Supporting healthcare
professionals
ANNUAL REPORT 2017
OVERVIEW
OVERVIEW
OUR BUSINESS
OUR BUSINESS
& MARKETPLACE
& MARKETPLACE
OPERATIONAL
OPERATIONAL
REVIEW
REVIEW
FINANCIAL
FINANCIAL
REVIEW
REVIEW
RISK
RISK
GOVERNANCE
GOVERNANCE
ACCOUNTS
ACCOUNTS
GROUP AND OTHER
GROUP AND OTHER
INFORMATION
INFORMATION
CONTENTS
OVERVIEW
CHAIRMAN’S STATEMENT
CHIEF EXECUTIVE OFFICER’S REVIEW
WHO WE ARE
OUR BUSINESS & MARKETPLACE
OUR BUSINESS MODEL
STRATEGIC PRIORITIES
OUR MARKETPLACE
OPERATIONAL REVIEW
OUR PRODUCTS
OUR RESOURCES
SUSTAINABILITY
FINANCIAL REVIEW
CHIEF FINANCIAL OFFICER’S REVIEW
FINANCIAL REVIEW
RISK
RISK REPORT
GOVERNANCE
OUR BOARD OF DIRECTORS
OUR LEADERSHIP
GOVERNANCE REPORT
NOMINATION & GOVERNANCE
COMMITTEE REPORT
ETHICS & COMPLIANCE COMMITTEE REPORT
AUDIT COMMITTEE REPORT
DIRECTORS’ REMUNERATION REPORT
2
4
6
8
10
16
18
25
33
36
38
40
50
54
56
66
69
71
79
ACCOUNTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
INDEPENDENT AUDITOR’S UK REPORT
CRITICAL JUDGEMENTS AND ESTIMATES
GROUP INCOME STATEMENT
GROUP STATEMENT OF
COMPREHENSIVE INCOME
GROUP BALANCE SHEET
GROUP CASH FLOW STATEMENT
GROUP STATEMENT OF CHANGES IN EQUITY
NOTES TO THE GROUP ACCOUNTS
COMPANY FINANCIAL STATEMENTS
NOTES TO THE COMPANY ACCOUNTS
GROUP AND OTHER INFORMATION
GROUP INFORMATION
OTHER FINANCIAL INFORMATION
INFORMATION FOR SHAREHOLDERS
107
108
114
115
115
116
117
118
119
163
165
171
176
184
Front cover: Employees from Smith & Nephew’s Expert
Connect Centre, Watford, UK – Natalia Zielinska (middle)
Bioskills Laboratory Manager, Alejandra Alvarez Pineda (left)
and Michael Mead, Bioskills Laboratory Specialists (right).
TRAINING & EDUCATION PAGE 32
We are a constituent of the UK’s FTSE100 and our shares are traded on the London
Stock Exchange and through American Depositary Receipts on the New York
Stock Exchange (LSE: SN, NYSE: SNN).
The Strategic Report, which has been prepared in accordance with the requirements
of the Companies Act 2006, comprises the first five sections above and has been
approved and signed on behalf of the Board. The Directors’ Report comprises pages 6,
16–17, 25–28, 33–39, 42–78, 107, 140–142, 158 and pages 171–193 of the Annual Report.
SMITH & NEPHEW ANNUAL REPORT 2017 SMITH & NEPHEW ANNUAL REPORT 2017 1
OVERVIEW
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Smith & Nephew is a global medical technology
business that has been supporting healthcare
professionals to improve patients’ lives since 1856.
DRIVING PERFORMANCE
PIONEERING INNOVATION
& ENSURING TRUST
We do this by taking a pioneering approach to the
design of our advanced medical products and services,
by securing wider access to our diverse technologies
for more customers globally, and by enabling better
outcomes for patients and healthcare systems.
We have leadership positions in:
Orthopaedic Reconstruction and Trauma
Joint replacement systems for knees and hips and products
to help repair broken bones
Advanced Wound Management
Treatment and prevention products for hard-to-heal wounds
Sports Medicine
Implants and enabling technologies for minimally invasive
repair of the joint
FIND MORE ONLINE
To learn more about Smith & Nephew,
to register to receive our news,
or to explore opportunities to join us,
please visit www.smith-nephew.com
OVERVIEW
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CHAIRMAN’S STATEMENT
PROVIDING
LEADERSHIP
The Board approaches 2018 with optimism.
Olivier has built a strong foundation and
we expect to attract someone of the highest
calibre to accelerate business performance
from this base.
DEAR SHAREHOLDER
One of the core duties of a Board is to
ensure that companies evolve to meet the
ever changing challenges and opportunities
they face. A Board must set the pace in this,
refreshing and strengthening its membership
with deeper expertise, new perspectives and
greater diversity.
Since becoming Chairman in 2014 I am
pleased with the evolutionary changes we
have made at Smith & Nephew. I believe
these build on the successes of the past and
position the Company well for further progress.
STRENGTHENING THE BOARD
We have been able to attract new Non-
Executive Directors of high calibre to replace
Board members retiring after completing
their service.
Angie Risley, who joined in September 2017,
is currently Group HR Director of J Sainsbury
plc and was previously Non-Executive Director
of Arriva plc, Biffa plc and Serco plc where
she was also chairman of the Remuneration
Committee. Marc Owen, recently retired from
the Executive Committee of Fortune 500
healthcare business McKesson Corp, where
he was Chairman of Celesio AG and
President of McKesson Speciality Health,
and previously a healthcare and technology
specialist at McKinsey, joined in October
2017. Roland Diggelmann, Chief Executive
Officer at Roche Diagnostics and a member
of the Corporate Executive Committee of
F. Hoffmann-La Roche Ltd, and previously a
senior executive at Zimmer GmbH, will join
on 1 March 2018.
Marc and Roland strengthen the Board’s
knowledge of commercial healthcare and the
medical devices sector while Angie will provide
effective leadership to our Remuneration
Committee when Joe Papa steps down
at the AGM in April. Joe has been a highly
valued colleague and exemplary steward
of Smith & Nephew. On behalf of the whole
Board, I thank him for his service.
CHIEF EXECUTIVE OFFICER
In October Olivier Bohuon notified the
Board of his intention to retire by the end
of 2018, after seven years as Chief Executive
Officer. Under Olivier’s leadership Smith
& Nephew has undergone important and
necessary change and he has significantly
strengthened the foundations of our Company.
As Smith & Nephew enters its next chapter,
the Board is determined to build on this.
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CHAIRMAN’S STATEMENT continued
Olivier continues to lead Smith & Nephew
and drive the Company’s growth initiatives
and operating plans. In this he is supported by
our new Chief Financial Officer, Graham Baker,
who joined in March 2017.
The Board has been impressed with
Graham’s strong start as he quickly developed
his understanding of the business and
we welcome his commercial acumen and
attention to detail. Our views of Graham have
been echoed by the positive shareholder
feedback we have received.
GOVERNANCE AND CULTURE
In 2017 the Board invested significant time
meeting local management and employees
and understanding market dynamics.
These included visiting our offices in Dubai,
Tokyo and Hull, as well as some Board
members spending time with our salesforce
to better appreciate their role and meeting
customers. In addition to giving us commercial
insight, such activities let us get anecdotal
evidence of the culture at Smith & Nephew,
something the Board puts great value on.
We strive to set the tone from the top, and
review data to demonstrate performance,
but it is only by meeting employees from all
levels of the Company that we can be certain
that Smith & Nephew’s values of I perform,
I innovate and I earn trust are being lived
across the business.
We conducted our regular review of strategy
and Group structure at our annual strategy
meeting in October, ensuring the continued
close alignment of Board and management
on our expectations and current direction.
We upgraded our Risk Management process
and strengthened our internal team in this area.
Our Senior Independent Director, Ian Barlow,
conducted a Board Effectiveness Review which
identified some areas of further improvement
which we are focusing on, such as deepening
our knowledge of the competitive landscape
to enable us to better support management
develop and deploy resources to win in our
chosen markets. I encourage you to read
more about these and other matters in our
Governance section starting on page 50.
2017 PERFORMANCE
The Board receives regular updates on the
performance of the business from the CEO
and CFO, together with members of the senior
management team attending Board meetings
over the course of the year.
We could clearly see areas of the business
where the Company excelled in 2017,
such as Global Operations where we have
improved quality and supply, and R&D, where
we have an exciting new product pipeline.
It is no coincidence that both of these areas
of the business have effective leaders who
impressed the Board during 2017.
Whilst the trading performance of the Group
was better than in 2016, and we delivered
within our guidance, we continue to endorse
the Chief Executive’s view that this business
can and should deliver better results and
reinforce the need for continued focus on
driving better execution.
The 2017 full year dividend of 35.0¢ per share
reflects the strong growth in adjusted earnings
per share.
The Board approaches 2018 with optimism.
Olivier has built a strong foundation and we
expect to attract someone of the highest
calibre to accelerate business performance
from this base. Thank you for your support
and engagement in 2017 and the Board looks
forward to serving you into an exciting next
chapter for Smith & Nephew.
Yours sincerely,
Roberto Quarta
Chairman
FINANCIAL HIGHLIGHTS
$4,765m
Revenue
+2%
Reported
+3%
Underlying1
35.0¢
Dividend per share
+14%
Group revenue was up 2% on a reported basis (including -1% headwind
from the 2016 Gynaecology business disposal) and 3% on an underlying
basis, in line with guidance.
The 14% year-on-year increase reflects the strong growth in adjusted
earnings per share.
$934m
Operating profit
+17%
$1,048m
Trading profit1
+3%
87.8¢
Earnings per share (EPS)
0%
Operating profit margin of 19.6% is up
240bps year-on-year due to more favourable
non-trading items.
Trading profit margin1 was 22.0%, up
20bps year on year, in line with guidance.
In 2016 EPS benefited from the gain on
the disposal of the Gynaecology business.
94.5¢
Adjusted Earnings per share1 (EPSA)
+14%
14.3%
Return on Invested Capital1 (ROIC)
+280bps
5%
R&D expenditure
Reflects one-off tax benefits, improvements in
trading profit margin and the tax rate on trading1.
Reflects improvements in operating profit,
the lower tax rate and a stable asset base.
To drive innovation, we maintain our investment
in R&D at around 5% of Group revenue.
1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.
FINANCIAL REVIEW PAGE 36 OUR BOARD OF DIRECTORS PAGE 50 GOVERNANCE PAGE 56
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CHIEF EXECUTIVE OFFICER’S REVIEW
A STRONGER
SMITH & NEPHEW
In 2018, I expect Smith & Nephew to build on
2017 by delivering another year of improved
performance driven by our strong product
portfolio and pipeline of innovative products.
DEAR SHAREHOLDER
We delivered on our promises to improve
the top and bottom line in 2017. Our healthy
balance sheet, good cash generation and
increased dividend demonstrate the robust
foundations underpinning our business.
In 2018, I expect Smith & Nephew to build on
2017 by delivering another year of improved
performance driven by our strong product
portfolio and pipeline of innovative products.
STRATEGIC PRIORITIES
In my first year as Chief Executive, in 2011,
we set five strategic priorities that have shaped
a fundamental management and operational
restructuring of the Group as a foundation
to improving its growth and profit profile.
Through these priorities we continue to drive
our business forward.
In 2017 I was pleased with the resultant
commercial performance in many areas.
In Knee Implants we had an outstanding year,
Trauma and Extremities and Advanced Wound
Devices also, and we returned the Emerging
Markets to double-digit revenue growth.
Of course, there are some areas that did not
meet my expectations, such as in Arthroscopic
Enabling Technologies and European Wound
Care. These are not because of new issues,
but they are taking longer to improve than
expected. We are attacking the underlying
issues with renewed vigour in 2018.
You can read more about our performance
against each of the strategic priorities in
the next few pages (pages 10–15). I would
like to draw your attention to how our strong
new product portfolio reflects our decision
of a few years ago to increase our investment
in disruptive R&D and technology acquisitions.
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CHIEF EXECUTIVE OFFICER’S REVIEW continued
OUR STRATEGIC PRIORITIES
Our strategic priorities guide our actions
to support healthcare professionals and
transform our growth profile.
BUILD A STRONG POSITION
IN ESTABLISHED MARKETS
FOCUS ON EMERGING
MARKETS
INNOVATE FOR VALUE
SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
SUPPLEMENT ORGANIC
GROWTH WITH ACQUISITIONS
STRATEGIC PRIORITIES UPDATE PAGE 10
OUR PEOPLE PAGE 25
Our survey tool is the Great Place to Work
Institute’s Trust Index, and in 2017 we performed
strongly across the dimensions of vision,
recognition, pride and equality. We now
have nine countries accredited as a Great
Place to Work.
We put great store by our culture, and work to
embrace diversity, encourage progression, and
reward success. We also want our employees
to put something back into their communities.
Our People section on pages 25–28 describes
our commitments and actions across all of
these areas.
LOOKING TO THE FUTURE
In October 2017 I announced my decision
to retire from Smith & Nephew by the end of
2018. As I looked ahead to the next long-term
phase of growth, I decided that it was the
right time to announce my retirement plans,
providing ample time to identify a successor
and ensure a smooth transition.
In the meantime, I remain resolutely focused
on delivering our commitments for 2018, while
positioning the Company for further success.
Looking further ahead, our greater focus on
commercial execution gives us confidence
we will outgrow our markets and the new
APEX programme supports our expectation
of improved trading profit margin.
Yours sincerely,
Olivier Bohuon
Chief Executive Officer
One of our best recent achievements was to
create a global R&D organisation that became
fully operational in 2017 and is building
on these successes. We now have greater
visibility across our development portfolio
to ensure we back the winners of the future
in areas such as digital, robotics and biologics.
We are making better decisions and hitting
milestones consistently, and this will underpin
our success for many years to come.
ACCELERATING PERFORMANCE
& INNOVATION
As we have transformed Smith & Nephew,
so our markets and industry have changed.
We are seeing an increasingly competitive
environment: new selling models, new
entrants, pricing pressure and increasing
costs – which in some markets are outpacing
our growth. We also see great opportunity to
invest behind pioneering technologies which
take market share, offer a wider selection
of commercial terms to suit more customers,
expand our reach in the emerging markets
and start to realise the benefits of the digital
revolution for our industry.
In late 2017 we undertook a review of
our business to look for opportunities to
achieve higher growth targets, strengthen
our competitive position, and make us more
agile to changes in the market. As a result,
in early 2018 we introduced the APEX
programme, which stands for ‘Accelerating
Performance and Execution’. APEX will make
key enhancements to our business and ways
of working over the next five years. We expect
this programme to deliver $160 million of
annualised benefits by 2022. APEX is now
possible because of the work put in to create
our strong Group structure, and it will build on
this robust base. More information on APEX
can be found on page 14.
BUILDING A WINNING CULTURE
Our success as a Company is made possible
by talented employees working together for
our shared mission: to support healthcare
professionals in their efforts to improve
patients’ lives. This is why being a great place
to work is important to us, and why every
two years we measure our progress toward
this goal with our Global Employee Survey.
SMITH & NEPHEW ANNUAL REPORT 2017 6
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WHO WE ARE
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ONE GLOBAL
BUSINESS
WITH MORE THAN 15,000 EMPLOYEES
OUR VALUES AND HOW WE ACT
Our values shape everything that we do as a business and
form the basis of our relationships with all our stakeholders.
Performance
Performance means being responsive
to the needs of our customers and their patients,
setting ourselves clear goals and standards
and achieving them.
Innovation
Innovation means being energetic, creative
and passionate about everything we do,
anticipating customers’ needs and overcoming
barriers and developing opportunities.
Trust
Trust is something we understand that
we have to earn and we strive to operate
with integrity and take an ethical
approach to business.
AN INTEGRATED BUSINESS
UNITED STATES (US)
OTHER ESTABLISHED MARKETS
EMERGING MARKETS
The United States is the Group’s largest
market representing 48% of our global
revenue. Due to its commercial importance
to the Group, its revenue is reported
separately. The United States is also home
to a number of our manufacturing facilities.
Other Established Markets comprise
commercial operations in Europe,
Australia, Japan, Canada and New
Zealand. We have manufacturing facilities
in the UK, Germany and Switzerland.
Emerging Markets include our commercial
businesses in China, Asia, India, Russia,
Middle East, Africa and Latin America.
These generated 16% of Group revenue
in 2017. We have manufacturing facilities
in China, Costa Rica, India, Russia
and Curaçao.
2017 revenue
$2,306m
0%
Reported
+2%
Underlying1
2017 revenue
$1,678m
0%
Reported
0%
Underlying1
2017 revenue
$781m
+13% +12%
Reported
Underlying1
ORTHOPAEDIC RECONSTRUCTION AND TRAUMA
SPORTS MEDICINE
ADVANCED WOUND MANAGEMENT
GLOBAL FUNCTIONS2
1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.
2
Commercial Excellence including Global Marketing, R&D, Manufacturing & Supply Chain, Central Support.
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WHO WE ARE continued
SELLING NINE PRODUCT FRANCHISES
KNEE IMPLANTS
SPORTS MEDICINE JOINT REPAIR
ADVANCED WOUND CARE
HIP IMPLANTS
ARTHROSCOPIC ENABLING
TECHNOLOGIES
ADVANCED WOUND BIOACTIVES
TRAUMA & EXTREMITIES
OTHER SURGICAL BUSINESSES
ADVANCED WOUND DEVICES
SUPPORTING HEALTHCARE PROFESSIONALS IN MORE THAN 100 COUNTRIES
UNITED STATES
OTHER ESTABLISHED MARKETS
EMERGING MARKETS
Revenue by products
A KNEE IMPLANTS
B HIP IMPLANTS
C TRAUMA & EXTREMITIES
$984m
$599m
$495m
D SPORTS MEDICINE JOINT REPAIR
$627m
E ARTHROSCOPIC ENABLING
TECHNOLOGIES
$615m
F OTHER SURGICAL BUSINESSES
$189m
G ADVANCED WOUND CARE
$720m
H ADVANCED WOUND BIOACTIVES $342m
I ADVANCED WOUND DEVICES
$194m
I
H
D
G
F
E
A
C
B
Revenue by geography
A UNITED STATES
$2,306m
B OTHER ESTABLISHED MARKETS
$1,678m
C EMERGING MARKETS
$781m
C
L
A
N
O
I
T
A
B
N
R
E
T
N
I
U
N
I
T
E
D
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T
A
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S
A
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OUR BUSINESS MODEL
HOW WE
CREATE VALUE
A FOCUS ON
PERFORMANCE
OUR VALUE PROPOSITION
Our mission is to support healthcare professionals by providing
advanced medical devices that they use in their daily efforts to
improve the lives of their patients.
PIONEERING
APPROACH
We take a pioneering approach
to the design of our products and
services. Smith & Nephew has
a long history of innovation, dating
back to our foundations in the
19th century, and today we support
customers to manage and prevent
disease states, and enable swifter
recovery for their patients.
ENSURING
WIDER ACCESS
We strive to secure wider access
to our advanced technologies
for more customers globally.
In emerging markets we have
built an entrepreneurial business
resourced to reach and support an
ever greater number of customers
in delivering affordable healthcare.
ENABLING BETTER
OUTCOMES
We seek to enable better
outcomes for patients and
healthcare systems, providing high
quality products and appropriate
training to improve clinical
outcomes, enabling healthcare
professionals to treat more patients
and improving the economic
outcome for payers.
THE RESOURCES WE NEED
OUR PEOPLE
Engaging, developing and retaining
our more than 15,000 employees is important
to us and we work hard to be a great place
to work as well as a responsible
corporate citizen.
RESEARCH & DEVELOPMENT
Innovation is part of our culture and
we invest 5% of our revenue to develop
new products that will help improve
patients’ lives.
MANUFACTURING & QUALITY
We operate our global manufacturing
efficiently, and at the highest possible
standards, to ensure product quality
at competitive pricing.
SALES & MARKETING
We support our customers in over
100 countries. Our commercial teams
are highly specialised with an in-depth
knowledge across the full range of
product franchises.
ETHICS & COMPLIANCE
We are committed to doing business
the right way and apply strict
business principles to the way we
deal with our customers and partners.
TRAINING & EDUCATION
Every year, thousands of healthcare
professionals attend our training
courses around the world. Education
is fundamental to how
we support our customers.
THE RESOURCES WE NEED PAGE 25
OUR BUSINESS &
MARKETPLACE
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OUR BUSINESS MODEL continued
CREATING
PRODUCTS
FOR OUR
CUSTOMERS
We service our customers
through our dedicated and highly
trained global sales force and
selected third party sellers:
– Surgeons
– Nurses
– Nurse specialists
– Physicians, GPs
– Healthcare systems
– Procurement groups
– Payers, administrators
– Retail, consumers, patients
We have leadership positions
in Orthopaedic Reconstruction
and Trauma, Advanced
Wound Management and
Sports Medicine:
– Knee Implants
– Hip Implants
– Trauma & Extremities
– Sports Medicine
Joint Repair
– Arthroscopic Enabling
Technologies
– Other Surgical Businesses
– Advanced Wound Care
– Advanced Wound
Bioactives
– Advanced Wound Devices
OUR PRODUCTS PAGE 18
THE OUTPUT OF WHAT WE DO
FINANCIAL PERFORMANCE
Targeting higher revenue growth
and a better trading profit margin.
$4,765m
Revenue
$934m
Operating Profit
$1,048m
Trading Profit1
CAPITAL ALLOCATION
FRAMEWORK
Prioritising the use of cash and ensuring
an appropriate capital structure.
$269m
Dividend
IMPROVED QUALITY
OF PATIENTS’ LIVES
Providing our advanced medical
devices in more than 100 countries.
100+
countries
TRAINING & EDUCATION
Supporting HCPs and ensuring the safe
and effective use of our products.
45,000+
surgeon training instances
GREAT PLACE TO WORK
Supporting and encouraging
employees to live our values.
15,000+
employees
A SUSTAINABLE BUSINESS
Working in a sustainable, ethical and
responsible manner everywhere we operate.
160+
years of proud history
1 These non-IFRS Financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
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STRATEGIC PRIORITIES
MAXIMISING OUR
PERFORMANCE
Smith & Nephew has a clear vision to build
a successful, sustainable business. This vision
is encapsulated in our corporate value proposition
– supporting healthcare professionals by taking a
pioneering approach to the design of our advanced
medical products and services, by securing wider
access to our diverse technologies for more customers
globally, and by enabling better outcomes for patients
and healthcare systems.
We are focused on transforming the growth profile
of the business while delivering this proposition.
We are working to rebalance the Group towards
higher growth opportunities. Over the last five years,
Smith & Nephew has materially improved the mix
of higher growth potential to lower growth businesses,
shifting from one-third higher growth to over 50% today.
Our strategic priorities, introduced in 2011, guide
our actions in delivering these twin aspirations
of supporting healthcare professionals and
transforming our growth profile.
OUR STRATEGIC PRIORITIES
BUILD A STRONG POSITION
IN ESTABLISHED MARKETS
Build on existing strong positions, win
market share through greater product
and commercial innovation and drive
efficiencies to liberate resources.
PAGE 11
FOCUS ON EMERGING MARKETS
Deliver leadership in the Emerging Markets by
building strong, direct customer relationships,
widening access to our premium products
and developing portfolios designed for the
economic mid-tier population.
PAGE 12
INNOVATE FOR VALUE
Deliver pioneering products and business
models that improve clinical and health
economic outcomes and widen access
across geographies and patient groups.
PAGE 13
SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
Pursue maximum efficiency in everything we do,
streamline our operations and manufacturing,
remove duplication and build strong global
functions to support our commercial teams.
PAGE 14
SUPPLEMENT ORGANIC
GROWTH WITH ACQUISITIONS
Build our platform by acquiring complementary
products or businesses in our higher growth
segments and manufacturing and distribution
capabilities in the Emerging Markets.
PAGE 15
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STRATEGIC PRIORITIES continued
BUILD A STRONG POSITION
IN ESTABLISHED MARKETS
Established Markets for Smith
& Nephew are the US, Europe,
Australia, Japan, Canada and
New Zealand. Smith & Nephew
delivered 84% of its revenue from
these countries in 2017.
In the United States, our single largest country
representing 48% of global revenue, reported
revenue growth was flat and underlying growth
was 2%. The Other Established Markets
growth rate was flat on both an underlying
and reported basis.
In 2017 we focused on improving our
commercial execution. With a simpler and
more agile commercial structure in each
country, supported by global functions, we
sought to drive improved performance and
greater efficiency. This was supported by sales
force excellence initiatives including a sharper
focus on both health economic and clinical
evidence to support our products.
In Reconstruction, the Knee Implants franchise
performed well, with the JOURNEY™ II Total
Knee System driving good growth, as did
the LEGION™ Revision Knee System. In Hip
Implants, the new REDAPT™ Revision and
POLARSTEM™ Cementless Stem systems were
well received. In Trauma & Extremities, new
clinical evidence supported increased uptake
of our TRIGEN™ INTERTAN™ hip fracture system.
Sports Medicine Joint Repair performance
was driven by good demand for our
shoulder repair portfolio, and we added an
exciting new technology when we acquired
Rotation Medical (see page 15 for more).
Arthroscopic Enabling Technologies was
impacted by continued softness in mechanical
resection. The roll-out of our LENS™ visualisation
and WEREWOLF™ COBLATION™ systems are
underway and we expect an increasing
contribution from these in 2018.
In the US, and other countries, we are seeing
a shift towards day-case surgery for total joints
starting to take place in Ambulatory Surgery
Centre (ASCs), something Smith & Nephew
is uniquely positioned to benefit from. Through
Sports Medicine we are already a partner
to many ASCs. We believe we can leverage
this customer knowledge and relationships to
improve the performance of our knee implants
franchise. Our portfolio is well-suited for ASCs
where early mobility and efficiency are key,
as is our robotic NAVIO™ Surgical System due
to its small footprint, portability and cost.
The Advanced Wound Care franchise delivered
strong growth in the US, but was held back by
softer market conditions in Europe. In Advanced
Wound Bioactives, SANTYL™ benefited from
a new analysis demonstrating its effectiveness
in advancing pressure ulcers through the healing
process2, improving performance in the second
half of the year. Advanced Wound Devices
performed strongly across the year, led by the
continued success of our single use negative
pressure wound therapy (sNPWT) device PICO™.
$3,984m
Revenue from Established Markets
2015
2016
2017
$3,919m
$3,978m
$3,984m
84%
of Group revenue
0%
Reported
+1%
Underlying1
WHY THIS KPI IS IMPORTANT
We use this KPI to track the relative strength
of our position in these markets.
HOW WE PERFORMED
Growth in the US, our largest market, was
offset somewhat by softer conditions in
some other markets.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 38 and 178–181.
2 Advances in Wound Care. Gilligan, A.M., et al. Comparative
effectiveness of Clostridial Collagenase Ointment to medicinal
honey for treatment of pressure ulcers. Volume 6, Number 4
(April 2017).
SUPPORTING CUSTOMERS
AT THE ECC
“It’s very humbling to know we are
helping improve patients’ outcomes.”
Natalia Zielinska Bioskills Laboratory Manager
Smith & Nephew is proud to support surgeons and
nurses by enabling them to learn from experts in their
field of speciality. We do this at our state-of-the art training
and innovation centres. In early 2017 we opened the
Expert Connect Centre (‘ECC’) in Croxley Park, Watford,
on the outskirts of London, UK. This is already establishing
itself as a flagship destination for healthcare professionals
from the UK, Europe and the Emerging Markets.
SMITH & NEPHEW ANNUAL REPORT 2017 12
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
STRATEGIC PRIORITIES continued
FOCUS ON EMERGING MARKETS
Our Emerging Markets represent
those outside the Established
Markets, including Brazil, Russia,
India and China. The Emerging
Markets accounted for 16% of
Smith & Nephew’s revenue in 2017.
In 2017 we returned our Emerging Markets
business to sustainable double-digit revenue
growth, up 13% on a reported basis and 12%
on an underlying basis. This was a significant
improvement over the flat underlying
performance of 2016.
In China, our largest Emerging Markets country,
we delivered double-digit revenue growth
as we improved our commercial execution.
In the oil-dependent Gulf States we returned
to growth by focusing on securing more private
healthcare business to compensate for the
reduction in government tenders. The majority
of our other Emerging Markets continued to
do well across 2017.
We have been early investors in many
of the Emerging Markets. There continue
to be quarterly fluctuations in the growth rates,
and differences in performance between
countries, so we look at the longer term
trends when making decisions, and those
are very favourable.
We also see the next wave of sustained
growth coming from the ‘mid-tier’, essentially
growth from widening access to a greater
proportion of the population in these countries.
We are addressing this by steadily building
a dedicated product portfolio and specific
distribution model.
We are well positioned to continue to
drive strong growth from the Emerging
Markets over the medium term. The much
improved performance in 2017 is in line with
where we see the medium term prospects
for this increasingly important segment of
Smith & Nephew’s business.
$781m
Revenue from Emerging Markets
2015
2016
2017
$715m
$691m
$781m
16%
of Group revenue
+13%
Reported
+12%
Underlying1
WHY THIS KPI IS IMPORTANT
We use this KPI to track the growth of
Emerging Markets relative to global growth.
HOW WE PERFORMED
Performance in the Emerging Markets
improved strongly over the previous year.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 38 and 178–181.
RETURNING CHINA
TO GROWTH
“We have seen a return to double-digit
growth in the attractive Chinese market.”
Olivier Bohuon Chief Executive Officer
China is our largest Emerging Market country. Here we
faced challenges in 2016 as the market growth slowed
down. In 2017 we improved our commercial execution and
management of, and involvement in, the channel inventory.
Looking to the medium term, we believe that our growth
prospects in China remain very attractive.
SMITH & NEPHEW ANNUAL REPORT 2017 13
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
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RISK
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ACCOUNTS
GROUP AND OTHER
INFORMATION
STRATEGIC PRIORITIES continued
INNOVATE FOR VALUE
In 2017 we began to benefit from
a suite of exciting new products,
solutions and business models as
we deliver on our strategic priority
to innovate for value.
In robotics, NAVIO is a unique and compelling
system. In 2017 we successfully extended its
indications and introduced it to new countries
such as India. We launched the total knee
arthroplasty (TKA) application for our JOURNEY
II, LEGION and GENESIS™ II Total Knee Systems.
Surgeons completed the world’s first robotics-
assisted bi-cruciate retaining total knee
replacement procedures. This new approach
used NAVIO to implant the new JOURNEY II
XR (bi-cruciate retaining total knee system)
currently in limited market release. This is the
first and only bi-cruciate retaining robotics
application commercially available.
In the Emerging Markets we continue to build
our mid-tier portfolio. Our ANTHEM™ Total Knee
System, which, alongside the ORTHOMATCH™
Universal Instrumentation Platform, has been
designed to provide wider market access to
affordable knee treatments, performed well
following its 2016 launch. During the year we
launched into more markets, including Russia
and Saudi Arabia, and introduced a new
Cruciate Retaining (CR) variant, extending
the options available to surgeons.
In Sports Medicine our new LENS™ Surgical
Imaging System and WEREWOLF™ COBLATION™
System for resecting soft tissue are being
rolled out to customers. In Reconstruction
we expanded our REDAPT™ Hip and LEGION™
Knee revision systems. In Advanced Wound
Management our pioneering disposable
single-use negative pressure wound therapy
(sNPWT) device PICO™ continued to perform
strongly and we extended our ALLEVYN
LIFE foam dressing range with a new non-
border version.
We also focus on providing customers with the
evidence that demonstrates the effectiveness
of our innovative products. In 2017, PICO
benefited from new clinical evidence showing
its effectiveness at reducing surgical site
infections1 and the TRIGEN™ INTERTAN™ hip
fracture system also performed strongly
supported by new clinical evidence2.
We continue to develop new business models
to address changing or unmet customer
needs. During 2017 we ran the first study
of our innovative Episode of Care Assurance
Program (eCAP) that combines our hip and
knee implants with PICO and ACTICOAT™
Flex 7 Antimicrobial Barrier Dressings.
The first results showed eCAP delivering
a 97% decrease in hospital readmission
rates following total joint replacement surgery
(based on 1,380 joint arthroplasties with
only two readmissions, a readmission rate
of only 0.145% as compared to published
rates of 5.3% or more).
$223m
R&D expenditure
2015
2016
2017
5%
of Group revenue
$222m
$230m
$223m
WHY THIS KPI IS IMPORTANT
Through this KPI we monitor our investment
in R&D.
HOW WE PERFORMED
The strong new product portfolio reflects
increased investment in R&D and
technology acquisitions.
1 O’Leary, D.P. et al, Prophylactic negative pressure dressing use
in closed laparotomy wounds following abdominal operations.
A randomised, controlled, open-label trial: The PICO Trial.
Annals of Surgery, published online 06 December 2016.
2 Smith & Nephew INTERTAN claims brochure “The evidence is in ...”
WORLD-CLASS R&D IN HULL
“Britain is a global leader in medical technology innovation.
Partnerships such as this between Smith & Nephew and
University of Hull further strengthen our position at the
forefront of global medical research and development.”
Emma Hardy MP for Hull West & Hessle
In 2017 we announced a long-term partnership with the University of Hull
to create one of the world’s largest Wound Care Research Clusters with
the aim of developing scientific insights and innovative treatments.
This includes the creation of eight PhD studentships and a programme
of collaboration between Smith & Nephew’s new Hull Research &
Development centre and the University’s new Health Campus.
SMITH & NEPHEW ANNUAL REPORT 2017 14
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
STRATEGIC PRIORITIES continued
SIMPLIFY AND IMPROVE
OUR OPERATING MODEL
Since 2011 Smith & Nephew has
undertaken two successful efficiency
programmes that have delivered
significant savings and created an
integrated Group structure.
As announced with our Third Quarter 2017
Results, we believe that we now have the
Group structure to allow us to strengthen
our competitive position by driving further
opportunities to accelerate performance
through better execution, while at the same
time realising savings through greater efficiency.
In 2017 we completed our assessment of
these opportunities and started to implement
a programme called APEX – Accelerating
Performance and Execution in early 2018.
APEX is expected to deliver an annualised
benefit of $160 million by 2022, with around
three-quarters of this expected by 2020, for
a cash cost of up to $240 million, of which
a charge of around $100 million is expected
in 2018.
APEX has three workstreams:
1. MANUFACTURING,
WAREHOUSING AND DISTRIBUTION
We have already made significant
improvements over the last two years, and see
further opportunities to simplify in line with best
practices to reduce overall cost, while improving
quality and delivery through:
– A best practice facility footprint with larger
manufacturing hubs supported by speciality
facilities where appropriate.
– A product portfolio that meets the needs
of our customers and complies with
regulations, while minimising cost, complexity
and inventory.
– A supply chain that is streamlined and
efficient so that we are positioned to
achieve the highest levels of delivery
at benchmark cost.
2. GENERAL AND ADMINISTRATIVE
(G&A) EXPENSES
We have improved our G&A expense ratio over
the last five years, but with our global function
structure we are now able to identify additional
areas of opportunity to reduce costs and
improve service through:
– Best-in-class Global Business Services
that includes a full-spectrum of support
services delivered quickly and efficiently,
enabling full focus on our customers and
business objectives.
– Service hubs in locations that align to our
regional needs and deliver the best value
for money.
– System infrastructure that drives maximum
efficiency, including rationalisation of legacy IT
systems and adopting a ‘cloud-first’ strategy.
3. COMMERCIAL EFFECTIVENESS
Whilst the commercial opportunities and
competitive environment continue to evolve
with changing customer expectations, new
go-to-market approaches and price pressure,
we expect to improve overall productivity and
accelerate top line growth through:
– Increased sales and marketing effectiveness.
– Selective refinement of structures
and territories to meet customer and
market demands.
– Being more responsive to customers’ use of
tenders and changing service level demands.
– More accurate demand forecasting to
improve inventory management.
19.6%
Operating Profit Margin
2015
2016
2017
13.6%
17.2%
19.6%
22.0%
Trading Profit Margin1
2015
2016
2017
23.7%
21.8%
22.0%
WHY THIS KPI IS IMPORTANT
We use this KPI to track our underlying
profit growth and trading profitability.
HOW WE PERFORMED
Trading profit margin was up 20bps,
in line with guidance.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
A MORE AGILE STRUCTURE
“Based on the preliminary work undertaken when I took over
as CFO, we undertook a thorough review of our business over the
last few months. Our objective was to look afresh at opportunities
to strengthen our competitive position and be more efficient.
“We have now substantially completed this analysis and
begun executing our programmes…”
Graham Baker Chief Financial Officer
SMITH & NEPHEW ANNUAL REPORT 2017 15
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
STRATEGIC PRIORITIES continued
SUPPLEMENT ORGANIC
GROWTH WITH ACQUISITIONS
Whilst our focus in 2017 has been
on improving our execution across
our existing business, we have
made one acquisition and a number
of strategic agreements that give us
access to new technologies.
In 2017 we acquired Rotation Medical, Inc.,
the developer of a novel tissue regeneration
technology for shoulder rotator cuff repair,
for an initial cash consideration of $125 million
and up to $85 million over the next five
years, contingent on financial performance.
Its bioinductive implant is highly complementary
to our Sports Medicine portfolio, serving an
unmet clinical need and providing a compelling
new treatment option for our customers2,3,4.
We signed distribution agreements with Leaf
Healthcare, a developer of a unique wireless
patient monitoring system for pressure
ulcer/injury prevention, and MolecuLight i:XTM,
a handheld point-of-care imaging device that
uses fluorescence imaging to display potentially
harmful concentrations of bacteria in wounds
in real-time.
2017 marked the third anniversary of our largest
acquisition, ArthroCare. This strengthened
our Sports Medicine business, with highly
complementary product portfolios and
customer relationships.
ArthroCare also had a strong pipeline of
innovations, many of which have been
launched since the acquisition. The ArthroCare
acquisition has met all of the three-year targets
that we set, many ahead of time.
The Board periodically reviews all acquisitions to
evaluate longer-term performance and capture
lessons learned to help improve strategy
and process. Collectively we are pleased
with the performance of the technology and
Emerging Markets acquisitions we have made.
We continue to seek further opportunities to
strengthen our technology and product portfolio
and Emerging Markets business.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Preliminary investigation of a biological augmentation of rotator
cuff repairs using a collagen implant: a 2-year MRI follow-up
Bokor, Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky
published in Muscles, Ligaments and Tendons Journal 5(3):144-150
(2015).
3 Histologic Evaluation of Biopsy Specimens Obtained After Rotator
Cuff Repair Augmented With a Highly Porous Collagen Implant
Arnoczky, D.V.M., Shariff K. Bishai, D.O., M.S., F.A.O.A.O., Brian
Schofield, M.D., Scott Sigman, M.D., Brad D. Bushnell, M.D.,
M.B.A., Jan Pieter Hommen, M.D., and Craig Van Kampen, Ph.D.
Arthroscopy: The Journal of Arthroscopic and Related Surgery,
33(2):278-283 (2016).
4 Evidence of healing of partial-thickness rotator cuff tears following
arthroscopic augmentation with a collagen implant: a 2-year MRI
follow-up. Bokor, Sonnabend, Deady, Cass, Young, Van Kampen,
Arnoczky. Muscles, Ligaments and Tendons Journal 6(1):16-25
(2016).
ARTHROCARE
In 2014 we acquired ArthroCare
for $1.5 billion to strengthen our
Sports Medicine business through
complementary product portfolios
and customer relationships.
$50m+
of additional sales from cross-selling
$85m
of total synergies on trading profit1 level
WHY THIS KPI IS IMPORTANT
We use this KPI to demonstrate the returns
from acquisitions.
HOW WE PERFORMED
ArthroCare has met or exceeded all of the
three-year targets, many ahead of time.
We achieved both the cost and revenue
synergies totalling $85m on a trading profit
level, and the Return on Invested Capital in
year three exceeded our target.
STRENGTHENING SPORTS MEDICINE
“We are proud of the impact our technology has made in
healthcare and are excited by the opportunity to reach many
more customers and their patients as an integrated part
of Smith & Nephew’s extensive Sports Medicine portfolio.”
Martha Shadan Chief Executive Officer, Rotation Medical, Inc.
The bioinductive implant from Rotation Medical, Inc. has shown the ability
to heal by inducing the growth of new tendon-like tissue2,3,4. With its small
sales force, Rotation Medical, Inc. achieved revenue of $17m in 2017.
We expect rapid growth as we roll out the product across our large
Sports Medicine sales force, first focusing on the US where the product
has FDA approval.
SMITH & NEPHEW ANNUAL REPORT 2017 16
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
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FINANCIAL
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RISK
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ACCOUNTS
GROUP AND OTHER
INFORMATION
OUR MARKETPLACE
ATTRACTIVE
LONG-TERM TRENDS
$34 billion
Smith & Nephew’s addressable
segment in medical devices1
4%
Annual growth rate of Smith & Nephew’s
addressable segment1
HEALTHY FUNDAMENTALS,
BUT COST REMAINS AN ISSUE
According to a study commissioned by the Bill
and Melinda Gates Foundation (Lancet, April
2017) global healthcare spend, amounting to
c. $9 trillion in 2014, is set to grow at a real rate
of c. 3% per annum per capita, reaching
c. $16 trillion in 2030 and c. $24 trillion in 2040,
representing c. 8% of the global economy.
The medical devices and supplies segment
of healthcare is today worth approximately
$340 billion per annum. Within that,
Smith & Nephew’s addressable segment
is approximately $34 billion, growing at
around 4% annually.
The main drivers for healthcare demand
include demographic shift towards older
populations, increases in lifestyle related
ailments such as obesity, advances in
technology leading to increased scope for
treatment, and economic growth increasing
the access and demand for healthcare
– especially in the Emerging Markets.
Additionally, patients increasingly seek to
influence the choice of care as they become
more and more informed about the range
and nature of treatment options available.
Today healthcare expenditure already
constitutes a significant share of the overall
global economy, especially in developed
markets where populations are ageing rapidly.
As an example, the share of US GDP spent
on healthcare has reached nearly 17% and
is set to continue to rise (Lancet, April 2017).
As a result, cost and cost control remain
the dominant issues across the sector and
healthcare systems increasingly shift towards
more efficient and effective value-based care.
SHIFT TOWARDS VALUE
RATHER THAN VOLUME
The traditional approach to healthcare provision
has been symptom and volume (fee-for-service)
oriented which – in combination with current
demographic trends – has put upward pressure
on healthcare costs. In response, stakeholders
are increasingly seeking to shift the focus from
‘break-fix’ to a more holistic and value-based
approach focused on disease prevention
and treatment results (fee-for-outcome).
Healthcare practitioners are no longer the
only decision-makers, but are part of larger
multi-stakeholder purchasing processes.
Economic stakeholders have increasing
influence on the purchase process for
medical devices. New payment models,
such as bundled procedure payments, risk
sharing, or quality incentives/penalties, are
shifting the focus from clinical utility and
safety alone to clinical outcomes and health
economic performance, which in turn drives
demand for Health Economic and Outcomes
Research (HEOR) to demonstrate clinical end
economic value.
As an example, the US Centers for Medicare
& Medicaid Services (CMS) aims by 2018 to
spend 50% of its Medicare fee-for-service
payments through alternative payment models
and link 90% of its fee-for-service to quality
(CMS, Jan 2015).
FOCUS ON LOWERING COSTS
AND INCREASING EFFICIENCY
The desire to lower costs and increase
efficiency gives rise to several trends including,
for example: healthcare providers increasingly
seeking to treat patients in outpatient
or community settings; the increasing use
of digital technologies to ensure that care
is as efficient and effective as possible; the
acceptance of ‘good enough’ products in some
circumstances; and the sector increasingly
seeing efforts to cooperate across the value
chain. As an example, the UK National Health
Service (NHS) is automating data exchange
between its institutions and suppliers and
has mandated all suppliers to provide
pricing information through the Global Data
Synchronization Network (GDSN) by October
2018 (NHS, Feb 2016).
SMITH & NEPHEW ANNUAL REPORT 2017 17
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
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FINANCIAL
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GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
OUR MARKETPLACE continued
GOVERNMENTS, REGULATIONS
& COMPLIANCE
Governments and other public bodies are key
stakeholders in our marketplace.
In the US, where healthcare spending is
higher as a percentage of GDP than most
other countries, politicians and regulators
are focused on reducing cost and simplifying
the regulatory burden on the industry.
Although common ground is hard to find, there
is a general consensus that the US healthcare
system needs to be restructured.
In 2017, the European Union reached
agreement on a new set of Medical Device
Regulations which entered into force on
25 May 2017. These have a three-year
transition period; therefore will fully apply
in EU Member States from 26 May 2020.
These regulations will impose tougher
requirements of market entry and post
market surveillance of medical devices.
Although healthcare systems are less costly
in Europe than in the US, strained government
budgets and demographic challenges are
driving an increased focus on value-based
healthcare and requirements to demonstrate
the value of innovation through evidence.
Additionally, some uncertainty exists around
the UK’s exit from the European Union where
the regulatory impact is not yet clear.
In China, which in recent years has focused
on, and succeeded with, increasing access
to healthcare, there is a strong focus on
compliance and cost control. In 2017 the
country introduced the two invoices system
which effectively limits length of the supply
chain thus increasing transparency and
lowering cost to the end consumer. Also in
2017 Chinese regulators initiated a process
to lower prices on medical devices. The initial
focus of these efforts is on hip implants, drug-
eluting stents and implantable cardioverter-
defibrillators (ICDs).
The major regulatory agencies for Smith
& Nephew’s products include the Food and
Drug Administration (FDA) in the USA, the
Medicines and Healthcare products Regulatory
Agency (MHRA) in the UK, the Ministry of
Health, Labour and Welfare in Japan, the
China Food and Drug Administration and the
Australian Therapeutic Goods Administration.
Legislation covering corruption and bribery, such
as the UK Bribery Act and the US Foreign Corrupt
Practices Act, applies to all our global operations.
We, and other companies in the industry, are
subject to regular inspections and audits by
regulatory agencies and notified bodies, and in
some cases remediation activities have required,
and will continue to require, significant financial
and resource investment.
SEASONALITY
Orthopaedic reconstruction and sports
medicine procedures tend to be higher
in the winter months when accidents
and sports related injuries are highest.
Elective procedures tend to slow down in
the summer months due to holidays. Due to
the nature of our product range, there is little
seasonal impact on our Advanced Wound
Management franchises.
In the US, out-of-pocket costs for health
insurance plans are tied to medical expenses
in a calendar year. As a result, households
who have reached their deductible (or out-of-
pocket) cap may find that accessing care later
in the year comes at a lower cost, which can
encourage more of them to try and schedule
any required treatments or procedures in the
final months of any given year.
COMPETITION
Across our franchises we have a number of
competitors which differ with respect to both
product focus, geographic reach and overall
scale. Whereas our key surgical competitors
are generally larger and more exposed to the
US, our key wound competitors are generally
not US centric.
In Orthopaedic Reconstruction and Trauma
we are one of four leading players as we
compete against Stryker (US), Zimmer Biomet
(US) and Johnson & Johnson (US). In Sports
Medicine we hold a leading position behind
Arthrex, while also competing against the
aforementioned companies.
Our Advanced Wound Management business
is the second largest in our marketplace.
We lead the somewhat fragmented Advanced
Wound Care sub-segment alongside
Mölnlycke (Sweden). In Advanced Wound
Devices we are the primary challenger to
US based NWPT incumbent Acelity (US).
In Advanced Wound Bioactives our key
products lead their respective categories.
MARKET SIZE1
$5.5bn
Sports Medicine2
+6%
E
C
D
A
B
$8.5bn
Advanced Wound Management Hip & Knee Implants (Recon)
$14.5bn
+5%
+2%
$5.5bn
Trauma & Extremities
+4%
A
E
A
E
A
E
B
D
C
D
C
D
C
B
A SMITH & NEPHEW
B ARTHREX
C DEPUY (MITEK)3
D STRYKER
E OTHERS
22%
32%
14%
11%
21%
A SMITH & NEPHEW
B ACELITY
C MOLNLYCKE
D CONVATEC
E OTHERS
15%
17%
10%
7%
51%
A SMITH & NEPHEW
11%
A SMITH & NEPHEW
B ZIMMER BIOMET
C DEPUY SYNTHES3
D STRYKER
E OTHERS
33%
21%
20%
B DEPUY SYNTHES3
C STRYKER
D ZIMMER BIOMET
15%
E OTHERS
1 Data used in 2017 estimates generated by Smith & Nephew is based on publicly available sources and internal analysis and represents an indication of market shares and sizes.
2 Representing access, resection and repair products.
3 A division of Johnson & Johnson.
B
9%
45%
26%
11%
9%
SMITH & NEPHEW ANNUAL REPORT 2017 18
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
OUR PRODUCTS
THE PRODUCTS WE
TAKE TO MARKET
Smith & Nephew has nine
global product franchises
I
H
G
F
E
D
A
C
B
A KNEE IMPLANTS
B HIP IMPLANTS
C TRAUMA & EXTREMITIES
D SPORTS MEDICINE JOINT REPAIR
E ARTHROSCOPIC ENABLING TECHNOLOGIES
F OTHER SURGICAL BUSINESSES
G ADVANCED WOUND CARE
H ADVANCED WOUND BIOACTIVES
I ADVANCED WOUND DEVICES
$984m
$599m
$495m
$627m
$615m
$189m
$720m
$342m
$194m
KNEE
IMPLANTS
2017 revenue
$984m +6%
Reported
+5%
Underlying1
Smith & Nephew offers an innovative range
of products for specialised knee replacement
procedures. Knee replacement surgery
involves replacing the worn, damaged or
diseased portion of a knee with an artificial
joint. Every year more than two million
patients receive total, partial or revision knee
replacements worldwide.
Smith & Nephew’s knee systems include
the LEGION/GENESIS II Total Knee System,
a comprehensive system designed to allow
surgeons to address a wide range of knee
procedures, and our JOURNEY II family of
Active Knees. The anatomical shape of
the JOURNEY II is designed to reproduce
normal knee kinematics and thereby delivers
improved functional outcomes and high
patient satisfaction.
In 2017 we progressed the limited market
release of our JOURNEY II XR, an innovative
bi-cruciate retaining knee implant, which
is designed to retain the anterior and
posterior cruciate ligaments (ACL/PCL) and
deliver normal perception of movement and
muscle control2.
These systems also feature VERILAST™
Technology, our advanced bearing surface.
The LEGION Primary Knee with VERILAST
Technology has been laboratory-tested to
30 years of simulated wear. While lab testing
is not the same as clinical performance, the
tests showed significant reduction in wear
compared to conventional technologies.
Our knee systems utilise our VISIONAIRE™
Patient-Matched Instrumentation, whereby
a patient’s MRI and X-Rays are used to create
customised cutting guides that allow the
surgeon to achieve optimal alignment of the
new implant.
In 2017 we expanded the geographic scope
of the ANTHEM Total Knee System, which,
alongside the ORTHOMATCH Universal
Instrumentation Platform, has been designed
to provide a wider market access to affordable
knee treatment. ANTHEM is tailored to meet
the anatomical needs of patients from Asia,
the Middle East, Africa and Latin America and
the ORTHOMATCH instrumentation platform
reduces weight, footprint and unnecessary
cost without compromising on quality or
clinical outcomes. In 2017 we expanded the
geographic scope of the system which is now
available in many markets including India,
South Africa, Mexico, Colombia, Chile, Russia
and the Middle East. We began the limited
market release of a cruciate retaining version
in 2017.
In early 2017 we launched the NAVIO Total
Knee Arthroplasty (TKA) system, adding to
the indications offered on our leading robotics
platform. In the fourth quarter, we initiated
the limited market release for the NAVIO
XR system, which we believe will be a key
technology enabler for the JOURNEY II XR
knee. The robotics team continues to expand
to major geographies such as India, South
Africa and Australia. For more information
on NAVIO see page 22.
In 2017 performance in this franchise was
driven by strong demand for the JOURNEY
II Total Knee System supported by growth
from the LEGION Revision Knee System and
ANTHEM Total Knee System.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Moro-Oka, Taka-Aki, Marc Muenchinger, Jean Pierre Canciani,
and Scott A Banks. ‘Comparing in Vivo Kinematics of Anterior
Cruciate-retaining and Posterior Cruciate-retaining Total Knee
Arthroplasty’. Knee Surgery, Sports Traumatology, Arthroscopy
15.1. (2007):93:99 Web.
OPERATIONAL
REVIEW
SMITH & NEPHEW ANNUAL REPORT 2017 19
OVERVIEW
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INFORMATION
OUR PRODUCTS continued
JOURNEY II BCS
JOURNEY II CR
JOURNEY II XR
JOURNEY PFJ
JOURNEY UNI
RENEWING
ACTIVE LIFESTYLE
Today’s fastest growing segment
of knee replacement patients
is seeking a return to a more
active lifestyle1
HIP
IMPLANTS
2017 revenue
$599m 0%
Reported
0%
Underlying1
Smith & Nephew’s Hip Implants franchise
offers a range of specialist products for
reconstruction of the hip joint. This may be
necessary due to conditions such as arthritis
causing persistent pain and/or as a result of
hip fracture. Every year more than two million
patients worldwide undergo total, resurfacing
and revision hip replacement procedures.
For Hip Implants, Smith & Nephew has
developed a range of primary hip systems.
Core systems include the ANTHOLOGY™
Hip System, SYNERGY™ Hip System, the
POLARSTEM Femoral Hip System, the R3
Acetabular System and the POLARCUP™ Dual
Mobility Hip System. This diversity exemplifies
our commitment to providing surgeons with
implant and instrumentation options that meet
the specific demands of their patients and
preferred surgical approach, most notably the
direct anterior or posterolateral approach.
Traditional knee replacement options don’t
meet the need for higher functionality,
improved motion or long-term durability2,3,4,5.
Most significantly, these systems fall short
in providing a return to a normal pattern of
motion meaning less satisfaction for patients.
JOURNEY II is a seamless, next generation
family of partial and primary knee designs,
including a new bi-cruciate retaining
JOURNEY II XR. JOURNEY II is intended to
restore patients to an unmatched level of
function, motion and durability.
For orthopaedic surgeons seeking
treatment solutions beyond traditional knee
replacements, JOURNEY II Active Knee
Solutions have been engineered to empower
patients to return to an active lifestyle.
We also market the BIRMINGHAM HIP
Resurfacing (BHR) System, an important option
for surgeons treating suitable patients.
Smith & Nephew’s portfolio also includes the
REDAPT Revision Femoral System.
The need to perform a revision can occur
for a variety of reasons including infection,
dislocation, or failure of the implants to
achieve biologic fixation. REDAPT is designed
to turn such complex hip revisions into
efficient, reproducible surgeries, allowing
surgeons to effectively recreate a patient’s
unique functionality, while quickly and easily
addressing issues such as poor bone quality.
The REDAPT Revision Femoral System
comprises a monolithic stem and a Fully
Porous Shell. A Fully Porous Acetabular Cup
with CONCELOC™ Technology was introduced
in 2016. To allow ingrowth, an additive, or 3D
printing, manufacturing process is used to
produce an entirely porous implant that mimics
the structure of cancellous bone. The 3D
printing method allows for complex design
geometries that would be difficult, expensive
or impossible to achieve with traditional
manufacturing methods. For example, solid
reinforcements can be built directly into the
porous structure to provide extra strength in
precise locations.
In 2017 we introduced a number of REDAPT
Augments to be used in conjunction with the
fully porous shell which will allow surgeons to
treat more difficult acetabular revisions.
In 2017 performance in this franchise was
better in the second half of the year, driven
by new REDAPT Revision and POLARSTEM
Cementless Stem systems.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
RENEWING ACTIVE LIFESTYLE
1 US Department of Health and Human Services Agency (HHSA) for
Healthcare Research and Quality (AHRQ) Knee Replacements Up
Dramatically Among Adults 45 to 64 Years Old. AHRQ News and
Numbers, November 3, 2011. Agency for Healthcare Research
and Quality, Rockville, MD.
2 Phil Noble et al; Does total knee replacement restore normal knee
function? 2005; CORR. (431): 157-65.
3 Huch K, Müller KA, Stürmer T, Brenner H, Puhl W, Günther KP.
Sports activities 5 years after total knee or hip arthroplasty: the Ulm
Osteoarthritis Study. Ann Rheum Dis. 2005 Dec; 64 (12):1715-20.
4 Comparing patient outcomes after THA and TKA: is there a
difference? Bourne RB, Chesworth B, Davis A, Mahomed N,
Charron K. Clin Orthop Relat Res. 2010 Feb; 468(2):542-6. Epub
2009 Sep 4.
5 Functional comparison of posterior cruciate-retained versus
cruciate-sacrificed total knee arthroplasty. Dorr LD, Ochsner JL,
Gronley J, Perry J. Clin Orthop Relat Res. 1988 Nov; (236):36.
SMITH & NEPHEW ANNUAL REPORT 2017 20
OVERVIEW
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& MARKETPLACE
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INFORMATION
OUR PRODUCTS continued
TRAUMA &
EXTREMITIES
2017 revenue
$495m +4%
Reported
+4%
Underlying1
Our Trauma & Extremities franchise supports
healthcare professionals by pioneering
solutions for surgeons to stabilise severe
fractures, correct bone deformities, treat
arthritis, and heal soft tissue complications.
For Trauma, the principal internal fixation
products are the TRIGEN family of
intramedullary (IM) nails (TRIGEN META-NAIL
System, TRIGEN Humeral Nail System and
TRIGEN INTERTAN), EVOS™ Plating System
and the PERI-LOC™ Plating System. In 2016
we unveiled new evidence showing that the
TRIGEN INTERTAN hip fracture system allows
patients to experience lower risk of implant
failure and re-operation; faster time to fracture
union; and a high return to pre-fracture status2.
The EVOS Mini Fragment Plate and Screw
System is a dedicated Trauma mini fragment
system. This is a stainless steel highly versatile
system with a multitude of plate geometries
and longer screw lengths than standard mini
fragment systems. In 2017, we introduced
the EVOS Small Fragment system for lower
extremity fractures and general trauma
FIRST AND ONLY
First and only bi-cruciate
retaining robotics application
2017 saw the world’s first robotics-assisted
bi-cruciate retaining total knee replacement
procedures, utilising our NAVIO robotics-
assisted surgical system and the JOURNEY II
XR bi-cruciate retaining total knee system.
The JOURNEY II XR has the potential to
deliver the best possible outcome for the
surgeon and patient through the preservation
of important anatomical structures such
as the Anterior Cruciate Ligament (ACL).
The NAVIO robotics-assisted surgical system
enables accurate tibial implant placement
to deliver a more reproducible surgical
technique. We are proud to be the only
company to offer the unique combination of
NAVIO robotics-assistance and the JOURNEY
II XR Knee System.
utilisation. This new system features more
points of fixation and greater breadth of plate
options. EVOS Small takes an evolutionary
approach to simplifying and unifying small
fragment plating systems.
For extremities and limb restoration, we offer
the TAYLOR SPATIAL FRAME™ Circular Fixation
System as well as a range of plates, screws,
arthroscopes, instrumentation, resection
and suture anchor products including foot
and ankle and hand and wrist specialists.
In addition, we introduced INVISIKNOT™,
a unique syndesmotic fixation device for
the ankle.
2017 saw the global launch of the ATLAS™ Hip
Fracture Nail in South Africa and India. It is the
first Smith & Nephew nail specifically designed
for the Emerging Markets.
In 2017 performance in this franchise
was driven by growth from our TRIGEN
INTERTAN hip fracture system where new
clinical evidence continued to support
increased uptake.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Smith & Nephew INTERTAN claims brochure “The evidence is in ...”
SPORTS MEDICINE
JOINT REPAIR
2017 revenue
$627m +7%
Reported
+6%
Underlying1
Our Sports Medicine Joint Repair franchise
offers surgeons a broad array of instruments,
technologies and implants necessary to
perform minimally invasive surgery of the
joints, including the repair of soft tissue injuries
and degenerative conditions of the knee,
hip and shoulder. Our franchise operates
in a large, growing market where unmet
clinical needs lend room for procedural and
technological innovation. Smith & Nephew is
well positioned both to innovate and to reach
customers globally.
Key products for knee repair include the
FAST-FIX™ family of meniscal repair systems,
the ENDOBUTTON™ and ULTRABUTTON™ fixed
and adjustable loop devices for knee ligament
reconstruction, BIOSURE™ interference screws
for ligament procedures, and CARGEL™ for the
repair of articular cartilage.
NAVIO
The power of robotics
SMITH & NEPHEW ANNUAL REPORT 2017 21
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OUR PRODUCTS continued
For shoulder, Smith & Nephew markets a
suite of products for Rotator Cuff Repair (RCR),
one of the most common sports medicine
procedures. These include ULTRATAPE™, a
suture that provides greater tendon-to-bone
contact when compared to traditional #2
suture and may enhance repair2, FIRSTPASS™
ST, a sterile-packaged retrograde suture
passer that eliminates the steps of loading and
unloading needles and cartridges; MULTIFIX™
S, an all-PEEK knotless screw-in anchor;
and HEALICOIL™, a family of suture anchors
featuring open architecture that allows new
bone to fill the fenestrations between screw
threads. All these products can be used
together or in conjunction with other existing
products from the Smith & Nephew portfolio in
a single procedure, significantly expanding the
breadth of our RCR Solutions.
In 2017 we acquired Rotation Medical, Inc.,
the developer of a novel tissue regeneration
technology for RCR, for an initial cash
consideration of $125 million and up to
$85 million over the next five years, contingent
on financial performance. The Rotation
Medical Rotator Cuff System incorporates
a breakthrough technology and technique
that balances biomechanics and biology to
enhance the body’s natural healing response,
helping tendons heal by inducing growth of
new tendon-like tissue4,5,6. Rotation Medical is
highly complementary to our Sports Medicine
portfolio, serving an unmet clinical need and
providing a compelling new treatment option
for our customers.
The Smith & Nephew joint repair portfolio
includes two next-generation anchors made
of soft, all-suture material – Q-FIX™ and
SUTUREFIX™. The Q-FIX All-Suture Anchor is
ideal for a variety of arthroscopic shoulder
and hip repairs, offering fixation performance
superior to commonly used all-suture anchors
and traditional anchors7,8. The SUTUREFIX Ultra
anchor is an attractive option for procedures in
which anatomic space is very limited9 while still
delivering high fixation strength10,11,12.
Smith & Nephew offers joint repair implants
made from REGENESORB™, including versions
of the HEALICOIL™ suture anchors for shoulder
repair and BIOSURE™ interference screws for
knee repair. REGENESORB™ is an advanced
biocomposite material shown to be absorbed
and completely replaced by bone within
24 months in pre-clinical studies13,14.
Smith & Nephew supports specific joint repair
procedures for shoulder, knee and hip with
a line of instruments, positioners and holders,
including SPIDER2™/T-MAX procedure-
enabling limb positioning systems and
ACUFEX™ Hand Held Instruments.
In 2017 performance in this franchise was
driven by strong demand for our leading
shoulder repair portfolio.
ARTHROSCOPIC
ENABLING TECHNOLOGY
2017 revenue
$615m -3%
Reported
-3%
Underlying1
Our Arthroscopic Enabling Technologies (AET)
franchise includes high definition imaging
solutions, industry leading energy based and
mechanical resection platforms, and fluid
management and access portfolios.
AET platforms work in concert to facilitate
access to various joint spaces, visualise the
patient’s anatomy, resect degenerated or
damaged tissue and prepare the joint for a
soft tissue repair. Products in this franchise are
often used in conjunction with products from
our Sports Medicine Joint Repair franchise.
Key AET products include the LENS™ Integrated
visualisation system which provides
outstanding image quality and functionality
in a simple three-in-one Console (CCU, LED
Light Source and Image Management System),
Camera Head and iPad application.
We also offer the WEREWOLF and QUANTUM™
2 COBLATION™ controllers and a wide range
of high performance COBLATION Technology
radio frequency (RF) wands to precisely ablate,
resect and coagulate soft tissue and enable
haemostasis of blood vessels.
The WEREWOLF COBLATION System is
the latest innovation in our market-leading
COBLATION technology. Featuring an all
new controller and designed to support a
broad variety of wands, WEREWOLF delivers
an unparalleled range of performance
capabilities and advanced safety features –
WEREWOLF carries broad indications across
Sports Medicine.
DYONICS™ Shaver blades provide superior
resection due to their sharpness and
reduce clogging with their debris evacuation
capabilities, GoFLO™ and Double® Pump
RF fluid management consoles expand the
joint space while providing haemostasis and
maintaining the saline environment necessary
to perform arthroscopic procedures.
Within an operating room, our AET products
are typically kept together in an arthroscopic
tower, often comprising a visualisation or
camera system, COBLATION or energy based
resection controllers, mechanical resection
or blade controllers and fluid management
or pump components. Because of the
strong link between the arthroscopic tower
and consumables, we will showcase our
industry leading tower components, such
as LENS, COBLATION and DYONICS shaver
blades, when selling the broader Sports
Medicine portfolio.
In 2017 performance in this franchise was
impacted by continued softness in mechanical
resection and the legacy RF technology during
the year. Our new LENS visualisation system
and WEREWOLF COBLATION system are
growing in share within our portfolio and we
expect a gradual improvement in 2018.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Shive, M., MD, et al. BST-CarGel Treatment Maintains Cartilage
Repair Superiority over Microfracture at 5 Years in a Multicenter
Randomized Controlled Trial. Cartilage 2015; Vol 6(2) 62-72.
3 Potter L, Moore C. Increased contact area utilizing the ULTRATAPE
Suture for rotator cuff repair. Bone&JointScience: Our Innovation
in Focus. 2014;4(3):1-4. Lit no: 02056.
4 Preliminary investigation of a biological augmentation of rotator
cuff repairs using a collagen implant: a 2-year MRI follow-up Bokor,
Sonnabend, Deady, Cass, Young, Van Kampen, Arnoczky published
in Muscles, Ligaments and Tendons Journal 5(3):144-150 (2015).
5 Histologic Evaluation of Biopsy Specimens Obtained After Rotator
Cuff Repair Augmented With a Highly Porous Collagen Implant
Arnoczky, D.V.M., Shariff K. Bishai, D.O., M.S., F.A.O.A.O., Brian
Schofield, M.D., Scott Sigman, M.D., Brad D. Bushnell, M.D.,
M.B.A., Jan Pieter Hommen, M.D., and Craig Van Kampen, Ph.D.
Arthroscopy: The Journal of Arthroscopic and Related Surgery,
33(2):278-283 (2016).
6 Evidence of healing of partial-thickness rotator cuff tears following
arthroscopic augmentation with a collagen implant: a 2-year MRI
follow-up. Bokor, Sonnabend, Deady, Cass, Young, Van Kampen,
Arnoczky. Muscles, Ligaments and Tendons Journal 6(1):16-25 (2016).
7 ArthroCare Report #P/N 54231-01 Rev. A; ArthroCare Report
#P/N 49193-01 Rev. A; ArthroCare Report #P/N 51963-01 Rev. A.
8 Douglass NP, Behn AW, Safran MR. Cyclic and Load to Failure
Properties of All-Suture Anchors in Synthetic Acetabular and
Glenoid Cancellous Bone. Arthroscopy (26 January 2017).
9 Smith & Nephew Evaluation Reports 15002113, 15002112, 15002117.
10 Smith & Nephew 2011. Validation REPORT ULTRABRAID II SUTURE
– BIOCOMPATIBILITY – 15001076.
11 Smith & Nephew 2013. Competitive Claims REPORT, SutureFix –
15002059.
12 Smith & Nephew 2013. Validation REPORT, Hip Suturefix XL –
15001076.
13 Data on File, Smith & Nephew report 15000897.
14 Results of in vivo simulation have not been shown to
quantitatively predict clinical performance.
SMITH & NEPHEW ANNUAL REPORT 2017 22
OVERVIEW
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& MARKETPLACE
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GROUP AND OTHER
INFORMATION
OUR PRODUCTS continued
OTHER SURGICAL
BUSINESSES
2017 revenue
$189m -11%
Reported2
+7%
Underlying1
The Other Surgical Businesses franchise
includes our Ear, Nose & Throat (ENT) business
and the NAVIO robotic surgical business,
acquired at the start of 2016.
In ENT we offer surgeons a wide variety of
market leading technologies to address
some of the most common pathologies in
otolaryngology. Our COBLATION technology
has been used to remove tonsils and adenoids
for over 15 years and is preferred by surgeons
and patients for its ability to remove tissue
at low temperatures with minimal damage to
surrounding tissue.
With its ease of use and strong clinical history,
COBLATION Technology is also marketed for
use in turbinate and laryngeal procedures.
Our RAPID RHINO™ Carboxymethylcellulose
(CMC) Technology is featured in both
dissolvable and removable nasal and sinus
dressings and epistaxis treatment products.
When mixed with water, CMC forms a
cushioning gel that naturally drains from the
body after several days and supports healing
by maintaining a moist physical environment.
The NAVIO Surgical System is a next
generation handheld robotics platform
designed to aid surgeons with implant
alignment, ligament balancing and bone
preparation. Furthermore, the NAVIO
robotics-assisted system does not require
a preoperative image, such as a CT scan.
This allows patients to receive the benefits of
robotics-assistance without the extra steps,
costs and radiation associated with additional
preoperative imaging.
In 2017 we successfully expanded the NAVIO
platform into total knees, which comprise 80%
of all knee replacement surgeries globally.
The total knee arthroplasty (TKA) application
supports Smith & Nephew’s JOURNEY II,
LEGION Primary and GENESIS II Total
Knee Systems.
Also during 2017 surgeons completed the
world’s first robotics-assisted bi-cruciate
retaining total knee replacement procedures.
With this launch, NAVIO now offers both partial
and total knee options that include the first
and only robotics-assisted bi-cruciate retaining
knee procedure, commercially available today.
In 2017 performance in this franchise was
driven by the Ear, Nose & Throat business and
continued demand for our hand-held robotics
NAVIO Surgical System including the new Total
Knee Application. The decline in reported
revenues reflects the impact of the disposal
of the Gynaecology business in 2016.
ADVANCED
WOUND CARE
2017 revenue
$720m 0%
Reported
0%
Underlying1
The Advanced Wound Care (AWC) franchise
consists of several groups of brands, including
exudate management, infection management
and our cornerstone range of products.
Exudate management products focus on
providing appropriate wound fluid absorption
and evaporation properties to promote an
optimal wound healing environment. This will
reduce the burden a wound has on the
patients and help them to get on with their
lives and at the same time diminish costs for
materials and nursing time.
Our key growth brand in this space is ALLEVYN
LIFE, an innovative dressing designed to
improve the quality of life for patients with
chronic wounds, as well as helping healthcare
professionals reduce the costs of frequent
dressing changes. Further research was
published in 2017, with a Randomised
Controlled Trial (RCT) showing how the use of
ALLEVYN LIFE, when combined with standard
care, reduced the rate of pressure ulcers in the
sacrum by 71%3.
Silver and iodine drive our infection
management portfolio.
Our silver-based products (ACTICOAT,
DURAFIBER™ Ag and ALLEVYN Ag) provide
clinicians with a range of solutions to address
individual patient needs in managing wound
infection. ACTICOAT is well positioned
to address the need for highly effective,
fast-acting local antimicrobials in the care
of serious infection on a wide range of
wounds, including surgical incisions and
chronic wounds.
Our cadexomer iodine based product,
IODOSORB™, has a unique mode of action
to deliver low level, slow release elemental
iodine without cytotoxic effects and effectively
eradicates biofilms. A recent expert consensus
showed biofilms contribute to the delay in
healing of chronic wounds4.
Smith & Nephew’s cornerstone range offers
a wide selection of wound care products,
which means we have one of the most
comprehensive ranges of wound care
solutions in the industry. These products
include our film and post-operative dressings,
skincare products and gels.
OPSITE™ is one of our most pioneering
products and has become the global standard
of care in post-operative dressings. IV3000™,
a specialist premium dressing for intravenous
lines, continues to perform well. PROSHIELD™
& SECURA™ are proven preventative skin care
products which help maintain and protect
skin integrity.
In 2017 performance in this franchise was
impacted by softer market conditions in
Europe, which offset strong growth in the US.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Reflects reduction in revenue following sale of Gynaecology
business in 2016 (2016 Gynaecology revenue: $37m).
3 Forni C., D’Alessandro F., Gallerani P., Genco R., Bolzon A,,
Bombino C., Mini S., Rocchegiani L., Notarnicola T., Vitullia A.,
Amodeo A., Celli G. Effectiveness of Using a New Polyurethane
Foam Multi-layer Dressing in the Sacral Area to Prevent the
Onset of Pressure Ulcer in the Elderly with Hip Fractures. Poster
presented at EPUAP 2017.
4 Schultz G., Bjarnsholt T., James G. A., Leaper D. J., McBain A. J.,
Malone M., Stoodley P., Swanson T., Tachi M., Wolcott R. D. for
the Global Wound Biofilm Expert Panel. Consensus guidelines for
the identification and treatment of biofilms in chronic non-healing
wounds International Journal of Tissue Repair and Regeneration
(in press).
SMITH & NEPHEW ANNUAL REPORT 2017 23
OVERVIEW
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& MARKETPLACE
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GROUP AND OTHER
INFORMATION
OUR PRODUCTS continued
LEAF
MOLECULIGHT i:X
OWN THE DISEASE
Helping customers
get closer to zero...
Smith & Nephew supports healthcare
professionals in reducing the human and
economic cost of wounds through pioneering
solutions that improve outcomes and at the
same time conserve resources for health
systems. Our aim is to help our customers
get closer to zero surgical site complications,
pressure ulcer incidence, delay in wound
healing, diabetic foot amputations, and
waste of healthcare. Customer insights
have confirmed the need to augment our
treatment offering with solutions that support
the clinician in making informed decisions
and achieving consistency of practice.
In 2017 we entered two distribution
relationships for innovative products in the
Pressure Ulcer Prevention and Infection
Management categories – Leaf and
MolecuLight i:X – which extended
our solutions beyond treatment options.
LEAF
An estimated 2.5 million pressure ulcers/
injuries are treated each year in US acute
care facilities alone1, with the cost to treat a
single full thickness pressure ulcer/injury as
high as $70,0002 and an estimated annual
burden of $11 billion3. Proven prevention
strategies focus on protecting vulnerable
areas, maintaining skin integrity and
consistent offloading through patient turning.
However, despite the best efforts,
maintaining these schedules with a
consistent execution is often difficult.
In particular, turning regimes for patients at
high risk can be difficult to adhere to, going
against the latest best practice guidance.
The Leaf Patient monitoring system is
a patient worn wireless sensor which
monitors the patient’s position. The constant
processing of the positional data facilitates
real time alerts to patient needs and turning
schedules. This data can help reduce the
incidence of hospital-acquired pressure
injuries and help improve operational
efficiency as part of a full protocol of care.
In an independently conducted RCT4
evaluating optimal patient turning, Leaf
induced a 43% relative increase in turning
protocol compliance in high-risk patients.
Patients treated with Leaf were 73% less likely
to develop a pressure injury.
MOLECULIGHT i:X
Currently wound assessments are made with
the naked eye which can lack the accuracy
required to most effectively guide clinical
decision making.5 Using fluorescence,
MolecuLight i:X quickly, safely, and easily
visualises potentially harmful bacteria6,7,8
in wounds which may otherwise lack signs
or symptoms of infection. It enhances
a clinician’s ability to choose the right
therapy, at the right time for their patient6,7
and can help to guide wound sampling
and debridement6,9,10, monitor wound
progression7,8, improve patient engagement5,9
and simplify wound documentation6.
Clinical data from wound assessments
demonstrates that incorporating the
MolecuLight i:X into standard of care
facilitated more objective medical decision
making and led to up to nine times faster
wound healing6 and 54% more accurate
swabbing.11 MolecuLight i:X is not yet
available in the US.
1 Sen et al. Wound Rep Reg 2009. 17:763-771.
2 Reddy et al. Preventing Pressure Ulcers: A Systematic Review.
JAMA, August 23/30 2006 Vol 296, No 8 (Reprinted).
3 Russo et al. Hospitalizations Related to Pressure Ulcers, 2006.
HCUP Statistical Brief #64. December 2008.
Agency for Healthcare Research and Quality, Rockville, MD.
http://www.hcup-us.ahrq.gov/reports/statbriefs/sb64.pdf.
4 Pickham D. et al. Effect of a wearable patient sensor on
care delivery for preventing pressure injuries in acutely ill
adults: A pragmatic randomized clinical trial (LS-HAPI study).
International Journal of Nursing Studies 80 (2018) 12–19.
5 Hoeflok J et al. Pilot clinical evaluation of surgical site
infections with a novel handheld fluorescence imaging device.
Proceedings of the Annual Military Health System Research
Symposium (MHSRS); 2014 Aug 18–21; Fort Lauderdale, FL.
6 DaCosta RS et al. Point-of-care autofluorescence imaging for
real-time sampling and treatment guidance of bioburden in
chronic wounds: first-in-human results. PLoS One. 2015 Mar
19;10(3).
7 MolecuLight Inc. PN 1189 MolecuLight i:X User Manual. 2016.
8 MolecuLight Inc. Case Study 0051 Track Wound Size and
Bacterial Presence with the MolecuLight i:X. 2016.
9 Raizman R. Point-of-care fluorescence imaging device guides
care and patient education in obese patients with surgical
site infections. Presented at: CAWC 2016. Proceedings of the
Annual Canadian Association of Wound Care Conference
(CAWC); 2016 Nov 3-6, Niagara Falls, ON.
10 Raizman R. Fluorescence imaging positively predicts bacterial
presence and guides wound cleaning and patient education in
a series of pilonidal sinus patients. Proceedings of the Annual
Wounds UK Conference; 2016 Nov 14-16; Harrogate, UK.
11 Ottolino-Perry K et al. Improved detection of wound bacteria
using fluorescence image guided wound sampling in diabetic
foot ulcers. Int Wound J. 2017 Feb 28. doi: 10.1111/iwj.12717.
SMITH & NEPHEW ANNUAL REPORT 2017 24
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OUR PRODUCTS continued
ADVANCED
WOUND BIOACTIVES
2017 revenue
$342m 0%
Reported
0%
Underlying1
Our Advanced Wound Bioactives (AWB)
franchise focuses on the commercialisation
of novel, topical biologic and skin substitute
products that provide a unique approach
to debridement, dermal repair and
tissue regeneration.
Currently, our AWB portfolio includes
Collagenase SANTYL Ointment (the only
FDA-approved biologic enzymatic debriding
agent for chronic dermal ulcers and severe
burns), OASIS® Wound Matrix and Ultra Tri-
Layer Matrix (naturally-derived, extracellular
matrix replacement products indicated for the
management of both chronic and traumatic
wounds) and REGRANEX® (becaplermin) Gel
0.01% (an FDA-approved platelet-derived
growth factor for the treatment of lower
extremity diabetic neuropathic ulcers).
Our most significant product by sales is
SANTYL Ointment, which plays an integral
role in removing necrotic or dead tissue in
chronic dermal ulcers (such as pressure
ulcers, diabetic ulcers, and venous ulcers)
and severely burned patients.
SANTYL Ointment is often considered as the
reference debridement product, especially
in the hospital and nursing home markets.
Additionally, in 2017 we continued to see
growth in the use of SANTYL Ointment by
office-based physicians and have been able
to stabilise the nursing home market.
In 2017 the evidence base supporting PICO
in our target surgical indications continued
to build. A Level 1 meta-analysis containing
10 Randomised Controlled Trials and 1,863
patients demonstrated significant reduction
in surgical site infections (58% reduction,
p<0.0001), significant reduction in dehiscence
(26% reduction, p<0.01) and significant
reduction in length of stay (0.47 days
reduction, p<0.0001)3. This summation of the
evidence demonstrates the positive impact
PICO is having on patient outcomes and
system costs.
For our traditional NPWT system, RENASYS™,
evidence was published demonstrating the
effectiveness in the treatment of challenging
wounds and its compatibility with ACTICOAT,
where high bacterial burden is impacting
wound progression4.
This franchise also includes the VERSAJET™
Hydrosurgery system, a surgical debridement
device used by surgeons to excise and
evacuate non-viable tissue, bacteria and
contaminants from wounds, burns and soft
tissue injuries.
In 2017 performance in this franchise was led
by PICO, which continued to perform strongly
across the year.
1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
2 Hurd, T., et al. Use of a portable, single use, negative pressure
wound therapy device in home care patients with low to
moderately exuding wounds. A case series. Ostomy Wound
Management. March 2014. Vol.60. Issue 3.
3 V. Strugala & R. Martin, Meta-analysis of comparative trials
evaluating a prophylactic single-use negative pressure wound
therapy system for the prevention of surgical site complications.
Surgical Infections (2017). DOI 10.1089/sur.2017.156.
4 Hurd, T., et al. A Retrospective Comparison of the Performance
of Two Negative Pressure Wound Therapy Systems in the
Management of Wounds of Mixed Etiology. Adv Wound Care
(New Rochelle). 2017 Jan 1;6(1):33–37.
We continue to focus on further establishing
the value of SANTYL Ointment in treating
patients. We are also working to lower overall
treatment costs, improve outcomes and patient
satisfaction, and further educate physicians,
patients, and payers on the critical role that
SANTYL Ointment plays in moving patients
forward through the healing process.
The wound bioactives market growth
continues to be impacted by changes in the
reimbursement landscape that are driving
increases in out-of-pocket expenses for
patients and access in general across all sites
of care.
The US is the largest market and represents
the current focus for our AWB franchise.
SANTYL Ointment is also available in Canada.
OASIS is accessible in a number of other
Established Markets.
In 2017 performance in this franchise reflected
SANTYL returning to growth in the second half
of the year as it benefited from new analysis of
its effectiveness in advancing pressure ulcers
through the healing process offset by the
reimbursement environment for OASIS which
remained a headwind, as expected.
ADVANCED
WOUND DEVICES
2017 revenue
$194m +13%
Reported
+13%
Underlying1
Our Advanced Wound Devices (AWD)
franchise is comprised of our Negative
Pressure Wound Therapy (NPWT) and surgical
debridement businesses.
The PICO system, our pioneering single-
use, canister-free NPWT solution brings the
effectiveness of traditional NPWT in a modern,
small portable system2. It is designed for both
open wounds such as pressure ulcers and
closed incisions and leverages our leading
dressing technology.
SMITH & NEPHEW ANNUAL REPORT 2017 25
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OUR RESOURCES
THE RESOURCES WE NEED
TO DELIVER OUR PRODUCTS
OUR PEOPLE
Engaging, developing and retaining
our more than 15,000 employees is
important to us and we work hard to
be a great place to work as well as a
responsible corporate citizen.
SEE OPPOSITE
RESEARCH & DEVELOPMENT
Innovation is part of our culture and
we invest 5% of our revenue to develop
new products that will help to improve
patients’ lives.
PAGE 28
MANUFACTURING & QUALITY
We operate our global manufacturing
efficiently, and to the highest possible
standards, to ensure product quality at
competitive pricing.
PAGE 29
SALES & MARKETING
We support our customers in over 100
countries. Our commercial teams are
highly specialised with an in-depth
knowledge across the full range of
product franchises.
PAGE 30
ETHICS & COMPLIANCE
We are committed to doing business
the right way and apply strict business
principles to the way we deal with our
customers and partners.
PAGE 32
TRAINING & EDUCATION
Every year, thousands of healthcare
professionals attend our training
courses around the world. Education
is fundamental to how
we support our customers.
PAGE 32
OUR
PEOPLE
WE ARE PIONEERS WITH A PURPOSE
Smith & Nephew is a company of pioneers,
extending access to advanced medical
technologies and enabling better outcomes
for patients globally. We’ve been doing this
since 1856.
From our beginnings as a small family
pharmacy in Hull, England, we have grown in
size and scope. Over the past six years, we
have fundamentally changed the structure
of our Company, creating greater alignment
and presenting one face to our customers.
We have brought pioneering products and
technologies to market, such as JOURNEY II
and PICO, and have successfully completed
many significant acquisitions, widening our
customer base around the world.
We are proud of the work we do and share a
mission to support healthcare professionals in
their daily efforts to improve the lives of their
patients. We achieve this by working together
to deliver our strategic priorities.
Every employee has a role in our success, and
so it is crucial that all employees feel engaged
in their work and know its importance. We start
each year by setting clear and measurable
objectives based on our strategy scorecard.
CELEBRATING
EXCELLENCE
The personal objectives of the Chief Executive
Officer are cascaded through the organisation,
with each employee setting aligned objectives
according to his or her role.
Through this process, each employee can
clearly see how their efforts contribute to the
overall success of the business, which drives
execution, accountability and engagement.
This engagement is measured through a
biennial Global Employee Survey using the
Great Place to Work Trust Index. In 2017, 88%
of our global employees participated in this
survey, providing meaningful results that have
driven actions for improvement. We track our
progress against these actions using regular
pulse surveys.
In 2017 we raised our overall Trust Index score
by five percentage points, to 67%, meeting
our target for improvement. We achieved
Great Place to Work recognition in a further
five countries, ahead of our target of two
more. In total we have received recognition
in nine countries.
In addition to the Trust Index, we have
implemented a culture dashboard which
includes key metrics such as employee
retention, business performance and feedback
from new hires. The foundation of this
dashboard is our values: to Perform, Innovate
and Earn Trust. It provides a clear framework
for our senior leaders to track progress and
identify areas for additional focus, action
or reinforcement.
The CEO Awards salute employees
at all levels who make outstanding
contributions for the benefit of
Smith & Nephew.
In 2017 Lorraine Belleville, a Packaging
Operator and Team Coordinator at our
Mansfield facility in the US, was recognised
for her significant contributions to
Mansfield’s improvement of ‘Finished Goods’
production by nearly 30% since 2016.
Lorraine took initiatives to improve the flow of
work at the facility by introducing important
tools such as a tracking scheme, daily
production sheet and visual management.
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WE ENCOURAGE AND REWARD
HIGH PERFORMANCE
We set ambitious targets and we achieve them
by creating a sense of purpose and urgency.
While achievement of these targets is crucial, our
Performance Management Process measures
not only what was achieved, but also that the
behaviours displayed in doing so match our
core values.
Smith & Nephew’s compensation philosophy
is to pay for performance. This means
compensating employees for sustained
performance that helps deliver timely and
tangible results to drive the business forward.
By following this philosophy we have found that
we not only attract, retain, and motivate talent,
but it also helps drive better business results and
provides an equitable work environment. We are
Living Wage Accredited in the UK, voluntarily
paying above the government required minimum
as we believe employees should receive fair
compensation for the work they do.
The Company’s ‘Going the Extra Mile’ global
employee recognition programme is used by
executives, managers and employees alike to
recognise and reward performance and our
corporate values.
We are committed to working with employees
to develop each individual’s talents, skills
and abilities.
Employee advancement is merit-based, reflecting
performance as well as demonstration of core
competencies which include our values, with an
emphasis on ethics and integrity. We prioritise
the development and promotion of existing
employees whenever possible. Each year Smith
& Nephew conducts a comprehensive global
development and capability review process to
identify high potential employees and ensure
they have well defined career development
plans. The Board reviews succession plans for
key executive roles and such plans are in place
for other critical positions across our business.
In 2017, we added to our development
programme three new opportunities:
Leadership Edge, Pioneer and Continuous
Learning Journeys. In 2017, 560 employees have
participated in these programmes. These are
designed to embed and enhance essential
leadership skills for new and experienced
managers, respectively through a combination
of guided and self-service learning tools. Our
‘myLearning’ self-directed online learning portal
was nominated for a Learning Technologies
Award for the ‘Best Online Distance Learning
Programme’ this year.
Employees are provided with opportunities
to develop their skills and career through new
assignments and on the job experiences.
BUILDING A LEADERSHIP CAREER
Laura Whitsitt has built a leadership career at Smith & Nephew.
Laura Whitsitt began her career at
Smith & Nephew as an intern in product
development. Thirty years later and now
Senior Vice President of Research &
Development for Orthopaedics, Laura says
she still sees opportunities for growth and
development. “I am often asked why I have
stayed at the same company for so long.
It’s important to me to learn and grow and
be challenged, and I’ve always had those
opportunities at Smith & Nephew.”
In the male-dominated industry of
orthopaedics, Laura says she has
always felt respected for her expertise.
Among the highlights of her career is
designing the Company’s first and only
spinal systems and managing them through
to successful launch.
NUMBER OF EMPLOYEES1 2017
15,933
Total employees
804
Senior managers2 and above
12
Board of directors
Far from a barrier, Laura believes her
perspective as a female leader has worked
in her favour, and has added value. “As a
woman I bring a different viewpoint to the
table, and that’s especially important in
R&D,” she says.
Laura says she has seen real progress over
her career in adding more female leaders
to the ranks at Smith & Nephew, but
there is more to do. “Mentoring has been
very valuable, and I have certainly seen
a positive change in the number of females
in managerial roles. The more diversity
we have at higher levels of the Company,
the more momentum we have to build on.”
59%
Male
74%
Male
75%
Male
41%
Female
26%
Female
25%
Female
1 Number of employees at 31 December including part time employees and employees on leave of absence.
2 Senior managers and above includes all employees classed as Directors, Senior Directors, Vice Presidents and Executive Officers
and includes all statutory directors and Directors of our subsidiary companies.
SMITH & NEPHEW ANNUAL REPORT 2017 27
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Through our global intranet, we provide
resources and tools to guide employees
to make decisions that comply with the law,
local industry code and our Company Code
of Conduct. We require advance approval
for significant interactions with healthcare
professionals or government officials and
we regularly assess existing and emerging
risks in the countries in which we operate.
See page 32 for more information on our
global compliance programme.
WE VIEW INNOVATION
AS AN ESSENTIAL SKILL
Innovation is owned by all of us who question
the status quo, dare to propose new solutions
and seek to be the best at what we do for the
benefit of our customers.
At Smith & Nephew, we recognise that
innovation includes the entire value chain within
our organisation from R&D to engineering,
manufacturing, distribution, sales, marketing,
and even facility utilisation and investment
strategy. We also acknowledge only a few
innovations will be truly disruptive, while others
will result in equally as important incremental
changes. To help aid this, Smith & Nephew has
introduced an Innovation Council to support its
culture of innovation and signal its importance
in the Company’s continued success.
The Council consists of ‘Innovation
Champions’ who reflect the diversity of the
Smith & Nephew employee base and have
a strong appetite for trying new things.
These champions will be responsible for
generating creative ways to embed this value
and look for opportunities to raise innovative
opportunities to the leadership team and to
celebrate success.
OUR RESOURCES continued
WE FOSTER AND EMBRACE DIVERSITY
OF EXPERIENCE, BACKGROUND
AND IDEAS
Smith & Nephew’s global diversity and inclusion
programme, called ‘Valuing Difference’, is
designed to highlight the value of bringing
different ideas and perspectives in from our work
and personal experiences. Through storytelling
and manager tools and discussion guides, the
programme encourages open dialogue and an
appreciation of the benefits of diverse teams.
We believe that diversity fuels innovation and
are committed to employment practices based
on equality of opportunity and the ability of the
person to perform the essential functions of the
job, regardless of colour, creed, race, national
origin, sex, age, marital status, sexual orientation
or mental or physical disability.
When we recognise and appreciate these
differences, they can help us better reflect the
wide range of cultures, customers, and patients
we serve, so we can better meet their needs
and be a better business – thereby building
credibility with all. Diversity is regarded as an
asset and it is further guarded by our global
policies regarding ‘Diversity and Inclusion’ and
‘Respectful Workplace’.
Our Valuing Difference Programme is sponsored
by Chief Executive Officer Olivier Bohuon,
and Steering Committee members include
our Chief Human Resources Officer, Members
of the Executive Committee and Regional
Presidents. Together, the committee agrees the
strategy which is then executed at the regional
and country-level in order to have the greatest
possible impact.
Local diversity councils meet regularly and work
to translate strategy to local needs, execute
specific actions and share best practice.
An example of a Valuing Difference Initiative is
the ‘Elevate’ programme, which was attended
by more than 275 female professionals in 2017.
Elevate is specifically designed to develop
our female leaders and includes a mix of
skill development and motivational support.
The programme has been highly successful, with
the majority of participants stating they prioritise
making time to attend the monthly webinar
sessions and more than one-third promoted
or changed roles in the past year.
Gender diversity and equity are important areas
of focus for us. Our goal is to have 33% women
in senior management positions by 2020, in
accordance with best practice as defined in the
Hampton Alexander Report. Currently just over
a quarter of senior management roles are held
by women, in line with the FTSE100 average
as defined by the 2017 Hampton Alexander
Review. We are also committed to ensuring that
our performance management and associated
rewards are equitable and free from any
unconscious gender bias. The UK government
has introduced a requirement that all employers
publish their gender pay ratio in the UK by 4 April
2018, which we will do on our website.
We recruit, employ and promote employees
on the sole basis of the qualifications 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 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. As a global medical
technology business, Smith & Nephew
recognises that we have a responsibility to
take a robust approach to preventing slavery
and human trafficking. Smith & Nephew is
committed to preventing slavery and human
trafficking in its corporate activities, and its
supply chains. Our full policy on preventing
slavery is available on our website.
WE DO THE RIGHT THING EVEN
WHEN NO ONE IS WATCHING
All employees receive our Code of Conduct
and Business Principles when they join
the Company, and renew their training and
commitment to the Code on an annual basis.
Smith & Nephew’s Global Compliance
Programme not only helps our businesses
comply with laws and regulations, but
also creates the culture of trust we deem
essential to our success. Our comprehensive
programme includes: Board and executive
oversight committees; global policies and
procedures; on-boarding and annual training
for employees and managers; training for
third-party sellers; monitoring and auditing
processes; and reporting channels and
recognition for demonstrating our values.
Annual training is required of all employees
and any stakeholders who represent
Smith & Nephew.
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WE CARE ABOUT EACH OTHER’S
WELLBEING AND THE SUSTAINABILITY
OF SMITH & NEPHEW
Each of us treats our Company’s resources
and the world’s natural resources as if they
were our own, and we take our responsibility
to our communities seriously. Smith & Nephew
not only applauds, but also supports the
donations of employees’ time and resources.
We encourage all our employees to volunteer
their time and talents by providing eight
hours per year paid time for volunteer
efforts. Many functions structure their team
building activities around group volunteering
opportunities such as Make a Wish Foundation
events and the Helping Hands Project which
builds prosthetic hands for amputees in third-
world countries.
Charity efforts are also coordinated across
entire sites, and beyond. In 2017, Smith
& Nephew brought together many local
companies in Hull with a ‘More Together’
initiative to raise tens of thousands of pounds
for local charities. Smith & Nephew was also
a major sponsor of the Hull City of Culture
celebrations, with employees contributing to
and benefiting from the year of activities
on-site and across the city.
Our social responsibility strategy is to
materially contribute to the delivery of our
Company Mission by engaging employees
to prioritise philanthropic resources and
efforts on areas that align with our business
strategy and values. Resources include
product donations, matching gifts, and
employee volunteerism.
We believe selection and management of
charitable and non-profit organisations and
activities is best accomplished at the local
level within the framework of our social
responsibility strategy. Each location’s Site
Leadership Council and/or Camaraderie
Council will design, construct, and operate
the local programme, including arrangement
of funding. These Councils build out the local
social responsibility programme, selecting
charitable organisations and activities that best
engage the local employee population and
underpin our Mission.
We Innovate.
We Perform.
We earn Trust.
We are Smith & Nephew.
Finally, we look to support our innovations with
compelling evidence of clinical and economic
value. The global R&D function includes our
Clinical, Medical and Scientific Affairs teams,
led by the Chief Medical Officer. This team
ensures that, from conception, plans are
developed to support product launches
with the evidence increasingly required by
clinicians, payers and regulators. Our products
undergo clinical and health economic
assessments both during their development
and post-launch.
During 2017 we secured a long-term
partnership with the University of Hull to
create one of the world’s largest Wound
Care Research Clusters with the aim of
developing scientific insights and innovative
treatments. This includes the creation of
eight PhD studentships and a programme
of collaboration between Smith & Nephew’s
new Hull R&D centre and the University’s new
Health Campus, both of which opened in 2017.
We also announced a three-year partnership
with Imperial College London to develop
enhanced surgical techniques relating to
ligament function, biomechanics and soft
tissue injuries of the knee, including the most
common injuries of torn menisci and anterior
cruciate ligament rupture. See page 29.
We also continue to invest in scouting for
new technologies, identifying complementary
opportunities in our core and adjacent
segments. In addition, we invest in
small companies developing compelling
technologies in our franchise areas through
our incubation fund, and provide our expertise
to help the development process, including
supporting clinical studies, and typically
secure preferred access to technology as it
nears market readiness.
In 2017, we invested $223 million in R&D, in
line with our commitment, set out in 2011, to
maintain our investment level at around 5% of
revenue. We expect to maintain this proportion
going forward, but to realise greater benefit
through our new structure and strategic focus.
RESEARCH &
DEVELOPMENT (R&D)
$223m
Investment in R&D in 2017
Smith & Nephew has a single global R&D
function, led by the President of Global R&D,
reporting directly to the Chief Executive Officer.
This team strives to increase value created
by research and development by focusing on
three imperatives: Disruptive Innovation that
matters, flawless execution of new product
development, and compelling evidence of
clinical and economic value.
The Portfolio Innovation Board drives our
innovation strategy and framework. This Board
identifies and selects only those projects
that will make a meaningful difference to our
customers and their patients. This includes
continuing to invest in incremental innovation
to improve existing products in a way that
improves outcomes. It also involves driving
greater efficiency through innovation,
potentially reducing our costs of goods.
For instance, by making instrument sets
more procedure and patient-specific, we will
reduce complexity and cost, to the benefit
of customers and the Company. Finally, by
seeking more meaningfully disruptive products
and services, we will harness transformational
innovation to provide access to new
technologies to people across the world.
Second, the team challenges itself to execute
flawlessly. This means developing the right
product at the right cost and quality, supported
by clinical evidence, in a timely manner.
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 fulfil an unmet clinical need,
have a strong commercial rationale, and are
technologically feasible. The R&D function
works closely with the marketing, clinical,
regulatory affairs, manufacturing and supply
chain management teams to ensure we can
produce new products to clinical, cost and
time specifications.
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MANUFACTURING
& QUALITY
GLOBAL OPERATIONS
Smith & Nephew takes great pride in its
expertise in manufacturing products to the
highest quality and ensuring they reach our
customers in a timely manner. We operate
manufacturing facilities in a number of
countries across the globe, and a number of
central distribution facilities in key geographical
areas. Products are shipped to individual
country locations which hold small amounts of
inventory locally for immediate supply to meet
customer requirements.
Manufacturing is a dynamic process and our
Global Operation leadership team is focused
on successfully supporting delivery of the
Group’s strategic priorities by ensuring our
footprint and expertise is ready to respond
to geographical growth, new product
development, greater external regulatory
scrutiny and the commercial pressure to be
ever more efficient.
Quality has always been paramount to
Smith & Nephew. We have a unified Quality
Assurance and Regulatory Affairs team
to ensure consistency across our country
business units. Requirements of global
regulatory agencies have become more
stringent in recent years and we expect
them to continue to do so. We are continuing
to expand our portfolio globally through new
product development and by registering our
existing products in new markets. In order
to meet the expectations of regulators and
support this added complexity we continued
to invest in our Quality and Regulatory
expertise in 2017.
INNOVATING THROUGH PARTNERSHIP
Smith & Nephew is working with Imperial College London
to develop enhanced surgical techniques relating to ligament
function, biomechanics and soft tissue injuries of the knee,
including the most common injuries of torn menisci and anterior
cruciate ligament rupture.
“The partnership with Smith & Nephew is
priceless for our work. It allows a strategic
attack on the unanswered biomechanical
issues in knee surgery. Knowing funding is
secure for three years allows a step-by-step
‘due diligence’ approach to investigating
these issues rather than sporadic studies.
This is the best way to translate from the
lab to patient care” said Mr Andy Williams,
Lead Surgical Researcher, Imperial College
London and Fortius Clinic.
Meniscus repair is one of the greatest
challenges of Sports Medicine. By
combining the clinical expertise of Imperial
College with our pioneering approach to
new product development we expect to be
able both to advance surgical techniques
and accelerate the development of next
generation products.
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OUR MANUFACTURING FACILITIES
Our largest manufacturing operation
is based in Memphis (Tennessee, US).
The Memphis facilities produce key products
and instrumentation in our Knee Implant, Hip
Implant and Trauma franchises. These include
the JOURNEY II and LEGION knees, the
ANTHOLOGY Primary Hip System and key
Trauma products such as the PERI-LOC Plating
System, REDAPT and TRIGEN Intramedullary
Nails. In addition to this, Memphis is home to
the design and manufacturing process of the
VISIONAIRE patient matched instrumentation
sets, and OXINIUM™ Oxidised Zirconium.
This patented metal alloy is available for many
of our knee and hip implant systems as part of
our VERILAST technology.
In Sports Medicine, our Alajuela (Costa
Rica) facility, opened in 2016, manufactures
COBLATION technology. Our Mansfield
(Massachusetts, US) facility manufactures
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 (Switzerland), Tuttlingen (Germany),
Beijing (China) and Devrukh (India) facilities
manufacture a number of surgical device
products including key reconstruction and
trauma products and the PLUS™ knee and hip
range. The Warwick (UK) facility produces the
BIRMINGHAM™ Hip Resurfacing System.
Our Oklahoma City (Oklahoma, US) facility
produces and services electro/mechanical
capital equipment as well as single use
sterile devices and also assembles some of
our NPWT devices using components from
third parties.
The majority of our wound management
products are manufactured at our facilities
in Hull, Suzhou and Curaçao. These include
pioneering products such as PICO and
ALLEVYN Life as well as our complex silver
coating technology for ACTICOAT. In Suzhou,
we also manufacture our wound care products
for the mid-tier in the Emerging Markets.
Manufacturing of our Advanced Wound
Bioactive products takes place in Curaçao and
at various third party facilities in the US.
PROCUREMENT
We procure raw materials, components,
finished products and packaging materials
from suppliers in various countries.
These purchases include metal forgings and
castings for orthopaedic products, optical
and electronic sub-components for sports
medicine products, active ingredients and
semi-finished goods for Advanced Wound
Management as well as packaging materials
across all product ranges.
Suppliers are selected, and standardised
contracts negotiated, by a centralised
procurement team wherever possible, with a
view to ensuring value for money based on the
total spend across the Group. On an ongoing
basis, we work closely with our key suppliers
to ensure high quality, delivery performance
and continuity of supply.
We outsource certain parts of our
manufacturing processes where necessary to
obtain specialised expertise or to lower cost
without undue risk to our intellectual property.
Suppliers of outsourced products and services
are selected based on their ability to deliver
products and services to our specification,
and adhere to and maintain an appropriate
quality system. Our specialist teams work
with and monitor suppliers through on-site
assessments and performance audits to
ensure the required levels of quality, service
and delivery.
GLOBAL SUPPLY CHAIN
Our Global Supply Chain function ensures
that our products reach our internal and
external customers where and when they
are needed, in a compliant and efficient
manner. Bringing together people, knowledge
and expertise helps us meet our objectives
and our customers’ expectations, driving
us to become more competitive, responsive
and integrated.
We operate three main holding warehouses
for surgical products, one in each of
Memphis, Baar (Switzerland) and Singapore.
These facilities consolidate and ship to
local country and distributor facilities.
Our distribution hubs for advanced wound
products are located in Neunkirchen
(Germany), Derby (UK) and Lawrenceville
(Georgia, US).
SALES &
MARKETING
Our customers are the providers of medical
and surgical treatments and services in
over 100 countries worldwide, ranging from
orthopaedic surgeons to wound care nurses,
general practitioners and other clinicians,
but increasingly also economic stakeholders.
These include purchasing professionals
in hospitals, healthcare insurers, materials
managers and others.
We serve these customers through our
sales force and other channels. Our sales
representatives are highly trained and skilled
individuals. Becoming a sales representative
requires intense training, including passing a
strict certification programme. Depending on
their area of specialism, representatives in
our surgical businesses must be able to
demonstrate a detailed knowledge of all
the surgical instruments used to implant a
device, or have specific understanding of the
various surgical techniques a customer might
use. In our advanced wound management
business, sales representatives must have
a detailed understanding of how patients
live with wounds and how clinicians seek
to prevent and treat them, as well as deep
knowledge of the clinical and economic
benefits of using our products within
treatment protocols.
Once a sales representative is certified,
they typically spend the majority of their
time working directly with and supporting
customers, or identifying and contacting new
customers. They help to provide in-hospital
support to aid in the safe and effective use of
our range of advanced medical technologies
and techniques.
Our Global Commercial Organisation oversees
all commercial activities (sales, marketing,
market access, and commercial strategy)
across the Group for our full line of business.
The organisation is led by two regional sales
presidents for the US and International, and
our Chief Marketing Officer (CMO). Within our
International region there are several regional
leaders for Europe & Canada, Asia Pacific and
Latin America.
Our sales forces in the Established Markets
are specialised by channel and consist of
a mixture of independent contract workers
and employees. In our Emerging Markets we
operate through direct selling and marketing
operations led by country managing directors,
and through third party sellers.
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OUR RESOURCES continued
Smith & Nephew has three global marketing
teams who set the strategic direction of
our businesses, guide our research &
development teams by specifying new
products & services needed to realise those
strategies, and develop the promotional assets
and guidance to commercialise our products.
They utilise a variety of traditional and novel
means to market to our customers, including
scientific congresses, commercial trade
shows, advertising in medical journals and,
increasingly, digital channels. These include
product websites, social media channels,
mobile applications and our professional
educational platform called Education &
Evidence.
Also reporting to our CMO is the global
Commercial Excellence team, which drives
numerous initiatives to strengthen commercial
execution in both the sales organisation and
our global marketing teams. There is a strong
focus on Sales Force Excellence to increase
efficiency and effectiveness of our sales
teams, and on Pricing to increase discipline
in our transactional pricing and define better
value creation strategies for our innovative
products. Other activities in Commercial
Excellence include strategic planning, business
intelligence and market research, digital
marketing, and marketing communications.
In addition, our Health Economics and
Outcomes Research (HEOR) team generates
evidence on the economic impact of our
products and provides supporting assets
and tools to commercialise our products.
They do this through collaboration with leading
medical centres in the world as well as existing
registries that track usage of our products.
The HEOR team also reports to our CMO.
A DAY IN THE LIFE…
Mustafa works as a Territory Manager in
our Sports Medicine franchise in the UK.
“Every day is different. My time is split
between supporting customers and
their operating theatre teams in hospitals,
meeting with potential customers, learning
and researching techniques and trends,
and keeping in touch with my colleagues,
the business and my existing customers.
“My favourite part of the job is the
interactions I have with my customers.
I believe that we sell solutions rather
than products, so everything I do is about
helping my customers to find answers to
the problems they face, to enable better
outcomes for their patients.
“We’re very lucky in the UK to be able to offer
an excellent training facility to the surgeons
we support. It’s a great feeling to be able to
support a consultant to refine their surgical
techniques. I’m also a mentor providing
expertise and guidance on our Resection
and Camera products to my colleagues in
the UK.”
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OUR RESOURCES continued
ETHICS &
COMPLIANCE
CODE OF CONDUCT AND
BUSINESS PRINCIPLES
Smith & Nephew earns trust with customers,
healthcare professionals, government
authorities, patients 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 vendors who
provide us with services and distributors and
independent agents that sell our products.
Our Code of Conduct and Business Principles
governs the way we operate to achieve
these objectives.
Smith & Nephew takes into account ethical,
social, environmental, legal and financial
considerations as part of its operating
methods. We have a robust whistle-blowing
system in all jurisdictions in which we operate.
We are committed to upholding our promise
in our Code of Conduct that we will not
retaliate against anyone who makes a report
in good faith.
GLOBAL COMPLIANCE PROGRAMME:
EXISTING ELEMENTS
Smith & Nephew has implemented what we
believe to be a world-class Global Compliance
Programme that helps our businesses comply
with laws and regulations. This comprehensive
compliance programme includes: Board and
executive oversight committees; global policies
and procedures; on-boarding and annual
training for employees and managers; training
for distributors and agents and higher-risk
vendors; monitoring and auditing processes;
reporting channels and employee-recognition
for demonstrating our values in their
everyday work.
We provide resources and tools to guide
employees to make decisions that comply with
the law, local industry codes and our Company
Code of Conduct. We conduct review and
approval in advance for significant interactions
with healthcare professionals or government
officials. We regularly assess existing and
emerging risks in the countries in which
we operate.
We assess the compliance controls in
Smith & Nephew’s businesses. We conduct
audits, supported by data analytics, and local
monitoring. We review the issues our testing
generates to identify patterns.
New distributors and other higher-risk
third parties are subject to screening and
are contractually obligated to comply with
applicable laws and our Code of Conduct.
Compliance training and certifications are
included in this process.
Managing Directors are required to complete
an annual certification to the Chief Executive
Officer to confirm the implementation of
required policies. Managers and employees
make an annual compliance certification
and conflict of interest disclosure.
Executive management, managers and
employees have a compliance performance
objective customised to their role.
GLOBAL COMPLIANCE PROGRAMME:
NEW ELEMENTS IN 2017
In 2017, we created an Ethical Leadership
model, which includes four pillars: Advise,
Lead, Observe, and Coach or Report.
We introduced this model during annual
manager training, reinforced the model
through further communications, and gave
managers resources they can use to raise
awareness of compliance risks and rules.
We benchmarked our whistle-blower
programme against industry metrics.
The benchmarking confirmed that all
Smith & Nephew reporting and substantiation
rates met industry practices. We conducted
a comprehensive review of the guidelines
recently issued by the US Department of
Justice on compliance programme effectiveness
and by the International Organisation of
Standards on Anti-Bribery Management
Systems, and are also identifying any actions
needed to align to this new guidance.
We applied enhanced standards prospectively
for new, potential partners and retrospectively
for existing distributors. We also developed
new guidelines for distributors or agents
who need to enter the operating room
when acting on our behalf. We worked
with our Procurement colleagues to integrate
compliance controls into the Company’s
new purchasing system. We also conducted
a comprehensive review of the types
of complementary workers we engage to
ensure they receive appropriate anti-bribery
and corruption compliance training and
will implement an updated training strategy
in 2018.
TRAINING &
EDUCATION
Smith & Nephew is dedicated to helping
healthcare professionals improve the quality
of care for patients. We are proud to support
the development of surgeons and nurses by
providing skills training and education on our
products and techniques.
In February 2017, we inaugurated our ‘Expert
Connect Centre’ in the UK. This new centre
for HCP training is a state-of-the-art learning
environment with the latest audio-visual
capabilities and 14-station bio-skills laboratory
for all levels of HCPs from around the globe.
In 2017, we provided more than 45,000
instances of training to surgeons through our
Smith & Nephew training centres in the US, UK
and China, as well as running many courses at
third party centres around the world.
Working under expert guidance, attendees
learn new techniques and refine skills,
to ensure the safe and effective use of
our products.
These courses are attended by residents,
fellows and practicing surgeons who work
together to review, discuss and train on current
and forward-looking surgical techniques in
their areas of clinical expertise. Our courses
help up-and-coming surgeons develop trust
and gain the experience and confidence
necessary to become experts in their field.
Thousands of nurses receive face-to-face
training from Smith & Nephew representatives
every year, including attending courses at
our centres, and through our representatives
visiting them at their place of work.
In 2017 almost 45,000 clinicians in the
US alone benefited from our wound care
educational resources.
In addition, we provide healthcare
professionals our online resources such
as the Global Wound Academy, The Wound
Institute and, for surgeons, our Education
and Evidence website. Recently we began
utilising innovative, digital technologies
to accelerate the learning experience of
surgeons. In 2017 we doubled the number
of healthcare professionals trained digitally
on Smith & Nephew products and techniques
to 180,000.
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SUSTAINABILITY
SUSTAINABILITY IS BETTER BUSINESS
SUSTAINABILITY
VISION AND MISSION
We envision a world in which
healthcare professionals have
access to the solutions they
need to help patients restore
their health, engage in society,
enhance the environment
and improve their wellbeing.
Our sustainability strategy aims to achieve
this vision. It outlines the steps we’ll take
with a view to leading our industry in the
development and use of products and
services that:
– Satisfy unmet health needs and
promote greater access to treatment;
– Offer easier, better, faster and more
effective treatment, enabling productive
engagement in society;
– Prioritise materials that are reused,
remanufactured, or recycled;
– Are manufactured using raw materials
sourced from an environmentally and
socially sound supply chain;
– Use natural resources efficiently;
– Are manufactured by processes that
are not hazardous to people or the
environment; and
– Implement the most sustainable
product options.
Our plan focuses on both the
foundational and competitive advantage
elements required to deliver our value
proposition sustainably. We employ a
continuous improvement approach based
upon the implementation of forward-
looking solutions (such as investing
in new materials and processes that
provide significant benefits with respect
to human rights, safety, energy, waste
and/or communities) and bridging
technologies to secure future game-
changing performance.
TAKING SUSTAINABILITY TO
THE CORE OF THE BUSINESS
We began to deliver in 2017 our commitment
to sustainability embodied in our refreshed
Group Sustainability Strategy. This strategy,
approved in 2016, both drives and is driven
by implementation of the Group Business
Strategy, ensuring that all three main aspects
of sustainability – economic prosperity, social
responsibility and environmental stewardship
– advance as one.
This is a summary report of our sustainability
activities and progress in 2017. Our annual
Sustainability Report, published at the
same time as this Annual Report, describes
the Group Sustainability Strategy and its
associated goals in more detail. It also
specifies targets to move our performance
towards these goals, and provides further
information regarding our 2017 progress.
It is available on our website.
GROUP SUSTAINABILITY STRATEGY
Smith & Nephew has been and remains
committed to working in a sustainable,
ethical and responsible manner everywhere
we do business. We are proud of our
achievements over many years, as witnessed
by our recurring inclusion in leading indices
such as FTSE4Good and the Dow Jones
Sustainability Index.
Sustainability is a journey, and in 2016
we thought deeply about our destination
for the longer-term. The result was a new
Group Sustainability Strategy. At the heart
of this are ten long-term aspirational goals.
These encompass all aspects of our business,
and will inform and drive our business strategy
for years to come. The Board has endorsed
these and executive management is behind
them. These goals are set out overleaf.
The Board has evaluated the social and
environmental risks as part of their ongoing
risk management duties and has concluded
that none of these risks are material in the
context of the Group as a whole.
Longer term goals need medium-term SMART
(specific, measurable, achievable, realistic
and timebound) targets to ensure we are
making the right progress. And we have taken
such targets through 2020. These targets
are discussed in more detail in the 2017
Sustainability Report which is available on
our website.
2017 was a year in which our refreshed
sustainability strategy was put into action.
We delivered improvements across our
traditional areas of focus: employee health
and safety, carbon emissions and water
consumption. In addition, we began to get
a fuller understanding of our impacts in
the areas of material efficiency, life cycle
environmental impacts, and labour practices.
We adopted a social responsibility strategy
which will drive employee engagement and
improve the communities in which we operate.
EMPLOYEE SAFETY, WELLNESS
AND VOLUNTEERING
A healthy and safe working environment is
fundamental to the way we work at Smith &
Nephew. We must ensure that the safety of
our employees and those who work with us
is given the highest priority when we perform
our daily activities in our offices around the
world, when we visit customers and in our
manufacturing environment.
Engagement with the communities in which
we operate continued to broaden and deepen
through the active attention of site leadership,
establishment and empowerment of local
camaraderie councils, broader application
of company-paid volunteering allowance,
and increase in the company match for
employee donations to charity. We continue
to strengthen and deepen employee wellness
programmes with a focus on enabling healthy
lifestyle choices.
SOCIAL RESPONSIBILITY
STRATEGY IMPLEMENTATION
In 2017, we developed and adopted a social
responsibility strategy aimed at improving
the alignment of our charitable donation,
volunteering, wellness and professional
development with both our Group Business
Strategy and the needs and desires of our
employees. The aim is to positively impact both
employee engagement and the quality of life
in communities in which we operate. We have
improved our understanding of compliance to
labour standards in our value chain, product
and service attributes which are important to
customers and our employees’ view of the role
of the organisation in society. In 2018, we will
use these and other social success factors,
informed by our Group Business Strategy
as well as our Company values, to deploy a
series of platforms and actions which advance
our cause.
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SUSTAINABILITY continued
OUR PERFORMANCE IN 2017
Our 10 long-term aspirational goals
2020 targets
Progress since 2016
1 Zero work-related injuries and illnesses across
the value chain.
2 Water: Total water impacts of our products and
solutions are balanced with local human and
ecosystem needs.
3 Waste: All materials are either shipped as part
of product or returned for beneficial use.
– 10% reduction in Total Injury Rate (TIR) from
– In 2016 the TIR = 0.52, in 2017 TIR = 0.35 (33% lower).
2016 actual.
– Water footprint (1) available for products
accounting for 75% of revenue and
(2) considerations embedded in new
product development process.
– Total potable water consumption at S&N
sites no higher than 2016 actual.
– Total material efficiency estimated for
products accounting for 75% of revenue
– 80% or more of waste generated reused,
recycled or recovered.
– Products accounting for 75% of revenue identified.
Water footprint tools identified.
– Work plan under development, will be approved and
commenced in 2018.
– Water reduction of 10%.
– Products accounting for 75% of revenue identified.
Material efficiency tools identified.
– Work plan under development, will be approved and
commenced in 2018.
– We currently reuse, recycle or recover energy from
77% of our total waste, up from 74% in 2016.
4 Carbon: 80% absolute reduction in total life
cycle greenhouse gas emissions by 2050.
5 Ethical Business Practices: All activities are
conducted in compliance with applicable
International Labour Organization (ILO)
conventions, involve no environmental
degradation, and are free from corruption.
6 Zero Product-related and service-related
patient injuries.
– Estimate total life cycle greenhouse gas
– Products accounting for 75% of revenue identified.
emissions of products accounting for 75%
of revenue.
Total lifecycle greenhouse gas emissions
tools identified.
– Total Scope 1 & 2 greenhouse gas emissions
– Work plan under development, will be approved and
reduced by 10% from 2016 actual.
commenced in 2018.
– In 2017 the reduction is 7%.
– Labour practices throughout the supply
chain associated with products accounting
for 75% of revenue compliant with applicable
ILO conventions.
– Products accounting for 75% of revenue identified.
Gap assessment to applicable ILO conventions
completed for internal operations. Engagement with
upstream suppliers and downstream distributors and
agents ramping up.
– Robust system in place to detect, record,
investigate and eliminate root cause
of product-related and service-related
patient injuries.
– Systems are in place to detect, record and investigate
patient injury incidents. Patterns in the data are being
used to craft models which will allow identification of
at-risk attributes.
7 Robust social responsibility programmes that
contribute to the attraction and retention of
top talent.
– Social responsibility strategy which aligns
philanthropy, employee volunteering and
wellness to the business strategy in place.
– Social responsibility strategy in place. Alignment
of current initiatives to the strategy under way.
8 Products and services are aligned to market
economic, social and environmental
expectations and anticipate future market
conditions:
– All products have identified and clearly-
described sustainability attributes.
– R&D and NPD processes deliver
environmental-, social-, and healthcare
economically-advantaged innovations.
– Sustainability attributes described for
products accounting for 75% of revenue
Robust emphasis on sustainability attributes
of new products/services in place.
– Products accounting for 75% of revenue identified.
Product/service sustainability attributes agreed.
– New product development (NPD) sustainability focus
planning under way.
9 Strategic risks and opportunities are
understood and business activities are aligned
to risk appetite.
– Enterprise risk management arrangements
are embedded in the routine business
decision-making process.
– Risk register reinvigorated. Deep dive programme
instituted with focus on both assurance that all relevant
risks have been identified and effectiveness of
mitigating actions is accurately assessed.
– Actions to further embed into the business
decision-making process are planned for 2018.
10 Environmental, social, and economic impacts
of (1) potential acquisitions, (2) technologies to
be extended to Emerging Markets, (3) innovative
business models, (4) cost-of-quality reduction
initiatives, and (5) manufacturing siting,
functional optimisation and site utilisation
alternatives are fully understood and
appropriately balanced.
– Formal programmes in place to measure/
– Launched our Enterprise Risk Management Policy
assess the economic, social and
environmental impacts of (1) potential
acquisitions, (2) technologies to be extended
to Emerging Markets, (3) innovative
business models, (4) cost-of-quality
reduction initiatives, and (5) manufacturing
siting, functional optimisation and site
utilisation alternatives.
and Manual.
– Trained our risk champions in risk identification
and mitigation.
– Introduced a product focused approach to
risk management.
– Conducted a number of ‘deep dives’ into several
key risks.
– Tools and standards to address new technologies are
being developed to support our NPD work above.
These targets are discussed in more detail in our 2017 Sustainability Report which is available on our website.
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SUSTAINABILITY continued
CO2e REPORTING
CO2e emissions (tonnes) from:
Direct emissions
Indirect emissions
Total
Intensity ratio
CO2e (t) per $m sales revenue
CO2e (t) per full-time employee
GETTING SERIOUS
ABOUT SOLAR
2017
2016
2015
9,451
76,107
85,558
17.8
5.2
9,822
82,415
92,237
19.6
5.9
11,011
77,191
88,202
19.2
6.0
Revenue: 2017: $4.8bn; 2016: $4.7bn; 2015: $4.6bn.
Full-time employee data: 2017: 16,333; 2016: 15,584; 2015: 14,686.
Notes
2015 data adjusted to exclude acquisitions in Russia and Colombia.
2017 data includes all data, including acquisitions since 2016.
CO2e reporting methodology, materiality and scope.
We report the carbon footprint of our Scope
1 and 2 greenhouse gas (GHG) emissions in
tonnes of CO2 equivalent from our business
operations for the calendar year ended
31 December 2017. Our focus is on the areas
of largest environmental impact including
manufacturing sites, warehouses, R&D sites
and offices. Smaller locations representing
less than 2% of our overall emissions are
not included. Acquisitions completed
before 2017 are included in the data, with
more recent ones being excluded and this
is in line with our established policy for
integration of acquired assets. Each year we
work with an independent partner to verify
our sustainability data and gain assurance.
Our GHG emissions reporting represents
our core business operations and
facilities which fall within the scope of
our consolidated financial statements.
Primary data from energy suppliers has
been used wherever possible.
We report our emissions in two ‘scopes’.
Scope 1 figures include: Direct sources of
emissions mainly comprise the fuels we use
on-site, such as gas and heating oil and
fugitive emissions arising mainly from the
losses of refrigerant gases.
Scope 2 figures include: Indirect sources of
emissions such as purchased electricity and
steam we use at our sites.
Location-based emissions are calculated
in compliance with the WRI/WBCSD
GHG Protocol Corporate Accounting
and Reporting Standard and have been
calculated using carbon conversion factors
published by BEIS/DEFRA for 2017. We have
applied the emission factors most relevant
to the source data, including DEFRA 2017
(for UK locations), IEA 2015 (for overseas
locations) and for the US we have used the
US EPA ‘Emissions & Generation Resource
Integrated Database’ (eGrid) for the regions
in which we operate. All other emission
factors for gas, oil, steam and fugitive
emissions are taken from DEFRA, 2017.
In line with our aspiration to
reduce carbon emissions, we
are investing in more efficient
energy solutions, such as
solar power.
Devrukh, India
At our Devrukh site in India, we are
running one of our largest renewable
energy projects.
By installing the 426 kVA roof top solar
panel system, we aim to produce enough
energy to provide the site with free power
for 25 years, whilst reducing carbon
emissions by up to 44% per annum.
We are already achieving a cost saving
of 44% per year and expect a return on
investment in less than five years.
The 1,330 solar panels will also enable
us to reduce the inside temperature of
the manufacturing floor by five to ten
degrees celsius, creating a safer and
more pleasant working environment for
our employees.
Suzhou, China
In April 2017, we installed 24 sets of solar
water heater units on the roof of one of
our buildings in Suzhou. The system can
produce around 12 tonnes of 55˚C hot
water every day for the site’s hot water
system and will save 291 tonnes of steam
every year.
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CHIEF FINANCIAL OFFICER’S REVIEW
BUILDING A MORE
COMPETITIVE
BUSINESS
I am excited by the prospects for 2018
and beyond as we realise the opportunities
in front of us.
DEAR SHAREHOLDER
I am delighted to address you for the first time in
the Annual Report as your Chief Financial Officer.
Under Olivier’s leadership, Smith & Nephew
has made significant organisational changes
to create a strong global business. I believe
that we are just starting to see the benefits
of these changes, and I am excited by the
prospects for 2018 and beyond as we realise
the opportunities in front of us. I am very
much looking forward to working with Olivier
and, in due course, his successor, to make
this happen.
2017 PERFORMANCE
Group revenue in 2017 was $4,765 million,
an increase of 2% on a reported basis and
3% on an underlying basis1. This was an
improvement from underlying growth of 2%
in 2016. Trading profit1 was $1,048 million, and
the trading profit margin1 was 22.0%, up 20bps
on 2016. I am pleased to report that both
our underlying revenue growth and trading
profit margin improvements were in-line with
our guidance.
The reported operating profit for 2017 was
$934 million, up from $801 million in 2016, with
the year-on-year increase primarily reflecting
a gain of $54 million from the settlement of an
intellectual property matter, no restructuring
charges and lower amortisation and
impairment of acquisition intangibles in 2017.
The tax rate on trading results1 was 17.1%
(2016: 23.8%). This is a considerable
reduction on the 2016 rate and is mainly due
to a one-off benefit following the conclusion
of a US tax audit, further progress in improving
our tax rate, tax provision releases following
expiry of statute of limitations and a beneficial
geographical mix of profits. The reported
tax rate of 12.7% was a result of the lower
tax rate on trading results and also included
a $32 million net benefit from US tax reform.
Adjusted earnings per share1 (EPSA) was up
14% at 94.5¢ as a result, and this is reflected
in the 14% increase in our full year dividend
distribution for 2017. Basic earnings per share
(EPS) was 87.8¢ in line with the previous year.
FINANCIAL
REVIEW
SMITH & NEPHEW ANNUAL REPORT 2017 37
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OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
CHIEF FINANCIAL OFFICER’S REVIEW continued
FINANCIAL HIGHLIGHTS
$4,765m
Revenue
+3%
+2%
Underlying1
Reported
87.8¢
Earnings per share EPS
0%
94.5¢
Adjusted earnings per share (EPSA)1
+14%
1 These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial
measure prepared in accordance with IFRS
on pages 178–181.
APEX is expected to deliver an annualised
benefit of $160 million by 2022, with at least
half of this expected by 2020, for a one-off
cash cost of up to $240 million.
SUCCESSFUL ACQUISITION
During the year, we continued to seek further
opportunities to strengthen our technology
and product portfolio. In December we
acquired Rotation Medical, Inc., the developer
of a novel tissue regeneration technology
for shoulder rotator cuff repair, for an initial
cash consideration of $125 million and up to
a further $85 million over the next five years,
contingent on financial performance. I am
excited by the potential for this new technology
and we remain alert to further opportunities
to bring other disruptive innovations into
the Group.
OUTLOOK
We expect the overall dynamics in our markets
to be similar in 2018 to those seen in 2017.
Against this backdrop, the Group expects to
continue to deliver an improved performance
in 2018 driven by our by our strong product
portfolio and pipeline of innovative products.
In terms of revenue, we expect our underlying
growth to be in the range of 3% to 4% (which
equates to 7% to 8% in reported terms at
exchange rates prevailing on 2 February 2018).
In terms of trading profit margin we expect to
drive a further 30-70bps improvement over
2017. As a result of the recently enacted US tax
reform, we expect a tax rate on trading results
in the range 20% to 21%, barring any changes
to tax legislation or other one-off items.
In 2018, we will continue to push for further
success as we build a more competitive
Smith & Nephew. I look forward to helping to
drive this, and to delivering on our commitments
for the benefit of all of our stakeholders.
Yours sincerely,
Graham Baker
Chief Financial Officer
I am pleased to report that trading cash flow1
was $940 million, up from $765 million in 2016,
with a higher trading profit to cash conversion
ratio1 of 90% as we improved our working
capital management.
As the result of improved operating profit, the
lower tax rate and a stable asset base we saw
an improvement in Return On Invested Capital1
(ROIC – as defined on page 39) from 11.5% in
2016 to 14.3% in 2017.
CAPITAL RETURNS
The appropriate use of capital on behalf
of shareholders is important to Smith &
Nephew. The Board believes in maintaining
an efficient, but prudent, capital structure,
while retaining the flexibility to make value-
enhancing acquisitions.
This approach is set out in our Capital
Allocation Framework which we used to
prioritise the use of cash and ensure an
appropriate capital structure.
Our commitment, in order of priority, is to:
– Continue to invest in the business to drive
organic growth;
– Maintain our progressive dividend policy;
– Realise acquisitions in-line with strategy; and
– Return any excess capital to shareholders.
This is underpinned by maintaining leverage
ratios commensurate with solid investment
grade credit metrics.
IMPROVING COMPETITIVENESS
On joining Smith & Nephew I was asked
by Olivier and the Board to look afresh at
efficiency opportunities within our business.
Some preliminary analysis highlighted a
number of areas of opportunity, and we
conducted a detailed assessment of these
during the final months of 2017.
Our conclusion was that we now have the
Group structure in place which lets us act on
these further opportunities. Through better
execution and efficiency we can and will
strengthen our competitive position.
We are calling this work the APEX programme,
standing for ‘Accelerating Performance and
Execution’, and we completed our planning
and started to take action in early 2018.
Our three workstreams are focused on
clear and obtainable improvements in the
Group’s manufacturing, warehousing and
distribution footprint, reducing our general and
administrative expenses, and driving greater
commercial effectiveness. More details on
APEX and each of these workstreams can be
found on page 14.
SMITH & NEPHEW ANNUAL REPORT 2017 38
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
FINANCIAL REVIEW
DELIVERING ON OUR COMMITMENTS
GROUP PERFORMANCE
HIGHLIGHTS FOR THE YEAR ENDED 31 DECEMBER
Consolidated income statement
Revenue
Operating profit
Trading profit1
Profit before tax
Attributable profit
EPS
EPSA1
Consolidated balance sheet
Goodwill and intangible assets
Other non-current assets
Current assets
Total assets
Total equity
Non-current liabilities
Current liabilities
Total liabilities
Total liabilities and equity
Net debt1
Consolidated cash flow statement
Cash flows from operating activities
Trading cash flow1
Free cash flow1
2017
$ million
2016
$ million
Change
$ million
4,765
934
1,048
879
767
87.8¢
94.5¢
3,742
1,393
2,731
7,866
4,644
1,876
1,346
3,222
7,866
1,281
1,273
940
714
4,669
801
1,020
1,062
784
88.1¢
82.6¢
3,599
1,216
2,529
7,344
3,958
2,038
1,348
3,386
7,344
1,550
1,035
765
457
96
133
28
(183)
(17)
(0.3¢)
11.9¢
143
177
202
522
686
(162)
(2)
(164)
522
(269)
238
175
257
NON-IFRS MEASURES
The underlying increase in revenues, by market, reconciles to reported growth, the most directly
comparable financial measure calculated in accordance with International Financial Reporting
Standards (IFRS), as follows:
2017
$ million
2016
$ million
Reported
growth
%
Underlying
growth
%
Acquisitions/
Disposals
%
Currency
impact
%
Reconciling items
US
Other Established Markets
Emerging Markets
Total
2,306
1,678
781
4,765
2,299
1,679
691
4,669
0%
0%
13%
2%
2%
0%
12%
3%
(2%)
0%
0%
(1%)
0%
0%
1%
0%
Trading profit reconciles to operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, as follows:
Operating profit
Acquisition-related costs
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other
Trading profit
2017
$ million
934
(10)
–
140
(16)
1,048
2017
%
19.6%
(0.2%)
–
2.9%
(0.3%)
22.0%
2016
$ million
801
9
62
178
(30)
1,020
2016
%
17.2%
0.2%
1.3%
3.8%
(0.7%)
21.8%
RESULTS OF OPERATIONS
In 2017, we delivered reported revenue
growth of 2% and underlying revenue growth1
of 3%. Revenue growth on a reported basis
was flat across our US and other Established
Markets, with a strong performance in Japan
driven by Sports Medicine and Knee Implants
counterbalanced by a soft wound care market
in the UK where we have now taken steps to
adapt our business in response.
In our Emerging Markets reported revenue
growth was 13% and underlying growth1 was
12% in 2017. In China, our largest Emerging
Markets country, we delivered double-digit
revenue growth as we improved our channel
management. In the oil-dependent Gulf
States we returned to growth by focusing on
securing more private healthcare business to
compensate for the reduction in government
tenders. We are well positioned to continue to
drive strong growth from the Emerging Markets
over the medium term.
Operating profit of $934 million (2016:
$801 million) is after integration and acquisition
costs, as well as amortisation and impairment
of acquisition intangibles and legal and other
items. The year-on-year increase in operating
profit primarily reflects a gain of $54 million
from the settlement of an intellectual property
matter, no restructuring charges and lower
amortisation and impairment of acquisition
intangibles in 2017. The sale of the rights
to distribute certain non-core products
contributed $19m to operating profit in 2017.
In 2016 similar product disposals along with
provision releases from favourable legal matter
outcomes contributed $18m.
Trading profit1 was $1,048 million (2016:
$1,020 million). Trading profit margin1 was
22.0%, up 20bps year-on-year, in line
with guidance.
In 2017, selling, general and administrative
expenses included a $10 million credit
relating to acquisition-related costs (2016:
$9 million charge), $16 million credit for
legal and other costs primarily related to
the settlement of patent litigation (2016:
$30 million credit for legal and other primarily
related to a $44 million curtailment credit
related on UK post-retirement benefits) and
$140 million charge for amortisation and
impairment of acquisition intangibles (2016:
$178 million charge).
Research and development expenditure
as a percentage of revenue remained
broadly consistent at 4.7% (2016: 4.9%) with
expenditure of $223 million in 2017 compared
to $230 million in 2016.
SMITH & NEPHEW ANNUAL REPORT 2017 39
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REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
FINANCIAL REVIEW continued
Profit before tax in 2016 includes the
$326 million profit on disposal of the
Gynaecology business.
The Group has completed its review of the
new US tax reform legislation, as enacted in
December 2017, including the reduction of the
US federal tax rate from 35% to 21%, which
came into effect on 1 January 2018. As a result,
the Group expects a positive impact on its
tax charge for future years in addition to
the one-off tax benefit in 2017 as discussed
below. Parts of the new legislation are subject
to questions of interpretation, and further
regulations may be issued in the future to
clarify or change certain elements, which
may affect future tax charges.
Included in the total tax charge is a $32 million
net benefit as a result of US tax reform
legislation which comprises a benefit from
a revaluation of deferred tax balances included
within changes in tax rates, partially offset by
a current tax charge relating to the deemed
repatriation of foreign profits not previously
taxed in the US.
Our reported tax rate of 12.7% (2016: 26.2%)
has decreased due to the $32 million net
benefit in 2017 from US tax reform, the lower
tax rate on trading results and the impact of
the Gynaecology disposal in 2016. Our trading
tax rate1 is 17.1% (2016: 23.8%) with the
reduction due to a one-off benefit following the
conclusion of a US tax audit, further progress
in improving our tax rate, tax provision releases
following expiry of statute of limitations and
a beneficial geographical mix of profits.
BALANCE SHEET
Goodwill increased by $183 million as a result
of $132 million arising on the acquisition of
Rotation Medical, Inc. and favourable currency
movements of $51 million. Intangible assets
decreased by $40 million with net movements
relating to additions, disposals and transfers
of $70 million relating to intellectual property,
distribution rights and software acquired
together with $61 million recognised with
the acquisition of Rotation Medical, Inc.
Amortisation and impairment during 2017
was $202 million and there were favourable
currency movements of $31 million.
Other non-current assets increased by
$177 million primarily due to a $67 million
increase in property, plant and equipment
with additions offsetting depreciation, and
the recognition of retirement benefit assets
of $62 million for our UK and US pension
schemes. Current assets increased by
$202 million with trade and other receivables
increasing $73 million primarily due to
$45 million of foreign exchange, inventories
increasing $60 million primarily due to foreign
exchange and cash increasing $69 million due
to the timing of receipts.
Non-current liabilities decreased by
$162 million primarily due to payments
made against our borrowing facilities.
Current liabilities decreased by $2 million
as a $73 million increase in trade and other
payables arising from a $37 million foreign
exchange increase and a $28 million timing
difference on the payment of expenses
associated with a patent litigation gain, which
was partially offset by a $59 million decrease
in bank overdrafts and loans and $18 million
decrease in provisions.
CASH FLOW
Cash generated from operations of
$1,273 million (2016: $1,035 million) is after
paying out $3 million (2016: $24 million) of
acquisition-related costs, $15 million (2016:
$62 million) of restructuring and rationalisation
expenses and $25 million (2016: $36 million)
relating to legal and other costs.
Trading cash flow1 increased by $175 million
primarily related to working capital movements.
Free cash flow1 increased by $257 million
primarily related to working capital movements
and lower cash outflows for acquisition-
related costs, restructuring and rationalisation
expenses and legal and other costs.
During the year ended 31 December 2017,
the Group purchased a total of 3.2 million
(2016: 24.0 million) ordinary shares at a cost
of $52 million (2016: $368 million) as part of the
ongoing programme to buy back an equivalent
number of shares to those vesting as part
of the employee share plans. 2016 share
repurchases included a $300 million share
buy-back programme following the disposal
of the Gynaecology business.
DIVIDENDS
The 2016 final dividend of 18.5 US cents per
ordinary share totalling $162 million was paid
on 10 May 2017. The 2017 interim dividend
of 12.3 US cents per ordinary share totalling
$107 million was paid on 1 November 2017.
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.
The Group’s net debt decreased from
$1,550 million at the beginning of 2017 to
$1,281 million at the end of 2017, representing
an overall decrease of $269 million.
At 31 December 2017, the Group held
$155 million (2016: $38 million) in cash net of
bank overdrafts. The Group had committed
facilities available of $2,425 million at
31 December 2017 of which $1,425 million was
drawn. Smith & Nephew intends to repay the
$13 million of bank loans due within one year
by using available cash and drawing down on
the longer-term facilities.
The principal variations in the Group’s
borrowing requirements result from the
timing of dividend payments, acquisitions
and disposals of businesses, timing of capital
expenditure and working capital fluctuations.
Smith & Nephew believes that its capital
expenditure needs and its working capital
funding for 2017, as well as its other known
or expected commitments or liabilities, can be
met from its existing resources and facilities.
The Group’s planned future contributions
are considered adequate to cover the current
underfunded position in the Group’s defined
benefit plans.
RETURN ON INVESTED CAPITAL
Return On Invested Capital1 (ROIC) is
a measure of the return generated on
capital invested by the Group. It provides
a metric for long-term value creation and
encourages compounding reinvestment
within the business and discipline around
acquisitions with low returns and long
payback. ROIC increased from 11.5% in 2016
to 14.3% in 2017 as a result of the improved
operating profit, the lower tax rate and a stable
asset base.
ROIC is defined as:
Net Operating Profit less Adjusted Taxes
(Opening Net Operating Assets +
Closing Net Operating Assets)/2
14.3% +280bps
Return On Invested Capital1 (ROIC)
WHY THIS KPI IS IMPORTANT
ROIC measures the return generated on
capital invested by the Group.
HOW WE PERFORMED
ROIC was up 280bps year-on-year driven
by improved operating profit, the lower tax
rate and a stable asset base.
1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.
SMITH & NEPHEW ANNUAL REPORT 2017
40
OVERVIEW
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
RISK REPORT
OUR APPROACH TO RISK
OUR RISK MANAGEMENT PROCESS
Our Enterprise Risk Management process is based on a holistic approach to risk management, leveraging the best risk identification and risk
treatments already in place throughout our Business Areas and Product Groups whilst incorporating the same risk processes into the strategic
planning process. Our belief is that the strategic and operational benefits of managing risk are achieved when Enterprise Risk Management is
aligned with the strategic and operational goals of the organisation and our process and governance structure firmly aligns to this approach.
In carrying out our business we face many risks and uncertainties and our Risk Management Policy and Enterprise Risk Management Manual
ensure that our Risk Community can identify, review and report risks at every level of our business. At the very top of our structure is our Board,
setting our risk appetite and monitoring the application of our risk framework through strategy, execution and practically through the outputs of
regular risk ‘deep dives’ by the business and Group Risk Team. The Board cascades our risk appetite throughout our organisation through the Risk
Committee, Risk Owner Community and our Management Group with a formal ‘bottom up’ process ensuring that risks are escalated back through
the process to our Board and form our Principal Risks as appropriate. Providing rigour and independence across this process is our Executive
Committee and the Group Risk Team. At the third line of defence is our Internal Audit Function, providing an annual opinion on the effectiveness
of our Risk Management process to the Group Risk Committee chaired by the Chief Executive Officer and then to the Board and its committees.
Roles
Responsibilities
– Responsible for regular oversight of risk management and for our annual
strategic risk review
– Monitors risks through Board processes (Strategy Review, Disclosures, M&A,
Investments, Disposals) and Committees (Audit and Ethics & Compliance),
management reports and deep dives of selected risk areas
– Audit Committee is responsible for ensuring oversight of the process by which
risks relating to the Company and its operations are managed and for viewing
the operating effectiveness of the Group’s Risk Management process
– Reviews external/internal environment for emerging risks
– Reviews risk register updates from Business Areas
– Identifies significant risks and assesses effectiveness of mitigating actions
– Business Area/Product Group Risk champion provides support to ensure
a framework is designed and implemented for alignment to the requirements
of the Enterprise Risk Management Framework
– Carry out day-to-day risk management activities
– Identify and assess risk
– Implement strategy and mitigating actions to treat risk within Business/
Product Risk Groups
– Risk Champions lead regular risk register updates
– Manage implementation of all aspects of the Group’s approach to Enterprise
Risk Management including implementation of processes, tools and systems
to identify, assess, measure, manage, monitor and report risks
– Facilitates implementation and coordination through Risk Champions
– Provides resources and training to support process
– Prepares Board and Group Risk Committee reports based on Business Area
and Product Group updates
Board
of Directors and
Board Committees
Group
Risk Committee
Business area/
Product Risk Groups
Group Risk Team
Annual assessment of effectiveness –
Internal audit and control functions
RISK
SMITH & NEPHEW ANNUAL REPORT 2017 41
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& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
RISK REPORT continued
RISK MANAGEMENT LIFE CYCLE – OUR SEVEN-STEP PROCESS
Our risk management life cycle was refreshed and updated in 2017 to align with our new approach to include Product Groups within our risk
portfolio. Our Risk Management Policy was launched in May with sponsorship from the Chief Executive Officer and a revised manual aligning to the
new structure was launched shortly after. Risks continue to be managed through a ‘bottom up’ and ‘top down’ process, with monthly oversight from
the Executive Committee and quarterly reports to the Board Committees. An overview of our ‘seven step’ process can be found below:
An overview of the Risk Management and Reporting Process
1
Risk
Identification
IDENTIFYING risks associated
to achievement of our objectives
by function and product and
at the Group level. Early and
continuous risk identification
including existing and
horizon risks.
2
Gross (inherent)
Risk assessment
ASSESSING the level of
inherent (gross) risk.
3
Current Control
identification
IDENTIFYING existing controls
to mitigate risks.
7
Monitoring
and review
MONITORING of risks and actions
by management, the accountable
Executive and Board. Coordinated and
ongoing monitoring of the internal and
external risk environment
to respond to emerging and
horizon risks.
6
Risk
Reporting
REPORTING the status of
our most significant risks through the
‘bottom up’ business area processes
and the ‘top down’ Executive
Committee and Board process.
Demonstrating appropriate
management of, and response
to, our risk profile.
5
Risk Response
Planning
IDENTIFYING additional actions
required to meet our expected risk
tolerance level and ASSIGNING
risk owners, timeframes and
actions for ongoing management
and reporting.
4
Net (residual) Risk
ASSESSING the level of residual
(net) risk after mitigation so that
risk levels are managed within
defined tolerance thresholds without
being over controlled or foregoing
desirable opportunities.
SMITH & NEPHEW ANNUAL REPORT 2017 42
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FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
RISK REPORT continued
2017 PRINCIPAL RISKS
We assess our Principal Risks in terms of their potential impact on our ability to deliver our Strategic Priorities. These links are highlighted across
the following pages and further information on the Strategic Priorities is found on page 10.
LEGAL AND COMPLIANCE RISKS
Our global remit results in heavy regulation across multiple jurisdictions. There is increasing public scrutiny of ethics in business and ‘doing the
right thing’ has become part of our licence to operate. National regulatory authorities enforce a complex pattern of laws and regulations that
govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products.
Operating across this increasingly complex and dynamic legal and compliance environment, including regulations on bribery and corruption,
with poor legal and compliance practices can lead to fines, penalties, reputational risk and competitive disadvantage. We have adopted
a proactive, holistic approach, which guides the Company towards a culture of compliance and turns the resolution of legal and compliance
issues into a source of competitive advantage.
Risk Tolerance
In complying with legal and compliance requirements,
we have an extremely low tolerance.
Change from 2016
No Change
Link to strategy
Compliance with applicable laws and regulations and
doing the right thing is part of our licence to operate and
underlies all our Strategic Priorities.
Oversight
Ethics & Compliance Committee
Examples of risks
– Failure to act in an ethical manner consistent with our
Actions taken by management
– Ethics & Compliance Committee oversees our ethical and compliance practices.
Code of Conduct.
– All employees are required to undertake annual training and to certify compliance
– Violation of anti-corruption or healthcare laws, breach by
on an annual basis with our Code of Conduct and Business Principles.
STRATEGIC PRIORITIES PAGE 10
employee or third party representative.
– Failure to respond adequately to changes in legislation/
regulation.
– Misuse or loss of personal information of patients, employees,
research subjects, consumers or customers results in
violations of data privacy laws, including General Data
Protection Regulations.
CYBER SECURITY
– Group monitoring and auditing programmes in place.
– Confidential independent reporting channels for employees and third parties
to report concerns.
High profile incidents coupled with increasing government focus has resulted in raised awareness of the extent and potential impact of cyber
security breaches. Our increasing business dependence on networked systems and the Internet, the design of new products, connectable
products and embedded software and the rapidly evolving cyber security threat landscape provides us with risk exposure not experienced
in prior years. In response to this we have undertaken an exercise to understand our threats and vulnerabilities to target cyber security
investment in the right places.
Risk Tolerance
In managing our cyber risk and the possible disruption and
reputational impact we have a low to moderate tolerance for
Cyber Security Risk.
Change from 2016
Included as ‘other risk’ in 2016
Link to strategy
Given our strategic priority ‘Innovate for value’ and an
increasing focus on connected products we must deliver
our technology solutions in compliance with laws and
regulations and in a way that protects any vulnerability
to Cyber Risk.
Oversight
Audit Committee
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Loss of Intellectual Property/major data privacy breach or
significant impact on business operations from Malware
or Ransomware outbreak.
– Cyber Security is not considered in the design of new
products with more products being connectable/having
embedded software.
Actions taken by management
– Security information and event management (SIEM) in place providing real-time analysis
of security alerts generated by applications and network hardware.
– Annual Penetration Testing, endpoint protection and Intrusion detection/prevention.
– Annual Mandatory training and continuous awareness training for end-users.
– Security Governance structure in place including a Cyber Security Steering Committee.
SMITH & NEPHEW ANNUAL REPORT 2017
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FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
RISK REPORT continued
NEW PRODUCT INNOVATION, DESIGN & DEVELOPMENT INCLUDING INTELLECTUAL PROPERTY
Our product portfolio is becoming increasingly complex, especially as we move to more innovative connected product technologies and our
strategy of ‘owning the disease’. Our success relies on investing in safe products and platforms and aligned internal and external design and
development innovation in order to compete effectively. The need to be nimble and considered in our approach to protecting our products,
process and Intellectual Property is essential.
Risk Tolerance
In pursuit of our strategy to be innovative but safe in our
product offering we have a moderate to high tolerance
for risk.
Link to strategy
Our Strategic Priority to ‘Innovate for Value’ depends
heavily on our ability to continue to develop new innovative
products and bring them to market.
Oversight
Board
Change from 2016
No Change
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Insufficient long-term planning to respond to competitor
disruptive entries into marketspace.
– Inadequate innovation due to low R&D investment, R&D skills
Actions taken by management
– Newly created Global Research & Development (R&D) organisation and governance
framework providing strategic direction for allocation of R&D investments across
all businesses.
gap or poor product development execution.
– R&D charter to transform our Innovation pipeline and drive our corporate strategy to Innovate
– Lower value business segment investment, such as product
for Value.
maintenance and line extension projects.
– Strengthened Clinical Affairs programme integrated with Global Marketing.
– Competitors may assert patents or other intellectual property
rights against the Company, or fail to respect the Company’s
intellectual property rights.
– Cross functional New Product Design and R&D processes focused on identifying new
products and potentially disruptive technologies and solutions.
– Monitoring of external market trends and collation of customer insights to develop
product strategies.
– Careful attention to intellectual property considerations.
QUALITY AND REGULATORY
Global regulatory bodies continue to increase their expectations on manufacturers and distributors of medical devices. Our products are
implanted into human bodies and therefore Patient Safety is of paramount importance. The European Medical Device Regulations, launch
of ISO13485-2016, the Medical Device Single Audit Programme and the tightening of the Chinese YY standards have increased the focus on
clinical and technical evidence, supplier controls and continual product risk reduction.
Risk Tolerance
Our response to this risk continues to be critical and our ability
to align and exceed the standards required to ensure safe and
compliant products is the key driver for our extremely low
tolerance for risk in this area.
Link to strategy
Our Strategic Priority to ‘Simplify and Improve our Business
Model’ requires us to operate effectively and efficiently and
to produce compliant products of the highest quality to
our customers.
Oversight
Board Ethics &
Compliance Committee
Change from 2016
Modified Principal Risk in 2017 – formerly included as
Operational Risk – Quality and Business Continuity
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Defects in design or manufacturing of products supplied to,
and sold by, the Company could lead to product recalls or
product removal or result in loss of life or major injury.
– Significant non-compliance with policy, regulations or
standards governing products and operations regarding
registration, manufacturing, distribution, sales or marketing.
– Failure to obtain proper approvals for new or changed
technologies, products or processes.
Actions taken by management
– Comprehensive product quality processes and controls from design to customer supply
are in place.
– Careful attention to intellectual property considerations.
– Standardised monitoring and compliance with quality management practices through our
Global Quality Assurance and Regulatory Affairs organisation.
– Incident management teams in place to respond immediately in the event of an incident
relating to patient safety.
– Governance framework in place for reporting, investigating and responding to instances
of product safety and complaints.
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PRICING AND REIMBURSEMENT
Our success depends on our ability to sell our products profitably in spite of increasing pricing pressures from customers, and governments
providing adequate funding to meet increasing demands arising from demographic trends. The prices we charge are therefore impacted by
budgetary constraints and our ability to persuade customers and governments of the economic value of our products, based on clinical data,
cost, patient outcomes and comparative effectiveness.
We further face challenging market dynamics, such as consolidation of customers into buying groups, increasing professionalisation of
procurement departments and the commoditisation of entire product groups, which continue to challenge prices.
Risk Tolerance
In implementing innovative pricing strategies, we have a
moderate to high tolerance for risk and are willing to accept
certain risks in pursuit of new business opportunities.
Change from 2016
No Change
Link to strategy
Our Strategic Priorities to ‘Build a Strong Position in
Established Markets’ and to ‘Focus on Emerging Markets’
depends on our ability to sell our products profitably in
spite of increased pricing pressures from governments.
Oversight
Board
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Reduced reimbursement levels and increasing
pricing pressures.
Actions taken by management
– Development of innovative economic product and service solutions for both Established and
Emerging Markets.
– Systemic challenge on number of elective procedures.
– Appropriate breadth of portfolio and geographic spread to mitigate exposure to localised risks.
– Lack of compelling health economics data to support
– Incorporating health economic components into the design and development of new products.
reimbursement requests.
– Risk of adverse trading margins due to fluctuating foreign
currency exchange rates across our main manufacturing
countries (US, UK, Costa Rica and China) and where our
products are sold.
BUSINESS CONTINUITY AND BUSINESS CHANGE
– Emphasising value propositions tailored to specific stakeholders and geographies through
strategic investment and marketing programmes.
– Holding prices within acceptable ranges through global pricing corridors.
Operating with a Global Remit, increased outsourcing and more sophisticated materials and product technology has made our manufacturing
and supply chain process far more complex, leading to a greater potential for disruptive events. Ensuring our ability to continually execute and
operate key sites and facilities in order to develop, manufacture and sell our products within this environment is a key strategic priority of the
organisation. In addition, the pace and scope of our business ‘change’ initiatives increases the execution risk that benefits may not be fully
realised, costs of these changes may increase, or that our business as usual activities may not perform in line with our plans.
Risk Tolerance
In operating our business, executing our change programmes
and in managing our suppliers and facilities we have a
low to medium tolerance for this risk.
Change from 2016
Modified Principal Risk in 2017 – formerly included as
Operational Risk – Quality and Business Continuity
Link to strategy
Our Strategic Priority to ‘Simplify and Improve our Business
Model’ requires us to operate effectively and efficiently and
to ensure continuity of supply of products and services
to customers.
Oversight
Board
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Failure or significant performance issues experienced at
Actions taken by management
– Comprehensive product quality processes and controls are in place from design to
critical/single source facilities.
customer supply.
· Disruption to manufacturing at single or sole source facility
– Emergency and incident management and business recovery plans are in place at major
(lack of manufacturing redundancy).
facilities and for key products and key suppliers.
· Supplier failure impacts ability to meet customer demand
– Second source suppliers identified for critical components or products.
(single source suppliers).
· Natural disaster impacts ability to meet customer demand.
– Significant ‘change’ prevents our projects and programmes
such as APEX achieving the intended benefits and disrupts
existing business activities.
– Undertaking risk based review programmes for critical suppliers.
– Project Management Governance and toolkits and project Steering Committee Oversight to
support successful execution of programme and projects. Executive Committee and Audit
Committee oversight of Risks to change programmes.
– Brexit Steering Group regularly monitors the evolving impact of Brexit and oversees
– Political and economic ‘uncertainty’ in the countries in
our response.
which we operate, e.g. Brexit.
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MERGERS AND ACQUISITIONS
As the Company grows to meet the needs of our customers and patients, we recognise that we are not able to develop all the products and
services required using internal resources and therefore need to undertake mergers and acquisitions in order to expand our offering and to
complement our existing business. In other areas, we may divest businesses which are no longer core to our activities. It is crucial for our
long-term success that we make the right choices around acquisitions and divestments. We have a well-defined cross-functional process for
managing risks associated with mergers and acquisitions that is subject to scrutiny from executive management and the Board of Directors.
Risk Tolerance
In acquiring new businesses and business models, we have
a moderate to high tolerance for commercial risk and are
willing to accept certain risks in pursuit of new business.
Change from 2016
No Change
Link to strategy
Our Strategic Priority to ‘Supplement Organic Growth with
Acquisitions’ depends on our ability to identify the right
acquisitions, to conduct thorough due diligence and to
integrate acquisitions effectively.
Oversight
Board
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Failure to identify appropriate acquisitions or to conduct
Actions taken by management
– Acquisition activity is aligned with corporate strategy and prioritised towards products,
effective acquisition due diligence.
franchises and markets identified to have the greatest long-term potential.
– Failure to integrate newly acquired businesses
– Clearly defined investment appraisal process based on return on capital, in accordance with
effectively, including Company standards, policies and
financial controls.
Capital Allocation Framework and comprehensive post-acquisition review programme.
– Undertaking detailed and comprehensive cross-functional due diligence prior to acquisitions.
– Compliance risks included as part of due diligence reviews, integration plans and reporting
for acquisitions.
TALENT MANAGEMENT
We recognise that people management, effective succession planning and the ability to attract and retain talent is of great importance to the
success of our Company. In the current economic environment of strong competition and reduced spending, retention of top talent is a critical
risk which requires a strong process in relation to retention and engagement. Failure to do so can result in risks in our ability to execute
Company strategy and achieve business objectives in relevant functions and to be effective in the chosen market/discipline and leadership
of newer workforce which may impact the Company’s future success.
Risk Tolerance
We have a moderate tolerance for this risk.
Change from 2016
Included as ‘other risk’ in 2016
Link to strategy
All our strategic priorities rely on ensuring we have the
right talent within our organisation to deliver maximum
efficiency in everything we do and to build strong leaders
for the future.
Oversight
Board
STRATEGIC PRIORITIES PAGE 10
Examples of risks
– Loss of key talent and lack of appropriate succession
planning in context of required skill sets for future
business needs.
Actions taken by management
– Formal Talent Review process where the Executive Team has accountability for
managing talent.
– Identification of high performing individuals and practices to plan for the succession
– Loss of competitive advantage due to an inability to attract
of key roles.
and retain Top Talent.
– Loss of intellectual capital due to poor retention of talent.
– Consistent and robust performance Management process.
– Development of strategic skills resourcing plan by functional areas.
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COMMERCIAL EXECUTION
We continue to make good and strong progress delivering our priorities and are proud of the pace with which our strategic and operational
decisions are quickly translated into actions. Effective communication and engagement with our customers are critical to the long-term success
of our business. We are confident that we have the right priorities, structures and capabilities across the Group and we acknowledge that only
strong and continued execution will keep us ahead of our competitors and best placed to serve our customers. Failure to execute our priorities
will impact our ability to continue to grow our business and serve our customers.
Risk Tolerance
In continuing to execute our priorities in an innovative, safe,
profitable and compliant way we have a low to moderate
tolerance level.
Link to strategy
All Strategic Priorities
Change from 2016
Modified Principal Risk in 2017 –
previously incorporated into other principal risks
STRATEGIC PRIORITIES PAGE 10
Oversight
Board
Examples of risks
– Failure to adequately execute our strategy from high-level
ambition to specific actions to make the ambition a reality.
– Inability to keep pace with significant product innovation and
Actions taken by management
– Strengthened our commercial platform by creating a global commercial organisation with
a remit to drive commercial performance across the Group through sales force excellence
and pricing discipline.
technical advances to develop commercially
viable products.
– Failure to appropriately adapt our priorities and execution
when conditions change meaning that transformational
programmes do not deliver the expected outcomes.
– Failure to engage effectively with our key stakeholders to
meet their evolving needs leading to loss of customers.
– Newly created Global Research & Development organisation and supporting
governance framework.
– Improved Market Development and Launch Execution – Commitment to ‘win’ profitably
in our target markets.
– Strategic planning process clearly linked to business and Group Risk.
– Global transformational programmes in place providing agile opportunities
for efficiencies, growth and a strengthened competitive position.
DEEP DIVES COMPLETED IN THE YEAR (Group Risk Team/Board and Audit Committee Reviews)
During the year, the risks identified through the ‘bottom up’ and ‘top down’ processes were mapped against each other with the most significant
risks forming our Principal Risks. These risks and our tolerance levels were discussed with each member of Executive Committee separately and
collectively in August and were presented to the Board during the Strategy Review in September 2017. A further ‘bottom up’ exercise was carried
out in November to validate that the risk profile had not significantly changed since the initial exercise in June. No changes were required to our risk
profile as a result of this exercise, which was also formally validated by each Accountable Executive.
Throughout 2017, a number of different risk topics were presented to the Board and its Committee and specific ‘Deep Dive’ reviews were also
completed by the Group Risk Team as follows.
Board and Audit Committee Deep Dives
Legal, Compliance and Quality
During the year the Ethics & Compliance Committee meetings considers
papers from the quality and regulatory, legal and compliance teams. In 2017,
the meetings have covered topics including preparation for General Data
Protection Regulation (GDPR) in EU, Medical Device Regulations (MDR), FDA
& Notified Body Inspection Activities, the Global Quality and Compliance
Audit programme, Transactions with Compliance Risks and the outcome of
significant Investigations.
Strategic: Research and Development and M&A
The Board has considered a report from the R&D team covering topics/risks in
relation to execution, driving high value Innovation Projects and investment in
Clinical Evidence and associated strategies to manage these risks. Each Board
meeting considers Corporate Development. For 2017, this has focused on the
lead up to, and our acquisition of, Rotation Medical. Retrospective reviews
have also happened during the year on previous acquisitions compared to the
expectations in the deal models.
Manufacturing Operations
Throughout the year, the Board has received presentations from the global
operations team with oversight of operational matters, particularly relating to the
manufacturing footprint and the risks associated with the current footprint and
the proposals to mitigate these risks.
Functional Oversight
The Board and Audit Committee receive regular updates throughout the year
from functions such as IT, Tax, Treasury and Financial operations. The Audit
Committee also receives an update three times during the year on progress of
risk management across the organisation.
IT/Cyber
The Audit Committee received reports on IT and Cyber security, including an
assessment of the existing risks and benchmarking against industry standards.
HR
Annual discussion at the Board in relation to talent succession, culture
and values.
Group Risk Team Deep Dives
A series of planned ‘Deep Dives’ have been completed in the year across
our Business and Product Group Risk Areas, including PICO, Total Knees and
ALLEVYN product Groups, Compliance and Europe/Canada Business Areas.
These reviews have been newly introduced in 2017 to supplement reports
provided to the Board and primarily cover an ‘independent’ assessment of
compliance to the expected Risk Management Framework and in particular the
adequacy of stated mitigating activities. The results are reported through the
Risk Champions and Accountable Executives to the Audit Committee and are
tracked and monitored to resolution by the Group Risk Team.
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2018 RISK MANAGEMENT PLAN
Our work will continue in 2018 to evolve and strengthen our approach to managing risks across the organisation, including our business areas
and product groups. We will continue to ensure a truly collaborative approach to risk management with risk accountability sitting squarely with
management and a proactive Group Risk Function influencing decision making through effective challenge and timely consultation. 2018 will
see innovation further driven through a new Global Enterprise Risk Management tool, more regular and sophisticated risk reporting across the
organisation and further embedding Risk Appetite into decision making.
2018 RISK MANAGEMENT TIMELINE
Q1 2018
Internal Audit
Deep dive risk reviews
Group Risk Team
– Refresh Enterprise Risk
management Policy
and process
– Monthly reports to
Executive Committee
Q2 2018
Q3 2018
Q4 2018
Q1 2019
– 2019 Risk Based Internal
Audit Plan Preparation
– Risk Management
Effectiveness Review report
to the next Audit Committee
– Risk Champion/
Owner training
– Facilitate ‘top down’
review process
– Prepare 2019 Enterprise
Risk Management Strategy
– Report to Audit Committee
– One to Ones with Executive
– Monthly reports to
Committee and Board
– Prepare Review of
Principal Risks
Executive Committee
– Monthly reports to
– Report to Audit Committee
Executive Committee
Business/Product Risk Areas
– Quarterly Risk Review by
Senior Leadership Team
– Quarterly Risk Review by
Senior Leadership Team
– Quarterly Risk Review by
Senior Leadership Team
– Quarterly Risk Review by
Senior Leadership Team
– Risk Register refresh and
submission to Group
Risk Team
– Risk Register refresh and
submission to Group Risk
Team annual certification
Executive Committee
Board
Audit Committee
– ‘Top Down’ Review of
– Approve Principal Risks
Principal/Significant Risks
– Review of significant risks
– Review and approval
of the Group’s 2017 Risk
Management Process and
Viability Statement
– Receive report from the
Group Risk Team and
review Enterprise Risk
Management process
– Receive report from the
Group Risk Team and
review Enterprise Risk
Management process
– Review and approve
Principal Risks
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OUR VIABILITY STATEMENT
HOW WE ASSESS OUR PROSPECTS
During the year, the Board has carried out a robust assessment of the
Principal Risks affecting the Company, particularly those which could
threaten the business model. These risks and the actions being taken
to manage or mitigate them are explained in detail on pages 42–46
of this Annual Report.
In reaching our Viability Statement conclusion, we have undertaken
the following process:
– The Audit Committee reviewed the Risk Management process at
their meetings in February, April, July and November, receiving
presentations from the Group Risk function, explaining the processes
followed by management in identifying and managing risk throughout
the business.
– In the summer, a series of detailed one-to-one discussions were held
with each member of the Executive Committee and the Group Risk
Team. In these discussions, the Executives were asked to consider
the significant risks which they believed could seriously impact the
profitability and future prospects of the Company and the principal
risks that would threaten its business model, future performance,
solvency or liquidity.
– As part of the annual Strategy Review in September, the Board
considered and discussed the principal risks which could impact
the business model over the next three years and discussed with
the management team how these risks were being managed
and mitigated.
– Throughout the year, a number of deep dives into different risks
were conducted by the Board, the Audit Committee and the Ethics &
Compliance Committee looking into the nature of the risks and how
they were mitigated, as detailed on page 46 of this Annual Report.
– Throughout the year, a number of deep dives into specific risk areas
were conducted by the Group Risk Team, the results of which were
presented to and discussed by the Audit Committee.
ASSESSMENT PERIOD
The Board have determined that the three-year period to December
2020 is an appropriate period over which to provide its Viability
Statement. This period is aligned to the Group’s Strategic Planning
process and reflects the Board’s best estimate of the future viability
of the business.
2017 SCENARIOS MODELLED
Scenario 1 – Pricing
– Pricing and reimbursement pressures or currency exchange volatility
(Principal Risk) – leading to a major loss of revenues and profits.
Action taken: We have modelled a 1% reduction in annual price growth/decline
for each year from 2018.
Scenario 2 – Operational risk
– Execution risk – our inability to launch new products losing significant market
share to the competition.
Action taken: We have modelled a 1% reduction in annual volume growth rates
each year from 2018.
– Product liability claims – giving rise to significant claims and legal fees.
Action taken: We have modelled a one-off significant product liability claim in 2019.
– Temporary loss of key production capability – resulting in our inability to
manufacture a key product for a period of time.
Action taken: We have modelled the loss of a factory, resulting in the loss
of production and sales of a key product for two years from 2019.
Scenario 3 – Legal regulatory and compliance risks
– Regulatory measures – impacting our ability to continue to sell key products.
Action taken: We have modelled the complete loss of revenue from a key product
for each year from 2018.
– Bribery and corruption claims – giving rise to significant fines.
Action taken: We have assumed a one-off significant fine in 2019.
Scenario 4 – Cyber security
– Inability to issue invoices or collect money for a period of time.
Action taken: We have modelled one of our key regions being unable to invoice
sales and collect cash for one month in 2019.
Other
– Political and economic forces – for example political upheaval, which could
cause us to withdraw from a major market for a period of time.
Action taken: We have modelled the loss of revenue and profits from a medium
sized business due to withdrawal from a market from 2019.
Link to Strategy
Link to Principal Risks
– Pricing and
Reimbursement
– New Product
Innovation, Design &
Development (including
Intellectual property)
– Commercial Execution
– Legal and Compliance
– Quality and Regulatory
– Cyber Security
– Business Continuity
and Business Change
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SCENARIO TESTING
For the purpose of testing the viability of the Company, we have
undertaken a robust scenario assessment of the principal risks
and some other risks, which could threaten the viability or existence
of the Company. These have been modelled as follows:
In carrying out scenario modelling of the principal and significant risks
on the previous page we have also evaluated the impact of a severe but
plausible combination of these risks actually occurring over the three-
year period. We have considered and discussed a report setting out the
terms of our current financing arrangements and potential capacity for
additional financing should this be required in the event of one of the
scenarios modelled occurring.
We are satisfied that we have robust mitigating actions in place as
detailed on pages 42–46 of this Annual Report. We recognise, however,
that the long-term viability of the Company could also be impacted by
other, as yet unforeseen, risks or that the mitigating actions we have put
in place could turn out to be less effective than intended.
VIABILITY STATEMENT
Having assessed the principal risks, the Board has determined that
we have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over a
period of three years from 1 January 2018. In our long-term planning
we consider horizons of both five and ten years. However, as most of
our efforts are focused on the coming three years, we have chosen this
period when considering our viability.
Our conclusion is based on our current Strategic Plan approved by
the Board in January 2018, having regard to longer-term strategic
intentions, yet to be formulated in detail. However, we operate in a
changing marketplace, which might cause us to adapt our Strategic
Plans. In responding to changing external conditions, we will continue
to evaluate any additional risks involved which might impact the
business model.
By order of the Board, on 22 February 2018
Susan Swabey
Company Secretary
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OUR BOARD OF DIRECTORS
A DIVERSE BOARD
ROBERTO QUARTA (68)
Chairman
OLIVIER BOHUON (59)
Chief Executive Officer
GRAHAM BAKER (49)
Chief Financial Officer
Joined the Board as Chief Financial Officer on
1 March 2017 and elected by shareholders on
6 April 2017.
Career and experience
Graham holds an MA degree in Economics from
Cambridge University and qualified as a Chartered
Accountant and Chartered Tax Adviser with Arthur
Andersen. In 1995, he joined AstraZeneca PLC
where he worked for 20 years, holding multiple
senior roles, including Vice President Finance &
Chief Financial Officer, North America (2008-2010),
Vice President, Global Financial Services (2010-2013)
and Vice President, Finance, International (2013-
2015) with responsibility for all emerging markets.
Most recently, Graham was Chief Financial Officer
of generic pharmaceuticals company Alvogen.
Skills and competencies
Graham has deep sector knowledge and has had
extensive exposure to established and emerging
markets which is extremely relevant to his role at
Smith & Nephew. He has a strong track record
of delivering operational excellence and has
relevant experience across major finance roles
and geographic markets, leading large teams
responsible for significant budgets.
Nationality
British
Joined the Board and was appointed Chief
Executive Officer in April 2011. Olivier has
announced his intention to retire by the end
of 2018.
Career and experience
Olivier holds a doctorate in Pharmacy from the
University of Paris and an MBA from HEC, Paris.
He started his career in Morocco with Roussel
Uclaf S.A. and then, with the same company,
held a number of positions in the Middle East
with increasing levels of responsibility. He joined
Abbott in Chicago as head of their anti-infective
franchise with Abbott International before becoming
Pharmaceutical General Manager in Spain.
He subsequently joined GlaxoSmithKline plc, rising
to Senior Vice President & Director for European
Commercial Operations. He then re-joined Abbott
as President for Europe, became President of Abbott
International (all countries outside of the US), and
then President of their Pharmaceutical Division.
He joined Smith & Nephew from Pierre Fabre, where
he was Chief Executive.
Skills and competencies
Olivier has extensive international healthcare
leadership experience within a number of significant
pharmaceutical and healthcare companies.
His global experience provides the skillset required
to innovate a FTSE 100 company with a deep
heritage and provide inspiring leadership. He is
a NED of Virbac Group and Shire plc, where he is
also a member of the Remuneration Committee
and the Nomination & Governance Committee and
will be appointed Senior Independent Director on
25 April 2018.
Nationality
French
Joined the Board in December 2013 and
appointed Chairman following election by
shareholders at the 2014 Annual General
Meeting. He was also appointed Chairman
of the Nomination & Governance Committee
and a Member of the Remuneration Committee
on that day.
Career and experience
Roberto is a graduate and a former Trustee of the
College of the Holy Cross, Worcester (MA), US.
He started his career as a manager trainee at
David Gessner Ltd, before moving on to Worcester
Controls Corporation and then BTR plc, where he
was a divisional Chief Executive. Between 1985
and 1989 he was Executive VP of Hitchiner
Manufacturing Co., Inc. He returned to BTR plc in
1989 as Divisional Chief Executive, where he was
appointed to the main board. From here he moved
to BBA Aviation plc, as CEO and then as Chairman,
until 2007. He has held several board positions,
including NED of Powergen plc, Equant N.V., BAE
Systems plc and Foster Wheeler AG. His previous
Chairmanships include Italtel SpA, Rexel S.A., IMI
plc and SPIE SA. He is currently Chairman of WPP
plc. He is a partner at Clayton Dubilier & Rice and
a former member of the Investment Committee of
Fondo Strategico Italiano S.p.A.
Skills and competencies
Roberto’s career in private equity brings valuable
experience to Smith & Nephew, particularly
when evaluating acquisitions and new business
opportunities. He has an in-depth understanding
of differing global governance requirements having
served as a director and chairman of a number
of UK and international companies. Since his
appointment as Chairman in April 2014, he has
conducted a comprehensive review into the
composition of the Board and its Committees,
and conducted the search for new Non-Executive
Directors, resulting in the appointment of Vinita
Bali in 2014, Erik Engstrom and Robin Freestone in
2015, Angie Risley and Marc Owen during 2017, and
Roland Diggelmann so far in 2018.
Nationality
American/Italian
GOVERNANCE
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VINITA BALI (62)
Independent Non-Executive Director
IAN BARLOW (66)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
in March 2010, Chairman (now Member) of the
Audit Committee in May 2010, Member of the
Ethics & Compliance Committee in October 2014
and Senior Independent Director and Member
of the Nomination & Governance Committee on
6 April 2017.
Career and experience
Ian is a Chartered Accountant with considerable
financial experience both internationally and in
the UK. He was a Partner at KPMG, latterly Senior
Partner, London, until 2008. At KPMG, he was
Head of UK tax and legal operations. Previously he
was Chairman of WSP Group plc, and is currently
NED and Chairman of the Audit Committees of The
Brunner Investment Trust PLC, Foxtons Group plc
and Urban&Civic plc.
Skills and competencies
Ian’s longstanding financial and auditing career
and extensive board experience add value to his
role as a member of the Audit Committee. As a
member of the Ethics & Compliance Committee,
he has managed to co-ordinate an oversight role
of both Committees. This has been invaluable
when commencing his role as Senior Independent
Director with effect from 6 April 2017. Ian’s first
board evaluation is discussed in the corporate
governance statement.
Nationality
British
Appointed Independent Non-Executive Director in
December 2014 and Member of the Remuneration
Committee and Ethics & Compliance Committee.
Career and experience
Vinita holds an MBA from the Jamnalal Bajaj Institute
of Management Studies, University of Bombay and
a BA in Economics from the University of Delhi.
She commenced her career in India with a Tata
Group Company, and then joined Cadbury India,
subsequently working with Cadbury Schweppes plc
in the UK, Nigeria and South Africa. She has held a
number of senior global positions in marketing and
general management at The Coca-Cola Company
based in the US and South America, becoming
President of the Andean Division in 1999 and VP,
Corporate Strategy in 2001. In 2003, she joined
Zyman Group, LLC, a US based consultancy, as
Managing Principal. Vinita was MD and CEO of
Britannia Industries Limited, a leading Indian publicly
listed food company from 2005 to 2014. Currently,
Vinita is NED of Syngene International Limited,
Titan Company Ltd, Bunge Limited and CRISIL India
(a Standard & Poor Company). She is also Chair of
the board of Global Alliance for Improved Nutrition
and a member of the Advisory Board of PwC India.
Skills and competencies
Vinita has an impressive track record of achievement
with blue-chip global corporations in multiple
geographies including India, Africa, South America,
US and UK, all key markets for Smith & Nephew.
Additionally, her strong appreciation of customer
service and marketing brings deep insight as we
continue to develop innovative ways to serve our
markets and grow our business.
Nationality
Indian
THE RT. HON BARONESS VIRGINIA
BOTTOMLEY OF NETTLESTONE DL (69)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
in April 2012 and Member of the Remuneration
Committee and Nomination & Governance
Committee in April 2014.
Career and experience
Virginia gained her MSc in Social Administration
from the London School of Economics following her
first degree. She was appointed a Life Peer in 2005
following her career as a Member of Parliament
between 1984 and 2005. She served successively
as Secretary of State for Health and then Culture,
Media and Sport. Virginia was formerly a Director of
Bupa and AkzoNobel NV. She is currently a Director
of International Resources Group Limited, member
of the International Advisory Council of Chugai
Pharmaceutical Co., Chancellor of University of Hull
and Sheriff of Hull and Trustee of The Economist
Newspaper. She is the Chair of Board & CEO
Practice at Odgers Berndtson.
Skills and competencies
Virginia’s extensive experience within Government,
particularly as Secretary of State for Health, brings a
unique insight into the healthcare system both in the
UK and globally, whilst her experience on the board
of Bupa brings an understanding of the private
healthcare sector and an insight into the needs of
our customers. Her experience running the board
practice at a search firm gives her a valuable skillset
as a member of the Nomination & Governance
Committee and Remuneration Committee. Her long
association with Hull, the home of many of our UK
employees, also brings an added perspective.
Nationality
British
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ERIK ENGSTROM (54)
Independent Non-Executive Director
ROBIN FREESTONE (59)
Independent Non-Executive Director
MICHAEL FRIEDMAN (74)
Independent Non-Executive Director
Appointed Independent Non-Executive
Director on 1 January 2015 and Member
of the Audit Committee.
Career and experience
Erik is a graduate of the Stockholm School of
Economics (BSc) and of the Royal Institute of
Technology in Stockholm (MSc). In 1988, he
graduated with an MBA from Harvard Business
School as a Fulbright Scholar. Erik commenced his
career at McKinsey & Company and then worked in
publishing, latterly as President and COO of Random
House Inc. and as President and CEO of Bantam
Doubleday Dell, North America. In 2001, he moved
on to be a partner at General Atlantic Partners,
a private equity investment firm. Between 2004
and 2009, he was CEO of Elsevier, the division
specialising in scientific and medical information
and then from 2009 CEO of RELX Group.
Skills and competencies
Erik has successfully reshaped RELX Group’s
business in terms of portfolio and geographies.
He brings a deep understanding of how technology
can be used to transform a business and insight into
the development of new commercial models that
deliver attractive economics. His experience as a
CEO of a global company gives him valuable insights
as a member of our Audit Committee.
Nationality
Swedish
Appointed Independent Non-Executive Director
and Member of the Audit Committee and the
Remuneration Committee on 1 September
2015 and Chairman of the Audit Committee on
6 April 2017.
Career and experience
Robin graduated with a BA in Economics from The
University of Manchester and later qualified and
commenced his career as a Chartered Accountant
at Deloitte. He has held a number of senior financial
positions throughout his career, including at ICI
plc, Henkel Ltd and at Amersham plc. Robin was
the Deputy CFO and then later the CFO of Pearson
plc between 2006 and August 2015, where he
was heavily involved with the transformation and
diversification of Pearson. He was previously NED at
eChem Ltd, Chairman of the 100 Group and Senior
Independent Director and Chairman of the Audit
Committee of Cable & Wireless Communications
plc. Robin is a NED and Chairman of the Audit
Committee at Moneysupermarket.com Group plc
and Michael Kors Holdings Ltd. Robin became Chair
of the ICAEW Corporate Governance Advisory Group
in 2017.
Skills and competencies
Robin has been a well-regarded FTSE 100 CFO
who has not only been heavily involved with
transformation and diversification, but also the
healthcare industry at Amersham, where his
acquisition experience will be of value to Smith
& Nephew as it continues to grow globally and in
different markets. He brings financial expertise
and insight as Chairman of the Audit Committee
and an understanding of how to attract and retain
talent in a global business as a member of the
Remuneration Committee.
Nationality
British
Appointed Independent Non-Executive Director
in April 2013 and Chairman of the Ethics &
Compliance Committee in August 2014.
Career and experience
Michael graduated with a Bachelor of Arts degree,
magna cum laude from Tulane University and a
Doctorate in Medicine from the University of Texas
Southwestern Medical Center. He completed
postdoctoral training at Stanford University and the
National Cancer Institute, and is board certified in
Internal Medicine and Medical Oncology. In 1983,
he joined the Division of Cancer Treatment at the
National Cancer Institute and went on to become
the Associate Director of the Cancer Therapy
Evaluation Program. Michael was most recently
CEO of City of Hope in California, and also served
as Director of the institution’s cancer centre and
held the Irell & Manella Cancer Center Director’s
Distinguished Chair. He was formerly Senior VP of
research, medical and public policy for Pharmacia
Corporation and also Deputy Commissioner and
Acting Commissioner at the US Food and Drug
Administration (FDA). He has served on a number
of boards in a non-executive capacity, including
Rite Aid Corporation. Currently, Michael is a NED of
Celgene Corporation, MannKind Corporation and
Intuitive Surgical, Inc.
Skills and competencies
Michael understands the fundamental importance
of research, which is part of Smith & Nephew’s
value creation process. His varied experience in
both the public and private healthcare sectors
have given him a deep insight and a highly
respected career. In particular his work with the
FDA and knowledge relating to US compliance
provides the skillset required to Chair the Ethics &
Compliance Committee.
Nationality
American
JOSEPH PAPA (62)
Independent Non-Executive Director
Appointed Independent Non-Executive
Director in August 2008 and Chairman of
the Remuneration Committee in April 2011,
Member of the Audit Committee and Ethics
& Compliance Committee.
Joe will be retiring from the Board at the
Annual General Meeting on 12 April 2018
and will not stand for re-election.
Career and experience
Joe graduated with a Bachelor of Science degree
in Pharmacy from the University of Connecticut
and MBA from Northwestern University’s Kellogg
Graduate School of Management. In 2012, he
received an Honorary Doctor of Science degree from
the University of Connecticut School of Pharmacy.
He began his career at Novartis International AG as
an Assistant Product Manager and eventually rose
to VP, Marketing, having held senior positions in
both Switzerland and US.
He moved on to hold senior positions at Searle
Pharmaceuticals and was later President & COO
of DuPont Pharmaceuticals and later Watson
Pharma, Inc. He was previously Chairman and
CEO of Cardinal Health, Inc. and Chairman and
CEO of Perrigo Company plc from 2006 to April
2016. Joe was appointed Chairman and CEO
of Valeant Pharmaceuticals International, Inc.
in May 2016.
Nationality
American
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MARC OWEN (58)
Independent Non-Executive Director
ANGIE RISLEY (59)
Independent Non-Executive Director
ROLAND DIGGELMANN (51)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
and Member of the Audit Committee on 1 October
2017. To be appointed Member of the Ethics &
Compliance Committee on 1 March 2018.
Career and experience
Marc graduated from Oxford University with a
BA and BCL in Law. In 1984 he was called to the
Bar, following four years at Corpus Christi College
Cambridge as a fellow and director of studies in law.
He decided upon a corporate career and undertook
an MBA at Stanford University. Marc commenced
his healthcare and technology career at McKinsey
& Company where he progressed to senior partner
and eventually a founding partner of McKinsey’s
Business Technology Office. In September 2001,
Marc joined McKesson Corporation and served
as Executive Vice President and member of the
Executive Committee. He delivered strategic
objectives and led over 40 acquisitions and
divestments over a 10-year period. In late 2011 he
headed Mckesson Speciality Health, which operates
over 130 cancer centres across the US and provides
services including market intelligence, supply
chain services, patient access to therapy, provider
and patient engagement and clinical trial support.
His final executive role came in 2014 where he was
appointed Chairman of the European Management
Board at Celesio AG. He retired in March 2017 once
he had improved operations, set the strategy and
recruited his successor.
Skills and competencies
Marc is a proven leader with an astute, strategic
vision, capable of building significant international
healthcare businesses. He has strong commercial
healthcare expertise which the Board values deeply
following the pending retirement of Joseph Papa at
the 2018 Annual General Meeting.
Nationality
British
Appointed Independent Non-Executive Director
and Chairman Elect of the Remuneration
Committee on 18 September 2017.
Career and experience
After graduating from Exeter University, and
completing a 1-year personnel management
programme, Angie joined the United Biscuits
graduate scheme. After working in various different
HR roles she joined Pizza Hut (UK) Ltd as Human
Resources Director, a joint venture between
PepsiCo and Whitbread plc. After five years she
joined Whitbread, becoming Executive Director on
the plc board responsible for HR and Corporate
Social Responsibility in 2004. Between 2007–2013
she was the Group HR Director for Lloyds Banking
Group, joining J Sainsbury plc as Group HR Director
in January 2013. Over the years, Angie has been
a member of the Low Pay Commission and has
held a number of non-executive directorships with
Biffa plc, Arriva plc and Serco Group plc. She was a
member of the Remuneration Committees at Arriva
plc and Biffa plc and Chairman of the Remuneration
Committee at Serco Group plc. She is also a NED on
the Sainsbury’s Bank Board.
Skills and competencies
Angie is a well-regarded FTSE 100 Human
Resources Director, proven NED and Remuneration
Committee Chairman. She has gained experience
in a wide range of sectors, including a regulated
environment. This diversity of experience is
welcomed by the Board and the Remuneration
Committee. Angie is also additional resource
and sounding board for our own internal Human
Resources function.
Nationality
British
To be appointed Non-Executive Director and
Member of the Audit Committee on 1 March 2018.
Careers and experience
Roland studied Business Administration at the
University of Berne. In 1995, he joined Sulzer AG
as Manager Strategic Planning and progressed
into further senior roles over the years until his
appointment as Executive Vice President, Sales
Europe and Asia Pacific from 2002 to 2004 for
Sulzer Medica (later known as Centerpulse).
Roland joined Zimmer Group in 2004, in the role
of Managing Director of Zimmer Japan and then
later in 2006 as Senior Vice President, EMEA until
2008. Roland joined Roche Diagnostics in 2008
as president of Asia Pacific before his current
appointment as the Chief Executive Officer of the
Diagnostics Division of F. Hoffmann-La Roche Ltd.
Skills and experience
Having spent his whole career in medical devices,
with 12 years at Sulzer and Zimmer, Roland brings
an in-depth knowledge of the medical device
industry and healthcare environment which will
be of great value to Smith & Nephew, in particular
following the retirement of Joseph Papa from
the Board at the Annual General Meeting on
12 April 2018.
Nationality
Swiss
Skills and experience
Susan has over 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, group risk
management, share registration, listing obligations,
corporate social responsibility, pensions, insurance
and employee and executive share plans. Susan is
a member of the CBI Companies Committee and is
a frequent speaker on corporate governance and
related matters. She is also Chairman of the Board
of Trustees of ShareGift, the share donation charity
and a member of the Financial Reporting Council
Lab Steering Group.
SUSAN SWABEY (56)
Company Secretary
Appointed Company Secretary in May 2009.
Nationality
British
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A STRONG TEAM
Olivier Bohuon is supported
in the day-to-day management
of the Group by a strong team
of Executive Officers.
GRAHAM BAKER (49)
Chief Financial Officer
GLENN WARNER (55)
President, US
Joined the Board as Chief Financial Officer on
1 March 2017. Graham holds an MA degree
in Economics from Cambridge University and
qualified as a Chartered Accountant and
Chartered Tax Adviser with Arthur Andersen.
He is based in London, UK.
Skills and competencies
Graham has deep sector knowledge and has had
extensive exposure to established and emerging
markets which is extremely relevant to his role at
Smith & Nephew. He has a strong track record
of delivering operational excellence and has
relevant experience across major finance roles
and geographic markets, leading large teams
responsible for significant budgets.
Nationality
British
Joined Smith & Nephew in June 2014 with
responsibility for Advanced Wound Management’s
global franchise strategy, marketing and product
development, as well as its US commercial
business. With effect from 1 January 2016, Glenn
became the President of Smith & Nephew’s US
business responsible for all the US commercial
business. He is based in Fort Worth, US.
Skills and experience
Glenn has a broad-based background in
pharmaceuticals and medical products including
extensive international experience, having served
most recently as AbbVie Vice President and
Corporate Officer, Strategic Initiatives, where he
was responsible for the development and execution
of pipeline and asset management strategies.
Prior to that he was President and Officer, Japan
Commercial Operations in Abbott’s international
pharmaceutical business and Executive Vice
President, TAP Pharmaceutical Products, Inc.
Nationality
American
RODRIGO BIANCHI (58)
President, International Markets
BRAD CANNON (50)
Chief Marketing Officer
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. With effect from
1 January 2016, Rodrigo also became responsible,
for the Latin American, Australian, New Zealand and
Japanese markets. His role was further expanded
in May 2017, when he became responsible for
oversight of the markets in Europe and Canada.
He is based in Dubai, UAE.
Skills and 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 the Medical Devices and
Diagnostics division in the Mediterranean region
and prior to that President of Mitek and Ethicon, Inc.
He started his career at Procter & Gamble Italy.
Joined Smith & Nephew in 2012 and became
President, Europe and Canada in March 2016.
On 1 September 2017, he became Chief Marketing
Officer. He is based in Andover, US.
Skills and experience
Brad was most recently President, Europe and
Canada, where he successfully led the commercial
business in those regions. Before that, he was
President of Global Orthopaedic Franchises, leading
Smith & Nephew’s Reconstruction, Endoscopy,
Trauma and Extremities businesses. Prior to Smith
& Nephew, Brad worked in Medtronic’s Spine and
Biologics division. From 2009, he was responsible
for Medtronic’s Spine International division and held
positions heading US sales and global commercial
operations. Brad is a graduate of Washington and
Lee University, and the Wharton School of Business
at the University of Pennsylvania.
Nationality
Italian
Nationality
American
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CATHY O’ROURKE (45)
Chief Legal Officer
MATTHEW STOBER (50)
President, Global Operations
VASANT PADMANABHAN (51)
President of Research & Development
Joined Smith & Nephew in February 2013
as Assistant General Counsel – Litigation &
Investigations and became Chief Legal Officer
in May 2017. Cathy heads up the Global Legal
function and is based in Andover, US.
Joined Smith & Nephew in October 2015 with
responsibility for global manufacturing, supply
chain, distribution, quality assurance, regulatory
affairs, direct procurement, and manufacturing IT
optimisation. He is based in Andover, US.
Joined Smith & Nephew in August 2016 and is
responsible for Research and Innovation, New
Product Development, Safety Affairs, Clinical
Affairs, Medical Device/Pharmacovigilance and
Clinical Operations. He is based in Andover, US.
Skills and experience
Prior to joining Smith & Nephew, Cathy spent
11 years of her career with Davis Polk & Wardwell
LLP. Cathy earned her Juris Doctorate in Law from
Harvard University.
Nationality
American
Skills and experience
Matt has more than 25 years’ experience
in healthcare manufacturing operations for
global companies including Merck & Co., Inc.
and GlaxoSmithKline plc. Most recently, he served
as Senior Vice President, Corporate Officer and
member of the Executive Committee at Hospira
Pharmaceuticals. As a senior pharmaceutical
operations executive with extensive technical and
cross functional experience in start-up and complex
challenging environments, Matt has led global and
multi-company development projects, new product
launches, critical quality-related turnarounds,
network rationalisations and organisational
transformations. He also has extensive experience
working directly with external regulatory bodies,
such as the US Food and Drug Administration.
Nationality
American
Skills and experience
Vasant brings extensive experience in R&D and
technology. Prior to Smith & Nephew, Vasant was
Senior Vice President of Technical Operations
at Thoratec Corporation, a leader in mechanical
circulatory support solutions for the treatment of
heart failure. In this role, he provided leadership
to a 600 member team, with responsibility for
global R&D, Program Management, Operations
and Quality. Prior to Thoratec, Vasant had an
18-year career at Medtronic, starting as a Staff
Scientist and, progressing through more senior
roles, ultimately becoming Vice President of Product
Development for the Implantable Defibrillator
Business. Vasant holds a Ph.D degree in Biomedical
Engineering from Rutgers University, USA and
an MBA degree from the Carlson School of
Management, Minnesota.
Nationality
American
CYRILLE PETIT (47)
Chief Corporate Development Officer
and President, Global Business
Services
Joined Smith & Nephew in May 2012 and leads
the Corporate Development function and from
October 2015 the Global Business Services.
He is based in London, UK.
Skills and experience
Cyrille spent the previous 15 years of his career
with General Electric Company, where he held
progressively senior positions beginning with GE
Capital, GE Healthcare and ultimately as the General
Manager, Global Business Development of the
Transportation Division. Cyrille began his career
in investment banking at BNP Paribas and then
Goldman Sachs.
ELGA LOHLER (50)
Chief Human Resources Officer
Joined Smith & Nephew in January 2002 and
became Chief Human Resources Officer in
December 2015. Elga leads the Global Human
Resources, Internal Communication and
Sustainability Functions. She is based in London, UK.
Skills and experience
Prior to being appointed as Chief Human Resources
Officer, Elga held progressively senior positions in
Human Resources at Smith & Nephew in Wound
Management, Operations, Corporate Functions
and Group. Elga has more than 25 years’ Human
Resources experience.
Nationality
American/South African
Nationality
French
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OVERVIEW
COMMITTED TO THE HIGHEST STANDARDS
OF CORPORATE GOVERNANCE
We maintain these standards through a clear definition of our roles, continuing development and evaluation
and accountability through the work of the Board Committees.
LEADERSHIP
EFFECTIVENESS
The Board sets the tone at the top of the Company
through:
– A clear definition of the roles of the individual members
of the Board.
– A comprehensive corporate governance framework.
– Defined processes to ensure the independence of
Directors and the management of conflicts of interest.
The Board carries out its duties through:
– Regular meetings focusing on the oversight of strategy,
risk (including viability) and succession planning.
– An annual review into the effectiveness of the Board.
– A comprehensive programme of development activities
throughout the year.
Read more about our Board’s Leadership on pages 57–60
Read more about our Board’s Effectiveness on pages 61–65
ACCOUNTABILITY
REMUNERATION
The Board delegates some of its detailed work to the
Board Committees:
– Each Committee meets regularly and reports back
to the Board on its activities.
– The terms of reference of each Committee may be found
on the Company’s website at www.smith-nephew.com.
– A report from the Chairman of each Committee is included
in this Annual Report.
The Remuneration Committee ensures that there
is a formal and transparent process for determining
and reporting on the pay of our Executive Directors:
– The Remuneration Policy was approved by shareholders
at the 6 April 2017 Annual General Meeting.
– The Committee ensures that: performance measures
are linked to our strategic priorities; there is alignment
between executive and shareholder interests; and our
arrangements are simple to understand.
Read more about our Board’s Accountability on pages 66–78
Read more about our Board’s Remuneration on pages 79–105
The Board is committed to the highest standards of corporate governance and we comply with all the provisions of the UK Corporate
Governance Code 2016 (the Code). The Company’s American Depositary Shares are listed on the New York Stock Exchange (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 Securities Exchange Commission (SEC)
applicable to foreign private issuers. We comply with the requirements of the NYSE and SEC and have no significant differences to report
between the UK and US corporate governance standards. We shall explain in this Corporate Governance Statement and in the reports on the
Audit Committee, the Nomination & Governance Committee, the Ethics & Compliance Committee and the Remuneration Committee, how we
have applied the provisions and principles of the Financial Conduct Authority’s (FCA) Listing Rules, Disclosure & Transparency Rules (DTRs) and
the Code throughout the year. The Code can be found at https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-
Corporate-Governance-Code-April-2016.pdf
The Directors’ Report comprises pages 6, 16-17, 25–28, 33–39, 42–78, 107, 140-142, 158 and pages 171–193 of the Annual Report.
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COMPOSITION & ROLES
LEADERSHIP
COMPOSITION OF BOARD AS AT 31 DECEMBER 2017
We believe the Board’s composition gives us the necessary balance of diversity, skills experience, independence and knowledge to ensure we
continue to run the business effectively and deliver sustainable growth.
Diversity
Gender
Years of service
Ethnicity
C
A
B
B
A EXECUTIVE
B NON-EXECUTIVE
C CHAIRMAN
A MALE
B FEMALE
2
9
1
D
E
C
A
B
A
B
A
9
3
A LESS THAN ONE YEAR
B ONE TO THREE YEARS
C THREE TO SIX YEARS
D SIX TO NINE YEARS
E OVER NINE YEARS
3
2
4
2
1
A WHITE
B ASIAN
11
1
The Nomination & Governance Committee uses the following matrix when considering succession planning and future Board composition
to ensure a balanced Board:
CEO
5 members of the Board are
either current or recent CEOs
Financial
5 members of the Board
have recent and relevant
financial experience
International
7 members of the Board have
international experience
Healthcare/
Medical Devices
5 members of the Board have
different levels of experience
within the Healthcare industry.
The Board’s medical devices
experience will be strengthened
with the appointment of
Roland Diggelmann
Emerging market
2 members of the Board have
Emerging Market experience
UK Governance
Remuneration
Gender
Ethnic
Other
8 members of the Board have
considerable experience
of working in a UK listed
environment and 6 members of
the Board have experience of the
US listed environment
5 members of the Board have
Remuneration Committee
experience within a UK
listed context
9 members of the Board are
male and 3 are female
11 members of the Board are
white and 1 is Asian ethnicity
Various Board members bring
experiences in a variety of
fields including customer focus,
investment markets, government
affairs, digital and corporate
social responsibility
CHANGES TO THE BOARD
During the year to 31 December 2017 and since the year end, there were the following changes to the Board:
– Julie Brown retired from the Board as Chief Financial Officer on 11 January 2017.
– Graham Baker joined the Board as Chief Financial Officer on 1 March 2017.
– Brian Larcombe retired from the Board on 6 April 2017.
– Robin Freestone was appointed Chairman of the Audit Committee, succeeding Ian Barlow on 1 March 2017.
– Ian Barlow was appointed Senior Independent Director, succeeding Brian Larcombe on 6 April 2017.
– Angie Risley was appointed Non-Executive Director and Member and Chairman Elect of the Remuneration Committee on 18 September 2017.
– Marc Owen was appointed Non-Executive Director and Member of the Audit Committee on 1 October 2017. He will become a Member of the
Ethics & Compliance Committee on 1 March 2018.
– Roland Diggelmann will join the Board as an additional Non-Executive Director and Member of the Audit Committee with effect from
1 March 2018.
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RESPONSIBILITY & ACTIVITY
LEADERSHIP
ROLE OF DIRECTORS
Whilst we all share collective responsibility for the activities of the Board, some of our roles have been defined in greater detail. In particular, the
roles of the Chairman and the Chief Executive Officer are clearly defined.
The roles of the Chairman, Non-Executive Directors, Senior Independent Director, Chief Executive Officer, Chief Financial Officer and the Company
Secretary are defined as follows:
Chairman
– Building a well-balanced Board.
– Chairing Board meetings and setting Board agendas.
– Ensuring effectiveness of the Board and enabling the annual
review of effectiveness.
– Encouraging constructive challenge and facilitating effective
communication between Board members.
– Promoting effective Board relationships.
– Ensuring appropriate induction and development programmes.
– Ensuring effective two-way communication and debate with
shareholders and stakeholders.
– Promoting high standards of corporate governance.
– Maintaining appropriate balance between stakeholders.
Chief Executive Officer
– Developing and implementing Group strategy.
– Recommending the annual budget and five-year strategic and
financial plan.
– Ensuring coherent leadership of the Group.
– Managing the Group’s risk profile and establishing effective
internal controls.
– Regularly reviewing organisational structure, developing executive
team and planning for succession.
– Ensuring the Chairman and Board are kept advised and 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.
– Day-to-day running of the business.
Chief Financial Officer
– Supporting the Chief Executive Officer in developing and
implementing the Group strategy.
– Leading the global finance function, developing key finance talent
and planning for succession.
– Ensuring effective financial reporting, processes and controls are
in place.
– Recommending the annual budget and long-term strategic and
financial plan.
– Maintaining relationships with shareholders.
Non-Executive Directors
– Providing effective challenge to management.
– Assisting in development and approval of strategy.
– Serving on the Board Committees.
– Providing advice to management.
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 and stakeholders on matters which
cannot otherwise be resolved.
– Leading the annual evaluation into the Board’s effectiveness.
– Leading the search for a new Chairman, if necessary.
Company Secretary
– Advising the Board on matters of corporate governance.
– Supporting the Chairman and Non-Executive Directors.
– Point of contact for investors on matters of corporate governance.
– Ensuring good governance practices at Board level and throughout
the Group.
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RESPONSIBILITY & ACTIVITY continued
LEADERSHIP
CORPORATE GOVERNANCE FRAMEWORK
The Board is responsible to shareholders for approving the strategy of the Group, for overseeing the performance of the Group and evaluating
and monitoring the management of risk.
Each member of the Board has access, collectively and individually, to the Company Secretary and is also entitled to obtain independent
professional advice at the Company’s expense, should they decide it is necessary in order to fulfil their responsibilities as Directors.
The Board delegates certain matters, as follows, to Board Committees, consisting of members of the Board:
BOARD
Remuneration
Committee
Determines Remuneration
Policy and packages for
Executive Directors and
Executive Officers, having
regard to pay across
the Group.
Nomination &
Governance
Committee
Reviews size and
composition of the
Board, succession
planning, diversity and
governance matters.
Ethics &
Compliance
Committee
Reviews and monitors
ethics and compliance,
quality and regulatory
matters across the Group.
Ad hoc
committees
Ad hoc committees may be
established to review and
approve specific matters
or projects.
Audit
Committee
Provides independent
assessment of the
financial affairs of the
Company, reviews
financial statements
and controls oversight
of the risk management
process and key risks,
such as cyber security.
Manages use of internal
and external auditors.
Read more on page 71
Read more on page 79
Read more on page 66
Read more on page 69
The Board delegates the day-to day running of the business to Olivier Bohuon, Chief Executive Officer, who is assisted in his role by the Executive
Committee comprising the Executive Officers who are shown on pages 54–55 and certain other senior executives. The governance framework
below outlines the Executive Committee arrangements as follows:
Recommends and implements strategy, approves budget and three-year plan, ensures liaison between commercial and corporate functions, receives regular
reports from sub-committees, reviews major investments, divestments and capital expenditure proposals and approves business development projects.
EXECUTIVE COMMITTEE
Commercial
Committee
Recommends and implements
strategy for global commercial
functions and regions,
managing sales, marketing,
market access and commercial
strategy and identifying and
executing new processes,
systems and practices to
improve operational efficiency
in commercial regions.
Finance & Banking
Committee
Approves banking and
treasury matters, guarantees,
Group structure changes
relating to mergers,
acquisitions and disposals.
Corporate Functions
Committee
Recommends and implements
strategy for corporate functions
identifying and executing
new processes, systems
and practices to improve
operational efficiency in
corporate functions.
Portfolio Innovation
Board
Defines portfolio allocation
principles, reviewing and
challenging current shape
of portfolio, identifying
gaps and opportunities and
re-prioritising segments
and geographies.
Regional leadership
meetings
Regional management
through committees to drive
regional performance.
Functional leadership
meetings
Functional leadership teams to
drive functional performance.
Disclosures
Committee
Approves release of
communications to investors
and Stock Exchanges.
Mergers &
Acquisitions
Council
Oversees Corporate
Development Strategy,
monitors status of transactions
and approves various stages
in merger, acquisition and
disposal process.
Group Risk
Committee
Reviews risk registers and risk
management programme.
Group Ethics &
Compliance
Committee
Reviews compliance matters
and country business unit or
function compliance reports.
Diversity & Inclusion
Council
Implements strategies
to promote diversity
and inclusion.
Global Benefits
Committee
Oversees all policies and
processes relating to pensions
and employee benefit plans.
Health, Safety &
Environment
Committee
Oversees health, safety and
environmental matters.
IT Governance
Board
Oversees IT and
cyber security.
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RESPONSIBILITY & ACTIVITY continued
LEADERSHIP
INDEPENDENCE OF DIRECTORS
We require our Non-Executive Directors to remain independent from
management so that they are able to exercise independent oversight
and 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 affiliates in which
any other Director is a director.
More importantly, each of our Non-Executive Directors are prepared
to question and challenge management, to request more information
and to ask the difficult questions. They insist on robust responses both
within the Boardroom and, sometimes, between meetings. The Chief
Executive Officer is open to challenge from the Non-Executive Directors
and uses this positively to provide more detail and to reflect further
on issues.
MANAGEMENT OF CONFLICTS OF INTEREST
None of our Directors or their connected persons, has any family
relationship with any other Director or Officer, nor has a material interest
in any contract to which the Company or any of its subsidiaries are,
or were, a party during the year or up to 22 February 2018.
Each Director has a duty under the Companies Act 2006 to avoid a
situation in which we have or may have a direct or indirect interest that
conflicts or might conflict with the interests of the Company. This duty is
in addition to the existing duty owed to the Company to disclose to the
Board any interest in a transaction or arrangement under consideration
by the Company.
If any Director becomes aware of any situation which might give rise
to a conflict of interest, they must, and do, inform the rest of the Board
immediately and the Board is then permitted under the Company’s
Articles of Association to authorise such conflict. This information is
then recorded in the Company’s Register of Conflicts, together with
the date on which authorisation was given. In addition, each Director
certifies on an annual basis that the information contained in the
Register of Conflicts is correct.
When the Board decides whether or not to authorise a conflict, only the
Directors who have no interest in the matter are permitted to participate
in the discussion and a conflict is only authorised if the Board believes
that it would not have an impact on the Board’s ability to promote the
success of the Company in the long term. Additionally, the Board may
determine that certain limits or conditions must be imposed when
giving authorisation. No actual conflicts have been identified, which
have required approval by the Board. However, six situations have been
identified which could potentially give rise to a conflict of interest and
these have been duly authorised by the Board and are reviewed on an
annual basis.
OUTSIDE DIRECTORSHIPS
We encourage our Executive Directors to serve as Non-Executive
Directors of external companies. We believe that the work they do
as Non-Executive Directors of other companies has benefits for their
executive roles with the Company, giving them a fresh insight into the
role of a Non-Executive Director. Olivier Bohuon is a Non-Executive
Director of Shire plc and of Virbac Group. Olivier Bohuon discussed his
external roles with the Chairman prior to accepting these appointments
and the Chairman was satisfied that he had the capacity for the time
commitment required.
RE-APPOINTMENT OF DIRECTORS
In accordance with the Code, all Directors offer themselves to
shareholders for re-election annually, except those who are retiring
immediately after the Annual General Meeting. Each Director may
be removed at any time by the Board or the shareholders.
DIRECTOR INDEMNITY ARRANGEMENTS
Each Director is covered by appropriate directors’ and officers’ liability
insurance and there are also Deeds of Indemnity in place between
the Company and each Director. These Deeds of Indemnity mean that
the Company indemnifies Directors in respect of any proceedings
brought by third parties against them personally in their capacity as
Directors of the Company. The Company would also fund 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 Board meets with retail investors at the Annual General Meeting
and responds to many letters and emails from shareholders throughout
the year.
The Executive Directors also meet regularly with institutional investors
to discuss the Company’s business and financial performance both at
the time of the announcement of results and at industry investor events.
During 2017, the Executive Directors held meetings with institutional
investors, including investors representing approximately 48% of the
Company’s share capital. Other topics discussed included strategy,
market trends, reimbursement and regulatory changes, relevant macro-
economic and political impacts on the business and the acquisition of
Rotation Medical, Inc.
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LEADERSHIP
EFFECTIVENESS
During the early part of 2017, the Chairman, Roberto Quarta, held
17 meetings and telephone calls with investors holding approximately
22% of the Company’s share capital. They discussed a range of topics
including the performance of the Company during 2016, our strategic
priorities, the structure of the Board, succession planning at Board
and Executive level, diversity, the capital allocation framework and
recent acquisitions.
Towards the end of 2017, Joseph Papa, the Chairman of the
Remuneration Committee, took the opportunity of introducing Angie
Risley, who will be succeeding him as Chairman of the Remuneration
Committee on 12 April 2018, to eight of our key institutional shareholders
holding around 15% of our share capital. They discussed the changes
made to our remuneration policy, which were approved by shareholders
at the 2017 Annual General Meeting and how the policy was being
implemented. As well as giving shareholders the opportunity to meet
Angie Risley, they also discussed the broad structure of remuneration
arrangements proposed for the new Chief Executive Officer to be
appointed following the retirement of Olivier Bohuon by the end of 2018.
At the time of these meetings, there was no specific candidate identified
as successor to Olivier Bohuon. They also discussed current trends and
developments in executive remuneration.
Members of the Board are always happy to engage with investors,
if they have matters they wish to raise with the non-executive team.
Please contact the Company Secretary to arrange a suitable time
to meet.
A short report on our major shareholders and any significant changes
in their holdings since the previous meeting is reviewed at each Board
meeting. The Chairman and Non-Executive Directors report back to the
Board following their meetings with investors. Olivier Bohuon routinely
reports on any concerns or issues that shareholders have raised with
him in their meetings. Copies of the analyst reports on the Company
and its peers are also circulated to Directors.
PURCHASE OF ORDINARY SHARES
In order to avoid shareholder dilution, shares allotted to employees
through employee share schemes are bought back on a quarterly basis
and subsequently cancelled as stated in Note 19.2 of the accounts on
page 157.
RESPONSIBILITY OF THE BOARD
The work of the Board falls into the following key areas:
Strategy
– Approving the Group strategy including major changes
to corporate and management structure.
– Approving acquisitions, mergers, disposals, capital transactions
in excess of $50 million.
– Setting priorities for capital investment across the Group.
– Approving annual budget, financial plan, five-year business plan.
– Approving major borrowings and finance and banking
arrangements.
– Approving changes to the size and structure of the Board and the
appointment and removal of Directors and the Company Secretary.
– Approving Group policies relating to sustainability, health
and safety, Code of Conduct and Code of Share Dealing and
other matters.
– Approving the appointment and removal of key professional
advisers.
Performance
– Reviewing performance against strategy, budgets and financial
and business plans.
– Overseeing Group operations and maintaining a sound system
of internal control.
– Determining the dividend policy and dividend recommendations.
– Approving the appointment and removal of the external auditor
on the recommendation of the Audit Committee.
– Approving significant changes to accounting policies or practices.
– Overseeing succession planning at Board and Executive
Officer level.
– Approving the use of the Company’s shares in relation
to employee and executive share incentive plans on the
recommendation of the Remuneration Committee.
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EFFECTIVENESS
Risk
– Overseeing the Group’s risk management programme.
– Regularly reviewing the risk register.
– Overseeing risk management processes (see pages 40 and 41
for further details).
Shareholder communications
– Approving preliminary announcement of annual results,
the publication of the Annual Report, the half-yearly report,
the quarterly Trading Reports, the release of price sensitive
announcements and any listing particulars, circulars
or prospectuses.
APRIL
– Received a review of recent acquisitions.
– Received an update on global operations.
– Reviewed the work of the Government Affairs function.
– Approved the Sustainability Report.
– Prepared for the Annual General Meeting to be held later that day.
MAY
(via voice conference)
– Reviewed the results for the first quarter 2017 and approved the
Q1 Trading Report announcement.
– Approving the Sustainability Report.
JUNE
– Maintaining relationships and continued engagement with
shareholders.
(via voice conference)
– Approved the appointment of Angie Risley as Non-Executive Director.
Providing advice
– Using experience gained within other companies and
organisations to advise management both within and between
Board meetings.
The Schedule of Matters Reserved to the Board describes the role and
responsibilities of the Board more fully and can be found on our website
at www.smith-nephew.com.
BOARD TIMETABLE 2017
FEBRUARY
Early February
Approval of Preliminary Announcement
– Reviewed the results for the full year 2016 and the preliminary
announcement and approved the final dividend to be recommended
to shareholders for approval.
– Reviewed and approved the annual risk management report.
– Received updates on the progress of certain acquisitions over the
past five years.
– Reviewed the results of the review into the effectiveness of the Board
in 2016 and agreed action points for 2017.
– Reviewed and accepted that fees paid to Non-Executive Directors
should remain unchanged.
Late February (via voice conference)
Approval of Financial Statements
– Reviewed and approved the Annual Report and Accounts for 2016,
having determined that they were fair, balanced and understandable.
– Reviewed and approved the Notice of Annual General Meeting and
related documentation.
– Approved the Budget for 2017 and the Strategic Plan for 2017-2021.
JULY
(in Hull, UK)
– Reviewed the results for the first half 2017 and approved the H1
announcement, having considered management’s judgement in
a number of areas, and approved payment of the interim dividend.
– Received and considered a report analysing the progress in Research
and Development.
– Received and discussed the annual review of Group Insurances.
– Discussed the strategy review agenda for September 2017.
SEPTEMBER
(in Tokyo, Japan)
Strategy Review
– Conducted review of corporate strategy for 2018-2022.
– Reviewed the implications, risks and opportunities of the Medical
Devices regulations.
– Approved the renewal of the directors’ and officers’ liability Insurance.
NOVEMBER
Early November (in Dubai, UAE)
Approval of Q3 Trading Report
– Reviewed the results for the third quarter 2017 and approved the
Q3 Trading Report announcement.
– Received a follow up from Executive Officers from the Strategy Review
in Tokyo in September.
– Received an update from Rodrigo Bianchi on the APAC/EM (Asia
Pacific and Emerging Markets) business.
– Discussed the annual executive talent review.
Late November
Approval of Budget
– Reviewed the Budget for 2018.
– Received a review of the activities of Global Business Services.
– Received updates from Glenn Warner on the US Business.
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EFFECTIVENESS
In addition various matters were determined by written resolution, including accepting notice of the intention to retire of Olivier Bohuon as Chief
Executive Officer and authorising the execution of certain agreements. Since the year end, we have also approved the Annual Report and Accounts
for 2017 and have concluded that, taken as a whole, they are fair, balanced and understandable. We have approved the Notice of Annual General
Meeting, recommended the final dividend to shareholders and have received and discussed the report on the effectiveness of the Board in 2017.
Each meeting was preceded by a meeting between the Chairman and the Non-Executive Directors without the Executive Directors and
management in attendance. Unless otherwise stated, meetings are held in London, UK. At each meeting, we approved the minutes of the previous
meetings, reviewed matters arising and received reports and updates from the Chief Executive Officer, the Chief Financial Officer, the Chief
Corporate Development Officer, the Chief Legal Officer and the Company Secretary. We also received reports from the chairmen of the Board
Committees on the activities of these Committees since the previous meeting.
BOARD AND COMMITTEE ATTENDANCE
Director
Roberto Quarta¹
Olivier Bohuon
Graham Baker²
Vinita Bali³
Ian Barlow
Virginia Bottomley
Erik Engstrom⁴
Robin Freestone
Michael Friedman
Joseph Papa
Marc Owen⁵
Angie Risley⁶
Brian Larcombe⁷
Audit
Committee
meetings
(7 meetings)
Remuneration
Committee
meetings
(7 meetings)
Nomination &
Governance
Committee
meetings
(8 meetings)
Ethics &
Compliance
Committee
meetings
(4 meetings)
Board meetings
(9 meetings)
9/9
9/9
7/7
7/9
9/9
9/9
9/9
9/9
9/9
9/9
2/2
3/3
3/3
–
–
–
–
7/7
–
6/7
7/7
–
7/7
2/2
–
3/3
6/7
–
–
6/7
–
7/7
–
7/7
–
7/7
–
3/3
3/3
8/8
–
–
–
6/6
8/8
–
–
–
–
–
–
2/2
–
–
–
4/4
4/4
–
–
–
4/4
4/4
–
–
–
Board Member since
December 2013
April 2011
1 March 2017
December 2014
March 2010
April 2012
January 2015
September 2015
April 2013
August 2008
1 October 2017
18 September 2017
March 2002
1 Roberto Quarta missed one Remuneration Committee meeting call convened on short notice. He had signified his approval of the matters being discussed to the Remuneration Committee Chairman prior to
the meeting.
2 Graham Baker was appointed on 1 March 2017 and attended all his scheduled meetings to 31 December 2017.
3 Vinita Bali missed one Board call and one Remuneration Committee meeting on the same day, due to a prior commitment and one Board call convened on short notice. In each case, she had signified her
approval of the matters being discussed to the Chairman prior to the meeting.
4 Erik Engstrom missed one Audit Committee meeting in Hull, which clashed with a RELX Board meeting, for which he is the Chief Executive Officer.
5 Marc Owen was appointed on 1 October 2017 and attended all his scheduled meetings to 31 December 2017.
6 Angie Risley was appointed on 18 September 2017 and attended all her scheduled meetings to 31 December 2017.
7 Brian Larcombe retired from the Board at the Annual General Meeting on 6 April 2017.
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EFFECTIVENESS
BOARD EFFECTIVENESS REVIEW
The Board Effectiveness Review in 2017 was internally facilitated by Ian Barlow, Senior Independent Director assisted by the Company Secretary.
The 2017 review comprised a questionnaire completed by each member of the Board. This questionnaire focused on the progress made
addressing the issues raised in previous Board Evaluations as well as looking into how the Board had handled particular topics throughout
the year. Ian Barlow then conducted individual interviews with each Board member. He also chaired a meeting of the Non-Executive Directors
specifically to discuss the performance of the Chairman.
In January 2018, he prepared a report, detailing his findings, which he shared with the Chairman. The report was then discussed by the full
Board in February 2018.
In discussion, we concluded that the Board worked well with a good breadth of skills, backgrounds and experience, which has been enhanced
with the appointments during the past year. The culture was open and collaborative; the cadence of board meetings and the administrative
support was broadly welcomed and we covered most of the right topics across the annual cycle. We did however identify some areas for further
improvement as follows:
– Some changes could be made to the Board calendar to spread our work more efficiently and effectively throughout the year, with an even
greater focus on people issues, R&D and commercial execution.
– We would like to spend more time on our site visits meeting the local teams, their staff, our customers and local hospitals to give us a deeper
understanding of our markets, our customers and our competition and to assist in assessing bench strength further down the Company.
– Further improvements could be made to how we monitor performance against our strategic objectives, tracking development and
implementation of strategy and lessons learned from our successes and shortfalls.
The areas for attention identified in the 2017 review had been addressed as follows:
Actions identified
Action taken
Gaining a deeper understanding of why our competitors are enjoying
superior growth rates compared with us so that we can help
management identify, acquire and develop the resources they need
to compete more effectively in our chosen markets.
Gaining a better understanding of the changing market dynamics in
our chosen markets, focusing on identifying the different categories
of customer and the pricing and reimbursement drivers which are
in play, so that we can support and challenge management more
effectively when they seek approval for projects to address these
changing conditions.
Playing a more active role in supporting management develop robust
succession plans for senior executive positions.
Encouraging management to develop metrics and dashboards on
a wider range of issues beyond financial metrics, particularly in the
areas of Human Resources and R&D and ensuring that we regularly
monitor progress against these metrics.
During the year, as part of our site visits, the Board met with senior
management in different territories and heard about the commercial
challenges faced in different markets. Part of the September Strategy
Review included a focus on the different categories of customers and
the pricing and reimbursement drivers which affect different business
in different parts of the world.
We positively encourage our Non-Executive Directors to spend time
with our sales representatives in order to experience the challenges
they face first-hand.
The Board reviews detailed succession plans on an annual basis.
The Board also meets with potential successors to members of
the management team during site visits and as part of Board
presentations. During the year, Non-Executive Directors have assisted
in the interview process for some senior management positions
and have acted as a sounding board for the executive team, when
considering succession plans in key areas.
Dashboards have been developed throughout the year, which are
reviewed at each Board meeting. These dashboards track progress
against defined metrics with both a long-term and a short-term
focus aligned to our Strategic Priorities, covering a wide range of
business areas, including R&D, HR, the commercial and operating
organisations, M&A and legal and compliance.
The last externally facilitated Board Effectiveness Review was carried out in 2015 by Belinda Hudson of Independent Audit.
The 2018 review will also be facilitated externally.
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EFFECTIVENESS
BOARD DEVELOPMENT PROGRAMME
Our Board Development Programme is directed to the specific 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 action. Meeting our local managers helps us to
understand the challenges they face and their plans to meet those
challenges. We also take these opportunities 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 in which we
operate around the world helps us to make investment and strategic
decisions. Meeting our local managers also helps us when making
succession planning decisions below Board level.
All Non-Executive Directors are encouraged to visit our overseas
businesses, if they happen to be travelling for other purposes. 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 Chairman regularly reviews the development needs
of individual Directors and the Board as a whole.
The following development sessions covering both the Smith & Nephew
business and wider market issues were held during the year:
July
– Visit to the Company’s site in Hull to take part in activities
celebrating our 160th anniversary on the site. The Board toured the
manufacturing and research facility and received presentations from
members of the workforce involved in community focused activities
as part of the Hull City of Culture 2017.
– Presentation from our Auditor, KPMG LLP (KPMG), on External
Reporting trends, covering changing accounting standards and
updates on financial reporting, the SEC and corporate governance
changes relating to Audit Committees and Auditors.
September
– Presentations from the entire executive team as part of the Board’s
Strategy Review, covering the whole business and including a
discussion on Risk.
November
– Visit to the Company’s offices in Dubai, the head office for our
Emerging Markets businesses. The Board received presentations
on our businesses in Saudi Arabia, India and Chile and met with the
local General Managers in these countries.
– Presentation on the Emerging Markets business, including deep dives
into Brazil, China and our Mid-Tier portfolio of products.
– Presentation on the US business discussing the opportunities and
challenges faced by our different franchises across the US.
December
– Opportunities for our UK based Non-Executive Directors to go on the
road with some of our London based sales representatives and for
Vinita Bali to meet with representatives in Bangalore.
During the course of the year, we also received updates at the Board
and Committee meetings on external corporate governance changes
likely to impact the Company in the future.
INDUCTION PROGRAMME FOR NEW DIRECTORS
During 2017, Graham Baker, Angie Risley and Marc Owen joined the
Board and each received tailored induction programmes relevant to their
skills and experiences and their roles on the Board. These induction
programmes, which are ongoing include:
– One-to-one meetings with senior executives to understand the roles
played by our senior employees and specifically how we do things at
Smith & Nephew;
– Visits to our sites local to the Director to get a feel of how our research
and manufacturing operations are run;
– Opportunities to accompany our sales representatives on the road to
better understand the daily challenges they face; and
– Meetings with our external advisers for example Freshfields, our
Corporate lawyers, KPMG, our Auditor and Willis Towers Watson, our
Remuneration Committee adviser to explain the legal and regulatory
background to their role on our Board and how these issues are
approached at Smith & Nephew.
By order of the Board, on 22 February 2018
– Visit to the Company’s offices in Tokyo and meetings with our senior
leaders in Japan, with presentations on the business and challenges
faced in Japan.
Roberto Quarta
Chairman
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NOMINATION & GOVERNANCE COMMITTEE REPORT
ACCOUNTABILITY
NOMINATION &
GOVERNANCE COMMITTEE
Member
since
Meetings
attended
– Overseeing the Board Development Programme and the induction
Membership
Roberto Quarta (Chairman)
Virginia Bottomley
Ian Barlow1
Brian Larcombe1
April 2014
April 2014
April 2017
April 2011
8/8
8/8
6/6
2/2
1
Ian Barlow joined the Committee following the Annual General Meeting on 6 April 2017 on his
appointment as Senior Independent Director. Ian replaced Brian Larcombe, who retired from the
Board and the Nomination & Governance Committee following the Annual General Meeting on
6 April 2017.
2018 focus
– Appointment of new Chief Executive Officer to succeed
Olivier Bohuon.
– Consider how best to ensure that the Board has considered
different stakeholders in accordance with the proposals from
the Government and the Financial Reporting Council.
DEAR SHAREHOLDER,
I am pleased to present the 2017 report of the Nomination
& Governance Committee.
ROLE OF THE NOMINATION & GOVERNANCE COMMITTEE
Our work falls into the following two areas:
Board Composition
– Reviewing the size and composition of the Board.
– Overseeing Board succession plans.
– Recommending the appointment of Directors.
– Monitoring Board diversity.
Corporate Governance
– Overseeing governance aspects of the Board and its Committees.
– Overseeing the review into the effectiveness of the Board.
– Considering and updating the Schedule of Matters Reserved to the
Board and the terms of reference of the Board Committees.
– Monitoring external corporate governance activities and keeping the
Board updated.
process for new Directors.
– Identifying and monitoring any conflict of interests of the Board.
The terms of reference of the Nomination & Governance Committee
describe our role and responsibilities more fully and can be found on
our website www.smith-nephew.com
ACTIVITIES OF THE NOMINATION & GOVERNANCE
COMMITTEE IN 2017 AND SINCE THE YEAR END
In 2017, we held five physical meetings and three via teleconference.
Each meeting was attended by all members of the Committee.
The Company Secretary, Chief Executive Officer and Chief Human
Resources Officer also attended all or some of the meetings by invitation
and other Non-Executive Directors were invited to join the meetings
to discuss the search for a new Chief Executive Officer. In between
each meeting, various discussions were held between members of the
Nomination & Governance Committee and the external search agent.
Our programme of work in 2017 was as follows:
Early February
Activities related to the year end
– Considered and approved the re-appointment of Directors who had
completed three or six years’ service and the annual appointment of
Directors serving in excess of nine years.
– Recommended the appointment of Ian Barlow as Senior Independent
Director to the Board following the retirement of Brian Larcombe
and the appointment of Robin Freestone to replace Ian Barlow as
Chairman of the Audit Committee.
– Reviewed and approved the Schedule of Matters Reserved to the
Board and the terms of reference of the Board Committees.
– Discussed the search for two additional Non-Executive Directors.
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ACCOUNTABILITY
April
Activities related to the appointment of Non-Executive Directors
– Considered candidates for the roles of Chairman Elect of the
Remuneration Committee and a Non-Executive Director with
Healthcare/Medical Devices experience.
August
Appointment of new Non-Executive Director
– Recommended to the Board that Marc Owen be appointed an
additional Non-Executive Director.
Early September (by teleconference)
Update on search for additional Non-Executive Director
– Received an update on potential Non-Executive Director candidates
with Medical Devices experience.
November (2 meetings)
Update on search for new Chief Executive Officer
– Received an update on the search for a new Chief Executive Officer.
December (2 meetings by teleconference)
Update on search for new Chief Executive Officer
– Discussed potential candidates for the role of Chief Executive Officer.
In the light of the departure of Brian Larcombe and Joseph Papa,
the Nomination & Governance Committee analysed the skills and
experiences required by the Board going forward to provide the
necessary support and challenge to the executive team to execute
against our Strategic Priorities. We used a matrix (see page 57) to
compare these required skills and experiences against those already
held by members of the Board and determined that we need to
focus on:
– Increasing the diversity at Board level.
– Finding a replacement for Joseph Papa as Chairman of the
Remuneration Committee.
– Replacing the investment knowledge and experience of
Brian Larcombe.
– Reinforcing the Board with specific healthcare and Medical
Devices experience.
During the year, we were advised by Zygos, who prepared a longlist
of candidates for us and then worked with us to select a shortlist of
candidates, who were interviewed by me and a number of other Non-
Executive Directors. As a result of this process, we recommended to
the Board that Angie Risley be appointed Non-Executive Director and
Chairman Elect of the Remuneration Committee on 18 September 2017
and Marc Owen be appointed Non-Executive Director and member of
the Audit Committee on 1 October 2017.
Further matters were resolved by written resolution including noting the
retirement of Olivier Bohuon as Chief Executive Officer.
Since the year end, we have also discussed the future structure of the
Board and completed our year end governance processes. We’ve also
appointed Roland Diggelmann to the Board as an additional Non-
Executive Director, who also has strong Medical Devices experience.
Angie Risley is a well-regarded FTSE 100 Human Resources Director and
proven Non-Executive Director and Remuneration Committee Chairman
with experience across a wide range of sectors, including a regulated
environment. She will bring to the Board valuable experience of leading
a Remuneration Committee as well as providing additional resource and
sounding for our Human Resources function.
Marc Owen is a proven leader with an astute strategic vision, and
experience of building significant international healthcare businesses.
He has strong commercial healthcare expertise and general business
experience, which will be of great value to the Company.
The appointment of Roland Diggelmann on 1 March 2018 will bring
additional Medical Devices experience to our Board.
CHIEF EXECUTIVE OFFICER
In September 2017, Olivier Bohuon announced his intention to retire by
the end of 2018. He chose to give us notice of this in order to give us
time to find his successor. The Nomination & Governance Committee
initiated a search in September 2017 advised by both Zygos and
Russell Reynolds. Zygos does no other work for the Company other
than advising on recruitment of Board members. Russell Reynolds also
advises the Company on executive recruitment and appointments.
This process is ongoing.
The key areas of focus for us in 2017 were:
NON-EXECUTIVE DIRECTORS
Brian Larcombe retired as Senior Independent Director at the 2017
Annual General Meeting and Ian Barlow was appointed in his
place. Ian Barlow has served on our Board as Chairman of the Audit
Committee since 2010. He knows the Company well and has a sound
understanding of the governance and regulatory requirements of the
Board. He has also met some of our shareholders in his previous role as
Chairman of the Audit Committee.
Robin Freestone took over the role of Chairman of the Audit Committee
from Ian Barlow with effect from 1 March 2017. Robin had served
as a Non-Executive Director of the Board and member of the Audit
Committee and the Remuneration Committee for a period of 18 months.
Prior to his appointment to the Board, he was a well-regarded FTSE 100
Chief Financial Officer who has brought relevant expertise and insight
to the Audit Committee. His appointment as Chairman of the Audit
Committee was designed to coincide with the appointment of Graham
Baker to enable the Chief Financial Officer and Chairman of the Audit
Committee to build a constructive working relationship together.
As we announced in the 2016 Annual Report, Joseph Papa will be
retiring from the Board at the 2018 Annual General Meeting after
more than nine years’ service, seven of which as Chairman of the
Remuneration Committee.
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ACCOUNTABILITY
DIVERSITY
We aim to have a Board which represents a wide range of backgrounds,
skills and experiences. We also value a diversity of outlook, approach
and style in our Board members. We believe that a balanced Board
is better equipped to consider matters from a broader perspective,
understanding the views of our stakeholders as well as our
shareholders and therefore come to decisions that have considered
a wider range of issues and perspectives than would be the case in a
more homogenous Board. Diversity is not simply a matter of gender,
ethnicity or other easily measurable characteristics. Diversity of outlook
and approach is harder to measure than gender or ethnicity but is
equally important. A Board needs a range of skills from technical
adherence to governance or regulatory matters to understand the
business in which we operate. It needs some members with a long
corporate memory and others who bring new insights from other fields.
There needs to be both support and challenge on the Board as
well as a balance of gender and commercial and international
experience. When selecting new members for the Board, we take these
considerations into account, as well as professional background.
A new Board member needs to fit in with their fellow Board members,
but also needs to provide a new way of looking at things.
In 2012, we stated that our expectation would be that by 2015, 25%
of our Board would be female and at the beginning and the end of
2017, we met this expectation, although the various Board changes
during the year meant that this percentage fluctuated throughout the
year. Looking forward, we shall work towards a Board with 33% female
representation in-line with the Hampton-Alexander Review. We will
also look to increase ethnic diversity on the Board following the Parker
Review as appropriate. We will continue to appoint our Directors on
merit, valuing the unique contribution that they will bring to the Board,
regardless of gender, ethnicity or any other diversity measure.
In order to ensure that our Board remains diverse, we analyse the skills
and experiences we require against the skills and experiences on our
Board using the matrix on page 57. We review this matrix regularly to
ensure that it is refreshed to meet the changing needs of the Company.
GOVERNANCE
During the year, the Nomination & Governance Committee also
addressed a number of governance matters. We received updates from
the Company Secretary on new developments in corporate governance
and reporting in the UK (and Europe). We reviewed the independence
of our Non-Executive Directors, considered potential conflicts of interest
and the diversity of the Board and made recommendations concerning
these matters to the Board.
We have reviewed the proposals in the Government’s Green Paper
on corporate governance particularly in relation to enhancing the
stakeholder voice. As a Board, we have identified our key stakeholders
and during the course of 2018, we will be considering the best ways of
ensuring that the voices of these different stakeholders are heard within
the Boardroom.
SMITH & NEPHEW’S BROAD STAKEHOLDERS
EMPLOYEES
CUSTOMERS
GOVERNMENTS
INVESTORS
PAST
PATIENTS
REIMBURSEMENT
PAST
PRESENT
SUPPLIERS
INSURERS
PRESENT
FUTURE
SURGEONS/
NURSES
COMMUNITIES
FUTURE
PROCUREMENT
PUBLIC
NGOS
Roberto Quarta
Chairman of the Nomination & Governance Committee
SMITH & NEPHEW ANNUAL REPORT 2017
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ACCOUNTABILITY
ETHICS & COMPLIANCE
COMMITTEE
Membership
Michael Friedman (Chairman)
Vinita Bali
Ian Barlow
Joseph Papa1
Member
since
Meetings
attended
August 2014
April 2015
October 2014
April 2008
4/4
4/4
4/4
4/4
1
Joseph Papa will be retiring from the Board and the Committee at the Annual
General Meeting to be held on 12 April 2018.
2 Marc Owen will join the Committee on 1 March 2018.
2018 focus
– Continue to monitor the impact of the EU General Data
Protection Regulation (GDPR) and the EU Regulations for
Medical Devices (MDR).
– Conduct select reviews of the compliance programme
in key markets.
– Continue to monitor progress against key compliance
and quality metrics.
DEAR SHAREHOLDER,
I am pleased to present the 2017 report of the Ethics
& Compliance Committee.
ROLE OF THE ETHICS & COMPLIANCE COMMITTEE
Our work falls into the following two general areas:
Ethics & Compliance
– Overseeing ethics and compliance programmes, strategies
and plans.
– Monitoring ethics and compliance process improvements
and enhancements.
– Reviewing compliance performance based on monitoring, auditing
and internal and external investigations data.
– Reviewing allegations of significant potential compliance issues.
– Receiving reports from the Group’s Ethics & Compliance Committee
meetings and from the Chief Compliance Officer and the Chief
Legal Officer.
Quality Assurance and Regulatory Affairs (QARA)
– Overseeing the processes by which regulatory and quality
risks relating to the Company and its operations are identified
and managed.
– Receiving and considering regular functional reports and
presentations from the President of Global Operations, SVP of
Quality Assurance and other Officers.
The terms of reference of the Ethics & Compliance Committee describe
our role and responsibilities more fully and can be found on our
website: www.smith-nephew.com
ACTIVITIES OF THE ETHICS & COMPLIANCE
COMMITTEE IN 2017 AND SINCE THE YEAR END
In 2017, we held four physical meetings. Each meeting was attended
by all members of the Committee. The Company Secretary, the Chief
Legal Officer, the Chief Compliance Officer, the SVP of Quality, and the
President of Global Operations also attended all or part of the meetings
by invitation.
Our programme of work in 2017 included the following:
February
– Reviewed various quality metrics including the level of complaints,
the number and nature of field actions and the results of US Food
and Drug Administration (FDA) inspections.
– Noted the progress made on the Global Compliance Programme
Plan for 2016 and noted the plan of action for 2017.
April
– Reviewed various quality metrics and approved the Global Quality
Plan for 2017, noting the additional work to be done in implementing
the EU Medical Devices Regulation (MDR).
– Reviewed the actions taken to mitigate risk in new business ventures.
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ACCOUNTABILITY
July (in Hull, UK)
– Reviewed various quality metrics including the results of inspections
by the FDA and Notified Bodies, progress on handling complaints and
in preparing for the MDR.
– Reviewed the progress being made to address findings identified by
the Internal Audit function.
– Received an update regarding the Company’s readiness for the new
EU General Data Protection Regulation (GDPR).
November (in Dubai, UAE)
– Reviewed various quality metrics including the results of inspections
by the FDA and Notified Bodies, progress on handling complaints and
preparations for the implementation of the MDR.
– Reviewed the progress against the 2017 Compliance Plan of Action
and the follow up actions to findings identified in compliance audits.
At each meeting we noted and considered the activities of compliance
and enforcement agencies and investigation of possible improprieties.
At every meeting a report on the Quality Assurance Regulatory
Assurance (QARA) function was provided along with updates of product
complaint trends regularly discussed in 2017. We also reviewed a report
on the activities of the Group’s Ethics & Compliance Committee and
reviewed the progress of the Global Compliance Programme.
OVERSIGHT OF QUALITY & REGULATORY
Product safety is at the heart of our business. Regulatory authorities
across the world enforce a complex series of laws and regulations that
govern the design, development, approval, manufacture, labelling,
marketing and sale of healthcare products. During the year, we oversaw
the quality and regulatory activities of our business. At each meeting,
we received a report on quality and regulatory matters from the SVP
Quality and the President of Global Operations.
We reviewed the results of inspections carried out by the FDA and other
regulators and monitored the progress of improvements following some
of these inspections, using a dashboard, which highlighted progress
being made. We also monitored the work being undertaken to help our
manufacturing sites to prepare for future inspections.
We requested an in-depth report from management into our complaint
handling process. This report explained our approach to complaint
handling including, how we categorised different complaints, how
we trained our staff to recognise and escalate complaints received
by the business appropriately, and our planned and ongoing
process enhancements.
We reviewed the results of quality audits undertaken during the year,
approved follow up actions and monitored progress made to address
these actions.
OVERSIGHT OF ETHICS & COMPLIANCE
‘Doing the right thing’ is part of our licence to operate.
Business practices in the healthcare industry are subject to increasing
scrutiny by government authorities in many countries. During the year,
we oversaw the ethics and compliance activities of our business.
At each meeting we received a report on ethics and compliance matters
from the Chief Compliance Officer and a legal update on these matters
from the Chief Legal Officer.
We regularly review our compliance programme as it relates to
healthcare professionals and third party sellers (such as distributors
and sales agents), particularly in higher risk markets. For healthcare
professionals, this includes policies, training and certification, as well
as pre-approval of consulting services and grants and fellowships.
For third parties, our programme includes due diligence, contracts
with compliance terms, compliance training and certification, and site
assessments to check compliance controls and monitoring visits to
review books and records.
We ensure that comprehensive due diligence is carried out prior to an
acquisition and we ensure that following acquisitions new businesses
are integrated rapidly into the Smith & Nephew compliance programme.
During the year, we received a report from management on the ethics
and compliance lessons learned from our mergers and acquisitions
process over the last five years.
We oversee the employee compliance training programme, ensuring
that all new employees are trained on our Code of Conduct, which
sets out our basic legal and ethical principles for conducting business.
We are updated on significant calls made to our whistle-blower line,
which enables employees and members of the public to contact us
anonymously through an independent provider (where allowed by
local law) and are updated on allegations of potentially significant
improprieties and the Company’s response.
Michael Friedman
Chairman of the Ethics & Compliance Committee
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ACCOUNTABILITY
AUDIT
COMMITTEE
Membership
Member
since
Meetings
attended
Robin Freestone (Chairman)1,2
Ian Barlow 1,2
Erik Engstrom3
Brian Larcombe4
Marc Owen5
Joseph Papa6
September 2015
May 2010
January 2015
January 2003
October 2017
February 2011
7/7
7/7
6/7
3/3
2/2
7/7
1 Robin Freestone was appointed Chairman of the Audit Committee on 1 March 2017, succeeding
Ian Barlow, who remained as a member of the Committee and became the Senior Independent
Director with effect from 6 April 2017.
2 Designated financial experts under the SEC Regulations or recent and relevant financial
experience under the UK Corporate Governance Code.
3 Erik Engstrom missed one Audit Committee meeting in Hull, which clashed with a RELX board
meeting for which he is the Chief Executive Officer.
4 Brian Larcombe retired from the Board and Audit Committee at the Annual General Meeting on
6 April 2017.
5 Marc Owen was appointed to the Board and the Audit Committee with effect from 1 October 2017.
6 Joseph Papa will retire from the Board and the Audit Committee at the Annual General Meeting
to be held on 12 April 2018.
7 Roland Diggelmann will join the Audit Committee on 1 March 2018.
2018 focus
– To provide assurance over the next phase of the Group’s
NAPO system (our SAP Enterprise Resource Planning (ERP)
implementation in North America).
– To extend the breadth of the assurance activities to include
other risk areas such as product risk linking into the Group’s
top risk items.
– Monitoring the progress made on cyber security, one of our
principal risks identified in 2017.
– To provide assurance over the Accelerating Performance
and Execution (APEX) programme, which will streamline
manufacturing, warehouse and distribution, use systems to
provide general administration more efficiently and increase
sales force effectiveness whilst maintaining customer focus.
DEAR SHAREHOLDER,
I’m pleased to write to you for the first time as your new Chairman of
the Audit Committee. I must take this opportunity to thank Ian Barlow
for his excellent chairmanship over the past seven years and wish him
well in his new role as Senior Independent Director, whilst retaining
his invaluable experience and expertise as he remains a member
of the Audit Committee. I’d also like to thank Brian Larcombe, who
stepped down on 6 April 2017, for his many years of wise counsel on
this Committee.
Your Audit Committee has had another busy year, meeting seven times.
Of course, the usual matters we expect to cover every year were dealt
with, but as with all years there were other matters as well. Indeed there
have been a number of personnel changes directly or indirectly
affecting the Committee this year which I should reference:
We welcomed Graham Baker as our new Chief Financial Officer, with
effect from 1 March 2017. Graham’s profile can be read in the section
about Directors on page 50 and he is an excellent appointment to
the Board, including strong executive oversight of the Company’s
controls framework.
Marc Owen has also joined the Audit Committee. His background
in healthcare, based in the US and European markets, provides the
experience which will be missed by the anticipated retirement of Joe
Papa in 2018. I’d like to welcome Marc to the Committee and look
forward to working with him.
We welcomed Steve Humphries, our new SVP Internal Audit.
Steve comes from a rich industry background. He was previously Chief
Internal Auditor for SABMiller plc, another manufacturing firm, and
brings strong insight. He has previously held positions at Wolseley plc,
Avery Dennison Inc. and Néstle UK Ltd.
Finally, we welcomed our new Chief Information Officer, Chris Bayley,
who has a strong background in cyber security from TUI plc. The work
he has commenced has given the Committee the opportunity to review
and challenge the IT architecture in the Company and its future-proofing
to the ever present threat of cyber attack.
Moving onto our auditor, KPMG. They have completed their third year’s
audit and continue to provide robust challenge and suggest areas of
improvement within our internal control framework. We have negotiated
fees that will continue to be reviewed for good market practice.
KPMG and the SVP Internal Audit‘s team continued to highlight areas
where improvements are required. Further detail of the work undertaken
can be found in the report below.
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The main non-routine matters we dealt with during the year were:
– Monitoring the improvements made in our risk management; led
by Susan Swabey, Company Secretary, who is responsible for our
risk management assessment. Susan has worked closely with our
Senior Director of Internal Audit to develop our processes for risk
management, our approach to risk appetite and improving alignment
between the Board’s assessment of risk and the underlying risk
registers generated by management. This work accelerated in 2017
with deep dives to examine risk through the lens of our products and
also considering risks from a cross-functional perspective.
– Monitoring the Company’s Minimum Acceptable Practices (MAPs) for
internal controls. We have set a goal of 97% compliance with these
practices (currently 95% as self-assessed by management) and
expect this to be achieved during 2018.
– Updates from our SVP Treasury, Tax and Finance Operations
Functions. The SVP Tax reported on US tax reform.
– Monitoring the Finance Transformation project, which is planned to
deliver significant cost savings and improvements to internal control
and update on the service provided by our outsourced finance facility.
– Monitoring the progress of the implementation of our NAPO system
(our SAP ERP implementation in North America).
– Assessing new accounting standards IFRS 9, 15 and 16.
– Update from Smith & Nephew’s Chief Information Officer including
cyber risk, IT risk as a whole and incident management reporting.
Robin Freestone
Chairman of the Audit Committee
ROLE OF THE AUDIT COMMITTEE
Our work falls into the following six areas:
Financial reporting
– Reviewing significant financial reporting judgements and accounting
policies and compliance with accounting standards.
– Ensuring the integrity of the financial statements and their compliance
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 the Group’s financial
performance.
Internal controls
– Monitoring the effectiveness of internal controls and compliance with
the UK Corporate Governance Code 2016 and the Sarbanes-Oxley
Act, specifically sections 302 and 404.
– Reviewing the operation of the Group’s risk mitigation processes and
the control environment over financial risks.
Risk management
– On behalf of the Board, reviewing and ensuring oversight of the
processes by which risks are managed, through regular functional
reports and presentations, and reporting any issues arising out of
such reviews to the Board.
– Reviewing the process undertaken and deep-dive work required to
complete the Viability Statement and recommending its adoption to
the Board.
– Reviewing the impact of risk management and internal controls and
working closely with the Ethics & Compliance Committee.
Fraud and whistle-blowing
– Receiving reports on the processes in place to prevent fraud and to
enable whistle-blowing.
– If significant, receive and review reports of potential fraud or whistle-
blowing incidents.
Internal audit
– Agreeing Internal Audit plans and reviewing reports of Internal
Audit work.
– Monitoring the effectiveness of the Internal Audit function.
– Reviewing the control observations made by the Internal Auditor, the
adequacy of management’s response to recommendations and the
status of any unremediated actions.
External audit
– Overseeing the Board’s relationship with the external auditor.
– Monitoring and reviewing the independence and performance of the
external auditor and evaluating their effectiveness.
– Making recommendations to the Board for the appointment or
re-appointment of the external auditor.
– Monitoring and approving the external auditor’s fees.
The terms of reference of the Audit Committee describe our role
and responsibilities more fully and can be found on our website,
www.smith-nephew.com, where further information can be found for
permitted non-audit services.
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ACCOUNTABILITY
ACTIVITIES OF THE AUDIT COMMITTEE IN 2017
AND SINCE THE YEAR END
In 2017, we held five physical meetings and two meetings via voice
conference. All except one meeting were attended by all appointed
members of the Audit Committee. The Chairman, the Chief Executive
Officer, the Chief Financial Officer, the SVP Internal Audit, the external
auditor, and key members of the finance function, the Company
Secretary and Deputy Company Secretary also attended by invitation.
We also met with the external auditor and the SVP Internal Audit without
management present. Our programme of work in 2017 was as follows:
Early February
Approval of Preliminary Announcement
– Reviewed the results for the full year 2016 and the preliminary
July (in Hull, UK)
Approval of H1 Results
– Reviewed the results for the first half 2017 and approved the
H1 announcement.
– KPMG reviewed and provided findings on H1 2017.
– Reviewed and approved the external auditor’s Integrated Audit Plan
for 2017.
– Received a progress report from the SVP Internal Audit.
– Received a report from the Group Treasurer, including an update on
pension matters.
– Approved the definitions for trading/non-trading for annual
reporting purposes.
announcement and recommended them for adoption by the Board.
– Received an update regarding the implementation of IFRS 9, 15
– Reviewed a draft of the 2016 Annual Report.
and 16.
– Reviewed the effectiveness of financial controls and of the Risk
Management process and identified areas for improvement in 2017.
– Received a progress report from the SVP Internal Audit and approved
the Internal Audit Plan for 2017.
– Received the Quality Assurance Report and approved the Quality
Assurance work programme for 2017.
– Received the Viability Statement and confirmed that the Company is
a viable entity for the assessed forthcoming three-year period.
– Confirmed the independence of KPMG as external auditor.
– Held private meetings with external auditor, KPMG and the SVP
Internal Audit.
Early November (in Dubai, UAE)
Approval of Q3 Trading Report
– Reviewed the Q3 2017 Trading Report and approved the
Q3 announcement.
– Reviewed the progress reports from the external auditor on Q3 2017
and from Internal Audit on their work.
– Received an update on new reporting, regulatory and
– Held a private meeting with external auditor, KPMG.
governance requirements.
Late February (via voice conference)
Approval of Financial Statements
– Reviewed and approved the Annual Report and Accounts for 2016,
having agreed that they were fair balanced and understandable,
and recommended them for adoption by the Board.
– Considered the effectiveness and independence of the external auditor
and concluded that their work had been effective and independent.
April
– Reviewed the control themes and observations of the external auditor
– Received an update on Sarbanes-Oxley (SOx) and MAPs progress.
– Received a progress report from the SVP Internal Audit, focusing
on fraud.
– Held a private meeting with the external auditor, KPMG.
Late November
Review of Functional Reports
– Received a report from the SVP Internal Audit focusing on the 2018
Internal Audit plan.
– Reviewed and approved the layout and design of the Annual
and concluded that they had met expectations.
Report 2017.
– Received a progress report from the SVP Internal Audit.
– Considered and approved critical accounting policies and
– Approved the Sustainability Report and its verification process.
judgements in advance of the 2017 year end.
– Received a corporate governance update for 2018
corporate reporting.
– Reviewed the annual report process and recommended
improvements for 2017.
– Risk management update, including heat maps from the Company
Secretary and Senior Director of Internal Audit.
– Held a private meeting with the external auditor, KPMG.
May (via voice conference)
Approval of Q1 Trading Report
– Reviewed the Q1 2017 Trading Report and approved the
Q1 announcement.
– Approved the Company’s policy and report on Conflict Minerals
for submission to the NYSE.
– Received an update from KPMG on the external audit and preliminary
SOx control findings.
– Received and discussed reports on Tax, Risk Management, Finance
Transformation and Cyber Risk.
– Held private meetings with external auditor, KPMG and the SVP
Internal Audit.
Since the year end, we have also reviewed the results for the full year
2017, the preliminary announcement, Annual Report and Accounts for
2017 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 business model,
which is set out on pages 8–9, risks and the key performance indicators
and their link to the strategy.
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ACCOUNTABILITY
SIGNIFICANT MATTERS RELATED
TO THE FINANCIAL STATEMENTS
We considered the following key areas of judgement in relation to the
2017 accounts and at each half-year and quarterly trading report, which
we discussed in all cases with management and the external auditor:
Valuation of inventories
A feature of the Orthopaedic Reconstruction and Trauma &
Extremities franchises (whose finished goods inventory makes up
approximately 60% 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
estimation of customer demand, effectiveness of inventory
deployment, length of product lives, phase-out of old products and
efficiency of manufacturing planning systems.
Our action
At each quarter end, we received reports from, and discussed with,
management the level of provisioning and material areas at risk.
The provisioning level was 19% at 31 December 2017 (20% as at
31 December 2016). We challenged the basis of the provisions and
concluded that the proposed levels were appropriate and have been
consistently estimated.
Liability provisioning
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 and uses
third party actuarial modelling where appropriate. 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.
Our action
As members of the Board, we receive regular updates from the
Chief Legal Officer. These updates form the basis for the level of
provisioning. The Group carries a provision relating to potential
liabilities arising on its portfolio of modular metal-on-metal hip
products of $157 million as of 31 December 2017. We received
detailed reports from management on this position, including the
actuarial model used to estimate the provision, and challenged the
key assumptions, including the number of claimants and projected
value of each settlement. The legal judgements have decreased
by $35 million during the year, primarily due to settlements of a
number of metal-on-metal matters that were provided for within the
actuarially determined provision. There have been some smaller
movements from cases having been resolved and some new
matters arising. We have determined that the proposed levels of
provisioning at year end of $190 million included within ‘provisions’
in Note 17.1 in 2017 ($225 million in 2016) were appropriate in
the circumstances.
Impairment
In carrying out impairment reviews of acquisition 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.
Our action
We reviewed management’s reports on the key assumptions
with respect to acquisition intangible assets – particularly the
forecast future cash flows and discount rates used to make these
calculations. We noted the reduction in headroom relating to the
coblation technology asset acquired with ArthroCare in 2014 and
challenged the assumptions used for future revenue growth of
products using this technology. We concluded that the carrying value
of this asset is appropriately supported by the cash flow projections.
We have also considered the disclosure surrounding these reviews,
and concluded that the review and disclosure were appropriate.
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ACCOUNTABILITY
Taxation
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.
Our action
We annually review our processes and approve the principles
for management of tax risks. We review quarterly reports from
management evaluating existing risks and tax provisions, which
has included a detailed impact assessment of US tax reforms in the
year end report from management. Based on a thorough report from
management of tax liabilities and our challenge of the basis of any
tax provisions recorded, we concluded that the levels of provisions
and disclosures were appropriate.
OTHER MATTERS RELATED TO THE FINANCIAL STATEMENTS
As well as the identified significant matters, other matters that the Audit
Committee considered during 2017 were:
Business combinations
During 2017, we acquired Rotation Medical, Inc. We received a report
from management setting out the significant 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 the intangible asset acquired. During 2017, we also
considered and concurred with management that there had been no
changes to the provisional fair values recognised in the 2016 acquisition
of Blue Belt Technologies, Inc.
Post Retirement Benefit Pensions
The Group has post retirement defined benefit pension schemes, which
require estimation in setting the assumptions. We received a report from
management setting out their proposed assumptions for the UK and
US schemes and concurred with management that these assumptions
were appropriate.
EXTERNAL AUDITOR
Independence of External Auditor
Following a competitive tender in 2014, KPMG was appointed external
auditor of the Company in 2015. We are satisfied that KPMG are fully
independent from the Company’s management and free from conflicts
of interest. Our Auditor Independence Policy, which ensures that this
independence is maintained, is available on the Company’s website.
We believe that the implementation of this policy helps ensure that
auditor objectivity and independence is safeguarded. The policy also
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.
The Auditor Independence Policy also governs the policy regarding
audit partner rotation with the expectation that the audit partner will
rotate at least every five years. Stephen Oxley has been in tenure
for three years as our Audit Partner. The Audit Committee confirms
it has complied with the provision of the Competition and Markets
Authority Order.
Effectiveness of external auditor(s)
We conducted a review into the effectiveness of the external audit as
part of the 2017 year end process, in line with previous years. We sought
the views of key members of the finance management team, considered
the feedback from this process and shared it with management.
During the year, we also considered the inspection reports from the
Audit Oversight Boards in the UK and US and determined that we were
satisfied with the audit quality provided by KPMG.
The Audit Committee regularly receives feedback from KPMG, including
at each meeting where management present their summary of critical
accounting estimates as at each quarter end.
Overall therefore, we concluded that KPMG had carried out their audit
for 2017 effectively.
The Audit Committee continues to review not only the effectiveness
of the external auditor, KPMG but also its market competitiveness.
Appointment of External Auditor at Annual General Meeting
Resolutions will be put to the Annual General Meeting to be held on
12 April 2018 proposing the re-appointment of KPMG as the Company’s
auditor and authorising the Board to determine its remuneration,
on the recommendation of the Audit Committee in accordance with
the Competition and Markets Authority (CMA) Order 2014.
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 confirm
that, to the best of their knowledge and belief, there is no relevant audit
information of which the Auditor, KPMG, is unaware and the Directors
also confirm that they have taken reasonable steps to be aware of any
relevant audit information and, accordingly, to establish that the Auditor
is aware of such information.
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ACCOUNTABILITY
Non-Audit Fees Paid to the Auditor
Non-audit fees are subject to approval in-line with the Auditor
Independence Policy which is reviewed annually and forms part
of the terms of reference of the Audit Committee.
The Audit Committee recognise the importance of the independence
of the external auditor and ensures that the Auditor’s independence
should not be breached. The Audit Committee ensures that the Auditor
does not receive a fee from the Company or its subsidiaries that would
be deemed large enough to impact its independence or be deemed
a contingent fee. The total fees for permitted non-audit services shall
be no more than 70% of the average of the fees paid in the last three
consecutive financial years for the statutory audits of the Company
and its subsidiaries. In light of the Financial Reporting Council’s revised
Ethical Standards and SEC Regulations, we have revised our Auditor
Independence Policy.
Any pre-approved aggregate, individual amounts up to $25,000 may
be authorised by the Senior Vice-President Tax and Senior Vice-
President Group Finance respectively and amounts up to $50,000 by
the Chief Financial Officer. Any individual amount over $50,000 must be
pre-approved by the Chairman of the Audit Committee. If unforeseen
additional permitted services are required, or any which exceed the
amounts approved, again pre-approval by the Chairman of the Audit
Committee is required.
The following reflects the non-audit fees incurred with KPMG in 2017,
which were approved by the Chairman of the Audit Committee:
Assistance with tax compliance
in Singapore only.
Tax fees and
compliance
services
Pension advice Advice on the impact of changes
to pension benefits for the UK
defined benefit scheme.
2017
$ million
2016
$ million
0.1
0.1
–
0.5
Tax compliance services conducted by KPMG in 2017 only took place
in countries where it is required by law for the auditor to conduct
these services.
The ratio of non-audit fees to audit fees for the year ended 31 December
2016 was 0.15. The ratio of non-audit fees to audit fees for the year
ended 31 December 2017 is 0.02.
Full details are shown in Note 3.2 of the Notes to the Group accounts.
Audit Fees paid to the Auditor
Fees for professional services provided by KPMG, the Group’s
independent auditor in each of the last two fiscal years, in each of the
following categories were:
Audit fees
Audit-related fees
Total
2017
$ million
2016
$ million
4.4
–
4.4
4.0
–
4.0
INTERNAL AUDIT
The Internal Audit team, which reports functionally to the Audit
Committee, carries out risk-based reviews across the Group.
These reviews examine the management of risks and controls over
financial, operational, IT and transformation programme activities.
The audit team, led by the SVP Internal Audit, consists of appropriately
qualified and experienced employees. Third parties may be engaged to
support audit work as appropriate.
The SVP Internal Audit has direct access to, and has regular meetings
with, the Audit Committee Chair and prepares formal reports for
Audit Committee meetings on the activities and key findings of the
function, together with the status of management’s implementation of
recommendations. The Audit Committee has unrestricted access to all
internal audit reports, should it wish to review them.
During the year, the team completed over 40 audits and reviews across
the Group. These included reviews of: the roll-out of SAP across the
North America business; IT operations including cyber status; inventory,
financial reporting and credit management processes across multiple
markets; Treasury operations; Manufacturing operations in China and
Costa Rica; Shared Services operations in China, India and Poland;
ERM effectiveness; and readiness for complying with e-commerce with
key customers (GS1-GDSN) and Global Data Protection Requirements
(GDPR).
A periodic review of the Internal Audit function is undertaken, most
recently in 2014, by an independent external consultant in accordance
with the guidelines of the Institute of Internal Auditors. In addition
a structured questionnaire was introduced this year, allowing Non-
Executive and Executive and senior management, plus the external
auditor, to comment on key aspects of the function’s performance.
The Audit Committee, which re-approved the function’s charter in
November 2017, has satisfied itself that adequate, objective internal
audit standards and procedures exist within the Group and that the
Internal Audit function is effective.
RISK MANAGEMENT PROGRAMME
Whilst the Board is responsible for ensuring oversight of strategic
risks relating to the Company, determining an appropriate level of
risk appetite, and monitoring risks through a range of Board and
Board Committee processes, the Audit Committee is responsible for
ensuring oversight of the processes by which operational risks, relating
to the Company and its operations are managed and for reviewing
financial risks and the operating effectiveness of the Group’s Risk
Management process.
During the year, we reviewed our Risk Management processes
and progress was discussed at our meetings in February, April and
November. We approved the Risk Management Programme for 2017
and monitored performance against that plan specifically reviewing the
work undertaken by the risk champions across the Group, identifying
the risks which could impact their areas of our business.
During May and June, a new risk management policy and manual
was rolled out with one-to-one training provided to risk champions.
From May 2017, this allowed risk reporting to commence in-line with the
strategy of a bottom up approach. This was revisited again in November.
The Enterprise Risk Management (ERM) approach commenced and
included interviewing individual members of senior management and
the Board throughout Q3 2017, to discuss principal risks and concerns
they had. These interviews were also used to understand the individual
Board members’ risk tolerance.
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ACCOUNTABILITY
Later in July, the ERM structure was aligned with that of the Internal Audit
function to assess the mitigating actions in place for our key products.
In November, it was reported that deep dives had concluded for
ALLEVYN, Total Knees, Compliance EUCAN (Europe and Canada) and
PICO, with key themes noted by the Committee. The 2017 Annual Report
disclosure was also discussed.
Since the year end, we have reviewed a report from the SVP Internal
Audit into the effectiveness of the Risk Management Programme
throughout the year. We considered the principal risks, the actions
taken by management to review those risks and the Board risk appetite
in respect of each risk.
We concluded that the Risk Management process during 2017 and up
to the date of approval of this Annual Report was effective. Work will
continue in 2018 and beyond to continue to enhance the process.
See pages 40–49 for further information on our Risk
Management Process.
VIABILITY STATEMENT
We also reviewed management’s work in conducting a robust
assessment of those risks which would threaten our business model
and the future performance or liquidity of the Company, including its
resilience to the threats of viability posed by those risks in severe but
plausible scenarios. This assessment included stress and sensitivity
analyses of these risks to enable us to evaluate the impact of a severe
but plausible combination of risks. We then considered whether
additional financing would be required in such eventualities. Based on
this analysis, we recommended to the Board that it could approve and
make the Viability Statement on pages 48–49.
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 36–49.
The financial position of the Group, its cash flows, liquidity position and
borrowing facilities are described on pages 38–39.
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 ongoing uncertain
economic outlook.
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future. Thus they continue to adopt the going concern basis
for accounting in preparing the annual financial statements.
Management also believes that the Group has sufficient working capital
for its present requirements.
EVALUATION OF INTERNAL CONTROLS
Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a–15(f) and
15d–15(f) under the US Securities Exchange Act of 1934.
There is an established system of internal control throughout the Group
and our country business units. The main elements of the internal
control framework are:
– The management of each country is responsible for the establishment
and review of effective financial controls within their business unit.
– The Group’s IT organisation is responsible for the establishment of
effective IT controls within the core financial systems and underlying
IT infrastructure. The responsibility for the review of the effectiveness
of such controls is split between the IT organisation and the Financial
Controls & Compliance Group.
– The Group Finance Manual sets out financial and accounting policies.
The Group’s Minimum Acceptable Practices (MAPs) have been
enhanced by simplifying and clarifying the requirements as well as
broadening their scope. The business is required to self-assess their
level of compliance with the MAPs twice a year and remediate any
gaps. MAPs compliance is validated through spot checks conducted
by the Financial Controls and Compliance function and during both
Internal Audit and external audit visits.
– There are clearly defined lines of accountability and delegations
of authority.
– During the year, there has been further progress in standardising and
simplifying our core financial controls. In 2018, there will be a focus on
standardising the controls globally, merging the core financial controls
with the MAPs and evaluating technology solutions to operating and
testing controls.
– The Internal Audit function executes a risk-based annual work plan,
as approved by the Audit Committee.
– The Audit Committee reviews reports from Internal Audit on their
findings on internal financial controls, including compliance with
MAPs and from the SVP Group Finance and the heads of the
Financial Controls and Compliance, Taxation and Treasury functions.
– The Audit Committee reviews regular reports from the Financial
Controls and Compliance function with regard to compliance
with the Sarbanes-Oxley Act including the scope and results of
management’s testing and progress regarding any remediation, as
well as the aggregated results of MAPs self-assessments performed
by the business.
– Business continuity planning, including preventative and contingency
measures, back-up capabilities and the purchase of insurance.
– Risk management policies and procedures including segregation of
duties, transaction authorisation, monitoring, financial and managerial
review and comprehensive reporting and analysis against approved
standards and budgets.
– A treasury operating framework and Group treasury team,
accountable for all treasury activities, which establishes policies and
manages liquidity and financial risks, including foreign exchange,
interest rate and counterparty exposures. Treasury policies, risk
limits and monitoring procedures are reviewed regularly by the Audit
Committee on behalf of the Board.
– Our published Group tax strategy which details our approach to tax
risk management and governance, tax compliance, tax planning, the
level of tax risk we are prepared to accept and how we deal with tax
authorities, which was reviewed by the Audit Committee on behalf of
the Board.
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AUDIT COMMITTEE REPORT continued
ACCOUNTABILITY
– The Audit Committee reviews the Group whistle-blower procedures.
– Having received the report from management, the Audit Committee
reports to the Board on the effectiveness of controls.
– KPMG, an independent registered public accounting firm issued an
audit report on the Group’s internal control over financial reporting
as at 31 December 2017.
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
We have adopted a Code of Ethics for Senior Financial Officers, which
applies to the Chief Executive Officer, the Chief Financial Officer, the
SVP Group Finance and the Group’s senior financial officers. There have
been no waivers to any of the Code’s provisions nor have there been
any amendments to the Code during 2017 or up until 22 February 2018.
A copy of the Code of Ethics for Senior Financial Officers can be found
on our website at www.smith-nephew.com
In addition, every individual in the finance function certifies to the
Chief Financial Officer that they have complied with the Finance Code
of Conduct.
EVALUATION OF COMPOSITION, PERFORMANCE AND
EFFECTIVENESS OF THE AUDIT COMMITTEE
The composition, performance and effectiveness of the Audit
Committee was evaluated this year in accordance with the EU Audit
Reform. Its effectiveness is also reviewed in conjunction with the annual
Board evaluation, which this year was conducted by Ian Barlow, in his
first year as Senior Independent Director.
The review by the Audit Committee found the following and the below
action will be taken during 2018:
Finding
Composition
The composition of the Audit Committee with at
least one financial expert and a mix of UK and
global experience in the healthcare sector was
deemed appropriate.
Performance
The Committee was considered to have performed
effectively with an appropriate balance between
challenge and constructive support.
Effectiveness
The Committee was considered to be effective with a
thorough agenda and good papers, which were well
presented and debated.
Action
None
None
None
– The Audit Committee received and reviewed a report on the progress
of the Finance Transformation during 2017 and the mitigation of the
associated risks.
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 limitation, our internal controls over financial reporting may not
prevent or detect all 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. Entities where the Company does not hold a controlling
interest have their own processes of internal controls similar to those
of the Company.
We have reviewed the system of internal financial control and satisfied
ourselves that we are meeting the required standards both for the year
ended 31 December 2017 and up to the date of approval of this Annual
Report. No concerns were raised with us in 2017 regarding possible
improprieties in matters of financial reporting.
This process complies with the Financial Reporting Council’s ‘Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting’ on the UK Corporate Governance Code and
additionally contributes to our compliance with the obligations under
the Sarbanes-Oxley Act and other internal assurance activities.
There has been no change during the period covered by this Annual
Report that has materially affected, or is reasonably likely to materially
affect, the Group’s internal control over financial reporting.
The Board is responsible overall for reviewing and approving the
adequacy and effectiveness of the risk management framework and
the system of internal controls over financial, operational (including
quality management and ethical compliance) processes operated by
the Group. The Board has 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 identifies any weaknesses and ensures these are
remediated within agreed timelines. The latest review covered the
financial year to 31 December 2017 and included the period up to the
approval of this Annual Report.
The main elements of this annual review are as follows:
– The Chief Executive Officer and the Chief Financial Officer evaluated
the effectiveness of the design and operation of the Group’s
disclosure controls and procedures as at 31 December 2017.
Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded on 22 February 2018 that the disclosure
controls and procedures were effective as at 31 December 2017.
– Management is responsible for establishing and maintaining
adequate internal control over financial reporting.
Management assessed the effectiveness of the Group’s internal
control over financial reporting as at 31 December 2017 in accordance
with the requirements in the US under section 404 of the Sarbanes-
Oxley Act. In making that assessment, they used the criteria set
forth by the Committee of Sponsoring Organisations of the Treadway
Commission in Internal Control-Integrated Framework (2013).
Based on their assessment, management concluded and reported
that, as at 31 December 2017, the Group’s internal control over
financial reporting was effective based on those criteria.
SMITH & NEPHEW ANNUAL REPORT 2017
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DIRECTORS’ REMUNERATION REPORT
REMUNERATION
DEAR SHAREHOLDER,
This will be the final time I write to you as your Chairman of the Smith
& Nephew plc Remuneration Committee. I have been a member of the
Board since 2008 and Chairman of the Remuneration Committee since
April 2011. With that longevity in mind, I will retire as Chairman of the
Remuneration Committee and as a Director of the Company at the
2018 Annual General Meeting, where I will not stand for re-election.
Much of my time during 2017 has been assisting our Chairman to
find my replacement and assisting the new Remuneration Committee
Chair in settling into her new role. I am very pleased to introduce
Angie Risley to you as our Chairman Elect. Angie has vast experience
of Human Resources, including remuneration and importantly was
an effective member of the Remuneration Committee in her previous
non-executive director roles, most recently as Chairman of the
Remuneration Committee at Serco plc. Her experience in a wide
variety of different sectors will add real value to what is becoming an
expanded role for the Remuneration Committee. Proposed Corporate
Governance changes indicate that increased employee engagement
and oversight of employee remuneration generally will fall under the
remit of the Remuneration Committee.
REVIEW OF 2017 PERFORMANCE
During the year, the Group delivered underlying revenue growth of
3% and a 20bps improvement in trading profit margin, in-line with
guidance. Highlights included strong growth from Knee Implants and
in the Emerging Markets. Trading cash flow improved year-on-year, at
$940 million, as did the trading profit to cash conversion ratio of 90%.
The tax rate on trading results reduced by 670bps to 17.1%, including
a benefit from a one-off US tax settlement. Adjusted earnings
per share (EPSA) were up 14%. Our Return On Invested Capital
also improved, up 280bps to 14.3%.
These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 178–181.
As a result of the financial performance in 2017 and over the three-
year period ending 31 December 2017, our Executive Directors
received the following awards:
Cash bonus
(as % of salary)
91%
104%
Equity Incentive
Award
(as % of salary
at date of grant)
Performance Share
Award vesting
(as % of salary
at date of grant)
50%
55%
102.6%
N/A
Olivier Bohuon
Graham Baker
The total remuneration paid to Olivier Bohuon and Graham Baker
in 2017 is detailed further on page 83. As Graham Baker joined the
Company on 1 March 2017, there are no comparative figures for him.
The single total remuneration figure for Mr Bohuon for 2017 increased
to $5,032,925 from $3,332,850 in 2016. This was directly related to
the stronger Company performance in 2017 and in particular above
target performance for trading cash flow and trading profit margin,
which collectively led to an increase of $616,009 for the Cash Incentive
Plan. Our cumulative free cash flow and Emerging Market results over
the three year performance period for our Performance Share Plan
also contributed to a total vesting of these awards at 108% of target
compared to 16% in 2016.
RETIREMENT OF OLIVIER BOHUON
You will see from the meetings the Remuneration Committee has
conducted, 2017 was a busy year relating to Executive Director
remuneration. Our Chairman, Roberto Quarta, has already touched
on the retirement of Olivier Bohuon as Chief Executive Officer.
The Committee has met to approve his retirement arrangements,
which are in-line with the Remuneration Policy approved by our
shareholders at the 2017 Annual General Meeting.
In summary, Olivier Bohuon will support the transition to the new
Chief Executive Officer, when appointed and will continue to receive
the same salary and benefits as in 2017. He will participate in the
Annual Incentive Plan for the period worked in 2018, but will not
receive a 2018 award under the Performance Share Plan. As a good
leaver, his Equity Incentive Awards will vest on his leaving date, and
his Performance Share Awards will be pro-rated for length of time
served since the date of award and will vest subject to the original
performance conditions on their original vesting dates in 2019 and
2020. Additionally, his 2017 award will remain subject to a two-year
post vesting holding period.
I’d also like to personally thank Olivier for his leadership and
improvements achieved during his tenure, and wish him the best
for the future.
2017 ANNUAL GENERAL MEETING (AGM)
We were pleased that following the vote against our Remuneration
Report (excluding the policy) in 2016, that both our Remuneration
Policy and Remuneration Report received over 98% of votes in favour
at the 2017 Smith & Nephew plc AGM. This demonstrates the strong
support from our shareholders for our remuneration arrangements.
We do not plan to make any changes to our remuneration
arrangements in 2018.
I’d like to thank those shareholders who engaged with us during
2017 and met with Angie Risley. These shareholders covered nearly
15% of our shares. We welcome your feedback on our remuneration
policy and arrangements and actively consider your views in
our discussions.
LOOKING FORWARD
The Remuneration Committee will continue to be guided by the
principles we have followed in the past:
– Performance measures linked to our strategic priorities;
– Alignment of executive and shareholder interests; and
– Simplicity.
We will ensure that pay remains aligned with performance.
We will also continue to monitor external corporate governance
developments and respond accordingly, in particular those relating
to expanding the remit of the Remuneration Committee to take
greater account of the employee voice.
Joseph Papa
Chairman of the Remuneration Committee
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION
MEASURES IN OUR VARIABLE PAY PLANS
Financial measures in Annual Incentive Plan
Revenue (35%)
Revenue is a key driver of profit growth.
Trading Profit Margin (25%)
Trading Cash Flow (15%)
Trading profit margin is a critical measure both for the business and our shareholders and
delivering margin improvements is a core commitment under our strategy.
Cash flow from our Established Markets is necessary in order to fund growth in Emerging
Markets, innovation, organic growth and acquisitions.
Business objectives in Annual Incentive Plan
Business Process (8.3%)
People (8.3%)
Customer (8.3%)
We need to release resources from the businesses through improved structures, efficiencies
and business processes in order to re-invest in our higher growth areas, including Emerging
Markets, innovation, organic growth and acquisitions.
We need to attract and retain the right people to achieve our strategy through improving our
operating model and drive the right behaviours for all of our people globally.
Our mission is to deliver advanced medical technologies that help healthcare professionals,
our customers and improve the quality of life of their patients.
Performance measures in our Performance Share Plan
Relative TSR (25%)
Cumulative Cash Flow (25%)
If we execute our strategy successfully, this will lead to an increased return for our
shareholders, whether you invest in the healthcare sector or in the FTSE.
Cash flow from our Established Markets is necessary in order to fund growth in Emerging
Markets, innovation, organic growth and acquisitions.
Sales Growth (25%)
Sales growth is a key driver of profit growth.
Return on Invested Capital (25%)
Detailed further on pages 97–101.
Return on invested capital is a high priority for our shareholders which will drive better
financial discipline and enhanced operating performance.
Compliance statement
We have prepared this Directors’ Remuneration Report (the Report) in accordance with The 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 Regulations). The Report also meets the relevant
requirements of the Financial Conduct Authority (FCA) Listing Rules.
The first part of the Report (pages 81–96) is the annual report on remuneration (the Implementation Report). The Implementation Report will be put to shareholders for
approval as an advisory vote at the Annual General Meeting on 12 April 2018. The Implementation Report explains how the Remuneration Policy was implemented
during 2017 and also how it is currently being implemented in 2018.
The second part of the Report (pages 97–105) is the Directors’ Remuneration Policy Report (the Policy Report) which was approved by shareholders at the Annual
General Meeting held in April 2017. The Policy Report describes our Remuneration Policy as it relates to the Directors of the Company. All payments we make to
any Director of the Company will be in accordance with this Remuneration Policy. This Policy remains unchanged in 2018 and it is intended that it will next be put to
shareholder vote at the Annual General Meeting to be held in 2020.
The financial tables on pages 83–92, the Directors’ interests table on page 93 and the tables on pages 94–96 have been audited by KPMG LLP.
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REMUNERATION
REMUNERATION
COMMITTEE
Membership
The Remuneration Committee presents the Annual Report on
remuneration (the Implementation Report), which will be put to
shareholders for an advisory vote at the Annual General Meeting
to be held on 12 April 2018.
ROLE OF THE REMUNERATION COMMITTEE
Our work falls into the following three areas:
Determination of Remuneration Policy and Packages
– Determination of Remuneration Policy for Executive Directors and
senior executives.
– Approval of individual remuneration packages for Executive Directors
and Executive Officers, at least annually, and any major changes to
individual packages throughout the year.
– Consideration of remuneration policies and practices across
the Group.
– Approval of appropriate performance measures for short-
term and long-term incentive plans for Executive Directors and
senior executives.
Member
since
Meetings
attended
– Determination of pay-outs under short-term and long-term incentive
plans for Executive Directors and senior executives.
Joseph Papa (Chairman)
Angie Risley1 (Chairman Elect)
Vinita Bali2
Virginia Bottomley
Robin Freestone
Brian Larcombe3
Roberto Quarta4
April 2011
September 2017
April 2015
April 2014
September 2015
September 2010
April 2014
7/7
3/3
6/7
7/7
7/7
3/3
6/7
1 Angie Risley was appointed to the Board on 18 September 2017 and will be appointed Chairman of
the Committee with effect from 12 April 2018, subject to her re-election.
2 Vinita Bali was unable to attend one meeting due to a prior commitment. She had signified her
approval of the matters being discussed to the Remuneration Committee Chairman prior to
the meeting.
3 Brian Larcombe retired from the Board at the Annual General Meeting on 6 April 2017.
4 Roberto Quarta was unable to attend one meeting due to its short notice. He had signified
his approval of the matter being discussed to the Remuneration Committee Chairman prior to
the meeting.
2018 focus
– Evaluate remuneration package for a new Chief Executive Officer.
– Review gender pay reports and approve the implementation of
a programme designed to reduce the gender pay gap.
– Consider possible response to BEIS Green Paper on Corporate
Governance and how best to engage with our employees on
remuneration matters.
– Consider the implications of US tax reform.
Oversight of all Company Share Plans
– Determination of the use of long-term incentive plans and overseeing
the use of shares in executive and all-employee plans.
Reporting and Engagement with shareholders
on Remuneration Matters
– Approval of the Directors’ Remuneration Report ensuring compliance
with related governance provisions.
– Continuation of constructive engagement on remuneration matters
with shareholders.
The terms of reference of the Remuneration Committee describe our
role and responsibilities more fully and can be found on our website:
www.smith-nephew.com
ACTIVITIES OF THE REMUNERATION COMMITTEE
IN 2017 AND SINCE THE YEAR END
In 2017, we held seven meetings and determined six matters by
written resolution. Each meeting was attended by all members of the
Committee (except Vinita Bali and Roberto Quarta who each missed
one meeting this year). The Chief Executive Officer, the Chief Human
Resources Officer and the SVP Global Reward, key members of the
finance function and the Company Secretary also attended all or part
of some of the meetings, except when their own remuneration was
being discussed. We also met with the independent Remuneration
Consultants, Willis Towers Watson, without management present.
Our programme of work in 2017 can be found in the report below.
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REMUNERATION
Early February
Approval of salaries, awards and payouts in 2017
– Agreed the targets for the short-term and long-term incentive plans
for 2017. Introduced global revenue growth and ROIC as long-term
performance measurements (defined on page 89). Approved the
remuneration strategy for 2017 against the proposed business plan.
– Approved the quantum of cash payments to Executive Directors
and Executive Officers under the Annual Incentive Plan and awards
under the Equity Incentive Programme and the Performance Share
Programme, having considered the 2016 financial results against the
performance targets, that were set.
– The Audit Committee joined the Remuneration Committee for both of
the above agenda items to answer any questions regarding audited
numbers and provide assurance.
– Reviewed the salaries of the Board, Executive Directors and Officers
and Chairman.
– Approved the text of the Remuneration Report.
Mid February
Review of Remuneration (via voice conference)
– Discussed the payout under the Annual Incentive Plan and decided
to use downwards discretion to adjust outcomes following the
performance of the Company in 2016.
Late February
Final approval of the Remuneration Report (via voice conference)
– Approved the final targets for the short-term and long-term incentive
plans for 2017.
– Approved the final text of the Remuneration Report.
July (in Hull, UK)
Mid-year Review of Remuneration Arrangements
– Reviewed the shareholder response to the Remuneration Report at
the Annual General Meeting and noted shareholders’ feedback that
would be addressed in this report.
– Reviewed the performance of long-term awards granted in 2015, 2016
and 2017.
– Discussed and planned a programme of engagement with
institutional investors on remuneration.
– Considered termination arrangements for Executive Directors and
Executive Officers.
– Reviewed adherence to shareholding guidelines by Executive
Directors, Executive Officers and senior executives.
– Monitored dilution limits and the number of shares available for use
in respect of executive and all-employee share plans.
– Approved amendments to the Smith & Nephew ShareSave Plan 2012
rules to reflect regulatory changes.
October
– Approved retirement package for Olivier Bohuon,
Chief Executive Officer.
Early November (in Dubai, UAE)
– Prepared for meetings with shareholders to solicit viewpoints and
introduce Angie Risley.
– Reviewed first draft of the Remuneration Report for 2017.
Late November
Review of Remuneration Strategy
– Received a report from the Chairman of the Remuneration Committee
on recent engagement with shareholders.
– Reviewed and considered the principles for determining payouts
under the long-term plans due to vest in 2018.
– Approved the final Remuneration Strategy for 2018.
– Reviewed market data for the Executive Directors and Executive
Officers prepared in accordance with the agreed methodology.
Six written resolutions were approved during the year relating to the
approval of remuneration arrangements for various Executive Officers.
Since year end, we have also reviewed the financial results for 2017
against the targets under the short-term and long-term incentive
arrangements jointly with the Audit Committee, and have agreed the
targets for the short-term and long-term incentive plans for 2018.
We have also approved increases to the salaries of Executive Directors
and Executive Officers and determined cash payments under the
Annual Incentive Plan, awards under the Equity Incentive Programme
and the Performance Share Programme, and the vesting of awards
under the Performance Share Programme granted in 2015. Finally, we
approved the wording of this Directors’ Remuneration Report.
During the year, the Remuneration Committee received information
and advice from Willis Towers Watson, an independent executive
remuneration consultancy firm appointed by the Remuneration
Committee in 2011 following a full tender process. They provided
advice on market trends and remuneration issues in general, attended
Remuneration Committee meetings, assisted in the review of the
Directors’ Remuneration Report, provided market benchmark data on
compensation design and levels, undertook calculations relating to
the TSR performance conditions, assisted in matters relating to the
Chief Executive Officer’s retirement, and advised on investor views
and engagement. In addition, the Committee received independent
advice from Mercer relating to the use of discretion downwards when
determining the level of payout in respect of the 2016 annual cash
incentive plan. The fees paid to Willis Towers Watson for Remuneration
Committee advice during 2017, charged on a time and expense basis,
were £98,000 and the fee paid to Mercer was £4,350. Willis Towers
Watson also provided other human resources and compensation advice
to the Company for the level below the Board. Mercer also provided
insurance broking, market data, actuarial and investment consulting
services both at a global and local level. Both Willis Towers Watson
and Mercer comply with the Code of Conduct in relation to Executive
Remuneration Consulting in the United Kingdom and the Remuneration
Committee is satisfied that their advice is objective and independent.
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REMUNERATION IMPLEMENTATION REPORT
SINGLE TOTAL FIGURE ON REMUNERATION
The amounts for 2017 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.2877 and € to US$1.1279
(2016: £ to US$1.349 and € to US$1.106).
Olivier Bohuon
Appointed 1 April 2011
Graham Baker
Appointed 1 March 2017
2017
2016
2017
Julie Brown
Appointed 4 February 2013
(resigned with effect from 11 January 2017)
2017
2016
Fixed pay
Base salary
Payment in lieu of pension
Taxable benefits
Annual variable pay
Annual Incentive
Plan – cash
Hybrid
Annual Incentive
Plan – equity
Long-term variable pay
$1,330,347
$1,295,017
$399,104
$177,433
$388,505
$166,465
$547,273
$164,182
$22,308
$1,208,911
$592,902
$683,797
$665,173
$652,258
$361,200
Performance Share Plan
$1,251,957
$237,703
–
$21,606
$6,482
$637
$730,257
$219,078
$30,007
–
–
–
–
–
–
Total
$5,032,925
$3,332,850
$1,778,760
$28,725
$979,342
Olivier Bohuon
Graham Baker
Julie Brown
2017
2016
$5,032,925
2017
$3,322,850
N/A
2016
$1,778,760
2017
2016
$28,725
$979,342
Base salary
the actual salary receivable for the year.
Payment in lieu of pension the value of the salary supplement paid by the Company in lieu of a pension.
Taxable benefits
the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year.
Annual Incentive
Plan – cash
Annual Incentive
Plan – equity
Performance Share Plan
the value of the cash incentive payable for performance in respect of the relevant financial year.
the value of the equity element awarded in respect of performance in the relevant financial year, but subject to an ongoing
performance test as described on pages 87–88 of this report.
the value of shares vesting that were subject to performance over the three-year period ending on 31 December in the
relevant financial year. For awards vesting in early 2018 this is based on an estimated share price of 1,352.140p per share,
which was the average price of a share over the last quarter of 2017. The value of the 2014 share awards that vested in 2017
have now been restated with the share price on the date of actual vesting being 1,221.625p per share on 7 March 2017.
Total
the sum of the above elements.
All data is presented in our reporting currency of US$. Amounts for Olivier Bohuon have been converted from EURO and amounts for Julie Brown
and Graham Baker from GBP using average exchange rates. Given currency volatility in 2017, this may give the impression of changes that are
misleading. Data is presented in local currency in the subsequent sections in the interests of full transparency.
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REMUNERATION IMPLEMENTATION REPORT
Retirement of Olivier Bohuon
On 9 October 2017, we announced that Olivier Bohuon intended to retire as Chief Executive Officer by the end of 2018.
Up until the date of his retirement, Olivier Bohuon will continue to be paid his salary, pension and benefits and will participate on a pro-rata basis
in the 2018 Annual Incentive Plan, which will be delivered entirely as cash. He will not receive a Performance Share Plan in respect of 2018. In-line
with good leaver provisions in the Plan Rules and Remuneration Policy, the awards granted under the Performance Share Plan in 2016 and 2017
(as detailed in this report) will be pro-rated for length of time held and will, subject to the performance conditions being satisfactorily met, vest on
the original vesting dates on the third anniversary of the respective dates of grant. The 2017 award will remain subject to a two-year post-vesting
holding period.
FIXED PAY
Base salary
In February 2017, it was agreed that with effect from 1 April 2017, Executive Directors would be paid the following base salaries.
Olivier Bohuon
Graham Baker
2017
2016
€1,179,490
£510,000
€1,179,490
–
In February 2018, 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% in the UK and the US; 2.6% globally. The Remuneration Committee has agreed
that there will be no increase to the base salary of Olivier Bohuon and that Graham Baker’s salary will be increased by 2% to £520,200.
Payment in lieu of pension
In 2017, Olivier Bohuon, Graham Baker and Julie Brown until her resignation on 11 January 2017 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.
Benefits
In 2017, Olivier Bohuon, Graham Baker and Julie Brown until her resignation on 11 January 2017 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 dependent persons. They also
received health cover for themselves and their families, a car allowance and financial consultancy advice. Olivier Bohuon also received assistance
with travel costs between London and Paris. The same arrangements will apply in 2018 for Olivier Bohuon and for Graham Baker. The following table
summarises the value of benefits on an element-by-element basis in respect of 2016 and 2017. Julie Brown received these benefits until she retired
from the Board on 11 January 2017.
Health cover
Car and fuel allowance
Financial consultancy advice
Travel costs
Subscriptions
2017
£17,807
£15,000
£34,204
€37,736
£33,703
£4,023
Olivier Bohuon
2016
£15,672
€18,292
£66,572
–
£23,814
£2,344
2017
£1,217
£14,182
£1,925
–
–
–
Graham Baker
2016
–
–
–
–
–
–
2017
£44
£451
–
–
–
–
Julie Brown
2016
£1,440
£14,640
£6,614
–
–
–
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REMUNERATION IMPLEMENTATION REPORT
ANNUAL VARIABLE PAY
Annual Incentive Plan 2017
Cash Element
During 2016, the Remuneration Committee reviewed the operation of the Annual Incentive Plan and the performance measures and weightings
which would apply to the cash element of the Annual Incentive Plan. These changes placed a greater emphasis on financial goals reflecting the
importance we place on achievement of financial measures. The financial measures comprise 75% of the total award and are split between revenue
(35%), trading profit margin (25%), and trading cash flow (15%). These measures were selected because revenue and trading profit margin constitute
the key drivers of profit growth, and trading cash flow was a key measure of how efficiently we turn our assets into cash. Trading profit margin is a
critical measure both for the business and our investors and delivering margin improvements is a core commitment under our strategy.
The remaining 25% of the total award are individual business objectives, similar to previous years, tied to our strategic priorities. As in previous
years, these business objectives fell into the categories of Business Process, People and Customer.
The weighting of the performance measures for 2017 can be summarised as follows:
Financial objectives
Revenue
Trading profit margin
Trading cash flow
Business objectives
Business process
People
Customer
75%
25%
35%
25%
15%
8.33%
8.33%
8.33%
The figures for threshold, target and maximum relating to the financial objectives of the cash element of the 2017 Annual Incentive Plan are
shown below:
Revenue
Trading profit margin
Trading cash flow²
1 At constant exchange rates. See page 182.
Threshold
$4,578m
21.8%
$801m
Target
Maximum
$4,720m
22.3%
$890m
$4,861m
22.7%
$979m
Actual
$4,654m1
22.3%1
$940m
2 During the year, the trading cash flow target was adjusted upwards to reflect the change regarding the cash funding of closed post-retirement benefit schemes (see pages 150–155).
‘Target’ was set and approved by the Board in the 2017 Budget. ‘Threshold’ and ‘Maximum’ are set at +/-3% from the target for revenue, at +/-45bps
for the trading profit margin measure and at +/-10% for the trading cash flow from target.
This resulted in a bonus achievement of 73% of salary in respect of the financial objectives.
Revenue
Trading profit margin
Trading cash flow
Weight
Achieved % of target
Award % of salary
35%
25%
15%
77%
107%
128%
26.9%
26.8%
19.2%
Accordingly, the following amounts have been earned by Olivier Bohuon and Graham Baker under the cash element of the Annual Incentive Plan in
respect of their financial objectives.
Olivier Bohuon
Graham Baker
€859,517
£371,647
The same measures and weightings will apply to the financial measurements of the cash element of the Annual Incentive Plan 2018. For reasons
of commercial sensitivity, we are unable to disclose the precise targets now, but they will be disclosed in the 2018 Remuneration Report at the time
of vesting.
Business Objectives
When setting business objectives for the upcoming year, the Board looks not only at the expected financial performance for the year, but also
at the actions it expects the Executive Director to carry out in the year to build a solid foundation for financial performance over the longer term.
In reviewing performance against these objectives at the end of the year, the Board is mindful that there is not always a necessary correlation
between financial performance and the achievement of business objectives.
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REMUNERATION IMPLEMENTATION REPORT
The table below sets out how Olivier Bohuon and Graham Baker have performed against the business objectives of People, Business Process
and Customers.
Olivier Bohuon
People
Graham Baker
– Delivered 50bps improvement in Group Great Place to Work Trust Index,
– Delivered 30bps improvement Finance function Great Place to Work Trust
meeting target of 67%.
Index, meeting target of 67%.
– Further five countries awarded Great Place to Work Accreditation, ahead
– Met target to upgrade Finance leadership team through combination of
internal moves and external hires. Exceeded targets to retain and develop
top Finance talent (80% of critical roles filled internally vs 50% target).
Exceeded target on Finance leadership retention, with minimal loss of
top-talent against target of less than 10%.
of target of two new countries, with nine countries in total now recognised.
– Made progress against targets for 50% of critical roles filled by top talent
(48% achieved); met target to identify internal successors for 50% of critical
roles. Target to reduce voluntary turnover of top talent missed (12% against
target of less than 10%).
– Clear communication of strategy and implementation plans across
the Group through direct and indirect channels to drive alignment and
increase engagement.
– Target of delivering $5 million incremental revenue from commercial excellence
programme not met with remediation action initiated.
– Achieved target of all employees and third party sellers completing more than
95% of global compliance on time.
Business Process
– Achieved target of new global R&D model fully operational by first quarter
of 2017, including Portfolio Innovation Board to drive strategy and prioritise
projects. More than 80% of programme milestones met tracking towards best-
in-class standard of 90%, and programme to develop further clinical evidence
progressing to plan.
– Maintaining an effective financial control environment.
– Met target to hold employees accountable for Finance policies and
procedures, with 95% compliance on Minimum Acceptable Practices (MAPs)
and deeper checking across all Group countries.
– Finance Transformation plan built, including integrating some back-office
services into Global Business Services.
– First phase of new IT finance system successfully implemented in
North America on time and within budget.
– Established relationships with investors and analysts supporting Group IR
programme, receiving excellent feedback from external stakeholders.
Customers
– Met target to continue to develop new business models including mid-tier
– Met target to provide robust financial modelling to improve business
portfolio in the Emerging Markets and eCAP in the US.
– Roadmap for mid-tier product development completed in-line with target, with
notable successes including ANTHEM Knee and ATLAS HF Nail in Emerging
Markets. Mid-tier portfolio revenue growth tracked behind target.
decision-making processes, including improved visibility of R&D portfolio
value and completion of acquisition of Rotation Medical, Inc.
– Delivered leadership with Chief Executive Officer in developing APEX
programme to improve competitiveness of Smith & Nephew.
– Met tax targets with tax on trading reduced from 23.8% in 2016 to 17.1% in 2017
reflecting one-off benefit following the conclusion of a US tax audit, further
progress in improving our tax rate, tax provision releases following expiry of
statute of limitations and a beneficial geographical mix of profits on trading.
This resulted in a bonus achievement of 18% of salary in respect of the
business objectives.
This resulted in a bonus achievement of 31% of salary in respect of the
business objectives.
People
Business Process
Customers
Weight
8.33%
8.33%
8.33%
Achieved % of
target
Award % of
salary
72%
100%
50%
6%
8%
4%
People
Business Process
Customers
Weight
8.33%
8.33%
8.33%
Achieved % of
target
Award % of
salary
120%
132%
120%
10%
11%
10%
Accordingly, the following amount has been earned by Olivier Bohuon
under the cash element of the Annual Incentive Plan in respect of his
business objectives.
Accordingly, the following amount has been earned by Graham Baker
under the cash element of the Annual Incentive Plan in respect of his
business objectives.
Olivier Bohuon
€212,308
Graham Baker
£159,375
The same measures and weightings will apply to the business objectives of the cash element of the Annual Incentive Plan in 2018.
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REMUNERATION IMPLEMENTATION REPORT
HYBRID
Equity Incentive Award
The individual performance of all employees in the Group is assessed on two bases. The first looks at what has been achieved, namely the extent
to which the employee has performed against the financial and business objectives set at the beginning of the year. The second looks at how this
performance has been achieved, reflecting the right culture and values in accordance with our critical enablers. Against each, the employee is rated
as having performed below, in-line or above expectations.
Assessment of what has been achieved
Below expectations
No Award
No Award
No Award
Assessment of how Executive Directors have achieved
Below expectations
In-line with expectations
Above expectations
In-line with expectations
No Award
Above expectations
No Award
Award of
50% of Salary
Award of
55% of Salary
Award of
55% of Salary
Award of
65% of Salary
The Remuneration Committee has considered the performance of Olivier Bohuon and Graham Baker in exactly the same way as other employees
in the Group when determining the level of Equity Incentive Award to be made to them. In assessing their performance against the same financial
and business objectives used to determine the level of their cash award, the Remuneration Committee has determined that on the first criterion
(assessing what they have achieved) Olivier Bohuon and Graham Baker have both performed in-line with expectations throughout the year. On the
second criterion (assessing how they have achieved), the Remuneration Committee has determined that Olivier Bohuon has performed in-line with
expectations and Graham Baker has performed above expectations. These ratings result in an Equity Incentive Award of 50% of salary for Olivier
Bohuon and 55% of salary for Graham Baker.
In summary, as a result of the financial performance described on page 85 and the performance described in the table on page 86, the
Remuneration Committee determined that the following awards be made under the Annual Incentive Plan in respect of performance in 2017:
Executive Director
Olivier Bohuon
Graham Baker
Cash Component
Equity Component
% of salary
Amount
% of salary
Amount
91% €1,071,825
£531,022
104%
50%
55%
€589,745
£280,500
These figures are converted into dollars and included under Annual Incentive Plan (cash) and (equity) in the single figure table on page 83.
As a result of the 2017 performance assessment for Olivier Bohuon, the first tranche of the Equity Incentive Award made in 2017, the second tranche
of the Equity Incentive Award made in 2016 and the third tranche of the Equity Incentive Award made in 2015 will vest. Both the grant and vesting of
these awards are subject to Olivier’s performance discussed on page 86. Graham Baker was not employed during 2016 and therefore received no
Equity Incentive award in 2017.
Director
Olivier Bohuon
Date of Grant
7 March 2017 – 1st tranche
7 March 2016 – 2nd tranche
9 March 2015 – 3rd tranche
Number of shares under
award vesting
Number of shares to vest
from each grant subject
to performance
13,886
16,717
12,849
27,779
16,725
0
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REMUNERATION IMPLEMENTATION REPORT
Details of awards made under the Equity Incentive Programme during 2017
Details of conditional awards over shares, granted as part of the Annual Equity Incentive Programme to Executive Directors under the rules of the
Global Share Plan 2010 for their 2016 performance (awarded in 2017) are shown below. The performance conditions and performance periods
applying to these awards are detailed above.
Date granted
Olivier Bohuon
7 March 2017
Number of shares under award
Date vesting
41,665
1/3 on 7 March 2018
1/3 on 7 March 2019
1/3 on 7 March 2020
The precise awards granted in 2018 to Olivier Bohuon and Graham Baker in respect of service in 2017 will be announced when the awards are
made and will be disclosed in the 2018 Annual Report.
Olivier Bohuon has announced his intention to retire by the end of 2018 and will therefore not be entitled to receive an Equity Incentive Award in
2019 after ceasing to be an employee. He will therefore receive a cash amount equivalent to the Equity Incentive Award he would have received,
if any, had he remained employed. This will be disclosed in full in the 2018 Remuneration Report.
The Equity Incentive Award element will operate in 2018 in exactly the same way as in 2017 and previous years. The Remuneration Committee will
assess what has been achieved by the Executive Directors against the same financial and business objectives used to determine the level of their
cash awards. The Remuneration Committee will assess how the Executive Directors have achieved their objectives by considering the role played
by the Executive Directors in establishing an appropriate culture and set of values throughout the organisation. The level of Equity Incentive Award
to be made will be determined according to the matrix on page 87.
LONG-TERM VARIABLE PAY
Performance Share Plan
Performance Share Programme – 2017 grants
Performance share awards granted in 2017 were made to Executive Directors under the Global Share Plan 2010 to a maximum value of 190%
of salary (95% for target performance). During 2016, the Remuneration Committee reviewed the operation of the Performance Share Programme
and made changes to the performance measures and weightings which were included with the Remuneration Policy and approved at the Annual
General Meeting on 6 April 2017. The four equally weighted performance measures are relative TSR, return on invested capital, sales growth and
cumulative free cash flow. These measures are aligned with our financial priorities and strategies. Performance will be measured over the three
financial years from 1 January 2017 and awards will vest subject to performance and continued employment in 2020. Sufficient shares will be sold
to cover taxation obligations and the Executive Directors will be required to hold the net shares for a further period of two years.
The two equally weighted peer groups against which the Company’s TSR performance will be measured are defined at the start of each
performance period based on constituents of the following:
– A sector-based peer group based on those companies classified as the S&P 1200 Global Healthcare subset comprising Medical Devices,
equipment and supplies companies (official industry classifications of ‘Health Care Equipment and Supplies, Life Sciences Tools & Services and
Health Care Technology’). This is a broader sector-based peer group than in previous years, so that we maintain a focus on outperforming our
broad sector without being impacted by the volatility of a smaller group.
– FTSE 100 constituents excluding financial services and commodities companies. This is in response to shareholders who assess our
performance not based on sector, but instead based on the index we operate in.
The Group’s TSR performance and its performance relative to the comparator group is independently monitored and reported to the Remuneration
Committee by Willis Towers Watson.
Total Shareholder Return (TSR) performance is relative to two separate indices as follows:
Relative TSR ranking
Below median
Median
Upper quartile or above
Award vesting as % of salary at date of grant
Sector Based Peer Group
FTSE100 Peer Group
Nil
5.9375%
23.75%
Nil
5.9375%
23.75%
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.
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
Return on invested capital (ROIC), adds focus on enhancing operating performance and reducing the under-performing asset base. 25% of the
award will vest subject to ROIC:
ROIC will be defined as:
Net Operating Profit1 less Adjusted Taxes2
(Opening Net Operating Assets + Closing Net Operating Assets3)/2
ROIC will be measured each year of the three-year performance period and a simple average of the three years will be compared to the targets
below (precise numbers will be included in the Remuneration Report prospectively). The Remuneration Committee will have the discretion to adjust
ROIC targets in the case of significant events such as material mergers, acquisitions and disposals and that such adjustment will be consistent with
the deal model and approved by the Board at the time of the transaction.
1 Operating profit is as disclosed in the Group income statement in the Annual Report.
2 Adjusted taxes represents our taxation charge per the Group income statement adjusted for the impact of tax on items not included in Operating Profit notably interest income and expense, other finance costs
and share of results of associates.
3 Net Operating Assets comprises net assets from the Group balance sheet (Total assets less Total liabilities) excluding the following items: Investments, Investments in associates, Retirement benefit assets
and liabilities, Long-term borrowings, Bank overdrafts and loans, and Cash at bank.
The awards subject to ROIC will vest as follows:
Return on Invested Capital
Below Threshold 11.1%
Threshold 11.1% (-1.9% of target)
Target 13% (as derived from the Strategic Plan)
Maximum or above 14.9% (+1.9% of target)
Award vesting as % of salary
Nil
11.875%
23.75%
47.5%
Awards will vest on a straight-line basis between these points.
Sales growth focuses on growth in both Established Markets and Emerging Markets. 25% of the award will be subject to sales growth and will vest
as follows:
Sales growth over three-year period commencing 1 January 2017
Award vesting as % of salary
Below Threshold
Threshold (-3% of target)
Target
Maximum or above (+3% of target)
Nil
11.875%
23.75%
47.5%
It is not possible to disclose precise targets for sales growth as this will give commercially sensitive information to our competitors concerning our
growth plans and is potentially price sensitive information. This target however will be disclosed in the 2019 Annual Report, when the Committee will
discuss performance against the target.
Cumulative free cash flow is defined as net cash inflow from operating activities, less capital expenditure, less the cash flow input of certain
adjusted items. Free cash flow is the most appropriate measure of cash flow performance because it relates to cash generated to finance additional
investments in business opportunities, debt repayments and distribution to shareholders. This measure includes significant elements of operational
financial performance and helps to align Executive Director awards with shareholder value creation.
It is important as it is derived from increased revenues and healthy trading profits. Having a healthy cash flow will enable us to continue to grow and
invest. 25% of the award will be subject to cumulative free cash flow performance and will vest as follows:
Cumulative free cash flow
Below $1,482m
$1,482m (-13% of target)
$1,703m
$1,924m or more (+13% of target)
Award vesting as % of salary
Nil
11.875%
23.75%
47.5%
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REMUNERATION IMPLEMENTATION REPORT
Performance Share Programme 2018
A performance share award will be made in 2018 to Graham Baker under the Global Share Plan 2010 to a maximum value of 190% of salary (95% for
target performance). No performance share award will be made to Olivier Bohuon in 2018.
Performance will be measured over the three financial years commencing 1 January 2018 against the same four equally weighted performance
measures as in 2017: relative TSR, return on invested capital, sales growth and cumulative free cash flow. On vesting, sufficient shares will be sold to
cover taxation obligations and Graham Baker will be required to hold the net shares for a further period of two years.
TSR performance will be measured in the same way as in 2017 as described on page 88 against the same two peer groups.
Return on invested capital (ROIC) will be measured in the same way as in 2017, as described on page 89. The targets will be as follows:
Return on Invested Capital
Below Threshold 11.6%
Threshold 11.6% (-1.25% of target)
Target 12.9% (as derived from the Strategic Plan)
Maximum or above 14.1% (+1.25% of target)
Award vesting as % of salary
Nil
11.875%
23.75%
47.5%
Awards will vest on a straight-line basis between these points.
Sales growth will be measured in the same way as in 2017, as described on page 89. The targets will be as follows:
Sales growth over three-year period commencing 1 January 2018
Award vesting as % of salary
Below Threshold
Threshold (-2.7% of target)
Target
Maximum or above (+2.7% of target)
Nil
11.875%
23.75%
47.5%
It is not possible to disclose precise targets for sales growth as this will give commercially sensitive information to our competitors concerning our
growth plans and is potentially price sensitive information. This target however will be disclosed in the 2020 Annual Report, when the Committee
will discuss performance against the target.
Cumulative free cash flow will be measured in the same way as in 2017, as described on page 89. The targets will be as follows:
Cumulative free cash flow
Below $1,575m
$1,575m (-13% of target)
$1,810m
$2,046m or more (+13% of target)
Award vesting as % of salary
Nil
11.875%
23.75%
47.5%
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
VESTING OF AWARDS MADE IN 2015
Performance Share Programme 2015
Since the end of the year, the Remuneration Committee has reviewed the vesting of conditional awards made to Executive Directors under the
Global Share Plan 2010 in 2015. Vesting of the conditional awards made in 2015 was subject to performance conditions based on TSR, revenue in
Emerging Markets and cumulative free cash flow measured over a three-year period commencing 1 January 2015.
25% of the award was based on the Company’s TSR relative to a bespoke group of 12 Medical Devices companies. This group comprised of the
following companies: Baxter, Becton Dickinson, Boston Scientific, Coloplast, Conmed, Edwards Life Sciences, Medtronic, NuVasive, Orthofix, Stryker,
Wright Medical and Zimmer. The following companies delisted during the period and were therefore removed: Covidien, C R Bard, Nobel Biocare
and St Jude Medical. Against this peer group, the Company’s TSR performance ranked below median meaning that this part of the award therefore
vested at 0%.
25% of the award was based on revenues in Emerging Markets. The threshold set in 2015 was $2,395 million with a target of $2,818 million.
Over the three-year period, the adjusted revenues in Emerging Markets were $2,411 million. These adjustments include translational foreign
exchange and Board-approved M&A. This part of the award therefore vested at 13% out of the 25% target.
50% of the award was based on cumulative free cash flow performance. Over the three-year period, the adjusted cumulative free cash flow was
$2,024 million which is between target and maximum. These adjustments include items such as Board-approved M&A, including the acquisition of
BlueBelt and Board-approved Business Plans such as the metal-on-metal settlements. This part of the award therefore vested at 95%.
TSR
Emerging Markets Sales
Cumulative Free Cash Flow
Threshold
Target
Maximum
Actual
Median
$2,395m
$1,578m
–
$2,818m
$1,814m
Upper Quartile Below Median
$2,411m
$2,024m
$3,240m
$2,050m
Percentage
Vesting
0%
13%
95%
Overall therefore, the conditional awards made in 2015 will vest at 54% of maximum (108% of target) on 9 March 2018 as follows:
Director
Olivier Bohuon
Date of grant
9 March 2015
Number of shares under
award at maximum
133,156
Number vesting
71,904
DETAILS OF OUTSTANDING AWARDS MADE UNDER THE PERFORMANCE SHARE PROGRAMME
Details of conditional awards over shares granted to Executive Directors subject to performance conditions are shown below. These awards
were granted under the Global Share Plan 2010. The performance conditions and performance periods applying to these awards are detailed
on pages 88 and 89.
Olivier Bohuon
Graham Baker
Date granted
9 March 2015
7 March 2016
7 March 2017
7 March 2017
Number of ordinary shares
under award at maximum
133,1561
146,620
158,328
79,166
Date of vesting
9 March 2018
7 March 2019
7 March 2020
7 March 2020
1 On 6 February 2018, 46% of the award granted at maximum to Olivier Bohuon lapsed following completion of the performance period.
SUMMARY OF SCHEME INTERESTS AWARDED DURING THE FINANCIAL YEAR
Annual Equity Incentive Award (see page 87)
Performance Share Award at maximum (see page 91)
41,665
158,328
€589,745
€2,241,030
–
79,166
1 Annual Equity Incentive Awards for 2017 were based on performance for 2016, hence Graham Baker received no award.
Number of shares
Face value
Number of shares
Olivier Bohuon
Graham Baker1
Face value
–
£969,000
Please see Policy Table on pages 99 and 100 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 2017 was 1,224p.
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
SINGLE TOTAL FIGURE ON REMUNERATION
Chairman and Non-Executive Directors
Director
Roberto Quarta
Vinita Bali2
Ian Barlow
Virginia Bottomley
Erik Engstrom
Robin Freestone
Michael Friedman
Brian Larcombe3
Marc Owen4
Joseph Papa
Angie Risley5
Basic annual fee1
Committee Chairman /
Senior Independent
Director fee
Intercontinental travel fee
2017
2016
2017
2016
2017
2016
2017
£412,000
£36,750
$59,780
£68,135
£68,135
£68,135
£68,135
$129,780
£20,750
$30,000
$129,780
£18,173
£409,750
£63,000
$9,780
£68,135
£68,135
£68,135
£68,135
$129,780
£68,135
–
$129,780
–
–
–
–
£20,000
–
–
£16,667
$35,000
£1,277
–
$35,000
–
–
–
–
£18,750
–
–
–
$33,000
£18,750
–
$33,000
–
£7,000
£7,000
$21,000
£7,000
£7,000
£7,000
£7,000
$42,000
–
$14,000
$35,000
£7,000
£3,500
£21,000
–
£3,500
£3,500
£3,500
£3,500
$35,000
£3,500
–
$35,000
–
£419,000
£43,750
$80,780
£95,135
£75,135
£75,135
£91,802
$206,780
£22,027
$44,000
$199,780
£25,173
Total
2016
£413,250
£84,000
$9,780
£90,385
£71,635
£71,635
£71,635
$197,780
£90,385
–
$197,780
–
1 The basic annual fee includes shares purchased for the Chairman and Non-Executive Directors in lieu of part of the annual fee, details of which can be found on the table on page 104.
2 Vinita Bali elected to receive the payment of her fee in US$ in August 2017 having previously been in GBP.
3 Brian Larcombe retired from the Board with effect from 6 April 2017.
4 Marc Owen was appointed to the Board with effect from 1 October 2017.
5 Angie Risley was appointed to the Board with effect from 18 September 2017.
Chairman and Non-Executive Director Fees
In February 2018, the Remuneration Committee reviewed the fees paid to the Chairman and determined that with effect from 1 April 2018 the fees
paid would increase by 2%. The Board reviewed the fees paid to the Non-Executive Directors and determined that with effect from 1 April 2018, the
fees paid in GBP would be increased by 2% and the fees paid in US$ would remain unchanged as follows:
Annual fee paid to the Chairman
Annual fee paid to Non-Executive Directors
Intercontinental travel fee (per meeting)
Fee for Senior Independent Director and Committee Chairman
£420,240 of which £105,060 paid in shares
£69,500 of which £6,500 paid in shares
Or $129,780 of which $9,780 paid in shares
£3,500 or $7,000
£20,000 or $35,000
Chief Executive Officer’s remuneration compared to employees generally
The percentage change in the remuneration of the Chief Executive Officer between 2016 and 2017 compared to that of employees generally is
as follows:
Chief Executive Officer
Average for all employees
Base salary %
change 2017
Benefits %
change 2017
0%
3.3%
6.6%
N/A
Annual cash
bonus %
change 2017
103.9%
N/A
The average cost of wages and salaries for employees generally decreased by 10% in 2017 (see Note 3.1 to the Group accounts). Figures for annual
cash bonuses are included in the numbers.
The Committee is mindful that the Government now requires quoted companies to publish their Chief Executive Officer’s pay in relation to its
workforce. The Committee awaits the Government’s advice on the exact method of calculation, but aims to publish this information in the 2018
Annual Report.
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
Payments made to past Directors
No payments were made to former Directors in the year, other than base payments made to Julie Brown for the 11 days worked in January 2017, as
disclosed on page 83.
Payments for loss of office
No payments were made in respect of a Director’s loss of office in 2017.
Service contracts
Executive Directors are employed on rolling service contracts with notice periods of up to 12 months from the Company and six months from the
Executive Director. Further information can be found on page 102 of the Policy Report.
Outside directorships
Olivier Bohuon is a Non-Executive Director of Virbac SA and received €21,000 in respect of this appointment. He is also a Non-Executive Director
of Shire Plc and received €107,466 in cash and £24,053 in shares in respect of this appointment. Julie Brown is a Non-Executive Director of Roche
Holding Ltd and received a fee of CHF10,849 until 11 January 2017.
Directors’ interests in ordinary shares
Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:
Ordinary shares
Share options
Performance share awards5
Equity Incentive awards
Other awards
Olivier Bohuon
Graham Baker
1 January
2017
31 December
2017
424,288
–
460,080
96,417
–
467,811
–
423,680
87,956
–
16 February
20181
467,8114
–
362,428
87,956
–
1 March
20172
31 December
2017
–
–
–
–
–
–
–
79,166
–
–
16 February
20181
–4
–
79,166
–
–
1 January
2017
90,040
2,400
273,598
50,649
–
Julie Brown
11 January
20173
90,040
–
–
–
–
1 The latest practicable date for this Annual Report.
2 Graham Baker was appointed to the Board from 1 March 2017.
3 Julie Brown retired from the Board on 11 January 2017.
4 The ordinary shares held by Olivier Bohuon on 16 February 2018 represent 571.6% of his base annual salary and for Graham Baker 0% of his base salary.
5 These share awards are subject to further performance conditions before they may vest, as detailed on pages 88–90.
The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company. In addition, Olivier Bohuon holds
50,000 deferred shares. Following the redenomination of ordinary shares into US$ on 23 January 2006, the Company issued 50,000 deferred
shares. These shares are normally held by the Chief Executive Officer and are not listed on any stock exchange and have extremely limited rights
attached to them.
Beneficial interests of the Chairman and Non-Executive Directors in the ordinary shares of the Company are as follows:
Director
Roberto Quarta3
Vinita Bali4
Ian Barlow
Virginia Bottomley
Erik Engstrom
Robin Freestone
Michael Friedman4
Brian Larcombe⁵
Marc Owen
Joseph Papa4
Angie Risley
1 January 2017 (or date of
appointment if later)
31 December 2017 (or date
of retirement if earlier)
16 February 20181
Shareholding as %
of annual fee2
24,156
6,522
18,786
18,473
15,350
15,310
9,476
40,718
–
13,547
–
28,261
6,836
19,009
18,714
15,547
15,525
9,910
40,718
–
13,860
–
28,261
6,836
19,009
18,714
15,547
15,525
9,910
N/A
7,000
13,860
1,601
87.8
130.7
357
351.4
292
291.5
139.4
N/A
98.5
195
30.1
1 The latest practicable date for this Annual Report.
2 Calculated using the closing share price of 1,279.50p per ordinary share and $36.54 per ADS on 16 February 2018, and an exchange rate of £1/$1.4027.
3 All Non-Executive Directors in office since 1 January 2017 held the required shareholding during the year except the Chairman.
4 Vinita Bali, Michael Friedman and Joseph Papa hold some of their shares in the form of ADS.
5 Brian Larcombe retired from the Board on 6 April 2017.
The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
Relative importance of spend on pay
The following table sets out the total amounts spent in 2017 and 2016 on remuneration, the attributable profit for each year and the dividends
declared and paid in each year.
Attributable profit for the year
Dividends paid during the year
Share buyback
Total Group spend on remuneration
For the year to
31 December 2017
For the year to
31 December 2016
$767m
$269m
$52m¹
$1,157m
$784m
$279m
$368m²
$1,227m
% change
-2%
-4%
-86%
-6%
1 Shares are bought in the market in respect of shares issued as part of the executive and employee share plans.
2 Following the disposal of the Gynaecology business in August 2016, the Company commenced a $300m share buy-back programme which completed during 2016. See Note 19.2 for further information.
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.
Nine-year Total Shareholder Return
(measured in UK Sterling, based on monthly spot values)
275
250
225
200
175
150
125
100
75
50
25
0
-25
Dec 2008
Source: DataStream
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Smith & Nephew
FTSE 100
However, as we compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 88), when
considering TSR performance in the context of the Global Share Plan 2010, we feel that the following graph showing the TSR performance of this
peer group is also of interest.
Nine-year Total Shareholder Return
(measured in US Dollars, based on monthly spot values)
250
225
200
175
150
125
100
75
50
25
0
-25
Dec 2009
Dec 2008
Source: DataStream
Medical Devices comparators that are still trading for awards made since 2012
Dec 2010
Dec 2011
Dec 2012
Smith & Nephew
Medical Devices – Median
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
Table of historic data
The following table details information about the pay of the Chief Executive Officer in the previous nine years:
Year
2017
2016
2015
2014
2013
2012
2011
2011
2010
Chief Executive Officer
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon1,2
David Illingworth3
David Illingworth
Single figure of total
remuneration $
Annual Cash Incentive
payout against maximum %
Performance shares %
Options %
Long-term incentive vesting rates against maximum opportunity
$5,032,925
$3,332,850⁴
$5,342,377
$6,785,121
$4,692,858
$4,956,771
$7,442,191
$3,595,787
$4,060,707
60.67⁵
30
75
43
84
84
68
37
57
54
8
33.5
57
0
N/A
N/A
27
70
–
–
–
–
–
–
–
27
61
1 Appointed Chief Executive Officer on 1 April 2011.
2
Includes recruitment award of €1,400,000 cash and a share award over 200,000 ordinary shares with a value of €1,410,000 on grant.
3 Resigned as Chief Executive Officer on 1 April 2011.
4 Prior years are restated to reflect amounts not known at the date of signing the previous Annual Report.
5 Calculated as 91% (actual payout) disclosed on page 87 divided by the maximum potential payout of 150%.
Statement of voting at Annual General Meeting held in 2017
At the Annual General Meeting held on 6 April 2017, votes cast by proxy and at the meeting and votes withheld in respect of the votes on the
Directors’ Remuneration Report were as follows:
Resolution
Approval of the Directors’
Remuneration Policy
Approval of the Directors’
Remuneration Report
Votes for
578,383,031
581,873,387
% for
98.30
98.85
Votes against
10,003,885
6,787,211
% against
Total votes validly cast
Votes withheld
1.70
1.15
588,386,916
1,422,700
588,660,598
1,149,020
The Remuneration Committee is mindful of the Government’s new requirements to engage more with employee stakeholders on all matters of
remuneration. The Committee is currently reviewing how best to implement this and will communicate with employees accordingly. Gender pay
is also a 2018 focus for the Committee, a programme to ensure women are fully supported in their careers at Smith & Nephew will be part of the
Committee’s agenda during this time of improvement as we look to the future.
Senior management remuneration
The Group’s administrative, supervisory and management body (senior management) is comprised for US reporting purposes, of Executive
Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 50 and 54–55.
Compensation paid to senior management in respect of 2015, 2016 and 2017 was as follows:
Total compensation (excluding pension emoluments, but including cash payments
under the performance-related incentive plans)
Total compensation for loss of office
Aggregate increase in accrued pension scheme benefits
Aggregate amounts provided for under supplementary schemes
2017
2016
2015
$13,573,000
$12,874,000
$13,971,000
$2,711,000
–
$872,00
–
–
$1,112,000
–
–
$698,000
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INFORMATION
DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION IMPLEMENTATION REPORT
As at 16 February 2018, senior management owned 720,897 shares and 3,015 ADSs, constituting less than 0.1% of the share capital of the Company.
Details of share awards granted during the year and held as at 16 February 2018 by members of senior management are as follows:
Equity Incentive awards
Performance Share awards at maximum
Conditional share awards under the Global Share Plan 2010
Options under Employee ShareSave plans
Options under the Global Share Plan 2010
Share awards granted
during the year
Total share awards held
as at 16 February 2018
306,903
617,156
190,464
0
0
319,377
1,033,315
197,510
4,559
0
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 or be forfeited before vesting or exercise. In the event that insufficient 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 (2008 to 2017), the number of new shares issued under our share plans has been as follows:
7,275,468 (0.83% of issued share capital as at 16 February 2018)
33,119,507 (3.79% of issued share capital as at 16 February 2018)
All-employee share plans
Discretionary share plans
By order of the Board, on 22 February 2018
Joseph Papa
Chairman of the Remuneration Committee
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REMUNERATION THE POLICY REPORT
FUTURE POLICY TABLE – EXECUTIVE DIRECTORS
The following table and accompanying notes explain the different elements of remuneration we pay to our Executive Directors. It was approved by
shareholders at the 2017 Annual General Meeting on 6 April 2017.
BASE SALARY AND BENEFITS
Base salary
We are a FTSE 50 listed company, operating in over 100 countries around the world. Our strategy to generate cash from Established Markets
in order to invest for growth in higher growth geographies and franchises means that we are competing for international talent and our base
salaries therefore need to reflect what our Executive Directors would receive if they were to work in another international company of a similar size,
complexity and geographical scope.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
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.
Salaries are normally reviewed annually,
with any increase applying from 1 April.
The base salary of the Executive Directors
with effect from 1 April 2017 will be as follows:
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
increases in the market in which the
Executive is based.
– Olivier Bohuon €1,179,490.
– Graham Baker £510,000.
The factors noted in the previous column
will be taken into consideration when making
increases to 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 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.
Payment in lieu of pension
In order to attract and retain Executive Directors with the capability of driving our corporate strategy, we need to provide market-competitive
retirement benefits similar to the benefits 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 defined benefit pension risks, and where possible will make payments in lieu of
providing a pension.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
Current Executive Directors receive
an allowance in lieu of membership
of a Company-run pension scheme.
Base salary is the only component
of remuneration which is pensionable.
Up to 30% of base salary.
The level of payment in lieu of a pension
paid to Executive Directors is not dependent
on performance.
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REMUNERATION THE POLICY REPORT
Benefits
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 benefits similar to the benefits they would receive if they were 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
provision, risk benefit cover or, if required, relocation issues.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
The level and cost of benefits provided to
Executive Directors is not dependent on
performance but on the package of benefits
provided to comparable roles within the
relevant location.
A wide range of benefits may be provided
depending on the benefits provided
for comparable roles in the location in
which the Executive Director is based.
These benefits 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 benefits 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 financial consultancy
advice. In some cases such payments may
be grossed up.
The policy is framed by the nature of the
benefits that the Remuneration Committee
is willing to provide to Executive Directors.
The maximum amount payable will
depend on the cost of providing such
benefits to an employee in the location
at which the Executive Director is based.
Shareholders should note that the cost of
providing comparable benefits in different
jurisdictions may vary widely.
As an indication, the cost of such benefits
provided in 2016 was as follows:
– Olivier Bohuon €150,511.
– Julie Brown £22,244.
The maximum amount payable in benefits
to an Executive Director, in normal
circumstances, will not be significantly more
than amounts paid in 2016 (or equivalent in
local currency). The Remuneration Committee
retains the right to pay more than this should
the cost of providing the same underlying
benefits increase or in the event of a
relocation. A full explanation will be provided
in the Implementation Report should the cost
of benefits provided be significantly higher.
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.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
ShareSave Plans are operated in the UK
and 31 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.
Executive Directors may currently invest up
to £500 per month in the UK ShareSave
Plan. The Remuneration Committee may
exercise its discretion to increase this amount
up to the maximum permitted by the HM
Revenue & Customs. Similar limits will apply in
different locations.
The potential gains from all-employee plans
are not based on performance but are linked
to growth in the share price.
SMITH & NEPHEW ANNUAL REPORT 2017 99
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REMUNERATION THE POLICY REPORT
ANNUAL INCENTIVES
Annual Incentive Plan – Cash Incentive
To motivate and reward the achievement of specific annual financial 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 and the level of the annual equity award are linked closely to the
Group strategy.
The financial measures of Revenue, Trading Profit Margin and Trading Cash Flow underline our strategy for growth.
The business objectives are also linked to the Group strategy. These change from year to year to reflect the evolving strategy, but will typically be
linked to the Strategic Priorities set out in this Annual Report. The Implementation Report each year will explain how each objective is linked to a
specific strategic priority.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
The Annual Incentive Plan comprises
a cash and an equity component, both
based on the achievement of financial
and business objectives set at 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 total maximum payable under the Annual
Incentive Plan is 215% of base salary (150%
Cash Incentive and 65% Equity Incentive).
The cash and share awards are subject to malus
and clawback as detailed in the notes following
this table.
In respect of the Cash Incentive:
– 150% salary awarded for
maximum performance.
– 100% salary awarded for
target performance.
– 50% salary awarded for
threshold performance.
– Performance assessed against individual
objectives and Group financial targets.
75% of the cash component is based on financial
performance measures, which currently include
Revenue (35%), Trading Profit Margin (25%) and
Trading Cash Flow (15%).
25% of the cash component is based on
other business goals linked to the Company’s
strategy, which could include financial and non-
financial measures.
The Remuneration Committee retains the
discretion to adjust the relative weightings of
the financial and business components, and to
adopt any performance measure that is relevant
to the Company.
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 more
fully in the notes.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
The equity award component comprises
conditional share awards (made at the time
of the cash award), with vesting phased
over the following three years.
In respect of the Equity Incentive:
– Performance is assessed against individual
performance, which includes an element of
Group financial targets.
The equity component vests 1⁄3, 1⁄3, 1⁄3
on successive award anniversaries, only
if performance remains satisfactory over
each of these three years; otherwise the
award will lapse.
Participants will receive an additional
number of shares equivalent to the amount
of dividend payable per vested share
during the relevant performance period.
– 65% of salary awarded for
maximum performance.
– 50% of salary awarded for
target performance.
– 0% of salary awarded for performance
assessed to be below target.
The Remuneration Committee will use its
judgement of the individual’s performance based
both on what has been achieved during the year
and how it has been achieved in determining the
level of equity award that may be awarded within
the range of 0% to 65% of salary.
The equity component will vest in three equal
tranches over a three-year period, provided that
satisfactory performance is sustained.
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DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION THE POLICY REPORT
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.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
The Performance Share Programme
comprises conditional share awards
which vest after three years, subject to the
achievement of stretching performance
targets linked to the Company’s strategy.
Awards may be subject to clawback in the
event of material financial misstatement
or misconduct.
Participants will receive an additional
number of shares equivalent to the amount
of dividend payable per vested share
during the relevant performance period.
On vesting, a number of shares are sold
to cover the tax liability. The remaining
shares are required to be held by the
Executive Director for a further two-year
holding period.
Annual awards:
Currently:
– 190% of salary for maximum performance.
– 95% of salary for target performance.
– 47.5% of salary for threshold performance.
– 25% of the award vests on achievement of a
three-year cumulative free cash flow target.
– 25% of the award vests subject to three-year
Total Shareholder Return (TSR) at median
performance relative to Global Healthcare
companies and to FTSE 100 companies.
– 25% of the award vests subject to the
achievement of return on invested
capital targets.
– 25% of the award vests subject to total
sales growth.
– These measures, the targets and performance
against them are described more fully in the
Implementation Report.
– 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 notes
following this table.
Awards made prior to 2017 were subject to
TSR against a sector peer group, cash flow and
revenue in Emerging Markets targets.
SMITH & NEPHEW ANNUAL REPORT 2017 101
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REMUNERATION THE POLICY REPORT
ILLUSTRATIONS OF THE APPLICATION OF THE
REMUNERATION POLICY 2017
The following charts show the potential split between the different
elements of the Executive Directors’ remuneration under three different
performance scenarios.
Figures as at salary levels in 2017, when the Policy Report
was approved by shareholders
Chief Executive Officer
I
I
I
I
M
M
N
N
M
M
U
U
M
M
€1,683,848
€1,683,848
T
A
T
A
R
R
G
G
E
T
E
T
€4,573,599
€4,573,599
I
M
M
A
A
X
X
M
M
U
U
M
M
I
Chief Financial Officer
I
I
I
I
M
M
N
N
M
M
U
U
M
M
£685,244
£685,244
T
A
T
A
R
R
G
G
E
T
E
T
£1,934,744
£1,934,744
I
M
M
A
A
X
X
M
M
U
U
M
M
I
£2,750,744
£2,750,744
Benefits
Payment in lieu of pension
Salary
Annual Incentive (Cash)
Performance Share Programme
Annual Incentive (Equity)
Total Remuneration by Performance Scenario
for 2017 Financial Year (percentage split)
Chief Executive Officer
Chief Financial Officer
4
2
3
1
6
2
7
3
0
0
1
5
3
2
1
7
2
6
2
5
2
3
1
6
2
6
3
0
0
1
5
3
2
1
8
2
5
2
MINIMUM %
TARGET %
MAXIMUM %
MINIMUM %
TARGET %
MAXIMUM %
Fixed pay
Annual Incentive (Cash)
Long-term Incentives
Annual Incentive (Equity)
Data for the Chief Executive Officer assumes an exchange rate of €1 = £0.820.
MALUS AND CLAWBACK
The Remuneration Committee may determine that an unvested
award or 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 financial results; or
– A material error in determining the extent to which any performance
condition has been satisfied; or
– A significant adverse change in the financial performance of the
Company, or a significant loss at a general level or at the country
business unit or function in which a participant worked; or
– Inappropriate conduct (for example reputational issues), capability
or performance by a participant, or within a team business area or
profit centre.
€6,460,783
€6,460,783
These provisions apply to share awards under the Global Share Plan
2010 and cash amounts under the Annual Cash Incentive Plan.
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
in the future policy table. Incoming Executive Directors will be entitled
to pension, benefit and incentive arrangements which are the same as
provided to existing Executive Directors. On that basis, incentive awards
would not exceed 405% of base salary.
We recognise that in the event that we require a new Executive Director
to relocate to take up a position with the Company, we will also pay
relocation and related costs as described in the future policy table,
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 judgement
in determining any such compensation, which will be decided on a
case-by-case basis. We will only provide compensation which is no
more beneficial than that given up by the new appointee and we will
seek evidence from the previous employer to confirm 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 Rule 9.4.2 in the Listing Rules, whilst at the
same time aiming for simplicity.
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REMUNERATION THE POLICY REPORT
If we appoint an existing employee as an Executive Director of the
Company, pre-existing obligations with respect to remuneration, such
as pension, benefits 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 benefits 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
& Nephew. The Company retains the right to waive these provisions
in certain circumstances. In the event that these provisions are waived
or 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 office:
15 Adam Street, London WC2N 6LA.
POLICY ON PAYMENT FOR LOSS OF OFFICE
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
benefits. In some circumstances additional benefits may become
payable to cover reimbursement of untaken holiday leave, repatriation
and outplacement fees, legal and financial 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 the time of departure.
In the case of a change of control which results in the termination of
an 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 benefits. In addition, the Remuneration Committee has
discretion to 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 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.
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REMUNERATION THE POLICY REPORT
CHANGES TO POLICY
The 2017 Remuneration Policy makes the following changes to the
2014 Remuneration policy:
– Introduction of a two-year holding period for vested
Performance shares;
– Flexibility to change measures;
– Increased emphasis on financial objectives in the Annual Incentive
Plan, increases from 70% to 75%; and
– Increased shareholding requirement to 300% of salary for the
Chief Executive Officer.
Further details can be found in the letter from the Chairman of the
Remuneration Committee on pages 79–80 of the 2017 Annual Report.
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 for them to hold a significant number of shares in the Company.
The Chief Executive Officer is therefore expected to build up a holding
of Smith & Nephew shares worth three times their base salary and the
Chief Financial Officer is expected to build up a holding of two times
their basic salary. In order to reinforce this expectation, we require them
to retain 50% of the shares (after tax) vesting under the equity incentive
programmes until this holding has been met, recognising that differing
international tax regimes affect the pace at which an Executive Director
may fulfil the shareholding requirement. When calculating whether or
not this requirement has been met, we will include ordinary shares
or ADRs held by the Executive Director and their immediate family.
Ordinarily, we would expect this required shareholding to have been
built up within a period of five years from the date of appointment.
Furthermore, from awards made in 2017, we require our Executive
Directors to retain all the shares (after tax) vesting under the
Performance Share Programme for a period of two years after vesting.
STATEMENT OF CONSIDERATION OF EMPLOYMENT
CONDITIONS ELSEWHERE IN THE COMPANY AND
DIFFERENCES TO THE EXECUTIVE DIRECTOR POLICY
All employees across the Group have performance-based pay linked
to objectives derived from the strategic priorities, which underpin the
performance metrics in the Executive Director Incentive Plans.
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 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 Officers either participate in the legacy pension arrangements
relevant to their local market or receive a cash payment of 30% of salary
in 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 pension. Differing amounts apply for lower levels within the Company.
The Company has established a benefits framework under which the
nature of benefits varies by geography. Executive Directors participate in
benefit arrangements similar to those applied for employees within the
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 country business unit financial
targets relating to revenue, trading profit and trading cash, similar to the
financial targets set for the Executive Directors.
Executive Officers and senior executives (61 as at 2017) participate
in the 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 specific consultation with employees has been undertaken
relating to 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. As at 2017, around 5,000 employees
in 63 countries participate in one or more of our global share plans.
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REMUNERATION THE POLICY REPORT
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 element of their remuneration is subject to performance. All 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 Chairman, the Chief Executive Officer and the Chief Financial Officer.
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 third quarter of each year in order to align Non-Executive Directors’ fees with the interests
of shareholders.
How the component operates
Maximum levels of payment
Fees will be reviewed periodically. In future, any increase will be paid in
shares until 25% of the total fee is 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 UK Sterling or US Dollars depending 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 £5,135 in shares; or
– $120,000 in cash plus $9,780 in shares.
Chairman fee:
– £309,000 plus £103,000 in shares.
Whilst it is not expected to increase the fees paid to the Non-Executive
Directors and the Chairman by more than the increases paid to
employees generally, in exceptional circumstances higher fees might
become payable.
The total maximum aggregate fees payable to the Non-Executive
Directors will not exceed £1.5 million as set out in the Company’s
Articles of Association.
Fee for Senior Independent Director and Committee Chairmen
To compensate Non-Executive Directors for the additional time spent as Committee Chairmen or as the Senior Independent Director.
How the component operates
Maximum levels of payment
A fixed fee is paid, which is reviewed periodically.
– £20,000 in cash; or
– $35,000 in cash.
Whilst it is not expected that the fees paid to the Senior Independent
Director or Committee Chairmen will exceed the increases paid to
employees generally, in exceptional circumstances, higher fees might
become payable.
Intercontinental travel
To compensate Non-Executive Directors for the time spent travelling to attend meetings in another continent.
How the component operates
Maximum levels of payment
A fixed 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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GOVERNANCE
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GROUP AND OTHER
INFORMATION
DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION THE POLICY REPORT
NOTES TO FUTURE POLICY TABLE
– NON-EXECUTIVE DIRECTORS
Changes to Remuneration Policy
There have been no changes to our Remuneration Policy as it applies
to Non-Executive Directors, since the Policy was initially approved by
shareholders in April 2014.
Additional duties undertaken by Non-Executive Directors
In the event that the Chairman or a Non-Executive Director is required
to undertake significant additional executive duties in order to support
the Executive Directors during a period of absence due to illness or a
gap prior to the appointment of a permanent Executive Director, the
Remuneration Committee is authorised to determine an appropriate
level of fees which shall be payable. These fees will not exceed the
amounts which would normally be paid to a permanent Executive
Director undertaking such duties and shall not include participation
in short- or long-term incentive arrangements or benefit plans.
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 profile and experience, the
time required to undertake the role and general business conditions.
In addition, the Remuneration Committee retains the right to authorise
the payment of relocation assistance or an accommodation allowance in
the 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
office: 15 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 office, for example, should they not
be re-elected at an Annual General Meeting. The appointment of the
Chairman is subject to a 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 fee within two years of their appointment to the Board.
STATEMENT OF CONSIDERATION OF SHAREHOLDER VIEWS
The broad outline of our remuneration arrangements have remained
largely unchanged since 2012. As our strategy has evolved, we
have altered some of the measures we use in our short- and long-
term incentive plans, but the overall structure of our remuneration
arrangements has remained the same. Shareholders formally approved
the Remuneration Policy in respect of our Executive Directors at the
Annual General Meeting in 2014. Joseph Papa, Chairman of the
Remuneration Committee, has met with shareholders before the policy
was approved and every year since, in order to ascertain shareholder
views on our remuneration arrangements.
Ahead of the Annual General Meeting in 2016, Mr Papa held meetings
and calls with 28 shareholders holding approximately 33% of the
Company’s Share Capital. Although the holders of 53% of our shares
voted against the Remuneration Report in 2016, our engagement ahead
of the 2016 Annual General Meeting had shown us that shareholders
were broadly supportive of our Remuneration Policy and those who
opposed the Remuneration Report were primarily voting against the use
of discretion rather than any aspect of the Remuneration Policy.
During 2016, following the Annual General Meeting, Mr Papa continued
to engage extensively with shareholders. In Autumn 2016, he met with
or held telephone calls with 28 shareholders holding around 41% of the
Company’s shares. The shareholders he met ranged from some of our
top 20 shareholders down to smaller active and engaged shareholders
holding fewer than one million shares. He discussed our proposals
to continue with the same overall remuneration arrangements, whilst
altering the performance measures used in the short- and long-term
incentive plans. We found the discussions with shareholders at this time
useful in helping to understand the measures and targets which were
important to our shareholders, and those which shareholders did not
support. As a result of these discussions, some updated performance
measures have been incorporated into our incentive plans for 2017 and
a two-year holding period will now apply on the vesting of performance
shares for our Executive Directors.
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CONTENTS
OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
NOTE 14
TRADE AND OTHER PAYABLES
NOTE 15
CASH AND BORROWINGS
NOTE 16
FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
NOTE 17
PROVISIONS AND CONTINGENCIES
NOTE 18
RETIREMENT BENEFIT OBLIGATIONS
NOTE 19
EQUITY
NOTE 20 CASH FLOW STATEMENT
NOTE 21 ACQUISITIONS AND DISPOSALS
NOTE 22 OPERATING LEASES
NOTE 23.1 SHARE-BASED PAYMENTS
NOTE 23.2 RELATED PARTY TRANSACTIONS
NOTE 24
POST BALANCE SHEET EVENTS
COMPANY FINANCIAL STATEMENTS
AND ASSOCIATED NOTES
GROUP AND OTHER INFORMATION
GROUP INFORMATION
OTHER FINANCIAL INFORMATION
INFORMATION FOR SHAREHOLDERS
139
140
143
148
150
156
158
159
161
162
162
162
163
171
176
184
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
INDEPENDENT AUDITOR’S REPORT
CRITICAL JUDGEMENTS AND ESTIMATES
GROUP FINANCIAL STATEMENTS
GROUP INCOME STATEMENT
GROUP STATEMENT OF
COMPREHENSIVE INCOME
GROUP BALANCE SHEET
GROUP CASH FLOW STATEMENT
GROUP STATEMENT OF CHANGES IN EQUITY
NOTES TO THE GROUP ACCOUNTS
NOTE 1
BASIS OF PREPARATION
NOTE 2
BUSINESS SEGMENT INFORMATION
NOTE 3
OPERATING PROFIT
NOTE 4
INTEREST AND OTHER FINANCE COSTS
NOTE 5
TAXATION
NOTE 6
EARNINGS PER ORDINARY SHARE
NOTE 7
PROPERTY, PLANT AND EQUIPMENT
NOTE 8
GOODWILL
NOTE 9
INTANGIBLE ASSETS
NOTE 10
INVESTMENTS
NOTE 11
INVESTMENTS IN ASSOCIATES
NOTE 12
INVENTORIES
NOTE 13
TRADE AND OTHER RECEIVABLES
107
108
114
115
115
116
117
118
119
121
125
126
127
130
131
133
134
136
136
137
138
ACCOUNTS
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GROUP AND OTHER
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GROUP FINANCIAL STATEMENTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT
OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Form 20-F and the Group and Parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are
required to prepare the Group financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (IASB) and as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to
prepare the Parent Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state
of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial
statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and estimates that are reasonable, relevant, reliable and prudent;
– for the Group financial statements, state whether they have been prepared in accordance with IFRSs, as issued by the IASB and adopted by
the EU;
– for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Parent Company financial statements;
– assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
– use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial
statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking
such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT
We confirm that to the best of our knowledge:
– the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
– the Strategic Report and Directors’ Report include a fair review of the development and performance of the business and the position of the
issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties
that they face.
The Strategic Report, which has been prepared in accordance with the requirements of the Companies Act 2006, comprises the following sections:
– Overview (pages 2–7);
– Our Business and Marketplace (pages 8–17);
– Operational Review (pages 18–35);
– Financial Review (pages 38–39);
– Risk (pages 40–49).
The Directors’ Report has also been prepared in accordance with the Companies Act 2006 and The Small Companies and Groups (Accounts and
Directors’ Report) Regulations 2008 comprising of pages 6, 16–17, 25–28, 33–39, 42–78, 107, 140–142, 158 and pages 171–192 of the Annual Report.
And has been approved and signed on behalf of the Board.
We consider the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group’s position and performance, business model and strategy.
By order of the Board, on 22 February 2018
Susan Swabey
Company Secretary
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GROUP AND OTHER
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GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT
AUDITOR’S REPORTS ON THE FINANCIAL STATEMENTS AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING
(SARBANES-OXLEY ACT SECTION 404)
The report set out below is provided in compliance with International Standards on Auditing (UK and Ireland). KPMG LLP has also issued reports in
accordance with standards of the Public Company Accounting Oversight Board in the US, which will be included in the Annual Report on Form 20-F
to be filed with the US Securities and Exchange Commission. Those reports are unqualified and include opinions on the Group Financial Statements
and on the effectiveness of internal control over financial reporting as at 31 December 2017 (Sarbanes-Oxley Act Section 404).
The Directors’ statement on internal control over financial reporting is set out on pages 77–78.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SMITH & NEPHEW PLC ONLY
OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT
1. Our opinion is unmodified
We have audited the financial statements of Smith & Nephew Plc (“the Company”) for the year ended 31 December 2017 which comprise the Group
Income Statement, Group Statement of Comprehensive Income, Group Balance Sheet, Group Cash Flow Statement, Group Statement of Changes in
Equity, Company Balance Sheet, Company Statement of Changes in Equity, and the related notes which include the accounting policies.
In our opinion:
– The financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2017 and of
the Group’s profit for the year then ended;
– The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the
European Union;
– The parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced
Disclosure Framework; and
– The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Additional opinion in relation to IFRSs as issued by the IASB
As explained in the accounting policies set out in the Group financial statements, the Group, in addition to complying with its legal obligation to
apply IFRS as adopted by the EU, has also applied IFRS as issued by the IASB. In our opinion, the Group financial statements have been properly
prepared in accordance with IFRS as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the audit committee.
We were appointed as auditor by the shareholders on 9 April 2015. The period of total uninterrupted engagement is for the 3 financial years ended
31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard
were provided.
OVERVIEW
Materiality: Group financial statements as a whole
Coverage
Risks of material misstatement
$42m (2016: $44m)
4.8% (2016: 5.3%) of group normalised profit before tax
87% (2016: 91%) of group profit before tax
Recurring risks
vs 2016
Recognition and measurement of provisions for uncertain tax provisions
Liability provisioning for metal-on-metal hip products
Advanced Wound Care, Bioactives and Devices revenue related rebates
Excess and obsolescence (E&O) provision for Orthopaedics Inventory
.
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GROUP AND OTHER
INFORMATION
GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT continued
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include
the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
We summarise below the key audit matters in decreasing order of audit significance, in arriving at our audit opinion above, together with our
key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters
were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial
statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate
opinion on these matters.
Recognition and measurement of provisions for uncertain tax provisions
Included in current tax payable ($233 million; 2016: $231 million)
The risk
Uncertain outcome
The Group has extensive international operations and is
subject to complex local and international tax legislation
in the normal course of business.
uncertain tax exposures.
As a result of the complexities of tax rules on transfer
pricing and other tax legislation, the provisioning for
uncertain direct tax positions is judgemental and
requires the Directors to make estimates in relation to
these uncertainties.
Risk vs 2016:
Our response
Our procedures included:
– Control operation: Testing the controls that Group has in place to identify and quantify its
– Our taxation expertise: Using our international and local tax specialists to assess the Group’s
direct tax positions and to analyse and challenge the assumptions used to determine provisions
based on our knowledge and experience of the application of the international and local
legislation by the relevant authorities and courts.
– Test of detail: Examining the calculations prepared by the Directors and agreeing assumptions
used to underlying data where possible.
– With the help of our tax specialists, considering the judgements applied to each significant
provision including the maximum potential exposure and the likelihood of a payment
being required.
– Inspecting correspondence with relevant tax authorities and assessing third party tax advice
received to evaluate the conclusions drawn from the advice where relevant to the significant
exposures faced by the Group.
Our results:
From the evidence we obtained we found the level of provisioning in respect of uncertain direct tax
positions to be acceptable.
Refer to page 75 (Audit Committee Report) and pages 114 and 127–129 (accounting policy and financial disclosures).
Liability provisioning for metal-on-metal hip products
($157 million; 2016: $163 million)
The risk
Subjective estimate
As disclosed in note 17 the Group holds a provision of
$157 million in respect of potential liabilities arising from
the ongoing exposure for metal-on-metal hip products.
Our response
Our procedures included:
– Control operation: Testing the controls that Group has in place to identify and quantify its
uncertain legal provisions.
– Enquiry of lawyers: Inspection of correspondence with external counsel and formal
Risk vs 2016:
The estimate for this provision requires the Directors
to use a statistical model and make a number of key
assumptions which include the expected number of
claimants, projected value of each settlement and the
likely time period expected for the settlements.
confirmations from counsel of open cases.
– Test of detail: Examining the calculations prepared by the Directors and agreeing assumptions
used to underlying data where possible.
– For the cases identified in external counsel confirmations that all these have been adequately
considered by the Directors in making their judgement on any provisioning that may be required.
– Our actuary expertise: Using our actuarial specialists to challenge the critical assumptions
used in statistical projections in determining the estimated liability by reference to historical data
including settlement amounts.
– Assessing transparency: Assessing the adequacy of the Group’s disclosures in respect of the
metal-on-metal hip provision.
Our results:
The results of our testing were satisfactory and we considered the liability recognised to
be acceptable.
Refer to page 74 (Audit Committee Report) and pages 114 and 148–150 (accounting policy and financial disclosures)
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GROUP AND OTHER
INFORMATION
GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT continued
Advanced Wound Care, Bioactives and Devices revenue related rebates
Risk vs 2016
The risk
Subjective estimate
The Group has a variety of agreements with wholesalers
and distributors whereby contractual rebates are due
to customers based on the actual quantity of goods
purchased over a defined period of time.
The contractual arrangement for rebates can vary by
customer, product type and jurisdiction.
The amount of revenue recognised for products sold
through these channels (wholesale customers and
distributors) require the Directors to calculate estimates
for these contractual rebates which are deducted in
arriving at revenue recorded in the period.
Due to the variations in complexity of these
arrangements, we consider that there is a risk of error in
calculating the estimates of rebates that have yet to be
agreed with the customer.
Our response
Our procedures included:
– Control operation: Evaluating controls that the Group has in place over the identification,
estimation and settlement of rebates.
– Inspection of customer contracts: Inspecting underlying contractual terms and
correspondence with customers for a selection of arrangements in place and considering
whether the accounting policy had been applied appropriately to the terms of the rebate,
discount and/or returns.
– Test of detail: Performing detailed testing on a sample basis of the largest rebates with
particular attention to whether these adjustments were recognised in the correct period and the
completeness and appropriateness of any rebates accrued at the year-end.
– Historical comparisons: Comparing provisions held in prior years to actual outcomes to assess
the accuracy by which the Directors were able to estimate these provisions.
Our results:
The results of our testing were satisfactory and we considered the rebates estimated to
be acceptable.
Refer to page 122 (accounting policy and financial disclosures).
Excess and Obsolescence (E&O) provision for Orthopaedics Inventory
Risk vs 2016:
The risk
Forecast-based valuation
In line with industry practice, the Group has high
levels of Orthopaedics Inventory located at customer
premises to be available for immediate use by surgeons.
Complete product sets include outsizes which are
used less frequently. Towards the end of a product’s
life cycle, finished goods inventory levels may exceed
requirements, in particular as it relates to inventory used
less frequently.
Historical sales of this inventory is often indicative of
future usage, adjusted for changes in market demand,
technological advancements or other factors.
In calculating the provision for excess and obsolete
inventory (E&O provision) the Directors have to estimate
the utilisation of inventory on hand based on forecast
production and sales.
Our response
Our procedures included:
– Control operation: Evaluating controls the Group has in place over the preparation, review
and approval of E&O provision, as well as over the review of the Group wide inventory
provisioning policy.
– Methodology implementation: Comparing the calculation of E&O provision to the principles
outlined in the Group accounting policy.
– Test of detail: Testing the accuracy of E&O provision calculation and assessing key underlying
assumptions. These include expected usage of inventory based on historical sales and other
internal or external factors which may impact the demand for the product. Corroborating key
assumptions against source documents such as prior year audited information.
– Inquiry of management: Performing inquiry of management to corroborate the Directors’ plans
for launching new or discontinuing product lines.
– Historical comparisons: Comparing provisions held in prior years to actual inventory write-offs
to assess the accuracy by which the Directors were able to forecast this E&O provision.
– Assessing transparency: Assessing the adequacy of the Group’s disclosures in respect of
E&O provision.
Our results:
The results of our testing were satisfactory and we considered the E&O provisions made to
be acceptable.
Refer to page 74 (Audit Committee Report) and pages 114 and 137 (accounting policy and financial disclosures).
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INFORMATION
GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT continued
Parent company financial statements: Recoverability of parent company’s investment in subsidiaries
Investments ($7,092 million; 2016: $5,322 million)
The risk
Low risk, high value
The carrying amount of the Company’s investments in
subsidiaries held at cost less impairment represents
94% (2016: 86%) of the Company’s total assets.
Our response
Our procedures included:
– Test of details: Comparing a sample of the highest value investments representing 98%
(2016: 97%) of the total investment balance with the relevant subsidiaries’ draft balance sheets
to identify whether their net assets, being an approximation of their minimum recoverable
amount, were in excess of their carrying amount and assessing whether those subsidiaries have
historically been profit-making.
Risk vs 2016:
We do not consider the valuation of these investments
to be at a high risk of significant misstatement, or to be
subject to a significant level of judgement. However,
due to their materiality in the context of the Company
financial statements as a whole, this is considered to
be the area which had the greatest effect on our overall
audit strategy and allocation of resources in planning
and completing our parent company audit.
– Assessing subsidiary audits: Assessing the work performed by the subsidiary audit team on
that sample of those subsidiaries and considering the results of that work, on those subsidiaries’
profits and net assets.
Our results:
We found the Directors’ assessment of the carrying value of investments to be acceptable.
Acquisition intangible assets
Oasis, the main asset at risk of impairment in the acquisition intangibles portfolio, was impaired in previous years. Whilst we continue to perform
audit procedures over the valuation of remaining acquisition intangibles, these assets have continued to perform in line with expectations.
Therefore, we no longer consider the valuation of acquisition intangible assets as a key audit matter and, consequently, is not separately identified
in our audit report this year.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at $42 million (2016: $44 million), determined with reference to a benchmark of
Group profit before tax, normalised to exclude acquisition related credit of $10 million, impairment charges of $10 million and a net credit for legal
and other items of $13 million as disclosed in Note 2 of which it represents 4.8% (2016: 5.3%). In addition to a net charge for legal and other items
of $20 million, the normalisation adjustments in 2016 also included a gain on disposal of a business of $326 million, acquisition related costs
of $9 million, impairment charges of $48 million and restructuring and rationalisation expenses of $62 million. There was no disposal of business
in 2017 and the restructuring programme was completed at the end of 2016.
We believe that pre-tax profit excluding these items provides us with a consistent year-on-year basis for determining materiality and is the most
relevant performance measure to the users of the financial statements. Materiality for the parent company financial statements as a whole was set
at $31 million (2016: $31 million), determined with reference to a benchmark of company total assets, of which it represents 0.4% (2016: 1%).
Group normalised profit
before tax
Group materiality
$42m
2016
$44 million
$866m
2016
$835 million
$19m
$2m
2016
$2.2m
Group normalised profit before tax
Group materiality
Whole financial statements materiality
Range of materiality at 37 components ($3m–$19m);
(2016: $5m to $35m)
Misstatements reported to the Audit Committee
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding $2.0 million (2016: $2.2 million),
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 110 (2016: 145) reporting components, we subjected 24 (2016: 46) to full scope audits for Group purposes and 13 (2016: 13) to audits
of specific account balances including revenue, receivables, inventory and taxation. The latter were not individually financially significant enough to
require a full scope audit for Group purposes, but did present specific individual risks that needed to be addressed or were included in the scope
of our Group reporting work in order to provide further coverage over the Group’s results.
The components within the scope of our work accounted for the percentages illustrated.
The remaining 16% (2016: 21%) of total Group revenue, 13% (2016: 9%) of group profit before tax and 14% (2016: 13%) of total Group assets is
represented by 73 (2016: 86) reporting components, none of which individually represented more than 2% (2016: 4%) of any of total Group revenue,
Group profit before tax or total Group assets. For these residual components, we performed analysis at an aggregated Group level to re-examine
our assessment that there were no significant risks of material misstatement within these.
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INFORMATION
GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT continued
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the
information to be reported back. The Group team approved component materialities, which ranged from $3 million to $19 million (2016: $5 million
to $35 million), having regard to the mix of size and risk profile of the Group across the components. The work on 19 of the 37 components
(2016: 40 of the 59 components) was performed by component auditors and the rest, including the audit of the parent company, was performed
by the Group team. The Group team performed procedures on the items excluded from normalised Group profit before tax.
The Group team visited 10 (2016: 5) component locations in USA, China, France, Italy, Spain, UK, South Africa, Costa Rica, Switzerland and Germany
(2016: USA, UK, Brazil, Germany and Switzerland) to assess the audit risk and strategy. Video and telephone conference meetings were also held
with these component auditors and others that were not physically visited. At these visits and meetings, the findings reported to the Group team
were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
Group revenue
Group total assets
Group profit before tax
16
21
14
13
84%
2016
79%
25 17
62
59
16
30
86%
2016
87%
71
56
13
9
10
21
87%
2016
91%
81
66
Full scope for group audit
purposes 2017
Audit of specific account
balances 2017
Full scope for group audit
purposes 2016
Audit of specific account
balances 2016
Residual components
4. We have nothing to report on going concern
We are required to report to you if:
– we have anything material to add or draw attention to in relation to the Directors’ statement in note 1 to the financial statements on the use of the
going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis
for a period of at least twelve months from the date of approval of the financial statements; or
– the related statement under the Listing Rules set out on page 77 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
5. We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the
financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below,
any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information
therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified
material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
– we have not identified material misstatements in the strategic report and the directors’ report;
– in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
– in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
– the Directors’ confirmation within the viability statement on page 48–49 that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
– the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
– the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so
and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect.
Corporate governance disclosures
We are required to report to you if:
– we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the Directors’
statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
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GROUP FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S UK REPORT continued
– the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the
Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the
UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
– the parent Company 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.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 107, the directors are responsible for: the preparation of the financial statements including
being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud, other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our sector
experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group’s
regulatory and legal correspondence as necessary. We had regard to laws and regulations in areas that directly affect the financial statements
including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws
and regulations as part of our procedures on the related financial statements items.
In addition we considered the impact of laws and regulations in the specific areas of compliance with the Food and Drug Administration in the USA
and the compliance of business practices with the UK Bribery Act and the US Foreign Corrupt Practices Act recognising the regulated nature of
the Group’s activities. With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect
of these was limited to enquiry of the directors and other management, testing the effectiveness of relevant entity level controls and inspection of
relevant regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our
procedures on the related financial statements items.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the
audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at Group level, with a
request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or
other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of non-compliance with relevant laws and regulations irregularities, as these may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
8. The purpose of our audit work and to whom we owe our responsibilities
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.
Stephen Oxley (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London E14 5GL
22 February 2018
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INFORMATION
GROUP FINANCIAL STATEMENTS
CRITICAL JUDGEMENTS AND ESTIMATES
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 and estimates 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.
The Group’s accounting policies do not include any critical judgements. The Group’s accounting policies are set out in Notes 1–23 of the Notes to
the Group accounts. Of those, the policies which require the most use of management’s estimation are as follows:
VALUATION OF INVENTORIES
A feature of the Orthopaedic Reconstruction and Trauma & Extremities franchises (whose finished goods inventory make up approximately 79%
of the Group’s 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 require management estimate in respect of 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 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.
LIABILITY PROVISIONING
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.
TAXATION
The Group operates in numerous tax jurisdictions around the world and it is Group policy to submit its tax returns to the relevant tax authorities as
promptly as possible. At any given time, the Group is involved in disputes and tax audits and will have a number of tax returns potentially subject
to audit. 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 tax provision whenever necessary. The ultimate tax liability may
differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.
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GROUP AND OTHER
INFORMATION
GROUP FINANCIAL STATEMENTS
GROUP INCOME STATEMENT
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Research and development expenses
Operating profit
Interest income
Interest expense
Other finance costs
Share of results of associates
Profit on disposal of business
Profit before taxation
Taxation
Attributable profit for the year1
Earnings per ordinary share1
Basic
Diluted
Notes
2
3
3
2 & 3
4
4
4
11
21
5
6
Year ended
31 December
2017
$ million
Year ended
31 December
2016
$ million
Year ended
31 December
2015
$ million
4,765
(1,248)
3,517
(2,360)
(223)
934
6
(57)
(10)
6
–
879
(112)
767
87.8¢
87.7¢
4,669
(1,272)
3,397
(2,366)
(230)
801
6
(52)
(16)
(3)
326
1,062
(278)
784
88.1¢
87.8¢
4,634
(1,143)
3,491
(2,641)
(222)
628
11
(49)
(15)
(16)
–
559
(149)
410
45.9¢
45.6¢
GROUP STATEMENT OF COMPREHENSIVE INCOME
Attributable profit for the year1
Other comprehensive income:
Items that will not be reclassified to income statement
Re-measurement of net 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 – forward foreign exchange contracts
– (losses)/gains arising in the year
– losses/(gains) transferred to inventories for the year
Fair value remeasurement of available for sale asset
Exchange differences on translation of foreign operations
Total items that may be reclassified subsequently to income statement
Other comprehensive income/(loss) for the year, net of taxation
Total comprehensive income for the year1
1 Attributable to equity holders of the Company and wholly derived from continuing operations.
The Notes on pages 119–162 are an integral part of these accounts.
Notes
18
5
Year ended
31 December
2017
$ million
767
Year ended
31 December
2016
$ million
784
Year ended
31 December
2015
$ million
410
64
(9)
55
(45)
21
(10)
181
147
202
969
(81)
10
(71)
(15)
20
10
(134)
(119)
(190)
594
(8)
10
2
34
(50)
–
(176)
(192)
(190)
220
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INFORMATION
GROUP FINANCIAL STATEMENTS
GROUP BALANCE SHEET
Assets
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Investments
Investments in associates
Other non-current assets
Retirement benefit assets
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
2017
$ million
At
31 December
2016
$ million
Notes
7
8
9
10
11
13
18
5
12
13
15
19
19
15
18
14
17
5
15
14
17
5
1,049
2,371
1,371
21
118
16
62
127
5,135
1,304
1,258
169
2,731
7,866
178
605
17
(257)
(228)
4,329
4,644
1,423
131
128
97
97
1,876
27
957
129
233
1,346
3,222
7,866
982
2,188
1,411
25
112
–
–
97
4,815
1,244
1,185
100
2,529
7,344
180
600
15
(432)
(375)
3,970
3,958
1,564
164
82
134
94
2,038
86
884
147
231
1,348
3,386
7,344
The accounts were approved by the Board and authorised for issue on 22 February 2018 and are signed on its behalf by:
Roberto Quarta
Chairman
Olivier Bohuon
Chief Executive Officer
Graham Baker
Chief Financial Officer
The Notes on pages 119–162 are an integral part of these accounts.
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INFORMATION
GROUP FINANCIAL STATEMENTS
GROUP CASH FLOW STATEMENT
Cash flows from operating activities
Profit before taxation
Net interest expense
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment and software
Distribution from trade investments
Share-based payments expense (equity settled)
Share of results of associates
Profit on disposal of business
Net movement in post-retirement benefit obligations
Increase in inventories
Increase in trade and other receivables
(Decrease)/increase in trade and other payables and provisions
Cash generated from operations1
Interest received
Interest paid
Income taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Acquisitions, net of cash acquired
Capital expenditure
Investment in associate
Purchase of investments
Proceeds on disposal of business
Tax on disposal of business
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
Purchase of own shares
Proceeds from borrowings due within one year
Settlement of borrowings due within one year
Proceeds from borrowings due after one year
Settlement of borrowings due after one year
Proceeds from own shares
Settlement of currency swaps
Equity dividends paid
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange adjustments
Cash and cash equivalents at end of year2
Notes
4
23
11
21
21
2
11
10
21
20
20
20
20
20
19
20
20
Year ended
31 December
2017
$ million
Year ended
31 December
2016
$ million
Year ended
31 December
2015
$ million
879
51
447
13
–
31
(6)
–
(40)
(17)
(40)
(45)
1,273
2
(50)
(135)
1,090
(159)
(376)
–
(8)
–
–
(543)
5
(52)
53
(64)
570
(706)
5
24
(269)
(434)
113
38
4
155
1,062
46
463
15
–
27
3
(326)
(85)
(47)
(74)
(49)
1,035
3
(48)
(141)
849
(214)
(392)
–
(2)
343
(118)
(383)
10
(368)
34
(38)
890
(759)
6
(25)
(279)
(529)
(63)
102
(1)
38
559
38
493
15
3
29
16
–
(57)
(83)
(26)
216
1,203
8
(44)
(137)
1,030
(44)
(358)
(25)
(2)
–
–
(429)
16
(77)
42
(26)
831
(1,062)
5
(15)
(272)
(558)
43
65
(6)
102
1
Includes $15m (2016: $62m, 2015: $52m) of outgoings on restructuring and rationalisation expenses, $3m (2016: $24m, 2015: $36m) of acquisition-related costs and $25m (2016: $36m, 2015: $3m) of legal and
other costs.
2 Cash and cash equivalents is net of bank overdrafts of $14m (2016: $62m, 2015: $18m).
The Notes on pages 119–162 are an integral part of these accounts.
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INFORMATION
GROUP FINANCIAL STATEMENTS
GROUP STATEMENT OF CHANGES IN EQUITY
At 31 December 2014
Attributable profit for the year1
Other comprehensive (expense)/income
Equity dividends declared and paid
Share-based payments recognised
Taxation on share-based payments
Purchase of own shares
Cost of shares transferred to beneficiaries
Cancellation of treasury shares
Issue of ordinary share capital4
At 31 December 2015
Attributable profit for the year1
Other comprehensive expense
Equity dividends declared and paid
Share-based payments recognised
Taxation on share-based payments
Purchase of own shares
Cost of shares transferred to beneficiaries
Cancellation of treasury shares
Issue of ordinary share capital4
At 31 December 2016
Attributable profit for the year1
Other comprehensive income
Equity dividends declared and paid
Share-based payments recognised
Taxation on share-based payments
Purchase of own shares
Cost of shares transferred to beneficiaries
Cancellation of treasury shares
Issue of ordinary share capital4
At 31 December 2017
Share
capital
$ million
Share
premium
$ million
Capital
redemption
reserve
$ million
Treasury
shares2
$ million
Other
reserves3
$ million
Retained
earnings
$ million
Total
equity
$ million
184
–
–
–
–
–
–
–
(1)
–
183
–
–
–
–
–
–
–
(3)
–
180
–
–
–
–
–
–
–
(2)
–
178
574
–
–
–
–
–
–
–
–
16
590
–
–
–
–
–
–
–
–
10
600
–
–
–
–
–
–
–
–
5
605
11
–
–
–
–
–
–
–
1
–
12
–
–
–
–
–
–
–
3
–
15
–
–
–
–
–
–
–
2
–
17
(315)
–
–
–
–
–
(77)
38
60
–
(294)
–
–
–
–
–
(368)
40
190
–
(432)
–
–
–
–
–
(52)
26
201
–
(257)
(64)
–
(192)
–
–
–
–
–
–
–
(256)
–
(119)
–
–
–
–
–
–
–
(375)
–
147
–
–
–
–
–
–
–
(228)
3,650
410
2
(272)
29
5
–
(33)
(60)
–
3,731
784
(71)
(279)
27
2
–
(34)
(190)
–
3,970
767
55
(269)
31
(3)
–
(21)
(201)
–
4,329
4,040
410
(190)
(272)
29
5
(77)
5
–
16
3,966
784
(190)
(279)
27
2
(368)
6
–
10
3,958
767
202
(269)
31
(3)
(52)
5
–
5
4,644
1 Attributable to equity holders of the Company and wholly derived from continuing operations.
2 Refer to Note 19.2 for further information.
3 Other reserves comprises gains and losses on cash flow hedges, foreign exchange differences on translation of foreign operations and net changes on fair value of trading investments. The cumulative translation
loss within other reserves at 31 December 2017 was $207m (2016: $388m loss, 2015: $254m loss).
4
Issue of ordinary share capital as a result of options being exercised.
The Notes on pages 119–162 are an integral part of these accounts.
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GROUP AND OTHER
INFORMATION
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 and services.
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 2017. 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 2017. IFRSs 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 year. The accounting policies requiring management to use significant estimates and assumptions are: inventories,
impairment, taxation and liability provisions. These are discussed on page 114. 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. Further information
regarding the Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in
Our Business & Marketplace on pages 8–17.
As described in Note 15, the Group meets its funding requirements through a mixture of shareholders’ funds, bank borrowings and private
placement notes. At 31 December 2017, the Group had committed borrowing facilities of $2.4bn and total liquidity of $1.2bn, including net cash
and cash equivalents of $155m and undrawn committed borrowing facilities of $1bn. The earliest expiry date of the Group’s committed borrowing
facilities is in respect of a $300m bilateral term loan facility due to expire in April 2020. In addition, Note 16 includes the Group’s objectives, policies
and processes for managing its capital; our financial risk management objectives; details of our financial instruments and hedging activities; and
our exposures to foreign exchange, interest rates and credit risk.
The Group’s forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Group has sufficient
financial resources. The Directors have reasonable expectation that the Company and the Group are well placed to manage their business risks
and to continue in operational existence for a period of at least three years from the date of the approval of the financial statements. Accordingly, the
Directors continue to adopt the going concern basis (in accordance with the guidance ‘Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting’ issued by the FRC) in preparing the consolidated financial statements.
There have been no new accounting pronouncements impacting the Group in 2017.
New accounting standards effective 2018
A number of new standards, amendments to standards and interpretations are effective for the Group’s annual periods beginning on or after
1 January 2018, and have not been applied in preparing these consolidated accounts. These include IFRS 15 Revenue from contracts with customers
and IFRS 9 Financial Instruments which will be adopted from 1 January 2018.
IFRS 15
The Group has undertaken a detailed impact assessment applying IFRS 15 to all the current ways in which the Group delivers products or
services to customers to identify divergence with current practice and has concluded that IFRS 15 will not have a significant impact on the timing
and recognition of revenue. The performance obligations involved in the sale of an orthopaedic implant are all considered to occur at the time of
procedure giving rise to no difference in the timing of revenue recognition. The instrument set and implant used in an orthopaedic procedure are
considered to be part of a single performance obligation. In line with past practice we will continue to measure and recognise revenue based on
invoiced amounts at the time of the procedure. Revenue recognised on the sale of products in our other surgical and wound businesses have also
been considered with reference to IFRS 15 with no impact identified in relation to the timing and measurement of revenue. The Group has also
considered the impact on provisions for returns, trade discounts and rebates and has determined that the current policy is aligned with IFRS 15.
The Group intends to apply the practical expedients in IFRS 15 to not disclose the amount of the transaction price allocated to the remaining
performance obligations and an explanation of when the Group expects to recognise that amount as revenue for all reporting periods presented
before 1 January 2018. The Group also intends to apply the practical expedients in relation to contracts with variable consideration and contracts
that were completed at the beginning of the earliest period presented and/or modified before the beginning of the earliest period presented.
The Group has concluded that applying these practical expedients will not have a significant impact on the timing, measurement and recognition
of revenue.
The Group has assessed the disclosure requirements of IFRS 15 and has preliminarily determined that the majority of the disclosures are either
currently included in the financial statements or can be prepared using data currently available. The Group continues to assess the disclosure
requirements in relation to unsatisfied performance obligations and the disaggregation of revenue.
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1 BASIS OF PREPARATION continued
IFRS 9
The amendments to IFRS 9 mainly relate to the classification and measurement of financial instruments, and will not have a significant impact to the
Group financial statements. When initially applying IFRS 9, the Group may choose as its accounting policy to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in IFRS 9. The Group will continue to apply the hedge requirements of IAS 39 on transition.
The Group has considered the expected credit loss model and has determined that it will not have a significant impact on the provision for bad and
doubtful debts. The Group has elected, from 1 January 2018, to present changes in the fair value of trade investments in the income statement.
New accounting standards effective 2019
IFRS 16
IFRS 16 Leases will be adopted retrospectively with the cumulative effect of initially applying the standard recognised at 1 January 2019 and the
Group is currently assessing the application and impact of the standard.
1.1 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, with the exception of jurisdictions whereby a different year end is required
by local legislation.
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.
1.2 Foreign currencies
Functional and presentation currency
The Group accounts are presented in US Dollars. The Company’s functional currency is US Dollars.
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 as 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.
The exchange rates used for the translation of currencies into US Dollars that have the most significant impact on the Group results were:
Average rates
Sterling
Euro
Swiss Franc
Year end rates
Sterling
Euro
Swiss Franc
2017
1.29
1.13
1.02
1.35
1.20
1.02
2016
1.35
1.11
1.02
1.23
1.05
0.98
2015
1.53
1.11
1.04
1.48
1.09
1.00
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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2 BUSINESS SEGMENT INFORMATION
The Group is engaged in a single business activity, being the development, manufacture and sale of medical technology products and services.
Development, manufacturing, supply chain and central functions are managed globally for the Group as a whole. Sales are managed through
two geographical selling regions: US and International; with a president for each who is responsible for the commercial review of that region.
The Executive Committee (‘ExCo’), comprises geographical presidents and certain heads of function and is chaired by the Chief Executive Officer
(‘CEO’). ExCo is the body through which the CEO uses the authority delegated to him by the Board of Directors to manage the operations and
performance of the Group. All significant operating decisions regarding the allocation and prioritisation of the Group’s resources and assessment of
the Group’s performance are made by ExCo, and whilst the members have individual responsibility for the implementation of decisions within their
respective areas, it is at the ExCo level that these decisions are made. Accordingly, ExCo is considered to be the Group’s chief operating decision
maker as defined by IFRS 8 Operating Segments.
In making decisions about the prioritisation and allocation of the Group’s resources, ExCo reviews financial information on an integrated basis
for the Group as a whole and determines the best allocation of resources to Group-wide projects. This information is prepared substantially on
the same basis as the Group’s IFRS financial statements aside from the adjustments described in Note 2.2. In assessing performance, ExCo
also considers financial information presented on a geographical selling region and product franchise basis for revenue. Financial information for
corporate and functional costs is presented on a Group-wide basis.
The types of products and services offered by the Group’s global business segment are as follows:
– Sports Medicine Joint Repair, which offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally
invasive surgery of the joints;
– Arthroscopic Enabling Technologies, which offers 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, electromechanical and mechanical tissue resection devices, and hand instruments for removing damaged tissue;
– Trauma & Extremities, consisting of internal and external devices used in the stabilisation of severe fractures and deformity correction procedures;
– Other Surgical Businesses, which includes robotics-assisted surgery, various products and technologies to assist in surgical treatment of the ear,
nose and throat, and gynaecological instrumentation, until the Gynaecology business disposal in August 2016;
– Knee Implants, which offers an innovative range of products for specialised knee replacement procedures;
– Hip Implants, which offers a range of specialist products for reconstruction of the hip joint;
– Advanced Wound Care, which includes products for the treatment and prevention of acute and chronic wounds, including leg, diabetic and
pressure ulcers, burns and post-operative wounds;
– Advanced Wound Bioactives, which includes biologics and other bioactive technologies that provide unique approaches to debridement and
dermal repair/regeneration; and
– Advanced Wound Devices, which consists of traditional and single-use Negative Pressure Wound Therapy and hydrosurgery systems.
The segment information is prepared in conformity with the accounting policies of the Group and the accounting standard IFRS 8
Operating Segments.
The segment profit measure reported to the Chief Executive Officer and the ExCo for the purposes of resource allocation and assessment is trading
profit and excludes the effects of non-recurring, infrequent, non-cash and other items that management does not otherwise believe are indicative
of the underlying performance of the consolidated Group as discussed in Note 2.2. Group financing (including interest receivable and payable) is
managed on a net basis outside the business segment.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 122
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2 BUSINESS SEGMENT INFORMATION continued
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. There is no significant revenue associated with the provision of discrete services.
In Established Markets we typically sell direct to healthcare institutions while in our Emerging Markets we typically sell to distributors and
intermediaries. In general our surgical business is more direct to hospitals and ambulatory service centres whereas in our wound business, and
in particular products used in community and homecare facilities, it is through wholesalers. 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.
Segment revenue reconciles to statutory revenues from continuing operations as follows:
Reportable segment revenue
Revenue from external customers
2017
$ million
2016
$ million
2015
$ million
4,765
4,669
4,634
In presenting information on the basis of geographical segments, segment revenue is based on location of Smith & Nephew businesses:
Geographical segment revenue
United Kingdom
United States of America
Other1
Consolidated revenue from continuing operations
2017
$ million
244
2,332
2,189
4,765
2016
$ million
2015
$ million
266
2,299
2,104
4,669
301
2,217
2,116
4,634
1
No other country represents more than 6% of consolidated sales revenue from continuing operations.
The table below shows revenue by product type from continuing operations. Included within the 2015 analysis is a reclassification of $58m
of product sales formerly included in the Sports Medicine Joint Repair franchise which has now been included in the Arthroscopic Enabling
Technologies franchise in order to present analysis in line with 2017 management reporting on a consistent basis.
Revenue by product from continuing operations
Knee Implants
Hip Implants
Trauma & Extremities
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
Other Surgical Businesses
Advanced Wound Care
Advanced Wound Bioactives
Advanced Wound Devices
Consolidated revenue from continuing operations
Major customers
No single customer generates revenue greater than 10% of the consolidated revenue.
2017
$ million
2016
$ million
2015
$ million
984
599
495
627
615
189
720
342
194
4,765
932
597
475
587
631
214
719
342
172
4,669
883
604
497
548
631
205
755
344
167
4,634
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 123
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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; amortisation and impairment of acquisition intangibles; significant restructuring programmes; gains and
losses arising from legal disputes; and other significant items. Further detail is provided in Notes 2.3, 2.4 and 2.5. Operating profit reconciles to
trading profit as follows:
Operating profit of the business segment
Acquisition-related costs
Restructuring and rationalisation expenses
Amortisation and impairment of acquisition intangibles
Legal and other
Trading profit of the business segment
2017
$ million
934
(10)
–
140
(16)
1,048
2016
$ million
801
9
62
178
(30)
1,020
2015
$ million
628
12
65
204
190
1,099
2.3 Acquisition-related costs
Acquisition-related costs credit of $10m (2016: $9m charge, 2015: $12m charge) relates to a remeasurement of contingent consideration for a prior
year acquisition partially offset by costs associated with the acquisition of Rotation Medical, Inc.
2.4 Restructuring and rationalisation expenses
No restructuring and rationalisation costs were incurred in 2017 (2016: $62m, 2015: $65m). In 2016 and 2015, these costs primarily related to the
ongoing implementation of the Group Optimisation Plan which was completed in 2016.
2.5 Legal and other
The legal and other credit within operating profit of $16m (2016: $30m credit, 2015: $190m charge) primarily related to a $54m credit recognised
following a settlement payment received from Arthrex relating to patent litigation, partially offset by legal expenses for patent litigation with Arthrex
and ongoing metal-on-metal hip claims. In 2017 there was a $10m increase in the provision that reflects the present value of the estimated costs to
reduce all other known and anticipated metal-on-metal hip claims.
2.6 Assets and liabilities by business segment and geography
Reconciliation of assets of the business segment
to the consolidated group
Assets of the business segment
Unallocated corporate assets:
– Deferred tax assets
– Retirement benefit assets
– Cash at bank
Total assets of the consolidated group
2017
$ million
2016
$ million
2015
$ million
7,508
127
62
169
7,866
7,147
97
–
100
7,344
6,929
105
13
120
7,167
In presenting information on the basis of geographical segments, non-current segment assets are based on their location:
Geographical segment assets
United Kingdom
United States of America
Other
Total non-current assets of the consolidated group1
1
Non-current assets excludes retirement benefit assets and deferred tax assets.
2017
$ million
364
3,295
1,287
4,946
2016
$ million
2015
$ million
335
3,145
1,238
4,718
366
2,982
1,226
4,574
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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Reconciliation of liabilities of the business segment
to the consolidated group
Liabilities of the business segment
Unallocated corporate liabilities:
– Long-term borrowings
– Retirement benefit obligations
– Deferred tax liabilities
– Bank overdrafts and loans – current
– Current tax payable
Total liabilities of the consolidated group
Depreciation, amortisation and impairment of the business segment
Depreciation of property, plant and equipment
Amortisation of acquisition intangibles
Amortisation of other intangible assets
Total depreciation and amortisation
Impairment losses on acquisition intangibles1
Impairment loss/(reversal) on trade investments1
Total depreciation, amortisation and impairment
1
Impairments recognised in operating profit, within the administrative expenses line.
2017
$ million
2016
$ million
2015
$ million
1,311
1,423
131
97
27
233
3,222
243
130
62
435
10
2
447
1,247
1,564
164
94
86
231
3,386
224
130
61
415
48
–
463
1,197
1,434
184
77
46
263
3,201
226
153
66
445
51
(3)
493
Segment acquisition of property, plant and equipment and intangibles reconciles to that of the consolidated group, and comprises the following:
Additions to property, plant and equipment
Additions to intangibles
Capital expenditure (excluding business combinations)
Trade investments
Acquisitions – Goodwill
Acquisitions – Intangible assets
Acquisitions – Property, plant and equipment
Capital and acquisition expenditure
2017
$ million
2016
$ million
2015
$ million
308
68
376
8
132
61
1
578
320
72
392
2
211
85
2
692
303
55
358
2
34
19
6
419
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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3 OPERATING PROFIT
Accounting policies
Research and development
Research expenditure is expensed as incurred. 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
Advertising costs are expensed as incurred.
Revenue
Cost of goods sold
Gross profit
Research and development expenses
Selling, general and administrative expenses:
Marketing, selling and distribution expenses
Administrative expenses1,2,3,4
Operating profit
2017
$ million
4,765
(1,248)
3,517
(223)
(1,781)
(579)
(2,360)
934
2016
$ million
4,669
(1,272)
3,397
(230)
(1,712)
(654)
(2,366)
801
2015
$ million
4,634
(1,143)
3,491
(222)
(1,735)
(906)
(2,641)
628
1 2017 includes $62m of amortisation of software and other intangible assets (2016: $61m, 2015: $66m).
2 2017 includes $140m of amortisation and impairment of acquisition intangibles (2016: $62m of restructuring and rationalisation expenses and $178m of amortisation and impairment of acquisition intangibles, 2015:
$65m of restructuring and rationalisation expenses and $204m of amortisation and impairment of acquisition intangibles).
3 2017 includes $16m credit relating to legal and other items (2016: $30m credit, 2015: $190m charge).
4 2017 includes $10m credit of acquisition-related costs (2016: $9m charge, 2015: $12m charge).
Note that items detailed in 2, 3, 4 are excluded from the calculation of trading profit, the segment profit measure.
Operating profit is stated after charging/(crediting) the following items:
Other operating income
Amortisation of intangibles
Impairment of intangible assets
Depreciation of property, plant and equipment
Loss on disposal of property, plant and equipment and intangible assets
Operating lease payments for land and buildings
Operating lease payments for other assets
Advertising costs
2017
$ million
2016
$ million
2015
$ million
(66)
192
10
243
13
36
21
102
(25)
191
48
224
15
39
19
88
(41)
219
51
226
15
37
20
91
In 2017 other operating income primarily relates to a gain relating to patent litigation (2016: insurance recovery relating to metal-on-metal claims,
2015: net gain relating to patent litigation).
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 126
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3 OPERATING PROFIT continued
3.1 Staff costs and employee numbers
Staff costs during the year amounted to:
Wages and salaries
Social security costs
Pension costs (including retirement healthcare)1
Share-based payments
Notes
18
23
2017
$ million
1,157
178
64
31
1,430
2016
$ million
1,227
129
23
27
1,406
2015
$ million
1,193
135
58
30
1,416
1
In 2016, pension costs include the past service cost credit of $49m arising primarily from the closure of the UK defined benefit scheme to future accrual.
During the year ended 31 December 2017, the average number of employees was 16,333 (2016: 15,584, 2015: 14,686).
3.2 Audit Fees – information about the nature and cost of services provided by the auditor
Audit services:
Group accounts
Local statutory audit pursuant to legislation
Other services:
Non-audit services
Taxation services:
Compliance services
Advisory services
Total auditor’s remuneration
Arising:
In the UK
Outside the UK
4 INTEREST AND OTHER FINANCE COSTS
4.1 Interest income/(expense)
Interest income
Interest expense:
Bank borrowings
Private placement notes
Other
Net interest expense
4.2 Other finance costs
Retirement benefit net interest expense
Unwinding of discount
Other
Other finance costs
2017
$ million
2016
$ million
2015
$ million
2.4
2.0
0.1
–
–
4.5
2.5
2.0
4.5
2.0
2.0
0.5
0.1
–
4.6
2.5
2.1
4.6
2.1
2.0
0.5
0.5
–
5.1
2.5
2.6
5.1
2017
$ million
2016
$ million
2015
$ million
6
(11)
(38)
(8)
(57)
(51)
6
(9)
(37)
(6)
(52)
(46)
11
(9)
(37)
(3)
(49)
(38)
Notes
18
2017
$ million
2016
$ million
2015
$ million
(5)
(5)
–
(10)
(7)
(9)
–
(16)
(11)
(3)
(1)
(15)
Foreign exchange gains or losses arose primarily on the translation of intercompany and third party borrowings and amounted to a net $25m loss in
2017 (2016: net $22m gain, 2015: net $11m gain). These amounts were matched by the fair value gains or losses on currency swaps held to manage
this currency risk.
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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 numerous tax jurisdictions around the world and it is Group policy to submit its tax returns to the relevant tax authorities
as promptly as possible. At any given time, the Group is involved in disputes and tax audits and will have a number of tax returns potentially
subject to audit. 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 tax 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.
5.1 Taxation charge attributable to the Group
Current taxation:
UK corporation tax
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
Taxation in other comprehensive income
Taxation in equity
Taxation attributable to the Group
2017
$ million
2016
$ million
2015
$ million
23
177
200
(60)
140
32
(49)
(11)
(28)
112
9
3
124
23
261
284
(53)
231
24
–
23
47
278
(10)
(2)
266
31
219
250
(56)
194
(73)
(3)
31
(45)
149
(10)
(5)
134
The 2017 and 2016 net prior period adjustment benefits of $71m and $30m respectively mainly relate to provision releases following agreement
reached with the IRS on US tax matters after the conclusion of US tax audits in 2017 and 2016, provision releases on the expiry of statute of
limitations and tax accrual to tax return adjustments, partially offset by an increase in certain other tax provisions. The 2015 net prior period
adjustment benefit of $25m mainly relates to provision releases after settlement with tax authorities or the expiry of statute of limitations and tax
accrual to tax return adjustments.
Included in the total tax charge is a $32m net benefit as a result of the new US tax reform legislation enacted in December 2017, which comprises
a benefit from a revaluation of deferred tax balances included within changes in tax rates, partially offset by a current tax charge relating to the
deemed repatriation of foreign profits not previously taxed in the US.
Total taxation as per the income statement of $112m includes a $58m net credit (2016: $48m net charge, 2015: $130m net credit) as a consequence
of the net benefit from US tax reform, acquisitions and disposals, amortisation and impairment of acquisition intangibles and legal and other.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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5 TAXATION continued
Factors affecting future tax charges
The Group operates in numerous tax jurisdictions around the world and is subject to factors that may affect future tax charges including the recently
enacted US tax reform, the review by the European Commission into whether the UK CFC financing exemption rules constitute illegal State Aid,
implementation of the OECD’s BEPS actions, tax rate changes, tax legislation changes, expiry of the statute of limitations and resolution of tax audits
and disputes.
At any given time the Group has unagreed years outstanding in various countries and is involved in tax audits and disputes, some of which may
take several years to resolve. Current tax payable of $233m includes $201m of provisions for uncertain tax positions in respect of various countries.
The Group believes that it has made adequate provision in respect of additional tax liabilities that may arise from these unagreed years, tax audits
and disputes, the majority of which relate to transfer pricing matters as would be expected for a Group operating internationally. However, the actual
liability for any particular issue may be higher or lower than the amount provided resulting in a negative or positive effect on the tax charge in any
given year, including a reduction in the tax charge because of an expiry of the relevant statute of limitations. Whilst the impact can vary from year
to year, the negative or positive effect on the tax charge for 2018 is not expected to result in a net prior period adjustment for 2018 which is greater
than that realised in 2017.
The Group has completed its review of the new US tax reform legislation, as enacted, including the reduction of the US federal tax rate from 35% to
21%, which came into effect on 1 January 2018. As a result, the Group expects a positive impact on its tax charge for future years in addition to the
one-off net tax benefit of $32m in 2017. However, it should be noted that parts of the new legislation are subject to questions of interpretation, and
further regulations may be issued in the future to clarify or change certain elements, which may affect future tax charges.
In December 2016, the Group appealed to the First Tier Tribunal in the UK against a decision by HM Revenue and Customs (HMRC) relating to
the tax deductibility of certain historical foreign exchange losses. The decision of the Tribunal was released on 8 February 2017 and it upheld the
Group’s appeal. HMRC appealed against this decision and their appeal will be heard by the Upper Tribunal in June 2018. No tax benefit has been
recognised to date in respect of these foreign exchange losses. In the event that the Group is ultimately successful in the Courts, then the Group’s
tax charge would be reduced, in the year of success, as a result.
In 2016, the UK Government enacted legislation to reduce the main rate of UK statutory corporation tax to 19.0% from 1 April 2017 and 17.0% from
1 April 2020.
The UK standard rate of corporation tax for 2017 is 19.3% (2016: 20.0%, 2015: 20.3%). Overseas taxation is calculated at the rates prevailing in the
respective jurisdictions. The table below reconciles the expected tax charge at the UK statutory rate with the actual tax charge:
Profit before taxation
Expected taxation at UK statutory rate of 19.3% (2016: 20.0%, 2015: 20.3%)
Differences in overseas taxation rates1
Disposal of the Gynaecology business (mainly at the US tax rate)
Benefit of US Manufacturing deduction
R&D credits
Tax losses not recognised
Utilisation of previously unrecognised tax losses
Impact of US tax reform
Expenses not deductible for tax purposes
Changes in tax rates
Adjustments in respect of prior years2
Total taxation as per the income statement
2017
$ million
2016
$ million
2015
$ million
879
169
48
–
(9)
(3)
10
(6)
(32)
11
(5)
(71)
112
1,062
212
34
56
(7)
(3)
1
(9)
–
23
1
(30)
278
559
113
52
–
(7)
(6)
11
–
–
14
(3)
(25)
149
1 Mainly relates to profits taxed in the US at a rate higher than the UK statutory rate and includes the impact of intra-group loans provided to finance US acquisitions and business operations.
2 The adjustments in respect of prior years are explained on the previous page.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 129
OVERVIEW
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GROUP AND OTHER
INFORMATION
5 TAXATION continued
5.2 Deferred taxation
Movements in the main components of deferred tax assets and liabilities were as follows:
At 31 December 2015
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other
comprehensive income
Movement in equity
Changes in tax rate
Acquisitions
At 31 December 2016
Exchange adjustment
Movement in income statement – current year
Movement in income statement – prior years
Movement in other
comprehensive income
Movement in equity
Changes in tax rate
Acquisitions
At 31 December 2017
Represented by:
Deferred tax assets
Deferred tax liabilities
Net position at 31 December
Accelerated
tax
depreciation
$ million
(62)
–
–
(11)
Intangibles
$ million
(223)
2
34
6
Retirement
benefit obligation
$ million
39
–
(16)
(2)
Macrotexture
$ million
52
–
–
–
Inventory,
provisions,
losses and other
differences
$ million
222
(3)
(42)
(16)
–
–
–
–
(73)
1
(9)
2
–
–
29
–
(50)
–
–
1
(29)
(209)
(2)
15
4
–
–
71
(22)
(143)
7
–
–
–
28
2
(6)
–
(17)
–
–
–
7
–
–
–
–
52
–
(1)
–
–
–
(18)
–
33
(1)
2
(1)
44
205
13
(31)
5
4
(3)
(33)
23
183
Total
$ million
28
(1)
(24)
(23)
6
2
–
15
3
14
(32)
11
(13)
(3)
49
1
30
2017
$ million
127
(97)
30
2016
$ million
97
(94)
3
The Group has gross unused trading and non-trading tax losses of $271m (2016: $230m) and gross unused capital losses of $113m (2016: $122m)
available for offset against future profits of which $32m of trading losses will expire within 3-8 years from the balance sheet date if not utilised.
A deferred tax asset of $38m (2016: $45m) has been recognised in respect of $132m (2016: $109m) of the trading and non-trading tax losses.
No deferred tax asset has been recognised on the remaining unused tax losses as they are not expected to be realised in the foreseeable future.
There are no temporary differences in respect of investments in subsidiaries and associates for which deferred tax liabilities have not been
recognised (2016: temporary differences of approximately $483m).
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 130
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6 EARNINGS PER ORDINARY SHARE
Accounting policies
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.
Diluted earnings per share
Diluted earnings per share is calculated by adjusting the basic earnings per share for the effect of conversion to ordinary shares associated with
dilutive potential ordinary shares, which comprise share options and awards granted to employees.
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: acquisitions and disposals related items including amortisation and
impairment of acquisition intangible assets; significant restructuring programmes; significant gains and losses arising from legal disputes and
other significant items (including US tax reform) 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)
Attributable profit is reconciled to adjusted attributable profit as follows:
Attributable profit for the year
Acquisition-related costs
Restructuring and rationalisation expenses
Amortisation and impairment of acquisition intangibles
Legal and other1
Profit on disposal of business
US tax reform
Taxation on excluded items
Adjusted attributable profit
2017
$ million
2016
$ million
2015
$ million
767
826
784
735
410
761
Notes
2017
$ million
2016
$ million
2015
$ million
3
9
21
5
5
767
(10)
–
140
(13)
–
(32)
(26)
826
784
9
62
178
(20)
(326)
–
48
735
410
25
65
204
187
–
–
(130)
761
1
Legal and other credit in 2017 includes $16m within operating profits (refer to Note 2.5), and a $3m charge within other finance costs for unwinding of the discount on the provision for known, anticipated and settled
metal-on-metal hip claims. In 2016 the legal and other credit includes $30m within operating profits (refer to Note 2.5), a $5m charge within other finance costs for unwinding of the discount on the provision for
known, anticipated and settled metal-on-metal hip claims, and a $5m charge within share of results of associates for expenses incurred by Bioventus for an aborted initial public offering of shares. In 2015 legal and
other costs include $190m within operating profit (refer to Note 2.5) and a $3m net interest credit.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 131
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GROUP AND OTHER
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6 EARNINGS PER ORDINARY SHARE continued
The numerators used for basic and diluted earnings per ordinary share are the same. The denominators used for all categories of earnings for basic
and diluted earnings per ordinary share are as follows:
Number of shares (millions)
Basic weighted number of shares
Dilutive impact of share options outstanding
Diluted weighted average number of shares
Earnings per ordinary share
Basic
Diluted
Adjusted2
2
Adjusted earnings per share is calculated using the basic weighted number of shares.
7 PROPERTY, PLANT AND EQUIPMENT
2017
874
1
875
87.8¢
87.7¢
94.5¢
2016
890
3
893
88.1¢
87.8¢
82.6¢
2015
894
5
899
45.9¢
45.6¢
85.1¢
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 ultimately 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
assessment of the time value of money and the risks specific to the asset.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 132
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GROUP AND OTHER
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7 PROPERTY, PLANT AND EQUIPMENT continued
Land and buildings
Plant and equipment
Notes
Freehold
$ million
Leasehold
$ million
Instruments
$ million
Other
$ million
Assets in
course of
construction
$ million
Total
$ million
Cost
At 1 January 2016
Exchange adjustment
Acquisitions
Additions
Disposals
Transfers
At 31 December 2016
Exchange adjustment
Acquisitions
Additions
Disposals
Transfers
At 31 December 2017
Depreciation and impairment
At 1 January 2016
Exchange adjustment
Charge for the year
Disposals
At 31 December 2016
Exchange adjustment
Charge for the year
Disposals
Transfers
At 31 December 2017
Net book amounts
At 31 December 2017
At 31 December 2016
21
21
21
154
(6)
–
1
–
16
165
6
–
1
–
56
228
48
(3)
5
–
50
3
6
–
2
61
167
115
58
–
–
1
–
60
119
1
–
–
(27)
(20)
73
35
–
7
–
42
–
7
(22)
3
30
43
77
1,042
(22)
2
166
(76)
4
1,116
63
–
176
(73)
2
1,284
732
(15)
131
(67)
781
45
146
(67)
(1)
904
380
335
1,003
(46)
–
72
(39)
33
1,023
33
1
28
(79)
56
1,062
655
(34)
81
(30)
672
24
84
(74)
(9)
697
365
351
156
(5)
–
80
(3)
(113)
115
3
–
103
(12)
(115)
94
11
–
–
–
11
–
–
(11)
–
–
94
104
2,413
(79)
2
320
(118)
–
2,538
106
1
308
(191)
(21)
2,741
1,481
(52)
224
(97)
1,556
72
243
(174)
(5)
1,692
1,049
982
Land and buildings includes land with a cost of $21m (2016: $19m) that is not subject to depreciation. There were no assets held under finance
leases at 31 December 2017 (2016: assets held under finance leases with a net book value of $5m were included within land and buildings).
Transfers from assets in course of construction includes $4m (2016: $nil) of software and $12m (2016: $nil) net book value of other non-
current assets.
Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $26m (2016: $55m).
The amount of borrowing costs capitalised in 2017 and 2016 was minimal.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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133
OVERVIEW
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 goodwill is tested annually for impairment by comparing the recoverable amount to the carrying value of
the CGUs. The CGUs identified by management are at the aggregated product franchise levels of Orthopaedics, Other Surgical Devices and
Advanced Wound Management, in the way the core assets are used to generate cash flows.
If the recoverable amount of the CGU 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
At 31 December
Impairment
At 1 January and 31 December
Net book amounts
Notes
2017
$ million
2016
$ million
21
2,188
51
132
2,371
–
2,371
2,012
(35)
211
2,188
–
2,188
Management has identified four CGUs in applying the provisions of IAS 36 Impairment of Assets: Orthopaedics (Reconstruction and Trauma), Other
Surgical Devices, Advanced Wound Care & Devices and Bioactives.
For the purpose of goodwill impairment testing, the Advanced Wound Care & Devices and Bioactives CGUs have been aggregated (Advanced
Wound Management), as this is the level at which goodwill is monitored and level at which the economic benefits relating to the goodwill within
these CGUs is realised.
Goodwill is allocated to the Group’s CGUs as follows:
Orthopaedics
Other Surgical Devices
Advanced Wound Management
2017
$ million
566
1,501
304
2,371
2016
$ million
551
1,351
286
2,188
Impairment reviews were performed in September 2017 and September 2016 by comparing the recoverable amount of each CGU with its carrying amount,
including goodwill. These were updated during December, taking into account any 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. In determining the growth rates used in the calculations of the value-in-use, management considered annual revenue growth. 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.
The discount rates used in the value-in-use calculations reflect management’s assessment of risks specific to the assets of each CGU.
8.1 Orthopaedics CGU
The sales growth and trading profit margin used in the value-in-use calculation for the Orthopaedics CGU, which includes the Reconstruction and
Trauma businesses, reflects management’s distinctive orthopaedic reconstruction strategy, which combines cutting edge innovation, disruptive
business models and a strong Emerging Markets platform to drive outperformance.
Revenue growth rates for the five-year period ranged from 1.0% to 10.6% for the various components of the Orthopaedics CGU. The average growth
rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 2.0%. The pre-tax discount rate used in the
Orthopaedics CGU value-in-use calculation reflects the geographical mix and is 10.0%.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
134
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8 GOODWILL continued
8.2 Other Surgical Devices CGU
The value-in-use calculation for the Other Surgical Devices CGU reflects growth rates and trading profit margins consistent with management’s
strategy to rebalance Smith & Nephew towards higher growth areas such as, for example, Sports Medicine.
Revenue growth rates for the five-year period ranged from 1.0% to 9.0% for the various components of the Other Surgical Devices CGU. The weighted
average growth rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 2.0%. The pre-tax discount rate
used in the Other Surgical Devices CGU value-in-use calculation reflects the geographical mix of the revenues and is 10.0%.
8.3 Advanced Wound Management CGU
The aggregated Advanced Wound Management CGU comprises the Advanced Wound Care & Devices and Bioactives CGUs.
In performing the value-in-use calculation for this combined CGU, management considered the Group’s focus across the wound product
franchises, focusing on widening access to the customer, the higher added value sectors of healing chronic wounds and tissue repair using
bioactives, and by continuing to improve efficiency.
Revenue growth rates for the five-year period ranged from 2.0% to 17.3% for the various components of the Advanced Wound Management CGU.
The weighted average growth rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 2.0%. The pre-tax
discount rate used in the Advanced Wound Management CGU value-in-use calculation reflects the geographical mix and industry sector and is 10.0%.
8.4 Sensitivity to changes in assumptions used in value-in-use calculations
The calculations of value-in-use for the identified CGUs are most sensitive to changes in discount and growth rates. Management’s consideration of
these sensitivities is set out below:
– Growth of market and market share – management has considered the impact of a variance in market growth and market share. The value-
in-use calculations shows that if the assumed long-term growth rates were reduced to nil, the recoverable amount of each CGU would still be
greater than its carrying value.
– Discount rate – management has considered the impact of an increase in the discount rate applied to the value-in-use calculations.
This sensitivity analysis shows that for the recoverable amount of each CGU to be less than its carrying value, the discount rate would have to be
increased to 29.5% for the Orthopaedics CGU, 16.6% for the Other Surgical Devices CGU and 26.3% for the Advanced Wound Management CGU.
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.
Contingent consideration
Contingent consideration receivable associated with the sale of product rights and other assets outside a business combination is recognised at
the time of purchase to the extent that the future event upon which the contingent consideration is conditional is within the Group’s control, or to
the extent that it is considered to be virtually certain that the contingent consideration will become due. If the contingent consideration is outside
the Group’s control or it cannot be considered virtually certain that it will become due, an asset and corresponding entry in profit and loss is
recognised only once it becomes virtually certain that the contingent consideration will become due.
Contingent consideration payable associated with the purchase of product rights and other assets outside a business combination is recognised
at the time of sale to the extent that the future event upon which the contingent consideration is conditional is under the control of the seller and
it is considered probable that the contingent consideration will become due. Contingent consideration associated within a contingent condition
that is within the Group’s control is recognised at the point when the contingent condition is met.
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
CGU to which it belongs. An asset’s recoverable amount is the higher of an asset’s or CGU’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 should arise, impairment charges may be required which would adversely impact operating results.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 135
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GROUP AND OTHER
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9 INTANGIBLE ASSETS continued
Cost
At 1 January 2016
Exchange adjustment
Acquisitions1
Additions
Disposals
At 31 December 2016
Exchange adjustment
Acquisitions1
Additions
Disposals
Transfers
At 31 December 2017
Amortisation and impairment
At 1 January 2016
Exchange adjustment
Charge for the year – amortisation2
Charge for the year – impairment
Disposals
At 31 December 2016
Exchange adjustment
Charge for the year – amortisation
Charge for the year – impairment
Disposals
Transfers
At 31 December 2017
Net book amounts
At 31 December 2017
At 31 December 2016
Technology
$ million
Product-
related
$ million
Customer and
distribution
related
$ million
Software
$ million
Total
$ million
235
(2)
68
–
–
301
10
59
–
(6)
(6)
358
21
–
15
–
–
36
2
6
–
11
(4)
51
307
265
1,864
(20)
17
24
(36)
1,849
38
2
2
(43)
6
1,854
759
(16)
131
48
(36)
886
21
133
10
(61)
4
993
861
963
119
2
–
–
–
121
1
–
3
(5)
–
120
69
1
10
–
–
80
1
15
–
(3)
–
93
27
41
289
(8)
–
48
–
329
12
–
63
(5)
4
403
156
(4)
35
–
–
187
6
38
–
(4)
–
227
176
142
2,507
(28)
85
72
(36)
2,600
61
61
68
(59)
4
2,735
1,005
(19)
191
48
(36)
1,189
30
192
10
(57)
–
1,364
1,371
1,411
1
In 2017 this relates to technology and product-related intangibles acquired with the purchase of Rotation Medical, Inc. In 2016 this relates to technology and product related intangibles acquired with the purchase of
Blue Belt Technologies Inc. and BST-CarGel.
2 The amortisation charge between technology and product-related intangibles has been restated by $33m with no impact on the total net book value of intangible assets.
Amortisation and impairment of acquisition intangibles is set out below:
Technology
Product-related
Customer and distribution related
Total
2017
$ million
6
124
10
140
2016
$ million
48
126
4
178
Group capital expenditure relating to software contracted but not provided for amounted to $nil (2016: $9m). In 2017, a product-related intangible
asset was determined to have a value in use below its carrying value, resulting in an impairment charge of $10m being recognised.
In determining the recoverable amount of the Coblation technology asset acquired with the purchase of ArthoCare in 2014, revenue from products
utilising this technology was assumed to have a growth rate of 4-5% in the medium term. This supported the carrying value of the Coblation
technology asset but a reduction of 4% would give rise to there being no headroom.
In 2016, two product-related intangible assets were determined to have a value in use below their carrying value, resulting in an impairment charge
being recognised. The impairment charge primarily relates to $32m from Oasis, calculated using a discount rate of 10.3%, a product right acquired
with the Healthpoint acquisition in 2012. The continued reimbursement pressure in 2016 resulted in revenues not increasing at the previously
expected rate. The second product-related intangible asset has no residual carrying value.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
136
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GROUP AND OTHER
INFORMATION
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 investments in unquoted entities and an entity that holds mainly unquoted equity securities, which by their nature have no
fixed maturity date or coupon rate. These investments are classed as ‘available-for-sale’ carried at fair value. The fair value of these investments
are based on the underlying fair value of the equity securities: marketable securities are valued by reference to closing prices in the market;
and 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
Additions
Fair value remeasurement
Impairment
At 31 December
11 INVESTMENTS IN ASSOCIATES
2017
$ million
2016
$ million
25
8
(10)
(2)
21
13
2
10
–
25
Accounting policy
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 associates’ 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 2017 and 31 December 2016, 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. Bioventus 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.
Bioventus sells bone healing stimulation devices and is a provider of osteoarthritis injection therapies. The Group’s ability to recover the value of its
investment is dependent upon the ongoing clinical and commercial success of these products. The profit after taxation recognised in the income
statement relating to Bioventus was $6m (2016: loss after taxation $3m).
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 amounts recognised in the balance sheet and income statement for associates are as follows:
Balance sheet
Income statement profit/(loss)
2017
$ million
118
6
2016
$ million
112
(3)
Summarised financial information for significant associates
Set out below is the summarised financial information for Bioventus, adjusted for differences with Group accounting policies:
Summarised statement of comprehensive income
Revenue
Attributable profit/(loss) for the year
Group adjustments1
Total comprehensive profit/(loss)
Group share of profit/(loss) for the year at 49%
2017
$ million
2016
$ million
301
1
11
12
6
282
(21)
15
(6)
(3)
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 137
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11 INVESTMENTS IN ASSOCIATES continued
Summarised balance sheet
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Group’s share of net assets at 49%
Group adjustments1
Group’s carrying amount of investment at 49%
2017
$ million
2016
$ million
332
122
(246)
(47)
161
79
35
114
364
105
(258)
(53)
158
77
32
109
1 Group adjustments include an adjustment to align the useful life of intangible assets with Group policy.
At December 2017, the Group held an equity investment in one other associate (2016: one) with a carrying value of $3m (2016: $3m).
12 INVENTORIES
Accounting policy
Finished goods and work-in-progress are valued at factory cost, including appropriate overheads, on a first-in first-out basis. Raw materials
and bought-in finished goods are valued at purchase price. All inventories are reduced to net realisable value where lower than cost.
Inventory acquired as part of a business acquisition is valued at selling price less costs to sell 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 seven years.
A feature of the orthopaedic business is the high level of product inventory required, some of which is located at customer premises and is
available for customers’ immediate use (referred to as consignment inventory). Complete sets of product, including large and small sizes, have
to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle
are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate
this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical or forecast
usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two
years. This method of calculation is considered appropriate based on experience but it involves management judgements on effectiveness of
inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
Raw materials and consumables
Work-in-progress
Finished goods and goods for resale
2017
$ million
207
69
1,028
1,304
2016
$ million
213
55
976
1,244
2015
$ million
205
84
928
1,217
Reserves for excess and obsolete inventories were $296m (2016: $303m, 2015: $322m). The decrease in reserves of $7m in the year comprised
a $20m reduction in the reserve relating to the write-off of inventory which was partially offset by foreign exchange movements of $13m.
The determination of the estimate of excess and obsolete inventory is a critical accounting estimate and includes assumptions on the future usage
of all different items of finished goods. This estimate is not considered to have a range of potential outcomes that is significantly different to the
$296m held at 31 December 2017.
The cost of inventories recognised as an expense and included in cost of goods sold amounted to $1,013m (2016: $1,131m, 2015: $961m). In addition,
$68m was recognised as an expense within cost of goods sold resulting from inventory write-offs (2016: $85m, 2015: $73m).
Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 138
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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 and other receivables due within one year
Trade receivables
Less: provision for bad and doubtful debts
Trade receivables – net
Derivatives – forward foreign exchange, currency swaps and interest rate contracts
Other receivables
Prepayments
Due after more than one year
Other non-current assets
2017
$ million
2016
$ million
2015
$ million
1,125
(69)
1,056
28
92
82
1,258
16
1,274
1,042
(54)
988
48
76
73
1,185
–
1,185
1,003
(64)
939
33
83
83
1,138
–
1,138
Trade receivables are classified as loans and receivables. 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 $17m (2016: $7m expense, 2015: $25m expense).
Other non-current assets primarily relate to long-term prepayments.
The amount of trade receivables that were past due was 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
2017
$ million
225
65
66
105
461
664
(69)
1,056
2016
$ million
2015
$ million
142
51
70
54
317
725
(54)
988
154
45
57
53
309
694
(64)
939
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 139
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13 TRADE AND OTHER RECEIVABLES continued
Movements in the provision for bad and doubtful debts were as follows:
At 1 January
Exchange adjustment
Acquisitions
Net receivables provided during the year
Utilisation of provision
At 31 December
Trade receivables include amounts denominated in the following major currencies:
US Dollar
Sterling
Euro
Other
Trade receivables – net
14 TRADE AND OTHER PAYABLES
Trade and other payables due within one year
Trade and other payables
Derivatives – forward foreign exchange, currency swaps and interest rate contracts
Acquisition consideration
Other payables due after one year
Acquisition consideration
Other payables
2017
$ million
2016
$ million
2015
$ million
54
3
1
17
(6)
69
64
(3)
–
7
(14)
54
47
(3)
–
25
(5)
64
2017
$ million
2016
$ million
2015
$ million
418
54
212
372
1,056
416
57
193
322
988
362
58
192
327
939
2017
$ million
2016
$ million
873
48
36
957
124
4
128
807
39
38
884
82
–
82
The acquisition consideration includes $104m (2016: $56m) contingent upon future events.
The acquisition consideration due after more than one year is expected to be payable as follows: $50m in 2019, $24m in 2020, $43m in 2021,
$2m in 2022, and $5m due in over five years (2016: $29m in 2018, $8m in 2019, $20m in 2020, $11m in 2021, and $14m due in over five years).
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 140
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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 bank borrowings and finance leases
Private placement notes
Borrowings
Cash at bank
(Debit)/credit balance on derivatives – currency swaps
Credit/(debit) balance on derivatives – interest rate swaps
Net debt
Borrowings are repayable as follows:
2017
$ million
27
300
1,123
1,450
(169)
(2)
2
1,281
2016
$ million
86
440
1,124
1,650
(100)
1
(1)
1,550
At 31 December 2017:
Bank loans
Bank overdrafts
Private placement notes
At 31 December 2016:
Bank loans
Bank overdrafts
Finance lease liabilities
Private placement notes
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
13
14
–
27
22
62
2
–
86
–
–
124
124
–
–
2
–
2
300
–
–
300
300
–
3
125
428
–
–
264
264
–
–
–
–
–
–
–
125
125
135
–
–
264
399
–
–
610
610
–
–
–
735
735
313
14
1,123
1,450
457
62
7
1,124
1,650
15.2 Assets pledged as security
Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:
Finance lease liabilities – due within one year
Finance lease liabilities – due after one year
Total amount of secured borrowings
Total net book value of assets pledged as security:
Property, plant and equipment
2017
$ million
2016
$ million
–
–
–
–
–
2
5
7
5
5
15.3 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.
The Group has available committed facilities of $2.4bn (2016: $2.4bn). The interest payable on borrowings under committed facilities is either at
fixed or floating rates. Floating rates are typically based on the LIBOR (or other reference rate) relevant to the term and currency concerned.
The Company is subject to restrictive covenants under its principal facility agreements. 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 2017, the Company was in compliance with these
covenants. The facilities are also subject to customary events of default, none of which are currently anticipated to occur.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 141
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15 CASH AND BORROWINGS continued
The Group’s committed facilities are:
Facility
$80 million 2.47% Senior Notes
$45 million Floating Rate Senior Notes
$300 million bilateral, term loan facility
$75 million 3.23% Senior Notes
$1.0 billion syndicated, revolving credit facility
$190 million 2.97% Senior Notes
$75 million 3.46% Senior Notes
$50 million 3.15% Senior Notes
$105 million 3.26% Senior Notes
$100 million 3.89% Senior Notes
$305 million 3.36% Senior Notes
$25 million Floating Rate Senior Notes
$75 million 3.99% Senior Notes
Date due
November 2019
November 2019
April 2020
January 2021
March 2021
November 2021
January 2022
November 2022
November 2023
January 2024
November 2024
November 2024
January 2026
15.4 Year end financial liabilities by contractual maturity
The table below analyses the Group’s year end financial liabilities by contractual maturity date, including contractual interest payments and
excluding the impact of netting arrangements:
At 31 December 2017
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Private placement notes
Acquisition consideration
Derivative financial liabilities:
Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – inflow
At 31 December 2016
Non-derivative financial liabilities:
Bank overdrafts and loans
Trade and other payables
Finance lease liabilities
Private placement notes
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
27
873
36
36
2,737
(2,739)
970
86
807
3
36
38
2,284
(2,285)
969
–
1
161
50
–
–
212
–
–
3
36
30
–
–
69
300
1
476
69
–
–
846
435
–
3
491
46
–
–
975
–
2
647
5
–
–
654
–
–
–
800
16
–
–
816
327
877
1,320
160
2,737
(2,739)
2,682
521
807
9
1,363
130
2,284
(2,285)
2,829
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.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 142
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15 CASH AND BORROWINGS continued
15.5 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
2017
$ million
2016
$ million
–
–
–
–
–
–
–
–
–
3
3
3
–
–
–
9
(2)
7
In 2017, the Group terminated its finance lease. Present value of minimum lease payments can be split out as: $nil (2016: $2m) due within one year,
$nil (2016: $5m) due between one to five years and $nil (2016: $nil) due after five years.
Liquidity and capital resources
The Group’s policy is to ensure that it has sufficient funding and facilities to meet foreseeable borrowing requirements.
At 31 December 2017, the Group held $155m (2016: $38m, 2015: $102m) in cash net of bank overdrafts. The Group had committed facilities available
of $2,425m at 31 December 2017 of which $1,425m was drawn. Smith & Nephew intends to repay the amounts due within one year using available
cash and drawing down on the longer-term facilities.
The principal variations in the Group’s borrowing requirements result from the timing of dividend payments, acquisitions and disposals of
businesses, timing of capital expenditure and working capital fluctuations. Smith & Nephew believes that its capital expenditure needs and its
working capital funding for 2018, 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 $1,550m at the beginning of 2017 to $1,281m at the end of 2017, representing an overall decrease
of $269m.
The Group’s planned future contributions are considered adequate to cover the current underfunded position in the Group’s defined benefit plans.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 143
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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
remeasured 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 the balance sheet date. 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 derivatives 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.
Interest rate derivatives transacted to convert fixed rate borrowings into floating rate borrowings are accounted for as fair value hedges and
changes in the fair values resulting from changes in market interest rates are recognised in the income statement.
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 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.
16.1 Foreign exchange exposures
The Group operates in many 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 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, Sterling and Singapore Dollars. At 31 December 2017, the Group had contracted to exchange within one
year the equivalent of $2.3bn (2016: $1.8bn). Based on the Group’s net borrowings as at 31 December 2017, if the US Dollar were to weaken against
all currencies by 10%, the Group’s net borrowings would decrease by $3m (2016: decrease by $1m) as the Group held a higher amount of foreign
denominated cash than foreign denominated borrowings.
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
2017 would have been $53m lower (2016: $51m lower). 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 2017 would have been $12m higher (2016: $17m higher). 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 2017 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 is 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.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 144
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16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
16.2 Interest rate exposures
The Group is exposed to interest rate risk on cash, borrowings and certain currency and interest rate swaps which are at floating rates.
When required the Group uses interest rate derivatives to meet its objective of protecting borrowing costs within parameters set by the Board.
These interest rate derivatives 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 derivatives
recorded in the balance sheet.
Additionally, the Group uses interest rate swaps to reduce the overall level of fixed rate debt, within parameters set by the Board. When used in
this way, interest rate derivatives are accounted for as fair value hedges. The fair value movement of the derivative is offset in the income statement
against the fair value movement in the underlying fixed rate debt.
Based on the Group’s gross borrowings as at 31 December 2017, if interest rates were to increase by 100 basis points in all currencies then the
annual net interest charge would increase by $6m (2016: $7m). A decrease in interest rates by 100 basis points in all currencies would have an
equal but opposite effect to the amounts shown above.
16.3 Credit risk exposures
The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits. 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 2017 was $28m (2016: $48m), 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 2017 was $169m (2016: $100m).
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.
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 2017
US Dollar
Other
Total interest bearing liabilities
At 31 December 2016
US Dollar
Other
Total interest bearing liabilities
Gross
borrowings
$ million
Currency
swaps
$ million
Interest rate
swaps
$million
Total
liabilities
$ million
Floating
rate liabilities
$ million
Fixed rate
liabilities
$ million
(1,428)
(22)
(1,450)
(1,588)
(62)
(1,650)
(291)
(95)
(386)
(367)
(81)
(448)
(2)
–
(2)
(1)
–
(1)
(1,721)
(117)
(1,838)
(1,956)
(143)
(2,099)
(866)
(117)
(983)
(1,108)
(129)
(1,237)
(855)
–
(855)
(862)
–
(862)
Fixed rate liabilities
Weighted
average
interest rate
%
Weighted
average time
for which
rate is fixed
Years
3.4
–
3.5
–
5.8
–
6.8
–
At 31 December 2017, $nil (2016: $7m) of fixed rate liabilities related to finance leases. In 2017, the Group also had liabilities due for deferred and
contingent acquisition consideration (denominated in US Dollars, Euros, Turkish Lira and Russian Rubles) totalling $160m (2016: $120m, 2015: $27m)
on which no interest was payable (see Note 14). There were no other significant interest bearing financial liabilities.
Floating rates on liabilities are typically based on the one, three or six-month LIBOR (or other reference rate) relevant to the currency concerned.
The weighted average interest rate on floating rate borrowings as at 31 December 2017 was 3% (2016: 2%).
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
Currency and interest rate profile of interest bearing assets:
At 31 December 2017
US Dollars
Other
Total interest bearing assets
At 31 December 2016
US Dollars
Other
Total interest bearing assets
Interest
rate swaps
$ million
Cash
at bank
$ million
Currency
swaps
$ million
Total assets
$ million
Floating
rate assets
$ million
Fixed
rate assets
$ million
–
–
–
–
–
–
110
59
169
29
71
100
94
294
388
83
366
449
204
353
557
112
437
549
204
353
557
112
437
549
–
–
–
–
–
–
Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned.
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); and 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.
There has been no change in the classification of financial assets and liabilities, the method and assumptions used in determining fair value and
the categorisation of financial assets and liabilities within the fair value hierarchy from those disclosed in the Annual Report for the year ended
31 December 2016.
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. 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 investments is based upon third party pricing models for share issues. As a result, investments are considered Level 3 in the fair
value hierarchy. There were no transfers between Levels 1, 2 and 3 during 2017 and 2016. 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.
The fair value of the private placement notes is determined using a discounted cash flow model based on prevailing market rates.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 146
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16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
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 2017
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
Currency swaps
Interest rate swaps
Private placement debt
Financial assets not measured
at fair value
Trade and other receivables
Cash at bank
Financial liabilities not measured
at fair value
Acquisition consideration
Bank overdrafts
Bank loans
Private placement debt
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
–
–
3
3
(104)
–
(1)
–
–
(105)
–
–
–
(56)
–
–
–
–
(56)
25
–
–
25
–
(45)
–
(2)
–
(47)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(198)
(198)
1,148
169
1,317
–
–
–
–
–
–
–
21
–
21
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25
21
3
49
(104)
(45)
(1)
(2)
(198)
(350)
1,148
169
1,317
–
(14)
(313)
(925)
(877)
(2,129)
(56)
(14)
(313)
(925)
(877)
(2,185)
25
–
3
–
(45)
(1)
(2)
(198)
–
21
–
(104)
–
–
–
–
25
21
3
(104)
(45)
(1)
(2)
(198)
(931)
–
(931)
Total acquisition consideration measured at fair value increased from $56m at 31 December 2016 to $104m at 31 December 2017 due to the addition
of $72m relating to the Rotation Medical, Inc. acquisition which was partially offset by $14m of acquisition payments and a remeasurement reduction
of $10m. 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.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
At 31 December 2016
Financial assets measured
at fair value
Forward foreign exchange contracts
Investments
Currency swaps
Interest rate swaps
Financial liabilities measured
at fair value
Acquisition consideration
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Private placement debt
Financial assets not measured
at fair value
Trade and other receivables
Cash at bank
Financial liabilities not measured
at fair value
Acquisition consideration
Bank overdrafts
Bank loans
Private placement debt
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
–
–
3
–
3
(56)
–
(2)
–
–
(58)
–
–
–
(64)
–
–
–
–
–
(64)
45
–
–
–
45
–
(36)
–
(1)
–
(37)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(199)
(199)
1,064
100
1,164
–
–
–
–
–
–
–
–
25
–
–
25
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(62)
(457)
(925)
(7)
(807)
(2,258)
45
25
3
–
73
(56)
(36)
(2)
(1)
(199)
(294)
1,064
100
1,164
(64)
(62)
(457)
(925)
(7)
(807)
(2,322)
45
–
3
–
–
(36)
(2)
(1)
(199)
–
25
–
–
(56)
–
–
–
–
45
25
3
–
(56)
(36)
(2)
(1)
(199)
(935)
–
(935)
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 148
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17 PROVISIONS AND CONTINGENCIES
Accounting policy
In the normal course of business the Group is involved in various legal disputes. Provisions are made for loss contingencies when it is deemed
probable that an adverse outcome will occur and the amount of the losses 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 takes the
discounted future lease payments (if any), 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 2016
Net charge to income statement
Acquisitions
Unwinding of discount
Utilised
Exchange adjustment
At 31 December 2016
Net charge to income statement
Unwinding of discount
Utilised
Transfers
Exchange adjustment
At 31 December 2017
Provisions – due within one year
Provisions – due after one year
At 31 December 2017
Provisions – due within one year
Provisions – due after one year
At 31 December 2016
Rationalisation
provisions
$ million
Metal-on-metal
$ million
Legal and other
provisions
$ million
Total
$ million
23
12
–
–
(14)
(1)
20
–
–
(15)
–
1
6
6
–
6
20
–
20
185
–
–
5
(27)
–
163
10
3
(19)
–
–
157
73
84
157
43
120
163
118
(1)
10
–
(30)
1
98
2
–
(28)
(9)
–
63
50
13
63
84
14
98
326
11
10
5
(71)
–
281
12
3
(62)
(9)
1
226
129
97
226
147
134
281
The principal elements within rationalisation provisions relate to the Group Optimisation programme (mainly severance) announced in May 2014.
Following the settlement of a large part of the US metal-on-metal hip claims (discussed below) the Group has estimated a provision of $157m
(2016: $163m) relating to the present value at 31 December 2017 of the estimated costs to resolve all other known and anticipated metal-on-metal
hip claims. The estimated value of the provision has been determined using an actuarial model. Given the inherent uncertainty in assumptions
relating to factors such as the number of claims and outcome the actual costs may differ significantly from this estimate. A range of expected
outcomes between the 25th and 75th percentile generated by the actuarial model would not give rise to a significantly different outcome in 2018.
The provision does not include any possible insurance recoveries on these claims or legal fees associated with defending claims. The Group carries
considerable product liability insurance, and will continue to defend claims vigorously.
The legal and other provisions mainly relate to various other product liability and intellectual property litigation matters.
All provisions are expected to be substantially utilised within five years of 31 December 2017 and none are treated as financial instruments.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 149
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17 PROVISIONS AND CONTINGENCIES continued
17.2 Contingencies
The Company and its subsidiaries are party to various legal proceedings, some of which include claims for substantial damages. The outcome of
these proceedings cannot readily be foreseen, but except as described herein management believes none of them is 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 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, and all claims have now been resolved. The aggregate cost at 31 December 2017 related to this matter is approximately
$205m. 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, for which a trial has not yet begun. An additional $22m was received during 2007 from a successful settlement with a third party.
17.3 Legal proceedings
Product liability claims
The Group faces 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 medical 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 2018, and giving effect to the US
settlements described below, approximately 740 such claims were pending with the Group around the world, of which approximately 430 had given
rise to pending legal proceedings. Most claims relate to the Group’s Birmingham Hip Resurfacing (BHR) product and its two modular metal-on-metal
components: the Birmingham Hip Modular Head (BHMH) and the optional metal liner component of the R3 Acetabular System (R3ML). The BHMH
and R3ML are no longer on the market: the R3ML was withdrawn in 2012 and the BHMH was phased out in 2014. In 2015, the Group ceased offering
smaller sizes of the BHR and restricted instructions for BHR use in female patients. These actions were taken to ensure that the BHR is only used in
those patient groups where it continues to demonstrate strong performance.
In 2015 and 2016, the Group’s US subsidiary settled a large part of the majority of its US metal-on-metal hip lawsuits in two group settlements,
without admitting liability. Insurance receipts covered most of the amounts paid, with the net cash cost being $25m. In November 2017, the Group’s
US subsidiary entered into a memorandum of understanding to settle a third group of claims, without admitting liability. The third settlement is
expected to be finalised in 2018. These cases principally related to the Group’s modular metal-on-metal hip components, which are no longer on
the market. On 5 April 2017, the Judicial Panel on Multidistrict Litigation (MDL) ordered Smith & Nephew BHR cases pending or later filed in US
federal court to be consolidated for pre-trial proceedings and transferred to the federal court in Baltimore, Maryland. There are currently 253 cases
pending in the MDL in the United States. In England and Wales, the Group’s UK subsidiary entered into a group settlement in 2017 to settle 150
claims principally related to the Group’s modular metal-on-metal hip component, which are no longer on the market. Metal-on-metal hip implant
claims against various companies in England and Wales have been consolidated for trials under group litigation orders in the High Court in London.
The BHR and other claims pending against the Group have been stayed and will not be reactivated until the outcome of those trials is known.
The Group has requested indemnity from its product liability insurers for most of these metal-on-metal hip implant claims. Each insurer makes
its own decision as to coverage issues, and the liability of some insurers depends on exhaustion of lower levels of coverage. Insurers of the
lower layers of the Group’s insurances have indemnified the Group in respect of these claims up to the limits of those insurances. The Group has
commenced arbitration proceedings against another insurer in respect of that insurer’s share of the claims and associated defence costs in the
amount of $50m.
Litigation outcomes are difficult to predict and defence costs can be significant. The Group takes care to monitor the clinical evidence relating to its
metal hip implant products and ensure that its product offerings are designed to serve patients’ interests.
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 prosecuted and defended a series of patent infringement suits against Arthrex in US federal courts in Oregon and Texas starting in 2004,
principally relating to suture anchors for use in shoulder surgery. Arthrex paid $99m in June 2015 in connection with the Oregon litigation, and most
of that award (net of various expenses) was recognised in the Group’s operating profit at that time. The Group asserted the same patent against
additional Arthrex products in a follow-up suit that was scheduled for trial in February 2017 in the Oregon court. Arthrex asserted its own suture
anchor patents against Smith & Nephew in 2014 and 2015 in the US District Court for the Eastern District of Texas. In December 2016, the jury in that
case decided that two of the Group’s US subsidiaries infringed two asserted Arthrex patents and awarded Arthrex $17.4m. In February 2017, the
parties reached a settlement resulting in the dismissal of all patent litigation in Oregon and Texas. Smith & Nephew agreed to pay Arthrex $8m, and
each party agreed to additional payments contingent on the outcome of patent validity proceedings currently pending at the US Patent & Trademark
Office relating to the asserted patents. In November 2017, the US Patent & Trademark Office issued a Reexamination Certificate confirming validity
of certain claims of US Patent No. 5,601,557 asserted by Smith & Nephew against Arthrex in the Oregon litigation. The issuing of the Reexamination
Certificate triggered a payment of $80m which was received by Smith & Nephew in December 2017, and $54m (net of various expenses) is
recognised in the Group’s 2017 operating profit. The Group has fully provided for any possible additional payment relating to its historical sales.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 150
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17 PROVISIONS AND CONTINGENCIES continued
In February 2016, ConforMIS, Inc. filed suit against the Group’s US subsidiary in the Eastern Division of the US District Court for the District of
Massachusetts, alleging that a number of its patents (generally directed to patient specific instrumentation associated with knee arthroplasty) are
infringed by Smith & Nephew’s VISIONAIRE cutting guides and associated knee implants. The suit requests damages and an injunction. Smith
& Nephew seeks to invalidate the asserted patents at the US Patent & Trademark Office and has also filed counterclaims for infringement by
ConforMIS of the Group’s US patents.
17.4 Tax Matters
At any given time the Group has unagreed years outstanding in various countries and is involved in tax audits and disputes, some of which may
take several years to resolve. The Group believes that it has made adequate provision in respect of related additional tax liabilities that may arise.
See Note 5 for further details.
18 RETIREMENT BENEFIT OBLIGATIONS
Accounting policy
The Group sponsors defined benefit plans in a number of countries. A defined benefit pension plan defines an amount of pension benefit that
an employee will receive on retirement or a minimum guaranteed return on contributions, 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, finance income/costs and other comprehensive income. 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 obligations/(assets)
The Group’s retirement benefit obligations/(assets) 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
2017
$ million
2016
$ million
(53)
(9)
46
(16)
60
25
69
131
(62)
4
27
52
83
55
26
164
164
–
The Group sponsors defined benefit pension plans for its employees or former 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. The provision of retirement and related benefits across the Group is kept under regular review. 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 age. The level of entitlement is dependent on the years of service of
the employee.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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18 RETIREMENT BENEFIT OBLIGATIONS continued
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 US and UK Plans were closed to future accrual in March 2014 and December 2016 respectively.
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.
There is no legislative minimum funding requirement in the UK, however the Group has agreed with the Board of Trustees to pay a schedule of
supplementary payments (see Note 18.8). The Trust Deed of the UK Plan and the Plan Document of the US Plan provide the Group with a right
to a refund of surplus assets assuming the full settlement of plan liabilities in the event of a plan wind-up. Furthermore, in the ordinary course of
business the UK trustee and US committee have no rights to unilaterally wind up, or otherwise augment the benefits due to members of the plans.
Based on these rights, any net surplus in the UK and US Plans is recognised in full.
The US Plan is governed by a US Pension Committee which is comprised 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
Past service credit
Settlements
Interest (expense)/income
Administration costs and taxes
Costs recognised in income statement
Re-measurements:
Actuarial gain due to liability experience
Actuarial loss due to financial assumptions change
Actuarial gain 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
Benefits paid, taxes and administration costs paid from scheme assets
Net cash
Exchange rate movements
Amount recognised on the balance sheet
Amount recognised on the balance sheet – liability
Amount recognised on the balance sheet – asset
Obligation
$ million
Asset
$ million
Total
$ million
Obligation
$ million
Asset
$ million
Total
$ million
2017
2016
(1,577)
1,413
(164)
(1,521)
1,350
(171)
(12)
4
–
(44)
(3)
(55)
1
(38)
42
–
5
–
(4)
2
102
100
(98)
(1,625)
(290)
(1,335)
–
–
–
42
–
42
–
–
–
59
59
53
4
(2)
(102)
(47)
89
1,556
159
1,397
(12)
4
–
(2)
(3)
(13)
1
(38)
42
59
64
53
–
–
–
53
(9)
(69)
(131)
62
(19)
51
7
(52)
(3)
(16)
7
(301)
33
–
(261)
–
(4)
3
61
60
–
–
(7)
48
–
41
–
–
–
180
180
60
4
(3)
(61)
–
161
(1,577)
(1,577)
–
(158)
1,413
1,413
–
(19)
51
–
(4)
(3)
25
7
(301)
33
180
(81)
60
–
–
–
60
3
(164)
(164)
–
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
152
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18 RETIREMENT BENEFIT OBLIGATIONS continued
Represented by:
UK Plan
US Plan
Other Plans
Total
Obligation
$ million
(854)
(481)
(290)
(1,625)
Asset
$ million
907
490
159
1,556
2017
Total
$ million
53
9
(131)
(69)
Obligation
$ million
(844)
(461)
(272)
(1,577)
Asset
$ million
840
434
139
1,413
2016
Total
$ million
(4)
(27)
(133)
(164)
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 11 years for the UK and US Plans respectively.
18.3 Plan assets
The market value of the US, UK and Other Plans assets are as follows:
2017
$ million
2016
$ million
2015
$ million
UK Plan:
Assets with a quoted market price:
Cash and cash equivalents
Equity securities
Other bonds
Liability driven investments
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
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 and other bonds
Insurance contracts
Property
Other quoted securities
Other assets:
Insurance contracts
Market value of assets
Total market value of assets
8
235
43
192
152
630
277
907
–
88
201
201
490
4
43
4
3
11
36
19
2
122
37
159
1,556
6
213
38
239
130
626
214
840
–
178
128
128
434
4
35
3
3
11
34
12
2
104
35
139
1,413
5
234
43
171
144
597
214
811
–
166
119
119
404
9
35
5
9
13
28
8
1
108
27
135
1,350
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017
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18 RETIREMENT BENEFIT OBLIGATIONS continued
No plans invest directly in property occupied by the Group or in financial securities issued by the Group.
Both the UK and US Plans hold a mixture of growth assets and matching assets. The growth assets of the UK and US Plans are invested in a
diversified range of industries across a broad range of geographies. The UK Plan matching assets include liability matching assets and annuity
policies purchased by the trustees, 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. The terms of the policy define that the contract value exactly matches
the amount and timing of the pensioner obligations covered by the contract. In accordance with IAS19R Employee Benefits, 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. In December
2014, the low risk asset portfolio held by the UK Plan was transferred into liability driven investments (LDI) which invests in a mixture of gilts
and swaps.
18.4 Expenses recognised in the income statement
The total expense relating to retirement benefits recognised for the year is $64m (2016: $23m, 2015: $58m). Of this cost recognised for the year,
$51m (2016: $48m, 2015: $49m) relates to defined contribution plans and $13m (2016: $25m net credit, 2015: $9m net expense) relates to defined
benefit plans.
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 2017 due to be paid over to the plans (2016: $nil, 2015: $nil).
In 2016, the $25m net credit for the year includes a $44m curtailment gain arising from the closure of the UK Plan to future accrual and $5m past
service credit relating to redundancies.
In 2015, the $9m net expense for the year includes a $16m past service cost credit arising from amendments to the US Retirement Healthcare plan
and a $5m gain arising from benefit options offered to members of the UK Plan.
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
Past service credit
Settlement loss
Net interest cost,
administration
and taxes
UK Plan
$ million
2017
US Plan
$ million
–
–
–
1
1
–
–
–
2
2
UK Plan
$ million
7
(49)
1
–
(41)
2016
US Plan
$ million
UK Plan
$ million
2015
US Plan
$ million
–
–
–
3
3
9
(7)
2
3
7
–
–
–
4
4
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
2017
% per annum
2016
% per annum
2015
% per annum
2.4
n/a
3.2
3.2
2.2
3.5
n/a
n/a
2.6
3.8
3.3
3.3
2.3
4.0
n/a
n/a
3.8
3.6
3.1
3.1
2.1
4.3
n/a
n/a
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 154
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18 RETIREMENT BENEFIT OBLIGATIONS continued
Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S2NA with projections in line with the CMI 2016
table and the US uses the RP2014 table with MP2016 scale. 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
2017
years
2016
years
2015
years
28.8
30.3
25.2
27.4
31.0
31.8
25.5
28.0
29.7
31.1
25.1
27.4
32.5
33.0
25.4
27.9
29.6
31.3
25.8
28.2
32.6
33.4
27.6
29.9
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.
Changes to the inflation assumption will not have any effect on the US Pension Plan as it was closed to future accrual in 2014.
$ 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
–80.9
+88.1
+38.0
–25.5
n/a
+11.4
+92.6
–77.3
–37.7
+27.9
n/a
–11.6
–2
+2
+1
–1
n/a
–
+2
–2
–1
+1
n/a
–
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 155
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18 RETIREMENT BENEFIT OBLIGATIONS continued
18.7 Risk
The pension plans expose the Group to the following risks:
Interest rate risk
Inflation risk
Volatility in financial markets can change the calculations of the obligation significantly 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.
In the UK, the liability matching portfolio held in conventional and index-linked gilts was transferred into liability driven
investments in order to reduce interest rate risk.
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. In the UK, the
liability matching portfolio held in conventional and index-linked gilts was transferred into liability driven investments in
order to reduce inflation risk.
The UK and US Plans have been closed to future accrual which eliminates the exposure to this risk.
Investment risk
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 a portfolio of liability matching assets and a bulk annuity, together with a
dynamic de-risking policy to switch growth assets into liability matching assets over time.
The US Plan has a dynamic de-risking policy to shift plan assets into longer-term stable asset classes. The policy
established 10 pre-determined funded status levels and when each trigger point is reached, the plan assets are
re-balanced accordingly. In 2017, two trigger points were reached and the plan assets were re-balanced such that
there was reduced investment in equity securities and increased investment in government and corporate bonds.
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, has entered into an insurance contract which covers a portion of
pensioner obligations.
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.
The exposure to salary risk in the UK and US has been eliminated with the closure of these Plans to future accrual.
Longevity risk
Salary risk
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 actuarial valuations
used for funding purposes may differ from those assumptions above.
UK Plan
The most recent full actuarial valuation of the UK Plan was undertaken as at 30 September 2015. The next full actuarial valuation will take place as
at 30 September 2018. Contributions to the UK Plan in 2017 were $24m (2016: $32m, 2015: $37m). This included supplementary payments of $24m
(2016: $26m, 2015: $29m).
The Group has currently agreed to pay annual supplementary payments of $25m until 2021. These supplementary payments will be reviewed when
the 30 September 2018 valuation has been completed.
US Plan
A full actuarial valuation for the US Plan was last undertaken as at 20 September 2013 before the closure of the Plan to future accrual.
Contributions to the US Plan were $20m (2016: $20m, 2015: $20m) which represented supplementary payments of $20m.
The planned supplementary contribution for 2018 is being kept under review given the funding status.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 OUR BUSINESS
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156
OVERVIEW
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 2015
At 31 December 2016
At 31 December 2017
Allotted, issued and fully paid
At 1 January 2015
Share options
Shares cancelled
At 31 December 2015
Share options
Shares cancelled
At 31 December 2016
Share options
Shares cancelled
At 31 December 2017
Ordinary shares (20¢)
Deferred shares (£1.00)
Thousand
$ million
Thousand
$ million
Total
$ million
1,223,591
1,223,591
1,223,591
917,942
1,855
(4,350)
915,447
1,283
(13,007)
903,723
655
(13,523)
890,855
245
245
245
184
–
(1)
183
–
(3)
180
–
(2)
178
50
50
50
50
–
–
50
–
–
50
–
–
50
–
–
–
–
–
–
–
–
–
–
–
–
–
245
245
245
184
–
(1)
183
–
(3)
180
–
(2)
178
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) 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
2017
$ million
178
605
17
(257)
4,101
4,644
2016
$ million
180
600
15
(432)
3,595
3,958
2015
$ million
183
590
12
(294)
3,475
3,966
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 157
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19 EQUITY continued
19.2 Treasury shares
Treasury shares represent the holding of the Company’s own shares in respect of the Smith & Nephew Employees’ Share Trust and shares bought
back as part of the share buy-back programme. In 2017 the Group purchased a total of 3.2m shares for a cost of $52m as part of the ongoing
programme to buy back an equivalent number of shares to those vesting as part of the employee share plans. During 2016, a total of 24.0m (2.7%)
ordinary shares were purchased at a cost of $368m and 13.0m (1.5%) ordinary shares were cancelled. This included a $300m share buy-back
programme following the sale of the Group’s Gynaecology business that completed in December 2016.
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 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 2016
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2016
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2017
At 1 January 2016
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2016
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2017
Treasury
$ million
Employees’
Share Trust
$ million
Total
$ million
264
368
(18)
(13)
(190)
411
52
(19)
(9)
(201)
234
30
–
18
(27)
–
21
–
19
(17)
–
23
294
368
–
(40)
(190)
432
52
–
(26)
(201)
257
Number
of shares
million
Number
of shares
million
Number
of shares
million
18.9
24.0
(1.2)
(0.9)
(13.0)
27.8
3.2
(1.3)
(0.6)
(13.5)
15.6
2.3
–
1.2
(2.0)
–
1.5
–
1.3
(1.2)
–
1.6
21.2
24.0
–
(2.9)
(13.0)
29.3
3.2
–
(1.8)
(13.5)
17.2
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 158
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19 EQUITY continued
19.3 Dividends
The following dividends were declared and paid in the year:
Ordinary final of 18.5¢ for 2016 (2015: 19.0¢, 2014: 18.6¢) paid 10 May 2017
Ordinary interim of 12.3¢ for 2017 (2016: 12.3¢, 2015: 11.8¢) paid 1 November 2017
2017
$ million
2016
$ million
2015
$ million
162
107
269
170
109
279
166
106
272
A final dividend for 2017 of 22.7¢ per ordinary share was proposed by the Board on 8 February 2018 and will be paid, subject to shareholder
approval, on 9 May 2018 to shareholders on the Register of Members on 6 April 2018. The estimated amount of this dividend is $198m. The Group
pursues 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. Future dividends will be dependent upon future
earnings, the future financial condition of the Group and the Board’s dividend policy. The Board reviews the appropriate level of total annual
dividend each year at the time of the full year results. 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. Smith & Nephew plc, the Parent Company of the Group, is a non-trading investment holding
company which derives its distributable reserves from dividends paid by subsidiary companies. The distributable reserves of the parent company
approximate to the balance on the profit and loss account reserve, less treasury shares and exchange reserves, which at 31 December 2017
amounted to $2,569m.
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 2015
Net cash flow impact
Exchange adjustment
At 31 December 2015
Net cash flow impact
Exchange adjustment
At 31 December 2016
Net cash flow impact
Termination of finance lease
Exchange adjustment
At 31 December 2017
Cash
$ million
Overdrafts
$ million
Due within
one year
$ million
Due after
one year
$ million
Net
currency swaps
$ million
Net
interest swaps
$ million
Borrowings
93
34
(7)
120
(18)
(2)
100
64
–
5
169
(28)
9
1
(18)
(45)
1
(62)
49
–
(1)
(14)
(11)
(17)
–
(28)
4
–
(24)
9
2
–
(13)
(1,666)
231
1
(1,434)
(129)
(1)
(1,564)
139
3
(1)
(1,423)
(1)
15
(16)
(2)
25
(22)
1
(24)
–
25
2
–
1
–
1
(2)
–
(1)
(1)
–
–
(2)
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
Termination of finance lease
Exchange adjustment
Change in net debt in the year
Opening net debt
Closing net debt
2017
$ million
113
(24)
147
236
5
28
269
(1,550)
(1,281)
2016
$ million
(63)
25
(127)
(165)
–
(24)
(189)
(1,361)
(1,550)
Total
$ million
(1,613)
273
(21)
(1,361)
(165)
(24)
(1,550)
236
5
28
(1,281)
2015
$ million
43
15
215
273
–
(21)
252
(1,613)
(1,361)
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 159
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20 CASH FLOW STATEMENT continued
Cash and cash equivalents
For the purposes of the Group cash flow statement cash and cash equivalents at 31 December 2017 comprise cash at bank net of bank overdrafts.
Cash at bank
Bank overdrafts
Cash and cash equivalents
2017
$ million
169
(14)
155
2016
$ million
100
(62)
38
2015
$ million
120
(18)
102
The Group operates in over 100 countries around the world, some of which impose restrictions over cash movement. These restrictions have only a
minimal impact of the management of the Group’s cash.
Cash (inflows)/outflows arising from financing activities
Repayment
of bank
loans
$ million
770
–
770
Repayment
of bank
loans
$ million
797
–
797
Repayment
of bank
loans
$ million
1,088
–
1,088
Borrowing
of bank
loans
$ million
Cash
(inflow)/outflow
from other
$ million
(623)
–
(623)
(24)
–
(24)
Borrowing
of bank
loans
$ million
Cash
(inflow)/outflow
from other
$ million
(924)
–
(924)
25
–
25
Borrowing
of bank
loans
$ million
Cash
(inflow)/outflow
from other
$ million
(873)
–
(873)
15
–
15
Dividends
$ million
–
269
269
Dividends
$ million
–
279
279
Dividends
$ million
–
272
272
Purchase of
own shares
$ million
Proceeds from own
shares/issue of
ordinary shares
$ million
–
52
52
–
(10)
(10)
Purchase of
own shares
$ million
Proceeds from own
shares/issue of
ordinary shares
$ million
–
368
368
–
(16)
(16)
Purchase of
own shares
$ million
Proceeds from own
shares/issue of
ordinary shares
$ million
–
77
77
–
(21)
(21)
2017
Total
$ million
123
311
434
2016
Total
$ million
(102)
631
529
2015
Total
$ million
230
328
558
Debt
Equity
Total
Debt
Equity
Total
Debt
Equity
Total
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.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 160
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21 ACQUISITIONS AND DISPOSALS continued
21.1 Acquisitions
Year ended 31 December 2017
During the year ended 31 December 2017, the Group acquired one medical technology business deemed to be a business combination within the
scope of IFRS 3 Business Combinations.
On 5 December 2017, the Group completed the acquisition of 100% of the share capital of Rotation Medical, Inc., a developer of a novel tissue
regeneration technology for shoulder rotator cuff repair. The acquisition furthers our strategy to invest in disruptive technologies that accelerate the
transformation of Smith & Nephew to higher growth. The maximum consideration payable of $210m has a fair value of $196m and includes $17m
of deferred and $72m of contingent consideration. The fair value of the contingent consideration is determined from the acquisition agreement,
the Board-approved acquisition model and a risk-free discount rate of 2.5%. The maximum contingent consideration is $85m. The provisional fair
values of assets acquired and liabilities assumed are set out below:
Intangible assets
Property, plant & equipment and inventory
Trade and other receivables
Trade and other payables
Net deferred tax assets
Net assets
Goodwill
Consideration (net of $nil cash acquired)
$ million
61
3
2
(3)
1
64
132
196
The goodwill is attributable to the control premium, the acquired workforce and the synergies that can be expected from integrating Rotation
Medical, Inc. into the Group’s existing business. The goodwill is not expected to be deductible for tax purposes.
During the year ended 31 December 2017, the contribution to revenue and attributable profit from this acquisition is immaterial. If the acquisition had
occurred at the beginning of the year, its contribution to revenue and attributable profit would have also been immaterial.
Year ended 31 December 2016
During the year ended 31 December 2016, the Group acquired two medical technology businesses deemed to be business combinations within the
scope of IFRS 3 Business Combinations. The acquisition accounting was completed during 2017 with no measurement adjustments made.
On 4 January 2016, the Group completed the acquisition of 100% of the share capital of Blue Belt Holdings Inc., a business specialising in robotic
technologies. The acquisition secures a leading position in the fast growing area of Orthopaedic robotics-assisted surgery. The fair value of
consideration is $265m and includes $51m deferred consideration. The fair values of assets acquired were:
Aggregate identifiable assets acquired and liabilities assumed
Intangible assets
Property, plant & equipment and inventory
Trade and other payable
Provisions
Deferred tax assets
Net assets
Goodwill
Consideration (net of $3m cash acquired)
$ million
70
13
(11)
(10)
16
78
184
262
The goodwill is attributable to the revenue synergies of providing a full robotic surgery offering and future applications of the technological
expertise. The goodwill is not expected to be deductible for tax purposes.
On 8 January 2016 the Group completed the acquisition of BST-CarGel, a first-line cartilage repair product from Piramal Healthcare (Canada)
Limited. The fair value of the consideration is $42m and included $37m of deferred and contingent consideration. The fair values of net assets
acquired are: product intangible assets of $15m, inventory of $1m, and a deferred tax liability of $1m. The goodwill, which is expected to be
deductible for tax purposes, arising on the acquisition is $27m, is attributable to the future penetration into new markets expected from
the transaction.
During the year ended 31 December 2016, the contribution to revenue and attributable profit from these acquisitions is immaterial. If the
acquisitions had occurred at the beginning of the year, their contribution to revenue and attributable profit would have also been immaterial.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 161
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21 ACQUISITIONS AND DISPOSALS continued
Year ended 31 December 2015
During the year ended 31 December 2015, the Group acquired its distributor in Colombia and its distributor and a manufacturer in Russia.
The acquisitions are deemed to be business combinations within the scope of IFRS 3 Business Combinations. The aggregated total fair value of
the consideration was $68m and included $23m of contingent consideration and $13m through the settlement of working capital commitments.
The acquisition accounting was completed in 2016 with no measurement adjustments being made.
The following table summarises the aggregate consideration transferred and the aggregate fair value amounts of assets acquired and liabilities
assumed at the acquisition date:
Identifiable assets acquired and liabilities assumed
Intangible assets
Other assets1
Liabilities
Net assets
Goodwill
Consideration (net of $1m cash acquired)
1
Including net cash of $1m.
$ million
19
29
(14)
34
34
68
The aggregated goodwill arising on the acquisitions is $34m. 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
deductible for tax purposes. The contribution to revenue and attributable profit from these acquisitions for the year ended 31 December 2015 was
immaterial. If the acquisitions had occurred at the beginning of the year, their contributions to revenue and attributable profit for the year ended
31 December 2015 would also have been immaterial.
21.2 Disposal of business
During the year ended 31 December 2016 the Group disposed of its Gynaecology business for cash consideration of $350m. The net assets
disposed included $6m plant and equipment, and $4m inventory. Disposal related costs of $7m and liabilities of $7m resulted in a pre-tax gain on
disposal of $326m.
For the years ended 31 December 2015 and 31 December 2017, the Group did not dispose of any businesses.
22 OPERATING LEASES
Accounting policy
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group.
All other leases are classified as operating leases.
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
2017
$ million
2016
$ million
40
35
27
23
19
56
200
17
11
5
1
34
33
27
23
16
13
41
153
15
11
6
2
34
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 162
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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.
The Group operates the following equity-settled executive and employee share plans: Smith & Nephew 2001 US Share Plan, Smith & Nephew
Global Share Plan 2010, Smith & Nephew ShareSave Plan (2012), Smith & Nephew International ShareSave Plan (2012) and the Smith & Nephew
France ShareSave plan (2012). At 31 December 2017, 5,277,000 options (2016: 5,780,000, 2015: 7,235,000) were outstanding with a range of exercise
prices from 535 to 1,092 pence.
At 31 December 2017, the maximum number of shares that could be awarded under the Group’s long-term incentive plans was 5,854,000
(2016: 5,807,000, 2015: 6,402,000). These include conditional share awards granted to senior employees and equity and performance share
awards granted to senior executives under the Global Share Plan 2010.
The expense charged to the income statement for share-based payments for the year is $31m (2016: $27m, 2015: $30m).
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 $nil (2016: $nil, 2015: $nil).
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
Compensation for loss of office
Directors’ remuneration disclosures are included on pages 83 to 93.
2017
$ million
2016
$ million
2015
$ million
15
7
1
3
26
15
7
1
–
23
16
8
1
–
25
24 POST BALANCE SHEET EVENTS
Subsequent to the year end the Group announced its Accelerating Performance and Execution (APEX) programme. This is a five-year effort to make
key enhancements to the Group’s business and ways of working in Manufacturing, Warehousing and Distribution, General and Administrative
Expenses and Commercial Effectiveness. The programme is expected to require a one-off cash cost of $240m of which a charge of around $100m
is expected in 2018. No provisions have been recorded in respect of this programme as at 31 December 2017. A constructive obligation in relation
to this programme had not arisen at 31 December 2017 as the Group had not announced the main features of the programme nor raised a valid
expectation in those employees affected by the programme.
NOTES TO THE GROUP ACCOUNTS continuedSMITH & NEPHEW ANNUAL REPORT 2017 163
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COMPANY FINANCIAL 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 liabilities
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
At 31 December
2017
$ million
At 31 December
2016
$ million
Notes
2
3
5
5
4
5
7,092
5,322
1,084
88
1,172
(4)
(1,202)
(1,206)
(34)
7,058
(1,423)
5,635
178
605
17
2,266
(257)
(52)
2,878
5,635
824
14
838
(41)
(814)
(855)
(17)
5,305
(1,559)
3,746
180
600
15
2,266
(432)
(52)
1,169
3,746
The accounts were approved by the Board and authorised for issue on 22 February 2018 and signed on its behalf by:
Roberto Quarta
Chairman
Olivier Bohuon
Chief Executive Officer
Graham Baker
Chief Financial Officer
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COMPANY FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN EQUITY
Share
capital
$ million
Share
premium
$ million
Capital
redemption
reserve
$ million
Capital
reserves
$ million
Treasury
shares
$ million
Exchange
reserves
$ million
Profit and
loss account
$ million
Total
shareholders’
funds
$ million
At 1 January 2016
Attributable profit for the year
Net gain on cash flow hedges
Exchange adjustments
Equity dividends paid in the year
Share-based payments recognised1
Cost of shares transferred to beneficiaries
New shares issued on exercise of share options
Cancellation of treasury shares
Treasury shares purchased
At 31 December 2016
Attributable profit for the year
Net gain on cash flow hedges
Exchange adjustments
Equity dividends paid in the year
Share-based payments recognised1
Cost of shares transferred to beneficiaries
New shares issued on exercise of share options
Cancellation of treasury shares
Treasury shares purchased
At 31 December 2017
183
–
–
–
–
–
–
–
(3)
–
180
–
–
–
–
–
–
–
(2)
–
178
590
–
–
–
–
–
–
10
–
–
600
–
–
–
–
–
–
5
–
–
605
12
–
–
–
–
–
–
–
3
–
15
–
–
–
–
–
–
–
2
–
17
2,266
–
–
–
–
–
–
–
–
–
2,266
–
–
–
–
–
–
–
–
–
2,266
(294)
–
–
–
–
–
40
–
190
(368)
(432)
–
–
–
–
–
26
–
201
(52)
(257)
(52)
–
–
–
–
–
–
–
–
–
(52)
–
–
–
–
–
–
–
–
–
(52)
1,589
58
1
(3)
(279)
27
(34)
–
(190)
–
1,169
2,167
1
1
(269)
31
(21)
–
(201)
–
2,878
4,294
58
1
(3)
(279)
27
6
10
–
(368)
3,746
2,167
1
1
(269)
31
5
5
–
(52)
5,635
1 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.
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 $2,569m (2016: $685m). 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 $2,167m (2016: $58m).
Fees paid to KPMG 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.
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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. On 1 January 2015, the Company transitioned
from previously extant UK Generally Accepted Accounting Practices to Financial Reporting Standard 101 Reduced Disclosure Framework (‘Reduced
Disclosure Framework’). These financial statements and accompanying notes have been prepared in accordance with the Reduced Disclosure
Framework for all periods presented. There were no transitional adjustments required on adoption of the new standard. The financial information for the
Company has been prepared on the same basis as the consolidated financial statements, applying identical accounting policies as outlined throughout
the Notes to the Group accounts. The Directors have determined that the preparation of the Company financial statements on a going concern basis is
appropriate as the Company receives dividend cash receipts from its subsidiary undertakings which enable it to meet its liabilities as they fall due.
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.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
– A Cash Flow Statement and related notes;
– Comparative period reconciliations for share capital and tangible fixed assets;
– Disclosures in respect of transactions with wholly-owned subsidiaries;
– Disclosures in respect of capital management;
– The effects of new but not yet effective IFRSs; and
– Disclosures in respect of the compensation of key management personnel.
As the consolidated financial statements include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in
respect of the following disclosures:
– IFRS 2 Share Based Payments in respect of group settled share based payments; and
– Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures.
The Company proposes to continue to adopt the reduced disclosure framework of FRS 101 in its next financial statements.
2 INVESTMENTS
ACCOUNTING POLICY
Investments in subsidiaries are stated at cost less provision for impairment.
At 1 January
Additions
At 31 December
2017
$ million
5,322
1,770
7,092
2016
$ million
5,322
–
5,322
Investments represent holdings in subsidiary undertakings. In 2017, the Company increased its investment in Smith & Nephew (Overseas) Limited.
In accordance with Section 409 of the Companies Act 2006, a listing of all entities invested in by the consolidated Group is provided in Note 9.
3 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 – forward foreign exchange contracts – subsidiary undertakings
Current asset derivatives – currency swaps
Current taxation
2017
$ million
2016
$ million
1,007
3
25
45
3
1
1,084
735
3
45
36
1
4
824
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NOTES TO THE COMPANY ACCOUNTS continued
4 OTHER CREDITORS
Amounts falling due within one year:
Amounts owed to subsidiary undertakings
Other creditors
Current liability derivatives – forward foreign exchange contracts
Current liability derivatives – forward foreign exchange contracts – subsidiary undertakings
Current liability derivatives – currency swaps
Current liability derivatives – interest rate swaps
2017
$ million
2016
$ million
1,119
10
45
25
1
2
1,202
715
17
36
45
–
1
814
5 CASH AND BORROWINGS
ACCOUNTING POLICY
Financial instruments
Currency swaps are used to match foreign currency net assets with foreign currency liabilities. They are initially recorded at fair value and then
for reporting purposes remeasured to fair value at exchange rates and interest rates at subsequent balance sheet dates.
Changes in the fair value of derivative financial instruments are recognised in the profit and loss account as they arise.
Bank loans and overdrafts due within one year or on demand
Borrowings due after one year
Borrowings
Cash and bank
(Debit)/credit balance on derivatives – currency swaps
Credit/(debit) balance on derivatives – interest rate swaps
Net debt
2017
$ million
4
1,423
1,427
(88)
(2)
2
1,339
2016
$ million
41
1,559
1,600
(14)
1
(1)
1,586
All currency swaps are stated at fair value. Gross US Dollar equivalents of $388m (2016: $449m) receivable and $386m (2016: $448m) payable have
been netted. Currency swaps comprise foreign exchange swaps and were used in 2017 and 2016 to hedge intra-group loans.
6 CONTINGENCIES
Guarantees in respect of subsidiary undertakings
2017
$ million
1
2016
$ million
–
The Company gives guarantees to banks to support liabilities and cross guarantees to support overdrafts.
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).
7 DEFERRED TAXATION
The Company has gross unused capital losses of $90m (2016: $100m) available for offset against future chargeable gains. No deferred tax asset
has been recognised on these unused losses as they are not expected to be realised in the foreseeable future.
8 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
$2,167m (2016: $58m).
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9 GROUP COMPANIES
In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries, associates, joint arrangements, joint ventures and
partnerships are listed below, including their country of incorporation. All companies are 100% owned, unless otherwise indicated. Unless otherwise
stated, the share capital disclosed comprises ordinary shares which are indirectly held by Smith & Nephew plc.
Country of
operation and
incorporation
Registered
Office
Company name
Country of
operation and
incorporation
Registered
Office
Company name
UK
Blue Belt Technologies UK Limited2
Michelson Diagnostic Limited3 (13.4%)
Neotherix Limited3 (24.9%)
Plus Orthopedics (UK) Limited2
Smith & Nephew (Overseas) Limited1
Smith & Nephew ARTC Limited
Smith & Nephew Beta Limited2
Smith & Nephew China Holdings UK
Limited1
Smith & Nephew Employees Trustees
Limited2
England & Wales
London
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Kent
York
London
London
London
London
London
England & Wales
London
Smith & Nephew ESN Limited2
England & Wales
Smith & Nephew Extruded Films Limited2
England & Wales
Smith & Nephew Finance2
Smith & Nephew Finance Oratec2
Smith & Nephew Healthcare Limited2
Smith & Nephew Investment Holdings
Limited1
England & Wales
England & Wales
England & Wales
England & Wales
Smith & Nephew Medical Fabrics Limited2
England & Wales
Smith & Nephew Medical Limited2
Smith & Nephew Nominee Company
Limited2
Smith & Nephew Nominee Services
Limited2
England & Wales
England & Wales
Rest of Europe
Smith & Nephew GmbH
ArthroCare Belgium SPRL2
Smith & Nephew S.A.-N.V
Smith & Nephew A/S
A2 Surgical2
Smith & Nephew France SAS1
Smith & Nephew S.A.S.
Smith & Nephew Oy
Smith & Nephew Business Services
GmbH & Co. KG1
Smith & Nephew Business Services
Verwaltungs GmbH1
Smith & Nephew Deutschland (Holding)
GmbH1
Smith & Nephew GmbH
Smith & Nephew Orthopaedics GmbH
Plus Orthopedics Hellas SA2
Smith & Nephew Hellas S.A.2
Smith & Nephew Limited
England & Wales
London
Smith & Nephew Finance Ireland Limited2
Smith & Nephew S.r.l.
Smith & Nephew Orthopaedics Limited2
England & Wales
Smith & Nephew Pensions Nominees
Limited2
England & Wales
London
London
ArthroCare Luxembourg Sarl2
Smith & Nephew Finance S.a.r.l.2
Smith & Nephew International S.A.1
Smith & Nephew Pharmaceuticals Limited2
England & Wales
Hull
Smith & Nephew (Europe) B.V.1
Smith & Nephew Raisegrade Limited2
Smith & Nephew Rareletter Limited2
England & Wales
England & Wales
Smith & Nephew Trading Group Limited1
England & Wales
Smith & Nephew UK Executive Pension
Scheme Trustee Limited2
Smith & Nephew UK Limited1
Smith & Nephew UK Pension Fund
Trustee Limited2
Smith & Nephew USD Limited1
Smith & Nephew USD One Limited1
T.J. Smith and Nephew, Limited
The Albion Soap Company Limited2
TP Limited1
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
Edinburgh
Smith & Nephew B.V.1
Smith & Nephew Management B.V.1
Smith & Nephew Nederland CV
Smith & Nephew Optics B.V.4
Smith & Nephew A/S
Smith & Nephew sp. z.o.o.
Smith & Nephew Lda
D-Orthopaedics LLC
DC LLC
Smith & Nephew LLC
Smith & Nephew S.A.U
Smith & Nephew Aktiebolag
Lumina Adhesives AB3 (11%)
Plus Orthopedics Holding AG1
Smith & Nephew Manufacturing AG
Smith & Nephew Orthopaedics AG
Smith & Nephew Schweiz AG
Smith & Nephew AG
London
Hull
London
London
Hull
London
London
Hull
London
London
London
London
London
London
London
London
London
Hull
London
Austria
Belgium
Belgium
Vienna
Zaventem
Zaventem
Denmark
Hoersholm
France
France
France
Neuilly-sur-
Seine
Neuilly-sur-
Seine
Neuilly-sur-
Seine
Finland
Helsinki
Germany
Hamburg
Germany
Hamburg
Germany
Hamburg
Germany
Germany
Hamburg
Tuttlingen
Greece
Greece
Ireland
Ireland
Italy
Athens
Athens
Dublin 2
Dublin 1
Milan
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Netherlands
Amsterdam
Netherlands
Amsterdam
Netherlands
Amsterdam
Netherlands
Amsterdam
Netherlands
Amsterdam
Norway
Poland
Portugal
Oslo
Warsaw
Lisbon
Russian Federation
Moscow
Russian Federation
Puschino
Russian Federation
Moscow 2
Spain
Barcelona
Sweden
Molndal
Sweden
Gothenburg
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
Baar
Aarau
Baar
Baar
Baar
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NOTES TO THE COMPANY ACCOUNTS continued
Country of
operation and
incorporation
Registered
Office
Company name
9 GROUP COMPANIES continued
Company name
US
Arthrocare Corporation1
Bioventus LLC3 (49%)
Blue Belt Holdings, Inc.1
Blue Belt Technologies, Inc.
Delphi Ventures V, L.P.3 (6.9%)
Healicoil, Inc.
Hipco, Inc.
Leaf Healthcare Inc.3 (11%)
Memphis Biomed Ventures I, LP3 (4.61%)
Oratec Interventions, Inc.
Orthopaedic Biosystems Ltd., Inc.
OsteoBiologics, Inc.
Plus Orthopedics LLC
Rotation Medical, Inc.
Sinopsys Surgical, Inc.3 (12.4%)
Smith & Nephew Consolidated, Inc.1
Smith & Nephew OUS, Inc.1
Smith & Nephew, Inc.
ArthroCare (Australasia) Pty Ltd2
Smith & Nephew Pty Limited
Smith & Nephew Surgical Holdings
Pty Limited2
Smith & Nephew Surgical Pty Limited2
Smith & Nephew Comercio de Produtos
Medicos LTDA
Smith & Nephew (Alberta) Inc.2
Smith & Nephew Inc.
Tenet Medical Engineering, Inc.
Smith & Nephew Finance Holdings
Limited2
ArthoCare Medical Devices (Beijing) Co.
Limited⁴
Plus Orthopedics (Beijing) Co. Limited⁴
Plus Trading (Beijing) Co Limited⁴
Smith & Nephew Medical
(Shanghai) Limited
United States
San Jose
United States
Wilmington
United States Minneapolis
United States
Pittsburgh
United States
San Mateo
United States
Wilmington
United States
Wilmington
United States
United States
United States
United States
United States
United States
United States
United States
Delaware
Delaware
Concord
Phoenix
Dallas
Andover
Andover
Boulder
United States
Wilmington
United States
Wilmington
United States
Wilmington
Argentina Buenos Aires
Australia
North Ryde
Australia
North Ryde
Australia
North Ryde
Australia
North Ryde
Brazil
São Paulo
Canada
Canada
Canada
Calgary
Toronto
Calgary
Cayman Islands South Church
Street,
George Town
China
China
China
China
Chao Yang
District,
Beijing
Shunyi
District,
Beijing
East City,
Beijing
Shanghai
Free Trade
Test Zone
Surgical Frontiers Series I, LLC3 (32%)
United States
Dover
Trice Medical Inc.3 (6%)
United States
Delaware
Africa, Asia, Australasia and Other America
Smith & Nephew Argentina S.R.L.2
Smith & Nephew Orthopaedics (Beijing)
Co., Ltd
S&N Holdings SAS1
Smith & Nephew Colombia S.A.S
ArthroCare Costa Rica Srl
Smith & Nephew Curaçao N.V.
Country of
operation and
incorporation
China
Registered
Office
Beijing
Economic
and Technical
Development
Area
Colombia
Colombia
Bogota
Bogota
Costa Rica
Costa Rica
Curaçao
Willemstad
Smith & Nephew Beijing Holdings Limited1
Hong Kong
Hong Kong
Smith & Nephew Limited
Hong Kong
Hong Kong
Smith & Nephew Suzhou Holdings Limited1
Hong Kong
Hong Kong
Adler Mediequip Private Limited
ArthoCare India Medical Device
Private Limited2
India
India
Pune
Mumbai
Smith & Nephew Healthcare Private Limited
India Mumbai-59
Ortho-Space Ltd.3 (16.8%)
Smith & Nephew KK
Israel
Japan
Smith & Nephew Chusik Hoesia
Korea, Republic of
Caesarea
Tokyo
Seoul
Smith & Nephew Healthcare Sdn Berhad
Malaysia Kuala Lumpur
Smith & Nephew S.A. de C.V.
Smith & Nephew Limited
Smith & Nephew Superannuation
Scheme Limited
Smith & Nephew, Inc.
Smith & Nephew Pte Limited
Smith & Nephew (Pty) Limited
Smith & Nephew Pharmaceuticals
(Proprietary) Limited2
Smith & Nephew Limited
Mexico Mexico City
New Zealand
Auckland
New Zealand
Auckland 2
Puerto Rico
San Juan
Singapore
Singapore
South Africa
South Africa
Westville
Westville
Thailand Huai Khwang
District,
Bangkok
Sri Siam Medical Limited1,3 (48.99%)
Thailand
Smith ve Nephew Medikal Cihazlar Ticaret
Limited Sirketi
Smith & Nephew FZE
Turkey
United Arab
Emirates
Lumpini
Phatumwan,
Bangkok
Sariyer,
Istanbul
Jebel Ali,
Dubai
1 Holding company.
2 Dormant company.
3 Not 100% owned by Smith & Nephew Group.
4
In liquidation.
Smith & Nephew Medical (Suzhou) Limited
China
Suzhou City
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 163–170 DO NOT FORM PART OF THE SMITH & NEPHEW’S
ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC.
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OUR BUSINESS
& MARKETPLACE
OPERATIONAL
REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
NOTES TO THE COMPANY ACCOUNTS continued
9 GROUP COMPANIES continued
Registered Office addresses
UK
London
Kent
York
Hull
15 Adam Street, London, WC2N 6LA
Ground Floor, Eclipse House, Eclipse Park,
Sittingbourne Road, Maidstone, Kent, ME14 3EN
25 Carr Lane, York, YO26 5HT
101 Hessle Road, Hull, HU3 2BN
Edinburgh
4th Floor, 115 George Street, Edinburgh, EH2 4JN
Rest of Europe
Vienna
Zaventem
Hoersholm
Neuilly-sur-Seine
Concorde Business Park, 1/C/3 2320,
Schwechat, Austria
Hector Heenneaulaan 366,
1930 Zaventem, Belgium
Slotsmarken 14, Hoersholm, DK-2970, Denmark
40, Boulevard du Parc, 92200 Neuilly-sur-Seine,
France
Helsinki
Hamburg
Tuttlingen
Athens
Dublin 1
Dublin 2
Milan
Luxembourg
Amsterdam
Oslo
Warsaw
Lisbon
Moscow
Moscow 2
Puschino
Barcelona
Molndal
Baar
Aarau
Ayritie 12 C, 01510, Vantaa, Finland
Friesenweg 4, Haus 21, 22763,
Hamburg, Germany
Alemannenstrasse 14, 78532,
Tuttlingen, Germany
Protopappa Street 43, GR 16346,
Ilioupoli, Athens, Greece
3rd Floor, Kilmore House, Park Lane,
Spencer Dock, Dublin 1, Ireland
Molyneux House, Bride Street,
Dublin 2, Ireland
Via de Capitani 2A, 20864,
Agrate Brianza (MI), Italy
163, Rue de Kiem, L-8030 Strassen, Luxembourg
Kruisweg 637, 2132 NB Hoofddorp,
The Netherlands
Nye Vakas vei 64, 1395, Hvalsted, Norway
Ul Osmanska 12, 02-823, Warsaw, Poland
Estrada Nacional no 10 ao Km. 131,
Parque Tejo – Bloco C, 2625-445 Forte de Casa,
Vila Franca de Xira, Portugal
9a, Bld, 10, 2nd Sinichkina Street,
Moscow 111020, Russian Federation
2nd Syromyatnichesky lane, Moscow, 105120,
Russian Federation
8/1 Stroiteley Street, 142290, City of Puschino,
Moscow Region, Russian Federation
Edificio Conata I, c/ Fructuos Gelabert 2 y 4,
San Joan Despi – 08970, Barcelona, Spain
PO Box 143, S-431 22 Molndal, Sweden
Oberneuhofstr 10d, Baar, 6340
Schachenallee 29, 5000, Aarau, Switzerland
Gothenburg
Varbergsgatan 2A / 412 65 Göteborg / Sweden
Registered Office addresses
US
San Jose
Minneapolis
Pittsburgh
Boulder
Wilmington
Concord
Phoenix
Dallas
Andover
San Mateo
Memphis
Tustin
Dover
595 North Pastoria Avenue, Sunnyvale,
California, 94086, USA
2905 Northwest Blvd, Suite 40,
Plymouth MN 55441, USA
2828 Liberty Ave, Suite 100,
Pittsburgh PA 15222, USA
5480 Valmont Road, Suite 215, Boulder,
Colorado, 80301, USA
CT Corporation, 1209 Orange Street,
Wilmington DE 19801, USA
C T Corporation, 9 Capitol Street, Concord,
New Hampshire, 03301, USA
CT Corporation System, 3225 North Central
Avenue, Phoenix AZ 85012, USA
CT Corporation System, 350 North St. Paul Street,
Dallas TX 75201, USA
150 Minuteman Road, Andover,
MA, 01810, USA
160 Bovet Road, Suite 408, San Mateo,
CA 94402, USA
6075 Poplar Avenue, Suite 335,
Memphis, Tennessee, 38119, USA
3002 Dow Avenue, Building 100,
Unit 138, Tustin, California, 92780, USA
160 Greentree Drive, Suite 101,
Dover, Delaware, 19904, USA
Africa, Asia, Australasia and Other America
Maipu 1300, 13th Floor,
Buenos Aires
City of Buenos Aires, Argentina
North Ryde
São Paulo
Calgary
Toronto
85 Waterloo Road, North Ryde NSW 2113, Australia
Avenida do Cafe, 277, Centro Empresarial do
Aco, Centro Empresarial do Aco, Torre B, 4 andar,
conjuto, CEP 04311-000, São Paulo 403,
Jabaquara, Brazil
3500-855-2 Street SW,
Calgary AB AB T2P 4J8, Canada
199, Bay Street, 4000, Toronto,
Ontario M5L 1A9, Canada
South Church Street,
Georgetown
c/o M&C Corporate Services Limited, Ugland
House, South Church Street, P.O. Box 309, George
Town, Grand Cayman, Cayman Islands
Chao Yang District, Beijing Room 17-021, Internal B17 floor, B3-24th floor,
No 3 Xin Yuan South Rd, Chao Yang District,
Beijing, China
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 163–170 DO NOT FORM PART OF THE SMITH & NEPHEW’S
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& MARKETPLACE
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REVIEW
FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
NOTES TO THE COMPANY ACCOUNTS continued
9 GROUP COMPANIES continued
Av. Insurgentes Sur, numero 1602, Piso No.7, Oficina
702, Colonia Credito, Constructor,
Delegacion Benito Juarez, C.P. 03940, Mexico
621 Rosebank Road, Avondale,
Auckland 6, New Zealand
36a Hillside Road, Wairau Valley, Auckland, 0627
NZ, New Zealand
Edificio Cesar Castillo, Calle Angel Buonomo
#361, Hato Rey, 00917, Puerto Rico
50 Raffles Place, #32-01 Singapore Land Tower,
048623, Singapore
30 The Boulevard, Westway Office Park,
Westville, 3629, South Africa
16th Floor Building A, 9th Tower Grand Rama 9,
33/4 Rama 9 Road, Huai Khwang District,
Bangkok, 10310, Thailand
16th Floor, GPF Witthayu Tower A,
93/1 Wireless Road, Lumpini, Phatumwan,
Bangkok, 10330, Thailand
Bahcekoy Mah., Orkide Sok.,
No:8/E Bahcekoy, Sariyer Istanbil, Turkey
PO Box 16993 LB02016, Jebel Ali,
Dubai, United Arab Emirates
Registered Office addresses
Shunyi District, Beijing
East City, Beijing
Guangzhou
Shanghai
Registered Office addresses
22 Linhe Avenue, Linhe Economic Development
Zone, Shunyi District, Beijing, 101300, China
Mexico City
No. B-D, Floor 2, A Building, Beijing East Gate Plaza,
No. 9, Dong Zhong Street, East City, Beijing, China
Auckland
Room 2502 No 33, 6th Jian She Rd, Yue Xiu District,
Guangzhou, China
Auckland 2
Room 1208-1209, No 168 Middle Xi Zang Rd,
Shanghai, China
Shanghai Free Trade Test
Zone
Part B, 4th Floor, Tong Yong Building,
No 188 Ao Na Rd, Shanghai Free Trade Test Zone,
Shanghai, China
Dong Cheng District,
Beijing
Chengdu
Unit B1, 2/F, Tower A, East Gate Plaza No.9,
Dongshong Street, Dong Cheng District,
Beijing, China
No 5. 15th Floor, Unit 1, Building,
1 Li Bao Building, No 62 North Ke Hua Rd,
Wu Hou District, Chengdu, China
Middle Xi Zang Rd,
Shanghai
Room 1201-1207, No168 Middle Xi Zang Rd,
Shanghai, China
San Juan
Singapore
Westville
Huai Khwang District,
Bangkok
Lumpini Phatumwan,
Bangkok
Suzhou City
12, Wuxiang Road, West Area of Comprehensive
Bonded Zone, Suzhou Industrial Park, Suzhou City,
SIP, Jiangsu Province, China
Sariyer, Istanbul
Jebel Ali, Dubai
Beijing Economic and
Technical Development
Area
No. 98 Kechuang Dongliujie,
Beijing Economic and Technical Development Area,
Beijing, China
Bogota
Costa Rica
Willemstad
Hong Kong
Pune
Mumbai
Mumbai-59
Caesarea
Tokyo
Seoul
Kuala Lumpur
Calle 100 No. 7 – 33 to 1 P3,
Bogota D.C., 0, Colombia
Building B32, 50 meters South of Revisión Téchnica
Vehicular, Province de Alajuela, Canton Alajuela,
Coyol Free Zone, District San José, Costa Rica
Pietermaai 15, PO Box 4905, Curaçao
Unit 813 – 816, 8/F, Delta House, 3 On Yiu Street,
Shatin, New Territories, Hong Kong
Sushrut House, Survey no.288,
Phase II next to MIDC, Hinjewadi, at Mann,
Taluka Mulshi, Pune, 411057, India
5A, Bakhtawar, 5th Floor, behind The Oberoi,
Nariman Point, Mumbai, Maharashtra, 400021,
India
501-B – 509-B Dynasty Business Park,
Andheri Kurla Road, Andheri East, Mumbai-59,
Maharashtra, India
7 Halamarish, Caesarea, 3088900, Israel
2-4-1, Shiba -Koen, Minato-Ku,
Tokyo 105-0011, Japan
13th Floor, ASEM Tower, Gangnam-gu 13th Floor,
ASEM Tower, 159-1 Samsung-dong, Seoul, Korea
Unit 10-02(A), Level 10, Menara TJB, 9, Jalan Syed
Mohd Mufti, Johor Bahru, Johor 8000, Malaysia
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 163–170 DO NOT FORM PART OF THE SMITH & NEPHEW’S
ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC.
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GROUP AND OTHER
INFORMATION
GROUP INFORMATION
BUSINESS OVERVIEW AND GROUP HISTORY
Smith & Nephew’s operations are organised into geographical selling regions and product franchises within the medical technology industry.
The Group has a history dating back 160 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. In 2015, the Advanced Wound Management and Advanced Surgical Devices divisions
were brought together to form a global business across nine product franchises, managed as three geographical selling regions with global
functions for operations, R&D and corporate support functions.
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.
PROPERTIES
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
UK office and surgical training facility in Watford, UK
Manufacturing and office facilities in Memphis, Tennessee, US
Wound management manufacturing, research and office facility in Hull, UK
Manufacturing facility in Suzhou, China
Manufacturing facility in Alajuela, Costa Rica
Distribution facility in Memphis, Tennessee, US
Manufacturing facility in Beijing, China
Bioactives headquarters and laboratory space in Fort Worth, Texas, US
Manufacturing, research and office facility in Austin, Texas, US
Manufacturing facility in Oklahoma City, Oklahoma, US
Regional headquarters in Andover, Massachusetts, US
Manufacturing facility in Aarau, Switzerland
Manufacturing facility in Mansfield, Massachusetts, US
Manufacturing facility in Devrukh, India
Regional headquarters and distribution facility in Baar, Switzerland
Manufacturing facility in Tuttlingen, Germany
13
60
968
473
288
265
248
192
165
157
155
144
121
98
74
71
50
The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Orthopaedics manufacturing facilities in
Memphis, Tennessee are largely freehold, a portion of Tuttlingen and the Advanced Wound Management facilities in Hull 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.
GROUP AND OTHER
INFORMATION
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GROUP AND OTHER
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GROUP INFORMATION continued
RISK FACTORS
There are known and unknown risks and uncertainties relating to Smith & Nephew’s business. The factors listed on pages 172–175 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 competes across a diverse range of geographic and product markets. Each market in which the Group operates 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. Some customers have joined group purchasing organisations or introduced other
cost containment measures that could lead to downward pressure on prices or limit the number of suppliers in certain 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, the Group 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 operates. 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 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 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. Provisions in US
healthcare legislation which previously imposed significant taxes on medical device manufacturers have been suspended for two years but may
be reinstated. There may be an increased risk of adverse changes to government funding policies arising from deterioration in macro-economic
conditions from time to time in 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.
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GROUP AND OTHER
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GROUP INFORMATION continued
RISK FACTORS continued
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 2017, 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 government debt, particularly those in the Emerging Markets and the oil-dependent Gulf States. These factors tempered the overall
growth of the Group’s global markets and could have an increased impact on growth in the future.
Political uncertainties
The Group operates on a worldwide basis and has distribution channels, purchasing agents and buying entities in over 100 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 preference for local suppliers, import quotas, taxation or other
matters could adversely affect the Group’s revenue and operating profit. War, economic sanctions, terrorist activities or other conflict could also
adversely impact the Group. These risks may be greater in Emerging Markets, which account for an increasing portion of the Group’s business.
In June 2016 the UK voted to leave the European Union. The UK’s withdrawal will be effective from 29 March 2019 at 11pm GMT. As negotiations
regarding the terms of the withdrawal continue, the nature of the trade agreements and the closeness of the economic ties between the UK and
the EU beyond the withdrawal date remains uncertain. We continue to monitor the situation. Among the potential impacts of Brexit, the regulatory
framework for medical devices could be affected, as it is unclear whether the UK will ascribe to the new Medical Devices Regulation which will
become applicable in May 2020.
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. However, the Group is exposed to medium to long-term adverse movements in the strength of currencies compared to the
US Dollar.
The Group uses the US Dollar as its reporting currency. 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 39.
Manufacturing and supply
The Group’s manufacturing production is concentrated at main facilities in Memphis, Mansfield and Oklahoma City in the US, Hull and Warwick
in the UK, Aarau in Switzerland, Tuttlingen in Germany, Devrukh in India, Suzhou and Beijing in China, Alajuela in Costa Rica, Puschino in Russia
and Curaçao, in Dutch Caribbean. 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.
The Group 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.
A supplier’s failure to meet expected quality standards could create liability for the Group and adversely affect sales of the Group’s related products.
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 including as part of the APEX programme, outsource or insource the manufacture of components and finished
products to third parties and will periodically relocate the manufacture of product and/or processes between existing and/or new facilities.
While these are planned activities, with these transfers there is a risk of disruption to supply.
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GROUP AND OTHER
INFORMATION
GROUP INFORMATION continued
RISK FACTORS continued
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. As at 31 December 2017, a provision of $157m is recognised relating to the present value of the
estimated costs to resolve all unsettled known and unknown anticipated metal-on-metal hip implant claims.
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. 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 extensive legislation, including anti-bribery and corruption and data protection, in each
country in which the Group operates. Our international operations are governed by the UK Bribery Act and the US Foreign Corrupt Practices
Act which prohibit us or our representatives from making or offering improper payments to government officials and other persons or accepting
payments for the purpose of obtaining or maintaining business. Our international operations in the Emerging Markets which operate through
distributors increase our Group exposure to these risks.
The Group will also be required to comply with the requirements of the EU General Data Protection Regulation (GDPR) concerning personal data of
data subjects residing in the EU when it comes into force in May 2018.
Enforcement of such legislation has increased in recent years with significant fines and penalties being imposed on companies and individuals
where breaches are found to have occurred.
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, the China Food and Drug Administration and the Australian Therapeutic Goods Administration. At any time, the
Group is awaiting a number of regulatory approvals which, if not received, could adversely affect results of operations. In 2017, the European Union
reached agreement on a new set of Medical Device Regulations which entered into force on 25 May 2017. These have a three-year transition period;
therefore will fully apply in EU Member States from 26 May 2020.
SMITH & NEPHEW ANNUAL REPORT 2017 175
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GROUP AND OTHER
INFORMATION
GROUP INFORMATION continued
RISK FACTORS continued
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 medical device regulation and Group 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 16–17, ‘Financial review’ on pages 38–39 and ‘Taxation information for shareholders’ on pages 190–191.
SMITH & NEPHEW ANNUAL REPORT 2017 176
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GOVERNANCE
ACCOUNTS
GROUP AND OTHER
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 profit1
Net interest (payable)/receivable
Other finance costs
Share of results of associates
Profit on disposal of business
Profit before taxation
Taxation
Attributable profit for the year
Earnings per ordinary share
Basic earnings per share
Diluted earnings per share
Average number of shares used in basic earnings per share (millions)
Average number of shares used in diluted earnings per share (millions)
Adjusted attributable profit2
Attributable profit for the year
Acquisition related costs
Restructuring and rationalisation expenses
Legal and other
Amortisation and impairment of acquisition intangibles
Profit on disposal of business
US tax reform
Taxation on excluded items
Adjusted attributable profit
Adjusted earnings per ordinary share (EPSA)3
2017
$ million
2016
$ million
2015
$ million
2014
$ million
2013
$ million
4,765
(1,248)
3,517
(2,360)
(223)
934
(51)
(10)
6
–
879
(112)
767
87.8¢
87.7¢
874
875
767
(10)
–
(13)
140
–
(32)
(26)
826
94.5¢
4,669
(1,272)
3,397
(2,366)
(230)
801
(46)
(16)
(3)
326
1,062
(278)
784
88.1¢
87.8¢
890
893
784
9
62
(20)
178
(326)
–
48
735
82.6¢
4,634
(1,143)
3,491
(2,641)
(222)
628
(38)
(15)
(16)
–
559
(149)
410
45.9¢
45.6¢
894
899
410
25
65
187
204
–
–
(130)
761
85.1¢
4,617
(1,162)
3,455
(2,471)
(235)
749
(22)
(11)
(2)
–
714
(213)
501
56.1¢
55.7¢
893
899
501
125
61
(2)
129
–
–
(71)
743
83.2¢
4,351
(1,100)
3,251
(2,210)
(231)
810
4
(11)
(1)
–
802
(246)
556
61.7¢
61.4¢
901
906
556
31
58
–
88
–
–
(40)
693
76.9¢
1 Reconciliation of operating to trading profit is presented below.
2 Non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 178–181.
3 Adjusted earnings per ordinary share is calculated by dividing adjusted attributable profit by the basic weighted number of shares.
Reconciliation of operating profit to trading profit
Operating profit
Acquisition related costs
Restructuring and rationalisation costs
Amortisation and impairment of acquisition intangibles
Legal and other
Trading profit
2017
$ million
934
(10)
–
140
(16)
1,048
2016
$ million
2015
$ million
2014
$ million
2013
$ million
801
9
62
178
(30)
1,020
628
12
65
204
190
1,099
749
118
61
129
(2)
1,055
810
31
58
88
–
987
SMITH & NEPHEW ANNUAL REPORT 2017
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ACCOUNTS
GROUP AND OTHER
INFORMATION
OTHER FINANCIAL INFORMATION continued
SELECTED FINANCIAL DATA continued
Group balance sheet
Non-current assets
Current assets
Total assets
Share capital
Share premium
Capital redemption reserve
Treasury shares
Retained earnings and other reserves
Total equity
Non-current liabilities
Current liabilities
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 business (net of tax)
Investment in associate
Proceeds from associate loan redemption
Proceeds from own shares
Equity dividends paid
Issue of ordinary capital and treasury shares purchased
Net cash flow from operating, investing and financing activities
Termination of finance lease
Exchange adjustments
Opening net debt
Closing net debt
Selected financial ratios
Gearing (closing net debt as a percentage of total equity)
Dividends per ordinary share
Research and development costs to revenue
Capital expenditure (including intangibles but excluding goodwill
and trade investments) to revenue
2017
$ million
2016
$ million
2015
$ million
2014
$ million
2013
$ million
5,135
2,731
7,866
178
605
17
(257)
4,101
4,644
1,876
1,346
3,222
7,866
1,273
(48)
(135)
1,090
(384)
(159)
–
–
–
5
(269)
(47)
236
5
28
(1,550)
(1,281)
27.6%
35.0¢1
4.7%
4,815
2,529
7,344
180
600
15
(432)
3,595
3,958
2,038
1,348
3,386
7,344
1,035
(45)
(141)
849
(394)
(214)
225
–
–
6
(279)
(358)
(165)
–
(24)
(1,361)
(1,550)
39%
30.8¢
4.9%
4,692
2,475
7,167
183
590
12
(294)
3,475
3,966
1,857
1,344
3,201
7,167
1,203
(36)
(137)
1,030
(360)
(44)
–
(25)
–
5
(272)
(61)
273
–
(21)
(1,613)
(1,361)
34%
30.8¢
4.8%
4,866
2,440
7,306
184
574
11
(315)
3,586
4,040
2,104
1,162
3,266
7,306
961
(33)
(245)
683
(379)
(1,552)
–
(2)
188
4
(250)
(35)
(1,343)
–
(17)
(253)
(1,613)
40%
29.6¢
5.1%
7.9%
8.4%
7.7%
8.1%
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)
6%
27.4¢
5.3%
7.8%
1 The Board has proposed a final dividend of 22.7 US cents per share which together with the first interim dividend of 12.3 US cents makes a total for 2017 of 35.0 US cents.
SMITH & NEPHEW ANNUAL REPORT 2017
178
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OUR BUSINESS
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FINANCIAL
REVIEW
RISK
GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
OTHER FINANCIAL INFORMATION continued
NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES
These Financial Statements include financial measures that are not prepared in accordance with International Financial Reporting Standards (IFRS).
These measures, which include trading profit, trading profit margin, tax rate on trading results, EPSA, ROIC, trading cash flow, free cash flow, trading
profit to trading cash conversion ratio, and underlying growth, exclude the effect of certain cash and non-cash items that Group management
believes are not related to the underlying performance of the Group. These non-IFRS financial measures are also used by management to make
operating decisions because they facilitate internal comparisons of performance to historical results.
Non-IFRS financial measures are presented in these Financial Statements as the Group’s management believe that they provide investors with
a means of evaluating performance of the business segment and the consolidated Group on a consistent basis, similar to the way in which the
Group’s management evaluates performance, that is not otherwise apparent on an IFRS basis, given that certain non-recurring, infrequent, non-
cash and other items that management does not otherwise believe are indicative of the underlying performance of the consolidated Group may not
be excluded when preparing financial measures under IFRS. These non-IFRS measures should not be considered in isolation from, as substitutes
for, or superior to financial measures prepared in accordance with IFRS.
Underlying revenue growth
‘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 or disposed of and for movements in exchange rates.
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-IFRS measure
in its internal financial reporting, budgeting and planning to assess performance on both a business 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-IFRS measure of underlying growth in revenue and the IFRS 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 and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year
average exchange rate and the prior revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current
and prior year revenues into US Dollars using the prior year closing rate.
The ‘acquisitions and disposals effect’ is the measure of the impact on revenue from newly acquired material business combinations and recent
material business disposals. 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.
SMITH & NEPHEW ANNUAL REPORT 2017 179
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GROUP AND OTHER
INFORMATION
OTHER FINANCIAL INFORMATION continued
NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES continued
Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying growth in
revenue as follows:
2017
Consolidated revenue by franchise
Sports Medicine, Trauma & Other
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
Trauma & Extremities
Other Surgical Businesses
Reconstruction
Knee Implants
Hip Implants
Advanced Wound Management
Advanced Wound Care
Advanced Wound Bioactives
Advanced Wound Devices
Total
2016
Consolidated revenue by franchise
Sports Medicine, Trauma & Other
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
Trauma & Extremities
Other Surgical Businesses
Reconstruction
Knee Implants
Hip Implants
Advanced Wound Management
Advanced Wound Care
Advanced Wound Bioactives
Advanced Wound Devices
Total
Reported growth
%
Underlying growth
%
Acquisitions/disposals
%
Reconciling items
Currency impact
%
1
7
(3)
4
(11)
4
6
–
2
–
–
13
2
3
6
(3)
4
7
3
5
–
2
–
–
13
3
(2)
–
–
–
(19)
–
–
–
–
–
–
–
(1)
–
1
–
–
1
1
1
–
–
–
–
–
–
Reported growth
%
Underlying growth
%
Acquisitions/disposals
%
Reconciling items
Currency impact
%
1
7
–
(4)
5
3
6
(1)
(3)
(5)
(1)
3
1
3
8
2
(4)
15
2
4
(1)
(1)
(3)
–
5
2
(1)
–
–
1
(9)
2
3
–
–
–
–
–
–
(1)
(1)
(2)
(1)
(1)
(1)
(1)
–
(2)
(2)
(1)
(2)
(1)
Trading profit, trading profit margin, trading cash flow and trading profit to cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a percentage of revenue), trading cash flow and trading profit to cash conversion
ratio (trading cash flow expressed as a percentage of trading profit) are trend measures, which present the long-term profitability of the Group
excluding the impact of specific transactions that management considers affect the Group’s short-term profitability and cash flows. The Group has
identified the following items, where material, as those to be excluded from operating profit and cash generated from operations when arriving at
trading profit and trading cash flow, respectively: acquisition and disposal related items arising in connection with business combinations, including
amortisation of acquisition intangible assets, impairments and integration costs; restructuring events; gains and losses resulting from legal disputes
and uninsured losses. In addition to these items, gains and losses that materially impact the Group’s profitability or cash flows on a short-term or
one-off basis and the cash cost to fund defined benefit pension schemes that are closed to future accrual are excluded from operating profit and
cash generated from operations when arriving at trading profit and trading cash flow, respectively.
Adjusted earnings per ordinary share (EPSA)
EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-tax impact of specific transactions that
management considers affect the Group’s short-term profitability and the one-off impact of US tax reform. The Group presents this measure to
assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure and is determined by adjusting
attributable profit for the items that are excluded from operating profit when arriving at trading profit and items that are recognised below operating
profit that affect the Group’s short-term profitability. The most directly comparable financial measure calculated in accordance with IFRS is basic
earnings per ordinary share (‘EPS’).
SMITH & NEPHEW ANNUAL REPORT 2017 180
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GROUP AND OTHER
INFORMATION
OTHER FINANCIAL INFORMATION continued
NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES continued
2017 Reported
Acquisition-related costs and profit on
disposal
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other 7
US tax reform
Capital expenditure
2017 Adjusted
Operating
profit1
$ million
934
Profit before
tax2
$ million
879
Attributable
profit4
$ million
Cash generated
from operating
activities5
$ million
767
1,273
Taxation3
$ million
(112)
Earnings
per share6
¢
87.8
(10)
–
140
(16)
–
–
1,048
(10)
–
140
(13)
–
–
996
2
–
(40)
12
(32)
–
(170)
(8)
–
100
(1)
(32)
–
826
3
15
–
25
–
(376)
940
(0.9)
–
11.4
(0.1)
(3.7)
–
94.5
Revenue
$ million
4,765
–
–
–
–
–
–
4,765
Acquisition-related costs and cash flows: For the year to 31 December 2017 the credit relates to a remeasurement of contingent consideration
for a prior year acquisition partially offset by costs associated with the acquisition of Rotation Medical, Inc.
Restructuring and rationalisation costs: There were no restructuring and rationalisation costs in the year to 31 December 2017. The restructuring
and rationalisation cash flows relate to the implementation of the Group Optimisation plan that was announced in May 2014 and completed at the
end of 2016.
Amortisation and impairment of acquisition intangibles: For the year to 31 December 2017 the charge relates to the amortisation of intangible
assets acquired in material business combinations and an impairment charge of $10m.
Legal and other: For the year to 31 December 2017 the charge relates primarily to legal expenses for patent litigation with Arthrex, ongoing metal-
on-metal hip claims and an increase of $10m in the provision that reflects the present value of the estimated costs to resolve all other known
and anticipated metal-on-metal hip claims. A $54m credit has been recognised in the year to 31 December 2017 following a settlement payment
received from Arthrex relating to patent litigation. For the year to 31 December 2017 $44m of cash funding to closed defined benefit pension
schemes is excluded from trading cash flow following the closure of the UK scheme to future accrual in December 2016.
2016 Reported
Acquisition-related costs and profit on disposal
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other
Capital expenditure
2016 Adjusted
Operating
profit1
$ million
Profit before
tax2
$ million
Taxation3
$ million
Attributable
profit4
$ million
Cash generated
from operating
activities5
$ million
Earnings
per share6
¢
801
9
62
178
(30)
–
1,020
1,062
(317)
62
178
(20)
–
965
(278)
120
(14)
(59)
1
–
(230)
784
(197)
48
119
(19)
–
735
1,035
24
62
–
36
(392)
765
88.1
(22.2)
5.4
13.4
(2.1)
–
82.6
Revenue
$ million
4,669
–
–
–
–
–
4,669
Acquisition-related costs and cash flows: For the year to 31 December 2016 these costs relate to the costs associated with the integration of
Blue Belt Technologies and other acquisitions. Taxation and attributable profit include the effect of the disposal of the Gynaecology business.
Restructuring and rationalisation costs: For the year to 31 December 2016 these costs primarily relate to the ongoing implementation of the
Group Optimisation plan that was announced in May 2014.
Amortisation and impairment of acquisition intangibles: For the year to 31 December 2016 these charges relate to the amortisation of
intangible assets acquired in material business combinations and a total impairment of $48m including $32m relating to Oasis, a product acquired
with the Healthpoint acquisition in 2013.
Legal and other: For the year to 31 December 2016 the net credit of $30m primarily relates to a $44m curtailment credit on post-retirement benefits
in the UK pension scheme partially offset by legal expenses incurred for patent litigation with Arthrex. Also included is a net $1m credit in respect of
insurance recoveries of $24m and legal expenses of $23m, relating to the ongoing metal-on-metal hip claims.
1 Represents a reconciliation of operating profit to trading profit.
2 Represents a reconciliation of reported profit before tax to trading profit before tax.
3 Represents a reconciliation of reported tax to trading tax.
4 Represents a reconciliation of reported attributable profit to adjusted attributable profit.
5 Represents a reconciliation of cash generated from operations to trading cash flow.
6 Represents a reconciliation of basic earnings per ordinary share to adjusted earnings per ordinary share (EPSA).
7 From 1 January 2017, the ongoing funding of closed defined benefit pension schemes is not included in management’s definition of trading cash flow as there is no defined benefit service cost for these schemes.
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GOVERNANCE
ACCOUNTS
GROUP AND OTHER
INFORMATION
OTHER FINANCIAL INFORMATION continued
NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES continued
Free cash flow
Free cash flow is a measure of the cash generated for the Group to use after capital expenditure according to its capital allocation framework, it is
defined as the net cash flow from operating activities less: capital expenditure and cash flows from interest and income taxes. A reconciliation from
net cash flow from operating activities, the most comparable IFRS measure, to free cash flow is set out below:
Net cash flow from operating activities
Capital expenditure
Interest received
Interest paid
Income taxes paid
Free cash flow
2017
$ million
1,273
(376)
2
(50)
(135)
714
2016
$ million
1,035
(392)
3
(48)
(141)
457
2015
$ million
1,203
(358)
8
(44)
(137)
672
Return on invested capital (ROIC)
Return on invested capital (ROIC) is a measure of the return generated on capital invested by the Group. It provides a metric for long-term value
creation and encourages compounding reinvestment within the business and discipline around acquisitions with low returns and long payback.
ROIC is defined as: Net Operating Profit less Adjusted Taxes/((Opening Net Operating Assets + Closing Net Operating Assets)/2).
Operating profit
Taxation
Taxation adjustment1
Net operating profit less adjusted taxes
Total equity
Retirement benefit asset
Investments
Investments in associates
Cash at bank
Long term borrowings
Retirement benefit obligation
Bank overdrafts and loans
Net operating assets
Average net operating assets
Return on invested capital
1 Being the taxation on interest income, interest expense, other finance costs, share of results of associates and profit on disposal of business.
2017
$ million
934
(112)
(10)
812
4,644
(62)
(21)
(118)
(169)
1,423
131
27
5,855
5,695
14.3%
2016
$ million
801
(278)
107
630
3,958
–
(25)
(112)
(100)
1,564
164
86
5,535
5,452
11.5%
2015
$ million
3,966
(13)
(13)
(115)
(120)
1,434
184
46
5,369
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INFORMATION
OTHER FINANCIAL INFORMATION continued
CONTRACTUAL OBLIGATIONS
Contractual obligations at 31 December 2017 were as follows:
Debt obligations
Private placement notes
Operating lease obligations
Retirement benefit obligation
Purchase obligations
Capital expenditure
Other
Less than
one year
$ million
One to
three years
$ million
Payments due by period
Three to
five years
$ million
More than
five years
$ million
27
36
57
25
164
26
81
416
300
194
78
50
7
–
74
703
–
443
43
25
–
–
45
556
–
647
56
–
–
–
5
708
Other contractual obligations represent $45m of foreign exchange contracts and $160m of acquisition consideration. Provisions that do not relate to
contractual obligations are not included in the above table.
The agreed contributions for 2018 in respect of the Group’s defined benefits plans are $25m for the UK Plan.
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 102.
The Company does not have contracts or other arrangements which individually are essential to the business.
EXCHANGE RATES
The Group publishes its consolidated financial statements expressed in US Dollars. The following tables provide certain information concerning the
exchange rates between Sterling and US Dollars based on the Bank of England rate.
Year ended 31 December
Year end
Average1
High
Low
1 The average of the Bank of England rates in effect on the last day of each month during the relevant period.
2017
1.35
1.30
1.36
1.21
2016
1.23
1.35
1.48
1.21
2015
1.48
1.53
1.59
1.46
2014
1.56
1.65
1.72
1.55
2013
1.66
1.56
1.66
1.48
High
Low
February
20181
January
2018
December
2017
November
2017
October
2017
September
2017
1.42
1.38
1.43
1.35
1.35
1.33
1.35
1.31
1.33
1.31
1.36
1.30
1 Up to 16 February 2018, the latest practicable date for this Annual Report.
On 16 February 2018, the latest practicable date for this Annual Report, the Bank of England rate was US$1.40 per £1.00.
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ACCOUNTS
GROUP AND OTHER
INFORMATION
2016 FINANCIAL HIGHLIGHTS
COMMENTARY ON THE INCOME STATEMENT
– Group revenue increased by $35m, 1% on a reported basis, from $4,634m in 2015 to $4,669m in 2016. The underlying increase is 2%, after
adjusting for 1% attributable to the unfavourable impact of currency movements.
– Cost of goods sold increased by $129m, 11% on a reported basis, from $1,143m in 2015 to $1,272m in 2016. The movement is primarily due to
underlying trading.
– Selling, general and administrative expenses decreased by $275m (10% on a reported basis) from $2,641m in 2015 to $2,366m in 2016. In 2016,
administrative expenses included amortisation of software and other intangible assets of $61m (2015: $66m), $62m of restructuring and
rationalisation expenses (2015: $65m), an amount of $178m relating to amortisation and impairment of acquired intangibles (2015: $204m), $9m
of acquisition related costs (2015: $12m) and $30m net credit primarily related to a $44m curtailment credit on UK post-retirement benefits (2015:
$190m charge for legal and other charges). Excluding the above items, selling, general and administrative expenses were $2,086m in 2016, a
decrease of $18m from $2,104m in 2015.
– Research and development expenditure as a percentage of revenue remained broadly consistent at 4.9% in 2016 (2015: 4.8%). Expenditure
was $230m in 2016 compared to $222m in 2015. The Group continues to invest in innovative technologies and products to differentiate it
from competitors.
– Operating profit increased by $173m from $628m in 2015 to $801m in 2016. This movement in 2016 was primarily driven by the absence of costs
recognised in 2015 relating to anticipated and settled metal-on-metal hip claims.
– Net interest expense increased by $8m from a net $38m expense in 2015 to a net $46m expense in 2016. This movement is primarily due to an
increase in the effective interest rate and the increase in net debt due to the acquisition of Blue Belt Technologies.
– Other finance costs in 2016 increased by $1m and principally relates to costs associated with the Group’s retirement benefit schemes.
– The taxation charge increased by $129m to $278m from $149m in 2015 principally due to the tax charge on the disposal of the Gynaecology
business. Our reported tax rate of 26.2% (2015: 26.7%) includes the one-off benefit of a US tax settlement which is partly offset by the tax rate on
the disposal of the predominantly US Gynaecology business.
COMMENTARY ON THE GROUP BALANCE SHEET
Non-current assets increased by $123m to $4,815m in 2016 from $4,692m in 2015. This is principally attributable to the following:
– Property, plant and equipment increased by $50m from $932m in 2015 to $982m in 2016. There were $320m of additions together with $2m
acquired with the Blue Belt acquisition which was partially offset by $21m of assets disposed. Depreciation of $224m was charged during 2016
and there were unfavourable currency movements of $27m.
– Goodwill increased by $176m from $2,012m in 2015 to $2,188m in 2016. This movement relates to additions of $211m from the acquisition of Blue
Belt and BST-CarGel. This was partially offset by unfavourable currency movements of $35m.
– Intangible assets decreased by $91m from $1,502m in 2015 to $1,411m in 2016. There were additions of $72m in 2016 relating to intellectual
property, distribution rights and software acquired together with $85m acquired with the Blue Belt and BST-CarGel acquisitions. Amortisation and
impairment during 2016 was $239m and there were unfavourable currency movements of $9m.
– Investments increased to $25m from $13m in 2015. The increase was attributable to additions of $2m and fair value remeasurement of $10m.
– Deferred tax assets decreased by $8m in the year from $105m in 2015 to $97m in 2016. The net deferred tax asset position is $3m (2015: asset of
$28m). The decrease of $25m is due to tax accrual to tax return adjustments and current year utilisation of net deferred tax assets offset by the
impact of acquisitions of $15m.
Current assets increased by $54m to $2,529m from $2,475m in 2015. The movement relates to the following:
– Inventories rose by $27m to $1,244m in 2016 from $1,217m in 2015. This movement is driven by inventory increases in distribution hubs and
general increase across the Emerging Markets. This was offset by unfavourable currency movements of $26m.
– The level of trade and other receivables increased by $47m to $1,185m in 2016 from $1,138m in 2015. The movement primarily relates to increased
trade receivables of $39m and $10m decrease in the bad debt provision as well as unfavourable currency movements.
– Cash at bank has decreased by $20m from $120m in 2015 to $100m in 2016.
Current liabilities increased by $4m from $1,344m in 2015 to $1,348m in 2016. This movement is attributable to:
– Bank overdrafts and loans increased by $40m from $46m in 2015 to $86m in 2016.
– Trade and other payables increased by $42m from $842m in 2015 to $884m in 2016 primarily due to deferred consideration for acquisitions
made in 2016.
– Provisions decreased by $46m from $193m in 2015 to $147m in 2016 primarily due to utilisation of the legal provision for known and anticipated
metal-on-metal hip claims.
– Current tax payables decreased by $32m from $263m in 2015 to $231m, mainly attributable to differences in the timing of cash tax payments
year-on-year.
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GROUP AND OTHER
INFORMATION
INFORMATION FOR SHAREHOLDERS
FINANCIAL CALENDAR
Annual General Meeting
First quarter Trading Report
Payment of 2017 final dividend
Half year results announced
Third quarter Trading Report
Payment of 2018 interim dividend
Full year results announced
Annual Report available
Annual General Meeting
1 Dividend declaration dates.
12 April 2018
3 May 2018
9 May 2018
26 July 20181
1 November 2018
November 2018
February 20191
February/March 2019
April 2019
Annual General Meeting
The Company’s Annual General Meeting (‘AGM’) will be held on Thursday, 12 April 2018 at 2pm at No.11 Cavendish Square, London W1G 0AN.
Registered shareholders have been sent either a Notice of Annual General Meeting or notification of availability of the Notice of Annual
General Meeting.
Corporate headquarters and registered office
The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam Street, London WC2N 6LA, UK.
Registered in England and Wales No. 324357. Tel. +44 (0)20 7401 7646 website: www.smith-nephew.com.
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GROUP AND OTHER
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INFORMATION FOR SHAREHOLDERS continued
ORDINARY SHAREHOLDERS
Registrar
All general enquiries concerning shareholdings, dividends, changes to shareholders’ personal details and the AGM should be addressed to:
Computershare Investor Services plc, The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ.
Tel: 0370 703 0047
Tel: +44 (0) 117 378 5450 from outside the UK
Website: www.investorcentre.co.uk
*
Lines are open from 8:30am to 5:30pm Monday to Friday, excluding public holidays in England and Wales.
SHAREHOLDER COMMUNICATIONS
We make 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.
We send paper copies of the Notice of Annual General Meeting and Annual Report only to those shareholders and ADS holders who 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 notifying them of the
availability of the Annual Report and Notice of Annual General Meeting on the Group’s website. If you elect to receive the Annual Report and Notice
of Annual General Meeting electronically you 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.
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.
AMERICAN DEPOSITARY SHARES (‘ADSS’) AND AMERICAN DEPOSITARY RECEIPTS (‘ADRS’)
In the USA, 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 two ordinary shares. Deutsche Bank 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:
Deutsche Bank Shareholder Services
American Stock Transfer and Trust Company
Operations Centre 6201 15th Avenue
Brooklyn, New York
NY 11219
Tel: +1 866 249 2593 (toll free)
E-mail: db@astfinancial.com
Website: www.adr.db.com
The Deutsche Bank Global Direct Investor Services Program is available for US residents, enabling investment directly in ADSs with reduced
brokerage commissions and service costs. For further information on Global Direct contact Deutsche Bank Shareholder Services (as above) or visit
www.adr.db.com.
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GROUP AND OTHER
INFORMATION
INFORMATION FOR SHAREHOLDERS continued
SMITH & NEPHEW ADS PRICE
The Company’s ADS price can be obtained from the official New York Stock Exchange website at www.nyse.com and the Smith & Nephew website
www.smith-nephew.com where the live financial data is updated with a 15-minute delay, and is quoted daily in the Wall Street Journal.
ADS PAYMENT INFORMATION
The Company hereby discloses ADS payment information for the year ended 31 December 2017 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 depositary 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.
Persons depositing or withdrawing shares must pay
For
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
$0.05 (or less) per ADS
$0.05 (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
Any charges incurred by the depositary or its agents for servicing
the deposited securities
Issuance of ADSs, including issuances resulting from a distribution
of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the
deposit agreement terminates
Any cash distribution to ADS registered holders, including payment
of dividend
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
As necessary
During 2017, a fee of one US cent per ADS was collected on the 2016 final dividend paid in May and a fee of one US cent per ADS was collected on
the 2017 interim dividend paid in October. In the period 1 January 2017 to 16 February 2018, the total program payments made by Deutsche Bank
Trust Company Americas were $599,992.
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.
At the time of the full year results, the Board reviews 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 July or 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’.
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GROUP AND OTHER
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INFORMATION FOR SHAREHOLDERS continued
DIVIDENDS PER SHARE
The table below sets out the dividends per ordinary share in the last five years.
Pence per share:
Interim
Final
Total
US cents per share:
Interim
Final
Total
2017
2016
2015
2014
2013
Years ended 31 December
9.340
16.1831
25.523
12.300
22.700
35.000
10.080
14.420
24.500
12.300
18.500
30.800
8.533
14.300
22.833
13.111
19.000
32.111
7.578
13.574
21.152
12.222
20.667
32.889
7.211
11.121
18.332
11.556
18.889
30.445
1 Translated at the Bank of England rate on 16 February 2018.
From 6 April 2016 dividends below £5,000 per tax year became tax free and dividends above £5,000 per tax year became subject to personal
income tax at the rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. A self-assessment
form will therefore be required if your dividend income exceeds £5,000 per tax year. This will apply to both cash and dividend reinvestment plan
(‘DRIP’) dividends, although dividends paid on shares held within pensions and ISAs will be unaffected, remaining tax free. Please note, with effect
from 6 April 2018, the tax free allowance for dividend income will reduce from £5,000 to £2,000. This will impact the 2017 final dividend, which will
be payable on 9 May 2018, subject to shareholder approval.
Dividends shown in the table above, prior to 6 April 2016, include the associated UK tax credit of 10%, but exclude the deduction of
withholding taxes.
Since the second interim dividend for 2005, all dividends have been declared in US cents per ordinary share.
In respect of the proposed final dividend for the year ended 31 December 2017 of 22.7 US cents per ordinary share, the record date will be 6 April
2018 and the payment date will be 9 May 2018. The Sterling equivalent per ordinary share will be set following the record date. Shareholders may
elect to receive their dividend in either Sterling or US Dollars and the last day for election will be 20 April 2018. The ordinary shares will trade ex-
dividend on both the London and New York Stock Exchanges from 5 April 2018.
The proposed final dividend of 22.7 US cents per ordinary share, which together with the interim dividend of 12.3 US cents, makes a total for 2017
of 35.00 US cents.
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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:
2013
20141
2015
2016
2017
Quarters in the year ended 31 December:
2016:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2017:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2018:
1st Quarter (to 16 February 2018)
Last six months:
August 2017
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018 (to 16 February 2018)
High
£
8.68
11.93
12.12
13.10
14.31
11.79
12.67
13.10
12.81
12.52
13.82
13.99
14.31
12.94
13.97
13.99
14.31
14.12
13.24
12.94
12.80
Ordinary shares
Low
£
High
US$
ADSs
Low
US$
6.80
8.57
10.60
10.51
11.70
10.51
11.12
12.11
10.67
11.70
12.16
12.94
12.79
12.15
13.16
13.08
13.59
13.10
12.79
12.31
12.15
71.85
97.27
37.78
35.06
38.50
34.80
34.97
35.06
32.97
31.71
35.71
37.17
38.50
37.20
36.40
37.17
38.50
37.42
36.13
37.20
36.54
52.90
29.39
32.48
27.11
29.90
30.55
31.43
32.37
27.11
29.90
30.98
33.87
34.62
34.12
34.99
35.53
36.10
35.50
34.62
34.58
34.12
1 On 14 October 2014, the ratio of ordinary shares per ADS changed from five ordinary shares per ADS to two ordinary shares per ADS.
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 two ordinary shares from 14 October 2014, before
which time one ADS represented five ordinary shares. The ADS facility is sponsored by Deutsche Bank 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 122/9p 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. 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.
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GROUP AND OTHER
INFORMATION
INFORMATION FOR SHAREHOLDERS continued
SHARE CAPITAL continued
Shareholdings
As at 16 February 2018, to the knowledge of the Group, there were 14,877 registered holders of ordinary shares, of whom 96 had registered
addresses in the USA and held a total of 207,045 ordinary shares (0.023% of the total issued). Because certain ordinary shares are registered in the
names of nominees, the number of shareholders with registered addresses in the USA is not representative of the number of beneficial owners of
ordinary shares resident in the USA.
As at 16 February 2018, 33,740,645 ADSs equivalent to 67,481,290 ordinary shares or approximately 7.7% of the total ordinary shares in issue, were
outstanding and were held by 87 registered ADS 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 16 February 2018, 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:
BlackRock, Inc.
BlackRock, Inc.
16 February 2018
%
5.2
2017
%
5.2
16 February 2018
’000
46,427
2017
’000
46,427
As at 31 December
2015
%
5.2
2016
%
5.2
2016
’000
46,427
As at 31 December
2015
’000
46,427
The Company is not aware of any person who has a significant direct or indirect holding of securities in the Company, and is not aware of
any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of
the Company.
Purchase of ordinary shares on behalf of the Company
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. In order to
avoid shareholder dilution, shares allotted to employees through employee share schemes are bought back on a quarterly basis and subsequently
cancelled by the Company.
From 1 January 2017 to 16 February 2018, in the months listed below, the Company has purchased 2,907,586 ordinary shares at a cost of
$50,112,844.04.
20-21 February 2017 (partial Q4 2016)
18-22 May 2017 (Q1 2017)
2 August 2017 (Q2 2017)
7-8 November 2017 (Q3 2017)
14-15 February 2018 (Q4 2017)
Total shares
purchased
000s
429
960
309
652
557
Average price
paid per share
pence
1,205.0589
1,324.2686
1,319.9881
1,384.7434
1,261.6308
Approximate US$ value
of shares purchased
under the plan
$6,451,301
$16,520,793
$5,410,073
$11,837,805
$9,892,872
The shares were purchased in the open market by J.P. Morgan Securities plc and Merrill Lynch International 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 USA and Canada.
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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 USA, a corporation (or other entity taxable as a corporation) created or organised in or under the laws
of the USA (or any State therein or the District of Columbia), 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 that 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 and 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 US Holders whose functional currency for US federal income tax purposes is other than
the US Dollar. 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, any alternative minimum tax consequences, any US federal tax other than income 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 for tax
purposes. 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 2017.
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 distributions in the UK and the USA
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 generally be taxed as foreign source dividends to the extent paid out of the Company’s current or
accumulated earnings and profits as determined for US federal income tax purposes. Because the Company does not maintain calculations of its
earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends.
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, each determined in US Dollars.
SMITH & NEPHEW ANNUAL REPORT 2017 191
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TAXATION INFORMATION FOR SHAREHOLDERS continued
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 USA 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 USA will be subject to UK inheritance tax but will be entitled to a credit for any US federal
estate tax charged in respect of ADSs and ordinary shares in computing the liability to UK inheritance tax. Special rules apply where ADSs and
ordinary shares are business property of a permanent establishment of an enterprise situated in the UK.
US information reporting and backup withholding
Payments of dividends on, or proceeds from the sale of, ADSs or ordinary shares that are made within the USA or through certain US-related
financial intermediaries generally will be subject to US information reporting, and may be subject to backup withholding, unless a 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.
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.
US Holders who are individuals or certain specified 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 ADSs
or ordinary shares.
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.
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.
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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.
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 2017.
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.
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ARTICLES OF ASSOCIATION continued
The necessary quorum for a general meeting is two shareholders present in person or by proxy carrying the right to vote upon the business to
be transacted.
Matters are transacted at general meetings of the Company by the processing and passing of resolutions of which there are two kinds; ordinary or
special resolutions:
– Ordinary resolutions include resolutions for the re-election of Directors, the approval of financial statements, the declaration of dividends (other
than interim dividends), the appointment and re-appointment of auditors or the grant of authority to allot shares. An ordinary resolution requires
the affirmative vote of a majority of the votes of those persons voting at the meetings at which there is a quorum.
– 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 US$1,000 each.
Amendments
The Company does not have any special rules about amendments to its Articles of Association beyond those imposed by law.
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CROSS REFERENCE TO FORM 20-F
This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.
Part I
Item 1
Item 2
Item 3
Item 4
Item 4A
Item 5
Item 6
Item 7
Item 8
Item 9
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
A – Selected Financial Data
B – Capitalization and Indebtedness
C – Reason for the Offer and Use of Proceeds
D – Risk Factors
Information on the Company
A – History and Development of the Company
B – Business Overview
C – Organizational 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
Directors, Senior Management and Employees
A – Directors and Senior Management
B – Compensation
C – Board Practices
D – Employees
E – Share Ownership
Major shareholders and Related Party Transactions
A – Major shareholders
– Host Country shareholders
B – Related Party Transactions
C – Interests of experts and counsel
Financial information
A – Consolidated Statements and Other Financial Information
– Legal Proceedings
– Dividends
B – Significant Changes
The Offer and Listing
A – Offer and Listing Details
B – Plan of Distribution
C – Markets
D – Selling shareholders
E – Dilution
F – Expenses of the Issue
Page
n/a
n/a
176–177
n/a
n/a
172–175
165–171, 184
2–47, 121–124, 169–175, 183
7, 136–137, 167–168
131–132, 171
None
6–7, 36–39, 172–175, 183
39, 140–142, 158-159
3, 5, 13, 125
16–17, 38-39, 171–175
171
182
200
50–55
79–105
50–78
25–28, 126
91, 93, 162
189
189
162, 171
n/a
107–162
149–150
186-187
None
188–189
n/a
188
n/a
n/a
n/a
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CROSS REFERENCE TO FORM 20-F continued
Part I
Item 10
Item 11
Item 12
Part II
Item 13
Item 14
Item 15
Item 16
Part III
Item 17
Item 18
Item 19
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
A – Debt securities
B – Warrants and rights
C – Other securities
D – American Depositary shares
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
(Reserved)
A – Audit Committee Financial Expert
B – Code of Ethics
C – Principal Accountant Fees and Services
D – Exemptions from the Listing Standards for Audit Committees
E – Purchases of Equity Securities by the Issuer and Affiliated Purchasers
F – Change in Registrant’s Certifying Accountant
G – Corporate Governance
H – Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
Page
n/a
192–193
n/a
189
190–191
n/a
n/a
200
167–170
143–147, 171–175
n/a
n/a
n/a
185–186
None
None
71–78
n/a
71
78
75–76, 126
n/a
157, 189
n/a
56
n/a
n/a
107–162
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GLOSSARY OF TERMS
Unless the context indicates otherwise, the following terms have the meanings shown below:
Term
ACL
ADR
ADS
Arthroscopic Enabling Technologies
Advanced Wound Bioactives
Advanced Wound Care
Advanced Wound Devices
AGM
Arthroscopy
Basis Point
Chronic wounds
Company
Companies Act
Emerging Markets
EPSA
Endoscopy
Established Markets
Euro or €
FDA
Financial statements
FTSE 100
Group or Smith & Nephew
Health economics
Hip Implants
IFRIC
IFRS
Knee implants
LSE
MHRA
Meaning
The anterior cruciate ligament (ACL) is one of the four major ligaments in the human knee.
In the US, the Company’s ordinary shares are traded in the form of American Depositary Shares
evidenced by American Depositary Receipts (ADRs).
In the US, the Company’s ordinary shares are traded in the form of American Depositary Shares (ADSs).
A product group which includes 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, electromechanical and mechanical tissue
resection devices, and hand instruments for removing damaged tissue.
A product group which includes biologics and other bioactive technologies that provide unique
approaches to debridement and dermal repair/regeneration.
A product group which includes products for the treatment and prevention of acute and chronic wounds,
including leg, diabetic and pressure ulcers, burns and post-operative wounds.
A product group which includes traditional and single-use Negative Pressure Wound Therapy and
hydrosurgery systems.
Annual General Meeting of the Company.
Endoscopy of the joints is termed ‘arthroscopy’, with the principal applications being the knee
and shoulder.
One hundredth of one percentage point.
Chronic wounds are those with long or unknown healing times including leg ulcers, pressure sores and
diabetic foot ulcers.
Smith & Nephew plc or, where appropriate, the Company’s Board of Directors, unless the context
otherwise requires.
Companies Act 2006, as amended, of England and Wales.
Emerging Markets include Greater China, India, Brazil and Russia.
EPSA (Adjusted earnings per ordinary share) is a trend measure, which presents the long-term
profitability of the Group excluding the post-tax 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 and
is determined by adjusting attributable profit for the items that are excluded from operating profit when
arriving at trading profit and items that are recognised below operating profit that affect the Group’s short-
term profitability.
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.
US Food and Drug Administration.
Refers to the consolidated Group Accounts of Smith & Nephew plc.
Index of the largest 100 listed companies on the London Stock Exchange by market capitalisation.
Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context
otherwise requires.
A branch of economics concerned with issues related to efficiency, effectiveness, value and behaviour in
the production and consumption of health and healthcare.
A product group which includes specialist products for reconstruction of the hip joint.
International Financial Reporting Interpretations as adopted by the EU and as issued by the International
Accounting Standards Board.
International Financial Reporting Standards as adopted by the EU and as issued by the International
Accounting Standards Board.
A product group which includes an innovative range of products for specialised knee replacement
procedures.
London Stock Exchange.
The Medicines and Healthcare products Regulatory Agency in the UK.
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Parent Company
Pound Sterling, Sterling, £, pence or p References to UK currency. 1p is equivalent to one hundredth of £1.
SEC
Sports Medicine Joint Repair
GLOSSARY OF TERMS continued
Term
Negative Pressure Wound Therapy
NHS
NYSE
Orthopaedic products
Other Surgical Businesses
OXINIUM
Trading results
Trauma & Extremities
UK
Underlying growth
US
US Dollars, $ or cents or ¢
Meaning
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.
The UK National Health Service.
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.
A product group which includes robotics-assisted surgery, various products and technologies to assist in
surgical treatment of the ear, nose and throat, and gynaecological instrumentation, until the Gynaecology
business disposal in August 2016.
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.
Smith & Nephew plc.
US Securities and Exchange Commission.
The Sports Medicine Joint Repair franchise includes instruments, technologies and implants necessary to
perform minimally invasive surgery of joints.
Trading profit, trading profit margin (trading profit expressed as a percentage of revenue), trading cash
flow and trading profit to cash conversion ratio (trading cash flow expressed as a percentage of trading
profit) are trend measures, which present the long-term profitability of the Group excluding the impact
of specific transactions that management considers affect the Group’s short-term profitability and
cash flows. The Group has identified the following items, where material, as those to be excluded from
operating profit and cash generated from operations when arriving at trading profit and trading cash flow,
respectively: acquisition and disposal related items arising in connection with business combinations,
including amortisation of acquisition intangible assets, impairments and integration costs; restructuring
events; gains and losses resulting from legal disputes and uninsured losses. In addition to these items,
gains and losses that materially impact the Group’s profitability or cash flows on a short-term or one-off
basis and the cash cost to fund defined benefit pension schemes that are closed to future accrual are
excluded from operating profit and cash generated from operations when arriving at trading profit and
trading cash flow, respectively.
A product group which includes internal and external devices used in the stabilisation of severe fractures
and deformity correction procedures.
United Kingdom of Great Britain and Northern Ireland.
Growth after adjusting for the effects of currency translation and the inclusion of the comparative impact
of acquisitions and exclusion of disposals.
United States of America.
References to US currency. 1 cent is equivalent to one hundredth of US$1.
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INDEX
2016 Financial highlights
Accounting Policies
Accounts Presentation
Acquisitions
Acquisition related costs
American Depositary Shares
Articles of Association
Audit fees
Board
Business overview
Business segment information
Cash and borrowings
Chairman’s statement
Chief Executive Officer’s review
Chief Financial Officer’s review
Company balance sheet
Company notes to the accounts
Contingencies
Contractual obligations
Corporate Governance Statement
Critical judgements and estimates
Cross Reference to Form 20-F
Currency fluctuations
Currency translation
Deferred taxation
Directors’ Remuneration Report
Directors’ responsibility statement
Dividends
Earnings per share
Employees/People
Employee share plans
Ethics and compliance
Executive Officers
Factors affecting results of operations
Financial instruments
Financial review
Glossary of terms
Goodwill
Group balance sheet
Group cash flow statement
Group companies
Group history
Group income statement
Group notes to the accounts
Group overview
Group statement of changes in equity
Group statement of comprehensive income
Independent auditor’s reports
Information for shareholders
Intangible assets
Intellectual property
Interest and other finance costs
Inventories
Investments
Investment in associates
Key Performance Indicators
Leases
Legal and other
Legal proceedings
Liquidity and capital resources
Manufacturing and quality
New accounting standards
Off-balance sheet arrangements
Operating profit
Other finance costs
Our marketplace
Outlook and trend information
Parent Company accounts
People/Employees
Provisions
Property, plant and equipment
Regulation
Related party transactions
Research and development
Restructuring and rationalisation expenses
Retirement benefit obligation
Risk factors
Risk report
Sales and marketing
Selected financial data
Share based payments
Share capital
Strategic priorities
Sustainability
Taxation
Taxation information for shareholders
Total shareholder return
Trade and other payables
Trade and other receivables
Training and education
Treasury shares
183
114, 119–120
199
15, 37, 159–161
123, 180
185–186
192–193
76, 126
50–53
6–7, 171–175
18–24, 121–124
140–142
2–3
4–5
36–37
163
165–170
148–150, 166
182
56
114
194–195
173
120
129
79–105
107
158, 186–187
3, 37, 38, 130–131
25–28
162
32, 69–70
54–55
175
143–147
38–39
196–197
133–134
116
117
167–168
171
115
119–162
6–7, 171
118
115
108–113
184–200
134–135
149–150
126
137
136
136–137
11–15, 39
142, 161
123, 180
149–150
39, 142
29–30
119–120
171
125–126
126
16–17
16–17, 38–39,
171–175
163–170
25–28
148–150
131–132
17, 43
162, 171
28–29
123, 180
150–155
172–175
40–49
30–31
176–177
162
156–158, 188–189
10–15
33–35
127–129
190–191
94
139
138–139
32
157
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IRAN NOTICE
Section 13(r) of the Exchange Act requires issuers to make specific disclosure in their annual reports of certain types of dealings with Iran, including
transactions or dealings with Iranian government-owned entities, as well as dealings with entities sanctioned for activities related to terrorism or
proliferation of weapons of mass destruction, even when those activities are not prohibited by US law and do not involve US persons. The Group
does not have a legal entity based in Iran, but in 2017 it exported certain medical devices to Iran, via sales by non-US entities, to a new privately
owned Iranian distributor for sale in Iran. Prior to 2017, the Group had sold products via non-US entities to a privately owned distributor based in
the UAE who sold products into Iran. In both cases, sales were to hospitals that we understand are owned or controlled by the Government of Iran.
The Group’s direct and indirect sales of US origin medical devices into Iran are permitted pursuant to section 560.530(a)(3)(i) of the Iranian
Transactions and Sanctions Regulations, and its indirect sales of non-US origin medical devices into Iran are made in accordance with applicable
law. The Group also provides training to its distributor(s) and surgeons in Iran as necessary and ordinarily incident to the safe and effective use
of the medical devices, which is also permitted by applicable law. In 2017, the Group’s gross revenues from sales to Iran were approximately $5.2m
and net losses were approximately $4.0m, due in part to the transition to the new distributor. For prior years, approximate gross revenues and net
profits of the Group from sales to Iran were: 2016: gross revenues $1.2m, net losses $0.4m; 2015: gross revenues $4.0m, net profits $0.8m; 2014:
gross revenues $3.8m, net profits $1.1m; and 2013: gross revenues $3.5m, net profits $1.2m.
The Group is reporting the entire gross revenues and net profits for the activities described above, which figures include sales of US origin medical
devices. The Group has included sales of US origin medical devices in the total gross revenue and net profit figures above as it does not separately
break out revenues and profits by country of origin. The Group intends to continue to engage in the activities described above in accordance with
applicable law.
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 and trauma, sports medicine and advanced wound management, with revenue of approximately $4.8bn in 2017. 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 2017. 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 100 countries. The Group is engaged in a single business
activity, being the development, manufacture and sale of medical technology products and services. The Group is structured as two geographical
selling regions: US and International; with a president for each who is responsible for the commercial view of that region. Research & Development,
Manufacturing, Supply Chain and Central functions are managed globally for the Group as a whole.
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 196–197. The product
names referred to in this document are identified by use of capital letters and the ◊ symbol (on first occurrence) and are trademarks owned by or
licensed to members of the Group.
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PRESENTATION
The Group’s fiscal year end is 31 December. References to a particular year in this Annual Report 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 16 February 2018, the latest practicable date for this Annual Report, the Bank of England rate was US$1.40
per £1.00.
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’ and ‘Strategic Priorities’, 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 healthcare
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 172–175 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.
PRODUCT DATA
Product data and product 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 website at www.sec.gov that contains reports and other information regarding registrants
that file electronically with the SEC. This Annual Report and some of the other information submitted by the Group to the SEC may be accessed
through the SEC website.
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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 landfill.
Designed and Produced by Radley Yeldar.
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Smith & Nephew plc
15 Adam Street
London WC2N 6LA
United Kingdom
T +44 (0) 20 7401 7646
enquiries@smith-nephew.com
www.smith-nephew.com