Supporting healthcare
professionals for over 150 years
ANNUAL REPORT 2013
SMITH & NEPHEW ANNUAL REPORT 2013
Contents
2
42
86
Innovation
Trust
Performance
GROUP STRATEGIC REPORT*
CORPORATE GOVERNANCE
Our Board of Directors*
Our Executive Of(cid:178) cers*
Corporate Governance Statement*
Audit Committee Report*
Directors’ remuneration report
44
46
48
58
62
Financial highlights
Chairman’s statement
Smith & Nephew today
Chief Executive Of(cid:178) cer’s
review of(cid:159)strategy
Strategic performance
Chief Financial Of(cid:178) cer’s overview
Our marketplace
Our business
Segment performance
Advanced Surgical Devices
Advanced Wound Management
Sustainability
Financial review and principal risks
4
5
6
10
12
14
16
19
24
29
34
36
FINANCIAL STATEMENTS
AND OTHER INFORMATION
Directors’ responsibilities for the
accounts*
Independent auditor’s US reports
Independent auditor’s UK report
Group accounts
Notes to the Group accounts
Independent auditor’s report
for(cid:159)the(cid:159)Company
Company accounts
Notes to the Company accounts
Group information*
Other (cid:178) nancial information*
Information for shareholders*
88
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94
101
150
151
152
155
159
168
Smith & Nephew is a global medical
technology business. We have leadership
positions in our four chosen specialities:
– Orthopaedic Reconstruction
– Advanced Wound Management
– Sports Medicine
– Trauma & Extremities
This success is(cid:159)built upon our three values of:
– Innovation
– Trust
– Performance
*These sections and pages 95, 97 and 99 form the Directors’ Report.
Our mission
SMITH & NEPHEW ANNUAL REPORT 2013
1
Delivering advanced
medical technologies
that help healthcare
professionals, our
customers, improve
the quality of life for
their patients
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$4.4bn
Revenue 1 up 4%
$987m
Trading pro(cid:178) t 1,2 up 5%
$810m
Operating pro(cid:178) t 1 up 1%
76.9¢
61.7¢
27.4¢
Adjusted earnings per share 2 up 3%
Earnings per share down 23%
Dividends per share up 5%
1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions
and(cid:159)exclusion(cid:159)of disposals.
2 Explanations of these non-GAAP (cid:178) nancial measures are provided on pages 161 to 163.
You can read more about our (cid:178) nancial performance in the (cid:178) nancial review on page 36
22 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
3
Group strategic
report
Financial highlights
Chairman’s statement
Smith & Nephew today
Chief Executive Of(cid:178) cer’s review of strategy
Strategic performance
Chief Financial Of(cid:178) cer’s overview
Our marketplace
Our business
Segment performance
Advanced Surgical Devices
Advanced Wound Management
Sustainability
Financial review and principal risks
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10
12
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16
19
24
29
34
36
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We are investing more in R&D to provide
our customers with greater innovation
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4 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Financial highlights
We delivered a good
performance in 2013
REVENUE 1
+4% $4,351m
TRADING PROFIT 1,2
+5%
$987m
OPERATING PROFIT 1
+1%
$810m
R&D EXPENDITURE AS A
PERCENTAGE OF REVENUE
5.3%
4,270
4,137
3,962
3,772
969
961
965
857
920
862
846
723
4.1
3.8
3.9
4.1
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
ADJUSTED EARNINGS
PER(cid:159)SHARE (EPSA) 2,3
+3%
76.9¢
73.0
73.7
74.8
64.9
EARNINGS PER SHARE (EPS) 3
61.7¢
-23%
DIVIDEND PER SHARE
+5%
27.4¢
80.4
68.6
64.5
52.7
26.10
17.40
15.82
14.39
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
TRADING PROFIT 2
MARGIN
-60bps
22.7%
OPERATING PROFIT
MARGIN
-180bps
18.6%
TRADING PROFIT
TO CASH CONVERSION 2
89%
OPERATING PROFIT
AS A PERCENTAGE
OF(cid:159)CASH(cid:159)GENERATED
FROM OPERATIONS
71%
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2
3
The underlying percentage increases/
decreases are(cid:159)after(cid:159)adjusting for the
effects of(cid:159)currency translation and the
inclusion of the comparative impact of
acquisitions and exclusion
of disposals.
Explanations of these non-GAAP
(cid:178) nancial measures are provided
on(cid:159)pages 161 to 163.
Earnings per share and adjusted earnings
per share have been restated following
the adoption of the revised IAS(cid:159)19
Employee Bene(cid:178) ts standard. See Note 1
of the Notes to the Group accounts.
You can read more about our (cid:178) nancial performance in the (cid:178) nancial review on page 36
Chairman’s statement
Dear Shareholder,
In 2013, Smith & Nephew generated good underlying revenue
and trading pro(cid:178) t growth.
We continued to focus investment on growth opportunities
and returned signi(cid:178) cant value to Shareholders through
increased dividends and a share buy-back programme.
Momentum increased throughout the year as we delivered
on(cid:159)our strategy to reshape Smith & Nephew for the future.
Our revenue was $4,351 million, up 4% on an underlying
basis. Advanced Wound Management delivered strong
growth, led by Healthpoint Biotherapeutics, our major 2012
acquisition. Sports Medicine Joint Repair had(cid:159)another
successful year, and we improved our performance in
Orthopaedic Reconstruction.
Almost 13% of our revenues now come from emerging market
countries, up from just over 8% in 2010. We were one of
the(cid:159)(cid:178) rst companies in our sector to focus on these markets.
We are building sustainable businesses through the strategy
of establishing direct relationships with customers, as(cid:159)well as
developing tailored products. In 2013, we invested further
in(cid:159)our existing teams and made acquisitions in Brazil,
India(cid:159)and Turkey to strengthen our platform.
Our trading pro(cid:178) t was up 5% on an underlying basis at
$987(cid:159)million. The trading pro(cid:178) t margin of 22.7% met
our(cid:159)expectations as we invested more in the emerging
markets and in research & development, and cost of the
US(cid:159)medical device excise tax ($24 million in 2013).
Ethics, compliance & governance
We give high priority to compliance and ethics, as well as
health, safety and the environment. The Board continues
to(cid:159)encourage management in their drive to ensure all of
Smith(cid:159)& Nephew’s programmes are world-class.
The Board also places great emphasis on governance and is
mindful of its responsibility to promote the long-term interests
of the Company for all our stakeholders. This is described in
detail in the Corporate Governance section of this Annual
Report (pages 44 – 85).
Creating sustainable value
Smith & Nephew has a long track record of creating value for
Shareholders. For instance, we have paid a dividend every
year since 1937. Since 2006, during my tenure as Chairman,
it(cid:159)is pleasing to report that we have delivered a compound
annual growth rate in adjusted earnings per share of 8%
against a FTSE 100 average of 6%, along with a dividend
compound growth rate of 14%. And the share price is up more
than 90% in that time. The Group generated trading cash (cid:179) ow
of $5.9 billion between 1 January 2006 and 31 December
2013, demonstrating our vitality over the long-term.
In 2013, we set out a Capital Allocation Framework that
will(cid:159)govern how we prioritise the use of the strong cash (cid:179) ow
we generate. This framework will guide our continued
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
5
investment in organic growth, and maintenance of a
progressive dividend. It also gives us headroom to make
further acquisitions and includes a commitment to return any
excess capital to Shareholders. It is underpinned by a desire
to(cid:159)maintain a strong balance sheet to ensure solid investment
grade credit metrics.
Following these principles, we spent $226 million on a share
buy-back programme during the year. This, together with the
2012 dividend increase, resulted in a total distribution to
Shareholders in 2013 of $465 million, two and a half times the
level of(cid:159)the prior year.
The Board is pleased to propose a (cid:178) nal dividend for the year of
17.0¢ per share, giving a total dividend for 2013 of(cid:159)27.4¢, up 5%
year-on-year.
Board changes
I will step down as Chairman of Smith & Nephew at the Annual
General Meeting in April 2014. Roberto Quarta joined the
Board as Non-executive Director in(cid:159)December 2013 and will
take over as Chairman. Roberto has impressive business and
board experience and is chairman of IMI plc, a FTSE 100 listed
engineering business and of Clayton, Dubilier & Rice, Europe,
a private equity (cid:178) rm.
Our Senior Independent Non-executive Director, Richard
De(cid:159)Shutter, and Non-executive Director Ajay Piramal, will also
both retire at the Annual General Meeting. I would like to thank
them for their service. In particular, Richard’s contribution
in(cid:159)this most important(cid:159)role has been invaluable. We are
fortunate to have as replacement the highly experienced
Brian(cid:159)Larcombe, who will(cid:159)become Senior Independent
Non-executive Director.
In 2013, we welcomed to the Board Julie Brown as Chief
Financial Of(cid:178) cer and Michael Friedman as Non-executive
Director. Julie has quickly established herself as an effective
Executive Director and her in(cid:179) uence is already seen in many
areas, including the Capital Allocation Framework. Michael’s
expertise in the US healthcare system and experience
leading(cid:159)a major research and treatment institution has
enhanced the Board.
Setting Smith & Nephew apart
During 2013, I was reminded of the quality of our people as
we(cid:159)reviewed our responses to natural disasters, providing
resources to aid recovery in the Philippines and in our own
of(cid:178) ces and communities, under Olivier Bohuon’s leadership,
responding to a major (cid:179) ood at the(cid:159)Advanced Wound
Management site in Hull, UK and to a tornado near our facility
in Oklahoma City, US. The tenacity and compassion sets
Smith(cid:159)& Nephew apart, as it has throughout our history of
supporting healthcare professionals for more than 150 years.
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It has indeed been a privilege working with the people at
Smith & Nephew and to serve the interests of customers,
employees and Shareholders. The Company has shown
great(cid:159)resilience in the recent economic environment, building
services for customers and value for Shareholders. There is
an(cid:159)excellent team in place, both Executive and Non-executive.
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I wish the Company well for a promising future.
Yours sincerely,
Sir John Buchanan
Chairman
6 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Smith & Nephew today
We are operating
in growth markets
TOTAL SEGMENT VALUE
ADVANCED SURGICAL DEVICES
TOTAL SEGMENT VALUE
ADVANCED WOUND MANAGEMENT
$23.2bn
GLOBAL POPULATION
+4%
$7.0bn
+4%
2.5 billion people
6 billion people
10 billion people
Our products are used by surgeons and nurses to help
repair and heal the human body throughout a person’s life
age
65+ 16%
20-64 56%
age
65+ 7%
20-64 54%
0-19 39%
0-19 28%
age
65+ 5%
20-64 51%
0-19 44%
1950
2000
2050
Source: United Nations – World Population Prospects, The 2012 Revision.
You can read more about our (cid:178) nancial performance in the marketplace review on page 16
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
7
With a business model
that creates value
OUR MISSION STATEMENT
Delivering advanced medical technologies that help healthcare
professionals, our customers, improve the quality of life for their patients
OUR VALUES
Innovation Trust Performance
OUR STRATEGIC PRIORITIES
You can read more about our strategy on page 12
1
2
3
4
ESTABLISHED MARKETS
EMERGING &
INTERNATIONAL MARKETS
INNOVATE FOR VALUE
SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
5
SUPPLEMENT
ORGANIC GROWTH
WITH ACQUISITIONS
OUR VALUE CREATION PROCESS
You can read more about our business model on page 19
Research &
Development
Regulatory &
Compliance
Manufacturing
Medical
Education
Sales &
Marketing
ATTRIBUTABLE PROFIT
$556m
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OUR CAPITAL ALLOCATION FRAMEWORK
You can read more about our Capital Allocation Framework on page 14
Reinvest for
organic growth
Progressive
dividend(cid:159)policy
Acquisitions in-line
with strategy
Return excess
to(cid:159)shareholders
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Maintain a strong balance sheet to ensure solid(cid:159)investment grade credit metrics
RESOURCE UTILISED
$5.8bn
Total Assets
$231m
Investment in R&D
11,036
Employees
14
Manufacturing plants
worldwide
$265m
Corporation tax paid
8 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Smith & Nephew today continued
We are organised by
our(cid:159)areas of expertise
Advanced Surgical Devices
Advanced Wound Management
ORTHOPAEDIC RECONSTRUCTION
Specialist hip and knee implant systems.
REVENUE1
$1,518m
2012 $1,540m
TRAUMA & EXTREMITIES
ADVANCED WOUND CARE
Products for the treatment of acute and chronic wounds,
including leg, diabetic and pressure ulcers, burns and
post-operative wounds.
-1%
REVENUE1
$843m
2012 $849m
+1%
Internal and external devices used in the stabilisation of
severe fractures and deformity correction procedures.
REVENUE1,2
$486m
2012 $474m
+4%
SPORTS MEDICINE JOINT REPAIR
Instruments, technologies and implants necessary to
perform minimally invasive surgery of joints.
REVENUE1,2
$496m
2012 $474m
+7%
ARTHROSCOPIC ENABLING TECHNOLOGIES
Cutting, visualisation and (cid:179) uid management technologies
necessary for Sports Medicine Joint Repair.
ADVANCED WOUND DEVICES
Traditional and single-use Negative Pressure Wound
Therapy (‘NPWT’) and hydrosurgery systems.
REVENUE1
$213m
2012 $180m
+20%
ADVANCED WOUND BIOACTIVES
Bioactive technologies that provide unique approaches to
debridement and dermal repair and regeneration.
REVENUE1
$280m
2012 N/A
+47%
REVENUE1,2
$441m
2012 $458m
OTHER ASD
Including gynaecological instrumentation.
REVENUE1,2
$74m
2012 $162m
-2%
+14%
1
2
The underlying percentage increases/decreases are after adjusting for the
effect of(cid:159)currency translation and the inclusion of the comparative impact of
acquisitions(cid:159)and exclusion of disposals.
The 2012 revenue by franchise has been restated to 2013 product franchises.
You can read more about our franchise areas in the segment analysis on pages 24 to 33
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
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With over 11,000 employees
supporting healthcare
professionals globally
US
Our ASD head of(cid:178) ce is based in
Andover and we have manufacturing
facilities in Memphis, Mans(cid:178) eld
and Oklahoma.
EMPLOYEES
4,640
CONTINENTAL EUROPE
Our main Continental European
manufacturing facilities are in
Tuttlingen – Germany and Aarau
– Switzerland.
EMPLOYEES
1,986
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Turkey: acquisition
of(cid:159)Advanced Surgical
Devices distribution.
India: acquisition of
Sushrut-Adler including
mid-tier trauma portfolio.
UK & IRELAND
Home of our Global Head Of(cid:178) ce in
London and our Advanced Wound
Management Head of(cid:178) ce in Hull.
EMPLOYEES
1,664
Brazil: acquisition
of(cid:159)Advanced Wound
Management distribution.
REST OF THE WORLD
We have manufacturing facilities,
warehouses and of(cid:178) ces across
the(cid:159)world to serve our customers.
EMPLOYEES
1,827
Head of(cid:178) ce (Division & Group)
Manufacturing
Distribution Centre
Of(cid:178) ce
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CHINA
Generated 30% revenue growth
in(cid:159)2013 and now our sixth largest
country. We have manufacturing
facilities in Beijing and Suzhou.
EMPLOYEES
919
10 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Chief Executive Of(cid:178) cer’s review of strategy
We are successfully
reshaping and rebalancing
Smith & Nephew
OUR STRATEGIC PRIORITIES
1
2
3
4
5
1 ESTABLISHED MARKETS
Build upon existing strong positions, win market share
through greater innovation and drive ef(cid:178) ciencies to liberate
resources.
2 EMERGING & INTERNATIONAL(cid:159)MARKETS
Deliver market leadership in the Emerging & International
Markets by(cid:159)building strong, direct customer relationships
and(cid:159)developing products speci(cid:178) cally designed for
these populations.
3 INNOVATE FOR VALUE
Accelerate our rate of innovation by investing more in(cid:159)research
& development to support projects that will move clinical and
cost boundaries and deliver maximum value.
4 SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
Pursue maximum ef(cid:178) ciency in everything we do, streamline
our operations and manufacturing, remove duplication and
build strong global functions to support our commercial teams.
5 SUPPLEMENT ORGANIC GROWTH
WITH ACQUISITIONS
Build our platform by acquiring complementary technologies,
manufacturing and distribution in the emerging markets and
complementary products or businesses in our higher
growth segments.
You can read more about our strategy in action throughout
the report in boxed out case studies.
Dear Shareholder,
For more than 150 years Smith & Nephew has supported
healthcare professionals as they improve the quality of life for
patients. Today we do this by providing advanced medical
technologies that move clinical boundaries and reduce
economic costs.
We focus where we see developing needs and invest in new
products and techniques to improve outcomes and expand
access. Through these actions we are at the forefront of fast
growing segments such as Sports Medicine and Advanced
Wound Bioactives, are leaders in the emerging markets, and
continue to develop in our more mature segments. We are
building a sustainable business to best support surgeons,
nurses and healthcare managers in the future.
In 2013, I am pleased to report that we made signi(cid:178) cant
progress, expanding our product portfolio, building our
platform, growing in the emerging markets and embedding a
culture of perpetual ef(cid:178) ciency.
Accelerating innovation
In 2013, we maintained a high rate of innovation, launching
major new products such as the natural-motion
JOURNEY™ II BCS Total Knee System and, in Sports Medicine,
HEALICOIL™(cid:159)REGENESORB™, an innovative next generation
bio-composite suture anchor. We also delivered 23 new
Advanced Wound Management products, such as the
DURAFIBER™ Ag antimicrobial dressing.
Looking ahead, we have a strong product pipeline, particularly
in Trauma & Extremities and Sports Medicine. Overall we
increased research & development ('R&D') investment to
$231 million in 2013, representing 5.3% of revenue, and are
committed to maintaining these high levels of investment and
innovation going forward. We were proud to be named one of
Forbes Magazine’s ‘Most Innovative Companies’ of 2013.
We are also investing in medical education to ensure that
our(cid:159)customers continue to have access to the best training on
our products and techniques. This includes signi(cid:178) cant online
resources such as Education and Evidence. Launched in 2013,
this is a powerful new e-learning platform for surgeons to
access and share peer-to-peer education.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
11
so that ever more of
our(cid:159)business comes from
areas(cid:159)of higher growth
Healthpoint acquisition delivers
Our major acquisition at the end of 2012, Healthpoint
Biotherapeutics, has given us a leading position in
bioactives,(cid:159)the fastest growing segment of Advanced
Wound(cid:159)Management. This business has out-performed
our(cid:159)expectations, increasing its revenue by 47% in(cid:159)2013. With
its unique portfolio, excellent sales execution and(cid:159)expertise in
product research and development, it is an outstanding
addition to Smith & Nephew.
Leaders in emerging markets
Throughout 2013, we have built upon our leading position in
the emerging markets, generating strong revenue growth. We
enhanced our platform, investing in the sales force and
infrastructure in markets such as Mexico and the Middle East,
as well as acquiring distributors in Turkey and Brazil. By having
a direct relationship with our customers we are able to offer
them a fuller range of products and services.
We see a major opportunity to create portfolios for patients in
the economic mid-tier across the emerging markets, and
launched our (cid:178) rst products and acquired the Sushrut-Adler
Indian trauma business in 2013.
Perpetual ef(cid:178) ciency
These strategic investments and many other initiatives have
been made possible through our continued drive to be more
ef(cid:178) cient, to reduce cost, and to simplify and improve our
operating model. In 2011, we announced an initial programme
to generate annual savings of $150 million and this will be
largely complete by the end of 2014. We are now a leaner
business, and, as importantly, we are embedding a culture of
perpetual ef(cid:178) ciency into our processes and future thinking.
Sustainability
Our mission at Smith & Nephew is to help our customers
improve people’s lives. I can think of nothing more intrinsic
to(cid:159)this mission than operating sustainably and responsibly to
deliver long-term bene(cid:178) ts. In 2013, we maintained our
commitment to our customers, patients, employees,
communities and Shareholders. This was again recognised
in(cid:159)our inclusion in the FTSE4Good and Dow Jones
Sustainability indices.
Sir John Buchanan
Sir John Buchanan will step down as Chairman of the Board in
April 2014. I wish to thank Sir John for his leadership, counsel
and dedication over the past nine years. As Chairman he has
overseen a number of signi(cid:178) cant changes and has given me
tremendous support in my role as Chief Executive Of(cid:178) cer. We
are con(cid:178) dent that in Roberto Quarta we have found another
excellent Chairman.
Acquisition of ArthroCare Corp
In February 2014, we announced our intention to acquire
ArthroCare, an innovative medical devices company with a
highly complementary sports medicine franchise. Based in
Austin, Texas, ArthroCare’s technology and products will
signi(cid:178) cantly strengthen our portfolio – and we will use our
global footprint to drive substantial new revenue growth. We
expect to complete this acquisition in the middle of 2014 for a
net cost of approximately $1.5 billion.
Rebalancing Smith & Nephew
Smith & Nephew made excellent progress in 2013, delivering
both revenue and earnings growth and generating strong cash
(cid:179) ow. I would like to thank our employees for their contribution
during the year. It was their dedication and focus that achieved
these results, and importantly, are enabling us to accomplish
our programmes to make the Group (cid:178) t and effective for
the(cid:159)future.
We are successfully reshaping and rebalancing Smith &
Nephew so that even more of our business comes from areas
of higher growth. In this way we will(cid:159)continue to deliver the best
support for our customers and the greatest value for
our Shareholders.
Yours sincerely,
Olivier Bohuon
Chief Executive Of(cid:178) cer
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12 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Strategic performance
This is how we measure
our(cid:159)performance
1 ESTABLISHED MARKETS
PERFORMANCE
Our businesses in the Established
Markets grew by 5% in the US and
was (cid:179) at in the Other Established
Markets, where the macro-economic
environment in Europe continues
to(cid:159)be weak.
By franchise, our performance
relative to estimated global segment
growth was slightly below in hip and
knee reconstruction and trauma,
around market in the higher growth
joint repair segment of sports
medicine and well above in advanced
wound management. Hip and Knee
Implant performance in 2013 was
held back by our relatively high
exposure to the weak European
market, our position in the product
cycle and metal-on-metal
hip headwinds.
Our performance in the second half
of 2013 was better than the (cid:178) rst half,
as a result of our investments in
marketing, medical education and
new products.
For more detail on the market and
competition see pages 16 to 18.
GLOBAL OUTLOOK
Established Markets for Smith &
Nephew are the US, Europe, Japan,
Australia, New Zealand and Canada.
In these markets we expect the
challenging economic conditions to
continue, requiring realigned
business models and focused
investment, albeit that there are some
signs of improvement in the US.
2 EMERGING & INTERNATIONAL MARKETS
PERFORMANCE
The Emerging & International Markets
grew at 18%, exceeding Established
Markets rates and contributing half of
annual revenue growth for the Group.
GLOBAL OUTLOOK
Emerging & International Markets
represent those outside of the
Established Markets including
Brazil,(cid:159)China, India and Russia.
REVENUE FROM EMERGING &
INTERNATIONAL MARKETS 1
+18%
$563m
The healthcare environment in these
markets is rapidly expanding and
with the right investments offers
signi(cid:178) cant opportunities for
the Group.
483
454
These geographies now represent
13% of the Group’s overall revenue.
During 2013:
– Our success in China continued
with growth of over 30% and now it
is our 6th largest country by
revenue
– Signi(cid:178) cant investment to drive
growth organically (e.g. Mexico and
Saudi Arabia) and through
acquisitions (Brazil, Turkey, India)
– We put in place our strategy to
address the mid-tier market.
REVENUE FROM
ESTABLISHED MARKETS 1
+2%
$3,788m
3,816
3,654
2011
2012
2013
(cid:81)(cid:3)(cid:3)2011 includes Clinical Therapies revenue of $237m
(cid:81)(cid:3)(cid:3)2012 includes Clinical Therapies revenue of $107m
AS A PERCENTAGE
OF GROUP REVENUE
13%
12%
11%
2011
2012
2013
2011
2012
2013
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
13
R&D EXPENDITURE 1
+18%
$231m
AS A PERCENTAGE
OF GROUP REVENUE
5.3%
167
171
4.1
3.9
3 INNOVATE FOR VALUE
PERFORMANCE
R&D investment now represents 5.3%
of revenue, an increase in spending
of 35% in reported terms. We have
maintained our strong momentum of
introducing new products:
– In ASD, we successfully launched
the JOURNEY II BCS Knee System
and our Sports Medicine franchise
expanded through a next
generation HEALICOIL suture
anchor range and we also
expanded our Extremities offering
– Over 20 new AWM products
launched
– In our Emerging & International
Markets we launched a low-cost
camera to(cid:159)drive market expansion
and access to minimally invasive
joint(cid:159)repair
– Launched new medical education
websites to support
healthcare professionals.
GLOBAL OUTLOOK
Innovation offers the key to meeting
the realities of healthcare and
economic paradigm in both
Established and Emerging &
International Markets. New products,
technologies and surgical techniques
hold the potential of reducing the
overall cost of healthcare.
2011
2012
2013
2011
2012
2013
4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
PERFORMANCE
Trading pro(cid:178) t grew by 5% and trading
pro(cid:178) t margin decreased slightly to
22.7% as expected. Targeted
investments, increased R&D and
the(cid:159)new US Medical Device tax
were(cid:159)partially off-set by ef(cid:178) ciency
and(cid:159)cost initiatives.
GLOBAL OUTLOOK
By simplifying and improving our
operating model we can liberate
resources to invest in growth
opportunities and meet the persistent
price pressure. A simpler and more
ef(cid:178) cient organisation allows us to
make faster and better decisions.
TRADING PROFIT 1,2
+5%
$987m
TRADING PROFIT MARGIN 2
-60bps
22.7%
961
965
23.3
22.5
Key initiatives included:
– Continuing to deliver our
$150 million per annum ef(cid:178) ciency
savings programme
– Expansion of the Suzhou facility
continues on track
– Started roll-out of major Europe-
wide single IT and business
intelligence platform.
2011
2012
2013
2011
2012
2013
(cid:81)(cid:3)(cid:3)2011 includes Clinical Therapies trading pro(cid:178) t of $48m
(cid:81)(cid:3)(cid:3)2012 includes Clinical Therapies trading pro(cid:178) t of $16m
5 SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS
GLOBAL OUTLOOK
Acquisitions and partnerships
are(cid:159)important elements which
supplement organic investment
and(cid:159)provide increased opportunity
for(cid:159)high growth and value creation.
PERFORMANCE
2013 has been another active year
from a business development
perspective, mainly focused on
supporting our Emerging &
International Markets strategy:
– Acquisition of distributors in Brazil
and Turkey
– Acquisition of a mid-tier trauma
business in India
– Successful integration of
Healthpoint Biotherapeutics
which(cid:159)we acquired in 2012.
1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion
of disposals.
2 Explanations of these non-GAAP (cid:178) nancial measures are provided on pages 161 to 163.
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14 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Chief Financial Of(cid:178) cer’s overview
We have delivered
good revenue and
earnings growth
Dear Shareholder,
When I joined Smith & Nephew in February 2013 I found a
business with(cid:159)a uni(cid:178) ed sense of purpose – helping customers
to improve the(cid:159)quality of life of patients – and a clear strategy
to deliver this in a sustainable manner across our Established
and Emerging & International Markets. The management team
were making choices about where to invest to maximise our
impact today and to ensure Smith & Nephew has the
products and platform for the future.
For me, the role of Finance is as a strategic partner, enabling
and supporting the business as it makes investments and
drives ef(cid:178) ciencies, and ensuring we can maintain our (cid:178) nancial
strength and discipline. I believe Smith & Nephew has made
signi(cid:178) cant progress in 2013 and that judicious (cid:178) nancial
management has been and remains central to our success.
Strong revenue and earnings
For the full year 2013, we generated good underlying revenue
and trading pro(cid:178) t growth and met our margin expectations.
Revenue was $4,351 million, an underlying 4% increase.
Trading pro(cid:178) t was $987 million, up 5% underlying. The trading
pro(cid:178) t margin was 22.7% a reduction of 60bps. Our adjusted
earnings per share were 76.9¢, up 3%. The trading cash (cid:179) ow
was $877 million, re(cid:179) ecting a trading pro(cid:178) t to cash conversion
ratio of 89%.
OUR CAPITAL ALLOCATION FRAMEWORK
Capital Allocation Framework
We consider that the ef(cid:178) cient use of capital on behalf of
Shareholders is(cid:159)an important objective. We have delivered
good revenue and earnings growth and strong cash
generation in the challenging markets of(cid:159)the last few years.
During 2011, we announced our Strategic Priorities, focusing
our business on liberating resources to invest in driving
greater growth. In order to support this strategy, the Board
believes in maintaining an ef(cid:178) cient, but prudent,
capital(cid:159)structure, while(cid:159)retaining the (cid:179) exibility to make value
enhancing acquisitions. This approach was set out in the new
Capital Allocation Framework announced in(cid:159)May 2013.
The Capital Allocation Framework will be used to prioritise
the(cid:159)use of cash and ensure an appropriate capital structure.
Our commitment, in order of priority, is to:
1. continue to invest in the business to drive organic growth;
2. maintain our progressive dividend policy;
3. realise acquisitions in-line with strategy; and
4. return any excess capital to Shareholders.
This is underpinned by maintaining leverage ratios
commensurate with solid investment grade credit metrics.
Reinvest for
organic growth
Progressive
dividend(cid:159)policy
Acquisitions in-line
with strategy
Return excess
to(cid:159)Shareholders
1
2
3
4
Maintain a strong balance sheet to ensure solid(cid:159)investment grade credit metrics
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
15
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and strong
cash(cid:159)generation
In-line with the above framework, and re(cid:179) ecting our
con(cid:178) dence in the successful execution of our Strategic
Priorities, we commenced a $300 million share buy-back
programme in May 2013. As of 31 December 2013 we had
spent $226 million. This programme was suspended
following(cid:159)our agreement to acquire ArthroCare, announced
on(cid:159)3 February(cid:159)2014.
Outlook
We anticipate the market conditions seen in the second half of
2013 to continue in 2014. We expect the US to be stable with
some signs of improvement, Europe to remain challenging
and the emerging markets to continue to offer opportunities
for higher growth.
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Liberating resources
In August 2011, Smith & Nephew announced a programme to
drive structural ef(cid:178) ciencies in order to liberate the resources
needed to fund investment in the emerging markets and R&D,
targeting savings of at least $150 million per annum. The cost
of the currently identi(cid:178) ed programmes is expected to be
$160 million in cash and $40 million in non-cash costs.
To date the Group has realised annualised bene(cid:178) ts of
$131 million and we expect to complete the programme in
early 2015 and realise slightly more than the anticipated
bene(cid:178) ts. The costs are on track. As a result of this programme
and other actions, a culture of continuously looking to be more
ef(cid:178) cient is being embedded across the Group.
Acquisitions
During the year the Group has completed acquisitions of
manufacturing and distribution businesses in Turkey, Brazil
and India. The aggregate cost was $126 million. Through these
acquisitions, we(cid:159)are implementing a number of our Strategic
Priorities: to build leadership positions in the Emerging &
International Markets; to supplement our organic growth
through acquisitions; and to bring forward mid-tier portfolios
to these countries.
In terms of revenue growth by franchise, we expect:
– Orthopaedic Reconstruction, continuing its recent improved
performance, to grow at approaching the market rate;
– Trauma & Extremities, building upon our recent
investments, to grow overall at the market rate, but with a
stronger second half to the year;
– Sports Medicine, with its strong product pipeline, to deliver
growth above the market rate; and
– Advanced Wound Management, with its unique mix of
leading products, to deliver another year of growth above
the market. Within this, we expect Advanced Wound
Bioactives to grow at a rate in the mid-teens.
In terms of trading pro(cid:178) t margin, we expect to exceed our
2013 performance.
I am con(cid:178) dent that our continuing focus on ef(cid:178) ciency, coupled
with further investments to drive growth and the disciplined
use of our strong cash (cid:179) ow will generate greater value for
our Shareholders.
Yours sincerely,
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Chief Financial Of(cid:178) cer
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16 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Our marketplace
We operate in
dynamic markets
Market trends
Demand for healthcare continues to increase worldwide
in(cid:179) uenced by the following trends:
Increased longevity and average age
As a result of improvements in healthcare and living
conditions, life expectancy across the world has increased
in(cid:159)modern times and this increase is expected to continue.
The Organisation for Economic Co-operation and
Development (‘OECD’) calculates the average life expectancy
at(cid:159)birth in 2010 as 79.7, a signi(cid:178) cant rise from the 70.3
calculated in 1970.
As a consequence of longer life expectancy and the falling
birth rates in many developed countries, there is an expanding
gap between the demand for healthcare and the ability of
governments to supply healthcare. Demand for healthcare
will(cid:159)increase because of the ageing world population but at
the(cid:159)same time the changing balance of age in the population
means that, relatively speaking, there is potentially an
accompanying decrease in funds available for healthcare
raised through taxation of the working population.
OECD COUNTRIES’ POPULATION
(million)
The number of people aged
20-64 per(cid:159)person aged 65+
Ratio
7:1
Ratio
5:1
Ratio
2:1
687
731
385
351
150
53
20-64
65+
20-64
65+
20-64
65+
1950
2000
2050
Source: OECD Social Indicators – Society at
a Glance 2011
More active lifestyles
Demand for healthcare is also increasing because people
now expect to maintain active lifestyles longer into retirement
and to return to activity sooner after treatment. This has
resulted in a desire for less invasive surgery and quicker
recovery times. Patients also desire products with a better
replication of natural movement and an ability to cope with
more rigorous activity over a longer period.
Obesity and associated chronic diseases
Obesity is an increasing global problem which causes more
wear on the joints of the human body and increases demand
for orthopaedic reconstruction.
Across the OECD countries, an average of 18% of the
population is obese; this has increased from 13% in 2000.
Obesity also increases the risk of diabetes which can lead
to(cid:159)other medical conditions and complications. In 2012, the
International Diabetes Federation estimated that 8.3% of the
world’s population (371 million people) suffer from diabetes
and this is projected to rise to 9.9% (552 million people)
by(cid:159)2030.
There is a proven link between diabetes and a higher risk
of(cid:159)surgical site infections which increases the risk of surgical
procedures on diabetic patients. This risk can be minimised
with the use of specialist wound care products designed to
lower the risk of infection.
It is estimated that up to 10% of people with diabetes also
suffer from diabetic foot ulcers. These ulcers are prone to
infection, causing an increased risk of amputation, increased
morbidity and are a signi(cid:178) cant burden on the health system.
Increased af(cid:179) uence in emerging markets
The emerging markets are becoming more af(cid:179) uent
and(cid:159)therefore more able to afford medical treatments.
However, the cost of many medical devices restricts access
by(cid:159)the(cid:159)wider population.
Patient awareness
In certain countries, patients are becoming increasingly
aware,(cid:159)from the internet and direct-to-customer advertising,
of(cid:159)the various healthcare options and treatments available.
This has led to some increased patient in(cid:179) uence over the
product purchasing decisions of medical service providers.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
17
Regulatory standards and compliance
in the healthcare industry
The international medical device industry is highly regulated.
Regulatory requirements are important 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 ef(cid:178) cacy of such products. Of particular
importance is the requirement in many countries that products
be authorised or registered prior to manufacture, marketing
or(cid:159)sale and that such authorisation or registration be
subsequently maintained. The major regulatory agencies
for(cid:159)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 China Food and
Drug Administration.
In general, the trend in many countries in which we do
business is towards higher expectations and increased
enforcement activity by governmental authorities.
We are committed to doing business with integrity
and(cid:159)welcome the trend to higher standards in the healthcare
industry. We and other companies in the industry have been
subject to investigations and other enforcement activity that
have incurred and may continue to incur signi(cid:178) cant expense.
See ‘Legal proceedings’ on page 130.
◊
, our patient matched instrumentation,
VISIONAIRE
uses the patient’s MRI and X-rays to design cutting
blocks speci(cid:178) c to each patient. This may reduce
surgery time by eliminating several sizing and
alignment steps and improves precision in (cid:178) tting
the(cid:159)implant.
We are developing products targeting the middle
economic tier of the emerging markets to capitalise
on their forecast growth. This will enable doctors
and(cid:159)nurses to deliver quality products to new patient
communities around the world.
OBESITY AND ASSOCIATED CHRONIC DISEASES
Prevalence (%)
<10.0
10.0-19.9
20.0-29.9
≥30.0
N/A
No data
Source: WHO Global Comparable Estimates, 2008
Global economic crisis
The supply of healthcare in many of our markets is funded by
governments. The global economic crisis in recent years has
placed increased pressure on governments around the world
to reduce or constrain healthcare expenditure.
In summary
The increased demand for healthcare products and the
limitation of available resources is widening the funding gap.
Providing technologies that deliver value by improving clinical
outcomes while reducing the consumption of overall
healthcare resources is vital for the success and sustainability
of medical device businesses.
RESPONDING TO THE MARKET
Smith & Nephew is committed to developing
products that respond to the(cid:159)demand and
supply pressures faced(cid:159)by(cid:159)the(cid:159)healthcare
industry. Some examples are set out below.
◊
Our VERILAST
Technology has been laboratory
tested to(cid:159)demonstrate wear performance suf(cid:178) cient
for 30(cid:159)years of use enabling a total replacement
option(cid:159)for(cid:159)younger, more active patients.
◊
is our single use NPWT product which brings
PICO
the wound healing bene(cid:178) ts of NPWT to a wider
audience due to its discrete size and portability.
Research is also proving the bene(cid:178) ts of NPWT
products to reduce recovery times after major
surgery, such(cid:159)as caesarean sections.
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18 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Our marketplace continued
Dependence on government
and(cid:159)other(cid:159)funding
In most markets throughout the world, expenditure on
medical(cid:159)devices is ultimately controlled to a large extent by
governments. Funds may be made available or withdrawn
from healthcare budgets as a result of government policy.
We(cid:159)are therefore largely dependent on future governments
providing increased funds commensurate with the increased
demand arising from demographic trends.
Pricing of our products is largely governed in most developed
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 ongoing in markets where we operate. This control
may be exercised by determining prices for an individual
product or for an entire procedure. We are exposed to
changes in reimbursement policy, tax policy and pricing which
may have an adverse impact on revenue and operating pro(cid:178) t.
In(cid:159)particular, from 2013 changes to the healthcare legislation
in(cid:159)the US have imposed signi(cid:178) cant taxes on medical device
manufacturers. There may be an increased risk of adverse
changes to government funding policies arising from the
deterioration in macro-economic conditions in some of
our markets.
Competitors
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. In order to achieve this there has been some
consolidation in our customer base, as well as amongst our
competitors, and these trends are expected to continue in the
long term. We compete against both local and multinational
corporations, including some with greater (cid:178) nancial, marketing
and other resources.
Our competitors include Arthrex, Biomet, DePuy Synthes,
Stryker and Zimmer in our Advanced Surgical Devices division
and Coloplast, Convatec, Kinetic Concepts and Molnlycke in
our Advanced Wound Management division.
Customers
In certain parts of the world, including the UK, much of
Continental Europe, Canada and Japan, the healthcare
providers are largely government organisations funded by
tax(cid:159)revenues. In the US, our 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(cid:159)knee and hip reconstruction procedures and for wound
treatment regimes.
MARKET SEGMENT AND LEADERSHIP
Hip & Knee Implants
OTHER
15%
BIOMET
12%
Sports Medicine*
OTHER
13%
STRYKER
10%
Data: 2013 estimates generated by Smith &
Nephew(cid:159)based upon public sources and
internal analysis.
*
Representing access, resection and
repair products.
** A division of Johnson & Johnson.
ARTHREX
28%
ZIMMER
23%
$14.0bn
+3%
DEPUY
SYNTHES**
20%
$4.3bn
+6%
SMITH & NEPHEW
20%
SMITH & NEPHEW
11%
STRYKER
19%
LINVATEC
5%
DEPUY MITEK**
15%
ARTHROCARE
5%
BIOMET
4%
Trauma & Extremities
Advanced Wound Management
OTHER
9%
BIOMET
6%
ZIMMER
6%
STRYKER
22%
$4.9bn
+7%
SMITH & NEPHEW
10%
COLOPLAST
4%
CONVATEC
8%
OTHER
37%
KINETIC
CONCEPTS
19%
$7.0bn
+4%
MOLNLYCKE
12%
SMITH & NEPHEW
20%
DEPUY
SYNTHES**
47%
Our business
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
19
Our mission is to deliver
advanced medical
technologies
Improving quality of life
Smith & Nephew’s business model, set out on page 7,
supports our mission to deliver advanced medical
technologies to help healthcare professionals, our customers,
improve the quality of life for their patients.
Through it we:
– invest in research & development to create innovative
new(cid:159)solutions that improve clinical outcomes and reduce
the economic burden on healthcare systems;
– rigorously enforce regulatory and compliance standards,
conducting business ethically everywhere we operate;
– ensure our manufacturing, supply and distribution footprint
is lean and ef(cid:178) cient;
– provide medical education and product training to
healthcare professionals to help ensure safe and effective
treatment for patients; and
– support our sales and marketing teams to guarantee our
customers have the advanced technologies and supporting
services they need to treat their patients.
Our business model is underpinned by our values and Capital
Allocation Framework:
– our values of Innovation, Trust and Performance focus our
people on being responsive to the needs of our customers;
energetic, creative and passionate in our work; and building
lasting and close relationships with our stakeholders; and
– Our Capital Allocation Framework enables us to invest for
the(cid:159)future, both in organic growth and through acquisitions,
whilst also generating value for Shareholders today through
a progressive dividend policy and commitment to return any
excess capital.
By implementing our Strategic Priorities we increase
momentum throughout the business model to:
– build on our strong position in the Established Markets;
– realise the signi(cid:178) cant opportunities in the Emerging &
International(cid:159)Markets;
– maintain an unremitting focus to innovate for value;
– simplify and improve our operating model to
maximise(cid:159)ef(cid:178) ciency; and
– supplement our organic growth through acquisitions.
Research and development
We have a deep knowledge of the needs of surgeons and
nurses, we understand the economic pressures healthcare
payers work under, and we recognise that patients are
demanding better treatment options to restore quality of life.
These factors inform our research and development (‘R&D’)
strategy, which is at the heart of our business model.
In 2013, we again delivered many new and innovative
products. These included a major new knee platform,
the(cid:159)JOURNEY II BCS; the (cid:178) rst sports medicine product to use
Smith(cid:159)&(cid:159)Nephew’s proprietary advanced biocomposite
material in(cid:159)the HEALICOIL REGENESORB Suture Anchor;
and(cid:159)DURAFIBER Ag, combining a highly absorbent, gelling
(cid:178) bre dressing with the antimicrobial bene(cid:178) ts of silver.
We have a strong new product pipeline for 2014, with many
innovations scheduled, in particular in Sports Medicine Joint
Repair, Trauma and Advanced Wound Management.
These new products, and many more currently in
development, are a result of our focus on R&D. We(cid:159)invested
$231 million in this area in 2013. At 5.3% of revenue this is an
increase from the 4.1% spent in the(cid:159)previous year. We expect
to maintain our investment level(cid:159)at around 5% of revenue
going forward.
We are highly disciplined in project selection. Our R&D experts
in the UK, US, Europe, China and India have extensive
customer and sector knowledge, which is augmented by
ongoing interaction with our marketing teams. Strict criteria are
applied to ensure new products ful(cid:178) l an unmet clinical need,
have a(cid:159)strong commercial case, and are technologically
feasible. Our(cid:159)R&D teams also work closely with manufacturing
and supply chain management to ensure we can produce
new(cid:159)products to clinical, cost and time speci(cid:178) cation.
Open Innovation
As part of our R&D strategy, Smith & Nephew supports and
works with numerous small companies looking for help with
developing and commercialising new technologies.
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As supporters of NASA’s TecFusion Open Innovation
programme we access and support companies developing
highly creative, often disruptive, technologies that are funded
by the US federal government.
We are a primary sponsor of the Massachusetts Medical
Device Development Center ('M2D2') New Venture
Competition, supporting entrepreneurial product
development(cid:159)by early-stage medical device companies.
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20 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Our business continued
We are the commercial partner in SWAN-iCare, an EU-funded
initiative to bring multidisciplinary European research teams
together to deliver a next generation integrated autonomous
solution for monitoring and adapting personalised therapy of
foot and leg ulcers.
InVentures
Smith & Nephew also welcomes new product concepts
from(cid:159)surgeons. Through our InVentures programme we
collaborate to bring ideas to reality. InVentures evaluates
surgeon concepts for technical and market viability and our
development team works hand-in-hand with surgeons to
deliver new products that advance healing. Commercialised
products bene(cid:178) t from the global selling power of
Smith(cid:159)& Nephew.
In 2013, we introduced a new MODULAR RAIL SYSTEM for
deformity correction and limb restoration that was designed
in(cid:159)collaboration with Dror Paley MD through the InVentures
programme. This new treatment option highlights our
increased investment in extremities and limb restoration, and
our commitment to working directly with surgeon inventors.
Intellectual property
We protect the results of our research and development
through patents and other forms of intellectual property. The
Group’s patent portfolio currently includes in excess of 5,000
patents and patent applications. Patent protection for our
products is sought routinely in our principal markets.
We also have a policy of protecting our products by registering
trademarks under the local laws of markets in which such
products are sold. We vigorously protect our trademarks
against infringement.
3 INNOVATE FOR VALUE
New treatment for venous leg ulcers
HP802-247 is an investigational human cell therapy for
the(cid:159)treatment of venous leg ulcers currently in Phase III
trials. Results from Phase IIb trials investigating the ef(cid:178) cacy
of HP802-247 were previously published in The Lancet.
Based on in vitro studies, HP802-247 is believed to
release(cid:159)various growth factors and cytokines into the
micro-environment of the wound. These living cells
are(cid:159)anticipated to interact with the patient’s own cells to
stimulate wound healing. HP802-247 has been designed
to deliver a de(cid:178) ned cell ratio (keratinocyte:(cid:178) broblasts) to
support optimal tissue regeneration.
Venous leg ulcers are increasingly common and costly to
healthcare systems and a(cid:159)cause of prolonged suffering
for(cid:159)patients. These wounds are caused by swelling and
in(cid:179) ammation secondary to blockage or back(cid:179) ow in the
veins of the legs. many venous ulcers fail to heal even
after(cid:159)three months of standard treatment and develop
into(cid:159)chronic, non-healing wounds.
Based on an estimated (cid:178) gure of 2.5 million venous leg
ulcers in the United States alone and a study of actual
direct treatment costs of $9,685 per person, the annual
cost of treating these wounds is likely to be in the many
billions of dollars. Accordingly, the availability of innovative
and more effective treatment strategies for such high-risk
wounds could provide tremendous bene(cid:178) ts to both
patients and society.
In addition to protecting our market position by (cid:178) ling and
enforcing patents and trademarks, we may oppose third party
patents and trademark (cid:178) lings where appropriate in those
areas that might con(cid:179) ict with our business interests.
In the ordinary course of business, we enter into a number of
licensing arrangements with respect to our products. None of
these arrangements individually is considered material to our
current operations and (cid:178) nancial results.
Regulatory and compliance
Code of conduct and business principles
Smith & Nephew earns trust with patients, customers,
healthcare professionals, authorities and the public by acting
in an honest and fair manner in all aspects of its operations.
We expect the same from those with whom we do business,
including distributors and independent agents that sell our
products, as well as vendors that interact with others on our
behalf. Our Code of Conduct and Business Principles (‘Code’)
governs the way we operate to achieve these objectives.
Smith & Nephew takes into account ethical, social,
environmental, legal and (cid:178) nancial considerations as part of its
operating methods. We have a robust whistle-blowing system
in all jurisdictions in which Smith & Nephew operates. We are
committed to upholding our promise in our Code that we will
not retaliate against anyone who makes a report in good faith.
New employees receive training on our Code, and we assign
annual compliance training to employees. In 2013, we created
two additional courses: a refresher course on Preventing
Bribery and Corruption and ‘Effective Communication’.
Global compliance programme
Smith & Nephew has implemented what we believe is a
world-class Global Compliance Programme that helps our
businesses manage risk and comply with laws and
regulations. In 2013, Smith & Nephew continued to strengthen
its comprehensive compliance programme, which includes
global policies and procedures, on-boarding and annual
training for its employees, managers, independent agents and
key employees of distributors and high risk vendors around
the world, monitoring and auditing processes, and reporting
channels. Through a global intranet website, we provide
resources and tools to guide employees to make decisions
that comply with the law and our Code and earn trust. We
conduct advance review and approval for any signi(cid:178) cant
interactions with healthcare professionals or government
of(cid:178) cials. New distributors are subject to due diligence and are
contractually obligated to comply with applicable laws and
our(cid:159)Code. Their management are required to take compliance
training and certify that they will ensure their employees and
agents comply with the law and our Code. In 2013, we
launched a compliance programme toolkit, in multiple
languages, for our distributors to provide them with the
resources to(cid:159)establish their own compliance programme.
The toolkit includes draft policies, training materials and
approval forms.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
21
In 2012, under the terms of the Company’s Foreign Corrupt
Practices Act (‘FCPA’) settlement (see Note 17.3 of the Notes to
the Group accounts), we retained an independent monitor to
review the effectiveness of our compliance programme and
make recommendations, as appropriate, for further
enhancements to the programme. In collaboration with the
independent monitor, our programme has been enhanced
even further. In late 2013, the monitor completed his 18-month
review and concluded that Smith & Nephew's compliance
programme is reasonably designed and implemented to
detect and prevent violations of the anti-corruption laws and
is(cid:159)functioning effectively. Smith & Nephew will report directly
to(cid:159)the US Department of Justice ('DOJ') and the US Securities
and Exchange Commission ('SEC') for the remainder of the
three-year settlement agreement.
Manufacturing
We continue to implement Lean Manufacturing throughout our
factories and the supply chain to improve and sustain higher
levels of service, quality, productivity and ef(cid:178) ciency.
Core competencies include: materials technology; high-
precision machining in Advanced Surgical Devices; and
high-volume, automated manufacturing in Advanced
Wound Management.
4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
Perpetual ef(cid:178) ciency
The signi(cid:178) cant investments undertaken in 2013 have
been(cid:159)possible through our successful drive to be more
ef(cid:178) cient, reduce cost, and simplify and improve our
operating model.
In 2011, we announced a programme to generate annual
savings of $150 million. As a result of our work to date, we
have annualised bene(cid:178) ts of $131 million. The programme
will be largely complete by the end of 2014.
Signi(cid:178) cant actions included a major reorganisation
when(cid:159)we created the Advanced Surgical Devices
division, the opening of an extension to our Advanced
Wound Management factory in Suzhou, China, and
the(cid:159)introduction of a major new IT platform.
We are now a leaner business, and, as importantly, we
are embedding a culture of perpetual ef(cid:178) ciency into our
processes and future thinking.
We purchase raw materials, components, (cid:178) nished products
and packaging materials from(cid:159)certain key suppliers. These
principally include metal forgings and stampings for
orthopaedic products, optical and electronic sub-components
and (cid:178) nished goods for sports medicine products, active
ingredients and (cid:178) nished goods for(cid:159)Advanced Wound
Management and packaging materials across all businesses.
Suppliers are selected, and contracts negotiated, by a
centralised procurement team wherever possible, with a view
to ensure value for money based on the total spend across
the Group.
We outsource manufacturing where necessary to obtain
specialised expertise or where it is possible to gain lower
cost(cid:159)without undue risk to intellectual property. Suppliers of
outsourced products and services are selected based on their
ability to deliver products and services to speci(cid:178) cation, 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 Advanced Surgical Devices
division and skincare products in the Advanced Wound
Management division.
We operate a number of manufacturing facilities around
the(cid:159)globe, which are predominantly division speci(cid:178) c, and a
number of central distribution facilities in the key geographical
areas in which we operate. Products are shipped to Group
companies which hold small amounts of inventory locally
for(cid:159)immediate or urgent customer requirements.
Advanced Surgical Devices
The Advanced Surgical Devices division’s largest
manufacturing operation is based in Memphis (Tennessee,
US), with additional production and assembly plants based
in(cid:159)Mans(cid:178) eld (Massachusetts, US), Oklahoma City (Oklahoma,
US), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China),
Calgary (Canada), Warwick (UK) and Sangameshwar (India).
The Memphis facilities produce key products and
instrumentation in our Knee Implants, Hip Implant and Trauma
franchises. These(cid:159)include the JOURNEY II BCS and LEGION◊
knees, the ANTHOLOGY◊ Primary Hip System and key Trauma
products such as the PERI-LOC◊ Ankle Fusion Plating System
and TRIGEN◊ Intramedullary Nails. In addition to this, Memphis
is(cid:159)the home to the design and manufacturing process of
the(cid:159)VISIONAIRE Patient Matched Instrumentation Sets.
The Mans(cid:178) eld facility focuses on sports medicine related
products for minimally invasive surgery including the FAST FIX◊
360 Meniscal Repair System, FOOTPRINT◊ PK Suture Anchor,
DYONICS◊ Platinum Shaver Blades, ENDOBUTTON◊ CL Ultra
and the HEALICOIL PK suture anchor.
The Aarau, Tuttlingen, Beijing and Warwick facilities produce
a(cid:159)large number of products including key Trauma products,
the(cid:159)PLUS◊ knee and hip range and the BIRMINGHAM◊ Hip
Resurfacing System. The facility in Oklahoma City deals
mainly(cid:159)with the assembly of surgical digital equipment,
such(cid:159)as(cid:159)HD560 Camera.
A distribution facility in Baar (Switzerland) serves as the main
holding and consolidation point for markets in Europe. In the
US, the distribution hub is located in Memphis.
Advanced Wound Management
Advanced Wound Management is headquartered in Hull
(UK)(cid:159)which is home to a large proportion of the division’s
manufacturing activities. There are also manufacturing
facilities in Gilberdyke (UK), Suzhou (China), Curaçao
(Dutch(cid:159)Caribbean), Alberta (Canada) and Oklahoma City.
The products made at the Hull site cover the therapies
of(cid:159)Exudate Management (Foam products – principally
ALLEVYN◊), Burns treatment (ACTICOAT◊) and Wound Closure
(OPSITE◊ (cid:178) lm products). Several brands produced in Hull, such
as JELONET◊ and BACTIGRAS◊, will be transitioning to Suzhou
in 2014.
A key base material used in the production of a large number
of dressings is the intermediate bulk rolls of (cid:178) lm which
are(cid:159)manufactured in the Gilberdyke (UK) facility. The facility in
Alberta (Canada) provides speci(cid:178) c expertise in the addition
of(cid:159)silver coatings onto the ACTICOAT burns range prior to
shipping to Hull for the (cid:178) nal conversion process into
(cid:178) nished dressings.
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22 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Our business continued
The Suzhou facility opened in 2009 initially to
manufacture(cid:159)some Foam products within Exudate
Management. It(cid:159)has since expanded to take on
production(cid:159)of(cid:159)some Film Wound Closure products.
NPWT is an area of the business which is growing strongly.
The majority of the NPWT components are bought in from
third(cid:159)parties and assembled in the Advanced Surgical Devices
Oklahoma City facility, with the exception of the dressings
used for the PICO product which are manufactured in Hull.
Manufacturing for Advanced Wound Bioactives takes place
in(cid:159)Curaçao, and at various third party facilities in the US. The
products are distributed from a third party logistics facility in
San Antonio, Texas.
Advanced Wound Management distribution hubs are located
in Neunkirchen (Germany) and Derby (UK) for international
distribution, Bedford (UK) for UK domestic distribution and
Lawrenceville (Georgia, US) for US distribution.
Medical education
Smith & Nephew is dedicated to helping healthcare
professionals improve the quality of care for patients. We are
proud to support the professional development of surgeons
and nurses by providing them with medical education and
training on our Advanced Surgical Devices and Advanced
Wound Management products.
Every year thousands of customers attend our state-of-the-art
training centres in the US, UK and China and Smith & Nephew
courses at multiple hospitals and facilities around the world.
Working under expert guidance, attendees re(cid:178) ne techniques
and learn new skills, whilst experiencing the safe and effective
use of our products. We also support healthcare professionals
through our online resources such as the Global Wound
Academy and, for surgeons, our Education and
Evidence website.
1 ESTABLISHED MARKETS
Pioneering e-learning
We have extended our commitment to medical education
in(cid:159)2013 with the launch of Education and Evidence, a new
e-learning platform for surgeons to(cid:159)access and share
peer-to-peer educational resources. It follows the success
of our Global Wound Academy (www.globalwoundacademy.
com) which has more than 46,000 registered users.
Education and Evidence supports joint repair and
replacement, extremities and trauma specialties.
The(cid:159)member-based service at www.smith-nephew.com/
education/ hosts more than 1,000 videos, articles, surgical
techniques, podcasts, training courses, tablet PC apps and
iBooksTM. It uses an innovative search engine and
self-pro(cid:178) ling to tailor content to users, while also enabling
the sharing of(cid:159)resources with colleagues.
Through these powerful e-learning tools we are delivering
on our Strategic Priorities, reinforcing our position in the
Established Markets and extending our(cid:159)reach in the
Emerging & International Markets.
Sales and marketing
Our customers are the providers of medical and surgical
treatments and services in over 90 countries worldwide.
The(cid:159)largest single customer worldwide is a purchasing group
based in the UK that represented 6% of our worldwide
revenue in 2013.
In our Established Markets, our Advanced Surgical Devices
are(cid:159)principally shipped and invoiced directly to healthcare
providers, hospitals and other healthcare facilities. Certain
Advanced Wound Management products are shipped and
invoiced to wholesale distributors and others are consigned
to(cid:159)distributors that lease the devices to healthcare providers,
hospitals and other healthcare facilities and end-users.
Each division operates its own dedicated sales force as the
customer for the divisions’ products are usually different. Our
US sales forces consist of a mixture of independent contract
workers and employees. Sales agents are contractually
prohibited from selling products that compete with our
products. In most Other Established Markets, each division
typically manages employee sales forces directly.
In our Emerging & International Markets we operate
through(cid:159)direct selling and marketing operations, and through
distributors. In these markets, our Advanced Surgical Devices
franchises frequently share sales resources. The Advanced
Wound Management sales force may be separate where it
calls on different customers.
Our people
Smith & Nephew had over 11,000 employees in 2013. We are
committed to attracting, engaging, developing and retaining
employees as well as to(cid:159)being a responsible corporate citizen.
Our employees are dedicated to our core values of Innovation,
Trust and Performance which represent the foundation of
our culture.
Investing in our people and communities helps ensure the
long-term sustainability of our business. In 2013, we executed
actions to address employee feedback from our Global Survey
and also participated in the Great Places to Work survey in
many of our markets.
Attracting the best talent and developing and engaging
our(cid:159)employees is critical to achieving and sustaining
our(cid:159)business objectives and overall performance. Our
appointments are made on merit and in alignment with a core
set of competencies and values of which ethics and integrity
are central. We prioritise the development and promotion of
our employees whenever possible.
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SMITH & NEPHEW ANNUAL REPORT 2013
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23
We aim to provide an open, challenging, productive and
participative environment based on constructive relationships.
We maintain good communications with employees through
regular and timely information and consultation.
We provide clearly communicated goals and performance
standards, and the training, information and authority needed
to do a good job. We provide fair recognition and reward
based on performance. Our annual CEO Award recognises
employees who deliver exceptional results in-line with our
core values, encouraging innovation and a spirit of continuous
improvement at all levels. We are committed to working with
employees to develop each individual’s talents, skills and
abilities. We provide encouragement to learn and progress
and to participate fully in the quest for continuous
improvement. We recruit, employ and promote employees on
the sole basis of the quali(cid:178) cations and abilities needed for the
work to be performed. We do not tolerate discrimination on
any grounds and provide equal opportunity based on merit.
We are committed to building diversity in a working
environment where there is mutual trust and respect and
where everyone feels responsible for the performance and
reputation of our Company. We are committed to providing
healthy and safe working conditions for all employees. We
achieve this by ensuring that health and safety and the
working environment are managed as an integral part of the
business, and we recognise employee involvement as a key
part of that process.
We do not use any form of forced, compulsory or child labour.
We support the Universal Declaration of Human Rights of the
United Nations. This means we respect the human rights,
dignity and privacy of the individual and the right of employees
to freedom of association, freedom of expression and the right
to be heard.
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Each year, Smith & Nephew conducts a comprehensive
global(cid:159)development and capability review process to identify
high-potential employees and ensure they have career
development plans in place. Talented employees are provided
with opportunities to develop and grow their skills and career.
Current programmes include the CEO Forum, designed to
develop talent and provide exposure to the broader business,
and the General Managers Meeting, held annually to align
these key leaders with the Group’s strategy and goals. In
addition, the Board reviews succession plans for key executive
roles. We have succession plans for critical positions across
our business and have taken proactive steps to recruit
specialist and leadership talent to augment our current team.
Our performance management process ensures all
employees set objectives which align to our overall business
goals. Reward systems are focused on promoting high-
performance and ethical behaviour. Our Code of Conduct is
an important measure of individual performance. All
employees are required each year to complete training
and(cid:159)certify their adherence to this Code.
Smith & Nephew strives to create a more engaged and
productive workforce and focuses on measures to drive
employee engagement. These include an understanding of
the Group’s mission and direction, sense of employee
involvement, focus and adaptability to customers and market
place. We continue to listen to our employees, via regular
surveys and focus groups, and we value their opinions.
Diversity at Smith & Nephew
Smith & Nephew believes that diversity fuels innovation.
We(cid:159)are committed to employment practices based on equality
of opportunity, regardless of colour, creed, race, national
origin, sex, age, marital status, sexual orientation or mental
or(cid:159)physical disability unrelated to the ability of the person to
perform the essential functions of the job.
The Board and Executive Of(cid:178) cers continue to recognise
the(cid:159)importance of diversity and over the last two years
have(cid:159)expanded their own diversity pro(cid:178) le. Three of our
12(cid:159)Board(cid:159)members are female.
At 31 December 2013, Smith & Nephew had the following
breakdown of employees:
Number of Employees 1
Directors
Male
Female
Total
Senior Managers and above 2
Male
Female
Total
Total employees
Male
Female
Total
9
3
12
484
140
624
7,203
4,821
12,024
1
2
Number of employees as at 31 December 2013 including part time
employees and employees on leave of absence.
Senior managers and above includes all employees classed as Directors,
Senior Directors, Vice Presidents and Executive Of(cid:178) cers and includes all
statutory Directors of our subsidiary companies.
24 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Segment performance: Advanced Surgical Devices
Advanced Surgical Devices
REVENUE 1 ($m)
+1%
$3,015m
TRADING PROFIT 1,2 ($m)
+2%
$712m
3,050
2,926
3,251
3,108
736
714
728
697
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
OPERATING PROFIT 1
+4%
$620m
TRADING PROFIT MARGIN 2
23.6%
+20bps
700
630
632
579
23.8
24.1
23.4
21.9
FRANCHISE AREAS
– Orthopaedic Reconstruction
(Knee Implants and Hip Implants)
– Trauma & Extremities
– Sports Medicine Joint Repair
– Arthroscopic Enabling Technologies (‘AET’)
– Other ASD
REVENUE BY FRANCHISE AREA
OTHER ASD
2%
AET
15%
KNEE
29%
SPORTS MEDICINE
31%
SPORTS MEDICINE
JOINT REPAIR
16%
$3,015m
ORTHOPAEDIC
RECONSTRUCTION
51%
HIP
22%
TRAUMA
EXTREMITIES
16%
REVENUE BY FRANCHISE AREA 1,3 ($m)
-1% 0% +4% +7%
-2%
+14%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
874 865
MANUFACTURING SITES
– US and Canada: Memphis TN, Mans(cid:178) eld MA and Oklahoma
City OK, Calgary – Canada
– Europe: Aarau – Switzerland, Tuttlingen – Germany
– UK: Leamington Spa (Warwick)
– Other: Beijing – China, Sangameshwar – India
SERVICE CENTRES
– US, UK, Germany, Japan and Australia
666 653
474 486
474
496
458 441
162
74
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
HIPS
KNEES
ORTHAPAEDIC
RECONSTRUCTION
TRAUMA
& EXTREMITIES
SPORT MEDICINE
JOINT REPAIR
AET
OTHER ASD
SPORTS
MEDICINE
1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and
exclusion of disposals.
2 Explanation of these non-GAAP (cid:178) nancial measures are provided on pages 161 to 163.
3 The 2012 revenue by franchise has been restated to 2013 product franchises.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
25
The Emerging &
International Markets have
become an increasingly
important opportunity
for(cid:159)our(cid:159)products
Knee Implants
Smith & Nephew offers a range of products for specialised
knee procedures. The JOURNEY II BCS Total Knee System was
launched in the US in 2013. It is designed to restore the normal
kinematic motion by replicating the anatomic shapes of a
normal, healthy knee.
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.
These systems also feature VERILAST Technology,
our(cid:159)advanced bearing surface and also utilised VISIONAIRE
Patient-Matched Instrumentation.
With VISIONAIRE Instrumentation, a patient’s MRI and X-rays
are(cid:159)used to create customised cutting blocks that allow the
surgeon to achieve optimal mechanical axis alignment of the
new implant. In addition, VISIONAIRE also helps save time by
reducing the number of steps and instruments needed in the
operating room.
Overview
In Advanced Surgical Devices (‘ASD’) we develop,
manufacture and sell products in the following franchise areas:
Orthopaedic Reconstruction
Smith & Nephew offers a range of specialist products
for(cid:159)orthopaedic reconstruction in its Knee Implants and
Hip(cid:159)Implants franchises.
Implant bearing surfaces such as the proprietary OXINIUM◊
Oxidized Zirconium continue to be a point of differentiation
for(cid:159)Smith & Nephew. OXINIUM Technology combines the
enhanced wear resistance of a ceramic bearing with the
superior toughness of a metallic bearing. When combined
with(cid:159)highly cross-linked polyethylene (‘XLPE’) it results in
our(cid:159)proprietary VERILAST Technology. In Hip Implants, the
combination of a ceramicised metal head and a polyethylene
lined cup have been shown in joint registry data to have
superior (cid:178) ve-year survivorship (97.9%) compared to implants
made from any other material. In Knee Implants, the LEGION
Primary Knee with VERILAST Technology is the only knee
implant with a 30-year wear performance claim – more
than(cid:159)double(cid:159)the length of wear performance testing of
conventional technologies.
5 SUPPLEMENT GROWTH WITH ACQUISITIONS
Leadership in India
The Emerging & International Markets have become
an increasingly important opportunity for our products.
The acquisition of India’s Sushrut-Adler, a(cid:159)leader in
trauma products, greatly enhanced our portfolio for
this fast growing segment.
Sushrut-Adler has a long and distinguished history, a
reputation for quality products and a loyal customer
base. Its trauma portfolio strongly complements our
established positions in orthopaedic reconstruction
and sports medicine in India. From our enhanced
platform we can develop further products for the
mid-tier in India and for export. We are delivering on
our Strategic Priorities to build leadership positions in
the Emerging & International Markets and to bring
forward products for these countries.
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26 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Segment performance: Advanced Surgical Devices continued
Hip Implants
For Hip Implants, core systems include the ANTHOLOGY
Hip(cid:159)System, SYNERGY ◊ Hip System, the SMF Short Modular
Femoral Hip System, the R3 Acetabular System, the
POLARCUP◊ Dual Mobility Hip System and the SL-PLUS
Hip(cid:159)Family System.
In 2013, we launched the SMF Monolithic Hip Stem which
is(cid:159)intended to capitalise on the clinically proven (cid:179) at taper
cementless primary stem. The SMF Monolithic Stem family
of(cid:159)products allows the surgeon to use the convenience of
a(cid:159)one(cid:159)piece stem and the advantage of a short stem.
We also introduced the POLARSTEM◊ HA Cementless
Stem(cid:159)System in the US for state-of-the-art minimally invasive
surgical techniques that preserve bone and soft tissue,
with(cid:159)good functionality and reproducible results.
Trauma & Extremities
Our Trauma & Extremities franchise offers both internal and
external devices, as well as other products used in the
stabilisation of(cid:159)severe(cid:159)fractures and deformity
correction procedures.
During 2013, the US business re(cid:178) ned its commercial model to
increase the focus and resources addressing the
opportunities in the high-growth trauma and
extremities markets.
For Trauma, the principal internal (cid:178) xation products are
the(cid:159)TRIGEN◊ family of IM nails (TRIGEN META-NAIL◊ System,
TRIGEN(cid:159)Humeral Nail System, TRIGEN SURESHOT◊, and
TRIGEN INTERTAN◊) and the PERI-LOC◊ Plating System. For
extremities and limb restoration, the franchise offers the
TAYLOR SPATIAL FRAME◊ Circular Fixation System as(cid:159)well as a
range of plates, screws, arthroscopes, instrumentation,
resection, and suture anchor products for foot, ankle, hand
and wrist surgeons.
2013 saw the introduction of the MODULAR RAIL SYSTEM
(‘MRS’) which is designed to correct bone deformities,
malunions, non-unions and limb length discrepancies. The
MRS takes advantage of the body’s ability to grow new bone
tissue.
In Extremities during 2013 we expanded our ALL28◊ Foot and
Ankle portfolio to include ankle instability and Achilles tendon
repair. Ankle instability builds upon our successful TWINFIX◊
titanium anchor technology in a new system speci(cid:178) cally
designed for foot & ankle surgeons. It allows the surgeon to
re-attach or repair the anterior talo(cid:178) bular ligament (‘ATFL’)
to(cid:159)the(cid:159)(cid:178) bula. The Achilles tendon repair solution uses our
FOOTPRINT◊ Ultra PK Suture Anchor to address traumatic
avulsion of the tendon. This technology allows for tension
adjustment after anchor insertion up until the inserter is
removed, as well as eliminating knot stack on the heel
that(cid:159)may(cid:159)cause irritation to the patient post procedure.
Sports Medicine Joint Repair
The Sports Medicine Joint Repair franchise offers surgeons
a(cid:159)broad array of instruments, technologies and implants
necessary to perform minimally invasive surgery of the joints,
including knee, hip and shoulder repair.
Signi(cid:178) cant launches during the year included the HEALICOIL
REGENESORB Biocomposite Suture Anchor, Active Heel
Traction Boot and CLANCY◊ Depth Gauge.
The HEALICOIL Suture Anchor’s distinctive, open-architecture
differs from solid-core implants by eliminating the material
between anchor threads, allowing blood and bone marrow
from the surrounding cancellous bone to enter the implant.
Our proprietary REGENESORB Material is an
advanced biocomposite.
Arthroscopic Enabling Technologies (‘AET’)
Our Arthroscopic Enabling Technologies franchise offers
healthcare providers a variety of technologies such as(cid:159)(cid:179) uid
management equipment for surgical access; high de(cid:178) nition
cameras, digital image capture, scopes, light sources and
monitors to assist with visualisation inside the joints; radio
frequency (‘RF’) probes, electromechanical and mechanical
blades, and hand instruments for removing damaged tissue.
Key AET products include DYONICS shaver blades, ACUFEX◊
handheld instruments, and a wide range of radio frequency
probes. The DYONICS Platinum Series Shaver Blades are
single-use blades that provide superior resection due to their
unequalled sharpness and virtually eliminate clogging through
their improved debris evacuation capabilities.
The new LED 3000 Light Source launched in 2013 is designed
to optimise the HD visualisation experience by providing
brilliant illumination through a compact and intuitive interface.
Other ASD
The Other ASD franchise includes smaller businesses such
as(cid:159)Gynaecology.
The main Gynaecology product is the TRUCLEAR◊ System, a
(cid:178) rst-of-its-kind hysteroscopic morcellator that pairs continuous
visualisation capabilities with minimally invasive tissue
removal providing safe and ef(cid:178) cient removal of endometrial
polyps and submucosal (cid:178) broids. The business also(cid:159)sells a
hysteroscopic (cid:179) uid management system, which provides
uterine distension and clear visualisation during
hysteroscopic procedures.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
27
3 INNOVATE FOR VALUE
Natural-motion Journey II
BCS Total Knee System
JOURNEY II BCS sets a new standard in
knee implant performance by restoring more
normal motion. This is achieved through
the reproduction of both the shapes of
the joint’s hard surfaces and the normal
force behaviour of the soft tissues, such as
ligament and muscle (cid:178) ring patterns. As a
result, the soft tissue’s re-adjustment to new
shapes and forces after surgery is minimised,
helping to return the patient’s stride to its
natural rhythm.
This latest innovation is the result of intense
research and design, and the development
of new PHYSIOLOGICAL MATCHING◊
Technology. Using our LifeMOD◊ human
simulation software, Smith & Nephew
engineers were able to conduct proprietary
analysis of the bone, ligament and muscle
forces that impact the knee, and then
account for those forces within the design
of an implant that restores anatomic shapes
and normal motion.
JOURNEY II BCS is made from Smith
& Nephew’s VERILAST Technology.
The combination of two wear reducing
materials – proprietary OXINIUM alloy and
a highly cross-linked plastic liner, VERILAST
Technology generates a signi(cid:178) cant reduction
in implant wear compared to traditional
bearing couples on the market.
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28 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Segment performance: Advanced Surgical Devices continued
Market and competition
In 2013, weaker economic conditions worldwide continued
to(cid:159)create several challenges for the overall surgical devices
market, including continued deferrals of joint replacement
procedures and heightened pricing pressures.
These factors contributed to the lower overall growth of
the(cid:159)worldwide surgical devices market versus historic
comparables. However, over the medium term, several
catalysts are expected to continue to drive sustainable growth
in surgical device procedures, including the growing and
ageing population with active lifestyles, rising rates of
co-morbidities such as obesity and diabetes, patient desire
for(cid:159)minimally invasive procedures, technology improvements
allowing surgeons to treat younger, more active patients,
and(cid:159)the increasing demand for healthcare
in(cid:159)emerging markets.
Orthopaedic and sports medicine procedures tend to be
higher in the winter months (quarter one and quarter four in
the US and Europe) when accidents and sports related injuries
are highest. Conversely, elective procedures tend to slow
down in the summer months due to holidays.
Global orthopaedic reconstruction segment
Smith & Nephew estimates that the global orthopaedic
reconstruction segment is worth approximately $14 billion
and(cid:159)the segment served by Smith & Nephew increased by
approximately 3% in 2013. Competitors in the orthopaedic
reconstruction segment include Biomet, DePuy Synthes
(a(cid:159)division of Johnson & Johnson), Stryker and Zimmer.
Global orthopaedic trauma segment
Smith & Nephew estimates that the global orthopaedic trauma
segment is worth approximately $5 billion and the segment
served by Smith & Nephew grew by approximately 7% in 2013.
Competitors in the orthopaedic trauma segment include
Biomet, DePuy Synthes (a division of Johnson & Johnson),
Stryker and Zimmer.
Global sports medicine segment
Smith & Nephew estimates that the global sports medicine
segment (representing access, resection and repair products)
is worth approximately $4 billion and the segment served by
Smith & Nephew grew by approximately 6% in 2013.
Competitors in the sports medicine segment include Arthrex,
DePuy Mitek (a division of Johnson & Johnson) and Stryker.
Regulatory approvals
In 2013, regulatory clearances/approvals were obtained for
several key products and instrumentations.
In the US, 510(k) clearance was obtained for Disposable
Knee(cid:159)Instruments, SURESHOT◊ Distal Targeting System v3.0
(added drill depth measurement functionality), HEALICOIL
REGENESORB Suture Anchor, TWINFIX Ti 3.5mm SL Anchor,
FOOTPRINT Ultra 4.5mm & 5.5mm SL Anchors, SUTUREFIX◊
Ultra Suture Anchors and ULTRATAPE◊ Suture.
In Europe, we obtained renewals for LEGION Narrow
Femoral(cid:159)Components (CE mark approval), ULTRA FAST-FIX◊ AB
(indications expansion to include meniscal allograft
transplantation), Round ENDOBUTTON◊, SCREWBUTTON◊
and(cid:159)ULTRA FAST-FIX AB (CE Renewal).
In Canada, the TWINFIX Ti 3.5mm SL Anchor and FOOTPRINT
Ultra 4.5mm & 5.5mm SL Anchors were approved.
In Australia, the OSTEORAPTOR◊ Curved 2.3 system
was approved.
In Japan, we received approvals for SURESHOT Distal
Targeting System (two approvals obtained in 2013, including
approval of current software version, 3.0), JOURNEY II BCS
Knee System, R3 Acetabular System (XLPE Liners and Shells),
JOURNEY Uni(cid:159)Knee System (OXINIUM femoral components
and all-poly tibial baseplates), JOURNEY Uni Knee System
(Articular inserts and tibial baseplates), VISIONAIRE Patient-
Matched Cutting Blocks, JOURNEY II CR Knee System,
XTENDOBUTTON◊, HEALICOIL PK Suture Anchor, Beaver
Blade, TRUCLEAR Hysteroscopic Morcellator system, BIOSURE
HA Interference Screw, BIORAPTOR Knotless Anchor and
TWINFIX ULTRA HA Suture Anchor.
In our Emerging & International Markets, we obtained a
number of regulatory clearances/approvals for several core
product lines, as follows:
In China, we received approvals for Ultra FASTFIX and Ultra
FASTFIX AB Meniscal Repair System, SURESHOT Distal
Targeting Systems, TWINFIX ULTRA HA Suture Anchor,
SPYROMITE and DYNOMITE Extremities Suture Achors and
LEGION Primary Knee System – POROUS Femoral Component
with HA Coating.
In Russia, we obtained approval to market our Multiple Knee
Systems including JOURNEY UNI, GENESIS II, LEGION
and TC_PLUS.
In Mexico, the OXINIUM Femoral Components, R3 Acetabular
System, REDAPT Instruments, Cannulated Screw Systems
were approved for distribution.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
29
Segment performance: Advanced Wound Management
Advanced Wound
Management
REVENUE 1
+11%
$1,336m
TRADING PROFIT 1,2
+14%
$275m
1,019
1,029
912
846
160
247
237
233
FRANCHISE AREAS
– Advanced Wound Care
– Advanced Wound Devices
– Advanced Wound Bioactives
REVENUE BY FRANCHISE AREA
ADVANCED WOUND
BIOACTIVES 21%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
OPERATING PROFIT 1
-8%
$190m
TRADING PROFIT MARGIN 2
-250bps
20.6%
$1,336m
ADVANCED
WOUND CARE
63%
232
220
214
144
18.9
25.6
24.3
23.1
ADVANCED
WOUND DEVICES
16%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
MANUFACTURING SITES
– US and Canada: Oklahoma City OK and Calgary – Canada
– UK: Hull, Gilberdyke
– China: Suzhou
– Other: Curaçao
SERVICE CENTRES
– US, UK, Germany, Japan and Australia
REVENUE BY FRANCHISE AREA 1 ($m)
+1%
849
843
+20%
+47%
180
213
2012
2013
2012
2013
280
2013
Nil
2012
ADVANCED
WOUND CARE
ADVANCED
WOUND DEVICES
ADVANCED
WOUND BIOACTIVES
1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and
exclusion of disposals.
2 Explanation of these non-GAAP (cid:178) nancial measures are provided on pages 161 to 163.
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30 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Segment performance: Advanced Wound Management continued
Overview
In Advanced Wound Management (‘AWM’) we offer products
from initial wound bed preparation through to full wound
closure. These products are(cid:159)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 acute wounds such as burns and invasive
surgery that impact the wider population.
The main products within the AWM business are for Exudate
management, Infection management, NPWT and Bioactives.
AWM has its global headquarters in Hull, UK and its North
American headquarters in St Petersburg, Florida.
Advanced Wound Care
Exudate management
Exudate management products focus on effectively and
ef(cid:178) ciently locking away wound (cid:179) uid and creating an optimal
healing environment to ensure better healing outcomes. Our
key brands in this space are ALLEVYN foam dressings and
DURAFIBER gelling (cid:178) bre dressings.
During 2013, we continued to invest in the commercialisation
of ALLEVYN Life, our latest innovation in foam dressings,
designed to provide a better quality of life to the patient during
the healing process. In several studies this has resulted in
better patient satisfaction, longer wear times and overall
reduced healthcare management costs. One recent article
published in the Journal of Community Nursing stated
"In(cid:159)employing a design intended to combat the common
problems of living with a wound, such as exudate leakage
and(cid:159)conformability, the dressing has the potential to improve
wound management practice and reduce the use of
associated resources, such as nursing time". The article
concluded that around 2,500 working days could be saved
annually as(cid:159)a result of using ALLEVYN Life.
DURAFIBER has continued to grow over the course of 2013,
with customers switching from other products within the
gelling (cid:178) bre segment.
Infection management
AWM has two signi(cid:178) cant technologies in its infection
management portfolio, silver (ACTICOAT, DURAFIBER Ag and
ALLEVYN Ag) and iodine (IODOSORB◊). The iodine-based
IODOSORB product has continued to gain interest as bio(cid:178) lms
become a more important topic in wound care.
We launched DURAFIBER Ag in 2013 and with it entered the
silver gelling (cid:178) bre market, one of the largest segments of the
infection management market.
4 SIMPLIFY & IMPROVE OUR OPERATING MODEL
Expanding
Suzhou
In April distinguished guests from Suzhou Industrial
Park and Jiangsu Province attended the of(cid:178) cial
opening of the major extension to Smith &
Nephew’s Advanced Wound Management
manufacturing facility in Suzhou, China.
The expansion more than doubled the size of the
Suzhou facility, and is enabling Smith & Nephew to
continue to develop its product portfolio both for the
Chinese market and for export. Those manufactured
at Suzhou include ALLEVYN, Smith & Nephew’s
leading foam dressing brand, which is used in the
treatment of hard to heal wounds such as leg ulcers,
as well as new portfolios for the mid-tier across the
Emerging & International Markets.
Completed on time, to budget, and without a lost-
time incident, the extension takes the total (cid:179) oor area
to 27,000 square meters and doubles the
production capacity to over 100 million wound
dressings a year. We are delivering on our Strategic
Priority to Simplify and Improve our Operating
Model by optimising our global manufacturing
footprint.
China is of great strategic importance to Smith &
Nephew. We are proud of what we have achieved
here and are investing for the long term. We now
have more than 900 people in China, working
across(cid:159)manufacturing and commercial operations.
We have(cid:159)built our success upon a sustainable and
ethical approach to business, and are bringing this
long-term commitment to our work, our employees
and our(cid:159)communities.
Other
We also offer a wide range of other wound care products,
which means we have one of the most comprehensive ranges
of wound care solutions in the industry. These products
include our (cid:178) lm and post-operative dressings, skincare
products and gels.
ADERMA: Following the acquisition and integration of
ADERMA pressure relieving technology in 2012, the launch in
the UK and increase in ADERMA sales activity has seen it
(cid:178) rmly established as the market leader. The UK government’s
targeting of Pressure Ulcer Prevention and the known cost to
the UK health system has driven the adoption of ADERMA in
both the Acute and Community sectors. Due to the success in
the UK, plans are in place to launch ADERMA as Dermapad in
2014 into other healthcare markets with equally strong
Pressure Ulcer Prevention drivers. With our Skincare portfolio,
ADERMA/ Dermapad and ALLEYVN Life, we are well placed to
deliver a strong and comprehensive Pressure Ulcer Prevention
and treatment solution through a tested and validated value
proposition into the Established Markets.
IV 3000: AWM’s specialist breathable premium IV dressing,
utilising REALTIC◊ (cid:178) lm technology and unique patterned
adhesive, continues to perform well, particularly driven by
emerging markets. Success in these markets and elsewhere
has identi(cid:178) ed an opportunity for a mid-tier offering.
OPSITE POST OP VISIBLE: This is our innovative dressing
that(cid:159)combines the qualities of a premium dressing with
the(cid:159)ability to see the incision. This unique product continues
to(cid:159)deliver strong growth in both our Established and Emerging
& International Markets as its adoption becomes more
widespread backed by good clinical evidence.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
31
Advanced Wound Devices
Advanced Wound Devices consists of two categories
of(cid:159)products; NPWT and(cid:159)VERSAJET◊.
NPWT
Our NPWT solutions include traditional NPWT products
(RENASYS◊ products) and the single-use portfolio
(PICO(cid:159)and(cid:159)KALYPTO◊ products).
In its sixth year on the market, our RENASYS traditional NPWT
brand has seen continuous improvement and innovation.
Product updates in 2013 enhanced both function and user
experience with our RENASYS systems as a whole. The
RENASYS product offering now includes multiple device
options, a choice of foam or gauze dressings, along with
a(cid:159)range of drains and specialty kits.
The PICO system, our single-use, canister-free solution
is(cid:159)revolutionising NPWT. As familiar and easy to use as
an(cid:159)advanced wound dressing, PICO provides an active
intervention to help promote optimal healing for early
discharge and enhanced outcomes in complex cases.
PICO(cid:159)simpli(cid:178) es NPWT.
VERSAJET
The VERSAJET Hydrosurgery system is a mechanical
debridement device used by surgeons to excise and evacuate
non-viable tissue, bacteria and contaminants from wound,
burns and soft tissue injuries.
Advanced Wound Bioactives
Bioactives represent the fastest growing category of chronic
wound therapeutics. Our diversi(cid:178) ed biotherapeutic portfolio
offers novel, cost-effective solutions for tissue repair and
healing, addressing the full spectrum of hard-to-heal wounds.
Currently, our leading product is Collagenase SANTYL◊
Ointment, the only FDA-approved biologic enzymatic
debriding agent for chronic dermal ulcers and severe
burns. Other products include: REGRANEX◊ Gel, a FDA-
approved platelet-derived growth factor; and the OASIS◊
family of naturally-derived, extracellular matrix replacement
products indicated for the management of both chronic and
traumatic wounds.
Additionally, the lead candidate in our bioactive pipeline
is(cid:159)HP802-247, an investigational allogeneic living cell
bioformulation containing keratinocytes and (cid:178) broblasts.
HP802-247 is currently in Phase III for the treatment of venous
leg ulcers following positive Phase IIb clinical trial results,
which were recently published in The Lancet.
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32 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Segment performance: Advanced Wound Management continued
Market and competition
The AWM market is focused on the treatment of chronic
wounds of the older population and other acute hard-to-heal
wounds such as burns and certain surgical wounds and is
therefore expected to bene(cid:178) t from demographic trends.
Growth is driven by an ageing population and by a steady
advance in technology and products that are more clinically
ef(cid:178) cient and cost-effective than their conventional
counterparts. The market for advanced wound treatments is
relatively unpenetrated and it is estimated that the potential
market is signi(cid:178) cantly larger than the current market.
Management believes that the market will continue the
trend(cid:159)towards advanced wound products with their ability
to(cid:159)accelerate healing rates, reduce hospital stay times
and(cid:159)cut(cid:159)the cost of clinician and nursing time as well
as(cid:159)aftercare in the home.
Smith & Nephew estimates that the global wound
management segment is worth approximately $7(cid:159)billion and
the segment served by Smith & Nephew grew by 4% in 2013.
Global competitors vary across the various product areas and
include Coloplast, Convatec, Kinetic Concepts and Molnlycke.
The 2013 Global NPWT market was (cid:179) at versus 2012. Price
pressures continue to offset the increase in patient therapy
volumes. Price pressures have increased in some key markets
due to competition, competitive bidding and reimbursement
changes. Market size is estimated to be $2(cid:159)billion.
Due to the nature of its product range there is little seasonal
impact on the Advanced Wound Management business.
Regulatory approvals
In 2013, regulatory clearance was obtained for ALLEVYN Life
Heel in the EU, US and Australia. ELECT◊ Super absorber was
also approved in Europe. The complete range of DURAFIBER
Ag sized dressings was approved in Europe and the US.
ALLEVYN Ag Gentle and ALLEVYN Ag Gentle Border were both
approved in Japan. ALLEVYN Gentle Border and ALLEVYN
Gentle were approved for import into China.
PICO Single Use Negative Wound Therapy System was
approved in Brazil, Russia, Mexico and Korea.
The next generation VERSAJET II system was approved in
Japan, China as well as several other Emerging &
International Markets.
The RENASYS◊ EZ PLUS pump and RENASYS Foam and
Gauze dressing kits were approved in China.
RENASYS EZ MAX Negative Pressure Wound Therapy pump
also received clearance in the US, EU and Australia.
RENASYS EZ PLUS and RENASYS GO were both certi(cid:178) ed as
compliant with the third edition of IEC 60601 an important
standard for the safety of electro-medical devices.
2 EMERGING & INTERNATIONAL MARKETS
Building our product portfolio
and commercial platform
We are building strong businesses in the Emerging &
International Markets by having close, direct relationships
with our customers – and by developing product portfolios
that meet the needs of patients in the(cid:159)economic mid-tier.
In 2013 we furthered this strategy. Our (cid:178) rst mid-tier
product, a low cost camera system, was launched. We also
acquired a portfolio of orthopaedic trauma products in
India. By developing and manufacturing in the Emerging &
International Markets we are able to deliver both quality
and value.
We also completed acquisitions of distributors in Turkey
and Brazil. Both these markets are fast-growing and offer
exciting opportunities. These are important investments
which(cid:159)will create a signi(cid:178) cant platform from which we
can grow.
Smith & Nephew is delivering on its strategic priority
to(cid:159)build a sustainable business in the Emerging &
International Markets.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
33
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5 SUPPLEMENT GROWTH THROUGH ACQUISITIONS
Integrating Healthpoint
Healthpoint Biotherapeutics, acquired in
late 2012, exceeded our expectations in its
(cid:178) rst year as a Smith & Nephew business.
With strong revenue growth of 47%, it met
our Strategic Priority of ‘Supplementing our
Organic(cid:159)Growth through Acquisitions’.
The acquisition marked Smith & Nephew’s
entry into Bioactives, the fastest growing
segment of advanced woundcare. It also gives
us enhanced presence in the US, including
access to new channels and capabilities.
During 2013, we delivered on our objective to
integrate Healthpoint gradually into Smith &
Nephew to maximise the respective strengths
of both companies and to avoid disruption to
our customers.
Healthpoint’s culture very much complemented
our own, with a clear focus on innovation,
customer needs and a commitment to a high
level of compliance and ethics. The integration
team sought to retain the best on both sides
– continuing to nurture the entrepreneurial
spirit of Healthpoint, whilst bringing the
wider bene(cid:178) ts of Smith & Nephew’s global
organisation to that business. The process
culminated with the rebranding of Healthpoint
to Smith & Nephew Biotherapeutics in
September.
Smith & Nephew now has leading brands
and positions in all the important Advanced
Wound Management segments of Exudate
Management, Infection Management, Negative
Pressure Wound Therapy and Bioactives.
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34 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Sustainability
Our sustainability strategy supports
our (cid:178) ve Strategic Priorities
Smith & Nephew promotes sustainability to our stakeholders
through addressing economic, social and environmental
considerations. In turn, our sustainability strategy is aligned
with the strategic priorities.
1 ESTABLISHED MARKETS
Making best environmental choices and manufacturing and
supply chain ef(cid:178) ciencies all contribute to reducing our cost
base, facilitating access to our products and helping our
customers meet their sustainability ambitions.
2 EMERGING & INTERNATIONAL(cid:159)MARKETS
Cost base reductions facilitate wider access to our products.
Speci(cid:178) cally our focus on mid-tier products is(cid:159)aimed at
supporting fundamental and affordable healthcare in the
Emerging & International Markets.
3 INNOVATE FOR VALUE
Building sustainability into our New Product Development
processes, including reducing packaging and waste, helps
us innovate to meet our customers’ expectations, deliver
mutual value and optimise patient care.
4 SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
Incorporating sustainability into our business processes
and(cid:159)optimising our facilities and supply chain to reduce
our(cid:159)resource consumption and environmental impact
help(cid:159)meet(cid:159)the expectations of(cid:159)our customers and society.
Protecting our employees through the implementation of
global(cid:159)HSE standards and responsible behaviours is not
only(cid:159)right but also adds value to our business.
5 SUPPLEMENT ORGANIC GROWTH
WITH ACQUISITIONS
Our due diligence approach includes sustainability
considerations, our global policies and standards to ensure
we protect the integrity and reputation of our business.
Speci(cid:178) cally our acquisition of Sushrut-Adler in India is aimed
at providing fundamental and affordable healthcare into the
emerging markets.
Sustainability strategy and targets
Progress towards the 2015 targets has been indexed to the baseline year 2011.
Target by 2015
Reduce non-renewable energy use by 15%
-0.6%
Energy consumption is decreasing but not in line with
expectations. This is largely in(cid:179) uenced by higher energy use in
China as we scale up for expansion. The increased production
levels at our Suzhou, China plant have given rise to an
underlying increase in Group energy usage of 2.6%.
Reduce CO2 emissions by 15%
+0.8%
CO2 emissions re(cid:179) ect different carbon footprints of energy
production in different geographic locations. Increasing
production capacity at the Suzhou plant has contributed to
an(cid:159)underlying increase in the carbon emissions of 3.6%.
The(cid:159)carbon footprint in China is roughly twice that of the UK.
Reduce water use(cid:159)by 15%
+11.9%
Water usage continues to rise as new facilities are
commissioned and we make operational choices based on best
environmental options. For example, as we have expanded at
Suzhou we have chosen to use a cooling system based on
evaporation to reduce energy consumption.
+7.6%
Water consumption at Memphis and Suzhou account for 84% of
our total water usage and when excluded the increase was 7.6%.
Reduce packaging materials by 15%
We are evaluating all the options for reducing packaging whilst
maintaining product safety and protection. This is a challenging
area and details and examples of projects will be available in our
Sustainability Report.
Reduce total waste(cid:159)by 15%
+15.1%
In 2013, there were two exceptional waste sources that
contributed to the increase in total waste generated by the
business. Speci(cid:178) cally these were from the validation of
manufacturing start-up in China and the disposal of obsolete
stock in the US. We continue to focus on waste reduction at
source and recycling opportunities.
The land(cid:178) ll component of our total waste was reduced by 21.7%.
-21.7%
Increase % of(cid:159)total(cid:159)waste recycled(cid:159)by 15%
+21.2%
(Excludes waste
to energy)
Recycling of wastes continues to rise as more opportunities
are(cid:159)exploited. We are now reporting separately the waste that
is(cid:159)diverted for energy recovery.
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SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
35
Safety performance
Safety Reporting
2013
2012
2011
OSHA recordable incidents per
200,000hrs worked (TIR)
Lost time incidents per
200,000hrs worked (LTIFR)
Number of lost time incidents
arising from manufacturing
facilities
1.11
1.09
1.16
0.48
0.51
0.58
25
37
42
There were no fatalities. Lost time injuries in our manufacturing
facilities decreased by 32% over the previous year. However,
the number of injuries in our non-manufacturing and supply
chain operations increased mainly due to car accidents.
Improving driving safety is a particular priority in 2014. We
are(cid:159)making signi(cid:178) cant progress with the deployment of
risk(cid:159)based(cid:159)control processes and our new HSE Integrated
Management System.
Greenhouse gases
Methodology, materiality and scope
We are reporting on the emission sources required under the
Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013. These sources fall within our consolidated
(cid:178) nancial statement. We have used the Greenhouse Gas
Protocol: A Corporate Accounting and Reporting Standard
(Revised Edition) as guidance for this process.
The focus of our data collection has been on the areas of the
business that have the most in(cid:179) uence on our environmental
impacts and provide stakeholders with a level of detail that
enables them to monitor emissions data, sustainability
management and trends. Wherever possible, primary
data(cid:159)from energy suppliers has been used.
During the year, we have continued to make progress in
reducing our energy consumption at many of our operational
facilities. CO2 emissions have not reduced in line with energy
due to the different carbon footprints of energy production in
different geographic locations, particularly China.
Global GHG emissions data for current reporting year
and comparisons
2013
2012
2011
CO2e emissions (tonnes) from:
Combustion of fuel and operation
of facilities (process(cid:159)and fugitive)
Purchased electricity, heat
and(cid:159)steam
Total
Intensity Ratio
Emissions (total) normalised to:
CO2e (t) per $m revenue (i)
CO2e (t) per full-time employee (ii)
10,102 10,922 10,894
66,659 64,991 65,241
76,761
75,913 76,135
18.9
7.3
18.3
7.2
17.8
7.1
Notes
2013 data adjusted to exclude Healthpoint.
(i) Revenue data: 2013: $4,071m, 2012: $4,137m, 2011: $4,270m.
(ii) Full-time employee data: 2013: 10,520, 2012: 10,477, 2011: 10,743.
Support for community
In 2013, Smith & Nephew’s support for community charitable
causes, grants, sponsorships and third party medical
education was $10m.
The largest proportion of our environmental impacts is from
manufacturing, warehousing and research. Sales locations are
included however some smaller, leased or shared of(cid:178) ces are
not reported. We estimate that these exclusions represent less
than 2% of our overall emissions.
For more information on sustainability see our
website(cid:159)www.smith-nephew.com/sustainability
Our 2013 Sustainability Report will be published
in(cid:159)spring 2014.
The Biotherapeutics business (acquired at the end of 2012)
is(cid:159)excluded from these (cid:178) gures along with other more recent
acquisitions during 2013. This is in line with our established
policy for integration of acquired assets.
Our emissions have been calculated by using speci(cid:178) c
emissions factors for each country outside the US and
regional factors within the US. We have used the US EPA
‘Emissions & Generation Resource Integrated Database’
(eGRID) for US regions and the UK Government DEFRA
Conversion Factors for Greenhouse Gas Reporting for
elsewhere. We believe that these factors are the most
appropriate to use for our business and give more accurate
conversion rates than the conversion factors we have used in
previous Sustainability Reports. The emissions from 2011, our
baseline year for the sustainability targets, have therefore
been recalculated using consistent rates. Fugitive emissions
are included from the manufacturing and research locations
and arise from the losses of refrigerant gases.
References
Emission factors have been taken from the following source:
–
UK Government DEFRA Conversion Factors for Greenhouse Gas Reporting, http://www.ukconversionfactorscarbonsmart.co.uk/
Emission factors for electricity from locations in the US have been taken from the following source:
–
US EPA ‘Emissions & Generation Resource Integrated Database’ (eGRID) http://www.epa.gov/cleanenergy/energy-resources/egrid/index.html
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36 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Financial review and principal risks
Judicious (cid:178) nancial management
has been and remains central to
our success
ASD
REVENUE BY FRANCHISE AREA ($m)
AWM
REVENUE BY FRANCHISE AREA ($m)
OTHER ASD
2%
AET
15%
KNEE
29%
SPORTS MEDICINE
31%
ADVANCED WOUND
BIOACTIVES 21%
SPORTS MEDICINE
JOINT REPAIR
16%
$3,015m
ORTHOPAEDIC
RECONSTRUCTION
51%
$1,336m
ADVANCED
WOUND CARE
63%
HIP
22%
ADVANCED
WOUND DEVICES
16%
TRAUMA
EXTREMITIES
16%
REVENUE BY FRANCHISE AREA 1,2 ($m)
REVENUE BY FRANCHISE AREA 1 ($m)
-1% 0% +4% +7%
-2%
+14%
+1%
849
843
+20%
+47%
874 865
666 653
474 486
474
496
458 441
162
74
180
213
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
280
2013
Nil
2012
HIPS
KNEES
ORTHAPAEDIC
RECONSTRUCTION
TRAUMA
& EXTREMITIES
SPORT MEDICINE
JOINT REPAIR
AET
OTHER ASD
ADVANCED
WOUND CARE
ADVANCED
WOUND DEVICES
ADVANCED
WOUND BIOACTIVES
SPORTS
MEDICINE
1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of
acquisitions and execution of disposals.
2 The 2012 revenue by franchise has been restated to 2013 product franchises.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
37
Revenue by market
The underlying increase in each division’s revenues, by market, reconciles to reported growth, the most directly comparable
(cid:178) nancial measure calculated in accordance with IFRS, as follows:
2013
$m
2012
$m
Reported
growth in
revenue
%
Constant
currency
exchange
effect
%
Acquisition
/Disposal
effect
%
Underlying
growth in
revenue
%
Advanced Surgical Devices
US
Other Established Markets
Established Markets
Emerging & International Markets
Advanced Surgical Devices
Advanced Wound Management
US
Other Established Markets
Established Markets
Emerging & International Markets
Advanced Wound Management
1,391
1,204
2,595
420
3,015
471
722
1,193
143
1,336
1,449
1,298
2,747
361
3,108
202
705
907
122
1,029
Advanced Surgical Devices
Revenue
ASD revenue decreased by $93m (-3% on a reported basis)
from $3,108m in 2012 to $3,015m in 2013. The underlying
increase of 1% is after adjusting for a net 3% adverse impact
from the disposal of the Clinical Therapies business in 2012
and the acquisitions completed in quarter four 2013, and a
1%(cid:159)unfavourable foreign currency translation.
In the US, revenue decreased by $58m to $1,391m in 2013
from $1,449m in 2012 (-4% on a reported basis). The
underlying increase of 1% is after adjusting 5% for the
adverse impact of the Clinical Therapies disposal in 2012. In
Other Established Markets, revenue was $1,204m in 2013, a
decrease of $94m from $1,298m in 2012 (-7% on a reported
basis). The underlying decrease was 3% after adjusting for
the adverse impact of 2% on the Clinical Therapies disposal
in 2012, and 2% from unfavourable foreign currency
translation. Our Emerging & International Markets revenue
increased by $59m to $420m in 2013 from $361m in 2012
(16% increase on a reported basis). The underlying increase
was 18% after adjusting 2% for unfavourable foreign currency
translation.
In the global Knee Implant franchise, revenue decreased by
$9m from $874m in 2012 to $865m in 2013 (-1% on a reported
basis), representing (cid:179) at underlying revenue performance after
1% of unfavourable currency translation. Growth has been
impacted by exposure to a weakening European market with
conditions continuing to deteriorate in Germany, our largest
European market, and our position in the product life cycle
versus our peers. Growth improved in the second half of the
year driven by sales of the Journey II BCS Knee System and
bene(cid:178) ts from the VERILAST bearing surface TV advertising
campaign in the US.
(4)
(7)
(6)
16
(3)
133
3
32
17
30
–
2
1
2
1
–
1
1
3
1
5
2
4
–
3
(111)
(1)
(23)
–
(20)
1
(3)
(1)
18
1
22
3
10
20
11
Global revenue from the Hip Implant franchise decreased
by(cid:159)$13m from $666m in 2012 to $653m in 2013 (-2% on a
reported basis), which represented an underlying revenue
decline of 1% after 1% unfavourable foreign currency
translation. Continuing metal-on-metal headwinds have
contributed to(cid:159)this decline.
Trauma & Extremities revenue increased by $12m from $474m
in 2012 to $486m in 2013 (3% on a reported basis).
This(cid:159)represents underlying revenue growth of 4% after 1% of
unfavourable foreign currency translation. During 2013,
bene(cid:178) ts were seen from the additional extremities US sales
representatives recruited earlier in the year.
Sports Medicine Joint Repair revenue increased by $22m
from $474m in 2012 to $496m in 2013 (5% on reported basis),
representing underlying revenue growth of 7% and 2% of
unfavourable foreign currency translation. This re(cid:179) ects a
strong contribution across all key joint types and geographies.
Global revenue from Arthroscopic Enabling technologies
decreased by $17m from $458m in 2012 to $441m in 2013
(-4% on a reported basis). This decrease represents an
underlying revenue decline of 2% and 2% of unfavourable
foreign currency translation.
The revenue in the Other ASD franchise fell by $88m from
$162m in 2012 to $74m in 2013 following the disposal of the
Clinical Therapies business in 2012. Excluding the impact of
this disposal, underlying revenue in the Other ASD franchise,
which includes gynaecology, grew by 14% with the remaining
Clinical Therapies geographies contributing $9m.
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38 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Financial review and principal risks continued
Trading and operating pro(cid:178) t
Operating pro(cid:178) t, the most directly comparable (cid:178) nancial
measure under IFRS, reconciles to trading pro(cid:178) t as follows:
Advanced Wound Bioactives revenue of $280m in 2013
(2012 – $nil) relates to Healthpoint acquired in December 2012.
The underlying increase, adjusted to include the results of
Healthpoint for the commensurate period in 2012, was 47%.
Operating pro(cid:178) t
Acquisition related costs
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
and(cid:159)impairments
Trading pro(cid:178) t
2013
$m
620
7
44
41
712
2012
$m
632
–
57
39
728
Trading pro(cid:178) t margin increased from 23.4% to 23.6%. Trading
pro(cid:178) t decreased by $16m to $712m from $728m in 2012. This
decrease re(cid:179) ects the impact of the CT disposal in May 2012,
the impact of the US medical device excise tax and the cost of
planned investments in the Knee Implants and Trauma
franchises and Emerging & International Markets offset by
bene(cid:178) ts from our structural ef(cid:178) ciency programme.
Operating pro(cid:178) t decreased by $12m from $632m in 2012 to
$620m in 2013. This comprises the decrease in trading pro(cid:178) t
of $16m discussed above, an increase in acquisition related
costs of $7m, an increase in amortisation of acquisition
intangibles of $2m, partially offset by a decrease in
restructuring and rationalisation costs of $13m.
Advanced Wound Management
Revenue
AWM revenue increased by $307m (30% on a reported basis),
from $1,029m in 2012 to $1,336m in 2013. The underlying
increase of 11% is after adjusting for an increase of 20% for the
acquisitions completed in the year and a 1% unfavourable
foreign currency translation.
In the US, revenue increased by $269m to $471m in 2013 from
$202m in 2012 (133% on a reported basis). The underlying
increase of 22% is after adjusting 111% for the impact of
acquisitions. In Other Established Markets, revenue was
$722m in 2013, an increase of $17m from $705m in 2012 (3%
on a reported basis). The underlying revenue increase was
also 3% with the 1% impact of acquisitions offset by 1%(cid:159)of
unfavourable foreign currency translation. Our Emerging &
International Markets revenue increased by $21m in 2012
(17%(cid:159)on a reported basis). The underlying increase was
20%(cid:159)after adjusting 3% for unfavourable foreign
currency translation.
Advanced Wound Care revenue decreased by $6m (-1% on
a(cid:159)reported basis) from $849m in 2012 to $843m in 2013. The
underlying growth of 1% is after adjusting for foreign currency
translation. Conditions across many European markets remain
challenging but the introduction of the ALLEVYN Life range
continues to make good progress across Europe following
product introductions and investment in marketing.
Advance Wound Devices revenue increased from $180m
in(cid:159)2012 to $213m in 2013, a reported increase of $33m and
18%. The underlying growth of 20% is after adjusting for
unfavourable foreign currency translations of 2%. This growth
was impacted by continued gain in market share in NPWT,
and our recent expansion into the emerging markets.
Trading and operating pro(cid:178) t
Operating pro(cid:178) t, the most directly comparable (cid:178) nancial
measure under IFRS, reconciles to trading pro(cid:178) t as follows:
Operating pro(cid:178) t
Acquisition related costs
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
and(cid:159)impairments
Trading pro(cid:178) t
2013
$m
190
24
14
47
275
2012
$m
214
11
8
4
237
Trading pro(cid:178) t margin decreased from 23.1% to 20.6%. Trading
pro(cid:178) t increased by $38m to $275m from $237m in 2012. The
increase in the year is primarily attributable to the full year
bene(cid:178) t of the Healthpoint acquisition and growth in the
Emerging & International Markets, partially offset by additional
investment in R&D and sales and marketing. The decrease in
trading margin re(cid:179) ects these same investments, combined
with price and mix changes at a gross margin level.
Operating pro(cid:178) t decreased by $24m from $214m in 2012
to(cid:159)$190m in 2013. This comprises of the increase in trading
pro(cid:178) t of $38m discussed above, offset by an increase of(cid:159)$43m
in amortisation of acquisition intangibles and an increase in
acquisition related costs of $13m, both due to the Healthpoint
acquisition which completed in December 2012, and an
increase in restructuring and rationalisation costs of $6m.
Principal risks and risk management
As an integral part of planning and review Group,
business(cid:159)area and functional management seek to identify
the(cid:159)signi(cid:178) cant risks involved in the business, and to review the
risk management action plans for those risks. The Group Risk
Committee, which is comprised of the Chief Executive Of(cid:178) cer
and Senior Executives, meets twice a year to review the risks
identi(cid:178) ed by(cid:159)the businesses and corporate functions and any
risk management actions being taken. As appropriate, the
Risk Committee may re-categorise risks or require further
information on the risk management action plans. The Risk
Committee reports to the Board on an annual basis detailing
all principal risks. In addition, the Board considers risk as part
of the development of strategy. Internal audit reviews and the
Audit Committee reports on(cid:159)the effectiveness of the operation
of the risk management process.
There are known and unknown risks and uncertainties relating
to Smith & Nephew’s business. The following pages provide
an overview of what the Board considers the most signi(cid:178) cant
risks that could cause the Group’s business, (cid:178) nancial 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. In addition, other factors not
listed here that Smith & Nephew cannot presently identify or
does not believe to be equally signi(cid:178) cant, could also materially
adversely affect Smith & Nephew’s business, (cid:178) nancial
position or results of operations.
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
39
GROUP RISK MANAGEMENT PROCESS
Business and
Corporate Function
Risk Registers
Group Risk
Committee
Group Risk Register
– Risk Champions arrange
business/function reviews and
submit updated Risk Register &
Mitigation Plans to Chief
Compliance Of(cid:178) cer (‘CCO’)
– Registers contain pertinent
risks for(cid:159)each unit with
Management plan
Process frequency: twice yearly
– Group Risk Committee considers
submissions and decides which
risks go into group-level risks
– CCO updates Group Risk Register
and prepares reports for the
Audit Committee and the Board
of(cid:159)Directors
– Contains risks considered
signi(cid:178) cant(cid:159)at Group level
– Assigns responsibility for
each(cid:159)risk(cid:159)and mitigation plan
to(cid:159)senior(cid:159)executives
Disruptive technologies
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 ef(cid:178) cient and valuable product
pipeline and secure protection for its(cid:159)intellectual property.
Speci(cid:178) c risks we face
Risk management actions
Possible impacts
– Competitors may introduce a disruptive
technology, or obtain patents or other
intellectual property rights, that affect
the(cid:159)Group’s competitive position
– Claims by third parties regarding
infringement of their intellectual
property(cid:159)rights
– Lack of innovation due to low R&D
investment, R&D skills gap or poor product
development execution for Established
and(cid:159)Emerging & International Markets
– Failure to successfully commercialise
a(cid:159)pipeline product, or failure to receive
regulatory approval
– Ineffective acquisition due(cid:159)diligence,
valuation, purchase terms or integration.
– Processes focused on identifying
new(cid:159)products and potential disruptive
technologies (internal and external)
– Increasing productivity, prioritisation
and(cid:159)allocation of R&D funds
– Increasing R&D investment in order
to(cid:159)enhance clinical capability, invest
in(cid:159)biomaterials
– Strengthen intellectual property rights
– Support an emerging market portfolio
– Business development resources and
processes and investments to augment
the(cid:159)internal product development
– Increasing speed to market of
new products.
Loss of market share,
pro(cid:178) t(cid:159)and(cid:159)long-term growth.
Link to Strategic Priority
3 INNOVATE FOR VALUE
4 SIMPLIFY AND IMPROVE
OUR(cid:159)OPERATING MODEL
5 SUPPLEMENT THE ORGANIC
GROWTH THROUGH
ACQUISITIONS
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40 SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
Financial review and principal risks continued
Country risk, pricing and reimbursement pressure
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. 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. Political upheaval in the countries where the Group operates or surrounding regions
could adversely affect Group operations or turnover.
Group operations are(cid:159)affected by transactional exchange rate movements. The Group’s manufacturing cost base is situated in
the US, UK, China and Switzerland and (cid:178) nished products are exported worldwide.
Speci(cid:178) c risks we face
Risk management actions
Possible impacts
– Reduced reimbursement levels and
increasing pricing pressures
– Reduced demand for elective surgery
– Increased focus on health economics
– Government policies favouring lower
priced(cid:159)and locally sourced products
– Political upheavals prevent selling of
products, receiving remittances of pro(cid:178) t
from a member of the Group or future
investments in that country
– The Group is exposed to (cid:179) uctuations
in(cid:159)exchange rates. If the manufacturing
country currencies strengthen against
the(cid:159)selling currencies, the trading margin
may be affected
– Economic downturn impacts demand
and(cid:159)collections
– Increased generic and low cost products
could impact revenue and pro(cid:178) ts.
– Develop innovative economic product and
service solutions for both Established and
Emerging & International Markets
– Incorporate health economic component
into design and development of
new(cid:159)products
– Enhanced expertise supporting
reimbursement strategy and guidance
– Optimise cost to serve to protect margins
and liberate funds for investment
– Streamline COGS, SKUs, and
inventory(cid:159)management
– The Group may transact forward foreign
currency commitments when (cid:178) rm
purchase(cid:159)orders are placed to reduce
exposure to currency (cid:179) uctuations.
Loss of revenue,
pro(cid:178) t(cid:159)and(cid:159)cash(cid:159)(cid:179) ows.
Link to Strategic Priority
1 ESTABLISHED MARKETS
2 EMERGING & INTERNATIONAL
MARKETS
3 INNOVATE FOR VALUE
4 SIMPLIFY AND IMPROVE
OUR(cid:159)OPERATING MODEL
Supply, system and site disruption
Unexpected events could disrupt the business by affecting either a key facility or system or a large number of employees.
The(cid:159)business is also reliant on certain key suppliers of raw materials, components, (cid:178) nished products and packaging materials.
Speci(cid:178) c risks we face
Risk management actions
Possible impacts
– Catastrophe could render one of the
Group’s production facilities out of action
– A signi(cid:178) cant event could impact key
leadership or a large number of employees
– Issues with a single source supplier of
a(cid:159)key(cid:159)component and failure to secure
critical(cid:159)supply
– A severe IT fault or cyber crime could
disable critical systems and cause loss
of(cid:159)sensitive data.
– Ensure crisis response/business
continuity(cid:159)plans at major facilities and
for(cid:159)key products and key suppliers
– Audit programme for critical suppliers
and(cid:159)second sources or increased
inventories for critical components
– Implement enhanced travel security
and(cid:159)protection programme
– IT disaster and data recovery plans are
in(cid:159)place and support overall business
continuity plans
– Mobile device and cyber security
protection(cid:159)plan implementation.
Loss of revenue,
pro(cid:178) t(cid:159)and(cid:159)cash(cid:159)(cid:179) ows.
Link to Strategic Priority
1 ESTABLISHED MARKETS
4 SIMPLIFY AND IMPROVE
OUR(cid:159)OPERATING MODEL
SMITH & NEPHEW ANNUAL REPORT 2013
GROUP STRATEGIC REPORT
41
Product safety, regulation, and litigation
National regulatory authorities 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 ef(cid:178) cacy of
such products and may also inspect for compliance with appropriate standards, including those relating to Quality Management
Systems (‘QMS’) or Good Manufacturing Practice (‘GMP’) regulations. Design or manufacturing defects in products could result
in product recalls and liability claims and impact revenues, pro(cid:178) ts and reputation.
Speci(cid:178) c risks we face
Risk management actions
Possible impacts
– Defective products supplied to
Smith(cid:159)&(cid:159)Nephew or failure in design
or(cid:159)manufacturing process
– New technology, product or processes
changed by Smith & Nephew or supplier
do not identify product de(cid:178) ciencies
– Failure to implement programmes and
supporting resources to manage quality
and(cid:159)regulatory compliance
– Failure to manage, process and
analyse(cid:159)customer complaints and adverse
event(cid:159)data.
– Standardise the Group’s quality
management and(cid:159)practice
– Monitoring and auditing programmes
to(cid:159)assure compliance
– Group-wide product complaint and
registration systems
– Group-wide practices to drive design,
and(cid:159)production line performance
and(cid:159)dependability
– Design for manufacture
in(cid:159)product(cid:159)development
– Post launch review of product safety
and(cid:159)complaint data.
Loss of revenue, pro(cid:178) t and
reduction in share price.
Negative impact on
brand/reputation.
Link to Strategic Priority
3 INNOVATE FOR VALUE
4 SIMPLIFY AND IMPROVE
OUR(cid:159)OPERATING MODEL
Compliance with laws and regulations
Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many
countries is towards increased enforcement activity. The Group is also subject to increased regulation of personal information.
Acquisitions and expansion into emerging markets could also require additional compliance resources.
Speci(cid:178) c risks we face
Risk management actions
Possible impacts
– Violation of healthcare, data privacy
– Strong Group oversight bodies with
or(cid:159)anti-corruption laws could result in
(cid:178) nes,(cid:159)loss of reimbursement and
impact(cid:159)reputation
– Serious breaches could potentially
prevent(cid:159)the Group from doing business
in(cid:159)a(cid:159)certain market
– Failure to conduct adequate due diligence
or to integrate appropriate internal controls
into acquired businesses could result in
(cid:178) nes and impact return on investment.
supporting global compliance resources
– Code of Conduct/Global Policies and
Procedures (‘GPPs’) providing controls
for(cid:159)signi(cid:178) cant compliance risks
– Training and e-resources to guide
employees and third parties with
compliance responsibilities
– Monitoring and auditing programmes
to(cid:159)verify implementation
– Independent reporting channels for
employees and third parties to report
concerns with con(cid:178) dentiality
– Additional controls for interactions with
healthcare professionals and government
of(cid:178) cials and for distributors and agents
– Due diligence reviews and integration
plans(cid:159)required for acquisitions.
Loss of pro(cid:178) t and
reduction(cid:159)in(cid:159)share price.
Negative impact on
brand/reputation.
Link to Strategic Priority
1 ESTABLISHED MARKETS
2 EMERGING & INTERNATIONAL
MARKETS
4 SIMPLIFY AND IMPROVE
OUR(cid:159)OPERATING MODEL
5 SUPPLEMENT ORGANIC
GROWTH THROUGH
ACQUISITIONS
By order of the Board, 26 February 2014
Susan Swabey
Company Secretary
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4242 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
43
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Corporate governance
Our Board of Directors
Our Executive Of(cid:178) cers
Corporate Governance Statement
Audit Committee Report
Directors’ remuneration report
44
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We have built our reputation by supporting healthcare
professionals for more than 150 years and are proud
of the trust(cid:159)they place in us.
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44 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Our Board of Directors
Our Board has the depth and breadth of experience necessary to help the business take full advantage of the opportunities and challenges ahead.
Sir John Buchanan (70)
Chairman
Sir John was appointed Independent Non-executive
Director in 2005 and was appointed Chairman and
Chairman of the Nomination & Governance Committee in
April 2006. He will retire from the Board following the
Annual General Meeting on 10 April 2014.
Sir John has broad international experience gained in
large and complex international businesses, with
extensive former board experience at Vodafone Group
Plc, AstraZeneca PLC and Boots Group PLC. He has
substantial experience in the petroleum industry and
knowledge of the international investor community. He(cid:159)has
held various leadership roles in strategic, (cid:178) nancial,
operational and marketing positions, including executive
experience in different countries. He is a former Executive
Director and Group Financial Of(cid:178) cer of BP, serving on the
BP Board for six years until 2003.
Other Directorships
– Chairman of ARM Holdings plc (until 1 March 2014)
– Senior Independent Director of BHP Billiton Plc
– Chairman of International Chamber of Commerce UK
– Chairman of the Trustees for The Christchurch
Earthquake Appeal (UK)
Nationality
British/New Zealand
Olivier Bohuon (55)
Chief Executive Of(cid:178) cer
Olivier was appointed Chief(cid:159)Executive Of(cid:178) cer in April
2011. He is a member of(cid:159)the(cid:159)Nomination &
Governance Committee.
Olivier has had extensive international and leadership
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
Nationality
French
Julie Brown (51)
Chief Financial Of(cid:178) cer
Julie was appointed Chief Financial Of(cid:178) cer
on 4 February 2013 and elected by Shareholders
at(cid:159)the Annual General Meeting on 11 April 2013.
Julie is a Chartered Accountant and Fellow of the
Institute of Taxation with international experience and
a deep understanding of the healthcare sector. She
trained with KPMG and then worked for AstraZeneca
PLC, where she served as Vice President Group
Finance, and more recently, as Interim Chief Financial
Of(cid:178) cer. Prior to that she held commercial roles as
Regional Vice President Latin America, Marketing
Company President AstraZeneca Portugal, and Vice
President Corporate Strategy and R&D Chief Financial
Of(cid:178) cer. She has previously held Vice President
Finance positions in all areas of the healthcare value
chain including commercial, operations, R&D and
business development.
Nationality
British
Roberto Quarta (64)
Independent Non-executive Director and
Chairman Elect
Roberto was appointed Non-executive Director and
Chairman Elect on 4 December 2013. He is a
member of the Nomination & Governance
Committee.
Roberto has signi(cid:178) cant management experience
spanning a broad range of manufacturing and
service businesses in both the UK and
internationally. He is Chairman of IMI plc, a FTSE 100
listed engineering business, Chairman of Clayton,
Dubilier & Rice and Chairman of the Supervisory
Board of Rexel SA. Previously, he was Chief
Executive and then Chairman of BBA Group plc.
Other Directorships
– Chairman of IMI plc
– Chairman of Clayton, Dubilier(cid:159)& Rice
– Chairman of the Supervisory Board of Rexel SA
Nationality
American/Italian
Richard De Schutter (73)
Senior Independent Director and
Non-executive Director
Richard was appointed Non-executive Director in
January 2001 and Senior Independent Director
in(cid:159)April 2011. He is a member of the Nomination &
Governance, Ethics & Compliance, Audit and
Remuneration Committees. He will retire from the
Board following the Annual General Meeting on 10
April 2014.
Richard has had extensive US corporate experience
at Chief Executive and Chairman level in a number
of(cid:159)major corporations with primarily a scienti(cid:178) c,
chemical, engineering or pharmaceutical focus
including G.D. Searle & Co., Monsanto Company,
Pharmacia Corporation and DuPont Pharmaceuticals
Company.
Other Directorships
– Non-executive Chairman of Incyte Corporation
– Non-executive Chairman of Durata Therapeutics, Inc.
– Non-executive Director of Navicure, Inc.
– Non-executive Director of Sprout Pharmaceuticals, Inc.
Nationality
American
Ian Barlow (62)
Independent Non-executive Director
Chairman of the Audit Committee
Ian was appointed Non-executive Director in March 2010
and Chairman of the Audit Committee in May 2010.
Ian is a Chartered Accountant and has had considerable
(cid:178) nancial experience both internationally and in the UK.
Prior to his retirement in 2008, he was a(cid:159)Partner at KPMG,
latterly Senior Partner, London. During his career with
KPMG, he was Head of their UK tax and legal operations,
and he acted as Lead Partner for many large international
organisations operating extensively in North America,
Europe and Asia.
Other Directorships
– Lead Non-executive Director chairing the Board of
Her Majesty’s Revenue & Customs
– Non-executive Director of The Brunner Investment
Trust PLC
– Non-executive Director of Foxtons Group plc
– Board Member of the China-Britain Council
– Chairman of The Racecourse Association
Nationality
British
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
45
The Rt. Hon Baroness Virginia Bottomley (65)
Independent Non-executive Director
Baroness Virginia Bottomley was appointed Non-
executive Director in April 2012. She is a member of
the Remuneration Committee.
Baroness Virginia Bottomley has extensive
experience and understanding of healthcare. She
was appointed a Life Peer in 2005 following her career
as a Member of(cid:159)Parliament between 1984 and 2005.
She served successively as Secretary of State for
Health and then National Heritage. She holds a
number of positions within the public and private
healthcare sector.
Other Directorships
– Director of International Resources Group Limited
– Member of the International Advisory Board of
Chugai Pharmaceutical Co.,
– Chancellor of University of Hull and Sheriff of Hull
– Pro Chancellor of the University of Surrey
– Governor of the London School of Economics
– Trustee of The Economist Newspaper
Nationality
British
Michael Friedman (70)
Independent Non-executive Director
Michael was appointed Non-executive Director and
elected by Shareholders at the Annual General
Meeting on 11 April 2013. He is a member of the Ethics
& Compliance Committee.
Michael was formerly Chief Executive Of(cid:178) cer of City of
Hope, the prestigious cancer research and treatment
institution in California and is now Executive for
Special Projects and Emeritus Cancer Center Director.
He has also served as director of the institution’s
comprehensive cancer centre and held the Irell &
Manella Cancer Center Director’s Distinguished Chair.
He was formerly senior vice president of research,
medical and public policy for Pharmacia Corporation
and has served as Deputy Commissioner and Acting
Commissioner at the US(cid:159)Food and Drug
Administration. He has also served on a number of
Boards in a Non-executive capacity, including RiteAid
Corporation.
Other Directorships
– Non-executive Director of Celgene Corporation
– Non-executive Director of MannKind Corporation
Nationality
American
Pamela Kirby (60)
Independent Non-executive Director
Chairman of the Ethics & Compliance Committee
Pamela was appointed Non-executive Director
in(cid:159)March 2002 and Chairman of the Ethics &
Compliance Committee in April 2011. She is a member
of the Remuneration Committee
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 Corporation in the US, having previously
held senior positions in various pharmaceutical
companies including AstraZeneca PLC and
F.(cid:159)Hoffmann-La Roche. She is now a Non-executive
Director of a number of international companies.
Other Directorships
– Non-executive Chairman of Scynexis, Inc.
– Senior Independent Non-executive Director of
Informa plc
– Non-executive Director of DCC plc
– Non-executive Director of Victrex plc
Nationality
British
Brian Larcombe (60)
Independent Non-executive Director
Brian was appointed Non-executive Director in
March(cid:159)2002. He is a member of the Nomination &
Governance, Audit and Remuneration Committees.
He will become Senior Independent Director following
the Annual General Meeting on 10 April 2014.
Brian spent his career in private equity with 3i(cid:159)Group.
After leading the UK investment business for
a(cid:159)number of years, he became Finance Director and
then Chief Executive of the Group following its
(cid:179) otation. He is well known in the City and has held
a(cid:159)number of Non-executive Directorships.
Other Directorships
– Non-executive Director of gategroup Holding AG
– Non-executive Director of Incisive
Media Holdings Limited
Nationality
British
Joseph Papa (58)
Independent Non-executive Director
Chairman of the Remuneration Committee
Joseph was appointed Non-executive Director in
August 2008 and Chairman of the Remuneration
Committee in April 2011. He is a member of the Ethics
& Compliance and Audit Committees.
Joseph has had over 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 Company
plc, one of the largest over the counter pharmaceutical
companies in the US, having previously held senior
positions at Novartis International AG, Cardinal
Health, Inc. and Pharmacia Corporation.
Other Directorships
– Chairman and Chief Executive
of Perrigo Company plc
Nationality
American
Ajay Piramal (58)
Independent Non-executive Director
Ajay was appointed Non-executive Director in
January 2012. He will retire from the Board following
the Annual General Meeting on 10 April 2014.
Ajay is one of India’s most respected businessmen.
He enabled the Piramal Group to transform from a
textile-centric group to a conglomerate in diversi(cid:178) ed
areas. He has extensive industry and market
knowledge and international experience. He has held
a number of global healthcare leadership positions in
both India and(cid:159)internationally.
Other Directorships
– Chairman of Piramal Enterprises Limited, Piramal
Glass Limited, Allergan India Pvt. Limited, and
IndiaREIT Fund Advisers Pvt. Ltd.
– Chairman of the Board of Governors of the Indian
Institute of Technology, Indore
– Member of the Board of Dean’s Advisors at Harvard
Business School
– Chairman of Pratham India
Nationality
Indian
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46 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Our Executive Of(cid:178) cers
Olivier Bohuon is supported in the day-to-
day management of the Group by a strong
team of Executive Of(cid:178) cers:
Julie Brown (51)
Chief Financial Of(cid:178) cer
Julie joined the Board on 4 February 2013 as Chief
Financial Of(cid:178) cer. She is a Chartered Accountant and
Fellow of the Institute of Taxation with international
experience and a deep understanding of the
healthcare sector.
Previous Experience
Julie trained with KPMG and then worked for
AstraZeneca PLC, where she served as Vice President
Group Finance, and more recently, as Interim Chief
Financial Of(cid:178) cer. Prior to that she held commercial
roles as Regional Vice President Latin America,
Marketing Company President AstraZeneca Portugal,
and Vice President Corporate Strategy and R&D Chief
Financial Of(cid:178) cer. She has previously held Vice
President Finance positions in all areas of the
healthcare value chain including commercial,
operations, R&D and business(cid:159)development.
Nationality
British
Mike Frazzette (52)
President, Advanced Surgical Devices
Mike joined Smith & Nephew in July 2006 as
President of(cid:159)the Endoscopy Global Business Unit.
Since July 2011, he has headed up the Advanced
Surgical Devices division and is responsible for the
Orthopaedic Reconstruction, Trauma and Endoscopy
business. He is based in Andover, Massachusetts.
Previous Experience
Mike has held a number of senior positions within
the(cid:159)global medical devices industry. He was President
and Chief Executive Of(cid:178) cer of Micro Group, a US
manufacturer of medical devices, and spent 15 years
at Tyco Healthcare (Covidien) in various commercial
roles eventually becoming President of the(cid:159)Patient
Care and Health Systems divisions.
Nationality
American
Roger Teasdale (46)
President, Advanced Wound Management
Roger joined Smith & Nephew in 1989 within the
Wound Management business. He was appointed
President of Advanced Wound Management in May
2009. He is(cid:159)based in Hull, UK.
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.
Nationality
British
Rodrigo Bianchi (54)
President, IRAMEA
Rodrigo joined Smith & Nephew in July 2013 with
responsibility for Greater China, India, Russia, Asia,
Middle East and Africa, focusing on continuing our
strong momentum in these regions. He is based
in(cid:159)Dubai.
Previous Experience
Rodrigo’s experience in the healthcare industry
includes 26 years with Johnson & Johnson in
progressively senior roles. Most recently, he was
Regional Vice President for Medical Devices and
Diagnostics division in the Mediterranean region
and(cid:159)prior to that President of Mitek and Ethicon.
He(cid:159)started his career at Procter & Gamble, Italy.
Nationality
Italian
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
47
Francisco Canal Vega (52)
President, Latin America
Francisco joined Smith & Nephew in January 2012
and now leads the Latin American region, focusing on
driving the substantial opportunities we see in this
region.
Previous Experience
Francisco has held senior management positions in
global companies including Gambro AB and Baxter
International. He has lived and worked in many
countries including Switzerland, Germany, China,
Japan, the US and Spain. Francisco was also formerly
a(cid:159)board member of EUCOMED.
Nationality
Spanish
Jack Campo (59)
Chief Legal Of(cid:178) cer
Jack joined Smith & Nephew in June 2008 and heads
up the Global Legal function. Initially based in London,
he(cid:159)has been based in Andover, Massachusetts since
late(cid:159)2011.
Previous Experience
Prior to joining Smith & Nephew, Jack held a number
of senior legal roles within the General Electric
Company, including seven years at GE Healthcare
(GE(cid:159)Medical Systems) in the US and Asia. He began
his career with Davis Polk & Wardwell.
Nationality
American
Gordon Howe (51)
President, Global Operations
Gordon joined Smith & Nephew in 1998 and, since
2013, is responsible for manufacturing, supply chain
and procurement, IT systems and Regulatory and
Quality Affairs. Prior to that, he 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, (cid:178) rstly in
the(cid:159)Orthopaedics division and more recently at Group
level. Prior to joining the Company, he held senior
roles at United Technologies Corporation.
Nationality
American
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Helen Maye (54)
Chief Human Resources Of(cid:178) cer
Helen joined Smith & Nephew in July 2011 and
leads(cid:159)the(cid:159)Global Human Resources and Internal
Communications functions. Since 2013, she has also
led the Sustainability, Health, Safety & Environment
functions. She is based in London.
Previous Experience
Helen has more than 35 years’ experience
across(cid:159)a(cid:159)variety of international and global roles
in(cid:159)medical devices and pharmaceuticals, including
manufacturing, supply chain and human resources.
Previously, she was Divisional Vice President of
Human Resources at Abbott Laboratories.
Nationality
Irish
Cyrille Petit (43)
Chief Corporate Development Of(cid:178) cer
Cyrille joined Smith & Nephew in May 2012 and leads
the(cid:159)Corporate Development function. He is based
in(cid:159)London.
Previous Experience
Cyrille spent the previous 15 years of his career
with(cid:159)General Electric Company, where he held
progressively senior positions beginning with
GE(cid:159)Capital, GE Healthcare and ultimately as the
General Manager, Global Business Development
of(cid:159)the Transportation Division. Cyrille’s career began
in(cid:159)investment banking at BNP Paribas and then
Goldman Sachs.
Nationality
French
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48 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Corporate Governance Statement
BOARD GENDER
BOARD NATIONALITY
BOARD BALANCE
FEMALE
3
MALE
9
12
NEW ZEALAND
1
AMERICAN
3
12
ITALIAN
1
INDIAN
1
FRENCH
1
BRITISH
5
BOARD COMMITTEE MEMBERSHIP AND ATTENDANCE
Sir John Buchanan
Olivier Bohuon
Ian Barlow
Julie Brown (i)
Michael Friedman (ii)
Baroness Virginia Bottomley
Pamela Kirby
Brian Larcombe (iii)
Joseph Papa
Ajay Piramal (iv)
Roberto Quarta (v)
Richard De Schutter
Board
8 meetings
8
8
8
8
6
8
8
8
8
3
1
8
Audit
Committee
8 meetings
–
–
8
–
–
–
–
8
8
–
–
8
CHAIRMAN
1
EXECUTIVE
DIRECTORS
2
12
Ethics &
Compliance
Committee
4 meetings
–
–
–
–
–
–
4
–
4
–
–
4
Remuneration
Committee
5 meetings
–
–
–
–
–
5
5
4
5
–
–
5
NON-EXECUTIVE
DIRECTORS
9
Nomination &
Governance
Committee
5 meetings
5
5
–
–
–
–
–
5
–
–
–
5
(i) Appointed to the Board on 4 February 2013.
(ii)
Appointed to the Board on 11 April 2013.
(iii) Unable to attend one Remuneration Committee meeting due to an unforeseen commitment.
(iv) Unable to attend some meetings due to other commitments. To retire from the Board following the Annual General Meeting on 10 April 2014.
(v) Appointed to the Board on 4 December 2013.
COMPANY SECRETARY
Susan Swabey (52)
Susan was appointed Company Secretary in
May 2009.
Susan has 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(cid:159)GC100 Group Executive Committee and the
CBI(cid:159)Companies Committee and is a frequent
speaker on corporate governance related matters.
With effect from 1 March 2014, she will be a trustee
of ShareGift, the share donation charity.
Nationality
British
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
49
Compliance statement
We are committed to the highest standards of corporate governance and
comply with all the provisions of the UK Corporate Governance Code
2012 (the(cid:159)‘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 Nomination & Governance Committee is not comprised
wholly of Independent Directors, as required by the NYSE, but consists
of(cid:159)a majority of Independent Directors in accordance with the Code.
We(cid:159)shall explain in this corporate governance statement and the Reports
of the Audit and Remuneration Committees, how we have applied the
provisions and(cid:159)principles of the Financial Conduct Authority’s (‘FCA’)
Listing Rules, Disclosure & Transparency Rules (‘DTR’) and the Code
throughout the year.
Board
The Board is responsible for determining the strategy of the Company.
The Chief Executive Of(cid:178) cer and his Executive team implement that
strategy. More detail about the structure of the Board, the matters we deal
with and the key activities we undertook in 2013 is on pages 49 and 50.
Changes to Board composition
We are making a number of changes to the composition of our Board at
the Annual General Meeting:
– Sir John Buchanan will be retiring from the Board, having joined the
Board in 2005 and assumed the role of Chairman in April 2006
– Roberto Quarta, who joined the Board as Non-executive Director and
Chairman Elect on 4 December 2013, will become Chairman, assuming
that he is elected as a Director by shareholders at the meeting
– Richard De Schutter will retire from the Board. Richard has served on
the Board since January 2001 as a Non-executive Director and a
member of a number of the Board Committees. He has been the
Senior Independent Director since April 2011
Chief Executive Of(cid:178) cer
– Developing and implementing Group strategy
– Recommending the annual budget and (cid:178) ve-year strategic and
(cid:178) nancial plan
– Ensuring coherent leadership of the Group
– Managing the Group’s risk pro(cid:178) le 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 updated
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.
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 Director are de(cid:178) ned as follows:
Non-executive Directors
– Providing effective challenge to management
– Assisting in development of strategy
– Serving on the Board Committees.
Senior Independent Director
– Chairing meetings in the absence of the Chairman
– Acting as a 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
– Brian Larcombe will take over as Senior Independent Director to assist
be(cid:159)resolved
a smooth transition between Chairmen
– Ajay Piramal will retire from the Board. He has served on the Board
since January 2012.
– Leading annual evaluation into the Board’s effectiveness
– Leading search for a new Chairman, as necessary.
Roles of Directors
Whilst we all share collective responsibility for the activities of the Board,
some of our roles have been de(cid:178) ned in greater detail. In particular, the
roles and responsibilities of the Chairman and Chief Executive Of(cid:178) cer
are(cid:159)clearly de(cid:178) ned.
Chairman
– Building a well balanced Board
– Chairing Board meetings and setting Board agendas
– Ensuring effectiveness of the Board and ensuring annual review
undertaken
– Encouraging constructive challenge and facilitating effective
communication between the Board members
– 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.
Independence of Non-executive Directors
We require our Non-executive Directors to remain independent from
management so that they are able to exercise independent oversight
and(cid:159)effectively challenge management. We therefore continually assess
the independence of each of our Non-executive Directors. The Executive
Directors have determined that all our 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. None of them receives additional
remuneration apart from Directors’ fees, nor do they participate in the
Group’s share plans or pension schemes. None of them serve as
directors of any companies or af(cid:178) liates in which any other Director
is(cid:159)a director.
However, more importantly, each of our Non-executive Directors is
prepared to question and challenge management, to request more
information and to ask the dif(cid:178) cult question. They insist on robust
responses both within the Board room and sometimes between Board
meetings. The Chief Executive Of(cid:178) cer is open to challenge from the
Non-executive Directors and uses this positively to provide more detail
and to re(cid:179) ect further on issues.
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50 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Corporate Governance Statement continued
As explained, Richard De Schutter will retire from the Board following the
Annual General Meeting. Brian Larcombe, who has served for 12 years,
will remain on the Board as Senior Independent Director to ensure a
smooth transition between chairmen. Pamela Kirby who has served for
12 years will remain on the Board as Chairman of the Ethics & Compliance
Committee and member of the Remuneration Committee. The Board
believes that the skills, diversity and experience Brian and Pamela bring
to the Board with their in-depth knowledge of the Company are important
for continuity in this time of transition.
We are mindful that some of our Non-executive Directors have served on
the Board for a period of time that some might regard as likely to impact
their independence. We do not believe this to be the case, but have
reviewed the length of service of our Non-executive Board members and
have taken this into consideration, when making the changes to the
Board composition outlined above.
We continue to search for other suitable Non-executive Directors, whose
experience will align with our strategic objectives and, in due course, our
longer serving directors will step down.
Performance
– Reviewing performance against strategy, budgets and (cid:178) nancial 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 Auditor and other
professional advisers and approving signi(cid:178) cant 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 (see pages 38–41 for more detail).
Board Membership
– Non-executive Chairman Sir John Buchanan (to retire on
10 April 2014)
– Chief Executive Of(cid:178) cer Olivier Bohuon
– Chief Financial Of(cid:178) cer Julie Brown (appointed 4 February 2013).
Nine Independent Non-executive Directors
– Richard De Schutter (Senior Independent Director)
(to retire on 10 April 2014)
– Ian Barlow
– Baroness Virginia Bottomley
– Michael Friedman (appointed 11 April 2013)
– Pamela Kirby
– Brian Larcombe
(to become Senior Independent Director on 10 April 2014)
– Joseph Papa
– Ajay Piramal (to retire on 10 April 2014)
– Roberto(cid:159)Quarta (appointed on 4 December 2013. Independent(cid:159)on
appointment) (to become Chairman on 10 April 2014).
Role of the Board
Strategy
– Approving the Group strategy including major changes to corporate
and management structure, acquisitions, mergers, disposals, capital
transactions over $10m, annual budget, (cid:178) nancial plan, business
plan, major borrowings and (cid:178) nance 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 policies relating to corporate social responsibility,
health and safety, Code of Conduct and Code of Share Dealing and
other matters.
Shareholder Communications
– Approving preliminary announcement of annual results, annual
report, half yearly report, quarterly (cid:178) nancial announcements, the
release of price sensitive announcements and any listing particulars,
circulars or prospectuses
– Maintaining relationships and continued engagement
with Shareholders.
Key activities in 2013
(in addition to regular annual activities)
– Review and oversight of the implementation of the strategy and
organisational structure
– Oversight of risk management process and review of strategic risk
– Approval of (cid:178) ve-year plan
– Review of Board effectiveness
– Continued review of Board composition and appointment of
Michael(cid:159)Friedman and Roberto Quarta to the Board
– Consideration and approval of the acquisitions of Sushrut-Adler
in(cid:159)India, Plato Grup in Turkey and Politec Saude and Pro Cirurgia
Especializada in Brazil
– Approval and oversight of European Process Optimisation
programme
– Six physical scheduled meetings and two scheduled telephone
meetings
– Four day strategy review and visit to our Tokyo headquarters
– Two day visit to our US operations in Andover, Massachusetts
– Considered and approved the Capital Allocation Framework
– Considered and reviewed succession planning both at Board level
and below
– Approved the sustainability policy and report.
Board Development Programme
Our Board Development Programme is directed to the speci(cid:178) c needs and
interests of our Directors. We focus the development sessions on
facilitating a greater awareness and understanding of our business rather
than formal training in what it is to be a Director. We value our visits to the
different Smith & Nephew sites around the world, where we meet with
the local managers of our businesses and see the daily operations
in(cid:159)action. Meeting our local managers helps us to understand the
challenges they face and their plans to meet those challenges. We also
take the opportunity to look at our products and in particular the new
products being developed by our R&D teams. This direct contact with the
business in the locations we operate around the world really helps us to
make investment and strategic decisions. Meeting our local managers
helps us when making succession planning decisions below Board level.
During the course of the year, we receive updates at the Board and
Committee meetings on external corporate governance changes likely
to(cid:159)impact the Company in the future. In 2013, we particularly focused on
changes to Narrative Reporting and Reporting on Remuneration. We
also(cid:159)looked into the implications of cyber security on the business.
New Directors receive tailored induction programmes, when they join the
Board. In 2013, Michael Friedman attended a brie(cid:178) ng on UK company
law(cid:159)and corporate governance practices. He also attended a series of
one-to-one meetings with senior members of management at our head
of(cid:178) ce. Roberto Quarta has commenced his induction programme,
meeting the leaders of key divisions and functions and visiting our key
site in Hull. All Non-executive Directors are encouraged to visit our
overseas businesses, if they happen to be travelling for other purposes.
In 2013, visits of this nature were made to operations in the US, Singapore
and India. Our local management teams enjoy welcoming Non-executive
Directors to their business and it emphasises the interest the Board takes
in all our operations.
The following development sessions were run during 2013:
Month
April
July
Activity
Presentation from Roger Teasdale, President, Advanced
Wound Management on the Advanced Wound
Management business and progress of the integration
of the Biotherapeutics business.
Audit Committee Development Session (open to all the
Board) covering developments in the accounting and
reporting landscape including narrative reporting, the
Financial Reporting Council changes to Audit Committee
and Auditor reporting, cyber security and other UK and
European developments.
September
Visit to our Tokyo of(cid:178) ces with a presentation from senior
Japanese management on the local business and
challenges faced.
Presentations from the entire Executive team as part
of(cid:159)the Board’s Strategy Review.
Board discussion on Risk as part of the Board’s
Strategy discussions.
October
Visit(cid:159)to Advanced Surgical Devices facility in
Andover, Massachusetts.
Series of presentations from our Advanced Surgical
Devices senior executives on the challenges faced by
the business, our strategy and initiatives to meet these
challenges and an update on progress made since the
previous year.
December
Workshop on cyber security.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
51
Board Effectiveness Review
We conduct an annual review into the effectiveness of the Board. In 2012,
the review was facilitated externally and drew positive conclusions. In
2013 therefore, we undertook an internal review, which was led by
Richard De Schutter, the Senior Independent Director.
The review in 2013 consisted of a questionnaire followed by a series of
interviews with the Directors towards the end of the year. The
questionnaire was based on the internal questionnaire used in 2011
enabling a comparison to be made between the two years. The
interviews with the Directors were broadly based on the questionnaire
but also covered any other matters the Directors wished to raise.
Mr De Schutter presented the results of his (cid:178) ndings to the Board in early
February 2014. Overall, the review concluded that the performance of the
Board had improved since the previous internal review particularly in
evaluating performance against the long-term strategic plan, identifying
and monitoring strategic risks and gaining a better understanding of the
competitive environment. Non-executive Directors also valued the
meetings they held without management present, ahead of each Board
and some Committee meetings as well as the opportunity to meet senior
executives below Board level on site visits and at Board presentations.
The review identi(cid:178) ed the following areas that would require attention in
2014:
Areas for Attention
The Board was currently in transition with the retirement of Sir John
Buchanan as Chairman, Richard De Schutter as Senior Independent
Director and Ajay Piramal as Non-executive Director following the Annual
General Meeting. It was therefore recognised that Succession Planning at
Non-executive Director level would be a key priority for the new
Chairman, Roberto Quarta, after the Annual General Meeting.
It was felt that the number, timing and length of the Board and Committee
meetings could be reviewed to consider whether the current pattern of
meetings was most effective.
It is expected that the review in 2014 will be facilitated externally.
Company Secretary and independent advice
The Company Secretary, Susan Swabey, is responsible to the Board
for(cid:159)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 ful(cid:178) l 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.
Management of con(cid:179) icts of interest
None of us, nor our connected persons, has any family relationship with
any other Director or of(cid:178) cer, 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 24 February 2014.
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 con(cid:179) icts or
might con(cid:179) ict with the interests of the Company. This duty is in addition
to(cid:159)the existing duty that we owe to the Company to disclose to the Board
any transaction or arrangement under consideration by the Company.
If(cid:159)we become aware of any situation which may give rise to a con(cid:179) ict of
interest, we inform the rest of the Board immediately and the Board is
then permitted under the Articles of Association to authorise such
con(cid:179) ict. The information is recorded in the Company’s Register of
Con(cid:179) icts together with the date on which authorisation was given.
In(cid:159)addition, we certify, on an annual basis, that the information
contained(cid:159)in(cid:159)the Register is correct.
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CORPORATE GOVERNANCE
Corporate Governance Statement continued
When the Board decides whether or not to authorise a con(cid:179) ict, only the
Directors who have no interest in the matter are able to participate in the
discussion and a con(cid:179) ict 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
identi(cid:178) ed no actual con(cid:179) icts which have required approval by the Board.
We have, however, identi(cid:178) ed six situations which could potentially give
rise to a con(cid:179) ict and these have been duly authorised by the Board and
are reviewed on an annual basis.
Re-appointment of Directors
In accordance with the Code, all Directors, offer themselves to
Shareholders for re-election annually, except those who are retiring
following the Annual General Meeting. Roberto Quarta who was
appointed to the Board on 4 December 2013 will offer himself for
election.(cid:159)Each Director may be removed at any time by the Board
or(cid:159)the(cid:159)Shareholders.
Directors’ Indemnity Arrangements
Each Director is covered by appropriate directors’ and of(cid:178) cers’ 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 indemni(cid:178) es 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 ongoing 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 (cid:178) nancial performance both at the time of the
announcement of results and at industry investor events. During 2013,
the Executive Directors held meetings with institutional investors,
including investors representing approximately 43% of the share
capital(cid:159)as at 31 December 2013.
As part of this programme of investor meetings, during 2013, as
Chairman(cid:159)of the Company, I met with investors representing 16%
of(cid:159)the(cid:159)share capital. Over the last three years, I have met investors
representing in aggregate 21% of the share capital. Also during 2013,
Joseph Papa met with Shareholders holding 20% of the share capital to
discuss remuneration policies and plans. In addition, we contacted a
further three Shareholders representing 8% of the share capital
summarising the discussions held with the Shareholders we had met.
We receive a short report at every Board meeting reviewing our major
Shareholders and any signi(cid:178) cant changes in their holdings since the
previous meeting. Olivier Bohuon and Julie Brown 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 (cid:178) nancial information and webcasts of the results presentations
to analysts for each quarter, as well as speci(cid:178) c information for private
Shareholders relating to the management of their shareholding.
Share capital
As at 24 February 2014, the Company’s total issued share capital with
voting rights consisted of 893,814,245 ordinary shares of 20.0 US cents
each. 25,122,968(cid:159)ordinary shares are held in treasury and are not
included in the above (cid:178) gure. Further information on treasury shares
can(cid:159)be found in Note 19 of the Notes to the Group accounts.
As at 24 February 2014, noti(cid:178) cation had been received from the
undernoted investors under the DTR in respect of interests in 3% or
more(cid:159)of the issued ordinary shares with voting rights of the Company.
Invesco
BlackRock, Inc.
Number of Shares
66,740,225
42,621,011
%
7.5
4.8
In addition to the above the Company is aware that Walter Scott &
Partners Limited hold approximately 37.7 million ordinary shares (4.2%).
Otherwise, the Company is not aware of any person who has a signi(cid:178) cant
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 (cid:178) nal dividend of 17.0 US cents per ordinary
share which, together with the interim dividend of 10.40 US cents, makes
a total for 2013 of 27.40 US cents. The (cid:178) nal dividend is expected to be
paid, subject to Shareholder approval, on 7 May 2014 to Shareholders
on(cid:159)the Register of Members at the close of business on 22 April 2014.
Annual General Meeting
The Company’s Annual General Meeting is to be held on 10 April 2014
at(cid:159)2:00 pm at No.11 Cavendish Square, London W1G 0AN. Registered
Shareholders have been sent either a Notice of Annual General Meeting
or noti(cid:178) cation of availability of the Notice of Annual General Meeting.
Code of Ethics for Senior Financial Of(cid:178) cers
We have adopted a Code of Ethics for Senior Financial Of(cid:178) cers, which
is(cid:159)available free of charge on the Group’s website (www.smith-nephew.
com) and on request. This applies to the Chief Executive Of(cid:178) cer, Chief
Financial Of(cid:178) cer, Vice President, Group Finance and the Group’s senior
(cid:178) nancial of(cid:178) cers. There(cid:159)have been no waivers to any of the Code’s
provisions nor any amendments made to the Code during 2013 or
up(cid:159)until 24 February 2014.
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CORPORATE GOVERNANCE
53
We, as a Board, are responsible overall for reviewing and approving the
adequacy and effectiveness of the risk management framework and the
system of internal controls over (cid:178) nancial, operational (including quality
management) and ethical compliance processes operated by the Group.
We have delegated responsibility for this review to the Audit Committee.
The Audit Committee, through the Internal Audit function reviews the
adequacy and effectiveness of internal control procedures and identi(cid:178) es
any weaknesses and ensures these are remediated within agreed
timelines. The latest review covered the (cid:178) nancial year to 31 December
2013 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 Of(cid:178) cer and Chief Financial Of(cid:178) cer have evaluated
the effectiveness of the design and operation of the Group’s disclosure
controls and procedures as at 31 December 2013. Based upon this
evaluation, the Chief Executive Of(cid:178) cer and Chief Financial Of(cid:178) cer
concluded on 24 February 2014 that the disclosure controls and
procedures were effective as at 31 December 2013.
Management is responsible for establishing and maintaining adequate
internal control over (cid:178) nancial reporting. Management assessed the
effectiveness of the Group’s internal control over (cid:178) nancial reporting as
at 31 December 2013 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 2013, the Group’s
internal control over (cid:178) nancial 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 (cid:178) rm
issued an audit report on the Group’s internal control over (cid:178) nancial
reporting as at 31 December 2013. This report appears on page 91.
Internal controls
Evaluation of Internal Controls Procedures
Management is responsible for(cid:159)establishing and maintaining adequate
internal control over (cid:178) nancial reporting as de(cid:178) ned in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934.
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 (cid:178) nancial controls within their Division.
The Group Finance Manual sets out, amongst other things, (cid:178) nancial
and accounting policies and minimum internal (cid:178) nancial
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 Internal Audit on their
(cid:178) ndings on internal (cid:178) nancial controls.
The Audit Committee reviews the Group Whistle-blower procedures.
The Audit Committee reviews regular reports from the Vice President,
Group Finance and the Heads of 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(cid:159)internal controls over (cid:178) nancial reporting may not prevent or detect
all(cid:159)misstatements. 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 Financial Reporting Council’s ‘Internal Control:
Revised Guidance for Directors on the Combined Code’ 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 (cid:178) nancial 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
(cid:178) nancial reporting.
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54 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Corporate Governance Statement continued
The Auditor
Ernst & Young LLP have expressed their willingness to continue as the
Auditor. Resolutions proposing their re-appointment for 2014 and to
authorise the Directors to determine their remuneration will be proposed
at the Annual General Meeting, as approved by the Audit Committee.
Corporate headquarters and registered of(cid:178) ce
The corporate headquarters is in the UK and the registered of(cid:178) ce
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
We shall be tendering the provision of Audit services for future years
during 2014. Further(cid:159)details are included in the Audit Committee Report.
Disclosure of information to the Auditor
In accordance with Section 418 of the Companies Act 2006, the Directors
serving at the time of approving the Directors’ Report con(cid:178) rm that, to the
best of their knowledge and belief, there is no relevant audit information
of which the Auditor, Ernst & Young LLP, are unaware and the Directors
also con(cid:178) rm that they have taken reasonable steps to be aware of any
relevant audit information and, accordingly, to establish that the Auditor
is(cid:159)aware of such information.
Principal accountant fees and services
Fees for professional services provided by Ernst & Young LLP, the Group’s
independent auditor in each of the last two (cid:178) scal years, in each of the
following categories were:
2013
$ million
2012
$ million
Audit
Audit related fees
Tax
Other
3
–
3
–
6
3
–
2
–
5
Audit fees include fees associated with the annual audit and local
statutory audits required internationally. A more detailed breakdown
of(cid:159)audit fees may be found in Note 3.2 of the Notes to the Group accounts.
Committees of the Board
We delegate some of the Board’s detailed work to each of the Nomination
& Governance, Ethics & Compliance, Audit and Remuneration
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.
Other Committees
Executive Risk Committee
Olivier Bohuon chairs our Executive Risk Committee which includes the
Executive Directors and Executive Of(cid:178) cers of the Group. As an integral
part of our planning and review process, the management of each of our
divisions identi(cid:178) es 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 signi(cid:178) cant risks categorised by potential (cid:178) nancial impact on
pro(cid:178) t and share price and by likelihood of occurrence. Details of new, key
or signi(cid:178) cantly 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 identi(cid:178) ed through this process
in(cid:159)‘Financial review and principal risks’ on pages 36 to 41 of this
Annual Report.
Disclosures Committee
Olivier Bohuon chairs the Disclosures Committee which includes the
Chief Financial Of(cid:178) cer 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, SEC and to
the(cid:159)London and New York Stock Exchanges.
By order of the Board, on 26 February 2014
Sir John Buchanan
Chairman
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
55
Nomination & Governance Committee
Sir John Buchanan
appointment of Roberto Quarta as Non-executive Director and Chairman
Elect with effect from 4 December 2013. I shall retire from the Board
following the Annual General Meeting and Roberto Quarta will be
appointed in my place.
Membership
– Sir John Buchanan (Chairman) (Independent on appointment)
– Olivier Bohuon
– Brian Larcombe (Independent)
– Richard De Schutter (Independent)
– Roberto Quarta (Independent) (Chairman Elect) with effect from
4 December 2013.
Five meetings
Main responsibilities
– Review size and composition of the Board
– Oversee the Board succession plans
– Recommend Director appointments
– Oversee governance aspects of the Board and its Committees
– Oversee review into the Board’s effectiveness
– Consider and update the Schedule of Matters Reserved to the Board
and the Terms of Reference of the Board Committees
– Monitor external corporate governance activities and keep the Board
updated
– Oversee the Board Development Programme and the induction
process for new Directors.
Key activities in 2013
(in addition to main responsibilities)
– Recommended the appointment of Roberto Quarta as Chairman Elect
– Recommended the appointment of Michael Friedman as a new
Non-executive Director
– Reviewed and approved new Terms of Reference for Board
Committees and new Matters Reserved to the Board
– Continued consideration of diversity issues, independence of
Non-executive Directors and potential con(cid:179) icts of interests
– Received updates on corporate governance matters.
Dear Shareholder,
I am pleased to present my report on the activities of the Nomination &
Governance Committee in 2013. The membership and principal duties
of(cid:159)the Committee are set out in the table above. In 2013, we dealt with the
following matters:
Appointment of Roberto Quarta as Chairman Elect
In April 2014, I shall have served on the Smith & Nephew plc Board for
nine(cid:159)years. The Board agreed therefore that they should commence a
search for my replacement during 2013. Richard De Schutter, Senior
Independent Director led this search assisted by Brian Larcombe,
member of this Committee and by the independent search (cid:178) rm, Russell
Reynolds. They interviewed a number of candidates, who also met with
Olivier Bohuon, the Chief Executive Of(cid:178) cer and other Non-executive
Directors. I(cid:159)did not take part in this search, but was kept updated of
progress throughout. In October, the Committee recommended the
Changes to Board Composition
The Committee recommended the appointment of Michael Friedman
as(cid:159)Non-executive Director. He joined the Board on 11 April 2013 bringing
exceptional experience of the US Healthcare market with both public and
private sector experience.
The Committee reviewed the composition of the Board and
recommended that Brian Larcombe replace Richard De Schutter as
Senior Independent Director, when he retires following the Annual
General Meeting.
The Committee has continued its search for additional Non-executive
Directors, focusing, in particular, on the skills, experience, independence
and diversity each candidate brings to the Board. We look for candidates
who will support the strategic priorities identi(cid:178) ed by the Board and in
2014 will continue to look for Non-executive Directors with experience
within emerging markets or within the US and European
healthcare systems.
Our focus on emerging markets experience will be particularly important
after the retirement of Ajay Piramel following the Annual General Meeting
on 10 April 2014.
Governance Matters
During the year, the Committee also addressed a number of governance
matters. We reviewed the Terms of Reference of all the Board Committees
in light of new regulations and guidance from the UK Government and
the(cid:159)Financial Reporting Council on Executive Remuneration, Narrative
Reporting and Audit Committee Reporting. We received updates from
the(cid:159)Company Secretary on new developments in corporate reporting
in(cid:159)both the UK and Europe. We reviewed the independence of our
Non-executive Directors, considered potential con(cid:179) icts of interest
and(cid:159)the(cid:159)diversity of the Board and made recommendations concerning
these matters to the Board.
Diversity
As we explained in our 2011 Annual Report, we value diversity in the
Boardroom. Our directors come from different backgrounds and each
brings unique capabilities and perspectives to our discussions with a
wide range of professional and geographical backgrounds. We are
committed to maintaining a diverse Board. In 2012, we stated that our
expectation would be that by 2015, 25% of our Board would be female
and we have met this expectation. When appointing new directors, we
will continue to appoint(cid:159)on merit whilst valuing diversity in its broadest
sense.
Whilst the whole Board remains responsible for ensuring that the
Company is governed appropriately, the Committee carries out the
more(cid:159)detailed work to support this.
Yours sincerely
Sir John Buchanan
Chairman of Nomination & Governance Committee
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56 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Corporate Governance Statement continued
Ethics & Compliance Committee
Pamela Kirby
Membership
– Pamela Kirby (Chairman) (Independent)
– Michael Friedman (Independent) with effect from 4 December 2013
– Joseph Papa (Independent)
– Richard De Schutter (Independent).
Four Meetings
Main responsibilities
– Review ethics and compliance programmes
– Review policies and training programmes
– Review compliance performance based on monitoring, auditing
and(cid:159)investigations data
– Review allegations of signi(cid:178) cant compliance failures
– Review Group’s internal and external communications relating to ethics
and compliance issues
– Review external developments and compliance activities
– Receive reports from the Group’s ethics and compliance meetings
and(cid:159)from the Chief Compliance Of(cid:178) cer and the Chief Legal Of(cid:178) cer.
Key activities in 2013
(in addition to main responsibilities)
– Held meetings with independent monitor appointed under the DOJ/
SEC settlement to discuss the effectiveness of our Global Compliance
programme, review his reports, and consider further enhancements
– Continued to review compliance programme for third party sellers and
other third parties doing business with the Company
– Reviewed development of employee compliance training programmes
– Considered compliance implications relating to potential acquisitions,
including due diligence (cid:178) ndings and integration plans.
Dear Shareholder,
I am pleased to present my report on the activities of the Ethics &
Compliance Committee in 2013. The membership and the principal
duties of(cid:159)the Committee are set out in the table. In 2013, we dealt with the
following matters, among others:
Settlement with US Securities and Exchange
Commission and US Department of Justice
During the year, we continued to work closely with the independent
monitor appointed as part of our settlement with the SEC and DOJ in
2012. With his help, we have continued to evaluate the effectiveness of
our compliance programme and adopt further enhancements to the
programme. We met individually with the monitor and collectively as a
Committee and discussed our compliance programme with him. In
August, the monitor submitted to the SEC, DOJ and our Board a follow-up
report to his initial report from 2012. The follow-up report contained
additional recommendations and observations regarding implementation
of his initial recommendations. It also concluded that Smith & Nephew’s
programme is reasonably designed and implemented to detect and
prevent violations of the anti-corruption laws and is functioning
effectively. The SEC and DOJ concurred in that assessment, and in
December 2013 we and the monitor submitted a (cid:178) nal, joint report. In
January 2014, the SEC and DOJ con(cid:178) rmed that the independent
monitorship has terminated. We are now subject to self-reporting and
other requirements for the remainder of the settlement agreements
(that(cid:159)is, until at least March 2015).
Compliance Programme for Distributors
We continued to review our compliance programme with third party
sellers (such as distributors and sales agents), particularly in higher risk
markets. This programme includes due diligence, contracts with
compliance terms and compliance training. To increase oversight, we are
also piloting related monitoring and auditing programmes in 2014. During
2013, we required our distributors to complete expanded due diligence
questionnaires and certi(cid:178) cations and have continued to work with them
to build and enhance their own compliance programmes. We provide all
our distributors with a set of resources, which they can customise and
brand for their own compliance programmes.
Compliance Programme for Other Third Parties
We have continued to strengthen our controls over other third parties
engaged by us to provide services other than selling our products, such
as customs, registration and travel agents. In 2014, we will(cid:159)increase our
scrutiny on potential higher risk third parties. We have established a
policy and process requiring that managers categorise third(cid:159)parties and(cid:159)
take appropriate steps, including performing a risk assessment,
conducting due diligence and assigning training, based on third party
type and risk pro(cid:178) le. We previously created Guidance on the Smith &
Nephew Code of Conduct and Business Principles for Third Parties to
highlight the areas of our Code of Conduct that apply directly to third
parties and that we expect them to follow when working on our behalf.
Employee Compliance Programme
New employees are trained on our Code of Conduct which sets out the
basic legal and ethical principles for carrying out business and applies
both to the employees and others 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
of(cid:178) cials. It also covered the broader issues of ethics and compliance
throughout the business and includes a code of business principles.
A(cid:159)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 (where allowed by local law). Individuals
can also report a concern to their direct manager or a manager in
Compliance, Legal or Human Resources. All calls and contacts are
investigated and the appropriate action taken, including reports for senior
management or the Board, where warranted. As stated in the Code of
Conduct, we also enforce our non-retaliation policy against anyone who
makes a report in good faith. The Ethics & Compliance Committee is
advised of any potentially signi(cid:178) cant improprieties which are reported.
In 2013, we reviewed the Group Policies and Procedures (‘GPPs’)
supporting the Code of Conduct, and made revisions to policies covering
booths at(cid:159)medical meetings, free products, digital media and other areas.
We(cid:159)continually work to enhance the employee compliance training
programme. New employees receive training on our Code of Conduct,
and we assign annual compliance training to employees. People
managers also must complete a certi(cid:178) cation that includes content
targeted to their role and the challenges they face. In 2013, we created a
refresher course on(cid:159)Preventing Bribery and Corruption and a course on
Effective Communication. The preventing bribery model gave employees
an opportunity to apply their knowledge in different scenarios.
The annual bonus to senior managers can be negatively impacted if
their(cid:159)team members have not completed the requisite training. The
compliance training programme continues to evolve to focus more on
tailored situations relevant to employees in speci(cid:178) c job situations. Further
support is provided through a comprehensive set of tools and resources
located on our global intranet platform. These tools and resources are
regularly reviewed and updated.
Compliance Infrastructure
We are mindful that an effective compliance programme requires both a
culture of integrity and investment in the necessary infrastructure to give
effect to that culture. As the Company grows in new markets, we continue
to expand our global network of Regional Compliance Of(cid:178) cers and they
work with local management to reinforce the importance of compliance
with our employees and third parties around the world. In 2013, we
added regional compliance staff in Russia, Brazil, Turkey, Japan and
the(cid:159)Middle East.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
57
Compliance Implications around Acquisitions
During 2013, there has been increased acquisition activity across the
Group, with the acquisition of Plato Grup in Turkey, Sushrut-Adler in India
and Politec in Brazil, as well as the announcement of an agreement to
acquire Pro Cirurgia Especializada, also in Brazil. We have compliance
due diligence reviews and integration plans relating to each of these
transactions and we monitor progress against these plans.
Compliance Investigations
Finally, an effective compliance programme must regularly evaluate and
address emerging risks and design appropriate controls and take
necessary remedial actions. These actions may include investigations
about possible improprieties, which we pursue with due care.
Yours sincerely
Pamela Kirby
Chairman of Ethics & Compliance Committee
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58 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Audit Committee Report
Ian Barlow
Dear Shareholder,
I am pleased to present the (cid:178) rst Audit Committee Report prepared in
accordance with the newly revised Corporate Governance Code, in
which(cid:159)the role of the Audit Committee and its activities during the year
are(cid:159)described in more detail than in previous years.
The role of the Audit Committee is to undertake an independent
assessment of the (cid:178) nancial affairs of the Company, to review the
(cid:178) nancial(cid:159)statements and to ensure that there is a sound system of
(cid:178) nancial control throughout the Group. Whilst the Board as a whole
is(cid:159)responsible for approving the (cid:178) nancial results, we undertake the
detailed(cid:159)work to support that decision.
Composition of the Audit Committee
I am Chairman of the Audit Committee and Brian Larcombe, Richard De
Schutter and Joseph Papa are members of the Committee. We are all
independent Non-executive Directors and served on the Committee
throughout 2013. Richard De Schutter will be retiring from the Board and
the Audit Committee following the 2014 Annual General Meeting. The
Board has determined that, as a Chartered Accountant and former
Senior(cid:159)Partner, London at KPMG, I am the designated (cid:178) nancial expert.
Role of the Audit Committee
Our work falls into the following (cid:178) ve areas:
Financial reporting
– Reviewing signi(cid:178) cant (cid:178) nancial reporting judgements and accounting
policies and compliance with accounting standards
– Ensuring the integrity of the (cid:178) nancial statements and their
compliance(cid:159)with UK and US statutory requirements
– Ensuring the Annual Report and Accounts are fair, balanced and
understandable and recommending their adoption by the Board
– Monitoring announcements relating to(cid:159)the Group’s
(cid:178) nancial(cid:159)performance.
Internal Controls and Risk Management
– Monitoring the effectiveness of internal controls and compliance with
the UK Corporate Governance Code 2012 and the Sarbanes-Oxley
Act, speci(cid:178) cally sections 302 and 404
– Reviewing the operation of the Group’s risk management processes
and the control environment over (cid:178) nancial, regulatory and quality
risks.
Fraud and Whistle-blowing
– Receiving reports on the processes in place to prevent fraud and to
enable whistle-blowing
– If required, receiving reports of fraud incidents.
Internal Audit
– Agreeing internal audit plans and reviewing reports of internal
audit(cid:159)work
– Monitoring the effectiveness of the internal audit function.
External Audit
– Overseeing the Board’s relationship with the external auditor
– Monitoring and reviewing the independence and performance of
the(cid:159)external auditor and evaluating their effectiveness
– Making recommendations to the Board for the appointment or
re-appointment of the external(cid:159)auditor.
The Terms of Reference of the Audit Committee describe our role
and(cid:159)responsibilities more fully and can be found on our website at
www.smith-nephew.com.
Activities of the Audit Committee in 2013 and since
the(cid:159)year end
In 2013, we held (cid:178) ve physical meetings and three meetings by telephone.
Each meeting was attended by all members of the Committee. The Chief
Executive Of(cid:178) cer, Chief Financial Of(cid:178) cer, Head of Internal Audit, the
external auditor and key (cid:178) nance personnel also attended by invitation.
We also met the(cid:159)external auditor without management present.
Our programme of work in 2013 is set out below and took the following
format: As part of our review of the (cid:178) nancial statements and the quarterly
announcements, we reviewed management’s judgements applied
in(cid:159)a(cid:159)number of areas including the valuation of inventories, liability
provisioning, impairment, retirement bene(cid:178) t obligations, trade
receivables, taxation and business combinations. The(cid:159)matters of
judgement and our processes and conclusions are described in
greater(cid:159)detail below.
During the year we received reports from the Group Treasurer, Head of
Tax, Chief Information Of(cid:178) cer (‘CIO’) and Chief Business Development
Of(cid:178) cer. All of these were focused on the risk management in these
functions. The CIO’s report had a particular emphasis on cyber security.
The Committee was satis(cid:178) ed that each function has evaluated the risks it
is managing and has effective processes in place to mitigate and respond
to those risks. We also had reports from the Heads of Quality Assurance
and of Risk Assurance and had two dedicated discussions on the
Group’s risk management during the year: (cid:178) rst to review the Group’s risk
management procedures and risk maps as(cid:159)a basis for sign off on the
Annual Report and Accounts; the second in September as part of the
Board’s annual strategy meeting to review the Board’s attitude to risk
and(cid:159)assessment of the high level strategic risks.
In light of the changes in UK reporting regulations we continued to review
the style, format and content of the Annual Report and Accounts paying
particular attention to the changes in the Corporate Governance Code
and reporting regulations. We also revised our Terms of Reference to take
account of these changes.
Since the year end, we have reviewed the Annual Report and Accounts
for(cid:159)2013 and have concluded that taken as a whole they are fair, balanced
and understandable and have advised the full Board accordingly. In
coming to this conclusion, we have considered the description of the
Group’s strategy and key risks, the key elements of the(cid:159)business model
which is set out on page 7, and the key performance indicators and their
link to the strategy.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
59
Signi(cid:178) cant matters related to the (cid:178) nancial statements
We considered the following key areas of judgement in relation to the 2013 accounts and at each reporting quarter end, which we discussed
in all cases with management and the external auditor:
Area of judgement
Our action
Valuation of inventories
A feature of the Advanced Surgical Devices division’s business model
(whose (cid:178) nished goods inventory makes up almost 80% of the Group total
(cid:178) nished 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,(cid:159)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.
Liability provisioning
The recognition of provisions for(cid:159)legal disputes is subject to a signi(cid:178) cant
degree of estimation. Provision is made for loss contingencies when it is
considered probable that an adverse outcome will occur and the(cid:159)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 re(cid:179) ect developments in the disputes. The ultimate liability
may differ from the amount provided depending on the outcome of court
proceedings or settlement negotiations or if new facts come to light.
The level of provisioning for contingent and other liabilities is an(cid:159)issue
where management and legal judgements are important.
Impairment
In carrying out impairment reviews of goodwill, intangible assets and
property, plant and equipment, a number of signi(cid:178) cant assumptions
have(cid:159)to be made when preparing cash (cid:179) ow projections. These include
the future rate of market growth, discount rates, the market demand for
the products acquired, the future pro(cid:178) tability of acquired businesses or
products, levels of reimbursement and success in obtaining regulatory
approvals. If(cid:159)actual results should differ or changes in expectations arise,
impairment charges may be required which would adversely impact
operating results.
Retirement Bene(cid:178) ts Obligations
A number of key judgements have to(cid:159)be made in calculating the fair value
of the Group’s de(cid:178) ned bene(cid:178) t pension plans. These assumptions affect
the balance sheet liability, operating pro(cid:178) t and other (cid:178) nance income/
costs. The most critical assumptions are the discount rate and mortality
assumptions to be applied to future pension plan liabilities. In making
these judgements, management takes into account the advice of
professional external actuaries and benchmarks its assumptions
against(cid:159)external data.
At each quarter end we received reports from and discussed with
management and the external auditor the level of provisioning
and(cid:159)material areas at risk. Provisioning averaged 26% during the year
(27% during 2012). We concluded that the proposed levels
were appropriate.
As members of the Board, we receive regular updates from the Chief
Legal Of(cid:178) cer. These updates form the basis for the level of provisioning.
These have(cid:159)not moved materially during the year and we determined that
the(cid:159)proposed levels at year end of $86m in 2013 ($80m in 2012) were
appropriate in the circumstances.
We reviewed management’s reports on the key assumptions with respect
to goodwill and investment in associates – particularly the forecast future
cash (cid:179) ows and discount rates used to make these calculations. We have
also considered the disclosure surrounding these reviews and concluded
it was appropriate.
We received quarterly reports from management setting out the
movement in the key assumptions for the principal pension schemes
in(cid:159)the Group and the (cid:178) nancial impact of these movements. Any signi(cid:178) cant
movement in the assumptions or movement in the underlying scheme
assets and liabilities was discussed with management. Details of the
assumptions used are set out in Note 18 of the Notes to the Group
accounts. Following these discussions we(cid:159)concluded that the
assumptions used were appropriate.
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60 SMITH & NEPHEW ANNUAL REPORT 2013
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Audit Committee Report continued
Area of judgement
Our action
Trade receivables
Guidance was issued by the Financial Reporting Council in early 2012 on
responding to increased country and currency risk particularly in
Southern Europe.
Taxation
Provisioning for potential current tax liabilities and the level of deferred tax
asset recognition in relation to accumulated tax losses are underpinned
by a range of judgements.
Business combinations
The Group has identi(cid:178) ed ‘growth through acquisitions’ as one of
its(cid:159)Strategic Priorities and over the past 12 months we have made
acquisitions in Turkey, India and(cid:159)Brazil.
External Auditor
The independence of our external auditor is critical for the integrity of(cid:159)the
audit. We therefore have an Auditor Independence Policy which ensures
that this independence is maintained, a copy of which is available on the
Company’s website. This governs our approach when we require our
external auditor to carry out non-audit services, and all such services are
strictly governed by this policy. During 2013, fees paid to Ernst & Young
LLP, our external auditor, for non-audit work totalled $3m which equates
to 44% of the total audit fees. Full details are shown in Note 3.2 of the
Notes to the Group accounts.
The Auditor Independence Policy also governs the policy regarding the
audit partner rotation. This year marks the (cid:178) fth and (cid:178) nal year for our audit
partner, Les Clifford, who will be replaced for 2014 by Andrew Walton.
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. We consider the implementation of
this policy helps ensure that auditor objectivity and independence
is safeguarded.
Each quarter we received reports from management containing key
metrics(cid:159)with regard to receivables with additional focus on receivables
in(cid:159)Southern Europe. We discussed the risk associated with trade
receivables in Southern Europe and the level of provisioning and
concluded that the stated values were appropriate.
We annually review our system and principles for management of tax
risks. We review quarterly reports from management evaluating existing
risks and tax provisions. We also consider reports from our external
auditor before determining that the levels of provisions was appropriate.
For completed acquisitions, we received a report from management
setting out the signi(cid:178) cant assets and liabilities acquired, details of the
provisional fair value adjustments applied, an analysis of the intangible
assets acquired, the assumptions behind the valuation of these acquired
intangible assets, and the proposed useful economic life of each
intangible asset class. These reports were reviewed and, following
discussion, approved.
We formally reviewed the effectiveness of the external audit process and
the quality of the audit. The review covered the following:
– The audit partners with particular focus on the lead audit engagement
partner;
– The skills and experience of the audit team;
– The planning and scope of the audit and identi(cid:178) cation of areas of
audit risk;
– The execution of the audit;
– The role of management in the audit process;
– The quality of communication between the external auditor and the
audit committee;
– The quality of their regular reports on accounting matters, governance
and control;
– The support provided by the external auditor to the audit committee;
– The contribution made by the external auditor towards insights and
added value;
– The reputation and standing of the external auditor;
– The independence and objectivity of the external auditor; and
– The quality of the formal report to Shareholders.
We conducted this review as part of the 2013 year-end process. The
views of each member of the Audit Committee, the Chief Financial Of(cid:178) cer,
the Vice President Group Finance and key members of the (cid:178) nance
management team at Group and divisional level were sought. We
considered the feedback from this process and shared it with the
external auditor and with management.
During the year, we considered the inspection reports from the Audit
Oversight Boards in the UK and US, speci(cid:178) cally the:
– Financial Reporting Council’s Audit Quality Inspections Annual Report
2012/13 and Public Report on the 2012 inspection of Ernst & Young LLP;
and
– The US based Public Company Accounting Oversight Board’s Report
on the 2012 inspection of Ernst & Young LLP.
We also reviewed the fees of the external auditor which benchmarked
well against groups of comparable size and complexity.
Our conclusions were that the external audit was carried out effectively,
ef(cid:178) ciently and with the necessary objectivity and independence.
Tender of External Audit Services
Ernst & Young or its predecessors have been our external auditor since
we listed in 1937. We have regularly reviewed the provision of external
audit services and because we have been satis(cid:178) ed with the quality and
cost of the work undertaken by Ernst & Young, we have not considered
it(cid:159)necessary to tender the appointment. We are however mindful of the
recent changes introduced by the UK Corporate Governance Code 2012,
the prospective new requirements of the Competition Commission to
tender regularly, the imminent changes being progressed by the
European Parliament for periodic mandatory rotation of auditors and the
views of some of our Shareholders regarding the length of tenure of our
external auditor. We recognise that now is the time to consider putting the
external audit out to tender. We chose not to do this in 2013 given the
very(cid:159)recent appointment of Julie Brown as Chief Financial Of(cid:178) cer. We
have however decided that following the Annual General Meeting in
2014, we(cid:159)will go out(cid:159)to tender in 2014 with a view to appointing a new
external auditor, or(cid:159)re-appointing Ernst & Young as external auditor, for
the(cid:159)year ending 31 December 2015.
As Chairman of the Audit Committee, I shall lead this process on
behalf(cid:159)of(cid:159)the Board supported by Julie Brown and senior members of
her(cid:159)(cid:178) nancial management. When we have made a decision regarding
the(cid:159)appointment of the external auditor, we shall make an appropriate
announcement to the market.
Internal Audit
Our Internal Audit function reports directly to the Audit Committee and
carries out work in three areas: our (cid:178) nancial systems and processes; our
systems that ensure compliance with our Code of Conduct, regulation
and laws; and our quality managements systems in our manufacturing
activities. In all three areas they act as a third line of defence behind
operational management’s front line and our own assurance activities.
During the year they completed 58 reviews, the results of which were
reviewed by the Committee which also oversees the effective and timely
remediation of any recommendations. The Committee receives a
quarterly report detailing any un-remediated and overdue
control recommendations.
We are keen to ensure that this vital function develops with the
increasing(cid:159)scale and complexity of the business. With regards to
new(cid:159)acquisitions speci(cid:178) cally, the function will perform an audit on the
Group’s Acquisition Due Diligence process followed by site speci(cid:178) c
audits on new acquisitions to ensure integration efforts are in line with
approved plans. We will continue to monitor Internal Audit’s scope of
work(cid:159)and operational methods to ensure it plays a full role in providing
assurance of the Group’s(cid:159)identi(cid:178) cation and management of risk and its
associated controls.
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61
Risk Management and Internal Control
On behalf of the Board we reviewed the system of internal (cid:178) nancial
control and satis(cid:178) ed ourselves that we are meeting required standards
both for the year ended 31 December 2013 and up to the date of approval
of this Annual Report. No concerns were raised with us in 2013 about
possible improprieties in matters of (cid:178) nancial reporting or other matters.
In coming to this conclusion:
– We received regular reports from the internal audit function on their
(cid:178) ndings from the reviews undertaken throughout the year both from
an(cid:159)internal audit perspective and also with regard to compliance with
the Sarbanes Oxley Act
– We requested and reviewed a report mapping Group level risks and
related control assurance
– We requested various reports from management relating to speci(cid:178) c
risks identi(cid:178) ed through the risk management process including the
progress of the European Process Optimisation project (integration of
enterprise reporting systems in Europe) and the risks inherent in our
programme of business acquisitions. In addition the Board conducted
a workshop on cyber security.
Our Risk Management Framework is underpinned by Business and
Functional risk registers that highlight the risks identi(cid:178) ed and the
probability and impact of risk to the Group, as well as mitigation plans.
The most signi(cid:178) cant of these risks are considered by the Group Risk
Committee for inclusion on a Group Risk Register. The effectiveness of
this Framework is reviewed annually by Internal Audit and our Committee.
Yours sincerely
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Chairman of the Audit Committee
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62 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report
Our aim is to devise
remuneration packages
that drive performance
Dear Shareholder,
I am pleased to present the (cid:178) rst Directors’ remuneration report prepared
in accordance with the new regulations. Our remuneration arrangements
have essentially remained unchanged from last year, but are now
presented in a new format. We have discussed this format with a number
of our major Shareholders and are very grateful for their suggestions
helping us to improve the clarity of the new remuneration policy table and
the remuneration policy report itself.
We made a number of decisions during the year, as follows:
– Agreed to introduce a third performance measure relating to
growth in Emerging & International Markets, into our Performance
Share Programme.
– Determined the incentive plan outcomes for long-term awards made
in 2010 and the Annual Incentive Plan 2012, and set the targets and
measures for the awards and plans in 2013.
– Redesigned the Directors’ Remuneration Report in line with the
new regulations.
Compliance statement
We have prepared this Directors’ Remuneration Report (the ‘Report’) in accordance with The(cid:159)Enterprise and Regulatory Reform Act 2012-2013 (clauses 81-84) and The Large and Medium-Sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the(cid:159)‘Regulations’). The Report also meets the relevant requirements of(cid:159)the Financial Conduct Authority (‘FCA’)
Listing Rules.
As required by the regulations, the (cid:178) rst part of the Report (pages 64 to 72) is the Directors’ Remuneration Policy Report (the ‘Policy Report’). The Policy Report will be put to Shareholders for
approval as a binding vote at the Annual General Meeting on 10 April 2014. The policy report describes our remuneration policy as it relates to the Directors of the Company. Once the policy
report has been approved by Shareholders, all payments we make to any Director of the Company will be in accordance with this remuneration policy. We intend that this remuneration policy
will remain in place unchanged for at least the next three years and will next be put to Shareholder vote at the Annual General Meeting to be held in 2017. We will bring the policy report back
to(cid:159)Shareholders earlier in the event that we make any material change to the remuneration policy or Shareholders do not approve the annual report on remuneration.
The second part of the Report (pages 73 to 85) is the annual report on remuneration (the ‘Implementation Report’). The Implementation Report will be put to Shareholders for approval(cid:159)as an
advisory vote at the Annual General Meeting on 10 April 2014. The Implementation Report explains how the remuneration policy was implemented during(cid:159)2013(cid:159)and also how it is currently
being implemented in 2014.
Pages 74, 79 to 82 have been audited by Ernst & Young LLP.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
63
in line with our strategy &
which are simple & clear
to(cid:159)understand
As a Remuneration Committee, our aim is to devise remuneration packages that drive a performance in line with our corporate strategy and(cid:159)which
are(cid:159)simple and clear to understand both for our Shareholders and for those who participate in our plans. We aim to have a clear line of sight between
the performance of the Company and how our Directors and senior executives are paid. We do this by setting the (cid:178) xed elements of pay, notably base
salary and bene(cid:178) ts, in line with what our Executive Directors would be paid at another company of a comparable size, complexity and geographical
spread. For the variable elements of pay, we(cid:159)select performance measures that are linked to one or more of our Strategic Priorities as detailed on
page(cid:159)10 of the Annual Report as follows:
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Measures in our Variable(cid:159)Pay Plans
Financial measures in Annual Incentive Plans
Revenue, Trading pro(cid:178) t, Cash
Link to Strategic Priorities
We need to generate cash in our Established Markets to be able to invest in(cid:159)Emerging & International
Markets, innovation, organic growth and acquisitions in order to continue to grow in the future. Cash (cid:179) ow is
therefore important and this in turn is derived from increased revenues and healthy trading pro(cid:178) ts.
Business objectives in Annual Incentive Plans
Re-investment
We need to release resources from the businesses through improved structures and ef(cid:178) ciencies in order
to(cid:159)re-invest in our higher growth areas, including emerging markets, innovation, organic growth and
acquisitions.
Processes
People
Customer
We need to enhance our business processes in order to operate more effectively and ef(cid:178) ciently and to
improve our operating model.
We need to attract and retain the right people to achieve our strategy through improving our operating
model, winning in Established Markets and growing in emerging markets.
Our mission is to deliver advanced medical technologies that help healthcare professionals, our customers,
improve the quality of life of their patients.
Performance measures in our Performance Share Plan
Cash (cid:179) ow
Revenue in Emerging &
International(cid:159)markets
TSR
Cash (cid:179) ow from our Established Markets is necessary in order to fund growth in emerging markets,
innovation, organic growth and acquisitions.
Our long-term strategy depends on our ability to(cid:159)grow in Emerging & International Markets, to innovate
for(cid:159)growth and to supplement organic growth through acquisitions. This depends on our ability to develop
new products and to expand into(cid:159)new(cid:159)markets both geographically and by product.
If we execute our strategy successfully, this(cid:159)will(cid:159)lead to an increased return for our Shareholders.
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The following pages set out our remuneration policy in greater detail and then explain how we implement that policy. We believe that outstanding
performance by our executives should be rewarded by attractive remuneration packages. We do however have measures in place which ensure
that(cid:159)plans do not pay out where performance has not met threshold performance and to recover any amounts paid out, where subsequent events
show that payments should not have been made.
We have aimed to design a remuneration package that will encourage our Executive Directors to drive performance in line with our strategy,
whilst(cid:159)minimising risk, which will(cid:159)in turn deliver a healthy return to our Shareholders. We very much hope that the new style report is clearer for
our(cid:159)Shareholders and(cid:159)shows how we(cid:159)have linked the design of our remuneration plans to our strategy.
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64 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report continued
The Policy Report
The Remuneration Committee presents the Directors’ remuneration policy report, which will be put to Shareholders as a binding vote at the
Annual(cid:159)General Meeting to be held on 10 April 2014 and subject to Shareholder approval, shall take immediate effect.
Future policy table
Executive Directors
The following table and accompanying notes explain the different elements of remuneration we pay to our Executive Directors:
How the component supports the short-
and long-term strategy of(cid:159)the Company
How the component operates
Base salary and bene(cid:178) ts
Base salary
We are a FTSE 50 listed company, operating in over 100 countries around the world.
Our(cid:159)strategy to generate cash from Established Markets in order to invest for growth in
Emerging Markets means that we are competing for international talent and our base
salaries therefore need to re(cid:179) ect what our Executive Directors would receive if they
were to work in another international company of a similar size, complexity and
geographical scope.
Payment in lieu of(cid:159)pension
In order to attract and retain Executive Directors with the capability of driving our
corporate strategy, we need to provide market-competitive retirement bene(cid:178) ts similar
to the bene(cid:178) ts they would receive if they were to work for one of our competitors.
At the same time, we seek to avoid exposing the Company to de(cid:178) ned bene(cid:178) t pension
risks, and where possible will make payments in lieu of providing a pension.
Bene(cid:178) ts
In order to attract and retain Executive Directors with the capability of driving our
corporate strategy, we need to provide a range of market-competitive bene(cid:178) ts similar
to(cid:159)the bene(cid:178) ts they would receive if they were(cid:159)to work for one of our competitors.
It is important that our Executive Directors are free to focus on the Company’s business
without being diverted by concerns about medical(cid:159)provision, risk bene(cid:178) t cover or, if
required, relocation issues.
Salaries are normally reviewed annually, with any increase applying from(cid:159)1 April.
Salary levels and increases take account of:
– market movements within a peer group of similarly sized UK listed companies;
– scope and responsibility of the position;
– skill/experience and performance of the individual Director;
– general economic conditions in the relevant geographic market; and
– average increases awarded across the Company, with particular regard to(cid:159)increases
in the market in which the Executive is based.
Current Executive Directors receive an allowance in lieu of membership of(cid:159)a(cid:159)Company-
run pension scheme.
Base salary is the only component of remuneration that is pensionable.
A wide range of bene(cid:178) ts may be provided depending on the bene(cid:178) ts provided for
comparable roles in the location in which the Executive Director is based. These bene(cid:178) ts
will include, as a minimum, healthcare cover, life assurance, long-term disability, annual
medical examinations, company car or car allowance. The Committee retains the
discretion to provide additional bene(cid:178) ts where necessary or relevant in the context of the
Executive’s location.
Where applicable, relocation costs may be provided in line with Company’s relocation
policy for employees, which may include removal costs, assistance with accommodation,
living expenses for self and family and (cid:178) nancial consultancy advice. In(cid:159)some cases such
payments may be grossed up.
All-employee arrangements
All-employee share plans
To enable Executive Directors to participate in all-employee share plans on the same
basis as other employees.
ShareSave Plans are operated in the UK and 27 other countries internationally. In the
US, an Employee Stock Purchase Plan is operated. These plans enable employees to
save on a regular basis and then buy shares in the Company. Executive Directors are
able to participate in such plans on a similar basis to other employees, depending on
where they are located.
SMITH & NEPHEW ANNUAL REPORT 2013
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65
Maximum levels of payment
Framework in which performance is assessed
The base salary of the Executive Directors with effect from 1 April 2014 will(cid:159)be as follows:
Olivier Bohuon €1,111,782
Julie Brown £514,000
The factors noted in the previous column will be taken into consideration when making
increases to(cid:159)base salary and when appointing a new Director.
In normal circumstances, base salary increases for Executive Directors will relate to the
geographic market and peer group. In addition, the average increases for employees
across the(cid:159)group will be taken into account. The Remuneration Committee retains the
right to approve higher increases when there is a substantial change in the scope of the
Executive Director’s role. A full explanation will be provided in the Implementation Report
should higher increases be approved in exceptional cases.
Performance in the prior year is one of the factors taken into account and poor
performance is likely to lead to a zero salary increase.
Up to 30% of base salary.
The(cid:159)level of payment in lieu of a pension paid to(cid:159)Executive Directors is not dependent
on performance.
The level and cost of bene(cid:178) ts provided to Executive Directors is not dependent on
performance but on the(cid:159)package of bene(cid:178) ts provided to(cid:159)comparable roles(cid:159)within
the(cid:159)relevant location.
The policy is framed by the nature of the bene(cid:178) ts that the Remuneration Committee is
willing to(cid:159)provide to Executive Directors. The maximum amount payable will depend
on(cid:159)the cost of providing such bene(cid:178) ts to an(cid:159)employee in the location at which the
Executive Director is based. Shareholders should note that the cost of providing
comparable bene(cid:178) ts in(cid:159)different jurisdictions may vary widely.
As an indication, the cost of such bene(cid:178) ts provided in 2013 was as follows:
Olivier Bohuon €80,705
Julie Brown £14,400
The maximum amount payable in bene(cid:178) ts to an Executive Director, in normal
circumstances, will not be signi(cid:178) cantly more than amounts paid in(cid:159)2013 (or equivalent
in(cid:159)local currency). The Remuneration Committee retains the right to pay more than this
should the cost of providing the same(cid:159)underlying bene(cid:178) ts increase or in the event of a
relocation. A full explanation will be provided in the Implementation Report should the
cost(cid:159)of bene(cid:178) ts provided be signi(cid:178) cantly higher.
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Executive Directors may currently invest up to £250 per month in the UK
ShareSave(cid:159)Plan. The Remuneration Committee may exercise its discretion to
increase(cid:159)this amount(cid:159)up(cid:159)to(cid:159)the maximum permitted by the HM Revenue & Customs.
Similar(cid:159)limits will apply(cid:159)in(cid:159)different locations.
The potential gains from all-employee plans are not based on performance but are
linked to growth in the share price.
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Directors’ remuneration report continued
Future policy table – Executive Directors continued
How the component supports the short-
and long-term strategy of(cid:159)the Company
Annual incentives
Annual Incentive Plan – Cash Incentive
To motivate and reward the achievement of speci(cid:178) c annual (cid:178) nancial and business
objectives related to the Company’s strategy and sustained through a clawback
mechanism explained more fully in the notes.
The objectives which determine the payment of the annual cash incentive(cid:159)and the
level(cid:159)of the annual equity award are linked closely to(cid:159)the(cid:159)Group strategy.
The (cid:178) nancial measures of revenue, trading pro(cid:178) t and cash (cid:179) ow underlie(cid:159)our strategy
for(cid:159)growth and the need to generate cash to fund(cid:159)future growth.
The business objectives are also linked to the Group strategy. These change from
year(cid:159)to year to re(cid:179) ect the evolving strategy, but will typically be linked to the Strategic
Priorities set out on page 10 of this Annual Report. The Implementation Report each
year will explain how each objective is linked to a speci(cid:178) c strategic priority.
For example, a Reinvestment objective links to the priority of improving the ef(cid:178) ciency of
the business model and investment in higher growth segments and geographies and
Processes and People objectives link to developing the right organisation.
Annual Incentive Plan – Equity Incentive
To drive share ownership and encourage sustained high standards through the
application of a ‘malus’ provision over three years, explained(cid:159)more fully in the notes.
Long-term incentives (awards actively being made)
Performance Share Programme
To motivate and reward longer term performance linked to the long-term strategy and
share price of the Company.
The performance measures which determine the level of vesting of the Performance
Share Awards are linked to our corporate strategy.
Our strategy requires the generation of cash in order to invest for growth. Cash (cid:179) ow is
therefore a key performance measure in our performance share plan.
Growth in our Emerging & International Markets is a key part of our strategy. Revenue in
our Emerging & International Markets is therefore included as one of our performance
share plan measures.
If our strategy succeeds, the total return to our shareholders will also increase and
therefore we include a relative TSR measure in our long-term share plan.
How the component operates
The Annual Incentive Plan comprises a cash and an equity component, both based
on(cid:159)the achievement of (cid:178) nancial and business objectives set at(cid:159)the start of the year.
The cash component is paid in full after the end of the performance year.
At the end of the year, the Remuneration Committee determines the extent to which
performance against these has been achieved and sets the award level.
The equity award component comprises conditional share awards (made at the time
of(cid:159)the cash award), with vesting phased over the following three years.
The equity component vests 1(cid:174)3, 1(cid:174)3, 1(cid:174)3 on successive award anniversaries, only
if(cid:159)performance remains satisfactory over each of these three years; otherwise the
award(cid:159)will lapse.
Participants will receive an additional number of shares equivalent to the(cid:159)amount of
dividend payable per vested share during the relevant performance period.
The Performance Share Programme comprises conditional share awards which vest
after three years, subject to the achievement of stretching performance targets linked
to(cid:159)the Company’s strategy.
Awards may be subject to clawback in the event of material (cid:178) nancial misstatement
or misconduct.
Participants will receive an additional number of shares equivalent to the(cid:159)amount of
dividend payable per vested share during the relevant performance period.
One-off share awards
In order to implement our Group strategy, we recognise that it is not always possible
to(cid:159)promote from within the Company. In the event that we(cid:159)recruit an Executive Director
who is currently employed by another company, we recognise that we might be
required to compensate that Executive Director for cash or share awards, they may
forfeit on leaving their former employer. Our policy regarding such awards is detailed
in(cid:159)the notes.
One-off share awards may be made under the provisions of Listing Rule(cid:159)9.4.2 to
facilitate the appointment of a new Executive Director. Such(cid:159)awards will be made
on(cid:159)a(cid:159)case-by-case basis depending on the(cid:159)circumstances at the time to take account of
amounts forfeited elsewhere on accepting appointment.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
67
Maximum levels of payment
Framework in which performance is assessed
The total maximum payable under the Annual Incentive Plan is 215% of(cid:159)base salary
(150% Cash Incentive and 65% Equity Incentive).
50% salary awarded for threshold performance.
100% salary awarded for target performance.
150% salary awarded for maximum performance.
Performance assessed against individual objectives and Group (cid:178) nancial targets.
The cash and share awards are subject to malus and clawback as detailed in the notes
following this table.
70% of the cash component is based on (cid:178) nancial performance measures,
which(cid:159)currently include revenue, trading pro(cid:178) t and trading cash. The Remuneration
Committee retains the discretion to adopt any (cid:178) nancial performance measure that
is(cid:159)relevant to the Company.
30% of the cash component is based on other business goals linked to the Company’s
strategy, which could include (cid:178) nancial and non-(cid:178) nancial measures.
The Remuneration Committee has the discretion to(cid:159)apply a multiplier, adjusting the
outcome up or down by 10% to reward or penalise conduct in respect(cid:159)of leadership,
corporate reputation, ethics, organisational behaviours and representing the Company
both internally and externally.
The maximum opportunity shown to the left cannot be(cid:159)exceeded through the application
of the multiplier.
0% of salary awarded for performance below target.
50% of salary awarded for target performance.
65% of salary awarded for maximum performance.
Performance assessed against individual performance which includes an(cid:159)element
of(cid:159)Group(cid:159)(cid:178) nancial targets.
The Remuneration Committee will use their judgement of the individual’s performance
in determining the level of equity award that may be awarded within the range of 50%
to(cid:159)65% of salary.
The equity component will vest in three equal tranches over a three-year period,
provided that the annual performance conditions set at the beginning of(cid:159)each year
continue to be met.
Annual awards:
47.5% of salary for threshold performance.
95% of salary for target performance.
190% of salary for maximum performance.
Currently:
– 50% of the award vests on achievement of a three-year cumulative free cash(cid:179) ow
target
– 25% of the award vests subject to three-year Total Shareholder Return (‘TSR’) at
median performance relative to industry peers
– 25% of the award vests subject to the achievement of revenue targets in Emerging
&(cid:159)International Markets
– These measures are described in more detail in the notes and the(cid:159)targets and
performance against them will be disclosed in the(cid:159)Implementation Report if
appropriate
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– The Performance Share Award will vest on the third anniversary of the date of grant,
depending on the extent to which the performance conditions are met over the three
year period commencing in the year the award was made
– The Remuneration Committee retains the discretion to change the measures and their
respective weightings to ensure continuing alignment with the Company’s strategy
– The cash and share awards are subject to malus and clawback as detailed in the
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notes following this table.
Awards made prior to 2014 were subject to TSR and cash (cid:179) ow targets.
Each award will be determined on a case-by-case basis. In normal circumstances
such(cid:159)awards will be no more bene(cid:178) cial than the value of(cid:159)amounts forfeited by
the(cid:159)Executive Director on leaving a previous company to join the Board.
The Remuneration Committee has the discretion to apply performance conditions
to(cid:159)one-off awards if appropriate. However, if it is impossible to replicate the vesting
conditions applicable to awards granted by other companies, awards may be made
without performance conditions.
68 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report continued
Notes to Future policy table – Executive(cid:159)Directors
Changes to remuneration policy
The remuneration policy described in the future policy table – Executive
Directors is the same remuneration policy in respect of Executive
Directors that has been in force since the beginning of 2012. It is
anticipated that this policy will apply at least until the Annual General
Meeting in 2017. The only change made has been to introduce a third
performance measure to our Performance Share Programme.
Performance measures – Annual Incentive Plan
The performance measures which apply to the Annual Incentive Plan for
Executive Directors comprise 70% (cid:178) nancial measures and 30% business
goals linked to the Company’s strategy, which could include (cid:178) nancial and
non-(cid:178) nancial measures.
The (cid:178) nancial measures may differ from year to year to provide continued
alignment with the Company strategy. Measures to be used in 2014 are
detailed in the Implementation Report. Each year the measures are
chosen in order to relate to our Strategic Priorities and in turn to our key
performance indicators, which are set out on pages 12 and 13. The
performance targets are set by taking into account the strategy of(cid:159)the
Company and are designed to be realistic yet stretching.
The business measures will differ from year to year as the evolving
corporate strategy means that we will wish to set Executive Directors
different business objectives in order to meet the current corporate
needs. The business objectives are personal to each Executive Director,
and are tailored to re(cid:179) ect their role and responsibilities during the year.
These are set at the start of the year and re(cid:179) ect the most important areas
of strategic focus for the Company. The Remuneration Committee sets
annual measurement criteria (performance targets) that are appropriate
to motivate and measure an Executive Director’s performance in any one
year. The factors taken into consideration include the three-year strategic
plan, prior years’ delivered performance and budgeted performance. In
the past, measures have included R&D investment, succession planning,
employee engagement, compliance, development of product portfolio,
M&A activity and shared services implementation.
Performance measures –
Performance Share Programme
The performance measures which apply to the Performance Share
Programme awards made in 2014 relate to cumulative free cash (cid:179) ow,
revenue in Emerging & International Markets and Total Shareholder
Return. We have chosen three measures which are relevant for the
long-term success of the Company.
The free cash (cid:179) ow measure is important for us in a period of growth,
when we need to generate cash to fund both organic and
inorganic investment.
Revenue in Emerging & International Markets is important for us when we
are seeking to generate pro(cid:178) table revenue in new markets and from new
products.
The Total Shareholder Return measure, which compares our long-term
performance against that of our peers, seeks to align the payout of the
Performance Share Programme with the experience of our Shareholders.
This helps Executive Directors relate to the Shareholder experience and
ensure that vesting is aligned to the out-performance of our sector.
The Remuneration Committee will keep these performance measures
under review and retains the discretion to alter the measures or their
respective weightings to ensure continuing alignment to the
corporate strategy.
Malus and clawback
The Remuneration Committee may determine that an unvested
award(cid:159)or(cid:159)part of an award may not vest (regardless of whether or not the
performance conditions have been met) or may determine that any cash
bonus, vested shares, or their equivalent value in cash be returned to the
Company in the event that any of the following matters is discovered:
– A material misstatement of the Company’s (cid:178) nancial results; or
– A material error in determining the extent to which any performance
condition has been satis(cid:178) ed; or
– A signi(cid:178) cant adverse change in the (cid:178) nancial performance of the
Company, or a signi(cid:178) cant loss at a general level or at the division
or(cid:159)function in which a participant worked; or
– Inappropriate conduct (for example reputational issues), capability
or(cid:159)performance(cid:159)by a participant, or within a team business area or
pro(cid:178) t centre.
These provisions apply to share awards under the Global Share Plan
2010 and cash amounts under the Annual Cash Incentive Plan.
Illustrations of the application of the remuneration policy
The following charts show the potential split between the different
elements of the Executive Directors’ remuneration under three different
performance scenarios:
Chief Executive Of(cid:178) cer
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€4,249,888
€6,028,739
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£2,764,300
(cid:81) Base salary (cid:81) Payment in lieu of pension (cid:81) Bene(cid:178) ts (cid:81) Annual Incentive (Cash)
(cid:81) Annual Incentive (Equity) (cid:81) Performance Share Programme
TOTAL REMUNERATION BY PERFORMANCE SCENARIO
FOR 2014 FINANCIAL YEAR
Chief Executive Of(cid:178) cer
Chief Financial Of(cid:178) cer
€1,526,022
€4,249,888
€6,028,739
£682,600
£1,941,900
£2,764,300
%
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TARGET
MAXIMUM
MINIMUM
TARGET
MAXIMUM
(cid:81) Fixed pay (cid:81) Annual Incentive (Cash) (cid:81) Annual Incentive (Equity) (cid:81) Long-term Incentives
Data for the Chief Executive Of(cid:178) cer assumes an exchange rate of €1 = £0.8494.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
69
Policy on recruitment arrangements
Our policy on the recruitment of Executive Directors is to pay a fair
remuneration package for the role being undertaken and the experience
of the Executive Director appointed. In terms of base salary, we will seek
to pay a salary comparable, in the opinion of the Committee, to that which
would be paid for an equivalent position elsewhere. The Remuneration
Committee will determine a base salary in line with the policy and having
regard to the parameters set out on pages 64 and 65. Incoming Executive
Directors will be entitled to pension, bene(cid:178) t and incentive arrangements
which are the same as provided to existing Executive Directors. On that
basis, awards would not exceed 405% of base salary.
We recognise that in the event that we require a new Executive Director
to(cid:159)relocate to take up a position with the Company, we will also pay
relocation and related costs as described in the Future policy table on
pages 64 and 65, which is in line with the relocation arrangements we
operate across the Group.
We also recognise that in many cases, an external appointee may forfeit
sizeable cash bonuses and share awards if they choose to leave their
former employer and join us. The Remuneration Committee therefore
believes that we need the ability to compensate new hires for incentive
awards they give up on joining us. The Committee will use its discretion in
setting any such compensation, which will be decided on a case-by-case
basis. We will only provide compensation which is no more bene(cid:178) cial
than that given up by the new appointee and we will seek evidence from
the previous employer to con(cid:178) rm the full details of bonus or share awards
being forfeited. As far as possible, we will seek to replicate forfeited share
awards using Smith & Nephew incentive plans or through reliance on
9.4.2 in the Listing Rules, whilst at the same time aiming for simplicity.
If we appoint an existing employee as an Executive Director of the
Company, pre-exisiting obligations with respect to remuneration, such
as(cid:159)pension, bene(cid:178) ts and legacy share awards, will be honoured. Should
these differ materially from current arrangements, these will be disclosed
in the next Implementation Report.
We will supply details via an announcement to the London Stock
Exchange of an incoming Executive Director’s remuneration
arrangements at the time of their appointment.
Service contracts
We employ Executive Directors on rolling service contracts with notice
periods of up to 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 pay them an
amount equivalent to the base salary and payment in lieu of pension and
bene(cid:178) ts they would have received if they had been required to work their
notice period.
Under the terms of the Executive Director’s service contract, Executive
Directors are restricted for a period of 12 months after leaving the
employment of the Company from working for a competitor, soliciting
orders from customers and offering employment to employees of
Smith(cid:159)&(cid:159)Nephew. The Company retains the right to waive these
provisions in certain circumstances. In the event that these provisions
are(cid:159)waived and the former Executive Director commences employment
earlier than at the end of the notice period, no further payments shall be
made in respect of the portion of notice period not worked. Directors’
service contracts are available for inspection at the Company’s registered
of(cid:178) ce: 15 Adam Street, London WC2N 6LA.
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70 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report continued
Policy on payment for loss of of(cid:178) ce
Our policy regarding termination payments to departing Executive
Directors is to limit severance payments to pre-established contractual
arrangements. In the event that the employment of an Executive Director
is terminated, any compensation payable will be determined in
accordance with the terms of the service contract between the Company
and the Executive Director, as well as the rules of any incentive plans.
Under normal circumstances (excluding termination for gross
misconduct) all leavers are entitled to receive termination payments in lieu
of notice equal to base salary, payment in lieu of pension, and bene(cid:178) ts. In
some circumstances additional bene(cid:178) ts may become payable to cover
reimbursement of untaken holiday leave, repatriation and outplacement
fees, legal and (cid:178) nancial advice.
In addition, we may also in exceptional circumstances exercise our
discretion to pay the Executive Director a proportion of the annual cash
incentive they would have received had they been required to work their
notice period. Any entitlement or discretionary payment may be reduced
in line with the Executive Director’s duty to mitigate losses, subject to
applying our non-compete clause.
We will supply details via an announcement to the London Stock
Exchange of a departing Executive Director’s termination arrangements
at(cid:159)the time of departure.
In the case of a change of control which results in the termination of
an(cid:159)Executive Director or a material alteration to their responsibilities or
duties, within 12 months of the event, the Executive Director would be
entitled to receive 12 months’ base salary plus payment in lieu of pension
and bene(cid:178) ts. In addition, the Remuneration Committee has discretion
to(cid:159)pay an Executive Director in these circumstances an annual cash
incentive. For Directors appointed prior to 1 November 2012, an automatic
annual cash incentive is payable at target.
In the event that an Executive Director leaves for reasons of ill-health,
death, redundancy or retirement in agreement with the Company, then
the vesting of any outstanding annual cash incentive and equity incentive
awards will generally depend on the Remuneration Committee’s
assessment of performance to date. Performance share awards will be
pro-rated for the time worked during the relevant performance period,
and will remain subject to performance over the full performance period.
For all other leavers, the annual cash incentive will generally be forfeited
and outstanding equity incentive awards and performance share awards
will lapse.
One-off awards granted on appointment will normally lapse on leaving
except in cases of death, retirement, redundancy, or ill-health. The
Remuneration Committee has discretion to permit such awards to vest
in(cid:159)other circumstances and will be subject to satisfactorily meeting
performance conditions if applicable.
The Remuneration Committee retains discretion to alter these provisions
on a case-by-case basis following a review of circumstances and to
ensure fairness for both Shareholders and Executive Directors.
We will supply details via an announcement to the London Stock
Exchange of an out-going Executive Director’s remuneration
arrangements around the time of leaving.
Policy on shareholding requirements
The Remuneration Committee believes that one of the best ways our
Executive Directors can have a greater alignment with Shareholders
is(cid:159)for(cid:159)them to hold a signi(cid:178) cant number of shares in the Company.
Executive(cid:159)Directors are therefore expected to build up a holding of
Smith & Nephew shares worth two-times their base salary. In order to
reinforce this expectation, we require them to retain 50% of all shares
vesting under the(cid:159)Company share plans (after tax) until this holding has
been met recognising that differing international tax regimes affect
the(cid:159)pace at which an Executive Director may ful(cid:178) l the shareholding
requirement. When calculating whether or not this requirement has been
met, we will(cid:159)include ordinary shares or ADRs held by the Executive
Director and(cid:159)their(cid:159)immediate family and the intrinsic value of any vested
but unexercised options.
Statement of consideration of employment
conditions(cid:159)elsewhere in the Company and
differences(cid:159)to the Executive Director Policy
All employees across the Group including the Executive Directors are
incentivised in a similar manner. Although the salary levels and maximum
opportunities under bonus and share plans differ, generally speaking the
same targets and performance conditions relating to the Company’s
strategy apply throughout the organisation.
Executive Director base salaries will generally increase at a rate in line
with the average salary increases awarded across the Company. Given
the diverse geographic markets within which the Company operates, the
Committee will generally be informed by the average salary increase in
both the market local to the Executive and the(cid:159)UK, recognising the
Company’s place of listing, and will also consider market data periodically.
A range of different pension arrangements operate across the Group
depending on location and/or length of service. Executive Directors and
Executive Of(cid:178) cers either participate in the legacy pension arrangements
relevant to their local market or receive a cash payment of 30% of salary
in(cid:159)lieu of a pension. Senior Executives who do not participate in a local
Company pension plan receive a cash payment of 20% of salary in lieu
of(cid:159)pension. Differing amounts apply for lower levels within the Company.
The Company has established a bene(cid:178) ts framework under which the
nature of bene(cid:178) ts varies by geography. Executive Directors participate
in(cid:159)bene(cid:178) t arrangements similar to those applied for employees within
the(cid:159)applicable location.
All employees are set objectives at the beginning of each year, which link
through to the objectives set for the Executive Directors. Annual cash
incentives payable to employees across the Company depend on the
satisfactory completion of these objectives as well as performance
against relevant Group and divisional (cid:178) nancial targets relating to revenue,
trading pro(cid:178) t and trading cash, similar to the (cid:178) nancial targets set for the
Executive Directors.
Executive Of(cid:178) cers and Senior Executives (currently 72) participate in
the(cid:159)annual Equity Incentive Programme and the Performance Share
Programme. The maximum amounts payable are lower, but the
performance conditions are the same as those that apply to the
Executive Directors.
No speci(cid:178) c consultation with employees has been undertaken relating
to(cid:159)Director remuneration. However, regular employee surveys are
conducted across the Group, which cover a wide range of issues relating
to local employment conditions and an understanding of Group-wide
strategic matters. Currently over 4,500 employees in 32 countries
participate in one or more of our global share plans.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
71
Future policy table
Chairman and Non-executive Directors
The following table and accompanying notes explain the different elements of remuneration we pay to our Chairman and Non-executive Directors.
No(cid:159)element of their remuneration is subject to performance. All(cid:159)payments made to the Chairman are determined by the Remuneration Committee,
whilst payments made to the Non-executive Directors are determined by the Directors who are not themselves Non-executive Directors, currently
the(cid:159)Chairman, the Chief Executive Of(cid:178) cer and the Chief Financial Of(cid:178) cer.
How the component supports the short-
and long-term strategy of the Company
Annual fees
Basic annual fee
To attract and retain Directors by setting fees at
rates comparable to what would be paid in an
equivalent position elsewhere.
A proportion of the fees are paid in shares in
the(cid:159)third quarter of each year in order to align
Non-executive Directors’ fees with the interest
of Shareholders.
How the component operates
Maximum levels of payment
Fees will be reviewed periodically. In(cid:159)future, any
increase will be paid in(cid:159)shares until 25% of the
total fee is(cid:159)paid in shares.
Fees are set in line with market practice for fees
paid by similarly sized UK listed companies.
Annual fees are set and paid in(cid:159)UK(cid:159)sterling
or(cid:159)US(cid:159)dollars depending(cid:159)on the location of
the Non-executive Director. If appropriate, fees
may be set and paid in alternative currencies.
Annual fees are currently as follows:
£63,000 in cash plus £3,150 in shares; or
$120,000 in cash plus $6,000 in shares.
Chairman fee:
£400,000 plus £20,000 in shares
(to(cid:159)April 2014).
£300,000 plus £100,000 in shares
(from April 2014).
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To compensate Non-executive Directors for the
additional time spent as Committee Chairmen
or(cid:159)as the Senior Independent Director.
A (cid:178) xed fee is paid, which is
reviewed periodically.
Whilst it is not expected to increase the fees
paid(cid:159)to the Non-executive Directors and the
Chairman by more than the(cid:159)increases paid
to(cid:159)employees generally, in exceptional
circumstances, higher fees might
become payable.
The total maximum aggregate fees payable to
the Non-executive Directors will not exceed
£1.5m(cid:159)as set out in the Company’s articles
of(cid:159)association.
£15,000 in cash; or
$27,000 in cash.
Whilst it is not expected that the fees paid to
the(cid:159)Senior Independent Director or Committee
Chairman will exceed the(cid:159)increases paid to
employees generally, in exceptional
circumstances, higher fees might
become payable.
Intercontinental travel fee
To compensate Non-executive Directors
for(cid:159)the(cid:159)time spent travelling to attend meetings
in(cid:159)another continent.
A (cid:178) xed fee is paid, which is
reviewed periodically.
£3,500 in cash; or
$7,000 in cash.
Whilst it is not expected to increase these fees
by more than the increases paid to employees
generally, in exceptional circumstances, higher
fees might become payable.
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CORPORATE GOVERNANCE
Directors’ remuneration report continued
Notes to Future policy table – Non-executive Directors
Changes to remuneration policy
The Board has altered the policy regarding the payment of Non-executive
Directors and to the Chairman in one respect in 2013, by introducing the
payment of a proportion of the fees in the form of shares. The fees paid
to(cid:159)the Non-executive Directors and to the Chairman were reviewed in
July(cid:159)2013 and it was agreed that the basic fee should be increased by 5%
(there having been no increase to these fees since August 2011) and that
the increase be paid in the form of shares. The amount of the increase
less applicable taxes was used to purchase shares in the market on
15 August 2013. Going forward any increase in the level of fees paid to a
Non-executive Director will be paid in the form of shares until 25% of the
Non-executive Director’s fee is paid in the form of shares. We have made
this change in order to align the fees paid to Non-executive Directors with
the experience of our Shareholders. With the appointment of Roberto
Quarta as Chairman of the Company with effect from the Annual General
Meeting, we have taken the opportunity to pay 25% of his fees in the form
of shares immediately.
Policy on recruitment arrangements
Any new Non-executive Director shall be paid in accordance with the
current fee levels on appointment, in line with the policy set out above.
With respect to the appointment of a new Chairman, fee levels will take
into account market rates, the individual’s pro(cid:178) le and experience, the
time required to undertake the role and general business conditions.
In(cid:159)addition, the Remuneration Committee retains the right to authorise
the(cid:159)payment of relocation assistance or an accommodation allowance
in(cid:159)the(cid:159)event of the appointment of a Chairman not based within the UK.
Letters of appointment
The Chairman and Non-executive Directors have letters of appointment
which set out the terms under which they provide their services to the
Company and are available for inspection at the Company’s registered
of(cid:178) ce: 15(cid:159)Adam Street, London WC2N 6LA. The appointment of Non-
executive Directors is not subject to a notice period, nor is there any
compensation payable on loss of of(cid:178) ce, for example, should they not be
re-elected at an Annual General Meeting. The appointment of the
Chairman is subject to a(cid:159)notice period of six months.
The Chairman and Non-executive Directors are required to acquire a
shareholding in the Company equivalent in value to one times their
basic(cid:159)fee within two years of their appointment to the Board.
Statement of consideration of Shareholder views
This policy report sets out the remuneration policy in relation to Executive
Directors, which has been in place since 2012. As this policy evolved at
the end of 2011 and during 2012, we engaged actively with Shareholders
to explain our remuneration arrangements and to discuss their views
on(cid:159)our proposals. At the time, Joseph Papa, the Chairman of the
Remuneration Committee and members of the Senior Executive Team
met with the holders of around 30% of our shares, including collectively
with a number of smaller engaged investors, as well as Shareholder
advisory bodies. We discussed the structure of our remuneration
package, our policies on termination, recruitment, shareholding
requirements and the operation of Annual Incentive Plan. The Directors’
remuneration report was approved by 96% of Shareholders who voted at
the Annual General Meeting in 2013 and we received feedback from
Shareholders around the time of this meeting that they understood and
approved of our remuneration arrangements. Although the remuneration
policy has remained essentially unchanged as in previous years, given
the changes in remuneration reporting, we also conducted an
engagement programme with our larger Shareholders in 2013. Joseph
Papa met with the holders of around 20% of our shares, and with a
number of Shareholder advisory bodies. He has also been available to
discuss any aspect of our remuneration programme with Shareholders
throughout the year. The Shareholders who have engaged with us have
all been supportive of our approach to remuneration, recognising the link
between the corporate strategy and executive reward.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
73
The Implementation Report
The Remuneration Committee presents the Annual report on remuneration, (the ‘Implementation Report’), which together with the annual
statement will be put to shareholders as an advisory vote at the Annual(cid:159)General Meeting to be held on 10 April 2014.
Key activities of the Remuneration Committee in 2013 were:
– Determination of remuneration packages and termination arrangement
for certain Executive Of(cid:178) cers
– Development of revised reporting style on remuneration in line with the
new reporting regulations
– Reviewed Executive service contracts
– Reviewed and revised the performance measures applying to our
Performance Share Programme
– Monitored the use of shares required for our employee share plans to
ensure they remained within the dilution limits
– Monitored adherence by executives to our shareholding guidelines
– Approved the remuneration package for Roberto Quarta, our
Chairman(cid:159)Elect
– Reviewed and approved remuneration arrangements for various
Executive Of(cid:178) cers
– Amended the terms of reference of the Remuneration Committee to
re(cid:179) ect new reporting regulations
– Met with key Shareholders to discuss remuneration matters.
The Implementation Report sets out both what we have paid our Directors
in 2013 and what we intend to pay them in 2014.
Remuneration Committee
The Chairman of the Remuneration Committee is Joseph Papa and
the(cid:159)remaining members of the Remuneration Committee are Baroness
Virginia Bottomley, Pamela Kirby, Brian Larcombe and Richard De
Schutter, all of whom are independent Non-executive Directors and
served throughout the year.
From time to time, other members of the Board attended meetings of
the(cid:159)Remuneration Committee by invitation. In addition, the meetings
are(cid:159)also attended by Susan Swabey, Company Secretary, Helen Maye,
Chief(cid:159)Human Resources Of(cid:178) cer and Bob Newcomb, SVP Global
Rewards. Members of the Board and the Executive Team left any
meeting(cid:159)at which their own remuneration was discussed.
During the year the Remuneration Committee met (cid:178) ve times and agreed
three matters by written resolution. Our main responsibilities are:
– Determination of remuneration policy for Executive Directors and
senior executives
– Approval of individual remuneration packages for Executive Directors
and Executive Of(cid:178) cers at least annually and any major changes to
individual packages throughout the year
– Determination of the use of long-term incentive plans and oversee
the(cid:159)use of shares in all executive and all-employee plans
– Approval of appropriate performance measures for short-term
and(cid:159)long-term incentive plans for Executive Directors and
senior(cid:159)executives
– Determination of pay-outs under short-term and long-term incentive
plans for Executive Directors and senior executives
– Approval of Directors’ Remuneration Report ensuring compliance
with related governance provisions
– Continuance of constructive engagement on remuneration issues
with Shareholders
– Consideration of remuneration policies and practices across
the Group.
During the year, the Remuneration Committee received information and
advice from Towers Watson, an independent executive remuneration
consultancy (cid:178) rm appointed by the Remuneration Committee in 2011
following a full tender process. They(cid:159)provided advice on market trends
and remuneration issues in general, attended Remuneration Committee
meetings, assisted in the review of the Director’s Remuneration Report
and in determining the third performance measure for the Performance
Share Programme. The fees paid to Towers Watson for Remuneration
Committee advice during 2013, charged on a time and expense basis,
totalled £59,538. Towers Watson also provided other human resources
and compensation advice to the Company for the level below the Board.
Towers Watson comply with the Code of Conduct in relation to Executive
Remuneration Consulting in the United Kingdom and the Remuneration
Committee is satis(cid:178) ed that their advice is objective and independent.
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CORPORATE GOVERNANCE
Directors’ remuneration report continued
Single total (cid:178) gure on remuneration – Executive Directors
Fixed pay
Annual
variable pay
Hybrid
Long-term variable pay
Other items in the nature
of(cid:159)remuneration
Payment in
lieu of
pension
Taxable
bene(cid:178) ts
Annual
Incentive
Plan – cash
Annual
Incentive
Plan – equity
Performance
Share Plan
Share
Option Plan
All-Employee
Share Plans
One-off
awards
Total
Director
Base salary
Olivier Bohuon
Appointed 1 April 2011
2013
2012
$1,425,559
$427,668
$107,160
$1,793,584
$933,410
$1,394,190
$418,257
$482,815
$1,755,285
$906,224
Julie Brown
Appointed 4 February 2013
2013
$708,450
$212,536
$22,510
$858,978
$390,800
$0
–
–
$0
–
–
–
– $4,687,381
– $4,956,771
–
$5,684 $838,266 $3,037,224
These (cid:178) gures have been calculated as follows:
Base salary: the actual salary receivable for the year.
Payment in lieu of pension: the value of the salary supplement paid by the Company in lieu of a pension.
Bene(cid:178) ts: the gross value of all taxable bene(cid:178) ts (or bene(cid:178) ts that would be taxable in the UK) received in the year. Prior years are restated to re(cid:179) ect
amounts not known at the date of signing the previous annual report.
Annual Incentive Plan – cash: the value of the cash incentive payable for performance in respect of the relevant (cid:178) nancial year.
Annual Incentive Plan – equity: the value of the equity element awarded in respect of performance in the relevant (cid:178) nancial year, but subject to an
ongoing performance test as described on pages 66 and 67 of this(cid:159)report.
Performance Share Plan: the value* of shares vesting that were subject to performance over the three-year period ending on 31 December in the
relevant (cid:178) nancial year.
Share Option Plan: the embedded gain* of options vesting that were subject to performance over the three-year period ending on 31 December in
the relevant (cid:178) nancial year.
All-Employee Share Plans: the gain on the date of grant for SAYE awards (these are only subject to an employment condition and therefore the total
value is captured in the year of grant), re(cid:179) ecting the 20% discount at which options are granted in the relevant (cid:178) nancial year.
One-off awards: the total face value of shares awarded to Julie Brown on appointment in 2013 as described on pages 66 and 67 of this report (these
awards are only subject to an employment condition and therefore the total value is captured in the year of award).
Total: the sum of the above elements.
* Awards and options granted in 2011 subject to a three-year performance period ending on 31 December 2013 have lapsed.
The amounts have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.5632 and € to US$1.3278.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
75
Base salary
With effect from 1 April in each year Executive Directors were paid the
following base salaries:
Annual Incentive Plan
During 2013, the Annual Incentive Plan for Executive Directors was
based(cid:159)in the achievement of speci(cid:178) c (cid:178) nancial and business objectives
as follows:
Olivier Bohuon
Julie Brown
2012
€1,050,000
N/A
2013
€1,081,500
£500,000
In February 2014, we reviewed the base salaries of the Executive
Directors, having considered general economic conditions and average
salary increases across the rest of the Group, which have averaged at
2.8%. The Remuneration Committee has therefore agreed that the
Executive Directors’ base salaries will increase by 2.8% with effect from
1 April 2014 to the following:
Financial objectives
Revenue 30%
Trading pro(cid:178) t 30%
Trading cash 10%
Business objectives
R&D investment
Succession planning
Olivier Bohuon
Julie Brown
€1,111,782
Employee engagement
£514,000
Compliance
70%
30%
Payment in lieu of pension
In 2013, both Olivier Bohuon and Julie Brown received a salary supplement
of 30% of their basic salary to apply towards their retirement savings, in lieu
of membership of one of the Company’s pension schemes. The same
arrangement will apply in 2014.
Bene(cid:178) ts
In 2013, both Olivier Bohuon and Julie Brown received death in service
cover of seven times basic salary, of which four times salary is payable as
a lump sum with the balance used to provide for any spouse and
dependant persons. They also received health cover for themselves and
their families and a car allowance. Olivier Bohuon also received (cid:178) nancial
consultancy advice and assistance with travel costs between London and
Paris. The(cid:159)same arrangements will apply in 2014. The following table
summarises the value of bene(cid:178) ts on an element-by-element basis
in(cid:159)respect of 2012 and 2013.
Olivier Bohuon
Adrian
Hennah
Julie Brown
2012
2013
2012
£16,870
£12,088(i)
£1,439
2013
£1,130
€18,486
€18,050
£21,524
£13,270
Health cover
Car and fuel
allowance
Financial
consultancy advice
£33,751
€25,577
Travel costs
£15,647
£19,407
Relocation costs
£226,893(ii)
£0
–
N/A
N/A
–
N/A
N/A
(i) Olivier Bohuon is a member of our international healthcare plan.
(ii) One-off relocation expense relating to relocating Olivier Bohuon from Paris to London.
Prior years are restated to re(cid:179) ect amounts not known at the date of signing the previous
annual report.
Development of product portfolio (Olivier Bohuon only)
Shared services (Julie Brown only)
At the end of 2013, the Remuneration Committee conducted an
assessment of each Executive Director against their (cid:178) nancial and
business objectives.
Over the period, revenue was $4,351m (ahead of target), trading pro(cid:178) t
was $987m (ahead of target) and trading cash (cid:179) ow $877m (between
target and maximum).
The Board have considered whether it would be in the best interests of
the Company and its Shareholders to disclose the precise targets agreed
for each of the performance measures in 2013. The targets for each year
are set within the context of the Group’s (cid:178) ve-year plan, which is updated
at least annually. If we were to disclose the precise targets for one year
of(cid:159)the plan, this would give information to our competitors about our
long-term plans, which they could use to compete against us, for
example by re-timing the launch of new products or extension into new
growth areas. This could be detrimental to our commercial performance
both in 2014 and going forward. The Board has concluded that even
though the actual results for 2013 are known and published, it would be
commercially sensitive to disclose what the precise targets determined
at(cid:159)the beginning of 2013 were.
The Remuneration Committee reviewed the performance of Olivier
Bohuon and Julie Brown against their agreed business objectives for
2013. The Committee determined that Olivier Bohuon had an outstanding
year. He led the Group strongly forward in both strategic and commercial
terms, building and rebalancing the business through investments and
acquisitions in areas of higher growth whilst delivering growth and
Shareholder value. The Committee determined that Julie Brown also
performed to a high standard in 2013. In her (cid:178) rst year as Chief Financial
Of(cid:178) cer, Julie has strengthened the Group’s (cid:178) nancial platform, processes
and disciplines, introducing new frameworks and methodologies to
support the sustained delivery of Smith & Nephew’s strategic priorities.
It(cid:159)is not possible to disclose the precise personal targets set as a number
of the measurements continue to apply into 2014 and would be
commercially sensitive if known by our competitors. The Committee
did(cid:159)highlight a number of their achievements as follows:
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76 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report continued
Commentary on 2013 performance
Acquisitions and R&D investment
Olivier Bohuon
Julie Brown
The Remuneration Committee also considered whether to apply the
multiplier to the annual incentive assessment of Olivier Bohuon and
Julie(cid:159)Brown and agreed that no multiplier was appropriate in respect of
2013. In summary the performance of the Executive Directors against the
targets set for 2013 was therefore as follows:
Signi(cid:178) cantly increased investment
in organic R&D and, through
successful M&A, further
strengthened the Group’s business
and product pipeline. More closely
aligned R&D to growth
opportunities including meeting
the(cid:159)needs of emerging market
customers. Increased the rate of
innovation to support sustainable
growth and maximise long-term
value to Shareholders.
Delivered Capital Allocation
Framework that ensures highly
disciplined use of cash; enabling
focused investment in key areas and
balance sheet ef(cid:178) ciency. Supported
the completion of three emerging
market deals over the year. Return
on investment assessments
established for R&D and Capital
investments to ensure resources
are(cid:159)allocated to areas that generate
the best return for business.
Succession planning
Olivier Bohuon
Julie Brown
Succession plans refreshed for all
Executive Of(cid:178) cers and top talent
identi(cid:178) ed, developed and retained
through signi(cid:178) cant personal
engagement across the Company.
Strengthened (cid:178) nance management
team through providing stretching
development opportunities for key
individuals and placement of top
talent. Completed comprehensive
Finance Talent Review and
established succession plans for
all(cid:159)key (cid:178) nance leadership positions.
Employee engagement
Olivier Bohuon
Julie Brown
Delivered demonstrable
improvements from implementation
of 2012 Employee Survey actions
and initiated Great places to Work
in initial tranche of 12 countries.
Increased business knowledge,
cross-functional alignment,
empowerment and personal
development across the (cid:178) nance
function, ensured employees
embrace objectives in context
of(cid:159)Group strategy and pursue
stretching goals.
Compliance
Olivier Bohuon
Julie Brown
Consistently demonstrated the
highest personal ethics, held
management to these same
standards, and reinforced
imperative in all employee
communications.
Set the tone from the top with the
highest personal standards and
ensured timely and rigorous
enactment of (cid:178) nancial controls
on(cid:159)all(cid:159)strategic plans, product
development and acquisitions.
Development of product portfolio
Olivier Bohuon
Delivered high cadence of new
products including (cid:178) rst portfolios
for the emerging markets, major
knee platform, Sports Medicine
advances and 25 Advanced
Wound Management launches.
Shared services
Olivier Bohuon
Not applicable
Julie Brown
Not applicable
Julie Brown
Initiated a Finance Transformation
Programme to consolidate shared
services globally to leverage
ef(cid:178) ciency across the Group and
strengthen KPI reporting.
Below
threshold
Between
threshold
and target
Between
target
and
maximum
Above
maximum
(cid:22)
(cid:22)
(cid:22)
(cid:22)
(cid:22)
N/A
N/A
Revenue (30%)
Trading pro(cid:178) t (30%)
Trading cash (10%)
Business objectives
(30%): Olivier Bohuon
Business objectives
(30%): Julie Brown
Multiplier (+/- 10%):
Olivier Bohuon
Multiplier (+/- 10%):
Julie Brown
In summary, as a result of the performance described above, the
Remuneration Committee determined that the following awards be
made(cid:159)under the Annual Incentive Plan in respect of performance in 2013:
Executive Director
Cash component
Equity component
% of salary
Amount
% of salary
Amount
Olivier Bohuon
125% €1,350,794
65% €702,975
Julie Brown
110% £549,500
50% £250,000
As both Olivier Bohuon and Julie Brown achieved the targets set them
in(cid:159)2013, the (cid:178) rst tranche of Equity Incentive Award made in 2013 and the
second tranche of the Equity Incentive Award made in 2012 (to Olivier
Bohuon only) will vest.
Annual Incentive Plan 2014
The Remuneration Committee has also reviewed the Annual Incentive
Plan arrangements for 2014 and has determined that the following
performance measures and weightings will apply to the (cid:178) nancial
objectives as in 2013. The business objectives for the Executive(cid:159)Directors
for 2014 will therefore be as follows:
Financial objectives
Revenue 30%
Trading pro(cid:178) t 30%
Trading cash 10%
Business objectives
Reinvestment
Business
People
Customer
Olivier Bohuon
Julie Brown
70%
70%
Olivier Bohuon
Julie Brown
5%
25%
10%
20%
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
77
The Board has determined that the disclosure of performance targets
at(cid:159)this time is commercially sensitive. As explained on page 75, these
targets are determined within the context of a (cid:178) ve-year plan and the
disclosure of these targets could give information to our competitors
about details of our strategy which would enable them to compete
more(cid:159)effectively with us to the detriment of our performance.
For the (cid:178) nancial performance measures, ‘Target’ is set at target
performance as approved by the Board in the Budget for 2014. ‘Threshold’
and ‘Maximum’ are set at -/+ 3% from the target for revenue and trading
pro(cid:178) t measures and -/+ 10% for the cash (cid:179) ow measure.
Details of awards made under the Equity Incentive
Programme
Details of conditional awards over shares, granted as part of the Annual
Equity Incentive Programme to Executive Directors under the rules of
the(cid:159)Global Share Plan 2010 in 2013 are shown below. The performance
conditions and performance periods applying to these awards are
detailed above.
Number of shares
under award
Date of vesting
Date granted
Olivier Bohuon
7 March 2013
82,423 ordinary shares
1(cid:174)3 on 7 March 2014,
1(cid:174)3 on 7 March 2015 and
1(cid:174)3 on 7 March(cid:159)2016
No awards were made to Julie Brown under the Equity Incentive
Programme in 2013, as she was not an employee in 2012 and did not
participate in the programme in 2013. The exact awards granted in 2014
in respect of service in 2013 will be disclosed in the 2014 Annual Report.
Performance Share Programme – grants
Performance share awards in 2013 were made to Executive Directors
under the Global Share Plan 2010 to a maximum value of 190% of salary
(95% for target performance). Performance will be measured over the
three (cid:178) nancial years beginning in 2013 and will vest subject to
performance and continued employment in 2016.
50% of the award will vest based on the Company’s Total Shareholder
Return (TSR) performance relative to a bespoke peer group of companies
in the medical devices sector over a three-year period commencing
1 January 2013 as follows:
Relative TSR ranking
Award vesting as % of salary
Below median
Median
Upper quartile
Nil
23.75%
95%
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.
The Group’s TSR performance and its performance relative to the
comparator group is independently monitored and reported to the
Remuneration Committee by Towers Watson. TSR is calculated in
common currency using a three-month averaging period at the start
and(cid:159)end of the performance period. The Committee has established
protocols for dealing with companies that cease to be listed or merger
and acquisition activity within the peer group.
The remaining 50% of the award is subject to cumulative free cash
(cid:179) ow(cid:159)performance. Free cash (cid:179) ow is de(cid:178) ned as net cash in(cid:179) ows from
operating activities, less capital expenditure. Free cash (cid:179) ow is the
most(cid:159)appropriate measure of cash (cid:179) ow performance because it relates
to(cid:159)the cash generated to (cid:178) nance additional investment in business
opportunities, debt repayments and distributions to Shareholders.
This(cid:159)measure includes signi(cid:178) cant elements of operational and
(cid:178) nancial(cid:159)performance and helps to align Executive Director awards
with(cid:159)shareholder value creation.
The 50% of the 2013 award subject to free cash (cid:179) ow performance will
vest as follows:
Cumulative free cash (cid:179) ow
Award vesting as % of salary
Below $1.55bn
$1.55bn
$1.78bn
$2.01bn or more
Nil
23.75%
47.5%
95%
Performance Share Programme 2014
Performance share awards will be made in 2014 to Executive Directors
under the Global Share Plan 2010 to a maximum value of 190% of salary
(95% for target performance). Performance will be measured over the
three (cid:178) nancial years beginning in 2014 and will vest subject to
performance and continued employment in 2017. Vesting will be subject
to three performance measures. 50% of the award will be subject to free
cash (cid:179) ow performance, 25% to revenue in Emerging & International
Markets and 25% to TSR.
Free cash (cid:179) ow is de(cid:178) ned as net cash in(cid:179) ows from operating activities,
less capital expenditure. Free cash (cid:179) ow is the most appropriate measure
of cash (cid:179) ow performance because it relates to the cash generated to
(cid:178) nance additional investment in business opportunities, debt
repayments and distributions to Shareholders. This measure includes
signi(cid:178) cant elements of operational and (cid:178) nancial performance and helps
to align Executive Director awards with Shareholder value creation.
The 50% of the award that will be subject to free cash (cid:179) ow performance
will vest as follows:
Cumulative free cash (cid:179) ow
Award vesting as % of salary
Below $1.64bn
$1.64bn
$1.88bn
$2.12bn or more
Nil
23.75%
47.5%
95%
The bespoke peer group for the 2013 awards comprises of the following
companies: Arthrocare, Baxter, Becton Dickinson, Boston Scienti(cid:178) c,
CR(cid:159)Bard, Coloplast, Conmed, Covidien, Edwards LifeSciences, Medtronic,
Nobel Biocare, Nuvasive, Ortho(cid:178) x, Stryker, St Jude Medical, Wright
Medical and Zimmer.
Awards will vest on a straight-line basis between these points.
Revenue in Emerging & International Markets is de(cid:178) ned as cumulative
revenue over a three-year period commencing 1 January 2014 from our
Emerging & International Markets.
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Directors’ remuneration report continued
The 25% of the award that will be subject to revenue in Emerging &
International Market performance will vest as follows:
Revenue in Emerging &
International(cid:159)Markets
Below Threshold
Threshold
Target
Maximum or above
Award vesting as % of salary
Nil
11.875%
23.750%
47.500%
It is not possible to disclose precise targets for revenue growth in
Emerging & International Markets, as this will give commercially sensitive
information to our competitors concerning our growth plans in Emerging
& International Markets, which they could use against us to launch new
products and enter new markets. This would be detrimental to our
business in the Emerging & International Markets, which are key to our
success overall. ‘Target’ is set at target cumulative revenue from Emerging
& International Markets in the corporate plan approved by the Board for
the three years commencing 1 January 2014. ‘Threshold’ and ‘Maximum’
are set at -/+ 15% from target.
25% of the award will vest based on the Company’s Total Shareholder
Return (TSR) performance relative to a bespoke peer group of companies
in the medical devices sector over a three-year period commencing
1 January 2014 as follows:
Relative TSR ranking
Award vesting as % of salary
Below median
Median
Upper quartile
Nil
11.875%
47.500%
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.
The bespoke peer group for the 2014 awards comprises of the following
companies: Arthrocare, Baxter, Becton Dickinson, Boston Scienti(cid:178) c,
CR(cid:159)Bard, Coloplast, Conmed, Covidien, Edwards LifeSciences, Medtronic,
Nobel Biocare, Nuvasive, Ortho(cid:178) x, Stryker, St Jude Medical, Wright
Medical and Zimmer.
The Group’s TSR performance and its performance relative to the
comparator group is independently monitored and reported to the
Remuneration Committee by Towers Watson. TSR is calculated in
common currency using a three-month averaging period at the start
and(cid:159)end of the performance period. The Committee has established
protocols for dealing with companies that cease to be listed or merger
and acquisition activity within the peer group.
Vesting of share options and awards made in 2010
In 2013, the Remuneration Committee also reviewed the vesting
of(cid:159)conditional awards made to Executive Directors under the
2004(cid:159)Performance Share Plan and share options granted under
the(cid:159)2004 Executive Share Option Plan in 2010.
Vesting of the conditional share awards made in 2010 was linked to
adjusted EPS (‘EPSA’) growth, and the number of shares could then be
increased subject to TSR performance relative to the major companies in
the medical devices industry. EPSA growth over the three years ended
31 December 2012 was 18.7% (adjusted for the Bioventus transaction)
against the compounded market growth rate of 11.7%. Over the same
period, the Company was ranked 10th out of 19 companies in the medical
devices comparator group, which meant that the multiplier of one was
applied to the number of shares vesting under the EPSA target.
The awards made to Adrian Hennah in 2010 lapsed on his leaving
the(cid:159)Company. The award made in 2010 to David Illingworth, a former
Executive Director vested on 1 March 2013 at 26%. The current
Executive(cid:159)Directors did not receive awards in 2010, which was prior
to(cid:159)their(cid:159)appointments to the Board at the Company.
Vesting of the share options were subject to TSR performance relative
to(cid:159)the major companies in the medical devices industry. Over the three
years ended 31 December 2012, the Company was ranked 10th out of 19
companies in the medical devices comparator group, which meant that
the options vested at 33%. The share option granted in 2010 to Adrian
Hennah lapsed on his leaving the Company. The share option granted in
2010 to David Illingworth, a former Executive Director, vested on
9 September 2013.
Vesting of share options and awards made in 2011
Since the end of the year, the Remuneration Committee has reviewed
the(cid:159)vesting of conditional awards made to Executive Directors under
the(cid:159)2004 Performance Share Plan and share options granted under
the(cid:159)2004 Executive Share Option Plan in 2011.
Vesting of the conditional awards made in 2011 was linked to EPSA
growth, and the number of shares could then be increased subject to
TSR(cid:159)performance relative to the major companies in the medical devices
industry. EPSA growth over the three years ended 31 December 2013 was
4%. This was well below the threshold for awards to vest. Over the same
period, the Company was ranked 12th out of 19 companies in the(cid:159)medical
devices comparator group, which meant that no multiplier was applied to
the number of shares vesting under the EPSA target. The awards made to
Adrian Hennah in 2011 lapsed on his leaving the Company. The award
made in 2011 to Olivier Bohuon has therefore lapsed.
Vesting of the share options were subject to TSR performance relative
to(cid:159)the major companies in the medical devices industry. Over the three
years ended 31 December 2013, the Company was ranked 12th out of 19
companies in the medical devices comparator group, which meant that
the options lapsed. The share option granted to Adrian Hennah in(cid:159)2011
lapsed on his leaving the Company. The share option granted in 2011 to
Olivier Bohuon has therefore lapsed.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
79
Remuneration arrangements for Julie Brown
On appointment as Chief Financial Of(cid:178) cer and Director on 4 February 2013, Julie Brown’s salary was set at £500,000 with her other bene(cid:178) ts and
ongoing incentive opportunities in line with the Smith & Nephew remuneration policy.
In addition to participation in the standard Smith & Nephew incentive plans, the Remuneration Committee made a one-off award over 75,000 shares
which were valued at £536,250 on the date of grant. These shares will vest in three equal tranches in February 2014, 2015 and(cid:159)2016 subject to
continued employment. In making this award the Committee was informed by the value of share awards that Julie Brown was forfeiting at her previous
employer which had a minimum value of(cid:159)£505,000 and a maximum value of £1,434,000 (excluding any share(cid:159)price movement). The Remuneration
Committee felt it was appropriate to(cid:159)align Julie Brown’s interests with those of our Shareholders immediately(cid:159)and to take into account these awards
forfeited on joining Smith(cid:159)& Nephew.
Summary of scheme interests awarded during the(cid:159)(cid:178) nancial year
Olivier Bohuon
Basis on which award is(cid:159)made
Number of shares
Face value Number of shares
82,423
–
€682,500
–
–
–
Julie Brown
Face value
–
–
Annual Equity Incentive Award (see pages 66 and 67)
65% base salary at maximum
50% base salary at target
Performance Share Award (see pages 66 and 67)
190% base salary at(cid:159)maximum
95% base salary at(cid:159)target
Share award granted on(cid:159)joining Company in compensation (see pages 66 and 67)
Compensation for shares forfeited at former employer
120,464
€997,500
–
–
75,000
£536,250
240,928
€1,995,000
132,866
66,433
£950,000
£475,000
Please see policy table on pages 66 and 67 for details of how the above plans operate. The number of shares is calculated using the closing share
price on the day before the grant which for the awards granted on 7 March 2013 was £7.15.
Details of awards made under the Performance Share(cid:159)Programme
Details of conditional awards over shares, granted to Executive Directors subject to performance conditions are shown below. These awards were
granted under the 2004 Performance Share Plan in 2011 and under the Global Share Plan 2010 in 2012 and 2013. The performance conditions and
performance periods applying to these awards are detailed on pages 66 and 67.
Director
Olivier Bohuon
Julie Brown
Date granted
Number of ordinary shares under award
7 September 2011 (i)
8 March 2012
7 March 2013
7 March 2013
227,547
267,304
240,928
132,866
Date of vesting
7 September 2014
8 March 2015
7 March 2016
7 March 2016
(i) On 6 February 2014 100% of the award granted to Olivier Bohuon lapsed following completion of the performance period.
Details of option grants under the All-Employee ShareSave Plan
Details of options held by Directors are shown below. These options were granted under the Smith & Nephew Sharesave Plan (2012).
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Date granted
Number of shares
under option
Date of vesting
Exercise period
Option price
17 September 2013
2,400 ordinary shares
1 November 2018
1 November 2018 to
30 April 2019
£6.25
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Directors’ remuneration report continued
Details of one-off awards
Details of awards granted to Executive Directors on joining to Company to compensate them for shares forfeited on leaving their former companies
are(cid:159)shown below. These awards are made under Listing Rule 9. There are(cid:159)no performance conditions attaching to these shares other than continued
service.
Director
Olivier Bohuon
Julie Brown
Date granted
1 April 2011
7 March 2013
Number of shares under award
66,666 ordinary shares
25,000 ordinary shares
25,000 ordinary shares
Date of vesting
1 April 2014
4 February 2015
4 February 2016
Single total (cid:178) gure on remuneration – Chairman and Non-executive Directors
Director
Basic annual fee (i)
2012
2013
Sir John Buchanan
£400,000
£420,000
Senior Independent
Director/Committee
Chairman fee
2012
n/a
2013
n/a
£63,000
£45,150
£66,150
£66,150
n/a
$126,000
£15,000
£15,000
n/a
n/a
n/a
n/a
Intercontinental travel fee
2012
2013
2012
Total
2013
£7,000
£7,000
£7,000
£0
£407,000
£420,000
£7,000
£7,000
£85,000
£52,150
£88,150
£73,150
n/a
$28,000
n/a
$154,000
£63,000
£63,000
£66,150
£66,150
£15,000
£15,000
n/a
n/a
£7,000
£7,000
£7,000
£7,000
£85,000
£70,000
£88,150
£73,150
$120,000
$126,000
$27,000
$27,000
$42,000
$28,000
$189,000
$181,000
Roberto Quarta (iii)
n/a
£4,846
£63,000
£66,150
n/a
n/a
n/a
n/a
£10,500
£10,500
£73,500
£76,650
n/a
n/a
n/a
£4,846
Richard De Schutter
$120,000
$126,000
$27,000
$27,000
$42,000
$35,000
$189,000
$188,000
(i) The basic annual fee includes shares purchased for the Chairman and Non-executive Directors in lieu of part of their annual fees details of which can be found in the table on page 71.
(ii) Appointed 11 April 2013.
(iii) Appointed 4 December 2013.
(iv) Total Executive and Non-executive Directors’ emoluments for 2013 amounted to $7,368,000 (2012 – $7,838,000).
Ian Barlow
Baroness Bottomley
Michael Friedman (ii)
Pamela Kirby
Brian Larcombe
Joseph Papa
Ajay Piramal
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
81
Chief Executive Of(cid:178) cer’s remuneration compared to employees generally
The percentage change in the remuneration of the Chief Executive Of(cid:178) cer between 2012 and 2013 compared to that of all employees
generally is as follows:
Chief Executive Of(cid:178) cer
Average for all employees*
Base salary
% change
2013
3.0
3.0
Bene(cid:178) ts
Annual cash bonus
% change
2013
-77.8
N/A
% change
2013
2.2
N/A
* The average cost of wages and salaries for employees generally rose by 6.86% in 2013 (see Notes 2.4 and 3.1 of the Notes to the Group accounts). Figures for annual cash bonuses are
included in the numbers.
Payments made to past Directors
David Illingworth received $230,531 following the vesting of his 2010 Performance Share award on 1 March 2013 and $83,384 following the exercise of
his 2010 option which vested on 9 September 2013. No other payments have been made in 2013 to former Directors of the Company.
Payments for loss of of(cid:178) ce
No payments were made in respect of a Director’s loss of of(cid:178) ce in 2013.
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CORPORATE GOVERNANCE
Directors’ remuneration report continued
Directors’ interests in ordinary shares
Bene(cid:178) cial interests of the Executive Directors in the ordinary shares of the Company are as follows:
1 January 2013 (or(cid:159)date
of appointment) if later
31 December 2013
(or(cid:159)date of retirement)
if(cid:159)earlier
24 February 2014 (i)
1 January 2013
(or date of
appointment) if later
31 December 2013
(or(cid:159)date of retirement)
if(cid:159)earlier
24 February 2014 (i)
Olivier Bohuon
Julie Brown
Ordinary shares
Share options (v)
Performance Share
Awards (ii)
Equity Incentive
Awards (ii)
Other awards
37,015
151,698
494,851
91,446
133,333
111,238
151,698
111,238 (iii)
0
735,779
508,232
143,387
66,666
143.387
66,666
(i) The latest practicable date for this Annual Report.
(ii) These share awards are subject to further performance conditions before they may vest, as detailed on pages 66 and 67.
(iii) The ordinary shares held by Olivier Bohuon on 24 February 2014 represents 120% of his base annual salary.
(iv) The ordinary shares held by Julie Brown on 24 February 2014 represents 48% of her base annual salary.
(v) This option was granted under the Smith & Nephew Sharesave Plan (2012).
0
0
0
0
0
0
2,400
25,000 (iv)
2,400
132,866
132,866
0
75,000
0
50,000
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 Of(cid:178) cer and are not listed on any Stock Exchange and have extremely limited rights attached to them.
Bene(cid:178) cial interests of the Chairman and Non-executive Directors in the ordinary shares of the Company are as follows:
1 January 2013 (or date
of appointment) if later
31 December 2013
(or date of retirement)
if earlier
24 February 2014 (i)
Shareholding as % of (annual fee
for(cid:159)Non-executive Directors) (ii)
Director
Sir John Buchanan
Ian Barlow
Baroness Bottomley
Michael Friedman
Pamela Kirby
Brian Larcombe
Joseph Papa
Ajay Piramal
Roberto Quarta
162,695
18,000
17,500
0
15,000
40,000
12,500
0
0
166,337
166,337
18,232
17,820
8,624
15,232
40,212
12,799
240
0
18,232
17,820
8,624
15,232
40,212
12,799
240
0
380.2
264.6
258.6
109.5
221.1
583.6
162.5
3.5
0
1527.6
Richard De Schutter
220,000
220,299
220,299
(i) The latest practicable date for this Annual Report.
(ii) Calculated using the closing share price of 960p per ordinary shares and $80.00 per ADS on 24 February 2014, and an exchange rate of £1/$ 1.6631.
(iii) Michael Friedman, Joseph Papa and Richard De Schutter hold some of their shares in the form of ADS.
The total holdings of the Directors represents 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 of(cid:178) ce, contains full details of Directors’ shareholdings.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
83
Relative importance of spend on pay
The following table sets out the total amounts spent in 2013 and 2012 on remuneration, the attributable pro(cid:178) t for each year and the dividends declared
and paid in each year:
Attributable pro(cid:178) t for the year
Dividends paid during the(cid:159)year
Share buyback
Total Group spend on remuneration
For the year to 31 December 2013
For the year to 31 December 2012
$556m
$239m
$226m
$998m
$721m (i)
$186m
N/A
$886m
% change
-22.88
28.49
N/A
12.64
(i) Attributable pro(cid:178) t for 2012 has been restated following the adoption of the revised IAS 19 Employee Bene(cid:178) t standard. See Note 1 of the Notes to the Group accounts.
Total Shareholder Return
A graph of the Company’s TSR performance compared to that of the FTSE 100 index is shown below in accordance with Schedule 8 to the Regulations.
FIVE YEAR TOTAL SHAREHOLDER RETURN
(MEASURED IN UK STERLING, BASED ON MONTHLY SPOT VALUES)
120
100
80
60
40
20
0
-20
-40
-60
Dec 2008
Source: DataStream
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Smith & Nephew
FTSE 100
However, as we compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 77), when considering
TSR performance in the context of the 2004 Performance Share Plan and the Global Share Plan 2010, we feel that the following graph showing the TSR
performance of this peer group is also of interest.
FIVE YEAR TOTAL SHAREHOLDER RETURN
(MEASURED IN US DOLLARS, BASED ON MONTHLY SPOT VALUES)
160
140
120
100
80
60
40
20
0
-20
-40
-60
Dec 2008
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Source: DataStream
Medical Devices comparators for awards made since 2012
Smith & Nephew
Medical Devices
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84 SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
Directors’ remuneration report continued
Table of historic data
The following table details information about the pay of the Chief Executive Of(cid:178) cer in the previous (cid:178) ve years.
Year
2013
2012
2011
2011
2010
2009
Chief Executive Of(cid:178) cer
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon (i)(iii)
David Illingworth (ii)
David Illingworth
David Illingworth
Long-term incentive vesting rates against
maximum opportunity
Single (cid:178) gure of
total remuneration
Annual cash incentive
payout against maximum
%
Performance
shares
%
$4,687,381
$4,956,771
$7,442,191
$3,595,787
$4,060,707
$4,406,485
84
84
68
37
57
59
N/A
N/A
N/A
27
70
46
Options
%
N/A
N/A
N/A
27
61
59
(i) Appointed Chief Executive Of(cid:178) cer on 1 April 2011.
(ii) Resigned as Chief Executive Of(cid:178) cer on 1 April 2011.
(iii) Includes recruitment award of €1,400,000 cash and a share award over 200,000 shares valued at €1,410,000 on grant.
(iv) Prior years are restated to re(cid:179) ect amounts not known at the date of signing the previous annual report.
Implementation of remuneration policy in 2014
The Remuneration Committee proposes to make no changes to the way that the remuneration policy is implemented in 2014 from how it was
implemented in 2013, other than increasing base salaries in line with the salary increases across the Group as explained on page 75 and(cid:159)setting new
targets for the Annual Incentive Plan and the Performance Share Programme as explained on page 77 to 78.
Statement of voting at Annual General Meeting held in 2013
At the Annual General Meeting held on 11 April 2103, votes cast by proxy and at the meeting and votes withheld in respect of the Directors’
remuneration were as follows:
Resolution
Votes for
% for
Votes against
% against Total votes validly(cid:159)cast
Votes withheld
Approval of the Directors’
remuneration report
613,386,066
96.5
22,233,539
3.5
635,619,605
14,465,350
In future years, voting information will be provided in respect of the votes in respect of the remuneration policy report and the Annual Report on
Remuneration (the Implementation Report).
In 2013, Joseph Papa, the Chairman of the Remuneration Committee, met with Shareholders holding 20% of the share capital to(cid:159)discuss remuneration
policies and plans. In addition, we contacted a further three Shareholders representing 8% of the share capital summarising the discussions held with
the Shareholders we met. Although our remuneration policies and practices have not changed materially since 2012, we wanted to(cid:159)discuss the impact
of the new reporting regulations with our investors to ensure that we addressing the issues they wanted us to. We had some useful discussions, as a
result of which, we have re-worded some sections to improve clarity. The Shareholders we met were broadly supportive of our
remuneration arrangements.
Other remuneration matters
Senior Management remuneration
The Group’s administrative, supervisory and management body
(‘the(cid:159)Senior Management’) is comprised, for US reporting purposes,
of(cid:159)Executive Directors and Executive Of(cid:178) cers. Details of the current
Executive Directors and Executive Of(cid:178) cers are given on pages 44 to 47.
In respect of the (cid:178) nancial year 2013, the total compensation (excluding
pension emoluments but including cash payments under the
performance-related incentive plans) paid to the Senior Management
for(cid:159)the year was $13,534,000 (2012 – $15,249,000, 2011 – $17,403,000),
the total compensation for loss(cid:159)of of(cid:178) ce was $Nil (2012 – $Nil, 2011 –
$1,161,000), the aggregate increase in accrued pension scheme bene(cid:178) ts
was $257,000 (2012 – increase of $229,000, 2011 – increase of $387,000)
and the aggregate amounts provided for under the supplementary
schemes was(cid:159)$414,000 (2012 – $537,000, 2011(cid:159)– $711,000).
During 2013, Senior Management were granted equity incentive awards
over 263,538 shares, performance share awards over 747,828 shares
and conditional share awards over 140,000 shares under the Global
Share Plan 2010 and options over 2,688 shares under the Employee
ShareSave Plans. As of 24 February 2014, the Senior Management (10
persons) owned 251,283 shares and 55,904 ADSs, constituting less than
0.1% of the issued share capital of the Company. Senior Management as
at this date also held options to purchase 557,858 shares, conditional
share awards over 223,466 shares, equity incentive awards over 428,538
shares, performance shares awards over 1,300,234 shares awarded
under the Global Share Plan 2010; and awards over 4,262 shares and
1,947 ADSs under the Deferred Bonus Plan.
SMITH & NEPHEW ANNUAL REPORT 2013
CORPORATE GOVERNANCE
85
Dilution headroom
The Remuneration Committee ensures that at all times the number of
new shares which may be issued under any share based plans, including
all-employee plans, does not exceed 10% of the Company’s issued share
capital over any rolling 10-year period (of which up to 5% may be issued to
satisfy awards under the Company’s discretionary plans). The Company
monitors headroom closely when granting awards over shares, taking
into account the number of options or shares that might be expected to
lapse be forfeited before vesting or exercise. In the event that insuf(cid:178) cient
new shares are available there are processes in place to purchase shares
in the market to satisfy vesting awards and to net-settle option exercises.
Over the previous 10 years (2004 to 2013), the number of new shares
issued under our share plans has been as follows:
All-employee share plans
Discretionary share plans
8,028,215 (0.90% of issued share capital
as at 24 February 2014)
36,627,154 (4.10% of issued share capital
as at 24 February 2014)
By order of the Board, on 26 February 2014
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Chairman of the Remuneration Committee
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8686 SMITH & NEPHEW ANNUAL REPORT 2013
FINANCIAL STATEMENTS
SMITH & NEPHEW ANNUAL REPORT 2013
FINANCIAL STATEMENTS
87
Financial statements
& other information
Accounts and other information
Directors’ responsibilities for the accounts
Independent auditor’s US reports
Independent auditor’s UK report
Group accounts
Notes to the Group accounts
Independent auditor’s report for(cid:159)the Company
Company accounts
Notes to the Company accounts
Group information
Other (cid:178) nancial information
Information for shareholders
88
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150
151
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155
159
168
We are responsive to the needs of our customers
and(cid:159)deliver quality and value, creating con(cid:178) dence
in(cid:159)our(cid:159)performance.
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88
Directors’ responsibilities for the accounts
The Directors are responsible for preparing the Group and Company
accounts in accordance with applicable UK 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.
The Directors are required to prepare Group accounts for each
financial year, in accordance with the International Financial
Reporting Standards (‘IFRS’) as adopted by the European Union
which present fairly the financial position of the Group and the
financial performance and cash flows of the Group for that period.
In preparing those Group accounts, the Directors are required to:
− select suitable accounting policies in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
and then apply them consistently;
− present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
− provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the Group’s financial position and financial performance; and
− state that the Group has complied with IFRS, subject to any
material departures disclosed and explained in the accounts.
Under UK law the Directors have elected to prepare the Company
accounts in accordance with UK Generally Accepted Accounting
Practice (UK 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:
− 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
89
Fair, Balanced and Understandable
As required by the UK Corporate Governance Code, the Directors
confirm that they consider that the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s performance,
business model and strategy. When arriving at this conclusion the
Board was assisted by a number of processes including:
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 ‘Financial review and principal risks’ section on pages 36 to 41.
The financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described under ‘Commentary on the
Group cash flow statement’ section set out on page 99.
− The Annual Report is drafted and comprehensively reviewed by
appropriate senior management with overall co-ordination by the
Head of Financial Reporting;
− An extensive verification process is undertaken to ensure factual
accuracy, with third party review by legal advisers; and
− The final draft is reviewed by the Audit Committee prior to
consideration by the Board.
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 UK 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 ‘Financial review and principal risks’ section and commentary
on pages 36 to 41 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.
In addition, the Notes to the Group accounts 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.
Directors’ Report
The Directors’ Report has been prepared in accordance with the
requirements of the Companies Act 2006.
By order of the Board, 26 February 2014
Susan Swabey
Company Secretary
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
90
Critical accounting policies
The Group prepares its consolidated financial statements in
accordance with IFRS as issued by the IASB and IFRS as adopted
by the EU, the application of which often requires judgements to
be made by management when formulating the Group’s financial
position and results. Under IFRS, the Directors are required to
adopt those accounting policies most appropriate to the Group’s
circumstances for the purpose of presenting fairly the Group’s
financial position, financial performance and cash flows.
In determining and applying accounting policies, judgement is
often required in respect of items where the choice of specific
policy, accounting estimate or assumption to be followed could
materially affect the reported results or net asset position of the
Group; it may later be determined that a different choice would
have been more appropriate.
The Group’s significant accounting policies are set out in Notes 1 to
23 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 Orthopaedic Reconstruction and Trauma &
Extremities franchises (whose finished goods inventory makes up
approximately 79% 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 products, including large and small sizes, have to
be made available in this way. These sizes are used less frequently
than standard sizes and towards the end of the product life cycle are
inevitably in excess of requirements. Adjustments to carrying value
are therefore required to be made to orthopaedic inventory to
anticipate this situation. These adjustments are calculated in
accordance with a formula based on levels of inventory compared
with historical usage. This formula is applied on an individual product
line basis and is first applied when a product group has been on the
market for two years. This method of calculation is considered
appropriate based on experience, but it does 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 2013, a
0.5% increase in discount rate would have reduced the combined
UK and US pension plan deficit by $112m whilst a 0.5% decrease
would have increased the combined deficit by $123m. A 0.5%
increase in discount rate would have increased profit before taxation
by $6m whilst a 0.5% decrease would have decreased it by $6m.
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 $42m. 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 18 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
advisers 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
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 2013 and 2012, 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 2013. 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 financial statement
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 2013 and 2012, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended 31 December 2013, in conformity
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 2013, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring
Organisations of the Treadway Commission (1992 framework)
and our report dated 26 February 2014 expressed an unqualified
opinion thereon.
Ernst & Young LLP
London, England
26 February 2014
91
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 2013, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organisations of the Treadway Commission (1992
framework), (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
‘Evaluation of Internal Control Procedures’. 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 2013, 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 2013 and
2012, 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 2013 of Smith & Nephew plc and our
report dated 26 February 2014 expressed an unqualified opinion
thereon.
Ernst & Young LLP
London, England
26 February 2014
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
92
Independent auditor’s UK report
Independent auditor’s report to the members of
Smith & Nephew plc
We have audited the group financial statements of Smith & Nephew
plc for the year ended 31 December 2013 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 23. The
financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards (‘IFRS’s) 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’ responsibilities statement
set out on pages 88 and 89, 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 Ethical Standards for Auditors.
Scope of the audit of the financial statements
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 and to identify
any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. 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 2013 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.
Our assessment of risks of material misstatement
We identified the following risks that have had the greatest effect
on the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team:
− Recognition and measurement of provisions for legal disputes
− Recognition and measurement of provisions for taxation
− Existence and valuation of inventory
− Timing of revenue recognition and measurement of related
reserves.
Our application of materiality
We determined planning materiality for the Group to be $45million,
which was approximately 5% of forecast pre-tax profit. This
provided a basis for identifying and assessing the risk of material
misstatement and determining the nature, timing and extent of
further audit procedures.
On the basis of our risk assessments, together with our assessment
of the Group’s overall control environment, our judgement was that
overall performance materiality (i.e. our tolerance for misstatement in
an individual account or balance) for the Group should be 75% of
planning materiality, namely $33.75million. Our objective in adopting
this approach was to reduce to an appropriately low level the
probability that the aggregate of total undetected and uncorrected
misstatements for the accounts as a whole did not exceed our
planning materiality.
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of $2.25million, as well
as differences below that threshold that, in our view warranted
reporting on qualitative grounds.
An overview of the scope of our audit
Following our assessment of the risk of material misstatement to
the Group financial statements, we selected 11 components which
represent the principal business units within the Group’s two
reportable segments and account for 70% of the Group’s total
assets, 65% Group revenue and 81% of the Group’s profit before tax.
Two of these components were subject to a full audit, whilst the
remaining nine were subject to a partial audit where the extent of
audit work was based on our assessment of the risks of material
misstatement and of the materiality of the Group’s business
operations at those locations. They were also selected to provide
an appropriate basis for undertaking audit work to address the
risks of material misstatement identified above. For the remaining
components, we performed other procedures to test or assess that
there were no significant risks of material misstatement in these
components in relation to the Group financial statements.
The audit work at the 11 components was executed at levels of
materiality applicable to each individual entity which were lower
than Group materiality.
The Group audit team continued to follow a programme of planned
visits that has been designed to ensure that the Senior Statutory
Auditor or his designate visits each of the locations where the Group
audit scope was focused at least once every two years and the most
significant of them at least once a year. For all full scope entities, in
addition to the location visit, the Group audit team reviewed key
working papers, participated in the component team’s planning
including the component team’s discussion of fraud and error. The
Group audit team visited 9 locations in total over the course of the
current year audit.
This page does not form part of Smith & Nephew’s Annual Report and Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
93
Our response to the risks identified above was as follows:
− Recognition and measurement of provisions for legal disputes –
We obtained legal advice that the Company had received, read
legal invoices and corresponded directly with external legal
advisers to assess the appropriateness of the provisions;
− Recognition and measurement of provisions for taxation – We
tested tax calculations and challenged the Company’s transfer
pricing arrangements, tax planning activities and ongoing tax
audits to assess the reasonableness of the provisions;
− Existence and valuation of inventory – We carried out tests of
controls over inventory processes, independently counted
inventory levels at a sample of locations, challenged the
Company’s plans for launching new product lines and
discontinuing existing product lines and tested the detailed
calculations for excess and obsolete inventory to assess the
inventory balance;
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 89, 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 specified for our review; and
− certain elements of the report to shareholders by the Board
on Directors’ remuneration.
− Timing of revenue recognition and measurement of related
reserves – We carried out tests of controls over revenue
recognition, including the timing of revenue recognition, as well as
substantive testing, analytical procedures and assessing whether
the revenue recognition policies adopted complied with IFRS;
Other matter
We have reported separately on the parent company financial
statements of Smith & Nephew plc for the year ended 31 December
2013 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 complied 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 2013, 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
26 February 2014
Opinion on other matter prescribed by
the Companies Act 2006
In our opinion the information given in the Strategic Report and
the Directors’ Report for the financial year for which the Group
financial statements are prepared is consistent with the Group
financial statements.
Matters on which we are required to report by
exception
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to you if,
in our opinion, information in the annual report is:
− materially inconsistent with the information in the audited financial
statements; or
− apparently materially incorrect based on, or materially inconsistent
with, our knowledge of the Group acquired in the course of
performing our audit; or
− is otherwise misleading.
In particular, we are required to consider whether we have identified
any inconsistencies between our knowledge acquired during the
audit and the Directors’ statement that they consider the Annual
Report is fair, balanced and understandable and whether the Annual
Report appropriately discloses those matters that we communicated
to the Audit Committee which we consider should have been
disclosed.
This page does not form part of Smith & Nephew’s Annual Report and Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
94
Group income statement
Notes
2
3
3
2 & 3
4
4
4
11
21
5
6
Notes
18
5
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 on disposal of net assets held for sale
Profit before taxation
Taxation
Attributable profit for the year (ii)
Earnings per ordinary share (ii)
Basic
Diluted
Group statement of comprehensive income
Attributable profit for the year (ii)
Other comprehensive income:
Items that will not be reclassified to income statement
Actuarial gains/(losses) on retirement benefit obligations
Taxation on other comprehensive income
Total items that will not be reclassified to
income statement
Items that may be reclassified subsequently to
income statement
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
– (gains)/losses transferred to inventories for the year
Exchange differences on translation of foreign operations
Exchange on borrowings classified as net
investment hedges
Total items that may be reclassified subsequently to
income statement
Other comprehensive (expense)/income for the year,
net of taxation
Total comprehensive income for the year (ii)
(i)
Restated for the adoption of the revised IAS 19 Employee Benefits standard, see Note 1.
(ii) Attributable to equity holders of the Company and wholly derived from continuing operations.
The Notes on pages 101 to 149 are an integral part of these accounts.
Year ended
31 December
2013
$ million
Year ended
31 December
2012
Restated(i)
$ million
Year ended
31 December
2011
Restated(i)
$ million
4,351
(1,100)
3,251
(2,210)
(231)
810
14
(10)
(11)
(1)
–
802
(246)
556
61.7¢
61.4¢
4,137
(1,070)
3,067
(2,050)
(171)
846
11
(9)
(11)
4
251
1,092
(371)
721
80.4¢
80.0¢
4,270
(1,140)
3,130
(2,101)
(167)
862
4
(12)
(13)
–
–
841
(266)
575
64.5¢
64.2¢
Year ended
31 December
2013
$ million
Year ended
31 December
2012
Restated(i)
$ million
Year ended
31 December
2011
Restated(i)
$ million
556
12
(16)
(4)
–
–
8
(3)
(6)
–
(1)
(5)
551
721
(5)
20
15
–
–
(1)
(6)
36
1
30
45
766
575
(63)
24
(39)
(1)
1
1
13
(32)
(4)
(22)
(61)
514
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Commentary on the Group income statement and Group statement of comprehensive income
95
Operating profit
Operating profit decreased by $36m to $810m from $846m in 2012.
This comprised a decrease of $12m in Advanced Surgical Devices
and a decrease of $24m in Advanced Wound Management.
The movement in Advanced Surgical Devices is attributable to the
continuing pressure on margins and its investment in the Emerging
& International Markets. Advanced Wound Management has
continued to invest in new products and new geographic markets
throughout the year.
Net interest receivable/(payable)
Net interest receivable increased, by $2m, from net $2m receivable
in 2012 to a net receivable of $4m in 2013. This increase is
principally a consequence of the interest receivable on the Bioventus
LLC (‘Bioventus’) loan note issued following the disposal of the
Clinical Therapies business which has been in place for a full year
in 2013 compared to eight months in 2012.
Other finance costs
Other finance costs in 2013 remained at $11m and principally relate
to costs associated with the Group’s retirement benefit schemes.
Taxation
The taxation charge decreased, by $125m, to $246m from $371m
in 2012. The rate of tax was 30.5%, compared with 33.7% in 2012.
After adjusting for specific transactions that management considers
affect the Group’s short-term profitability (profit on disposal of the
Clinical Therapies business, restructuring and rationalisation
expenses, amortisation of acquisition intangibles and acquisition-
related costs) the tax rate was 29.2% (2012 – 29.9%).
Revenue
Group revenue increased by $214m (5% on a reported basis), from
$4,137m in 2012 to $4,351m in 2013. The underlying increase is 4%
after adjusting for the net impact of 2% on the Healthpoint
acquisition and Clinical Therapies disposal and 1% attributable
to the unfavourable impact of currency movements.
Cost of goods sold
Cost of goods sold increased by $30m (3% on a reported basis) from
$1,070m in 2012 to $1,100m in 2013. The underlying movement is 2%
after adjusting for the net impact of 2% on the Healthpoint
acquisition and Clinical Therapies disposal and 1% attributable to the
favourable impact of currency movements. The movement in
underlying costs of goods sold of 2% is largely attributable to the
increase in underlying trading.
During 2013, $12m of restructuring and rationalisation expenses
(2012 - $3m) and $5m of acquisition related costs (2012 - $nil) were
charged to cost of goods sold.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $160m
(8% on a reported basis) from $2,050m in 2012 to $2,210m in 2013.
The underlying movement is 6% after adjusting for the net impact of
3% on the Healthpoint acquisition and Clinical Therapies disposal
and 1% attributable to the favourable impact of currency movements.
The underlying increase of 6% is due to the continuing investment in
Emerging & International Markets, promotion of new products in
ASD and AWM and the underlying increase in trading.
In 2013, administrative expenses included $64m of amortisation of
other intangible assets (2012 – $51m), $46m of restructuring and
rationalisation expenses (2012 – $62m), an amount of $88m relating
to amortisation of acquisition intangibles (2012 – $43m) and $26m of
acquisition related costs (2012 – $11m).
Research and development expenses
Research and development expenditure as a percentage of revenue
increased by 1.2% to 5.3% in 2013 (2012 – 4.1%). Actual expenditure
was $231m in 2013 compared to $171m in 2012. The Group
continues to invest in innovative technologies and products to
differentiate it from competitors. It also continues to invest in HP802-
247, currently in Phase III trials, which was acquired as part of the
Healthpoint acquisition in December 2012.
The financial commentary on this page forms part of the business review and is unaudited.
See pages 164 to 167 for commentary on the 2012 financial year.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
96
Group balance sheet
Assets
Non-current assets:
Property, plant and equipment
Goodwill
Intangible assets
Investments
Investments in associates
Loans to associates
Retirement benefit asset
Deferred tax assets
Current assets:
Inventories
Trade and other receivables
Cash at bank
Total assets
Equity and liabilities
Equity attributable to owners of the Company:
Share capital
Share premium
Capital redemption reserve
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
Total liabilities
Total equity and liabilities
At
31 December
2013
$ million
At
31 December
2012
$ million
Notes
7
8
9
10
11
11
18
5
12
13
15
19
19
15
18
14
17
5
15
14
17
816
1,256
1,054
2
107
178
5
145
3,563
1,006
1,113
137
2,256
5,819
184
535
10
(322)
120
3,520
4,047
347
230
7
65
50
699
44
785
60
184
1,073
1,772
5,819
793
1,186
1,064
2
116
167
6
164
3,498
901
1,065
178
2,144
5,642
193
488
–
(735)
121
3,817
3,884
430
266
8
63
61
828
38
656
59
177
930
1,758
5,642
The accounts were approved by the Board and authorised for issue on 26 February 2014 and are signed on its behalf by:
Sir John Buchanan Olivier Bohuon
Chairman
Chief Executive Officer
Julie Brown
Chief Financial Officer
The Notes on pages 101 to 149 are an integral part of these accounts.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Commentary on the Group balance sheet
97
Non-current assets
Non-current assets increased by $65m to $3,563m in 2013 from
$3,498m in 2012. This is principally attributable to the following:
Non-current liabilities
Non-current liabilities decreased by $129m from $828m in 2012
to $699m in 2013. This movement relates to the following items:
− Property, plant and equipment increased by $23m from $793m
in 2012 to $816m in 2013. Depreciation of $209m was charged
during 2013 and assets with a net book value of $12m were
disposed of. These movements were offset by $242m of additions
relating primarily to instruments and other plant & machinery and
$5m of additions arising on acquisitions in Turkey, Brazil and
India. The balance relates to unfavourable currency movements
totalling $3m
− Goodwill increased by $70m from $1,186m in 2012 to $1,256m in
2013. Of this movement, $37m arose on acquisitions in Turkey,
Brazil and India. An additional $16m arose on finalisation of the of
the Healthpoint opening balance sheet. The remaining balance
relates to favourable currency movements totalling $17m
− Intangible assets decreased by $10m from $1,064m in 2012 to
$1,054m in 2013. Intangible assets totalling $64m arose on the
acquisition in Turkey, Brazil and India. There was a reduction of
$11m on finalisation of the Healthpoint opening balance sheet.
Amortisation of $152m was charged during the year and assets
with a net book value of $11m were disposed of. A total of $98m
relates to the cost of intellectual property, distribution rights and
software acquired. The balance relates to favourable currency
movements totalling $2m
− Investment in associates (including a loan to an associate of
$178m in 2013, up from $167m in 2012) has increased from $283m
in 2012 to $285m in 2013. This movement relates to the interest of
$11m arising on the Bioventus loan note which was largely offset
from the disposal of the Group’s 49% interest in the Austrian
entities Plus Orthopedics GmbH and Intraplant GmbH and its 20%
interest in the German entity Intercus GmbH
− Deferred tax assets decreased by $19m in the year from $164m
in 2012 to $145m in 2013.
Current assets
Current assets increased by $112m to $2,256m from $2,144m
in 2012. The movement relates to the following:
− Inventories rose by $105m to $1,006m in 2013 from $901m in
2012. This movement is principally attributable to an increase
of $48m in the US due to inventory build prior to the launch of
JOURNEY II BCS and an increase of $17m due to inventory build
in our Hull factory prior to the transfer of part of our Wound
production to China. A further increase of $12m arose on the
acquisitions in Turkey, Brazil and India. The movement also
includes $6m of unfavourable currency movements
− The level of trade and other receivables increased by $48m to
$1,113m in 2013 from $1,065m in 2012. The movement primarily
relates to the increase in underlying revenues and includes $9m
of unfavourable currency movements
− Cash at bank has fallen by $41m to $137m from $178m in 2012.
− Long-term borrowings have decreased from $430m in 2012
to $347m in 2013
− The Retirement benefit obligation decreased by $36m to $230m
in 2013 from $266m in 2012. This was largely due to the Group’s
additional pension contributions, together with net actuarial gains
for the year
− Deferred tax liabilities decreased by $11m in the year from $61m
in 2012 to $50m in 2013.
Current liabilities
Current liabilities increased by $143m from $930m in 2012 to
$1,073m in 2013. This movement is attributable to:
− Bank overdrafts and current borrowings have increased by $6m
from $38m in 2012 to $44m in 2013
− Trade and other payables have increased by $129m to $785m in
2013 from $656m in 2012. This increase includes $50m largely
driven from strong sales performance in the US in quarter four and
a $23m increase in Europe associated with promotional activities
in Advanced Surgical Devices. A total of $19m of trade and other
payables arose on the acquisitions in Turkey, Brazil and India
and an amount of $5m is attributable to favourable currency
movements.
− Current tax payable is $184m at the end of 2013 compared to
$177m in 2012.
Total equity
Total equity increased by $163m from $3,884m in 2012 to $4,047m
in 2013. The principal movements were:
1 January 2013
Attributable profit
Currency translation gains
Hedging reserves
Actuarial gains on retirement benefit obligations
Dividends paid during the year
Purchase of own shares
Taxation on Other Comprehensive Income and
equity items
Net share-based transactions
31 December 2013
Total equity
$ million
3,884
556
(6)
5
12
(239)
(231)
(16)
82
4,047
The financial commentary on this page forms part of the business review and is unaudited.
See pages 164 to 167 for commentary on the 2012 financial year.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
98
Group cash flow statement
Cash flows from operating activities
Profit before taxation
Net interest (receivable)/payable
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment
and software
Share-based payments expense
Share of results of associates
Dividends received from associates
Profit on disposal of net assets held for sale
Decrease in retirement benefit obligations
(Increase)/Decrease in inventories
Increase in trade and other receivables
Increase/(Decrease) in trade and other payables
and provisions
Cash generated from operations (ii) (iii)
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)
Proceeds on disposal of net assets held for sale
Capital expenditure
Investment in associate
Cash received on disposal of associate
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
Purchase of own shares
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)/from 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
Year ended
31 December
2013
$ million
Notes
Year ended
31 December
2012
Restated(i)
$ million
Year ended
31 December
2011
Restated(i)
$ million
4
23
11
11
21
21
21
2
11
20
20
20
20
20
19
20
20
20
802
(4)
361
23
28
1
1
–
(27)
(99)
(70)
122
1,138
4
(10)
(265)
867
(74)
–
(340)
–
7
(407)
48
(231)
12
(6)
695
(779)
3
(1)
(239)
(498)
(38)
167
(3)
126
1,092
(2)
312
12
34
(4)
7
(251)
(28)
12
(5)
5
1,184
4
(8)
(278)
902
(782)
103
(265)
(10)
–
(954)
77
–
40
(296)
415
(1)
6
(1)
(186)
54
2
161
4
167
841
8
297
9
30
–
–
–
(37)
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
(i)
(i)
(ii)
Restated for the adoption of the revised IAS 19 Employee Benefits standard, see Note 1.
Includes $54m (2012 – $55m, 2011 – $20m) of outgoings on restructuring and rationalisation expenses.
Includes $25m (2012 – $3m, 2011 – $1m) of acquisition-related costs and $nil (2012 – $nil, 2011 – $3m) of costs unreimbursed by insurers relating to macrotextured knee revisions.
In the year ended 31 December 2012 cash outflows included a legal settlement of $22m.
The Notes on pages 101 to 149 are an integral part of these accounts.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Commentary on the Group cash flow statement
The main elements of the Group’s cash flow and movements in net
debt can be summarised as follows:
Net cash inflow from operating activities
Cash generated from operations in 2013 of $1,138m (2012 – $1,184m,
2011 – $1,135m) is after paying out $25m (2012 – $3m, 2011 – $1m) of
acquisition-related costs, $54m (2012 – $55m, 2011 – $20m) of
restructuring and rationalisation expenses and $22m in 2012 relating
to a legal settlement.
Capital expenditure
The Group’s ongoing 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 2013, capital
expenditure on tangible and intangible fixed assets represented
approximately 8% of continuing Group revenue (2012 – 6%,
2011 – 8%).
In 2013, capital expenditure amounted to $340m (2012 – $265m,
2011 – $321m). 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 2013, $41m (2012 – $4m, 2011 – $9m) of capital
expenditure had been contracted but not provided for which will
be funded from cash inflows.
Acquisitions and disposals
In the three-year period ended 31 December 2013, $889m was
spent on acquisitions, funded from net debt and cash inflows. This
comprised, $33m for Tenet Medical Engineering during 2011, $782m
for Healthpoint acquired in December 2012 and $74m relating to
acquisitions in Turkey, Brazil and India completed in quarter four
of 2013.
During 2012, the Group completed the transfer of its Biologics and
Clinical Therapies business (‘CT’) to Bioventus for total consideration
of $367m. As part of this transaction the Group received a 49%
interest in Bioventus with a value of $104m and subsequently
invested a further $10m.
Cash proceeds of $7m were received from the disposal of the
Group’s 49% interest in the Austrian entities Plus Orthopedics GmbH
and Intraplant GmbH and its 20% interest in the German entity
Intercus GmbH.
99
Liquidity and capital resources
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 entered into a five-year $1bn multi-
currency revolving facility with an initial interest of 70 basis points
over LIBOR.
At 31 December 2013, the Group held $126m (2012 – $167m, 2011 -
$161m) in cash and bank. The Group has committed and
uncommitted facilities of $1,008m and $319m respectively. The
undrawn committed facilities totalling $672m expire after one year
(2012 – $597m expiring within two to 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 $14m (of which
$3m extends beyond five years).
In December 2013, the Group signed a private placement agreement
to borrow $325m of long-term debt. The funds, which have an
average fixed rate of 3.7% and an average maturity of just over nine
years, were drawn down on 21 January 2014 and used to repay
existing bank debt.
Subsequent to the balance sheet date, on 3 February 2014 the
Group announced the execution of a definitive agreement to acquire
100% of the shares of ArthroCare Corp. for approximately $1.7 billion.
The acquisition is subject to customary conditions, including a vote
of ArthroCare’s shareholders and governmental clearances. The
acquisition is expected to close in mid-2014. The acquisition will be
financed through existing debt facilities and cash balances, including
the existing $1 billion revolving credit facility and a new two-year
$1.4 billion term loan facility, established in February 2014.
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 2014, as well as its other
known or expected commitments or liabilities, can be met from its
existing resources and facilities. The Group’s net debt decreased
from $492m at the beginning of 2011 to $253m at the end of 2013,
representing an overall decrease of $239m.
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 exposure 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.
The financial commentary on this page forms part of the business review and is unaudited.
See pages 164 to 167 for commentary on the 2012 financial year.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
100
Group statement of changes in equity
Share
capital
$ million
Share
premium
$ million
Capital
redemption
reserve
$ million
Treasury
shares (ii)
$ million
Other
reserves (iii)
$ million
Retained
earnings
$ million
Total
equity
$ million
At 31 December 2010
Total comprehensive income (i)
Equity dividends declared and paid
Share-based payments recognised
Deferred taxation on share-based
payments
Purchase of own shares
Cost of shares transferred to beneficiaries
Issue of ordinary share capital (iv)
At 31 December 2011
Total comprehensive income (i)
Equity dividends declared and paid
Share-based payments recognised
Cost of shares transferred to beneficiaries
Issue of ordinary share capital (iv)
At 31 December 2012
Total comprehensive income (i)
Equity dividends declared and paid
Share-based payments recognised
Deferred taxation on share-based
payments
Purchase of own shares
Cost of shares transferred to beneficiaries
Cancellation of treasury shares
Issue of ordinary share capital (iv)
191
–
–
–
–
–
–
–
191
–
–
–
–
2
193
–
–
–
–
–
–
(10)
1
396
–
–
–
–
–
–
17
413
–
–
–
–
75
488
–
–
–
–
–
–
–
47
At 31 December 2013
184
535
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
10
(778)
–
–
–
–
(6)
18
–
(766)
–
–
–
31
–
(735)
–
–
–
–
(231)
21
623
–
(322)
116
(25)
–
–
–
–
–
–
91
30
–
–
–
–
121
(1)
–
–
–
–
–
–
–
2,848
539
(146)
30
(2)
–
(11)
–
3,258
736
(186)
34
(25)
–
3,817
552
(239)
28
3
–
(18)
(623)
–
2,773
514
(146)
30
(2)
(6)
7
17
3,187
766
(186)
34
6
77
3,884
551
(239)
28
3
(231)
3
–
48
120
3,520
4,047
(i) Attributable to equity holders of the Company and wholly derived from continuing operations.
(ii) Refer to Note 19.2 for further information.
(iii) Other reserves comprises gains and losses on cash flow hedges, foreign 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 2013 were $118m (2012 – $124m, 2011 – $87m).
Issue of ordinary share capital as a result of options being exercised.
(iv)
The Notes on pages 101 to 149 are an integral part of these accounts.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Notes to the Group accounts
1 Basis of preparation
Smith & Nephew plc (the ‘Company’) is a public limited company
incorporated in England and Wales. In these accounts, the ‘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 Advanced Surgical Devices 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
2013. 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 2013. 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 are; inventories, impairment,
retirement benefits, contingencies and provisions. These are
discussed under Critical accounting policies on page 90. Although
these estimates are based on management’s best knowledge of
current events and actions, actual results ultimately may differ from
those estimates. Estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to estimates are
recognised prospectively.
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.
From 1 January 2013, the Group adopted the revised IAS 19
Employee Benefits standard, which was endorsed by the EU in
June 2012. The previous method of including the expected income
from the plan assets at an estimated asset return is replaced by
applying the discount rate used to calculate the net retirement
benefit obligation. The change in accounting policy has been
applied retrospectively but does not impact the net retirement
benefit obligation or retained earnings as at the beginning or during
the years ended 31 December 2011 or 2012. The income statement
and statement of comprehensive income for the years ended
31 December 2012 and 31 December 2013 have been adjusted for
the change in accounting policy. These adjustments have resulted
in an increase of $8m in other finance costs and an increase of $8m
in actuarial gains on retirement benefit obligations recorded within
other comprehensive income for the year ended 31 December 2012
and an increase of $7m in other finance costs and an increase of
$7m in actuarial gains on retirement benefit obligations recorded
within other comprehensive income for the year ended 31 December
2011. Due to the change in other finance costs, basic and diluted
earnings per share for the year ended 31 December 2012 both
decreased by 0.9¢ and for the year ended 31 December 2011 both
decreased by 0.8¢.
The Group has also adopted the amendments to IAS 1 Presentation
of Items of Other Comprehensive Income, resulting in a change to the
presentation of items within other comprehensive income.
In addition, effective 1 January 2013, the Group has adopted the
following new IFRS standards and amendments to standards, none
of which had a material impact on the Group’s net results, net assets
or disclosure; IFRS 10 Consolidated Financial Statements,
101
IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other
Entities and IFRS 13 Fair Value Measurement, along with
consequential amendments to IAS 27 Separate Financial Statements
and IAS 28 Investments in Associates and Joint Ventures, and
amendments to IFRS 7 Financial Instruments: Disclosures on
Offsetting Financial Assets and Liabilities.
A number of new standards, amendments to standards and
interpretations are effective for annual periods beginning after
1 January 2013, and have not been applied in preparing these
consolidated accounts. None of these is expected to have a
significant effect on the consolidated accounts of the Group.
Consolidation
The Group accounts include the accounts of Smith & Nephew plc
and its subsidiaries for the periods during which they were members
of the Group.
Subsidiaries are entities controlled by the Group. The Group controls
an entity when it is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those
returns through its power over the entity. 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. Intra-group balances and transactions, and any
unrealised income and expenses arising from intra-group
transactions, are eliminated on consolidation. All subsidiaries have
year ends which are co-terminus with the Group’s.
When the Group loses control over a subsidiary, it derecognises the
assets and liabilities of the subsidiary and any related components of
equity. Any resulting gain or loss is recognised in profit or loss. Any
retained interest in the former subsidiary is measured at fair value.
Foreign currencies
Functional and presentation currency
The Group accounts are presented in US Dollars, which is the
Company’s functional currency.
Foreign currency transactions
Transactions in foreign currencies are translated to the
respective functional currencies of Group companies at exchange
rates at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are retranslated to the functional
currency at the exchange rate at the reporting date. Non-monetary
items are not retranslated.
Foreign operations
Balance sheet items of foreign operations, including goodwill and
fair value adjustments arising on acquisition are translated into US
Dollars on consolidation at the exchange rates at the reporting date.
Income statement items and the cash flows of foreign operations
are translated at average rates as an approximation to actual
transaction rates, with actual transaction rates used for large
one-off transactions.
Foreign currency differences are recognised in Other comprehensive
income and accumulated in ‘Other reserves’ within equity. These
include: 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 actual (or
average, as an approximation) 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
102
Notes to the Group accounts continued
1 Basis of preparation continued
The exchange rates used for the translation of currencies into
US Dollars that have the most significant impact on the Group
results were:
The following tables present revenue, profit, asset and liability
information regarding the Group’s operating segments. Investments
in associates and loans to associates are segmentally allocated to
Advanced Surgical Devices.
2013
2012
2011
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.
Revenue by business segment
Advanced Surgical Devices
Advanced Wound Management
2013
$ million
2012
$ million
2011
$ million
3,015
1,336
4,351
3,108
1,029
4,137
3,251
1,019
4,270
There are no material sales between business segments.
Revenue by geographic market
United States
United Kingdom
Other Established Markets
Emerging & International Markets
2013
$ million
2012
$ million
2011
$ million
1,862
293
1,633
563
4,351
1,651
297
1,706
483
4,137
1,756
291
1,769
454
4,270
Revenue has been allocated by basis of destination. No revenue
from a single customer is in excess of 10% of the Group’s revenue.
Average rates
Sterling
Euro
Swiss Franc
Year-end rates
Sterling
Euro
Swiss Franc
1.56
1.33
1.08
1.66
1.38
1.12
1.58
1.28
1.07
1.63
1.32
1.09
1.60
1.39
1.13
1.55
1.29
1.06
2 Business segment information
For management purposes, the Group is organised into business
segments according to the nature of its products and has two
reportable business segments – Advanced Surgical Devices and
Advanced Wound Management. The types of products and services
offered by each business segment are:
− Smith & Nephew’s Advanced Surgical Devices (‘ASD’) business
offers the following products and technologies:
− Orthopaedic Reconstruction which includes Hip Implants, Knee
Implants and ancillary products such as bone cement and
mixing systems used in cemented reconstruction joint surgery
− Trauma & Extremities consisting of internal and external devices
used in the stabilisation of severe fractures and deformity
correction procedures
− Sports Medicine Joint Repair, which offers surgeons a broad
array of instruments, technologies and implants necessary to
perform minimally invasive surgery of the joints
− Arthroscopy Enabling Technologies which offer healthcare
providers a variety of technologies such as fluid management
equipment for surgical access, high definition cameras, digital
image capture, scopes, light sources and monitors to assist with
visualisation inside the joints, radio frequency wands,
electromechanical and mechanical blades, and hand
instruments for removing damaged tissue
− Other ASD which includes gynaecological instrumentation and
the remaining Clinical Therapies geographies which are in the
process of being transferred to Bioventus.
− Smith & Nephew’s Advanced Wound Management (‘AWM’)
business offers a range of products:
− Advanced Wound Care includes products for the treatment of
acute and chronic wounds, including leg, diabetic and pressure
ulcers, burns and post-operative wounds
− Advanced Wound Devices consists of traditional and single-use
Negative Pressure Wound Therapy and hydrosurgery systems
− Advanced Wound Bioactives includes biologics and other
bioactive technologies that provide unique approaches to
debridement and dermal repair/regeneration.
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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
103
2.2 Trading and operating profit by business segment
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:
Notes
3
3
9
3
Operating profit
Acquisition-related costs
Restructuring and rationalisation expenses
Amortisation of acquisition intangibles and impairments
Legal provision
Trading profit
Trading profit by business segment
Advanced Surgical Devices
Advanced Wound Management
Operating profit by business segment
reconciled to attributable profit for the year
Advanced Surgical Devices
Advanced Wound Management
Operating profit
Net interest receivable/(payable)
Other finance costs
Share of results of associates
Profit on disposal on net assets held for sale
Taxation
Attributable profit for the year
2013
$ million
2012
Restated
$ million
2011
Restated
$ million
810
31
58
88
–
987
712
275
987
620
190
810
4
(11)
(1)
–
(246)
556
846
11
65
43
–
965
728
237
965
632
214
846
2
(11)
4
251
(371)
721
862
–
40
36
23
961
714
247
961
630
232
862
(8)
(13)
–
–
(266)
575
2.3 Assets and liabilities by business segment and geography
2013
$ million
2012
$ million
2011
$ million
Balance sheet
Assets:
Advanced Surgical Devices
Advanced Wound Management
Operating assets by business segment
Assets held for sale (relating to Advanced Surgical Devices
business segment)
Unallocated corporate assets
Total assets
Liabilities:
Advanced Surgical Devices
Advanced Wound Management
Operating liabilities by business segment
Liabilities directly associated with assets held for sale
(relating to Advanced Surgical Devices business segment)
Unallocated corporate liabilities
Total liabilities
3,684
1,848
5,532
–
287
5,819
609
308
917
–
855
1,772
3,518
1,776
5,294
–
348
5,642
530
256
786
–
972
1,758
3,396
819
4,215
125
407
4,747
526
169
695
19
846
1,560
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
104
Notes to the Group accounts continued
2 Business segment information continued
Unallocated corporate assets and liabilities comprise the following:
Deferred tax assets
Retirement benefit asset
Cash at 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 (including acquisitions)
Advanced Surgical Devices
Advanced Wound Management
Capital expenditure segmentally allocated above comprises:
Additions to property, plant and equipment
Additions to intangible assets
Capital expenditure (excluding business combinations)
Acquisitions – Goodwill
Acquisitions – Intangible assets
Acquisitions – Property, plant and equipment
Capital expenditure
Depreciation, amortisation and impairment
Advanced Surgical Devices
Advanced Wound Management
2013
$ million
2012
$ million
2011
$ million
145
5
137
287
347
230
50
44
184
855
164
6
178
348
430
266
61
38
177
972
223
–
184
407
16
287
66
306
171
846
2013
$ million
2012
$ million
2011
$ million
327
124
451
188
839
1,027
334
31
365
2013
$ million
2012
$ million
2011
$ million
242
98
340
53
53
5
451
197
68
265
73
662
27
1,027
229
92
321
44
–
–
365
2013
$ million
2012
$ million
2011
$ million
268
93
361
274
38
312
259
38
297
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
105
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:
Amortisation of acquisition intangibles
Depreciation of property, plant and equipment
Impairment of goodwill in Austrian associate
Amortisation of other intangible assets
Impairment of investments
2013
$ million
2012
$ million
2011
$ million
88
209
–
64
–
361
43
212
4
51
2
312
36
217
–
42
2
297
No impairments were recognised within operating profit in 2013 (2012 – $6m, 2011 – $2m, both recognised within the administrative
expenses line). In 2012 and 2011, the impairments were segmentally allocated to Advanced Surgical Devices.
Geographic
Assets by geographic location
United States
United Kingdom
Other Established Markets
Emerging & International Markets
Non-current operating assets by geographic location
United States
United Kingdom
Other Established Markets
Emerging & International Markets
Current operating assets by geographic location
Unallocated corporate assets (see page 104)
Total assets
2.4 Other business segment information
2013
$ million
2012
$ million
2,086
255
902
170
3,413
1,121
288
486
224
2,119
287
5,819
2,122
257
895
54
3,328
999
279
528
160
1,966
348
5,642
Other significant expenses recognised within operating profit
Advanced Surgical Devices
Advanced Wound Management
2013
$ million
2012
$ million
2011
$ million
51
38
89
57
19
76
32
8
40
The $89m incurred in 2013 relates to $58m restructuring and rationalisation expenses and $31m acquisition-related costs (2012 – $65m
relates to restructuring and rationalisation expenses and $11m acquisition-related costs, 2011 – $40m relates to restructuring and
rationalisation expenses).
Average number of employees
Advanced Surgical Devices
Advanced Wound Management
2013
numbers
2012
numbers
7,066
3,970
11,036
7,194
3,283
10,477
2011
numbers
7,611
3,132
10,743
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
106
Notes to the Group accounts continued
3 Operating profit
ACCOUNTING POLICIES
Research and development
Research expenditure is expensed as occurred. Internal development expenditure is only capitalised if the recognition criteria in IAS 38
Intangible Assets have been satisfied. The Group considers that the regulatory, technical and market uncertainties inherent in the
development of new products mean that in most cases development costs should not be capitalised as intangible assets until products
receive approval from the appropriate regulatory body.
Payments to third parties for research and development projects are accounted for based on the substance of the arrangement. If the
arrangement represents outsourced research and development activities the payments are generally expensed except in limited
circumstances where the respective development expenditure would be capitalised under the principles established in IAS 38. By
contrast, the payments are capitalised if the arrangement represents consideration for the acquisition of intellectual property developed at
the risk of the third party.
Capitalised development expenditures are amortised on a straight-line basis over their useful economic lives from product launch.
Advertising costs
Expenditure on advertising costs is expensed as incurred.
Revenue
Cost of goods sold (i)(ii)
Gross profit
Research and development expenses
Selling, general and administrative expenses:
Marketing, selling and distribution expenses
Administrative expenses (iii) (iv) (v) (vi)
Operating profit
2013
$ million
4,351
(1,100)
3,251
(231)
(1,535)
(675)
(2,210)
810
2012
$ million
4,137
(1,070)
3,067
(171)
(1,440)
(610)
(2,050)
846
2011
$ million
4,270
(1,140)
3,130
(167)
(1,526)
(575)
(2,101)
862
2013 includes $12m of restructuring and rationalisation expenses (2012 – $3m, 2011 – $7m).
(i)
(ii) 2013 includes $5m of acquisition-related costs (2012 – $nil, 2011 – $nil).
(iii) 2013 includes $64m of amortisation of other intangible assets (2012 – $51m, 2011 – $42m).
(iv) 2013 includes $46m of restructuring and rationalisation expenses and $88m of amortisation of acquisition intangibles (2012 – $62m of restructuring and rationalisation
expenses and $43m of amortisation of acquisition intangibles, 2011 – $33m of restructuring and rationalisation expenses and $36m of amortisation of acquisition intangibles).
(v) 2013 includes $nil relating to legal provision (2012 – $nil, 2011 – $23m).
(vi) 2013 includes $26m of acquisition-related costs (2012 – $11m, 2011 – $nil).
Note that items detailed in (i), (ii), (iv), (v) and (vi) are excluded from the calculation of trading profit.
Operating profit is stated after charging the following items:
Amortisation of acquisition intangibles
Amortisation of other intangible assets
Impairment of goodwill in Austrian associate
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
2013
$ million
2012
$ million
2011
$ million
88
64
–
209
23
–
32
19
91
43
51
4
212
12
2
29
21
74
36
42
–
217
9
2
33
32
90
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
3.1 Staff costs
Staff costs during the year amounted to:
Wages and salaries
Social security costs
Pension costs (including retirement healthcare)
Share-based payments
Notes
18
23
2013
$ million
998
106
72
28
1,204
2012
Restated
$ million
886
97
72
34
1,089
107
2011
Restated
$ million
930
99
71
30
1,130
3.2 Audit Fees – information about the nature and cost of services provided by auditors
2013
$ million
2012
$ million
2011
$ million
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
1
2
2
1
6
3
3
6
1
2
1
1
5
2
3
5
1
2
1
1
5
2
3
5
3.3 Acquisition-related costs
Acquisition-related costs of $31m (2012 – $11m, 2011 – $nil) were incurred in the twelve month period to 31 December 2013. These costs
relate to professional and adviser fees and integration costs in connection with the acquisition of Healthpoint Biotherapeutics completed in
2012 and the acquisitions in Turkey, Brazil and India during 2013.
3.4 Restructuring and rationalisation expenses
Restructuring and rationalisation costs of $58m (2012 – $65m, 2011 – $40m) were incurred in the twelve month period to 31 December 2013.
Charges of $58m (2012 – $65m, 2011 – $26m) were incurred, relating mainly to people costs and contract termination costs associated with
the structural and process changes announced in August 2011. During 2013, no charges (2012 – $nil, 2011 – $14m) were incurred in relation
to the earnings improvement programme which was completed in 2011.
3.5 Legal provision
In 2011, the Group established a provision of $23m in connection with the previously disclosed investigation by the US Securities and
Exchange Commission (‘SEC’) and Department of Justice (‘DOJ’) into potential violations of the US 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 paid 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. The monitor’s final report was
filed in late 2013, and the independent monitorship has now been terminated. 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
108
Notes to the Group accounts continued
4 Interest and other finance costs
4.1 Interest receivable/(payable)
Interest receivable
Interest payable:
Bank borrowings
Other
Net interest receivable/(payable)
4.2 Other finance costs
Retirement benefit net interest expense
Other
Other finance costs
Notes
18
2013
$ million
2012
$ million
2011
$ million
14
(8)
(2)
(10)
4
2013
$ million
(11)
–
(11)
11
(7)
(2)
(9)
2
2012
Restated
$ million
(11)
–
(11)
4
(6)
(6)
(12)
(8)
2011
Restated
$ million
(14)
1
(13)
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 $1m gain in 2013 (2012 – net $5m loss, 2011 – net $3m 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.
5 Taxation
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 tax rates that have been enacted or substantively enacted by the balance sheet date.
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 un-agreed 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 advisers 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.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for: temporary differences related to investments in subsidiaries and associates 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 profits will be available against which they can be
used. Deferred tax assets are reviewed at each reporting date.
Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or substantively enacted by the
reporting 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 recognised within 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
5.1 Taxation charge attributable to the Group
Current taxation:
UK corporation tax at 23.3% (2012 – 24.5%, 2011 – 26.5%)
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
109
2013
$ million
2012
$ million
2011
$ million
50
229
279
(5)
274
(23)
(4)
(1)
(28)
246
16
(3)
259
53
248
301
(17)
284
88
(3)
2
87
371
(20)
–
351
56
214
270
(16)
254
18
(3)
(3)
12
266
(24)
2
244
The tax charge was reduced by $40m as a consequence of restructuring and rationalisation expenses, amortisation of acquisition
intangibles and acquisition-related costs. In 2012, the tax charge was increased by $82m as a consequence of the profit on disposal of net
assets held for sale after adjusting for acquisition-related costs, restructuring and rationalisation expenses and amortisation of acquisition
intangibles. In 2011, the tax charge was reduced by $17m as a consequence of restructuring and rationalisation expenses, amortisation of
acquisition intangibles and legal provision.
The applicable tax for the year is based on the UK standard rate of corporation tax of 23.3% (2012 – 24.5%, 2011 – 26.5%). 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
Overseas income taxed at other than UK standard rate
Total effective tax rate
2013
%
23.3
(1.0)
(0.5)
0.9
7.8
30.5
2012
%
24.5
0.4
(1.3)
0.8
9.3
33.7
2011
%
26.5
(0.5)
(1.6)
0.3
6.7
31.4
The enacted UK tax rate applicable from 1 April 2013 is 23%. The UK Government have enacted legislation to reduce the tax rate to 21% from
1 April 2014 and 20% from 1 April 2015.
5.2 Deferred taxation
Deferred tax assets
Deferred tax liabilities
Net position at 31 December
2013
$ million
145
(50)
95
2012
$ million
164
(61)
103
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
110
Notes to the Group accounts continued
5 Taxation continued
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
Arising on acquisition
At 31 December
Movements in the main components of deferred tax assets and liabilities were as follows:
2013
$ million
2012
$ million
103
(4)
27
1
(16)
3
(19)
95
157
–
(85)
(2)
20
–
13
103
Deferred tax assets
At 1 January 2012
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Acquisition
Transfers
At 31 December 2012
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other comprehensive income
Charge to equity
Acquisition
At 31 December 2013
Retirement
benefit
obligation
$ million
Macro-
textured
claim
$ million
Other
$ million
Total
$ million
79
–
(4)
2
17
–
(9)
85
–
5
–
(32)
–
–
58
52
–
–
–
–
–
–
52
–
–
–
–
–
–
52
92
1
(85)
(4)
1
13
9
27
(3)
15
1
(2)
2
(5)
35
223
1
(89)
(2)
18
13
–
164
(3)
20
1
(34)
2
(5)
145
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
111
The Group has unused tax losses of $31m (2012 – $61m) available for offset against future profits. A deferred tax asset has been recognised
in respect of $3m (2012 – $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 2012
Exchange adjustment
Movement in income statement – current year
Movement in other comprehensive income
At 31 December 2012
Exchange adjustment
Movement in income statement – current year
Movement in other comprehensive income
Charge to equity
Acquisitions/disposals
At 31 December 2013
6 Earnings per ordinary share
ACCOUNTING POLICIES
(28)
(1)
2
–
(27)
(1)
3
–
–
–
(25)
(27)
–
6
–
(21)
–
8
–
–
–
(13)
(11)
–
(4)
2
(13)
–
(4)
18
1
(14)
(12)
(66)
(1)
4
2
(61)
(1)
7
18
1
(14)
(50)
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 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; significant gains and losses arising from
legal disputes and significant uninsured losses; and taxation thereon.
The calculations of the basic, diluted and adjusted earnings per ordinary share are based on the following attributable profit and numbers of
shares:
Earnings
Attributable profit for the year
Adjusted attributable profit (see below)
2013
$ million
556
693
2012
Restated
$ million
721
671
2011
Restated
$ million
575
657
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Notes to the Group accounts continued
6 Earnings per ordinary share continued
Attributable profit is reconciled to adjusted attributable profit as follows:
Notes
2013
$ million
2012
Restated
$ million
2011
Restated
$ million
Attributable profit for the year
Acquisition-related costs
Restructuring and rationalisation expenses
Amortisation of acquisition intangibles and impairments
Profit on disposal of net assets held for sale
Legal provision
Taxation on excluded items
Adjusted attributable profit
3
3
9
21
3
5
556
31
58
88
–
–
(40)
693
721
11
65
43
(251)
–
82
671
575
–
40
36
–
23
(17)
657
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 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
2013
901
5
906
61.7¢
61.4¢
76.9¢
76.5¢
2012
897
4
901
2011
891
4
895
Restated
Restated
80.4¢
80.0¢
74.8¢
74.5¢
64.5¢
64.2¢
73.7¢
73.4¢
Share options not included in the diluted EPS calculation because they were non-dilutive in the period totalled 0.5m (2012 – 8.2m,
2011 – 12.9m).
7 Property, plant and equipment
ACCOUNTING POLICIES
Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the
straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over
the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the
lease term. Freehold land is not depreciated. The estimated useful lives of items of property, plant and equipment is 3–20 years and for
buildings is 20–50 years.
Assets in course of construction are not depreciated until they are available for use.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
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.
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Land and buildings
Plant and equipment
Freehold
$ million
Leasehold
$ million
Instruments
$ million
Other
$ million
Assets in
course of
construction
$ million
Total
$ million
133
2
8
–
–
–
143
1
–
2
(3)
–
143
43
1
2
–
46
(1)
1
(3)
43
100
97
52
–
–
1
(1)
–
52
(1)
1
1
–
–
53
27
–
3
(1)
29
(1)
3
–
31
22
23
1,009
3
–
122
(92)
–
1,042
(16)
2
139
(102)
–
1,065
688
2
137
(89)
738
(10)
135
(99)
764
301
304
878
15
7
46
(37)
10
919
6
2
23
(80)
68
938
573
11
70
(31)
623
5
70
(73)
625
313
296
42
1
12
28
–
(10)
73
–
–
77
(2)
(68)
80
–
–
–
–
–
–
–
–
–
80
73
2,114
21
27
197
(130)
–
2,229
(10)
5
242
(187)
–
2,279
1,331
14
212
(121)
1,436
(7)
209
(175)
1,463
816
793
Cost
At 1 January 2012
Exchange adjustment
Acquisitions (see Note 21.4)
Additions
Disposals
Transfers
At 31 December 2012
Exchange adjustment
Acquisitions (see Note 21.1)
Additions
Disposals
Transfers
At 31 December 2013
Depreciation and impairment
At 1 January 2012
Exchange adjustment
Charge for the year
Disposals
At 31 December 2012
Exchange adjustment
Charge for the year
Disposals
At 31 December 2013
Net book amounts
At 31 December 2013
At 31 December 2012
Land and buildings includes land with a cost of $15m (2012 – $15m) that is not subject to depreciation. Assets held under finance leases
with a net book amount of $10m (2012 – $11m) are included within land and buildings.
Historically, capital expenditure represents the Group’s expected annual investment in property, plant and equipment and other intangible
assets. This varies between 6% and 8% (2012 – 7% and 8%) of annual revenue.
Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $20m (2012 – $4m).
The amount of borrowing costs capitalised in 2013 and 2012 was minimal.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
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Notes to the Group accounts continued
8 Goodwill
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. The CGUs, monitored by management, are at the business segment level, Advanced Surgical Devices and
Advanced Wound Management.
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 of the CGU.
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.
Cost
At 1 January
Exchange adjustment
Acquisitions (i)
At 31 December
Impairment
At 1 January and 31 December
Net book amounts
Notes
21
(i) Includes an adjustment of $16m (2012: $nil) following the finalisation of the Healthpoint acquisition balance sheet. See Note 21.4.
Each of the Group’s business segments represent a CGU and include goodwill as follows:
Advanced Surgical Devices
Advanced Wound Management
2013
$ million
2012
$ million
1,186
17
53
1,256
–
1,256
2013
$ million
918
338
1,256
1,096
17
73
1,186
–
1,186
2012
$ million
886
300
1,186
In September 2013 and 2012 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 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
Advanced Surgical Devices business is 10% (2012 – 10%) and for the Advanced Wound Management business it is 10% (2012 – 9%).
In determining the growth rate used in the calculation of the value-in-use, the Group considered the annual revenue 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 Advanced Surgical Devices business vary up to 7%
(2012 – 7%) and for the Advanced Wound Management business up to 18% (2012 – 9%).
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115
Specific considerations and strategies taken into account in determining the sales growth and trading profit margin for each CGU are:
− Advanced Surgical Devices – In the Advanced Surgical Devices CGU management intends to deliver growth through continuing to focus
on the customer, high-quality customer service, innovative product development and through continuing to make efficiency improvements
− 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, NPWT, healing of chronic wounds and tissue
repair using bioactives and by continuing to improve efficiency.
A long-term growth rate of 3% for Advanced Surgical Devices business and 5% for the Advanced Wound Management business (2012 –
both businesses 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.
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 33% (2012 – 31%) for the Advanced Surgical Devices business and 65% (2012 – 49%) for the Advanced Wound
Management business.
9 Intangible assets
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 intangible 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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
116
Notes to the Group accounts continued
9 Intangible assets continued
Acquisition
intangibles
$ million
Software
$ million
Distribution
rights
$ million
Patents &
Intellectual
property
$ million
Total
$ million
Cost
At 1 January 2012
Exchange adjustment
Acquisitions (i)
Additions
Disposals
At 31 December 2012
Exchange adjustment
Acquisitions (ii)
Additions
Disposals
At 31 December 2013
Amortisation and impairment
At 1 January 2012
Exchange adjustment
Charge for the year
Disposals
At 31 December 2012
Exchange adjustment
Charge for the year
Disposals
At 31 December 2013
Net book amounts
At 31 December 2013
At 31 December 2012
436
11
662
–
–
1,109
3
53
–
–
1,165
234
6
43
–
283
1
88
–
372
793
826
170
1
–
37
(3)
205
–
–
53
(29)
229
65
–
26
–
91
–
31
(18)
104
125
114
60
–
–
–
(17)
43
–
–
27
–
70
34
–
10
(17)
27
–
14
–
41
29
16
143
2
–
31
–
176
–
–
18
–
194
53
–
15
–
68
–
19
–
87
107
108
809
14
662
68
(20)
1,533
3
53
98
(29)
1,658
386
6
94
(17)
469
1
152
(18)
604
1,054
1,064
(i)
(ii)
The majority of this balance relates to the acquisition of the product rights for two established Healthpoint products (see Note 21.4). These product rights are amortised over
15 years.
Includes an adjustment of $11m following the finalisation of the Healthpoint acquisition balance sheet. See Note 21.4.
Group capital expenditure relating to software contracted but not provided for amounted to $21m (2012 – $4m).
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
117
10 Investments
ACCOUNTING POLICY
Investments, other than those related to associates, are initially recorded at fair value plus any directly attributable 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. 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. Objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost less any
impairment loss previously recognised. Impairment losses are recognised by reclassifying the losses accumulated in other reserves to
profit or loss.
At 1 January
Impairment
At 31 December
11 Investments in associates
ACCOUNTING POLICY
2013
$ million
2
–
2
2012
$ million
4
(2)
2
Investments in associates, being those entities over which the Group has a significant influence and which is neither a subsidiary nor
a joint venture, are accounted for using the equity method, with the Group recording its share of the associate’s profit and loss and other
comprehensive income. The Group’s share of associates profit or loss is included in one separate income statement line and is calculated
after deduction of their respective taxes.
At 31 December 2013 and 31 December 2012, the Group holds 49% of Bioventus LLC (‘Bioventus’). Bioventus is a limited liability company
operating as a partnership. The Company’s headquarters is located in Durham, North Carolina, US. The Company focuses its medical
product development around its core competencies of orthobiologic therapies and orthopaedic diagnostics from which it develops and
markets clinically proven orthopaedic therapies and diagnostic tools, including osteoarthritis pain treatments, bone growth stimulators and
ultrasound devices. The Company sells bone stimulation devices and a provider of osteoarthritis injection therapies. The loss after taxation
recognised in the income statement relating to Bioventus was $2m (2012 – profit after taxation $4m).
The carrying amount of this investment was reviewed for impairment as at the balance sheet date. For the purposes of impairment testing the
recoverable amount of this investment was based on its fair value less cost to sell, estimated using discounted cash flows. The fair value
measurement was categorised as a level 3 fair value based on the inputs and valuation technique used. Given the relatively short passage
of time between the date of acquisition and the impairment review, the estimated recoverable amount of the investment marginally exceeded
its carrying amount. Management has identified that a reasonable possible change in the key assumptions and estimated cash flows could
cause the carrying amount to exceed the recoverable amount. However, any such change would not result in the recognition of a material
impairment loss.
In addition to its 49% ownership interest in Bioventus, the Group holds a senior secured five year loan note with Bioventus. The loan note
was created in May 2012 with a principal amount of $160m and an annual coupon rate of LIBOR plus 5%. The loan note is carried at
amortised cost. Interest receivable of $11m was accrued during 2013 (2012: $7m). In accordance with the terms of the agreement $10m of
interest receivable has been rolled-up into principal during 2013. As at the balance sheet date, the carrying amount of the loan note and the
related interest receivable is neither past due nor impaired.
In 2013, the Group sold its 49% interest in the Austrian entities Plus Orthopedics GmbH and Intraplant GmbH and its 20% interest in the
German entity Intercus GmbH. The profit after taxation recognised in the income statement prior to the disposal was $1m (2012 – $nil).
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
118
Notes to the Group accounts continued
11 Investments in associates continued
The following table summarises the financial position of the Group’s investment in these associates:
2013
$ million
2012
$ million
Share of results of associates:
Revenue
Operating costs and taxation
Share of associates (loss)/profit after taxation recognised in the income statement
Investments in associates at 1 January
Investment of 49% in Bioventus
Additional investment in Bioventus
Dividends received
Impairment of goodwill in Austrian associate
Disposal of interest in Plus and Intraplant
Other non-cash movements
Investments in associates at 31 December
Investments in associates is represented by:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets (100%)
Group’s share of net assets (49%)
Group adjustments (i)
Investment in associate
(i) Group adjustments primarily relate to an adjustment to the useful economic life of intangible assets.
Loans to associates:
Loan note receivable from Bioventus
Accrued interest on loan note receivable
12 Inventories
ACCOUNTING POLICY
113
(114)
(1)
116
–
–
(1)
–
(7)
–
107
315
129
(194)
(59)
191
93
14
107
171
7
178
80
(76)
4
13
104
10
(7)
(4)
–
(4)
116
310
129
(167)
(33)
239
117
(1)
116
160
7
167
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.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Raw materials and consumables
Work-in-progress
Finished goods and goods for resale
2013
$ million
151
72
783
1,006
2012
$ million
138
45
718
901
119
2011
$ million
140
24
695
859
Reserves for excess and obsolete inventories were $354m (2012 – $332m, 2011 – $322m). During 2013, $73m was recognised as an
expense within cost of goods sold resulting from the write down of excess and obsolete inventory (2012 – $84m, 2011 – $65m). The
cost of inventories recognised as an expense and included in cost of goods sold amounted to $958m (2012 – $906m, 2011 – $991m).
Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.
13 Trade and other receivables
ACCOUNTING POLICY
Trade and other 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.
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 and geographies. 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
Prepayments and accrued income
2013
$ million
992
(57)
935
28
60
90
1,113
2012
$ million
964
(49)
915
12
65
73
1,065
2011
$ million
936
(36)
900
21
50
66
1,037
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 for the year was $15m (2012 – $16m, 2011 – $42m). Amounts due from insurers in respect of the macro textured claim of $138m
(2012 – $137m, 2011 – $136m) are included within other receivables and have been provided in full.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
120
Notes to the Group accounts continued
13 Trade and other receivables continued
The amount of trade receivables that were past due were as follows:
Past due not more than three months
Past due more than three months and not more than six months
Past due more than six months and not more than one year
Past due more than one year
Neither past due 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
Trade receivables include amounts denominated in the following major currencies:
US Dollar
Sterling
Euro
Other
Trade receivables – net (loans and receivables)
14 Trade and other 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
2013
$ million
2012
$ million
2011
$ million
206
52
61
70
389
603
(57)
935
49
1
15
(8)
–
57
225
52
52
80
409
555
(49)
915
36
–
16
(3)
–
49
198
51
59
94
402
534
(36)
900
49
(1)
42
(34)
(20)
36
2013
$ million
2012
$ million
2011
$ million
293
103
271
268
935
258
100
276
281
915
238
75
317
270
900
2013
$ million
2012
$ million
751
20
14
785
7
646
10
–
656
8
The acquisition consideration due after more than one year is expected to be payable as follows: $4m in 2015 and $3m in 2016 (2012 – $8m
in 2014).
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
15 Cash and borrowings
15.1 Net debt
Net debt comprises borrowings and credit balances on currency swaps less cash at bank.
Bank overdrafts and loans due within one year
Long-term borrowings
Borrowings
Cash at bank
Debit balance on derivatives – currency swaps
Net debt
Borrowings are repayable as follows:
121
2013
$ million
2012
$ million
44
347
391
(137)
(1)
253
38
430
468
(178)
(2)
288
At 31 December 2013:
Bank loans
Bank overdrafts
Finance lease liabilities
At 31 December 2012:
Bank loans
Bank overdrafts
Finance lease liabilities
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
31
11
2
44
25
11
2
38
335
–
2
337
1
–
2
3
–
–
2
2
415
–
2
417
–
–
2
2
–
–
2
2
–
–
3
3
–
–
2
2
–
–
3
3
–
–
6
6
366
11
14
391
441
11
16
468
15.2 Post balance sheet event
In December 2013, the Group signed a private placement agreement to borrow $325m of long-term debt. The funds, which have a weighted
average fixed rate of 3.7% and an average maturity of just over nine years, were drawn down on 21 January 2014 and used to repay existing
bank debt.
Subsequent to the balance sheet date, on 3 February 2014 the Group announced the execution of a definitive agreement to acquire 100%
of the shares of ArthroCare Corp. for approximately $1.7 billion. The acquisition is subject to customary conditions, including a vote of
ArthroCare’s shareholders and governmental clearances. The acquisition is expected to close in mid-2014. The acquisition will be financed
through existing debt facilities and cash balances, including the existing $1 billion revolving credit facility and a new two-year $1.4 billion term
loan facility, established in February 2014.
15.3 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
2013
$ million
2012
$ million
2
12
14
10
10
2
14
16
11
11
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Notes to the Group accounts continued
15 Cash and borrowings continued
15.4 Currency swap analysis
All currency swaps are stated at fair value. Gross US Dollar equivalents of $146m (2012 – $175m) receivable and $145m (2012 – $173m)
payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2013 and 2012 to hedge intragroup loans
and other monetary items.
Currency swaps mature as follows:
At 31 December 2013
Within one year:
Euro
Japanese Yen
Chinese Renminbi
Sterling
At 31 December 2013
Within one year:
New Zealand Dollar
Swiss Franc
Swedish Krona
Australian Dollar
Canadian Dollar
Sterling
At 31 December 2012
Within one year:
Euro
Japanese Yen
Canadian Dollar
At 31 December 2012
Within one year:
New Zealand Dollar
Swiss Franc
Swedish Krona
Australian Dollar
Japanese Yen
Amount receivable
$ million
Amount payable
Currency million
28
13
17
11
69
EUR 20
JPY 1,315
CNY 100
GBP 7
Amount receivable
Currency million
Amount payable
$ million
NZD 9
CHF 14
SEK 31
AUD 41
CAD 3
GBP 6
7
16
5
36
3
10
77
Amount receivable
$ million
Amount payable
Currency million
76
19
17
112
EUR 58
JPY 1,500
CAD 17
Amount receivable
Currency million
Amount payable
$ million
NZD 1
CHF 35
SEK 33
AUD 14
JPY 335
1
38
5
15
4
63
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15.5 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 $1,008m (2012 – $1,017m) and total uncommitted facilities of
$319m (2012 – $341m). The Group has undrawn committed facilities of $672m (2012 – $597m). Of the undrawn committed facilities, $665m
expires after one but within two years (2012 – $586m expiring after two but within five). 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.
In December 2010, the Company entered into a five-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 2013, 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.
15.6 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 2013
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Finance lease liabilities
Acquisition consideration
Derivative financial liabilities:
Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – inflow
At 31 December 2012
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Finance lease liabilities
Acquisition consideration
Derivative financial liabilities:
Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – 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
42
751
3
14
1,734
(1,733)
811
42
646
3
–
1,422
(1,424)
689
335
–
3
4
–
–
342
4
–
3
8
–
–
15
–
–
9
3
–
–
12
418
–
9
–
–
–
427
–
–
3
–
–
–
3
–
–
6
–
–
–
6
377
751
18
21
1,734
(1,733)
1,168
464
646
21
8
1,422
(1,424)
1,137
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.
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Notes to the Group accounts continued
15 Cash and borrowings continued
15.7 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.
The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease
payments. Assets held under finance leases are capitalised as property, plant or equipment and depreciated accordingly. Minimum lease
payments are apportioned between the finance expense and the reduction in the outstanding liability. The finance expense is allocated to
each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
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
2013
$ million
2012
$ million
3
3
3
3
3
3
18
(4)
14
3
3
3
3
3
6
21
(5)
16
Present value of minimum lease payments can be split out as: $2m (2012 – $2m) due within one year, $9m (2012 – $8m) due between one to
five years and $3m (2012– $6m) due after five years.
16 Financial instruments and risk management
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
re-measured at their fair value at subsequent balance sheet dates.
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 in the period in which 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.
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125
16.1 Foreign exchange exposures
The Group operates in over 90 countries and as a consequence has transactional and translational foreign exchange exposure. It is Group
policy for operating units not to hold material unhedged monetary assets or liabilities other than in their functional currencies.
Foreign exchange variations affect trading results in two ways. Firstly, on translation of overseas sales and profits into US Dollars and
secondly, transactional exposures arising where some or all of the costs of sale are incurred in a different currency from the sale. The
principal transactional exposures arise as the proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion of sales
in each of these currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.
The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts. The Group
uses forward foreign exchange contracts, designated as cash flow hedges, to hedge forecast third party and intercompany trading cash
flows for forecast foreign currency inventory purchases for up to one year. When a commitment is entered into, forward foreign exchange
contracts are normally used to increase the hedge to 100% of the exposure. Cash flows relating to cash flow hedges are expected to occur
within 12 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 12-month period. The principal currencies hedged by forward foreign exchange contracts are US Dollars, Euros and
Sterling. At 31 December 2013, the Group had contracted to exchange within one year the equivalent of $1.6bn (2012 – $1.3bn).
Based on the Group’s net borrowings as at 31 December 2013, if the US Dollar were to weaken against all currencies by 10%, the Group’s net
borrowings would decrease by $2m (2012 – decrease by $8m) as the Group held a higher amount of foreign denominated cash than foreign
denominated borrowings. 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 $4m (2012 – decrease by $4m).
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 2013 would have been $34m lower (2012 – $23m). 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 2013 would have been $27m higher (2012 – $30m).
Movements in the fair value of forward foreign exchange contracts would be recognised in other comprehensive income and accumulated
in the hedging reserve.
A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2013 would have had the equal but opposite effect
to the amounts shown above, on the basis that all other variables remain constant.
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. In addition, the movements in the fair value of other financial
instruments used for hedging such as currency swaps for which hedge accounting is not applied, offset movements in the values of assets
and liabilities and are recognised through the income statement.
16.2 Interest rate exposures
The Group is exposed to interest rate risk on cash, borrowings and certain currency swaps which are all at floating rates. When required the
Group uses interest rate 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 and accumulated in the hedging reserve, 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. During 2013 and 2012 the Group was not exposed to significant interest
rate risk. As a result, interest rate swaps were not utilised in accordance with the Board approved policy.
Based on the Group’s gross borrowings as at 31 December 2013, if interest rates were to increase by 100 basis points in all currencies then
the annual net interest charge would increase by $4m (2012 – $5m). 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 2013 was $29m (2012 – $14m), being the total debit fair values on forward
foreign exchange contracts and currency swaps. The maximum credit risk exposure on cash at bank at 31 December 2013 was $137m (2012
– $178m). 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.
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Notes to the Group accounts continued
16 Financial instruments and risk management 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:
At 31 December 2013:
US Dollar
Euro
Other
Total interest bearing liabilities
At 31 December 2012:
US Dollar
Euro
Other
Total interest bearing liabilities
Gross
borrowings
$ million
Currency
swaps
$ million
Total
liabilities
$ million
Floating
rate liabilities
$ million
Fixed
rate liabilities
$ million
297
59
35
391
432
7
29
468
77
28
40
145
62
76
35
173
374
87
75
536
494
83
64
641
360
87
75
522
478
83
64
625
14
–
–
14
16
–
–
16
Fixed rate liabilities
Weighted
average
Interest
rate
%
Weighted
average time
for which
rate is fixed
Years
7.1
–
–
7.1
–
–
4
–
–
4
–
–
At 31 December 2013, $14m (2012 – $16m) of fixed rate liabilities relate to finance leases. In 2013, the Group also had liabilities due for
deferred acquisition consideration (denominated in US Dollars and Brazilian Real) totalling $21m (2012 – $8m, 2011 – $11m) 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 2013 was 1% (2012 – 1%).
Currency and Interest Rate Profile of Interest Bearing Assets:
At 31 December 2013:
US Dollars
Other
Total interest bearing assets
At 31 December 2012:
US Dollars
Other
Total interest bearing assets
Cash
at bank
$ million
Currency
swaps
$ million
Total assets
$ million
Floating
rate assets
$ million
8
129
137
59
119
178
69
77
146
113
62
175
77
206
283
172
181
353
77
206
283
172
181
353
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 2013 or 31 December 2012.
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16.5 Fair value of financial assets and liabilities
ACCOUNTING POLICY
Measurement of fair values
A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial assets and
liabilities and non-financial assets acquired in a business combination (see Note 21).
When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are
categorised into different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted
prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); Level 3: inputs for the asset or
liability that are not based on observable data (unobservable inputs).
The Group recognises transfers between the levels of the fair value hierarchy at the end of the reporting period during which the change
has occurred.
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair
value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying
amount is a reasonable approximation of fair value.
At 31 December 2013
Financial assets measured
at fair value
Forward foreign exchange
contracts
Investments
Currency swaps
Financial liabilities measured
at fair value
Acquisition consideration
Forward foreign exchange
contracts
Financial assets not measured
at fair value
Trade and other receivables
Cash at bank
Financial liabilities not
measured at fair value
Bank overdrafts
Bank loans
Finance lease liabilities
Trade and other payables
Carrying amount
Fair value
Designated
at fair
value
$ million
Fair value –
hedging
instruments
$ million
Loans
and
receivables
$ million
Available
for sale
$ million
Other
financial
liabilities
$ million
Total
$ million
Level 2
$ million
Level 3
$ million
Total
$ million
–
–
1
1
(21)
–
(21)
–
–
–
–
–
–
–
–
28
–
–
28
–
(20)
(20)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,085
137
1,222
–
–
–
–
–
–
2
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(11)
(366)
(14)
(751)
28
2
1
31
28
–
1
29
(21)
–
(20)
(41)
(20)
(20)
–
2
–
2
(21)
–
(21)
28
2
1
31
(21)
(20)
(41)
1,085
137
1,222
(11)
(366)
(14)
(751)
(1,142)
(1,142)
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Notes to the Group accounts continued
16 Financial instruments and risk management continued
At 31 December 2012
Financial assets measured
at fair value
Forward foreign exchange
contracts
Investments
Currency swaps
Financial liabilities measured
at fair value
Acquisition consideration
Forward foreign exchange
contracts
Financial assets not measured
at fair value
Trade and other receivables
Cash at bank
Financial liabilities not
measured at fair value
Bank overdrafts
Bank loans
Finance lease liabilities
Trade and other payables
Designated
at fair
value
$ million
Fair value –
hedging
instruments
$ million
Loans
and
receivables
$ million
Available
for sale
$ million
Other
financial
liabilities
$ million
Total
$ million
Level 2
$ million
Level 3
$ million
Total
$ million
Carrying amount
Fair value
12
–
2
14
–
(10)
(10)
–
2
–
2
(8)
–
(8)
12
2
2
16
(8)
(10)
(18)
–
–
2
2
(8)
–
(8)
–
–
–
–
–
–
–
–
12
–
–
12
–
(10)
(10)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,053
178
1,231
–
–
–
–
–
–
2
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(11)
(441)
(16)
(646)
(1,114)
12
2
2
16
(8)
(10)
(18)
1,053
178
1,231
(11)
(441)
(16)
(646)
(1,114)
The Group enters into derivative financial instruments with financial institutions with investment grade credit ratings. The fair value of forward
foreign exchange contracts is calculated by reference to quoted market forward exchange rates for contracts with similar maturity profiles.
The fair value of currency swaps is determined by reference to quoted market spot rates. As a result, foreign forward exchange contracts
and currency swaps are classified as Level 2 within the fair value hierarchy.
As at 31 December 2013 and 31 December 2012, the fair value of derivatives 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.
The fair value of contingent consideration is estimated using a discounted cash flow model. The valuation model considers the present value
of expected payment, discounted using a risk-adjusted discount rate. The expected payment is determined by considering the possible
scenarios, which relate to the achievement of established milestones and targets, the amount to be paid under each scenario and the
probability of each scenario. As a result, contingent consideration is classified as Level 3 within the fair value hierarchy.
There were no transfers between level 1, 2 and 3 during 2013 and 2012.
For cash and cash equivalents, short-term loans and receivables, overdrafts and other short-term liabilities which have a maturity of less than
three months the book values approximate the fair values because of their short-term nature.
Long-term borrowings are measured in the balance sheet at amortised cost. 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 2013 and
31 December 2012, the fair value of the Group’s long-term borrowing was not materially different from amortised cost.
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17 Provisions and contingencies
ACCOUNTING POLICY
In the normal course of business the Group is involved in various 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.
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 or 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 purpose 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.
A provision for rationalisation is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring
either has commenced or has been announced publicly. Future operating losses are not provided for.
17.1 Provisions
At 1 January 2012
Charge to income statement
Provision arising on acquisition
Utilised
At 31 December 2012
Charge to income statement
Utilised
At 31 December 2013
Provisions – due within one year
Provisions – due after one year
At 31 December 2013
Provisions – due within one year
Provisions – due after one year
At 31 December 2012
Rationalisation
provisions
$ million
Legal and other
provisions
$ million
Total
$ million
26
29
–
(30)
25
15
(22)
18
18
–
18
25
–
25
97
21
13
(34)
97
22
(12)
107
42
65
107
34
63
97
123
50
13
(64)
122
37
(34)
125
60
65
125
59
63
122
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 provisions are:
− $16m (2012 – $17m) relating to the declination of insurance coverage for macrotextured knee revisions (see Note 17.2)
− A provision of $15m (2012 – $13m) relating to the acquisition and integration of Healthpoint Biotherapeutics (see Note 21.4)
− The remaining balance largely represents provisions for various patent disputes and other litigation.
All provisions are expected to be substantially utilised within three years of 31 December 2013 and none are treated as financial instruments.
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Notes to the Group accounts continued
17 Provisions and contingencies continued
17.2 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 are likely to 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 of related claims have been filed, most of which have been settled. The aggregate cost at 31 December 2013 related to this matter
is approximately $215m. 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. Trial has not yet begun. An additional $22m was received during 2007 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 $16m (2012 – $17m) provision remaining is adequate to cover
remaining claims. Given the uncertainty inherent in such matters, there can be no assurance on this point.
17.3 Legal proceedings
Product liability claims
The Group faces other claims from time to time for alleged defects in its products and has on occasion recalled or withdrawn products from
the market. Such claims are endemic to the orthopaedic device industry. The Group maintains product liability insurance subject to limits and
deductibles that management believes are reasonable. All policies contain exclusions and limitations, however, and there can be no
assurance that insurance will be available or adequate to cover all claims.
In recent years, there has been heightened concern about possible adverse effects of hip implant products with metal-on-metal bearing
surfaces, and the Group has incurred and will continue to incur expenses to defend claims in this area. As of February 2014 approximately
650 such claims had been notified to the Group around the world, of which 310 had given rise to pending legal proceedings. Most of the
pending legal proceedings are in the United States. Most claims relate to the Group’s Birmingham Hip Resurfacing (‘BHR’) product and the
Birmingham Hip Modular Head (‘BHMH’) and R3 Metal Liner (‘R3ML’) components. In 2012, the Group restricted instructions for use of the
BHMH and ceased offering the R3ML. In 2013, the Group’s US subsidiary agreed with lawyers representing metal-on-metal claimants to
consolidate pre-trial proceedings (such as discovery) in their lawsuits in a state court in Memphis, Tennessee, and those lawsuits account for
most of the US proceedings. The Group takes care to monitor the clinical evidence relating to its metal hip implant products and ensure that
its product offerings and training are designed to serve patients’ interests.
Business practice investigations
Business practices in the healthcare industry are subject to regulation and review by various government authorities. From time to time
authorities undertake investigations of the Group’s activities to verify compliance. 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.
On 6 February 2012, Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith
& Nephew paid 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. The monitor’s final report was
filed in late 2013, and the independent monitorship has now been terminated. 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 other intellectual property matters. These disputes are being heard in courts in the US and other jurisdictions and also before agencies
that examine patents. Outcomes are rarely certain and costs are often significant.
The Group has won a jury verdict in the US district court for Oregon against Arthrex Inc. for infringement of the Group’s patents relating to
suture anchors. The verdict was initially overturned by the district court but then (in January 2013) reinstated on appeal. Arthrex continues to
appeal the amount of the damages award.
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 ‘whistle-blower’
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.
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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 Defense 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 whistle-blower
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.
18 Retirement benefit obligations
ACCOUNTING POLICY
The Group’s major pension plans are of the defined benefit type. A defined benefit pension plan defines an amount of pension benefit
that an employee will receive on retirement, which is dependent on various factors such as age, years of service and final salary. The
Group’s obligation is calculated separately for each plan by discounting the estimated future benefit that employees have earned in return
for their service in the current and prior periods. The fair value of any plan assets is deducted to arrive at the net liability.
The calculation of the defined benefit obligation is performed annually by external actuaries using the projected unit credit method.
Re-measurements arising from defined benefit plans comprise actuarial gains and losses and the return on the plan assets net of the
costs of managing the plan assets. The Group recognises these immediately in other comprehensive income (‘OCI’) and all other
expenses, such as service cost, net interest cost, administration costs and taxes, are recognised in the income statement.
A number of key assumptions are made when calculating the fair value of the Group’s defined benefit pension plans. These assumptions
impact the balance sheet asset 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 discount rate is based on the yield
at the reporting date on bonds that have a credit rating of AA, denominated in the currency in which the benefits are expected to be paid
and have a maturity profile approximately the same as the Group’s obligations. In determining these assumptions management take into
account the advice of professional external actuaries and benchmarks its assumptions against external data.
The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset).
The Group also operates a number of defined contribution plans. A defined contribution plan is a pension plan under which the Group
and employees pay fixed contributions to a third party financial provider. The Group has no further payment obligations once the
contributions have been paid. Contributions are recognised as an employee benefit expense when they are due.
18.1 Retirement benefit net (assets)/obligations
The Group’s retirement benefit obligations comprise:
Funded plans:
UK Plan
US Plan
Other Plans
Unfunded Plans:
Other Plans
Retirement Healthcare
Amount recognised on the balance sheet - liability
Amount recognised on the balance sheet - asset
2013
$ million
2012
$ million
50
65
28
143
39
43
225
230
(5)
(6)
147
38
179
36
45
260
266
(6)
The Group sponsors pension plans for its employees in 16 countries and these are established under the laws of the relevant country.
Funded plans are funded by the payment of contributions and the assets are held by separate trust funds or insurance companies. In
countries where there is no Company-sponsored pension plan, state benefits are considered by management to be adequate. Employees’
retirement benefits are the subject of regular management review. The Group’s 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 rage. The level of entitlement is dependent
on the year of service of the employee.
The Group’s two major defined benefit pension plans are in the UK and US. Both these plans were closed to new employees in 2003 and
defined contribution plans are offered to new joiners.
The UK Plan operates under trust law and responsibility for its governance lies with a Board of Trustees. This Board is composed of
representatives of the Group, plan participants and an independent trustee who act on behalf of members in accordance with the terms of
the Trust Deed and Rules and relevant legislation. The UK Plan’s assets are held by the trust. Annual increases on benefits in payment are
dependent on inflation. The main uncertainties affecting the level of benefits payable under the UK Plan are future inflation levels (including
the impact of inflation on future salary increase) and the actual longevity of the membership.
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Notes to the Group accounts continued
18 Retirement benefit obligations continued
The US Plan is governed by a US Pension Committee which is composed of both plan participants and representatives of the Group. In the
US, the Pension Protection Act (2006) established both a minimum required contribution and a maximum deductible contribution. Failure to
contribute at least the minimum required amount will subject the Company to significant penalties and contributions in excess of the
maximum deductible have negative tax consequences. The minimum funding requirement is intended to fully fund the present value of
accrued benefits over seven years.
18.2 Reconciliation of benefit obligations and pension assets
The movement in the Group’s pension benefit obligation and pension assets is as follows:
Amounts recognised on the balance sheet at
beginning of the period
Income statement expense:
Current service cost
Net interest (expense)/income, administration costs
and taxes
Costs recognised in Income statement
Re-measurements:
Actuarial gain due to liability experience
Actuarial gain/(loss) due to financial
assumptions change
Actuarial loss due to demographic assumptions
Return on plan assets greater than discount rate
Re-measurements recognised in OCI
Cash:
Employer contributions
Employee contributions
Benefits paid directly by the Group, taxes and
administration costs paid from scheme assets
Benefits paid
Net cash
Exchange rates
Amount recognised on the balance sheet
Amount recognised on the balance sheet - liability
Amount recognised on the balance sheet - asset
Represented by:
UK Plan
US Plan
Other Plans
Total
Obligation
$ million
Asset
$ million
2013
Total
$ million
Obligation
$ million
Asset
$ million
2012
Total
$ million
(1,487)
1,227
(260)
(1,350)
1,063
(287)
(29)
(62)
(91)
1
16
(42)
–
(25)
–
(4)
3
45
44
(22)
(1,581)
(1,548)
(33)
–
51
51
–
–
–
37
37
67
4
(3)
(45)
23
18
1,356
1,318
38
(29)
(11)
(40)
1
16
(42)
37
12
67
–
–
–
67
(4)
(225)
(230)
5
(29)
(63)
(92)
18
(51)
(13)
–
(46)
–
(4)
1
44
41
(40)
(1,487)
(749)
(738)
–
52
52
–
–
–
41
41
73
4
–
(44)
33
38
1,227
483
744
Obligation
$ million
Asset
$ million
(855)
(482)
(244)
(1,581)
805
417
134
1,356
2013
Total
$ million
(50)
(65)
(110)
(225)
Obligation
$ million
Asset
$ million
(738)
(506)
(243)
744
359
124
(1,487)
1,227
(29)
(11)
(40)
18
(51)
(13)
41
(5)
73
–
1
–
74
(2)
(260)
(266)
6
2012
Total
$ million
6
(147)
(119)
(260)
All benefits are vested at the end of each reporting period. The weighted average duration of the defined benefit obligation at the end of the
reporting period is 20 years and 16 years for the UK and US plans respectively. For 2012, this was 19 years for the UK Plan and 17 years for
the US Plan.
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133
18.3 Plan assets
The market value of the US, UK and Other Plans assets are as follows:
2013
$ million
2012
$ million
2011
$ million
UK Plan:
Assets with a quoted market price:
Cash and cash equivalents
Equity securities
Government bonds – fixed interest
– index linked
Diversified growth funds
Other assets:
Insurance contract
Market value of assets
US Plan:
Assets with a quoted market price:
Cash and cash equivalents
Equity securities
Government bonds – fixed interest
Corporate bonds
Hedge funds
Market value of assets
Other Plans:
Assets with a quoted market price:
Cash and cash equivalents
Equity securities
Government bonds – fixed interest
– index linked
Corporate bonds
Insurance contracts
Property
Other quoted securities
Other assets:
Equities
Insurance contracts
Investment property
Market value of assets
Total market value of assets
8
220
61
109
159
557
248
805
6
181
64
151
15
417
6
32
9
11
13
24
6
3
104
–
29
1
11
249
92
282
110
744
–
744
1
242
106
–
10
359
5
26
7
34
2
–
5
11
90
2
31
1
6
248
88
265
49
656
–
656
5
195
88
–
10
298
5
24
6
33
2
–
5
11
86
2
20
1
134
1,356
124
1,227
109
1,063
No plans invest directly in property occupied by the Group or in financial securities issued by the Group.
The US and UK plan assets are invested in a diversified range of industries across a broad range of geographies. These assets include
liability matching assets and annuity policies purchased by the trustees of each plan, which aim to match the benefits to be paid to certain
members from the plan and therefore remove the investment, inflation and demographic risks in relation to those liabilities.
In January 2013, the UK Plan, in order to minimise longevity and interest risk, purchased an insurance contract with Rothesay Life covering
a subset of the UK Plan pensioner liabilities. The terms of this policy means that it exactly matches the amount and timing of the pensioner
obligations covered by the contract.
In accordance with IAS19, the fair value of the insurance contract is deemed to be the present value of the related obligations which is
discounted at the AA corporate bond rate.
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Notes to the Group accounts continued
18 Retirement benefit obligations continued
18.4 Expenses recognised in the income statement
The total expense relating to retirement benefits recognised for the year is $72m (2012 – $72m, 2011 – $71m). Of this cost recognised for the
year, $40 million (2012 – $40m, 2011 – $42m) relates to the defined benefit plan and $32m (2012 – $32m, 2011 – $29m) relates to defined
contributions.
The cost charged 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. These were charged to operating profit in selling, general and administrative expenses. There were $nil
outstanding payments as at 31 December 2013 due to be paid over to the plans (2012 – $nil, 2011 – $nil).
Defined benefit plan costs comprise service cost which is charged to operating profit in selling, general and administrative expenses and net
interest cost and administration costs and taxes which are reported as other finance costs.
The defined benefit pension costs charged for the UK and US plans are:
Service cost
Net interest cost, administration and taxes
UK Plan
$ million
7
1
8
2013
US Plan
$ million
10
7
17
UK Plan
$ million
8
1
9
2012
US Plan
$ million
11
7
18
UK Plan
$ million
10
3
13
2011
US Plan
$ million
9
6
15
18.5 Principal actuarial assumptions
The following are the principal financial actuarial assumptions used at the reporting date to determine the UK and US defined benefit
obligations and expense.
UK Plan:
Discount rate
Future salary increases
Future pension increases
Inflation (RPI)
Inflation (CPI)
US Plan:
Discount rate
Future salary increases
Inflation
2013
% per annum
2012
% per annum
2011
% per annum
4.4
3.9
3.4
3.4
2.4
4.9
3.0
2.5
4.5
3.5
3.0
3.0
2.2
4.0
3.0
2.5
4.9
5.1
3.1
3.1
2.1
4.6
4.5
2.5
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135
Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S1NA with projections in line with the CMI
2011 table and the US uses the RP2000 table with scale AA. The current longevities underlying the values of the obligations in the defined
benefit plans are as follows:
Life expectancy at age 60
UK Plan:
Males
Females
US Plan:
Males
Females
Life expectancy at age 60 in 20 years’ time
UK Plan:
Males
Females
US Plan:
Males
Females
2013
years
29.3
31.1
23.8
25.5
32.2
33.2
23.8
25.5
2012
years
28.7
30.2
22.9
25.0
31.2
31.9
24.6
25.0
2011
years
28.6
30.2
22.8
25.0
31.0
31.8
24.5
25.0
18.6 Sensitivity analysis
The calculation of the defined benefit obligation is sensitive to the assumptions used. The following table summarises the increase/decrease
on the UK and US defined benefit obligation and pension costs as a result of reasonably possible changes in some of the assumptions while
holding all other assumptions consistent. The sensitivity to the inflation assumption change includes corresponding changes to the future
salary increases and future pension increase assumptions. The analysis does not take into account the full distribution of cash flows
expected under the plan.
$ million
UK Plan:
Discount rate
Inflation
Mortality
US Plan:
Discount rate
Inflation
Mortality
Increase in pension obligation
Increase in pension cost
+50bps/+1yr
-50bps/-1yr
+50bps/+1 yr
-50bps/-1yr
-77
+87
+29
-35
+5
+13
+88
-75
-29
+35
-5
-13
-4
+5
+1
-2
+1
+1
+4
-4
-1
+2
-1
-1
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Notes to the Group accounts continued
18 Retirement benefit obligations continued
18.7 Risk
The pension plans expose the Group to the following risks:
Interest rate risk
Inflation risk
Investment risk
Longevity risk
Volatility in financial markets can change the calculations of the obligation dramatically as the calculation of
the obligation is linked to yields on AA-rated corporate bonds. A decrease in the bond yield will increase the
measure of plan liabilities, although this will be partially offset by increases in the value of matching plan assets
such as bonds and insurance contracts.
The UK Plan is linked to inflation. A high rate of inflation will lead to a higher liability. This risk is managed by
holding inflation-linked bonds and an inflation-linked insurance contract in respect of some of the obligation.
If the return on plan assets is below the discount rate, all else being equal, there will be an increase in the
plan deficit.
In the UK, this risk is partially managed by holding bonds and a bulk annuity, together with a dynamic
de-risking policy to switch growth assets into bonds over time.
In 2013, the US Pension committee implemented a dynamic de-risking policy to shift plan assets into longer
term stable asset classes. The policy established ten pre-determined funded status levels and when each
trigger point is reached, the plan assets are re-balanced accordingly.
The present value of the plans defined benefit liability is calculated by reference to the best estimate of the
mortality of the plan participants both during and after their employment. An increase in the life expectancy
of plan participants above that assumed will increase the benefit obligation.
The UK Plan, in order to minimise longevity risk, entered into an insurance contract which covers a portion
of pensioner obligations.
Salary risk
The calculation of the defined benefit obligation uses the future estimated salaries of plan participants.
Increases in the salary of plan participants above that assumed will increase the benefit obligation.
18.8 Funding
A full valuation is performed by actuaries for the Trustees of each plan to determine the level of funding required. Employer contributions
rates, based on these full valuations, are agreed between the trustees of each plan and the Group. The assumptions used in the funding
actuarial valuations may differ from those assumptions above. Employees are required to contribute to the plans.
UK Plan
The most recent full actuarial valuation of the UK Plan was undertaken as at 30 September 2012. These valuations are performed every
two years with the next scheduled for 30 September 2014. Contributions to the UK Plan in 2013 were $37m (2012 – $39m, 2011 – $37m).
This included supplementary payments of $31m (2012 – $30m, 2011 – $29m).
The Group has agreed to pay the supplementary payments each year until 2017. The agreed supplementary contributions for 2014 are $31m.
US Plan
Full actuarial valuations are performed annually for the US Plan with the last undertaken as at 20 September 2013. Contributions to the US
Plan were $20m (2012 – $27m, 2011 – $30m) which included supplementary payments of $17m. The agreed contributions for 2014 are $26m.
18.9 Post balance sheet event
On 7 February 2014, the Group announced its intention to close the US Pension Plan to future accrual with effect from 31 March 2014. The
Group expects to recognise a gain in 2014 as a result of the closure, but due to the member consultation period currently underway, is
unable to calculate the precise past service cost adjustment. However, it is estimated that the gain will not be material. The effect of the
closure has not been recognised as at 31 December 2013.
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137
19 Equity
ACCOUNTING POLICY
Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.
When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net
of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in
the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase
in equity and the resulting surplus or deficit on the transaction is presented within share premium.
19.1 Share capital
Authorised
At 31 December 2011
At 31 December 2012
At 31 December 2013
Allotted, issued and fully paid
At 1 January 2011
Share options
At 31 December 2011
Share options
At 31 December 2012
Share options
Shares cancelled
At 31 December 2013
Ordinary shares (20¢)
Deferred Shares (£1.00)
Thousand
$ million
Thousand
$ million
Total
$ million
1,223,591
1,223,591
1,223,591
952,837
1,991
954,828
8,752
963,580
5,587
(51,000)
918,167
245
245
245
191
–
191
2
193
1
(10)
184
50
50
50
50
–
50
–
50
–
–
50
–
–
–
–
–
–
–
–
–
–
–
245
245
245
191
–
191
2
193
1
(10)
184
The deferred shares were issued in 2006 in order to comply with English Company law. They are not listed on any stock exchange and have
extremely limited rights and effectively have no value. These rights are summarised as follows:
− The holder shall not be entitled to participate in the profits of the Company;
− The holder shall not have any right to participate in any distribution of the Company’s assets on a winding up or other distribution except
that after the return of the nominal amount paid up on each share in the capital of the Company of any class other than the deferred
shares and the distribution of a further $1,000 in respect of each such share there shall be distributed to a holder of a deferred share
(for each deferred share held by him) an amount equal to the nominal value of the deferred share;
− The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and
− The Company may create, allot and issue further shares or reduce or repay the whole or any part of its share capital or other capital
reserves without obtaining the consent of the holders of the deferred shares.
The Group’s objectives when managing capital are to ensure the Group has adequate funds to continue as a going concern and sufficient
flexibility within the capital structure to fund the ongoing growth of the business and to take advantage of business development
opportunities including acquisitions.
The Group determines the amount of capital taking into account changes in business risks and future cash requirements. The Group reviews
its capital structure on an ongoing basis and uses share buy-backs, dividends and the issue of new shares to adjust the retained capital.
The Group considers the capital that it manages to be as follows:
Share capital
Share premium
Capital redemption reserve
Treasury shares
Retained earnings and other reserves
2013
$ million
184
535
10
(322)
3,640
4,047
2012
$ million
193
488
–
(735)
3,938
3,884
2011
$ million
191
413
–
(766)
3,349
3,187
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Notes to the Group accounts continued
19 Equity continued
19.2 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. On 2 May 2013, as part of the new Capital Allocation Framework, the Group
announced the start of a new share buy-back programme to return $300m of surplus capital to its Shareholders. The programme has now
been suspended as a result of our agreement to acquire ArthroCare Corp. announced on 3 February 2014. As at 31 December 2013, a total
of 18.2m ordinary shares (2.0%) had been purchased at a cost of $226m and 51.0m ordinary shares (5.7%) had been cancelled. The
maximum number of ordinary shares held in treasury during 2013 was 65.2m (7.3%) with a nominal value of $13.0m.
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 2012
Shares transferred from treasury
Shares transferred to Group beneficiaries
At 31 December 2012
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2013
At 1 January 2012
Shares transferred from treasury
Shares transferred to Group beneficiaries
At 31 December 2012
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2013
19.3 Dividends
The following dividends were declared and paid in the year:
Ordinary final of 16.20¢ for 2012 (2011 – 10.80¢, 2010 – 9.82¢)
paid 8 May 2013
Ordinary interim of 10.40¢ for 2013 (2012 – 9.90¢, 2011 – 6.60¢)
paid 29 October 2013
Treasury
$ million
Employees’
Share Trust
$ million
750
(10)
(10)
730
226
(8)
(7)
(623)
318
16
10
(21)
5
5
8
(14)
–
4
Total
$ million
766
–
(31)
735
231
–
(21)
(623)
322
No of shares
million
No of shares
million
No of shares
million
61.2
(0.9)
(0.8)
59.5
18.2
(0.6)
(0.6)
(51.0)
25.5
1.4
0.9
(1.8)
0.5
0.4
0.6
(1.2)
–
0.3
62.6
–
(2.6)
60.0
18.6
–
(1.8)
(51.0)
25.8
2013
$ million
2012
$ million
2011
$ million
146
93
239
97
89
186
88
58
146
A final dividend for 2013 of 17.0 US cents per ordinary share was proposed by the Board on 5 February 2014 and will be paid, subject to
shareholder approval, on 7 May 2014 to shareholders on the Register of Members on 22 April 2014. The estimated amount of this dividend
on 24 February 2014 is $152m.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
139
20 Cash flow statement
ACCOUNTING POLICY
In the Group cash flow statement, cash and cash equivalents includes cash at bank, 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 2011
Net cash flow
Other non-cash changes
Exchange adjustment
At 31 December 2011
Net cash flow
Exchange adjustment
At 31 December 2012
Net cash flow
Exchange adjustment
At 31 December 2013
Cash
$ million
Overdrafts
$ million
Due within
one year
$ million
Due after
one year
$ million
Net currency
swaps
$ million
Total
$ million
Borrowings
207
(21)
–
(2)
184
(10)
4
178
(38)
(3)
137
(12)
(12)
–
1
(23)
12
–
(11)
–
–
(11)
(45)
252
(517)
27
(283)
256
–
(27)
(6)
–
(33)
(642)
140
517
(31)
(16)
(414)
–
(430)
84
(1)
(347)
–
1
–
(1)
–
1
1
2
1
(2)
1
(492)
360
–
(6)
(138)
(155)
5
(288)
41
(6)
(253)
Reconciliation of net cash flow to movement in net debt
Net cash flow from cash net of overdrafts
Settlement of currency swaps
Net cash flow from borrowings
Change in net debt from net cash flow
Exchange adjustment
Change in net debt in the year
Opening net debt
Closing net debt
2013
$ million
2012
$ million
2011
$ million
(38)
1
78
41
(6)
35
(288)
(253)
2
1
(158)
(155)
5
(150)
(138)
(288)
(33)
1
392
360
(6)
354
(492)
(138)
Cash and cash equivalents
For the purposes of the Group Cash Flow Statement cash and cash equivalents at 31 December 2013 comprise cash at bank net of bank
overdrafts.
Cash at bank
Bank overdrafts
Cash and cash equivalents
2013
$ million
137
(11)
126
2012
$ million
178
(11)
167
2011
$ million
184
(23)
161
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
140
Notes to the Group accounts continued
21 Acquisitions and disposals
ACCOUNTING POLICY
The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration
transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested
annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as
incurred, except if related to the issue of debt or equity securities.
Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as
equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the
contingent consideration are recognised in profit or loss.
21.1 Acquisitions
Year ended 31 December 2013
On 30 September 2013, the Group acquired certain assets and liabilities in respect of a Turkish business, which distributes products related
to orthopaedic reconstruction, trauma, sports medicine and arthroscopic technologies.
The acquisition is deemed to be a business combination within the scope of IFRS 3.
The estimated fair value of the consideration is $63m and includes $12m of contingent consideration in respect of agreed milestones and
$36m through the settlement of working capital commitments. The fair values shown below are provisional. If new information is obtained
within the measurement period about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised.
The provisional estimate of goodwill arising on the acquisition is $12m. It is attributable to the additional economic benefits expected from the
transaction, including the assembled workforce, which has been transferred as part of the acquisition. The goodwill recognised is expected
to be deductible for tax purposes.
The following table summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the
acquisition date.
Identifiable assets acquired and liabilities assumed
Property, plant and equipment
Inventories
Trade receivables and prepayments
Identifiable intangible assets
Payables and accruals
Net assets
Goodwill
Cost of acquisition
$ million
4
8
24
17
(2)
51
12
63
The Group incurred acquisition-related costs of $4m, primarily related to external legal fees and due diligence costs. These costs have been
recognised in administrative expenses in the Group’s income statement.
In 2013, the contribution to revenue and attributable profit from the acquisition was immaterial. If the acquisition had occurred at the
beginning of the year the contribution to revenue and attributable profit would have also been immaterial.
Other acquisitions
During the year ended 31 December 2013, the Group acquired a Brazilian distributor of its advanced wound management products and a
business based in India primarily engaged in the manufacture and distribution of trauma products. These acquisitions are deemed to be
business combinations within the scope of IFRS 3.
The aggregated total estimated fair value of the consideration is $63m and includes $2m of contingent consideration and $2m through the
settlement of working capital commitments. The fair values shown below are provisional. If new information is obtained within the
measurement period about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised.
As at the acquisition date, the aggregated value of the net assets acquired was $38 million, which included property, plant and equipment of
$1 million, inventory of $4 million, trade receivables and prepayments of $3 million, identifiable intangible assets of $47 million, payables and
accruals of $3 million and deferred tax liabilities of $14 million.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
141
The provisional aggregated estimate of goodwill arising on the acquisitions is $25m. This is attributable to the additional economic benefits
expected from the transactions, including the assembled workforces, which have been transferred as part of the acquisitions. The goodwill
recognised is not expected to be deductible for tax purposes.
In 2013, the contribution to revenue and attributable profit from these acquisitions is immaterial. If these acquisitions had occurred at the
beginning of the year their contribution to revenue and attributable profit would have also been immaterial.
21.2 Post balance sheet event
Subsequent to the balance sheet date, on 3 February 2014 the Group announced the execution of a definitive agreement to acquire 100% of
the shares of ArthroCare Corp. for approximately $1.7 billion. The acquisition is subject to customary conditions, including a vote of
ArthroCare’s shareholders and governmental clearances. The acquisition is expected to close in mid-2014. The acquisition will be financed
through existing debt facilities and cash balances, including the existing $1 billion revolving credit facility and a new two-year $1.4 billion term
loan facility, established in February 2014. Information regarding the assets and liabilities acquired will not be available until after completion.
21.3 Commitment
On 26 March 2013, the Group entered into an agreement to acquire the assets related to the distribution business for its sport medicine,
orthopaedic reconstruction, and trauma products in Brazil. This acquisition is expected to close in the first half of 2014 subject to the
satisfaction of conditions required for closing. The final consideration for this acquisition is subject to change based on the terms and
conditions of the agreement and is not expected to be material. As at 31 December 2013 and the date of approval of these financial
statements, the Group does not hold any legal ownership in, or control this business.
21.4 Year ended 31 December 2012
On 21 December 2012 the Group acquired substantially all the assets of Healthpoint Biotherapeutics (‘Healthpoint’), a leader in bioactive
debridement, dermal repair and regeneration wound care treatments.
The acquisition is deemed to be a business combination within the scope of IFRS 3. Consideration was in the form of a single payment of
$782m. The accounting for the acquisition was completed during 2013. The fair values shown below include measurement period
adjustments recognised during the period.
The goodwill arising on the acquisition is $89m. It is attributable to the additional economic benefits expected from the transaction, including
revenue synergies and the assembled workforce, which has been transferred as part of the acquisition. The goodwill recognised is
deductible for tax purposes.
The following table summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the
acquisition date.
Identifiable assets acquired and liabilities assumed
Property, plant and equipment
Inventories
Trade receivables
Identifiable intangible assets
Deferred tax assets
Payables and accruals
Provisions
Net assets
Goodwill
Cost of acquisition
Provisional
values
$ million
Adjustment
$ million
Revised
values
$ million
27
46
31
662
5
(49)
(13)
709
73
782
–
–
–
(11)
(5)
–
–
(16)
16
–
27
46
31
651
–
(49)
(13)
693
89
782
In 2012, the Group incurred acquisition-related costs of $11m related to professional and adviser fees. These costs have been recognised in
administrative expenses in the income statement. No acquisition-related costs were incurred in 2011.
In 2012, since the date of acquisition, the contribution to attributable profit from Healthpoint products was immaterial. The unaudited
revenues from Healthpoint products during 2012 were $190m.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
142
Notes to the Group accounts continued
21 Acquisitions continued
21.5 Disposal of business
Year ended 31 December 2012
In January 2012, the Group announced its intention to sell the Clinical Therapies business to Bioventus. This was completed during May 2012
for a total consideration of $367m and resulted in a profit on disposal before taxation of $251m. The revenue of the Clinical Therapies
business in the four-month period to disposal was $69m and profit before taxation was $12m. The details of the transaction are set out
below.
Loan note receivable
Investment in associate
Cash
Total consideration
Net assets of business disposed and disposal transaction costs
Profit before taxation
22 Operating leases
ACCOUNTING POLICY
$ million
160
104
103
367
(116)
251
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.
Payments under operating leases are expensed in the income statement on a straight line basis over the term of the lease. Lease
incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
Future minimum lease payments under non-cancellable operating leases fall due as follows:
Land and buildings:
Within one year
After one and within two years
After two and within three years
After three and within four years
After four and within five years
After five years
Other assets:
Within one year
After one and within two years
After two and within three years
After three and within four years
2013
$ million
2012
$ million
30
22
16
13
7
5
93
15
9
4
2
30
30
24
17
14
8
4
97
15
10
4
1
30
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
143
23 Other Notes to the accounts
23.1 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. The grant date fair value is recognised over the vesting
period as an expense, with a corresponding increase in retained earnings.
Employee plans
The Smith & Nephew Sharesave Plan (2002) (adopted by Shareholders on 3 April 2002) (the Save As You Earn (‘SAYE’) plan), the Smith &
Nephew International Sharesave Plan (2002), Smith & Nephew France Sharesave Plan (2002), Smith & Nephew Sharesave Plan (2012) (the
Save As You Earn (‘SAYE 2012’) plan) (adopted by Shareholders on 12 April 2012), Smith & Nephew International Sharesave Plan (2012)
(adopted by Shareholders on 12 April 2012) and Smith & Nephew France Sharesave Plan (2012) (adopted by Shareholders on 12 April 2012)
are together termed the “Employee Plans”.
The SAYE and SAYE 2012 plans are available to all employees in the UK employed by participating Group companies, subject to three
months’ service. The schemes enable employees to save up to £250 per month and give 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) and Smith & Nephew
International Sharesave Plan (2012) are available to employees in Australia, Austria, Belgium, Canada, Denmark, Finland, Germany,
Hong Kong, India, Ireland, Italy, Japan, South Korea, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South
Africa, Spain, Sweden, Switzerland and the United Arab Emirates. Employees in China and France participated in these plans for the first time
in 2013. Puerto Rico participants were eligible to receive options under the International Plans up to 2011 and were eligible to receive
phantom options in 2013. The Smith & Nephew France Sharesave Plans were available to all employees in France up to 2012. The
International and French plans operate on a substantially similar basis to the SAYE 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 is 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 was open to Senior Executives 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.
From 2012 onwards Senior Executives were granted share awards instead of share options and from 2013 executives were granted
conditional share awards instead of share options. The awards vest 33.3% after one year, 66.7% after two years and the remaining balance
after the third year subject to continued employment. There are no performance conditions for executives. Vesting for senior executives is
subject to personal performance levels. The market value used to calculate the number of awards is the closing price of an ordinary share
on the last trading day prior to the grant date.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
144
Notes to the Group accounts continued
23 Other Notes to the accounts continued
23.1 Share based payments continued
At 31 December 2013 13,601,000 (2012 – 19,690,000, 2011 – 27,316,000) 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 2011
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2011
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2012
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2013
Options exercisable at 31 December 2013
Options exercisable at 31 December 2012
Options exercisable at 31 December 2011
Executive Plans:
Outstanding at 1 January 2011
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2011
Granted
Forfeited
Exercised
Expired
Outstanding at 31 December 2012
Forfeited
Exercised
Expired
Outstanding at 31 December 2013
Options exercisable at 31 December 2013
Options exercisable at 31 December 2012
Options exercisable at 31 December 2011
3,358
1,090
(122)
(602)
(144)
3,580
947
(402)
(925)
(38)
3,162
1,178
(174)
(751)
(128)
3,287
71
152
122
22,395
5,706
(763)
(2,369)
(1,233)
23,736
3,046
(954)
(8,740)
(560)
16,528
(118)
(5,540)
(556)
10,314
6,631
8,512
7,979
348.0-640.0
452.0-585.0
348.0-609.0
348.0-576.5
380.0-609.0
348.0-640.0
535.0-535.0
348.0-609.0
348.0-609.0
348.0-640.0
380.0-609.0
625.0
380.0-625.0
380.0-609.0
380.0-625.0
380.0-625.0
461.0-556.0
380.0-609.0
348.0-640.0
409.5-680.5
580.0-703.0
479.0-637.8
445.0-680.5
445.0-637.8
409.5-703.0
642.0-650.0
479.0-703.0
434.0-651.0
435.5-637.8
409.5-680.5
514.0-650.0
435.5-671.0
435.5-650.0
409.5-680.5
409.5-680.5
409.5-680.5
409.5-680.5
430.1
454.8
427.6
454.7
450.7
432.8
535.0
434.5
396.0
496.2
473.1
625.0
488.2
453.8
490.0
530.5
467.8
400.8
470.8
544.9
599.4
565.5
536.6
549.7
561.2
650.0
569.0
547.7
588.7
583.3
618.8
568.0
582.3
591.1
571.1
562.7
595.6
The weighted average remaining contractual life of options outstanding at 31 December 2013 was 6.2 years (2012 – 6.6 years, 2011 – 6.6
years) for Executive Plans and 2.5 years (2012 – 2.6 years, 2011 – 2.6 years) for Employee Plans.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Weighted average share price
Options granted during the year were as follows:
2013
pence
764.7
2012
pence
640.5
145
2011
pence
639.9
Weighted
average fair
value per
option at
grant date
Pence
Weighted
average
share price at
grant date
Pence
Options
granted
Thousand
Weighted
average
exercise
price
Pence
Weighted
average
option life
Years
Employee Plans
1,178
203.9
792.5
625.0
3.8
The weighted average fair value of options granted under Employee Plans during 2012 was 184.0p (2011 – 189.2p) and those under Executive
Plans during 2012 was 148.7p (2011 – 176.1p).
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.
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
Employee plans
Executive plans
2013
2.0
25.0
1.3
3.8
2012
1.5
25.0
1.3
3.8
2011
1.5
30.0
2.0
3.9
2013
–
–
–
–
2012
1.5
25.0
1.2
10.0
2011
1.5
30.0
2.0
10.0
(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.
Summarised information about options outstanding under the share option plans at 31 December 2013 is as follows:
Employee Plans:
380.0p to 764.7p (i)
Executive Plans:
409.5p to 764.7p (i)
(i)
The split has been determined based on the weighted average share price of 764.7p.
Number
outstanding
Thousand
Weighted average
remaining contract life
Years
3,287
10,314
2.5
6.2
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
146
Notes to the Group accounts continued
23 Other Notes to the accounts continued
23.1 Share based payments continued
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.
The plan included a Performance Share Plan (‘PSP’) and a Bonus Co-Investment Plan (‘CIP’).
Vesting of the PSP awards 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 was 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 was compulsorily deferred into shares which vested, subject to continued employment, in equal annual tranches over three
years (ie one-third each year). No further performance conditions applied to the deferred shares.
From 2010, Performance Share awards were 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.
From 2012, Deferred Bonus Plan and GSP 2010 options for Executive Directors, Executive Officers and the next level of Senior Executives
were replaced by Equity Incentive Awards (‘EIA’). EIA are designed to encourage Executives to build up and maintain a significant
shareholding in the Company. EIA will vest, in equal annual tranches over three years (ie one-third each year), subject to continued
employment and personal performance. No further performance conditions apply to the EIA.
The fair values of awards granted under long-term incentive plans are calculated using a binomial model. 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. A correlation of 40% (2012 – 35%, 2011 – 40%) 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 Free Cash Flow growth and the Group’s TSR performance over the three-year
performance period.
The other assumptions used are consistent with the Executive scheme assumptions disclosed in Note 23.1.
At 31 December 2013 the maximum number of shares that could be awarded under the Group’s long-term incentive plans was:
Outstanding at a January 2011
Awarded
Vested
Forfeited
Outstanding at 31 December 2011
Awarded
Vested
Forfeited
Outstanding at 31 December 2012
Awarded
Vested
Forfeited
Other
Awards
–
838
(44)
–
794
187
(263)
–
718
1,179
(437)
(11)
EIA
–
–
–
–
–
1,060
(49)
(82)
929
785
(379)
(51)
Outstanding at 31 December 2013
1,449
1,284
Number of shares in Thousands
Deferred
Bonus Plan
522
351
(375)
(6)
492
–
(287)
(41)
164
–
(115)
(5)
44
CIP
197
–
–
(197)
–
–
–
–
–
–
–
–
–
Total
6,731
3,471
(785)
(1,863)
7,554
3,437
(2,384)
(1,554)
7,053
3,927
(1,342)
(1,664)
7,974
PSP
6,012
2,282
(366)
(1,660)
6,268
2,190
(1,785)
(1,431)
5,242
1,963
(411)
(1,597)
5,197
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 2013 was 1.4 years (2012 – 0.8 years, 2011 –
1.2 years) for the PSP, 0.2 years (2012 – 0.9 years, 2011 – 1.7 years) for the Deferred Bonus Plan, 1.8 years (2012 – 2.2 years) for the EIA and
2.1 years (2012 – 0.9 years, 2011 – 1.5 years) for the other awards. There were no awards outstanding under the CIP in 2013, 2012 or 2011.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
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
2013
$ million
10
18
28
2012
$ million
9
25
34
147
2011
$ million
9
21
30
Under the Executive Plans, PSP, EIA 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 10 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 10-year period under all
share plans operated by the Company may not exceed 10% of the ordinary share capital at the date of grant.
23.2 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
2013
$ million
5
2
2012
$ million
14
8
2011
$ million
8
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
2013
$ million
2012
$ million
2011
$ million
15
11
1
–
27
16
10
1
–
27
19
9
1
1
30
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
148
Notes to the Group accounts continued
23 Other Notes to the accounts continued
23.3 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
Activity
Country of operation and incorporation
UK:
Smith & Nephew Healthcare Limited
Smith & Nephew Medical Limited
T. J. Smith & Nephew, Limited
Continental Europe:
Smith & Nephew GmbH
Smith & Nephew SA-NV
Smith & Nephew A/S
Smith & Nephew Oy
Smith & Nephew SAS
Smith & Nephew Orthopaedics GmbH
Smith & Nephew GmbH
Smith & Nephew Orthopaedics 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 Manufacturing AG
Smith & Nephew Orthopaedics AG
US:
Smith & Nephew Inc.
Medical Devices
Medical Devices
Medical Devices
England & Wales
England & Wales
England & Wales
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Austria
Belgium
Denmark
Finland
France
Germany
Germany
Greece
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Spain
Sweden
Switzerland
Switzerland
Medical Devices
United States
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
149
Company Name
Activity
Country of operation and incorporation
Africa, Asia, Australasia and Other America:
Smith & Nephew Pty Limited
Smith & Nephew do Brasil Participacoes S.A.
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
Adler Mediequip Private 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.
LLC Smith & Nephew
Smith & Nephew Pte Limited
Smith & Nephew (Pty) Limited
Smith & Nephew Limited
Smith ve Nephew Medikal Cihazlar Ticaret Limited Sirketi
Smith & Nephew FZE
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Medical Devices
Australia
Brazil
Canada
Canada
Canada
China
China
China
Hong Kong
India
India
Japan
Korea
Malaysia
Mexico
New Zealand
Puerto Rico
Russia
Singapore
South Africa
Thailand
Turkey
United Arab Emirates
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150
Independent auditor’s report for the Company
Independent Auditor’s Report to the members of
Smith & Nephew plc
We have audited the Parent Company financial statements of
Smith & Nephew plc for the year ended 31 December 2013 which
comprise the Parent Company balance sheet and the related Notes 1
to 9. The financial reporting framework that has been applied in
their preparation is applicable law and UK 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.
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 Strategic Report and the Directors’
Report for the financial year for which the financial statements
are prepared is consistent with the parent company
financial statements.
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:
Respective responsibilities of Directors and auditor
As explained more fully in the Directors’ responsibility statement set
out on pages 88 and 89, the Directors are responsible for the
preparation of the Parent Company 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 Parent Company 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.
− 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 financial statements 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 financial statements of
Smith & Nephew plc for the year ended 31 December 2013.
Les Clifford (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
26 February 2014
Scope of the audit of the financial statements
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 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 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 accounts
In our opinion the Parent Company financial statements:
− give a true and fair view of the state of the Company’s affairs as at
31 December 2013;
− 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.
The Parent Company financial statements of Smith & Nephew plc on pages 151 to 154 do not form part of the Smith & Nephew’s Annual
Report on Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Company balance sheet
Fixed assets:
Investments
Current assets:
Debtors
Cash and bank
Creditors: amounts falling due within one year:
Borrowings
Other creditors
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after one year:
Borrowings
Total assets less total liabilities
Equity shareholders’ funds:
Called up equity share capital
Share premium account
Capital redemption reserve
Capital reserve
Treasury shares
Exchange reserve
Profit and loss account
Shareholders’ funds
151
At 31 December
2013
$ million
At 31 December
2012
$ million
Notes
3
4
6
6
5
6
7
7
7
7
7
7
7
3,597
2,140
6
2,146
(2)
(1,590)
(1,592)
554
4,151
(335)
3,816
184
535
10
2,266
(322)
(52)
1,195
3,816
3,597
2,679
20
2,699
(1)
(1,871)
(1,872)
827
4,424
(415)
4,009
193
488
–
2,266
(735)
(52)
1,849
4,009
The accounts were approved by the Board and authorised for issue on 26 February 2014 and signed on its behalf by:
Sir John Buchanan Olivier Bohuon
Chairman
Chief Executive Officer
Julie Brown
Chief Financial Officer
The Parent Company financial statements of Smith & Nephew plc on pages 151 to 154 do not form part of the Smith & Nephew’s Annual
Report on Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtSGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
152
Notes to the Company accounts
1 Basis of preparation
Smith & Nephew plc (the ‘Company’) is a public limited company incorporated in England and Wales.
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 94 to 149.
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.
2 Results for the year
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 $198m (2012 – $167m).
3 Investments
ACCOUNTING POLICY
Investments in subsidiaries are stated at cost less provision for impairment.
At 1 January
Impairment
At 31 December
2013
$ million
3,597
–
3,597
2012
$ million
3,598
(1)
3,597
Investments represent holdings in subsidiary undertakings.
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 23.3 of the Notes to the Group accounts for the principal trading and manufacturing subsidiary undertakings of the Group.
The Parent Company financial statements of Smith & Nephew plc on pages 151 to 154 do not form part of the Smith & Nephew’s Annual
Report on Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
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 asset derivatives – currency swaps
Current taxation
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
6 Cash and borrowings
ACCOUNTING POLICY
153
2013
$ million
2012
$ million
2,091
3
45
1
–
2,140
2,628
7
20
2
22
2,679
2013
$ million
2012
$ million
1,533
10
2
45
1,590
1,832
19
–
20
1,871
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
Debit balance on derivatives – currency swaps
Net debt
2013
$ million
2012
$ million
2
335
337
(6)
(1)
330
1
415
416
(20)
(2)
394
All currency swaps are stated at fair value. Gross US Dollar equivalents of $146m (2012 – $175m) receivable and $145m (2012 – $173m)
payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2013 and 2012 to hedge intragroup loans.
The Parent Company financial statements of Smith & Nephew plc on pages 151 to 154 do not form part of the Smith & Nephew’s Annual
Report on Form 20-F as filed with the SEC.
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154
Notes to the Company accounts continued
7 Equity and reserves
Share
capital
$ million
Share
premium
$ million
Capital
redemption
reserve
$ million
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
Cancellation of
treasury shares
Treasury shares
purchased
193
–
488
–
–
–
–
1
(10)
–
–
–
–
47
–
–
–
–
–
–
–
–
10
–
Treasury
shares
$ million
Exchange
reserves
$ million
Profit and
loss account
$ million
2013
2012
Total
shareholders’
funds
$ million
Total
shareholders’
funds
$ million
(735)
–
(52)
–
1,849
198
4,009
198
–
–
21
–
623
(231)
–
–
–
–
–
–
(239)
(239)
28
28
(18)
3
–
48
(623)
–
–
(231)
3,911
167
(186)
34
6
77
–
–
Capital
reserves
$ million
2,266
–
–
–
–
–
–
–
At 31 December
184
535
10
2,266
(322)
(52)
1,195
3,816
4,009
Further information on the share capital of the Company can be found in Note 19.1 of the Notes to the Group accounts.
The total distributable reserves of the Company are $821m (2012 – $1,062m). 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 $198m (2012 – $167m).
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 3.2 of the Notes to the Group accounts.
8 Share-based payments
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 23.1 of the Notes to the Group accounts.
9 Contingencies
Guarantees in respect of subsidiary undertakings
2013
$ million
25
2012
$ million
37
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 18 of the Notes to the Group accounts).
The Parent Company financial statements of Smith & Nephew plc on pages 151 to 154 do not form part of the Smith & Nephew’s Annual
Report on Form 20-F as filed with the SEC.
Smith & Nephew ANNuAl report 2013FiNANCiAl StAtemeNtS
Group information
155
Business overview and Group history
Smith & Nephew’s operations are organised into two primary divisions that operate globally: Advanced Surgical Devices 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. Following 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, producing
various medical devices, personal care products and traditional and advanced wound care 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. In 2011, the Endoscopy and Orthopaedics businesses
were brought together to create an Advanced Surgical Devices division.
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.
Approximate area
(square feet 000’s)
Group head office in London, UK
Group research facility in York, UK
Advanced Surgical Devices headquarters in Andover, Massachusetts, US
Advanced Wound Management headquarters and manufacturing facility in Hull, UK
Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee, US
Advanced Surgical Devices distribution facility in Memphis, Tennessee, US
Advanced Surgical Devices manufacturing facility in Aarau, Switzerland
Advanced Surgical Devices manufacturing facility in Beijing, China
Advanced Surgical Devices manufacturing and warehouse facility in Warwick, UK
Advanced Surgical Devices manufacturing and warehouse facility in Tuttlingen, Germany
Advanced Surgical Devices distribution facility and European headquarters in Baar, Switzerland
Advanced Surgical Devices manufacturing facility in Mansfield, Massachusetts, US
Advanced Surgical Devices manufacturing facility in Oklahoma City, Oklahoma, US
Advanced Surgical Devices manufacturing facility in Calgary, Canada
Advanced Surgical Devices manufacturing facility in Sangameshwar, India
Advanced Wound Management manufacturing facility in Gilberdyke, UK
Advanced Wound Management manufacturing facility in Suzhou, China
Advanced Wound Management manufacturing facility in Fort Saskatchewan, Canada
Advanced Wound Management US headquarters in St. Petersburg, Florida, US
Advanced Wound Bioactives headquarters and laboratory space in Texas, US
Advanced Wound Bioactives manufacturing facility in Curaçao, Dutch Caribbean
20
84
144
473
971
210
121
192
90
64
67
98
155
17
39
51
288
76
44
105
16
The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Advanced Surgical Devices
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.
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 23.2 of Notes to the Group accounts), no other related party had material transactions
or loans with Smith & Nephew over the last three financial years.
Smith & Nephew ANNuAl report 2013Group iNFormAtioNGroup StrAteGic reportcorporAte GoverNANceFiNANciAl StAtemeNtS AND other iNFormAtioN
156
Group information 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 (‘R&D’)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 revenue 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. The Group may fail to innovate due to low R&D
investment, a R&D skills gap or poor product development. 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 ongoing
in markets where the Group has operations. This control may be
exercised by determining prices for an individual product or for an
entire procedure. The Group is exposed to government policies
favouring locally sourced products. The Group is also exposed to
changes in reimbursement policy, tax policy and pricing which may
have an adverse impact on revenue and operating profit. In
particular, changes to the healthcare legislation in the US have
imposed 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.
During 2013, 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.
Smith & Nephew ANNuAl report 2013Group iNFormAtioN
157
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 revenue
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
revenue 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 ‘Liquidity and
capital resources’ on page 99.
Manufacturing and supply
The Group’s manufacturing production is concentrated at 14 main
facilities in Memphis, Mansfield and Oklahoma City in the US, Hull,
Warwick and Gilberdyke in the UK, Aarau in Switzerland, Tuttlingen
in Germany, Fort Saskatchewan and Calgary in Canada,
Sangameshwar in India, Suzhou and Beijing in China and Curaçao.
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 or in some cases on a single supplier. 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 will, from time to time, outsource the manufacture of
components and finished products to third parties and will
periodically relocate the manufacture of product and/or processes
between existing facilities. While these are planned activities, with
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 revenue 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 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.
Smith & Nephew ANNuAl report 2013Group iNFormAtioNGroup StrAteGic reportcorporAte GoverNANceFiNANciAl StAtemeNtS AND other iNFormAtioN
158
Group information continued
Regulatory standards and 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. 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 Note 17 to the Group accounts. 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.
International regulation
The Group operates across the world and is subject to legislation,
including anti-bribery and corruption and data protection, in each
country in which we operate. Our international operations are
governed by the UK Bribery Act and the US Foreign Corrupt Practices
Act (FCPA) which prohibit us or our agents from making, or offering,
improper payments to foreign governments and their officials for the
purpose of obtaining or maintaining business or product approvals.
Enforcement of such legislation has increased in recent years with
significant fines and penalties being imposed on companies and
individuals. Our international operations, particularly in the emerging
markets, expose the Group to the risk that our employees or agents
will engage in prohibited activities.
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 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 China Food and Drug Administration.
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.
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.
Failure to make successful acquisitions
A key element of the Group’s strategy for continued growth is to
make acquisitions or alliances to complement its existing business.
Failure to identify appropriate acquisition targets or failure to conduct
adequate due diligence or to integrate them successfully would have
an adverse impact on the Group’s competitive position and
profitability. This could result from the diversion of management
resources towards the acquisition or integration process, challenges
of integrating organisations of different geographic, cultural and
ethical backgrounds, as well as the prospect of taking on
unexpected or unknown liabilities. In addition, the availability of
global capital may make financing less attainable or more expensive
and could result in the Group failing in its strategic aim of growth by
acquisition or alliance.
Relationships with healthcare professionals
The Group seeks to maintain effective and ethical working
relationships with physicians and medical personnel who assist in
the research and development of new products or improvements to
our existing product range or in product training and medical
education. If we are unable to maintain these relationships our ability
to meet the demands of our customers could be diminished and our
revenue and profit could be materially adversely affected.
Reliance on sophisticated information technology
The Group uses a wide variety of information systems, programmes
and technology to manage our business. Our systems are
vulnerable to a cyber-attack, malicious intrusion, loss of data privacy
or any other significant disruption. Our systems have been and will
continue to be the target of such threats. We have systems in place
to minimise the risk and disruption of these intrusions and to monitor
our systems on an ongoing basis for current or potential threats.
There can be no assurance that these measures will prove effective
in protecting Smith & Nephew from future interruptions and as a
result the performance of the Group could be materially
adversely affected.
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.
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
further in the ‘Our Marketplace’ on pages 16 to 18, ‘Segment
performance’ on pages 24 to 33 and ‘Taxation information for
shareholders’ on pages 175 and 176.
Smith & Nephew ANNuAl report 2013Group iNFormAtioN
Other financial information
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 receivable/(payable)
Other finance (costs)/income
Share of results of associates
Profit on disposal of net assets held for sale
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
Profit on disposal of net assets held for sale
Taxation on excluded items
Adjusted attributable profit
Adjusted basic earnings per ordinary share (‘EPSA’) (ii)
Adjusted diluted earnings per ordinary share (iii)
159
2013
$ million
2012(i)
Restated
$ million
2011(i)
Restated
$ million
2010(i)
Restated
$ million
2009(i)
Restated
$ million
4,351
(1,100)
3,251
(2,210)
(231)
810
4
(11)
(1)
–
802
(246)
556
61.7¢
61.4¢
556
31
58
–
88
–
(40)
693
76.9¢
76.5¢
4,137
(1,070)
3,067
(2,050)
(171)
846
2
(11)
4
251
1,092
(371)
721
80.4¢
80.0¢
721
11
65
–
43
(251)
82
671
74.8¢
74.5¢
4,270
(1,140)
3,130
(2,101)
(167)
862
(8)
(13)
–
–
841
(266)
575
64.5¢
64.2¢
575
–
40
23
36
–
(17)
657
73.7¢
73.4¢
3,962
(1,031)
2,931
(1,860)
(151)
920
(15)
(16)
–
–
889
(280)
609
68.6¢
68.5¢
609
–
15
–
34
–
(10)
648
73.0¢
72.9¢
3,772
(1,030)
2,742
(1,864)
(155)
723
(40)
(21)
2
–
664
(198)
466
52.7¢
52.7¢
466
26
42
–
66
–
(26)
574
64.9¢
64.9¢
(i)
The prior periods have been restated following adoption of the revised IAS 19 Employee Benefits standard.
(ii) Adjusted basic earnings per ordinary share is calculated by dividing adjusted attributable profit by the average number of shares.
(iii) Adjusted diluted earnings per ordinary share is calculated by dividing adjusted attributable profit by the diluted number of shares
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
160
Other financial information continued
Group balance sheet
Non-current assets
Current assets
Assets held for sale
Total assets
Share capital
Share premium
Capital redemption reserve
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
Proceeds on disposal of net assets held for sale
Investment in associate
Cash received from Plus settlement
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
Gearing (closing net debt as a percentage of total equity)
Dividends per ordinary share (i)
Research and development costs to Revenue
Capital expenditure (including intangibles but excluding goodwill) to
revenue
2013
$ million
2012
$ million
2011
$ million
2010
$ million
2009
$ million
3,563
2,256
–
5,819
184
535
10
(322)
3,640
4,047
699
1,073
–
1,772
5,819
1,138
(6)
(265)
867
(340)
(67)
–
–
–
3
(239)
(183)
41
(6)
(288)
(253)
3,498
2,144
–
5,642
193
488
–
(735)
3,938
3,884
828
930
–
1,758
5,642
1,184
(4)
(278)
902
(265)
(782)
103
(10)
–
6
(186)
77
(155)
5
(138)
(288)
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)
6%
27.40¢
5.3%
7%
26.10¢
4.1%
4%
17.40¢
3.9%
18%
15.82¢
3.8%
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)
43%
14.39¢
4.1%
7.8%
6.4%
7.5%
7.7%
8.4%
(i)
The Board has proposed a final dividend of 17.0 US cents per share which together with the first interim dividend of 10.4 US cents makes a total for 2013 of 27.4 US cents.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
161
The ‘acquisitions and disposals effect’ is the measure of the impact
on revenue from newly acquired business combinations. This is
calculated by comparing the current year, constant currency actual
revenue (which include acquisitions and exclude disposals from the
relevant date of completion) with prior year, constant currency actual
revenue, adjusted to include the results of acquisitions and exclude
disposals for the commensurate period in the prior year. These sales
are separately tracked in the Group’s internal reporting systems and
are readily identifiable.
Reported revenue growth, the most directly comparable financial
measure calculated in accordance with IFRS, reconciles to underlying
growth in revenue as follows:
Reported revenue growth
Constant currency
exchange effect
Acquisition/Disposals effect
Underlying revenue
2013
%
2012
%
2011
%
5
1
(2)
4
(3)
2
3
2
8
(4)
–
4
A reconciliation of reported revenue growth to underlying revenue
growth, by business segment, can be found on page 37.
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; acquisition costs; 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)
focuses 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.
Non-GAAP Financial Information
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 and disposals effect’,
described below.
The ‘constant currency exchange effect’ is a measure of the
increase/decrease in revenue resulting from currency movements
on non-US Dollar sales. 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.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
162
Other financial information continued
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 claim (see page 130)
Trading profit
2013
$million
2012
$million
2011
$million
810
31
58
88
–
987
846
11
65
43
–
965
862
–
40
36
23
961
A reconciliation of operating profit to trading profit, by business
segment, can be found on page 38.
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:
Attributable profit for the year
Acquisition-related costs
Restructuring and
rationalisation expenses
Amortisation of acquisition
intangibles and impairments
Profit on disposal of net assets
held for sale
Legal claim (see page 130)
Taxation on excluded items
(see page 109)
Adjusted attributable profit
2013
$million
556
31
58
88
–
–
(40)
693
2012
Restated
$million
2011
Restated
$million
721
11
65
43
(251)
–
82
671
575
–
40
36
–
23
(17)
657
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.
Earnings per Ordinary Share
Basic
Diluted
Adjusted: Basic
Adjusted: Diluted
2013
61.7¢
61.4¢
76.9¢
76.5¢
2012
Restated
2011
Restated
80.4¢
80.0¢
74.8¢
74.5¢
64.5¢
64.2¢
73.7¢
73.4¢
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 transaction costs and cash flows arising from legal
disputes and uninsured losses.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
163
Trading cash flow reconciles to cash generated from operations, the
most directly comparable financial measure calculated in accordance
with IFRS, as follows:
Contractual obligations
Contractual obligations at 31 December 2013 were as follows:
Cash generated from operations
Less: Capital expenditure
Add: Cash received on disposal
of fixed assets
Add: Acquisition-related costs
Add: Restructuring and
rationalisation related
expenditure
Add: Legal settlement
Add: Macrotexture expenditure
Trading cash flow
Trading profit
Trading profit to cash
conversion ratio
2013
$million
2012
$million
2011
$million
1,138
(340)
1,184
(265)
1,135
(321)
−
25
54
−
−
877
987
−
3
55
22
−
999
965
−
1
20
−
3
838
961
89%
104%
87%
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 $1.28 to $1.33 (+3%), Sterling
weakened from $1.58 to $1.56 (-1%), the Swiss Franc strengthened
from $1.07 to $1.08 (1%), the Australian Dollar weakened from $1.04
to $0.96 (-7%) and the Japanese Yen weakened from ¥79.8 to
¥97.6 (-22%).
The Group’s principal manufacturing locations are in the US
(Advanced Surgical Devices), Switzerland (Advanced Surgical
Devices), UK (Advanced Wound Management and Advanced
Surgical Devices) and China (Advanced Surgical Devices 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 more 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.
Payments due by period
Total
$ million
Less than
1 year
$ million
1–3 years
$ million
3–5 years
$ million
More than
5 years
$ million
Debt obligations
Finance lease
obligations
Operating lease
obligations
Retirement
benefit obligation
Purchase
obligations
Capital
expenditure
Other
377
14
123
72
–
41
41
42
335
2
45
72
–
41
34
4
51
–
–
–
7
–
5
22
–
–
–
–
668
236
397
27
–
3
5
–
–
–
–
8
Other contractual obligations represent $20m of foreign exchange
contracts and $21m of acquisition consideration. Provisions that do
not relate to contractual obligations are not included in the
above table.
The agreed contributions for 2014 in respect of the Group’s defined
benefits plans are: $39m for the UK (including $31m of
supplementary payments), $26m for the US Plan and $7m for other
funded defined benefit plans. The table above does not include
amounts payable in respect of 2015 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 70.
The Company does not have contracts or other arrangements which
individually are essential to the business.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
164
Other financial information continued
2012 Financial highlights
Revenue
Group revenue decreased by $133m (-3%) from $4,270m in
2011 to $4,137m in 2012. Underlying revenue growth was 2%
of which -2% growth was attributable to unfavourable currency
translation and -3% was attributable to the effect of disposing of
the Clinical Therapies business. Advanced Surgical Devices
revenues decreased by $143m (-4%), underlying growth of 2% was
offset by -2% unfavourable currency movements and -4% due to the
disposal of the Clinical Therapies business. Advanced Wound
Management revenues increased by $10m (1%), underlying growth
was 4% with –3% due to unfavourable currency translation.
Cost of goods sold
Cost of goods sold decreased by $70m to $1,070m from $1,140m
in 2011, which represents a 6% decrease. Of this movement, 1% is
due to favourable currency translation movements. The remaining
movement is largely attributable to the continued focus on costs,
and partly attributable to the sale of the Clinical Therapies business
in May 2012 which impacted both revenue and cost of sales.
Marketing, selling and distribution expenses
Marketing, selling and distribution expenses decreased by $86m
(-6%) to $1,440m from $1,526m in 2011. The underlying movement
of -4% is after adjusting for favourable currency movement of -2%.
Increased cost savings in Established Markets were partly offset by
investment in Emerging & International Markets and promotion of
new products particularly in Advanced Wound Management.
Administrative expenses
Administrative expenses increased by $35m (6%) to $610m from
$575m in 2011. Favourable currency movements offset 2% of this
increase. The main factors contributing to the underlying movement
of 8% were an increase of $16m in amortisation on acquisition costs.
Research and development expenses
Expenditure as a percentage of revenue increased by 0.2% to 4.1%
in 2012 (2011 – 3.9%). Actual expenditure was $171m in 2012
compared to $167m in 2011. The Group continues to invest in
innovative technologies and products to differentiate it from
competitors.
Operating profit
Operating profit decreased by $16m to $846m from $862m in 2011.
This comprised an increase of $2m in Advanced Surgical Devices
and a decrease of $18m in Advanced Wound Management.
Advanced Surgical Devices started to see the benefits of its focus
on costs (more than offsetting the additional restructuring expense)
whilst Advanced Wound Management has continued to invest in
new products throughout the year and also acquired Healthpoint
Biotherapeutics in December 2012, both increasing costs.
Net interest receivable/(payable)
Net interest payable reduced by $10m from $8m payable in 2011 to
a receivable of $2m in 2012. This is a consequence of the overall
reduction of borrowings within the Group, a reduction in the
applicable interest rates and the $7m interest receivable on the
Bioventus loan note issued following the disposal of the Clinical
Therapies business.
Other finance cost
Other finance costs, restated for the revised IAS 19 Employee
Benefits accounting standard, in 2012 were $11m compared to $13m
in 2011. This decrease is attributable to an increase in the expected
return on pension plan assets.
Taxation
The taxation charge increased by $105m to $371m from $266m
in 2011. The rate of tax was 33.7%, compared with 31.4% in 2011.
The tax charge increased by $82m in 2012 (2011 – $17m reduction)
as result of the profit on disposal of the Clinical Therapies business
partially offset by an increase in restructuring and rationalisation
expenses, amortisation of acquisition intangibles and acquisition-
related costs. The tax rate was 29.9% (2011 – 29.9%) 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
2012
$million
2011
$million
3,498
2,144
–
5,642
828
930
–
1,758
3,884
5,642
2,542
2,080
125
4,747
422
1,119
19
1,560
3,187
4,747
Non-current assets
Non-current assets increased by $956m to $3,498m in 2012 from
$2,542m in 2011. This is principally attributable to the following:
− Goodwill increased by $90m from $1,096m in 2011 to $1,186m
in 2012. Of this movement $73m arose on the acquisition of
Healthpoint. The balance relates to favourable currency
movements totalling $17m
− Intangible assets increased by $641m from $423m in 2011 to
$1,064m in 2012. Intangible assets totalling $662m arose on the
Healthpoint acquisition. Amortisation of $94m was charged during
the year and assets with a net book value of $3m were written-off.
A total of $68m relates to the cost of intellectual property and
software acquired. The balance relates to favourable currency
movements totalling $8m
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
165
Total equity
Total equity increased by $697m from $3,187m in 2011 to $3,884m
in 2012. The principal movements were:
1 January 2012
Attributable profit
Currency translation gains
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 2012
Total equity
$million
3,187
729
37
(7)
(13)
(186)
20
117
3,884
2012 Financial performance by business segment
Advanced Surgical Devices
Advanced Surgical Devices revenue decreased by -4% to $3,108m
from $3,251m in 2011. Of this decrease, underlying growth of 2% is
offset by -2% unfavourable currency movements and -4% due to the
disposal of the Clinical Therapies business.
The underlying increase in ASD revenue reconciles to reported
growth, the most directly comparable financial measure calculated
in accordance with IFRS, as follows:
Reported growth
Constant currency exchange effect
Disposal effect
Underlying growth
2012
%
2011
%
(4)
2
4
2
8
(4)
–
4
In the Established Markets, revenue decreased by $163m to
$2,747m (-6%).
In the US revenue decreased by $118m to $1,449m (-8%). This
movement is attributable to underlying growth of 1% and -9% due to
the effect of the disposal of the Clinical Therapies business. In the
Established Markets outside of the US revenue decreased by $45m
to $1,298m (-3%). Underlying growth was 1% with -4% due to
unfavourable currency movements.
In Emerging & International Markets, revenue increased by $20m to
$361m (6%). Underlying growth was 10% with -4% due
to unfavourable currency.
− Property, plant and equipment increased by $10m from $783m in
2011 to $793m in 2012. Depreciation of $212m was charged during
2012 and assets with a net book value of $9m were written-off.
These movements were largely offset by $197m of additions
relating primarily to instruments and other plant and machinery
and $27m of additions arising on the Healthpoint acquisition. The
balance relates to favourable currency movements totalling $7m
− Deferred tax assets decreased by $59m in the year
− The total investment in associates has increased from $13m in
2011 to $283m in 2012. This movement predominately relates to
the acquisition of Bioventus during the year totalling $114m plus
$160m in the form of a loan note to Bioventus.
Current assets
Current assets increased by $64m to $2,144m from $2,080m in
2011. The movement relates to the following:
− Inventories rose by $42m to $901m in 2012 from $859m in 2011.
Of this movement, $46m arose on the Healthpoint acquisition and
it includes $9m relating to favourable currency movements
− The level of trade and other receivables increased by $28m to
$1,065m in 2012 from $1,037m in 2011. This movement includes
$31m arising on the Healthpoint acquisition and $8m related to
favourable currency movements
− Cash and cash equivalents have fallen by $6m to $178m from
$184m in 2011.
Non-current liabilities
Non-current liabilities increased by $406m from $422m in 2011
to $828m in 2012. This movement relates to the following items:
− Long-term borrowings have risen from $16m in 2011 to $430m
in 2012. This increase of $414m is attributable to the acquisition
of Healthpoint for $728m cash in December 2012
− The net retirement benefit obligation decreased by $21m to
$266m in 2012 from $287m in 2011. This was largely due to the
Group’s additional pension contributions which were partially
offset by net actuarial losses for the year
− Deferred acquisition consideration remains at $8m at the end of
2012. This relates to the acquisition of Tenet Medical Engineering
during 2011
− Provisions increased from $45m in 2011 to $63m in 2012.
The principal component of this movement is $13m arising
on the Healthpoint acquisition
− Deferred tax liabilities decreased by $5m in the year.
Current liabilities
Current liabilities decreased by $189m from $1,119m in 2011 to
$930m in 2012. This movement is attributable to:
− Bank overdrafts and current borrowings have decreased by
$268m from $306m in 2011 to $38m in 2012
− Trade and other payables have increased by $92m to $656m in
2012 from $564m in 2011. The primary cause of this increase is
the acquisition of Healthpoint which increased trade and other
payables by $49m
− Provisions have decreased by $19m from $78m in 2011 to $59m
in 2012. The most significant item contributing to this decrease
is the payment of $22m to settle the legal provision (see Note 3
of the Notes to the Group accounts)
− Current tax payable is $177m at the end of 2012 compared to
$171m in 2011.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
Trading and operating profit
Trading profit increased by $14m (2%) to $728m from $714m in 2011.
Trading profit margin increased from 21.9% to 23.4%. These
increases reflect the early benefits of implementing the Strategic
Priorities, in particular, restructuring the Group to provide the right
commercial models and cost structure.
Operating profit increased by $2m from $630m in 2011 to $632m
in 2012. This comprises the increase in trading profit of $14m
discussed above and the recognition of a legal claim of $23m
in 2011, offset by an increase of $10m in the amortisation of
acquisition intangibles and a $25m increase in restructuring
and rationalisation costs.
Operating profit, the most directly comparable financial measure
in accordance with IFRS, reconciles to trading profit as follows:
Operating profit
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
and impairments
Legal settlement
Trading profit
2012
$million
2011
$million
632
57
39
–
728
630
32
29
23
714
Advanced Surgical Devices trading profit and operating profit
as a percentage of Group trading profit and operating profit was
as follows:
Trading profit
Operating profit
2012
%
75
75
2011
%
74
73
166
Other financial information continued
Franchises
Underlying revenue growth for key product lines are:
Reconstruction
– Knee implants
– Hip implants
Sports Medicine
Arthroscopic Enabling Technologies
Trauma
2012
%
2011
%
3
(3)
8
(2)
3
5
(1)
11
–
3
Both the knee and hip implant markets continue to experience
economic pressure. Knee implant franchise revenue increased by
1% to $874m in 2012, which represented an underlying revenue
growth of 3% and unfavourable foreign currency translation of -2%.
This compared to a market growth rate of 3%. Growth slowed in the
second half of 2012 as a result of a weakening of the overall knee
market in Europe and the division’s knee product cycle. Between
2009 and 2011, when the division materially outperformed the knee
market, it benefited from the launch of VERILAST Technology and
VISIONAIRE Patient Matched Instrumentation. This benefit has now
been annualised.
In the global Hip implant franchise revenue decreased by $39m
to $666m (-6%) in 2012, representing a -3% underlying revenue
decline in the face of the continuing metal-on-metal headwinds
and -2% due to unfavourable foreign currency translation. The Hip
implant franchise, led by the ANTHOLOGY Hip with VERILAST
Technology, has also continued to perform well in its focus
product areas.
Sales of our BIRMINGHAM Hip Resurfacing system continued
to decline during the year. The BIRMINGHAM Hip Resurfacing
System is a clinically proven system for hip resurfacing which
preserves bone and is particularly suited for younger, more
active male patients.
Global Trauma revenue increased by $5m to $462m (1%),
representing underlying revenue growth of 3% and -2%
unfavourable foreign currency translation.
Global revenue from Sports Medicine Joint Repair increased by
$30m to $521m (6%), of which 8% was underlying growth and -2%
unfavourable foreign currency translation.
AET revenue decreased by $16m to $409m (-4%) in 2012, which
represented an underlying revenue decline of -2% and -2% of
unfavourable foreign currency translation.
The revenue in this Other franchise (excluding Clinical Therapies)
increased by $2m to $69m (5%), which represented an underlying
revenue growth of 7% and -2% of unfavourable foreign
currency translation.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
167
Advanced Wound Management
Advanced Wound Management continues to outperform the market,
with revenue growing at 4% in 2012 on an underlying basis
(excluding a -3% unfavourable currency impact) to $1,029m.
Management estimates the market grew at 1%.
Trading and operating profit
Trading profit reduced by $10m to $237m from $247m and trading
profit margin decreased 24.3% to 23.1%. The decrease in the year is
primarily attributable to the additional costs arising from investment
in new products throughout the year.
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
2012
%
1
3
4
2011
%
12
(5)
7
Operating profit decreased by $18m to $214m in 2012. This
comprises the decrease in trading profit of $10m discussed
above and an increase of $11m in connection with the acquisition-
related costs on the purchase of Healthpoint. These costs were
partially offset by a reduction of $3m in the amortisation of
acquisition intangibles.
Operating profit, the most directly comparable financial measure
in accordance with IFRS, reconciles to trading profit as follows:
In Established Markets, revenue increased from $906m to $907m
in 2012. This represents an underlying growth of 4% which was
offset by unfavourable currency movements of -3%.
In the US, revenue increased by 7% from $189m to $202m. In the
Established Markets outside of the US, revenues decreased –
2% from $717m in 2011 to $705m in 2012. This represents an
underlying growth of 2% after adjusting for -4% of unfavourable
currency movements.
Operating profit
Acquisition-related costs
Restructuring and rationalisation costs
Amortisation of acquisition intangibles
and impairments
Trading profit
2012
$million
2011
$million
214
11
8
4
237
232
–
8
7
247
Franchises
Underlying revenue growth for key product lines are:
Advanced Wound Management trading profit and operating profit
as a percentage of Group trading profit and operating profit was
as follows:
Exudate management
Infection management
Other AWM
2012
%
1
(2)
7
2011
%
2
4
10
Trading profit
Operating profit
2012
%
25
25
2011
%
26
27
Revenue in the Emerging & International Markets increased from
$113m in 2011 to $122m in 2012 (8%). The underlying movement was
11% offset by -3% of unfavourable currency movements.
Exudate management revenues decreased by -2% from $275m
in 2011 to $269m in 2012. This represents an underlying growth
of 1% offset by -3% in unfavourable currency exchange.
Infection management revenues have fallen from $133m in 2011
to $127m in 2012 (-5%). This also represents an underlying decline
of -2% along with 3% of unfavourable currency exchange.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
168
Information for shareholders
Financial calendar
Annual General Meeting
Quarter One results
Payment of 2013 final dividend
10 April 2014
1 May 2014
7 May 2014
Half year results announced
1 August 2014 (i)
Quarter Three results announced
30 October 2014
Payment of 2014 first interim dividend November 2014
Full year results announced
February 2015 (i)
Annual Report available
Annual General Meeting
(i) Dividend declaration dates.
February/March 2015
April 2015
Ordinary Shareholders
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 *
Tel: +44 (0) 121 415 7072 from outside the UK
Website: www.shareview.co.uk
*
Calls to this number are charged at 8p per minute (excluding VAT) plus network
extras. Lines are open from 8.30am to 5.30pm Monday to Friday, excluding UK
public holidays.
Shareholder facilities
Shareview
Equiniti’s on-line enquiry and portfolio management service for
Shareholders. To view information about your shareholdings
on-line, register at www.shareview.co.uk. Once registered
for Shareview, you will also be able to elect to receive future
Shareholder communications via the Company’s website
(www.smith-nephew.com), update your address details or dividend
payment instructions and register your proxy instructions on-line.
E-communications
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).
Duplicate accounts
Shareholders who have more than one account due to inconsistency
in account details may avoid duplicate mailings by contacting Equiniti
and requesting an amalgamation of their share accounts.
Keep your personal details up to date
Please remember to tell Equiniti if you move house or change bank
details or there is any other change in your account information.
You can update your information on-line via the Shareview portfolio
if you are a Smith & Nephew Shareview member. If you do not have
a portfolio you will need to write to Equiniti or complete a change of
address form which can be downloaded from Shareview. If you hold
2,500 shares or fewer, you can also change your address or update
your bank details quickly and easily over the phone using the
contact details provided.
Dividend reinvestment 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 reinvest
future dividends, contact Equiniti.
Individual savings account (‘ISA’)
Shareholders who are UK resident may hold Smith & Nephew plc
shares in an Individual Savings Account, which is administered by
the Company’s registrar. For information about this service please
contact Equiniti.
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 and ADS
holders that have elected to receive Shareholder documentation
by post. 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.
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 Annual
General Meeting and the Company regularly responds to letters from
Shareholders on a range of issues.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
169
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 London Stock
Exchange 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 the live financial data
is updated with a 15-minute delay.
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 address given on
page 168.
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
Unauthorised brokers (boiler room scams)
Shareholders are advised to be very wary of any unsolicited advice,
offers to buy shares at a discount or offers of free company reports.
These are typically from overseas-based ‘brokers’ who target UK
Shareholders offering to sell them what often turn out to be
worthless or high-risk shares in US or UK investments. These
operations are commonly known as ‘boiler rooms’.
If you deal with an unauthorised firm, you will not be eligible to
receive payment under the Financial Services Compensation
Scheme if things go wrong. If you receive any unsolicited investment
advice, obtain the correct name of the person and organisation and
check that they are properly authorised by the FCA by visiting
www.fca.org.uk/register/.
If you think you have been approached by an unauthorised firm
you should contact the FCA consumer helpline on 0800 111 6768
or e-mail consumer.queries@fca.org.uk.
More detailed information can be found on the FCA website at
www.fca.org.uk/consumers/protect-yourself/unauthorised-firms.
Social media
Smith & Nephew has a presence across a range of social media
channels, including Twitter, Facebook and LinkedIn, which are linked
below. Information provided by Smith & Nephew through social
media channels is not incorporated by reference herein and does
not from part of our annual report on Form 20-F.
https://twitter.com/SmithNephewPLC
www.facebook.com/SmithNephewPlc
http://www.linkedin.com/company/smith-&-nephew
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 New York Stock Exchange
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:
BNY Mellon Depositary Receipts, P.O. Box 43006, Providence, RI
02940-3006, US
Tel: +1-866-259-2287 inside the US (toll free)
Tel: +1-201-680-6825 internationally
E-mail: shrrelations@cpushareownerservices.com
A Global Buy DIRECT plan is available for US residents, enabling
investment directly in ADSs with reduced brokerage commissions
and service costs. For further information on Global Buy DIRECT
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 voting instruction forms 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 where the live financial data is updated with
a 15-minute delay.
ADS payment information
The Company hereby discloses ADS payment information for the
year ended 31 December 2013 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.
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170
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
$0.02 (or less) per ADS per calendar year
Registration or transfer fees
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
Distribution of securities distributed to holders of deposited securities
which are distributed by the depositary to ADS registered holders
Depositary services
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
As necessary
Any charges incurred by the depositary or its agents for servicing the
deposited securities
As necessary
A fee of two US cents per ADS was paid on the 2012 final dividend and a fee of one US cent per ADS was deducted from the 2013 first
interim dividend paid in October. In the period 1 January 2013 to 24 February 2014 the total reimbursed by The Bank of New York Mellon
was $134,298.50.
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171
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.
On 2 August 2012, the Board announced its intention to pursue a progressive dividend policy, with the aim of increasing the US Dollar value
of ordinary dividends over time broadly based on the Group’s underlying growth in earnings, while taking into account capital requirements
and cash flows.
From 2013, the Board will review at the time of the full year results, the appropriate level of total annual dividend each year. The Board
intends that the interim dividend will be set by a formula and will be equivalent to 40% of the total dividend for the previous year. Dividends
will continue to be declared in US Dollars with an equivalent amount in Sterling payable to those Shareholders whose registered address is
in the UK, or who have validly elected to receive Sterling dividends.
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
2013
2012
2011
2010
2009
Years ended 31 December
7.211
11.358 (i)
18.569
11.556
18.889
30.445
6.811
11.778
18.589
11.000
18.000
29.000
4.639
7.444
12.083
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
Translated at the Bank of England rate on 24 February 2014.
(i)
(ii) 2009 Second interim, 2010 to 2013 Final.
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 2013 final dividend will be payable on 7 May 2014, subject to Shareholder approval.
In respect of the proposed final dividend for the year ended 31 December 2013 of 17.0 US cents per ordinary share, the record date will be
22 April 2014 and the payment date will be 7 May 2014. 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 22 April 2014. The
ordinary shares will trade ex-dividend on both the London and New York Stock Exchanges from 16 April 2014.
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172
Information for shareholders continued
Share prices
The table below sets out, for the periods indicated, the highest and lowest middle market quotations for the Company’s ordinary shares
(as derived from the Daily Official List of the UK Listing Authority) and the highest and lowest sales prices of its ADSs (as reported on the
New York Stock Exchange composite tape).
Year ended 31 December:
2009
2010
2011
2012
2013
Quarters in the year ended 31 December:
2012:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2013:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2014:
1st Quarter (to 24 February 2014)
Last six months:
August 2013
September 2013
October 2013
November 2013
December 2013
January 2014
February 2014 (to 24 February 2014)
Ordinary shares
Low
£
4.20
5.38
5.21
5.80
6.80
5.95
5.80
6.38
6.38
6.80
7.18
7.30
7.48
8.57
7.50
7.61
7.48
8.01
8.13
8.57
8.74
High
£
6.42
6.97
7.42
6.93
8.68
6.43
6.40
6.93
6.92
7.60
7.95
8.00
8.68
9.60
8.00
7.89
8.03
8.16
8.68
8.96
9.60
High
US$
51.38
53.94
60.19
56.13
71.85
51.13
51.23
56.13
55.77
58.00
60.17
63.06
71.85
80.18
61.58
63.06
65.30
66.88
71.85
74.81
80.18
ADSs
Low
US$
30.57
41.29
42.17
45.13
52.90
45.57
45.13
49.50
51.01
52.90
54.83
56.01
60.05
70.84
58.26
59.19
60.05
64.41
67.20
70.84
71.69
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173
Shareholdings
As at 24 February 2014, 7,837,412 ADSs equivalent to 39,187,060
ordinary shares or approximately 4.4% of the total ordinary shares
in issue, were outstanding and were held by 88 registered holders.
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 24 February 2014, no persons are known to Smith & Nephew
to have any interest (as defined in the Disclosure and Transparency
Rules of the FCA) 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:
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.
As at 24 February 2014, to the knowledge of the Group, there were
18,188 registered holders of ordinary shares, of whom 89 had
registered addresses in the US and held a total of 172,541 ordinary
shares (0.02% 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.
Invesco
BlackRock, Inc.
Newton Investment Management Limited
Legal & General Group plc
Capital Group of Companies Inc.
Invesco
BlackRock, Inc.
Newton Investment Management Limited
Legal & General Group plc
Capital Group of Companies Inc.
24 February 2014
%
7.5
4.8
–
–
–
24 February 2014
‘000
66,740
42,621
–
–
–
2013
%
12.1
4.7
–
–
–
2013
‘000
107,823
41,870
–
–
–
2012
%
11.9
5.0
4.9
3.0
–
2012
’000
107,823
44,811
8,432
26,906
–
As at 31 December
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
In addition to the above, the Company is aware that Walter Scott & Partners Limited held approximately 37.7 million ordinary shares (4.2%) at
24 February 2014.
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.
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174
Information for shareholders continued
Purchase of ordinary shares on behalf of the Company
At the AGM, the Company will be seeking a renewal of its current permission from Shareholders to purchase up to 10% of its own shares.
On 2 May 2013, the Company announced its intention to purchase up to $300m of its own ordinary shares. The Company has purchased
18,210,000 ordinary shares at a cost of $226m for the year to 31 December 2013.
2 May 2013
7-31 May 2013
3-24 June 2013
2-29 August 2013
2-25 September 2013
1-29 November 2013
2-17 December 2013
Total shares
purchased
(000s)
Average price
paid per share
(p)
Total number of
shares purchased as
part of publicly
announced plans or
programmes
Approximate US$
value of shares that
may yet be purchased
under the plan
2,434,000
3,970,000
2,750,000
3,385,000
3,791,000
1,880,000
773.9220
750.9677
782.7249
773.9235
806.5939
836.7099
2,434,000
6,404,000
9,154,000
12,539,000
16,330,000
18,210,000
300,000,000
271,072,938
224,546,903
190,975,094
149,054,820
99,483,166
73,647,255
The shares were purchased in the open market by JP Morgan Cazenove Limited and UBS Limited on behalf of the Company.
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
reinvestment plan, which are not sent to Shareholders with recorded
addresses in the US and Canada.
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175
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 US, a corporation (or other entity taxable as a corporation)
created or organised in or under the laws of the US, 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 UK through which a US Holder
carries on a business in the UK or a fixed base from which a US
Holder performs independent personal services in the UK, 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 use
the mark to market method of tax accounting, 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 US Holders liable for alternative minimum tax. In addition,
the comments below do not address the potential application of the
provisions of the United States Internal Revenue Code, known as
the Medicare contribution tax, or any 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 advisers 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 2013.
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 UK and the US
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 may be subject to US federal income tax at lower
rates than those applicable to other types of ordinary income if
certain conditions are met. Non-corporate US Holders should
consult their own tax advisers 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
US and is not a UK national or domiciled in the UK will not be subject
to UK inheritance tax in respect of ADSs and ordinary shares. A UK
national who is domiciled in the US 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 UK 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 UK.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
A charge of stamp duty or SDRT at the rate of 1½% 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 UK, and
provided further that any instrument of transfer or written agreement
to transfer is not executed in the UK and the transfer does not relate
to any matter or thing done or to be done in the UK (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.
176
Information for shareholders continued
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 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 backup
withholding exceeds the actual liability, the US Holder may obtain
a refund by timely filing the appropriate refund claim with the
US Internal Revenue Service.
Certain US Holders who are individuals (and under proposed
Treasury regulations, certain entities) may be required to report
information relating to securities issued by a non-US person (or
foreign accounts through which the securities are held), subject to
certain exceptions (including an exception for securities held in
accounts maintained by US financial institutions). US Holders should
consult their tax advisers regarding their reporting obligations with
respect to 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 effected in
the UK and whether or not the parties to it are resident or situated
in the UK.
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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
UK 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 2012.
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.
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 1% 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.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
178
Information for shareholders continued
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
− 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 re-denomination 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.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
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
Identity of Directors, Senior Management and Advisers
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
Item 4
Information on the Company
179
Page
n/a
n/a
159–160
n/a
n/a
156–158
Item 4A
Item 5
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 licences, etc.
D – Trend information
E – Off Balance Sheet Arrangements
F – Tabular Disclosure of Contractual Obligations
G – Safe Harbor
Item 6
Directors, Senior Management and Employees
A – Directors and Senior Management
B – Compensation
C – Board Practices
D – Employees
E – Share Ownership
Item 7
Major Shareholders and Related Party Transactions
A – Major Shareholders
– Host Country Shareholders
B – Related Party Transactions
C – Interests of experts and counsel
Item 8
Financial information
A – Consolidated Statements and Other Financial Information
Item 9
– 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
155
1, 6-13, 16-33, 102-105,
156-158, 164-167
8-9, 117-118, 148-149
155
None
7-13, 24–33, 36–41, 95, 97,
99, 164-167
99, 121-126, 139
13, 19-20
16-18, 90
155
163
184
44-47, 49
62-85
44-61
9, 22-23, 105
82, 143-147
173
173
147, 155
n/a
87–149
129–131
171
None
172-173
n/a
173
n/a
n/a
n/a
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
180
Cross Reference to Form 20-F continued
Item 10
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
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
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
Item 16H
Part III
Item 17
Item 18
Item 19
Page
n/a
177-178
11, 99, 121
174
175-176
n/a
n/a
184
148-149
121-128, 156-158
n/a
169-170
None
None
53, 58-61, 91
n/a
58
52
54, 60-61, 107
n/a
138, 174
None
49
n/a
n/a
87–149
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
Glossary of terms
181
Unless the context indicates otherwise, the following terms have the meanings shown below:
Term
ADR
ADS
Advanced Surgical Devices
Advanced Wound Management
AET
AGM
Arthroscopy
ASD
AWM
Basis Point
Chronic wounds
COGS
Company
Companies Act
DOJ
EBITA
EBITDA
Meaning
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 for orthopaedic replacement and reconstruction, endoscopy
devices and trauma devices. Products for orthopaedic replacement include systems for knees, hips,
and shoulders. Endoscopy devices comprise of support products for orthopaedic surgery such as
computer assisted surgery and minimally invasive surgery techniques using specialised viewing and
access devices, surgical instruments and powered equipment. Orthopaedics trauma devices are used
in the treatment of bone fractures including rods, pins, screws, plates and external frames.
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.
Arthroscopic Enabling Technologies. Franchise offering healthcare providers a variety of technologies
such as fluid management equipment for surgical access, high definition cameras, digital image
capture, scope, light sources and monitors, radio frequency probes, electromechanical and mechanical
blades and hand instruments for removing damaged tissue.
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.
Cost of Goods Sold
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.
US Department of Justice
Earnings before interest, tax and amortisation.
Earnings before interest, tax, depreciation and amortisation.
Emerging markets
Emerging markets include Greater China, India, Brazil and Russia.
EPSA
Endoscopy
Established Markets
Euro or €
FCA
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.
Through a small incision, surgeons are able to see inside the body using a monitor and identify and
repair defects.
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.
Financial Conduct Authority
US Food and Drug Administration.
Financial statements
Refers to the consolidated Group Accounts of Smith & Nephew plc.
FTSE 100
GMP
Group or Smith & Nephew
Index of the largest 100 listed companies on the London Stock Exchange by market capitalisation.
Good manufacturing practice or ‘GMP’ is the guidance that outlines the aspects of production and
testing that can impact the quality of a product.
Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context
otherwise requires.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
182
Glossary of terms continued
Term
IFRS
International markets
LIBOR
LSE
Metal-on-metal hip resurfacing
Negative Pressure Wound Therapy
NYSE
Orthopaedic products
OSHA
OXINIUM
Meaning
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 Interbank Offered Rate
London Stock Exchange.
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.
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.
New York Stock Exchange.
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.
US Occupational Safety and Health Administration
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
SEC
SKUs
Trading profit
UK
UK GAAP
US
A product group within ASD comprising specialised devices, fixation systems and
bio-absorbable materials to repair joints and associated tissue.
Products that cut or ablate tissue within ASD comprising mechanical blades, radio
frequency wands, electromechanical and hand instruments for resecting tissue.
US Securities and Exchange Commission
Stock Keeping Units
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; acquisition costs; and gains and losses
resulting from legal disputes and uninsured losses.
United Kingdom of Great Britain and Northern Ireland.
Accounting principles generally accepted in the United Kingdom.
United States of America.
US Dollars, US $ or cents
References to US currency. 1 cent is equivalent to one hundredth of US$1.
US GAAP
Visualisation
Accounting principles generally accepted in the United States of America.
Products within ASD comprising digital cameras, light sources, monitors, scopes, image
capture, central control and multimedia broadcasting systems for use in endoscopic
surgery with visualisation.
Wound bed
An area of healthy dermal and epidermal tissue of a wound.
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioN
Index
2012 Financial highlights
2013 Financial highlights
Accounting Policies
Accounts Presentation
Acquisitions and disposals
Acquisition related costs
Advanced Surgical Devices – segment performance
Advanced Wound Management – segment performance
American Depository Shares
Articles of Association
Audit fees
Board of Directors
Business overview
Business segment information
Cash and borrowings
Chairman’s statement
Chief Executive Officer’s review of strategy
Company auditor’s report
Company balance sheet
Contingencies
Contractual obligations
Corporate Governance Statement
Critical accounting policies
Cross Reference to Form 20-F
Currency fluctuations
Currency translation
Deferred taxation
Directors’ remuneration report
Directors’ responsibilities for the accounts
Directors’ responsibility statement
Dividends
Earnings per share
Employees/People
Employees’ Share Trust
Executive Officers
Financial instruments
Glossary of terms
Goodwill
Governance and policy
Group balance sheet
Group cash flow statement
Group history
Group income statement
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
164
4
101
184
140
107
24
29
169
Internal control framework
Inventories
Investments
Investment in associates
Investor information
Key Performance Indicators
Leases
Legal proceedings
Liquidity and capital resources
177, 178
Manufacturing, supply and distribution
107
44
19
102
121
5
10
150
151
129
163
48
90
179
157
101
109
62
88
89
138
111
Marketplace
New accounting standards
Notes to the Company accounts
Notes to the Group Accounts
Off-balance sheet arrangements
Operating profit
Other finance (costs)/income
Outlook and trend information
Parent Company accounts
Payables
People/Employees
Principal subsidiary undertakings
Provisions
Property, plant and equipment
Receivables
Regulation
Related party transactions
Research and development
Restructuring and rationalisation expenses
Retirement benefit obligation
9, 22, 105
Risk factors
Risk management
Sales and marketing
Selected financial data
Share based payments
Share buy-back
Share capital
Shareholder return
Strategy
Sustainability
Taxation
Taxation information for Shareholders
Treasury shares
138
46
124
181
114
43
96
98
155
94
8
100
94
91, 92, 93
168
115
20
95, 108
183
53
59, 90, 118
117
117, 118
168
12
124, 142
130
99
21, 157
16
101
152
101
155
38, 95,
103, 106
108
15, 16
151
120
9, 22, 105
148
129
112, 155
60, 119
17, 20, 41,
158
147, 155
19, 95,
106, 164
107
59, 90, 131
156
38, 61, 124
22
159
143
15, 138, 174
52, 137,
154, 173
83
10
34
60, 95, 108
175
138, 154
Smith & Nephew ANNuAl report 2013other FiNANCiAl iNFormAtioNGroup StrAteGiC reportCorporAte GoverNANCeFiNANCiAl StAtemeNtS AND other iNFormAtioN
184 Smith & Nephew ANNuAl report 2013
other fiNANciAl iNformAtioN
About Smith & Nephew
the Smith & Nephew Group (the ‘Group’) is a global medical devices
business operating in the markets for advanced surgical devices
comprising orthopaedic reconstruction, trauma and sports medicine and
advanced wound management, with revenue of approximately $4 billion
in 2013. 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 2013. 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 divisions.
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 &
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 181 to 182. the product
names referred to in this document are identified by use of capital letters
and the ◊ symbol (on first occurence) 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.
unless stated otherwise, the translation of uS Dollars and cents to
Sterling and pence in this Annual report has been made at the Bank of
england exchange rate on the date indicated. on 24 february 2014, the
Bank of england rate was uS$1.6631 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. for example, statements regarding
expected revenue growth and trading profit margins discussed under
‘outlook’, ‘Global outlook’ and Strategic performance’, market trends and
our product pipeline are forward-looking statements. phrases such as
‘aim’, ‘plan’, ‘intend’, ‘anticipate’, ‘well-placed’, ‘believe’, ‘estimate’, ‘expect’,
‘target’, ‘consider’ and similar expressions are generally intended to
identify forward-looking statements. forward-looking statements involve
known and unknown risks, uncertainties and other important factors that
could cause actual results, to differ materially from what is expressed or
implied by the statements.
For Smith & Nephew, these factors include: 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 performing due diligence, valuing
and integrating acquired businesses; disruption that may result from
transactions or other changes we make in our business plans or
organisation to adapt to market developments and numerous other
matters that affect us or our markets, including those of a political,
economic, business,competitive or reputational nature; relationships
with healthcare professionals; reliance on information technology.
Specific risks faced by the Group are described under ‘Risk factors’ on
pages 156 to 158 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.
Division data
Division data and division 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.
The inks used are renewable, biodegradable and emit fewer Volatile Organic Compounds (VOCs) 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 land(cid:178) ll.
Designed by Radley Yeldar.
Printed by RR Donnelley 472599.
Smith & Nephew plc
15 Adam Street
London WC2N 6LA
United Kingdom
T +44 (0) 20 7401 7646
F +44 (0) 20 7960 2356
www.smith-nephew.com