Smith & Nephew Annual Report 2018

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Life Unlimited

SMITH & NEPHEW ANNUAL REPORT 2018

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Smith & Nephew Annual Report 2018

CONTENTS

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CHAIR’S INTRODUCTION

LEADERSHIP

NOMINATION & GOVERNANCE
COMMITTEE REPORT

COMPLIANCE & CULTURE
COMMITTEE REPORT

AUDIT COMMITTEE REPORT

DIRECTORS’ REMUNERATION REPORT 84

AT A GLANCE

CHAIR’S STATEMENT

CHIEF EXECUTIVE OFFICER’S REVIEW

OUR CULTURE PILLARS

OUR STRATEGIC IMPERATIVES

OUR MARKETS

OUR BUSINESS MODEL

OUR FRANCHISES

OUR RESOURCES

SUSTAINABILITY

CHIEF FINANCIAL OFFICER’S REVIEW 36

FINANCIAL REVIEW

RISK REPORT

STATEMENT OF DIRECTORS’
RESPONSIBILITIES

GROUP INFORMATION

116

OTHER FINANCIAL INFORMATION

187

192

INDEPENDENT AUDITOR’S UK REPORT 117

INFORMATION FOR SHAREHOLDERS 201

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

124

125

126

127

128

129

GO ONLINE
To learn more about
Smith & Nephew, please visit
www.smith-nephew.com

DRAFT

COMPANY FINANCIAL STATEMENTS 178

NOTES TO THE COMPANY ACCOUNTS 180

Life Unlimited

SMITH & NEPHEW ANNUAL REPORT 2018

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Our purpose

Physical health is never just about
our body. It’s our mind, feelings and
ambitions. When something holds
it back, it’s our whole life on hold.
We’re here to change that, to use
technology to take the limits off living,
and help other medical professionals
do the same.
So that farmworkers, rugby players,
grandmas and their grandkids stare
down fear, see that anything’s possible,
then go on stronger. Inspired by a
simple promise. Two words that bring
together all we do…
Life Unlimited

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At a glance

Smith & Nephew is a leading portfolio
medical technology company

HIGHLIGHTS

REVENUE

$4,904m

EMPLOYEES

16,000+

YEARS

160+

COUNTRIES SUPPORTING
HEALTHCARE PROFESSIONALS

100+

REVENUE BY GEOGRAPHY

United States

Other Established Markets

Emerging Markets

$2,354m

$1,693m

$857m

MANUFACTURING & QUALITY

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.

PAGE 28-29

OUR PURPOSE

Life Unlimited
Smith & Nephew exists to restore
people’s bodies, and their self-belief.

OUR CULTURE PILLARS

These guide our behaviours
and build a winning spirit.

Care
A culture of empathy and understanding
for each other, our customers and patients

Collaboration
A culture of teamwork based on mutual
trust and respect

Courage
A culture of continuous learning,
innovation and accountability

PAGE 8

OUR STRATEGIC IMPERATIVES

Five new strategic imperatives form
our value creation plan for the medium term.

1 Achieve the full potential of our portfolio

2 Transform the business through

enabling technologies

3 Expand in high-growth segments

4 Strengthen talent and capabilities

5 Become the best owner

PAGE 9

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AT A GLANCE continued

OUR GLOBAL FRANCHISE AREAS

ORTHOPAEDICS
Orthopaedics includes an innovative range
of Hip and Knee Implants used to replace
diseased, damaged or worn joints and
Trauma products used to stabilise severe
fractures and correct bone deformities.

PAGE 15-17

SPORTS MEDICINE & ENT
Our Sports Medicine and Ear, Nose and Throat
(ENT) businesses offer advanced products
and instruments used to repair or remove soft
tissue. They operate in growing markets where
unmet clinical needs provide opportunities for
procedural and technological innovation.

ADVANCED WOUND MANAGEMENT
Our Advanced Wound Management portfolio
provides a comprehensive set of products to
meet broad and complex clinical needs, to
help healthcare professionals get CLOSER TO
ZERO human and economic consequences
of wounds.

PAGE 18-19

PAGE 20-22

OUR NEW COMMERCIAL STRUCTURE

In 2018, we initiated substantial changes to our commercial organisation
to move to a franchise-led model from January 2019. Under this,
a president leads each of our three specialised global marketing
franchises – Orthopaedics, Sports Medicine & ENT and Advanced

Wound Management. Aligned with and supporting the franchises
are presidents and regional commercial organisations for Europe,
Middle East, and Africa (EMEA), and Asia Pacific (APAC). The franchise
presidents also have commercial responsibility for the US.

INNOVATION

Smith & Nephew delivers innovation that aims to improve
quality of life. New products and business models enable
healthcare professionals to offer patients improved outcomes.
We develop technology through our global R&D programme,
and additionally acquire exciting products where we can
add value through technical or commercial acumen.

PAGE 30-31

10% MORE INVESTED
IN R&D IN 2018

$246m

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Financial highlights

REVENUE

$4,904m

Reported
+3%

Underlying1
+2%

Group revenue was up 3% on a reported basis
(including 1% from foreign exchange tailwind)
and 2% on an underlying basis.

REVENUE BY MARKET

KPI

Established Markets
$4,047m
Reported

Emerging Markets
$857m
Reported

+2%
Underlying1
+1%

+7%
Underlying1
+8%

DIVIDEND PER SHARE

OPERATING PROFIT

36.0¢

+3%

$863m

KPI

-8%

The 3% year-on-year increase reflects the
growth in adjusted earnings and is in-line
with our progressive policy.

Operating profit margin of 17.6% is down
200bps year-on-year due to impact of
restructuring charges.

EARNINGS PER SHARE (EPS)

TRADING PROFIT1

76.0¢

-13%

$1,123m

KPI

+7%

The decrease reflects the impact of the
restructuring charges relating to the
APEX programme.

Trading profit margin1 was 22.9%, up
90bps year-on-year reflecting both improved
trading performance and cost control and a
50bps one-off legal settlement benefit.

ADJUSTED EARNINGS PER SHARE1 (EPSA)

R&D EXPENDITURE

KPI

100.9¢

+7%

$246m

+10%

The increase reflects improved trading
performance and lower tax rate on trading.1

R&D expenditure was up 10% reflecting our
increased investment in new products and
clinical evidence.

RETURN ON INVESTED CAPITAL1 (ROIC)

12.5%

-180bps

The decrease reflects primarily
the fall in operating profit.

These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 194–198.

DEAR SHAREHOLDER
2018 was a busy year for Smith & Nephew.
Performance improved across the year, whilst
the Company underwent a period of significant
transformation; in leadership, structure, culture
and strategy.

CHIEF EXECUTIVE OFFICER
In 2017, Olivier Bohuon told us he intended
to retire after more than seven years as Chief
Executive Officer. Under his leadership,
Smith & Nephew experienced important
and necessary change and he significantly
strengthened the foundations of our Company.
I would like to take this opportunity to thank
him for his service and wish him a long and
healthy retirement.

In May 2018, Namal Nawana joined Smith
& Nephew as Chief Executive Officer
and was appointed to the Board as an
Executive Director.

Namal is a global industry insider, an innovator,
and proven leader. Most recently, he was Chief
Executive Officer, President and a member of
the Board of Directors of medical diagnostics
company Alere, Inc. Here he led the successful
turnaround of this global business before its
acquisition by Abbott Laboratories in 2017.

Before joining Alere, Namal spent more than
15 years at Johnson & Johnson, in roles of
increasing responsibility in Europe, Asia and
North America, culminating in Worldwide
President of DePuy Synthes Spine. We were
delighted when he agreed to join Smith &
Nephew.

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Chair’s statement

A period of significant
transformation; in leadership,
structure, culture and strategy

The phrase ‘step change’ is used
too often, but today I believe that
Smith & Nephew stands at the
start of such a transformation.

Roberto Quarta
Chair

LEADERSHIP & CULTURE
Since May, Namal has worked closely with
the Board. We have reviewed and endorsed
his actions to restructure the Company.
He has rapidly built a highly experienced new
leadership team, bringing in strong external
leaders as well as promoting from within
Smith & Nephew. Members of this team
meet regularly with the Board, and we have
seen for ourselves the clear focus and strong
collaboration across this team.

The Board has long held culture as an
important indicator of the underlying health
of the Company. We have welcomed the
importance Namal has placed on this, and his
forensic approach to defining the Company’s
purpose and the behaviours all employees
must display to deliver the strategy. This was
not an academic exercise, or conducted by
just the senior management team, but rather
a case study in how to engage employees,
with 6,000 employees contributing to the
process. The Board believes that the new
purpose – Life Unlimited – and Culture Pillars
of Care, Collaboration and Courage – are both
authentic and inspiring.

STRATEGY
In December, the Board approved the new
strategic imperatives that will drive value
creation in the medium term. This was a
culmination of a collaborative process between
the Board and the Chief Executive Officer
and senior leadership team over a number
of months. During this process we tested
their insight of, and vision for, the medical
technology industry and found their analysis
of the opportunities the Company faces was
detailed and compelling.

The five strategic imperatives are similarly
robust. The Board welcomes their wide-ranging
scope – to accelerate growth, both organically
and through acquisitions, strengthen people
and capabilities, and improve the operations
of our business globally.

2018 PERFORMANCE
The Board closely monitors the performance
of the business through regular updates from
the Chief Executive Officer and Chief Financial
Officer and other members of the senior
leadership team.

2018 performance was solid, with an improved
dynamic in the second half. The Board
noted how well the new team delivered this
acceleration whilst also undertaking important
work to restructure the Group. Whilst there is
still much work to be done, the new Group
structure is now in place. The Board endorses
the guidance for further progress in 2019.

The Board is pleased that shareholders
will benefit from strong growth in adjusted
earnings per share, which is reflected in the
3% increase in the full year dividend to 36.0
cents per share. The performance of our
shares is also noteworthy, increasing 13% from
when Namal joined up to the end of 2018,
strongly outperforming the FTSE 100.

BOARD CHANGES
During 2018, we welcomed Roland
Diggelmann as a Non-Executive Director.
Roland was, until recently, Chief Executive
Officer of Roche Diagnostics and a member
of the Corporate Executive Committee of
F. Hoffmann-La Roche Ltd. He brings direct
experience in orthopaedics from previous
senior roles at Zimmer.

Ian Barlow will step down from the Board at the
Annual General Meeting in April 2019, having
completed a nine-year term. Ian has served
Smith & Nephew with great distinction as our
Senior Independent Director, and previously
as Chair of the Audit Committee. I have been
grateful for his counsel and thank him for his
significant contribution over the years.

Michael Friedman, Chair of our Compliance
& Culture Committee, will also be retiring at
that time after six years’ service, and I thank
him for his leadership in this crucial area.
Robin Freestone will replace Ian as Senior
Independent Director and Marc Owen will
replace Michael as Chair of the extended
Compliance & Culture Committee.

Smith & Nephew values diversity, and I am
pleased that this is reflected in our Board,
which, following these changes will be
30% female and include six nationalities.
We continue to look for opportunities to
widen our outlook and expertise with an
expanded mandate.

The phrase ‘step change’ is used too often, but
today I believe that Smith & Nephew stands at
the start of such a transformation. Whilst there
is still much work to be done, the Board is
excited by the prospects and looks forward to
supporting the new management team as they
realise Smith & Nephew’s full potential.

Yours sincerely,

Roberto Quarta
Chair

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Chief Executive Officer’s review

At Smith & Nephew, we aspire to be
amongst the highest-performing portfolio
medical technology companies

DEAR SHAREHOLDER
Everyone has health issues at some stage
in their life. At Smith & Nephew, we have
the opportunity to help patients get back to
their lives as quickly as possible, and as well
as possible. Whether it be in Orthopaedics,
Sports Medicine or Wound Management we
recognise this opportunity and it inspires and
motivates our work each day around the world.

To support this brand purpose we have
developed three culture pillars: Care,
Collaboration and Courage – which we
launched with employees at the end of 2018.
Grounded in the service of patients and
practitioners, these simple tenets guide us
in our work together and couple the idea of
continuous learning and improvement with the
aspiration to lead in all our endeavours.

CREATING A PURPOSE-DRIVEN
CULTURE
I believe that a successful and sustainable
business has a foundation that is built on
a purpose-driven culture. When I joined,
we asked our employees which elements
of our culture they liked and that we
should retain, as well as what we needed
to improve at Smith & Nephew. 6,000
employees responded.

It was clear that our colleagues cared deeply
about the work that we do. It was also clear
that they recognised that we could do better.
The opportunity was to find an authentic and
inspiring purpose that combines this caring
spirit with a greater focus on working more
effectively and instilling a strong accountability
to deliver consistently on our commitments.

Life Unlimited captures the essence of Smith
& Nephew and our purpose to address
meaningfully the health issues that hinder
people from living their lives to their fullest.

OUR BUSINESS AND
STRATEGIC IMPERATIVES
Smith & Nephew is a portfolio medical
technology company with a broad and deep
range of high quality products. We have
examples of market-leading technology in
almost every area of our business. We also
operate in large and attractive global markets,
with solid long-term growth prospects
supported by favourable demographics and
lifestyle trends.

At the end of 2018, we launched five new
strategic imperatives that recognise the
specific business and markets we operate in,
and form the basis of our value creation plan
for the medium-term.

1 Achieve the full potential of our portfolio
2

Transform the business through
enabling technologies

3 Expand in high-growth segments
4 Strengthen talent and capabilities
5 Become the best owner

These highlight the key multi-year initiatives
in which the Company is now engaged.
They also detail the specific plans and metrics
for the upcoming calendar year from which
all employees build their own individual
annual objectives.

INCREASING CUSTOMER
CENTRICITY
One of the most significant changes we are
making is implementing a new commercial
model. In line with industry best practice for
global medical technology businesses, we
are moving from a regional selling model to
a global franchise structure. We have put
dedicated presidents of Orthopaedics, Sports
Medicine & ENT, and Advanced Wound
Management in place.

Each president has global upstream marketing
responsibility, as well as full commercial
responsibility for the franchise in the US.
Outside the US, we will have two regions,
Europe, Middle East and Africa, and Asia
Pacific. Both regions are now represented on
the Smith & Nephew Executive Committee
ensuring continued focus on commercial
execution. As specialists, the presidents bring
great insight into our customers’ current and
future needs, wherever they are in the world
and will be able to direct the full resources of
their franchises to meet these.

I am delighted with the quality of leaders
we have attracted. The focus is now on
unlocking the potential of Smith & Nephew,
with five members of my executive team
directly responsible for driving growth in their
franchises and regions.

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CHIEF EXECUTIVE OFFICER’S REVIEW continued

I am delighted with the quality of
talent we have attracted. The focus
is now on unlocking the potential
of Smith & Nephew, with five
members of my executive team
directly responsible for driving
organic growth in their franchises
and regions.

Namal Nawana
Chief Executive Officer

ADDING VALUE THROUGH
ACQUISITIONS
Smith & Nephew completed 2018 with a net
debt1 to adjusted EBITDA ratio2 of 0.8x and,
with strong cash flows and cash conversion,
we will look to appropriately deploy capital
to M&A initiatives more significantly than in
recent years as part of our business model
for success.

Technology acquisitions such as Rotation
Medical have proven to be a great success.
From its REGENETEN™ Bioinductive Implant for
rotator cuff repair, we have driven performance
well-ahead of our deal model, with more than
130% growth in 2018. We believe there is still
much more to come from this product as we
add manufacturing capacity and launch in new
international markets in 2019.

In December, we announced the acquisition
of Ceterix Orthopaedics, the developer of
the NovoStitch™ Pro Meniscal Repair System.
This product is highly complementary to our
portfolio and will significantly expand our
opportunity in the underserved meniscal
repair segment.

I expect us to continue to enhance our position
in high-growth, high-innovation markets over
time and capitalise on our platform as a global
medical device portfolio company.

2018 RESULTS
In 2018, revenue growth was 3% on a
reported basis and 2% underlying, and we
delivered a meaningful improvement in trading
profit margin.

Geographically, we continued to build upon
our strong position in the Emerging Markets,
which now account for 17% of Group revenue.
A solid performance in the US, our largest
market, was somewhat offset by continued
weakness in some European markets.

At a franchise level, highlights included the
market beating growth from Knee Implants,
the strong return to growth delivered in Hip
Implants, and the increased adoption of our
NAVIO robotics platform. Growth from our
Advanced Wound Devices franchise also
stood out, driven by our PICO single-use
Negative Pressure Wound Therapy system.
Actions are underway to improve weaker
performances from Arthroscopic Enabling
Technology and Advanced Wound Bioactives.

After a slow start to 2018, it’s pleasing that
our team accelerated performance as the
year progressed, whilst at the same time
making the important changes to how we run
the Company.

FOCUSED ON DELIVERY
At Smith & Nephew, we aspire to be amongst
the highest-performing portfolio medical
technology companies.

We start 2019 with a new executive leadership
team and operating structure in place.
We have clarified our brand purpose with Life
Unlimited and have introduced new culture
pillars and strategic imperatives to support it.

Together, we are confident that we are building
the right foundation for sustainable success
and an ability to grow consistently with our
markets in the future. This confidence is
reflected in our financial guidance for further
improvements in both revenue and margin
performance in 2019, explained in detail by
our Chief Financial Officer, Graham Baker,
on page 37 of this Annual Report.

There is much to do to achieve our goals
and aspirations but we are grateful for the
opportunity to positively affect the patients,
practitioners and health systems that we serve
globally. I look forward to updating you on
our progress.

Yours sincerely,

Namal Nawana
Chief Executive Officer

1 Net debt is reconciled in Note 15 to the Group accounts.

These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194–198.

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Our culture pillars

A successful business needs to
have a purpose-driven culture

Life Unlimited captures the
essence of Smith & Nephew
and our purpose to address
meaningfully the health issues
that hinder people from living
their lives to their fullest.

Namal Nawana
Chief Executive Officer

Life Unlimited

CARE

COLLABORATION

COURAGE

A culture of empathy and
understanding for each other,
our customers and patients

A culture of teamwork,
based on mutual
trust and respect

A culture of continuous
learning, innovation
and accountability

– We step into our customers’ shoes, anticipate
their needs and deliver the highest levels
of innovation and service

– We are stronger, and achieve more,

as a team. By joining forces we are both
unstoppable and efficient

– We strive to have the best understanding of
the patients whom we ultimately serve, and
we develop our products with them in mind

– Our passion for what we do drives us to
continuously improve and expand the
positive impact that we have on the world

– Through transparent and respectful

communication, we are motivated by
a shared purpose and understand the
impact of our individual contributions
on our collective goals

– By encouraging different perspectives
and leveraging our global experiences,
we achieve the best outcomes

– By staying curious, thinking big and having
the humility to challenge our conventional
ways of thinking, we push the boundaries
of our industry

– Fostering an entrepreneurial, can-do

attitude we look for solutions and achieve
them through talent and force of will
– With a growth mindset, we have the

capability and confidence to win, and
we do so with integrity and the highest
ethical standards

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Our strategic imperatives

Five new strategic imperatives
form our value creation plan
for the medium term

GROW

TOGETHER

EFFECTIVELY

Achieve the full potential of our portfolio

Improving execution to accelerate organic performance
with a focus on (i) platform-specific plans, (ii) Ambulatory
Surgery Centres and (iii) Emerging Markets, especially
China and Latin America.

Transform the business through
enabling technologies

By acquiring and developing leading enabling technologies
to transform procedures, including robotics, imaging and
augmented reality.

Expand in high-growth segments

By accelerating portfolio growth, strengthening or establishing
leadership positions, and driving meaningful synergies.

Strengthen talent and capabilities

By developing a winning culture to improve
retention and attract talent.

Become the best owner

To drive meaningful margin expansion through operational
transformation and organisation simplification.

MEASURING PERFORMANCE
Behind our strategic imperatives
sits a detailed dashboard of
key performance indicators that
we use to track and evaluate
our performance. These cover
Commercial, Operations, R&D,
People, our SG&A and cost base,
as well as return on investment
and cash.

Whilst many of these are
commercially sensitive, and hence
will not be published, they all
support our objective to deliver
on our financial guidance for 2019.
This is detailed in the CFO review
on page 37.

Other published metrics include our
work to simplify the organisation and
processes through our restructuring
programme APEX, and our focus on
turning profit into cash. These are
also described in more detail in the
CFO review.

2018 KPIs were set against previous
strategic priorities. These measured
revenue growth in our Established
and Emerging Markets, operating
and trading profit margin and R&D
investment. These measures are
reported on page 4.

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Our markets

Competing in large,
attractive markets

The healthcare sector is a growing market driven by long-term trends.
Global healthcare spend amounted to $7.7 trillion, or 10.4% of global GDP
in 2017, and is projected to increase at an annual rate of 5.4% over the
five year period to 2022.*

The medical devices and supplies segment
of healthcare is today worth more than
$400 billion per annum. Within that, Smith
& Nephew’s product segments are worth
approximately $38 billion, growing at around
4% annually.

The main drivers for healthcare demand
include demographic shift towards ageing
populations and an increase in lifestyle-
related ailments such as diabetes and obesity.
The World Health Organisation (WHO),
for example, states that obesity has nearly
tripled since 1975 worldwide – a major risk
factor for diseases such as diabetes and
musculoskeletal disorders.

Faster growing emerging markets with an
emerging middle class also drive demand.
The Brookings Institute estimates that 65%
of the global population will be middle class
by 2030. Access to middle class comforts
encourages sedentary lifestyles that may lead
to greater incidence of diabetes, obesity and
other health conditions. Wealthier patients also
try to exert more choice over healthcare and
have greater expectation of quality of life.

The number of people aged 60 years and
older will outnumber children younger than
five years by 2020, according to WHO.
This change in dynamic puts healthcare
providers and governments increasingly
under economic pressure. Politicians seek
ways to reduce overall healthcare expenditure
whilst maintaining the quality of care and
treatment provided.

COMPLIANCE
Interactions between medical device
companies and healthcare professionals
or government officials are subject to strict
control. These include laws and industry
codes, including the AdvaMed Code of
Ethics and the Med Tech Europe Code of
Business Practice.

Legislation covering corruption and bribery,
such as the UK Bribery Act and the US
Foreign Corrupt Practices Act, also applies to
Smith & Nephew world-wide. There is also a
strong focus on compliance and cost control
in emerging markets such as China. We are
committed to ensuring regulatory compliance
globally, at all times, and to execute business
with integrity.

GEO-POLITICAL FACTORS
Some uncertainty continues around the UK’s
exit from the European Union and its regulatory
impact. The European Union is the UK’s
biggest export market for medical devices.
Around $2 billion worth of products are sent
to European countries each year.

Smith & Nephew has taken steps to prepare
for the various Brexit scenarios, including
moving certain of its product certifications from
BSI UK to BSI Netherlands, ensuring these
remain with a Notified Body domiciled in the
European Union. There is also uncertainty
around US-China trade relations, which has
resulted in tariffs on some medical devices
being exported between the two countries.

A HIGHLY REGULATED INDUSTRY
The medical device sector is highly regulated.
This is vital in determining whether products
are both safe and effective.

In Europe, the European Union Medical Device
Regulations came into force in 2017 and will
apply from May 2020. This will also 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 to demonstrate the value of
innovation through evidence.

The major regulatory agencies for Smith &
Nephew’s products include the US FDA, the
Medicines and Healthcare products Regulatory
Agency (MHRA) in the UK, the Ministry of
Health, Labour and Welfare in Japan, the
National Medical Products Administration
(NMPA) in China, formerly the China Food
and Drug Administration, and the Australian
Therapeutic Goods Administration.

We are subject to regular inspections and
audits by regulatory agencies and notified
bodies, and in some cases remediation
activities have been required and will
continue to require significant financial
and resource investment.

* Source: Deloitte 2019 Global Health Care Outlook.

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OUR MARKETS continued

EVOLVING MODELS OF HEALTHCARE
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.

There are a number of emerging trends
which will shape our marketplace in the
medium term.

COMPETITION
Smith & Nephew’s franchises have several
competitors which differ with respect to
product focus, geographic reach and overall
scale. For example, our main surgical
competitors are larger in scale and tend to
be more exposed to the US, whereas our
key wound competitors are generally not
US centric.

In Orthopaedics, as one of four leading
players, we compete against US-based
companies Stryker, Zimmer Biomet and Depuy
Synthes (a Johnson & Johnson company).
In Sports Medicine, we hold a leading position
behind Arthrex (US), and also compete against
Stryker and Depuy Synthes.

We are the second largest global Advanced
Wound Management business. We lead the
somewhat fragmented Advanced Wound Care
sub-segment alongside Mölnlycke (Sweden)
and ConvaTec (UK). In Advanced Wound
Devices, we are the primary challenger to
Negative Pressure Wound Therapy incumbent
Acelity (US). In our Advanced Wound
Bioactives franchise, our key products lead
their respective categories.

There is an emerging trend for greater use
of outpatient surgery. This is leading to a
shift in where total joint procedures take
place. Historically these have been inpatient
procedures requiring an overnight stay in a
hospital. With improvements in technology,
more minimally invasive techniques and better
pain management, total joint procedures can
take place in the outpatient setting for the
right patients. For example in the US there are
ambulatory surgery centers (ASCs), smaller
clinical units with no overnight beds. Costs are
lower when no overnight stay is required,
important in the context of pressure on health
budgets around the world.

Other emerging trends include digital health,
with connected devices monitoring patients
to prevent conditions, support rehabilitation
and measure outcomes. Robotics is also
becoming increasingly present in the operating
room, offering surgeons greater precision
and consistency.

SEASONALITY
Some seasonality is evident in medical
devices. 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. The majority of our
business is in the Northern Hemisphere,
including approximately 50% in the US and
25% in Europe. 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 may encourage
some to schedule any required treatments
or procedures in the final months of any
given year.

MARKET SIZE1

ORTHOPAEDICS

SPORTS MEDICINE2 ADVANCED WOUND

MANAGEMENT

Hip & Knee Implants

Trauma & Extremities

$14.5bn

+2% $6.0bn

+4% $5.0bn

+5% $9.0bn

+5%

A SMITH & NEPHEW

B ZIMMER BIOMET

C STRYKER
D DEPUY SYNTHES3

E OTHERS

12%

33%

21%

20%

14%

A SMITH & NEPHEW
B DEPUY SYNTHES3

C STRYKER

D ZIMMER BIOMET

E OTHERS

43%

26%

11%

12%

A SMITH & NEPHEW

26%

A SMITH & NEPHEW

B ARTHREX

C STRYKER
D DEPUY SYNTHES3

E OTHERS

31%

15%

12%

16%

B ACELITY

C MOLNLYCKE

D CONVATEC

E OTHERS

14%

16%

10%

53%

1 Data used in 2018 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 repair products and arthroscopic enabling technologies, and excluding ENT.

3 A division of Johnson & Johnson.

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Our business model

Value creation is driven by our
new brand purpose, culture pillars
and strategic imperatives

OUR RESOURCES

CREATING VALUE THROUGH

Our people & culture
Attracting, developing and retaining the
best employees is important. We strive
to build a purpose-driven culture based
on strong and authentic values.

Ethics & compliance
Committed to doing business the right way,
applying strict principles to the way we work.

Sales & marketing
Supporting customers through highly specialised
sales teams with in-depth technical knowledge
that surgeons and nurses greatly value.

Manufacturing & quality
Operating global manufacturing efficiently,
to the highest standards, to ensure quality
and competitiveness.

Medical education
Supporting the safe and effective use of
our products through medical education.

Research & development
Innovation is part of our culture and we
are increasing the amount we invest in
new products.

Sustainability
We focus on three aspects of sustainability;
economic prosperity, social responsibility
and environmental stewardship.

Purpose-driven culture

We believe in Life Unlimited, and have
three culture pillars that guide our
behaviours and build a winning team
spirit: Care, Collaboration and Courage.

Strong product portfolio

We have market-leading technology
across our broad range of products.
We deploy our capital to drive
continued innovation from our
R&D programmes and invest in
product and technology acquisitions,
which improve outcomes and widen
access to life-changing care.

Life
Unlimited

OUR RESOURCES
PAGES 23-34

OUR CULTURE PILLARS
PAGE 8

OUR STRATEGIC IMPERATIVES
PAGE 9

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OUR BUSINESS MODEL continued

VALUE DELIVERED IN 2018

VALUE SHARED

Strategic imperatives

REVENUE

Our five new strategic imperatives
reflect our ambition to maximise
commercial advantage from our
marketplace. They will form our
value creation plan for the
medium term.

Customer centricity

Serving our customers is at the
heart of our model. We have a
global franchise model led by
management who are specialists
in their markets. This keeps us
close to our customers, ensuring
we can anticipate and meet
their needs.

$4,904m

OPERATING PROFIT

TRADING PROFIT1

$863m

$1,123m

DIVIDEND

JOBS

$321m

16,000+

EFFICIENCY
SAVINGS

$60m

PUBLISHED
CLINICAL EVIDENCE

200+

PRACTITIONER
TRAINING INSTANCES

PHILANTHROPIC
DONATIONS

50,000+

$8m

These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial measure
prepared in accordance with IFRS on pages 194–198.

Shareholders
We have a progressive dividend policy and
in respect of 2018 our shareholders benefited
from a 3% increase in dividend. In addition,
our shares rose 14% over the course of 2018.

Patients
Patients in more than 100 countries were
treated with our products in 2018. We continued
to widen access to our products, with 17%
of revenue now coming from sales to the
emerging markets.

Customers
We continued to expand treatment options
available through R&D and acquisitions,
published more than 200 pieces of clinical or
economic evidence, and provided extensive
professional development training.

Employees
6,000 employees engaged in the development
of our new purpose and culture pillars which
are guiding revised evaluation, diversity and
development programmes.

Communities
We work in a sustainable, ethical and
responsible manner, making $8m in cash and
product donations in 2018.

OUR FRANCHISES
PAGES 14-22

OUR RESULTS
PAGE 4

OUR RESOURCES
PAGES 23-34

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Our franchises

From 1 January 2019, we will
serve our customers through
three franchises

Orthopaedics

Sports Medicine & ENT

Advanced Wound Management

Orthopaedics includes an innovative range
of Hip and Knee Implants used to replace
diseased, damaged or worn joints and
Trauma products used to stabilise severe
fractures and correct bone deformities.

Our Sports Medicine and Ear, Nose and
Throat (ENT) businesses offer advanced
products and instruments used to repair
or remove soft tissue. They operate in
growing markets where unmet clinical needs
provide opportunities for procedural and
technological innovation.

Our Advanced Wound Management
portfolio provides a comprehensive set of
products to meet broad and complex clinical
needs, to help healthcare professionals get
CLOSER TO ZERO human and economic
consequences of wounds.

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OUR FRANCHISES

Orthopaedics

Proven products to
enhance quality of life

Smith & Nephew’s Orthopaedics franchise includes an innovative range
of Hip and Knee Implants used to replace diseased, damaged or worn
joints, and Trauma products used to stabilise severe fractures, correct
bone deformities, treat arthritis and heal soft tissue complications.

KNEE IMPLANTS
Every year more than two million patients
receive total, partial or revision knee
replacements worldwide.1 Smith & Nephew’s
range of products for specialised knee
replacement procedures include leading
products for total, partial and patellofemoral
joint resurfacing procedures. Customers and
patients benefit from our unique technologies
including our proprietary advanced bearing
surface, VERILAST™, our robotics-assisted
platform, NAVIO™ Surgical System, and
our customised VISIONAIRE™ Patient-
Matched Instrumentation.

Smith & Nephew’s JOURNEY™ II Total Knee
Arthroplasty system is designed and
demonstrated to replicate normal knee
positions, shapes, and motions.2-8 The range
includes bi-cruciate stabilised and cruciate
retaining options, and the JOURNEY II XR, an
innovative bi-cruciate retaining knee implant
launched in 2018, which is designed to retain
the anterior and posterior cruciate ligaments
(ACL/PCL) and deliver normal perception of
movement and muscle control.9

The LEGION™/GENESIS™ II Total Knee System
is a comprehensive system designed to allow
surgeons to address a wide range of knee
procedures. It includes the LEGION Revision
Knee System, designed to offer surgeons
improved options to deal with the complexities
associated with revision knee arthroplasty.

These systems feature VERILAST Technology,
our advanced bearing surface of OXINIUM™
Oxidized Zirconium with highly cross-linked
polyethylene. The LEGION Primary Knee with
VERILAST Technology has been laboratory-
tested for 45 million cycles of wear simulation,
approximating 30 years of activity. While lab
testing is not the same as clinical performance,
the tests showed significant reduction in wear
compared to conventional technologies.10*

Our ANTHEM™ Total Knee System and
ORTHOMATCH™ Universal Instrumentation
Platform, launched in 2017, are designed to
provide 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.11

With best-in-class products utilising
unique materials and backed by strong
data, our Orthopaedics franchise is
well-positioned for further growth.

Skip Kiil
President of Orthopaedics

The NAVIO Surgical System provides
accuracy,12-20 flexibility and confidence utilising
real-time imaging (without the need for a
preoperative CT scan), hand-held robotics,
a portable cart, and multiple partial and total
knee implant options in an economically sound
platform.21 NAVIO offers both partial and total
knee options that include the first and only
robotics-assisted bi-cruciate retaining knee
procedure commercially available today.

Additionally, our knee systems can utilise our
VISIONAIRE Patient-Matched Instrumentation,
whereby an MRI and X-Rays are used to create
customised cutting guides designed to allow
the surgeon to achieve optimal alignment of
the new implant.22

HIP IMPLANTS
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.1

Smith & Nephew has developed a range of
primary hip systems. Core systems include
the ANTHOLOGY™ Hip System, SYNERGY™ Hip
System and the POLAR3™ Total Hip Solution.
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. We also
market the BIRMINGHAM HIP™ Resurfacing
(BHR) System, an important option for
surgeons treating suitable patients.

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OUR FRANCHISES continued

Orthopaedics

Smith & Nephew’s portfolio also includes
the REDAPT™ Revision Hip 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.23

The REDAPT Fully Porous Acetabular Cup with
CONCELOC™ Technology is designed to allow
ingrowth through an additive, or 3D printing,
manufacturing process which produces a
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.24

TRAUMA
In Trauma, 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 status.25

The EVOS™ Plate and Screw System is a
stainless steel, highly versatile system with
a multitude of plate geometries and longer
screw lengths than standard mini fragment
systems. The EVOS Small Fragment system for
lower extremity fractures and general trauma
utilisation features more points of fixation
and greater breadth of plate options.

For extremities and limb restoration, our range
includes the TAYLOR SPATIAL FRAME™ External
Fixator as well as plates, screws, arthroscopes,
instrumentation, resection and suture anchor
products for foot and ankle and hand and
wrist repair as well as INVISIKNOT™, a unique
syndesmotic fixation device for the ankle.

OUR PERFORMANCE IN 2018

References
1

2018 Smith & Nephew Market Model.

Knee Implants
Hip Implants
Trauma

Revenue

$1,017m
$613m
$493m

Reported
growth
3%
2%
0%

Underlying
growth**
3%
2%
-1%

In Knee Implants we delivered a market
beating growth in 2018. This was driven by
double-digit underlying growth across our
JOURNEY II Total Knee System, LEGION
Revision Knee System and ANTHEM Knee
System for the Emerging Markets.

In Hip Implants, performance improved
markedly in the second half of the year, with
improved execution driving demand for the
POLAR3 total hip solution, with its class-
leading survivorship data, and the continued
roll-out of the REDAPT Revision System.

In Trauma we delivered good growth from
INTERTAN Nails and drove an increasing
contribution from the new EVOS SMALL plating
system, offset by reduced tender activity in the
Middle East.

Noble PC, et al. Clin Orthop Relat Res. 2005;431:157-165.

Mayman DJ, et al. Poster presented at: ISPOR Symposium;
May 2018; USA.

Nodzo SR, et al. Tech Orthop. 2018;33:37-41.

Takubo A, et al. J Knee Surg. 2017;30:725–729.

Kosse NM, et al. Poster 99 presented at: 2nd World Arthroplasty
Congress; April 2018; Italy.

Kaneko T, et al. J Orthop. 2017;14(1):201-206.

Grieco TF, et al. J Arthroplasty. 2017;33(2):565-571.

Smith & Nephew 00225 V3 JOURNEY II BCS and CR Design
Rationale 0118.

10 Papannagari R, et al. Poster 1141, ORS Annual Meeting, 2011.

Smith & Nephew 07147 V2 ANTHEM Total Knee System Design
Rationale 10.18.

12 Herry Y, et al. Int Orthop. 2017;41:2265-2271.

13 Batailler C, et al. Poaster presented at: ESSKA; May 2018; UK.

14 Gregori A, et al. Paper presented at: International Society for

Computer Assisted Orthopaedic Surgery; June 2015; Canada.

15 Gregori A, et al. Abstract presented at: 15th EFORT Congress;

June 2014; UK.

16 Smith JR, et al. Poster presented at: Congress of the International

Society of Biomechanics; August 2013; Brazil.

17 Jaramaz B, et al. Paper presented at: International Society for
Computer Assisted Orthopaedic Surgery; June 2015; Canada.

18 Mitra R. Poster presented at: World Arthroplasty Congress;

April 2018; Italy.

19 Jaramaz B, et al. EPiC Series in Health Sciences. 2018;2:98-101.

20 Jaramaz B, et al. Poster presented at: 19th EFORT

Annual Congress; May/June 2018; Spain.

21 Sg2 Healthcare Intelligence. Technology Guide: Orthopedic

Surgical Robotics. 2014.

22 Smith & Nephew 2012 VISIONAIRE Design Rationale 7128-1567

Rev. A10/12.

23 Smith & Nephew 10864 V1 REDAPT Revision Acetabular Augment

Design Rationale 0718.

24 Smith & Nephew 03955 V2 CONCELOC Material

Specifications 0317.

25 Smith & Nephew 05036 V2 TRIGEN INTERTAN Claims

Brochure 0817.

26 National Joint Registry for England, Wales and Northern Ireland:

15th Annual Report. 2018.

The LEGION Primary CR Knee System completed 45 million cycles
of in vitro simulated wear testing, which is an estimate of 30 years
of activity. Other LEGION VERILAST Primary Knee Systems
underwent similar lab testing comparable to industry standards.
The results of in vitro wear simulation testing have not been
proven to quantitatively predict clinical wear performance. Also,
a reduction in total polyethylene wear volume or wear rate alone
may not result in improved clinical outcomes as wear particle
size and morphology are also critical factors in the evaluation
of the potential for wear mediated osteolysis and associated
aseptic implant loosening. Particle size and morphology were not
evaluated as part of the testing.

** These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194-198.

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OUR FRANCHISES continued

POLAR3 TOTAL HIP SOLUTION

The POLARSTEM and R3 Total Hip
Solution has the best survivorship figures
of any total hip construct at seven years
according to the world’s largest national
joint registry.26

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OUR FRANCHISES continued

Sports Medicine & ENT

Technology to
improve healthcare

We have a leading portfolio of
instruments and implants for soft
tissue repair, and a proud history
of successfully addressing unmet
clinical needs.

Brad Cannon
President of Sports Medicine & ENT

Smith & Nephew’s Sports Medicine
and Ear, Nose and Throat (‘ENT’)
franchise operates in growing
markets where unmet clinical needs
provide opportunities for procedural
and technological innovation.

SPORTS MEDICINE JOINT REPAIR
In Sports Medicine Joint Repair, our
technologies, instruments and implants enable
surgeons to perform minimally invasive surgery
of the joints, including the repair of soft tissue
injuries and degenerative conditions of the
shoulder, knee, hip and small joints.

For shoulder repair, we market products
primarily for Rotator Cuff Repair (RCR) and
instability repair, two of the most commonly
performed sports medicine procedures.
Our key shoulder repair products include a
variety of suture anchors, such as HEALICOIL™
Suture Anchors featuring open-architecture
design and SUTUREFIX™ and Q-FIX™ All-Suture
Anchors, suture passers such as FIRSTPASS™
ST, and ULTRABRAID™ and ULTRATAPE Sutures.
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 comprehensive solutions for
shoulder repair.

Enhancing our RCR portfolio, the REGENETEN™
Bioinductive Implant, acquired in 2017, is
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 tissue.1-3

REGENETEN BIOINDUCTIVE IMPLANT

Rotator cuff disease is
a significant and costly
problem3,16,17 that causes
ongoing pain and limits patients’
mobility.18 The REGENETEN
Bioinductive Implant stimulates
the body’s natural healing
response to support new
tendon growth and disrupt
disease progression.3,19

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OUR FRANCHISES continued

The REGENETEN implant is highly
complementary to our Sports Medicine
portfolio, especially for enhancing a broad
spectrum of rotator cuff repairs, serving an
unmet clinical need and providing a compelling
new treatment option for our customers.

In knee repair, the FAST-FIX™ family of
Meniscal Repair Systems, FIRSTPASS MINI
Suture Passer, and the ACUFEX™ Meniscal
Root Repair System increase the number
of meniscal injuries we can help surgeons
address. For ligaments, the ENDOBUTTON™
and ULTRABUTTON™ fixed and adjustable
loop devices, BIOSURE™ interference screws,
and the new ACUFEX™ EXTRA-ARTICULAR
Reconstruction Guide System give surgeons
multiple tools for performing single and
complex ligament repairs. Outside the United
States, the CARGEL™ Bioscaffold can be used
in conjunction with microfracture to repair
articular cartilage. With these products,
we provide a unique package of solutions
used by surgeons to help them restore knee
function for their patients.

In December 2018, we announced the
acquisition of Ceterix Orthopaedics, Inc., the
developer of the NovoStitch Pro Meniscal
Repair System. This unique device addresses
complex meniscal tear patterns not adequately
served by other repair systems and is highly
complementary to Smith & Nephew’s leading
FAST-FIX 360 Meniscal Repair System.
The acquisition completed on 22 January 2019.

The Smith & Nephew joint repair portfolio
includes implants made from a variety of
biocompatible materials, including next-
generation anchors made of soft, all-suture
material and REGENESORB™, an advanced
biocomposite. For example, 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
anchors.4 The SUTUREFIX ULTRA All-Suture
Anchor is an attractive option for procedures
in which anatomic space is very limited5,
while still delivering high fixation strength.6
Implants made from REGENESORB, including
versions of the HEALICOIL™ Suture Anchor for
shoulder repair and BIOSURE™ Interference
Screw for knee repair, have been shown to
be absorbed and replaced by bone within
24 months in pre-clinical studies.7 *

ARTHROSCOPIC ENABLING
TECHNOLOGIES (AET)
AET products are often used in conjunction
with products from Sports Medicine Joint
Repair. AET includes high definition imaging
solutions, industry leading energy-based
and mechanical resection platforms, and
fluid management and access technologies.
Our 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.

The WEREWOLF™ and QUANTUM 2™
COBLATION™ Controllers, which are used
with a wide range of high performance
COBLATION radio frequency (RF) wands,
enable surgeons to remove soft tissue
precisely8 and control bleeding in a variety
of arthroscopic procedures. WEREWOLF, our
latest advance in COBLATION™ Technology,
and the FLOW 50™ Wand have demonstrated
faster patient recovery9 and better long-term
patient outcomes10,11 and safety12,13 in knee
procedures.* The WEREWOLF and QUANTUM
2 Controllers and their associated wands carry
broad indications across Sports Medicine.

The LENS™ Integrated Visualisation System
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. Our DYONICS™ shaver
blades provide superior resection due to their
sharpness and reduced clogging with their
debris evacuation capabilities.14 GoFLO™ and
Double® Pump Fluid Management Systems
facilitate surgical access by expanding the joint
space, providing haemostasis, and maintaining
the saline environment necessary to perform
arthroscopic procedures.

EAR, NOSE & THROAT (ENT)
In ENT, 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.15 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.

OUR PERFORMANCE IN 2018

Revenue

Reported
growth

Underlying
growth**

Sports Medicine
Joint Repair
AET
Other Surgical
Business***

$697m
$600m

$209m

11%
-2%

10%

8%
-3%

10%

In 2018, strong growth in Sports Medicine Joint
Repair franchise was driven by our shoulder
repair portfolio. Within this, the recently
acquired REGENETEN™ Bioinductive Implant for
rotator cuff repair delivered more than 130%
growth, performing ahead of expectations.

AET performance was held back by continued
softness in mechanical and legacy radio-
frequency resection. We expect the launch
of the FLOW 90™ COBLATION™ wand for
shoulder in the first half of 2019 to support
better growth.

Other Surgical Businesses double-digit growth
reflects strong demand for our robotic NAVIO
Surgical System from both the Established and
Emerging markets.

References
1

Bokor DJ, et al. MLTJ. 2015;5(3):144-150.

Arnoczky SP, et al. Arthroscopy. 2017;33(2):278-283.

Bokor DJ, et al. MLTJ. 2016;6(1):16-25.

Douglass NP, et al. Arthroscopy. 2017;33(5):977-985.e5.

Data on file Smith & Nephew. Report 15002117. 2013.

Data on file Smith & Nephew. Report 15002059. 2013.

Data on file Smith & Nephew. Report 15000897. 2010.

Amiel D, et al. Arthroscopy. 2004;20(5):503-510.

Spahn G, et al. Knee Surg Sports Traumatol Arthrosc.
2008;16(6):565–573.

10 Spahn, G, et al. Arthroscopy. 2010;26(Suppl 9):S73-80.

Spahn G, et al. Knee Surg Sports Traumatol Arthrosc.
2016;24(5):1560-1568.

12 Gharaibeh M, et al. Cartilage. 2018;9(3):241-247.

13 Voloshin I, et al. Am J Sports Med. 2007;35(10):1702-1707.

14 Data on file Smith & Nephew. Report 15005165. 2016.

15 Woloszko J, et al. Proc of SPIE. 2003;4949:341-352.

16 Washburn III R, et al. Arthrosc Tech. 2017:6(2);e297-e301.

17 Mather RC, et al. J Bone Joint Surg Am. 2013;95:1993-2000.

18 Lin JC, et al. J Am Med Dir Assoc. 2008;9(9):626-632.

19 Schlegel TF, et al. J Shoulder Elbow Surg. 2018;27(2):242-251.

FDA cleared for use in the knee on all soft tissue types

** These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194–198.

*** Includes ENT and NAVIO robotics system.

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OUR FRANCHISES continued

Advanced Wound Management

Reducing the burden
of wounds

Our customers choose the breadth
and depth of our portfolio, innovation,
and expertise in order to achieve
their ‘CLOSER TO ZERO’ goals.

Simon Fraser
President of Advanced
Wound Management

Our Advanced Wound Management portfolio provides a comprehensive
set of products to meet broad and complex clinical needs, to help
healthcare professionals get CLOSER TO ZERO human and economic
consequences of wounds.

ADVANCED WOUND MANAGEMENT
Because of the breadth and depth of our
portfolio we are uniquely positioned to support
customers who follow best practice guidelines,
including managing wounds with T.I.M.E.

ADVANCED WOUND CARE (AWC)
Our AWC range covers several segments
aimed at helping improve outcomes in the
Infection and Moisture balance clinical goals
of T.I.M.E.

T.I.M.E. stands for Tissue non-viable, Infection
and/or Inflammation, Moisture imbalance,
and Edge of wound non-advancing. These
represent critical barriers of wound healing.
T.I.M.E. was first established as a concept for
best practice wound management in 20031
by a panel of world leading experts, and has
since been widely adopted around the world,
becoming a staple reference framework for
routine clinical practice.2

We use T.I.M.E. to help our customers navigate
the complexity of product choices they face
based on which clinical goal they may have,
and we also use it to guide our own new
product and programme development, as well
as life cycle management, to ensure we remain
relevant to the evolving clinical needs.

Having supported T.I.M.E. since its inception,
at Smith & Nephew we are uniquely
positioned to provide customers with
differentiated and effective products via our
Advanced Wound Care (AWC), Advanced
Wound Devices (AWD) and Advanced Wound
Bioactives (AWB) portfolio across each T.I.M.E.-
based clinical need.

In infection management, our silver-based
dressings (ACTICOAT™, DURAFIBER Ag™
and ALLEVYN™ Ag) provide clinicians with
a range of solutions to address individual
patient needs in managing wound infection.
ACTICOAT, for instance, is a fast-acting, highly
effective antimicrobial3 for serious infection
on a wide range of wounds. Our Cadexomer
iodine based IODOSORB™ dressing is indicated
outside the US to deliver best in class efficacy
effective against biofilms across numerous
clinically relevant in vitro tests,4 animal biofilm
models4 and in clinical practice.5

In exudate (or moisture) management our
products are designed to respond to varying
levels of wound exudate providing appropriate
wound fluid absorption, lock in and
evaporation properties to promote an optimal
wound healing environment. This helps
patients get on with their lives as well as
lowering costs for materials and nursing
time by reducing unnecessary dressing
changes. Our key growth brand in this
space is the ALLEVYN range with two focus
variants, ALLEVYN Gentle Border dressing
(versatile and adaptable, so suitable for a
wide variety of chronic and acute wounds6,7)
and ALLEVYN LIFE dressing (our most

advanced dressing, uniquely differentiated
by its distinct quadrilobe shape which lasts
for up to two times longer than any other
dressing8). The ALLEVYN range was extended
in 2018 through the launch of ALLEVYN
LIFE Non-Bordered to ensure the portfolio
continues to meet broad needs.

The rest of our AWC range includes our
film and post-operative dressings, skincare
products and gels. Leading brands include
OPSITE™ dressings, IV3000™, PROSHIELD™
and SECURA™.

ADVANCED WOUND BIOACTIVES
(AWB)
Our AWB portfolio covers key product
segments aimed at helping improve outcomes
in the Tissue viability and wound Edge
advancement clinical goals of T.I.M.E.

In this part of our business we focus on
the commercialisation of topical biologics
and a skin substitute that provide a unique
approach to debridement, dermal repair,
and tissue regeneration.

Our portfolio includes Collagenase SANTYL™
Ointment, OASIS® Wound Matrix and OASIS
ULTRA Tri-Layer Matrix (a naturally-derived,
extracellular matrix replacement product
indicated for the management of both chronic
and traumatic wounds) and REGRANEX™
(becaplermin) Gel 0.01%.

Our most significant product by sales in
this segment is SANTYL Ointment9, the only
FDA-approved biologic enzymatic debriding
agent for chronic dermal ulcers and severe
burns. SANTYL plays an integral role in
debriding chronic dermal ulcers and severely
burned areas.

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OUR FRANCHISES continued

PICO 7

The UK’s National Institute for Health and Care
Excellence (NICE) issued a Medtech innovation
briefing26 on the prophylactic use of PICO which
highlighted its potential to be more effective at
preventing surgical site infections than standard
surgical dressings. This is the only such briefing
published by NICE on an NPWT device for
preventing such complications.

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OUR FRANCHISES continued

ADVANCED WOUND DEVICES (AWD)
Our AWD portfolio covers key product
segments aimed at helping improve outcomes
in the Tissue viability, Moisture balance,
and wound Edge advancement clinical goals
of T.I.M.E.

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.25

References
1

Schultz et al., Wound Rep Reg 2003;11:1-28.

2 Leaper et al. Int Wound J 2012;9 Suppl.2):1–19.

Wright et al. Am.Jnl.Inf.Contrl 1998; 26(6) 572-577.

Fitzgerald et al. Wound Repair Regen. 2017;25,13–24.

5 Malone et al. J. Antimicrob. Chemother. 2017; 72,2093–2101.

Smith&Nephew DOF DS/14/318/R.2015.

Smith&Nephew DOF DS/09/013/R2.2009.

Joy et al. Jnl Wound Care 2015;24(7):312,314-7.

SANTYL is indicated for chronic dermal ulcers and severely
burned areas. Occasionally, slight transient erythema has been
noted in surrounding tissue when applied outside the wound.
One case of systemic hypersensitivity has been reported after
1 year of treatment with collagenase and cortisone. Use of
SANTYL Ointment should be terminated when debridement is
complete and granulation tissue is well-established. See full
prescribing information for more details.

10 Hurd et al. Ostomy Wound Mngt. March 2014; Vol.60:3.

Smith&Nephew DOF DS.17/666/R2.

12 Smith&Nephew DOF DS/17/701/R.

13 Delhougne et al. Ostomy Wound Manage 2018; 64(1):26-33.

14 Dingemans et al. Int. Orthopaedics 2018; 42(4): 747-753.

doi:10.1007/s00264-018-3781-6.

15 Fleming, et al. Journal of Hospital Infection 2018; 99(1): 75-80.

doi:10.1016/j.jhin.2017.10.022.

16 Galiano et al. Plastic & Reconstructive Surgery Global.

2018;6(1):e1560.

OUR PERFORMANCE IN 2018

Revenue

Reported
growth

Underlying
growth*

Advanced
Wound Care
Advanced
Wound Bioactives
Advanced
Wound Devices

$740m

$320m

$215m

-6%

10%

-6%

In 2018, performance in Advanced Wound
Care included good growth in the US, led
by ALLEVYN LIFE and our pressure ulcer
prevention strategy, offset by softness in some
European countries.

In Advanced Wound Bioactives, performance
from SANTYL, our largest product, was weaker
than the previous year as volumes came under
pressure. Following review of two large safety
studies, the FDA approved the removal of the
boxed warning from REGRANEX, and we will
relaunch this product in early 2019.

17 Hyldig et al. Bjog 2018;doi: 10.1111/1471-0528.15413.

18 Svensson-Björk et al, Wound Repair & Regeneration

2018;26(1):77-86.

19 Yamaguchi et al. Jnl Dermatology 2018; 45(4): 483-486.

doi:10.1111/1346-8138.14180.

20 Innocenti et al. J Reconstr Microsurg. 2018;Aug 15.

21 Edwards et al. Wounds UK. 2018;14:56–62.

22 Giannini et al, Jnl. Wound Care, 2018; 27(8):520-525.

Advanced Wound Devices delivered strong
growth led by demand for our PICO sNPWT,
which benefited from the launch of two new
models in 2018.

23 Forlee, et al. WUWHS, 2016;Florence.

24 Forlee, et al. EWMA; 2018;Poland.

25 Mosti, et al. Wounds. 2006;18(8):227-237.

26 NICE Medtech Innovation briefing (MIB149) June 2018.

These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194–198.

In the NPWT segment, the PICO™ Single Use
Negative Pressure Wound Therapy System
(sNPWT) brings the effectiveness of traditional
NPWT in a modern, small portable system.10
It is designed for both open wounds and
closed incisions, and leverages our proprietary
AIRLOCK™ dressing technology.

During the year, we extended the PICO range
with the introduction of two new models.

PICO 7 delivers a more efficient vacuum
and superior leak management than the
previous version11, includes an industry-first
dressing-full indicator, which is intended to
help reduce unnecessary dressing changes
and wastage, and is over 25% quieter than
the previous version.12

PICO 7Y, launched in Europe in 2018, is the
first sNPWT system to include an innovative
integrated Y connector enabling the utilisation
of two dressings concurrently from one
pump, in practice allowing for two wounds
to be addressed at the same time, thereby
potentially reducing cost.

The PICO evidence base continued to grow,
validating the patient and provider benefits
of the technology, with the publication of
key studies in multiple indications including
orthopaedics, vascular, plastics, OBGYN,
breast reconstruction and chronic wounds.13-24

With RENASYS™ NPWT system, our strategy is
to simplify the delivery of NPWT, combining
the advantages of PICO with the simplicity
and power of RENASYS TOUCH, an intuitive
touchscreen traditional NPWT device
delivering advanced features to manage large,
highly exuding wounds.23,24

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Our resources

The resources we need to deliver our
products and serve our customers

Our people & culture

Ethics & compliance

Sales & marketing

Manufacturing & quality

Medical education

Research & development

Sustainability

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OUR RESOURCES

Our people & culture

A unifying purpose and
culture of care, collaboration
and courage to win

Smith & Nephew has a proud history of more than 160 years of
improving health around the world. Whilst we have grown significantly
from our beginnings as a small family pharmacy in Hull, England,
our caring spirit has remained the same.

In 2018, led by our new management team,
Smith & Nephew began the work to create a
culture that, whilst rooted in caring, was also
clearly aligned on a unifying purpose and
culture of collaboration and courage to win.

Throughout the year, in addition to gauging
our progress against our framework of
Great Place to Work (GPTW), we engaged
employees in a review of our existing
culture and future aspirations. GPTW Pulse
surveys were conducted in four of our major
markets – US, China, UK and Australia/
New Zealand – with an overall response rate
of 75% and China again receiving country-
level recognition. GPTW recognition was also
received during the year in Austria, Ireland,
Poland and the UAE.

In addition, we conducted a voluntary
feedback survey and subsequent focus
groups with participation from nearly 40% of
the workforce to review our company culture.
Together, this input formed the basis for a
new purpose, Life Unlimited (see page 8), and
our culture pillars of Care, Collaboration and
Courage. These pillars represent the best of
Smith & Nephew today, as well as what we
aspire to be in the future.

CARE
Our culture pillar of Care means that we show
empathy and understanding for each other,
our customers and patients. We step into
our customers’ shoes, anticipate their needs
and deliver the highest levels of innovation
and service.

We strive to have the best understanding of
the patients whom we ultimately serve, and
we develop our products with them in mind.
And, our passion for what we do drives us to
continuously improve and expand the positive
impact that we have on the world.

In 2018, our people displayed this culture
in numerous ways, including charitable
donations and sponsorships of more than 50
organisations in the communities where we
live and work. This extends to support of our
own employees in times of need.

For example, in 2018, US employees who
were displaced from their homes due to a gas
pipeline explosion were provided lodging or
heaters until their power returned.

We encourage all our employees to volunteer
their time and talents by providing paid
time for volunteer efforts. Many functions
structured their team building activities around
group volunteering opportunities such as
Make a Wish Foundation events and Habitat
for Humanity.

By continuously improving our own
performance, we can increase our positive
influence on the world. To encourage this,
we offer advancement and development
opportunities for our employees.
Employee advancement is merit-based,
reflecting performance as well as
demonstration of our newly created Winning
Behaviours, which underpin our culture pillars
and replace our previous core competencies.

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.

Employees are provided with opportunities
to develop their skills and career through
new assignments and on the job experiences.
In addition, succession plans are in place for
key executive roles and other critical positions
across our business.

COLLABORATION
Our culture pillar of Collaboration means we
work together as a team, based on mutual
trust and respect. Through transparent and
respectful communication, we are motivated
by a shared purpose and understand the
impact of our individual contributions on our
collective goals. And, by encouraging different
perspectives and leveraging our global
experiences we achieve the best outcomes.

In 2018, we broadened our quarterly
business performance communications to
include live global webcasts featuring Namal
Nawana and members of his executive
team. These included an open question and
answer dialogue with employees around the
world in real-time. The feedback has been
tremendously positive, increasing transparency
and supporting our shared purpose.

We provide peer-to-peer recognition to
celebrate achievements or just say ‘thank
you’ via our Going the Extra Mile (GEM)
programme. Awards range from simple
notes to appreciation through substantial
monetary awards.

We are committed to employment practices
based on equal opportunities, regardless of
colour, creed, race, national origin, sex, age,
marital status, sexual orientation, or physical
or intellectual disability. We believe a person’s
ability to perform essential functions of a job
is the only relevant criteria.

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The strategic imperatives and annual targets
form the basis of individual objectives of every
employee in the Company 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.

We continued to provide opportunities for
all levels of the organisation to strengthen
their skills through development programmes
including Pioneer, Edge and Continuous
Learning Journey. These programmes
consistently received positive feedback
from participants.

Smith & Nephew’s compensation also
supports high-performance and accountability.
Employees are compensated based on
sustained performance that helps deliver
timely and tangible results to drive the
business forward and support our culture.

Having a robust compensation framework is
vital as we seek to recruit high calibre people.
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.

OUR RESOURCES continued

In 2018, an internal evaluation showed that
those teams with greater diversity achieved
better results. The work also revealed that our
people understand why valuing difference is
important and our teams benefit from high
levels of trust and respect.

We have raised awareness of preventing
unconscious biases through our management
and Human Resources training globally,
carrying out a Talent Acquisition Diversity and
Inclusion Masterclass. We also conducted
inclusion workshops at the 2018 Managing
Directors’ Meeting and numerous regional
leadership business meetings.

We stepped-up our efforts to accelerate
the development of women in our business.
We have extended our Elevate women’s
leadership development programme, including
nearly 300 participants in 2018. We also
attended the 2018 Conference of the Society
of Women Engineers, to generate further
awareness and recruit female talent in the
science and engineering fields. In addition,
in 2018, we added another female leader to
our executive team.

COURAGE
Our culture pillar of Courage is about
continuous learning, innovation and
accountability. By staying curious, thinking
big and having the humility to challenge our
conventional ways of thinking, we push the
boundaries of our industry. Fostering an
entrepreneurial, can-do attitude we look for
solutions and achieve them through talent and
force of will. And, with a growth mindset, we
have the capability and confidence to win, and
we do so with integrity and the highest ethical
standards. We start each year by setting clear
and measurable objectives with a clear
strategy communicated Company-wide.

REDEFINING OUR CULTURE

6,000 employees participated in our
programme to define our new purpose
and culture pillars. We used feedback
surveys and ran workshops at our sites
across the world, including in Japan.

SUPPORTING WOMEN

We encourage women to follow careers
in STEM. Our Society of Women Engineers
(SWE) chapter is thriving, with more than
110 members. We had a major presence
at the 2018 SWE Conference, recruiting
for talented new graduate engineers.

For more information about how we
are putting people first, download our
Sustainability Report from our website.

NUMBER OF EMPLOYEES1 2018

Total employees
16,377
Male
58%

Female
42%

Senior managers2 and above
788
Male
73%

Female
27%

Board of Directors
12
Male
75%

Female
25%

1 Number of employees at 31 December 2018 including part time employees and employees on leave of absence.

2 Senior managers and above include all employees classed as Directors, Senior Directors, Vice Presidents,

Executive Officers and includes all statutory directors and Directors of our subsidiary companies.

Life Unlimited

SMITH & NEPHEW SUSTAINABILITY REPORT 2018

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OUR RESOURCES continued

Ethics & compliance

Smith & Nephew has a strong reputation
for integrity and ethical behaviour

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 products and 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
which is benchmarked against industry
metrics. We are committed to upholding the
promise we make in our Code of Conduct
to not retaliate against anyone who makes
a report in good faith.

GLOBAL COMPLIANCE
PROGRAMME
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 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 Code of
Conduct. We review and approve significant
interactions with healthcare professionals or
government officials in advance. 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, with central 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, including guidelines
for those who need to enter the operating
room when acting on our behalf.

Senior leaders, including all Vice Presidents
and above, 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.

We constantly seek new ways to enhance
our Compliance Programme. New measures
in 2018 included expanding the compliance
ambassador process where selected sales
staff serve as compliance contact for their
peers for some training and questions,
successfully completing a pilot for an
enhanced root cause analysis methodology for
recurring issues and implementing additional
processes and training on data privacy.

AN ETHICAL EMPLOYER
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.

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OUR RESOURCES continued

Sales & marketing

We put customers at the
heart of our commercial model

Outside of the Americas, our commercial
activities will be run through two regions
– Europe, Middle East and Africa, and
Asia Pacific – each under a president.
Under these presidents will be country
clusters, a group of countries, based on
geographic proximity, critical mass of revenue,
and similar go-to-market strategies. They will
be led by a single managing director and have
business unit leads for each franchise.

This structure will reduce complexity and take
out administrative costs, and importantly will
bring us closer to our customers.

In 2018, we began to make these changes
while keeping stability in our selling and
customer-facing organisations.

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.

In 2018, we began the implementation of a
global franchise structure with dedicated
presidents of Orthopaedics, Sports Medicine
& ENT and Advanced Wound Management
to direct and support our customer facing
activities. This new structure will replace
our regional selling model in 2019.

Under the new structure, each president
will lead their franchise with global upstream
marketing responsibility and full commercial
responsibility for their franchise in the US.
They will also lead one or more shared global
commercial support teams, in the critical
areas of professional education, sales training
and healthcare economics. In addition,
the president of Sports Medicine & ENT has
commercial responsibility for Latin America
and Canada.

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OUR RESOURCES continued

Manufacturing & quality

Efficiently delivering products
of the highest quality

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 nine
countries across the globe and have central
distribution facilities in the US, Europe and Asia.
Products are shipped to individual country
locations to meet customer requirements.

Manufacturing is a dynamic process and
our Global Operations 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.

Products for our Orthopaedics franchise are
made in sites in Memphis (Tennessee, US),
Aarau (Switzerland), Tuttlingen (Germany),
Beijing (China), Warwick (UK), Puschino
(Russia) and Devrukh (India). Memphis is our
largest location and is home to the design
and manufacturing process of the OXINIUM
Oxidised Zirconium, a patented metal alloy
available for many of our knee and hip implant
systems as part of our VERILAST technology.

In Sports Medicine Joint Repair, products
are manufactured at our Mansfield
(Massachusetts, US) and Alajuela
(Costa Rica) facilities.

The majority of our Advanced Wound
Management products are manufactured
at our facilities in Hull (UK), Suzhou (China)
and Curaçao. We have also invested in a
new facility in Fort Worth, Texas, to support
our Advanced Wound Bioactives franchise.
Our Oklahoma City facility in the US 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.

We procure raw materials, components,
finished products and packaging materials
from suppliers in various countries.
These include metal forgings and castings
for orthopaedic products, optical and
electronic sub-components for Sports
Medicine Joint Repair 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.

Our Global Supply Chain team ensures
that our products reach our internal and
external customers where and when they
are needed, in a compliant and efficient
manner. We operate main holding warehouses
for surgical products, one in each of
Memphis (TN, US), Columbus (OH, US), Baar
(Switzerland) and Singapore. These facilities
consolidate and ship to local country and
distributor facilities. Our distribution hubs for
Advanced Wound Management products are
located in Neunkirchen (Germany), Derby (UK)
and Lawrenceville (Georgia, US).

QUALITY AND REGULATORY AFFAIRS
Quality is of paramount importance to Smith &
Nephew. In 2018, we restructured the global
Quality and Regulatory Affairs function to
ensure consistent high standards across the
Group. This function is led by the Chief Quality
and Regulatory Affairs Officer, a new role
reporting directly to the Chief Executive Officer.

Requirements of global regulatory agencies
have become more stringent in recent years
and we expect them to continue to do so.
The team is leading a major Group-wide
programme to prepare for implementation
of the European Union (EU) Medical Devices
Regulation (MDR), which came into force in
May 2017, with a three-year transition period
until May 2020. The regulation includes new
requirements for the manufacture, supply
and sale of all CE marked products sold in
Europe and requires the re-registration of all
medical devices, regardless of where they
are manufactured.

Quality and Regulatory Affairs has also
provided leadership in preparing the Group
for Brexit, which has required the management
of changes to our European Authorised
Representative strategy and Notified Body
relationships. Finally, the team continued to
support the expansion of our portfolio globally
through the registration of new products and
existing products in new markets.

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OUR RESOURCES continued

Medical education

Supporting the safe and
effective use of our products

3D PRINTING OF REDAPT
CUPS IN MEMPHIS

Additive manufacturing (AM), commonly
referred to as 3D printing, is a novel
manufacturing method that involves
the use of a laser or electron beam,
for example, to sinter polymer or metal
powders into a solid part that is built
layer-by-layer. The REDAPT Revision
Femoral System includes a Fully Porous
Acetabular Cup featuring Smith &
Nephew’s unique CONCELOC Advanced
Porous Titanium. This mimics the structure
of cancellous bone, allowing ingrowth
for improved fixation and stability.

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 2018, we provided more than 30,000
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. In 2018, we opened a new surgical
training centre in Phoenix (Arizona) to bring
professional development and skills training
to customers, primarily in the West and
Southwest of the US, complementing Smith
& Nephew’s existing US facilities in Memphis
(Tennessee), Andover (Massachusetts),
Austin (Texas) and Plymouth (Minnesota).

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 practising 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 2018,
more than 20,000 clinicians benefited
from our specialist wound care education
training courses.

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 2018,
we provided digital training on Smith &
Nephew products and techniques to 225,000
healthcare professionals, a 25% increase over
the prior year.

ECC ENDORSED BY ROYAL
COLLEGE OF SURGEONS
In 2018, Smith & Nephew’s Expert Connect
Centre (ECC) in Watford, UK became the
first commercial surgical training facility in
Europe to be accredited by the Royal College
of Surgeons. The recognition enables
delegates to receive Continuing Professional
Development (CPD) points when attending
Smith & Nephew sessions, demonstrating
their commitment to developing their
surgical skills.

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OUR RESOURCES continued

Research & development

We are increasing our
investment in new products

Innovation is the lifeblood of our
Company. We strive to partner with
our customers to create meaningful
solutions for unmet needs, with the
goal of improving outcomes.

Vasant Padmanabhan
President of Research & Development

Smith & Nephew’s global Research & Development (R&D) function
supports the Group’s strategic imperatives by delivering innovative system
solutions that aim to improve clinical and healthcare economic outcomes.
We do this in partnership with our customers, executing new product
development and clinical programmes across the enterprise.

In 2018, we invested $246 million in
R&D, equivalent to 5% of Group revenue.
Over time, we are committed to increasing
this investment, driven by the needs of the
business to support sustainable growth.
In 2018, we launched a number of major new
products and publications with evidence of
clinical and economic value. Our major new
product launches included the full commercial
release of the bi-cruciate retaining JOURNEY
II XR total knee arthroplasty (TKA) system,
updates and extensions to our REDAPT
Revision Hip System, the EVOS SMALL Plating
System in Trauma, a suite of all-suture anchor
shoulder repair systems in sports medicine
and two new versions of our leading PICO
Single Use Negative Pressure Wound Therapy
System (sNPWT).

We published more than 200 different
abstracts and publications in peer-
reviewed journals; a significant increase
compared to previous years, and the result
of increased investment in clinical studies.
Highlights included 14 abstracts accepted at
the World Arthroplasty Congress in Rome in
April and the completion of one of the largest
multi-centre retrospective patient cohorts ever
studied with the JOURNEY II BCS TKA system.
A number of studies highlighted how PICO
can help manage scarring and surgical site
infections. We were also successful in securing
the NICE Medtech Innovation Briefing for PICO
described on page 21.

OUR ENTERPRISE R&D
OPERATING MODEL
Our enterprise R&D model provides
governance and simple processes for new
product development, starting with front end
innovation and research, moving through new
product development and launch, and ending
with support of released products.

Project selection is critical; we focus on
projects that will make a meaningful
difference to our customers and their patients.
This includes investing in incremental
innovation to improve existing products. It also
involves driving greater efficiency through
innovation, potentially reducing our costs of
goods. Finally, we aim to transform our
business using disruptive technologies,
services and business models.

Following project selection, the team
challenges itself to execute flawlessly.
This means developing the right product at
the right cost and quality, and supported by
clinical evidence. Our R&D experts in the UK,
US, Europe, Singapore, China and India have
extensive customer and sector knowledge,
which is augmented by 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.

R&D 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.

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.

We work in partnership with academia. As an
example, with the University of Hull we have
created one of the world’s largest Wound Care
Research Clusters and with Imperial College
London we are developing enhanced surgical
techniques relating to ligament function,
biomechanics and soft tissue injuries of the knee.

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 (CMSA)
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.

For 2019, we have a strong pipeline, with
a number of important launches planned,
and also expect to maintain the high cadence
of clinical and economic evidence.

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OUR RESOURCES continued

TREATING DIFFICULT REVISIONS

The REDAPT Revision Femoral System
includes an additive, or 3D printed Fully
Porous Acetabular Cup. With a number
of new REDAPT Augments, to be used in
conjunction with the porous shell, we are
enabling surgeons to treat more difficult
acetabular revisions.

WIDENING OUR PORTFOLIO

The Q-FIX™ CURVED, Q-FIX MINI and
SUTUREFIX CURVED All-Suture Anchor
systems are important additions to
Smith & Nephew’s sports medicine
portfolio. For use in procedures where
space is limited and the anatomy can be
difficult to access, they are designed to aid
in optimal suture anchor placement during
drilling and insertion.

WORLD FIRST

The new PICO 7Y Single Use Negative
Pressure Wound Therapy System (sNPWT)
with AIRLOCK Technology is the first
sNPWT system to include an innovative
integrated Y extension. This enables the
utilisation of two dressings concurrently
from one pump, in practice allowing for two
wounds to be addressed at the same time,
thereby potentially reducing cost.

EXPANSIVE, USER FRIENDLY SYSTEM

The EVOS SMALL Plating System is
indicated for fixation of small and long
bone fractures in adults and children.
It is an expansive, user friendly system
with multiple fixation options including
non-locking, locking, variable-angle
locking, optimised plate contours and
screw trajectories as well as a low
profile construct.

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Sustainability

Sustainability is better business

The Board has endorsed these and executive
management is behind them. These goals are
set out on the next page.

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.

We have set medium-term targets to 2020
which support our longer-term goals. These
are discussed in more detail in our 2018
Sustainability Report.

2018 was a year in which we accelerated
progress toward the achievement of our
2020 targets. We once again delivered
improvements across our traditional areas
of focus: employee health and safety,
carbon emissions and water consumption.
In addition, we deepened and broadened our
understanding of our impacts in the areas of
material efficiency, life cycle environmental
impacts, and labour practices. We deployed
the social responsibility strategy developed
in the previous year, positively contributing to
employee engagement and supporting the
communities in which we operate.

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 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.

SUSTAINABILITY IS AT THE CORE
OF THE BUSINESS
In 2016, we launched our Group Sustainability
Strategy, setting out our aspirational goals
and targets. The strategy is integrated with
our Group Business Strategy. This ensures
that the three main aspects of sustainability
– economic prosperity, social responsibility
and environmental stewardship – are
tackled together.

This is a summary report of our sustainability
activities and progress in 2018. 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 detailed
information regarding the progress made
during 2018. 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.

At the heart of the Group Sustainability
Strategy are 10 long-term aspirational goals.
These encompass all aspects of our business,
and inform and drive our business strategy.

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SUSTAINABILITY continued

OUR PERFORMANCE
Our 10 long-term aspirational goals
2020 target

Performance to 31 December 2018

ZERO WORK-RELATED INJURIES AND ILLNESSES ACROSS THE VALUE CHAIN

– 10% reduction in Total Injury Rate (TIR) from 2016 actual.

– 13% reduction achieved (2016 TIR = 0.52, 2018 TIR = 0.45).

WATER: Total water impacts of products and solutions balanced with local human and ecosystem needs.

– Water footprint available for products accounting for 75% of revenue

and considerations embedded in new product development process.
Total potable water consumption no higher than 2016 actual.

– Water reduction of 21% achieved since 2016. Products and tools identified
as per target. Life cycle assessment for a representative product underway
with completion expected early 2019.

WASTE: All materials are either shipped as part of product or returned for beneficial use.

– Total material efficiency estimated for products accounting for
75% of revenue and 80% or more of waste generated reused,
recycled or recovered.

– 79% of our total waste reused, recycled or energy recovered from,
up from 74% in 2016. Products and tools identified as per target.
Life cycle assessment underway.

CARBON: 80% absolute reduction in total life cycle greenhouse gas emissions by 2050.

– Estimate total life cycle greenhouse gas emissions of products

– Products and tools identified as per target. Life cycle assessment

accounting for 75% of revenue.

underway.

– Total Scope 1 & 2 greenhouse gas emissions reduced by 10%

– 16% reduction in emissions since 2016.

from 2016 actual.

ETHICAL BUSINESS PRACTICES: All activities conducted in compliance with applicable International Labour Organization (ILO) conventions,
involve no environmental degradation, and are free from corruption.

– Labour practices throughout the supply chain associated with products

– Products identified and assessment to applicable ILO conventions

accounting for 75% of revenue compliant with applicable ILO conventions.

completed for internal operations. Engagement with upstream suppliers
and downstream distributors and agents initiated.

ZERO PRODUCT-RELATED AND SERVICE-RELATED PATIENT INJURIES

– Robust system in place to detect, record, investigate and eliminate

– Systems in place.

root cause of product and service-related patient injuries.

– Data being used to craft models to identify at-risk attributes.

ROBUST SOCIAL RESPONSIBILITY PROGRAMMES that contribute to the attraction and retention of top talent.

– Social responsibility strategy which aligns philanthropy, employee

– Social responsibility strategy in place. Alignment to new strategic

volunteering and wellness to the business strategy.

imperatives under way.

PRODUCTS AND SERVICES are aligned to market economic, social and environmental expectations and anticipate future market conditions.

– Sustainability attributes described for products accounting for
75% of revenue. Robust emphasis on sustainability attributes
of new products/services in place.

– Products identified and sustainability attributes agreed. New product

development (NPD) sustainability focus planning under way.

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 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 2019.

ENVIRONMENTAL, SOCIAL, AND ECONOMIC impacts of business activities fully understood and appropriately balanced.

– Formal programmes in place to measure/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.

– Launched Enterprise Risk Management Policy and Manual
and provided training in risk identification and mitigation.

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SUSTAINABILITY continued

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.

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.

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 2018. 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
2018 are included in the data.

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.

Engagement with the communities in which
we operate continues to broaden and deepen
through the active attention of site leadership,
empowerment of local camaraderie councils
as well as broader application of company-
paid volunteering allowance and company
matching of 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
We further improved our understanding of
performance against relevant labour standards
in both our operations and in our supply
chain. We undertook measures to improve
performance across the entire business, taking
significant steps toward the implementation of
the Social Responsibility Strategy which was
adopted in 2017.

Our Social Responsibility Strategy aims
to improve the alignment of our charitable
donations, volunteering, wellness and
professional development with both our
Group Business Strategy and the needs
and desires of our employees. Our goal is to
impact positively both employee engagement
and the quality of life in communities in which
we operate.

In 2018, we improved our understanding
of product and service attributes which are
important to customers and our employees’
view of the role of the organisation in society.

In 2019, we will further drive labour practice
improvements in our supply chain and
turn our attention more fully to identifying
and delivering the socially responsible
attributes which help drive quality of life
in the communities in which we operate.

CO2e emissions (tonnes) from:
Direct emissions
Indirect emissions
Total
Intensity ratio
CO2e (t) per $m sales revenue
CO2e (t) per full-time employee

2018

2017

2016

9,956
67,886
77,842

15.9
4.7

9,451
76,107
85,558

17.8
5.2

9,822
82,415
92,237

19.6
5.9

Revenue: 2018: $4.9bn; 2017: $4.8bn; 2016: $4.7bn.
Full-time employee data: 2018: 16,681; 2017: 16,333; 2016: 15,584.

We report our emissions in two ‘scopes’.
Scope 1 figures include: Direct sources of
emissions which 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 2018. We have applied the emission
factors most relevant to the source data,
including DEFRA 2018 (for UK locations), IEA
2016 (for overseas locations) and for the US we
have used the most recently available 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 2018.

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Our performance

We improved performance, delivered
meaningful efficiency savings, and
generated good cash flow

Chief Financial Officer’s review

Financial review

Risk report

Our Viability Statement

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Chief Financial Officer’s review

Our performance accelerated
across the year and we take
good momentum into 2019

DEAR SHAREHOLDER
Smith & Nephew delivered a solid financial
performance in 2018. We improved
performance, delivered meaningful efficiency
savings, sustained investments in R&D for
growth and continued to generate strong
cash flow. This was achieved while also
making important changes to our leadership,
structures and culture which all position us
well for further progress in 2019 and beyond.

2018 PERFORMANCE
Group revenue in 2018 was $4,904 million,
an increase of 3% on a reported basis and
2% on an underlying basis.1 Our performance
accelerated across the year, with 3% revenue
growth on an underlying basis1 in the second
half, and we take good momentum into 2019.

The reported operating profit for 2018
was $863 million, an 8% reduction from
the previous year primarily reflecting the
costs of the Accelerating Performance and
Execution (APEX) restructuring programme as
described below.

Trading profit1 for the year was $1,123 million
and the trading profit margin was up 90bps
to 22.9%. This reflects both the 50bps benefit
of a one-off legal settlement and improved
trading performance and cost control.

The reported tax rate was 15.1% (2017: 12.7%).
The tax rate on trading results1 for the year
to 31 December 2018 was 16.1% (2017: 17.1%).
This was lower than the guided rate of
between 20–21% mainly due to a one-off
benefit from a tax provision release following
expiry of statute of limitations and a beneficial
geographical mix of profits.

The reported tax rate was lower than the tax
rate on trading results as a higher proportion
of non-trading items were in higher tax
jurisdictions, notably the US.

Basic earnings per share (‘EPS’) was down
13% to 76.0¢, also primarily due to APEX
restructuring charges. Adjusted earnings
per share1 (‘EPSA’) was up 7% at 100.9¢,
reflecting the legal settlement gain, improved
trading performance and the lower tax rate on
trading results.

I’m pleased to report that trading cash flow1
was $951 million, up from $940 million in
2017, and we had another year of strong
cash conversion (as defined on page 195)
at 85% (2017: 90%). Return On Invested
Capital (ROIC1 – as defined on page 198) was
12.5% (2017: 14.3%), reflecting the reduction
in operating profit over the prior year
noted above.

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:
1. Continue to invest in the business to drive

organic growth;

2. Maintain our progressive dividend policy;
3. Realise acquisitions in-line with strategy; and
4. Return any excess capital to shareholders.

Net debt2 was $1,104 million at year-end, a
decrease of $177 million from $1,281 million at
31 December 2017. As part of our strategy to
expand in higher growth markets, we expect
to participate actively in value-enhancing M&A
opportunities, and I am pleased with progress
of our REGENETEN business, acquired from
Rotation Medical in Q4 2017, which exceeded
expectations throughout 2018. We have a
strong balance sheet and substantial capacity
for acquisitions. Appropriate financing for
larger acquisitions would be considered on a
case-by-case basis, as opportunities arise.

CETERIX ACQUISITION
In January 2019 we completed the acquisition
of Ceterix Orthopaedics, Inc., the developer
of the NovoStitch Pro Meniscal Repair System.
The acquisition supports the Company’s
strategy to invest in innovative technologies that
address unmet clinical needs. The cost of the
acquisition was $45 million upon completion,
$5 million deferred and up to a further
$55 million over the next five years, contingent
on financial performance.

EFFICIENCY
Our new Strategic Imperatives include Become
the Best Owner. One of the ways we will do
this is through simplifying the organisation
and its processes, including through the APEX
programme, initiated at the end of 2017.

We are on track across all three workstreams
of 1) Manufacturing, Warehousing and
Distribution, 2) General and Administrative
(G&A) Expenses, and 3) Commercial
Effectiveness. APEX is expected to drive an
annualised benefit of $160 million by 2022 for
a one-off cost of $240 million.

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CHIEF FINANCIAL OFFICER’S REVIEW continued

In 2018, APEX incurred restructuring
costs of $120 million with actions
undertaken that resulted in benefits
of approximately $60 million in
the year.

Graham Baker
Chief Financial Officer

REVENUE

$4,904m

REPORTED
+3%

UNDERLYING1

+2%

EARNINGS PER SHARE
76.0¢

-13%

ADJUSTED EARNINGS PER SHARE1 (EPSA)
+7%
100.9¢

OUTLOOK
Our 2019 guidance for further improvement
in underlying performance at the top and
bottom line is an important step in realising
our medium-term ambition to outgrow
our markets.

In terms of revenue, we expect our underlying
growth to be in the range of 2.5% to 3.5% in
2019. On a reported basis this equates to a
range of around 1.8% to 2.8% at exchange
rates prevailing on 1 February 2019 and
including the effect of the Ceterix acquisition.

We expect 2019 trading profit margin to be
in the range of 22.8% to 23.2%, a further
40–80bps improvement over 2018, excluding
the one-off 50bps legal settlement benefit.

The tax rate on trading results for 2019 is
expected to be in the range 19% to 21%,
subject to any material changes to tax law,
or other one-off items.

Following the implementation of the new
franchise-based organisational structure from
January 2019, we have concluded that we will
have reportable segments for our three main
franchises; Orthopaedics, Sports Medicine &
ENT and Advanced Wound Management, from
2019 onwards. I hope that investors and others
will benefit from the additional information this
will provide.

Yours sincerely,

Graham Baker
Chief Financial Officer

1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194–198.

2 Net debt is reconciled in Note 15 to the Group accounts.

We continue to keep the programme under
review to ensure the delivery of benefits and
assess any further incremental opportunities
that may arise.

In 2018, APEX incurred restructuring costs
of $120 million with actions undertaken
that resulted in benefits of approximately
$60 million in the year.

During the year, I was pleased to take on
responsibility for our Global Business Services
(GBS) and IT functions. Both functions have
important roles to play both in supporting
delivery of the business strategy and delivering
efficiencies as part of the APEX programme.

Expert people, improved systems and effective
processes are core to those functions and
both functions provide high quality service
to the business from a mixture of locations,
both near to our business and in cost effective
regional centres.

We now have fully functioning GBS centres
in Costa Rica, Malaysia, India and Poland.
Our employees in these locations are integral
members of the Smith & Nephew team and
we expect all the centres to expand to take on
more work in the coming year.

UK’S WITHDRAWAL FROM THE EU
The Group does not believe that the UK’s
decision to leave the EU will have a significant
impact on our long-term ability to conduct
business into and out of the EU or UK. We are
making good progress with our preparations
for the various scenarios. Early in 2019, our
preparations were assessed by external
advisors on behalf of the Internal Audit
function, with the findings reviewed by the
Audit Committee.

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Financial review

We have a strong balance sheet
and substantial capacity for
acquisitions

GROUP PERFORMANCE

Consolidated income statement
Revenue
Operating profit
Trading profit1
Profit before tax

Attributable profit
EPS
EPSA1

2018
$ million

4,904
863
1,123
781

663
76.0¢
100.9¢

2017
$ million

Change
$ million

4,765
934
1,048
879

767
87.8¢
94.5¢

139
(71)
75
(98)

(104)
(11.8¢)
6.4¢

DIVIDENDS
The 2017 final dividend of 22.7 US cents per
ordinary share totalling $198 million was paid
on 9 May 2018. The 2018 interim dividend
of 14.0 US cents per ordinary share totalling
$123 million was paid on 31 October 2018.

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:

2018
$ million
2,354

2017
$ million
2,306

Reported
growth
%
2%

Underlying
growth
%
1%

Acquisitions/
Disposals
%
1%

Reconciling items
Currency
impact
%
0%

1,693
857
4,904

1,658
801
4,765

2%
7%
3%

0%
8%
2%

0%
0%
0%

2%
(1%)
1%

US
Other Established
Markets2
Emerging Markets2
Total

Trading profit reconciles to operating profit, the most directly comparable financial measure
calculated in accordance with IFRS, as follows:

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 decreased from 14.3% in 2017
to 12.5% in 2018 as a result of the reduction
in operating profit.

ROIC is defined as:

Net Operating Profit less Adjusted Taxes

(Opening Net Operating Assets +
Closing Net Operating Assets)/2

Operating profit
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of
acquisition intangibles
Legal and other
Trading profit

2018
$ million
863
(7)
120

113
34
1,123

2018
%
17.6%
(0.1%)
2.4%

2.3%
0.7%
22.9%

2017
$ million
934
(10)
–

140
(16)
1,048

2017
%
19.6%
(0.2%)
–

2.9%
(0.3%)
22.0%

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FINANCIAL REVIEW continued

BALANCE SHEET

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 debt3

2018
$ million

2017
$ million

Change
$ million

3,547
1,435
3,077
8,059
4,874
1,720
1,465
3,185
8,059
1,104

3,742
1,393
2,731
7,866
4,644
1,876
1,346
3,222
7,866
1,281

(195)
42
346
193
230
(156)
119
(37)
193
(177)

Goodwill decreased by $34 million primarily
as a result of foreign currency movements.
Intangible assets decreased by $161 million
with amortisation and impairment of
$179 million and foreign currency movements
of $14 million partially offset by net additions of
$32 million.

Other non-current assets increased by
$42 million primarily due to an increase of
$30 million in the retirement benefit assets
for our UK and US pension schemes.
Trade investments also increased by
$13 million as a result of additions of $4 million
and fair value remeasurements of $9 million.
Current assets increased by $346 million
with trade and other receivables increasing

$59 million as a result of the timing of
collections, inventories increasing $91 million
primarily due to sales growth and new product
build, and cash increasing $196 million
due to insurance recoveries and stronger
underlying profits.

Non-current liabilities decreased by
$156 million primarily due to the reclassification
of certain payables and borrowings to current
liabilities, as they now fall due within one year.
Current liabilities increased by $119 million as
a result of the aforementioned reclassifications
from non-current to current liabilities and an
increase of $18 million in bank overdrafts.

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 debt3 decreased from
$1,281 million at the beginning of 2018 to
$1,104 million at the end of 2018, representing
an overall decrease of $177 million.

At 31 December 2018, the Group held
$333 million (2017: $155 million) in cash net of
bank overdrafts. The Group had committed
facilities available of $2,429 million at
31 December 2018 of which $1,429 million was
drawn. Smith & Nephew intends to repay the
$125 million of facilities 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 2019, 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.

CASH FLOW STATEMENT

Consolidated cash flow statement
Cash generated from operations
Trading cash flow1
Free cash flow1

2018
$ million

1,108
951
584

2017
$ million

1,273
940
714

Change
$ million

(165)
11
(130)

1 These non-IFRS financial measures are explained and reconciled
to the most directly comparable financial measure prepared in
accordance with IFRS on pages 194–198.

Included within the 2017 analysis is a reclassification of
$20 million of revenue formerly included in Other Established
Markets which has now been included in Emerging Markets in
order to present consistent analysis to the 2018 results.

3 Net debt is reconciled in Note 15 to the Group accounts.

Cash generated from operations of
$1,108 million is after paying out $3 million
of acquisition and disposal related items,
$83 million of restructuring and rationalisation
expenses and $104 million relating to legal and
other costs.

Trading cash flow1 increased by $11 million
driven by higher trading profit and lower
capital expenditure. These movements were
partly offset by a working capital net outflow
which included an increase in inventory as

described above. Free cash flow1 decreased
by $130 million primarily related to higher cash
outflows for restructuring and rationalisation
expenses and legal and other costs.

During the year ended 31 December 2018,
the Group purchased a total of 2.7 million
(2017: 3.2 million) ordinary shares at a cost of
$48 million (2017: $52 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.

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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 Executive Committee, chaired
by the Chief Executive Officer, and then to the
Board and its Committees.

BOARD OF DIRECTORS AND
BOARD COMMITTEES
– 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 Compliance & Culture),
management reviews and ‘deep dives’
of selected risk areas

– The Audit Committee is responsible for

ensuring oversight of the process by which
risks relating to the Company and its
operations are managed and for reviewing
the operating effectiveness of the Group’s
Risk Management process

Risk report
Our risk management process

Our approach to risk

Like all businesses, we face a number of risks and uncertainties.

Some come from outside our organisation,
others from within. Some we can’t control,
some we can. Many of our risks are similar to
those experienced by similar businesses and
for 2018 we are undoubtedly aligned with other
businesses as risks around Brexit uncertainty
and political unrest globally have heightened.

Successful management of existing
and emerging risks is critical to the
long-term success of our business and to
the achievement of our strategic objectives.
In order to seize market opportunities and
leverage the potential for success, risk
must be accepted to a reasonable degree
within our tolerances. Risk management
is therefore an integral component of the
Group’s Corporate Governance.

As in previous years our Enterprise Risk
Management process is based on a holistic
approach to risk management, leveraging risk
identification and risk treatments already in
place throughout our Business Areas 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.

The current financial year has seen further
maturity of the risk management framework
with further testing of key controls through
‘deep dives’ by the Group Risk Team and a
number of different risk topics presented to
the Board and its Committees. We have also
designed our Enterprise Risk Management
Framework to be fully integrated into our
business processes. This will be built on
further throughout 2019.

Our risk governance framework is set out
below. 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’ and
reviews by the business and Group Risk
Team. The Board cascades our risk appetite
throughout our organisation through the
Executive 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.

Board of
Directors and
Board Committees

Executive Committee

Business Area

Group Risk Team

Internal Audit Annual Assessment of Effectiveness

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RISK REPORT continued

EXECUTIVE COMMITTEE SITTING
AS GROUP RISK COMMITTEE
– Reviews external/internal environment

for emerging risks

– Reviews risk register updates from

Business Area Risk Groups

– Identifies significant risks and assesses

effectiveness of mitigating actions

BUSINESS AREA
– Business Area Risk Champions provide

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 Area
– Business Area Risk Champions lead

regular risk register updates

GROUP RISK TEAM
– Manages 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 Business Area Risk Champions

– Provides resources and training

to support process

– Regular risk reporting to the

Executive Committee

– Prepares Board and Group Risk

Committee reports

ANNUAL ASSESSMENT OF
EFFECTIVENESS – INTERNAL AUDIT
AND CONTROL FUNCTIONS
– Provides independent assurance to
the Board and Audit Committee on
the effectiveness of the Group’s Risk
Management process

Risk management life cycle

Our risk management life cycle was fully refreshed in 2017 and
was updated in 2018 to align with our new strategic imperatives
which we launched in December.

Our Risk Management Policy, sponsored by
our Chief Executive Officer, is supported by
an Enterprise Risk Management Manual and
the risk team provide regular training to all risk
champions throughout the year. As in 2018
risks continue to be managed

through a ‘bottom up’ and ‘top down’ process,
with regular oversight from the Executive
Committee and quarterly reports to the
Board Committees. An overview of our risk
management life cycle can be found below:

onitoring a n d r e vi e
g M

n
i
t
r
o
p
e
r

k
s

R i s k identif cation Gro

s (i

t
)

m
e
n
t

n
atio

u rr e nt control identif c

e pla

ning Net (residual ) r i s k

1 Risk identifcation
IDENTIFYING risks associated
with the achievement of our
objectives by function at the
Group level.

2 Gross (inherent)
risk assessment
ASSESSING the level
of inherent (gross) risk.

3 Current control
identifcation
IDENTIFYING existing
controls to mitigate risks.

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.

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.

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.

7 Monitoring and review
MONITORING of risks and
actions by management, the
accountable Executive and Board.

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2018 principal risks

We assess our Principal Risks in terms
of their potential impact on our ability
to deliver our Strategic Imperatives

These links are highlighted across the following pages and further information
on the Strategic Imperatives is found on page 9.

BUSINESS CONTINUITY AND BUSINESS CHANGE

Operating with a global remit, increased
outsourcing, more sophisticated materials and
the speed of technological change in an already
complex manufacturing process leads to 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 imperative of the organisation.
In addition, the pace and scope of our business
‘change’ initiatives increases the execution risk
that benefts 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.

Examples of risks
– Failure or significant performance issues experienced

at critical/single source facilities.

– Disruption to manufacturing at single or sole source

facility (lack of manufacturing redundancy).

– Supplier failure impacts ability to meet customer demand

(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.

Actions taken by management
– Comprehensive product quality processes and controls

are in place from design to customer supply.

– Emergency and incident management and business
recovery plans are in place at major facilities and for
key products and key suppliers.

– 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 our response.

Risk Tolerance
In operating our business, executing
our change programmes and in
managing our suppliers and facilities
we have a low to moderate
tolerance for this risk.

Change from 2017
No change.

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to
ensure we remain sustainable into
the future and through periods of
business change.

Oversight
Board

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RISK REPORT continued

CYBER SECURITY

High profle 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 a level of 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.

QUALITY AND REGULATORY

Global regulatory bodies continue to increase
their expectations of manufacturers and
distributors of medical devices. Our products are
used in the human body 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.

2018 has also brought uncertainty in terms of
Britain’s exit from the EU as well as future trade
and regulatory relations between the EU and UK.
Like many other companies we are planning for the
impact of a range of eventualities, particularly in
continuity assessment and how our products will
continue to be appropriately registered for trade
around the EU.

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 provides real-time analysis of security alerts
generated by applications and network hardware.

– Annual penetration testing and quarterly vulnerability testing.
Endpoint protection and Intrusion detection/prevention.
– The adoption of additional authentication tools to reduce

the likelihood of remote attacks.

– Annual mandatory training and continuous awareness

training for end-users.

– Security governance structure in place including

a Cyber Security Steering Committee.

– Further strengthening governance including a

programme to monitor cyber security capabilities and
controls, technical and governance matters.

Examples of risks
– Defects in design or manufacturing of products supplied
to, and sold by, the Group 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.

– CE certificates issued by UK notified bodies prior to the
withdrawal date may be rendered void post Brexit.

Actions taken by management
– Comprehensive and documented product quality
processes and controls from design to customer
distribution are in place.

– 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.

– Brexit working group is in place considering various

deal/no deal scenarios.

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 2017
No change.

Link to strategy
Our Strategic Imperative to
‘Transform the business through
enabling technologies’ requires
us to deliver technology solutions
in compliance with laws and
regulations and in a way that
protects any vulnerability to
Cyber Risk.

Oversight
Audit Committee

Risk Tolerance
Our response to this risk continues
to be critical and our ability to align
the standards required to ensure
safe and compliant products is the
key driver for our extremely low
tolerance for risk in this area.

Change from 2017
No change.

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to
operate effectively and efficiently
and to produce compliant products
of the highest quality to provide
safe and effective solutions to
our customers.

Oversight
Board Compliance &
Culture Committee

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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. Our success
relies on investing in safe products and platforms,
aligned internal and external design, and
development innovation in order to compete
effectively. The need to be considered in our
approach to protecting our products, process and
intellectual property is essential.

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.

Examples of risks
– Failure to develop an appropriate pipeline of

commercially successful products to meet and anticipate
the needs of our customers ahead of the competition.
– Insufficient long-term planning to respond to competitor

disruptive entries into marketspace.

– Inadequate innovation due to low Research &

Development (R&D) investment, R&D skills gap or poor
product development execution.

– Lower value business segment investment, such as
product maintenance and line extension projects.
– Competitors may assert patents or other intellectual

property rights against the Company, or fail to respect
the Company’s intellectual property rights.

Actions taken by management
– Global R&D organisation and governance framework
providing strategic direction for allocation of R&D
investments across all businesses. Clear stage-gate
process to continually evaluate R&D investments
decisions and development of new products.

– Enhanced relationship with Commercial team to focus

on developing products that customers need.
– Strengthened Clinical Affairs programme integrated

with Global Marketing.

– 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.

Risk Tolerance
In pursuit of our strategy to be
innovative in our product offering we
have a moderate to high tolerance
for risk.

Change from 2017
Reduced risk.

Link to strategy
Our Strategic Imperative to
‘Transform the business through
enabling technologies’ depends
heavily on our ability to continue to
develop new innovative products
and bring them to market.

Oversight
Board

Examples of risks
– Loss of key talent, high attrition and lack of appropriate
succession planning in context of required skillsets
for future business needs.

– Loss of competitive advantage due to an inability to

attract and retain Top Talent.

– Loss of intellectual capital due to poor retention of talent.

Actions taken by management
– Talent planning and people development processes
are well established across the Group. Talent and
succession planning is discussed annually by the
Board and regularly by the Executive Committee and
Nomination & Governance Committee.

– Identification of high performing individuals and
practices to plan for the succession of key roles.

– Consistent and robust performance

management process.

– Development of strategic skills resourcing plan

by functional areas.

Risk Tolerance
We have a moderate tolerance for
this risk.

Change from 2017
No change.

Link to strategy
All our strategic imperatives 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

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RISK REPORT continued

PRICING AND REIMBURSEMENT

Our success depends on our ability to sell our
products proftably 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.

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-defned cross-functional process
for managing risks associated with mergers
and acquisitions that is subject to scrutiny from
executive management and the Board of Directors.

Examples of risks
– Reduced reimbursement levels and increasing

pricing pressures.

– Systemic challenge on number of elective procedures.
– Lack of compelling health economics data to support

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.

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 2017
No change.

Actions taken by management
– Development of innovative economic product
and service solutions for both Established and
Emerging Markets.

– Appropriate breadth of portfolio and geographic spread

to mitigate exposure to localised risks.

– Incorporating health economic components into the

design and development of new products.

– Emphasising value propositions tailored to specific
stakeholders and geographies through strategic
investment and marketing programmes.

Link to strategy
Our Strategic Imperative to ‘Achieve
the full potential of our portfolio’
depends on our ability to sell
our products profitably in spite
of increased pricing pressures
from payers.

Oversight
Board

Examples of risks
– Failure to identify appropriate acquisitions or to conduct

effective acquisition due diligence.

– Failure to integrate newly acquired businesses effectively,
including integration with Company standards, policies
and financial controls.

Actions taken by management
– Acquisition activity is aligned with corporate strategy and
prioritised towards products, franchises and markets
identified to have the greatest long-term potential.
– Clearly defined investment appraisal process based on
return on capital, in accordance with 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.

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 2017
No change.

Link to strategy
Our Strategic Imperatives to ‘Expand
in high-growth segments’ and
‘Transform the business through
enabling technologies’ depend
on our ability to identify the right
acquisitions, to conduct thorough
due diligence and to integrate
acquisitions effectively.

Oversight
Board

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RISK REPORT continued

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’ is 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 fnes, 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.

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 confdent 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.

Examples of risks
– Failure to act in an ethical manner consistent with our

Code of Conduct.

– Violation of anti-corruption or healthcare laws, breach by

employee or third party representative.

– 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.

Actions taken by management
– Ethics & Compliance Committee oversees our ethical

and compliance practices.

– Global compliance programme, policies and procedures.
– All employees are required to undertake annual training
and to certify compliance on an annual basis with our
Code of Conduct and Business Principles.

– Group monitoring and auditing programmes in place.
– Confidential independent reporting channels for
employees and third parties to report concerns.

Risk Tolerance
In complying with legal and
compliance requirements, we have
an extremely low tolerance.

Change from 2017
No change.

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to
comply with applicable laws and
regulations and do the right thing as
part of our licence to operate.

Oversight
Board Compliance &
Culture Committee

Examples of risks
– Failure to execute our strategy adequately from

high-level ambition to specific actions to make the
ambition a reality.

– Inability to keep pace with significant product innovation

and technical advances to develop commercially
viable products.

– Failure to adapt our priorities and execution appropriately
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.

Risk Tolerance
We have a low to moderate
tolerance level for commercial
execution risk.

Change from 2017
No change.

Actions taken by management
– Global R&D 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.

Link to strategy
Our Strategic Imperatives to ‘Achieve
the full potential of our portfolio’,
‘Transform the business through
enabling technologies’ and ‘Expand
in high-growth segments’ requires
excellent commercial execution.

– Global transformational programmes in place providing

agile opportunities for efficiencies, growth and a
strengthened competitive position.

Oversight
Board

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RISK REPORT continued

POLITICAL AND ECONOMIC

Across our business we are exposed to the
effects of political and economic risks from the
impact of Brexit to changes in the regulatory
and competitive landscape to the impact of
the US Administration’s changed approach
to Trade Policy.

Turning to Brexit, there remain heightened
levels of political and regulatory uncertainty in
the UK following the referendum vote to leave
the EU in June 2016, the triggering of Article 50
in March 2017 and the general election in June
2017. This uncertainty is expected to continue for
the foreseeable future until EU exit negotiations
have been completed and alternative trade
deals have been put in place. This situation may
adversely impact trading performance across the
sector. Regulatory risk forms the most signifcant
risk presently; the ability for us to continue to
manufacture and register our products in a
compliant manner for global distribution is key.

Risk Tolerance
In preparing for Brexit and
managing risk arising from
changes to our political economical
environment, we have a low to
moderate tolerance.

Change from 2017
New risk previously
incorporated into
Business Change.

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to
operate effectively within different
global political situations, which
change constantly.

Oversight
Board

Examples of risks
– Macro-economic uncertainty or downturn in the

UK economy as a result of Brexit.

– Regulatory risk whereby certificates issued by UK

Notified Bodies are no longer recognised in EU following
March 2019.

– Global political uncertainty – regarding trade policy.
– Implementation of healthcare reforms and/or

protectionist measures and regulation or legislation in
local markets.

– Exchange rate volatility.
– The availability of markets and market access rights.
– Impact on strategy and operations.
– Increases in import and labour costs.
– Retention of skilled labour and recruitment concerns.
– Increases in tariffs and restrictions on global trade.

Actions taken by management
– Continued engagement with governments,
administrations and regulatory bodies.

– The Group has a Brexit committee which meets regularly
and is split into a number different work streams namely:
– Regulatory – the most complex work stream considering

product registration.

– Supply chain – considering the impacts on import
and export requirements in UK and Europe; supply
routes, managing inventory levels in the UK and
Europe to minimise disruption from border clearance
and managing labelling changes required as a result
of the regulatory changes.

– UK and Ireland (‘UKI’) market – considering issues

expected to impact the UKI specifically the Irish border
issue – including whether a changed route to market is
required in Ireland.

– HR – considering issues such as impact on

EU workers currently employed in UK and future
mobility considerations.

– Finance – considering issues such as impact on

tax including EU trading arrangements and the VAT
implications of the changes and the impact on financial
reporting, eg EU/UK endorsement of IFRS.

– Improved engagement and monitoring/lobbying on

localisation initiatives.

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RISK REPORT continued

‘Deep Dives’ and reviews completed
in the year

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 the Executive
Committee separately and collectively in
September and were presented to the Board
during the Strategy Review in December 2018.
In December, the Accountable Executives were
further required 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 2018, the Board assessed and
monitored risk in a number of areas and
specific ‘Deep Dive’ reviews were also
completed by the Group Risk team. In addition,
in early 2019, the Board reviewed the results
of a deep dive on Brexit risk. The 2018 risk
reviews and deep dives included:

BOARD AND AUDIT COMMITTEE ‘DEEP DIVES’ AND REVIEWS

LEGAL, COMPLIANCE
AND QUALITY

RESEARCH AND
DEVELOPMENT

FUNCTIONAL
OVERSIGHT

During the year, the Ethics
& Compliance Committee
considered papers from
the quality and regulatory
and legal and compliance
functions covering topics such
as preparations for EU Medical
Device Regulations, FDA &
Notified Body inspections,
outcomes of internal
investigations, reviews of legal
issues and a review of sexual
harassment policies and claims.

During the year, the Board
received a report from the R&D
function which included a focus
on the risks associated with the
R&D programme and strategies
to manage these risks.

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 a year
on the progress of the risk
management programme.

MANUFACTURING
OPERATIONS

M&A

During the year, the Board
has received a number of
presentations from the global
operations team considering
the risks in particular associated
with the manufacturing footprint
and the supply chain and
proposals to mitigate these risks.

The Board has reviewed
and approved all Executive
Officer changes during the
year within the context of the
overall strategy and have been
kept updated on management
actions to implement the new
culture pillars.

IT/CYBER

Each Board meeting considers
Corporate Development within
the context of the Group
Strategy and also reviews
specific acquisitions. During the
year, the Board also undertook
retrospective reviews of
previous acquisitions compared
to expectations in the original
deal models.

The Audit Committee received reports on IT and cyber security
including an assessment of the existing risks and benchmarking
against industry standards.

GROUP RISK TEAM ‘DEEP DIVES’

A series of planned ‘Deep Dives’ have been completed in the year across our Business Risk Areas,
including Global Manufacturing, Strategic Sourcing, Supply Chain, Global Quality and Regulatory,
Global Business Services and IT. These reviews were 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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RISK REPORT continued

2019 Risk Management Plan

Our work will continue to evolve in 2019 and we will
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.

2019 RISK MANAGEMENT TIMELINE

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

INTERNAL AUDIT

– Risk Management

Effectiveness Review report
to Audit Committee

GROUP RISK TEAM

– Refresh Enterprise Risk
Management Policy
and Manual

BUSINESS RISK AREAS

– Quarterly Risk Review
by leadership teams

EXECUTIVE COMMITTEE

– 2020 Risk Based Internal
Audit Plan Preparation

– Risk Management
Effectiveness
Review report
to Audit Committee

– Risk training
– Report to Audit Committee
– Facilitate ‘top down’
review process

– Prepare 2020 Enterprise

Risk Management Strategy

– Prepare Review of
Principal Risks

– Report to Audit Committee

– Refresh Enterprise Risk
Management Policy
and process

– Quarterly Risk Review by

leadership teams
– Review Principal
Risks and map to
Strategic Imperatives

leadership teams

– Risk Register refresh and
submission to Group Risk
Team annual certification

– Quarterly Risk Review
by leadership teams

– Review reports from
Group Risk Team

– ‘Top Down’ review of

– Approve Principal Risks

Principal Risks

– Review reports from
Group Risk Team

AUDIT COMMITTEE

– Review and approval of
the Group’s 2018 Risk
Management Process
and Viability Statement

BOARD

– Receive report from the
Group Risk Team and
review Enterprise Risk
Management process

– Review and approve

Principal Risks

– Review and approval of
the Group’s 2019 Risk
Management Process
and Viability Statement

– Approve Principal Risks

– Review of Principal Risks

– Approve Principal Risks

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RISK REPORT continued

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 41–49 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, July, September and December,
receiving presentations from the Group
Risk function, explaining the processes
followed by management in identifying and
managing risk throughout the business.
– In October, 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 strategy business updates
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’ and reviews 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 48 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 and are
detailed on page 48 of this Annual Report.

ASSESSMENT PERIOD
The Board have determined that the
three-year period to December 2021 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.

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
following 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 42–47 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.

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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 2019. 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
February 2019, 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 Plan. 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 21 February 2019.

Susan Swabey
Company Secretary

RISK REPORT continued

2018 SCENARIOS MODELLED

SCENARIO 1 – PRICING AND REIMBURSEMENT PRESSURES

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% annual
price erosion from 2019.

Link to strategy
– Achieve the full potential of our portfolio

Link to Principal Risks
– Pricing and Reimbursement

SCENARIO 2 – OPERATIONAL RISK

Execution risk – our inability to launch new
products losing significant market share
to the competition.
Product liability claims – giving rise to significant
claims and legal fees.

Action taken: We have modelled a universal 1%
reduction of annual volume growth from 2019.

Action taken: We have modelled a one-off
significant product liability claim in 2020, without
any insurance coverage.

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 2020.

Link to strategy
– Become the best owner
– Transform the business through

enabling technologies

– Achieve the full potential of our portfolio

Link to Principal Risks
– New Product Innovation, Design &

Development Including Intellectual Property

– Commercial Execution
– Business Continuity and Business Change

SCENARIO 3 – LEGAL REGULATORY AND COMPLIANCE RISKS

Regulatory measures – impacting our ability
to continue to sell key products.

Bribery and corruption claims – giving rise
to significant fines.

Action taken: We have modelled the complete
loss of revenue from a key product for each year
from 2019.
Action taken: We have assumed a one-off
significant fine in 2020.

Link to strategy
– Become the best owner

Link to Principal Risks
– Legal and Compliance
– Quality and Regulatory

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 for a month in
2020 due to an IT disruption.

Link to strategy
– Transform the business through

enabling technologies

Link to Principal Risks
– Cyber Security

OTHER

Political and economic risk– for example, political
upheaval, which could cause us to withdraw from a
major market for a period of time.

Action taken: We have modelled a major
disruption due to a hard Brexit having a regulatory
impact, and also causing severe delays with
imports and exports for three months.

Link to strategy
– Become the best owner

Link to Principal Risks
– Political and Economic

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Governance

Leadership

Our Board of Directors

Executive team

Nomination & Governance Committee report

Compliance & Culture Committee report

Audit Committee report

Directors’ Remuneration report

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 Compliance & Culture
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:

www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf.

In addition, we are making progress in complying with certain aspects of the 2018 Corporate Governance Code early.

The Directors’ Report comprises pages 2, 10-11, 24-25,32-39, 40-83, 116, 154-156, 173, 187-209 of the Annual Report.

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Chair’s introduction

We are making progress implementing
the 2018 UK Corporate Governance Code.

DEAR SHAREHOLDER,
I am pleased to present the governance
section of our Annual Report, which includes
details about the Board and an explanation
of our individual roles and responsibilities.
We also summarise the activities of the Board
during the year and the Chair of each Board
Committee discusses the activities of that
Committee during the past year.

The publication by the Financial Reporting
Council in 2018 of the new UK Corporate
Governance Code (the ‘Code’) and the
Guidance on Board Effectiveness has caused
us to reconsider some aspects of how we will
operate as a Board going forward. We are in
the process of reorganising the composition
and the responsibilities of some of the Board
Committees to reflect the new emphasis in
the Code on listening to the employee voice
and having regard to the views of all our
key stakeholders. We explain our intended
approach in the reports from the Nomination
& Governance Committee and the Ethics &
Compliance Committee, which will become the
expanded Compliance & Culture Committee.
The scope of the Remuneration Committee has
also been broadened and this is discussed in
the Remuneration Report. These changes are
reflected in revised terms of reference, which
are available on our website and in revised
Committee memberships, explained further in
the individual Committee reports.

We have also included a section explaining
how the Board has fulfilled its duties towards
our key stakeholders – our employees, our
customers and suppliers, our investors and
governments and regulators – in 2018, and
how we plan to build on this in 2019.

In particular, we have considered how we
can listen better to the employee voice.
We feel that as a unitary Board, this is very
much the responsibility of the Board as a
whole and that this responsibility should not
fall to any one designated director or to an
employee representative. We are a global
company operating out of multiple locations,
with employees coming from many different
perspectives. Elsewhere in this report, you
will have read about the work Namal and
the executive team have done in the past
year, developing the new purpose, strategic
imperatives and culture pillars. This work
included engagement with a large number
of our employees across the world at all
levels of the organisation. The Board intends
to build on these now established means
of engagement, so that we too can listen
effectively and respond to the employee
voice. This programme will be developed for
us by the expanded Compliance & Culture
Committee and will be in addition to the
engagement we currently have with employees
when we undertake site visits as part of our
Board programme.

CHANGES TO THE BOARD IN 2018
During the year to 31 December 2018, there
were the following changes to the Board:
1. Namal Nawana joined the Board as

Chief Executive Officer on 7 May 2018.
2. Olivier Bohuon retired from the Board

as Chief Executive Officer on 7 May 2018.
3. Roland Diggelmann joined the Board as
a Non-Executive Director and Member
of the Audit Committee on 1 March 2018.

4. Joseph Papa retired from the Board on

12 April 2018.

At the Annual General Meeting to be
held on 11 April 2019 there will be some
additional Board changes. Ian Barlow, our
Senior Independent Director and former
Chair of the Audit Committee will be retiring
after nine years’ service to the Company.
Michael Friedman, Chair of our Compliance &
Culture Committee will also be retiring after six
years’ service.

We would like to thank both Ian and
Michael for their outstanding contribution
to the Company through periods of change.
Michael has given us deeper insight into
regulatory matters and Ian has been a valuable
support to me on many matters, most recently
in finding Namal Nawana, our new Chief
Executive Officer.

Robin Freestone will succeed Ian as Senior
Independent Director and Marc Owen will
succeed Michael as Chair of the expanded
Compliance & Culture Committee. Over the
course of the coming months, we shall be
undertaking a search for a new Non-Executive
Director with recent and relevant financial
experience to be our financial expert and
in time take over from Robin as Chair of the
Audit Committee.

Roberto Quarta
Chair

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Leadership
Our Board of Directors

ROBERTO QUARTA (69)
Chair
Joined the Board in December 2013 and appointed
Chair following election by shareholders at the 2014
Annual General Meeting. He was also appointed
Chair 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 Chair,
until 2007.

He has held several board positions, including
Non-Executive Director 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 Chair 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 Chair 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 in 2018. Roberto also
conducted the search resulting in the appointment
of Namal Nawana as our CEO in 2018.

Nationality

American/Italian

NAMAL NAWANA (48)
Chief Executive Officer
Joined the Board and was appointed Chief Executive
Officer on 7 May 2018. He will stand for election
by shareholders at the AGM on 11 April 2019.
He is based in Andover, US.

Career and experience
Prior to Smith & Nephew Namal was Chief Executive
Officer and a member of the Board of Medical
Diagnostics Company Alere Inc, until its $8 billion
acquisition by Abbott in 2017. Before joining Alere,
Namal spent more than 15 years at Johnson &
Johnson in progressively senior leadership roles
globally including the role of Worldwide President
of Johnson & Johnson’s multi-billion dollar spine
franchise, DePuy Synthes Spine. In addition to his
role as CEO of Smith & Nephew, Namal is also a
member of the Board of Directors of Hologic, Inc. a
Nasdaq listed company and Advamed (Advanced
Medical Technology Association).

Skills and competencies
Namal holds an undergraduate degree in
Mechanical Engineering and a Masters degree in
Medical Science from the University of Adelaide,
South Australia, as well as an MBA from Henley
Management College. He is a global leader with
broad experience in healthcare and medical
technology.

Nationality

Australian/French

GRAHAM BAKER (50)
Chief Financial Officer
Joined the Board as Chief Financial Officer in
March 2017. He is based in London, UK.

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

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Leadership
Our Board of Directors continued

VINITA BALI (63)
Independent Non-Executive Director
Appointed Independent Non-Executive Director in
December 2014 and Member of the Remuneration
Committee and Compliance & Culture 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,
Bunge Limited and CRISIL India (a Standard & Poor
Company). She is also 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.
Her strong appreciation of customer service and
marketing brings deep insight as Smith & Nephew
continues to develop innovative ways to serve our
markets and grow our business.

Nationality
Indian

THE RT. HON BARONESS
VIRGINIA BOTTOMLEY OF
NETTLESTONE DL (70)
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 and will join the Compliance
& Culture Committee in April 2019.

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, where
she is Chair of Board & CEO Practice at Odgers
Berndtson. She is a member of the International
Advisory Council of Chugai Pharmaceutical
Co., Chancellor of University of Hull and Sheriff
of Kingston upon Hull. She is a Trustee of The
Economist Newspaper.

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

ROLAND DIGGELMANN (51)
Independent Non-Executive Director
Appointed Independent Non-Executive Director and
Member of the Audit Committee on 1 March 2018.
He was elected by shareholders at the AGM on
12 April 2018. He will join the Compliance & Culture
Committee in April 2019.

Career 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 starting
as president of Asia Pacific before assuming the
role of Chief Executive Officer of the Diagnostics
Division of F. Hoffmann-La Roche Ltd from 2012
until September 2018.

Skills and competencies
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 is of
great value to Smith & Nephew.

Nationality
Swiss

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Leadership
Our Board of Directors continued

ERIK ENGSTROM (55)
Independent Non-Executive Director
Appointed Independent Non-Executive Director in
January 2015 and Member of the Audit Committee.
He will join the Nomination & Governance
Committee in April 2019.

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 and Nomination &
Governance Committees.

Nationality
Swedish

ROBIN FREESTONE (60)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
and Member of the Audit Committee and the
Remuneration Committee in September 2015 and
Chair of the Audit Committee in April 2017. Robin will
succeed Ian Barlow as Senior Independent Director
following the AGM on 11 April 2019 and join the
Nomination & Governance Committee.

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, Chair of the
100 Group and Senior Independent Director and
Chair of the Audit Committee of Cable & Wireless
Communications plc. Robin is NED and Chair of the
Audit Committee at Capri Holdings Ltd, (formerly
Michael Kors Holdings Ltd). Robin became Chair
of the ICAEW Corporate Governance Committee
in 2017 and is currently a NED and Chair of the Audit
Committee at MoneySupermarket.com plc. Robin
will be appointed as Chair of their Board with effect
from the conclusion of its Annual General Meeting
on 9 May 2019.

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 is of value
to Smith & Nephew as it continues to grow
globally and in different markets. He brings
financial expertise and insight as Chair 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

MARC OWEN (59)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
and Member of the Audit Committee in October
2017 and Member of the Compliance & Culture
Committee in March 2018. He will be appointed
chair of the Compliance & Culture Committee in
April 2019.

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 Chair 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 and makes him ideally placed to Chair the
Compliance & Culture Committee.

Nationality
British

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Our Board of Directors continued

ANGIE RISLEY (60)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
in September 2017 and appointed Chair of the
Remuneration Committee on 12 April 2018.

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 HRD 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
and Serco Group plc, and now Smith & Nephew.
At Serco she was the Chair of the Remuneration
Committee. Previously she has attended
Remuneration Committees of Whitbread, Lloyds
Banking Group, Arriva and attends Sainsbury’s
today. She is also a Non-Executive Director on the
Sainsbury’s Bank Board.

Skills and competencies
Angie is a well-regarded FTSE 100 Human
Resources Director, proven Non-Executive Director
and Remuneration Committee Chair. 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 an additional resource and
sounding board for Smith & Nephew’s own internal
Human Resources function.

Nationality
British

DIRECTORS WHO SERVED
DURING 2018 RETIRING AT
ANNUAL GENERAL MEETING

IAN BARLOW (67)
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
Compliance & Culture Committee in October
2014 and Senior Independent Director and
Member of the Nomination & Governance
Committee on 6 April 2017. Ian will retire from the
Board at the Annual General Meeting on 11 April
2019 and will not stand for re-election.

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.

MICHAEL FRIEDMAN (75)
Independent Non-Executive Director
Appointed Independent Non-Executive Director
in April 2013 and Chairman of the Compliance &
Culture Committee in August 2014. Michael will
be retiring from the Board at the Annual General
Meeting on 11 April 2019 and will not stand for
re-election.

Career and experience
Michael is medically trained, specialising in
Internal Medicine and Medical Oncology. He was
formerly CEO of City of Hope in California, and
also served as Director of the institution’s cancer
centre. 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
and is currently a NED of Celgene Corporation,
MannKind Corporation and Intuitive Surgical, Inc.

SUSAN SWABEY (57)
Company Secretary
Joined Smith & Nephew in May 2009 as Company
Secretary with responsibility for Board support and
corporate governance, employee and executive
share plans and subsidiary governance. In 2016,
she also assumed responsibility for leading the
group’s risk management programme. She is
based in Watford.

Career 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, remuneration,
corporate transactions, group risk management,
share registration, listing obligations, corporate
social responsibility, pensions, insurance and
employee and executive share plans.

Susan holds an MA from Corpus Christi College
Oxford in Literae Humaniores and is a Fellow
of the Institution of Chartered Secretaries:
The Governance Institute. She is also Chair of
ShareGift, the share donation charity, a member
of the Financial Reporting Council Lab Steering
Group and a frequent speaker on corporate
governance and related matters.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Executive team

Namal Nawana is supported
in the day-to-day management
of the Group by Graham Baker,
Chief Financial Officer, and a
strong team of Executive Officers.

RODRIGO BIANCHI (58)
Interim President, Asia Pacifc
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 now President of Asia Pacific. 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.

Nationality
Italian

BRAD CANNON (50)
President, Sports Medicine & ENT
Joined Smith & Nephew in 2012 and has since been
the President of Smith & Nephew's Europe and
Canada business, the Company's Chief Marketing
Officer, and now serves as the President of the
Global Sports Medicine and Ear, Nose and Throat
business. He is based in Andover, US.

Skills and experience
Brad was most recently the Chief Marketing Officer
and prior to that the President of Europe and
Canada, where he successfully led the commercial
business in those regions. He has also served as
the 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

American

NEW COMMERCIAL MODEL: CREATION OF GLOBAL FRANCHISES

Chief Executive Officer

President of
Orthopaedics

President,
Sports
Medicine
& ENT

President
of Advanced
Wound
Management

President,
Europe, Middle
East and Africa

President,
Asia Pacific

Chief Financial
Office, GBS & IT

President
of Global
Operations

Chief Quality
and Regulatory
Affairs Officer

President
of Research &
Development

Specialist commercial role

Generalist commercial role

EVP,
Business
Development
& Corporate
Affairs

Chief Human
Resources
Officer

Chief Legal &
Compliance
Officer

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Executive team continued

MASSIMILIANO COLELLA (50)
President, Europe, Middle East and Africa
Joined Smith & Nephew in 2013 as Senior Vice
President for Mid-Tier Business based in Dubai,
Massimiliano (Max to his colleagues and friends),
afterwards took over the role of SVP Smith &
Nephew AsiaPac in Singapore. Promoted to
President Europe and Canada, he moved back
to Europe in 2017. He is now President of Europe,
Middle East and Africa. Massimiliano is based
in Baar, Switzerland.

Skills and experience
Over his 26 years spent in the medical device
industry, Massimiliano has held a number
of national and international roles in Europe,
Middle-East and Asia. Before joining Smith &
Nephew, Max worked for 21 years in Johnson &
Johnson, leading a number of different businesses
in Ethicon and DePuy Synthes franchises.

Nationality
Italian

PHIL COWDY (51)
Executive Vice President, Business
Development & Corporate Affairs
Joined Smith & Nephew in 2008 as Director of
Investor Relations. From 2010 his responsibility
expanded as Head of Corporate Affairs, including
media, investor relations, global brand and
government affairs, together with Strategic Planning.
Between 2015 and 2018 he was also responsible
for IT. In 2018 he took on additional responsibility for
Business Development. He is based in London, UK.

Skills and experience
Prior to joining Smith & Nephew, Phil served as
a senior Director at Deutsche Bank for 13 years,
providing corporate finance and equity capital
markets advice to a variety of UK-based companies.
He qualified as a chartered accountant with EY.

Nationality
British

SIMON FRASER (51)
President of Advanced Wound Management
Joined Smith & Nephew in January 2019 with
commercial leadership responsibility for Advanced
Wound Management in the US and global upstream
marketing for the Advanced Wound Management
Franchise. As part of his executive responsibilities
Simon will also provide leadership for Healthcare
Systems. Simon is based in Fort Worth, US.

Skills and Experience
Simon brings to this role more than 25 years
of experience across medical devices,
pharmaceuticals and diagnostics, including wound
management. Importantly, he is a purpose-driven
and accomplished business leader who has
successfully managed large, global commercial
organisations with full P&L responsibility while
growing business and earning market share.

Prior to joining Smith & Nephew Simon was Group
Vice President of Dentsply-Sirona’s Dental Implant
Global Business Unit. Prior to this Simon was Vice
President, US Commercial Infectious Diseases
including corporate accounts at Abbott Laboratories.
Simon joined Abbott following the acquisition
of Alere where he had three successful years
as the President of Latin America. Prior to these
roles, Simon had a 15-year career with Johnson
& Johnson, where he held increasingly senior
commercial roles spanning surgical devices, wound
management, implants and pharmaceuticals
including both global strategic marketing and
P&L responsibilities.

Nationality

American/Canadian

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Executive team continued

MARK GLADWELL (43)
President of Global Operations
Joined Smith & Nephew in August 2018 with
responsibility for Global Manufacturing, Global
Supply Chain, Global Procurement, Global
Engineering and Global Operational Excellence,
and all Operational Strategy and programmes
including APEX projects related to Global
Operations. Mark is based in Watford, UK.

Skills and experience
Mark joined Smith & Nephew from QIAGEN,
a provider of sample and assay technologies for
molecular diagnostics, applied testing, academic
and pharmaceutical research. There he was Senior
Vice President of Global Operations responsible
for global manufacturing, supply chain, quality
assurance and control, regulatory affairs, and global
customer service.

Mark is a seasoned operational leader bringing
more than 20 years of experience in progressively
senior operations roles across global organisations
including DuPont, AGFA Medical Imaging, Johnson
& Johnson, and Alere Inc. Mark has experience
of working and living in Europe and the US and
operating global manufacturing and supply
chain organisations with a significant focus and
track record in delivering operational excellence
transformation programmes.

MELISSA GUERDAN (44)
Chief Quality and Regulatory Affairs Officer
Joined Smith & Nephew in July 2018 with
responsibility for Quality and Regulatory Affairs
and is based in Andover, US.

Skills and Experience
Melissa brings more than 20 years of leadership
experience in Quality and Regulatory Affairs
spanning the pharmaceutical, medical device
and biologics industries. Melissa has deep
compliance and operations knowledge and has
progressed through senior leadership roles in global
organisations including Pfizer, Baxter, Covidien
and Alere. Most recently, Melissa was Senior Vice
President, Quality and Regulatory for Alere where
she had executive responsibility for establishing
enterprise vision, strategy and direction for all
aspects of quality, compliance and regulatory
affairs. Melissa is adept at inspiring diverse global
organisations to achieve common goals and
has consistently delivered material value at the
enterprise level through transformational quality
and regulatory improvement programmes.

Melissa holds a BA degree in Biology and Psychology,
and holds an MBA from DePaul University.

Nationality

American

Nationality
British

SKIP KIIL (44)
President of Orthopaedics
Joined Smith & Nephew in November 2018 with
global responsibility for the Orthopaedics franchise,
which includes Reconstruction, Trauma, Extremities
and Robotics. Skip is based in Memphis, US.

Skills and Experience
Skip is a seasoned leader who brings a wealth of
global experience from diverse medical technology
companies, and importantly, significant global
experience in Orthopaedics markets over an
extended period. Prior to joining Smith & Nephew,
Skip was most recently responsible for all Global
Commercial Operations at NuVasive and member
of the senior executive leadership team. Prior to
this, Skip spent three years with Alcon, a division of
Novartis Corporation, based in Geneva, Switzerland,
where he served as Surgical Head, Europe, Middle
East, Africa and Russia. While at Alcon, Skip led
the successful commercial transformation of its
$1.1bn surgical business across both developed and
emerging growth markets.

Before joining Alcon, Skip had a successful 12-year
career with Stryker Corporation, beginning in
sales and holding progressively senior positions in
commercial leadership in the US as well as in global
marketing. Skip also had general management
experience in Japan, as well as group leadership
responsibilities in Europe where he held the role of
Vice President and General Manager of its Medical
Surgical Group.

Nationality

American

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Executive team continued

ELGA LOHLER (51)
Chief Human Resources Officer
Joined Smith & Nephew in January 2002 as
Director of HR and has since held progressively
senior positions in Wound Management, Operations,
Corporate Functions and Group. Elga became
Chief Human Resources Officer in December 2015
and leads the Global Human Resources, Internal
Communication and Sustainability Functions.
Elga is based in Fort Worth, US.

Skills and Experience
Elga has more than 25 years’ Human Resources
experience. Prior to joining Smith & Nephew,
Elga held Human Resources roles at Transnet,
Sensormatic (now Tyco) and Advanced Tissue
Sciences, which was acquired by Smith &
Nephew in 2002. Through these roles, Elga has
developed deep expertise in strategy planning
and development, organisational design and
effectiveness, restructuring and integration and
transformational change in support of business
objectives. In her current roles, Elga is responsible
for driving Smith & Nephew’s human capital strategy
across the enterprise in support of the company's
overall business plan and strategic direction.

Elga holds an undergraduate degree in Psychology
and a Master’s degree in Organizational Psychology,
both from the University of Witwatersrand in
South Africa.

Nationality

American/South African

CATHY O’ROURKE (46)
Chief Legal and Compliance Officer
Cathy joined Smith & Nephew in February 2013
and became Chief Legal Officer in May 2017 and
Chief Legal and Compliance Officer in July 2018.
Cathy heads up the Global Legal and Compliance
functions and is based in Andover, US.

Skills and Experience
Prior to being appointed Chief Legal Officer,
Cathy had various responsibilities within Legal
as Assistant General Counsel – Litigation and
Investigations. 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

VASANT PADMANABHAN (52)
President of Research & Development
Vasant 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
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, Programme 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, US and an MBA degree from
the Carlson School of Management, Minnesota.

Nationality

American

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Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Roles and composition

Whilst we all share collective responsibility for the activities of the Board, some of our roles have been defined in greater detail below.

CHAIR

CHIEF FINANCIAL OFFICER

– 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.

– 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.

CHIEF EXECUTIVE OFFICER

SENIOR INDEPENDENT DIRECTOR

COMPANY SECRETARY

– Developing and implementing Group

– Chairing meetings in the absence of the Chair.

– Advising the Board on matters

strategy.

– Recommending the annual budget and
three-year strategic and financial plan.

– Acting as a sounding board for the Chair

on Board-related matters.

– Acting as an intermediary for the other

of corporate governance.

– Supporting the Chair and
Non-Executive Directors.

– Ensuring coherent leadership of the Group.

Directors where necessary.

– Point of contact for investors on matters

– Managing the Group’s risk profile and
establishing effective internal controls.

– Regularly reviewing organisational structure,
developing executive team and planning
for succession.

– Available to shareholders and stakeholders
on matters which cannot otherwise be
resolved.

– Leading the annual evaluation into the

Board’s effectiveness.

– Ensuring the Chair and Board are kept

– Leading the search for a new Chair,

advised and updated regarding key matters.

if necessary.

of corporate governance.

– Ensuring good governance practices at
Board level and throughout the Group.

– 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.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

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:

Remuneration
Committee
Determines Remuneration
Policy and packages for
Executive Directors and
Executive Officers, having
regard to pay across
the Group.

BOARD

Nomination &
Governance
Committee
Reviews size and
composition of the
Board, succession
planning, diversity and
governance matters.

Ad hoc
committees
Ad hoc committees may be
established to review and
approve specific matters
or projects.

Compliance & Culture
Committee
Reviews and monitors
ethics and compliance,
quality and regulatory
matters across the Group.

Role to be expanded in
2019 to include oversight of
culture, sustainability and
stakeholder relationships.

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.

PAGE 76

PAGE 84

PAGE 71

PAGE 74

The Board delegates the day-to-day running of the business to Namal Nawana, Chief Executive Officer, who is assisted in his role by the
Executive Committee comprising the Executive team shown on pages 58-61. The governance framework below outlines the Executive Committee
arrangements as follows:

The Executive Committee meets regularly and makes decisions collectively. It recommends and implements strategy, recommends budget and three-year plan to
the Board for approval, ensures liaison between commercial and corporate functions, receives regular reports from sub-committees, reviews major investments,
divestment and capital expenditure proposals and approves business development projects.

EXECUTIVE COMMITTEE

Monthly Operating Review
Wider group of senior commercial
and financial leaders reviews
monthly commercial and marketing
and operating results against
budget, identifying gaps and
agreeing remedial actions.

Finance & Banking Committee
Approves banking and treasury
matters, guarantees, Group
structure changes relating
to mergers, acquisitions
and disposals.

Franchise, Functional
and Regional
Leadership Meetings
Senior management meetings to
drive performance across each
franchise, function and region.

Disclosures Committee
Approves release of
communications to investors and
Stock Exchanges.

Portfolio Innovation Board
Defines portfolio allocation
principles, reviewing and
challenging current shape of
portfolio, identifying gaps and
opportunities and re-prioritising
segments and geographies.

Mergers & Acquisitions
Investment Committee
Oversees Corporate Development
Strategy, monitors status of
transactions and approves various
stages in merger, acquisition and
disposal process.

Diversity & Inclusion Council
Implements strategies to promote
diversity and inclusion.

Global Benefts Committee
Oversees all policies and
processes relating to pensions and
employee benefit plans.

Health, Safety &
Environment Committee
Oversees health, safety and
environmental matters.

Group Ethics & Compliance
Committee
Reviews compliance matters and
country business unit or function
compliance reports.

IT Governance Board
Oversees IT and cyber security.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Responsibilities of the Board

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, three-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.

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.

– Approving the Sustainability Report.
– Maintaining relationships and continued engagement with shareholders.

RISK
– Overseeing the Group’s risk management programme.
– Regularly reviewing the risk register.
– Overseeing risk management processes (see pages 41-49 for further details).

Board timetable 2018

January

Early February
2017 Preliminary
Results

Approved Strategic
Plan for 2018–2020
Approved
2018 Budget

Reviewed capital
allocation policies
Reviewed report on
post acquisitions
reviews

Reviewed financial
performance
Received update
on European business

Approved Preliminary
Announcement 2017
Considered payment
of final dividend

Approved
Annual Risk
Management
Report

PROVIDING ADVICE
– Using experience gained within other companies and organisations to advise management both within and between Board meetings on an ad hoc basis.

OTHER MATTERS

Reviewed
Non-Executive
Director Fees

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

Late February April

May

June

2017 Financial

Statements

STRATEGY

Annual General

Q1 2018

Meeting

July

H1 2018

September October

December

Site visit

to Berlin

Q3 Trading

Report

Strategic

Planning

Approved

Considered the

Update on

re-financing of

Company’s

organisational

the revolving credit

organisational

change

facility

design

Considered

the Company’s

strategic focus

Approved the

strategic plan

for 2019–2021

Approved the

budget for 2019

PERFORMANCE

Reviewed financial

performance

Received updates

on global

operations

Received report

from new Chief

Executive

Officer on first

impressions

Reviewed financial

performance,

operating review

and scorecards

performance and

global operations

performance

Received update

on Medical

Devices global

market

SHAREHOLDER COMMUNICATIONS

Prepared for the

Annual General

Meeting to be

held later that day

Approved

Q1 2018

Trading Report

Approved

H1 2018

Results

Announcement

and media

perspectives

Considered

Approved Q3 2018

report on investor

Trading Report

Approved the:

Annual Report

for 2017

Notice of the

Annual General

Meeting

Sustainability

Report 2017

RISK

Reviewed update

on Brexit

PROVIDING ADVICE

OTHER MATTERS

Reviewed risk

management

programme

as part of

strategy review

Approved the

terms of the

Directors’ and

Officers’ Liability

Insurance

Reviewed results

of external board

effectiveness

review and agreed

follow up actions

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, three-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.

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.

– Approving the Sustainability Report.

– Maintaining relationships and continued engagement with shareholders.

RISK

– Overseeing the Group’s risk management programme.

– Regularly reviewing the risk register.

– Overseeing risk management processes (see pages 41-49 for further details).

PROVIDING ADVICE

OTHER MATTERS

– Using experience gained within other companies and organisations to advise management both within and between Board meetings on an ad hoc basis.

Reviewed

Non-Executive

Director Fees

Reviewed financial

performance

Received update

on European business

Approved Preliminary

Announcement 2017

Considered payment

of final dividend

Approved

Annual Risk

Management

Report

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Responsibilities of the Board continued

Board timetable 2018

January

Early February

2017 Preliminary

Results

Late February April
2017 Financial
Statements

Annual General
Meeting

May
Q1 2018

June

July
H1 2018

September October
Site visit
Q3 Trading
Report
to Berlin

December
Strategic
Planning

Approved Strategic

Plan for 2018–2020

Reviewed capital

allocation policies

Approved

2018 Budget

Reviewed report on

post acquisitions

reviews

STRATEGY

PERFORMANCE

Approved
re-financing of
the revolving credit
facility

Considered the
Company’s
organisational
design
Considered
the Company’s
strategic focus

Update on
organisational
change

Approved the
strategic plan
for 2019–2021
Approved the
budget for 2019

Reviewed financial
performance
Received updates
on global
operations

Received report
from new Chief
Executive
Officer on first
impressions

Reviewed financial
performance,
operating review
and scorecards

Reviewed financial
performance and
global operations

Reviewed financial
performance
Received update
on Medical
Devices global
market

SHAREHOLDER COMMUNICATIONS
Approved the:
Annual Report
for 2017
Notice of the
Annual General
Meeting
Sustainability
Report 2017

Prepared for the
Annual General
Meeting to be
held later that day

Approved
Q1 2018
Trading Report

RISK

Reviewed update
on Brexit

PROVIDING ADVICE

OTHER MATTERS

Approved
H1 2018
Results
Announcement

Considered
report on investor
and media
perspectives

Approved Q3 2018
Trading Report

Reviewed risk
management
programme
as part of
strategy review

Approved the
terms of the
Directors’ and
Officers’ Liability
Insurance

Reviewed results
of external board
effectiveness
review and agreed
follow up actions

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

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Our approach to stakeholders

EMPLOYEES

The Board regularly takes the opportunity to meet with staff at all levels in the organisation when making site visits across our operations.
Regular staff surveys are undertaken, which the Board reviews and follows up on outcomes. The Compliance & Culture Committee reviews
certain workplace policies and whistle-blowing incidents, ensuring that appropriate follow up is implemented as necessary. We ensure that
when making strategic decisions the impact upon our employees is fully considered.

Actions during 2018
– The Board reviewed and discussed the results of the Culture Survey
and focus forums initiated by Namal Nawana, Chief Executive Officer
on joining the Company. See page 24–25.

– We actively debated and approved the culture pillars of Care,

Collaboration and Courage, which will underpin our purpose and
corporate strategy.

– We met with key employees on our site visit to Berlin in September and
some of us have undertaken additional site visits and spent time on the
road with our sales representatives.

– The Ethics & Compliance Committee reviewed our policies on sexual

harassment.

– In making decisions regarding organisational change and the APEX

programme, we have considered the impact on employees, ensuring
that all are treated fairly and with respect.

– The Chief Executive Officer and senior management hold quarterly

webcasts for the workforce, which encourage employee engagement
and dialogue.

Actions planned for 2019
– The Board will continue to consider the impact on employees when

making strategic decisions.

– We will continue to take opportunities to meet staff at all levels across

the organisation when conducting site visits. We plan to visit our
Memphis facility in 2019.

– The Compliance & Culture Committee (formerly Ethics & Compliance
Committee) will assume responsibility for overseeing our corporate
culture and workplace policies and will report back regularly to the
Board.

– In listening to the employee voice, we have decided not to appoint
an employee director or to nominate a single designated Non-
Executive Director. Instead, we have designated our Compliance &
Culture Committee as a whole with the responsibility for engaging
with employees. This programme of employee engagement will be
developed and implemented during 2019.

– The Board will continue to monitor the outcomes from employee

surveys and forums.

CUSTOMERS AND SUPPLIERS

The Board receives regular updates at Board meetings from the management team on relationships with our key customers and suppliers
and how these relationships are evolving as we respond to different market conditions and environments. We also take the opportunity to meet
with key customers during our site visits.

Actions during 2018
– As part of our country visit to Germany, we visited La Charité Hospital
in Berlin, which is the largest University hospital in Germany. We met
with surgeons who used our products and also the Chief Executive
who outlined some of the challenges in the German market.

– A number of us accompanied sales representatives in the UK,
US and Switzerland as they met with customers and surgeons
who used our products.

– During the course of the year, we received management updates
on different areas of the business. These included presentations
on the management of our supply chain, and the changing market
environment and expectations from our customers.

Actions planned for 2019
– The Board will continue to receive management updates on our

customers and suppliers.

– We will meet with customers and surgeons when we visit our

Memphis facility.

– The Compliance & Culture Committee will assume responsibility for

overseeing relationships with our key stakeholders including customers
and suppliers.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Our approach to stakeholders continued

INVESTORS

The Board meets with retail investors at the Annual General Meeting and responds to letters and emails from shareholders throughout the year.
Members of the Board are always happy to engage with investors, if they have matters they wish to raise with the non-executive team. The Chair
and other Board members report back to the Board following their meetings with investors. A short report on our major shareholders and any
signifcant changes in their holdings since the previous meeting is reviewed at each Board meeting. Copies of the analyst reports on
the Company and its peers are also circulated to Directors.

Actions during 2018
– The Executive Directors held 124 meetings with investors representing

43.8% of the Company’s share capital. They discussed a range of topics
including strategy, performance and organisational structure.

Actions planned for 2019
– The Board will continue to receive regular updates at Board meetings
on management and Chair meetings with investors and will review
regular analyst reports.

– The management team and the Chair and Non-Executive Directors will
continue to engage with shareholders. If you have matters to raise with
the non-executive team, please contact the Company Secretary.

– The Chair, Roberto Quarta, held 7 meetings and telephone calls

with investors holding approximately 12.6% of the Company’s share
capital. They discussed a range of topics including the performance
of the Company, the appointment of Namal Nawana as our new
Chief Executive Officer, our Strategy, the structure of the Board and
succession planning at Board and Executive level.

– The Chair of the Remuneration Committee, Angie Risley reached out
to our top 20 shareholders holding 44% of the company’s shares and
received responses from 9 shareholders collectively holding 17.1%
of the company’s share capital in connection with Graham Baker’s
pay following his increased responsibility for IT and Global Business
Services. See page 85 for further details.

GOVERNMENTS AND REGULATORS

In many countries, our principal customers are governments, who purchase our products for their national health systems. It is important that we
maintain good relationships with governments so that we continue to develop cost efficient solutions to their national healthcare issues. We
operate in a heavily regulated industry and our businesses across the world are regulated by many different authorities in different jurisdictions.
Our Compliance & Culture Committee has for a number of years overseen our relationships with our key regulators, particularly in areas of ethics,
compliance and quality.

Actions during 2018
– The Compliance & Culture Committee received regular reports from the
Quality and Regulatory function on regulatory activities and the results
of regulatory inspections.

– The Compliance & Culture Committee received regular reports from the
Legal & Compliance function on the activities of key agencies relating to
ethics and compliance matters.

– The Board received regular updates from the business areas on
the pricing challenges faced by the business when dealing with
governments operating with limited financial resources.

– The Board and the Audit Committee received regular updates relating
to the progress towards Brexit and management plans to manage the
transition as smoothly as possible.

Actions planned for 2019
– The Compliance & Culture Committee will continue to oversee

relationships between the Company and our regulators.

– The Board and the Audit Committee will continue to monitor

management preparations for Brexit.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Responsibilities of the Board

BOARD AND COMMITTEE ATTENDANCE

Total meetings

Board

Appointed

Roberto Quarta¹

December 2013

10/10

Olivier Bohuon²

Graham Baker

Vinita Bali

Ian Barlow³

April 2011

5/5

March 2017

10/10

December 2014

10/10

March 2010

10/10

Virginia Bottomley

April 2012

10/10

Roland Diggelmann4

1 March 2018

7/7

Erik Engstrom

January 2015

10/10

Robin Freestone

September 2015

10/10

Michael Friedman

April 2013

10/10

Namal Nawana⁵

7 May 2018

5/5

Marc Owen

Joseph Papa6

Angie Risley

October 2017

10/10

August 2008

4/4

September 2017

10/10

Audit Remuneration

Nominations
& Governance

Committee
Compliance
& Culture

–

7/8

–

5/6

8/8

–

8/8

3/3

–

5/5

–

5/5

–

5/5

–

5/5

–

2/2

5/5

3/4

–

4/4

–

4/4

–

2/2

4/4

3/3

2/2

–

1 Roberto Quarta missed one Nomination & Governance Committee meeting on 11 April 2018 because

of another commitment.

2 Olivier Bohuon retired from the Board on 7 May 2018.
3
Ian Barlow missed one Audit Committee meeting on 11 April 2018 in order to attend a funeral.
4 Roland Diggelmann was appointed on 1 March 2018. He missed one Audit Committee meeting

on 24 July 2018 because of another commitment scheduled before his appointment.
5 Namal Nawana was appointed on 7 May 2018 and attended all his scheduled meetings

to 31 December 2018.

6 Joseph Papa retired from the Board at the Annual General Meeting on 12 April 2018.

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.

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 15 February 2019.

Each Director has a duty under the Companies Act 2006 to avoid a
situation in which they 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, eight 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. Namal Nawana is an independent Director
of Hologic Inc. Namal discussed his external role with the Chair prior to his
appointment and the Chair was satisfied that he had the capacity for the
time commitment required. Suitable arrangements were put in place when
reaching a settlement with Hologic related to historical intellectual property
litigation to ensure that Namal was not party to any of the negotiations or
discussions, which could have given rise to an actual conflict.

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.

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 172.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Board effectiveness review

The Board effectiveness review in 2018 was externally facilitated by Dr
Tracy Long of Boardroom Review. Dr Long interviewed each member of
the Board and the Company Secretary, reviewed minutes, Board papers
and other Board documents, and attended and observed the Board
and Committee meetings held in October 2018. She then prepared a
report summarising her findings, which she presented to the Board for
discussion in December.

RECOMMENDATION 1

– The Board will need to ensure that it continually reviews and ensures
alignment of its appetite for risk against the changing landscape and
revised Strategic Imperatives, particularly as the Company continued
to evolve. This will require continued monitoring of Board composition
and succession planning.

FINDINGS
Overall she observed that the Board had many strengths, was
effective with a diversity of perspectives and was an open supportive
environment. It was led by a strong Chair, the Chief Executive Officer
and Chief Financial Officer were both highly regarded and recent
appointments had strengthened the Board’s domain knowledge.
Finance, risk and governance controls were working well and
corporate culture was openly discussed at Board level.

RECOMMENDATIONS
She did note however that there were challenges ahead, given the
number of initiatives underway across the Company to lift performance,
the recent appointment of a new Chief Executive Officer, a refreshed
management team and the development of new Strategic Imperatives,
Purpose and Culture Pillars. There would be additional work for the
Board in coming months to get behind the new strategy and develop
a shared perspective on the future strategy and appetite for risk.

The Board accepted the recommendations and an action plan is being
developed to address them.

RECOMMENDATION 2

– Performance management will need to evolve to monitor alignment with
the new strategy, with an increased emphasis on a globally consistent
culture and purpose.

RECOMMENDATION 3

– The workload, composition and support for the Board Committees will
be reviewed to ensure a more even balance of workload and greater
diversity on each Committee.

RECOMMENDATION 4

– The Chair and Chief Executive Officer will agree shared priorities for
Board site visits at the beginning of each year, so that individual and
group site visits could be arranged within these agreed parameters
rather than on an ad hoc basis.

The areas for attention identifed in the 2017 review have been addressed as follows:

Actions identifed

Action taken

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 competition,
and to assist in assessing bench strength further down the Company.

During the year, the Board and Committee calendar for the year has
been reviewed and updated and a revised rolling calendar has been
prepared for 2019, aligned to the new Group strategy and the updated
Strategic Imperatives.

The Board site visit to Berlin in September 2018 incorporated meetings
with the German management team and a visit to La Charite, the largest
university hospital in Germany to meet with surgeons and hospital staff.
This helped us gain a deeper understanding of the views and needs of
our customers.

Further improvements could be made to how we monitor performance
against our strategic objectives, tracking development and implementation
of our strategy, and lessons learned from our successes and shortfalls.

During the year, we have evolved the way reports on performance are
presented to the Board. Going forward, performance reports will be aligned
with the new Strategy and Strategic Imperatives.

The reviews in 2019 and 2020 will be facilitated internally and led by the Senior Independent Director and the Company Secretary. The 2021 review
will also be facilitated externally.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Leadership
Board development

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 effective 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 Chair regularly reviews the development needs
of individual Directors and the Board as a whole.

The following development sessions covering the Smith & Nephew
business and wider market issues were held during the year:

June

September

October

December

2018 PROGRAMME
The Board received an overview
from the new Chief Executive
Officer on his first impressions of
the Company and his proposals
for a new organisational structure.

Presentations from the entire
Executive team as part of the
Board’s annual Strategy Review,
covering the whole business.

Presentation from Deloitte LLP to
the Remuneration Committee on
the changes to be made to the role
of the Committee in light of the new
UK Corporate Governance Code.
Presentation by the Company
Secretary to the Audit Committee/
Nomination & Governance
Committee on the changes required
by the UK Corporate Governance
Code to the roles and structure
of the Board and its Committees.
Presentation to the Board by McKinsey
on the current environment and trends
in the Medical Devices industry.

Visit to Germany to meet with our
local management team and to visit La
Charité, the largest university hospital
in Germany and one of our significant
customers. The Board received
presentations from local surgeons and
members of the hospital’s executive
team about the challenges faced in
the German healthcare market and
role played by Smith & Nephew.
The Board received updates from
new members of the Executive team
on their first impressions on joining
the Company and their plans for the
EMEA business, Global Operations
and Quality and Regulatory Assurance.
The Board received updates from the
Executive team on Investor and Media
coverage, and the results of the culture
survey and focus groups carried out
earlier in the summer.

INDUCTION PROGRAMME FOR NEW DIRECTORS
During 2018, Roland Diggelmann joined the Board. He and Angie Risley
and Marc Owen continued to receive tailored induction programmes
relevant to their skills and experiences and their roles on the Board.
These induction programmes included:

– 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 in UK, US and Switzerland to get
a feel of how our research and manufacturing operations are run;
– Opportunities to accompany our sales representatives in the US

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 Deloitte LLP,
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.

Strategic report

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Accounts

Other information

Smith & Nephew Annual Report 2018

Nomination & Governance
Committee report

Ensuring the Board evolves to align
with the new Strategic Imperatives
and with the developing external
regulatory environment.

MEMBERSHIP

Roberto Quarta (Chair)1
Ian Barlow2
Erik Engstrom3
Robin Freestone3
Virginia Bottomley

Member from Meetings attended
3/4
4/4
N/A
N/A
4/4

April 2014
April 2014
April 2019
April 2019
April 2014

1 Roberto Quarta missed the meeting in April because of a conflicting commitment.
2

Ian Barlow will be retiring from the Board and the Committee at the Annual
General Meeting to be held on 11 April 2019, having completed nine years’ service.

3 Erik Engstrom and Robin Freestone will join the Nomination & Governance

Committee on 11 April 2019.

The terms of reference for the Nominations & Governance Committee describe
the role and responsibilities of this Committee more fully and can be found on our
website at www.smith-nephew.com.

Early February

March

April

October

Considered candidates for
the role of Chief Executive
Officer and agreed to
recommend to the Board
the appointment of
Namal Nawana.

Approved the re-appointment
of Directors who had
completed three or six years’
service and the annual
appointment of Directors
serving in excess of six years.
Discussed progress on
search for a new Chief
Executive Officer.

Reviewed and approved
the Schedule of Matters
Reserved to the Board and
the terms of reference of
the Board Committees.

Reviewed current
governance trends in
the UK and particularly
the changes likely
to be proposed in
the UK Corporate
Governance Code.

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.

– Overseeing the Board Development
Programme and the induction
process for new Directors.

Reviewed the composition
of the Board and agreed to
appoint Robin Freestone as
Senior Independent Director
to replace Ian Barlow who
would be retiring from the
Board at the Annual General
Meeting in 2019.

Reviewed the annual
cadence of Board and
committee meetings.
Considered the implications
of the UK Corporate
Governance Code 2018
and in particular the
expanded role of the
Board relating to corporate
culture and relationships
with stakeholders and
agreed that the remit of
the Ethics & Compliance
Committee be expanded
to undertake some of
these responsibilities on
behalf of the Board.

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

NOMINATION & GOVERNANCE COMMITTEE REPORT continued

In 2018, we held four meetings. In addition to members of the
Committee, the Company Secretary, Chief Executive Officer and Chief
Human Resources Officer also attended all or some of the meetings.
Other Non-Executive Directors were invited to join the meetings to
discuss the search for a new Chief Executive Officer.

Further matters were resolved by written resolution including the
appointment of Roland Diggelmann.

Since the year end, we have also discussed the future structure
of the Board and its Committees and completed our year end
governance processes.

APPOINTMENT OF CHIEF EXECUTIVE OFFICER
During the early part of the year, the Committee continued its search
for a new Chief Executive Officer to replace Olivier Bohuon who had
announced his intention to retire by the end of 2018. The Committee
recommended the appointment of Namal Nawana, who joined the
Company as Chief Executive Officer in May 2018. Namal brings a
wealth of experience of the international medical devices industry to
his role. The Nomination & Governance Committee was advised by
Russell Reynolds on this appointment. Russell Reynolds also advises
the Company on other executive recruitment and appointments.

NON-EXECUTIVE DIRECTORS
The Committee has reviewed the composition of the Board and its
Committees to ensure that it evolves to align with the new Strategic
Imperatives and with the developing external regulatory environment.

The Committee also recommended the appointment of Roland
Diggelmann as an additional Non-Executive Director who joined
the Board in March 2018. Roland has many years’ experience in the
Medical Devices industry. Russell Reynolds advised the Committee
on this appointment.

Ian Barlow will be retiring from the Board and from his position as
Senior Independent Director at the Annual General Meeting to be held
on 11 April 2019, following completion of nine years’ service as Non-
Executive Director and until 2017 as Chairman of the Audit Committee
and then latterly as Senior Independent Director. The Committee
recommended to the Board that Robin Freestone be appointed Senior
Independent Director in Ian’s place at the conclusion of the Annual
General Meeting, subject to his re-appointment by shareholders.

Robin will continue to Chair the Audit Committee, but the Committee will
undertake a search for an additional Non-Executive Director with recent
and relevant financial experience who could in time succeed Robin as
Chair of the Audit Committee. When considering candidates for this role,
the Committee will be mindful of building a diverse Board and will aim to
ensure an appropriate balance of genders, ethnicity, backgrounds, skills
and experience.

Michael Friedman will also be retiring from the Board and from his
position as Chair of the Compliance & Culture Committee at the Annual
General Meeting, following the completion of six years’ service. He will
be succeeded as Chair of the expanded Compliance & Culture
Committee by Marc Owen.

Erik Engstrom and Robin Freestone will be joining the Nomination &
Governance Committee as additional members in April 2019 after the
Annual General Meeting and Virginia Bottomley and Roland Diggelmann
will be joining the Compliance & Culture Committee at the same time.

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 homogeneous 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 understanding 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.

During 2018, 25% of our Board were female. With the retirement of Ian
Barlow and Michael Friedman in April 2019, this percentage rises to
30%. Looking forward, we are working towards a Board with 33% female
representation in line with the Hampton-Alexander Review. From 7 May
2018, 17% of our Board were of non-white ethnicity. This rises to 20%
after the Annual General Meeting in April 2019.

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.

SUCCESSION PLANNING
Since the appointment of Namal Nawana as Chief Executive Officer
in May 2018, we have initiated substantial changes to our structure
to move to a franchise-led model, as described on page 14.
Throughout the year, the Board and Nomination & Governance
Committee have monitored the consequent changes to the
organisational structure and approved appointments to key leadership
positions. Individual Directors have acted as a sounding board for
the executive team when considering succession plans in key areas.
Given the level of change during 2018, this will be a continued focus
of the Nomination & Governance Committee during 2019.

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Smith & Nephew Annual Report 2018

NOMINATION & GOVERNANCE COMMITTEE REPORT continued

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. 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 following matrix. We review this matrix regularly to ensure that it
is refreshed to meet the changing needs of the Company.

CEO

Financial

International

Four members of the Board are
either current or recent CEOs

Two members of the Board
have recent and relevant
financial experience

Seven members of the Board
have international experience

Healthcare/
Medical Devices
Six members of the Board have
different levels of experience
within the Healthcare industry

UK Governance
Six members of the Board
have considerable experience
of working in a UK listed
environment and four members
of the Board have experience
of the US listed environment

Remuneration
Five members of the Board
have Remuneration Committee
experience within a UK listed
context

Gender
Nine members of the Board are
male and three are female

Ethnic
Ten members of the Board
are white and two are
of Asian ethnicity

Emerging market

Two members of the
Board have Emerging
Market experience

Other
Various Board members
bring experiences in a variety
of fields including customer
focus, investment markets,
government affairs, digital and
corporate social responsibility

LOOKING FORWARD
During 2019 our focus will include:

Search for an additional Non-Executive Director with
recent and relevant financial experience to serve on the
Audit Committee.

Monitoring the implementation of the revised Board and
Committee structure to ensure that the Company complies
with the UK Corporate Governance Code or explains why not.

Roberto Quarta
Chairman of the Nomination & Governance Committee

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. 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 also took the opportunity of reviewing whether the annual cadence
of our Board and Committee meetings was appropriate for the work
we need to undertake. As a result of this review, we have changed the
physical October meeting to approve the third quarter trading figures
to a half day Board telephone call. We have also introduced additional
monthly Board update calls for those months when we do not meet
physically and will be introducing separate site visits for Non-Executive
Directors to meet employees and customers.

We also considered how we would implement the requirements
of the 2018 UK Corporate Governance Code and agreed that the
Remuneration Committee would retain responsibility for provisions
relating to executive pay and pay matters generally. This is discussed
further on pages 84–85. We also agreed that the remit of the new
Compliance & Culture Committee would be expanded to cover
responsibility for overseeing corporate culture and relationships
with stakeholders on behalf of the Board. The revised remit of the
Compliance & Culture Committee is discussed on pages 74–75 and
our approach to listening to the voice of our employees and other
stakeholders is discussed on pages 66–67. We have noted the
three options set out in the 2018 UK Corporate Governance Code for
listening to the Employee Voice and have determined that this will
be the responsibility of the Compliance & Culture Committee as this
is too important an issue to fall to one Non-Executive Director.

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Smith & Nephew Annual Report 2018

Compliance & Culture Committee report
(formerly Ethics & Compliance Committee)

Broadening our scope to oversee
culture in addition to our focus on
compliance and quality.

MEMBERSHIP

Michael Friedman (Chair)1
Vinita Bali
Virginia Bottomley2
Ian Barlow3
Roland Diggelmann4
Marc Owen5
Joseph Papa6
Robin Freestone

Member from Meetings attended
4/4
August 2014
4/4
April 2015
N/A
April 2019
4/4
October 2014
N/A
April 2019
3/3
1 March 2018
2/2
August 2008
2/2
24 July 2018

2
3
4
5
6

Michael Friedman will retire from the Board and the Committee at the Annual
General Meeting on 11 April 2019.
Virginia Bottomley will join the Committee on 11 April 2019.
Ian Barlow will retire from the Board and the Committee on 11 April 2019.
Roland Diggelmann will join the Committee on 11 April 2019.
Marc Owen joined the Committee on 1 March 2018.
Joseph Papa retired from the Board and the Committee on 12 April 2018.

February

April

July

October

Noted the progress made
on the Global Compliance
Programme Plan for 2017
and noted the plan of
action for 2018.

Reviewed the ethics
and compliance training
programmes in place
across the Group.
Reviewed significant
findings from monitoring,
auditing and progress
on Corrective and
Preventative Actions.

Noted progress on the
2018 Global Compliance
Plan of Action.
Reviewed significant
findings from monitoring
auditing, and progress
on Corrective and
Preventative Actions.

Received Ethics &
Compliance update in
new format and noted
insights from various
aspects of Global
Compliance Programme.

ETHICS & COMPLIANCE
– Overseeing ethics and compliance
programmes, strategies and plans.
– Monitoring ethics and compliance

process improvements
and enhancements.

– Assessing 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 Legal
and Compliance 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 assessing regular

functional reports and presentations
from the Chief Quality and
Regulatory Affairs Officer, or the
SVP Quality Assurance.

OTHER MATTERS

Reviewed various
quality metrics.
Noted the plans to address
the potential impact on
the Group of both the EU
Medical Device Regulations
(EU MDR) and Brexit.

Reviewed various quality
metrics and approved the
Global Quality Plan for 2018,
noting the additional work
to be done to implement
the EU MDR.

Reviewed various quality
metrics including the
results of inspections
by the FDA and Notified
Bodies, progress on
handling complaints and in
preparing for the EU MDR.

Received Quality and
Regulatory report in
updated format from
newly appointed Chief
Quality and Regulatory
Affairs Officer, noting
status of various Quality
and Regulatory metrics
and initiatives.

February
Reviewed the sexual harassment policies and procedures
in place across the Group.

As a follow up to the February meeting, reviewed
the circumstances and actions taken to address the
sexual harassment allegations made in the year.

The Terms of Reference of the Compliance & Culture Committee describe the role and responsibilities more fully and can be found on our website at www.smith-nephew.com.

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Smith & Nephew Annual Report 2018

COMPLIANCE & CULTURE COMMITTEE REPORT continued

In 2018, we held four physical meetings. Each meeting was
attended by all members of the Committee. The Company Secretary,
the Chief Legal and Compliance Officer and the Chief Quality and
Regulatory Affairs Officer or SVP, Quality Assurance also attended
all or part of the meetings by invitation.

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. 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 Chief Quality and Regulatory Affairs Officer, or the
SVP Quality Assurance.

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. We also monitored the work being undertaken
to help our manufacturing sites to prepare for future inspections.

We reviewed the results of quality audits undertaken during the year,
noted 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. 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 Legal and Compliance 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 for
employees and sales agents, 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.

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.

During the year, we expanded our remit and reviewed the policies and
procedures we have in place to handle claims of sexual harassment.

LOOKING FORWARD
The Board and the Committee have considered the UK Corporate
Governance Code 2018 and have decided to expand the role of the
Committee to cover a broader focus. Whilst oversight of our Ethics
& Compliance programme will continue to remain a key focus for us
and we will monitor and assess quality and regulatory issues, we will
also oversee culture across the organisation and relationships with
our key stakeholders. We will develop the mechanism for ensuring
that the Board listens to the employee voice and will oversee the
Sustainability Programme.

Our focus for 2019 will include:

> Develop a programme to enable the Board to monitor

and assess the corporate culture.

> Develop a programme to enable the Board to engage with

employees, building on existing processes within the Company.

> Ensure oversight of the Company’s Sustainability programme

and relationships with key stakeholders.

This will be my final report as Chair of this Committee, as I shall be
retiring from the Board at the Annual General Meeting. I should like to
thank my colleagues on the Committee and particularly Marc Owen who
will be succeeding me as Chair of the Committee and overseeing its
expanded focus on culture, the employee voice and stakeholders.

Michael Friedman
Chair of the Compliance & Culture Committee

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Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

Audit Committee report

MEMBERSHIP

2018 was my first full year as
Chair of the Audit Committee.
I have overseen a busy schedule
– with the Committee meeting
eight times during the year.

Robin Freestone (Chair)1 September 2015
Ian Barlow1,2
May 2010
Roland Diggelmann3,4
March 2018
January 2015
Erik Engstrom
October 2017
Mark Owen
Joseph Papa5
February 2011

Member from Meetings attended
8/8
7/8
5/6
8/8
8/8
3/3

2
3
4
5

Designated financial experts under the SEC Regulations or recent and relevant
financial experience under the UK Corporate Governance Code.
Ian Barlow missed one Audit Committee meeting on 11 April 2018.
Roland Diggelmann joined the Audit Committee on 1 March 2018.
Roland Diggelmann missed one Audit Committee meeting on 24 July 2018.
Joseph Papa retired from the Board and Audit Committee at the Annual General
Meeting on 12 April 2018.

In addition to discharging its role in accordance with its terms
of reference, the Committee has met its commitments to provide
assurance in respect of various non-routine matters. Areas of scrutiny
for the Committee in 2018 have included: the progression of NAPO,
(our SAP Enterprise Resource Planning migration in North America);
top risks identified in the 2017 Annual Report such as Cyber Security;
Brexit readiness; and the Accelerating Performance and Execution
(APEX) programme.

In 2018 the Committee oversaw the adoption of two accounting
standards, IFRS 15 Revenue from contracts with customers and IFRS 9
Financial Instruments. A detailed impact assessment of the application
of IFRS 15 was undertaken with the conclusion being that there
was no significant impact on the timing and recognition of revenue.
The main impact on adoption of IFRS 9 has been the implementation
of the expected credit loss methodology for the calculation of the
loss allowance for trade receivables. This resulted in an additional
loss allowance of $14 million being recognised on 1 January 2018.
With regard to IFRS 16 Leases, the Committee considered the application
of exemptions, estimated impact, transition preparations (including
the implementation of a new lease accounting software solution) and
transition readiness. IFRS 16 will be adopted on 1 January 2019 with no
restatement of comparatives.

In May 2018 we welcomed our new Chief Executive Officer, Namal
Nawana. Under Namal’s leadership, Smith & Nephew has established
its new strategy and organisational structure. That will provide the
context for our focus of activity for 2019 – particularly as it will form
the backdrop for our risk assessment.

Roland Diggelmann joined the Audit Committee in March 2018 where
his experience and expertise enables him to provide appropriate
challenge to information presented at meetings by the Executive.

Ian Barlow will be standing down as a member of the Board after
the AGM on 11 April. He has served as member of the Committee
since 2010 (including seven years as Chair) and has been the
Senior Independent Director since 2017. I should like to take this
opportunity to thank Ian for his valuable contribution and wise
counsel during his tenure.

KPMG have now completed their fourth year’s audit and continue
to provide robust challenge. We have negotiated fees that will continue
to be reviewed for good market practice. We have also agreed
arrangements for rotation of the senior partner in accordance with
recommendations set out in the Financial Reporting Council’s (FRC)
Guidance for Audit Committees 2016 and as required by the Securities
Exchange Commission (SEC). Finally, we note the positive comments
received from the FRC following its review of KPMG’s audit of Smith &
Nephew’s financial statements for 2017.

Our focus for 2019 will include:
>

The next phase of the APEX programme.

Ensuring compliance with new leasing standard IFRS 16.

Risk management process – aligned to the new strategy
and organisational structure.

Continuing to provide assurance on the effectiveness
of managing the risks associated with Cyber Security.

Ensuring that we are compliant with additional governance
and reporting requirements coming into effect for 2019 –
such as the revised UK Corporate Governance Code.

Robin Freestone
Chair of the Audit Committee

The Terms of Reference of the Audit Committee describe the role and responsibilities more fully
and can be found on our website at www.smith-nephew.com.

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Other information

Smith & Nephew Annual Report 2018

AUDIT COMMITTEE REPORT continued

SIGNIFICANT MATTERS RELATED
TO THE FINANCIAL STATEMENTS
We considered the following key areas of judgement in relation to the
2018 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 inventory makes up approximately 60% of the Group
total 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 18% at 31 December 2018 (19% as
at 31 December 2017). 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 and Compliance 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 metal-on-metal hip products of $192 million as of
31 December 2018. 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 claim. The provisions for legal
matters have increased by $27 million during the year, primarily due to
an increase in the metal-on-metal provision. There have been some
smaller movements from other cases having been resolved. We have
determined that the proposed levels of provisioning at year end of
$217 million included within ‘provisions’ in Note 17.1 in 2018 ($190 million
in 2017) 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 concluded that the carrying value of these assets 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.

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 factors including 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. 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.

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Governance

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Other information

Smith & Nephew Annual Report 2018

AUDIT COMMITTEE REPORT continued

Early February

Late February

April

May

July

September

October

December

FINANCIAL ACCOUNTING AND 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 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.

Preliminary
Announcement

Financial Statements

Endorsed 2017 results
and Preliminary
announcement
Report from KPMG
on 2017 results
Reviewed draft
2017 Annual Report
including report of the
Audit Committee
Assessed compliance
with UK and
US governance
requirements

Approved the Annual
Report and Accounts for
2017 including report of
the Audit Committee –
confirming fair, balanced
and understandable
Report from KPMG
on 2017 statements –
Unqualified Opinion
Approved letter of
representation for 2017
Reviewed S302 and
S906 certifications
Confirmed Going Concern
and Viability Statement

Reviewed year
end Report

Reviewed effectiveness
of Internal Audit

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

Risk Management
Update

recommending its adoption to the Board.

– Reviewing the impact of risk management and internal controls and working closely with the Ethics

& Compliance Committee.

– Overseeing risk management processes (see pages 40 – 49 for further details).
– Regularly reviewing the risk register.

Confirmed effective system
of risk management in
place and approved the
Viability Statement

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 risk.

Considered Sarbanes-
Oxley (Sox) and MAPs
Update

Reviewed effectiveness
of Internal Controls over
financial reporting

FRAUD & 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.
– Reviewed Internal Audit Report on Fraud.

EXTERNAL AUDITOR
– 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.

OTHER MATTERS

Reviewed Internal
Audit Report on Fraud
and Whistle-blowing

Confirmed
independence
of KPMG

Endorsed NAPO
processing and
scheduling plan
Approved Audit
Committee’s TOR

Reviewed effectiveness
and independence
and concluded their
effectiveness
Approved external auditor
fees for 2017

Approved consultancy
fees to external advisors

2018 Q1 Trading Report

2018 H1 Results

2018 Q3 Trading Report

FINANCIAL ACCOUNTING AND REPORTING

Debrief of Annual

Report process and

timetable for 2018

Reviewed and endorsed

Reviewed and

2018 Q1 Trading Report

and announcement

endorsed H1 results

and announcement

Approved Senior Finance

Approved the Company’s

Report from KPMG

Officers Code of Ethics

Reviewed summary

of Company audits

policy and report on

Conflict Minerals for

submission to NYSE

on H1 results

Approved letter

of representation

for H1 2018

Reviewed and endorsed

Reviewed accounting

Q3 Trading Report

and announcement

Clarified MDR policy

New reporting

and regulatory

matters for 2018

Considered and approved

critical accounting policies

and judgements in

advance of 2018 year end

work for adoption of IFRS 16

Approved plans for delivery

of the Annual Report 2018

requirements update

Reviewed preparation

INTERNAL AUDIT

Reviewed progress

RISK MANAGEMENT

Reviewed progress

Reviewed Progress

and approved Charter

and 2019 Plan

Risk Management

Update

Risk Management

Update

INTERNAL CONTROLS

Considered Sarbanes-

Oxley (Sox) and MAPs

Planning 2018

FRAUD & WHISTLE-BLOWING

Considered Sarbanes-

Oxley (Sox) and MAPs

progress

EXTERNAL AUDITOR

Endorsed External

Approved 2017 fee

Approved Engagement

Audit Plan

overruns

KPMG Fee

Schedule 2018

Results of FRC Review

of KPMG

Reviewed Internal Audit

Report on Fraud

letter for 2018

Noted partner rotation

arrangements

Considered Sarbanes-

Oxley (Sox) and MAPs

progress

Reviewed Internal

Audit Report on Fraud

and Whistle-blowing

OTHER MATTERS

Treasury Update

Cyber Security

Project reports

including Apex

China Channel

Management

Cyber Security Update

Update on NAPO

Project reports

including APEX

Tax Update/Strategy

Cyber Security

Tax Update

Cyber Update

APEX Update

FINANCIAL ACCOUNTING AND REPORTING

– Reviewing significant financial reporting judgements and accounting policies and compliance with

Endorsed 2017 results

Approved the Annual

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.

Preliminary

Announcement

Financial Statements

and Preliminary

announcement

Report from KPMG

on 2017 results

Reviewed draft

2017 Annual Report

including report of the

Audit Committee

Assessed compliance

with UK and

US governance

requirements

Report and Accounts for

2017 including report of

the Audit Committee –

confirming fair, balanced

and understandable

Report from KPMG

on 2017 statements –

Unqualified Opinion

Approved letter of

representation for 2017

Reviewed S302 and

S906 certifications

Confirmed Going Concern

and Viability Statement

Reviewed year

end Report

Reviewed effectiveness

of Internal Audit

Strategic report

Governance

Accounts

Other information

Smith & Nephew Annual Report 2018

AUDIT COMMITTEE REPORT continued

Early February

Late February

April

May

July

September

October

December

2018 Q1 Trading Report

2018 H1 Results

2018 Q3 Trading Report

FINANCIAL ACCOUNTING AND REPORTING
Debrief of Annual
Report process and
timetable for 2018
Approved Senior Finance
Officers Code of Ethics
Reviewed summary
of Company audits

Reviewed and endorsed
2018 Q1 Trading Report
and announcement
Approved the Company’s
policy and report on
Conflict Minerals for
submission to NYSE

Reviewed and
endorsed H1 results
and announcement
Report from KPMG
on H1 results
Approved letter
of representation
for H1 2018

Reviewed and endorsed
Q3 Trading Report
and announcement
Clarified MDR policy
New reporting
and regulatory
requirements update

Reviewed accounting
matters for 2018
Considered and approved
critical accounting policies
and judgements in
advance of 2018 year end
Reviewed preparation
work for adoption of IFRS 16
Approved plans for delivery
of the Annual Report 2018

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.

– On behalf of the Board, reviewing and ensuring oversight of the processes by which risks are managed, through

Risk Management

Confirmed effective system

regular functional reports and presentations, and reporting any issues arising out of such reviews to the Board.

Update

– Reviewing the process undertaken and deep-dive work required to complete the Viability Statement and

of risk management in

place and approved the

Viability Statement

– Reviewing the impact of risk management and internal controls and working closely with the Ethics

– Overseeing risk management processes (see pages 40 – 49 for further details).

RISK MANAGEMENT

recommending its adoption to the Board.

& Compliance Committee.

– Regularly reviewing the risk register.

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 risk.

Considered Sarbanes-

Oxley (Sox) and MAPs

Update

Reviewed effectiveness

of Internal Controls over

financial reporting

FRAUD & 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.

– Reviewed Internal Audit Report on Fraud.

EXTERNAL AUDITOR

– 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.

OTHER MATTERS

Reviewed Internal

Audit Report on Fraud

and Whistle-blowing

Confirmed

independence

of KPMG

Endorsed NAPO

processing and

scheduling plan

Approved Audit

Committee’s TOR

Reviewed effectiveness

and independence

and concluded their

effectiveness

Approved external auditor

fees for 2017

Approved consultancy

fees to external advisors

INTERNAL AUDIT
Reviewed progress

RISK MANAGEMENT

Reviewed progress

Reviewed Progress
and approved Charter
and 2019 Plan

Risk Management
Update

INTERNAL CONTROLS
Considered Sarbanes-
Oxley (Sox) and MAPs
Planning 2018

FRAUD & WHISTLE-BLOWING

EXTERNAL AUDITOR
Endorsed External
Audit Plan

Approved 2017 fee
overruns

OTHER MATTERS
Treasury Update
Cyber Security
Project reports
including Apex
China Channel
Management

Reviewed Internal Audit
Report on Fraud

Approved Engagement
letter for 2018
Noted partner rotation
arrangements

Cyber Security Update

Considered Sarbanes-
Oxley (Sox) and MAPs
progress

Reviewed Internal
Audit Report on Fraud
and Whistle-blowing

KPMG Fee
Schedule 2018

Results of FRC Review
of KPMG

Update on NAPO
Project reports
including APEX
Tax Update/Strategy
Cyber Security

Tax Update
Cyber Update
APEX Update

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Other information

Smith & Nephew Annual Report 2018

AUDIT COMMITTEE REPORT continued

OTHER MATTERS RELATED TO
THE FINANCIAL STATEMENTS
Regular private meetings have taken place between the Audit
Committee and the External auditor (KPMG) and the Audit Committee
and the Group Head of Internal Audit.

As well as the identified significant matters, other matters that the
Audit Committee considered during 2018 were:

Business combinations
During 2018, we considered and concurred with management that
there had been no changes to the provisional fair values recognised
in the 2017 acquisition of Rotation Medical, Inc.

Post Retirement Benefts
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.

Since the year end
Since the year end we have also reviewed the results for the full year
2018, the preliminary announcement, Annual Report and Accounts,
for 2018 and have concluded that they are fair, balanced and
understandable. 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 12–13, risks and the key
performance indicators and their link to the strategy.

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 four 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 2018 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 Board in the UK 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 2018 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
11 April 2019 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.

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 recognises 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.

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AUDIT COMMITTEE REPORT continued

Any pre-approved aggregate, individual amounts up to $25,000 may
be authorised by the Group Treasurer 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 2018,
which were approved by the Chairman of the Audit Committee:

During the year, the team completed 53 risk based audits and reviews
across the Group. These included Financial and Operational Market
based reviews covering the EMEA, APAC, US and Latam Regions; Global
Operations, including manufacturing and supply chain; IT and various
Programme Assurance reviews ranging from the implementation of
SAP across the North American Business to MDR preparedness.
Key issues noted during reviews included the need to better control
user access to some systems, also the need to improve internal controls
in a number of smaller markets. Management has taken swift action to
implement Internal Audit’s recommendations.

Tax fees and
compliance
services

Assistance with tax compliance
in Singapore only

2018
$ million
–

2017
$ million
0.1

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
2018 is 0.00. The ratio of non-audit fees to audit fees for the year ended
31 December 2017 was 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

2018
$ million
6.0
–
6.0

2017
$ million
4.4
–
4.4

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 Group Head of Internal Audit, consists of
appropriately qualified and experienced employees. Third parties may
be engaged to support audit work as appropriate.

The Group Head of 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.

A periodic review of the Internal Audit function is undertaken by an
independent external consultant, in accordance with the guidelines
of the Institute of Internal Auditors. In 2018 KPMG completed an
ISA 610 review of the function and this concluded satisfactorily.
Finally, the performance of the function is assessed using a structured
questionnaire, 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 December 2018, 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, July, September
and December. We approved the Risk Management Programme
for 2018 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.

The Risk Management programme in 2018 followed the new risk
management policy and manual rolled out across the Company in
2017. This programme combines a ‘bottom up’ approach (whereby risks
are identified within business areas by local risk champions working
with their leadership teams), with a top-down approach (when the
Executive Committee meets as the Risk Committee to consider the
risks facing the Group at an enterprise level).

Throughout the year, the Audit Committee maintained oversight
of this programme. We reviewed the principal risks identified and
the heat maps prepared by management showing how these risks
were being managed. We considered those risks where the risk
profile was changing particularly political and economic risks as a
consequence of Brexit. We also reviewed the deep dives undertaken
by the Group Risk team, which looked more closely at the risks
impacting certain business areas.

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AUDIT COMMITTEE REPORT continued

Since the year end, we have reviewed a report from the Group Head of
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 2018 and up
to the date of approval of this Annual Report was effective. Work will
continue in 2019 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 page 50–51.

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 42–47.

The financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described on page 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 and group function is responsible
for the establishment, maintenance and review of effective financial
controls within their business unit or function.

– The Group’s IT organisation is responsible for the establishment of

effective IT controls within the core financial systems and underlying
IT infrastructure.

– The Financial Controls & Compliance Group has responsibility for

the review of the effectiveness of controls operating in the countries,
functions and IT organisation, either by performing testing directly
or reviewing testing performed in-country.

– The Group Finance Manual sets out financial and accounting

policies. The Group’s Minimum Acceptable Practices (MAPs) have
been further enhanced during 2018 by simplifying and clarifying the
requirements as well as broadening their scope and incorporating
the core financial controls. 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 & Compliance Group 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
our core financial controls globally and merging with the MAPs.
In 2019, there will be a focus on implementing a technology solution
to facilitate the operation and testing of 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 & Compliance, Taxation and Treasury functions.

– The Audit Committee reviews regular reports from the Financial
Controls & Compliance Group 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.

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AUDIT COMMITTEE REPORT continued

– A treasury operating framework and Group treasury team,

– 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 2018.
– 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 2018 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 2018, the Group’s internal control
over financial reporting was effective based on those criteria.
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 2018.

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 substantive amendments to the Code during 2018 or up until
15 February 2019. 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, conducted by Boardroom Review.

The review by the Audit Committee found the following and the below
action will be taken during 2019:

Composition

Following retirement of Ian Barlow an additional
member with recent and relevant financial experience
will be required

Performance &
Effectiveness

The Audit Committee is well chaired, with a clear role,
an efficient use of time and high quality information

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, or the Finance and Banking 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 is reviewed by the Audit Committee on behalf of
the Board.

– The Audit Committee reviews the Group whistle-blower procedures

to ensure they are effective.

– The Audit Committee received and reviewed a report on the
progress of the Finance Transformation during 2018 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 2018 and up to the date of approval of this Annual
Report. No concerns were raised with us in 2018 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 its Internal Audit
function, reviews the adequacy and effectiveness of internal control
procedures and identifies any significant weaknesses and ensures
these are remediated within agreed timelines. The latest review covered
the financial year to 31 December 2018 and included the period up to
the approval of this Annual Report. The main elements of this review
are as follows:

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Smith & Nephew Annual Report 2018

Directors’ Remuneration Report
Remuneration Committee report

Our focus in 2019 will be on
aligning our remuneration
arrangements to the new Strategic
Imperatives of the Company

MEMBERSHIP

Angie Risley1 (Chair)
Vinita Bali
Virginia Bottomley
Robin Freestone
Joseph Papa1
(Former Chair)
Roberto Quarta

Member from Meetings attended
5/5
5/5
5/5
5/5
2/2

September 2017
April 2015
April 2014
September 2015
April 2011

April 2014

5/5

Angie Risley was appointed Chair of the Committee on 12 April 2018 replacing
Joseph Papa, on his retirement from the Board.

DEAR SHAREHOLDER,
It is a great pleasure to be writing to you for the first time as Chair of
the Remuneration Committee. I should like to take the opportunity of
thanking my predecessor, Joseph Papa, who was a great support to
me during our handover process. The recruitment of Namal Nawana
as our new Chief Executive Officer and the consequent changes
to his leadership team have given the Committee a full programme
during the year. We have also considered the expansion of the role
of the Remuneration Committee in the light of revised remuneration
regulations and corporate governance reforms. At all times, we have
sought to ensure that our pay arrangements support and drive delivery
of the strategic aims set out by the Company, while making careful
decisions to align pay outcomes with the performance delivered
during the period.

Review of 2018 performance
During the year, the Group delivered underlying revenue growth of
2% and a 90bps improvement in trading profit margin, in line with
guidance. Performance improved over the course of the year, with 1%
underlying revenue growth in the first half and 3% in the second half.
Highlights included our continued strength in the Emerging Markets,
with China delivering double-digit growth. At a franchise level, our Knee
Implants franchise continued to deliver market-beating growth and Hip
Implants improved markedly in the second half. In Sports Medicine
REGENETEN for shoulder repair, acquired in December 2017, had an
outstanding year as we more than doubled sales and the acquisition
of Ceterix, completed in early 2019, offers exciting opportunities in
knee repair. Our performance in Advanced Wound Care and Advanced
Wound Devices in the US also stood out across 2018. The team
delivered these successes whilst controlling costs. This contributed
to the margin growth, which also included a gain from a one-off legal
settlement. Most impressively, the significant change in structure and
leadership in the second half did not detract from delivery and the
stronger finish to the year.

Pay for performance is important to us and therefore members of
the Audit Committee joined us to consider our results and determine
the extent to which performance against the targets in our incentive
plans were met. Taking into account this financial performance along
with consideration of how our Executive Directors performed against

their business performance objectives, the Remuneration Committee
determined that Namal Nawana would receive a cash incentive
payment of 67.7% of his full year’s salary and an Equity Incentive award
of 35.9% of his full year’s salary (prorated to reflect his joining date
in May 2018) and that Graham Baker would receive a cash incentive
payment of 95.5% of his salary and an Equity Incentive award of 50%
of his salary (pro-rated to reflect his increase in salary from July 2018
to reflect increased responsibilities). The Committee also determined
that Olivier Bohuon would receive a cash incentive payment of 94% of
his salary in respect of the period worked as Chief Executive Officer to
May 2018, when he retired from the Board. Reviewing the performance
of the Company, the Committee was confident that these outcomes
appropriately reflected our underlying performance over the year as
a whole.

The Committee also reviewed performance over the past three years
and determined that 93% of the target Performance Share Plan
awards made in 2016 to Olivier Bohuon would vest reflecting the
performance of the Company as a whole. Namal Nawana and Graham
Baker were not employed by the Company at the time these awards
were made.

The total remuneration paid to Namal Nawana, Olivier Bohuon and
Graham Baker in 2018 is detailed further on page 89.

Looking forward – remuneration arrangements for 2019
As explained on pages 8–11, the Board approved a new strategy during
2018 and Namal articulated his vision for the business externally earlier
in 2019. During the course of 2019 our focus will be on developing
remuneration arrangements to align with this strategy and to drive the
performance and behaviours to deliver that strategy. We shall engage
with shareholders during the course of 2019 to ensure firstly that
shareholders understand our business strategy and secondly how we
intend to align our remuneration arrangements to that strategy. We shall
ensure that shareholder views are appropriately reflected in the
Remuneration Policy we submit at the 2020 Annual General Meeting.

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DIRECTORS’ REMUNERATION REPORT continued

Looking forward – UK corporate governance code
We are mindful of the corporate governance changes which have come
into effect at the beginning of 2019. During 2018, we discussed how we
would be addressing these changes. We have updated our Terms of
Reference to expand our remit to consider pay and benefits across the
Company in more depth and breadth than before. The review of our
Remuneration Policy in 2019 will also consider the new provisions of the
UK Corporate Governance Code.

Although we are not required to report on the CEO pay ratio until next
year, we have compared the pay of our outgoing Chief Executive Officer,
Olivier Bohuon and our new Chief Executive Officer, Namal Nawana to
the median pay in the UK and determined that our CEO pay ratio is 95:1.
Further details are given on page 102.

Appointment of Namal Nawana
We determined the remuneration arrangements for Namal Nawana,
our incoming Chief Executive Officer, having regard both to the
remuneration policy approved by shareholders in 2017 and also to the
competitive market environment for Medical Devices Chief Executives
of Namal’s calibre and experience, most of whom are based in the US.
We are very grateful for the support and guidance we received from
the shareholders we spoke to when we were considering appropriate
remuneration arrangements.

His remuneration arrangements are described more fully in the
following pages. Namal is employed on a standard US executive
contract. He receives a base salary of $1,540,000 and participates in
the Annual Incentive Plan (cash and equity) and the Performance Share
Plan. He also participates in the retirement plans available to our US
Executives: Executive Plus Plan, 401k and 401k plus. The Company
contribution to these plans is: 20% of base salary to the Executive
Plus Plan, standard company match for 401k and standard 401k plus
contribution up to the IRS maximum. He will be required to give six
months’ notice and the notice period from the Company is 12 months.
He received no sign-on or buy-out award on joining the Company.

Executive officer remuneration
We also considered and approved remuneration arrangements for
a number of Executive Officers who have moved into new roles or
joined the Company as part of Namal’s review of the leadership
team and organisational structure. In particular, we consulted
shareholders over the summer with regard to increasing our Chief
Financial Officer, Graham Baker’s base salary by 5% to reflect his
increased responsibilities for our IT and Global Business Services
functions. We are grateful to those shareholders who responded to this
consultation and were overwhelmingly supportive. We reached out to
the holders of over 40% of our share capital and received responses
from nearly half of these shareholders, all of whom were supportive.

Retirement of Olivier Bohuon
We also determined the retirement arrangements for Olivier Bohuon,
our former Chief Executive Officer, in line with the Remuneration Policy
approved by our shareholders in 2017.

Olivier stepped down from the Board on Namal’s appointment in May
2018 and remained employed in an advisory capacity supporting the
transition for a period of six months, during which time he continued
to receive the same salary and benefits as in 2017. He participated in
the Annual Incentive Plan for the period worked as Chief Executive
Officer in 2018, but did not receive a 2018 award under the Performance
Share Plan. As a good leaver, his Equity Incentive Awards vested on
his retirement date on 7 November 2018, and his Performance Share
Awards have been 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 remains subject to a two-year post vesting holding period.

2018 Annual general meeting
We were pleased that our Remuneration Report received over
97% of votes in favour at the 2018 Smith & Nephew plc AGM.
This demonstrates the strong support from our shareholders for
our remuneration arrangements.

I should like to thank the shareholders who have engaged with us and
supported us during the year and particularly those I met as part of my
induction programme.

I should also like to thank my fellow Committee members for
their support during the year and to welcome Deloitte as our new
remuneration advisors.

LOOKING FORWARD
In summary, our focus for 2019 includes:

Developing a new Remuneration Policy to align with the
new strategy to deliver the performance and behaviours
required to deliver the results.

Engaging with key shareholders whilst developing a new
Remuneration Policy to ensure alignment of views.

Continuing to develop our understanding and oversight of pay
arrangements across the Group focusing particularly on the
CEO pay ratio and the gender pay ratio.

Angie Risley
Chair of the Remuneration Committee

The Terms of Reference of the Remuneration Committee describe the role and responsibilities more fully
and can be found on our website at www.smith-nephew.com.

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MEASURES IN OUR VARIABLE PAY PLANS

FINANCIAL MEASURES IN ANNUAL INCENTIVE PLAN

Revenue (35%)

Trading Proft Margin (25%)

Trading Cash Flow (15%)

Revenue is a key driver of profit growth.

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

Growth (8.3%)

Business Process (8.3%)

People (8.3%)

Revenue growth through achieving the full potential of our portfolio transforming our business through
enabling technologies and expanding in high growth segments is fundamental to our future success.

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.

PERFORMANCE MEASURES IN OUR PERFORMANCE SHARE PLAN

Relative TSR (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.

Cumulative Free Cash Flow (25%)

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%)

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 89 to 105) 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 11 April 2019. The Implementation Report explains how the Remuneration Policy was implemented during 2018 and also how it is currently being
implemented in 2019.

The second part of the Report (pages 106 to 114) 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 2019 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 and narrative reporting on pages 89 to 100, (including the Directors’ interests tables on page 101, the table of historic data on page 104 and the senior management remuneration
table on page 105), have been audited by KPMG LLP.

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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 11 April 2019.

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.

WORK OF THE REMUNERATION COMMITTEE IN 2018
In 2018, we held five meetings and determined ten matters by written
resolution, mainly relating to Executive Officer Remuneration and
termination packages and the appointment of Deloitte LLP as new
Remuneration Committee advisors. Each meeting was attended by
all members of the Committee. 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, in the first part of the year and
Deloitte in the second half of the year without management present.
Our programme of work in 2018 can be found in the table on the
next page.

Since year end, we have also reviewed the financial results for 2018
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 2019.
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 2016. Finally,
we approved the wording of this Directors’ Remuneration Report.

INDEPENDENT REMUNERATION COMMITTEE ADVISORS
During the year, the Remuneration Committee received information
and advice from both Willis Towers Watson and Deloitte LLP. Both firms
are independent executive remuneration consultancy firms appointed
by the Remuneration Committee following a full tender process in 2011
and 2018 respectively. Deloitte LLP replaced Willis Towers Watson as
our primary Remuneration advisors in July 2018, although Willis Towers
Watson continue to provide market benchmark data on compensation
design and levels for our Executive Director and Executive Officer
positions. During the year, both firms provided advice on market trends
and remuneration issues in general, attended Remuneration Committee
meetings, assisted in the review of the Directors’ Remuneration Report,
undertook calculations relating to the TSR performance conditions,
advised on Executive Director and Officer pay and investor views
and engagement.

The fees paid to Deloitte LLP for Remuneration Committee advice during
2018, charged on a time and expense basis, were £68,200 and the fees
paid to Willis Towers Watson were £91,000. Deloitte LLP also provided
other tax and consultancy services to the Company. Willis Towers
Watson also provided other human resources and compensation
advice to the Company for the level below the Board. Both Deloitte LLP
and Willis Towers Watson 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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Late January
Approval of salaries,
awards and payouts
in 2018

Early February
Approval of targets
and Remuneration
strategy for 2018

July
Mid-year Review
of Remuneration
Arrangements

September
Review of Graham
Baker’s base pay

October
Review of
Remuneration
Strategy

Approved 5% base
salary increase for
Graham Baker to
reflect his increased
responsibilities
for the IT and
Global Business
Services functions
following consultation
programme
with the holders
of 40% of the
Company’s shares.

Agreed to update the
Company’s Remuneration
Policy to align with the
new corporate strategy
during 2019 to put
to shareholders for
approval in 2020.
Agreed to make
minor adjustments to
certain targets and
measures in 2019 in
line with the existing
remuneration Policy.
Reviewed benchmarking
data for the Executive
Directors and Executive
officers prepared
in accordance with
agreed methodology.
Considered reports
on Gender Pay Gap.

DETERMINATION OF REMUNERATION POLICY AND PACKAGES
– Determination of Remuneration
Policy for Executive Directors
and senior executives.
– Approval of individual

Approved quantum
of cash payments
and awards to
Executive Directors
and Officers under
the Annual Incentive
Plan, the Equity
Incentive Programme
and Performance
Share Programme,
(in the context of 2017
financial performance).
Reviewed the fees for
the Chair, Executive
Directors and Officers.

Agreed the targets
for the short-term
and long-term
incentive plans for
2018. Approved
the remuneration
strategy for 2018
against the proposed
business plan.
Considered appropriate
remuneration
package for new Chief
Executive Officer.
Reviewed Chair’s pay.

Report from Deloitte
on current market
trends in remuneration
matters and an analysis
of how the Company’s
remuneration arrangements
aligned with current
practices elsewhere.
Reviewed the
performance of
long-term awards
granted in 2016,
2017 and 2018.

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 in particular relating to
CEO Pay ratio and Gender Pay.

– Approval of appropriate

performance measures for short-
term and long-term incentive
plans for Executive Directors
and senior executives.
– Determination of pay-outs

under short-term and long-term
incentive plans for Executive
Directors and senior executives.

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.

Reviewed adherence to
shareholding guidelines
for Directors and Senior
Management.
Monitored dilution limits
and the number of shares
available for use in respect
of Executive and all-
employee share plans.
Approved amendments to
various share plan rules to
reflect regulatory changes.

REPORTING AND ENGAGEMENT WITH SHAREHOLDERS ON REMUNERATION MATTERS
– Approval of the Directors’

Approved the
Remuneration
Report.

Reviewed the
shareholder response
to the Remuneration
Report at the AGM
and noted feedback.

Remuneration Report ensuring
compliance with related
governance provisions.
– Continuation of constructive

engagement on remuneration
matters with shareholders.

OTHER MATTERS

Audit Committee in
attendance to answer
questions related to
audited numbers and
provide assurance.

Confirmed the appointment
of Deloitte LLP as the new
independent advisors
to the Committee.

Reviewed the
shareholder response
to the Remuneration
Report at the AGM
and noted feedback.

Discussed recent
corporate governance
changes and the impact
they would have on the
Remuneration
Committee.

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SINGLE TOTAL FIGURE ON REMUNERATION
The amounts for 2018 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.334 and € to US$1.180
(2017: £ to US$1.2877 and € to US$1.1279).

Namal Nawana
Appointed 7 May 2018

Olivier Bohuon
Appointed 1 April 2011
(resigned from Board
7 May 2018)

Graham Baker
Appointed 1 March 2017

Julie Brown
Appointed 4 February 2013
(resigned with effect from
11 January 2017)

2018

2017

2018

2017

2018

2017

2018

2017

FIXED PAY

Base salary

Pension payments

Taxable benefts

ANNUAL VARIABLE PAY

$1,006,923

$222,010

$59,754

Annual Incentive Plan – cash

$1,042,655

HYBRID

Annual Incentive Plan – equity

$552,290

–

$490,615

$1,330,347

$707,628

$547,273

$147,184

$399,104

$212,302

$164,182

$44,322

$177,433

$26,758

$22,308

$455,345

$1,208,911

$676,025

$683,797

–

$665,173

$353,817

$361,200

LONG-TERM VARIABLE PAY

Performance Share Plan

–

$1,193,678

$1,335,721

–

Total

$2,883,632

$2,331,144

$5,116,689

$1,976,530

$1,778,760

–

$21,606

$6,482

$637

–

$28,725

Base salary

Pension payments

Taxable benefts

the actual salary receivable for the year.

the value of the salary supplement in lieu of pension or contribution to any pension scheme
made by the Company.

the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year.

Annual Incentive Plan – cash

the value of the cash incentive payable for performance in respect of the relevant financial year.

Annual Incentive Plan – equity

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 94–95 of this report.

Performance Share Plan

the value of shares vesting that were subject to performance over the three-year period ending on
31 December in the relevant financial year. For awards vesting in early 2019 this is based on an estimated
share price of 1,380.98p per share, which was the average price of a share over the last quarter of 2018.
The value of the 2015 share awards that vested in 2018 have now been restated with the share price
on the date of actual vesting being 1,325.65p per share on 9 March 2018.

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 2018, 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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FIXED PAY

Base salary
In February 2018, it was agreed that with effect from 1 April 2018, Executive Directors would be paid the following base salaries per annum.

Olivier Bohuon (retired from Board on 7 May 2018 and from Company on 7 November 2018)
Graham Baker

2018
€1,179,490
£520,000

2017
€1,179,490
£510,000

Namal Nawana was appointed Chief Executive Officer on 7 May 2018 and paid a base salary of $1,540,000 per annum.

After a period of consultation with shareholders, Graham Baker’s salary was increased by 5% to £546,210 to take effect from 1 July 2018, when he
assumed additional responsibilities for the IT and Global Business Services functions.

In February 2019, 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 2.9% in the UK and 3% in the US. The Remuneration Committee has agreed that
Namal Nawana’s salary will increase by 2.5% and Graham Baker’s salary will increase by 2% to $1,578,500 and £557,134 respectively with effect
from 1 April 2019.

Pension payments
In 2018, Graham Baker and Olivier Bohuon, until his retirement from the Company on 7 November 2018, 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.

Namal Nawana participates in the retirement plans available to our US Executives: Executive Plus Plan, 401k and 401k plus. During 2018, total
Company Pension and 401k contributions for Mr Nawana amounted to $222,010 which on an annualised basis is equivalent to 21.34% of salary.
Due to the fact that Mr Nawana reached the annual cap on 401k contributions in the period from joining on 7 May 2018, the actual percentage for
2018 equated to 22.05%. For 2019, the combined pension and 401k Company contribution is expected to be less than 21.47% of his base salary.

Benefts
In 2018, our UK based Executive Directors (Olivier Bohuon and Graham Baker) 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. Namal Nawana participated
in the US Life Assurance Program, which in total is capped at $2 million. 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 2019 for Namal Nawana and for Graham Baker. The following table summarises the value of benefits in respect of 2017
and 2018. Olivier Bohuon and Julie Brown received these benefits until they retired from the Board on 7 May 2018 and 11 January 2017 respectively.

Health cover
Car and fuel allowance
Financial consultancy advice

Travel costs
Subscriptions

Namal Nawana

Olivier Bohuon

Graham Baker

Julie Brown

2018
$6,635
$8,467
£33,485
–
–
–

2017
–
–
–
–
–
–

2018
£2,915
£5,288
£15,733
–
£7,056
£2,245

2017
£17,807
£15,000
£34,204
€37,736
£33,703
£4,023

2018
£1,369
£17,676
£1,020
–
–
–

2017
£1,217
£14,182
£1,925
–
–
–

2018
–
–
–
–
–
–

2017
£44
£451
–
–
–
–

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ANNUAL VARIABLE PAY

Annual Incentive Plan 2018 – cash element

The performance measures and weightings which apply to the cash element of the Annual Incentive Plan are set out in the Remuneration Policy
approved by shareholders in 2017 and detailed on page 108.

The weightings of the performance measures and the figures for threshold, target and maximum relating to the financial objectives of the cash
element can be summarised as follows:

Revenue
Trading profit margin
Trading cash flow

1 At constant exchange rates. See page 131.

Weighting
35%
25%
15%

Threshold
$4,887m
22.0%
$886m

Target
$5,039m
22.5%
$985m

Maximum
$5,190m
22.9%
$1,083m

Actual
$4,960m1
22.7%1
$951m

The Committee determined that this performance fairly reflected the overall performance of the Company during 2018 and therefore resulted in a
bonus achievement of 71% of salary in respect of the financial objectives.

Revenue
Trading profit margin
Trading cash flow

Weight
35%
25%
15%

Achieved %
of target
74%
129%
83%

Award %
of salary
25.9%
32.3%
12.5%

Accordingly, the following amounts have been earned by Namal Nawana and Graham Baker under the cash element of the Annual Incentive Plan in
respect of their financial objectives.

Namal Nawana (pro-rated to reflect date of joining Company 7 May 2018)
Graham Baker (pro-rated to reflect change to salary from 1 July 2018)

$708,268
£374,287

The same measures and weightings will apply to the financial measurements of the cash element of the Annual Incentive Plan 2019. For reasons
of commercial sensitivity, we are unable to disclose the precise targets now, but they will be disclosed in full in the 2019 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.

The table on page 92 overleaf sets out how Namal Nawana and Graham Baker have performed against the business objectives of People,
Business Process and Customers.

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Namal Nawana

People

Graham Baker

– Assessed and took action at the senior leadership level designing a new
operating model and attracting four new Executive Committee leaders to
Smith & Nephew as well as numerous vice presidents. Improved diversity
and aligned team in support of the new purpose, culture pillars and
strategic imperatives.

– Successfully launched new brand purpose – Life Unlimited – culture pillars
and winning behaviours. Engaged organisation with more than 40% of
employees actively participating in the process.

– Implemented an employee engagement platform through the introduction
of Company-wide live, interactive broadcast meetings and extended face-
to-face engagement opportunities with >20% of global employee base
through face-to-face Town Halls, factory and other site meetings.

Business Process

– Key accomplishments in 2018 included strengthening Finance

leadership team and improving diversity, as well as successfully
integrating Global Business Services and IT following transfer of
additional responsibilities mid-year. Supported successful CEO
transition including assessment of the overall Company and design
of the new organisational operating model.

– Completed a robust market and internal organisational assessment

– Strong delivery of APEX restructuring programme, at both Group level,

as well as external benchmarking to inform the development of a clear
strategy resulting in a newly designed operating model including a flatter,
franchise-led organisational design with global supporting functions.
– Introduced new Company strategy with five imperatives to drive medium
and long-term value creation for shareholders with detailed and robust
KPIs put in place internally for continuous measurement throughout the
relevant period.

– Engaged with R&D organisations in all business areas and reprioritised
programmes to align with strategy. Personally led robotic programme
acceleration and the team exceeded overall target of 80% key product
launches delivered to plan.

Customers

– Demonstrated strong customer focus meeting with hundreds of customers

in aggregate including through hospital visits and attending medical
education events and industry conferences.

– Engaged regularly with key shareholders and investors through face-
to-face meetings built around the financial calendar and key investor
conferences in London and the United States.

– Delivered significant shareholder returns through strong stock out-
performance of FTSE 100 index and improved dividend distribution.

with around $60 million of benefits realised and tight control of operating
expenditure, and in Finance function with successful insourcing of
transaction processing and IT upgrades. Delivered a significantly
improved full year trading margin and built robust plans for further multi-
year expansion. Additionally, delivered meaningful reduction in trading
tax rate¹ for 2018, down to 16.1%.

– Regular engagement with shareholders, supporting financial calendar
reporting and key investor conferences, as well as management of
debt provider and other key financial stakeholders. Delivered significant
shareholder returns through strong stock out-performance of FTSE 100
index and improved dividend distribution.

This resulted in a bonus achievement of 33.2% of salary in respect
of the business objectives.

This resulted in a bonus achievement of 25% of salary in respect
of the business objectives.

People
Business Process
Customers

Weight
8.33%
8.33%
8.33%

Achieved %
of target
133%
116%
150%

Award %
of salary
11.1%
9.7%
12.5%

People
Business Process
Customers

Weight
8.33%
8.33%
8.33%

Achieved %
of target
100%
100%
100%

Award %
of salary
8.33%
8.33%
8.33%

Accordingly, the following amount has been earned by Namal Nawana
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.

Namal Nawana (pro-rated to reflect
date of joining Company 7 May 2018)

$334,387

Graham Baker (pro-rated to reflect 5%
salary increase with effect from 1 July 2018)

£132,664

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As well as considering the monetary outcome of the formulaic calculation of these awards, the Committee considered whether discretion should
be applied to override these formulaic outcomes and concluded that the monetary outcomes were aligned with the financial performance of the
Company, individual performance during 2018 and the intention of the Remuneration Policy.

For 2019, the business objectives for the Executive Directors will be; Growth, People, and Business Processes to align with the new Strategic
Imperatives. These business objectives will be equally weighted.

The Committee also considered the level of Cash Incentive Payment to be made to Olivier Bohuon who retired as Chief Executive Officer on 7 May 2018.
75% of his Cash Incentive Payment was based on the Financial Objectives, which resulted in a payout of 94% of target as described on page 91. 25% of
his Cash Incentive Payment was based on his performance against his Business Objectives: People, Business Process and Customers. In 2018, these
objectives were all aligned to ensuring an orderly transition to the new Chief Executive Officer. The Committee considered his performance as Chief
Executive Officer against these business objectives for the period up to 7 May 2018 and concluded that he had broadly met these objectives and that
therefore the payout in respect of his Business Objectives should be in line with the payout in respect of the overall financial objectives at 94% as follows:

Financial Objectives (75% of award)
Business Objectives (25% of award)
Total Cash Incentive Payment

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 194–198.

Amount
€289,463
€96,488
€385,951

Award %
of target
94
94

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Annual Incentive Plan – equity element
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
In-line with expectations
Above expectations

Assessment of how Executive Directors have achieved

Below expectations
No Award
No Award
No Award

In-line with expectations
No Award
Award of 50% of Salary
Award of 55% of Salary

Above expectations
No Award
Award of 55% of Salary
Award of 65% of Salary

The Remuneration Committee has considered the performance of Namal Nawana 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) Namal Nawana 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 Namal Nawana has exceeded
expectations and Graham Baker has performed in line with expectations. These ratings result in an Equity Incentive Award of 55% of salary (pro-
rated to 35.9% to reflect his appointment on 7 May 2018) for Namal Nawana and 50% of salary for Graham Baker. In summary, as a result of the
financial performance described on page 91 and the individual performance described in the table on page 92, the Remuneration Committee
determined that the following awards be made under the Annual Incentive Plan in respect of performance in 2018:

Executive Director
Namal Nawana
Graham Baker

Cash Component

Equity Component

% of salary
67.7%
95.5%

Amount
$1,042,655
£506,951

% of salary
35.9%
50.0%

Amount
$552,290
£265,328

These figures are converted into dollars and included under Annual Incentive Plan (cash) and (equity) in the single figure table on page 89.

The precise awards granted in 2019 to Namal Nawana and Graham Baker in respect of service in 2018 will be announced when the awards are
made and will be disclosed in the 2019 Annual Report. The Committee also determined that no Equity Incentive Award would be made to Olivier
Bohuon who had retired as Chief Executive Officer during the year. As a result of the 2018 performance assessment for Graham Baker, the first
tranche of the Equity Incentive Award made in 2018 will vest. Both the grant and vesting of these awards are subject to Graham’s performance
discussed on page 92. Namal Nawana was not employed during 2017 and therefore received no Equity Incentive award in 2018.

Director
Graham Baker

Date of Grant
7 March 2018

Number of shares
under award vesting
7,242

Number of shares to vest from
each grant subject to performance
14,485

EQUITY INCENTIVE AWARD FROM PRIOR YEARS
The following Equity Incentive awards held by Olivier Bohuon vested in their entirety on his retirement from the Company on 7 November 2018 in
accordance with the plan rules:

Director
Olivier Bohuon

Date of Grant
7 March 2018
7 March 2017
7 March 2016

Number of shares under award
vested on 7 November 2018
41,587
28,787
17,608

EQUITY INCENTIVE AWARDS IN 2019
The Equity Incentive Award element will operate in 2019 in exactly the same way as in 2018 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 above.

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LONG-TERM VARIABLE PAY

Performance Share Plan

Performance Share Programme – 2018 grants
Performance share awards granted in 2018 were made to Graham Baker and to Namal Nawana on his appointment under the Global Share Plan
2010 to a maximum value of 190% of salary (95% for target performance). As Olivier Bohuon had already indicated his intention to retire at the time the
awards were made in 2018, no award was made to him. 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 2018 and awards will vest subject to performance and continued employment in 2021. 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 groups is independently monitored and reported to the Remuneration
Committee by Deloitte LLP.

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
Nil
5.9375%
23.75%

FTSE 100 Peer Group
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 against both indices, none of
this part of the award will vest.

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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 Assets)3 ÷ 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, borrowings and loans, and Cash at bank.

The awards subject to ROIC will vest 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)

Awards will vest on a straight-line basis between these points.

Award vesting as % of salary
Nil
11.875%
23.75%
47.5%

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 2018
Below Threshold
Threshold (-2.7% of target)
Target
Maximum or above (+2.7% of target)

Award vesting as % of salary
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 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 $1,575m
$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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Performance Share Programme 2019
Performance share awards will be made in 2019 to the Executive Directors under the Global Share Plan 2010 to a maximum value of 190% of salary
(95% for target performance). Performance will be measured over the three financial years commencing 1 January 2019 against the same four
equally weighted performance measures as in 2018: 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 the Executive Directors 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 2018 as described on page 95 against the same two peer groups.

Return on invested capital (ROIC) will be measured in the same way as in 2018, as described on page 96.

The targets will be as follows:

Return on Invested Capital
Below Threshold 11.8%
Threshold 11.8% (-1.25% of target)
Target 13.1% (as derived from the Strategic Plan)
Maximum or above 14.3% (+1.25% of target)

Awards will vest on a straight-line basis between these points.

Sales growth will be measured in the same way as in 2018, as described on page 96. The targets will be as follows:

Sales growth over three-year period commencing 1 January 2019
Below Threshold
Threshold (-2.7% of target)
Target
Maximum or above (+2.7% of target)

Award vesting as % of salary
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 2021 Annual Report, when the Committee
will discuss performance against the target.

Cumulative free cash flow will be measured in the same way as in 2018, as described on page 96. The targets will be as follows:

Cumulative free cash flow
Below $1,923m
$1,923m (-13% of target)
$2,210m
$2,497m or more (+13% of target)

Award vesting as % of salary
Nil
11.875%
23.75%
47.5%

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Performance Share Programme 2016
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 2016. Vesting of the conditional awards made in 2016 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 2016.

25% of the award was based on the Company’s TSR relative to a bespoke group of 15 Medical Devices companies. This group comprised the
following companies; Baxter, Becton Dickinson, Boston Scientific, Coloplast, Conmed, Edwards Life Sciences, Essilor Luxottica, Getinge B, GN Store
Nord, Medtronic, Shire, Sonova N, Stryker, William Demant Holding, and Zimmer. The following companies delisted during the period and were
therefore removed; C R Bard 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 2016 was $2,316 million with a target of $2,725 million.
Over the three-year period, the adjusted revenues in Emerging Markets were $2,560 million. These adjustments include translational foreign
exchange. This part of the award therefore vested at 20% 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
$1,929 million which is between target and maximum. These adjustments include items such as Board-approved M&A, including the acquisition
of Rotation Medical and the disposal of the Gynaecological business and Board-approved Business Plans such as the APEX programme, the
commercial restructuring programme and exceptional expenditure to comply with the EU Medical Devices Regulations. This part of the award
therefore vested at 73%.

TSR
Emerging Markets Sales
Cumulative Free Cash Flow

Threshold
Median
$2,316m
$1,585m

Target

Maximum
– Upper Quartile
$3,133m
$2,059m

$2,725m
$1,822m

Actual
Below Median
$2,560m
$1,929m

Percentage
Vesting
0%
20%
73%

Overall therefore, the conditional awards made in 2016 will vest at 93% of target (46.5% of maximum) on 7 March 2019 as follows:

Director
Olivier Bohuon

Date of grant
7 March 2016

Number of shares under award at maximum
139,396
Pro-rated for length of time held prior to retirement
from the Company on 7 November 2018

Number vesting
64,819

As well as considering the monetary outcome of the formulaic calculation of these awards, the Committee considered whether discretion should
be applied to override these formulaic outcomes and concluded that the monetary outcomes were aligned with the financial performance of the
Company during the performance period and the intention of the Remuneration Policy.

Neither Namal Nawana nor Graham Baker were employed by the Company in 2016 and therefore have no Performance Share Awards to vest on
7 March 2019.

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 page 95–97.

Olivier Bohuon

Graham Baker

Namal Nawana

Date granted
7 March 2016
7 March 2017
7 March 2017
7 March 2018
9 May 2018

Number of ordinary shares
under award at maximum

Date of vesting
139,3961,2
7 March 2019
97,7441,2 7 March 2020
7 March 2020
79,166
9 March 2021
75,058
9 May 2021
108,800

1 Pro-rated to reflect Olivier Bohuon’s retirement from the Company on 7 November 2018.

2 On 5 February 2019, 53.5% of the award granted at maximum to Olivier Bohuon lapsed following completion of the performance period.

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SUMMARY OF SCHEME INTERESTS AWARDED DURING THE FINANCIAL YEAR

Annual Equity Incentive Award (see page 94)
Performance Share Award at maximum
(see page 98)

Namal Nawana1

Olivier Bohuon2

Number of shares
–

Face value Number of shares
40,801

–

Face value Number of shares
21,727
€589,745

Graham Baker1

Face value
£280,500

108,800

£1,419,311

–

75,058

£969,000

1 Annual Equity Incentive Awards for 2018 were based on performance for 2017, hence Namal Nawana received no award.

2 Olivier Bohuon did not receive a Performance Share Award in 2018, as he had announced his intention to retire.

Please see Policy Table on pages 108 and 109 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 2018 was 1291p, and for the awards granted on 9 May 2018 was 1304.5p.

SINGLE TOTAL FIGURE ON REMUNERATION
Chair and Non-Executive Directors

Director
Roberto Quarta
Vinita Bali2

Ian Barlow
Virginia Bottomley
Roland Diggelmann3
Erik Engstrom
Robin Freestone
Michael Friedman
Brian Larcombe4
Marc Owen5
Joseph Papa6
Angie Risley 7

Basic annual fee1

Committee Chair/Senior
Independent Director fee

Intercontinental travel fee

2018
£418,695
–
$129,780
£69,500
£69,500
£59,000
£69,500
£69,500
$129,780
–
$129,780
$44,115
£69,500

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

2018
–
–
–
£20,000
–
–
–
£20,000
$35,000
–
–
–
£14,172

2017
–
–
–
£20,000
–
–
–
£16,667
$35,000
£1,277
–
$35,000
–

2018
–
–
$42,000
–
–
–
–
–
$42,000
–
$42,000
$14,000
–

2017
£7,000
£7,000
$21,000
£7,000
£7,000
–
£7,000
£7,000
$42,000
–
$14,000
$35,000
£7,000

2018
£418,695
–
$171,780
£89,500
£69,500
£59,000
£69,500
£89,500
$206,780
–
$171,780
$58,115
£83,672

Total

2017
£419,000
£43,750
$80,780
£95,135
£75,135
–
£75,135
£91,802
$206,780
£22,027
$44,000
$199,780
£25,173

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 100.

2 Vinita Bali elected to receive the payment of her fee in US$ in August 2017 having previously been in GBP.

3 Roland Diggelmann was appointed to the Board on 1 March 2018.

4 Brian Larcombe retired from the Board with effect from 6 April 2017.

5 Marc Owen was appointed to the Board with effect from 1 October 2017.

6 Joseph Papa retired from the Board with effect from 12 April 2018.

7 Angie Risley was appointed to the Board with effect from 18 September 2017.

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Chair and Non-Executive Director Fees
In February 2019, the Remuneration Committee reviewed the fees paid to the Chairman and determined that with effect from 1 April 2019 the fees
paid would remain unchanged. The Board reviewed the fees paid to the Non-Executive Directors and determined that with effect from 1 April 2019,
the fees would remain unchanged as follows:

Annual fee paid to the Chair
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

Payments made to past Directors
Olivier Bohuon retired as Chief Executive Officer of the Board on 7 May 2018 and as an employee of the Company on 7 November 2018 and was
paid in accordance with the Remuneration Policy approved by shareholders in 2017 as an employee and the terms of his service agreement.
In respect of the transition period, (from 7 May to 7 November 2018) he received salary (€612,427), benefits (£39,472) and a payment in lieu of
pension (€176,924). In accordance with the Plan Rules, on his retirement from the Company all unvested Equity Incentive Awards vested in their
entirety and the outstanding Performance Share Plan awards were pro-rated for service to 7 November 2018 and will, subject to the performance
conditions being satisfactorily met at the end of the three-year performance period, vest on the original vesting dates on the third anniversary of the
respective dates of grant. He will be required to retain any vested shares, net of tax, in relation to the 2017 award for a further two-year period after
the vesting date. In light of his anticipated retirement, no Performance Share Plan award was made in 2018.

No other payments were made to former Directors in the year.

Payments for loss of office
No payments were made in respect of a Director’s loss of office in 2018.

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 111 of the Policy Report.

Outside directorships
Olivier Bohuon was a Non-Executive Director of Virbac SA and received £7,269 in respect of this appointment up to 7 May 2018. He was also
a Non-Executive Director of Shire Plc and received £48,348 in respect of this appointment up to 7 May 2018.

Namal Nawana is a Non-Executive Director of Hologic, Inc. and received $56,231 in respect of this appointment from 7 May 2018 to
31 December 2018.

Directors’ interests in ordinary shares
Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:

Namal Nawana

Graham Baker

Olivier Bohuon

7 May

20181
–
–
–
–

31 December
2018
224,214
–
108,800
–

15 February
20192
224,2144
–
108,800
–

1 January
2018
–
–
79,166
–

31 December
2018
10,076
2,734
154,224
21,727

15 February
20192
10,0764
2,734
154,224
21,727

1 January
2018
467,811
–
423,680
87,956

7 May
20183
531,470
–
304,948
85,305

Ordinary shares
Share options
Performance share awards5
Equity Incentive awards

1 Namal Nawana was appointed to the Board on 7 May 2018.

2 The latest practicable date for this Annual Report.

3 Olivier Bohuon retired from the Board on 7 May 2018.

4 The ordinary shares held by Namal Nawana on 15 February 2019 represent 276.41% of his base annual salary and for Graham Baker 28.67% of his base salary.

5 These share awards are subject to further performance conditions before they may vest, as detailed on pages 95 to 97.

The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company.

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Beneficial interests of the Chair and Non-Executive Directors in the ordinary shares of the Company are as follows:

Director
Roberto Quarta
Vinita Bali4
Ian Barlow
Virginia Bottomley
Roland Diggelmann5
Erik Engstrom
Robin Freestone
Michael Friedman4
Marc Owen
Joseph Papa6
Angie Risley

1 January 2018 (or date of
appointment if later)
28,261
6,836
19,009
18,714
–
15,547
15,525
9,910
–
13,860
–

31 December 2018 (or date
of retirement if earlier)
32,449
7,154
19,291
19,024
4,867
15,796
15,774
10,212
7,290
13,860
1,960

15 February 20191
32,449
7,154
19,291
19,024
4,867
15,796
15,774
10,212
7,290
N/A
1,960

Shareholding as %
of annual fee2
112.04
152.12
402.75
397.18
101.61
329.78
329.32
149.26
213.29
N/A
40.92

1 The latest practicable date for this Annual Report.

2 Calculated using the closing share price of 1,451p per ordinary share and $37.97 per ADS on 15 February 2019, and an exchange rate of £1/$1.284687.

3 All Non-Executive Directors in office since 1 January 2018 held the required shareholding during the year except Angie Risley.

4 Vinita Bali, Michael Friedman and Marc Owen hold some of their shares in the form of ADS.

5 Roland Diggelmann was appointed to the Board on 1 March 2018.

6 Joseph Papa retired from the Board on 12 April 2018.

The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.

Chief Executive Officer remuneration compared to employees generally
The percentage change in the remuneration of the Chief Executive Officer between 2017 and 2018 compared to that of employees generally was
as follows:

Chief Executive Officer1
Average for all employees

Base salary
% change 2018
12.6%
2.6%

Benefits
% change 2018
-41.3%
N/A

Annual cash bonus
% change 2018
23.9%
N/A

1 Amounts paid to Olivier Bohuon up to his retirement on 7 May 2018 and to Namal Nawana after his appointment on the same date.

The average cost of wages and salaries for employees generally increased by 6% in 2018 (see Note 3.1 to the Group accounts). Figures for annual
cash bonuses are included in the numbers.

When considering remuneration arrangements for our Executive Directors, the Remuneration Committee takes into account pay across the Group
in the following ways:

Salary levels and increases for all employees including Executive Directors take account of the scope and responsibility of position, the skills,
experience and performance of the individual and general economic conditions within the relevant geographical market. When considering
increases to Executive Director base salaries, the Committee considers the average pay increases in the market where the Executive Director
is based.

All employees including the Executive Directors have performance objectives determined at the beginning of the year which cascade down from the
Strategic Imperatives for the Group. The level of variable pay determined for all employees, whether in the form of shares or cash is dependent on
performance against these imperatives, both financially and personally.

Executive Directors participate in benefits plans and arrangements comparable to benefits paid to other senior executives in the relevant geography.

The Remuneration Committee is keeping under review the level of pension benefits and cash payments in lieu of pensions paid to our Executive
Directors, which for historical reasons are currently higher than paid to most employees.

Executive Directors participate in the same senior executive incentive plans (currently the Annual Incentive Programme and the Performance
Share Programme) as other Executive Officers and senior executives. The level of award reflect the differing seniority of participants but the same
performance conditions apply for all.

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Chief Executive Officer Pay Ratio
The Committee has chosen to provide our CEO pay ratio data for 2018, despite the requirement not coming into force until 2019, as we consider that
it is important to take a lead in this area.

Our calculations are based on actual pay data for 2018, (in accordance with Option A as set out in the Companies (Miscellaneous Reporting)
Regulations 2018) using a combined figure for CEO pay comprising: pay for Olivier Bohuon (Chief Executive Officer until 7 May 2018); and pay for
Namal Nawana (Chief Executive Officer from 7 May 2018).

Comparisons have been made with employees at median (P50), lower (P25) and upper (P75) quartiles. The Committee is satisfied that the
individuals identified in the employee comparison group appropriately reflect the employee pay profile at those quartiles, and that the overall picture
presented by the ratios is consistent with our pay, reward and progression policies for UK employees.

The table below sets out the ratio at the median, lower and upper quartiles:

Year
2018

P25 (lower quartile)
142:1

P50 (median)
95:1

P75 (upper quartile)
59:1

The table below provides the total pay figure used for each quartile employee, and the salary component within this.

Component
Salary
Total pay

CEO (combined)
$1,497,538
$5,214,776

P25 (lower quartile)
$32,976
$36,597

P50 (median)
$51,434
$54,923

P75 (upper quartile)
$83,011
$87,956

In assessing our pay ratio, the Committee would like to highlight that 2018 reflects a year of change for the CEO role at Smith & Nephew, with the
transition from Olivier Bohuon to Namal Nawana in May. Next year we expect the figures to relate solely to remuneration for Namal Nawana.

Relative importance of spend on pay
When considering remuneration arrangements for our Executive Directors and employees as a whole, the Remuneration Committee also takes into
account the overall profitability of the Company and the amounts spent elsewhere, particularly in returning profits to shareholders in the form of
dividends and share buy backs.

The following table sets out the total amounts spent in 2018 and 2017 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

1 Shares are bought in the market in respect of shares issued as part of the executive and employee share plans.

For the year to
31 December 2018
$663m
$321m
$48m1
$1,330m

For the year to
31 December 2017
$767m
$269m
$52m1
$1,231m

% change
-14%
19%
-8%
8%

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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)

450

400

350

300

250

200

150

100

Dec 2008
Source: DataStream

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Dec 2016

Dec 2017

Dec 2018

Smith & Nephew

FTSE 100

However, as we compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 95), 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)

Dec 2008

Dec 2009

Dec 2010

Dec 2011

Dec 2012

Dec 2013

Dec 2014

Dec 2015

Dec 2016

Dec 2017

Dec 2018

Source: DataStream
Medical Devices comparators that are still trading for awards made since 2012

Smith & Nephew

Medical Devices – Median

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DIRECTORS’ REMUNERATION REPORT continued

Remuneration implementation report continued

Table of historic data
The following table details information about the pay of the Chief Executive Officer in the previous ten years:

Long-term incentive vesting rates against maximum opportunity

Year
2018
2018
2017
2016
2015
2014
2013
2012
2011
2011
2010

Chief Executive Officer
Namal Nawana1
Olivier Bohuon2
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon3,4
David Illingworth5
David Illingworth

Single figure of total
remuneration $
$2,883,632
$2,331,144
$5,116,6896
$3,332,850
$5,342,377
$6,785,121
$4,692,858
$4,956,771
$7,442,191
$3,595,787
$4,060,707

Annual Cash Incentive
payout against maximum %
697
637
61
30
75
43
84
84
68
37
57

Performance shares %
N/A
46.5
54
8
33.5
57
–
N/A
N/A
27
70

Options %
–
–
–
–
–
–
–
–
–
27
61

1 Appointed Chief Executive Officer on 7 May 2018.

2 Retired as Chief Executive Officer on 7 May 2018.

3 Appointed Chief Executive Officer on 1 April 2011.

4 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.

5 Resigned as Chief Executive Officer on 1 April 2011.

6 Prior years are restated to reflect amounts not known at the date of signing the previous Annual Report.

7 Calculated as 103.8% for Namal Nawana and 94% for Olivier Bohuon, (disclosed on pages 92-93), divided by the maximum potential payout of 150%.

Gender Pay Ratio
In 2018, the Remuneration Committee reviewed our UK Gender Pay ratio. It was noted that the average pay gap had increased from 29% (in 2017)
to 31% (in 2018) and the median pay gap from 15% to 21% for the same period. We recognised that the reasons for this increase were a higher level
of female attrition with more males being promoted or recruited during the year into senior positions, as well as the move of one senior female
executive from UK to US. We shall continue to review these figures and the actions being taken by management to address these gaps across our
global business.

A number of initiatives were established in 2018 including: Developing our female leaders – though a programme we call Elevate (280 female
professionals participated in the programme); Training our managers and Human Resource professionals in areas such as increasing awareness
of unconscious biases; Conducting a masterclass for the Talent Acquisition Team – to further drive diversity and inclusion in our approach to
recruitment; and Procuring Talent – widening recruitment channels to improve diversity and inclusion in our candidate pipeline.

From 2019 a programme of activity is planned, under the sponsorship of the Chief Executive Officer and Executive Committee and in line with
our new purpose and culture pillars. It includes plans to: leverage a new spirit of inclusion at the Executive level to drive change at a global level;
sponsor female talent and leveraging role models to increase diversity in senior roles; pro-actively map the market for female talent, launch
a female acceleration programme to drive development of talented women; and train our leaders and managers on how to lead inclusively
beyond recruitment.

Shareholding Requirements
The Chief Executive Officer is required to hold three times his salary in the form of shares and the Chief Financial Officer is required to hold two
times his salary. Our current remuneration arrangements also require Executive Directors to retain any shares received in respect of Performance
Share Awards made in or after 2017 for a period of two years after vesting. The Remuneration Committee will be considering these requirements
further as part of our review of Remuneration Policy in 2019 and in particular, we will be looking to introduce some form of post-cessation
shareholding requirement for our Executive Directors.

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DIRECTORS’ REMUNERATION REPORT continued

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Statement of voting at Annual General Meeting held in 2018
At the Annual General Meeting held on 12 April 2018, 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 Report
(excluding policy)

Votes for

% for

Votes against

% against

Total votes
validly cast

Votes withheld

581,091,881

97.29

16,160,313

2.71

597,252,194

407,092

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 54 and 58–61.

Compensation paid to senior management in respect of 2016, 2017 and 2018 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

2018

2017

2016

$15,935,000
$433,000
–
$1,570,000

$13,573,000
$2,711,000
–
$872,000

$12,874,000
–
–
$1,112,000

As at 15 February 2019, senior management owned 306,666 shares and 112,107 ADSs, constituting less than 0.1% of the share capital of the
Company. For this purpose, the Group is defined as the Executive Directors, members of the Executive Committee, including the Company
Secretary and their Persons Closely Associated. Details of share awards granted during the year and held as at 15 February 2019 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

Share awards granted
during the year
218,794
510,358
95,890
6,504

Total share awards held
as at 15 February 2019
257,530
987,432
244,056
9,041

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 (2009 to 2018), the number of new shares issued under our share plans has been as follows:

All-employee share plans 2019
Discretionary share plans

By order of the Board, on 21 February 2019

Angie Risley
Chair of the Remuneration Committee

7,567,286 (0.86% of issued share capital as at 15 February 2019)
31,010,812 (3.54% of issued share capital as at 15 February 2019)

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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.

– 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.

The base salary of the Executive Directors
with effect from 1 April 2017 will be as follows:
– 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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Benefts
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 the 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.

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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.

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.

In respect of the Equity Incentive:
– Performance is assessed against individual
performance, which includes an element of
Group financial targets.
– 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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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.

Annual awards:
– 190% of salary for maximum performance.
– 95% of salary for target performance.
– 47.5% of salary for threshold performance.

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.

Currently:
– 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.

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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

M
M
N
N
M
M
U
M
U
M

€1,683,848
€1,683,848

T
A
T
R
A
G
R
G
E
T
E
T

€4,573,599
€4,573,599

M
M
A
X
A
X
M
M
U
M
U
M

CHIEF FINANCIAL OFFICER

I
I

M
M
N
N
M
M
U
M
U
M

£685,244
£685,244

T
A
T
R
A
G
R
G
E
T
E
T

£1,934,744
£1,934,744

M
M
A
X
A
X
M
M
U
M
U
M

£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 %
Fixed pay
Long-term Incentives

TARGET %
Annual Incentive (Cash)

MAXIMUM %

MINIMUM %
Annual Incentive (Equity)

TARGET %

MAXIMUM %

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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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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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 page 79 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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DIRECTORS’ REMUNERATION REPORT continued

The Policy Report continued

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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DIRECTORS’ REMUNERATION REPORT continued

The Policy Report continued

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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Accounts

Statement of Directors’ responsibilities

Independent auditor’s UK report

Critical judgements and estimates

Group financial statements

Notes to the Group accounts

Company financial statements

Notes to the Company accounts

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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 (IFRSs)
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 pages 2–51.
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 2,
10–11, 24–25, 32–39, 40–83, 116, 154–156, 173 and pages 187–209 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 21 February 2019

Susan Swabey
Company Secretary

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Independent auditor’s UK report

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SMITH & NEPHEW PLC

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 (unchanged from 2017), 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.

1. Our opinion is unmodifed
We have audited the financial statements of Smith & Nephew plc (“the
Company”) for the year ended 31 December 2018 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 includes
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 2018
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 (IFRSs as adopted by the EU);
– 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 International Accounting Standards Board (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 4 financial years
ended 31 December 2018. 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.

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GROUP FINANCIAL STATEMENTS

Independent auditor’s UK report continued

RECOGNITION AND MEASUREMENT OF PROVISIONS FOR UNCERTAIN DIRECT TAX

Risk vs 2017:

The risk
UNCERTAIN OUTCOME
Provisions for tax uncertainties require the directors to make judgements and
estimates in relation to tax issues and exposures given that the Group operates
in a number of tax jurisdictions, the complexities of transfer pricing and other
international tax legislation and the time taken for tax matters to be agreed with
tax authorities.

A provision of $178 million (2017: $201 million) has been recognised for uncertain
tax positions, including $nil in respect of a potential exposure under EU State
Aid rules.

The effect of these matters is that, as part of our risk assessment, we
determined that the provision has a high degree of estimation uncertainty, with
a potential range of reasonable outcomes greater than our materiality for the
financial statements as a whole. The financial statements (note 5.1) disclose the
range estimated by the Group.

Our response
Our procedures included:
– Control operation: Testing the design and operating effectiveness of controls

that the Group has in place to identify and quantify its uncertain direct
tax exposures.

– Our taxation expertise: With the assistance of our international and local
tax specialists, assessing the Group’s direct tax positions and analysing
and challenging the assumptions used to determine tax provisions and
contingencies based on our knowledge and experience of the application of
international and local legislation by the relevant authorities and courts.
– Test of detail: Examining the calculations prepared by the Directors and

agreeing key inputs used to underlying data.

– 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.
– Assessing transparency: Assessing the adequacy of the Group’s

disclosures in respect of the uncertain direct tax provisioning.

Our results:
– We found the level of provisioning in respect of uncertain direct tax positions

and related contingent liabilities to be acceptable (2017: acceptable).

Refer to page 77 (Audit Committee Report), page 139 (accounting policy) and pages 140–141 (financial disclosures).

LIABILITY PROVISIONING FOR METAL-ON-METAL HIP PRODUCTS

Risk vs 2017:

The risk
SUBJECTIVE ESTIMATE
As disclosed in note 17 the Group holds a provision of $192 million (2017:
$157 million) in respect of potential liabilities arising from the ongoing exposure
for metal-on-metal hip products.

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.

The financial statements (note 17.1) disclose the range estimated by the Group.

Our response
Our procedures included:
– Control operation: Testing the design and operating effectiveness

of controls that Group has in place to identify and quantify its provision
for metal-on-metal hip products.

– Enquiry of lawyers: Inspection of correspondence with external counsel
and written enquiries of external counsel on the status of open cases.
– Test of detail: Examining the calculations prepared by the Directors and

agreeing key inputs used to underlying data.

– For the cases identified from written enquiries of external counsel assessing
whether these have been adequately considered by the Directors in making
their estimate.

– Our actuarial expertise: With the assistance of our actuarial specialists,

challenging 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:
– We found the level of provisioning in respect of metal-on-metal hip products

to be acceptable (2017: acceptable).

Refer to page 77 (Audit Committee Report), page 162 (accounting policy) and page 162–163 (financial disclosures).

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GROUP FINANCIAL STATEMENTS

REVENUE RELATED REBATES

The risk
RISK OF ERROR
The Group has a variety of agreements with wholesalers and distributors
whereby contractual rebates are due to customers. As disclosed in note 2.1
rebates deducted against revenue in the year amounted to $335 million.

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 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 or error in calculating the rebate or amounts that have yet to be
agreed with the customer.

Risk vs 2017

Our response
Our procedures included:
– Control operation: Evaluating the design and operating effectiveness of

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 terms of the rebate, discount and/or returns have
been applied correctly in calculating the rebate.

– Test of detail: Performing detailed testing on a sample basis of the

largest rebates with particular attention to whether the adjustments were
recognised in the correct period and the completeness of any rebates
accrued at the year-end by comparison with contractual commitments agreed
with customers.

Our results:
The results of our testing were satisfactory and we considered the rebates
estimated to be acceptable (2017: acceptable).

Refer to page 133 (accounting policy) and page 133–134 (financial disclosures).

EXCESS AND OBSOLESCENCE (E&O) PROVISION FOR ORTHOPAEDICS INVENTORY

Risk vs 2017:

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 infrequently.
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 inventory are 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)
disclosed in note 12 of $305 million (2017: $296 million) 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 the design and operating effectiveness of
controls the Group has in place over the preparation, review and approval
of E&O provision.

– Methodology implementation: Considering whether the Group accounting
policy was in line with accounting standards and comparing the calculation of
E&O provision to the principles outlined in the Group accounting policy.

– Test of detail: Assessing key underlying assumptions in the E&O provision
calculation. These include expected usage of inventory based on historical
sales and other internal or external factors such as new product launches
and delays in regulatory approvals which may impact the demand for the
product. Corroborating key assumptions (historical revenue and future revenue
projections) against prior year actuals and challenging budgets/forecasts with
reference to historic performance.

– Inquiry of management: Performing inquiry of finance personnel 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 (2017: acceptable).

Refer to page 77 (Audit Committee Report), page 151 (accounting policy) and page 152 (financial disclosures).

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GROUP FINANCIAL STATEMENTS

Independent auditor’s UK report continued

PARENT COMPANY FINANCIAL STATEMENTS: RECOVERABILITY OF PARENT COMPANY’S
INVESTMENT IN SUBSIDIARIES
The risk
LOW RISK, HIGH VALUE
The carrying amount of the Parent Company’s investments in subsidiaries held
at cost less impairment represents 78% (2017: 86%) of the Parent Company’s
total assets.

Risk vs 2017:

Our response
Our procedures included:
– Test of details: Comparing a sample of the highest value investments
representing 98% (2017: 98%) 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.

– Assessing subsidiary audits: Assessing the work performed by the

subsidiary audit team on that sample of subsidiaries and considering the
results of their work, on those subsidiaries’ profits and net assets.

– Comparing valuations: For the investments where the carrying amount
exceeded the net asset value, comparing the carrying amount of the
investment with the expected value of the business based on a suitable
multiple of subsidiaries’ profits.

Our results:
– We found the Company’s assessment of the recoverability of the
investment in subsidiaries to be acceptable (2017: acceptable).

GROUP ADJUSTED
PROFIT BEFORE TAX

GROUP MATERIALITY
$46m

2017
$42m

$38m

$932m

2017
$866m

$2.3m

Group normalised proﬁt before tax

Group materiality

Whole ﬁnancial statements materiality $46m (2017: $42m)

Range of materiality at 19 components ($5m–$38m); (2017: $3m–$19m)

Misstatements reported to the Audit Committee

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 Parent 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.

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 $46 million (2017: $42 million), determined with reference to
a benchmark of Group profit before tax, normalised to exclude
restructuring costs of $120 million (2017: $nil), legal and other charges
of $38 million (2017: net credit of $13 million), a credit of $7 million
(2017: $10 million) related to acquisition items and an impairment charge
of $nil (2017: £10 million) as disclosed in note 2.2 of which it represents
4.9% (2017: 4.8%).

Materiality for the Parent Company financial statements as a whole
was set at $36 million (2017: $31 million), determined with reference
to a benchmark of company total assets, of which it represents 0.4%
(2017: 0.4%).

We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding $2.3 million
(2017: $2.0 million), in addition to other identified misstatements
that warranted reporting on qualitative grounds.

Of the Group’s 109 (2017: 110) reporting components, we subjected 9
(2017: 24) to full scope audits for Group purposes and 27 (2017: 13) to
audits of specific account balances including revenue, receivables,
cash (6 (2017: 6)) and inventory (3 (2017: 3)).

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.

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GROUP FINANCIAL STATEMENTS

The components within the scope of our work accounted for the
percentages illustrated below.

GROUP REVENUE

GROUP TOTAL ASSETS

85%

2017
84%

85%

2017
86%

GROUP PROFIT BEFORE TAX

86%

2017
87%

Full scope for group audit
purposes 2018

Audit of speciﬁc account
balances 2018

Full scope for group audit
purposes 2017

Audit of speciﬁc account
balances 2017

Residual components

The remaining 15% (2017: 16%) of total Group revenue, 14% (2017: 13%)
of Group profit before tax and 15% (2017: 14%) of total Group assets
is represented by 73 (2017: 73) reporting components, none of which
individually represented more than 2% (2017: 2%) 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.

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
materiality, which ranged from $5 million to $38 million (2017: $3 million
to $19 million), having regard to the mix of size and risk profile of the
Group across the components. The work on 19 of the 36 components
(2017: 19 of the 37 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 6 (2017: 10) component locations in USA,
Australia, Turkey, Japan, Switzerland and Germany (2017: USA, China,
France, Italy, Spain, UK, South Africa, Costa Rica, Switzerland and
Germany) 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.

4. We have nothing to report on going concern
The Directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Company or the
Group or to cease their operations, and as they have concluded that the
Company’s and the Group’s financial position means that this is realistic.
They have also concluded that there are no material uncertainties that
could have cast significant doubt over their ability to continue as a going
concern for at least a year from the date of approval of the financial
statements (“the going concern period”).
Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit report.
However, as we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent with
judgements that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this auditor’s report
is not a guarantee that the Group and the Company will continue
in operation.
In our evaluation of the Directors’ conclusions, we considered the
inherent risks to the Group’s and Company’s business model, including
the impact of Brexit, and analysed how those risks might affect the
Group’s and Company’s financial resources or ability to continue
operations over the going concern period.
The risks that we considered most likely to adversely affect the
Company’s available financial resources over this period were:
– Pricing and reimbursement pressures or currency exchange volatility

leading to a major loss of revenues and profit;

– Inability to launch new products losing significant market share to

the competition;

– Product liability claims – giving rise to significant claims and legal

fees; and

– Temporary loss of key production capability – resulting in an inability

to manufacture a key product for a period of time.

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Independent auditor’s UK report continued

As these were risks that could potentially cast significant doubt on
the Company’s ability to continue as a going concern, we considered
sensitivities over the level of available financial resources indicated
by the Company’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise from these
risks individually and collectively and evaluated the achievability of the
actions the Directors consider they would take to improve the position
should the risks materialise. We also considered less predictable but
realistic second order impacts, such as the impact of a disorderly Brexit
which could result in a rapid reduction of available financial resources.
Based on this work, 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 page 116 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 82

is materially inconsistent with our audit knowledge.

We have nothing to report in these respects, and we did not identify
going concern as a key audit matter.

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.

– the directors’ confirmation within the viability statement on page 82
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.

Our work is limited to assessing these matters in the context of only
the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were
reasonable at the time they were made, the absence of anything to
report on these statements is not a guarantee as to the Group’s and
Company’s longer-term viability.

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

– 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.

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;

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.

– in our opinion the information given in those reports for the financial

We have nothing to report in these respects.

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:

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

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GROUP FINANCIAL STATEMENTS

– certain disclosures of directors’ remuneration specified by law are

not made; or

these laws and regulations as part of our procedures on the related
financial statement items.

– 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 116, 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 or 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 general commercial and sector experience and through
discussion with the directors and other management (as required by
auditing standards), and from inspection of the Group’s regulatory
and legal correspondence and discussed with the directors and other
management the policies and procedures regarding compliance with
laws and regulations. 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.

The potential effect of these laws and regulations on the financial
statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly affect
the financial statements including financial reporting legislation
(including related companies legislation), distributable profits legislation
and taxation legislation and we assessed the extent of compliance with

Secondly, the Group is subject to many other laws and regulations
where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for instance
through the imposition of fines or litigation or the loss of the Group’s
licence to operate. We identified the following areas as those most likely
to have such an effect: Food and Drug Administration regulations in
the US 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. Auditing standards limit the required
audit procedures to identify non-compliance with these laws and
regulations to enquiry of the directors and other management and
inspection of regulatory and legal correspondence, if any. These limited
procedures did not identify actual or suspected non-compliance.

Owing to the inherent limitations of an audit, there is an unavoidable
risk that we may not have detected some material misstatements
in the financial statements, even though we have properly planned
and performed our audit in accordance with auditing standards.
For example, the further removed non-compliance with laws and
regulations (irregularities) is from the events and transactions reflected
in the financial statements, the less likely the inherently limited
procedures required by auditing standards would identify it. In addition,
as with any audit, there remained a higher risk of non-detection
of irregularities, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls.
We are not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.

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 and
the terms of our engagement by the company. 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 the
further matters we are required to state to them in accordance with the
terms agreed with the company, 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
21 February 2019

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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 1–24 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 inventory make up approximately 60% of the Group’s
total 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 factors including interpretations of tax law, settlement negotiations or
changes in legislation.

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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 proft for the year1
Earnings per ordinary share1
Basic
Diluted

Notes
2

3
3
2 & 3
4
4
4
11
21

Year ended
31 December 2018
$ million
4,904
(1,298)
3,606
(2,497)
(246)
863
8
(59)
(20)
(11)
–
781
(118)
663

Year ended
31 December 2017
$ million
4,765
(1,248)
3,517
(2,360)
(223)
934
6
(57)
(10)
6
–
879
(112)
767

Year ended
31 December 2016
$ million
4,669
(1,272)
3,397
(2,366)
(230)
801
6
(52)
(16)
(3)
326
1,062
(278)
784

76.0¢
75.7¢

87.8¢
87.7¢

88.1¢
87.8¢

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:

Gains/(losses) arising in the year
Losses transferred to inventories for the year
Fair value remeasurement of available for sale asset
Exchange differences on translation of foreign operations
Taxation on other comprehensive income
Total items that may be reclassified subsequently to income statement
Other comprehensive (loss)/income 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 129–177 are an integral part of these accounts.

Notes

Year ended
31 December 2018
$ million
663

Year ended
31 December 2017
$ million
767

Year ended
31 December 2016
$ million
784

18
5

11
(1)
10

21
2
–
(132)
(3)
(112)
(102)
561

64
(9)
55

(45)
21
(10)
181
–
147
202
969

(81)
10
(71)

(15)
20
10
(134)
–
(119)
(190)
594

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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, borrowings and loans
Trade and other payables
Provisions
Current tax payable

Total liabilities
Total equity and liabilities

Notes

At 31 December 2018
$ million

At 31 December 2017
$ million

7
8
9
10
11
13
18
5

12
13
15

15
18
14
17
5

15
14
17
5

1,062
2,337
1,210
34
105
16
92
126
4,982

1,395
1,317
365
3,077
8,059

177
608
18
(214)
(340)
4,625
4,874

1,301
114
53
153
99
1,720

164
957
121
223
1,465
3,185
8,059

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

The accounts were approved by the Board and authorised for issue on 21 February 2019 and are signed on its behalf by:

Roberto Quarta
Chairman

Namal Nawana
Chief Executive Officer

Graham Baker
Chief Financial Officer

The Notes on pages 129–177 are an integral part of these accounts.

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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
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
Increase/(decrease) 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
Purchase of investments
Distribution from associate
Proceeds on disposal of business
Tax on disposal of business
Net cash used in investing activities
Cash flows from fnancing 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

Year ended
31 December 2018
$ million

Year ended
31 December 2017
$ million

Year ended
31 December 2016
$ million

Notes

23
11
21

21
2
10
11
21

20
20
20
20

20
19

20
20

781
51
435
19
35
11
–
(35)
(152)
(108)
71
1,108
2
(54)
(125)
931

(29)
(347)
(4)
2
–
–
(378)

3
(48)
24
(30)
370
(371)
10
(8)
(321)
(371)
182
155
(4)
333

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

Includes $83m (2017: $15m, 2016: $62m) of outgoings on restructuring and rationalisation expenses, $3m (2017: $3m, 2016: $24m) of acquisition-related costs and $104m (2017: $25m, 2016: $36m) of legal and
other costs.

2 Cash and cash equivalents is net of bank overdrafts of $32m (2017: $14m, 2016: $62m).

The Notes on pages 129–177 are an integral part of these accounts.

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GROUP FINANCIAL STATEMENTS

Group statement of changes in equity

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
Adjustment on initial application of IFRS 9 (net of tax)
Adjusted balance as at 1 January 2018
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 2018

Share
capital
$ million
183
–
–
–
–
–
–
–
(3)
–
180
–
–
–
–
–
–
–
(2)
–
178
–
178
–
–
–
–
–
–
–
(1)
–
177

Share
premium
$ million
590
–
–
–
–
–
–
–
–
10
600
–
–
–
–
–
–
–
–
5
605
–
605
–
–
–
–
–
–
–
–
3
608

Capital
redemption
reserve
$ million
12
–
–
–
–
–
–
–
3
–
15
–
–
–
–
–
–
–
2
–
17
–
17
–
–
–
–
–
–
–
1
–
18

Treasury

shares2

$ million
(294)
–
–
–
–
–
(368)
40
190
–
(432)
–
–
–
–
–
(52)
26
201
–
(257)
–
(257)
–
–
–
–
–
(48)
40
51
–
(214)

Other
reserves3
$ million
(256)
–
(119)
–
–
–
–
–
–
–
(375)
–
147
–
–
–
–
–
–
–
(228)
–
(228)
–
(112)
–
–
–
–
–
–
–
(340)

Retained
earnings
$ million
3,731
784
(71)
(279)
27
2
–
(34)
(190)
–
3,970
767
55
(269)
31
(3)
–
(21)
(201)
–
4,329
(11)
4,318
663
10
(321)
35
1
–
(30)
(51)
–
4,625

Total
equity
$ million
3,966
784
(190)
(279)
27
2
(368)
6
–
10
3,958
767
202
(269)
31
(3)
(52)
5
–
5
4,644
(11)
4,633
663
(102)
(321)
35
1
(48)
10
–
3
4,874

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 trade investments. The cumulative translation

loss within other reserves at 31 December 2018 was $339m (2017: $207m loss, 2016: $388m loss).

Issue of ordinary share capital in connection with the Group’s share incentive plans.

The Notes on pages 129–177 are an integral part of these accounts.

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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 2018. 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
2018. 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 124. 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 on
pages 10–22.

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 2018 the Group had committed borrowing facilities of $2.4bn and total liquidity of $1.3bn, including net cash
and cash equivalents of $333m and undrawn committed borrowing facilities of $1bn. The earliest expiry date of the Group’s committed borrowing
facilities is in respect of $125m of Senior Notes due to expire in November 2019. 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 rate 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.

New accounting standards effective 2018
IFRS 15 Revenue From Contracts With Customers
On 1 January 2018, the Group adopted IFRS 15 Revenue from contracts with customers using the modified retrospective method for contracts which
were not completed as of that date. The Group applied 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.

Under IFRS 15, revenue is recognised as the performance obligations to deliver products or services are satisfied and revenue is recorded based
on the amount of consideration expected to be received in exchange for satisfying the performance obligations. The Group undertook a detailed
impact assessment applying IFRS 15 to all the existing ways in which the Group delivers products or services to customers to identify divergence
with previous accounting practice governed by IAS 18 Revenue and concluded that IFRS 15 does not have a significant impact on the timing and
recognition of revenue. Accordingly, there was no adjustment required on transition to IFRS 15.

IFRS 9 Financial Instruments
On 1 January 2018, the Group adopted IFRS 9 Financial Instruments. The Group has not restated comparative information for prior periods with
respect to classification and measurement (including loss allowance) requirements.

The amendments to IFRS 9 mainly relate to the classification and measurement of financial instruments. IFRS 9 largely retains the existing
requirements in IAS 39 Financial Instruments: Recognition and Measurement for the classification and measurement of financial liabilities; however,
it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. The Group elected,
from 1 January 2018, to present changes in the fair value of trade investments in the income statement. The Group also elected to continue to apply
the hedge accounting guidance in IAS 39 Financial Instruments: Recognition and Measurement.

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1 BASIS OF PREPARATION continued
With respect to loss allowances for trade receivables, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL)
model. The Group, from 1 January 2018, has measured loss allowances for trade receivables at an amount equal to lifetime expected credit
losses. In determining credit risk, the Group considers reasonable and supportable information that is relevant and available without undue cost
or effort. This includes both quantitative and qualitative information and analysis based on the Group’s historical experience, and forward-looking
information. The Group considers the model and some of the assumptions used in calculating these ECLs as sources of estimation uncertainty.
The Group performed the calculation of ECL rates separately for customer groups which were segmented based on common risk characteristics
such as credit risk grade and type of customer (for example government and non-government). While not material, the Group has determined that
the application of IFRS 9 at 1 January 2018 results in an additional loss allowance for trade receivables of $14m. This transition adjustment gives rise
to a deferred tax credit of $3m.

The following table and the accompanying notes below explain the original measurement categories under IAS 39 and the new measurement
categories under IFRS 9 for each class of the Group’s financial assets and financial liabilities as at 1 January 2018.

The effect of adopting IFRS 9 on the carrying amounts of financial assets at 1 January 2018 relates solely to the loss allowance for trade receivables
as described above.

Original classification under IAS 39

New classification under IFRS 9

Original carrying
amount under IAS 39
$ million

New carrying
amount under IFRS 9
$ million

Financial assets
Forward foreign exchange contacts
Investments
Currency swaps
Trade and other receivables
Cash at bank
Total financial assets
Financial liabilities
Acquisition consideration
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Private placement debt
Bank overdrafts
Bank loans
Trade and other payables
Total financial liabilities

Fair value – hedging instrument
Available for sale
Fair value through profit or loss
Loans & receivables
Loans & receivables

Fair value – hedging instrument
Fair value through profit or loss
Fair value through profit or loss
Amortised cost
Amortised cost

Fair value through profit or loss
Fair value – hedging instrument
Fair value through profit or loss
Fair value – hedging instrument
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities

25
21
3
1,148
169
1,366

(160)
(45)
(1)
(2)
(1,123)
(14)
(313)
(877)
(2,535)

25
21
3
1,134
169
1,352

(160)
(45)
(1)
(2)
(1,123)
(14)
(313)
(877)
(2,535)

A number of other new amendments to standards are effective from 1 January 2018 but they do not have a material effect on the Group’s
financial statements.

Accounting standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019 and earlier application is
permitted; however, the Group has not early adopted them in preparing these consolidated financial statements. These are not expected to have a
significant impact on adoption, apart from IFRS 16 Leases which is described below.

The Group will adopt IFRS 16 using the modified retrospective approach and the right of use asset on transition will equal the lease liability.
The cumulative effect of initially adopting the IFRS 16 will be recognised as an adjustment to retained earnings at 1 January 2019 with no restatement
of comparative information. The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it
will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.

The Group intends to avail itself of the exemptions for short-term leases and leases of low-value items. The Group will recognise new assets and
liabilities, primarily with regard to its operating leases of property and motor vehicles. In addition the Group will no longer recognise accruals relating
to the straight-lining of rent expense for leases which include a rent-free period.

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The Group has designed a new lease accounting process and has implemented a new lease accounting software solution. The Group has
assessed the estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual
impacts of adopting the standard on 1 January 2019 may change because the Group has not finalised the testing and assessment of controls over
its new lease accounting process, and the new accounting policies are subject to change until the Group presents its first financial statements that
include the initial application of the standard.

Based on the information currently available, the Group estimates that it will recognise additional lease assets and liabilities of $145m to $165m as at
1 January 2019. The Group does not expect the adoption of IFRS 16 to have a material impact on the income statement.

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

2018

1.33
1.18
1.02

1.28
1.14
1.02

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

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2 BUSINESS SEGMENT INFORMATION
The Group was engaged in a single business activity, being the development, manufacture and sales of medical technology products and services.
Development, manufacturing, supply chain and central functions are managed globally for the Group as a whole. Sales were managed through
two geographical selling regions, US and International, with a president for each who was 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 were made by ExCo, and whilst the members have individual responsibility for the implementation of decisions within
their respective areas, it was at the ExCo level that these decisions are made. Accordingly, ExCo was 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:
– 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;
– Trauma & Extremities, consisting of internal and external devices used in the stabilisation of severe fractures and deformity

correction procedures;

– Sports Medicine Joint Repair, which offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally

invasive surgery of the joints;

– 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;

– 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;

– 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.

During 2018, the Group began its transition to a global franchise structure with three dedicated franchises for Orthopaedics, Sports Medicine & ENT,
and Advanced Wound Management, each with their own president. From 2019 onwards, with the Group’s operating structure organised around
three franchises, the chief operating decision maker will be able to monitor performance, make operating decisions and allocate resources on a
global franchise basis in contrast with 2018 and prior, where these were done on a Group-wide basis. The franchise presidents will be responsible
for implementing the operating decisions for their respective franchise in the US. Regional presidents in EMEA and APAC will be responsible for
this implementation in their respective regions. Based on the aforementioned changes from January 2019, the Group has concluded that there will
be three reportable segments from this date. The Group will not restate comparative information in 2019, other than revenue, as the Group was
managed as one operating segment in 2018 and 2017, and historical financial information is not available on a franchise basis. The Group does
have sufficient historical financial information of revenue by franchise to restate the comparative information of revenue by operating segment.

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2.1 Revenue by business segment and geography

Accounting policy
Revenue is recognised as the performance obligations to deliver products or services are satisfied and is recorded based on the amount of
consideration expected to be received in exchange for satisfying the performance obligations. Revenue is recognised primarily when control
is transferred to the customer, which is generally when the goods are shipped or delivered in accordance with the contract terms, with some
transfer of services taking place over time. Substantially all performance obligations are performed within one year. There is no significant
revenue associated with the provision of discrete services. Payment terms to our customers are based on commercially reasonable terms for
the respective markets while also considering a customer’s credit rating. Appropriate provisions for returns, trade discounts and rebates are
deducted from revenue. Rebates primarily comprise chargebacks and other discounts granted to certain customers. Chargebacks are discounts
that occur when a contracted customer purchases directly through an intermediary wholesaler. The contracted customer generally purchases
product at its contracted price plus a mark-up from the wholesaler. The wholesaler in turn charges the Group for the difference between the
price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on
expected sell-through levels by the Group’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels.

The revenue accounting policy for the year ending 31 December 2017 was consistent with the requirements of IAS 18. Revenue was recognised
once the significant risks and rewards of ownership had been transferred to the customer, rather than the satisfaction of the performance
obligations to deliver products or services.

Reconstruction, Sports Medicine, Trauma & Other
Reconstruction, Sports Medicine, Trauma & Other consists of the following franchises: Knee Implants and Hip Implants, Sports Medicine
Joint Repair, Arthroscopic Enabling Technologies, Trauma & Extremities and Other Surgical Business. 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.
Substantially all other revenue is recognised when control is transferred to the customer, which is generally when the goods are shipped or
delivered in accordance with the contract terms. Revenue is recognised for the amount of consideration expected to be received in exchange
for transferring the products or services.

In general our Reconstruction, Sports Medicine, Trauma & Other business in Established Markets is direct to hospitals and ambulatory surgery
centres whereas in the Emerging Markets we generally sell through distributors.

Advanced Wound Management
Advanced Wound Management consists of the following product franchises: Advanced Wound Care, Advanced Wound Bioactives and
Advanced Wound Devices. Substantially all revenue is recognised when control is transferred to the customer, which is generally when the
goods are shipped or delivered in accordance with the contract terms. Revenue is recognised for the amount of consideration expected to be
received in exchange for transferring the products or services. Appropriate provisions for returns, trade discounts and rebates are deducted
from revenue, as explained above.

The majority of our Advanced Wound Management business, and in particular products used in community and homecare facilities, is
through wholesalers and distributors. The proportion of sales direct to hospitals is higher in our Advanced Wound Devices business in
Established Markets.

Segment revenue reconciles to statutory revenues from continuing operations as follows:

Reportable segment revenue
Revenue from external customers

2018
$ million

2017
$ million

2016
$ million

4,904

4,765

4,669

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2 BUSINESS SEGMENT INFORMATION continued
Disaggregation of revenue:
The following table shows the disaggregation of Group revenue by product franchise:

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

2018
$ million

2017
$ million

2016
$ million

1,017
613
493
697
600
209
740
320
215
4,904

984
599
495
627
615
189
720
342
194
4,765

932
597
475
587
631
214
719
342
172
4,669

The following table shows the disaggregation of Group revenue by geographic market and product category. The disaggregation of revenue into
the two product categories below reflects that in general the products in the Advanced Wound Management franchises are sold to wholesalers
and intermediaries, while products in the other franchises are sold directly to hospitals, ambulatory surgery centres and distributors. The further
disaggregation of revenue by Established Markets and Emerging Markets reflects that in general our products are sold through distributors
and intermediaries in the Emerging Markets while in the Established Markets, with the exception of the Advanced Wound Care and Bioactives
franchises, products are in general sold direct to hospitals and ambulatory surgery centres. The disaggregation by Established Markets and
Emerging Markets also reflects their differing economic factors including volatility in growth and outlook.

Reconstruction, Sports Medicine,
Trauma & Other Surgical Businesses
Advanced Wound Management
Total

Established
Markets1
$ million

Emerging
Markets
$ million

2,944
1,103
4,047

685
172
857

2018

Total
$ million

3,629
1,275
4,904

Established
Markets1
$ million

Emerging
Markets
$ million

2,867
1,097
3,964

642
159
801

2017

Total
$ million

3,509
1,256
4,765

Established
Markets1
$ million

Emerging
Markets
$ million

2,868
1,092
3,960

568
141
709

2016

Total
$ million

3,436
1,233
4,669

1 Established Markets comprises the US, Australia, Canada, Europe, Japan and New Zealand.

In 2018, the Group has presented sales attributed to the country of destination rather than based on the location of the Group’s businesses.
Comparatives have been presented on a consistent basis with 2018. US revenue for 2018 was $2,354m (2017: $2,306m, 2016: $2,299m) and UK
revenue for 2018 was $211m (2017: $222m, 2016: $266m).

Contract assets and liabilities
The nature of our products and services do not generally give rise to contract assets as we do not typically incur costs to fulfil a contract before a
product or service is provided to the customer. The Group generally satisfies performance obligations within one year from the contract inception
date. There was no material revenue recognised in the current reporting period that related to carried-forward contract liabilities (deferred income)
or performance obligations satisfied in the previous year. There is no material revenue that is likely to arise in future periods from unsatisfied
performance obligations at the balance sheet date. Therefore, there are no associated significant accrued income and deferred income balances
at 31 December 2018. As of 31 December 2018, contract assets principally comprised trade receivables and contract liabilities principally comprise
rebates (as described in the accounting policy above). The accrual for rebates at 31 December 2018 was $65m (2017: $56m) with $334m being
recognised in revenue in 2018.

Major customers
No single customer generates revenue greater than 10% of the consolidated revenue.

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2.2 Trading and operating proft 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 affect the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of
trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit:
acquisition and disposal-related items; 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 and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition intangibles
Legal and other
Trading profit of the business segment

2018
$ million
863
(7)
120
113
34
1,123

2017
$ million
934
(10)
–
140
(16)
1,048

2016
$ million
801
9
62
178
(30)
1,020

2.3 Acquisitions and disposal related items
For the year to 31 December 2018 the credit relates to a remeasurement of contingent consideration for a prior year acquisition and adjustments to
provisions on disposal of a business, partially offset by costs associated with the acquisition of Rotation Medical, Inc.

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. For the year to 31 December 2016, these costs relate to the costs associated with the
integration of Blue Belt Technologies and other acquisitions.

2.4 Restructuring and rationalisation costs
Restructuring and rationalisation costs of $120m were incurred in 2018 (2017: $nil, 2016: $62m) primarily relating to the implementation of the
Accelerating Performance and Execution (APEX) programme that was announced in February 2018. In 2016, these costs primarily related to the
Group Optimisation Plan.

2.5 Legal and other
For the year ended 31 December 2018 charges primarily relate to legal expenses for ongoing metal-on-metal hip claims and an increase of $72m
in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated metal-on-metal hip claims globally.
The year to 31 December 2018 also includes costs for implementing the requirements of the EU Medical Device Regulations that will apply from
May 2020. These charges in the year to 31 December 2018 were partially offset by a credit of $84m relating to settlement agreements with insurers
related to product liability claims involving macrotextured components withdrawn from the market in 2003.

For the year ended 31 December 2017 charges primarily relate to legal expenses for patent litigation with Arthrex and 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 globally. These charges were offset by a $54m credit following a settlement payment received from Arthrex relating to
patent litigation. For the year ended 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 in 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 globally.

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

2018
$ million

7,476

126
92
365
8,059

2017
$ million

7,508

127
62
169
7,866

2016
$ million

7,147

97
–
100
7,344

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2 BUSINESS SEGMENT INFORMATION continued
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

Non-current assets excludes retirement benefit assets and deferred tax assets.

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, borrowings 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 property, plant and equipment1
Impairment losses on acquisition intangibles1
Impairment losses on other intangible assets1
Impairment losses on trade investments1
Total depreciation, amortisation and impairment

Impairments recognised in operating profit, within the administrative expenses line.

2018
$ million

354
3,186
1,224
4,764

2017
$ million

364
3,295
1,287
4,946

2016
$ million

335
3,145
1,238
4,718

2018
$ million

2017
$ million

2016
$ million

1,284

1,301
114
99
164
223
3,185

251
113
63
427
5
–
3
–
435

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

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

2018
$ million
332
15
347
4
–
–
–
351

2017
$ million
308
68
376
8
132
61
1
578

2016
$ million
320
72
392
2
211
85
2
692

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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 sold1
Gross profit
Research and development expenses2
Selling, general and administrative expenses:

Marketing, selling and distribution expenses
Administrative expenses3,4,5,6

Operating profit

2018
$ million
4,904
(1,298)
3,606
(246)

(1,820)
(677)
(2,497)
863

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

1 2018 includes $4m charge relating to legal and other items (2017: $nil, 2016: $nil).

2 2018 includes $9m charge relating to legal and other items (2017: $nil, 2016: $nil).

3 2018 includes $63m of amortisation of software and other intangible assets (2017: $62m, 2016: $61m).

4 2018 includes $113m of amortisation and impairment of acquisition intangibles and $120m of restructuring and rationalisation expenses (2017: $140m of amortisation and impairment of acquisition intangibles,

2016: $62m of restructuring and rationalisation expenses and $178m of amortisation and impairment of acquisition intangibles).

5 2018 includes $21m charge relating to legal and other items (2017: $16m credit, 2016: $30m credit).

6 2018 includes $7m credit of acquisition and disposal related items (2017: $10m credit, 2016: $9m charge).

Note that items detailed in 1,2,4,5 and 6 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 intangible assets
Impairment of intangible assets
Impairment of property, plant and equipment
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

2018
$ million
(107)
176
3
5
251
19
32
25
88

2017
$ million
(66)
192
10
–
243
13
36
21
102

2016
$ million
(25)
191
48
–
224
15
39
19
88

In 2018 other operating income primarily comprises an insurance recovery relating to product liability claims involving macrotextured components
voluntarily withdrawn from the market in 2003 and a gain relating to patent litigation (2017: gain relating to patent litigation, 2016: insurance recovery
relating to metal-on-metal claims). In 2018, $84m (2017: $54m, 2016: $24m) of other operating income was included with legal and other items, as
explained in Note 2.5, and does not form part of the segment trading profit.

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3 OPERATING PROFIT continued
3.1 Staff costs and employee numbers
Staff costs during the year amounted to:

Wages and salaries1
Social security costs
Pension costs (including retirement healthcare)2
Share-based payments

Notes

18
23

2018
$ million
1,330
176
65
35
1,606

2017
$ million
1,231
178
64
31
1,504

2016
$ million
1,227
129
23
27
1,406

1 The 2017 wages and salaries cost has been amended from $1,157m to $1,231m. This amendment has no impact on the Group Income Statement, Group Statement of Comprehensive Income, Group Balance Sheet,

Group Cash Flow Statement and Group Statement of Changes in Equity for any period presented.

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 2018, the average number of employees was 16,681 (2017: 16,333, 2016: 15,584).

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

2018
$ million

2017
$ million

2016
$ million

2.6
3.4

–

–
–
6.0

2.4
3.6
6.0

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

2018
$ million
8

2017
$ million
6

2016
$ million
6

(11)
(38)
(10)
(59)
(51)

(11)
(38)
(8)
(57)
(51)

(9)
(37)
(6)
(52)
(46)

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NOTES TO THE GROUP ACCOUNTS continued

4.2 Other fnance costs

Retirement benefit net interest expense
Unwinding of discount
Other
Other finance costs

Notes
18

2018
$ million
(3)
(9)
(8)
(20)

2017
$ million
(5)
(5)
–
(10)

2016
$ million
(7)
(9)
–
(16)

Foreign exchange gains or losses arose primarily on the translation of intercompany and third party borrowings and amounted to a net $11m gain in
2018 (2017: net $25m loss, 2016: net $22m gain). These amounts were matched by the fair value gains or losses on currency swaps held to manage
this currency risk.

5 TAXATION

Accounting policy
The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance sheet date.

The Group operates in 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 factors including 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.

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5 TAXATION continued
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

2018
$ million

2017
$ million

2016
$ million

27
131
158
(33)
125

(3)
1
(5)
(7)
118
(4)
(1)
113

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

The 2018 net prior period adjustment benefits of $38m mainly relate to the expiry of statute of limitations and tax accrual to tax return adjustments,
partially offset by an increase in certain other tax provisions. 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.

Included in the total 2017 tax charge is a $32m net benefit as a result of the 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 $118m includes a $51m net credit (2017: $58m net credit, 2016: $48m net charge) as a consequence
of restructuring and rationalisation costs, acquisitions and disposals, amortisation and impairment of acquisition intangibles, and legal and other
items. In 2017, the net credit included a net benefit from US tax reform.

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 review
by the European Commission into whether the UK CFC financing exemption rules constitute illegal State Aid (see below), transfer pricing, tax rate
changes, tax legislation changes, tax authority interpretation, expiry of 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. Provisions are based on best estimates and management’s judgements concerning the likely ultimate outcome of the
audit or dispute. Management consider the specific circumstances of each tax position and takes external advice, where appropriate, to assess the
range of potential outcomes and estimate additional tax that may be due. Current tax payable of $223m (2017: $233m) includes $178m (2017: $201m)
of provisions, penalties and interest for uncertain tax positions which relate to multiple issues across the jurisdictions in which the Group operates.
Other creditors includes $8m of other interest on these provisions. The anticipated impact of IFRIC 23 is not expected to give rise to a material
difference to the tax risk provisions.

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The Group believes that it has made adequate provision in respect of additional tax liabilities that may arise from unagreed years and 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. A reduction in the tax charge may also arise for other reasons such as an expiry of the relevant statute of limitations. Whilst the impact
can vary from year-to-year, we believe the possibility of a material adverse impact on the tax charge for 2019 is remote. Depending on the final
outcome of certain tax audits which are currently in progress, possible statute of limitations expiry and other factors, a credit to the tax charge at or
around similar levels in recent years could arise. In respect of the risks provided for at 31 December 2018, we do not envisage circumstances that
would give rise to a release of more than approximately half of the provisions held.

As referenced in our 2017 Annual Report, one of the factors that may affect our future tax charge is the review by the European Commission
(EC) into whether the UK CFC financing exemption rules between 2013 and 2018 constituted illegal State Aid. The EC issued its preliminary view
in October 2017 that the financing exemption did constitute State Aid and their final decision, following their investigation, is expected in 2019.
Depending on the outcome, this may then be subject to a further legal process. The financing exemption was introduced into UK legislation by
the British government in 2013. In line with many other UK-based international groups which have followed this legislation, we may be affected by
the final outcome. If the preliminary findings of the EC investigation were ultimately to be upheld, we calculate our maximum potential liability as at
31 December 2018 to be approximately $147m. We do not consider at present that any provision is required in respect of this amount based on our
current assessment of the issue.

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 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 was heard by the Upper Tribunal in June 2018. The decision was released on
29 November 2018 and it upheld the decision of the First Tier Tribunal. In the event that HMRC either is not granted leave to appeal or is not
successful in their appeal, with the result that the Group is ultimately successful in the Courts, the Group’s tax charge would be reduced in the year
of success. Whether HMRC will be granted leave to appeal in the Court of Appeal is uncertain at the present date. No tax benefit for these losses
has been taken to date. Should the case become final in 2019, we estimate that we would receive a tax refund of approximately $100m. In addition,
remaining losses would be potentially available to offset future profits, the benefit of which will depend on future facts and circumstances.

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 2018 is 19.0% (2017: 19.3%, 2016: 20.0%). 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 19.0% (2017: 19.3%, 2016: 20.0%)
Differences in overseas taxation rates1
Disposal of the Gynaecology business (mainly at the US tax rate)
Benefit of US Manufacturing deduction
R&D tax 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

1 Reflects the geographical mix of profits offset by 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.

2018
$ million
781
148
(5)
–
–
(6)
4
(1)
–
15
1
(38)
118

2017
$ million
879
169
48
–
(9)
(3)
10
(6)
(32)
11
(5)
(71)
112

2016
$ million
1,062
212
34
56
(7)
(3)
1
(9)
–
23
1
(30)
278

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5 TAXATION continued
5.2 Deferred taxation
Movements in the main components of deferred tax assets and liabilities were as follows:

Accelerated tax
depreciation
$ million
(73)
1
(9)
2
–
–
29
–
(50)
–
(50)
–
11
(12)
–
–
(1)
(52)

Intangibles
$ million
(209)
(2)
15
4
–
–
71
(22)
(143)
–
(143)
2
14
1
–
–
–
(126)

Retirement
benefit obligations
$ million
28
2
(6)
–
(17)
–
–
–
7
–
7
–
–
4
(6)
–
–
5

Macrotexture
claims
$ million
52
–
(1)
–
–
–
(18)
–
33
–
33
–
(33)
–
–
–
–
–

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
Adjustment on initial application of IFRS 9
Adjusted balance at 1 January 2018
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
At 31 December 2018

Represented by:

Deferred tax assets
Deferred tax liabilities
Net position at 31 December

Inventory,
provisions,
losses and other
differences
$ million
205
13
(31)
5
4
(3)
(33)
23
183
3
186
(7)
11
12
(3)
1
–
200

2018
$ million
126
(99)
27

Total
$ million
3
14
(32)
11
(13)
(3)
49
1
30
3
33
(5)
3
5
(9)
1
(1)
27

2017
$ million
127
(97)
30

The Group has gross unused trading and non-trading tax losses of $149m (2017: $271m) and gross unused capital losses of $102m (2017: $113m)
available for offset against future profits of which $14m of trading losses will expire within 3-8 years from the balance sheet date if not utilised.
A deferred tax asset of $28m (2017: $38m) has been recognised in respect of $74m (2017: $132m) 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 (2017: $nil).

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NOTES TO THE GROUP ACCOUNTS continued

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 and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition intangibles1
Legal and other2
Profit on disposal of business
US tax reform
Taxation on excluded items
Adjusted attributable profit

2018
$ million

2017
$ million

2016
$ million

663
881

2018
$ million
663
(7)
120
118
38
–
–
(51)
881

767
826

2017
$ million
767
(10)
–
140
(13)
–
(32)
(26)
826

784
735

2016
$ million
784
9
62
178
(20)
(326)
–
48
735

Notes

3
9

21
5
5

1 Amortisation and impairment of acquisition intangibles includes a $113m charge within operating profit and a $5m charge within share of result of associates.

2 Legal and other charge in 2018 includes $34m (2017: $16m credit, 2016: $30m credit) within operating profit (refer to Note 2.5) and a $4m charge (2017: $3m charge, 2016: $5m charge) within other finance costs for
unwinding of the discount on the provision for known, anticipated and settled metal-on-metal hip claims globally. In 2016, legal and other credit also includes a $5m charge within share of results of associates for
expenses incurred by Bioventus for an aborted initial public offering of shares.

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NOTES TO THE GROUP ACCOUNTS continued

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 per
ordinary share are as follows:

Number of shares (millions)
Basic weighted number of shares
Dilutive impact of share incentive schemes outstanding
Diluted weighted average number of shares
Earnings per ordinary share
Basic
Diluted
Adjusted3

Adjusted earnings per share is calculated using the basic weighted number of shares.

7 PROPERTY, PLANT AND EQUIPMENT

2018

873
3
876

76.0¢
75.7¢
100.9¢

2017

874
1
875

87.8¢
87.7¢
94.5¢

2016

890
3
893

88.1¢
87.8¢
82.6¢

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.

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NOTES TO THE GROUP ACCOUNTS 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 2017
Exchange adjustment
Acquisitions
Additions
Disposals
Transfers
At 31 December 2017
Exchange adjustment
Additions
Disposals
Impairment
Transfers
At 31 December 2018
Depreciation and impairment
At 1 January 2017
Exchange adjustment
Charge for the year
Disposals
Transfers
At 31 December 2017
Exchange adjustment
Charge for the year
Impairment
Disposals
Transfers
At 31 December 2018
Net book amounts
At 31 December 2018
At 31 December 2017

165
6
–
1
–
56
228
(5)
3
–
–
33
259

50
3
6
–
2
61
(2)
8
–
–
5
72

187
167

119
1
–
–
(27)
(20)
73
(1)
3
–
–
1
76

42
–
7
(22)
3
30
–
6
1
–
–
37

39
43

1,116
63
–
176
(73)
2
1,284
(45)
179
(73)
–
43
1,388

781
45
146
(67)
(1)
904
(30)
163
–
(59)
23
1,001

387
380

1,023
33
1
28
(79)
56
1,062
(20)
21
(24)
–
(7)
1,032

672
24
84
(74)
(9)
697
(14)
74
3
(21)
(28)
711

321
365

115
3
–
103
(12)
(115)
94
(1)
126
(1)
(1)
(89)
128

11
–
–
(11)
–
–
–
–
–
–
–
–

128
94

2,538
106
1
308
(191)
(21)
2,741
(72)
332
(98)
(1)
(19)
2,883

1,556
72
243
(174)
(5)
1,692
(46)
251
4
(80)
–
1,821

1,062
1,049

Land and buildings includes land with a cost of $21m (2017: $21m) that is not subject to depreciation. There were no assets held under finance
leases at 31 December 2018 and 2017.

Transfers from assets in course of construction includes $19m (2017: $4m) of software and $nil (2017: $12m) net book value of other
non-current assets.

Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $16m (2017: $26m).

The amount of borrowing costs capitalised in 2018 and 2017 was minimal.

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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

2018
$ million

2017
$ million

2,371
(34)
–
2,337

–
2,337

2,188
51
132
2,371

–
2,371

Management has identified four CGUs in applying the provisions of IAS 36 Impairment of Assets: Orthopaedics, 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

2018
$ million
727
1,313
297
2,337

2017
$ million
566
1,501
304
2,371

Impairment reviews were performed as of September 2018 and September 2017 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 three 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 three-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.

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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 our performance.

Revenue growth rates for the three-year period ranged from 3.6% to 4.5% for the various components of the Orthopaedics CGU. The average
growth rate used to extrapolate the cash flows beyond the three-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 9.6%.

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 three-year period ranged from 2.6% to 4.7% for the various components of the Other Surgical Devices CGU.
The weighted average growth rate used to extrapolate the cash flows beyond the three-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 9.6%.

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 three-year period ranged from 2.8% to 4.2% for the various components of the Advanced Wound Management
CGU. The weighted average growth rate used to extrapolate the cash flows beyond the three-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 9.6%.

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
21.5% for the Orthopaedics CGU, 13.5% for the Other Surgical Devices CGU and 20.8% for the Advanced Wound Management CGU.

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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 3–20 years depending on its nature.
Internally-generated intangible assets are expensed in the income statement as incurred. Purchased computer software and certain costs
of information technology projects are capitalised as intangible assets. Software that is integral to computer hardware is capitalised as plant
and equipment.

Impairment of intangible assets
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value
may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment
loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the
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.

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Technology
$ million

Product-
related
$ million

Customer and
distribution
related
$ million

Software
$ million

Assets in course of
construction
$ million

Total
$ million

Cost
At 1 January 2017
Exchange adjustment
Acquisitions1
Additions
Disposals
Transfers
At 31 December 2017
Exchange adjustment
Additions
Disposals
Transfers
At 31 December 2018
Amortisation and impairment
At 1 January 2017
Exchange adjustment
Charge for the year:
Amortisation
Impairment

Disposals
Transfers
At 31 December 2017
Exchange adjustment
Charge for the year:
Amortisation
Impairment

Disposals
At 31 December 2018
Net book amounts
At 31 December 2018
At 31 December 2017

301
10
59
–
(6)
(6)
358
(4)
–
–
–
354

36
2

6
–
11
(4)
51
(1)

24
–
–
74

280
307

1,849
38
2
2
(43)
6
1,854
(18)
1
(1)
–
1,836

886
21

133
10
(61)
4
993
(14)

103
–
(1)
1,081

755
861

121
1
–
3
(5)
–
120
(8)
–
–
–
112

80
1

15
–
(3)
–
93
(4)

6
–
–
95

17
27

329
12
–
63
(5)
4
403
(6)
8
(4)
12
413

187
6

38
–
(4)
–
227
(3)

43
3
(2)
268

145
176

–
–
–
–
–
–
–
–
6
–
7
13

–
–

–
–
–
–
–
–

–
–
–
–

13
–

2,600
61
61
68
(59)
4
2,735
(36)
15
(5)
19
2,728

1,189
30

192
10
(57)
–
1,364
(22)

176
3
(3)
1,518

1,210
1,371

In 2017 this relates to technology and product-related intangibles acquired with the purchase of Rotation Medical, Inc.

Transfers into software and assets in course of construction includes $19m (2017: $4m) of software transferred from property, plant and equipment.

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9 INTANGIBLE ASSETS continued
Amortisation and impairment of acquisition intangibles is set out below:

Technology
Product-related
Customer and distribution related
Total

2018
$ million
24
86
3
113

2017
$ million
6
124
10
140

Group capital expenditure relating to software contracted but not provided for amounted to $nil (2017: $nil). There was no impairment charge in
2018. 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.

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 fair value through profit or loss. The fair value of these investments is
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 based on externally observable valuation events are
recognised in profit or loss.

The investments accounting policy for the year ending 31 December 2017 was consistent with the requirements of IAS 39. Changes in fair value
were recorded through other comprehensive income, rather than through profit or loss.

At 1 January
Additions
Fair value remeasurement1
Impairment
At 31 December

2018
$ million
21
4
9
–
34

2017
$ million
25
8
(10)
(2)
21

1 The Group adopted IFRS 9 on 1 January 2018 and elected to present changes in the fair value of trade investments in the income statement from that date. The fair value remeasurement of trade investments in 2017

was recognised in other comprehensive income.

11 INVESTMENTS IN ASSOCIATES

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 2018 and 31 December 2017, 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 loss after taxation recognised in the income statement
relating to Bioventus was $11m (2017: $6m profit).

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.

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The amounts recognised in the balance sheet and income statement for associates are as follows:

Balance sheet
Income statement (loss)/profit

2018
$ million
105
(11)

2017
$ million
118
6

Summarised fnancial information for signifcant 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 (loss)/profit for the year
Group adjustments1
Total comprehensive (loss)/profit
Group share of (loss)/profit for the year at 49%

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%

2018
$ million

2017
$ million

320
(19)
(3)
(22)
(11)

301
1
11
12
6

2018
$ million

2017
$ million

296
149
(234)
(56)
155
76
26
102

332
122
(246)
(47)
161
79
35
114

1 Group adjustments include an adjustment to align the useful life of intangible assets with Group policy.

During the year the Group received a $2m (2017: $nil) cash distribution from Bioventus.

At December 2018, the Group held an equity investment in one other associate (2017: one) with a carrying value of $3m (2017: $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.

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12 INVENTORIES continued

Raw materials and consumables
Work-in-progress
Finished goods and goods for resale

2018
$ million
219
88
1,088
1,395

2017
$ million
207
69
1,028
1,304

2016
$ million
213
55
976
1,244

Reserves for excess and obsolete inventories were $305m (2017: $296m, 2016: $303m). The increase in reserves of $9m in the year comprised a
$19m increase in the reserve relating to the write-off of inventory which was partially offset by foreign exchange movements of $10m.

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
$305m held at 31 December 2018.

The cost of inventories recognised as an expense and included in cost of goods sold amounted to $1,126m (2017: $1,013m, 2016: $1,131m).
In addition, $94m was recognised as an expense within cost of goods sold resulting from inventory write-offs (2017: $68m, 2016: $85m).

Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.

13 TRADE AND OTHER RECEIVABLES

Accounting policy
Trade and other receivables are carried at amortised cost, less any allowances for uncollectible amounts. They are included in current assets,
except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.

The trade and other receivables accounting policy for the year ending 31 December 2017 was consistent with the requirements of IAS 39.
Provisions against trade receivables were based on incurred losses, rather than the expected credit loss allowance.

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. Allowance losses are calculated by reviewing lifetime expected credit
losses using historic and forward-looking data on credit risk. The Group performed the calculation of expected credit loss rates separately
for customer groups which were segmented based on common risk characteristics such as credit risk grade and type of customer (such as
government and non-government).

Trade and other receivables due within one year
Trade receivables
Less: loss allowance
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

2018
$ million

2017
$ million

2016
$ million

1,166
(62)
1,104
37
107
69
1,317

16
1,333

1,125
(69)
1,056
28
92
82
1,258

16
1,274

1,042
(54)
988
48
76
73
1,185

–
1,185

Trade receivables are classified as loans and receivables. Management considers that the carrying amount of trade and other receivables
approximates to the fair value. Allowance losses are calculated by reviewing lifetime expected credit losses using historic and forward-looking data
on credit risk. The loss allowance expense for the year was $14m (2017: $17m expense, 2016: $7m expense). Other non-current assets primarily
relate to long-term prepayments.

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The following table provides information about the ageing of and expected credit losses for trade receivables:

Not past due
Past due not more than 3 months
Past due not more than 3–6 months
Past due more than 6 months

Loss allowance
Trade receivables – net

2018 Weighted
average loss rate
%
0.3%
0.4%
2.6%
33.5%

2018 Loss
allowance
$ million
(2)
(1)
(2)
(57)
(62)

2018 Gross
carrying amount
$ million
647
271
78
170
1,166
(62)
1,104

2017 Gross
carrying amount
$ million
664
225
65
171
1,125
(69)
1,056

2016 Gross
carrying amount
$ million
725
142
51
124
1,042
(54)
988

The Group’s expected credit loss accounting policy includes guidance on how the expected credit loss percentages should be determined; it does
not include preset limits as the customer groups and risk profiles are not consistent across all of our markets. Each market determines their own
percentages based on their historic experience and future expectations, and in line with the general guidance in the Group’s policy.

Movements in the loss allowance were as follows:

At 31 December
Adjustment on initial application of IFRS 9
Adjusted balance at 1 January
Exchange adjustment
Reclassification1
Acquisitions
Net receivables provided during the year
Utilisation of provision
At 31 December

1 On transition to IFRS 9, the Group reclassified a credit note provision from the loss allowance to gross trade receivables.

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

2018
$ million
69
14
83
(3)
(8)
–
14
(24)
62

2018
$ million
527
45
201
331
1,104

2017
$ million
54

2016
$ million
64

3
–
1
17
(6)
69

2017
$ million
418
54
212
372
1,056

(3)
–
–
7
(14)
54

2016
$ million
416
57
193
322
988

2018
$ million

2017
$ million

854
25
78
957

49
4
53

873
48
36
957

124
4
128

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14 TRADE AND OTHER PAYABLES continued
The acquisition consideration includes $99m (2017: $104m) contingent upon future events.

The acquisition consideration due after more than one year is expected to be payable as follows: $21m in 2020, $23m in 2021, $1m in 2022,
$1m in 2023, and $3m due in over five years (2017: $50m in 2019, $24m in 2020, $43m in 2021, $2m in 2022, and $5m due in over five years).

15 CASH AND BORROWINGS
15.1 Net debt
Net debt comprises borrowings and credit balances on currency swaps less cash at bank.

Bank overdrafts, borrowings and loans due within one year
Long-term bank borrowings
Private placement notes
Borrowings
Cash at bank
Credit/(debit) balance on derivatives – currency swaps
Credit balance on derivatives – interest rate swaps
Net debt

Borrowings are repayable as follows:

2018
$ million
164
304
997
1,465
(365)
1
3
1,104

2017
$ million
27
300
1,123
1,450
(169)
(2)
2
1,281

At 31 December 2018
Bank loans
Bank overdrafts
Private placement notes

At 31 December 2017
Bank loans
Bank overdrafts
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

7
32
125
164

13
14
–
27

–
–
–
–

–
–
124
124

–
–
262
262

300
–
–
300

304
–
125
429

–
–
264
264

–
–
105
105

–
–
125
125

–
–
505
505

–
–
610
610

311
32
1,122
1,465

313
14
1,123
1,450

15.2 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 (2017: $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.

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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 2018, 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.

The Group’s committed facilities are:

Facility
$80 million 2.47% Senior Notes
$45 million Floating Rate Senior Notes
$75 million 3.23% Senior Notes
$190 million 2.97% Senior Notes
$75 million 3.46% Senior Notes
€265 million bilateral, term loan facility
$50 million 3.15% Senior Notes
$1.0 billion syndicated, revolving credit facility
$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
January 2021
November 2021
January 2022
April 2022
November 2022
June 2023
November 2023
January 2024
November 2024
November 2024
January 2026

15.3 Year end fnancial 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 2018
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 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

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

39
854
164
78

2,394
(2,393)
1,136

27
873
36
36

2,737
(2,739)
970

–
1
35
21

–
–
57

–
1
161
50

–
–
212

304
1
571
25

–
–
901

300
1
476
69

–
–
846

–
2
522
3

–
–
527

–
2
647
5

–
–
654

343
858
1,292
127

2,394
(2,393)
2,621

327
877
1,320
160

2,737
(2,739)
2,682

The amounts in the tables above are undiscounted cash flows, which differ from the amounts included in the balance sheet where the underlying
cash flows have been discounted.

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NOTES TO THE GROUP ACCOUNTS continued

15 CASH AND BORROWINGS continued
15.4 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 2018, the Group held $333m (2017: $155m, 2016: $38m) in cash net of bank overdrafts. The Group had committed facilities
available of $2,429m at 31 December 2018 of which $1,429m 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 2019, 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 $1,281m at the beginning of 2018 to $1,104m at the end of 2018, representing an overall decrease
of $177m.

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

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 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.

Changes in the fair values of hedging instruments 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 risk management
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.

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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 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 2018, the Group had contracted to exchange within one year
the equivalent of $2.1bn (2017: $2.3bn). Based on the Group’s net borrowings as at 31 December 2018, if the US Dollar were to weaken against all
currencies by 10%, the Group’s net borrowings would increase by $25m (2017: decrease by $3m) principally due to the €265m term loan.

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
2018 would have been $38m lower (2017: $53m 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 2018 would have been $15m higher (2017: $12m 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 2018 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. Hedge ineffectiveness is caused by actual cash flows in foreign currencies varying from forecast cash flows.

16.2 Interest rate risk management
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 and cash as at 31 December 2018, if interest rates were to increase by 100 basis points in all currencies
then the annual net interest charge would increase by $3m (2017: $6m). 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 management
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 2018 was $37m (2017: $28m), 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 2018 was $365m (2017: $169m).
The Group’s exposure to credit risk is not material as the amounts are held in a wide number of banks in a number of different countries.

Credit risk on trade receivables is detailed in Note 13.

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16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
The amounts relating to items designated as hedging instruments were as follows:

At 31 December 2018
Foreign currency risk
Forward exchange contracts1
Interest rate risk
Interest rate swaps2

At 31 December 2017
Foreign currency risk
Forward exchange contracts1
Interest rate risk
Interest rate swaps2

Nominal
amount
$ million

Carrying
Amount:
Assets
$ million

Carrying
Amount:
Liabilities
$ million

Changes in
fair value
in OCI
$ million

Hedge
ineffectiveness
in profit or loss
$ million

Amounts reclassified
from hedging reserve
to profit or loss
$ million

Line item in
profit or loss

2,394

(200)

2,737

(200)

–

(22)

(3)

(45)

(2)

–

(24)

–

2 Cash flow hedges

–

N/A

21 Cash flow hedges

–

N/A

1 Presented in Trade and other receivables and Trade and other payables on the Balance Sheet.

2 Presented in Trade and other payables on the Balance Sheet.

16.4 Net investment hedge
Part of the Group’s net investment in its Euro subsidiaries is hedged by a new €265m Euro-denominated bank loan which mitigates the foreign
currency risk arising from the subsidiaries’ net assets. The loan is designated as a hedging instrument for the changes in the value of the net
investment that is attributable to changes in the EUR/USD spot rate, and is 100% hedged.

To assess hedge effectiveness, the Group determines the economic relationship between the hedging instrument and the hedged item by
comparing changes in the carrying amount of the debt that is attributable to a change in the spot rate with changes in the investment in the foreign
operation due to movements in the spot rate (the offset method). The Group’s policy is to hedge the net investment only to the extent of the debt
principal. Hedge ineffectiveness occurs if the value of the Euro-denominated bank loan exceeds the value of the Euro subsidiaries.

16.5 Currency and interest rate profle 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 2018
US Dollar
Other
Total interest bearing liabilities
At 31 December 2017
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

(1,142)
(323)
(1,465)

(1,428)
(22)
(1,450)

(193)
(61)
(254)

(291)
(95)
(386)

(3)
–
(3)

(2)
–
(2)

(1,338)
(384)
(1,722)

(1,721)
(117)
(1,838)

(483)
(384)
(867)

(866)
(117)
(983)

(855)
–
(855)

Fixed rate liabilities
Weighted
average time
for which
rate is fixed
Years

Weighted
average
interest rate
%

3.4
–

4.8
–

5.8
–

In 2018, the Group also had liabilities due for deferred and contingent acquisition consideration (denominated in US Dollars, Euros and Russian
Rubles) totalling $127m (2017: $160m, 2016: $120m) on which no interest was payable (see Note 14). There were no other significant interest bearing
or non-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 2018 was 4% (2017: 3%).

Currency and interest rate profile of interest bearing assets:

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NOTES TO THE GROUP ACCOUNTS continued

At 31 December 2018
US Dollars
Other
Total interest bearing assets
At 31 December 2017
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

–
–
–

289
76
365

110
59
169

60
193
253

94
294
388

349
269
618

204
353
557

349
269
618

204
353
557

–
–
–

Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned.

16.6 Fair value of fnancial 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 (ie as prices) or indirectly (ie 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 2017 other than as disclosed in Note 1.

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 2018 and 2017. 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.

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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 2018
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

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 in a hedge
relationship
Private placement debt not in a hedge
relationship
Trade and other payables

Fair value –
hedging
instruments
$ million

Amortised
cost
$ million

Fair value
through OCI
$ million

Fair value
through profit
or loss
$ million

Other
financial
liabilities
$ million

Total
$ million

Level 2
$ million

Level 3
$ million

Total
$ million

Carrying amount

Fair value

36
–
1

–
(20)
(2)
(3)

–
34
–

(99)
–
–
–

36
34
1

(99)
(20)
(2)
(3)

36
–
–
36

–
(20)
–
(3)
(23)

–
–
–

–

–
–
–

–
–
–
–

–
–
–
–
–

1,211
365
1,576

–
–
–

–

–
–
–

–
–
1
1

–
–
(2)
–
(2)

–
–
–

–

–
–
–

–
34
–
34

(99)
–
–
–
(99)

–
–
–

(28)
–
–

–

–
–
(28)

–
–
–
–

–
–
–
–
–

–
–
–

–
(32)
(311)

(197)

36
34
1
71

(99)
(20)
(2)
(3)
(124)

1,211
365
1,576

(28)
(32)
(311)

(197)

(925)
(858)
(2,323)

(925)
(858)
(2,351)

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During the year ended 31 December 2018, acquisition consideration decreased by $33m due to $29m of payments for acquisitions made in prior
years and $4m of remeasurements. 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.

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

Financial assets not measured
at fair value
Trade and other receivables
Cash at bank

Fair value –
hedging
instruments
$ million

Amortised
cost
$ million

Fair value
through OCI
$ million

Fair value
through profit
or loss
$ million

Other
financial
liabilities
$ million

Total
$ million

Level 2
$ million

Level 3
$ million

Total
$ million

Carrying amount

Fair value

25
–
3

–
(45)
(1)
(2)

–
21
–

(104)
–
–
–

25
21
3

(104)
(45)
(1)
(2)

25
–
–
25

–
(45)
–
(2)
(47)

–
–
–

–

–
–
–

–
–
–
–

–
–
–
–
–

1,148
169
1,317

–
–
–

–

–
–
–

–
–
3
3

–
–
(1)
–
(1)

–
–
–

–

–
–
–

–
21
–
21

(104)
–
–
–
(104)

–
–
–

(56)
–
–

–

–
–
(56)

–
–
–
–

–
–
–
–
–

–
–
–

–
(14)
(313)

25
21
3
49

(104)
(45)
(1)
(2)
(152)

1,148
169
1,317

(56)
(14)
(313)

(198)

(925)
(877)
(2,327)

(925)
(877)
(2,383)

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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 2017
Net charge to income statement
Unwinding of discount
Utilised
Transfers
Exchange adjustment
At 31 December 2017
Net charge to income statement
Unwinding of discount
Utilised
Exchange adjustment
At 31 December 2018
Provisions – due within one year
Provisions – due after one year
At 31 December 2018
Provisions – due within one year
Provisions – due after one year
At 31 December 2017

Rationalisation
provisions
$ million
20
–
–
(15)
–
1
6
120
–
(90)
(1)
35
35
–
35
6
–
6

Metal-on-metal
$ million
163
10
3
(19)
–
–
157
72
4
(41)
–
192
50
142
192
73
84
157

Legal and other
provisions
$ million
98
2
–
(28)
(9)
–
63
(2)
–
(14)
–
47
36
11
47
50
13
63

Total
$ million
281
12
3
(62)
(9)
1
226
190
4
(145)
(1)
274
121
153
274
129
97
226

The principal elements within rationalisation provisions relate to the implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018.

Following the settlement of a group of the US metal-on-metal hip claims (discussed below) the Group has estimated a provision of $192m
(2017: $157m) relating to the present value at 31 December 2018 of the estimated costs to resolve all other known and anticipated metal-on-metal hip
claims globally. 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 outcomes, the actual costs may differ significantly from this estimate. A range of expected
outcomes between the 5th and 95th percentile generated by the actuarial model would not give rise to a significantly different outcome in 2019.
Based on the actuarial model the likelihood of a charge similar to that incurred in 2018 being incurred in 2019 is remote. 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 2018 and none are treated as financial instruments.

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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 2018 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 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. An additional $22m was received during 2007 from a successful settlement with a third party. In 2018, the Group agreed to settle the
suit against the insurers for a total of approximately $84m which has been recognised in the Group’s 2018 operating profit.

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 2019, and giving effect to the US
settlements described below, approximately 1,023 such claims were pending with the Group around the world. 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 was
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. As of February 2019, there were approximately
571 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 were consolidated for trials under group litigation orders in the High Court in
London. As of February 2019, the majority of the BHR claims pending against the Group in England and Wales have been discontinued.

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.

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17 PROVISIONS AND CONTINGENCIES continued
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.

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 requested damages and an injunction.
Smith & Nephew sought 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. In September 2018, the Group entered into a settlement with ConforMis whereby Smith & Nephew paid
$10.5m to settle the dispute and obtain a non-exclusive license under ConforMis patents pertaining to patient-specific instruments.

Smith & Nephew brought suit against Hologic in the US District Court for Massachusetts (Boston) in June 2010 for infringement of two patents. A trial
was held in September 2012. The jury returned a verdict in Smith & Nephew’s favour, finding both asserted patents valid and infringed. Smith &
Nephew’s motion for permanent injunction was granted, but stayed pending the result of re-examination proceedings instituted by Hologic in the
United States Patent & Trademark Office (USPTO). In August 2016, Smith & Nephew divested its Gynaecology business to Medtronic, but retained
rights to assert these patents against Hologic. On 25 October 2016, the USPTO upheld validity of one of the patents and Hologic appealed this
decision. On 14 March 2018, the Federal Circuit affirmed the USPTO and again upheld validity of the patent. In October 2018, the parties reached
a settlement and Hologic agreed to pay an amount approximating $35m. After deductions of payments to interested third parties, the Group
recognised approximately $23m from this payment in the Group’s 2018 operating profit.

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.

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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.
Remeasurements 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 beneft net assets/(obligations)
The Group’s retirement benefit assets/(obligations) comprise:

Funded plans:
UK Plan
US Plan
Other plans

Unfunded plans:
Other plans
Retirement healthcare

Amount recognised on the balance sheet – liability
Amount recognised on the balance sheet – asset

2018
$ million

2017
$ million

77
13
(34)
56

(60)
(18)
(22)
(114)
92

53
9
(46)
16

(60)
(25)
(69)
(131)
62

The Group sponsors defined benefit pension plans for its employees or former employees in 14 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.

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.

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18 RETIREMENT BENEFIT OBLIGATIONS continued
The 2018 court case in relation to Guaranteed Minimum Pensions does not impact the UK Plan as members were not contracted out of the State
Earnings Related Pension (Serps) between 1990 and 1997.

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 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 beneft 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 gain/(loss) due to financial assumptions change
Actuarial gain due to demographic assumptions
Return on plan assets (less than)/more 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
(1,625)

Asset
$ million
1,556

2018
Total
$ million
(69)

Obligation
$ million
(1,577)

Asset
$ million
1,413

2017
Total
$ million
(164)

(12)
7
–
(40)
(3)
(48)

6
97
11
–
114

–
(4)
3
100
99

–
–
–
40
–
40

–
–
–
(103)
(103)

44
4
(3)
(100)
(55)

50
(1,410)
(245)
(1,165)

(50)
1,388
131
1,257

(12)
7
–
–
(3)
(8)

6
97
11
(103)
11

44
–
–
–
44

–
(22)
(114)
92

(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

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NOTES TO THE GROUP ACCOUNTS continued

Represented by:

UK Plan
US Plan
Other Plans
Total

Obligation
$ million
(718)
(424)
(268)
(1,410)

Asset
$ million
795
437
156
1,388

2018
Total
$ million
77
13
(112)
(22)

Obligation
$ million
(854)
(481)
(290)
(1,625)

Asset
$ million
907
490
159
1,556

2017
Total
$ million
53
9
(131)
(69)

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 19 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:

2018
$ million

2017
$ million

2016
$ 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
Government bonds – 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

2
127
41
246
138
554

241
795

–
79
91
267
437

2
42
3
3
13
34
20
4
121

8
235
43
192
152
630

277
907

–
88
201
201
490

4
43
4
3
11
36
19
2
122

35
156
1,388

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

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NOTES TO THE GROUP ACCOUNTS continued

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 IAS 19R 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 $65m (2017: $64m, 2016: $23m). Of this cost recognised for the year,
$57m (2017: $51m, 2016: $48m) relates to defined contribution plans and $8m (2017: $13m net credit, 2016: $25m net credit) 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 2018 due to be paid over to the plans (2017: $nil, 2016: $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.

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
–
–
–

–
–

2018
US Plan
$ million
–
–
–

–
–

UK Plan
$ million
–
–
–

1
1

2017
US Plan
$ million
–
–
–

2
2

UK Plan
$ million
7
(49)
1

–
(41)

2016
US Plan
$ million
–
–
–

3
3

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

2018
% per annum

2017
% per annum

2016
% per annum

2.7
n/a
3.2
3.2
2.2

4.2
n/a
n/a

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

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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 MP2018 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

2018
years

2017
years

28.9
30.4

24.9
27.1

31.1
31.9

25.1
27.7

28.8
30.3

25.2
27.4

31.0
31.8

25.5
28.0

2016
years

29.7
31.1

25.1
27.4

32.5
33.0

25.4
27.9

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 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 and it has no other
inflation-linked assumptions.

$ million
UK Plan:

Discount rate
Inflation
Mortality

US Plan:

Discount rate
Inflation
Mortality

Increase in pension obligation
-50bps/-1yr

+50bps/+1yr

+50bps/+1 yr

Increase in pension cost
-50bps/-1yr

-62.7
+66.6
+29.0

-21.0
n/a
+10.0

+73.0
-60.2
-28.8

+23.0
n/a
-10.2

-2
+1
+1

-1
n/a
–

+2
-1
–

+1
n/a
–

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NOTES TO THE GROUP ACCOUNTS continued

18 RETIREMENT BENEFIT OBLIGATIONS continued
18.7 Risk
The pension plans expose the Group to the following risks:

Interest rate risk

Inflation risk

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 Plan is closed to future accrual which reduces the exposure to this risk. The US Plan is also closed to future
accrual and has no other inflation-linkage thus eliminating 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 from return-seeking (growth) assets to liability
matching assets over time. The US Pension Plan has an established glide path with two remaining funding level
triggers that are designed to stabilize funding status by reducing the Plan’s exposure to return-seeking assets.

Longevity risk

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.

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 as at
30 September 2018 has commenced. Contributions to the UK Plan in 2018 were $25m (2017: $24m, 2016: $32m). This included supplementary
payments of $25m (2017: $24m, 2016: $26m).

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
The most recent full actuarial valuation of the US Plan was undertaken as at 1 January 2018. The next full actuarial valuation will take place as at
1 January 2019. Future accruals to the US Plan ceased as at 31 March 2014. Contributions to the US Plan were $10m (2017: $20m, 2016: $20m) which
represented supplementary payments of $10m (2017: $20m, 2016: $20m).

The planned supplementary contribution for 2019 is being kept under review given the funding status.

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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 2016
At 31 December 2017
At 31 December 2018
Allotted, issued and fully paid
At 1 January 2016
Share options
Shares cancelled
At 31 December 2016
Share options
Shares cancelled
At 31 December 2017
Share options
Shares cancelled
At 31 December 2018

Thousand

Ordinary shares (20¢)
$ million

Thousand

Deferred shares (£1.00)
$ million

Total
$ million

1,223,591
1,223,591
1,223,591

915,447
1,283
(13,007)
903,723
655
(13,523)
890,855
418
(3,321)
887,952

245
245
245

183
–
(3)
180
–
(2)
178
–
(1)
177

50
50
50

50
–
–
50
–
–
50
–
–
50

–
–
–

–
–
–
–
–
–
–
–
–
–

245
245
245

183
–
(3)
180
–
(2)
178
–
(1)
177

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.

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19 EQUITY continued
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

2018
$ million
177
608
18
(214)
4,285
4,874

2017
$ million
178
605
17
(257)
4,101
4,644

2016
$ million
180
600
15
(432)
3,595
3,958

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 2018 the Group purchased a total of 2.7m shares for a cost of $48m as part of the ongoing
programme to buy back an equivalent number of shares to those vesting as part of the employee share plans. In 2017 the Group purchased a total
of 3.2m shares for a cost of $52m as part of the same programme.

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 2017
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2017
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2018

Treasury
$ million
411
52
(19)
(9)
(201)
234
48
(29)
(13)
(51)
189

Employees’
Share Trust
$ million
21
–
19
(17)
–
23
–
29
(27)
–
25

Total
$ million
432
52
–
(26)
(201)
257
48
–
(40)
(51)
214

Number of shares
million
27.8
3.2
(1.3)
(0.6)
(13.5)
15.6
2.7
(1.9)
(0.9)
(3.3)
12.2

Number of shares
million
1.5
–
1.3
(1.2)
–
1.6
–
1.9
(1.8)
–
1.7

Number of shares
million
29.3
3.2
–
(1.8)
(13.5)
17.2
2.7
–
(2.7)
(3.3)
13.9

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NOTES TO THE GROUP ACCOUNTS continued

19.3 Dividends

The following dividends were declared and paid in the year:

Ordinary final of 22.7¢ for 2017 (2016: 18.5¢, 2015: 19.0¢) paid 9 May 2018
Ordinary interim of 14.0¢ for 2018 (2017: 12.3¢, 2016: 12.3¢) paid 31 October 2018

2018
$ million

2017
$ million

2016
$ million

198
123
321

162
107
269

170
109
279

A final dividend for 2018 of 22.0¢ per ordinary share was proposed by the Board on 7 February 2019 and will be paid, subject to shareholder
approval, on 8 May 2019 to shareholders on the Register of Members on 5 April 2019. The estimated amount of this dividend is $192m. 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 2018
amounted to $2,274m.

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 2016
Net cash flow impact
Exchange adjustment
At 31 December 2016
Net cash flow impact
Termination of finance lease
Exchange adjustment
At 31 December 2017
Net cash flow/debt movement
Exchange adjustment
At 31 December 2018

Cash
$ million
120
(18)
(2)
100
64
–
5
169
200
(4)
365

Overdrafts
$ million
(18)
(45)
1
(62)
49
–
(1)
(14)
(18)
–
(32)

Due within
one year
$ million
(28)
4
–
(24)
9
2
–
(13)
(118)
(1)
(132)

Due after
one year
$ million
(1,434)
(129)
(1)
(1,564)
139
3
(1)
(1,423)
126
(4)
(1,301)

Net
currency swaps
$ million
(2)
25
(22)
1
(24)
–
25
2
8
(11)
(1)

Borrowings
Net
interest swaps
$ million
1
(2)
–
(1)
(1)
–
–
(2)
(1)
–
(3)

Total
$ million
(1,361)
(165)
(24)
(1,550)
236
5
28
(1,281)
197
(20)
(1,104)

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NOTES TO THE GROUP ACCOUNTS continued

20 CASH FLOW STATEMENT continued
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

2018
$ million
182
8
7
197
–
(20)
177
(1,281)
(1,104)

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)

Cash and cash equivalents
For the purposes of the Group cash flow statement cash and cash equivalents at 31 December 2018 comprise cash at bank net of bank overdrafts.

Cash at bank
Bank overdrafts
Cash and cash equivalents

2018
$ million
365
(32)
333

2017
$ million
169
(14)
155

2016
$ million
100
(62)
38

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 fnancing activities

2018
Debt
Equity
Total

2017
Debt
Equity
Total

2016
Debt
Equity
Total

Repayment
of bank
loans
$ million
401
–
401

Borrowing
of bank
loans
$ million
(394)
–
(394)

Cash outflow
from other
$ million
8
–
8

Dividends
$ million
–
321
321

Purchase of
own shares
$ million
–
48
48

Proceeds from own
shares/issue of
ordinary shares
$ million
–
(13)
(13)

770
–
770

797
–
797

(623)
–
(623)

(924)
–
(924)

(24)
–
(24)

25
–
25

–
269
269

–
279
279

–
52
52

–
368
368

–
(10)
(10)

–
(16)
(16)

Total
$ million
15
356
371

123
311
434

(102)
631
529

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NOTES TO THE GROUP ACCOUNTS continued

21 ACQUISITIONS AND DISPOSALS

Accounting policy
The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration
transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually
for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred,
except if related to the issue of debt or equity securities.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity,
then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent
consideration are recognised in profit or loss.

21.1 Acquisitions
Year ended 31 December 2018
The Group made no acquisitions deemed to be business combinations within the scope of IFRS 3 in the year ended 31 December 2018. The cash
outflow of $29m relates to acquisitions completed in prior years.

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 as follows. The acquisition accounting was completed in 2018 with no adjustments to the provisional fair
value disclosed in the Group’s 2017 Annual Report.

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 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:

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NOTES TO THE GROUP ACCOUNTS continued

21 ACQUISITIONS AND DISPOSALS continued

Aggregate identifiable assets acquired and liabilities assumed
Intangible assets
Property, plant & equipment and inventory
Trade and other payables
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.

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. Tax paid on the disposal was $118m. For the years ended 31 December 2017 and 31 December 2018, 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

2018
$ million

2017
$ million

37
30
27
22
16
52
184

17
11
4
2
34

40
35
27
23
19
56
200

17
11
5
1
34

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NOTES TO THE GROUP ACCOUNTS continued

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 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 2018, 4,911,000 options (2017: 5,277,000, 2016: 5,780,000) were outstanding with a range of exercise prices from 538
to 1,097 pence.

At 31 December 2018, the maximum number of shares that could be awarded under the Group’s long-term incentive plans was 5,678,000
(2017: 5,854,000, 2016: 5,807,000). 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 $35m (2017: $31m, 2016: $27m).

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 (2017: $nil, 2016: $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 84–105.

2018
$ million
18
10
2
–
30

2017
$ million
15
7
1
3
26

2016
$ million
15
7
1
–
23

24 POST BALANCE SHEET EVENTS
On 22 January 2019 the Group completed the acquisition of 100% of the share capital of Ceterix Orthopaedics, Inc., the developer of the NovoStitch™
Pro Meniscal Repair System. This unique device addresses complex tear patterns not adequately served by other repair systems and is highly
complementary to the Group’s FAST-FIX™ 360 Meniscal Repair System.

This acquisition will be treated as a business combination under IFRS 3. The maximum consideration, all payable in cash, is $105m and the
provisional fair value consideration is $96m and includes $5m of deferred consideration and $46m of contingent consideration which relates to
the achievement of established milestones and targets. The fair value of contingent consideration is determined from the acquisition agreement,
the Board approved acquisition model and a risk-free discount rate of 3.3%. Acquired net assets have a provisional value of $2m which is not
expected to have material fair value adjustments. The remaining $94m will be allocated between identifiable intangible assets including technology,
research and development in-progress and goodwill, with the majority expected to be goodwill. Goodwill represents the control premium, the
acquired workforce and the synergies expected from integrating Ceterix Orthopaedics, Inc. into the Group’s existing business, and is not expected
to be deductible for tax purposes. The contribution to revenue and attributable profit from this acquisition is expected to be immaterial for the year
ending 31 December 2019.

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COMPANY FINANCIAL STATEMENTS

Company balance sheet

Fixed assets
Investments
Current assets
Debtors
Cash at 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 2018
$ million

At
31 December 2017
$ million

Notes

3
5

5
4

7,092

1,697
277
1,974

(145)
(2,277)
(2,422)
(448)
6,644

(1,301)
5,343

177
608
18
2,266
(214)
(52)
2,540
5,343

7,092

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

The accounts were approved by the Board and authorised for issue on 21 February 2019 and signed on its behalf by:

Roberto Quarta
Chairman

Namal Nawana
Chief Executive Officer

Graham Baker
Chief Financial Officer

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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COMPANY FINANCIAL STATEMENTS

Statement of changes in equity

At 1 January 2017
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
Attributable profit for the year
Net gain on cash flow hedges
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 2018

Share
capital
$ million
180
–
–
–
–
–
–
–
(2)
–
178
–
–
–
–
–
–
(1)
–
177

Share
premium
$ million
600
–
–
–
–
–
–
5
–
–
605
–
–
–
–
–
3
–
–
608

Capital
redemption
reserve
$ million
15
–
–
–
–
–
–
–
2
–
17
–
–
–
–
–
–
1
–
18

Capital
reserves
$ million
2,266
–
–
–
–
–
–
–
–
–
2,266
–
–
–
–
–
–
–
–
2,266

Treasury
shares
$ million
(432)
–
–
–
–
–
26
–
201
(52)
(257)
–
–
–
–
40
–
51
(48)
(214)

Exchange
reserves
$ million
(52)
–
–
–
–
–
–
–
–
–
(52)
–
–
–
–
–
–
–
–
(52)

Profit and
loss account
$ million
1,169
2,167
1
1
(269)
31
(21)
–
(201)
–
2,878
28
1
(321)
35
(30)
–
(51)
–
2,540

Total
shareholders’
funds
$ million
3,746
2,167
1
1
(269)
31
5
5
–
(52)
5,635
28
1
(321)
35
10
3
–
(48)
5,343

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 $2,274m (2017: $2,569m). 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 $28m (2017: $2,167m).

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.

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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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

2018
$ million
7,092
–
7,092

2017
$ million
5,322
1,770
7,092

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 8.

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

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

2018
$ million

2017
$ million

1,635
3
36
20
1
2
1,697

1,007
3
25
45
3
1
1,084

Allowance losses on amounts owed by subsidiary undertakings are calculated by reviewing 12-month expected credit losses using historic and
forward-looking data on credit risk. The loss allowance expense for the year was $nil (2017: $nil).

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

2018
$ million

2,204
12
20
36
2
3
2,277

2017
$ million

1,119
10
45
25
1
2
1,202

5 CASH AND BORROWINGS

ACCOUNTING POLICY
Financial instruments
Currency swaps are used to match foreign currency 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, borrowings and overdrafts due within one year or on demand
Borrowings due after one year
Borrowings
Cash at bank
Credit/(debit) balance on derivatives – currency swaps
Credit balance on derivatives – interest rate swaps
Net debt

2018
$ million
145
1,301
1,446
(277)
1
3
1,173

2017
$ million
4
1,423
1,427
(88)
(2)
2
1,339

All currency swaps are stated at fair value. Gross US Dollar equivalents of $253m (2017: $388m) receivable and $254m (2017: $386m) payable have
been netted. Currency swaps comprise foreign exchange swaps and were used in 2018 and 2017 to hedge intra-group loans.

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

6 CONTINGENCIES

Guarantees in respect of subsidiary undertakings

2018
$ million
–

2017
$ million
1

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 $80m (2017: $90m) 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 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. The share capital
disclosed comprises ordinary shares which are indirectly held by Smith & Nephew plc, unless otherwise stated.

Company name
UK
Blue Belt Technologies UK Limited2
Michelson Diagnostic Limited3 (7%)
Neotherix Limited3 (24.9%)
Plus Orthopedics (UK) Limited2
Smith & Nephew (Overseas) Limited1, 5
Smith & Nephew ARTC Limited
Smith & Nephew Beta Limited2
Smith & Nephew China Holdings UK
Limited1
Smith & Nephew Consumer Products
Limited2
Smith & Nephew Employees Trustees
Limited2
Smith & Nephew ESN Limited2
Smith & Nephew Extruded Films Limited
Smith & Nephew Finance2
Smith & Nephew Finance Oratec2
Smith & Nephew Healthcare Limited2
Smith & Nephew Investment Holdings
Limited1
Smith & Nephew Medical Fabrics Limited2
Smith & Nephew Medical Limited

Country of
operation and
incorporation

Registered
Office

Company name

England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales

London
Kent
York
London
London
London
London
London

England & Wales

London

England & Wales

London

England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales

England & Wales
England & Wales

London
Hull
London
London
Hull
London

London
Hull

Smith & Nephew Nominee Company
Limited2
Smith & Nephew Nominee Services
Limited2
Smith & Nephew Orthopaedics Limited
Smith & Nephew Pensions Nominees
Limited2
Smith & Nephew Pharmaceuticals Limited2
Smith & Nephew Raisegrade Limited1,2
Smith & Nephew Rareletter Limited2
Smith & Nephew Trading Group Limited1
Smith & Nephew UK Executive Pension
Scheme Trustee Limited2
Smith & Nephew UK Limited1, 5
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

Country of
operation and
incorporation

England & Wales

Registered
Office

London

England & Wales

London

England & Wales
England & Wales

England & Wales
England & Wales
England & Wales
England & Wales
England & Wales

England & Wales
England & Wales

England & Wales
England & Wales
England & Wales
England & Wales
Scotland

London
London

Hull
London
London
London
London

London
London

London
London
Hull
London
Edinburgh

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

Country of
operation and
incorporation

Registered
Office

Company name

Country of
operation and
incorporation

Registered
Office

Company name

Rest of Europe
Smith & Nephew GmbH
ArthroCare Belgium SPRL2
Smith & Nephew S.A.-N.V
Smith & Nephew A/S
Smith & Nephew Oy
A2 Surgical2

Smith & Nephew France SAS1

Smith & Nephew S.A.S.

Smith & Nephew Business Services
GmbH & Co. KG1
Smith & Nephew Business Services
Verwaltungs GmbH
Smith & Nephew Deutschland (Holding)
GmbH1
Smith & Nephew GmbH
Smith & Nephew Orthopaedics GmbH
Plus Orthopedics Hellas S.A.4
Smith & Nephew Hellas S.A.4
Smith & Nephew (Ireland) Trading Limited
Smith & Nephew Finance Ireland Limited
Smith & Nephew S.r.l.
ArthroCare Luxembourg S.a.r.l.1,2
Smith & Nephew Finance S.a.r.l.1
Smith & Nephew International S.A.1
Smith & Nephew (Europe) B.V.1
Smith & Nephew B.V.
Smith & Nephew Management B.V.1
Smith & Nephew Nederland CV
Smith & Nephew A/S
Smith & Nephew sp. z.o.o.
Smith & Nephew Lda
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 1
Smith & Nephew Schweiz AG
Smith & Nephew AG

Austria
Belgium
Belgium
Denmark
Finland
France

France

Germany

Vienna
Zaventem
Zaventem
Hoersholm
Helsinki
Neuilly-sur-
Seine
Neuilly-sur-
Seine
Neuilly-sur-
Seine
Hamburg

Germany

Hamburg

Germany

Hamburg

Germany
Germany
Greece
Greece
Ireland
Ireland
Italy
Luxembourg
Luxembourg
Luxembourg
Netherlands
Netherlands
Netherlands
Netherlands
Norway
Poland
Portugal
Russian Federation
Russian Federation
Spain
Sweden
Sweden
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland

Hamburg
Tuttlingen
Athens
Athens
Dublin 2
Dublin 1
Milan
Luxembourg
Luxembourg
Luxembourg
Amsterdam
Amsterdam
Amsterdam
Amsterdam
Oslo
Warsaw
Lisbon
Puschino
Moscow
Barcelona
Molndal
Gothenburg
Baar
Aarau
Baar
Baar
Baar

US
Arthrocare Corporation1
Bioventus LLC3 (49%)
Blue Belt Holdings, Inc.1
Blue Belt Technologies, Inc.1
Charlie Merger Corp.

Delphi Ventures V, L.P.3 (6.9%)
Healicoil, Inc.
Hipco, Inc.
Leaf Healthcare Inc.3 (11%)
Memphis Biomed Ventures I, LP3 (4.61%)
Miach Orthopaedics, Inc3 (8.3%)
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.
Smith & Nephew, Inc.1
Surgical Frontiers Series I, LLC3 (33.46%)
Trice Medical Inc.3 (6%)

Africa, Asia, Australasia and Other America
Smith & Nephew Argentina S.R.L.2
ArthroCare (Australasia) Pty Ltd4
Smith & Nephew Pty Limited
Smith & Nephew Surgical Holdings
Pty Limited1,2
Smith & Nephew Surgical Pty Limited1,2
Smith & Nephew Comercio de Produtos
Medicos LTDA
Smith & Nephew (Alberta) Inc.2
Smith & Nephew Inc.
Tenet Medical Engineering, Inc.
Smith & Nephew
Finance Holdings Limited2, 5

ArthoCare Medical Devices
(Beijing) Co. Limited⁴

Plus Orthopedics (Beijing) Co. Limited2

United States
United States
United States
United States
United States

United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States

Wilmington
Wilmington
Wilmington
Philadelphia
Wilmington
19808
Wilmington
Wilmington
Wilmington
Wilmington
Dover
Sherborn
Wilmington
Phoenix
Wilmington
Wilmington
Wilmington
Wilmington
Wilmington
Wilmington
Wilmington
Dover
Wilmington
19808

Argentina Buenos Aires
North Ryde
Australia
North Ryde
Australia
North Ryde
Australia

Australia
Brazil

North Ryde
São Paulo

Canada
Canada
Canada

Calgary
Toronto
Calgary
Cayman Islands South Church
Street,
George Town
Chao Yang
District,
Beijing
Shunyi
District,
Beijing

China

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

8 GROUP COMPANIES continued

Country of
operation and
incorporation

China

China
China

Colombia
Colombia
Costa Rica
Curaçao
Hong Kong
Hong Kong
Hong Kong
India
India

Registered
Office

Shanghai
Free Trade
Test Zone
Suzhou City
Beijing
Economic
and Technical
Development
Area
Bogota
Bogota
Costa Rica
Willemstad
Hong Kong
Hong Kong
Hong Kong
Pune
Mumbai

India Mumbai-59
Caesarea
Israel
Tokyo
Japan
Seoul
Korea, Republic of
Malaysia Kuala Lumpur
Malaysia Kuala Lumpur
Mexico Mexico City
Auckland
Auckland

New Zealand
New Zealand

Puerto Rico
Singapore
South Africa
South Africa

San Juan
Singapore
Westville
Westville

Thailand

Thailand Huai Khwang
District,
Bangkok
Lumpini
Phatumwan,
Bangkok
Sariyer,
Istanbul
Jebel Ali,
Dubai

Turkey

United Arab
Emirates

Registered Office addresses
UK
London
Kent

York
Hull
Edinburgh

Rest of Europe
Vienna

Zaventem

Hoersholm
Helsinki
Neuilly-sur-Seine

Hamburg

Tuttlingen

Athens

Dublin 1

Dublin 2

Milan

Luxembourg
Amsterdam

Oslo
Warsaw
Lisbon

Moscow

Puschino

Barcelona

Molndal
Gothenburg
Baar
Aarau

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
4th Floor, 115 George Street, Edinburgh, EH2 4JN

Concorde Business Park, 1/C/3 2320,
Schwechat, Austria
Hector Heenneaulaan 366,
1930 Zaventem, Belgium
Slotsmarken 14, Hoersholm, DK-2970, Denmark
Ayritie 12 C, 01510, Vantaa, Finland
40, Boulevard du Parc,
92200 Neuilly-sur-Seine, France
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
13-18 City Quay, Dublin 2, D02 ED70,
Ireland
Via de Capitani 2A, 20864,
Agrate Brianza (MI), Italy
163, Rue de Kiem, L-8030 Strassen, Luxembourg
Bloemlaan 2, 2132NP, 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
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
Varbergsgatan 2A/412 65 Göteborg/Sweden
Oberneuhofstr 10d, Baar, 6340
Schachenallee 29, 5000, Aarau, Switzerland

Company name

Smith & Nephew Medical
(Shanghai) Limited

Smith & Nephew Medical (Suzhou) Limited
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.
Smith & Nephew Beijing Holdings Limited1
Smith & Nephew Limited
Smith & Nephew Suzhou Holdings Limited1
Adler Mediequip Private Limited
ArthoCare India Medical Device
Private Limited2
Smith & Nephew Healthcare Private Limited
Ortho-Space Ltd.3 (16.8%)
Smith & Nephew KK
Smith & Nephew Chusik Hoesia
Smith & Nephew Healthcare Sdn Berhad
Smith & Nephew Services SDN. BHD.
Smith & Nephew S.A. de C.V.
Smith & Nephew Limited1
Smith & Nephew Superannuation
Scheme Limited
Smith & Nephew, Inc.
Smith & Nephew Pte Limited1
Smith & Nephew (Pty) Limited1
Smith & Nephew Pharmaceuticals
(Proprietary) Limited
Smith & Nephew Limited

Sri Siam Medical Limited1,3 (48.99%)

Smith ve Nephew Medikal Cihazlar Ticaret
Limited Sirketi
Smith & Nephew FZE

1 Holding company.

2 Dormant company.

3 Not 100% owned by Smith & Nephew Group.

In liquidation.

5 Directly owned by Smith & Nephew plc.

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

Registered Office addresses

US
Wilmington

Philadelphia

Dover

Phoenix

Sherborn

Wilmington 19808

CT Corporation, 1209 Orange Street,
Wilmington DE 19801, USA
CT Corporation 1515 Market Street,
Philadelphia, PA 19102, USA
160 Greentree Drive, Suite 101,
Dover, Delaware, 19904, USA
CT Corporation System, 3800 North Central
Avenue, Phoenix AZ 85012, USA
c/o Martha Murray 19 Saddlebrook Road
Sherborn, MA 01770, USA
251 Little Falls Drive,
Wilmington DE 19808, USA

Africa, Asia, Australasia and Other America
Buenos Aires

Calgary

North Ryde
São Paulo

Maipu 1300, 13th Floor,
City of Buenos Aires, Argentina
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
c/o Maples Corporate Services Limited, P.O. Box
309, Ugland House, Grand Cayman, KY1-1104,
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

South Church Street,
Georgetown

Toronto

Registered Office addresses

Shunyi District, Beijing

Shanghai Free Trade Test
Zone

Suzhou City

Beijing Economic and
Technical Development
Area
Bogota

Costa Rica

Willemstad
Hong Kong

Pune

Mumbai

Mumbai-59

Caesarea
Tokyo

Seoul

Kuala Lumpur

Mexico City

22 Linhe Avenue, Linhe Economic Development
Zone, Shunyi District, Beijing, 101300, China
Part B, 4th Floor, Tong Yong Building,
No 188 Ao Na Rd, Shanghai Free Trade Test Zone,
Shanghai, China
12, Wuxiang Road, West Area of Comprehensive
Bonded Zone, Suzhou Industrial Park, Suzhou City,
SIP, Jiangsu Province, China
No. 98 Kechuang Dongliujie,
Beijing Economic and Technical Development Area,
Beijing, China
Calle 100 No. 7 – 33 to 1 P3,
Bogota D.C., 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
Level 25, Menara Hong Leong,
NO. 6 Jalan Damanlela Bukit Damansara
Kuala Lumpur W.P. 50490 Kuala Lumpur, Malaysia
Av. Insurgentes Sur, numero 1602, Piso No.7,
Oficina 702, Colonia Credito, Constructor,
Delegacion Benito Juarez, C.P. 03940, Mexico

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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NOTES TO THE COMPANY ACCOUNTS continued

8 GROUP COMPANIES continued
Registered Office addresses

Auckland

San Juan

Singapore

Westville

Huai Khwang District,
Bangkok

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

Registered Office addresses

Lumpini Phatumwan,
Bangkok

Sariyer, Istanbul

Jebel Ali, Dubai

16th Floor, GPF Witthayu Tower A,
93/1 Wireless Road, Lumpini, Phatumwan,
Bangkok, 10330, Thailand
Bahcekoy Merkez Mah. Ergene Nehri SK
No:8/4 Bahcekoy Sariyer Istanbul, Turkey

PO Box 16993 LB02016, Jebel Ali,
Dubai, United Arab Emirates

9 SUBSIDIARY UNDERTAKINGS EXEMPT FROM AUDIT
The following UK subsidiaries will take advantage of the audit exemption set out within Section 479A of the Companies Act 2006 for the year ended
31 December 2018:

– Smith & Nephew China Holdings UK Limited (Registration number: 9152387)
– Smith & Nephew Investment Holdings Limited (Registration number: 384546)
– Smith & Nephew Trading Group Limited (Registration number: 681256)
– Smith & Nephew USD One Limited (Registration number: 10428326)
– TP Limited (Registration number: SC005366)

The Parent Company financial statements of Smith & Nephew plc on pages 178–186 do not form part of
the Smith & Nephew Annual Report on Form 20-F as filed with the SEC.

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GROUP INFORMATION

BUSINESS OVERVIEW AND GROUP HISTORY
In 2018, Smith & Nephew’s operations were 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 company 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. In 2019, a new global franchise commercial model will be implemented with three
dedicated franchises: Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management, each with their own president. The franchise
presidents will be responsible for implementing the operating decisions for their respective franchise in the US. Regional presidents in EMEA and
APAC will be responsible for this implementation in their respective regions.

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.

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
Manufacturing facility in Oklahoma City, Oklahoma, US
Regional headquarters in Andover, Massachusetts, US
Bioactives headquarters and laboratory space in Fort Worth, Texas, US
Research and office facility in Austin, Texas, 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

Approximate area (square feet 000’s)
13
60
968
473
288
265
248
192
155
144
139
136
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.

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GROUP INFORMATION continued

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.

RISK FACTORS
There are known and unknown risks and uncertainties relating to Smith & Nephew’s business. The factors listed on pages 188–191 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 since 2016 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 INFORMATION 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 2018, economic conditions worldwide continued to create several challenges for the Group, including the US Administration’s changed
approach to trade policy, deferrals of 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. 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.

There remain heightened levels of political and regulatory uncertainty in the UK following the result of the referendum in June 2016 to leave the
European Union, the triggering of Article 50 in March 2017 and the general election in June 2017. As of the date of this report, there remains
uncertainty as to the UK’s future relationship with the EU. This may adversely impact trading performance across the sector. Regulatory uncertainty
forms the most significant risk presently; the ability for us to continue to manufacture and register our products in a compliant manner for global
distribution is key. Smith & Nephew has taken steps to prepare for the various Brexit scenarios, including moving certain of its product certifications
from UK-based notified bodies to notified bodies based in the EU. The UK accounts for approximately 5% of global Group revenue and the majority
of our manufacturing takes place outside the UK and EU. There is also uncertainty around US-China trade relations, which has resulted in tariffs on
some medical devices being exported between the two countries.

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, Costa Rica 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.

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GROUP INFORMATION continued

RISK FACTORS continued
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.

Requirements of global regulatory agencies have become more stringent in recent years and we expect them to continue to do so. The Group’s
Quality and Regulatory Affairs team is leading a major Group-wide programme to prepare for implementation of the EU Medical Devices Regulation
(MDR), which came into force in May 2017, with a three-year transition period until May 2020. The regulation includes new requirements for the
manufacture, supply and sale of all CE marked products sold in Europe and requires the reregistration of all medical devices, regardless of where
they are manufactured.

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 2018, a provision of $192m 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 globally.

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 is also required to comply with the requirements of the EU General Data Protection Regulation (GDPR), which imposes additional
obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored
and became effective on 25 May 2018. As privacy and data protection have become more sensitive issues for regulators and consumers, new
privacy and data protection laws, such as the GDPR, continue to develop in ways we cannot predict. Ensuring compliance with evolving privacy and
data protection laws and regulations on a global basis may require us to change or develop our current business models and practices and may

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increase our cost of doing business. Despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational
harm in connection with our European activities as enforcement of such legislation has increased in recent years on companies and individuals
where breaches are found to have occurred. Failure to comply with the requirements of privacy and data protection laws, including GDPR, could
adversely affect our business, financial condition or results of operations.

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 EU 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 and therefore, will fully apply
in EU Member States from 26 May 2020.

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. The Group also develops and sells
certain products that are or will be connected to networks and/or the internet. 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.

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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 Markets’ on pages 10–11, ‘Financial review’ on pages 38–39 and ‘Taxation information for shareholders’ on pages 206–207.

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
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 and disposal related items
Restructuring and rationalisation costs
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

2018
$ million

2017
$ million

2016
$ million

2015
$ million

2014
$ million

4,904
(1,298)
3,606
(2,497)
(246)
863
(51)
(20)
(11)
–
781
(118)
663

76.0¢
75.7¢
873
876

663
(7)
120
38
118
–
–
(51)
881
100.9¢

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¢

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 194–198.

3 Adjusted earnings per ordinary share is calculated by dividing adjusted attributable profit by the basic weighted number of ordinary shares.

Reconciliation of operating proft to trading proft

Operating profit
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition intangibles
Legal and other
Trading profit

2018
$ million
863
(7)
120
113
34
1,123

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

2014
$ million
749
118
61
129
(2)
1,055

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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)
Distribution from/(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 fnancial 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

2018
$ million

2017
$ million

2016
$ million

2015
$ million

2014
$ million

4,982
3,077
8,059
177
608
18
(214)
4,285
4,874
1,720
1,465
3,185
8,059

1,108
(52)
(125)
931

(351)
(29)
–
2
–
10
(321)
(45)
197
–
(20)
(1,281)
(1,104)

22.7%
36.0¢1
5.0%

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¢
4.7%

7.1%

7.9%

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%

8.4%

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%

7.7%

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%

8.1%

1 The Board has proposed a final dividend of 22.0 US cents per share which together with the first interim dividend of 14.0 US cents makes a total for 2018 of 36.0 US cents.

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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, net debt to adjusted EBITDA, 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.

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Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying growth in
revenue as follows:

2018
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

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

Reported growth
%
4
11
(2)
–
10
3
3
2
2
3
(6)
10
3

Reported growth
%
1
7
(3)
4
(11)
4
6
–
2
–
–
13
2

Underlying growth
%
2
8
(3)
(1)
10
3
3
2
–
1
(6)
9
2

Underlying growth
%
3
6
(3)
4
7
3
5
–
2
–
–
13
3

Acquisitions/disposals
%
1
2
–
–
–
–
–
–
–
–
–
–
–

Acquisitions/disposals
%
(2)
–
–
–
(19)
–
–
–
–
–
–
–
(1)

Reconciling items
Currency impact
%
1
1
1
1
–
–
–
–
2
2
–
1
1

Reconciling items
Currency impact
%
–
1
–
–
1
1
1
–
–
–
–
–
–

Trading proft, trading proft margin, trading cash flow and trading proft 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.
The adjustments made exclude 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 are excluded from operating profit and cash generated from operations when arriving at trading profit
and trading cash flow. The cash contribution to fund defined benefit pension schemes that are closed to future accrual are also excluded from cash
generated from operations when arriving at trading cash flow.

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NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES continued
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’).

2018 Reported
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other 7
Capital expenditure
2018 Adjusted

Revenue
$ million
4,904
–
–

–
–
–
4,904

Operating
profit1
$ million
863
(7)
120

113
34
–
1,123

Profit before
tax2
$ million
781
(7)
120

118
38
–
1,050

Attributable
profit4
$ million
663
(6)
96

Cash generated
from operating
activities5
$ million
1,108
3
83

91
37
–
881

–
104
(347)
951

Taxation3
$ million
(118)
1
(24)

(27)
(1)
–
(169)

Earnings
per share6
¢
76.0
(0.7)
11.0

10.3
4.3
–
100.9

Acquisition and disposal related items: For the year to 31 December 2018 the credit relates to a remeasurement of contingent consideration for
a prior year acquisition and adjustments to provisions on disposal of a business, partially offset by costs associated with the acquisition of Rotation
Medical, Inc.

Restructuring and rationalisation costs: For the year to 31 December 2018, these costs relate to the implementation of the Accelerating
Performance and Execution (APEX) programme that was announced in February 2018.

Amortisation and impairment of acquisition intangibles: For the year to 31 December 2018 the charge relates to the amortisation of intangible
assets acquired in material business combinations.

Legal and other: For the year ended 31 December 2018 charges primarily relate to legal expenses for ongoing metal-on-metal hip claims and an
increase of $72m in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated metal-on-metal
hip claims globally. The year to 31 December 2018 also includes costs for implementing the requirements of the EU Medical Device Regulations
that will apply from May 2020. These charges in the year to 31 December 2018 were partially offset by a credit of $84m relating to settlements with
insurers related to product liability claims involving macrotextured components withdrawn from the market in 2003. $35m of cash funding to closed
defined benefit pension schemes is excluded from trading cash flow.

2017 Reported
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other 7
US tax reform
Capital expenditure
2017 Adjusted

Revenue
$ million
4,765
–
–

–
–
–
–
4,765

Operating
profit1
$ million
934
(10)
–

140
(16)
–
–
1,048

Profit before
tax2
$ million
879
(10)
–

140
(13)
–
–
996

Taxation3
$ million
(112)
2
–

(40)
12
(32)
–
(170)

Attributable
profit4
$ million
767
(8)
–

100
(1)
(32)
–
826

Cash generated
from operating
activities5
$ million
1,273
3
15

–
25
–
(376)
940

Earnings
per share6
¢
87.8
(0.9)
–

11.4
(0.1)
(3.7)
–
94.5

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OTHER INFORMATION continued

Acquisition and disposal related items: 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 ended 31 December 2017 charges primarily relate to legal expenses for patent litigation with Arthrex and 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 globally. These charges were offset by a $54m credit following a settlement payment received from
Arthrex relating to patent litigation. $44m of cash funding to closed defined benefit pension schemes is excluded from trading cash flow.

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 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.

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

2018
$ million
1,108
(347)
2
(54)
(125)
584

2017
$ million
1,273
(376)
2
(50)
(135)
714

2016
$ million
1,035
(392)
3
(48)
(141)
457

Net debt to adjusted EBITDA ratio
Net debt to adjusted EBITDA ratio is used by the Group to measure leverage. Net debt is reconciled in Note 15 to the Group accounts. Adjusted
EBITDA is defined as trading profit before depreciation of property, plant and equipment and amortisation of other intangible assets.

The calculation of net debt to adjusted EBITDA ratio is set out below:

Net debt

Trading profit
Depreciation of property, plant and equipment
Amortisation of other intangible assets
Adjusted EBITDA
Net debt to adjusted EBITDA ratio (x)

2018
$ million
1,104

1,123
251
63
1,437
0.8

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OTHER INFORMATION continued

NON-IFRS FINANCIAL INFORMATION – ADJUSTED MEASURES continued
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, borrowings and loans
Net operating assets
Average net operating assets
Return on invested capital

2018
$ million
863
(118)
(14)
731

4,874
(92)
(34)
(105)
(365)
1,301
114
164
5,857
5,856
12.5%

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%

1 Being the taxation on interest income, interest expense, other finance costs, share of results of associates and profit on disposal of business.

CONTRACTUAL OBLIGATIONS
Contractual obligations at 31 December 2018 were as follows:

Debt obligations
Private placement notes
Operating lease obligations
Retirement benefit obligation
Purchase obligations
Capital expenditure
Other

Less than
one year
$ million
39
164
54
25
359
16
98
755

One to
three years
$ million
–
332
72
50
12
–
44
510

Payments due by period
More than
five years
$ million
–
522
52
–
–
–
3
577

Three to
five years
$ million
304
274
40
–
–
–
2
620

Other contractual obligations represent $20m of derivative contracts and $127m of acquisition consideration. Provisions that do not relate
to contractual obligations are not included in the above table.

The Group has currently agreed to pay annual supplementary payments of $25m until 2021 for the UK defined benefit plan. These supplementary
payments will be reviewed when the 30 September 2018 valuation has been completed.

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 111.

The Company does not have contracts or other arrangements which individually are essential to the business.

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OTHER INFORMATION continued

COMMENTARY ON THE INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017
– Group revenue increased by $96m from $4,669m to $4,765m in 2017.
– Cost of goods sold decreased by $24m from $1,272m to $1,248m in 2017 primarily due to underlying efficiencies.
– Selling, general and administrative expenses decreased by $6m from $2,366m to $2,360m. In 2017, administrative expenses included

amortisation of software and other intangible assets of $62m (2016: $61m), nil restructuring and rationalisation expenses (2016: $62m), an
amount of $140m relating to amortisation and impairment of acquired intangibles (2016: $178m), $10m credit for acquisition and disposal related
items (2016: $9m charge) and $16m net credit for legal and other items (2016: $30m credit). Excluding the above items, selling, general and
administrative expenses were $2,184m in 2017, an increase of $98m from $2,086m in 2016.

– Research and development expenditure as a percentage of revenue remained broadly consistent at 4.7% in 2017 (2016: 4.9%). Expenditure was

$223m in 2017 compared to $230m in 2016.

– Operating profit increased by $133m from $801m to $934m in 2017. The year-on-year increase in operating profit primarily reflects a gain of
$54m from the settlement of an intellectual property matter, no restructuring charges and lower amortisation and impairment of acquisition
intangibles in 2017.

– The taxation charge decreased by $166m from $278m to $112m in 2017. The reported tax rate was lower at 12.7% (2016: 26.2%) due to the $32m

net benefit in 2017 from US tax reform and the tax impact of the Gynaecology disposal in 2016.

COMMENTARY ON THE GROUP BALANCE SHEET AS AT 31 DECEMBER 2017
Non-current assets increased by $320m from $4,815m to $5,135m in 2017. This is principally attributable to the following:
– Property, plant and equipment increased by $67m from $982m to $1,049m in 2017. There were $308m of additions, $1m acquired with the
Rotation Medical acquisition and favourable currency movements of $34m. This was partially offset by depreciation of $243m and $33m of
assets disposed.

– Goodwill increased by $183m from $2,188m to $2,371m in 2017 due to additions of $132m from the acquisition of Rotation Medical and

favourable currency movements of $51m. Intangible assets decreased by $40m from $1,411m to $1,371m in 2017. Amortisation and impairment
during 2017 was $202m and this was partially offset by net additions of $70m, $61m from the acquisition of Rotation Medical and favourable
currency movements of $31m.

– Retirement benefit assets of $62m (2016: nil) for UK and US retirement schemes due to changes in actuarial assumptions and contributions

made during 2017.

– Deferred tax assets increased by $30m in the year from $97m in 2016 to $127m in 2017 due to changes primarily in deferred tax on

inventory provisions.

Current assets increased by $202m from $2,529m to $2,731m in 2017. This is principally attributable to the following:
– Inventories rose by $60m to $1,304m in 2017 from $1,244m in 2016 primarily due to favourable currency movements of $62m.
– The level of trade and other receivables increased by $73m to $1,258m in 2016 from $1,185m in 2016. The movement primarily relates to

increased net trade receivables of $68m (including favourable currency movements of $44m).

– Cash at bank has increased by $69m from $100m in 2016 to $169m in 2017 due to the timing of a receipt for the settlement of patent litigation

in 2017.

Current liabilities decreased by $2m from $1,348m in 2016 to $1,346m in 2017 primarily due to a $59m decrease in bank overdrafts to $27m and a
$18m decrease in provisions to $129m. These movements were partially offset by a $73m increase in trade and other payables to $957m primarily
due to $47m currency movements and $28m timing difference on the payment of expenses associated with a patent litigation gain.

Non-current liabilities decreased by $162m from $2,038m to $1,876m in 2017. This is principally attributable to the following:
– Long term borrowings decreased by $141m from $1,564m in 2016 to $1,423m in 2017 due to repayments made in 2017.
– Retirement benefit obligations decreased $33m from $164m in 2016 to $131m in 2017 due to changes in actuarial assumptions.
– Trade and other payables were $46m higher at $128m in 2017 from $82m in 2016 primarily due to movements in deferred and contingent

consideration for acquisitions.

– Provisions decreased by $37m from $134m in 2016 to $97m in 2017 primarily due to changes in classification between provisions due within

one year.

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OTHER INFORMATION continued

FINANCIAL CALENDAR

Annual General Meeting
First quarter Trading Report
Payment of 2018 final dividend
Half year results announced
Third quarter Trading Report
Payment of 2019 interim dividend
Full year results announced
Annual Report available
Annual General Meeting

1 Dividend declaration dates.

11 April 2019
2 May 2019
8 May 2019
31 July 20191
31 October 2019
November 2019
February 20201
February/March 2020
April 2020

Annual General Meeting
The Company’s Annual General Meeting (‘AGM’) will be held on Thursday, 11 April 2019 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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INFORMATION FOR SHAREHOLDERS

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 US, the Company’s ordinary shares are traded in the form of ADSs, evidenced by ADRs, on the New York Stock Exchange under the symbol
SNN. Each American Depositary Share represents two ordinary shares. Deutsche Bank is the authorised depositary bank for the Company’s ADR
programme. This relationship is governed under a Depositary Agreement that contains a clause which the Company has been advised by different
Depositary Banks was previously considered as standard. This clause supports what we understand to be the normal practice under the US voting
system, whereby votes which have not been instructed are then deemed to have given a discretionary proxy (‘auto-proxy’). Whilst the wording of
our Depositary Agreement does grant auto-proxy rights, the Company can confirm that we do not believe that it is appropriate, within a UK context,
to utilise this clause. The Company has therefore always instructed our Depositary Bank to not exercise this right and to only vote those ADRs which
have been specifically instructed. The Company will look to remove this clause when updating the Depositary Agreement clause during the course
of 2019.

It is also the Company’s practice to always notify our ADR holders of upcoming Annual General Meetings and General Meetings and the
availability of relevant documentation on the Company website as well as providing instructions on how to submit votes, where applicable.
This is in accordance with US regulations, which require NYSE ADR listed issuers to solicit ADR votes regardless of the wording in their
Depositary Agreement.

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INFORMATION FOR SHAREHOLDERS continued

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.

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 2018 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
$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

For
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 2018, a fee of one US cent per ADS was collected on the 2017 final dividend paid in May and a fee of one US cent per ADS was collected on
the 2018 interim dividend paid in October. In the period 1 January 2018 to 15 February 2019, the total program payments made by Deutsche Bank
Trust Company Americas were $829,350.

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INFORMATION FOR SHAREHOLDERS continued

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 reaffirmed 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 October or November. A final dividend will be
recommended by the Board of Directors and paid subject to approval by shareholders at the Company’s Annual General Meeting.

Future dividends of Smith & Nephew will be dependent upon: future earnings; the future financial condition of the Group; the Board’s dividend
policy; and the additional factors that might affect the business of the Group set out in ‘Special note regarding forward-looking statements’ and
‘Risk Factors’.

DIVIDENDS PER SHARE
The table below sets out the dividends per ordinary share in the last five years:

Pence per share:

Interim
Final

Total
US cents per share:

Interim
Final

Total

2018

2017

2016

Years ended 31 December
2014

2015

10.670
17.1201
27.790

14.000
22.000
36.000

9.340
16.240
25.580

12.300
22.700
35.000

10.080
14.420
24.500

12.300
18.500
30.800

7.680
13.000
20.680

11.800
19.000
30.800

6.820
12.340
19.160

11.000
18.600
29.600

1 Translated at the Bank of England rate on 15 February 2019.

From 6 April 2018 dividends below £2,000 per tax year became tax free and dividends above £2,000 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. If you need to pay
tax, how you pay depends on the amount of dividend income you receive in a year. If your dividend income is up to £10,000 you can request
HMRC to change your tax code so that the tax will be taken from your wages or pension or you can complete a self-assessment tax return. If your
dividend income is over £10,000 in the tax year, you will need to complete a self-assessment tax return. 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.

Between 6 April 2016 and 6 April 2018 dividends below £5,000 per tax year were tax free and dividends above £5,000 per tax year were subject
to personal income tax at the rates referred to above.

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 2018 of 22.0 US cents per ordinary share, the record date will
be 5 April 2019 and the payment date will be 8 May 2019. 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 17 April 2019. The ordinary
shares will trade ex-dividend on both the London and New York Stock Exchanges from 4 April 2019.

The proposed final dividend of 22.0 US cents per ordinary share, which together with the interim dividend of 14.0 US cents, makes a total for 2018
of 36.0 US cents.

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INFORMATION FOR SHAREHOLDERS continued

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 are held by
the Company Secretary, although the Board reserves the right to transfer them to a member of the Board should it so wish.

Shareholdings
As at 15 February 2019, to the knowledge of the Group, there were 14,301 registered holders of ordinary shares, of whom 95 had registered
addresses in the US and held a total of 185,400 ordinary shares (0.02% of the total issued). Because certain ordinary shares are registered in
the names of nominees, the number of shareholders with registered addresses in the USA is not representative of the number of beneficial
owners of ordinary shares resident in the US.

As at 15 February 2019, 41,419,215 ADSs equivalent to 82,838,430 ordinary shares or approximately 9.5% of the total ordinary shares in issue,
were outstanding and were held by 85 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 15 February 2019, the Company is not aware of any person who has a significant direct or indirect holding of securities in the Company,
as defined in the Disclosure and Transparency Rules (DTRs) of the Financial Conduct Authority (FCA), other than as shown below, 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.

The following table shows the last notification(s) received by the Company, in accordance with the FCA’s DTRs relating to notifiable interests in the
voting rights in the company’s issued share capital:

BlackRock, Inc.

* Percentage of ordinary shares in issue, excluding Treasury shares.

15 February 2019
%*
5.2

15 February 2019
’000
46,427

2018
%*
5.2

2018
’000
46,427

As at 31 December
2016
%*
5.2

2017
%*
5.2

2017
’000
46,427

As at 31 December
2016
’000
46,427

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INFORMATION FOR SHAREHOLDERS continued

Purchase of ordinary shares on behalf of the Company
At the AGM, the Company will be seeking a renewal of its current permission from shareholders to purchase up to 10% of its own shares. 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 2018 to 15 February 2019, in the months listed below, the Company has purchased 3,644,693 ordinary shares at a cost
of $65,825,922.

14-15 February 2018 (Q4 2017)
16-23 May 2018 (Q1 2018)
31 July-1 August 2018 (Q2 2018)
19-22 November 2018 (Q3 2018)
11-15 February 2019 (Q4 2018)

Total shares
purchased
000’s
557
1,226
216
670
976

Average price
paid per share
pence
1,261.6308
1,320.3255
1,324.2552
1,395.2269
1,465.1940

Approximate US$ value
of shares purchased
under the plan
$9,892,872
$21,758,003
$3,772,227
$12,015,283
$18,387,536

The shares were purchased in the open market by J.P. Morgan Securities plc on behalf of the Company.

Exchange controls and other limitations affecting security holders
There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that affect the payment of dividends,
interest or other payments to non-resident holders of Smith & Nephew’s securities, except for certain restrictions imposed from time to time by
Her Majesty’s Treasury of the United Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964,
against the Government or residents of certain countries.

There are no limitations, either under the laws of the UK or under the Articles of Association of Smith & Nephew, restricting the right of non-UK
residents to hold or to exercise voting rights in respect of ordinary shares, except that where any overseas shareholder has not provided to the
Company a UK address for the service of notices, the Company is under no obligation to send any notice or other document to an overseas
address. It is, however, the current practice of the Company to send every notice or other document to all shareholders regardless of the country
recorded in the register of members, with the exception of details of the Company’s dividend reinvestment plan, which are not sent to shareholders
with recorded addresses in the US and Canada.

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INFORMATION FOR SHAREHOLDERS continued

TAXATION INFORMATION FOR SHAREHOLDERS
The comments below are of a general and summary nature and are
based on the Group’s understanding of certain aspects of current UK
and US federal income tax law and practice relevant to the ADSs and
ordinary shares not in ADS form. The comments address the material
US and UK tax consequences generally applicable to a person who is
the beneficial owner of ADSs or ordinary shares and who, for US federal
income tax purposes, is a citizen or resident of the US, a corporation
(or other entity taxable as a corporation) created or organised in
or under the laws of the US (or 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, indirectly
or constructively 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 2018.

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 US
The UK does not currently impose a withholding tax on dividends paid
by a UK corporation, such as the Company.

Distributions paid by the Company will 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.

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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 1.5% 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.

INFORMATION FOR SHAREHOLDERS continued

Inheritance and estate taxes
HM Revenue & Customs imposes inheritance tax on capital
transfers which occur on death, and in the seven years preceding
death. 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 US 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 US 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.

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INFORMATION FOR SHAREHOLDERS continued

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 Company’s Articles of
Association provide that Directors should regularly be submitted for
re-election at intervals of three years, however in accordance with the
UK Corporate Governance Code, all Directors are subject to annual re-
election. 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 a 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 2018.

Voting rights of ordinary shares
The Company’s Articles of Association provide that 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 chair 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.

It is the Company’s usual practice to vote by poll at Annual
General Meetings.

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.

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INFORMATION FOR SHAREHOLDERS continued

Matters are transacted at general meetings of the Company by the
processing and passing of resolutions of which there are two kinds;
ordinary or special resolutions:
– Ordinary resolutions include resolutions for the re-election of
Directors, the approval of financial statements, the declaration
of dividends (other than interim dividends), the appointment and
re-appointment of auditors or the grant of authority to allot shares.
An ordinary resolution requires the affirmative vote of a majority of
the votes of those persons voting at the meetings at which there is
a quorum.

– Special resolutions include resolutions amending the Company’s

Articles of Association, dis-applying statutory pre-emption rights or
changing the Company’s name; modifying the rights of any class of
the Company’s shares at a meeting of the holders of such class or
relating to certain matters concerning the Company’s winding up.
A special resolution requires the affirmative vote of not less than
three-quarters of the votes of the persons voting at the meeting at
which there is a quorum.

Annual General Meetings must be convened upon advance written
notice of 21 days. Other general meetings must be convened upon
advance written notice of at least 14 clear days. The days of delivery or
receipt of notice are not included. The notice must specify the nature
of the business to be transacted. Meetings are convened by the Board
of Directors. Members with 5% of the ordinary share capital of the
Company may requisition the Board to convene a meeting.

Variation of rights
If, at any time, the Company’s share capital is divided into different
classes of shares, the rights attached to any class may be varied,
subject to the provisions of the Companies Act, with the consent in
writing of holders of three-quarters in nominal value of the issued
shares of that class or upon the adoption of a special resolution passed
at a separate meeting of the holders of the shares of that class. At every
such separate meeting, all the provisions of the Articles of Association
relating to proceedings at a general meeting apply, except that the
quorum is to be the number of persons (which must be two or more)
who hold or represent by proxy not less than one-third in nominal value
of the issued shares of the class and at any such meeting a poll may
be demanded in writing by any person or their proxy who hold shares
of that class. Where a person is present by proxy or proxies, he is
treated as holding only the shares in respect of which the proxies are
authorised to exercise voting rights.

Rights in a winding up
Except as the Company’s shareholders have agreed or may otherwise
agree, upon the Company’s winding up, the balance of assets available
for distribution:
– After the payment of all creditors including certain preferential

creditors, whether statutorily preferred creditors or normal creditors;
and

– Subject to any special rights attaching to any other class of shares;

– Is to be distributed among the holders of ordinary shares according

to the amounts paid-up on the shares held by them. This distribution
is generally to be made in US Dollars. A liquidator may, however,
upon the adoption of any extraordinary resolution of the
shareholders and any other sanction required by law, divide among
the shareholders the whole or any part of the Company’s assets
in kind.

Limitations on voting and shareholding
There are no limitations imposed by English law or the Company’s
Articles of Association on the right of non-residents or foreign
persons to hold or vote the Company’s ordinary shares or ADSs,
other than the limitations that would generally apply to all of the
Company’s shareholders.

Transfers of shares
The Board may refuse to register the transfer of shares held in
certificated form which:
– Are not fully paid (provided that it shall not exercise this discretion in
such a way as to prevent stock market dealings in the shares of that
class from taking place on an open and proper basis);

– Are not duly stamped or duly certified or otherwise shown to the
satisfaction of the Board to be exempt from stamp duty, lodged at
the Transfer Office or at such other place as the Board may appoint
and (save in the case of a transfer by a person to whom no certificate
was issued in respect of the shares in question) accompanied by
the certificate for the shares to which it relates, and such other
evidence as the Board may reasonably require to show the right of
the transferor to make the transfer and, if the instrument of transfer
is executed by some other person on his behalf, the authority of that
person so to do;

– Are in respect of more than one class of shares; or
– Are in favour of more than four transferees.

Deferred shares
Following the re-denomination of share capital on 23 January 2006,
the ordinary shares’ nominal value became 20 US cents each.
There were no changes to the rights or obligations of the ordinary
shares. In order to comply with the Companies Act 2006, a new class
of Sterling shares was created, deferred shares, of which £50,000 were
issued and allotted in 2006 as fully paid to the Chief Executive Officer.
These shares were subsequently transferred and are now held by the
Company Secretary, although the Board reserves the right to transfer
them to a 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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INFORMATION FOR SHAREHOLDERS continued

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
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

192–198
n/a
n/a
188–191

180, 187, 200, 216
2–49, 133–134, 199
150–151, 182–186
144–145, 187
None

2, 4, 36–39, 188–191, 199
39, 154–156, 173–174
4, 30–31, 137
10–11, 38–39, 187–191
187
198
216

53–61
84–114
53–83
24–25, 138
99–100, 177

204
177, 188
n/a

116–177
163–164
203
None

201–202, 205
n/a
201–202
n/a
n/a
n/a

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INFORMATION FOR SHAREHOLDERS continued

CROSS REFERENCE TO FORM 20-F continued
This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.

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
208–209
None
205
206–207
n/a
n/a
216
182–186
156–161, 188–191

n/a
n/a
n/a
201–202

None
None
82–83
n/a
76
83
80–81, 138
n/a
172, 205
n/a
52
n/a

n/a
116–177, 194–198

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INFORMATION FOR SHAREHOLDERS continued

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

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 Latin America, Asia (excluding Japan), Africa 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 are 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.

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INFORMATION FOR SHAREHOLDERS continued

GLOSSARY OF TERMS continued
Unless the context indicates otherwise, the following terms have the meanings shown below:

Term
Knee implants
LSE
MHRA
Negative Pressure Wound Therapy

NHS
NYSE
Orthopaedic products

Other Surgical Businesses

OXINIUM

Parent Company
Pound Sterling, Sterling, £, pence or p
SEC
Sports Medicine Joint Repair

Trading results

Trauma & Extremities

UK
Underlying growth

US
US Dollars, $ or cents or ¢

Meaning
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.
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.
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.
References to UK currency. 1p is equivalent to one hundredth of £1.
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

2017 Financial highlights
Accounting Policies
Accounts Presentation
Acquisitions
Acquisition and disposal related items
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

199
124, 129–131
216
7, 36, 175–176
135, 196, 197
201–202
208–209
81, 138
54–57
2–3, 187–191
14–22, 132–136
154–156
4–5
6–7
36–37
178
180–186
162–164, 182
198
52
124
210–211
189
131
142
84–114
116
173, 203
4, 37, 38, 143–144
24–25
177
26, 74–75
58–61
191
156–161
38–39
212–213
146–147
126
127
182–186
187
125
129–177
2–3, 187
128

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
Medical education
New accounting standards
Off-balance sheet arrangements
Operating profit
Other finance costs
Our markets
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 imperatives
Sustainability
Taxation
Taxation information for shareholders
Total shareholder return
Trade and other payables
Trade and other receivables
Treasury shares

125
117–123
201–216
148–150
163–164
138–139
151–152
150
150–151
4
137, 176
135, 196, 197
163–164
39, 156
28–29
29
129–131
187
137–138
139
10–11
10–11, 36–39, 187–191
178–186
24–25
162–164
144–145
10, 43
177, 188
30–31
135, 196, 197
165–170
188–191
40–51
27
192–193
177
171–172, 204–205
9
32–34
139–142
206–207
103
153–154
152–153
172

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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 2018 it exported certain medical devices to Iran, via sales by non-US entities, to a
privately owned Iranian distributor for sale in Iran. Sales by the distributor were made 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 2018, S&N’s gross revenues from sales to Iran were approximately US$3.4m and net losses were approximately US$1.1m.

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. Although the Group is not required to disclose the sales of US origin medical devices because such sales to Iran are licensed under
US law, the Group is including sales of these devices in its total gross revenue and net profit figures as it does not separately break out revenues
and profits by country of origin.

ABOUT SMITH & NEPHEW
The Smith & Nephew Group (the Group) is a portfolio medical technology business with leadership positions in Orthopaedics, Advanced Wound
Management and Sports Medicine, and revenue of approximately $4.9bn in 2018. 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 2018. 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. In 2018, the Group was 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 212–213. 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 15 February 2019, the latest practicable date for this Annual Report, the Bank of England rate was US$1.28
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 188–191 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