
driven by Smith & Nephew’s substantial negative pressure portfolio and
a series of innovative new product releases.
262189_pp014_pp041.indd 41
41
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationStrategy, KPIs & Risk managementOverview Sustainability
Smith & Nephew’s commitment to people,
the planet and sustainable profitability.
Highlights and strategy
Smith & Nephew is proud of much of its sustainability
performance in 2011. The Group achieved continued
improvements in its sustainability KPIs: energy, CO2,
waste and water reduction and increased recycling. The
employee accident rate increased 1% year-on-year.
The Group’s on-going success is also recognised by
a number of highly regarded third party organisations.
Smith & Nephew had another year of strong ranking in
the Dow Jones Sustainability Index (“DJSI”) and
FTSE4Good, achieved a top 20% ranking in the UK Carbon
Reduction Commitment (“CRC”) obligation and third party
verification by the Carbon Trust Standard.
Smith & Nephew constantly strives to improve its
performance year-on-year. This year, the appointment of the
Group’s new Chief Executive Officer, Olivier Bohuon, and
the focus of the business around new strategic priorities,
provided an opportunity to take a further step in defining
our sustainability vision and developing multi-year targets.
Sustainability vision and strategy
Smith & Nephew has been measuring, improving and reporting its
sustainability performance since 2001. During this time the Group has
made good progress, and is proud of what has been achieved.
Adapting and accelerating sustainability performance is an important
element of the Group’s overall business strategy. During 2011, Smith &
Nephew invested considerable effort re-evaluating the fundamental
issues that underpin its approach to sustainability.
Sustainability vision
“Collaborate with external and internal customers to develop efficient
and innovative sustainable business solutions to help differentiate and
grow the business”
Top priorities
Sustainability is a multi-faceted subject and developing an executable
strategy requires focus on the issues of greatest importance to the
Group. To assist with this, the Group conducted extensive consultation
with a diverse array of internal and external stakeholders to obtain their
insights on topics of importance. These included employees throughout
the business, customers, industry peers, investor rating agencies,
community partners, and sustainability thought leaders. The Group also
evaluated these topics in terms of their potential impact on the
business. This “materiality analysis” identified the focus areas for the
sustainability strategy. Those key focus areas are outlined below.
Materiality Analysis
High
A
B
E
C
D
F
e
c
n
a
t
r
o
p
m
i
l
r
e
d
o
h
e
k
a
t
S
H
J
G
L
N
I
K
M
O
P
Q
R
S
Low
Impact on S&N
High
A. Stakeholder Engagement
B. Philanthropy Community
C. Human Rights
D. Climate
E. Monitoring Systems
F. Water Use
G. Energy Reduction
H. Waste Packaging Reduction
I. Revenue Growth
J. Innovative Products
K. Ethics/Reputation
L. Business Continuity
M. Health And Safety
N. Responsible Supply Chain
O. Diversity
P. Recruitment Retention
Q. Wellness
R. Employee Satisfaction
Strategic development
The Group is in the process of refining its strategy for sustainability and
the priorities for the next five years, incorporating the materiality
analysis work. The Board has actively participated in this discussion
and supports the further development of Smith & Nephew’s
sustainability agenda. Once the Board has agreed the priorities, they
will be detailed in the 2011 Sustainability Report to be published later
this year.
42
262189_pp042_pp045.indd 42
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011
Hazardous
waste
– 25%
Close attention to improved
manufacturing processes and
better sorting of waste streams
The business’s total waste production in 2011 declined by nearly 4%
over the previous year. This was attributable to disciplined waste
reduction projects at all sites. Importantly, within the Group’s total waste
stream, the hazardous waste output was 25% less than 2010, resulting
from close attention to improved manufacturing processes and better
sorting of waste streams. Of additional encouragement was the
Group’s almost 6% increase in waste directed to recycling. As of the
end of 2011, the Group is now directing almost 48% of all waste to
recycling efforts.
Water consumption, while not substantial, showed a modest decline
(-1%) relative to 2010 despite the opening of a significant new
commercial building in Memphis.
The one area where the Group fell short in the key measures of
performance was in workplace safety, after demonstrating improved
performance in 2010. The Lost Time Accident Frequency Rate (“LTAFR”)
increased marginally (1%) over 2010, but the numbers of days lost was
higher than last year reflecting a higher accident severity. While quite a
number of these accidents were related to unusually severe winter
weather, the Group also experienced more accidents within its
manufacturing facilities. Considering this, in the fourth quarter of 2011,
the Group developed a new workplace safety training protocol that is
being implemented in 2012 to help drive improved, long-term safety
performance.
People
Smith & Nephew’s vision is to be the best at improving people’s lives.
This vision includes its own employees. In 2011, the Smith & Nephew
employee workforce included nearly 11,000 people in approximately 32
countries worldwide.
The management is firmly committed to the benefits of a diverse and
balanced workforce across the Group. It appoints on merit and values
diversity in its broadest sense, whilst highlighting that the percentage of
women Executive Officers in the Group has increased and is now 20%.
Additionally, as noted elsewhere in this Report, the Board recognises
the importance of diversity. The Board is currently comprised of 20%
women and the Group aspire to increase the number of women on the
Board to around 25% by 2015.
During 2011, Smith & Nephew introduced a new strategy and operating
model to increase its competitiveness in the face of changing
economies and health care environments. The Group continues to
pursue this strategy, which includes simplifying its operating model,
whilst at the same time ensuring all employees are engaged in its future
and success.
Smith & Nephew is committed to attracting, retaining and developing
talented employees who are dedicated to its core values of
Performance, Innovation and Trust. These values represent the
foundation of the Group’s culture.
2011 Progress
Environmental, health and safety performance
In 2011, the Group accelerated the sustainability commitment by
incorporating Group-wide energy, waste and water reduction best
practices throughout its operations.
While the Group collects absolute performance data, in this document,
data is normalised for changes related to cost of production (using 2010
as base year) to facilitate better year-on-year comparisons. 2011
performance relative to the previous year for the key sustainability
parameters is illustrated in the chart below.
2011 Key Performance Indicators
Smith & Nephew is achieving continued improvements in its
sustainability KPIs: energy, CO2, waste and water reduction,
and recycling.
-3.2%
Energy
-1.3%
CO2
-3.8%
Total Group Waste
-1.1%
Water
Change in % sent for recycling
5.8%
-4
-3
-5
% change compared to 2010
*LTAFR – Lost time accident frequency rate
-2
-1
LTAFR* 1.0%
0
1
2
3
4
5
6
Energy consumption for the Group decreased by over 3% in 2011.
This was largely attributable to a focus at all sites on energy efficiency
projects and despite opening a substantial new commercial building
in Memphis and additional production in the new Beijing plant.
The Group’s carbon dioxide emissions were reduced by slightly more
than 1% over the previous year. This figure is calculated from both direct
emissions from the combustion of fossil fuels on Smith & Nephew’s
sites and secondary emissions from utility company power generation
for Smith & Nephew’s energy needs. The decrease was linked directly
to reduced energy consumption, but the magnitude of the decrease
was less than for energy because of the composition of the energy
sources – some of which are more carbon intensive than others.
262189_pp042_pp045.indd 43
43
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management Sustainability continued
2011 Progress continued
We perform
Smith & Nephew and its employees set ambitious goals and seek to
achieve them. The Group fosters this through a rigorous performance
management process. Feedback to employees is not an “annual event”
but instead an on-going discussion between supervisor and employee.
Using a combination of face to face discussion and online tools,
objectives are set and aligned at the beginning of each year to support
the overall Group strategy, so that every employee can see the link
between his or her work and the Group’s overall success. CEO Forums
are held twice a year and are designed to develop key talent by
providing exposure to the broader business and also the opportunity to
interact with senior leadership in a small group setting. An Annual
General Managers’ meeting ensures that those closest to Smith &
Nephew’s markets and customers are fully engaged in the Group’s
strategy and goals from the start of each year. In 2011, Smith & Nephew
initiated annual CEO Awards to reward exceptional contributions to the
Group’s strategy. This award is open to all employees throughout the
Group below executive level.
We innovate
Smith & Nephew encourages and supports new ideas. The Group
always seeks solutions to the challenges of its customers and their
patients by offering valuable and effective health care products and
services. This same innovation applies to Smith & Nephew’s practices
to recruit, engage and develop its employees. The application process
is facilitated through online application. New employees are welcomed
through an online global induction program, shortening their learning
curve and maximising their opportunities for success. Smith & Nephew
believes diversity fuels innovation and is committed to providing equal
opportunity to all employees without discrimination. This includes
support of employees who are disabled or have become disabled
during the course of their employment. In these cases, it is Group policy
to provide continuing employment wherever practical in the same or a
suitable alternative position.
Each year, Smith & Nephew conducts a comprehensive talent review to
identify employees with high potential and ensure they receive the
development needed for their success and also develop future leaders
for critical roles. As a measure of this success the percentage of
vacancies filled by internal applicants in 2011 averaged 35% (2010 –
32%). The Group’s target for all employees continues to be 40%
including management positions.
44
Suzhou manufacturing
facility focuses on energy
use reduction.
Despite working in a relatively new facility, our advanced
wound product team in China is constantly exploring
opportunities for continuous improvement. A wide array of
energy efficiency projects including HVAC enhancements
and building management protocols were established that
resulted in a 27% decrease in energy used in 2011.
We earn trust
Trust is the foundation on which Smith & Nephew is built and it is the
hall-mark of its interactions with stakeholders both inside and outside
the Group. A Code of Conduct defines the standards of behaviour for
the Group’s employees as well as suppliers, contractors and
distributors authorised to do business on the Group’s behalf. In 2011,
Smith & Nephew continued to strengthen its comprehensive
compliance program which includes both annual and on-going training
for its employees around the world. Smith & Nephew also initiated its
first global ethics and compliance survey to serve as a benchmark for
on-going improvement efforts.
Smith & Nephew fosters trust through open communication and a
collaborative environment where ideas are encouraged, recognised
and rewarded. Formal communication channels include Group-wide
and divisional newsletters and intranet platforms as well as variety of
forums for open dialogue including quarterly reports from the CEO and
quarterly employee meetings on the state of the Group and important
initiatives.
Ensuring a healthy and safe work environment
Smith & Nephew is committed to a healthy, supportive and safe work
environment for its employees. Smith & Nephew does not use any form
of forced, compulsory or child labour. The Group’s global risk
management process ensures that potential issues are identified and
mitigated. Smith & Nephew adheres to all local and country regulations
and employs a range of applicable health, safety and security
measures. Smith & Nephew protects the health of its employees
through work-based strategies such as safety and ergonomics,
minimising the risk of work-related injury and ensuring that sufficient
resources and systems are in place to address health and safety
matters. The Group involves all employees in continuous improvement
including applicable training, reporting and review of health and safety
matters.
Measuring our progress
Smith & Nephew monitors its own internal culture through Employee
Engagement Surveys. The Group uses the results of these surveys to
identify areas of opportunity and develop and execute action plans to
address them. Regular reporting is maintained on some key metrics
of engagement. One of the key measures is the average voluntary
labour turnover rate. The Group’s US and UK employee population
(approximately 60% of total employees) have the most established
and robust data collection processes in place.
During 2011, the voluntary labour turnover rate in these regions was
8.8%, a slight increase from 7.2% in 2010. Average involuntary labour
turnover was 6.3% (2010: 5.1%), which reflects organisational changes
taken as part of Smith & Nephew’s new strategy and operating model.
The average voluntary turnover for employees leaving the Group within
two years of joining was 3.7% for 2011, compared to 10.9% in 2010.
262189_pp042_pp045.indd 44
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011
Investment
in communities
$14m
Investment
in R&D
$167m
$14m was given in support for
community charitable causes,
grants, sponsorships, medical
education and disaster relief.
The Group invested $167m
(2010 – $151m) in Research and
Development to develop improved
products and services.
Economic contribution
Sustainability by definition includes positive economic performance.
The Group is committed to providing innovative, cost-effective
healthcare solutions benefiting patients, healthcare professionals,
reimbursement agencies and their patients through improved
treatment, ease and speed of product use. The Group’s business
policies are designed to achieve long-term growth and profits – which
in turn bring continued economic benefits to shareholders, employees,
suppliers and local communities. Highlights for 2011 included:
– Group revenue in 2011 amounted to $4.3 billion (2010 – $4.0 billion);
Smith & Nephew’s employment of nearly 11,000 people globally
–
is a substantial economic-generator; total wages and salaries
in 2011 amounted to $930m (2010 – $817m); and
The Group invested $167m (2010 – $151m) in Research and
Development to develop improved products and services.
–
Looking ahead
A more complete analysis of Smith & Nephew’s 2011 sustainability
performance will be included in the 2011 Sustainability Report to be
published later this year.
Employee numbers
The average numbers of full-time equivalent employees in 2011 was
10,743, of whom 1,670 were located in the UK, 4,404 were located in
the US and 4,669 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 was:
Orthopaedics
Endoscopy
Advanced Wound Management
2011
5,280
2,331
3,132
2010
5,045
2,134
2,993
10,743
10,172
2009
4,853
1,888
3,023
9,764
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 24 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.
Our communities
Smith & Nephew is committed to being a strong corporate citizen
across its sphere of influence and in particular, in the communities
where we work and live. This includes monetary support (cash and
donated products) and support of its employees to volunteer for
community causes. In 2011, Smith & Nephew’s support for community
charitable causes, grants, sponsorships, medical education and
disaster relief totalled $13,640,000, comprised of $9,101,000 in cash
and $4,539,000 in product donations. As a matter of policy,
Smith & Nephew makes no political contributions.
Smith & Nephew is committed to establishing mutually beneficial
relationships with its suppliers, customers and business partners. The
Group works only with partners it believes adhere to business
principles and health, safety, social and environmental standards
consistent with its own. In 2011, the Group commenced implementation
of a formal sustainability performance questionnaire for a sub-set of its
supply chain partners. The Group has also continued to promote
diversity objectives through long-term relationships with local or small
business enterprises and minority-owned and women-owned
business enterprises.
262189_pp042_pp045.indd 45
45
24/02/2012 21:12
Business ReviewSmith & Nephew Annual Report 2011Business ReviewCorporate GovernanceAccounts and other informationOverviewStrategy, KPIs & Risk management
Corporate Governance
Chairman’s introduction
to corporate governance
Sir John Buchanan
Chairman
“ Smith & Nephew is a
Group which takes great
pride not only in what we
do, but in how we do it”
46
Smith & Nephew Annual Report 2011
262189_pp046_pp060.indd 46
24/02/2012 21:13
Dear shareholder,
Smith & Nephew is a Group which takes great pride not only in what
we do, but in how we do it. The Board of Smith & Nephew is committed
to this principle and leads from the top in setting a tone that we expect
from all employees across the Group.
Seeking best practice in corporate governance is important to us. All
Board members are active contributors to the proper and responsible
way of running the Group. The Corporate Governance Statement that
follows explains in technical detail how we, as a Board, comply with the
corporate governance principles.
However, we feel there is value in highlighting those particular aspects
of governance we have dealt with during the year. This gives our
shareholders an insight into what governance means at Smith &
Nephew.
Board changes
Olivier Bohuon joined the Board on 1 April 2011 and took over as
Chief Executive Officer on 14 April following last year’s Annual General
Meeting, when David Illingworth retired. I have paid tribute to David
elsewhere in this Annual Report.
This year, at our Annual General Meeting, Rolf Stomberg will be retiring
from the Board after 14 years’ service. We are truly indebted to Rolf for
his enormous contribution and commitment during his time on the
Board. He served as Chairman of the Remuneration Committee for
10 years, Senior Independent Director for 9 years and played a major
part in the CEO succession process. We have benefited greatly from his
experience and wisdom.
We were delighted to welcome Ajay Piramal to the Board in January
2012. Ajay is one of India’s most respected businessmen and brings
both a wealth of global healthcare experience and, of course, expertise
in the emerging markets. It is a major achievement to have attracted
Ajay to Smith & Nephew.
Development of strategy
You will have read elsewhere in this Annual Report how Olivier has
been redefining our strategic priorities. His work is making a positive
impact on the business, our customers, the definition of our KPIs, the
analysis of the risks we face and the way we choose to pay and
incentivise our employees. Olivier works closely with the Board in this
process. We debated the issues extensively at our Strategy Review in
September, including analysing the risks that might prevent us meeting
our strategic priorities.
Diversity in the Boardroom
We value the diversity of views in our Boardroom. My Board colleagues
all come from different backgrounds and each brings unique
capabilities and perspectives to our discussions. We have a wide
geographical spread and a mix of professional backgrounds. We are
committed to maintaining a diverse Board and whilst it is our
expectation that 25% of the Board will be female by 2015, we will
appoint on merit and value diversity in its broadest forms.
different parts of the world. Visiting our manufacturing, distribution,
training or sales and marketing offices and sites gives us a more
detailed perspective and interacting with our talented people stimulates
ideas. The visits to Shanghai, York and Hull in 2011 gave us valuable
insights into these Group operations.
The Board evaluates its own effectiveness. In 2011, Richard De Schutter,
our Senior Independent Director led this evaluation process. We felt
that in a year of such change, we would benefit more from an internally
facilitated evaluation, with an external evaluation scheduled for 2012.
The review’s conclusions are summarised on page 55.
Director independence
We value the independence of our Non-Executive Directors. It is
important that the Chief Executive Officer and the Chief Financial Officer
are challenged in the Boardroom, leading to wider debate and better
proposals and decisions. This leads to an improved articulation of
strategy and enhanced assessment of risk and opportunities.
This can only be done effectively if the Non-Executive members of the
Board are prepared to ask the difficult questions, to insist on sound
responses and to spend time understanding the key drivers and
challenges faced by the Group. Our Non-Executive Directors do this
both at formal Board meetings and, on occasion, between meetings.
We value the longevity of our long-serving members, who have a deep
understanding of the Group. However, we are also mindful of our need
to plan for the future and the need to refresh our Board structure. We
shall continue to look for new Non-Executive Directors to ensure that
we have a balanced Board with the capabilities fit for taking us into the
future and its new challenges.
Ethics and Compliance
You will note that we have a specific Board Committee focused on
Ethics and Compliance. This is an area of intense focus for us, given our
responsibility to our healthcare customers and their patients and the
close scrutiny that the industry faces from regulators. We believe that all
our employees should act appropriately and ethically. We have detailed
policies and training programmes in force covering all employees in all
the territories in which we operate and also our third party sellers.
It is important to set the tone from the top and our Ethics and
Compliance Committee therefore reviews all Group activities in this
area and takes a lead in enforcing compliance and encouraging good
practice.
Finally, while governance sets the vital framework, we are aware that the
Board’s prime responsibility is to promote the long-term success of the
Company for the benefit of customers, employees and shareholders.
Directors’ development and effectiveness
The Board and I value the opportunity to visit our multiple locations,
learning first-hand about the specific challenges our business faces in
Sir John Buchanan
Chairman
22 February 2012
262189_pp046_pp060.indd 47
47
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management The Board of Directors
8
11
5
10
4
2
1
3
9
7
6
12
1 Sir John Buchanan
Chairman
3 Adrian Hennah
Chief Financial Officer
Joined the Board as an Independent Non-Executive
Director in 2005, appointed Chairman and
Chairman of Nominations Committee in April 2006.
Joined the Board as Chief Financial Officer in
June 2006.
Adrian has had extensive financial and
management experience in a number of companies
including GlaxoSmithKline and Invensys, where he
held the position of Chief Financial Officer. His role
at Smith & Nephew is strategic as well as financial
and he is responsible for driving margin
performance and addressing operational
improvements.
Other Directorships
– Non-Executive Director of Reed Elsevier PLC
– Member of Supervisory Board of Reed
Elsevier NV
5 Geneviève Berger
Independent Non-Executive Director
Appointed Non-Executive Director in March 2010.
Geneviève is a scientist with a PhD in Physics and
Biology as well as being an MD, and has held a
number of senior business roles as Chairman of the
Health Advisory Board for the European
Commission and Professor at the University of Paris,
Le Pitié-Sapêtrière Teaching Hospital and Director
General of the French Centre National de La
Recherche Scientifique. She is currently, Chief
Research & Development Officer at Unilever plc and
NV which she originally joined as a Non-Executive
Director.
Other Directorships
– None
Board Committee Membership
– None
Board Committee Membership
– Ethics & Compliance Committee
4 Ian Barlow
Independent Non-Executive Director
Chairman of Audit Committee
Appointed Non-Executive Director in March 2010
and Chairman of Audit Committee in May 2010.
Ian is a Chartered Accountant and has had
extensive financial experience both internationally
and in the UK. Prior to his retirement in 2008, he
was Senior Partner, London at KPMG and
previously Head of their UK tax and legal
operations. During his career with KPMG, he acted
as Lead Partner for many large international
organisations operating extensively in North
America, Europe and Asia.
Other Directorships
– Chairman of WSP Group plc
– Non-Executive Director and Chairman of the
Audit Committee of the PA Consulting Group
– Non-Executive Director and Chairman of the
Audit Committee of Brunner Investment Trust
– Chairman of The Racecourse Association
– Non-Executive Director of the Board of Her
Majesty’s Revenue and Customs
Board Committee Membership
– Audit Committee
6 Richard De Schutter
Senior Independent Non-Executive Director
Appointed Non-Executive Director in January 2001
and Senior Independent Director in April 2011.
Richard has had extensive US corporate experience
at Chief Executive and Chairman level in a number
of major corporations with primarily a scientific,
chemical, engineering or pharmaceutical focus
including GD Searle, Monsanto, Pharmacia
Corporation and DuPont Pharmaceuticals.
Other Directorships
– Non-Executive Chairman of Incyte Corporation
– Non-Executive Director of Navicure Inc
– Non-Executive Director of Sprout
Pharmaceuticals
Board Committee Membership
– Nominations Committee
– Audit Committee
– Ethics & Compliance Committee
– Remuneration Committee
Sir John has broad international experience gained
in large and complex international businesses. He
has substantial experience in the petroleum
industry and knowledge of the international investor
community. He has held various leadership roles in
strategic, financial, operational and marketing
positions, including executive experience in
different countries. He is a former Executive Director
and Group Financial Officer of BP, serving on the BP
Board for six years.
Other Directorships
– Senior Independent Director and Deputy
Chairman of Vodafone Group Plc
– Senior Independent Director of BHP Billiton Plc
– Chairman of International Chamber of Commerce
(UK) Ltd
– Member of Advisory Board of Ondra Bank
– Chairman of UK Trustees for the Christchurch
Earthquake appeal
Board Committee Membership
– Nominations Committee
2 Olivier Bohuon
Chief Executive Officer
Joined the Board and appointed Chief Executive
Officer in April 2011.
Olivier has had extensive international experience
within a number of pharmaceutical and healthcare
companies. Prior to joining Smith & Nephew, he
was President of Abbott Pharmaceuticals, a division
of Abbott Laboratories based in the US, where he
was responsible for the entire business, including
R&D, Global Manufacturing and global support
functions.
Other Directorships
– Non-Executive Director of Virbac Group
Board Committee Membership
– Nominations Committee
48
262189_pp046_pp060.indd 48
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011
8
11
5
10
4
2
1
3
9
7
6
12
7 Pamela Kirby
Independent Non-Executive Director
Chairman of the Ethics & Compliance Committee
9 Joseph Papa
Independent Non-Executive Director
Chairman of the Remuneration Committee
Appointed Non-Executive Director in March 2002
and Chairman of Ethics and Compliance Committee
in April 2011.
Appointed Non-Executive Director in August 2008
and Chairman of Remuneration Committee in April
2011.
Pamela has extensive commercial and product
development experience within the international
pharmaceutical and healthcare industry. Her last
executive position was Chief Executive of Quintiles
Transnational Corp in the USA, having previously
held senior positions in various pharmaceutical
companies including AstraZeneca and F. Hoffmann-
La Roche. She is now a Non-Executive Director of a
number of international companies.
Other Directorships
– Non-Executive Chairman of Scynexis Inc.
– Non-Executive Director of Informa plc
– Non-Executive Director of Victrex plc
– Non-Executive Member of the Board of Simmons
& Simmons LLP
Board Committee Membership
– Ethics & Compliance Committee
– Remuneration Committee
8 Brian Larcombe
Independent Non-Executive Director
Appointed Non-Executive Director in March 2002.
Brian spent his career in private equity with 3i
Group. After leading the UK investment business for
a number of years, he became Finance Director and
then Chief Executive of the Group following its
flotation. He is well known in the City and has held a
number of Non-Executive Directorships.
Other Directorships
– Non-Executive Director of gategroup
Holdings AG
– Non-Executive Director of Incisive Media
Holdings Limited
Board Committee Membership
– Audit Committee
– Remuneration Committee
Joseph has had nearly 30 years’ experience in the
pharmaceutical industry working for a number of
companies both in the US and Switzerland. He is
now Chairman and Chief Executive of Perrigo, one
of the largest over the counter pharmaceutical
companies in the US, having held senior positions
at Novartis, Cardinal Health Inc. and Pharmacia.
Other Directorships
– Chairman and Chief Executive of Perrigo
Company
Board Committee Membership
– Remuneration Committee
– Audit Committee
– Ethics and Compliance Committee
10 Ajay Piramal
Independent Non-Executive Director
Appointed Non-Executive Director in January 2012.
Ajay is one of India’s most respected businessmen.
He enabled the Piramal Group to transform from a
textile centric group to a $2.0bn conglomerate in
diversified areas. He has extensive industry and
market knowledge and international experience
particularly in India and China. He has held a
number of global healthcare leadership positions in
both India and internationally.
Other Directorships
– Chairman of Piramal Healthcare, Piramal Glass,
Allergan India Limited, IndiaREIT fund advisors
and IndiaVentures Advisors
– Chairman of Board of Governors of Indian
Institute of technology, Indore
– Member of Board of Dean’s Advisors at Harvard
Business School
– Chairman of Pratham India
Board Committee Membership
– None
11 Rolf Stomberg
Independent Non-Executive Director
Appointed Non-Executive Director in 1998.
Retiring from the board following the Annual
General Meeting on 14 April 2012.
Rolf has a wide board experience within a range of
diverse international industries. He held a number
of leadership positions at BP over a number of years
until his retirement in 1997, when he was Chief
Executive Officer of BP Oil and a member of the BP
Board. He is now a Non-Executive Director of a
number of international companies.
Other Directorships
– Chairman of Lanxess AG
– Non-Executive Director of Hoyer GmbH,
– Non-Executive Director of Biesterfeld AG
– Non-Executive Director of Severstal OAU
– Non-Executive Director of Ruspetro Plc
Board Committee Membership
– Nominations Committee
– Audit Committee
– Remuneration Committee
12 Susan Henderson
Company Secretary
Appointed Company Secretary in May 2009.
Susan has nearly 30 years’ experience as a
company secretary in a wide range of companies
including Prudential plc, Amersham plc and RMC
Group plc. Her work has covered Board support,
corporate governance, corporate transactions,
share registration, listing obligations, corporate
social responsibility, pensions, insurance and
employee and executive share plans. Susan is a
member of the GC100 Group Executive Committee
and the CBI Companies Committee and is a
frequent speaker on corporate governance related
matters.
262189_pp046_pp060.indd 49
49
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management
Executive Officers
Olivier Bohuon is supported in the
day-to-day management of the Group
by a strong team of Executive Officers:
Mike Frazzette
President, Advanced Surgical Devices
Joined Smith & Nephew in July 2006 as President
of the Endoscopy business. Since July 2011, he has
headed up our Advanced Surgical Devices division
and is responsible for the Orthopaedic, Trauma and
Endoscopy business in Established Markets. He is
based in Andover, Massachusetts.
Previous Experience
Mike has held a number of senior positions within
the US medical devices industry. He was President
and Chief Executive Officer of Micro Group, a US
manufacturer of medical devices and spent 15 years
at Tyco Healthcare becoming President of each of
the Patient Care and Health Systems divisions.
Mark Augusti
President, Clinical Therapies/Biologics
Helen Maye
Head of Group Human Resources
Joined Smith & Nephew in 2003 and since January
2008, has led the Clinical Therapies and Biologics
businesses. He is based in Raleigh, North Carolina.
He will leave the Group on completion of the Clinical
Therapies disposal announced on 4 January 2012.
Previous Experience
Mark has held a number of senior positions within
the Orthopaedics and Biologics businesses of
Smith & Nephew. Prior to joining Smith & Nephew,
he worked for GE Medical Systems in the US and
Asia. Mark is also a Non-Executive Director of
Hutchinson Technology Inc.
Joined Smith & Nephew in July 2011. She is based
in London and leads the Global Human Resources
and Internal Communications functions.
Previous Experience
Helen has more than 30 years’ experience across a
variety of international and global roles in medical
devices and pharmaceuticals, including
manufacturing, supply chain and human resources.
Previously, she was Divisional Vice President of
Human Resources at Abbott Laboratories.
50
262189_pp046_pp060.indd 50
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011 Roger Teasdale
President, Advanced Wound Management
Francisco Canal Vega
President, Emerging Markets
Kelvin Johnson
President, International Markets
Joined Smith & Nephew in 1989 within the Wound
Management business. He was appointed
President of Advanced Wound Management in
May 2009. He is based in Hull.
Joined Smith & Nephew in January 2012. He is
based in Dubai and leads the Emerging Markets
division, focusing particularly on achieving market
leading growth in Brazil, Russia, China and India.
Joined Smith & Nephew in 1980 and was
appointed to lead the International Markets division,
covering all countries outside the Established and
Emerging Markets in 2011. He is based in Dubai.
Previous Experience
Previous Experience
Previous Experience
Roger has held a number of key roles within the Smith
& Nephew Group in both the UK and the US and has
been responsible for leading the transformation of the
wound business in recent years.
Francisco has held senior management positions in
global companies including Gambro AB, Excelsior
and Baxter International and has lived and worked
in many countries including China, Japan, US and
Spain. Francisco was also formerly a Board Member
of EUCOMED.
Kelvin has held a number of key international roles
with Smith & Nephew, firstly in South Africa and
then leading the Emerging Market strategy. He has
spent some time leading the Group’s increased
focus in China.
Ros Rivaz
Chief Technology Officer
Joined Smith & Nephew in November 2011. She is
responsible for global operations, IT systems,
Corporate Sustainability and Regulatory and Quality
Affairs and is focused on improving efficiency in
Smith & Nephew’s processes. Ros is based in
London.
Previous Experience
Ros has held senior management positions in
global companies in the areas of supply chain
management, logistics, manufacturing,
procurement and systems, including, Imperial
Chemical Industries, Tate & Lyle, Diageo and
Premier Foods. She has 30 years’ experience
across all areas of operational excellence.
262189_pp046_pp060.indd 51
Gordon Howe
Senior Vice President,
Global Planning and Development
Joined Smith & Nephew in 1998 and, since August
2007, has headed up the Global Planning and
Business Development teams. He is based in
Memphis, Tennessee.
Previous Experience
Gordon has held a number of senior management
positions within the Smith & Nephew Group firstly
in the Orthopaedics division and more recently at
Group Level. Prior to joining the Company, he held
senior roles at United Technologies Corporation.
Jack Campo
Chief Legal Officer
Joined Smith & Nephew in June 2008 and heads
up the Global Legal function. Since late 2011 he has
been based in Andover, Massachusetts.
Previous Experience
Prior to joining Smith & Nephew, Jack held a
number of senior legal roles within the General
Electric Company including 7 years at GE Healthcare
(GE Medical Systems) in the US and Asia.
51
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management The Non-Executive Directors meet regularly prior to each Board
meeting without management in attendance. The roles of Non-
Executive Directors and in particular the Senior Independent Non-
Executive Director are defined as follows:
Non-Executive Directors
– Providing effective challenge to management
– Assist in development of strategy
– Serve on the Board Committees
Senior Independent Non-Executive Director
– Chairing meetings in the absence of the Chairman
– Acting as sounding board for the Chairman on Board related matters
– Acting as an intermediary for the other Directors where necessary
– Available to shareholders on matters which cannot otherwise
be resolved
– Leading annual evaluation into the Board’s effectiveness
– Leading search for a new Chairman, as necessary
Independence of Non-Executive Directors
We are sensitive to the need for our Non-Executive Directors to remain
independent from management in order to exercise our independent
oversight and effectively challenge management as necessary. The
Board has determined that all Non-Executive Directors are independent
in accordance with both UK and US requirements. None of our
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. None of them receive additional
remuneration apart from Directors’ fees, nor do they participate in the
Group’s share option plans, performance related pay schemes or
pension schemes. Nor do they serve as Directors of any companies or
affiliates in which any other Director is a Director.
Now that Olivier Bohuon has settled into his new role and we are
beginning to implement our new strategy, we are in a position to
analyse the appropriate Board balance and structure for the future.
We know that we will need different skills and experiences and, in
particular, we would like to have a greater representation from Emerging
Markets, which is a key Strategic Priority for us. The appointment of
Ajay Piramal at the beginning of 2012 goes some way towards
achieving this.
Rolf Stomberg has served on the Board for 14 years and will be retiring
from the Board following this year’s Annual General Meeting. We are
continuing to look for suitable Non-Executive Directors and, in due
course, other longer serving Directors will step down.
Corporate Governance Statement
Compliance Statement
We are committed to the highest standards of corporate governance
and comply with all the provisions of the UK Corporate Governance
Code (“the Code”). The Company’s American Depositary Shares are
listed on the NYSE and we are therefore subject to the rules of the NYSE
as well as to the US securities laws and the rules of the SEC applicable
to foreign private issuers. We comply with the requirements of the SEC
and NYSE except that the Nominations Committee is not comprised
wholly of independent Directors, as required by the NYSE, but consists
of a majority of independent Directors in accordance with the Code. We
shall explain in this Corporate Governance Statement and in the
Directors’ Remuneration Report how we have applied the provisions
and principles of the FSA Listing Rules, the Disclosure & Transparency
Rules (“DTR”), and the Code throughout the year.
Board
The Board is responsible for determining the strategy of the Chief
Executive Officer and his Executive team implement that strategy. The
chart on the next page gives more detail about the structure of the
Board, the matters we deal with and the key activities we undertook
in 2011.
Roles of Directors
Whilst we all share collective responsibility for the activities of the Board,
some of our roles have been defined in greater detail. In particular, the
roles and responsibilities of the Chairman and Chief Executive Officer
are clearly defined.
Chairman
– Building a well balanced Board
– Chairing Board meetings and setting Board agenda
– Ensuring effectiveness of the Board and ensuring annual review
undertaken
– Encouraging constructive challenge and facilitating effective
communication in the Board
– Promoting effective Board relationships
– Ensuring appropriate induction and development programmes
– Ensuring effective two way communication and debate with
shareholders
– Setting the tone at the top with regard to compliance and
sustainability matters
– Promoting high standards of corporate governance
– Maintaining appropriate balance between stakeholders
Chief Executive Officer
– Developing and implementing Group strategy
– Recommending the annual budget and five year strategic and
financial plan
– Ensuring coherent leadership of the Group
– Managing the Group’s risk profile and establishing effective
internal controls
– Regularly reviewing organisational structure, developing executive
team and planning for succession
– Ensuring the Chairman and Board are kept advised and up to date
regarding key matters
– Maintaining relationships with shareholders and advising the board
accordingly
– Setting the tone at the top with regard to compliance and
sustainability matters
52
262189_pp046_pp060.indd 52
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011
Board Membership
Non-Executive Chairman Sir John Buchanan
Chief Executive Officer Olivier Bohuon (appointed on 1 April 2011)
Chief Financial Officer Adrian Hennah
8 Independent Non-Executive Directors
– Richard De Schutter (Senior Independent Director)
– Ian Barlow
– Geneviève Berger
– Pamela Kirby
– Brian Larcombe
– Joseph Papa
– Ajay Piramal (appointed 1 January 2012)
– Rolf Stomberg (to retire on 12 April 2012)
(David Illingworth retired as Chief Executive on 14 April 2011)
Role of the Board as set out in the schedule of matters reserved to the Board
Strategy
Approving the Group strategy including major changes to corporate and management structure, acquisitions, mergers, disposals, capital transactions
over $10m, annual budget, financial plan, business plan, major borrowings and finance and banking arrangements
Approving changes to the size and structure of the Board, overseeing succession planning and the appointment and removal of Directors and the
Company Secretary
Approving Group polices relating to corporate social responsibility, health and safety, Code of Conduct and Code of Share Dealing and other matters
Performance
Reviewing performance against strategy, budgets and financial and business plans
Overseeing Group operations and maintaining a sound system of internal control
Determining dividend policy and dividend recommendations
Approving the appointment and removal of the auditors and other professional advisors and approving significant changes to accounting policies or
practices
Approving the use of the Company’s shares in relation to employee and executive incentive plans
Risk
Determining risk appetite, regularly reviewing risk register and risk management processes
Shareholder Communications
Approving preliminary announcement of annual results, annual report, half yearly report, quarterly interim management statements, the release of
price sensitive announcements and any listing particulars, circulars or prospectuses
Maintaining relationships and continued engagement with shareholders
Key activities in 2011 (in addition to regular annual activities)
– Appointment of Olivier Bohuon as Chief Executive Officer
– Approval of new strategy and updated organisational structure
– Approval of risk management programme
– Approval of five year plan
– Review of effectiveness of Board
– Review of on-going Board composition
– 9 Scheduled meetings
– 3 Telephone Update Calls
– 4 Day Strategy Review and visit to our China operations
– 2 Day visit to our York and Hull operations
262189_pp046_pp060.indd 53
53
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management
Corporate Governance Statement continued
Board and Committee attendance
The table below details attendance of Directors at Board and Committee meetings held throughout the year:
Sir John Buchanan
Olivier Bohuon (i)
David J. Illingworth (ii)
Adrian Hennah
Ian Barlow
Geneviève B. Berger (iii, iv)
Pamela J. Kirby
Brian Larcombe
Joseph C. Papa
Richard De Schutter
Rolf W. H. Stomberg
Board
9 meetings
Remuneration
Committee
4 meetings
Audit
Committee
6 meetings
Nominations
Committee
4 meetings
Ethics and
Compliance
Committee
4 meetings
9
7
3
9
9
8
9
9
9
9
9
–
–
–
–
–
–
4
4
4
4
4
–
3
–
–
6
–
–
6
6
6
6
4
–
1
–
–
–
–
–
–
4
4
–
–
–
–
2
4
–
4
4
–
(i) Appointed to the Board on 1 April 2011.
(ii) Retired from the Board on 14 April 2011.
(iii) Appointed to the Ethics and Compliance Committee on 14 April 2011.
(iv) Attended all scheduled meetings and was unable to attend some meetings arranged at short notice because of prior commitments.
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 that Committee.
Board development programme
In 2011, the Board development programme focused on continuing to
increase our understanding of the business and markets in which the
Group operates. Throughout the year, we receive regular updates from
our business operations across the world. It is however very much
more real to visit these operations, to view the processes and to meet
the people running and working in the businesses. This gives us an
in-depth understanding of the opportunities and challenges employees
face on a daily basis and helps to inform our decisions. Meeting our key
employees around the world also helps us with succession planning.
We have commenced an induction programme for Ajay Piramal who
joined the Board on 1 January 2012. He has received a briefing on the
responsibilities and duties of a Director of a UK Listed company as well
as a number of key corporate documents. A programme of events is
being planned for his first visit to London as a member of our Board,
when he will meet with senior employees and have the opportunity to
visit some of our key UK locations.
Month
Activity
September
Visit to Advanced Wound Management Factory in
Suzhou, China
Visit to Emerging Markets Head Office in Shanghai,
China
Presentation on the opportunities and challenges of
doing business in China
Presentation on the challenges of developing a
Strategy in emerging markets
November
Visit to Surgical Skills Centre in York
Visit to Advanced Wound Manufacturing factory and
Head Office in Hull
54
262189_pp046_pp060.indd 54
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011 Management of Conflicts of Interest
None of us nor our 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 21 February 2012.
Each of us has a duty under the Companies Act 2006 to avoid a
situation in which we have or may 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 we owe to the Company to
disclose to the Board any transaction or arrangement under
consideration by the Company. If we become aware of any situation
which may give rise to a conflict of interest, we inform the rest of the
Board immediately and the Board is then permitted under the articles of
association to authorise such conflict. The information is recorded in the
Company’s Register of Conflicts together with the date on which
authorisation was given. In addition, we certify, on an annual basis, that
the information contained in the Register is correct.
When the Board decides whether or not to authorise a conflict, only the
Directors who have no interest in the matter are able to participate in
the discussion and a conflict is only authorised if we believe that it
would not have an impact on our ability to promote the Company’s
success in the long-term. Additionally, we may, as a Board determine
that certain limits or conditions must be imposed when giving
authorisation. We have identified no actual conflicts which have
required approval by the Board. We have, however, identified seven
situations which could potentially give rise to a conflict and these have
been duly approved by the Board and are reviewed on an annual basis.
Re-appointment of Directors
In accordance with the Code, with effect from the Annual General
Meeting held in 2011, all Directors, including Ajay Piramal who was
appointed on 1 January 2012, offer ourselves to shareholders for
re-election annually. In 2012 Rolf Stomberg will be retiring from the
Board and will not offer himself for re-election as noted previously.
Retiring Directors retain office until the conclusion of the Annual
General Meeting. In addition, each Director may be removed at any
time by the Board or the shareholders.
Board evaluation
Towards the end of 2011, Richard De Schutter, the Senior Independent
Director led a review into the effectiveness of the Board and its
Committees as a whole as well as reviewing individual contributors. He
asked us to complete an online questionnaire and then interviewed
each of us individually. With the appointment of a new Chief Executive
Officer during the year and the subsequent development of the
updated Strategic Priorities and organisational structure, we felt that it
would be more beneficial to use an external facilitator for our
effectiveness review in 2012, once some of the changes have had time
to settle. Richard De Schutter reported back to us on his findings, which
we discussed in detail in February 2012.
The review concluded that the Board works effectively and has an
appropriate balance of experience and skills. Non-Executive Directors
particularly valued receiving regular reports from Olivier Bohuon
between meetings and having meetings with myself without
management present prior to each Board meeting. We were also
satisfied with the positive start made by Olivier Bohuon as Chief
Executive Officer and welcomed the progress he was making in
implementing the new strategy and in building a strong team.
We identified certain areas for continued improvement throughout 2012:
Ensuring that we spend more time in Board meetings on key strategic
issues and not allowing time to be spent on operational matters that
impact that priority
Implementing a more streamlined process for the appointment of
Non-Executive Directors
Gaining a better understanding of succession planning below Board
level
Taking more time to review our competitors and their strategies better
Reviewing our past decisions on a systematic basis
Company Secretary and Independent Advice
The Company Secretary, Susan Henderson, is responsible to the Board
for ensuring that we comply with all corporate governance requirements
and are kept updated on our responsibilities. We all have access to her,
individually and collectively.
We may also, from time to time, obtain independent professional
advice, at the Company’s expense, if we judge it necessary in order to
fulfil our responsibilities as Directors. If we are unable to attend a Board
meeting or Board Committee meeting, we ensure that we are familiar
with the matters to be discussed and make our views known to the
Chairman or the Chairman of the relevant Committee prior to the
meeting.
262189_pp046_pp060.indd 55
55
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Corporate Governance Statement continued
Directors’ Indemnity Arrangements
Each Director is covered by appropriate directors and officers liability
insurance and there are also Deeds of Indemnity in place between the
Company and each Director. These Deeds of Indemnity mean that the
Company indemnifies Directors in respect of any proceedings brought
by third parties against them personally in their capacity as Directors of
the Company. The Company would also fund on-going costs in
defending a legal action as they are incurred rather than after
judgement has been given. In the event of an unsuccessful defence in
an action against them, individual Directors would be liable to repay the
Company for any damages and to repay defence costs to the extent
funded by the Company.
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 2011,
the Executive Directors held meetings with institutional investors,
including investors representing approximately 47% of the share capital
as at December 2011.
As part of this programme of investor meetings, during 2011, as
Chairman of the Company, I met with investors representing 13.5% of
the share capital. Over the last three years, I have met investors
representing in aggregate 22.8% of the share capital. Also during 2011,
Joseph Papa met with shareholders holding 14.3% of the share capital
to discuss remuneration policies and plans and to introduce himself as
the new Chairman of the Remuneration Committee.
We receive a short report at every Board meeting reviewing our major
shareholders and any significant changes in their holdings since the
previous meeting. Olivier Bohuon and Adrian Hennah routinely advise
us of any concerns or issues that shareholders have raised with them
in their meetings. We also receive copies of analysts’ reports on the
Company and our peers between Board meetings.
The Company’s website (www.smith-nephew.com) contains information
of interest to both institutional investors and private shareholders,
including financial 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.
Share capital
As at 21 February 2012, the Company’s total issued share capital with
voting rights consisted of 895,845,540 Ordinary Shares of 20 US cents
each. 60,322,610 Ordinary Shares are held in treasury and are not
included in the above figure.
As at 21 February 2012, notification had been received from the
undernoted investors under the DTR in respect of interests in 3% or
more of the issued Ordinary Shares with voting rights of the Company.
Invesco
BlackRock, Inc.
Number of
Shares
%
44,901,016
5.02
44,811,205
5.02
Newton Investment Management Limited 44,337,465
4.98
Legal and General Group plc
35,675,739
3.99
In addition to the above the Company is aware that Walter Scott &
Partners Limited hold approximately 38m Ordinary Shares (4.2%).
Otherwise, 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 proposed a final dividend of 10.80 US cents per share
which, together with the interim dividend of 6.60 US cents, makes a
total for 2011 of 17.40 US cents. The final dividend is expected to be
paid, subject to shareholder approval, on 9 May 2012 to shareholders
on the register of Members at the close of business on 20 April 2012.
Annual General Meeting
The Company’s Annual General Meeting is to be held on 12 April 2012
at 2pm at The Royal Society, 6-9 Carlton House Terrace, London, SW1Y
5AG. Registered shareholders have been sent either a Notice of Annual
General Meeting or notification of availability of the Notice of Annual
General Meeting, as appropriate.
Code of Ethics for senior financial officers
We have adopted a Code of Ethics for senior financial officers, which is
available on the Group’s website (www.smith-nephew.com) and on
request. This applies to the Chief Executive Officer, 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 2011 or up until
21 February 2012.
56
262189_pp046_pp060.indd 56
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011 Evaluation of internal controls procedures
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.
We, as a Board, are responsible overall for reviewing and approving the
adequacy and effectiveness of internal controls operated by the Group,
including financial, operational and compliance controls and risk
management. We have delegated responsibility for the review of
financial, ethical compliance and quality management systems controls
to the Audit Committee, which reviews the internal control process, on
an annual basis and evaluates its effectiveness to ensure that it
remains robust and to identify any control weaknesses. The latest
review covered the financial year to 31 December 2011 and included
the period up to the approval of this Annual Report. The main elements
of this annual review are as follows:
The Chief Executive Officer 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 2011. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded on 22 February 2012 that the disclosure controls and
procedures were effective as at 31 December 2011.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Management assessed the
effectiveness of the Group’s internal control over financial reporting as
at 31 December 2011 in accordance with the requirements in the US
under s404 of the Sarbanes-Oxley Act. In making this assessment,
they used the criteria set forth by the Committee of Sponsoring
Organisations of the Treadway Commission in Internal Control-
Integrated Framework. Based on their assessment, management
concluded and reported that, as at 31 December 2011, the Group’s
internal control over financial reporting is effective based on those
criteria.
Having received the report from management, the Audit Committee
reports to the Board on the effectiveness of controls.
Ernst & Young LLP, an independent registered public accounting firm
issued an audit report on the Group’s internal control over financial
reporting as of 31 December 2011. This report appears on page 83.
There is an established system of internal control throughout the Group
and our divisions. The main elements of the internal control framework
are as follows:
The management of each Division is responsible for the establishment
and review of effective internal financial controls within their Division.
The Group Finance Manual sets out, amongst other things, financial
and accounting policies and minimum internal financial control
standards.
The Internal Audit function agrees an annual work plan and scope of
work with the Audit Committee.
The Audit Committee reviewed reports from the internal auditors on
their findings on internal financial controls.
The Audit Committee reviews the Group Whistleblower procedures.
The Audit Committee reviews regular reports from the Group Financial
Controller and the Taxation and Treasury functions.
This system of internal control has been designed to manage rather
than eliminate material risks to the achievement of our strategic and
business objectives and can provide only reasonable, and not
absolute, assurance against material misstatement or loss. Because of
inherent limitations, our internal controls over financial reporting may
not prevent or detect all mis-statements. In addition, our 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. This process complies with the Turnbull
working party guidance, revised October 2005 and additionally
contributes to our compliance with the obligations under the Sarbanes-
Oxley Act 2002 and other internal assurance activities. 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.
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
2011
$ million
2010
$ million
3
–
2
–
5
3
–
2
–
5
Audit fees include fees associated with the annual audit and local
statutory audits required internationally. A more detailed breakdown of
audit fees may be found in Note 3 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 Annual General Meeting as approved by the
Audit Committee.
Directors’ Report
The Directors’ Report includes the following sections; “Business
Review” (pages 14 to 45), “Corporate Governance” (pages 46 to 76) and
“Investor Information” (pages 137 to 150).
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.
262189_pp046_pp060.indd 57
57
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Corporate Governance Statement continued
Committees of the Board
We delegate some of the Board’s detailed work to four Committees. Each of these has their 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. The Chairman of
each Committee reports orally to the Board and minutes of the meetings are circulated to all members of the Board.
Audit Committee
Ian Barlow
Remuneration Committee
Joseph Papa
Membership
– Ian Barlow (Chairman) (Independent and financial expert)
– Brian Larcombe (Independent)
– Joseph Papa (Independent)
– Richard De Schutter (Independent)
– Rolf Stomberg (Independent)
Six Meetings
Membership
– Joseph Papa (Chairman) (Independent)
– Brian Larcombe (Independent)
– Pamela Kirby (Independent)
– Richard De Schutter (Independent)
– Rolf Stomberg (Independent)
Four Meetings
Main Responsibilities
– Ensure Integrity of financial statements, reviewing significant financial
reporting judgments and compliance with accounting standards,
policies and practices ensuring compliance with UK and US
statutory requirements
– Monitor announcements relating to Group’s financial performance
– Monitor effectiveness of internal controls and compliance with s404
Sarbanes Oxley
– Review operation of Group’s risk management processes and the
control environment mitigating compliance and quality management
system risk
– Recommend the re-appointment of the external auditors, monitor
and review their performance, and the effectiveness of the audit
process
– Receive reports on fraud and whistleblowing
– Agree internal audit plans and review internal audit reports
– Monitor the effectiveness of the internal audit function
Key Activities in 2011 (in addition to main responsibilities)
– Reviewed plans for reformatting the Annual Report
– Reviewed the risk management process
– Assumed responsibility for the review of the audit of Quality
Management Systems
– Considered the management of strategic risk by the Tax function
– Reviewed the operations of the Disclosures Committee
– Received and considered a report from the Treasury function
– Received and considered an external report on the effectiveness of
the internal audit function
Three matters agreed by written resolution
Main Responsibilities
– Determine remuneration policy for Executive Directors and senior
executives
– Approve individual remuneration packages for Executive Directors
and Executive Officers at least annually and any major changes to
individual packages throughout the year
– Determine the use of long-term incentive plans and oversee the use
of shares in all executive and employee plans
– Approve appropriate performance measures for short-term and
long-term incentive plans for Executive Directors and senior
executives
– Determine pay-outs under short-term and long-term incentive plans
for Executive Directors and senior executives
– Approve Directors’ Remuneration Report ensuring compliance with
related governance provisions
– Maintain constructive engagement on remuneration issues with
shareholders
– Have regard to remuneration policies and practices across the
Group
Key Activities in 2011 (in addition to main responsibilities)
– Approved package for incoming Chief Executive Officer and
retirement arrangements for outgoing Chief Executive
– Approved joining and leaving packages for all direct reports to Chief
Executive Officer
– Undertook comprehensive review of remuneration arrangements for
top 70 senior executives to align remuneration with the updated
Group strategy
– Undertook engagement programme with major shareholders to
explain new remuneration arrangements
58
262189_pp046_pp060.indd 58
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011 Ethics & Compliance Committee
Pamela Kirby
Nominations Committee
Sir John Buchanan
Membership
– Pamela Kirby (Chairman) (Independent)
– Joseph Papa (Independent)
– Richard De Schutter (Independent)
– Geneviève Berger (Independent)
Four Meetings
Main Responsibilities
– Review ethics and compliance programmes
– Review policies and training programmes
– Review compliance performance based on monitoring auditing and
investigations data
– Review hotline issues and calls
– Review Group’s internal and external communications relating to
ethical and compliance issues
– Review external developments and compliance activities
– Receive reports from the Executive ethics and compliance meetings
and from the Chief Compliance Officer and the Chief Legal Officer
Key Activities in 2011 (in addition to main responsibilities)
– Reviewed implications of UK Bribery Act and approved updates to
processes as appropriate
– Reviewed updates on compliance programme for distributors
– Reviewed internal reports into the effectiveness of our compliance
arrangements in China
Membership
– Sir John Buchanan (Chairman) (Independent on appointment)
– Olivier Bohuon
– Richard De Schutter (Independent)
– Rolf Stomberg (Independent)
Four Meetings
One matter agreed by written resolution
Main Responsibilities
– Review size and composition of Board
– Oversee Board succession plans
– Recommend Director appointments
Key Activities in 2011 (in addition to main responsibilities)
– Undertook the search for a new Chief Executive Officer and
recommended the appointment of Olivier Bohuon
– Reviewed and updated the parameters for the search for additional
Non-Executive Directors. Recommended changes to the
composition and chairmanship of Board Committees
– Recommended the appointment of Ajay Piramal as Non-Executive
Director
– Considered the implications of the Davies Report and revised policy
on building a diverse Board
– Reviewed our use of search firms
262189_pp046_pp060.indd 59
59
24/02/2012 21:13
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Corporate Governance Statement continued
Audit Committee
Dear shareholder,
I am pleased to present my report on the activities of the Audit
Committee in 2011. The membership and the principal duties of the
Committee are set out in the table on page 58 of this report.
The members are all independent Directors and bring relevant
expertise to the committee from their current or prior roles as Chief
Executives of substantial businesses both in the UK and USA and from
their roles as Non-Executive Directors at other corporations. I myself am
the designated finance expert being a Chartered Accountant and
former senior partner at KPMG UK, retiring in 2008.
In addition to the usual matters, which fall to the Audit Committee, such
as approving the financial results for the year, half year and the
quarterly interim management statements and the review of applicable
accounting policies and going concern assumptions, the Audit
Committee reviewed a number of topics during 2011.
Review of format of Annual Report
As you will have noticed, we undertook a thorough review of the style
and format of the Annual Report during 2011. We wanted to present our
Group to you in a clearer more user friendly manner, so that you could
find your way more easily around the document to the information you
need. We have explained our Strategic Priorities and their relation to our
Key Performance Indicators, risk and remuneration policies. We have
included more tables, charts and pictures and adopted a more
personal style in explaining our approach to governance. We are
mindful of proposals from the Department of Business Innovation And
Skills regarding Narrative Reporting and regard the work done in
refocusing the Annual Report this year, as being a good base on which
to build the report of the future.
Review of accounting policies
As noted we reviewed and concluded on the appropriateness of the
Group’s principal accounting policies, practices and accounting
judgments concentrating on the critical accounting policies requiring
management’s judgement, namely the valuation of inventory, review of
the carrying value of goodwill, intangible and tangible assets and the
valuation of retirement benefits, contingencies and provisions.
Compliance
We reviewed compliance with accounting standards, accounting policies
and practices, accounting and reporting issues, going concern
assumptions and the UK Corporate Governance Code and section 404
of the Sarbanes Oxley Act. No concerns were raised with us in 2011
about possible improprieties in matters of financial reporting or other
matters.
Review of Internal Audit function
We reviewed the Internal Audit function, its programme of work and its
resourcing requirements, specifically in the area of internal controls over
financial reporting, ethical compliance, quality management systems
(see below), assessing the effectiveness of the risk management
process and the prevention and detection of fraud. We were assisted in
this by an external review carried out by PricewaterhouseCoopers. This
concluded that the internal audit function was effective and respected
across the Group having adapted successfully to an expanding remit to
address the changing needs of the business.
Quality Management Systems audit
In 2010, our Internal Audit function assumed responsibility for the review
of our quality management systems, for our systems that monitor our
manufacturing activities for compliance with standards set by regulatory
authorities, including the FDA in the US, the MHRA in the UK and other
comparable bodies worldwide. We continued to review the work of the
Internal Audit function in this area in 2011. This work included monitoring
controls that mitigate quality management system risk.
Review of risk management process
We examined and updated the way we manage risk within the
organisation and undertook a mapping exercise to link the key risks
identified within our businesses with the key risks identified by the
Board at our Strategy Review. We then linked these risks back to our
60
Strategic Priorities and identified the mitigating action in place to control
these risks. This will assist the Board and senior management to
concentrate on the key strategic risks and their management faced by
the Group. These are both downside risks (something going wrong)
and upside risk (missed opportunities).
We continued to review the Group’s approach to internal financial
control and the operation of the risk management process. We also
evaluated the effectiveness of the Group’s systems to identify and
manage material risks.
Receipt of functional reports
During the year, we received reports from the Tax and Treasury
functions including how they manage risk.
Review of the work of the external auditors
We assessed the performance of Ernst & Young, our external auditors.
This was done throughout the year through review of their regular
reports on the scope and outcomes of their work. These reports
included accounting matters, governance and control and accounting
developments. In addition we utilised formal year-end feedback from all
our operating units as a result of which we asked for improvements to
be made in two operating locations. We reviewed the inspection
reports from the Auditor Oversight Boards in the UK and the US. We
also ensured that the audit-related, tax and other services received
from the external auditors were pre-approved in accordance with the
Auditor Independence Policy described below. Finally we reviewed the
fees of the auditors using benchmarking against groups of comparable
size and complexity. Our conclusions were that the external audit was
carried out effectively and with the necessary objectivity and
independence and this is the basis for our recommendation to the
Board and shareholders that Ernst & Young be reappointed.
Auditor Independence Policy
We have determined a schedule of approved non-audit services for the
Group external auditors to undertake. Our Auditor Independence Policy
prohibits the external auditors from performing services which would
result in the auditing of their own work, participating in activities
normally undertaken by management, acting as advocates for the
Group and creating a mutuality of interest between the auditors and the
Group by, for example, being remunerated through a success fee
structure. On an annual basis, we pre-approve the budget for fees
relating to audit and non-audit work, including taxation compliance
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, my approval is required. The Committee is subsequently
advised of any such services and fees. In this way all services provided
by the external 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 the year the second partner on the account was
replaced under these rules, a transition that was handled well by Ernst
& Young. Partners and senior audit staff may not be recruited by the
Group unless two years have expired since their previous involvement
with the Group. No such recruitment has occurred.
Internal control and risk management
On behalf of the Board, we reviewed the system of internal financial
control and satisfied ourselves that we are meeting required standards
both for the year ended 31 December 2011 and up to the date of
approval of this Annual Report.
Ian Barlow
Chairman of Audit Committee
262189_pp046_pp060.indd 60
24/02/2012 21:13
Corporate GovernanceSmith & Nephew Annual Report 2011 Nominations Committee
Dear shareholder,
I am pleased to present my report on the activities of the Nominations
Committee in 2011. The membership and the principal duties of the
Committee are set out in the table on page 59 of this report.
We dealt with the following important matters in 2011.
Use of search firms
During the year, we reviewed our use of search firms. When briefing
search firms, we explain the importance to us of building a diverse
board and request that shortlists include candidates from a wide range
of backgrounds.
Appointment of Olivier Bohuon
We completed the search for a new Chief Executive Officer,
recommending to the Board in February that Olivier Bohuon be
appointed. Olivier joined the Board in April and became Chief Executive
Officer on 14 April 2011 following the Annual General Meeting.
Review of Board composition
We reviewed the composition of the Board, recognising that whilst
stability was important through a period of change, it was also
important to refresh and build a Board for the future.
We have identified that Rolf Stomberg, Richard De Schutter, Pamela
Kirby and Brian Larcombe have all served on the Board for over 9 years
and that, therefore, some may consider their independence to be
impaired. We have analysed the skills that the Board would lose when
these Directors leave the Board and the skills we will need to ensure we
have the most effective Board to see us into the future. We have
identified that the Board needs the following skills and experience:
– Emerging market experience, ideally in China or India
– US medical devices experience
– European healthcare experience
Our search, is therefore focusing on these three key areas. As and
when we find suitable candidates willing to join our Board, we can
replace some of the longer serving Directors. We are reluctant to
release hard working and experienced colleagues who are active
contributors to our boardroom discussions until we appoint suitable
Directors to take their place.
Appointment of Ajay Piramal
We completed the search for an additional Non-Executive Director and
recommended to the Board in December that Ajay Piramal be
appointed. We approached Ajay directly to consider joining our Board,
because of his well-established and renowned track record both in the
Healthcare industry and specifically in the Emerging Markets of India
and China, which we identified as one of our Strategic Priorities.
Consideration of diversity issues
We also considered the Davies Report into Women on Boards and our
response to the issues it raised.
We are strongly committed to diversity in its broadest sense and over
the years have attempted to recruit Board members from a wide range
of backgrounds.
We already have two female Directors – Pamela Kirby and Geneviève
Berger and aspire to increase the number of women on the Board to
around 25% by 2015.
We will, however, continue to recruit on merit and for us gender is only
one diversity measure. We welcome the existing diversity on our Board
where we enjoy a broad perspective given our differing skills and
experiences. This includes professionals, with backgrounds ranging
from UK and US corporate careers to notable scientists who are vital in
bringing understanding of the importance of innovation and the
scientific challenges we face as a business. We also have a broad
range of nationalities represented on our Board, from UK, US, India,
Europe and New Zealand.
Sir John Buchanan
Chairman of Nominations Committee
262189_pp061_pp076.indd 61
61
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management
Corporate Governance Statement continued
Ethics & Compliance Committee
Dear shareholder,
I am pleased to present my report on the activities of the Ethics &
Compliance Committee in 2011. The membership and the principal
duties of the Committee are set out in the table on page 59 of this
report.
The following are some of the key issues we have focused on in 2011.
UK Bribery Act
We considered the implications of the UK Bribery Act on our operations
and practices. We already had a well-developed global compliance
programme in accordance with laws such as the US Foreign Corrupt
Practices Act (“FCPA”) but recognised the need to make various
changes to adapt our programme to reflect the requirements of the UK
Bribery Act. We therefore discussed and approved applicable changes
to our existing processes.
Compliance activities in Emerging Markets
We received regular reports from the Chief Compliance Officer on our
compliance programme in China, the specific compliance challenges
faced by our people in this region and the measures taken to address
these challenges, particularly our work with third party sellers.
Oversight of ethics and compliance programmes
We continued to monitor the effectiveness of our global ethics and
compliance programmes. This included reviewing Group policies in this
area and considering compliance, monitoring and audit reports. We
also received regular reports on the number and nature of
investigations conducted and calls to our hotline.
Communication and training
In addition, we continued to monitor the Group’s internal
communications and training in relation to ethics and compliance
policies and reviewed the materials used to train our third party sellers.
All employees have received a copy of the Code of Conduct which 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 (www.smith-nephew.com).
The Code of Conduct includes our whistle-blowing policy, which
enables employees and members of the public to contact us
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.
Settlement with US Securities and Exchange Commission
(“SEC”) and US Department of Justice (“DOJ”)
In January 2012, we reviewed and approved the final terms of the
settlement between the Company and the SEC and DOJ in connection
with their FCPA investigation of the medical devices industry. This has
been a matter that we, as a Committee have monitored closely since
the formation of the Committee in 2008.
Pamela Kirby
Chairman of Ethics & Compliance Committee
62
262189_pp061_pp076.indd 62
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011 Other Committees
Executive Risk Committee
Olivier Bohuon chairs our Executive Risk Committee which includes the
Executive Directors and Executive Officers of the Group. As an integral
part of our planning and review process, the management of each of
our divisions identifies the risks applicable to their business, the
probability of those risks occurring, the impact if they do occur and the
actions required and being taken to manage and mitigate those risks.
The Executive Risk Committee meets twice-a-year to review the major
risks they identify across the Group and the mitigation processes and
plans. As appropriate, the Executive Risk Committee may re-categorise
risks or require further information or mitigating action to be
undertaken. We receive an annual report from the Executive Risk
Committee, which details the significant risks categorised by potential
financial impact on profit and share price and by likelihood of
occurrence. Details of new, key or significantly increased risks, along
with actions put in place to mitigate such risks, are also reported to us
as appropriate. We have provided further information on the principal
risks identified through this process in “Risk factors” on pages 16 to 18
of this Annual Report.
Disclosures Committee
Olivier Bohuon chairs the Disclosures Committee which includes the
Chief Financial Officer and various additional senior executives. The
Committee meets as required and approves the release of all major
communications to investors, to the UK Listing Authority and to the
London and New York Stock Exchanges.
Sir John Buchanan
Chairman
22 February 2012
262189_pp061_pp076.indd 63
63
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management
Corporate Governance
Directors’ Remuneration Report
Joseph Papa
Chairman of Remuneration Committee
“ We are building a
remuneration framework to
reinforce a new strategy and
to drive performance for the
benefit of our shareholders”
64
Smith & Nephew Annual Report 2011
262189_pp061_pp076.indd 64
24/02/2012 21:14
We have also amended the short-term incentive arrangements. The
cash element will be linked to the achievement of business and
strategic performance measures with an equity incentive linked to
individual and business performance over the medium-term.
We have introduced measures to enable us to clawback payments and
awards already made should a serious financial mis-statement come to
light or a participant is found to have engaged in misconduct. We have
also strengthened the rules around share ownership for our executives.
In December, I visited a number of our largest shareholders and UK
Institutional bodies to discuss our new proposals. They were all broadly
supportive of our moves towards increased transparency, simplification
and alignment with our changing corporate strategy and most
importantly shareholder interests. The suggestions made by these
shareholders have been most useful in developing our final proposals.
Retirement arrangements for David Illingworth
Consideration was given to the retirement arrangements for David
Illingworth who stepped down from the Board in April. We followed the
provisions in his service contract and saw no need to make
discretionary adjustments. David was employed for seven months of
the year and will receive a bonus in respect of this employment period.
Since his retirement David has continued to provide consultancy advice
to Olivier and has received a consultancy fee in respect of this. Details
of David’s retirement and consultancy arrangements can be found in
the report that follows.
UK and International ShareSave Plans
We have operated an all-employee ShareSave Plan in the UK for 30
years. In 2002 we introduced an International ShareSave Plan which
now operates in 27 countries. The UK and International ShareSave
Plans approved in 2002 have now expired and need to be renewed at
the Annual General Meeting. These plans are very popular amongst
our employees who are able to save on a regular basis and then buy
shares in the Company. We have around 2,500 employees participating
in the current plans around the world and are currently exploring ways of
extending these arrangements to China and other emerging markets to
enable us to attract and retain talent in these key areas.
Directors’ Remuneration Report
Dear shareholder,
I am pleased to present the report on the activities of the Smith &
Nephew Remuneration Committee throughout 2011. This was a year of
many changes for Smith & Nephew. I took over from Rolf Stomberg as
Chairman of the Committee at the Annual General Meeting, the same
day as Olivier Bohuon assumed the role of Chief Executive Officer.
Elsewhere in this annual report, you will have read about the new
strategy which Olivier is implementing across the Group. I shall now
explain how the Remuneration Committee are building the
remuneration framework for the Executive Directors and other senior
executives that will reinforce that new strategy and drive performance
for the benefit of you, our shareholders.
Our review has been driven by the following principles:
– Restraint – the total reward at target under the 2012 framework is
broadly the same as under the 2011 framework.
– Transparency – the new framework is simpler and clearer to
understand by all stakeholders.
– Alignment with strategy – the measures and targets in all our plans
are linked back to our business goals.
The membership and the principal duties of the Committee are set out
in the table on page 58 of this Annual Report. The formal Directors’
Remuneration Report that follows explains the technical details of our
remuneration arrangements in 2011 and also looks forward to explain
our remuneration strategy for 2012 and beyond. Firstly however, I
should like to explain some of the main activities of the Committee in
2011 and the reasoning behind the new remuneration structure we are
proposing.
New remuneration arrangements for the Executive
Directors and Senior Executives
The main work of the Remuneration Committee this year has been the
development of a remuneration strategy for our Executive Directors and
Senior Executives which supports and reinforces the new strategy
Olivier is pursuing. We want to put in place a remuneration framework
that will focus our key executives to drive the new strategy over the
short, medium and long-term which in turn will drive performance for
our shareholders.
Following a review of our existing arrangements, which included
feedback from our senior executives, it was felt that the plans previously
in place were too complex and really did not work as effective
incentives for the performance and behaviours we wished to drive. As
a result, we are proposing a revised framework, which seeks to simplify
remuneration at Smith & Nephew, provide a clear link to the business
goals and strengthen the line of sight between reward and
performance. The changes we are proposing have consciously been
designed to be broadly neutral in value: for target performance the
quantum available to our Executive Directors and Executive Officers will
not change. However, we have rebalanced the package across the
short, medium and long-term varying by level, to improve the link with
our business strategy.
We have moved away from two long-term incentive arrangements to a
simple performance share plan linked to the delivery of Total
Shareholder Return relative to our peers and growth in free cash flow.
262189_pp061_pp076.indd 65
65
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Directors’ Remuneration Report continued
Compliance statement
We have prepared this Directors’ Remuneration Report (the “Report”) in
accordance with The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (the “Regulations”). It also
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 on
12 April 2012.
As set out on page 58 of this Annual Report, my fellow members of the
Remuneration Committee are Pamela Kirby, Brian Larcombe, Richard
De Schutter and Rolf Stomberg who will be retiring from the Board on
12 April 2012. We would like to thank Rolf for all the work he did as
Chairman of the Remuneration Committee for 10 years. Details
concerning the number of meetings held and the scope and role of our
duties may be found on this page. From time to time, we are advised by
Olivier Bohuon, Chief Executive Officer, Susan Henderson, Company
Secretary, Helen Maye, Head of Group Human Resources and
Elizabeth Sohn, SVP Compensation and Benefits, who attend some or
all of our meetings, except for when their personal remuneration is
being discussed.
Independent advice
During the year, we conducted a review of our remuneration
consultants. We felt that with a new Chief Executive Officer, a new
Chairman of the Remuneration Committee and a new Head of Group
Human Resources, it would also be appropriate to appoint a new
Remuneration Consultant. Given our global business, we wanted a firm
with an international presence and in particular one with an internal
data service. After considering a number of firms, the Remuneration
Committee appointed Towers Watson in September 2011. They have
assisted us in developing the new remuneration packages in line with
our new strategy. Throughout 2011, we were also advised by Deloitte
LLP relating to long-term comparative performance and Towers Watson,
Aon Hewitt, Mercer Limited relating to salary data. Towers Watson also
provided other human resources and compensation advice to the
Company for levels below Board level and Deloitte also provided
taxation advice to the Group. All of these consultants have complied
with the Code of Conduct for Remuneration Consultants and we are
satisfied that their advice is objective and independent.
Remuneration policy
Our policy is designed to attract talent that will drive the strategy over
the short, medium and long-term, which in turn will lead to performance
for our shareholders. This report describes the remuneration
arrangements which were in force during 2011, but it also looks forward
to describe the remuneration arrangements we are applying in 2012
and beyond. We therefore thought that it would be helpful to provide a
summary of these arrangements before focusing on the detail later in
the report.
66
262189_pp061_pp076.indd 66
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011
2011
2012
Objective
Link to Business Strategy
Base Salary
and Benefits
Base salary benchmarked to median for relevant
geographic market.
Benefits such as private healthcare, company car or
allowance in line with local competitive practice.
Executive Directors
Non pensionable, non bonusable salary supplement of
30% base salary paid in lieu of pension contributions.
Death in service cover of 7 times base salary, of which
4 times salary payable as lump sum.
Executive Officers
Pension plan entitlement based on local defined benefit
and defined contribution arrangements.
To attract and retain high
performing talent to the
Group by setting base
salary and benefits at rates
comparable to what would
be paid in an equivalent
position elsewhere.
Ensure we have a strong
team of executives to drive
performance.
Reflects responsibility of role
and breadth of leadership of
the Group.
Annual Cash Incentive
One year
Executive Directors
Target: 100% of salary
Maximum: 150% of salary
Executive Directors
Target: 100% of salary
Maximum: 150% of salary
To motivate and reward the
achievement of annual
Group objectives.
Drives annual performance
on our financial, operating
and strategic KPIs.
Executive Officers
Target: 70% of salary
Maximum: 140% of salary
Executive Officers
Target: 55% of salary
Maximum: 110% of salary
Focuses on reward for
performance against
specific Group goals.
Equity Incentive Award
One-three years
Not applicable
Executive Directors and
Executive Officers
Target: 50% of salary
Maximum: 65% of salary
Vesting in equal annual
tranches over three years,
subject to sustained
individual performance.
To motivate and reward
sustained individual
performance.
To provide a strong retention
element over the medium-
term and reinforce the
longer term view.
Long-Term Incentives
Three years
Performance Share Plan
Performance Share Plan
Executive Directors
Max Face value: 150% of
salary + 1.5x multiplier, or
225% of salary
Executive Officers
Max Face value: 75% of
salary + 1.5x multiplier or
112.5% of salary
Executive Directors
Target value: 95% of salary
Max value: 190% of salary
Executive Officers
Target value: 55% of salary
Max value: 110% of salary
Reward for strong
performance over the
longer-term.
From 2012, vesting depends
on relative TSR ranking and
free cash flow.
Reinforces individual
performance and
accountability on the
immediate annual goals
which will provide a solid
base for delivering sustained
year on year growth over the
longer-term.
Weighted heavily towards
financial performance at
individual and Group level.
Reinforces the Smith &
Nephew principles of “what”
and “how” to ensure that
executives are delivering
results in the right way,
having regard for our
people, reputation and
ethics.
Underscores individual
performance and
accountability to deliver
results focusing on
near-term milestones to
provide the base for future
growth.
Awards continue to be
linked to strong relative
returns to shareholders and
to maintaining long-term
cash generation.
Executive Option Plan
Removed
Removed
Removed
Executive Directors and
Executive Officers
Face value: 100% of salary
These arrangements are described in greater detail on pages 68 to 71.
262189_pp061_pp076.indd 67
67
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Directors’ Remuneration Report continued
Base salary and benefits (including pensions)
We aim to pay base salaries taking into account the scope and
responsibility of the position and performance potential of the individual
by reference to the median salary for the relevant geographical market.
We review salaries on an annual basis with effect from 1 April each year.
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 and defined contribution plans, a supplementary plan is used
to provide additional retirement benefits and to compensate for the
earnings cap imposed by the US Internal Revenue Code.
With effect from 1 April 2011, we approved the following base salaries
for the Executive Directors:
Olivier Bohuon
Adrian Hennah
€1,050,000
£ 580,000
In February 2012, we reviewed the base salaries of the Executive
Directors having regard to average salary increases across the Group
which will be around 3%. We considered increasing the salaries paid to
the Executive Directors by a similar amount given their outstanding
performance and contribution. The Executive Directors have however
requested that at a time when we are driving cost efficiencies across
the Group and a number of positions are being eliminated, no increase
be made to Olivier Bohuon’s salary and that Adrian Hennah’s salary be
increased by 1%. Their base salaries with effect from 1 April 2012 will
therefore be:
Olivier Bohuon
Adrian Hennah
€1,050,000
£585,800
We also provide benefits in line with local market practice in the
countries in which we operate. Typically, these benefits include private
healthcare, company car or allowance and where appropriate
relocation expenses.
Pensions
We provide pension arrangements for employees across the Group.
The nature of the arrangements differ depending on their location and
in some cases their length of service depending on the arrangements
in place when they first joined the Company.
Olivier Bohuon and Adrian Hennah both receive a salary supplement of
30% of basic salary to apply towards their retirement savings in lieu of
membership of a company run pension scheme. Base salary is the
only element of remuneration that is pensionable. They also receive
death in service cover of seven times basic salary, of which four times
salary is payable as a lump sum. Executive Officers who joined the
company in 2003 or later are also entitled to receive a salary
supplement or to join one of the Company’s Defined Contribution
Pension Plans depending on local practice.
Different arrangements are in place for employees and Executive
Officers who joined the Company prior to 2003 as follows:
In the UK, such Executive Officers participate in the Smith & Nephew
UK Pension Fund or 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. The normal retirement age is 62.
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 a 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.
In the US such 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-sixth of final
pensionable salary up to a limit based on service of 53% of final
pensionable salary. The plan also provides for a spouse’s pension at
68
Short-term incentive arrangements
As I explained in my introductory letter, we reviewed all our
remuneration arrangements in 2011. This review has resulted in a
change to our short-term incentive arrangements. As you will have
seen elsewhere in this Annual Report, our strategy has a number of
near term goals, particularly in improving efficiencies and reducing
costs in our established markets. We need to achieve these short-term
goals before we can achieve our longer term objectives of investing in
emerging markets and innovating for value. We therefore need a
remuneration framework which incentivises our executives to drive
short-term performance which will enable the Group to achieve the
long term performance we want for our shareholders.
A proportion of Annual Incentive earned by Executive Directors and
Executive Officers prior to 2011 was deferred into share awards. For
2012, we are moving away from a single Annual Incentive Plan, with a
deferred element to two distinct elements comprising an Annual Cash
Incentive and an Equity Incentive Award. The bonuses earned in 2011
have therefore been paid entirely in cash and a new short-term Equity
Incentive Award will be made later in March 2012.
The arrangements which applied in 2011 and those which will apply
from 2012 onwards are both described below.
Annual Incentive Plan in 2011
During 2011, we operated an Annual Incentive Plan across the Group.
Executive Directors and Executive Officers participated in the same
Annual Incentive Plan although the opportunities varied, reflecting their
differing roles and levels of responsibility:
Executive Directors
Executive Officers
Performance at
target
Performance at
maximum
100%
70%
150%
140%
The performance measures for the Annual Incentive Plan were linked to
the four strategic pillars for success which drove our Strategy in 2011,
namely “Customer Led” “Efficient”, “Investing for Growth” and “Aligned”.
All employees across the Group were set performance objectives that
linked back to these strategic pillars.
The incentive bonus in 2011 for Executive Directors was subject to
performance measures relating to revenue (30% of incentive), trading
profit/margin (30%) and trading cash flow (15%). The remaining 25% of
the incentive payable was dependent on personal objectives.
Over the period, underlying revenue growth was 4%, underlying trading
profit fell by 4%, trading margin fell by 200 bps and trading profit to cash
conversion was 87%. Collectively these financial performance
measures were just below target. The remaining part of the incentive
bonus reflects the Executive Directors’ performance against their
personal objectives. The Remuneration Committee reviewed the
performance of Olivier Bohuon and Adrian Hennah against their agreed
individual objectives for 2011 and determined that Olivier Bohuon had
consistently exceeded his objectives for the year (in building a strong
team and launching the new strategy) and that Adrian Hennah had
consistently met his objectives for the year.
262189_pp061_pp076.indd 68
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011 The overall cash incentive bonuses were as follows:
Equity Incentive Award in 2012
Olivier Bohuon(i)
Adrian Hennah
David Illingworth(i)
Total Cash
Bonus
€807,709
£548,680
$497,199
(i)
Prorated to reflect active service with the Company.
(Olivier Bohuon appointed CEO in April 2011; David Illingworth retired in August 2011).
Annual Cash Incentive in 2012
From 2012 onwards, the Annual Incentive for Executive Directors and
Executive Officers is divided into two parts: a) an Annual Cash Incentive
and b) an Equity Incentive Award, which is a conditional award over
ordinary shares, vesting in equal annual tranches over three years,
provided that individual performance is sustained. The payment of
the Annual Cash Incentive and the award and subsequent vesting of
the Equity Incentive Award are dependent upon the same
performance measures.
The Annual Cash Incentive is designed to reward employees for the
annual achievement of Company financial and non-financial business
goals. The level of Equity Incentive Award is governed by these same
annual goals and vests only if an acceptable level of performance
against these same goals is sustained in each of the following
three years.
The performance measures for Executive Directors are based on a mix
of financial goals and non-financial goals as follows:
Financial Goals
Revenue (30%)
Trading Profit (30%)
Trading Cash (10%)
Non-Financial Goals Olivier Bohuon
Adrian Hennah
R&D investment
R&D investment
Development of
product portfolio
Shared Services
Succession
Planning
Employee
engagement
Succession
Planning
Employee
engagement
Compliance
Compliance
70%
30%
The performance measures for Executive Officers and for all other
employees in the Group are cascaded down from these goals, so that
all employees are aligned with the same business goals.
For each of the above measures, we have determined the precise
measurements for the achievement at threshold, target and maximum,
which are directly linked with the Financial Plan for 2012. As such, these
measurements are commercially sensitive. In next year’s Report, we will
disclose levels of performance against the measures.
The maximum Cash Incentive payable depends upon level within the
Company. Maximum and target awards for Executive Directors and
Executive Officers are as follows:
Executive Directors
Executive Officers
Performance at
target
Performance at
maximum
100%
55%
150%
110%
Grant Conditions
We measure achievement against the goals in two different ways. Firstly
we look at what the employee has achieved in the year and secondly
we look at how they have performed in the year. It is important to us that
as well as achieving their financial targets, our employees are displaying
the right behaviours and values, that they are customer focused,
operating compliantly and ethically and are treating their fellow
employees fairly. Executive Directors and Executive Officers will receive
an Annual Equity Incentive Award provided that they consistently meet
the goals described above on both the “how” and “what” bases. If they
fail to meet either of these ratings, they will receive no award and if they
exceed their objectives on both measures, they will receive a higher
award. The level of awards for Executive Directors and Executive
Officers is as follows:
Consistently meets
“how” and “what”
objectives
Consistently exceeds
“how” and “what”
objectives
Executive Directors 50% base salary
65% base salary
Executive Officers
50% of base salary
65% of base salary
Vesting Conditions
The Equity Award will be a conditional award over ordinary shares. This
award will vest in equal annual tranches over three years subject to
continued achievement of objectives. Each tranche will only vest if the
Executive Director or Executive Officer has consistently met their
objectives on both the “how” and the “what” basis in each year since
the grant of the award. In the event that objectives in subsequent years
are not met, the unvested portion of the Equity Incentive Awards
granted in previous years will lapse.
Long term incentives
As I mentioned earlier, we have made changes to the overall
remuneration framework for 2012. Prior to 2012, Executive Directors
and Executive Officers received share option grants and performance
share awards. From 2012, we shall only be making performance share
awards. The arrangements which applied in 2011 and those which will
apply from 2012 onwards are both described below.
Performance Share Awards prior to 2012
During 2011, we made conditional share awards to Executive Directors,
Executive Officers and senior executives. Awards to Executive Directors
were made under the 2004 Performance Share Plan and awards to
other employees were made under the Global Share Plan 2010. In
respect of the Performance Share Awards, these two plans operate in
the same way. The level of the awards made to Executive Directors and
Executive Officers were as follows:
Executive Directors
Executive Officers
Market value of award as
% of base salary
150%
75%
These share awards are subject to performance conditions measured
over a three-year period. These awards will only vest if pre-determined
levels of adjusted Earnings Per Share (“EPSA”) growth are achieved. The
number of shares delivered to executives may then be increased
subject to the achievement of superior Total Shareholder Return (“TSR”)
measured against the major companies in the medical devices industry.
262189_pp061_pp076.indd 69
69
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management
Directors’ Remuneration Report continued
The required EPSA levels used for the awards made in 2011 were as
follows:
Growth in EPSA over the three years
ending 31 December 2013
EPSA growth of 15% (approximately 4.5%
compounded annually over three years)
EPSA growth of 20% (approximately 6%
compounded annually over three years)
EPSA growth of 30% (approximately 9%
compounded annually over three years)
Percentage of award vesting
25% – Threshold
50% – Target
100% – Maximum
None of the awards will vest if the growth in EPSA over three years is
less than threshold. For EPSA performance falling between the points
given in the table above, awards will vest on a straight-line basis up to a
maximum of 100%.
In addition, 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
Multiplier
Below or at Median
Upper quartile
Upper decile or above
1.0x
1.3x
1.5x
The multiplier increases on a straight line basis between the above
points.
TSR is measured in a common currency, with values averaged over
three months prior to the start and end of the performance period. We
compare the Company’s performance against a tailored sector peer
group of medical devices companies. The companies in the
comparator group for the awards made in 2011 are:
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
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. The awards made in 2009 were subject to
performance conditions determined at that time which were based on
a relative EPSA measure with a relative TSR multiplier.
The targets for growth in EPSA were 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
these 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 was then 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.
70
EPSA growth over the three years ending 31 December 2011 was 34%
against the compounded market growth rate of 13%. Over the same
period the Company was ranked 6th out of 20 companies in the
medical devices comparator group which meant that a multiplier of 1.28
was applied to the number of shares vesting under the EPSA target. As
a result the following awards will vest on 13 August 2012:
Number of
shares under
2009 award
Number of
shares vesting
in 2012
177,855
161,273
156,510
141,920
David Illingworth(i)(ii)
Adrian Hennah
(i)
The award granted to David Illingworth will be settled prior to 15 March 2012 in accordance with
S409A of the US Internal Revenue Code.
(ii) The number of shares under the 2009 award has been pro-rated for service during the
performance period.
Share Options Grants prior to 2012
During 2011, we granted share options to Executive Directors, Executive
Officers, senior executives and to certain high performing managers.
Option grants to Executive Directors were made under the 2004
Executive Share Option Plan and option grants to other employees were
made under the Global Share Plan 2010. Executive Directors and
Executive Officers received options at market value of 100% of base
salary.
Options granted to Executive Directors are subject to performance
conditions measured over a three year period. These awards will only
vest if pre-determined levels of TSR rank are achieved measured
against the major companies in the medical devices industry.
The performance measurement for grants made in 2011 to Executive
Directors was based on Total Shareholder Return. TSR is calculated on
the same basis as for the Performance Share Awards. If the Company’s
TSR is positioned at or above median when compared with the TSR of
those companies in our tailored sector peer group over a three year
period commencing 1 January 2011, then the options become
exercisable as follows:
TSR Ranking within comparator group
Below Median
Median
Upper Quartile
Percentage of
options vesting
Nil
33%
100%
Options vest on a straight line basis between these points. If the
Company’s TSR performance is below median, no options vest. The
comparator group is the same for the Performance Share Awards
outlined above.
Options granted to Executive Officers and other employees in 2011 are
not subject to performance conditions.
The options granted to Executive Directors in 2009 were subject to the
same performance conditions as described above for options granted
in 2011.
The Company’s TSR performance and its performance relative to the
comparator group is independently monitored and reported to the
Remuneration Committee by Towers Watson.
262189_pp061_pp076.indd 70
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011 Over the three year period ending 31 December 2011 the Company
was ranked 6th out of 20 companies in the medical devices comparator
group which meant that 96% of the options granted to Executive
Directors in 2009 will vest on 13 August 2012 as follows:
This group is slightly different from the group of companies used for
plans in previous years, because of various corporate actions and
acquisitions in the market over recent years. TSR will be calculated on
the same basis as in 2011.
David Illingworth(i)
Adrian Hennah
Number of
options granted
in 2009
Number of
options vesting
in 2012
118,570
107,515
113,825
103,214
(i) The option granted in 2009 has been pro-rated for service during the performance period.
Long term incentive arrangements in 2012
In 2012, no share options will be granted to Executive Directors or
Executive Officers. We will however make performance share awards to
Executive Directors and Executive Officers under the Global Share Plan
2010. The level of the awards made to Executive Directors and
Executive Officers will be as follows:
Market value of
award vesting at
maximum as a
% of base salary
Market value of
award vesting
at target as a %
of base salary
190%
110%
95%
55%
Executive Directors
Executive Officers
These share awards will be subject to performance conditions
measured over a three year period.
50% of the Award will vest depending on the Company’s TSR
performance relative to a selection of comparator companies and 50%
of the award will vest subject to the achievement of the free cash flow
target over a three year performance period.
The threshold, target and maximum levels for the 50% of the Award
subject to TSR performance are based on the position of the
Company’s TSR ranking when compared with the TSR of a bespoke
peer group of companies in the medical devices sector over a three
year period commencing 1 January 2012 as follows:
TSR Ranking within comparator group
Below Median
Median
Upper Quartile
Percentage of
Award vesting
Nil
25%
100%
Awards will vest on a straight line basis between these points. If the
Company’s TSR performance is below median, none of this part of the
award will vest.
TSR will be measured relative to a bespoke peer group of companies
operating in the medical devices sector. For the awards to be made in
2012, these companies are:
Arthrocare
Bard
Baxter
Becton Dickinson
Boston Scientific
Coloplast Group
Conmed
Covidien
Edwards Life Sciences Corp
Medtronic
Nobel Biocare
Nuvasive
Orthofix
Stryker
St Jude Medical
Synthes
Wright Medical
Zimmer
The Group’s TSR performance and its performance relative to the
comparator group will be independently monitored and reported to the
Remuneration Committee by Towers Watson.
The cash flow target is a cumulative performance target over the
three-year performance period. The inclusion of a cash measure in
both the annual and long term plans reflects its importance over both
timescales. The measure for the long-term target is free cash flow,
which is defined as net cash inflows from operating activities, less
capital expenditure. Free cash flow is considered to be the most
appropriate measure of cash flow performance because it relates to the
cash generated to finance additional investment in business
opportunities, debt repayments and distributions to shareholders. This
measure includes significant elements of operational and financial
performance and helps to align executives’ rewards with shareholder
value creation.
The threshold, target and maximum levels for the 50% of the award
subject to free cash flow performance are as detailed below:
Cumulative Free Cash Flow
Below $1.41 billion
$1.41 billion
$1.62 billion
$1.83 billion or more
Percentage of
Award vesting
Nil
25%
50%
100%
Awards will vest on a straight line basis between these points.
It is intended that the Committee should have the discretion to adjust,
but on an exceptional basis only, the free cash flow target during the
performance period for material factors that would otherwise distort the
performance measure in either direction. For example, adjustments
may be required to reflect exchange rate movements, significant
acquisitions or divestments, or major legal and taxation settlements.
Any major adjustments to the calculation will be disclosed to
shareholders. There is no retesting of performance.
We feel that these changes to the long-term element of our
remuneration framework simplify the previous arrangements, whilst
continuing to drive strong cash flow performance and the delivery of
superior relative returns to our shareholders.
Shareholding requirements
We believe that one of the best ways our senior executives can act and
feel like shareholders is for them to hold a significant number of shares
in Company. We therefore expect our Executive Directors and Executive
Officers to build up a holding of shares in the Company. In order to
reinforce this expectation, we require them to retain 50% of all shares
vesting under Company share plans (after tax) until this holding has
been met. We will take into account their progress towards this
shareholding requirement when determining whether they will be
allocated awards in the future. We require Executive Directors to hold
shares equivalent in value to two times their base salary and for
Executive Officers to hold shares equivalent in value to one and a half
times their base salary. When calculating whether or not this
requirement has been met, we will include Ordinary Shares or ADSs
held by the individual or their immediate family and the intrinsic value of
any vested but unexercised options.
As at 21 February 2012, Olivier Bohuon holds no shares, Adrian
Hennah holds 167,968 shares to the value of 181% of his base salary.
262189_pp061_pp076.indd 71
71
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Directors’ Remuneration Report continued
Total reward
The following chart shows the split between the different pay elements
of the Executive Directors’ remuneration packages on an expected
value basis in both 2011 and 2012:
s
r
e
c
fi
f
O
e
v
i
t
u
c
e
x
E
s
r
o
t
c
e
r
i
D
e
v
i
t
u
c
e
x
E
2012
2011
2012
2011
0%
50%
100%
150% 200% 250% 300% 350% 400%
Salary
Annual Bonus
Annual Equity
Awards
Performance
Shares
Share
Options
Service contracts
We employ Executive Directors on service contracts with notice periods
of 12 months from the Company and six months from the Executive
Director. On termination of the contract, we may require the Executive
Director not to work their notice period and as such pay them an
amount equivalent to the salary, pension and benefits they would have
received if they had been required to work their notice period. In
addition, we may also, in exceptional circumstances, exercise our
discretion to pay the Executive Director a proportion of the bonus that
they would have received had they been required to work their notice
period. The Executive Director will also be required, where possible, to
mitigate the loss. We will also seek to enforce the non-compete clause
in Executive Directors’ contracts. In the event that we dismiss an
Executive Director for cause, no payment will be made as we have a
policy of not rewarding failure.
In the case of a change in control which results in the termination of an
Executive Director or a material alteration to their responsibilities or
duties within 12 months of the change in control the Executive Directors
would be entitled to receive 12 months base salary and 12 months
bonus at target plus pension and benefits.
Executive
Director
Olivier
Bohuon
Adrian
Hennah
Date of
Service
Contract Effective Date
Expiry
Date
Notice period
from company
9 February
2011
1 February
2006
1 April
2011
3 January
2017
1 June
2006
12 November
2019
12 months
12 months
We encourage our Executive Directors to serve as a Non-Executive
Director of a maximum of one external company. Such appointments
are subject to the approval of the Nominations Committee and any fees
earned are retained by the Executive Director. Currently Olivier Bohuon
is a Non-Executive Director of Virbac and Adrian Hennah is a non-
executive Director of Reed Elsevier. During 2011, Olivier Bohuon
received €19,000 and Adrian Hennah received £38,475 in respect of
these appointments.
72
Non-Executive Directors
Non-Executive Directors are engaged by the Company on the basis of
letters of appointment. They are normally appointed for terms of three
years, terminable at will, without notice by either the Group or the
Director and without compensation. The Board reviews the pay 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 is paid in shares.
Non-Executive Director fees were reviewed and increased in August
2011. 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 each receive an extra
fee in recognition of their additional responsibilities. An additional fee is
also payable to Non-Executive Directors in cases where intercontinental
travel is necessary to attend Board and Committee meetings. The fees
currently paid to Non-Executive Directors are as follows:
Fee in
UK Sterling
Fee in
US Dollars
Fee in
Euros
Basic Annual Fee
£63,000
$120,000
€84,250
Committee Chairman and
Senior Independent
Director Fee
Intercontinental Travel fee
(per meeting)
£15,000
$27,000
€20,000
£3,500
$7,000
€5,000
The Remuneration Committee reviews the fee of the Chairman. The
Chairman’s fee was last reviewed in August 2011 and increased to
£400,000, an increase of 6.7%, in recognition of his outstanding work in
leading the Company through the period of searching and appointing a
new Chief Executive Officer and mentoring him in his new role. The
Chairman is engaged on a letter of appointment and has a six month
notice period.
We also require our Non-Executive Directors to hold a personal stake in
the Company equivalent to their basic annual fee. These shares may be
held as Ordinary Shares or as ADSs held either by themselves or their
immediate family.
Special issues in 2011
During 2011, we considered, reviewed and approved the proposed
remuneration package for Olivier Bohuon, joining the Company as the
new Chief Executive Officer and the retirement arrangements for David
Illingworth. The key elements of these arrangements are as follows:
We employed Olivier on a standard package, participating in the same
incentive plans and on the same basis as Adrian Hennah. As explained
last year, on joining the Company, he also received a cash payment of
€1,400,000 and a conditional award over 200,000 shares vesting in
three equal tranches over three years. The first tranche of this award
will vest on 1 April 2012.
David Illingworth worked a period of six months’ notice and retired from
the Company on 10 August 2011 receiving pay and benefits in
accordance with his service contract. He has also received a bonus in
respect of the period he worked in 2011. The outstanding awards under
the Company’s long-term incentive plans have been pro-rated for time
and vest at their normal vesting date subject to the applicable
performance conditions. At the end of his period of employment, we
continued to engage David in a consultancy capacity up to 10 February
2012 for a total fee of $180,000.
262189_pp061_pp076.indd 72
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011
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
Chairman (Non-Executive)
Sir John Buchanan
Executive Directors
Olivier Bohuon (iv)
Adrian Hennah
David Illingworth (vi)
Non-Executive Directors
Ian Barlow
Geneviève Berger
Pamela Kirby
Brian Larcombe
Joseph Papa
Richard De Schutter
Rolf Stomberg
Salaries and fees
Benefits (i)
Annual
Incentive
Salary
Supplement in
lieu of pensions
Thousands
Total 2011 (iii)
Total 2010 (iii)
£389
£31
–
–
£420
£373
€788
£568
$893
£80
€87
£75
£65
$173
$181
€98
(v) €1,675
£21
$168
€808
£549
$497
€236
£170
(ii) $258
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
€3,507
£1,308
$1,816
£80
€87
£75
£65
$173
$181
€98
–
£1,157
$2,742
£70
€83
£64
£64
$134
$158
€125
(i) Benefits shown in the table above include cash allowances and benefits in kind.
(ii) The amount provided under an international pension plan for David Illingworth is disclosed below.
(iii) Total Executive and Non-Executive Directors’ emoluments for 2011 amounted to $10,423,000 (2010 – $6,044,000).
(iv) Appointed on 1 April 2011.
(v)
(vi) Retired on 9 August 2011.
Includes amounts for relocation expenses in first year of appointment and €1,400,000 received on appointment.
b) Pensions
Increase in
accrued
pension
excluding
inflation
Accrued
Pension as at
1 Jan 2011
Increase in
accrued
pension due
to inflation
Accrued
pension at
31 Dec 2011
Transfer value
of accrued
pension at
1 Jan 2011
Director’s
contribution
during 2011
Increase in
transfer
value less
Director’s
contribution
Transfer
value of
accrued
pension at
31 Dec 2011
$ thousands per annum
$ thousands
David Illingworth
3
–
–
3
20
–
3
23
$nil (2010 – $318,198) was provided under an International pension plan for David Illingworth.
No amounts have been paid to third parties in respect of Executive Directors’ services and no excess retirement benefits or compensation has
been paid to past Executive Directors.
262189_pp061_pp076.indd 73
73
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Directors’ Remuneration Report continued
c) Directors’ Share Options
Options as at
1 January 2011
(number)
Granted
during 2011
(number)
Exercise
price of
options
granted
Exercised
during 2011
(number)
Lapsed during
2011
(number)
Options as at
31 December
2011
(number)
Average
exercise
price
Range of
exercisable dates
of options held at
31 December
2011 (vi)
(date)
Olivier Bohuon
(i)
Adrian Hennah
(i)
(ii)
(iv)
Total
David Illingworth
(i)
(ii)
(iii)
Total
–
151,698
607.00p
346,679
95,551
607.00p
43,814
3,351
–
–
393,844
95,551
293,332
83,435
343,990
720,757
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
151,698
607.00p 09/2014-09/2021
(58,682)
383,548
525.18p 06/2009-09/2021
–
–
43,814
3,351
626.50p 03/2010-03/2017
461.00p 11/2015-04/2016
(58,682)
430,713
(82,155)
211,177
83,435
578.67p
627.25p
02/2012
02/2012
343,990
$40.90 (v) 08/2012-03/2013
–
–
(82,155)
638,602
(i) Options over Ordinary Shares granted under Executive Share Option Plans at prices below the market price at 31 December 2011 of 625.50p.
(ii) Options over Ordinary Shares granted under Executive Share Option Plans at prices above the market price at 31 December 2011 of 625.50p.
(iii) Options over ADSs granted under 2004 Executive Share Option Plans. Figures in the above table show the equivalent number of Ordinary Shares.
(iv) Options granted under the UK ShareSave Scheme.
(v) Per ADS.
(vi) Or date of retirement if earlier.
The range in the market price of the Company’s Ordinary Shares during the year was 521.00p to 742.00p and the market price at 31 December
2011 was 625.50p. The notional gain made by Adrian Hennah on his exercise of options during the year was £nil (2010 – £2,781). In 2011 the gain
made by David Illingworth on exercising share options was $nil, (2010 – $nil). On 2 February 2012, 4% of the options granted to David Illingworth
and Adrian Hennah under the 2004 Executive Share Option plan lapsed following completion of the performance period. The remainder of options
will vest and become capable of being exercised on the third anniversary of their grant in August 2012.
d) Long-Term Incentive Plan Awards
Number of
shares
awarded at
1 January
2011
(number)
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
2011 (iv)
(number)
Latest
performance
period (date)
–
–
–
200,000
709.00p
227,547
607.00p
427,547
–
–
–
–
–
–
–
–
–
200,000
03/2014
227,547
12/2013
427,547
Award
type
RSA
PSP
PSP
428,259
143,327
607.00p
(32,556)
558.57p
(88,022)
451,008
12/2013
428,259
143,327
(32,556)
(88,022)
451,008
PSP
PSP
517,640
168,810
686,450
–
–
–
–
–
–
–
–
–
–
–
–
517,640
12/2012
(123,232)
(123,232)
45,578
12/2011
563,218
Olivier Bohuon
(i)
(ii)
Total
Adrian Hennah
(ii)
Total
David Illingworth
(ii)
(iii)
Total
(i) Award made over Ordinary Shares under Listing Rule 9.
(ii) Awards made over Ordinary Shares under the 2004 Performance Share Plan.
(iii) Awards made over ADSs under the 2004 Performance Share Plan. Figures in the above table show the equivalent number of Ordinary Shares.
(iv) Or date of retirement if earlier.
On 2 February 2012, 12% of the awards granted to David Illingworth and Adrian Hennah in 2009 under the 2004 Performance Share Plan lapsed
following completion of the performance period. The remainder of the awards will vest on the third anniversary of their grant in August 2012. In
accordance with S409A of the US Internal Revenue Code the remainder of David Illingworth’s award will be paid out prior to 15 March 2012.
74
262189_pp061_pp076.indd 74
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011 e) 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.
David Illingworth
Adrian Hennah
Total as at
1 January 2011
Awarded
during 2011
Vested
during 2011
Total as at
31 December 2011 (i)
95,341
57,873
54,055
32,947
(37,517)
(23,413)
111,879
67,407
(i) Or date of retirement if earlier.
All outstanding awards vested following David Illingworth’s retirement on 9 August 2011, generating a gain of $966,874 and £111,996.
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. Details of the current Executive Directors and Executive Officers are given on pages 48 to 51.
In respect of the financial year 2011, the total compensation (excluding pension emoluments but including cash payments under the performance
related incentive plans) paid to the senior management for the year was $17,403,000 (2010 – $11,689,000, 2009 – $11,456,000), the total
compensation for loss of office was $1,161,000 (2010 – $nil, 2009 – $nil), the aggregate increase in accrued pension benefits was $387,000
(2010 – increase of $16,000, 2009 – increase of $9,000) and the aggregate amounts provided for under the supplementary schemes was
$711,000 (2010 – $1,141,000, 2009 – $1,179,000).
During 2011, senior management were granted options over 653,375 shares under the 2004 Executive Share Option Plans, Global Share Plan 2010
and employee ShareSave plans. Performance share awards were granted to senior management over 520,909 shares and 39,165 ADSs under the
2004 Performance Share Plan and the Global Share Plan 2010, 65,931 shares and 20,908 ADSs under the Deferred Bonus Plan and conditional
share awards over a total of 374,803 shares and 38,038 ADSs. As of 21 February 2012, the Senior Management (11 persons) owned 195,233 shares
and 34,765 ADSs, constituting less than 0.1% of the issued share capital of the Company. Senior Management also held as of this date, options to
purchase 1,959,199 shares, conditional share awards over 345,479 shares and 29,192 ADSs, performance share awards over 884,337 shares and
101,889 ADSs awarded under the 2004 Performance Share Plan and the Global Share Plan 2010; and awards over 100,317 shares and 16,751 ADSs
under the Deferred Bonus Plan.
Directors’ interests
Beneficial interests of the Directors in the Ordinary Shares of the Company are as follows:
Numbers
Sir John Buchanan
Olivier Bohuon (ii)
Adrian Hennah
Ian Barlow
Geneviève Berger
Pamela Kirby
Brian Larcombe
Joseph Papa
Ajay Piramal
Richard De Schutter
Rolf Stomberg
David Illingworth
Total
1 January 2011
(Or at date of appointment)
Options
Shares
31 December 2011
(Or at date of retirement)
Options
Shares
21 February 2012 (i)
Options
Shares
156,977
–
140,698
10,000
–
8,500
20,000
5,000
–
250,000
13,100
326,828
931,103
–
–
159,483
–
393,844
167,968
–
–
–
–
–
–
–
–
720,757
18,000
1,750
15,000
40,000
5,000
–
250,000
13,100
339,618
–
159,483
151,698
430,713
–
–
–
–
–
–
–
–
638,602
–
167,968
18,000
1,750
15,000
40,000
5,000
–
250,000
13,100
–
–
151,698
426,412
–
–
–
–
–
–
–
–
–
1,114,601
1,009,919
1,221,013
670,301
578,110
(i)
(ii)
The latest practicable date for this Annual Report.
In addition, Olivier Bohuon 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 Officer 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.
262189_pp061_pp076.indd 75
75
24/02/2012 21:14
Corporate GovernanceCorporate GovernanceSmith & Nephew Annual Report 2011Business ReviewAccounts and other informationOverviewStrategy, KPIs & Risk management Directors’ Remuneration Report continued
Total shareholder return
A graph of the Company’s TSR performance compared to that of the TSR of the FTSE100 index is shown below in accordance with Schedule 8 to
the Regulations.
Smith & Nephew - Five year Total Shareholder Return
(measured in UK sterling, based on monthly spot values)
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Dec 06
Jan 08
Jan 09
Smith & Nephew
Jan 10
FTSE 100
Jan 11
Source: Datastream
However, as we, compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 70), when
considering TSR performance in the context of the 2004 Performance Share Plan and Global Share Plan 2010, we feel that the following graph
showing the TSR performance of this peer group is also of interest.
Smith & Nephew - Five year Total Shareholder Return
(measured in US dollars, based on monthly spot values)
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Dec 06
Jan 08
Smith & Nephew
Jan 09
Jan 10
Medical Devices - Median
Jan 11
Source: Datastream
Joseph Papa
Chairman of Remuneration Committee
22 February 2012
76
262189_pp061_pp076.indd 76
24/02/2012 21:14
Corporate GovernanceSmith & Nephew Annual Report 2011 Financial statements
Financial statements
Directors’ responsibilities for the accounts
Directors’ responsibility statement pursuant to disclosure and
transparency Rule 4
Independent auditor’s UK report
Independent auditor’s 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
Independent auditor’s report for the Company
Company balance sheet
Notes to the Company accounts
78
79
80
82
84
84
85
86
87
88
129
130
131
262189_pp077_pp084.indd 77
77
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Directors’ responsibilities for the accounts
The Directors are responsible for preparing the Group and Company
accounts in accordance with applicable United Kingdom law and
regulations. As a consequence of the 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.
Under United Kingdom law the Directors have elected to prepare the
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 Company and of the profit or loss of the
Company for that period. In preparing the Company accounts, the
Directors are required to:
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.
– 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 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 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 legal requirements. Legislation in the
UK governing the preparation and dissemination of accounts may differ
from legislation in other jurisdictions.
78
262189_pp077_pp084.indd 78
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011 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 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 Company; and
– the “Business Review” and “Risk management” sections contained
in the accounts includes a fair review of the development and
performance of the business and the financial position of the
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, 22 February 2012
Susan Henderson
Company Secretary
262189_pp077_pp084.indd 79
79
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Independent auditor’s UK Report
Independent Auditor’s Report to the Members of Smith & Nephew plc
We have audited the Group accounts of Smith & Nephew plc for the year ended 31 December 2011 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 24. 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 auditor
As explained more fully in the Directors’ Responsibility Statement set out on page 79 the directors are responsible for the preparation of the Group
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group
financial statements 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 financial statements sufficient to give reasonable assurance
that the financial statements 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 financial statements. In addition,
we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the Group financial statements:
– give a true and fair view of the state of the Group’s affairs as at 31 December 2011 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 financial statements are prepared is
consistent with the Group financial statements.
80
262189_pp077_pp084.indd 80
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011 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 27, 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 UK Corporate Governance
Code; and
– certain elements of the report to shareholders by the Board on directors’ remuneration.
Other matter
We have reported separately on the Company financial statements of Smith & Nephew plc for the year ended 31 December 2011 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 financial statements, 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 financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 31 December
2011 and of its profit for the year then ended.
Les Clifford (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
22 February 2012
262189_pp077_pp084.indd 81
81
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Independent auditor’s 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 2011 and 2010, 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 2011. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smith &
Nephew plc at 31 December 2011 and 2010, and the consolidated results of its operations and cash flows for each of the three years in the period
ended 31 December 2011, in accordance with 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 2011, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organisations of the Treadway Commission and our report dated 22 February 2012 expressed an unqualified
opinion thereon.
Ernst & Young LLP
London, England
22 February 2012
82
262189_pp077_pp084.indd 82
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011 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 2011, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (the COSO criteria).
Smith & Nephew plc’s management 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.
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 the transactions and dispositions of the assets of the company; (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.
Because of its inherent limitations, internal control over financial 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.
In our opinion, Smith & Nephew plc maintained, in all material respects, effective internal control over financial reporting as of 31 December 2011,
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 2011 and 2010, 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 2011
and our report dated 22 February 2012 expressed an unqualified opinion thereon.
Ernst & Young LLP
London, England
22 February 2012
262189_pp077_pp084.indd 83
83
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management 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
Share of results of associates
Profit before taxation
Taxation
Attributable profit for the year (i)
Earnings per Ordinary Share (i)
Basic
Diluted
Notes
2
3
2 & 3
4
4
4
11
5
6
Year ended
31 December
2011
$ million
Year ended
31 December
2010
$ million
Year ended
31 December
2009
$ million
4,270
(1,140)
3,130
(2,101)
(167)
862
4
(12)
(6)
–
848
(266)
582
65.3¢
65.0¢
3,962
(1,031)
2,931
(1,860)
(151)
920
3
(18)
(10)
–
895
(280)
615
69.3¢
69.2¢
3,772
(1,030)
2,742
(1,864)
(155)
723
2
(42)
(15)
2
670
(198)
472
53.4¢
53.3¢
Group Statement of Comprehensive Income
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
– gains/(losses) arising in the year
– losses transferred to inventories for the year
Exchange differences on translation
Exchange on borrowings classified as net investment hedges
Actuarial (losses)/gains on retirement benefit obligations
Taxation on items relating to components of other
comprehensive income (ii)
Other comprehensive income/(expense) for the year, net
of taxation
Total comprehensive income for the year (i)
Year ended
31 December
2011
$ million
582
Year ended
31 December
2010
$ million
615
Year ended
31 December
2009
$ million
472
(1)
1
1
13
(32)
(4)
(70)
24
(68)
514
(1)
4
(3)
1
66
(14)
26
(7)
72
687
(3)
13
(15)
7
63
(3)
41
(12)
91
563
(i) Attributable to equity holders of the Company and wholly derived from continuing operations.
(ii) Taxation on items relating to components of other comprehensive income comprises a credit of $27m related to retirement benefit obligations (2010 – charge of $7m, 2009 – charge of $12m) partly offset by a
charge of $3m related to cash flow hedges (2010 – $nil, 2009 – $nil).
The Notes on pages 88 to 128 are an integral part of these accounts.
84
262189_pp077_pp084.indd 84
24/02/2012 21:14
Accounts and other informationSmith & Nephew Annual Report 2011
Group Balance Sheet
Assets
Non–current assets:
Property, plant and equipment
Goodwill
Intangible assets
Investments
Investments in associates
Deferred tax assets
Trade and other receivables
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
Provisions
Deferred tax liabilities
Current liabilities:
Bank overdrafts and loans
Trade and other payables
Provisions
Current tax payable
Liabilities directly associated with assets held for sale
Total liabilities
Total equity and liabilities
Notes
At 31 December 2011
$ million
At 31 December 2010
$ million
7
8
9
10
11
17
13
12
13
15
22
20
20
15
19
14
18
17
15
14
18
22
783
1,096
423
4
13
223
–
2,542
859
1,037
184
2,080
125
4,747
191
413
(766)
91
3,258
3,187
16
287
8
45
66
422
306
564
78
171
1,119
19
1,560
4,747
787
1,101
426
6
13
224
22
2,579
923
1,024
207
2,154
–
4,733
191
396
(778)
116
2,848
2,773
642
262
–
73
69
1,046
57
617
37
203
914
–
1,960
4,733
85
The accounts were approved by the Board and authorised for issue on 22 February 2012 and are signed on its behalf by:
Sir John Buchanan
Chairman
Olivier Bohuon
Chief Executive Officer
Adrian Hennah
Chief Financial Officer
The Notes on pages 88 to 128 are an integral part of these accounts.
262189_pp085_pp111.indd 85
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Group Cash Flow Statement
Year ended
31 December 2011
$ million
Year ended
31 December 2010
$ million
Year ended
31 December 2009
$ million
Notes
Cash flows 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 payments expense
Share of results of associates
Decrease in retirement benefit obligations
Decrease/(Increase) in inventories
(Increase)/Decrease in trade and other receivables
(Decrease)/Increase in trade and other payables and provisions
4
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 (net of $2m of cash received in 2011)
Cash received from Plus settlement
Capital expenditure
Proceeds on disposal of property, plant and equipment and software
22
22
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
Treasury shares purchased
Proceeds of borrowings due within one year
Settlement of borrowings due within one year
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 financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange adjustments
Cash and cash equivalents at end of year
21
21
21
21
21
20
21
21
21
848
8
297
9
30
–
(44)
40
(47)
(6)
1,135
4
(12)
(285)
842
(33)
–
(321)
–
(354)
17
(6)
78
(330)
92
(232)
7
(1)
(146)
(521)
(33)
195
(1)
161
895
15
273
15
21
–
(31)
21
(100)
2
1,111
3
(20)
(235)
859
–
–
(315)
8
(307)
15
(5)
17
–
277
(714)
8
(3)
(132)
(537)
15
174
6
195
670
40
298
14
18
(2)
(2)
(17)
46
(35)
1,030
2
(43)
(270)
719
(25)
137
(318)
–
(206)
7
–
–
(66)
526
(814)
10
(12)
(120)
(469)
44
122
8
174
Includes $20m (2010 – $16m, 2009 – $32m) of outgoings on restructuring and rationalisation expenses.
(i)
(ii) Includes $1m (2010 – $nil, 2009 – $22m) of acquisition related costs and $3m (2010 – $5m, 2009 – $5m) unreimbursed by insurers relating to macrotextured knee revisions.
The Notes on pages 88 to 128 are an integral part of these accounts.
86
262189_pp085_pp111.indd 86
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011
Group Statement of Changes in Equity
At 1 January 2009
Total comprehensive income (i)
Equity dividends declared and paid
Share based payments recognised
Deferred taxation on share based payments
Cost of shares transferred to beneficiaries
Issue of ordinary share capital (iv)
At 1 January 2010
Total comprehensive income (i)
Equity dividends declared and paid
Purchase of own shares
Share based payments recognised
Cost of shares transferred to beneficiaries
Issue of ordinary share capital (iv)
At 1 January 2011
Total comprehensive income (i)
Equity dividends declared and paid
Purchase of own shares
Share based payments recognised
Deferred taxation on share based payments
Cost of shares transferred to beneficiaries
Issue of ordinary share capital (iv)
Share
capital
$ million
Share
premium
$ million
Treasury
shares (ii)
$ million
Other
reserves (iii)
$ million
Retained
earnings
$ million
Total
equity
$ million
190
–
–
–
–
–
–
190
–
–
–
–
–
1
191
–
–
–
–
–
–
–
375
–
–
–
–
–
7
382
–
–
–
–
–
14
396
–
–
–
–
–
–
17
(823)
–
–
–
–
29
–
(794)
–
–
(5)
–
21
–
(778)
–
–
(6)
–
–
18
–
1
62
–
–
–
–
–
63
53
–
–
–
–
–
116
(25)
–
–
–
–
–
–
1,956
501
(120)
18
2
(19)
–
2,338
634
(132)
–
21
(13)
–
2,848
539
(146)
–
30
(2)
(11)
–
1,699
563
(120)
18
2
10
7
2,179
687
(132)
(5)
21
8
15
2,773
514
(146)
(6)
30
(2)
7
17
At 31 December 2011
(i) Attributable to equity holders of the Company and wholly derived from continuing operations.
(ii) Refer to Note 20 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 ruling on the date of redenomination instead of the rate at the balance sheet date. The cumulative translation adjustments within Other Reserves at 31 December 2011 were $87m (2010 – $123m, 2009 –
$71m).
3,258
(766)
191
413
91
3,187
(iv) Issue of Ordinary Share Capital as a result of options being exercised.
The Notes on pages 88 to 128 are an integral part of these accounts.
262189_pp085_pp111.indd 87
87
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Accounts and other information
Notes to the Group accounts
Basis of preparation
1
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.
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 2011. 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
2011. 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.
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; inventories,
impairment, retirement benefits and contingencies and provisions, are discussed under Critical Accounting Policies within the “Business Review”
section on page 28. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately
may differ from those estimates.
The Directors continue to adopt the going concern basis for accounting in preparing the annual financial statements. The Directors have a
reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.
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. Control comprises the power to govern the financial and operating policies of the investee so as
to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights. Subsidiaries are consolidated in the Group
accounts from the date that the Group obtains control, and continue to be consolidated until the date that such control ceases. Intercompany
transactions, balances and unrealised gains and losses on transactions between group companies are eliminated on consolidation. All
subsidiaries have year ends which are co-terminus with the Group’s.
Recognition of financial assets and liabilities
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.
Foreign currencies
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.
The exchange rates used for the translation of currencies into US Dollars that have the most significant impact on the Group results were:
2011
2010
2009
1.60
1.39
1.13
1.55
1.29
1.06
1.54
1.32
0.96
1.57
1.34
1.07
1.56
1.39
0.92
1.61
1.43
0.97
Average rates
Sterling
Euro
Swiss Franc
Year-end rates
Sterling
Euro
Swiss Franc
88
Smith & Nephew Annual Report 2011
262189_pp085_pp111.indd 88
24/02/2012 21:15
New IFRS accounting standards
The following IFRS standard, which is relevant to the Group, has been issued by the International Accounting Standards Board (“IASB”) but is not
yet effective or has 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 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.
No 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 explained with the relevant notes to the accounts.
Business segment information
2
For management purposes, the Group is organised into business segments according to the nature of its products and has three business
segments – Orthopaedics, Endoscopy and Advanced Wound Management. The types of products and services offered by each business
segment 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 segments 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 business segments.
The following tables present revenue, profit, asset and liability information regarding the Group’s operating segments. The share of results of
associates is segmentally allocated to Orthopaedics.
2.1
Revenue by business segment and geography
Accounting policy
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.
Business segment
Revenue by business segment
Orthopaedics
Endoscopy
Advanced Wound Management
There are no material sales between business segments.
2011
$ million
2,312
939
1,019
4,270
2010
$ million
2,195
855
912
3,962
2009
$ million
2,135
791
846
3,772
262189_pp085_pp111.indd 89
89
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Geographic
Revenue by geographic market
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America
2011
$ million
291
1,118
1,756
1,105
4,270
2010
$ million
283
1,032
1,707
940
3,962
2009
$ million
286
1,027
1,664
795
3,772
Revenue has been allocated by basis of origin. No revenue from a single customer is in excess of 10% of the Group’s revenue.
Trading and operating profit by business segment
2.2
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that
management considers affects 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:
Operating profit
Acquisition related costs
Restructuring and rationalisation expenses
Amortisation of acquisition intangibles and impairments
Legal provision
Notes
3
3
8 & 9
3
Trading profit
Trading profit by business segment
Orthopaedics
Endoscopy
Advanced Wound Management
Operating profit by business segment reconciled to
attributable profit for the year
Orthopaedics
Endoscopy
Advanced Wound Management
Operating profit
Net interest payable
Other finance costs
Share of results of associates
Taxation
Attributable profit for the year
2011
$ million
862
–
40
36
23
961
492
222
247
961
415
215
232
862
(8)
(6)
–
(266)
582
2010
$ million
920
–
15
34
–
969
536
200
233
969
503
197
220
920
(15)
(10)
–
(280)
615
2009
$ million
723
26
42
66
–
857
508
189
160
857
410
169
144
723
(40)
(15)
2
(198)
472
90
262189_pp085_pp111.indd 90
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
2.3
Assets and liabilities by business segment and geography
Business segment
Balance sheet
Assets:
Orthopaedics
Endoscopy
Advanced Wound Management
Operating assets by business segment
Assets held for sale (relating to Orthopaedics business segment)
Unallocated corporate assets
Total assets
Liabilities:
Orthopaedics
Endoscopy
Advanced Wound Management
Operating liabilities by business segment
Liabilities directly associated with assets held for sale (relating to
Orthopaedics business 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
Bank overdrafts and loans due within one year
Current tax payable
Unallocated corporate liabilities
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
Acquisitions – Goodwill
Acquisitions – Intangible assets
Acquisitions – Property, plant and equipment
Capital expenditure
2011
$ million
2010
$ million
2009
$ million
2,550
846
819
4,215
125
407
4,747
398
128
169
695
19
846
1,560
2,778
769
755
4,302
–
431
4,733
457
124
146
727
–
1,233
1,960
2,656
705
810
4,171
–
394
4,565
426
111
194
731
–
1,655
2,386
2011
$ million
2010
$ million
2009
$ million
223
184
407
16
287
66
306
171
846
2011
$ million
241
93
31
365
2011
$ million
229
92
321
44
–
–
365
224
207
431
642
262
69
57
203
1,233
2010
$ million
227
58
30
315
2010
$ million
250
65
315
–
–
–
315
202
192
394
1,090
322
31
45
167
1,655
2009
$ million
235
41
63
339
2009
$ million
216
102
318
3
12
6
339
91
262189_pp085_pp111.indd 91
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
2011
$ million
2010
$ million
2009
$ million
Depreciation, amortisation and impairment
Orthopaedics
Endoscopy
Advanced Wound Management
209
50
38
297
195
41
37
273
Amounts comprise depreciation of property, plant and equipment, amortisation of other intangible assets, impairment of investments and
amortisation of acquisition intangibles and impairments 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
2011
$ million
–
36
36
217
42
2
297
2010
$ million
–
34
34
203
34
2
273
206
52
40
298
2009
$ million
32
34
66
206
26
–
298
Impairments of $2m were recognised within operating profit in 2011 and included within the administrative expenses line (2010 – $2m, 2009 –
$32m). This is segmentally allocated to Orthopaedics (2010 – Orthopaedics, 2009 – Orthopaedics $19m and Endoscopy $13m).
2011
$ million
2010
$ million
283
837
920
279
2,319
190
569
762
375
1,896
125
407
4,747
301
891
942
221
2,355
176
543
873
355
1,947
–
431
4,733
Geographic
Assets by geographic location
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America
Non-current operating assets by geographic location
United Kingdom
Continental Europe
United States
Africa, Asia, Australasia and Other America
Current operating assets by geographic location
Assets held for sale
Unallocated corporate assets (see page 91)
Total assets
92
262189_pp085_pp111.indd 92
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
2.4 Other business segment information
Other significant expenses recognised within operating profit
Orthopaedics
Endoscopy
Advanced Wound Management
2011
$ million
26
6
8
40
2010
$ million
8
2
5
15
2009
$ million
22
2
6
30
The $40m incurred in 2011 relates to restructuring and rationalisation expenses (2010 – $15m relates to restructuring and rationalisation expenses,
2009 – $30m relates to acquisitions related costs and restructuring and rationalisation expenses).
Average number of employees
Orthopaedics
Endoscopy
Advanced Wound Management
Operating profit
3
Accounting policies
2011
numbers
5,280
2,331
3,132
10,743
2010
numbers
5,045
2,134
2,993
10,172
2009
numbers
4,853
1,888
3,023
9,764
Research and development
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 receive approval from the appropriate regulatory body. Substantially all
development expenditure is complete by the time the product is submitted for regulatory approval. Consequently the majority of expenditure on
research and development is expensed as incurred.
Advertising costs
Expenditure on advertising costs is expensed as incurred.
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) (v)
2011
$ million
4,270
(1,140)
3,130
(167)
(1,526)
(575)
(2,101)
862
2010
$ million
3,962
(1,031)
2,931
(151)
(1,414)
(446)
(1,860)
920
2009
$ million
3,772
(1,030)
2,742
(155)
(1,351)
(513)
(1,864)
723
Operating profit
(i)
In 2011, $7m of restructuring and rationalisation expenses related to cost of goods sold (2010 – no restructuring and rationalisation expenses or acquisition related costs, 2009 – $15m of restructuring and
rationalisation expenses and $12m of acquisition related costs).
(ii) 2011 includes $nil of restructuring and rationalisation expenses (2010 – $3m of restructuring and rationalisation expenses, 2009 – $7m of acquisition related costs and $10m of restructuring and rationalisation
expenses).
(iii) 2011 includes $42m of amortisation of other intangible assets (2010 – $34m, 2009 – $26m).
(iv) 2011 includes $33m of restructuring and rationalisation expenses and $36m of amortisation acquisition intangibles (2010 – $12m of restructuring and rationalisation expenses and $34m of amortisation
acquisition intangibles, 2009 – $7m of acquisition related costs, $17m of restructuring and rationalisation expenses and $66m of amortisation of acquisition intangibles and impairments).
(v) 2011 includes $23m relating to legal provision (2010 – $nil, 2009 – $nil).
(vi) Items detailed in (i), (ii), (iv) and (v) are excluded from the calculation of trading profit.
262189_pp085_pp111.indd 93
93
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
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
3.1
Staff costs during the year amounted to:
Wages and salaries
Social security costs
Pension costs (including retirement healthcare)
Share based payments
Notes
19
24
2011
$ million
36
42
–
217
9
2
33
32
90
2011
$ million
930
99
64
30
1,123
2010
$ million
34
34
–
203
15
2
31
28
83
2010
$ million
817
91
60
21
989
3.2
Audit Fees – Information about the nature and cost of services provided by auditors
Audit services: Group accounts
Other services:
Local statutory audit pursuant to legislation
Taxation services:
Compliance services
Advisory services
Total auditors’ remuneration
Arising:
In the UK
Outside the UK
2011
$ million
1
2010
$ million
1
2
1
1
5
2
3
5
2
1
1
5
2
3
5
2009
$ million
34
26
32
206
14
–
27
28
71
2009
$ million
768
86
64
18
936
2009
$ million
1
2
1
1
5
2
3
5
Restructuring and rationalisation expenses
3.3
In 2011, restructuring and rationalisation costs of $40m (2010 – $15m, 2009 – $42m) were incurred in the twelve month period to 31 December 2011.
Charges of $14m (2010 – $15m, 2009 – $42m) related to the earnings improvement programme which was completed in the year. Charges of
$26m (2010 – $nil) were also incurred, relating mainly to people costs associated with the structural and process changes announced in
August 2011.
Legal provision
3.4
In 2011, the Group has established a provision of $23m in connection with the previously disclosed investigation by the U.S. Securities and
Exchange Commission (“SEC”) and Department of Justice (“DOJ”) into potential violations of the U.S. Foreign Corrupt Practices Act in the medical
devices industry.
On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith &
Nephew has committed to pay slightly less than $23m in fines and profit disgorgement, maintain an enhanced compliance programme, and
appoint an independent monitor for at least 18 months to review and report on its compliance programme.
94
262189_pp085_pp111.indd 94
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
4
4.1
Interest and Other finance costs
Interest (payable)/receivable
Interest receivable
Interest payable:
Bank borrowings
Other
Net interest payable
2011
$ million
4
(6)
(6)
(12)
(8)
2010
$ million
3
(7)
(11)
(18)
(15)
2009
$ million
2
(16)
(26)
(42)
(40)
Interest receivable includes net interest receivable of $1m (2010 – $nil, 2009 – $nil) on interest rate and currency swaps and interest payable
includes $nil (2010 – $5m, 2009 – $23m) of net interest payable on currency and interest rate swaps. The gross interest receivable on these swaps
was $4m (2010 – $4m, 2009 – $14m) and the gross interest payable was $3m (2010 – $9m, 2009 – $37m).
4.2 Other finance costs
Retirement benefits: Interest cost
Retirement benefits: Expected return on plan assets
Other
Other finance costs
Notes
19
19
2011
$ million
(66)
59
1
(6)
2010
$ million
(64)
55
(1)
(10)
2009
$ million
(61)
48
(2)
(15)
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 $3m gain in 2011 (2010 – net $8m gain, 2009 – 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.
Taxation
5
Accounting policy
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. The accounting policy for deferred taxation is set out in Note 17.
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 reliably 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.
5.1
Taxation charge attributable to the Group
2011
$ million
2010
$ million
2009
$ million
Current taxation:
UK corporation tax at 26.5% (2010 – 28%, 2009 – 28%)
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
56
214
270
(16)
254
18
(3)
(3)
12
266
(24)
2
244
52
238
290
(18)
272
4
(2)
6
8
280
7
–
287
50
189
239
(31)
208
(7)
–
(3)
(10)
198
12
(2)
208
95
262189_pp085_pp111.indd 95
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
The tax charge was reduced by $17m in 2011 (2010 – $10m, 2009 – $26m) as a consequence of restructuring and rationalisation expenses,
acquisition related costs, amortisation of acquisition intangibles and legal provision.
The applicable tax for the year is based on the United Kingdom standard rate of corporation tax of 26.5% (2010 – 28%, 2009 – 28%). 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 incurred not relieved/(utilised not previously recognised)
Overseas income taxed at other than UK standard rate
Total effective tax rate
2011
%
26.5
(0.5)
(1.6)
0.3
6.7
31.4
2010
%
28.0
0.2
(1.5)
(0.2)
4.8
31.3
2009
%
28.0
1.2
(4.8)
(0.1)
5.3
29.6
During the year the enacted UK tax rate applicable from 1 April 2012 was reduced to 25% and the UK Government announced policy to reduce the
tax rate to 23% across the following three years. It is expected that if the stated policy is enacted deferred tax credits will arise.
Earnings per Ordinary Share
6
Accounting policy
Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of Ordinary Shares in
issue during the year, excluding shares held by the Company in the Employees’ Share Trust or as treasury shares.
Adjusted earnings per share
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 affects 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. 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.
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)
Adjusted attributable profit
Attributable profit is reconciled to adjusted attributable profit as follows:
Attributable profit for the year
Acquisition related costs
Restructuring and rationalisation expenses
Amortisation of acquisition intangibles and impairments
Legal provision
Taxation on excluded items
Adjusted attributable profit
Notes
3
3
8 & 9
5
2011
$ million
582
664
2011
$ million
582
–
40
36
23
(17)
664
2010
$ million
615
654
2010
$ million
615
–
15
34
–
(10)
654
2009
$ million
472
580
2009
$ million
472
26
42
66
–
(26)
580
96
262189_pp085_pp111.indd 96
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
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
2011
891
4
895
65.3¢
65.0¢
74.5¢
74.2¢
2010
888
1
889
69.3¢
69.2¢
73.6¢
73.6¢
2009
884
1
885
53.4¢
53.3¢
65.6¢
65.5¢
Share options not included in the diluted EPS calculation because they were non–dilutive in the period totalled 12.9m (2010 – 2.5m, 2009 – 21.4m).
Property, plant and equipment
7
Accounting policies
Property, plant and equipment
Property, plant and equipment is 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 over lives ranging between 20 and 50 years. 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.
The useful lives and residual values of all property, plant and equipment are reviewed each financial year-end, and where adjustments are
required, these are made prospectively.
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.
Impairment of assets
The carrying values of property, plant and equipment 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.
262189_pp085_pp111.indd 97
97
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Cost
At 1 January 2010
Exchange adjustment
Additions
Disposals
Transfers
At 31 December 2010
Exchange adjustment
Additions
Disposals
Transfers
Transferred to assets held for sale
At 31 December 2011
Depreciation and impairment
At 1 January 2010
Exchange adjustment
Charge for the year
Disposals
Transfers
At 31 December 2010
Exchange adjustment
Charge for the year
Disposals
Transferred to assets held for sale
At 31 December 2011
Net book amounts
At 31 December 2011
At 31 December 2010
Land and buildings
Plant and equipment
Freehold
$ million
Leasehold
$ million
Instruments
$ million
Other
$ million
Assets in
course of
construction
$ million
Total
$ million
129
(2)
1
(8)
11
131
–
4
(2)
–
–
133
29
(1)
4
(5)
14
41
–
4
(2)
–
43
90
90
52
–
1
–
–
53
(1)
2
(2)
–
–
52
22
–
4
(1)
–
25
–
3
(1)
–
27
25
28
889
9
145
(81)
2
964
(13)
144
(86)
–
–
1,009
575
7
130
(74)
–
638
(9)
139
(80)
–
688
321
326
784
–
48
(43)
(3)
786
(7)
32
–
72
(5)
878
502
(2)
65
(41)
(14)
510
(6)
71
–
(2)
573
305
276
27
–
55
(3)
(12)
67
–
47
–
(72)
–
42
–
–
–
–
–
–
–
–
–
–
–
42
67
1,881
7
250
(135)
(2)
2,001
(21)
229
(90)
–
(5)
2,114
1,128
4
203
(121)
–
1,214
(15)
217
(83)
(2)
1,331
783
787
Land and buildings includes land with a cost of $14m (2010 – $10m) that is not subject to depreciation. Assets held under finance leases with a net
book amount of $12m (2010 – $14m) are included within land and buildings and $8m (2010 – $10m) are included within plant and equipment.
Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $9m (2010 – $15m).
Goodwill
8
Accounting policy
Goodwill is not amortised but is reviewed for impairment annually. Goodwill is allocated to the cash-generating unit (“CGU”) that is expected to
benefit from the acquisition. The recoverable amount of CGUs to which goodwill has been allocated is tested for impairment annually. For purposes
of impairment testing, goodwill is allocated to the related CGUs monitored by management, being the business segment level, Orthopaedics,
Endoscopy and Advanced Wound Management.
In carrying out impairment reviews of goodwill a number of significant assumptions have to be made when preparing cash flow projections. These
include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired
businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes in
expectations arise, impairment charges may be required which would adversely impact operating results. 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.
98
262189_pp085_pp111.indd 98
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued Cost
At 1 January
Exchange adjustment
Acquisitions
Transferred to assets held for sale
Adjustment to contingent consideration
At 31 December
Impairment
At 1 January
Transferred to assets held for sale
At 31 December
Net book amounts
Each of the Group’s business segments represent a CGU and include goodwill as follows:
Orthopaedics
Endoscopy
Advanced Wound Management
Notes
2011
$ million
2010
$ million
22
22
22
1,108
(12)
44
(44)
–
1,096
7
(7)
–
1,100
12
–
–
(4)
1,108
7
–
7
1,096
1,101
2011
$ million
549
323
224
1,096
2010
$ million
582
280
239
1,101
In September 2011 and 2010 impairment reviews were performed by comparing the recoverable amount of each CGU with its carrying amount,
including goodwill. These are updated during December, taking into account significant events that occurred between September and December.
For each CGU, 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 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 10% (2010 – 11%), for the Endoscopy businesses it is 11% (2010 – 15%) and for the Advanced Wound Management
business it is 9% (2010 – 10%).
In determining the growth rate used in the calculation of the value-in-use, the Group considered the annual sales growth and trading profit
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. Growth rates for the five year period for the Orthopaedics business vary up to 6% (2010 – 9%), for the Endoscopy business up
to 13% (2010 – 10%) and for the Advanced Wound Management business up to 8% (2010 – 8%).
Specific considerations and strategies taken into account in determining the sales growth and trading profit 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 long-term growth rate of 4% (2010 – 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% (2010 – 8%) of annual revenue.
262189_pp085_pp111.indd 99
99
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
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% (2010 – 31%) for the Orthopaedics business, 43% (2010 – 43%) for the Endoscopy business and 51% (2010 – 53%) for the Advanced
Wound Management business.
Intangible assets
9
Accounting policies
Intangible assets
Intangible assets acquired separately from a business combination (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 information technology projects are capitalised as intangible assets. Software that is integral to
computer hardware is capitalised as plant and equipment.
Impairment of assets
The carrying values of 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 intangible assets a number of significant assumptions have to be made when preparing cash flow
projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of
acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes
in expectations arise, impairment charges may be required which would adversely impact operating results.
100
262189_pp085_pp111.indd 100
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued Cost
At 1 January 2010
Exchange adjustment
Additions
Disposals
Transfers
At 31 December 2010
Exchange adjustment
Additions
Disposals
Transferred to assets held for sale
At 31 December 2011
Amortisation and impairment
At 1 January 2010
Exchange adjustment
Charge for the year
Disposals
At 31 December 2010
Exchange adjustment
Charge for the year
Disposals
Transferred to assets held for sale
At 31 December 2011
Net book amounts
At 31 December 2011
At 31 December 2010
Acquisition
intangibles
$ million
Software
$ million
Distribution
Rights
$ million
Patents &
Intellectual
Property
$ million
Total
$ million
417
23
–
–
–
440
(4)
–
–
–
436
159
7
34
–
200
(2)
36
–
–
234
202
240
111
1
32
(1)
2
145
1
32
(5)
(3)
170
29
1
17
–
47
–
22
(3)
(1)
65
105
98
67
–
11
(25)
–
53
–
7
–
–
60
35
–
14
(25)
24
–
10
–
–
34
26
29
91
–
22
–
–
113
–
53
(1)
(22)
143
51
–
3
–
54
–
10
(1)
(10)
53
90
59
686
24
65
(26)
2
751
(3)
92
(6)
(25)
809
274
8
68
(25)
325
(2)
78
(4)
(11)
386
423
426
Commitments
The Group is contractually committed to four milestone payments, which total $60m (2010 – $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. This
committment will transfer to the Group’s new associate as detailed in Note 22.
Investments
10
Accounting policy
Investments, other than those related to associates, are initially recorded at fair value plus transaction costs on the trade date. The Group has
an investment in an entity that holds mainly unquoted equity securities, which by their very nature have no fixed maturity date or coupon rate. The
investment 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. 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. 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.
At 1 January
Impairment
At 31 December
2011
$ million
6
(2)
4
2010
$ million
7
(1)
6
101
262189_pp085_pp111.indd 101
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Investments in associates
11
Accounting policy
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.
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.
2011
$ million
2010
$ million
Share of results of associates:
Revenue
Operating costs and taxation
Profit after taxation recognised in the income statement
Dividends paid
Net (loss)/profit attributable to the Group
Investments in associates at 1 January
Exchange adjustment
Investments in associates at 31 December
Investments in associates is represented by:
Assets
Liabilities
Net assets
Goodwill
11
(11)
–
–
–
13
–
13
10
(1)
9
4
13
11
(11)
–
(1)
(1)
13
1
13
11
(2)
9
4
13
Inventories
12
Accounting policy
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.
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 it involves management judgements on effectiveness of inventory
deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
Raw materials and consumables
Work-in-progress
Finished goods and goods for resale
2011
$ million
140
24
695
859
2010
$ million
159
23
741
923
2009
$ million
157
28
748
933
Reserves for excess and obsolete inventories were $322m (2010 – $322m, 2009 – $303m). During 2011, $65m was recognised as an expense
within cost of goods sold resulting from the write down of excess and obsolete inventory (2010 – $66m, 2009 – $92m). The cost of inventories
recognised as an expense and included in cost of goods sold amounted to $991m (2010 – $909m, 2009 – $866m).
No inventory is carried at fair value less costs to sell in any year.
102
262189_pp085_pp111.indd 102
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued Trade and other receivables
13
Accounting policy
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.
The Group manages credit risk through credit limits which require authorisation commensurate 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
historically 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.
Trade receivables
Less: provision for bad and doubtful debts
Trade receivables – net (loans and receivables)
Derivatives – forward foreign exchange contracts
Other receivables
Amounts owed by associates
Prepayments and accrued income
Less non-current portion: Trade receivables
Current portion
2011
$ million
2010
$ million
2009
$ million
936
(36)
900
21
50
–
66
1,037
–
1,037
952
(49)
903
23
55
–
65
1,046
(22)
1,024
843
(47)
796
13
71
2
64
946
–
946
All non-current receivables are due within five years from the balance sheet date.
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 $42m (2010 – $30m, 2009 – $33m). Amounts due from insurers in respect of the
macrotextured claim of $136m (2010 – $133m, 2009 – $128m) are included within other receivables and have been provided in full.
The amount of trade receivables that were past due but not impaired were as follows:
2011
$ million
2010
$ million
2009
$ million
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 nor impaired
Provision for bad and doubtful debts
Trade receivables – net (loans and receivables)
Movements in the provision for bad and doubtful debts were as follows:
At 1 January
Exchange adjustment
Receivables provided for during the year
Utilisation of provision
Provision transferred to assets held for sale
At 31 December
198
51
59
94
402
534
(36)
900
49
(1)
42
(34)
(20)
36
168
52
57
59
336
616
(49)
903
47
–
30
(28)
–
49
202
56
46
80
384
459
(47)
796
40
1
33
(27)
–
47
In 2011, no trade receivables from third parties are held under factoring agreements with recourse (2010 – $11m, 2009 – $20m). The amounts
disclosed in prior years did not qualify for de-recognition as the Group retains part of the credit risk. The associated liability amounted to $4m in
2010 and $12m in 2009 and were accounted for as a part of current payables.
262189_pp085_pp111.indd 103
103
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Trade receivables include amounts denominated in the following major currencies:
US Dollar
Sterling
Euro
Other
Trade receivables – net (loans and receivables)
14
Payables
Trade and other payables due within one year
Trade and other payables
Derivatives – forward foreign exchange contracts
Acquisition consideration
Other payables due after one year:
Acquisition consideration
2011
$ million
2010
$ million
2009
$ million
238
75
317
270
900
282
72
283
266
903
281
55
280
180
796
2011
$ million
2010
$ million
The acquisition consideration due after more than one year is expected to be payable as follows: $8m in 2014 (2010 – $nil).
Cash and borrowings
15
15.1 Net debt
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
Net debt
Borrowings are repayable as follows:
2011
$ million
306
16
322
(184)
138
549
12
3
564
8
584
33
–
617
–
2010
$ million
57
642
699
(207)
492
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
280
23
3
306
41
12
4
57
1
–
1
2
498
–
2
500
–
–
2
2
–
–
2
2
–
–
2
2
126
–
2
128
–
–
2
2
–
–
2
2
–
–
8
8
–
–
10
10
281
23
18
322
665
12
22
699
At 31 December 2011:
Bank loans
Bank overdrafts
Finance lease liabilities
At 31 December 2010:
Bank loans
Bank overdrafts
Finance lease liabilities
104
262189_pp085_pp111.indd 104
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued 15.2 Assets pledged as security
Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:
Finance lease liabilities – due within one year
Finance lease liabilities – due after one year
Total amount of secured borrowings
Total net book value of assets pledged as security:
Property, plant and equipment
2011
$ million
3
15
18
20
20
2010
$ million
4
18
22
22
22
15.3 Currency swap analysis
All currency swaps are stated at fair value. Gross US Dollar equivalents of $112m (2010 – $61m) receivable and $112m (2010 – $61m) payable have
been netted. Currency swaps comprise foreign exchange swaps and were used in 2011 and 2010 to hedge intragroup loans and other monetary
items.
Currency swaps mature as follows:
At 31 December 2011
Within one year:
Euro
Japanese Yen
Canadian Dollar
At 31 December 2011
Within one year:
Swiss Franc
Swedish Krona
Australian Dollar
At 31 December 2010
Within one year:
Japanese Yen
Canadian Dollar
At 31 December 2010
Within one year:
New Zealand Dollar
Australian Dollar
Amount
receivable
$ million
1
20
33
54
Amount
receivable
Currency
million
CHF 18
SEK 20
AUD 36
Amount
receivable
$ million
18
25
43
Amount
receivable
Currency
million
NZD 5
AUD 14
Amount
payable
Currency
million
EUR 1
JPY 1,500
CAD 34
Amount
payable
$ million
19
3
36
58
Amount
payable
Currency
million
JPY 1,500
CAD 24
Amount
payable
$ million
4
14
18
105
262189_pp085_pp111.indd 105
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
15.4 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 total committed facilities of $1,259m (2010 – $1,511m) and total uncommitted facilities of $375m
(2010 – $332m). The Group has undrawn committed facilities of $1,003m (2010 – $884m). Of the undrawn committed facilities, $1,000m expires
after two but within five years (2010 – $7m expired within one year and $877m 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 approximates to fair value.
In December 2010, the Company reviewed and replaced its principal banking facilities ahead of their maturity in May 2012. The Company reduced
its $1 billion 5-year term loan to $245m as at 31 December 2011. The interest rate for this multi-currency facility, at 20 basis points over LIBOR, is
unchanged. Smith & Nephew also has an undrawn 5 year $1 billion multi-currency revolving facility with an initial interest rate of 70 basis points
over LIBOR. The commitment fee on the undrawn amount of the revolving facility is 24.5 basis points. The Company 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, EBITDA, EBITA and net interest all being calculated as defined in the agreement. These financial
covenants are tested at the end of each half year for the 12 months ending on the last day of the testing period. As of 31 December 2011, the
Company was in compliance with these covenants. The facility is also subject to customary events of default, none of which are currently
anticipated to occur.
15.5 Year-end financial liabilities by contractual maturity
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:
At 31 December 2011
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Finance lease liabilities
Derivative financial liabilities:
Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – inflow
At 31 December 2010
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
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
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
305
549
4
1,053
(1,052)
859
59
584
5
1,008
(1,000)
2
(2)
656
–
–
3
–
–
3
500
–
4
–
–
–
–
–
–
9
–
–
9
130
–
9
–
–
–
–
504
139
–
–
9
–
–
9
–
–
12
–
–
–
–
12
305
549
25
1,053
(1,052)
880
689
584
30
1,008
(1,000)
2
(2)
1,311
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.
106
262189_pp085_pp111.indd 106
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued 15.6 Finance leases
Accounting policy
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.
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
2011
$ million
2010
$ million
4
3
3
3
3
9
25
(7)
18
5
4
3
3
3
12
30
(8)
22
Present value of minimum lease payments can be split out as: $3m (2010 – $4m) due within one year, $7m (2010 – $8m) due between one to five
years and $8m (2010 – $10m) due after five years.
Financial instruments and risk management
16
Accounting policy
Derivative Financial Instruments
Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently
remeasured at their fair value at subsequent balance sheet dates. The fair value of forward foreign exchange 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 and includes counterparty credit risk.
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. Amounts taken to other comprehensive income are
transferred to the income statement when the hedged transaction affects profit and loss.
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.
16.1 Foreign exchange exposures
The Group operates in over 90 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 2011, CHF32m (2010 – CHF125m) of Group borrowings 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 2011 was $34m (2010 – $134m). It is Group policy for operating units not to
hold material unhedged monetary assets or liabilities other than in their functional currencies.
262189_pp085_pp111.indd 107
107
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management 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
normally used 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
2011, the Group had contracted to exchange within one year the equivalent of $940m (2010 – $944m).
Based on the Group’s borrowings as at 31 December 2011, if the US Dollar were to weaken against all currencies by 10%, the Group’s net
borrowings would increase by $11m (2010 – $24m). In respect of borrowings held in a different currency to the relevant reporting entity, if the
US Dollar were to weaken by 10% against all other currencies, the Group’s borrowings would increase by $16m (2010 – $35m). Excluding
borrowings designated as net investment hedges, the increase would be $13m (2010 – $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
2011 would have been $17m lower (2010 – $20m), which would be recognised through the hedging reserve. Similarly, if the Euro were to weaken
by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2011 would have been
$24m higher (2010 – $19m).
A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2011 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 on the
value of forward foreign exchange contracts is not significant.
Interest rate exposures
16.2
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 no net cash flow from movements in market interest rates on the hedged items. At 31 December 2011
the Group had no interest rate swaps, at 31 December 2010 interest rates had been fixed on borrowings totalling $98m for a period of six months
and $112m for a period of one year.
Based on the Group’s gross borrowings as at 31 December 2011, if interest rates were to increase by 100 basis points in all currencies then the
annual net interest charge would increase by $4m (2010 – $5m). Excluding the impact of the Group’s interest rate hedges, the increase in the
interest charge would be $4m (2010 – $7m). A decrease in interest rates by 100 basis points in all currencies would have an equal but opposite
effect to the amounts shown above.
16.3 Credit risk exposures
The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits which, with certain
minor exceptions due to local market conditions, require counterparties to have a minimum “A” rating from one of the major ratings agencies. The
financial exposure of a 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 market value 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 maximum credit risk exposure on derivatives at 31 December 2011 was $21m (2010 – $23m), being the total debit fair values on forward
foreign exchange contracts, interest rate swaps and currency swaps. The maximum credit risk exposure on cash and bank at 31 December 2011
was $184m (2010 – $207m). 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 13.
108
262189_pp085_pp111.indd 108
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued 16.4 Currency and interest rate profile of interest bearing liabilities and assets
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
85
35
126
76
322
294
137
167
101
699
58
–
1
53
112
18
–
–
43
61
143
35
127
129
434
312
137
167
144
760
126
35
126
129
416
244
80
100
104
528
17
–
1
–
18
68
57
67
40
232
7.1
3.0
5.0
–
2.5
0.6
1.0
0.9
5
2
2
–
2
1
1
1
At 31 December 2011:
US Dollar
Swiss Franc
Euro
Other
Total interest bearing liabilities
At 31 December 2010:
US Dollar
Swiss Franc
Euro
Other
Total interest bearing liabilities
At 31 December 2011, $18m (2010 – $22m) of fixed rate liabilities relate to finance leases and $nil (2010 – $210m) relate to hedged borrowings under
the $245m term facility. In 2011, the Group also had liabilities due for deferred acquisition consideration (denominated in US Dollars, Euro and Yen)
totalling $11m (2010 – $nil, 2009 – $46m) on which no interest was payable (see Note 14). 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 floating rate borrowings as at 31 December 2011 was 2% (2010 – 1%).
Currency and Interest Rate Profile of Interest Bearing Assets:
At 31 December 2011:
US Dollars
Other
Total interest bearing assets
At 31 December 2010:
US Dollars
Other
Total interest bearing assets
Cash
and bank
$ million
Currency
swaps
$ million
Total assets
$ million
Floating
rate assets
$ million
56
128
184
46
161
207
56
56
112
43
18
61
112
184
296
89
179
268
112
184
296
89
179
268
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 2011 or 31 December 2010.
16.5 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 are recorded at fair value. 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.
262189_pp085_pp111.indd 109
109
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
As at 31 December 2011 and 31 December 2010, 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 2011 and 31 December 2010, the
fair value of the Group’s long-term borrowing was not materially different from amortised cost.
Deferred taxation
17
Accounting policy
Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising between the carrying
amount of assets and liabilities in the accounts and the corresponding tax bases used in computation of taxable profit.
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 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.
Deferred tax assets
Deferred tax liabilities
Net position at 31 December
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
Movement in other comprehensive income
Movement in shareholders’ equity
Transfers
At 31 December
2011
$ million
223
(66)
157
2010
$ million
224
(69)
155
Notes
2011
$ million
2010
$ million
155
(1)
(15)
3
24
(2)
(7)
157
171
(1)
(4)
(4)
(7)
–
–
155
110
262189_pp085_pp111.indd 110
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued Movements in the main components of deferred tax assets and liabilities were as follows:
Deferred tax assets:
At 1 January 2010
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Transfers
At 31 December 2010
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Charge to equity
Transfers
At 31 December 2011
Retirement
benefit
obligation
$ million
Macro-
textured
claim
$ million
Other
$ million
Total
$ million
54
–
(5)
–
6
(1)
54
–
(7)
–
31
–
1
79
52
–
–
–
–
–
52
–
–
–
–
–
–
52
96
1
18
(1)
–
4
118
(2)
(11)
(2)
–
(1)
(10)
92
202
1
13
(1)
6
3
224
(2)
(18)
(2)
31
(1)
(9)
223
The Group has unused tax losses of $29m (2010 – $21m) available for offset against future profits. A deferred tax asset has been recognised in
respect of $1m (2010 – $1m) 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.
Accelerated tax
depreciation
$ million
Intangible
assets
$ million
Other
$ million
Total
$ million
Deferred tax liabilities:
At 1 January 2010
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Transfers
At 31 December 2010
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Charge to equity
Transfers
At 31 December 2011
(35)
2
2
1
–
5
(25)
1
3
(2)
–
–
(5)
(28)
(34)
(1)
4
1
–
(3)
(33)
–
5
–
–
–
1
(27)
38
(3)
(23)
(5)
(13)
(5)
(11)
–
(5)
7
(7)
(1)
6
(11)
(31)
(2)
(17)
(3)
(13)
(3)
(69)
1
3
5
(7)
(1)
2
(66)
262189_pp085_pp111.indd 111
111
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Provisions and contingencies
18
Accounting policy
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 unless they are virtually certain of being realised.
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.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the
unavoidable cost of meeting its obligations under the contract. For the purposes of calculating any onerous lease provision, the Group has taken
the discounted future lease payments, net of expected rental income. Before a provision is established, the Group recognises any impairment loss
on the assets associated with that contract.
18.1 Provisions
At 1 January 2011
Charge to income statement
Utilisation/Released
At 31 December 2011
Provisions – due within one year
Provisions – due after one year
At 31 December 2011
Provisions – due within one year
Provisions – due after one year
At 31 December 2010
Rationalisation
provisions
$ million
Legal and
other provision
$ million
Total
$ million
14
22
(10)
26
26
–
26
14
–
14
96
44
(43)
97
52
45
97
23
73
96
110
66
(53)
123
78
45
123
37
73
110
The principal provisions within rationalisation provisions relate to the rationalisation of operational sites (mainly severance and legal costs)
arising from the legacy earnings improvement programme and people costs associated with the structural and process changes announced
in August 2011.
Included within the legal and other provision is:
– $17m (2010 – $20m) relating to the declination of insurance coverage for macrotextured knee revisions (see Note 18.2).
– $23m (2010 – $nil) in connection with the previously disclosed investigation by the U.S. Securities and Exchange Commission (“SEC”) and
Department of Justice (“DOJ”) into potential violations of the U.S. Foreign Corrupt Practices Act in the medical devices industry. On 6 February
2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith & Nephew has
committed to pay approximately $23m in fines and profit disgorgement, maintain an enhanced compliance programme, and appoint an
independent monitor for at least 18 months to review and report on its compliance programme.
– The remaining balance largely represents provisions for various litigation and patent disputes.
All provisions are expected to be substantially utilised within three years of 31 December 2011 and none are treated as financial instruments.
18.2 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 management believes none of them will result in a material adverse effect on the financial
position of the Group. The Group provides for outcomes that are deemed to be probable and can be reliably estimated. There is no assurance that
losses will not exceed provisions 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
112
262189_pp112-pp128.indd 112
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
of related claims have been filed, most of which have been settled. The aggregate cost at 31 December 2011 related to this matter is approximately
$214m. The Group has sought recovery from its primary and excess insurers for costs of resolving the claims. The primary insurance carrier has
paid $60m in full settlement of its policy liability. However, the 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 the US District Court for the Western District of
Tennessee, and trial is expected to commence in 2013. An additional $22m was received from a successful settlement with a third party.
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 $17m provision remaining is adequate to cover remaining claims. Given the
uncertainty inherent in such matters, there can be no assurance on this point.
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 with costs and settlements often significant.
Retirement benefit obligations
19
Accounting policy
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.
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 that reference high-quality corporate
bonds that are denominated in the currency in which the benefits will be paid and 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 rate, the
rate of inflation and mortality assumptions to be applied to future pension plan liabilities. The most important 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.
Where defined contribution plans operate, the contributions to these plans are charged to operating profit as they become payable.
19.1
Retirement benefit obligations
The Group’s retirement benefit obligations comprise:
Funded Plans:
UK Plan
US Plan
Other Plans (i)
Unfunded Plans:
Other Plans (i)
Retirement Healthcare
2011
$ million
2010
$ million
24
168
33
225
24
38
287
59
110
36
205
22
35
262
(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.
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”) and a breakdown of the pension costs charged to income are as follows:
262189_pp112-pp128.indd 113
113
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
19.2 Principal actuarial assumptions:
UK Plan:
Discount rate
Expected return on plan assets (i)
Expected rate of salary increases
Future pension increases
Inflation (RPI)
Inflation (CPI)
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)
2011
4.9
5.1
5.1
3.1
3.1
2.1
28.6
31.0
4.6
7.1
4.5
–
2.5
22.8
24.5
3.9
4.5
3.3
2.2
1.9
2010
% per annum
5.5
5.9
5.5
3.5
3.5
3.0
28.2
31.5
5.6
7.5
4.7
–
2.7
22.8
24.7
4.2
5.1
3.0
2.3
2.1
2009
5.7
6.4
5.6
3.6
3.6
N/A
28.1
31.3
6.0
7.5
4.7
–
2.7
23.0
25.8
4.6
5.0
3.3
1.9
1.0
(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.
19.3 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
2011
$ million
2010
$ million
2009
$ million
28
66
(59)
35
29
64
26
64
(55)
35
25
60
26
61
(48)
39
25
64
Of the $64m (2010 – $60m, 2009 – $64m) net cost for the year, $57m (2010 – $51m, 2009 – $51m) was charged to operating profit. The interest
cost and expected return on plan assets are reported as other finance costs.
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 2011, there were $nil outstanding payments due to be paid over to the plans (2010
– $nil, 2009 – $nil).
114
262189_pp112-pp128.indd 114
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued 19.4 Actuarial (losses)/gains recognised in Group Statement of Comprehensive Income:
Experience gains in pension scheme assets
Experience gains on scheme liabilities
Losses due to changes in assumptions underlying scheme liabilities
2011
$ million
9
–
(79)
(70)
2010
$ million
34
21
(29)
26
2009
$ million
71
17
(47)
41
The actuarial losses of $70m (2010 – gain of $26m, 2009 – gain of $41m) were reported in the statement of other comprehensive income making
the cumulative charge to date $298m (2010 – $228m, 2009 – $254m).
The contributions made in the year in respect of defined benefit plans were: UK Plan $37m (2010 – $37m, 2009 – $19m); US Plan $30m (2010 – $20m,
2009 – $14m); and Other Plans $9m (2010 – $8m, 2009 – $8m). The agreed contributions for 2012 in respect of the Group’s defined benefit plans are:
$37m for the UK Plan (including $29m of supplementary payments), $27m for the US Plan and $7m for other defined benefit plans.
19.5
Scheme assets
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 2011
Equities
Bonds
Other
Market value of assets
Present value of defined benefit obligations
Deficit: non-current liability recognised in
the balance sheet
31 December 2010
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
7.2
3.2
6.7
7.4
4.0
–
4.1
248
353
55
656
(680)
(24)
324
262
–
9
595
(654)
(59)
8.8
3.0
2.3
8.4
4.2
–
2.8
196
93
9
298
(466)
(168)
192
70
–
10
272
(382)
(110)
8.2
3.3
4.5
8.3
4.5
5.8
4.1
6
42
61
109
(166)
(57)
33
33
5
29
100
(158)
(58)
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
2011
2010
2011
2010
2011
2010
38
54
–
8
100
55
44
–
1
100
66
31
–
3
100
71
26
–
3
100
6
38
–
56
100
33
33
5
29
100
262189_pp112-pp128.indd 115
115
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
A reconciliation of the fair value of plan assets is shown in the following tables:
Fair value of plan assets at 1 January 2010
Expected return on plan assets
Settlements to members
Experience gains/(losses) on plan assets
Plan participant contributions
Company contributions
Benefits paid
Exchange adjustment
Fair value of plan assets at 31 December 2010
Expected return on plan assets
Experience gains/(losses) on plan assets
Plan participant contributions
Company contributions
Benefits paid
Exchange adjustment
Fair value of plan assets at 31 December 2011
UK Plan
$ million
US Plan
$ million
Other
Plans
$ million
Retirement
Healthcare
$ million
Total
$ million
534
33
–
26
2
37
(21)
(16)
595
35
20
1
37
(23)
(9)
656
234
17
–
11
–
20
(10)
–
272
19
(12)
–
30
(11)
–
298
87
5
(2)
(3)
6
8
(5)
4
100
5
1
3
9
(6)
(3)
109
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
855
55
(2)
34
8
65
(36)
(12)
967
59
9
4
76
(40)
(12)
1,063
19.6 Present value of defined benefit obligations
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 2010
Current service cost
Settlements to members
Other finance cost
Experience (gains)/losses on plan liabilities
Losses on change of assumptions
Plan participant contributions
Benefits paid
Exchange adjustment
Present value of defined benefit obligations
at 31 December 2010
Current service cost
Other finance cost
Experience losses/(gains) on plan liabilities
Losses on change of assumptions
Plan participant contributions
Benefits paid
Benefits paid directly by employer
Exchange adjustment
Present value of defined benefit obligations
at 31 December 2011
668
9
–
36
(21)
1
2
(21)
(20)
654
10
36
6
6
1
(23)
(1)
(9)
680
343
8
–
20
2
19
–
(10)
–
382
9
21
(1)
66
–
(11)
–
–
466
137
9
(2)
6
(2)
4
6
(5)
5
158
9
7
(3)
2
3
(6)
–
(4)
166
29
–
–
2
–
5
–
(1)
–
35
–
2
(2)
5
–
–
(2)
–
38
1,177
26
(2)
64
(21)
29
8
(37)
(15)
1,229
28
66
–
79
4
(40)
(3)
(13)
1,350
116
262189_pp112-pp128.indd 116
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
19.7 History of experience adjustments
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
$ million
Deficit in
plan
$ million
Amount –
gain/(loss)
$ million
Percentage
of plan
liabilities
%
Amount –
gain/(loss)
$ million
Percentage
of plan
assets
%
(680)
(466)
(166)
(654)
(382)
(158)
(668)
(343)
(137)
(516)
(337)
(141)
(753)
(283)
(145)
656
298
109
595
272
100
534
234
87
416
180
76
673
256
98
(24)
(168)
(57)
(59)
(110)
(58)
(134)
(109)
(50)
(100)
(157)
(65)
(80)
(27)
(47)
(6)
1
3
21
(2)
2
10
–
7
1
(5)
5
–
1
(1)
1
–
2
3
–
1
2
–
5
–
1
4
–
–
1
20
(12)
1
26
11
(3)
36
34
1
(126)
(100)
(10)
8
(5)
12
3
4
1
4
4
3
7
15
1
30
56
13
1
2
12
At 31 December 2011:
UK Plan
US Plan
Other Plans
At 31 December 2010:
UK Plan
US Plan
Other Plans
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
The Group recharges the UK pension plan with the costs of administration and independent advisers. The amount recharged in the year was $2m
(2010 – $2m, 2009 – $2m). The amount receivable at 31 December 2011 was $nil (2010 – $nil, 2009 – $nil).
19.8 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:
% per annum
Discount rate
Medical cost inflation
2011
2010
2009
UK
4.9
7.0
US
4.6
8.0
UK
5.5
7.0
US
5.6
8.0
UK
5.7
7.0
US
6.0
8.0
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 2011 by more than $2m (2010 – more than $2m, 2009– more than $2m).
For the US the retirement healthcare cost trend for 2012 is expected to be 3.4% above the discount rate. Thereafter the healthcare cost trend rate is
assumed to decrease by 0.5% per year to an ultimate rate of 5%. For the UK it will remain flat at 7%.
262189_pp112-pp128.indd 117
117
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Equity
20
20.1 Share capital
Authorised
At 31 December 2009
At 31 December 2010
At 31 December 2011
Allotted, issued and fully paid
At 1 January 2009
Share options
At 31 December 2009
Share options
At 31 December 2010
Share options
At 31 December 2011
Ordinary Shares
(20¢)
Deferred Shares
(£1.00)
Thousand
$ million
Thousand
$ million
Total
$ million
1,223,591
1,223,591
1,223,591
949,890
1,131
951,021
1,816
952,837
1,991
954,828
245
245
245
190
–
190
1
191
–
191
50
50
50
50
–
50
–
50
–
50
–
–
–
–
–
–
–
–
–
–
245
245
245
190
–
190
1
191
–
191
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 on-going 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 on-going 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
2011
$ million
191
413
(766)
3,349
3,187
2010
$ million
191
396
(778)
2,964
2,773
2009
$ million
190
382
(794)
2,401
2,179
118
262189_pp112-pp128.indd 118
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
20.2 Treasury shares
Treasury shares represents the holding of the Company’s own shares in respect of the Smith & Nephew Employee’s Share Trust and shares
bought back as part of the share buy-back programme, which was suspended in 2008.
The Smith & Nephew 2004 Employees’ Share Trust (“Trust”) was established to hold shares relating to the long-term incentive plans referred to in
the “Directors’ Remuneration Report”. The Trust is administered by an independent professional trust company resident in Jersey and is funded by
a loan from the 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.
The movements in Treasury shares and the Employees’ Share Trust are as follows:
At 1 January 2010
Shares purchased
Shares transferred from treasury
Shares transferred to group beneficiaries
At 31 December 2010
Shares purchased
Shares transferred from treasury
Shares transferred to group beneficiaries
At 31 December 2011
At 1 January 2010
Shares purchased
Shares transferred from treasury
Shares transferred to group beneficiaries
At 31 December 2010
Shares purchased
Shares transferred from treasury
Shares transferred to group beneficiaries
At 31 December 2011
20.3 Dividends
The following dividends were declared and paid in the year:
Ordinary final of 9.82¢ for 2010 (2009 – 8.93¢, 2008 – 8.12¢)
paid 19 May 2011
Ordinary interim of 6.6¢ for 2011 (2010 – 6.00¢, 2009 – 5.46¢)
paid 1 November 2011
Treasury
$ million
Employees’
Share Trust
$ million
Total
$ million
793
–
(19)
(5)
769
–
(14)
(5)
750
1
5
19
(16)
9
6
14
(13)
16
794
5
–
(21)
778
6
–
(18)
766
No of shares
million
No of shares
million
No of shares
million
64.7
–
(1.6)
(0.4)
62.7
–
(1.1)
(0.4)
61.2
0.1
0.6
1.6
(1.5)
0.8
0.6
1.1
(1.1)
1.4
64.8
0.6
–
(1.9)
63.5
0.6
–
(1.5)
62.6
2011
$ million
2010
$ million
2009
$ million
88
58
146
79
53
132
72
48
120
A final dividend for 2011 of 10.80 US cents per Ordinary Share was proposed by the Board on 1 February 2012 and will be paid, subject to
shareholder approval, on 9 May 2012 to shareholders on the Register of Members on 20 April 2012. The estimated amount of this dividend on
22 February 2012 was $96m.
262189_pp112-pp128.indd 119
119
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Cash Flow Statement
21
Accounting policy
In the Group Cash Flow Statement, cash and cash equivalents includes cash in hand, deposits held with banks, other short-term liquid investments
with original maturities of three months or less and bank overdrafts. In the Group Balance Sheet, bank overdrafts are shown within bank overdrafts
and loans under current liabilities.
Analysis of net debt
At 1 January 2009
Net cash flow
Exchange adjustment
At 31 December 2009
Net cash flow
Exchange adjustment
At 31 December 2010
Net cash flow
Other non-cash changes
Exchange adjustment
At 31 December 2011
Borrowings
Cash
$ million
Overdrafts
$ million
due within
one year
$ million
due after
one year
$ million
Net currency
swaps
$ million
145
38
9
192
9
6
207
(21)
–
(2)
184
(23)
6
(1)
(18)
6
–
(12)
(12)
–
1
(23)
(92)
66
(1)
(27)
(17)
(1)
(45)
252
(517)
27
(283)
(1,358)
288
(20)
(1,090)
437
11
(642)
140
517
(31)
(16)
(4)
12
(8)
–
3
(3)
–
1
–
(1)
–
Total
$ million
(1,332)
410
(21)
(943)
438
13
(492)
360
–
(6)
(138)
Reconciliation of net cash flow to movement in net debt
Change in cash net of overdrafts in the year
Settlement of currency swaps
Net change in borrowings
Change in net debt from net cash flow
Exchange adjustment
Change in net debt in the year
Opening net debt
Closing net debt
2011
$ million
2010
$ million
2009
$ million
(33)
1
392
360
(6)
354
(492)
(138)
15
3
420
438
13
451
(943)
(492)
44
12
354
410
(21)
389
(1,332)
(943)
Cash and cash equivalents
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
2011
$ million
184
(23)
161
2010
$ million
207
(12)
195
2009
$ million
192
(18)
174
Acquisitions and assets held for sale
22
Accounting policy
On acquisition, identifiable assets and liabilities (including contingent liabilities) of subsidiaries and associates are measured at their fair values at
the date of acquisition using the acquisition 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 acquired, is capitalised.
No “acquisition related costs” were incurred in 2011 or 2010. In 2009, $26m of acquisition costs related to the integration of the Plus business.
120
262189_pp112-pp128.indd 120
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
22.1 Acquisitions
Year ended 31 December 2011
On 23 June 2011, Smith & Nephew acquired 100% of the voting rights of Tenet Medical Engineering, Inc. for an initial payment of $35m, a further
payment of $2.5m, deferred for 18 months, and up to $14.5m based on the achievement of future revenue milestones. The cost is assessed as
$46m, being the fair value of the probable consideration.
Pre-acquisition
carrying
amounts
$ million
Fair value
adjustments
$ million
Fair value
to Group
$ million
Trade and other receivables
Inventories
Trade and other payables
Cash
Net assets
Goodwill on acquisition
Cost of acquisition
Discharged by:
Cash
Deferred consideration
Contingent consideration
Total consideration
2
1
(3)
2
2
–
–
–
–
–
2
1
(3)
2
2
44
46
35
3
8
46
As the Group was the only material customer of Tenet Medical Engineering Inc., no contribution to revenue was achieved in 2011. The post-
acquisition contribution to attributable profit for 2011 was immaterial.
Year ended 31 December 2010
In the year ended 31 December 2010 there were no acquisitions.
Year ended 31 December 2009
Plus Orthopedics Holdings AG
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.
Nucryst Pharmaceuticals, Corp.
On 22 December 2009, the Group acquired substantially all of 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.
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 ascquisition of the product right in 2001.
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
262189_pp112-pp128.indd 121
Pre-acquisition
carrying
amounts
$ million
Fair value
adjustments
$ million
10
–
4
(1)
–
13
(4)
12
–
–
1
9
Fair value
to Group
reported
in 2009
$ million
6
12
4
(1)
1
22
3
25
25
121
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
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.
22.2 Assets held for sale
The Group has classified following assets as held for sale:
Goodwill
Intangible assets
Property, plant and equipment
Deferred tax assets
Inventory
Trade and other receivables
Liabilities directly associated with assets held for sale
2011
$ million
2010
$ million
37
14
3
7
15
49
125
19
–
–
–
–
–
–
–
–
The Group has announced its intention to dispose of the Clinical Therapies business to an entity in which Smith & Nephew will retain an investment
as an associate. The assets and liabilities of the Clinical Therapies business have been classified as held for sale, their net realisable value is
estimated to be greater than their net book value. In 2011, this business contributed $237m to revenue and $48m to trading profit. The transaction
is expected to complete during the first half of 2012. On completion of this transaction, the Group expects to recognise a profit before taxation in
excess of $250m.
As part of this disposal the Group commitment of $60m detailed in Note 9 will be transferred to the associate.
23 Operating leases
Accounting policy
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.
Rentals payable under operating leases are expensed in the income statement on a straight line basis over the term of the relevant lease.
Future minimum lease payments under non-cancellable operating leases fall due as follows:
2011
$ million
2010
$ million
31
22
18
15
11
13
110
19
12
6
2
39
30
25
19
18
14
21
127
23
10
5
1
39
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
122
262189_pp112-pp128.indd 122
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued 24 Other Notes to the accounts
24.1 Share based payments
Accounting policy
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.
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, Belgium, 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 Italy, the Netherlands and France are able to participate respectively in 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”. These
plans have now reached the end of their ten year life and resolutions will be put to shareholders at the Annual General Meeting on 12 April 2012 to
renew these 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 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), the Smith & Nephew 2004 Executive Share Option Plan (adopted by shareholders
on 6 May 2004) and the Smith & Nephew Global Share Plan 2010 (adopted by shareholders on 6 May 2010) are together termed the “Executive
Plans”.
Under the terms of the Executive Plans, the Remuneration Committee, consisting of Non-Executive Directors, may at their discretion 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”) and the Smith & Nephew 2004 Executive Share Option Plan are to acquire ADSs or Ordinary Shares. 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. For the Global Share Plan adopted in 2010 the market value is the closing price of an Ordinary Share or ADS on the last
trading day prior to the grant date. With the exception of options granted under the 2001 US Plan and the Global Share Plan 2010, the vesting of
options granted from 2001 are subject to achievement of a performance condition. Options granted under the 2001 US Plan and the Global Share
Plan 2010 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 was open to certain employees outside the US and the US Plan is open to certain employees in the
US, Canada, Mexico and Puerto Rico. The Global Share Plan 2010 is open to employees globally. The 2004 Plan is open to Executive Directors only.
The maximum term of options granted, under all plans, is 10 years from the date of grant. All share option plans are settled in shares.
262189_pp112-pp128.indd 123
123
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management At 31 December 2011 27,316,000 (2010 – 25,753,000, 2009 – 23,383,000) 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 2009
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2009
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2010
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2011
Options exercisable at 31 December 2011
Options exercisable at 31 December 2010
Options exercisable at 31 December 2009
Executive Plans:
Outstanding at 1 January 2009
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2009
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2010
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2011
Options exercisable at 31 December 2011
Options exercisable at 31 December 2010
Options exercisable at 31 December 2009
3,533
1,563
(680)
(1,029)
(4)
3,383
986
(364)
(625)
(22)
3,358
1,090
(122)
(602)
(144)
3,580
122
87
109
18,148
5,849
(1,348)
(1,754)
(895)
20,000
6,249
(977)
(2,386)
(491)
22,395
5,706
(763)
(2,369)
(1,233)
23,736
7,979
5,153
6,668
321.0 – 640.0
380.0 – 519.0
321.0 – 640.0
321.0 – 507.0
321.0 – 600.5
348.0 – 640.0
459.0 – 556.0
348.0 – 609.0
348.0 – 576.5
348.0 – 640.0
348.0 – 640.0
452.0 – 585.0
348.0 – 609.0
348.0 – 576.5
380.0 – 609.0
348.0 – 640.0
348.0 – 640.0
425.0 – 576.5
348.0 – 498.0
183.5 – 680.5
448.0 – 595.0
409.5 – 680.5
183.5 – 637.8
185.8 – 574.5
265.0 – 637.5
424.0 – 675.0
479.0 – 680.5
265.0 – 637.5
418.0 – 637.8
409.5 – 680.5
580.0 – 703.0
479.0 – 637.8
445.0 – 680.5
445.0 – 637.8
409.5 – 703.0
409.5 – 680.5
409.5 – 627.0
265.0 – 637.5
427.4
381.6
436.1
362.7
427.9
422.7
462.2
439.8
435.2
431.7
430.1
454.8
427.6
454.7
450.7
432.8
470.8
466.5
362.4
592.5
477.0
565.9
428.3
492.8
547.1
520.9
581.3
479.2
575.6
544.9
599.4
565.5
536.6
549.7
561.2
595.6
548.3
532.0
The weighted average remaining contractual life of options outstanding at 31 December 2011 was 6.6 (2010 – 6.1 years, 2009 – 5.9 years) years for
Executive Plans and 2.6 (2010 – 2.7 years, 2009 – 2.7 years) years for Employee Plans.
Weighted average share price
124
2011
pence
639.9
2010
pence
619.3
2009
pence
504.0
262189_pp112-pp128.indd 124
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued Options granted during the year were as follows:
Employee Plans
Executive Plans
Weighted
average fair
value per
option at
grant date
Pence
189.2
176.1
Weighted
average
share
price at
grant date
Pence
591.0
609.0
Options
granted
Thousand
1,090
5,706
Weighted
average
exercise
price
Pence
454.8
599.4
Weighted
average
option life
Years
3.9
10.0
The weighted average fair value of options granted under employee plans during 2010 was 170.2p (2009 – 212.0p) and those under executive
plans during 2010 was 173.7p (2009 – 147.9p).
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 consider 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 is used for executive plans so that proper allowance is made for the possibility of early exercise. At the 2011 grant management
expected 90% of the options granted under the Global Share Plan 2010 to vest (2010 – 90%, 2009 – n/a), 90% of the 2004 Executive Scheme to
vest (2010 – 90%, 2009 – 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:
Dividend yield (%)
Expected volatility (%) (i)
Risk free interest rate (%) (ii)
Expected life in years (iii)
Employee plans
Executive plans
2011
1.5
30.0
2.0
3.9
2010
1.5
30.0
2.5
3.9
2009
1.5
30.0
3.3
3.9
2011
1.5
30
2.0
10.0
2010
1.5
30.0
2.5
9.8
2009
1.5
30.0
3.3
6.8
(i) Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options.
(ii) 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% (2010 – 5%, 2009 – 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% (2010 – 50%, 2009 – 50%) of Executive Plan option holders are assumed
to exercise by choice per annum providing the gain available is at least 50% for the options granted to executives and 25% for other recipients under the Global Share Plan 2010 (2010 – 50% for the 2004 Plan and
50% for the options granted to executives and 25% for other recipients under the Global Share Plan 2010, 2009 – 50% for the 2004 Plan and 25% for the 2001 Plans).
Summarised information about options outstanding under the share option plans at 31 December 2011 is as follows:
Employee Plans:
348.0p to 639.9p*
639.9p* to 640.0p
Executive Plans:
409.5p to 639.9p*
639.9p* to 703.0p
Number outstanding
Thousand
Weighted average
remaining
contract life
Years
3,577
3
3,580
23,628
108
23,736
2.6
0.3
2.6
6.6
3.0
6.6
* The split has been determined based on the weighted average share price of 639.9p.
As at 31 December 2011 nil (2010 – nil, 2009 – 77,669) options remain outstanding under the 1999 and 2000 Stock Appreciation Rights Plan. The fair
value liability related to these schemes was $nil in 2011, 2010 and 2009. This was materially the same as intrinsic value.
262189_pp112-pp128.indd 125
125
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Share based payments – long-term incentive plans
In 2004, a 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.
From 2009, the CIP was replaced by the Deferred Bonus Plan. This plan is designed to encourage 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.
From 2010, Performance Share awards are granted under the Global Share Plan 2010 for all executives other than Executive Directors. Awards
granted under both plans are combined to provide the figures below. Vesting of the share awards is dependent upon performance relative to the
FTSE 100 and an index based on major international companies in the medical devices industry.
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. Performance Share awards under both the PSP and Global Share Plan 2010 contain 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 40% (2010 – 35%, 2009 – 30%) has been assumed with the constituents of the
group. A correlation of 40% (2010 – 35%, 2009 – 30%) has also been assumed for the companies in the medical devices sector as they are
impacted by similar factors. The Performance Target for the Global Share Plan 2010 is a combination of EPSA growth and the Group’s Total
Shareholder Return (“TSR”) performance over the three year performance period.
The other assumptions used are consistent with the executive scheme assumptions disclosed in Note 24.1 (a).
At 31 December 2011 the maximum number of shares that could be awarded under the Group’s long-term incentive plans was:
Outstanding at 1 January 2009
Awarded
Vested
Forfeited
Outstanding at 31 December 2009
Awarded
Vested
Forfeited
Outstanding at 31 December 2010
Awarded
Vested
Forfeited
Outstanding at 31 December 2011
Other Awards
PSP
Deferred
Bonus Plan
CIP
Number of shares in thousands
–
–
–
–
–
–
–
–
–
838
(44)
–
794
3,817
2,372
(334)
(975)
4,880
2,386
(501)
(753)
6,012
2,282
(366)
(1,660)
6,268
750
–
(99)
(206)
445
–
(116)
(132)
197
–
–
(197)
–
–
305
(7)
(6)
292
338
(101)
(7)
522
351
(375)
(6)
492
Total
4,567
2,677
(440)
(1,187)
5,617
2,724
(718)
(892)
6,731
3,471
(785)
(1,863)
7,554
Other Awards mainly comprises of conditional share awards granted under the Global Share Plan 2010.
The weighted average remaining contractual life of awards outstanding at 31 December 2011 was 1.2 years (2010 – 1.8 years, 2009 – 1.8 years) for
the PSP, 1.7 years (2010 – 1.9 years, 2009 – 2.2 years) for the Deferred Bonus Plan and 1.5 years for the other awards. There were no awards
outstanding under the CIP, the remaining contractual life of awards under the CIP was 0.2 years for 2010 and 0.7 years for 2009.
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 payments expense for the year
126
2011
$ million
9
21
30
2010
$ million
5
16
21
2009
$ million
2
16
18
262189_pp112-pp128.indd 126
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
Under the Executive Plans, PSP and CIP the number of Ordinary Shares over which options and share awards 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.
24.2 Related party transactions
Trading transactions
In the course of normal operations, the Group traded with its associates detailed in Note 11. The aggregated transactions, which have not been
disclosed elsewhere in the financial statements, are summarised below:
Sales to the associates
Purchases from the associates
2011
$ million
8
4
2010
$ million
8
4
2009
$ million
7
4
All sale and purchase transactions occur on an arm’s length basis.
Key management personnel
The remuneration of executive officers (including Non-Executive Directors) during the year is summarised below:
Short-term employee benefits
Share-based payments expense
Pension and post-employment benefit entitlements
Termination benefits
2011
$ million
2010
$ million
2009
$ million
19
9
1
1
30
13
3
1
–
17
14
6
1
–
21
24.3 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 Orthopedics GmbH
Smith & Nephew GmbH
Smith & Nephew Orthopedics Hellas SA
Smith & Nephew Limited
Smith & Nephew Srl
Smith & Nephew Nederland CV
Smith & Nephew A/S
Smith & Nephew Sp Zoo
Smith & Nephew Lda
Smith & Nephew SAU
Smith & Nephew AB
Smith & Nephew Orthopaedics AG
Activity
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
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Country of operation and
incorporation
England & Wales
England & Wales
England & Wales
Austria
Belgium
Denmark
Finland
France
Germany
Germany
Greece
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Spain
Sweden
Switzerland
262189_pp112-pp128.indd 127
127
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Company Name
USA:
Smith & Nephew Inc.
Africa, Asia, Australasia and Other America:
Smith & Nephew Pty Limited
Smith & Nephew Inc.
Smith & Nephew (Alberta) Inc.
Tenet Medical Engineering Inc.
Smith & Nephew Medical (Shanghai) Limited
Smith & Nephew Medical (Suzhou) Limited
Smith & Nephew Orthopaedics (Beijing) 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
Activity
Country of operation and
incorporation
Medical Devices
United States
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
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Australia
Canada
Canada
Canada
China
China
China
Hong Kong
India
Japan
Korea
Malaysia
Mexico
New Zealand
Puerto Rico
Singapore
South Africa
Thailand
United Arab Emirates
128
262189_pp112-pp128.indd 128
24/02/2012 21:15
Accounts and other informationSmith & Nephew Annual Report 2011Notes to the Group accounts continued
Independent auditor’s report for the Company
Independent Auditor’s 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 2011 which comprise the Parent company
balance sheet and the related notes 1 to 10. 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.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibility Statement set out on page 79, 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 and express an opinion on 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.
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 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.
Opinion on accounts
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 2011;
– 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.
Opinion on other matters prescribed by the Companies Act 2006
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.
Matters on which we are required to report by exception
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.
Other matter
We have reported separately on the Group accounts of Smith & Nephew plc for the year ended 31 December 2011.
Les Clifford (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
22 February 2012
262189_pp129-pp155.indd 129
129
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Company Balance Sheet
Fixed assets:
Investments
Current assets:
Debtors
Cash and bank
Creditors: amounts falling due within one year:
Borrowings
Other creditors
Provisions due in less than one year
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
At 31 December 2011
$ million
At 31 December 2010
$ million
Notes
3
4
7
7
5
6
7
8
8
8
8
8
8
3,598
2,145
25
2,170
(245)
(1,607)
(5)
(1,857)
313
3,911
–
3,911
191
413
2,266
(766)
(52)
1,859
3,911
3,598
2,523
21
2,544
(1)
(1,675)
–
(1,676)
868
4,466
(623)
3,843
191
396
2,266
(778)
(52)
1,820
3,843
The accounts were approved by the Board and authorised for issue on 22 February 2012 and signed on its behalf by:
Sir John Buchanan
Chairman
Olivier Bohuon
Chief Executive Officer
Adrian Hennah
Chief Financial Officer
130
262189_pp129-pp155.indd 130
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011
Notes to the Company accounts
Basis of preparation
1
The separate accounts of the 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 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 84 to 128.
The 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 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.
Foreign currencies
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.
Deferred taxation
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.
Results for the year
2
As permitted by section 408(4) of the Companies Act 2006, the Company has not presented its own profit and loss account. Profit for the year was
$166m (2010: $157m).
Investments
3
Accounting policy
Investments in subsidiaries are stated at cost less provision for impairment.
At 1 January 2011 and 31 December 2011
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 24.3 of the Notes to the Group accounts for the principal trading and manufacturing subsidiary undertakings of the Group.
4
Debtors
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Current asset derivatives – forward foreign exchange contracts
Current taxation
2011
$ million
2,113
5
25
2
2,145
2010
$ million
2,514
6
3
–
2,523
131
262189_pp129-pp155.indd 131
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Notes to the Company accounts continued
5
Other creditors
Amounts falling due within one year:
Amounts owed to subsidiary undertakings
Other creditors
Current taxation
Current liability derivatives – forward foreign exchange contracts
2011
$ million
1,574
8
–
25
1,607
2010
$ million
1,646
14
12
3
1,675
Provisions due in less than one year
6
During quarter four of 2011, a provision of $5m was established by Smith & Nephew plc in connection with the previously disclosed
investigation by the U.S. Securities and Exchange Commission (“SEC”) into potential violations of the U.S. Foreign Corrupt Practices Act
in the medical devices industry. On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC in
connection with this matter. Smith & Nephew has committed to pay slightly less than $23m in fines and profit disgorgement, maintain
an enhanced compliance programme, and appoint an independent monitor for at least 18 months to review and report on its compliance
programme. Of this total amount of slightly less than $23m, $5.4m specifically relates to profit disgorgement imposed by the SEC on
Smith & Nephew plc.
Cash and borrowings
7
Accounting policy
Financial instruments
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.
Bank loans and overdrafts due within one year or on demand
Bank loans due after one year
Borrowings
Cash and bank
Net debt
2011
$ million
245
–
245
(25)
220
2010
$ million
1
623
624
(21)
603
All currency swaps are stated at fair value. Gross US Dollar equivalents of $112m (2010 – $61m) receivable and $112m (2010 – $61m) payable have
been netted. Currency swaps comprise foreign exchange swaps and were used in 2011 and 2010 to hedge intragroup loans.
8
Equity and reserves
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
At 31 December
132
2011
Share
Capital
$ million
191
–
–
–
Share
Premium
$ million
396
–
–
–
Capital
reserves
$ million
2,266
–
–
–
Treasury
Shares
$ million
(778)
–
–
–
Exchange
reserves
$ million
(52)
–
–
–
–
–
–
191
–
17
–
413
–
–
–
2,266
18
–
(6)
(766)
–
–
–
(52)
Profit and
loss
account
$ million
1,820
166
(146)
30
(11)
–
–
1,859
Total
share-
holders’
funds
$ million
3,843
166
(146)
30
7
17
(6)
3,911
2010
Total
share-
holders’
funds
$ million
3,779
157
(132)
21
8
15
(5)
3,843
262189_pp129-pp155.indd 132
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Further information on the share capital of the Company can be found in Note 20 of the Notes to the Group Accounts.
The total distributable reserves of the Company are $1,041m (2010 – $990m). 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 $166m (2010 – $157m).
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 3 of the Notes to the Group Accounts.
Share based payments
9
The 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 Company is detailed in Note 24 of the Notes to the Group accounts.
10
Contingencies
Guarantees in respect of subsidiary undertakings
2011
$ million
42
2010
$ million
33
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. The Company has provided guarantees to the Trustees of the pension plans to support future amounts
due from participating employers (see Note 19 of the Notes to the Group Accounts).
262189_pp129-pp155.indd 133
133
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Group information
Group Information
Business overview and Group history
Property, plant and equipment
Contractual obligations
Off balance sheet arrangements
Related party transactions
135
135
136
136
136
134
262189_pp129-pp155.indd 134
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Business overview and Group history
Smith & Nephew’s operations are organised into three primary business units that operate globally: Orthopaedics, Endoscopy and Advanced
Wound Management.
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, UK
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 across the globe, including
various medical devices, personal care products and traditional and advanced woundcare treatments. In 1998, Smith & Nephew announced a
major restructuring to focus management attention and investment on three global business units – advanced 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 carries out business around the world.
Property, plant and equipment
The table below summarises the main properties which the Group uses and their approximate areas.
Group head office in London, UK
Group research facility in York, UK
Orthopaedics headquarters and manufacturing facilities in Memphis, Tennessee, US
Orthopaedics distribution facility in Memphis, Tennessee, US
Orthopaedics manufacturing facility in Aarau, Switzerland
Orthopaedics manufacturing facility in Beijing, China (Linhe)
Orthopaedics manufacturing facility in Beijing, China
Orthopaedics manufacturing and warehouse facility in Warwick, UK
Orthopaedics manufacturing and warehouse facility in Tüttlingen, Germany
Orthopaedics and Endoscopy distribution facility and Orthopaedics European headquarters in Baar, Switzerland
Orthopaedics – Biologics/ Global Operations headquarters in Durham, North Carolina, US
Endoscopy headquarters in Andover, Massachusetts, US
Endoscopy manufacturing facility in Mansfield, Massachusetts, US
Endoscopy manufacturing and distribution facility in Oklahoma City, Oklahoma, US
Advanced Wound Management headquarters and manufacturing facility in Hull, UK
Advanced Wound Management manufacturing facility in Gilberdyke, UK
Advanced Wound Management manufacturing facility in Suzhou, China
Advanced Wound Management manufacturing facility in Alberta, Canada
Advanced Wound Management US headquarters in St. Petersburg, Florida, US
Approximate area
(Square feet 000’s)
15
84
971
210
121
23
192
90
64
73
27
144
98
155
439
51
144
76
44
The Group Global Operations strategy includes on-going assessment of the optimal facility footprint. The Orthopaedics headquarters and
manufacturing facilities in Memphis, Tennessee are largely freehold, a portion of Tuttlingen and the Advanced Wound 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.
262189_pp129-pp155.indd 135
135
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Group information continued
Contractual obligations
Contractual obligations at 31 December 2011 were as follows:
Debt obligations
Finance lease obligations
Operating lease obligations
Retirement benefit obligation
Purchase obligations
Capital expenditure
Other
Payments due by period
Total
$ million
Less than
1 year
$ million
1-3 years
$ million
3-5 years
$ million
More than
5 years
$ million
304
18
149
71
–
9
23
574
303
3
50
71
–
9
15
451
1
3
58
–
–
–
8
70
–
4
28
–
–
–
–
32
–
8
13
–
–
–
–
21
Other contractual obligations represent $12m of foreign exchange contracts and $11m of acquisition consideration. Provisions that do not relate to
contractual obligations are not included in the above table.
The agreed contributions for 2012 in respect of the Group’s defined benefits plans are: $37m for the UK (including $29m of supplementary
payments), $27m for the US plan and $7m for other funded defined benefit plans. The table above does not include amounts payable in respect of
2013 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 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 service contracts between the Company and its Executive Directors which provide for the
automatic payment of a bonus following loss of office or employment occurring because of a successful takeover bid. Further details are set out on
page 72.
The Company does not have contracts or other arrangements which individually are essential to the business.
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 24 of Notes to the Group Accounts), no other related party had material transactions or loans with
Smith & Nephew over the last three financial years.
136
262189_pp129-pp155.indd 136
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Investor information
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
138
140
143
145
147
149
151
153
155
* A graph showing total shareholder return can be found in the Directors’ Remuneration Report on page 76.
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.
262189_pp129-pp155.indd 137
137
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Shareholder return
Dividends
Dividend history
Smith & Nephew has paid dividends on its Ordinary Shares in every year since 1937. 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.
An interim dividend in respect of each fiscal year is normally declared in August and paid in November. A final dividend will be recommended by
the Board of Directors and paid subject to approval by shareholders at the Company’s Annual General Meeting.
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
Final/Second interim (ii)
Total
US cents per share:
Interim
Final/Second interim (ii)
Total
(i) Translated at the Bank of England rate on 21 February 2012.
(ii) 2006 to 2009 Second interim, 2010 Final.
Years ended 31 December
2011
2010
2009
2008
2007
4.639
7.585(i)
12.224
7.333
12.000
19.333
4.233
6.639
10.872
6.667
10.911
17.578
3.650
6.494
10.144
6.067
9.922
15.989
3.194
6.194
9.388
5.511
9.022
14.533
2.450
4.059
6.509
5.011
8.200
13.211
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 2011 final dividend will be payable on 9 May 2012, subject to shareholder approval.
In respect of the final dividend for the year ended 31 December 2011 of 10.80 US cents per Ordinary Share, the record date will be 20 April 2012
and the payment date will be 9 May 2012. 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 20 April 2012. The Ordinary Shares will trade ex-
dividend on both the London and New York Stock Exchanges from 18 April 2012.
138
262189_pp129-pp155.indd 138
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 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).
Ordinary Shares
Year ended 31 December:
2007
2008
2009
2010
2011
Quarters in the year ended 31 December:
2010:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2011:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2012:
1st Quarter (to 21 February 2012)
Last Six Months:
August 2011
September 2011
October 2011
November 2011
December 2011
January 2012
February 2012 (to 21 February 2012)
High
£
6.50
6.91
6.42
6.97
7.42
6.97
6.95
6.16
6.86
7.42
7.15
6.87
6.26
6.43
6.30
6.27
5.87
5.93
6.26
6.26
6.43
Low
£
5.33
4.13
4.20
5.38
5.21
6.25
6.05
5.38
5.43
6.50
6.35
5.21
5.41
ADSs
High
US$
67.84
68.87
51.38
53.94
60.19
53.23
53.94
47.45
52.52
60.19
58.18
55.30
48.15
Low
US$
51.54
30.39
30.57
41.29
42.17
48.98
43.26
41.29
43.09
50.83
51.11
42.17
42.68
5.95
51.13
45.57
5.21
5.71
5.57
5.41
5.75
5.95
6.13
51.64
50.31
46.89
46.89
48.15
48.89
51.13
42.17
43.68
42.68
42.76
44.21
45.57
48.47
262189_pp129-pp155.indd 139
139
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Information for shareholders
Financial Calendar
Annual General Meeting
Quarter One results
Payment of 2011 final dividend
Half year results announced
Quarter Three results announced
Payment of 2012 first interim dividend
Full year results announced
Annual Report available
Annual General Meeting
(i) Dividend declaration dates.
Ordinary shareholders
12 April 2012
3 May 2012
9 May 2012
2 August 2012 (i)
1 November 2012
November 2012
February 2013 (i)
February/March 2013
April/May 2013
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.
Shareholder facilities:
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 e-mail 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.
Payment of dividends direct to your bank or building
society account
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).
Dividend re-investment plan (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).
Individual savings account (ISA)
Shareholders who are UK resident may 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).
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, press releases, institutional presentations and audio webcasts
are also available on the website.
The Company sends paper copies of the Notice of Annual General
Meeting and 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 Notice of Annual General
Meeting 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, which the Company provides free of
charge. The Company will continue to send to Ordinary shareholders
by post the Form of Proxy and an accompanying letter notifying them of
the availability of the Annual Report and Notice of Annual General
Meeting on the Group’s website. Shareholders who elect to receive the
Annual Report and 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.
140
262189_pp129-pp155.indd 140
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Investor communications
The Company maintains regular dialogue with individual institutional
shareholders, 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.
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.
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.
ADS enquiries
All enquiries regarding ADS holder accounts and payment of dividends
should be addressed to:
The Bank of New York Mellon, 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
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 & Nephew ADS price
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.
ADS payment information
The Company hereby discloses ADS payment information for the year
ended 31 December 2011 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, including
payment of dividends by the Company 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 fee for those services are paid.
262189_pp129-pp155.indd 141
141
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Information for shareholders continued
Persons depositing or withdrawing shares must pay:
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
$0.02 (or less) per ADS
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
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
Any cash distribution to ADS registered holders, including payment of
dividend
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
A fee of 2 US cents per ADS was paid on the 2010 final dividend and a fee of 1 US cent per ADS was deducted from the 2011 first interim dividend
paid in November. In the period 1 January 2011 to 21 February 2012 the total reimbursed by The Bank of New York Mellon was $148,885.
142
262189_pp129-pp155.indd 142
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 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 Officer, although the Board reserves the right to transfer them
to another member of the Board should it so wish.
Shareholdings
As at 21 February 2012, 7,864,895 ADSs equivalent to 39,324,475
Ordinary Shares or approximately 4.1% of the total Ordinary Shares in
issue, were outstanding and were held by 93 registered holders.
As at 21 February 2012, to the knowledge of the Group, there were
19,830 registered holders of Ordinary Shares, of whom 82 had
registered addresses in the US and held a total of 72,735 Ordinary
Shares (less than 0.1% of the total issued). Because certain Ordinary
Shares are registered in the names of nominees, 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.
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 21 February 2012, 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:
As at 31 December
Invesco
BlackRock, Inc.
Newton Investment Management Limited
Legal and General Group plc
Capital Group of Companies Inc.
FMR LLC
Thornburg Investment Management Inc.
Invesco
BlackRock, Inc.
Newton Investment Management Limited
Legal and General Group plc
Capital Group of Companies Inc.
FMR LLC
Thornburg Investment Management Inc.
21 February 2012
%
5.0
5.0
5.0
4.0
–
–
–
21 February 2012
’000
44,901
44,811
44,337
35,676
–
–
-
2011
%
5.0
5.0
5.0
4.0
0.7
–
–
As at 31 December
2011
’000
44,901
44,811
44,337
35,676
6,138
–
–
2010
%
–
5.0
5.0
5.0
5.1
–
4.1
2010
’000
–
44,322
44,735
44,704
44,594
–
36,164
2009
%
–
–
5.1
4.0
5.1
3.9
4.8
2009
’000
–
–
45,129
35,329
44,594
34,101
44,852
In addition to the above, the Company is aware that Walter Scott & Partners Limited held approximately 38m Ordinary Shares (4.2%) at
21 February 2012.
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.
262189_pp129-pp155.indd 143
143
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Share capital continued
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
12 April 2012. As at 31 December 2011, 68,240,200 (2010 – 68,240,200)
ordinary shares had been purchased under the share buy-back
programme that commenced in February 2007. No shares were
purchased in 2011, 2010 or 2009.
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 country recorded in the register of members, with the
exception of details of the Company’s dividend re-investment plan,
which are not sent to shareholders with recorded addresses in the US
and Canada.
144
262189_pp129-pp155.indd 144
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 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
Other finance (costs)/income
Share of results of associates
Profit before taxation
Taxation
Attributable profit for the year
Earnings per Ordinary Share
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
Taxation on excluded items
Adjusted attributable profit
Adjusted basic earnings per Ordinary Share (“EPSA”) (i)
Adjusted diluted earnings per Ordinary Share (ii)
2011
$ million
2010
$ million
2009
$ million
2008
$ million
2007
$ million
4,270
(1,140)
3,130
(2,101)
(167)
862
(8)
(6)
–
848
(266)
582
65.3¢
65.0¢
582
–
40
23
36
(17)
664
74.5¢
74.2¢
3,962
(1,031)
2,931
(1,860)
(151)
920
(15)
(10)
–
895
(280)
615
69.3¢
69.2¢
615
–
15
–
34
(10)
654
73.6¢
73.6¢
3,772
(1,030)
2,742
(1,864)
(155)
723
(40)
(15)
2
670
(198)
472
53.4¢
53.3¢
472
26
42
–
66
(26)
580
65.6¢
65.5¢
3,801
(1,077)
2,724
(1,942)
(152)
630
(66)
(1)
1
564
(187)
377
42.6¢
42.4¢
377
61
34
–
51
(30)
493
55.6¢
55.4¢
3,369
(994)
2,375
(1,740)
(142)
493
(30)
6
–
469
(153)
316
34.2¢
34.1¢
316
111
42
30
30
(49)
480
52.0¢
51.7¢
(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.
262189_pp129-pp155.indd 145
145
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Selected financial data continued
Group balance sheet
Non-current assets
Current assets
Assets held for sale
Total assets
Share capital
Share premium
Treasury shares
Retained earnings and other reserves
Total equity
Non-current liabilities
Current liabilities
Liabilities directly associated with assets held for sale
Total liabilities
Total equity and liabilities
Group cash flow statement
Cash generated from operations
Net interest paid
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
New finance leases
Facility fee paid
Borrowings and finance leases acquired
Proceeds from own shares
Equity dividends paid
Issue of ordinary capital and treasury shares purchased
Exchange adjustments
Opening (net debt)/net cash
Closing net debt
Selected financial ratios
2011
$ million
2010
$ million
2009
$ million
2008
$ million
2007 (iv)
$ million
2,542
2,080
125
4,747
191
413
(766)
3,349
3,187
422
1,119
19
1,560
4,747
1,135
(8)
(285)
842
(321)
(33)
–
–
–
–
7
(146)
11
360
(6)
(492)
(138)
2,579
2,154
–
4,733
191
396
(778)
2,964
2,773
1,046
914
–
1,960
4,733
1,111
(17)
(235)
859
(307)
–
–
–
–
–
8
(132)
10
438
13
(943)
(492)
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
(21)
(1,332)
(943)
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)
(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)
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
(iii) The Board has proposed a final dividend of 10.80 US cents per share which together with the first interim dividend of 6.60 US cents makes a total for 2011 of 17.40 US cents.
(iv) Restated due to Plus opening balance sheet adjustments.
4%
17.40¢
3.9%
43%
14.39¢
4.1%
18%
15.82¢
3.8%
8.0%
8.4%
8.0%
78%
13.08¢
4.0%
72%
11.89¢
4.2%
7.7%
5.9%
146
262189_pp129-pp155.indd 146
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Taxation information for shareholders
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 Shares not in ADS form. The comments address the material
US and UK tax consequences generally applicable to a person who is
the beneficial owner of ADSs or Ordinary Shares and who, for US
federal income tax purposes, is a citizen or resident of 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 (i) persons whose holding of ADSs or Ordinary Shares is
effectively connected with or pertains to either a permanent
establishment in the United Kingdom through which a US Holder
carries on a business in the United Kingdom or a fixed base from which
a US Holder performs independent personal services in the United
Kingdom, or (ii) persons 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 their own tax advisors as to the particular tax
consequences to them of the ownership of ADSs or Ordinary Shares.
The Company believes, and this discussion assumes, that the
Company was not a passive foreign investment company for its taxable
year ended 31 December 2011.
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 released before shares are
delivered to the depositary (“pre-released”) may be taking actions that
are inconsistent with the claiming of foreign tax credits by owners of
depositary shares. 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 availability of the reduced tax rate for dividends received by certain
non-corporate US Holders of ADSs 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 2013 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 the ADSs or Ordinary Shares are held in
connection with a trade carried on in the UK through a permanent
establishment (or in the case of 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 a
taxable sale or other disposition of ADSs or Ordinary Shares by US
Holders generally will be US source capital gains or losses and will be
long-term capital gains or losses if the ADSs or Ordinary Shares were
held for more than one year. The amount of a US Holder’s gain or loss
will be equal to the difference between the amount realised on the sale
or other 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.
262189_pp129-pp155.indd 147
147
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Taxation information for shareholders continued
A charge of stamp duty or SDRT at the rates of 1 ½% 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 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.
US information reporting and backup withholding
A US Holder may be subject to US information reporting and backup
withholding on dividends paid on or the proceeds of sales of ADSs or
Ordinary Shares made within the US or through certain US-related
financial intermediaries, unless the US Holder is an 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 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 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.
For taxable years ending after December 19, 2011, certain US Holders
who are individuals are required to report information relating to their
ownership of an interest in certain foreign financial assets, including
stock of a non-US person, subject to exceptions (including an exception
for stock held in custodial accounts maintained by US financial
institutions or by US branches of certain non-US financial institutions).
Certain US Holders that are entities may be subject to similar rules in
the future. US Holders are recommended to consult their own tax
advisors regarding the particular consequences, if any, of these
requirements on their ownership and disposition of the Ordinary
Shares or ADSs.
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 ½% 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 ½% (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 ½%, and this will apply
whether or not the transfer is affected in the United Kingdom and
whether or not the parties to it are resident or situated in the
United Kingdom.
148
262189_pp129-pp155.indd 148
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 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 articles of association and English law. This summary is
qualified in its entirety by reference to the Companies Act and the
Company’s 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
conclusion of 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. If not re-
appointed a Director retiring at a meeting shall retain office until the
meeting appoints someone in his place, or if it does not do so, until the
conclusion of the meeting. 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.
Under the Company’s articles of association and English law, a Director
may be indemnified out of the assets of the Company against liabilities
he may sustain or incur in the execution of his duties.
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 2011.
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 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 meetings at which there is a
quorum.
262189_pp129-pp155.indd 149
149
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Articles of association continued
– Special resolutions include resolutions amending the Company’s
articles of association, dis-applying 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 of 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 5% 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 nominal value of the issued
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 person or their proxy who hold 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;
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 US Dollars. 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
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 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 Officer 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.
150
262189_pp129-pp155.indd 150
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Cross Reference to Form 20-F
This table provides 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
H – Documents on Display
I – Subsidiary Information
Page
n/a
n/a
145-146
n/a
n/a
16-18
25, 135
3, 14, 16, 18, 30-40, 89-93
3, 30, 127-128, 156
135
None
19-40
25, 27
15
14, 27, 41
136
136
156
48-51, 55
64-76
48-56, 58, 72
45
45, 74-75, 123-127
143
143
127, 136
n/a
77-128
28-29
138
None
139, 143
n/a
143
n/a
n/a
n/a
n/a
149-150
25
144
147-148
n/a
n/a
156
127-128
151
262189_pp129-pp155.indd 151
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management
Cross Reference to Form 20-F continued
Item 11
Item 12
Item 12D
Part II
Item 13
Item 14
Item 15
Item 16
Item 16A
Item 16B
Item 16C
Item 16D
Item 16E
Item 16F
Item 16G
Iterm 16H
Part III
Item 17
Item 18
Item 19
Quantitative and Qualitative Disclosure about Market Risk
Description of Securities Other than Equity Securities
American Depository shares
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
(Reserved)
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committee
Purchase of Equity Securities by the Issuer and Affiliated Purchase
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
Page
16-18, 104-110
n/a
141-142
None
None
57, 63, 83
n/a
58
56
57, 60
n/a
144
None
52
n/a
n/a
77-128
152
262189_pp129-pp155.indd 152
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011
Glossary of terms
Unless the context indicates otherwise, the following terms have the meanings shown below:
Term
ACL
ADR
ADS
Advanced Wound Management
AGM
Arthroscopy
ASD
AWD
Basis Point
Chronic wounds
Company
Companies Act
DUROLANE
EBITA
EBITDA
EIP
Meaning
The anterior cruciate ligament (ACL) is one of the four major ligaments in the human knee.
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 the joints is termed “arthroscopy”, with the principal applications being the knee and
shoulder.
Advanced Surgical Devices division.
Advanced Wound Management division.
One hundredth of one percentage point.
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 2006, as amended, of England and Wales.
DUROLANE is a registered trademark of Q-MED AB.
Earnings before interest, tax and amortisation.
Earnings before interest, tax, depreciation and amortisation.
Earnings Improvement Programme or “EIP”, 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.
Emerging Markets
Emerging Markets include Greater China, India, Brazil and Russia.
EPSA
Endoscopy
Endoscopy products
ERP
Established Markets
Euro or €
External fixation
FDA
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 affects 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.
Endoscopy allows surgeons to operate through small 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.
Enterprise Resource Planning: a software system which integrates internal and external management
information, facilitating the flow of information across an organisation.
Established Markets include United States of America, Europe, Australia, New Zealand, Canada and
Japan.
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.
US Food and Drug Administration.
Financial statements
Refers to the consolidated Group Accounts of Smith & Nephew plc.
FTE
FTSE 100
Full Time Equivalent or “FTE” is a unit that indicates the workload of an employed person in a way that
makes workloads comparable across various contexts.
Index of the largest 100 listed companies on the London Stock Exchange by market capitalisation.
Glenohumeral joint
This is the main joint of the shoulder.
GMP
Good manufacturing practice or “GMP” is the guidance that outlines the aspects of production and testing
that can impact the quality of a product.
Group or Smith & Nephew
Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context
otherwise requires.
262189_pp129-pp155.indd 153
153
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management Glossary of terms continued
Term
HVAC
IFRIC
IFRS
International Markets
LSE
Meniscal repair
Meaning
Refers to heating, ventilation and air conditioning.
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.
International Markets include Middle East, North Africa, Southern Africa, Latin America, ASEAN, South
Korea and Eastern Europe.
London Stock Exchange.
Relates to a surgical procedure performed on the knee.
Metal-on-metal hip resurfacing
A less invasive surgical approach to treating arthritis in certain patients whereby only the surfaces of the
hip joint are replaced leaving the hip head substantially preserved.
Negative Pressure Wound Therapy 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.
Orthobiologics products
Any product that is primarily intended to act as a scaffold and/or actively stimulates bone growth.
Orthopaedic products
OXINIUM
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 frames. Clinical therapies products include joint fluid therapy for pain reduction of the
knee and an ultrasound treatment to accelerate the healing of bone fractures.
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 Company
Smith & Nephew plc.
Pound Sterling, Sterling, £,
pence or p
References to UK currency. 1p is equivalent to one hundredth of £1.
Repair
Resection
SUPARTZ
Trading profit
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.
SUPARTZ is a registered trademark of Seikagaku Corp.
Trading profit is a trend which presents the long-term profitability of the Group excluding the impact of
specific transactions that management considers affects 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.
Traditional woundcare
Product group comprising medical textile products, adhesive tapes and fixative sheets to secure wound
management products to the body.
UK
UK GAAP
US
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.
Accounting principles generally accepted in the United States of America.
Products within endoscopy comprising digital cameras, light sources, monitors, scopes, image capture,
central control and multimedia broadcasting systems for use in endoscopic surgery with visualisation.
An area of healthy dermal and epidermal tissue of a wound.
US GAAP
Visualisation
Wound bed
154
262189_pp129-pp155.indd 154
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011 Index
2010 Financial highlights
2011 Financial highlights
Accountability, Audit and Internal Control Framework
Accounting Policies
Accounts Presentation
Acquisitions
Acquisition related costs
Advanced Wound Management – Business segment review
American Depository Shares
Articles of Association
Assets held for sale
Audit fees
Board
Business overview
Business Review
Business segment information
Cash and borrowings
Chairman’s statement
Chief Executive Officer’s statement
Company Auditor’s Report
Company Balance Sheet
Company Notes to the Accounts
Contingencies
Contractual obligations
Corporate Governance Statement
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/People
Employees’ Share Trust
Endoscopy – Business segment review
Exchange and interest rate risk and financial instruments
Executive officers
Factors affecting results of operations
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 history
26
22
57, 60
88
88
121
93
38
141, 143
149
122
57, 94
48
2, 4, 135
14
89
104
6
8
129
130
131
112
136
52
28
151
88
110
64
78
79
119, 138
2, 96
43
119
35
15
50
16
107
25
20
153
98
46
85
86
135
Group Income Statement
Group Notes to the Accounts
Group overview
Group Statement of Changes in Equity
Group Statement of Comprehensive Income
Independent Auditor’s Reports
Information for shareholders
Intangible assets
Intellectual property
Interest
Inventories
Investments
Investment in associates
Investor information
Key Performance Indicators
Leases
Legal proceedings
Manufacturing, supply and distribution
New accounting standards
Off-Balance Sheet arrangements
Operating profit
Orthopaedics – Business segment review
Other finance (costs)/income
Outlook and trend information
Parent Company accounts
Payables
People/Employees
Principal subsidiary undertakings
Provisions
Property, plant and equipment
Receivables
Recent developments
Regulation
Related party transactions
Research and development
Restructuring and rationalisation expenses
Retirement benefit obligation
Risk factors
Risk management
Sales and marketing
Selected financial data
Share based payments
Share capital
Shareholder return
Strategy
Sustainability
Taxation
Taxation information for shareholders
Treasury shares
262189_pp129-pp155.indd 155
84
88
2
87
84
80, 82
140
100
15
95
102
101
102
137
11
107, 122
28
14
89
136
93
31
95
41
129
104
43
127
112
97, 135
103
22
18
127, 136
15, 23, 93
94
113
16
12
14
145
123
118, 143
138
10
42
23, 95
147
119
155
24/02/2012 21:16
Accounts and other informationSmith & Nephew Annual Report 2011Accounts and other informationBusiness ReviewCorporate GovernanceOverviewStrategy, KPIs & Risk management For Smith & Nephew, these factors include: economic and financial
conditions in the markets we serve, especially those affecting health care
providers, payers and customers; price levels for established and
innovative medical devices; developments in medical technology;
regulatory approvals, reimbursement decisions or other government
actions; product defects or recalls; litigation relating to patent or other
claims; legal compliance risks and related investigative, remedial or
enforcement actions; strategic actions, including acquisitions and
dispositions and our success in integrating acquired businesses; and
numerous other matters that affect us or our markets, including those of a
political, economic, business or competitive nature. Specific risks faced by
the Group are described under “Risk factors” on pages 16 to 18 of this
Annual Report. Any forward-looking statement is based on information
available to Smith & Nephew as of the date of the statement. All written or
oral forward-looking statements attributable to Smith & Nephew are
qualified by this caution. Smith & Nephew does not undertake any
obligation to update or revise any forward-looking statement to reflect any
change in circumstances or in Smith & Nephew’s expectations.
Segment data
Segment data and segment 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.
About Smith & Nephew
The Smith & Nephew Group (the “Group”) is a global medical devices
business operating in the markets for orthopaedic reconstruction and
trauma, endoscopy (which includes arthroscopic procedures referred to as
sports medicine) and advanced wound management, with revenue of
approximately $4 billion in 2011. Smith & Nephew plc (the “Company”) is
the parent company of the Group. It is an English public limited company
with its shares listed on the premium list of the UK Listing Authority and
traded on the London Stock Exchange. Shares are also traded on the New
York Stock Exchange in the form of American Depositary Shares (“ADSs”).
This is the Annual Report of Smith & Nephew plc for the year ended
31 December 2011. 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”).
Smith & Nephew operates on a worldwide basis and has distribution
channels in over 90 countries. In the more established countries by
revenue, the Group’s business operations are organised by Business
segments. In the majority of the remaining markets, operations are
managed by country managers who are responsible for sales and
distribution of the Group’s entire product range. These comprise the
Emerging Markets and International Markets.
Smith & Nephew’s corporate website, www.smith-nephew.com, gives
additional information on the Group, including an electronic version of this
Annual Report. Information made available on this website, or other
websites mentioned in this Annual Report, are not, and should not be
regarded as being, part of or incorporated into this Annual Report.
For the convenience of the reader, a Glossary of technical and financial
terms used in this document is included on pages 153 to 154. 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 Group.
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 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
Bank of England exchange rate on the date indicated. On 21 February 2012,
the Bank of England rate was US$1.582 per £1.
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 companies with functional currency other than US
Dollars. The currencies which most influenced these translations in the
years covered by this report were Sterling, Swiss Franc and the Euro.
The Accounts of the Group in this Annual Report are presented in millions
(“m”) unless otherwise indicated.
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, contain “forward-looking statements” within the
meaning of the US Private Securities Litigation Reform Act of 1995, that may
or may not prove accurate. In particular, statements regarding expected
revenue growth and trading profit margins discussed under “Outlook and
Trend Information”, market trends and our product pipeline are forward-
looking statements. Phrases such as “aim”, “plan”, “intend”, “anticipate”,
“well-placed”, “believe”, “estimate”, “expect”, “target”, “consider” and similar
expressions are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual results, to
differ materially from what is expressed or implied by the statements.
156
262189_pp156-IBC.indd 156
24/02/2012 21:16
Smith & Nephew Annual report 2011 The inks used are renewable, biodegradable and emit fewer Volatile Organic Compounds (VOC’s) than mineral-oil inks.
They are based on high levels of renewable raw materials such as vegetable oils and naturally occurring resin.
The inks do not contain any toxic heavy metals and therefore, do not pose a problem if placed in landfill.
Designed by Radley Yeldar
Printed by RR Donnelley 262189
Smith & Nephew Annual report 2011
262189_pp156-IBC.indd 157
24/02/2012 21:16
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
1
Annual Report 2011
Smith & Nephew plc
15 Adam Street
London WC2N 6LA
United Kingdom
T +44 (0) 20 7401 7646
F +44 (0) 20 7960 2350
www.smith-nephew.com
262189_cover.indd 1
24/02/2012 20:27