Smith & Nephew Annual Report 2020

FY2020 Annual Report · Smith & Nephew

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Life
Unlimited

Annual Report and Accounts 2020

Our Purpose

Life Unlimited captures the essence of our purpose to
improve the health issues that hinder people from living
their lives to the fullest. We design and make technology
that takes the limits off living, and we help healthcare
professionals achieve the same goal. Together we
improve life, while also improving performance.

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Contents

Strategic report

At a glance

Who we are

Chair’s statement

Chief Executive Officer’s review

Responding to COVID-19

Our global markets

Our business model

Key Performance Indicators

Financial review

Sustainability reporting

Investing in our people

Delivering innovation

Serving our customers

Our stakeholders

Risk report

Governance

Letter from the Chair

Board leadership and purpose

Nomination & Governance
Committee report

Audit Committee report

Compliance & Culture
Committee report

Our approach to stakeholders

102

Directors’ Remuneration report 106

Accounts

Statement of Directors’
responsibilities

Independent auditor’s
UK report

Group income statement

Group statement of
comprehensive income

Group balance sheet

Group cash flow statement

Group statement of changes
in equity

Other information

139

Group information

Other information

Shareholder information

140

148

149

150

151

214

220

227

Notes to the Group accounts

152

Company financial statements 205

Notes to the Company
accounts

207

Smith+Nephew Annual Report 2020

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At a glance

Our Performance

Our performance in 2020 reflected the significant
impact of COVID-19 across our markets.

Group revenue
$4,560m
Reported
-11.2%

Underlying1
-12.1%

Earnings per share (EPS)
51.3¢
-25%

Adjusted Earnings
per share1 (EPSA)
64.6¢
-37%

Dividend per share
37.5¢
Unchanged

Operating profit
$295m
-64%

Trading profit1
$683m
-42%

Return on invested capital1
(ROIC)
7.1%
-340bps

Operating profit margin
6.5%
-940bps

Trading profit margin1
15.0%
-780bps

R&D expenditure
$307m
+5%

HCPs trained
185,000+
+67%

Cash generated
from operations
$972m
-29%

Product donations
$4.7m

Trading cash flow1
$690m
-29%

KPIs on
pages 18–19

Financial
review on
pages 20–23

1 These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 222–226.

Smith+Nephew Annual Report 2020

Who we are

We are a leading portfolio
medical technology company

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

18,000

100

160+

employees supporting
healthcare professionals
in over

countries, for more than

years

Our strategy

Five 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

Smith+Nephew has been
responding to COVID-19 since
January 2020, first in China,
and then across all of our
markets globally.
» See page 10

Our culture

Our culture pillars
guide our behaviours
and build winning spirit:

» Care

» Collaboration

» Courage
» See page 30

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Smith+Nephew Annual Report 2020

Innovation
Innovation is at the heart of
Smith+Nephew. We deliver new
products that empower healthcare
professionals with options to
improve patient outcomes.
We develop technology through
our global Research & Development
(R&D) programme, and also acquire
exciting technologies where we can
add value and make a meaningful
difference to our customers and
their patients.

Manufacturing
and Quality
At Smith+Nephew we take great
pride in our manufacturing expertise.
Our main manufacturing facilities
in the Americas, Europe and Asia
continued to deliver our
vital products in 2020 despite
COVID-19.

Medical Education
Every year Smith+Nephew provides
medical education and training to
tens of thousands of surgeons and
nurses to help improve patient
outcomes through the safe and
effective use of our products.
» See pages 36–43

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We serve our customers
through three global franchises

» Read more about our
three global franchises
on pages 44–51

Orthopaedics
Orthopaedics includes an
innovative range of Hip and
Knee Implants used to replace
diseased, damaged or worn
joints, robotics-assisted
enabling technologies that
empower surgeons, and
Trauma products used to
stabilise severe fractures and
correct bone deformities.

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
reduce the human and
economic consequences
of wounds.

Smith+Nephew Annual Report 2020

Chair’s statement

Emerging
stronger from a
challenging year

Dear Shareholder
The 2020 financial performance was
disappointing when set against the
high expectations we had for the year.

Revenue was impacted by COVID-19
restrictions in all of our markets and the
resultant postponement of elective
surgeries. Faced with these challenges,
management took the decision that
Smith+Nephew had the financial strength
to weather this storm whilst continuing
to invest in the business and our strategy.
As a result, jobs were protected and we
proceeded with our plans to invest behind
product launches, R&D and acquisitions,
offset by some discretionary one-off
cost savings.

The combination of the lower revenue
and the sustained commitment to
investment had an impact on margin,
and consequently earnings, for the
year. Looking ahead, we expect these
investments to drive recovery and deliver
higher growth over time. This, in turn,
will support recovery in earnings.

Leadership
In July we welcomed Anne-Françoise
Nesmes as the Company’s new Chief
Financial Officer (CFO). Anne-Françoise
is an established finance leader who has
demonstrated her effectiveness supporting
ambitious strategic, investment and
efficiency programmes in her past roles,
including CFO of Merlin Entertainments
and Dechra Pharmaceuticals.

Graham Baker stood down as CFO
in April for a new opportunity, and left
with our best wishes for the future.
The Board is grateful to Ian Melling,
Senior Vice President Group Finance, who
served as interim CFO between Graham
leaving and Anne-Françoise joining.

Smith+Nephew has a strong, stable
and highly experienced leadership
team and the Board has noted the team
spirit developing between Roland,
Anne-Françoise and the whole
Executive Committee.

We aim for our Board to have a wide range
of background, skills and experiences and
were pleased to welcome new colleagues
with significant experience of leadership
in medtech within our major markets
of the US, Europe and China. More details
on changes to the Board can be found
on page 66 onwards.

Annual General Meeting
A highlight in our calendar is the Annual
General Meeting, with its opportunity to
interact directly with many of our private
shareholders. Unfortunately this could
not take place in the usual manner in 2020.
Rather we held a small official meeting,
followed by a virtual question and answer
session. I thank everyone involved in
delivering this unique event, and also thank
shareholders who submitted questions
and dialled-in to the virtual session.

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We expect these investments
to drive recovery and deliver
higher growth steadily
over time. This, in turn, will
support recovery in earnings.”

Roberto Quarta
Chair

Smith+Nephew Annual Report 2020

“ Smith+Nephew has
a strong, stable and
highly experienced
leadership team.”

37.5¢
per share dividend
unchanged from
2019

Given the ongoing lockdown restrictions,
which we expect to continue for some
time, we shall be livestreaming our 2021
AGM from our Expert Connect Centre
in Watford, UK, to enable all shareholders
to participate electronically and safely
whilst still being able to vote, speak and
raise questions. More details are contained
in the Notice of Meeting. We very much
hope to be able to revert to an in-person
meeting in 2022, as well as continuing
to livestream.

Dividend
Smith+Nephew has paid a dividend every
year since its shares were first listed on
the London Stock Market in 1937. This
reflects our long-standing commitment
to delivering value while also investing for
the future. In 2020, the Board determined
that the Company’s strong balance sheet,
effective response to COVID-19 and
our desire to balance the needs of all
our stakeholders, gave us the confidence
to ensure shareholders benefitted from
an annual distribution.

Therefore, the Board is recommending
a Final Dividend of 23.1¢ per share,
which, together with the Interim
Dividend of 14.4¢ per share, will give a
total distribution of 37.5¢ per share,
unchanged from 2019 and maintaining
our progressive dividend policy.

Culture
The Board wanted to ensure that COVID-19
did not stop our commitment to engage
beyond the senior leadership team to
take stock of the culture and morale
within Smith+Nephew. Prior to the crisis,
individual Board members had started a
series of face-to-face listening sessions
with employees. As we moved to an online
environment we were able to continue
this process with Board colleagues hosting
video calls with employees across US,
Europe and Asia Pacific. The invaluable
insights from these meetings are covered
in the Compliance & Culture Committee
report on page 98.

Your Board is proud of how
Smith+Nephew’s employees and
management team have conducted
themselves in 2020. In the face of an
unprecedented global situation, they
have continued to serve our customers
today whilst making solid progress in
transforming the Company for the future.
On behalf of the whole Board, I would
like to thank the team for their
dedication and fortitude.

Yours sincerely,

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Roberto Quarta
Chair

» Our governance
report starts on
page 66

“ Your Board is proud
of how Smith+Nephew’s
employees and management
team have conducted
themselves in 2020.”

Smith+Nephew Annual Report 2020

We made significant improvement in our
engagement as measured by our Global
Employee Survey. We also reinforced our
commitment to Inclusion and Diversity
by beginning a Standing Together initiative,
as well as launching several Employee
Inclusion Groups, furthering our long-term
strategic priority to strengthen
our workforce.

We also made positive steps towards
meeting the ambitious targets set out
in our new sustainability strategy. These
are focused on creating a lasting positive
impact on our communities, minimising
our environmental impacts, innovating
sustainably and creating products that
enable people to live their life to the full.

You can read more about all of these
initiatives in this report.
» Investing in our people

page 28

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Chief Executive Officer’s review

Innovation-led
and focused
on growth

Dear Shareholder
In 2020 Smith+Nephew faced
unprecedented challenges as COVID-19
disrupted our business in every market.
Trading across the year was impacted,
with the second quarter being particularly
badly affected as healthcare systems shut
down elective procedures to focus on
providing treatment to COVID-19 patients.

Throughout this period we prioritised
the health and safety of employees,
continued to support our customers
and communities, and at the same time
undertook important work to strengthen
the Group. This included increasing
investment in R&D, launching multiple
new products, and making strategic
acquisitions in higher growth segments.

I am proud of the approach we took
and the progress we made.

Guided by our culture
Faced with a global pandemic we could
easily have made excuses. We did not.
Instead, our employees worked together
to care for our customers, our communities
and one another to further our purpose
of Life Unlimited.

From our sales representatives who slept
in their cars outside of hospitals to make
sure they were there for the customers
who needed them, to our team who
mobilised quickly to develop a ventilator
prototype, to our employees with health
care training who returned to their
communities to help treat those with
COVID-19, to our essential workers
who continued to come to our sites to
manufacture and deliver product to
our customers – across the business our
teams demonstrated our culture pillars
of Care, Collaboration and Courage.

Faced with a global
pandemic we could easily
have made excuses.
We did not.”

Roland Diggelmann
Chief Executive Officer

Smith+Nephew Annual Report 2020

2020 performance
We entered 2020 full of optimism following
record revenue in 2019 and a growth rate
we had not delivered for many years.
However, COVID-19 hit early in the year,
first in China, an important market for us,
and, soon after, all of our markets were
affected. As a result, our 2020 revenue
and profit were both down year-on-year.

The impact of COVID-19 was most
pronounced on our Orthopaedic
Reconstruction, Sports Medicine and
ENT businesses, driven by lower levels
of elective surgery.

Our Advanced Wound Management
and Trauma businesses remained more
resilient across the year.

The second quarter was particularly
difficult, with revenue falling by nearly
30%. We saw some improvement in
the summer and autumn, but rates of
COVID-19 infection increased again from
mid-October onwards. Encouragingly
the overall effect on the business was
less severe than we saw earlier in the year,
as some healthcare systems were able
to maintain non-COVID care at a
higher rate than before.

Even within this disappointing year
there were milestones of note. We sold
our millionth PICO◊ 7 Negative Pressure
Wound Therapy system and two millionth
OXINIUM◊ hip or knee implant. And the
success of recently launched products,
such as our OR3O◊ Dual Mobility Hip and
EVOS◊ System in Trauma, demonstrated
that true innovation will always
drive demand.

We also adapted in how we served our
customers. A highlight of this was our
medical education team, which pivoted
to online and delivered a record number
of training courses across the year.

New innovation
Smith+Nephew is an innovation-led
business. In 2020 we invested a record
$307 million in R&D and delivered
important launches. These included
cutting-edge digital solutions, such as a
new robotics system, a suite of connected
sports medicine surgical tools for the
operating room and a business and patient
management platform to help customers
expand outpatient care. Despite the
challenges, we intentionally maintained
our focus on developing and launching
new products so that we could regain
momentum as our markets recovered.

Investing in businesses and technologies
in higher-growth segments is at the core
of our acquisition strategy. The pandemic
did not stop us from making important
progress here too. In January 2020 we
acquired the developer of Tula®, a new
system for in-office delivery of ear tubes to
treat recurrent or persistent ear infections.
And in September we announced the
acquisition of an extremity orthopaedics
business that will significantly strengthen
our portfolio in this higher growth area.

You can read more about the work of
our R&D team, our product launches
and acquisitions later in this report.
» Delivering innovation

page 36

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2 million

implants made from
OXINIUM have been
used in the treatment
of patients

Two million patients have been treated with
implants made from OXINIUM Technology –
Smith+Nephew’s proprietary oxidised zirconium
alloy used in hip and knee replacements.

OXINIUM is a unique material that
combines the strength of metal with the
wear resistance of ceramic. Its hardness,
low-friction and resistance to roughening
and abrasion makes it ideal for a wide
variety of hip and knee applications.
The evidence behind OXINIUM is compelling.
Four major registries around the world have
shown OXINIUM to be the best performing
hip bearing on the market1–4 and it is the
only bearing technology with published
results of 45 million knee cycles in vitro wear
simulation testing, simulating 30 years
of normal activity.5, 6

OXINIUM Technology is a key component in
several advanced products offered through
Smith+Nephew’s innovative hip and knee
portfolios. This includes the POLAR3◊
Total Hip Solution, the OR3O◊ Dual Mobility
Hip System and the JOURNEY◊ II Total
and Unicompartmental Knee Systems.
» References available on

page 238

Smith+Nephew Annual Report 2020

Chief Executive Officer’s review continued

Our strategic imperatives

Together

Grow
1 Achieve the full
2 Transform the business

through enabling
technologies

potential of our portfolio 4 Strengthen talent

and capabilities

Effectively
5 Become the

best owner

3 Expand in high-growth

segments

2021 priorities
Our three priorities for 2021 build on
the work undertaken and investments
made in 2020 and are underpinned
by our strategic imperatives.

Return to top-line growth
and recapture momentum
Our first priority for 2021 is to return
to top-line growth and recapture the
momentum we were building prior to
COVID-19, with the ultimate aim of
increasing earnings through operating
leverage. This priority aligns with the
first three of our Strategic Imperatives
targeted at improving revenue growth.

Our focus here is to drive higher returns from
our differentiated product portfolio. Our
recent experience of launching innovative
products demonstrates that our emphasis on
commercial excellence can enhance growth.
Many of our recent new product launches
are at early stages, and there is considerable
scope to expand them both to new
customers, and into new markets. As an
example, later this year our new robotics
platform CORI will launch in Europe and India,
important markets for surgical robotics.

In 2021 we expect to again invest more in
R&D as we continue to develop innovation
that improves outcomes for patients and
customers and meets unmet clinical needs.
We have a strong pipeline across the
franchises with many launches planned,
including further digital technologies,
subject to completion of necessary
regulatory reviews, clearances and
approvals. These include a cementless
knee, a next-generation single-use
negative pressure wound therapy system
and upgrades to our robotics and
connected tower platforms. We also have
a significant programme of innovation
planned for China, including new products
made in China for China.

We also expect to make progress in
delivering value from recently acquired
assets. In particular there are opportunities
to drive synergistic growth in Trauma &
Extremities, Sports Medicine Joint Repair,
ENT and Advanced Wound Bioactives.
For instance, the acquired Sports Medicine
products REGENETEN and NOVOSTITCH◊,
which have been well received in the US,
are only at the start of their launch in
other markets.

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The Extremity Orthopaedics business,
acquired in January 2021, is expected
to deliver strong growth, and the Tula
System has the potential to transform
tympanostomy tube treatment of
children as ENT surgeries restart.

Drive further operational
improvement across the Group
Our second priority for 2021 is to drive
further operational improvement across
Smith+Nephew in order to provide more
resources for investment in the mid-term,
including in R&D. This priority aligns to
our strategic imperative to become
the best owner.

We are undertaking a programme
to transform our operations, which is
expected to deliver around $200 million
of annualised benefits by 2025 for a
one-off cost of around $350 million.

One major component of the programme is
to continue to optimise our manufacturing
network, including introducing digital
technologies and lean manufacturing.
We are building a new facility in Malaysia,
which will provide additional capacity in a
low-cost location to support future growth
and have expanded our site in Costa Rica.
We are outsourcing our global warehousing
and distribution functions in the US and
Europe to a specialist third party partner
and expect to benefit from the greater
scale and expertise of our partner, including
their advanced warehouse automation.

We will also focus on other process
efficiencies. We have already made
progress on commercial optimisation,
having completed buy-outs of a number
of third-party sellers in some markets.
Doing this brings us closer to our
individual sales representatives and to
our customers, as well as removing an
additional layer of cost. In addition, we
aim to simplify end-to-end processes
in all parts of our business.

“ Our medical education
team pivoted to online
and delivered a record
number of training
courses across the year.”

Smith+Nephew Annual Report 2020

“ In 2020 we sold
our one millionth
PICO◊ 7 single-use
NPWT System.”

Continue to respond effectively
to COVID-19
Protecting and supporting our employees
remains our priority in our response to
COVID-19. We are developing new ways
to work, and have initiated a Workplace
Unlimited programme to address
employees’ needs for flexible working.
We continue to invest in safety at our sites,
such as wearable sensor technologies
to encourage social distancing.

We are also focused on how we can
best support our customers in person
and virtually. This includes innovating
in how we deliver medical education
for customers to support the safe and
effective use of our products. In 2021
we will launch Education Unlimited,
a new global website platform with
medical education resources spanning
across our franchises.

We remain determined to balance
discretionary costs while at the same
time preparing for recovery. As examples,
travel remains restricted and company
meetings have been moved online.

Ready to deliver
I’m proud of the way Smith+Nephew
has responded to the challenges of 2020.
We’ve demonstrated our financial and
cultural resilience, and stayed focused
on supporting customers and advancing
our strategy for growth.

We expect the impact of COVID-19 on
our customers and markets to continue
in the first half of 2021, with the timing
and extent of the recovery still uncertain,
and Anne-Françoise covers our outlook
on page 23.

What I am certain of is that our recent
investments into innovation and the
portfolio are ready to translate into growth
acceleration. I’m excited by the pipeline
of new technology that’s approaching
launch, and by the potential of our recent
acquisitions as we integrate them into
Smith+Nephew. We have a clear set
of priorities, a strong team and
renewed energy.

Yours sincerely,

Roland Diggelmann
Chief Executive Officer

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“ Many of our recent
product launches are at
early stages, and there
is considerable scope
to expand them both
to new customers, and
into new markets.”

Smith+Nephew Annual Report 2020

Responding to COVID-19

Protecting employees
and serving customers

Smith+Nephew has been responding to COVID-19
since January 2020, first in China, and then across
all of our markets globally. Throughout the year we
prioritised the health and wellbeing of employees
and protecting jobs, supported our customers and
communities, and worked to ensure the business was
well prepared to respond as elective surgeries returned.

Maintaining Board effectiveness
The Board reacted to COVID-19
by seamlessly switching to a digital
environment. Board meetings were held
over video conference and we increased
the number of meetings, both to support
management and ensure effective
oversight of the Company’s response.

The Board was also determined not
to dilute its engagement with other
stakeholders. Employee engagement
sessions were moved online, with
Non-Executive Directors meeting
employees from the US, APAC and EMEA
in this manner. The Board also continued
to hear the voice of our customers,
for instance in October hearing from
a surgeon involved in the design of our
new robotics system CORI◊. Shareholder
meetings continued via video conference.
You can read more about the Board’s
stakeholder engagement in our Section
172 Statement on page 102.
» Read more in our Corporate
Governance section starting
on page 66

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+ Care

Taking care of each other
by social distancing
BumpTM is a cutting-edge system designed
to improve workplace safety and use
anonymous employee data to inform
effective social distancing. Bump
technology immediately alerts wearers
when they are getting too close to
another person. Following a successful trial,
Bump was rolled out at Smith+Nephew’s
Hull facility. In 2021 we expect to utilise
it at other major sites in Memphis,
Tennessee and Costa Rica.

Smith+Nephew Annual Report 2020

Special pandemic leave was introduced
so that no employee had to take unpaid
leave to care for a loved one or if asked
to self-isolate. Other measures taken
included enhancing our Employee
Assistance Programme to make it easier
for employees to access resources
to support their emotional, mental,
physical and financial wellbeing, as well
as reviewing objectives during the year
to ensure expectations were achievable
and aligned with business deliverables
in the second half of the year. Details of
the impact of COVID-19 on Remuneration
can be found in our Policy report on
page 106.
» Read more on page 28

Caring for employees
In 2020 our employees faced
unprecedented challenges. Many new
working practices were required whilst
we continued to serve our customers.

We took many measures to safeguard
employees, including temporarily closing
offices and supporting working from
home wherever possible.

At all our sites precautionary safety
measures were put in place consistent
with applicable local requirements.
These included social distancing measures,
temperature checks, availability of hand
sanitisers and other PPE equipment.
We limited business travel and
in-person meetings.

As a result we were able to continue
to manufacture our critical products
and supply customers as they strove to
improve the quality of life of patients.

No jobs were lost amongst our workforce
in 2020 as a result of COVID-19, and
we did not utilise the UK Government’s
furlough scheme.

We recognised that our duty of care
also extended to the broader welfare
of employees. For our sales force, for
whom a proportion of their income is
typically commission based, we ensured
that they retained a significant percentage
of regular income and used downtime
to enhance digital training on technical
product knowledge and business skills.

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Serving our customers
We continued to serve customers to
the best of our ability while respecting
local restrictions.

At the height of the global lockdown in
the second quarter of 2020, our Trauma
and Reconstruction teams supported
urgent patient cases, and our Advanced
Wound Management teams kept product
flowing to customers in both hospital
and community care settings.

We also launched new services for
customers. For example, in March we
launched a new digital education
programme designed to support the
development of surgeons by providing
educational webinars on the safe and
effective use of Smith+Nephew products
as well as surgical techniques. More than
11,000 healthcare professionals attended
in the first month. You can read more
about our medical education programme
on page 42.

In the US we launched a 24/7 helpline
where both patients and clinicians can
access information on our Advanced
Wound Management portfolio and
get immediate answers to questions
on the proper use of our products as
well as wound-related education,
with the intent of easing the burden
on healthcare providers.

We also continued to innovate,
and launched multiple new products
with a focus on enabling and digital
technologies. More details of our R&D
activities and product launches can
be found in the Innovation section
starting on page 36.

Extensive safety measures
to protect employees were
put in place at all our sites.

24/7

In the US we launched a 24/7
helpline where both patients
and clinicians can access
information on our Advanced
Wound Management portfolio

Smith+Nephew Annual Report 2020

Responding to COVID-19 continued

The ‘New Normal’
programme uses the
experience of the early
months of COVID-19
to identify, align or
accelerate existing
efforts to prepare us for
what comes next in our
marketplace as well
as in our own workplace.”

Supporting communities
Smith+Nephew actively engaged in
its communities, and made donations
of product and personal protective
equipment in 2020. We also supported
employee volunteering, including
registered healthcare professionals
wanting to return to front line care.

We are using our manufacturing expertise
to support the fight against COVID-19.
For example, in the UK we worked with
the University of Oxford and King’s College
London to develop OxVent, a low-cost
ventilator. Our facilities in Memphis and
Costa Rica assembled more than one
million face shields, and we used our
3D printers to produce PPE for donation
to non-profit organisation Church Health
in Memphis.

Our New Normal programme
COVID-19 has required companies
worldwide to adapt to new ways
of working. In July Smith+Nephew
launched its ‘New Normal’ programme,
with the objective of using the experience
of the early months of COVID-19 to
identify, align or accelerate existing
efforts to prepare us for what comes
next in our marketplace as well as
in our own workplace.

Our New Normal programme has two
workstreams: Workplace Unlimited
and Go to Market. Each is sponsored
by several members of the
Executive Committee.

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+ Collaboration

1 million+

Face shields assembled
by our teams in Memphis
and Costa Rica

Collaborating with our
suppliers and colleagues
to produce more than
one million face masks
Recognising the need for more face shields,
in April we started working with InTech
Industries Inc. (Birmingham, Alabama),
our existing supplier of face shields,
to ramp up production for the US.
Our Memphis team, joined by colleagues
in Costa Rica, assembled more than
one million face shields.

Smith+Nephew Annual Report 2020

7,000+

employees responded to
our Workplace Unlimited
survey, making it clear that
most employees wanted
the opportunity for
increased flexibility

New Normal – Workplace Unlimited
In August, we launched the Workplace
Unlimited survey to better understand
what flexibility meant to our teams.
More than 7,000 employees responded,
and from the feedback it was clear that
most employees wanted the opportunity
for increased flexibility, in some fashion.

With executive sponsorship by our
Chief HR Officer Elga Lohler, and President
Operations & GBS Mark Gladwell, a
project team of more than 50 colleagues
set out to further understand employee
needs regarding workspace solutions
and practices, and to design a new model
based on a common Group-wide set of
global flexibility principles. Through them
we will provide as much flexibility as
possible in the future.
» Read more on Workplace

Unlimited page 31

New Normal – Go to Market
COVID-19 will have a lasting impact
on our business and our markets. While
it has presented significant challenges,
it has also given us a unique opportunity
to put in place new approaches to serve
our customers better than ever before.

Go to Market is focused on evaluating
our current approaches and establishing
new and innovative ways to meet our
customers’ needs while driving growth.
It is led by Myra Eskes, President
APAC Region, Simon Fraser, President
Advanced Wound Management and
Skip Kiil, President Orthopaedics.

The project consists of workstreams
seeking ways to be more efficient and
effective across all facets of commercial
execution, from innovation to product
launch excellence, the use of digital
technology to enhance the customer
experience, and identifying and refining
ways to enhance value delivery to
healthcare systems, improve outcomes
and reduce cost of care.

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+ Courage

Supporting colleagues
who volunteered to
return to front line care
Wound Care Consultant, Tanja Lamm
is based in Germany. Before joining us,
she worked as a specialist in intensive
care and anaesthesia, providing care for
critically ill patients. With the outbreak
of the COVID-19 pandemic, Tanja took
special volunteering leave, returning
to the hospital to support her former
colleagues and care for patients in
the COVID-19 intensive care unit.

Smith+Nephew Annual Report 2020

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Our global markets

Smith+Nephew
competes in large
and attractive markets

The medical device and supplies segment of the global
healthcare industry is worth more than $400 billion per
annum. Within this, Smith+Nephew’s product segments
are worth around $38 billion, growing at approximately
4% annually prior to 2020 and the impact of COVID-19.

COVID-19 has increased
the focus on telehealth,
including solutions to
provide patient care
remotely over digital
platforms pre and
post procedure.

$38bn

Value of Smith+Nephew’s
addressable market segments

Average annual growth rate
across our segments prior
to COVID-19

Long-term growth has been driven
by lifestyle related health conditions,
such as increasing prevalence of diabetes
and obesity, lifestyle choices such as
greater levels of physical activity and
sport later in life, as well as improvements
to life expectancy meaning that there are
increasingly more patients in the world.
In emerging markets, these factors
have been compounded by economic
development driving demand, particularly
in China and India. At the same time,
governments are focused on reducing the
cost of healthcare, pushing down pricing.
Medical technology companies are under
pressure to continue to innovate, and also
to provide evidence supporting both the
clinical and economic benefits of products.

Clinical innovations, financial benefits
and patient preferences are prompting
hospitals and health systems to
move certain inpatient procedures to
outpatient settings.¹ The impact of
COVID-19 has accelerated this trend, as
providers try to keep patients separated
from COVID-19 patients, and also catch
up on elective procedures delayed by
lockdown measures. COVID-19 has
also increased the focus on telehealth,
including solutions to provide patient
care remotely over digital platforms
pre and post procedure.

The US is expected to continue to lead
the medical device industry reaching
$300 billion in annual sales by 2030.2
By this stage, China and India, who are
both growing at twice the global market
rate, are expected to be in the top five
markets, with over $200 billion and
$40 billion of sales respectively.

A highly regulated industry
The medical device sector is one of the
world’s most heavily regulated industries.

Regulations and industry codes govern
the way industry interacts with healthcare
professionals and government officials
globally, including the AdvaMed Code
of Ethics and the MedTech Europe
Code of Ethical Business Practice.

Anti-bribery and corruption legislation,
including the UK Bribery Act and the
US Foreign Corrupt Practices Act, also
apply to Smith+Nephew’s global business.
There is also a strong focus on compliance
and cost control in emerging markets,
especially in China. For more information
on our approach to compliance see
page 33.

National regulatory authorities govern
the design, development, approval,
manufacture, labelling, marketing and sale
of healthcare products. They also review
data supporting the products to ensure
they are safe and perform as intended.

1 Becker’s ASC Review: 4 trends driving

change in healthcare.

2 KPMG: Medical devices 2030: Making a

power play to avoid the commodity trap.

Smith+Nephew Annual Report 2020

The majority of countries require
products to be authorised or registered
prior to entering the market, and such
authorisation or registration needs to be
subsequently maintained. Smith+Nephew’s
major regulatory authorities include the
US FDA, the Medicines and Healthcare
products Regulatory Agency (MHRA) in
the UK, relevant EU Competent Authorities,
the Ministry of Health, Labour and Welfare
in Japan, the National Medical Products
Administration (NMPA) in China, and
the Australian Therapeutic Goods
Administration (TGA). Inspections and
audits by these authorities continue
to increase year-on-year and involve
significant and continued financial and
resource investment by Smith+Nephew
to respond appropriately. In addition
we are required to respond to new
regulations, such as the European
Union (EU) Medical Device Regulations
(MDR) which will be fully implemented
from May 2021 (see page 43).

Geo-political factors
Following the UK’s departure from the EU,
a new Trade and Cooperation Agreement
came into effect on 1 January 2021.
This includes commitment to zero tariffs
and zero quotas on all goods that comply
with the appropriate rules of origin.

In the UK, the CE mark can continue
to be used until 30 June 2023 and the
UK will develop a new regulatory system.
The UK continues to negotiate agreements
to reproduce the effects of EU trade
agreements with other countries.

US and Chinese tariffs remain in place
after no progress was made on a second
phase of negotiations in 2020. Relief
is unlikely in the near term, however,
as the US government is likely to focus
on domestic economic recovery, before
addressing outstanding trade issues.

Additionally, some countries are adopting
localisation and price-control policies
with respect to government procurement
of healthcare products that aim to
increase domestic manufacturing, with
the pandemic focusing greater attention
on global supply chains and accelerating
this trend.

The importance of seasonality
There tends to be a higher volume
of orthopaedic and sports medicine
procedures during the winter months
when accidents and sports-related
injuries are more frequent. Elective
procedures tend to slow down in
the summer months due to holidays.
Advanced Wound Management is
less impacted by seasonality due to
the nature of the products.

At Smith+Nephew, the majority of our
business is in the northern hemisphere,
including approximately 50% in the US
and 20% 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 that have
reached their annual deductible amount
and/or annual out-of-pocket cap before
year’s end will find it to be cost-effective
to schedule necessary procedures later
in that year rather than delaying into
the next year.

Competition
Smith+Nephew’s three global franchises
have several major competitors who differ
with respect to product focus, geographic
reach and scale. For example, our main
surgical competitors are larger in scale
and tend to be more exposed to the US,
whereas the majority of our key wound
competitors are not US-centric.

In our Orthopaedic franchise we are
one of four leading players, competing
against US-based companies Stryker,
Zimmer Biomet and DePuy Synthes
(a Johnson & Johnson company). In
Sports Medicine, Smith+Nephew holds
a leading position behind Arthrex (US),
and also competes against Stryker
and DePuy Mitek.

We are the second largest global
Advanced Wound Management business
in terms of revenue, with the broadest
product range. In the Advanced Wound
Care sub-segment we compete with
Mölnlycke (Sweden) and ConvaTec (UK).
In Advanced Wound Devices, we are the
primary challenger to Negative Pressure
Wound Therapy incumbent 3M. In our
Advanced Wound Bioactives franchise,
we have leadership positions in our
respective categories.

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Market size 20201
Orthopaedics

Hip and
Knee Implants
$12.6bn
+2% -15%

2017–19
Average
growth

2020
Growth

Trauma and
Extremities
$6.5bn
+4% -4%

2017–19
Average
growth

2020
Growth

A Smith+Nephew2

B Zimmer Biomet

C Stryker

D DePuy Synthes4

E Others

11%

33%

22%

19%

15%

A Smith+Nephew2

B DePuy Synthes4

C Stryker

D Zimmer Biomet

E Others

40%

22%

Sports Medicine3

Advanced Wound
Management

$4.6bn
+5% -12%

2017–19
Average
growth

2020
Growth

$9.1bn
+5% -3%

2017–19
Average
growth

2020
Growth

A Smith+Nephew2

B Arthrex

C Stryker

D DePuy Mitek4

E Others

26%

33%

11%

13%

17%

A Smith+Nephew2

B 3M5

C Mölnlycke

D ConvaTec

E Others

14%

19%

51%

1 Data used in 2020 estimates generated by

Smith+Nephew is based on publicly available sources
and internal analysis and represents an indication
of market shares and sizes.

2 Smith+Nephew 2020 market share unchanged

from 2019 final data. 2019 Annual Report published
estimates based on preliminary data. 2019 final data
was Hip & Knee Implants 11%, Trauma & Extremities 7%,
Sports Medicine 26% and AWM 14%.

3 Representing repair products and arthroscopic
enabling technologies, and excluding ENT.

4 A division of Johnson & Johnson.
5 3M acquired Acelity in 2019.

Smith+Nephew Annual Report 2020

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Our business model

Value creation is driven
by our 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.
» See page 28 for more
Ethics & compliance
Committed to doing business the right way,
compliance is embedded in the way we work.
» See page 33 for more
Sustainability
Our sustainability strategy includes challenging
targets set over the long term in the three
areas of People, Planet and Products.
» See page 24 for more
Research & development
Innovation is part of our culture and we
are protecting the amount we invest
in new products.
» See page 36 for more
Manufacturing & quality
Operating global manufacturing efficiently
and to high standards to ensure quality
and competitiveness.
» See page 40 for more
Medical education
Supporting the safe and effective use of
our products through medical education.
» See page 42 for more
Sales & marketing
Supporting customers through highly
specialised sales teams with in-depth
technical product knowledge that
surgeons and nurses value greatly.
» See page 44 for more

Purpose-driven culture
Having a clear purpose gives employees
a sense of belief and determination and a
common goal. This supports a strong
culture which drives performance across
the business both in terms of financial
and non-financial value.

» See page 28 to read
how our culture
guided us in 2020

» See page 6 to read
about our strategic
progress in 2020

Life
Unlimited

Strategic imperatives
Our five strategic imperatives are
fundamental to how we focus the
resources of the business to maximise
commercial impact in our markets.
They form the basis of our value
creation plan for the medium term.

Smith+Nephew Annual Report 2020

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.

» See pages 36–40
to read more about
our innovation

» See pages 44–51 to
read more about the
performance across
our franchise areas

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

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» Value delivered in 2020
$4,560m
Revenue

$295m
Operating profit

$683m
Trading profit1

c.$40m
Efficiency savings

185,000+
Practitioner
training instances

$4.7m
Product donations

8,000
Hours volunteered

$328m
Dividend

» See pages 18–19 for
more on our KPIs

1 These non-IFRS financial measures are explained
and reconciled to the most directly comparable
financial measure prepared in accordance with
IFRS on pages 222–226.

Smith+Nephew Annual Report 2020

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Key Performance Indicators

Measuring our progress

Smith+Nephew uses a number of financial
and non-financial Key Performance
Indicators (KPIs) to track and evaluate
performance and delivery against its
strategic imperatives, as described on page 8,
and other business objectives. Those KPIs
in the public domain are consolidated below.
A number of other KPIs are commercially
sensitive and not published.

Grow
KPIs measuring progress across our three strategic imperatives focused on growth

Revenue growth

Profit margin

Investment in R&D

Revenue growth allows management
and investors to measure our relative
performance. We are committed to
outgrowing our markets in the medium term.

Profit margin allows management and
investors to determine relative performance.
We are committed to delivering
improvements in the medium term.

This KPI allows management and investors
to understand how much is being invested
in new innovative products designed to
drive future revenue growth and profit.

Revenue growth – reported

Operating profit margin

$246m

$292m

$307m

4.8%

-11.2%

-11.2%
Reported revenue growth
includes a 110bps benefit
from acquisitions and
-20bps currency
impact in 2020.

17.6%

15.9%

6.5%

6.5%
Reported profit margin
reflects restructuring costs,
as well as acquisition and
disposal related items,
amortisation and legal
and other items.

2018

2019

2020

2018

2019

2020

Revenue growth – underlying 1

Trading profit margin1

4.4%

-12.1%

-12.1%
Revenue was impacted
by COVID-19 restrictions
and the resultant
postponement of
elective surgeries.

22.9%

22.8%

15.0%

15.0%
The combination of the
lower revenue and our
sustained commitment
to investment had an
impact on margin for
the year.

2018

2019

2020

2018

2019

2020

Dividend per share

Return on Invested Capital

Dividend payments allow investors
to receive a cash return on their
investment in Smith+Nephew.

ROIC allows management and investors
to measure the return generated on
capital invested, providing a metric
for long-term value creation.

36.0¢

37.5¢

37.5¢
The total distribution
of 37.5¢ per share,
unchanged from 2019,
maintains our progressive
dividend policy.

12.5%

10.5%

7.1%

7.1%
The decrease in ROIC
in 2020 reflected the
reduction in operating
profit.

2018

2019

2020

2018

2019

2020

$307m
In 2020 we protected
our R&D investment
and launched multiple
new products from
our organic pipeline
and acquisitions.

2018

2019

2020

» For more information see page 36
Medical Education

This KPI helps investors understand how
we support the safe and effective use
of our products through the provision
of medical education.

185,000+
practitioner training instances
More than 185,000 healthcare professionals
attended our courses globally, with nearly
80% delivered virtually.
» For more information see page 42

» Financial review
on pages 20–23

1 These non-IFRS financial measures are explained
and reconciled to the most directly comparable
financial measure prepared in accordance with
IFRS on pages 222–226.

Smith+Nephew Annual Report 2020

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Together
KPI measuring progress across
our fourth strategic imperative
focused on our people

Effectively
KPIs measuring progress across our final
strategic imperative focused on stewardship

Employee engagement score

Efficiency savings

The Gallup Global Engagement Survey
allows management and investors
to assess how well our employees
are engaged, which is a key driver
of business performance.
+0.32
Engagement growth
Our Grand Mean score improved by
0.32 propelling us from the 34th to the
76th percentile of companies in Gallup’s
extensive database. These are excellent
results for a company in its second
survey year, according to Gallup.

16,000 employees participated,
an outstanding response rate of 89%,
up from 84% in 2019.

This KPI helps management and
investors measures our progress in
driving greater efficiency to liberate
resources for reinvestment in future
drivers of growth.
$190m
Annualised benefits from APEX
APEX programme, initiated at the end of
2017, was substantially completed in 2020,
delivering around $190 million of annualised
benefits for one-off costs of around
$290 million.

Quality and safety

This KPI allows management and investors
to understand if we are operating a safe
working environment at high standards
to ensure quality and competitiveness.

Headline safety rate

0.45

0.49

0.30

2018

2019

2020

Our headline safety rate
improved in 2020. We adopt
the industry-standard OSHA
system to record incidents
of occupational injury and
ill health. Performance is
expressed as the number
of incidents per 200,000
hours worked. For more
information see our 2020
Sustainability Report.

Regulatory inspections
Our manufacturing and product design
sites are subject to external regulatory
inspections and audits conducted by the
US FDA as well as other health authorities
and regulatory agencies. During 2020
we received no warning letters or other
significant regulatory actions.

$200m
COVID-19 related savings delivered
$200m of one-off COVID-19 related
savings against the budget set at the start
of the year were realised in the year in
areas such as variable pay, third party
commissions and royalties, travel, promotional
activity, events, and consultancy spend.
$200m
Operations transformation
annualised target
We are taking the next step in improving our
long-term efficiency, continuing a programme
to transform our operations. This is expected
to deliver around $200 million of annualised
benefits by 2025 for a one-off cost of around
$350 million.

Long-term sustainability targets

These KPIs allow management and
investors to measure progress against our
long-term sustainability targets in the
three areas of People, Planet and Products.

8,000
Hours volunteered
Each year employees are encouraged
to use paid volunteering time.
$4.7m
Product donations
Each year we donate products to
support underserved communities.
» More details on these, including the
actions we are undertaking to meet
our commitments, can be found
on page 24

Smith+Nephew Annual Report 2020

Financial review

Maintaining
financial
strength

2020 Performance
and impact of COVID-19
Group revenue in 2020 was $4,560 million,
a decrease of 11.2% on a reported
basis and a decrease of 12.1% on an
underlying basis.1

Our business was significantly impacted
by the COVID-19 pandemic, first in China
in the first quarter and then more broadly
across the world as lockdowns took effect
and elective procedures were postponed.
In the second quarter this resulted in
revenue growth rates of -29.8% reported
(-29.3% underlying1). The business
rebounded strongly in the third quarter
as COVID-19 rates fell and procedures

resumed with revenue declines of
-3.7% reported (-4.2% underlying1).
In the fourth quarter, COVID-19 infection
levels increased in the US and Europe
and sales declined by -5.8% reported
(-7.1% underlying1) as healthcare systems
were better prepared to continue
procedures compared to earlier in
the year.

We also took the decision early on to
maintain investments behind R&D and
where needed to ensure we were ready
for the recovery.

In parallel, we also identified quickly the
discretionary spend that could be reduced
to mitigate the impact of the pandemic.

The reported operating profit for 2020
was $295 million, a 64% reduction from
the previous year due to the impact of
COVID-19 described above, although this
was partially mitigated by cost savings.
Profit was also reduced by higher
amortisation which increased from the
prior year reflecting a full year amortisation
charge of acquisitions completed in 2019.
Legal and other charges increased due
to higher costs associated with EU
Medical Device Regulations.

Trading profit1 for the year was $683 million
and the trading profit margin1 was 15.0%
reflecting the impact of the sales reductions
caused by COVID-19 and resulting
manufacturing facility underutilisation
and increased inventory provisions.

Global franchise trading profit performance
was impacted by COVID-19 with each
franchise profit reducing from the prior
year. The impact was greater in our
Orthopaedics and Sports Medicine & ENT
franchises as they were more exposed
to postponement of elective procedures.
More details on franchise performance
can be found on pages 46–51.

Earnings per share
Basic earnings per share (‘EPS’) was
down 25% to 51.3¢ reflecting the
impact of COVID-19 partially offset by
a reported tax credit. Adjusted earnings
per share1 (‘EPSA’) was down 37%
at 64.6¢, reflecting the lower trading
performance partially offset by
the lower trading tax rate.

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We took the decision early
on to maintain strategic
investments, such as R&D,
to ensure the business is
well positioned to grow
when the recovery starts.”

Anne-Françoise Nesmes
Chief Financial Officer

Smith+Nephew Annual Report 2020

Group performance

Revenue
Operating profit
Trading profit1
Profit before tax
Attributable profit
EPS
EPSA1

2020
$ million
4,560
295
683
246
448
51.3¢
64.6¢

2019
$ million
5,138
815
1,169
743
600
68.6¢
102.2¢

Change
$ million
(578)
(520)
(486)
(497)
(152)
(17.3¢)
(37.6¢)

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:

2020
$ million
2,339

2019
$ million
2,551

Reported
growth
%
(8.3%)

Underlying
growth
%
(10.1%)

Acquisitions/
Disposals
%
1.8%

Currency
impact
%
–

Reconciling items

1,450
771

4,560

1,630
957

5,138

(11.0%)
(19.4%)

(12.3%)
(16.8%)

(11.2%)

(12.1%)

0.2%
0.5%

1.1%

1.1%
(3.1%)

(0.2%)

US
Other Established
Markets
Emerging Markets

Total

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

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

Trading profit

2020
$ million
295
4
124

171
89

683

2020
%
6.5%
0.1%
2.7%

3.7%
2.0%

2019
$ million
815
32
134

143
45

2019
%
15.9%
0.6%
2.6%

2.8%
0.9%

15.0%

1,169

22.8%

» Franchise

performance
on pages 46–50

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Taxation
Reported tax for the year to 31 December
2020 was a credit of $202 million
(2019: charge of $143 million). This
reflects refunds and tax credits due to
the successful UK tax litigation outcome,
releases of provisions following the
conclusion of tax audits and other
settlements, and lower profits. The tax
rate on trading results1 for the year
to 31 December 2020 was 11.3%
(2019: 19.1%). This is lower than the prior
year due to releases of tax provisions
following the conclusion of tax audits
and other settlements.

Smith+Nephew is subject to various taxes
in the many countries in which the Group
operates. We seek to pay the correct
amount of tax in-line with local tax
laws in each jurisdiction.

Our business generates tax receipts for
the governments in each of these countries.
In addition to corporate income taxes,
we pay and collect other taxes principally
including payroll (employee) taxes, sales
(indirect) taxes and customs duties.

During 2020, we made global tax payments
of $637 million. This comprises $229 million
of taxes borne by Smith+Nephew
(corporate income taxes, employer social
security contributions and customs duties)
and $408 million of taxes collected from
employees and customers on behalf of
governments (employee income taxes
and social security contributions and net
indirect tax payable). Corporate income
taxes, in particular, were lower than in
prior years due to the impact on profits
of COVID-19. These figures exclude
the $100 million tax refund we received
following the successful outcome of the
UK tax litigation matter.

Efficiency
The APEX programme that was announced
in February 2018 and the operations
and commercial excellence programme
that was announced in February 2020,
incurred restructuring costs of $124 million
in 2020, with additional benefits recognised
in the 2020 income statement of around
$40 million. Whilst some projects were
delayed slightly by COVID-19, these
programmes remain an important part
of our strategy.

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared

in accordance with IFRS on pages 222–226.

Smith+Nephew Annual Report 2020

Financial review continued

Balance sheet data and net debt

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 debt2 including lease liabilities

2020
$ million
4,414
1,934
4,664
11,012
5,279
4,045
1,688
5,733
11,012
1,926

2019
$ million
4,356
1,724
3,219
9,299
5,141
2,594
1,564
4,158
9,299
1,770

Change
$ million
58
210
1,445
1,713
138
1,451
124
1,575
1,713
156

Goodwill increased by $139 million as a
result of acquisitions of $96 million and
foreign currency movements of $43 million.
The primary acquisition in the year was
Tusker Medical, Inc. (‘Tusker‘), a developer
of an innovative in-office solution for
tympanostomy (ear tubes) called Tula.

Intangible assets decreased by $81 million
primarily because of amortisation and
impairment of $246 million being partially
offset by acquisitions of $61 million,
additions of $78 million and foreign
currency movements of $17 million.

The acquisition of intangible assets
mainly related to Tula from the Tusker
acquisition and additions related
to software.

Other non-current assets increased by
$210 million primarily due to an increase
of $126 million in property, plant and
equipment mainly arising from additions
of $452 million which are partially offset
by depreciation and impairment of
$316 million. Current assets increased by
$1,445 million primarily as a result of an
increase in cash of $1,485 million mostly

Cash flow data

Cash generated from operations
Trading cash flow1
Free cash flow1

2020
$ million
972
690
437

2019
$ million
1,370
970
714

Change
$ million
(398)
(280)
(277)

Cash generated from operations of
$972 million is after paying out $24 million
of acquisition and disposal related items,
$117 million of restructuring and
rationalisation expenses and $75 million
for legal and other items.

Trading cash flow¹ decreased by
$280 million driven by lower trading profit.
Free cash flow¹ decreased by $277 million
mainly related to the lower trading cash flow.

Free cash flow includes net tax refunds
of $22 million (2019: tax payments of
$150 million) primarily due to a refund
from the UK tax litigation matter.

During the year ended 31 December 2020,
the Group purchased a total of 0.6 million
(2019: 3.1 million) ordinary shares at a
cost of $16 million (2019: $63 million).

related to receipts from the corporate
bond issuance and private placement
notes. This was partially offset by a
decrease in trade and other receivables
of $117 million mostly driven by a decrease
in sales demand. Inventory of $1,691 million
was broadly consistent with the prior year
as we responded to the impact of lower
sales demand. Ensuring we carry the
optimum levels of inventory in future is
a focus of the Global Operations team.

Non-current liabilities increased
by $1,451 million mainly due to a
$1,378 million increase in borrowings
of which $992 million relates to the
corporate bond and $550 million of new
private placement notes, partially offset
by $267 million of private placement notes
(including interest rate swaps) reclassified
to current liabilities. Current liabilities
increased by $124 million primarily
relating to the reclassification of the
$267 million private placement notes
which was partially offset by a $80 million
decrease in provisions.

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Return on invested capital
Return On Invested Capital1,3 (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. ROIC decreased from
10.5% in 2019 to 7.1% in 2020 as a result
of the reduction in operating profit.

1 These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 222–226.

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

3 ROIC is defined as:

Operating Profit less Adjusted Taxes

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

Smith+Nephew Annual Report 2020

Liquidity
The appropriate use of capital on
behalf of shareholders is important to
Smith+Nephew. The Board believes in
maintaining a strong balance sheet, while
retaining the flexibility to make value
enhancing acquisitions. This approach
is used to prioritise the use of cash and
ensure an appropriate capital structure.

The Group’s policy is to ensure that it has
sufficient funding and facilities in place to
meet foreseeable borrowing requirements.

During 2020, the Group issued its first
corporate bond, representing $1 billion
of notes bearing an interest rate of
2.032% repayable in 2030. Whilst the
Group has maintained a strong liquidity
position, the low interest rate environment
in 2020 presented an opportunity to
further diversify our funding options at
a relatively low cost. Moving forward we
will be well positioned to tap a number
of funding options in order to support
our growth strategy.

The Group’s net debt2 increased from
$1,770 million at the beginning of 2020
to $1,926 million at the end of 2020,
representing an overall increase
of $156 million.

At 31 December 2020, the Group held
$1,751 million (2019: $257 million) in
cash net of bank overdrafts. The Group
had committed available facilities
of $4.5 billion at 31 December 2020
of which $3.5 billion was drawn.

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 2021,
as well as its other known or expected
commitments or liabilities, can be met
from its existing resources and facilities.

Going concern
The Directors have considered various
scenarios in assessing the impact
of COVID-19 on future financial
performance and cash flows, with the
key judgement applied being the speed
and sustainability of the return to a
normal volume of elective procedures
in key markets, including the impact
of a further wave of restrictions on
elective procedures in the first half
of 2021. Throughout these scenarios,
which include a severe but plausible
outcome, the Group continues to have
headroom on its borrowing facilities
and financial covenants.

The Directors have a 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 22 months from the date of the
approval of the financial statements.

Accordingly, the Directors continue
to adopt the going concern basis
in preparing the consolidated
financial statements.

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Dividends
The 2019 final dividend of 23.1 US cents
per ordinary share totalling $202 million
was paid on 6 May 2020. The 2020 interim
dividend of 14.4 US cents per ordinary
share totalling $126 million was paid
on 28 October 2020.

Outlook
The impact of COVID-19 is likely to
continue during the first half of 2021,
and while there is still uncertainty on the
timing of recovery, we have maintained
our readiness and ability to respond.

In terms of revenue, we expect to deliver
substantial underlying growth in 2021
compared to 2020. Within this, we expect
our Hip Implants business to continue to
outperform Knee Implants, our Sports
Medicine & ENT franchise to perform
strongly as markets recover, and for
Advanced Wound Management’s growth
trajectory to improve as recent commercial
changes continue to deliver benefits.

In terms of profit margin, we expect
an improved performance in 2021 over
the prior year. Relative to 2019 (the year
before COVID-19), we anticipate a
headwind from the continuing impact
of reduced production volumes on gross
margin as well as dilution of around 100bps
from the increased investment in R&D
and around 150bps from the acquisitions
completed in 2020 and so far in 2021.
Foreign exchange will be an additional
headwind of around 100bps.

The tax rate on trading results for 2021
is forecast to be in the range 18% to 19%,
subject to any material changes to tax
law or other one-off items.

Available debt facilities by maturity date ($m)

Yours sincerely,

265

729

431

430

1,000

140

100

1,095

155

1,000

Anne-Françoise Nesmes
Chief Financial Officer

604

326

430

265

125

105

140

2021

2022

2023

2024

2025

2026

2027

100

155

2029

2030

2031

2032

60
2028

Maturity by date

Revolving credit facility

USD corporate bond

EUR term loans

Private placement debt

Smith+Nephew Annual Report 2020

Sustainability reporting

Sustainability
on purpose

Our sustainability strategy is built on our
purpose – Life Unlimited, our strategic
imperatives and our culture pillars of Care,
Collaboration and Courage.

Employee safety,
wellness and volunteering
A healthy and safe working environment
is fundamental to the way we work at
Smith+Nephew. This has been highlighted
even more during the global pandemic.
The safety of our employees and those
who work with us is given the highest
priority – across all our offices and
manufacturing sites and when we
visit customers.

More information on our actions
to improve workplace safety can be
found in our 2020 Sustainability Report.

Details of our actions to protect
employees during the pandemic can
be found on page 10 (Responding
to COVID-19) and page 28 (Investing in
our people) of this Annual Report.

We engage meaningfully with the
communities where we operate through
our site leadership teams and local
camaraderie councils. We encourage
employees to volunteer in local
communities, offer paid volunteering
time and match employee
charitable donations.

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Our strategy was inspired by the United
Nations’ Sustainable Development Goals
(SDGs). It reflects the importance of social,
environmental and economic aspects
of sustainable development. As a profit-
seeking enterprise, our challenge is to
focus our efforts on meeting our economic
objectives whilst at the same time
optimising the social and environmental
impacts of our work.

Our sustainability vision is to accelerate
the delivery of Life Unlimited through
industry sustainability leadership. We strive
to deliver this to the communities where
we live and work through the application
of our values:
– We demonstrate Care by respecting
our global resources, minimising our
impact on the environment and
ensuring the safety and wellbeing
of our employees.

– We demonstrate Collaboration by
ensuring our suppliers and partners
share our commitment and by
working together to contribute to
our communities through individual
and team volunteerism.

– We demonstrate Courage by

setting ambitious goals to increase
our volunteerism, reduce waste and
CO2 emissions and minimising our
ecological footprint by operating
responsibly and sustainably.

Our sustainability strategy was developed
by our Sustainability Council and approved
by the Board in late 2019. The Compliance
& Culture Committee of the Board regularly
reviews our progress.

Our sustainability strategy includes
challenging targets set over the
long-term in three areas:

People
Creating a lasting positive
impact on our communities

Planet
A medical technology business
with a positive impact

Products
Innovating sustainably

Smith+Nephew Annual Report 2020

People
Creating a lasting positive
impact on our communities

Our targets

Between 2020 and 2030,
contribute 1 million volunteer
hours to the communities
in which we live and work.

Our progress in 2020
8,000

Hours of volunteering

Between 2020 and 2030,
donate $125 million in
products to underserved
communities.

$4.7m

Product donations

Empower and promote
the inclusion of all.

Eight

Global Employee Inclusion
Groups were established. Our
senior leaders and managers
were trained on Inclusion

Planet
A medical technology business
with a positive impact

Our targets

Achieve an 80% absolute
reduction in total lifecycle
greenhouse gas emissions
by 2050, beginning by
implementing 100%
renewable electricity
(eg solar or wind) plans
at our facilities in Memphis,
US, and Malaysia by 2022,
and at all of our strategic
manufacturing facilities
by 2025.

Our progress in 2020
All

Sites in Memphis, US began
sourcing renewable electricity

72,945 tonnes

CO2e emitted (location-based),
a 6% reduction since 2019

40,132 tonnes

CO2e emitted (market-based),
a 40% reduction since 2019

Achieve zero waste to landfill
at our facilities in Memphis, US,
and Malaysia by 2025 and at all
of our strategic manufacturing
facilities by 2030.

1,853 tonnes

We sent 7% less waste to
landfill during 2020 compared
to the previous year

Supporting our targets

All employees have eight hours of paid volunteering time
each year, and in 2020, we additionally made 160 hours
available to employees with a healthcare professional
background to use their skills to work directly in response
to the pandemic. Our philanthropic activities during the year
totalled $4.8million. This consisted of $4.7million in product
donations and $0.1million from cash and matching employee
gifts to qualified charities. Our employee volunteering and
product donation strategies were both held back by
COVID-19 in 2020. We continued to use the Gallup Global
Engagement Survey and saw significant increases in overall
employee engagement in 2020. For the first time, the Gallup
Inclusion Index gave us a baseline measure of how engaged
our employees were at Smith+Nephew. See page 28.

We are working with our global energy partner to evaluate
our current carbon footprint and develop a carbon road
map to achieve our long-term target. As a first step, all our
locations in Memphis, US began sourcing all electricity from
renewable wind energy in 2020, accounting for around 40%
of the Group’s electricity. Our Malaysia facility, currently
under construction, is not on track due to heavy use of fossil
fuels in the local power grid and we are working to identify
both on-site and country-specific sustainable options. We
continue to identify and implement source reduction, reuse
and recycling opportunities, and ways to divert waste from
landfill. In 2020, we recycled 78% of our total waste,
including waste diverted to energy recovery.

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Following the earthquake in
Puerto Rico in January 2020
we provided Advanced Wound
Care products and trained
military clinical personnel in
their use to help meet urgent
patient needs.

100%

All our locations in Memphis
began sourcing their electricity
from renewable wind energy
in 2020.

Smith+Nephew Annual Report 2020

Sustainability reporting continued

Products
Innovating sustainably

Our targets

By 2022, include sustainability review
in new product development phase
reviews for all new products and
product acquisitions.

Our progress in 2020

Initiated sustainability
reviews within New
Product Development.

By 2025, incorporate at least 30%
post-consumer recycled content into
all non-sterile packaging materials.

Started packaging
reduction roadmap.

By 2025, incorporate packaging
materials from sustainable sources
for new packaging parts.

Started packaging sustainability
strategy and roadmap.

By 2025, complete supply chain
assessment of all suppliers,
including subsequent tier levels,
to assure compliance with our
sustainability requirements.

Supporting our targets

We have started risk
mapping our supply chain.

During 2020, we started to develop our packaging sustainability strategy
and roadmap. Talking with suppliers has helped us to understand the
market trends and drivers of environmental sustainability and we initiated
activities to move to more sustainable packaging, including down-gauging
materials, using less packaging, optimisation, and selecting sustainable
materials. We started to put sustainability reviews in place for all new
innovation programmes in our new product development process with
areas for improvement including: sustainability-focused raw material
selection; reducing packaging material usage and footprint; sharing
packaging designs across product families to minimise waste; and clear
guidance on recyclability.

By switching materials on the
primary packaging for ALLEVYN LIFE◊
Foam Dressings we reduced material
weight by 20% on the back of the
dressing pouch, as well as moving to
a more sustainable film which does
not use solvent-based adhesive
in the lamination process.

The impact of climate change
One of the United Nations’ Sustainable
Development Goals (SDGs), is to
“take urgent action to combat climate
change and its impacts”.

It is widely recognised that continued
emission of greenhouse gases will cause
further warming of the planet which
could have damaging social and economic
consequences. During 2020, we have
continued to consider and mitigate
against the potential impact of climate
change on our business operations.

Our Board of Directors is supportive of
implementing the Task Force on Climate-
related Financial Disclosures (TCFD)
recommendations over time. The
Compliance & Culture Committee and
the Audit Committee received updates
on TCFD in 2020. We have conducted a
review of our current state and capture
related business risks in our risk register.
We plan to conduct scenario analyses
and use the data to inform our decisions
and prioritise actions.

We have assessed our business activities
against the sustainability disclosure topics
and accounting metrics included in the
Sustainability Accounting Standards
Board (SASB) framework for our sector
of Medical Equipment and Supplies and
we have determined them not to be
Principal Risks to the business.

You can learn more about our
sustainability targets and strategy
in our 2020 Sustainability Report at
www.smith-nephew.com/sustainability

Sustainability
on purpose

Sustainability Report 2020

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Smith+Nephew Annual Report 2020

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
year ended 31 December 2020. We are
including UK specific energy and emissions
data to satisfy the Streamlined Energy and
Carbon Reporting (SECR) requirements.

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 2020 are included in
the data, with more recent ones excluded.
This is in-line with our established policy
for the integration of acquired assets.

Our GHG emissions reporting represents
our core business operations and facilities
that fall within the scope of our consolidated
financial statements. Primary data
from energy suppliers has been used
wherever possible.

We report our emissions in two scopes:
– Scope 1 figures include: Direct sources
of emissions 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. We include UK
vehicle emissions from leased cars
in 2020 only.

– 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 2020. We have
applied the emission factors most relevant
to the source data, including DEFRA 2020
(for UK locations), IEA 2018 (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 2020.

In-line with dual-reporting we also
report market-based emissions. These are
contractual or supplier-specific emission
factors that can be applied when procuring
low-carbon energy or siting facilities in areas
with lower emissions but also recognising
that this might be higher than the grid
average in some cases. Where market-
based factors were not available, we have
used ‘Residual Mix’ data for the EU locations
and IEA data for all other countries, except
the remaining US locations where the
eGRID factors were applied.

We have also implemented, or benefited
from, numerous energy efficiency and
low-carbon energy measures during 2020.
Some of these savings include:

LED lighting installations, the use of solar
panels in India and China, a Combined Heat
and Power (CHP) (natural gas fired) units
in Germany, Building Energy Management
systems (BEMS) to control equipment for
maximum efficiency and the use of time
zones and setbacks. We have also targeted

the use of online ‘real time’ data to monitor
energy usage to make savings. We have
a programme to replace older inefficient
equipment with highly efficient equipment,
such as compressors, chillers, pumps,
fans and motors.

In Memphis, US, during 2020, we
purchased renewable energy certificates
(RECs) through Green Flex, a voluntary
renewable energy programme. Certified by
Green-e Energy, North America’s leading
certification programme for renewable
energy, Green Flex RECs are based on
wind power generated in the Midwest US.
Purchasing RECs gives buyers the right
to renewable energy and also makes
it possible to track ownership of it. Our
participation in this scheme underscores
our commitment to supporting renewable
energy and helps to reduce our market-
based carbon emissions footprint.

Committed to working in a sustainable,
ethical and responsible manner
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, including our recurring inclusion
in leading indices, such as FTSE4Good,
ISS and the Dow Jones Sustainability Index.

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CO2e emissions (tonnes) from:
Direct emissions (Scope 1)1
Indirect emissions (Scope 2)
(location-based)

Total (location-based)
Indirect emissions (Scope 2)
(market-based)

Total (market-based)

Energy consumption to calculate
Scope 1+2 emissions (GWh)
Intensity ratio:
CO2e (t) per $m sales revenue
CO2e (t) per full-time employee

2020

2019

2018

Global
(excluding UK)

Total

Global
(excluding UK)

Total

Global
(excluding UK)

Total

4,842

3,968

8,810

4,851

9,693

4,912

9,754

4,747

5,141

9,888

5,842

4,114

9,956

59,223

63,191

64,135

72,945

25,527

30,378

30,439

40,132

4,911

9,658

5,072

9,819

62,413

67,554

67,324

5,790

62,096

67,886

77,212

11,632

66,210

77,842

52,080

57,152

6,137

60,338

66,475

57,221

67,040

11,979

64,452

76,431

169

212

168

213

160

209

15.9
3.9

15.1
4.3

1 UK vehicle data included in Scope 1 emissions in 2020.

2020 data includes recent acquisitions completed during 2019. Revenue: 2020:$4.6bn; 2019: $5.1bn; 2018: $4.9bn. Full-time employee data: 2020: 18,581; 2019: 18,030; 2018: 16,681.

15.9
4.7

Smith+Nephew Annual Report 2020

Investing in
our people

Smith+Nephew is a team of 18,000
colleagues inspired by our purpose of Life
Unlimited and united by our culture pillars
of Care, Collaboration and Courage.

Ensuring our employees are fully engaged
with this purpose and culture is at the
heart of our people strategy as we know
engagement is a key driver of performance.
We use the Gallup Q12 as our Annual
Global Employee Survey to measure this
and to determine where we need to focus
and improve the employee experience.

In May, 89% of our employees took the
time to complete the survey. This was
an outstanding response and exceeded
the previous year’s participation rate
of 84%.

This was the second year we have used
the Gallup tool, and we made significant
improvement across every element of the
survey. Our Grand Mean score improved
by 0.32 propelling us from the 34th to the
76th percentile of companies in Gallup’s
extensive database. These are excellent
results for a company in its second year
of survey, according to Gallup. Managers
were provided with their individual team
results and have set action plans to build
upon strengths and address any gaps
to continue to further drive engagement
across Smith+Nephew.

Engagement is a priority, from the Board
and senior management team and across
all levels of employees. In 2020, the Board
initiated its own programme to meet with
employees, conducting listening sessions
both face-to-face, and then virtually
as required, with employees at locations
across the globe. For more details see
the Compliance & Culture Committee
report on page 98.

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Smith+Nephew Annual Report 2020

We were determined to provide
employees with authentic and clear
internal communication, both using
existing channels and new. We issued
regular updates via email and created
a dedicated section on our intranet
for COVID-19 information and guidance,
including information about mental and
physical wellness during this difficult
period. We used short, personal videos
and live web meetings on specific topics
as needed to allow dialogue and address
questions. We also leveraged our
social channels to build engagement
and camaraderie among our remote
employees. For our site-based employees
we focused our communication on
safety and appreciation for their efforts.
No longer able to gather in groups, we
have focused on building digital literacy
and connectedness so that site-based
employees feel informed and engaged.

Prioritising
employee health

Smith+Nephew’s response to COVID-19
is described in detail on pages 10–13
of this report. The commitment to our
people’s health, wellbeing and jobs was
central to everything we did, with the
Crisis Management Team’s first actions
being to establish protocols to
protect employees.

We established special pandemic leave
to enhance existing leave policies and
provided volunteer hours for employees
who are healthcare providers to return
to frontline care. We took an active
management approach to employees
with COVID-19, close contact or
suspected cases. We also enhanced
the tools available to support physical
and mental health and deployed new
collaboration tools.

Employees are being encouraged
‘not to mask their feelings’ in support
of mental health awareness.

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An ethical
employer

At Smith+Nephew, 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.

Smith+Nephew gives individuals
with disabilities fair consideration for all
vacancies against the requirements of
the role. Where possible, for any employee
who has a disability or who becomes
disabled while working for us, we make
reasonable adjustments and provide
appropriate training to ensure that
they are supported in their career.
We are committed to providing equal
opportunities in recruitment, promotion
and career development for all employees,
including those with disabilities.

We do not use any form of forced,
compulsory or child labour. Smith+Nephew
supports the Universal Declaration
of Human Rights of the United Nations,
respecting the human rights, dignity
and privacy of individuals and their right
to freedom of association, freedom
of expression and the right to be heard.

As a global medical technology business,
we recognise our responsibility to take
a robust approach to preventing slavery
and human trafficking. Smith+Nephew is
committed to preventing such activities
in all of its corporate operations and in its
supply chains. Our full policy on modern
slavery is available on our website.

» To read more go to

www.smith-nephew.com/
sustainability/policies

Smith+Nephew
Annual Report 2020

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Investing in our people continued

Our culture pillars
are our compass

Smith+Nephew had started on a transformation
journey before COVID-19. At the heart of this was
our new purpose of Life Unlimited and our culture
pillars of Care, Collaboration and Courage.
These had been welcomed and well received
across all our employees.

As COVID-19 began to impact our
Company, first in China in early 2020,
and then across all our markets, having
such a strongly embraced purpose and
culture made it much easier to determine
how we should respond. They became
our compass, and gave us the answers
to many questions that we did not have
a playbook for.

We lived our culture and made the
decision to prioritise protecting our
employees’ wellbeing and their roles.
We took the position that those companies
that treat their employees with care and
compassion during these difficult times
will be ready for the recovery and will be
here for their customers and their patients.

The next step for our Company was to
establish guiding principles for returning
to the office. As we operate across
so many countries and have various
complexities in those countries it was
impossible to have everyone follow
exactly the same plan. Guiding principles
set everyone up with clear direction,
informed decision making and gave us
greater opportunity for being consistent
in how we supported employees,
customers and communities, bringing
us back to our purpose and culture.

We also spent a significant amount of
time engaging our employees in authentic
conversations about the state of the
business, COVID-19 cases and the specific
steps we are taking to protect those that
continued to come to our sites and those
working from home. In a matter of hours
we became well-versed with working
from home, set up protocols to enable
this approach and became comfortable
knowing that we did not have all the
answers. Our employees trusted us
to do the right thing and got on with it;
and were patient when things did not
happen or immediately work as planned.

We also found the time to step back
from the day-to-day management and
started a body of work about the future.
This is led by a cross-functional and
cross-geographic team focused on
learning from what just happened to
the world and to our Company and
helping us become stronger for it versus
reverting right back to the way we always
operated. The outputs of this work include
Workplace Unlimited, redefining where
and how work happens at Smith+Nephew,
which is described on the page opposite.

We are incredibly proud of how our
employees continue to adapt to and
overcome obstacles and for how they
are embracing the future. An engaged
workforce that lives and breathes our
purpose and culture is an amazingly
powerful force.
» Read more at www.smith-nephew.
com/sustainability/policies

Elga Lohler
Chief Human Resources Officer

Smith+Nephew Annual Report 2020

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Workplace
Unlimited

At Smith+Nephew we have chosen to take this
opportunity to re-think where and how work
happens, understand employees’ aspirations,
and be agile in the development of principles
that will work for all.

“ The office will become a
place where we replenish
our energy together,
reinforce our collective
culture, and support
a sense of who we are
as Smith+Nephew.”
Mark Gladwell
President Operations & GBS

We believe our global flexibility
mindset will bring significant and
impactful benefits, including greater
trust, increased productivity and
employee engagement.

At the heart of Workplace Unlimited
is a commitment to meet the needs
of employees – be they mobile workers
who need to work from offices
occasionally, teams who frequently
need to meet to collaborate, specialists
requiring access to specific equipment
or employees who have on-site
positions such as in manufacturing.

These needs are captured in
four personas – external mobile,
neighbourhood, hybrid and
non-mobile.

External mobile
Employees who are road or remote-
based with a schedule aligned to
customer needs, such as our sales force.

Hybrid
Employees who require flexible
workspace to collaborate with others
such as members of our Regulatory
Affairs team.

Neighbourhood
Employees who use offices to collaborate
and require dedicated area with specific
assets, such as R&D engineers.

Non-mobile
Employees who have an onsite position,
with some flexibility options around time,
such as manufacturing operators.

Smith+Nephew Annual Report 2020

Investing in our people continued

Inclusion and
diversity

For the first time we participated
in Gallup’s Inclusion Index in 2020.
This index consists of questions around
confidence that the Company will do
what is right in issues of compliance and
ethics, is committed to developing each
employee’s strengths, and treats each
employee with respect. We performed
at around the mid-point of the Gallup
database, and now have a baseline from
which we can build a truly inclusive
culture across Smith+Nephew.

We established a number of new initiatives
in 2020, including formally launching global
Employee Inclusion Groups (EIGs) and
starting a new conversation around racial
diversity inspired by events in the US and
elsewhere in 2020. Roland Diggelmann,
our Chief Executive Officer, initiated and
attended a number of listening sessions
with Elga Lohler, Chief Human Resources
Officer. As a result, we formed three
employee-led work teams dedicated to
increasing inclusion and diversity across
our workplace. One of the first actions
has been the formation of UNITY, a new
EIG on racial diversity.

“ As we cultivate an environment
of high performance, it must be
built on the trust of employees
and the ability for all backgrounds,
perspectives, and experiences
to be respected and celebrated.
I am proud that we are launching
official EIGs to bring employees
together to share these
experiences, help educate
others and further drive our
commitment to inclusion and
diversity initiatives.”

Brad Cannon
President Sports Medicine & ENT
(ExCo Sponsor of UNITY)

Our team in Wroclaw, Poland,
celebrated Pride 2020, bringing the
colours of the rainbow to the office.

EIGs are voluntary, employee-led groups
that foster a diverse, inclusive workplace
aligned with our purpose, culture pillars,
and business objectives – sponsored
by senior leaders. Our primary goal for
our EIGs is to create an inclusive culture
that supports diversity of thought,
background and perspective. We have
now launched a number of EIGs covering
a broad spectrum of diversity including:
women; young professionals, race and
ethnicity, veterans and mental and
physical wellbeing. Our EIGs provide a
network for employees to engage and
collaborate as part of a global framework
and be empowered to drive local/site
events and activities.

We continue to run Listening+Sharing
sessions, hosted by members of
the Executive Committee, designed
to create powerful global conversations
to elevate the topic of Inclusion+Diversity.
They allow management to learn from
all employees about their experiences
and ideas on how we can create an
inclusive work environment for everyone
and strengthen the sense of belonging
and identity. We are committed to
employment practices based on equal
opportunities, regardless of race, ethnicity,
gender, sexual orientation, socio-economic
status, age, physical abilities, religious
beliefs, political beliefs, or other ideologies.
In 2020 we delivered inclusion training to
2,600 managers across Smith+Nephew.

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17,914
Total employees1

Male
58%

Female
42%

1,057
Senior Managers
and above2

Male
70%

Female
30%

12
Board of Directors

Male
67%

Female
33%

Our UK Gender Pay
ratios improved in 2020,
as we built on the progress
delivered in 2019 (see page
126). We have also focused on
sponsorship of female talent
with each ExCo member
sponsoring up and coming
females to help accelerate
their development.

1 Number of employees at 31 December 2020 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.

Smith+Nephew Annual Report 2020

We put emphasis on developing our
female leaders. We also saw record
numbers participating in Elevate,
a monthly webinar series supporting the
professional development of up to 200
women per month. Our UK Gender Pay
ratios improved in 2020, as we built on the
progress delivered in 2019 (see page 126)
We have also focused on sponsorship
of female talent with each ExCo member
sponsoring up and coming females
to help accelerate their development.
In addition we have specific EIGs that
focus on fostering an inclusive environment
for women including women in sales,
the society of women in engineering and
women in leadership and management.

Achieving results
with responsibility

We believe that it’s a privilege to provide
products and services for patients and
healthcare professionals. And we believe
that it’s up to everyone who works for
us – or on our behalf – to share that
responsibility by upholding our reputation
for integrity and ethical conduct,
because the sustainability of our business
depends on doing things the right way.

Our world-class Global Compliance
Programme helps our business to comply
with applicable laws and regulations.
Our comprehensive programme
includes global policies and procedures,
on-boarding and annual training for
employees and managers, monitoring
and validation processes, and
reporting channels.

We have multiple levels of ethics and
compliance oversight, including a Board
Compliance & Culture Committee,
to ensure managers, employees and
business partners act with integrity and
we regularly assess existing and emerging
risks in the countries in which we operate.

We updated our Code of Conduct and
Business Principles in 2019 (available at
www.smith-nephew.com). This gives
each employee the legal and ethical
framework to guide what we do every
day in a way that reflects our Company
and our culture. It’s not enough to simply
comply with the law; we should always
behave ethically, even where the law
is unclear or still developing.

Through our global intranet, we provide
resources and tools to guide employees
to make decisions that comply both
with the law and our Code of Conduct.
We ensure appropriate oversight of
significant interactions with healthcare
professionals or government officials.
We comply with all country and US state
transparency reporting laws which require
reporting of physician compensation.

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We believe that it’s up to
everyone who works for us –
or on our behalf – to share that
responsibility by upholding our
reputation for integrity and
ethical conduct, because the
sustainability of our business
depends on doing things
the right way.

Smith+Nephew Annual Report 2020

Investing in our people continued

Committed to
development

We are committed to training, with
employees having bespoke 70-20-10
development plans. These take a blended
approach to learning and development:
70% through experiential/on the job
learning; 20% by learning from others,
for example through coaching; and 10%
from formal learning. We have invested
resources to support these plans, and
exceeded our 2020 target of 80% of all
employees having a development plan.

In 2019 we launched ‘Winning Behaviours’,
a behavioural competency framework
directly linked to our culture pillars of Care,
Collaboration and Courage. It supports
employee development by helping
employees understand how they can
demonstrate our culture on a daily basis.
Our recruitment and assessment approach,
and our performance management and
talent management processes, all directly
align to these Winning Behaviours.

The 70-20-10 development philosophy
and our Winning Behaviours guide the
development of leadership programmes
and solutions. All employees have access
to MyLearning, an online platform that
includes videos, book summaries and
virtual/online courses. We see very high
levels of usage and engagement on the
platform. Over half of employees who use
it return for a second or third time, which is
much higher than the SkillSoft benchmark.

Despite the disruption in 2020, 268 people
leaders participated in our successful
leadership programmes, Pioneer and
Leadership Edge during the year. As well
as refreshing content to reflect new
leadership requirements, we also evolved
these programmes to a more virtual
and interactive deployment model,
accommodating remote working.

Our Continuous Leadership Journeys
(CLJs), which enables employees to tailor
their training and learn at their own pace,
continued to be extremely popular,
with 294 participants across various
programmes in 2020.

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Our purpose
Why we’re here…

Our culture pillars
What we stand for…

Winning behaviours
We are at our best when…

Life Unlimited

Care

We put customers first

We value each other

Collaboration

We work together to win

We own our success

Courage

We create possibilities

Smith+Nephew Annual Report 2020

In light of the pandemic, we had to cancel
many of our 2020 summer internships yet
we wanted to provide continued support
to these students. We had been reviewing
the option of ‘Micro-internships’ (a virtual
short-term, paid, project based position
that is similar to those given to interns) and
COVID-19 accelerated our implementation
of a successful programme. Interns taking
advantage of micro-internships each
completed multiple projects throughout
the summer. In addition, we ran a virtual
professional development programme
for other interns impacted.

We ran a successful pilot of our new
Executive Development Programme for
our senior leaders in 2020, in partnership
with Yale School of Management and
Colombia Business School. 22 senior
leaders completed the programme and
the feedback was extremely positive.
The opportunity to apply learnings
in a real-world business project was
particularly beneficial for participants
and the business. We also continued to
conduct Global Talent Reviews including
Talent Spotlight sessions to identify
emerging high potential employees.

The Global Talent Acquisition Team
began 2020 with a focus on the
implementation of our new internal
model along with introducing several
new technologies to drive greater
efficiency and to enhance our candidate
experience. The timing of our Modern
Hire implementation could not have been
better – enabling it to provide the best
support to the business as we made the
rapid shift to complete virtual interviewing.
We also moved to a virtual/agile on-
boarding process so we can ensure new
employees feel quickly connected and
aligned to our culture.

Every year, we set out clear and
measurable Group objectives based
upon our strategic imperatives, which
are directly linked to personal objectives
of all employees. This enables employees
to clearly see how their efforts contribute
to the overall success of the business,
which drives execution, accountability
and engagement. During 2020 all
employees’ objectives were reviewed
to ensure they remained relevant and
achievable in the face of the challenges
of COVID-19.

Smith+Nephew’s compensation
strategy supports high-performance
and accountability across both financial
and cultural performance metrics.
A robust compensation framework
is vital in attracting, retaining, and
motivating high calibre people, driving
better business results across an equitable
work environment. We are Living Wage
Accredited in the UK, voluntarily paying
above the government required minimum.
We also offer a share plan to the majority
of employees globally.

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Our recruitment and
assessment approach, and
our performance management
and talent management
processes, all directly align to
these Winning Behaviours.

Smith+Nephew
Annual Report 2020

Delivering
innovation

Throughout 2020 we continued to innovate
to ensure the Group emerges from this crisis
as strongly as possible. We protected our
R&D investment, launched new products,
made strategically important acquisitions,
adapted our medical education and identified
efficiencies across manufacturing.

Research & Development
At the heart of our innovation strategy
is our R&D team, focused on delivering
meaningful innovation and launching
new products, systems and services
backed by compelling clinical evidence.
In 2020 we invested $307 million in R&D.

We delivered a number of important
launches in 2020. In Orthopaedics this
was led by a new handheld robotics
platform, the CORI◊ Surgical System,
available for both unicompartmental
and total knee arthroplasty.

Enabling innovation

CORI is the vanguard of our Real
Intelligence digital ecosystem which,
following applicable regulatory clearance
and approval pathways, will include
patient engagement, pre-operative
planning, digital and robotic surgery,
post-operative assessment and
outcomes measurement solutions.

We launched RI.HIP NAVIGATION for total
hip arthroplasty (THA), designed to help
maximise accuracy and reproducibility
by delivering patient-specific component
alignment. We also launched the
JOURNEY◊ II Unicompartmental Knee
(UK) System, building on the heritage
of our partial knees now paired with
proprietary OXINIUM◊ Technology. In China
we received approval from the National
Medical Products Administration (NMPA)
to introduce our REDAPT◊ System for
revision THA.

In Sports Medicine we introduced the
INTELLIO◊ Connected Tower Solution,
which wirelessly connects and remotely
controls multiple Sports Medicine systems
from outside the sterile field, an ideal
solution for both hospitals and Ambulatory
Surgery Centers (ASCs) where space is
at a premium. In Europe we launched
the NOVOSTITCH◊ PRO Meniscal Repair
System and continued to roll out our
REGENETEN◊ Bioinductive Implant.

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RI.HIP NAVIGATION
for total hip arthroplasty
is designed to help maximise
accuracy and reproducibility
by delivering patient-specific
component alignment.

Smith+Nephew Annual Report 2020

We also continued to invest in evidence to
support the use of our products, including
a new publication further validating the
performance of our proprietary OXINIUM
on XLPE (highly cross-linked polyethylene)
for total hip arthroplasty. For our PICO◊
Single Use Negative Pressure Wound
Therapy System (sNPWT) new studies
demonstrated cost effectiveness when
compared with traditional NPWT and
clinical effectiveness compared to
standard dressings in reducing surgical
site complications, resulting in fewer
deep sternal wound infections following
cardiac surgery.

Acquisitions

Smith+Nephew’s strategy to invest in
higher-growth segments is at the core
of our acquisition programme. Under
our capital allocation framework, M&A
is the third priority for use of cash, and our
business development team is focused
on finding value-enhancing opportunities.

In September 2020 we announced
our intention to acquire the Extremity
Orthopaedics business of Integra
LifeSciences Holdings Corporation
for $240 million.

The acquisition, which we completed in
January 2021, will significantly strengthen
Smith+Nephew’s extremities business by
adding a combination of a focused sales
channel predominantly in the US as well
as Canada and Europe, complementary
shoulder replacement and upper and
lower extremities portfolio, and an
exciting new product pipeline.

The portfolio is highly complementary
to Smith+Nephew’s existing orthopaedics
offering, in particular providing entry
into the shoulder replacement and foot
and ankle segments. The Extremity
Orthopaedics R&D pipeline includes a
next-generation shoulder replacement
system, which is expected to be ready
for full commercial launch in 2022.

In January 2020 we acquired Tusker
Medical, Inc., the developer of the Tula®
System, a new system for in-office delivery
of ear tubes to treat recurrent or persistent
ear infections. This FDA-approved
‘Breakthrough-designated Device’ is
the first system that can be used to place
ear tubes in young children using local
anaesthesia in the physician-office setting.
Tula is highly complementary to our
existing ENT portfolio. While the roll-out
of Tula has been significantly impacted by
the slow-down in elective ENT surgeries
caused by COVID-19, we completed
the first commercial procedures in
May as planned.

In 2020 we also acquired two digital
technology products as well as remote
physical therapy assets. These formed
the foundation for ARIA, our digital care
management platform for ASCs,
launched in 2020.

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The acquired Integra
portfolio is highly
complementary,
in particular providing
entry into the shoulder
replacement and foot
and ankle segments.

“ The Extremity Orthopaedics
business acquired from Integra
is an established global player in
the rapidly growing extremities
segment, including total shoulder
replacement, and has a well-
regarded specialised sales channel
and a strong pipeline of new
products. This strategic acquisition
represents a significant opportunity
to strengthen Smith+Nephew’s
position in a high-value area
and allows us to offer a
leading extremities portfolio
to customers.”

Skip Kiil
President Orthopaedics

Smith+Nephew Annual Report 2020

Delivering innovation continued

Major product
launches in 2020

INTELLIO◊ Connected
Tower Solution
wirelessly connects
and remotely controls
multiple Sports
Medicine systems
from outside the
sterile field.

The CORI◊ surgical
platform is small and
portable, making it ideal
for ambulatory surgery
centers (ASCs) and
outpatient surgery.

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The JOURNEY II◊
Unicompartmental Knee
(UK) System utilises
Smith+Nephew’s
proprietary OXINIUM◊
Technology for
partial knees.

ARIA is a digital platform
and application designed
to connect delivery of
patient care with providers
throughout the surgical
and clinical episode.

HEALICOIL KNOTLESS◊
Suture Anchor expands
our line of advanced
healing solutions for
rotator cuff repair.

The revolutionary Tula®
System gives ENT surgeons
an option to place ear tubes
in an awake child during an
office visit without the need
for general anaesthesia.

Smith+Nephew Annual Report 2020

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At the heart of our innovation strategy is our
R&D team, focused on delivering innovation
and launching new products, systems and
services backed by compelling clinical evidence.
In 2020 we invested $307 million in R&D.
Vasant Padmanabhan
President Research & Development

What are you most
proud of in 2020?
I am most proud of our Company’s
steadfast focus on the health and safety
of our employees and customers during
the pandemic. We made the decision
early in the year to ring-fence our key
R&D programmes, while reducing expenses
wherever possible. We are very pleased
with how well we have delivered exciting
new products for launches during the
year in spite of the COVID-19 challenges.

What should we
expect in the future?
We expect to continue to deliver our
innovation pipeline with further product
approvals and launches globally. Our
products and solutions are becoming
more connected digitally. We will
develop solutions like the Real Intelligence
Digital Surgery ecosystem that help our
customers to perform surgeries more
precisely and accurately leading to better
patient outcomes. Our solutions will
continue to provide insights, derived from
big data, for better patient management.

What is Smith+Nephew’s
R&D model?
Our R&D model is structured to deliver
a pipeline of innovative products and
solutions that meet customer and patient
needs. Our model and structure provide
for customer and franchise focused
innovation, while leveraging assets
and capabilities across the enterprise.
The close alignment between new product
development and Clinical Affairs allows us
to deliver clinical and economic evidence of
the value of our innovation. New products
are developed using a rigorous phase-gate
approach starting with business case
review and ending with launch readiness
review. We also work closely with our
manufacturing colleagues to embed
sustainability principles into our design
and packaging.

How important are acquisitions?
Very important. We are proud of our track
record in acquiring new technologies and
realising their potential in high growth
markets and segments. These acquisitions
complement existing product innovation
and help accelerate portfolio growth,
strengthen our established leadership
positions, and boost our core technologies
and enterprise capabilities. In 2020 we
delivered new launches based around
acquired technologies in ENT, robotics
and our ASC business.

What is Real
Intelligence (RI)?

Smith+Nephew
Annual Report 2020

Real Intelligence: How Smith+Nephew thinks,
innovates and re-imagines surgery.

While others focus on Artificial Intelligence (AI)
as their path to the future, we take a different
approach. Real Intelligence: where the power
of human insight and experience work together
with technology to create new care pathways.

Smith+Nephew has made significant investments
in technology including: Blue Belt, the Brainlab
Orthopaedic Joint Reconstruction business,
and Atracsys.

Our vision combines robotics, software and data
to improve outcomes. The Real Intelligence
ecosystem creates a seamless connection
through the continuum of care.

In 2021 we will introduce
remote Physical Therapy (PT)
functionality for ARIA,
Smith+Nephew’s digital
care management platform
for ASCs.

Delivering innovation continued

Innovating
for ASCs

We have continued to develop new offerings
for the Ambulatory Surgical Center (ASC)
segment, which we view as a strategic
cross-franchise opportunity. We are seeing
an increase in the proportion of joint
replacement procedures taking place
in ASCs and believe that part of the
US healthcare system’s response
to COVID-19 has been to accelerate the
shift. Smith+Nephew is well positioned
to benefit from this trend through our
new ASC solutions programme Positive
Connections which offers a unique
combination of leading technologies,
partnerships, programmes and training to
benefit patients and healthcare providers.

ARIA, Smith+Nephew’s digital care
management platform, was launched
in August 2020 with a focus on ASC
customers. It promotes engagement
between patients and providers to support
the overall patient experience before and
after surgery. We continue to build ARIA,
adding patient selection and care-pathway
optimisation tools as well as remote
Physical Therapy (PT) functionality for
launch in 2021, bringing convenience for
patients with musculoskeletal problems
and helping to manage costs for payors
and employers.

ARIA promotes
engagement between
patients and providers
to support the overall
patient experience before
and after surgery.

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Manufacturing
and quality

Delivering high quality products
Smith+Nephew takes great pride in its
manufacturing expertise and commitment
to distributing innovative, quality products
globally. Our Global Operations team
supports the delivery of the Group’s
strategic imperatives by ensuring that
we respond efficiently to geographical
growth, new product development and
increasing regulatory requirements.

We operate manufacturing facilities
in eight countries across the globe, and
have central distribution in the US, Europe
and Asia. Products for our Orthopaedics
franchise are primarily manufactured
at facilities in Memphis (US), Aarau
(Switzerland), Tuttlingen (Germany),
Beijing (China), and Warwick (UK).
We are currently building a new high
technology manufacturing facility in
Penang (Malaysia) which is expected
to open in late 2022.

Sports Medicine products are primarily
manufactured at the Mansfield (US)
and Alajuela (Costa Rica) facilities.
The majority of Advanced Wound
Management products are made in
Hull (UK), Fort Worth (US), Columbia,
Maryland (US), and Suzhou (China).

Smith+Nephew Annual Report 2020

“ Global Operations is focused
on delivering ever-greater
efficiency by operating an optimal
facility footprint, driving lean
manufacturing methods across
our network and identifying
opportunities within our supply
chain to deliver world-class
service levels.”

Mark Gladwell
President Operations & GBS

Work is progressing rapidly on our new
high technology manufacturing facility
in Penang, Malaysia.

We procure raw materials, components,
finished products and packaging materials
from suppliers globally. These include
metal forgings and castings, optical
and electronic sub-components, active
ingredients and semi-finished goods,
as well as packaging materials. Suppliers
are contracted to ensure value for money
based on total spend across the Group.
We work closely with our 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 or quality.
We monitor suppliers through on-site
assessments and performance audits
to ensure the required levels of quality,
service and delivery.

Manufacturing efficiency
We are continuing a programme to
transform our operations. This programme
is expected to deliver around $200 million
of annualised benefits by 2025 for a
one-off cost of around $350 million.

One major component of the programme is
to continue to optimise our manufacturing
network, including introducing digital
technologies and lean manufacturing.
Malaysia will provide additional capacity
in a low-cost location to support future
growth. We have expanded our site in
Costa Rica and are transforming it into
a multi-franchise facility to manufacture
PICO sNPWT for the US market. We have
also completed the transfer of Bioactives
manufacturing from Curaçao to our
facility in Texas.

A second component underway is the
outsourcing of our global warehousing and
distribution functions in the US and Europe
to a specialist third party partner. We
expect to benefit from the greater scale
and expertise of our partner, including
their advanced warehouse automation.

$200m

Our programme to
transform our operations
is expected to deliver
around $200 million of
annualised benefits by
2025 for a one-off cost
of around $350 million.

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Preparation
for Brexit

Supporting our customers to ensure they
are able to continue treating patients is
an absolute priority for Smith+Nephew.

At the heart of this is our supply chain,
where we have built comprehensive
contingency plans, in particular related
to threats of wider disruption posed by
the end of the Brexit Transition Period
on 31 December 2020, and the impact
of COVID-19.

These contingency plans are built
on Smith+Nephew’s Group Business
Resilience and Continuity Management
programme, which reviews and
implements protocols and procedures
to address risks and impacts identified
to our business – as may affect our staff,
customers, stakeholders, and products
and services.

In anticipation of the end of the
Brexit Transition Period, we undertook
detailed programmes to identify risks
and ensure that contingencies could
be implemented as required. Our
plans addressed risks and issues which
might have impacted on regulatory
compliance, manufacturing, supply chain,
our people and operation of our IT and
finance systems. As a Brexit contingency
we built up an additional six weeks of
inventory in the UK.

If necessary, we have the ability to
flex our supply chain to ship products
directly to both the UK and EU, reducing
our reliance on crossing the UK/EU border.
We have registered for the UK Government
Secured Freight Capacity and Government
Express Freight schemes for easier access
into the UK and have secured Authorised
Economic Operator (AEO) status which
enables priority treatment for our products
at the UK border.

Smith+Nephew Annual Report 2020

80%

In 2020, a record 186,000
healthcare professionals
attended our courses globally,
with nearly 80% delivered
virtually compared to just
11% during 2019.

Delivering innovation continued

Medical
education

Smith+Nephew is committed to
empowering healthcare professionals with
education and training to help improve
patient outcomes across the globe.

Medical education at Smith+Nephew
offers healthcare providers opportunities
to learn the latest evidence, innovative
surgical techniques, and effective
use of our products. We also partner
with professional societies, fellowship
programmes, and thought leaders to
elevate the standard-of-care across
the therapeutic areas we serve.

Our focus is providing learning journeys
delivered when it is most needed in a
format preferred by the user. Customers
have access to content that is tailored
to their specialty and role in the treatment
continuum. We have also expanded our
course offering and introduced a new
engaging online platform to supplement
traditional peer-to-peer interactions
and hands-on practice.

By leveraging state-of-the art technology,
Smith+Nephew provides virtual
experiences for hospitals, ASCs and clinics,
bringing together surgeons, education
professionals, and clinicians remotely.
Our distinct ability to adapt to customers’
learning needs provides options of remote
procedure support, proctoring, and
collaboration. Smith+Nephew Responds
goes further in providing on-demand live
wound care support and education.

We are also developing a broader reach
to educate across sites of care, specialties,
and geographies. Our goal is to provide
a rich offering of education across the full
continuum of care including nurses, allied
professionals, extended staff, and payers.

This year, we accelerated virtual and
hybrid learning opportunities to enhance
in-person learning and provide education
when and how customers want it. In 2020,
a record 186,000 healthcare professionals
attended our courses globally, with nearly
80% delivered virtually compared to
just 11% during 2019.

In 2021, Smith+Nephew will launch
Education Unlimited, a new global
website platform with medical education
resources spanning across Advanced
Wound Management, Orthopaedics,
Sports Medicine, and ENT.

Royal College of Surgeons
accreditation for new digital
medical education programme

In May 2020 we were pleased to
announce that our new global digital
medical education programme had
been accredited by the Royal College
of Surgeons of England.

Launched in response to the COVID-19
pandemic, the programme was designed
to support the development of surgeons
by providing educational webinars on the
safe and effective use of Smith+Nephew
products as well as surgical techniques.

In its first month the programme
attracted healthcare professionals
from more than 110 different countries.

This accreditation builds on the
Royal College of Surgeons of England
accreditation received in 2018 for
Smith+Nephew’s surgical training
facility, the Expert Connect Centre,
in Watford, UK.

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Smith+Nephew Annual Report 2020

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Quality and
Regulatory Affairs

Global regulators are constantly striving
to improve standards. In 2021 new regulations
in Europe will have a fundamental effect on
our industry.
Melissa Guerdan
Chief Quality and Regulatory Affairs Officer

Is Smith+Nephew ready?
We have been preparing for MDR
since 2017. Given the magnitude and
complexity of the regulation, a project
team approach was adopted so that
there was dedicated focus on this
important regulatory change. More
than 300 employees working across
11 workstreams, including regulatory,
quality, R&D and supply chain, are
ensuring that the requirements of the
regulation are embedded and met across
our business. We have re-organised
our EU supply chain to comply with the
economic operator requirements of the
Regulation, and from a manufacturer
perspective we have completed
all technical requirements and are
finalising labelling changes ahead
of the May 2021 deadline.

A global Quality and Regulatory Affairs
function supports full product life-cycle
management of Smith+Nephew’s global
product portfolio from design and
development through manufacturing
and post-market surveillance.

These teams establish appropriate
processes and procedures to facilitate
compliance to complex global
regulations and laws that govern
the design, development, approval,
manufacture, labelling, marketing
and sale of healthcare products.

The Quality and Regulatory Affairs
teams directly support expansion
of our global portfolio through the
registration of new products and
existing products in new markets,
as well as ensuring compliance with
regulatory reporting standards.

110

In its first month the
programme attracted
healthcare professionals
from more than 110
different countries.

What is EU MDR?
Requirements of global regulatory
agencies are becoming increasingly
stringent and we expect this to continue.
The European Union (EU) Medical
Devices Regulation (MDR) 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 with CE marking,
regardless of where the devices are
manufactured. This is a significant
undertaking. EU MDR will apply from
May 2021.

Is EU MDR a good thing?
At Smith+Nephew we view any changes
that are in the interest of protecting
patients as positive and in-line with our
own company values. Amongst a number
of changes, EU MDR creates transparency
of product performance with the intent
to drive improvements in product
innovation and performance, while
helping customers make informed
decisions – these are noble objectives
and aligned with our values. We have for
a number of years been increasing our
investment in clinical evidence for exactly
the same reason – to inform clinical
practice and help improve outcomes.

“ Our Quality and Regulatory
Affairs teams strive to ensure
that patient safety and product
quality are at the forefront of
our global employees’ approach
to their work. We maintain
an unwavering commitment
to excellence and service to
our customers.”

Melissa Guerdan
Chief Quality and
Regulatory Affairs Officer

Smith+Nephew
Annual Report 2020

Serving our
customers

Healthcare professionals are our customers,
and they can range from orthopaedic surgeons
to wound care nurses, general practitioners and
other clinicians, but increasingly also economic
stakeholders such as purchasing professionals
in hospitals and healthcare insurers.

Putting customers at the heart of our business

Three franchises set
global product strategy

Three regional organisations
sell to our customers

Our franchise model
Smith+Nephew has a global franchise
structure with three franchises:
Orthopaedics, Sports Medicine & ENT,
and Advanced Wound Management.
Each is led by a dedicated global president
who serves on our Executive Committee
and reports to the Chief Executive Officer.
The franchise model is designed to
ensure that we have subject and market
experts leading specialist teams dedicated
to serving the specific requirements of
our customers.

Our franchises are responsible for strategy,
determining which products we take
to market and how we market these
globally. The franchises work closely
with R&D to ensure we are developing
products that meet unmet needs and
with Global Operations to ensure we
have appropriate availability.

The franchises also share global
commercial support teams in the
areas of medical education, sales
training, marketing services and
healthcare economics.

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Orthopaedics

Skip Kiil, President

46 Read more on
our franchise

Sports Medicine
& ENT

Brad Cannon, President

48 Read more on
our franchise

Advanced Wound
Management

Simon Fraser, President

50 Read more on
our franchise

US/Americas

In the US, our largest market, the commercial
teams are organised by franchise and led
by the franchise presidents. The President
Sports Medicine & ENT also leads our
teams in LATAM and Canada

Europe, Middle East & Africa

Our EMEA commercial organisation
is headquartered in Zug, Switzerland.
The team is led by Peter Coenen,
President EMEA Region

Asia Pacific

Our Asia Pacific commercial organisation
is headquartered in Singapore. It is led by
Myra Eskes, President Asia Pacific Region

Our customers:
– Nurses

– Surgeons

– Healthcare
systems

– Payors

– Patients

Smith+Nephew Annual Report 2020

Commercial delivery
Smith+Nephew sells through a regional
commercial structure, with dedicated
organisations covering the US, Europe,
Middle East and Africa (EMEA), and
Asia Pacific (APAC).

In the US, our largest market, the
commercial teams are organised by
franchise. These teams are also led
by the global franchise president
who has full commercial responsibility.
The President Sports Medicine & ENT
also leads our teams in Latin America
and Canada.

Our EMEA and APAC commercial
organisations are also led by presidents,
who serve on our Executive Committee
and report to the Chief Executive Officer.
Again this is to ensure that their voices are
heard at the highest level and the needs
of their customers are recognised and
appropriate resource dedicated to them.

Under the EMEA and APAC presidents
are country clusters, based on geographic
proximity, critical mass of revenue, and
similar go-to-market strategies. They are
led by managing directors with business
unit leads for each franchise.

Highly trained
and skilled

Our sales representatives
are highly trained and
skilled individuals.
Depending on their area of
specialism, representatives in our
surgical businesses will not only know
the devices that they sell, but also
have a detailed knowledge of the
surgical instruments used to implant
them, and specific understanding
of the various surgical techniques
a customer might use.

Once a sales representative is trained
and certified, they typically spend the
majority of their time working directly
with and supporting customers to
aid in the safe and effective use of
our advanced medical technologies,
or identifying and contacting
new customers.

In Advanced Wound Management, sales
representatives have deep knowledge of
how clinicians seek to prevent and treat
wounds, as well as an understanding
of the economic benefits of using our
products within treatment protocols.

We pride ourselves on giving customers
a high standard of service and invest
in developing our sales and marketing
organisation. We are proud of our Global
Commercial Training and Education
structure, which delivers a consistent
content and curriculum-based
approach, coupled with deep
commercial training specialisation
in key markets.

In 2020, as access to hospitals was
restricted due to COVID-19, many
of our representatives continued to
support urgent cases at the request
of customers. For those who were
not required, we invested more in
training our representatives to ensure
we were ready to step back up as
elective procedures restarted.

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Smith+Nephew
Annual Report 2020

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Serving our customers continued

Orthopaedics

Smith+Nephew’s Orthopaedics franchise includes
an innovative range of Hip and Knee Implants
used to replace diseased, damaged or worn joints,
enabling technologies that empower surgeons,
and Trauma products used to stabilise fractures
and correct bone deformities.

Performance

Franchise revenue
Franchise profit

2020

2019
$1,917m $2,222m
$389m $666m

2020
2020
Underlying
Reported
2020
growth*
growth
Revenue
$822m -21.1% -21.0%
-7.4%
-7.5%
$567m
$68m -12.9% -26.1%
-5.1%
-5.7%

$460m

Knee Implants
Hip Implants
Other Recon
Trauma

* These non-IFRS financial measures are explained
and reconciled to the most directly comparable
financial measure prepared in accordance with
IFRS on pages 222–226.

“ Our joint reconstruction
portfolio of unique and
differentiated hip and knee
implants allows surgeons
to utilise our leading robotic
technology to help restore
pain-free movement
to patients.”

Skip Kiil
President Orthopaedics

In Knee Implants, Smith+Nephew’s
specialised systems include leading
products for total primary and revision,
partial and patellofemoral joint
resurfacing procedures.

The JOURNEY◊ II Total Knee Arthroplasty
system is demonstrated to replicate
normal knee positions, shapes, and
motions.1–3 The LEGION◊/GENESIS◊ II
Total Knee System is a comprehensive
system which includes a revision option
to replace a knee implant that is no longer
functioning properly. Both systems feature
our proprietary advanced hard-wearing
OXINIUM◊ Oxidized Zirconium bearing
surface. In 2020 we launched the
JOURNEY◊ II Unicompartmental Knee
(UK) System, building on the heritage
of our partial knees paired with
OXINIUM Technology.

In Hip Implants, our range includes the
ANTHOLOGY◊ Hip System, SYNERGY◊
Hip System, POLAR3◊ Total Hip Solution
and OR3O◊ Advanced Dual Mobility
system. All these systems feature
OXINIUM. Our REDAPT◊ Revision Hip
System is designed to allow ingrowth
through an additive, or 3D printing,
manufacturing process which produces
a porous implant designed to mimic
the structure of cancellous bone.

In our Other Reconstruction segment
we launched a new handheld robotics
platform, the CORI◊ Surgical System,
available for both unicompartmental knee
arthroplasty and total knee arthroplasty.

OR3O◊

OR3O, our new Advanced Dual Hip
Mobility system incorporating our
proprietary OXINIUM technology,
has been well-received by customers,
delivering a good commercial
performance in the second half
of 2020.

CORI is the vanguard of our Real
Intelligence digital ecosystem, which is
described in more detail on page 39.
CORI is being rolled out globally and
replaces the NAVIO◊ Surgical System
in our portfolio.

In Trauma, leading products include the
TRIGEN◊ INTERTAN◊ hip fracture system,
which is backed by many years strong
clinical evidence,4 the EVOS◊ Plating
System that offers multiple fixation options
and, for extremities and limb restoration,
the TAYLOR SPATIAL FRAME◊ External
Fixator as well as plating systems and
soft tissue repair products.

In January 2021 we acquired
Extremity Orthopaedics business of
Integra LifeSciences Holdings Corporation
for $240 million. This acquisition is
expected to strengthen our extremities
business by adding a combination of a
focused sales channel, complementary
shoulder replacement and upper and
lower extremities portfolio, and an
exciting new product pipeline including
a next-generation shoulder replacement
system. See page 37.

2020 Performance
The impact of COVID-19 was pronounced
on our Orthopaedics franchise in 2020,
driven by lower levels of elective surgery.
As a result, on a reported basis, revenue
declined -13.7% and profit -42%.
Hip Implants performance included good
growth from the REDAPT◊ Revision Hip
System and recently launched OR3O
Dual Mobility Hip System. Recovery in
Knee Implants lagged behind Hip Implants
reflecting the nature and causes of the
procedure as well as the ongoing drag
ahead of the launch of our cementless
knee. In Other Reconstruction the
reception for CORI surgical system was
positive. Our Trauma businesses remained
more resilient across the year, with the
EVOS Plating System performing strongly.

A full list of references can be found on page 238

Smith+Nephew Annual Report 2020

Enhancing
quality of life

Whether through improving clinical
outcomes, extending the life and
functionality of implants or enhancing
operating room efficiency, our
innovations differentiate us and
provide solutions to patients seeking
to regain their quality of life.

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King of the court
“Basketball has always been my shield
against getting old. When I learned
that patients don’t usually return to
playing basketball after having knee
replacement, I was determined
that wouldn’t be my story.
“Of course, defying the odds meant
two things: I had to be willing to put
in the hard work, and I needed the
right teammates beside me – Dr. David
Mayman at Hospital for Special Surgery
and my physical therapist.
“Six months after the second knee was
replaced, I began shooting. Around nine

months later, I was playing three hours
a day, twice a week. Best of all, I was
holding my own against guys thirty
years younger.
“Knee replacement was one of
the best decisions I’ve ever made.
I was in constant pain, limping around
and generally miserable. Now, at
69 and about to celebrate the tenth
anniversary of my first OXINIUM knee
replacement, I’m still playing ball and
don’t think about pain at all.”

Craig Raucher
Founder/Commissioner Staten Island
Basketball League

4747

» See page 238 for testimonial reference

Smith+Nephew
Annual Report 2020

Smith+Nephew Annual Report 2020

Serving our customers continued

Innovative
technology
for minimally
invasive
surgery

Smith+Nephew has a rich history
of product development, and 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.

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Throwing the ball again
“I have a son that’s very active in sports.
Every day we throw the baseball. Well,
that was a worry, I couldn’t throw
the baseball. Well, we’re throwing the
ball every day again now and it’s been
less than a year since I had my surgery.
The results were pretty impressive
to me.
“My goal was to be able to get back
to work, and be able to get back to my
family, and get back to my recovery.
And that seemed to work out
pretty good.

“Captain Don Hiller had Rotator
Cuff Repair Surgery on a partial cuff
tear using the REGENTEN Bioinductive
Implant. The operating surgeon
was Dr Alejandro Badia, MD, FACS.
Captain Hiller was back to work
two months after surgery.

“ My name is Captain Don Hiller
and since my procedure, I have
been able to live my life unlimited.”

Captain Don Hiller

48
48

» See page 238 for testimonial reference

Smith+Nephew
Annual Report 2020

Smith+Nephew Annual Report 2020

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Sports
Medicine
& ENT

Smith+Nephew’s Sports Medicine & ENT franchise
operates in growing markets where unmet clinical
needs provide opportunities for procedural and
technological innovation.

Performance

Franchise revenue
Franchise profit

2020

2019
$1,333m $1,536m
$306m $489m

2020
2020
Underlying
Reported
2020
growth*
growth
Revenue
-10.5% -10.2%
$710m
-12.6% -12.4%
$517m
$106m -29.9% -29.7%

SMJR
AET
ENT

* These non-IFRS financial measures are explained
and reconciled to the most directly comparable
financial measure prepared in accordance with
IFRS on pages 222–226.

“ Our Sports Medicine
& ENT franchise is well
positioned for growth with
a differentiated portfolio
that addresses the needs
of patients, physicians,
providers and payers.”

Brad Cannon
President Sports Medicine & ENT

REGENETEN
Bioinductive
Implant

The REGENETEN Bioinductive
Implant, which supports the
body’s natural healing response
by inducing the growth of new
tendon-like tissue,1-5 has had
a transformative impact on
the way surgeons approach
rotator cuff procedures.

In Sports Medicine Joint Repair (SMJR) our
products help surgeons repair soft tissue
injuries and degenerative conditions
of the joint.

For shoulder repair, we market products
primarily for Rotator Cuff Repair (RCR) and
instability repair, two of the most common
sports medicine procedures. Advanced
Healing Solutions for rotator cuff repair
includes the innovative REGENETEN◊
Bioinductive Implant, which supports
the body’s natural healing response to
facilitate new tendon-like tissue growth
and disrupt disease progression1-5, and
novel REGENESORB◊ Material, used in
anchors, which encourages the implant
to be absorbed and replaced by bone
within 24 months.6-8

In knee repair, the NOVOSTITCH◊ PRO
Meniscal Repair System addresses complex
meniscal tear patterns not adequately
served by other repair systems, including
horizontal cleavage tears affecting
approximately one-third of meniscal repair
patients.9 Part of our All Tears All Repairs
portfolio, it is highly complementary to our
FAST-FIX◊ 360 Meniscal Repair System.

In Arthroscopic Enabling Technologies
(AET) our products facilitate the practice
of arthroscopic surgery. These include 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 LENS 4K
Surgical imaging system uses 4K UHD image
quality and network connectivity in a 3-in-1
console for multispecialty environments. The
WEREWOLF◊ and QUANTUM◊ 2 COBLATION◊
Controllers enable surgeons to remove soft
tissue precisely10 and control bleeding in
a variety of arthroscopic procedures.

In 2020 we introduced the INTELLIO◊
Connected Tower Solution, which wirelessly
connects and remotely controls multiple
Sports Medicine systems from outside
the sterile field, an ideal solution for both
hospitals and Ambulatory Surgery Centers
(ASCs) where space is at a premium.
See page 40.

In Ear, Nose & Throat (ENT) our COBLATION◊
Plasma Technology, which has been used
to remove tonsils and adenoids for over
15 years, has an ability to remove tissue
at low temperatures with minimal damage
to surrounding tissue.11 Using COBLATION
Technology, the HALO◊ COBLATION Wand
with the WEREWOLF◊ System is the only
system with an all-in-one device designed
for both fine dissection and debulking
of tissue in adenotonsillectomy. We also
market a wide range of dissolvable and
removable post-operative nasal dressings,
as well as a comprehensive portfolio of
epistaxis solutions.

We launched the Tula® System, an in-office
solution for placement of tympanostomy
tubes (commonly known as ear tubes),
following our acquisition of Tusker Medical,
Inc. in January 2020. See page 37.

2020 Performance
Performance in Sports Medicine & ENT
was significantly impacted by COVID-19
restrictions in 2020, resulting in lower
levels of elective surgery. As a result, on
a reported basis, revenue declined -13.2%
and profit -37%. Sports Medicine Joint
Repair performance was driven by shoulder
repair. In Arthroscopic Enabling Technology
capital sales aligned closely to recovery
in elective surgery volumes over the year.
ENT’s revenue was substantially lower
year-on-year due largely to greater caution
over restarting procedures and lower
rates of ENT infections.

A full list of references can be found on page 238

Smith+Nephew Annual Report 2020

Serving our customers continued

Advanced
Wound
Management

Performance

Franchise revenue
Franchise profit

2020

2019
$1,310m $1,380m
$316m $370m

2020
Revenue
$647m
$431m
$232m

2020
2020
Underlying
Reported
growth*
growth
-7.7%
-7.5%
-1.1% -10.5%
-4.8%
-4.8%

AWC
AWB
AWD

* These non-IFRS financial measures are explained
and reconciled to the most directly comparable
financial measure prepared in accordance with
IFRS on pages 222–226.

“ Chronic wounds represent
a large and increasing burden
on patients and healthcare
systems. Smith+Nephew has
a broad portfolio used across
the spectrum of clinical needs,
from prevention protocols
to wound healing.”

Simon Fraser
President Advanced
Wound Management

ALLEVYN
LIFE

Use of ALLEVYN LIFE Dressing
in a community setting helped to
significantly¥ reduce the frequency
of weekly dressing changes (47.1%)
and weekly dressing costs (58.7%)
compared with previous dressings,
as well as improve HCP and
patient satisfaction.2

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Smith+Nephew’s extensive Advanced Wound
Management portfolio is designed to meet broad
and complex clinical needs, helping healthcare
professionals get ‘CLOSER TO ZERO’ human
and economic consequences of wounds.

In Advanced Wound Care (AWC) our
portfolio includes products that are
designed to manage exudate and infection,
protect the skin and prevent pressure
injuries. In exudate management, our
products provide appropriate wound fluid
handling and absorption to help promote
an optimal wound healing environment.1
Our ALLEVYN◊ LIFE Foam Dressing is
uniquely differentiated, with its EXUMASK◊
Change Indicator and fluid lock-in
technology. In a recent study a 47.1%
reduction in weekly dressing change
frequency was observed compared to
a variety of other wound management
dressings.2

In infection management, our key silver-
based ACTICOAT◊ Antimicrobial Barrier
Dressings, DURAFIBER◊Ag Absorbent
Gelling Silver Fibrous Dressing, ALLEVYN◊
Ag Antimicrobial Foam Dressing, as well as
IODOSORB◊ Cadexomer Iodine Ointment
provide clinicians with a range of solutions
to address bacterial burden, biofilm
and infection.

Smith+Nephew promotes best practice
guidelines, including the globally recognised
T.I.M.E. principles, offering a systematic
approach to wound healing.3 Due to the
breadth of our portfolio, Smith+Nephew is
uniquely positioned to provide customers
with a set of comprehensive products
across each clinical need assessed within
the externally recognised T.I.M.E. Clinical
Decision Support Tool.

In Advanced Wound Bioactives (AWB),
our products provide an approach to
debridement, dermal repair, and tissue
substitutes with over 500 publications
supporting their clinical application.
Collagenase SANTYL◊ Ointment 250 units/
gram is the only FDA-approved biologic
enzymatic debridement agent available
in the US market.

In our skin substitute product range,
GRAFIX◊ Placental Membrane and
STRAVIX◊ Umbilical Tissue, acquired
in 2019 with Osiris Therapeutics, retain
the extracellular matrix, growth factors,
and endogenous mesenchymal stem cells,
fibroblasts and epithelial cells of the
native placental tissue to support
advanced soft tissue repair. Intended for
application directly to acute and chronic
wounds and as surgical cover or wrap.
In addition, OASIS◊ Wound Matrix is a
naturally-derived porcine extracellular
matrix replacement portfolio.

In Advanced Wound Devices (AWD),
our portfolio helps improve healing
outcomes in chronic wounds4, prevent
surgical site complications5 and prevent
pressure injuries.6 The PICO◊ system range
of single use negative pressure wound
therapy systems (sNPWT) brings the
effectiveness of traditional NPWT in a small
portable system. This unique technology
is used on both chronic wounds and closed
incisions. AWD also includes our traditional
RENASYS◊ Negative Pressure Wound
Therapy System, LEAF◊ Patient Monitoring
System that supports a hospital’s pressure
injury prevention strategy, and the
VERSAJET◊ Hydrosurgery System,
a surgical debridement device.

2020 Performance
Performance in Advanced Wound
Management was more resilient across
2020 than our surgical franchises, although
it was impacted by restrictions on access
to healthcare facilities and lower levels of
elective surgery. As a result, on a reported
basis, revenue declined -5.1% and
profit -15%. Within AWC our focus on
commercial execution led to an improved
performance across most regions by
year-end. AWB was impacted by COVID-
related restrictions to US healthcare
provision. In AWD PICO sNPWT led
performance, with our traditional RENASYS
system having a strong finish to 2020.

A full list of references can be found on page 238

Smith+Nephew Annual Report 2020

Reducing the
burden of wounds

Following the 2019 guidance from
the UK’s National Institute for Health
and Care Excellence (NICE) for PICO◊
sNPWT7, we have continued to build
the world-class evidence base. As of
1 May 2020 there were 146 publications,
including 31 level one studies, randomly
controlled clinical trials, meta-analyses
etc. in multiple closed incision and open
wound indications that demonstrates
the clinical performance and economic
value of the PICO◊ System.

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Reducing surgical site infections
The 2019 NICE Guidance supported the
adoption of PICO◊ sNPWT System, in
patients at risk of surgical site infections
(SSIs).7 SSIs are a substantial burden as
Laura’s story demonstrates. Having had
complications following her first two
Caesarian sections resulting in months
of GP visits, pain and frustration, she was
prescribed PICO sNPWT on her third
C-section and subsequently no surgical
site complications materialised.

In a recent RCT of 876 obese women
undergoing C-section, the use of PICO
sNPWT resulted in a reduction in
the incidence of SSIs by 50%, when
compared to standard dressings.8
Nana Hyldig of Odense
Universitetshospital, Denmark, said:
“The study shows that PICO dressing
reduces the risk of SSI. It is our hope that
the results from the study will benefit
patients and health care systems
around the world.”

» See page 238 for testimonial reference

Smith+Nephew
Annual Report 2020

Smith+Nephew Annual Report 2020

Our stakeholders

Our approach
to stakeholders

In accordance with section 172 of
the Companies Act 2006 and the UK
Corporate Governance Code 2018,
the Board considers the potential impact
on the Company’s key stakeholders and
takes their views and interests into account
when making decisions. The Board also
takes the opportunity to engage with
our stakeholders, as appropriate. Whilst
this has been challenging during 2020
due to the COVID-19 pandemic, virtual
arrangements have been made where
possible with our main stakeholders.
For further information on how
we engage with our main
stakeholders see:

Employees

Our employees are crucial
to the success of our
business and many of our
decisions have an impact
on them. We believe that
an engaged workforce
is better for business.

See pages 28–35,
99 and 103

Investors

Our equity investors are
the owners of our business
and it is important for
us to understand their
perspectives on capital
allocation and how the
Company is run.

See pages 102
and 227–235

Environment
and community

People, Planet and Products
are at the heart of our
Sustainability strategy
ensuring a positive impact
on our communities and
our environment and
enabling us to innovate
sustainably.

See pages 24–27
and our 2020
Sustainability
Report

Government
and regulators

We are subject to the laws
and regulations of many
governments and regulators
across the world and we work
to ensure product safety and
legal compliance in order to
achieve the full potential
of our portfolio.

See page 105

Customers
and suppliers

Our business model creates
value through customer
centricity whilst working
in partnership with our
suppliers ensures we have
the right resources to
support our growth.

See pages 44–45
and 104

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Smith+Nephew Annual Report 2020

Risk report

Our risk
management
process

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

Successful management of existing
and emerging risks is critical to the
achievement of strategic objectives and
to the long-term success of any business.
Risk management is therefore an integral
component of Smith+Nephew’s
Corporate Governance.

As in previous years our Enterprise
Risk Management process is based on
a holistic approach to risk management.
Our belief is that the strategic and
operational benefits of proactively
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 achieves this.

2020 has seen a further maturing of risk
management, including by increasing
senior management engagement in risk
and business continuity. The Company’s
response to the global pandemic was
managed by the Group’s Crisis Management
Team that was convened within the
existing business continuity and incident
management framework.

Additionally, as part of the strategy session,
we discussed emerging risks with the
Board. For example, we evaluated the
risk of digital companies moving
into healthcare.

Risk management life cycle
Annual improvement and refinement
to our risk management ensures that
it remains aligned with strategy
and operations.

Our Risk Management Policy,
sponsored by our Chief Executive
Officer, is supported by an Enterprise
Risk Management Manual and the
Group Risk Team providing training
to Business Area Risk Champions.
As in prior years risks continue to be
managed through a ‘top-down’ and
‘bottom-up’ process, with regular
oversight from the Executive
Committee and quarterly reports to
the Board Committees. An overview
of our risk management life cycle
is illustrated.

2021 Risk Management Plan
Our work will continue to evolve
in 2021 with a particular focus on
strengthening integration to strategy
and budgeting processes. We will
continue to ensure a truly collaborative
approach to risk management with risk
accountability sitting squarely with
management and a proactive Group
Risk Team influencing decision-making
through effective challenge and
timely consultation.

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1. Risk identification
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
identification
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
tolerance thresholds without
being over-controlled or foregoing
desirable opportunities.

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.

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.

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

Smith+Nephew Annual Report 2020

Risk report continued

Our risk governance framework

At the very top of our structure is our
Board, setting our risk appetite and
monitoring the application of our risk
framework including strategy, execution
and outputs of risk 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. A formal ‘bottom-up’
exercise ensures that risks are escalated
back through the process to our Board
and are reflected in our Principal Risks
as appropriate. Providing guidance and
rigour across this process is our Executive
Committee and the Group Risk Team.

At the third line of defence is our
Internal Audit Function, providing an
annual opinion on the effectiveness
of our Risk Management process to
the Executive Committee, chaired by
the Chief Executive Officer, and then
to the Board and its Committees.

Board of
Directors and
Board Committees

Internal Audit

Executive Committee

Business Area

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Smith+Nephew Annual Report 2020

Business Area Risk Champions
– Carry out day-to-day risk
management activities.
– Identify and assess risk.
– Implement strategy and

mitigating actions to treat risk
within Business Area.

– Lead regular risk register updates.

Board of Directors
and Board Committees
– The Board is responsible for regular
oversight of risk management, for
our annual strategic risk review and
for determining the risk appetite
the organisation is willing to take
in achieving its strategic objectives.
– The Board monitors risks through
Board processes (Strategy Review,
Disclosures, M&A, Investments,
Disposals) and Committees
(Audit and Compliance & Culture).
– 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.

Executive Committee sitting
as Group Risk Committee
– Identifies and ensures the

management of risks that would
prevent us from achieving
our objectives.

– Appoints Business Area Risk

Champions who are accountable
for applying the Enterprise Risk
Management Policy and Framework
to produce the risk deliverables.

– Reviews external/internal

environment for emerging risks.
– Reviews risk register updates from
Business Area Risk Champions.

– Identifies significant risks and assesses
effectiveness of mitigating actions.

Internal Audit
– Provides independent assurance

to the Board and Audit Committee
on the effectiveness of the Group’s
Risk Management process.
– Provides annual assessment
of effectiveness of Enterprise
Risk Management.

Group Risk Team
– Manages all aspects of the

Group’s approach to Enterprise
Risk Management including design
and implementation of processes,
tools and systems to identify,
assess, measure, manage, monitor
and report risks.

– Facilitates implementation and
co-ordination through Business
Area Risk Champions.

– Provides resources and training

to support process.

– Reports regularly on risk to the

Executive Committee.

– Prepares Board and Group Risk

Committee reports.

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Smith+Nephew Annual Report 2020

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Risk report continued

2020 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 pages 6–9. The Principal Risks are presented
in alphabetical order below.

Business continuity
and business change
Our business depends on our ability
to plan for, and be resilient in the face
of, events that threaten one or more
of our key sites. Damage caused by
natural disasters and severe weather
can and do threaten our critical sites.
Widespread outbreaks of infectious
diseases, such as the COVID-19
pandemic, create uncertainty
and challenges for the Group and
our customers.
Our business also requires continuous
improvement and depends on our
ability to execute business change
programmes. The pace and scope of
our business ‘change’ initiatives may
increase execution risk for the change
programmes as well as for our business
as usual activities.

Examples of risks
– Ongoing COVID-19 disruption
to manufacturing, distribution
and support functions globally or
regionally due to subsequent waves.

– Natural disaster causes disruption

to manufacturing at single or
sole source facility (lack of
manufacturing redundancy).
– Severe weather patterns caused

by climate change or natural disaster
causes damage to manufacturing
or distribution facilities, impacting
ability to meet customer demand.
– Significant ‘change’ prevents our

projects and programmes achieving
the intended benefits and disrupts
existing business activities.

– Disruption to the business due to
critical system infrastructure and
applications being unavailable.

– Widespread outbreaks of infectious
diseases (other than COVID-19).

COVID-19 Impact
The challenges created by the COVID-19
pandemic include disruptions at
manufacturing facilities and other sites
caused by government restrictions on
travel and imports and exports, as well
as enhanced health and safety protocols.

Actions taken by management
– Continuous management of response to COVID-19

through Global and Regional Crisis Management Teams.

– Flexible/remote work policy, split team shift patterns
and limitation on number of people allowed on a site
at one time.

– Increased use of technology for internal and

external meetings.

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

– Implementation of technology to enforce manufacturing

social distancing.

– Initiated Workplace Unlimited ‘New Normal‘ programme.
– Sustainability Council and policy in place.
– Project management governance and toolkits and
project steering committee oversight to support
successful execution of programme and projects.

– IT disaster recovery policy in place.

Oversight
Board

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to ensure we
remain sustainable into the future and
to drive meaningful margin expansion
through operational transformation
and organisation simplification.

Change from 2019
Our net risk rating of the likelihood and impact for Business
Continuity and Business Change is currently unchanged.
The increased Business Continuity risk due to COVID-19
is balanced against risk reduction as Business Change
programmes slowed. We have mitigated the COVID-19
risks though the Crisis Management Team interventions.

Smith+Nephew Annual Report 2020

Commercial execution
The long-term success of our business
depends on setting the right strategic
priorities and executing on our plans
to deliver those priorities in highly
competitive markets. This requires
effective communication and
engagement with our customers,
the right structures and capabilities
across the Group and the ability to
adjust and refine strategic priorities
when necessary. Failure to set priorities
and execute on those priorities will
impact our ability to continue to grow
our business and serve our customers.

Examples of risks
– Medical facilities stop or severely

Actions taken by management
– Adopted alternative channels to engage with

restrict sales representative access
due to ongoing COVID-19 precautions.

healthcare professionals and healthcare providers.

– Provided sufficient and appropriate PPE and

training to staff and closely tracked testing and
vendor credentialing requirements at medical facilities.
– Account level monitoring of return to elective surgery;
supporting technologies to assist in screening prior
to surgery and remote management post-surgery
in development.

– Closely cooperated with customers to identify

remote selling and support opportunities.
– Virtual medical education processes in place.
– Continued new product launches despite COVID-19.
– Developed accessible sales information and training

modules for sales staff.

– Strategic planning process clearly linked to business

and Group risk.

– Policies and procedures to enhance channel

management implemented.

– COVID-19 pandemic drives shift

from clinic to home care.

– 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 engage effectively with

our key stakeholders to meet their
evolving needs leading to loss
of customers.

– Failure to manage distributors
effectively leading to stocking
and compliance issues.

COVID-19 Impact
Widespread outbreaks of infectious
diseases, such as the COVID-19 pandemic,
increase commercial execution risk through
declines in and cancellations of elective
procedures at medical facilities, reduced
procedure capacity at medical facilities,
restricted access for sales representatives
and disruptions in other commercial
activities due to travel restrictions.

Oversight
Board

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.

Change from 2019
Our net risk rating of the likelihood and impact
for Commercial Execution is currently unchanged.
The increased risk of postponement of elective surgery
is partially offset by improved commercial focus, including
technology to enable remote sales and support.

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Our strategy

Five 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.

» Read about our

strategic progress in
2020 on pages 6–9

Smith+Nephew Annual Report 2020

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Risk report continued

2020 principal risks continued

Cybersecurity
We depend on a wide variety of
information systems, programs and
technology to manage our business.
We also develop and sell certain
products that are or will be digitally
enabled including connection to
networks and/or the internet.
Our systems and the systems of the
entities we acquire are vulnerable to
a cyber-attack, theft of intellectual
property, malicious intrusion, data
privacy breaches or other significant
disruption. We have a layered security
approach in place to prevent, detect
and respond, in order to minimise
the risk and disruption of these
intrusions and to monitor our systems
on an ongoing basis for current or
potential threats.

Oversight
Audit Committee

Finance
Our financial results depend on
our ability to comply with financial
reporting and disclosure requirements,
comply with tax laws, appropriately
manage treasury risks and avoid
significant transactional errors
and customer defaults. Volatility in
exchange rates can only be partially
mitigated. Failure to comply with our
financial reporting requirements or
relevant tax laws can lead to litigation
and regulatory activity and ultimately
to material loss to the Group.

Examples of risks
– Loss of intellectual property/major
data privacy breach or significant
impact on business operations.

– Inadequate consideration of
cybersecurity in the design
of new products.

– Disruption to business operations from
a significant cybersecurity incident.

– Increased government focus on
cybersecurity and changes in
regulatory environment.

COVID-19 Impact
Our systems have been and will continue
to be the target of such threats, including
as a result of increased levels of remote
working due to the COVID-19 pandemic.

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 against
vulnerability to cyber risk.

Examples of risks
– Risk of adverse trading margins due

to fluctuating foreign currency exchange
rates across our main manufacturing
operations (US, UK, Costa Rica and China)
and where our products are sold.
– Failure to report accurate financial

information in compliance with accounting
standards and applicable legislation.
– Failure to comply with current tax laws.
– Failure to manage treasury risks

effectively.

– Failure to operate adequate financial

controls over business operations leading
to material financial loss to the Group.

– Transfer pricing policy not correctly

implemented and monitored.

– Counterparty risk on cash deposits.

COVID-19 Impact
The adverse effects of the COVID-19
pandemic on our business operations
and the related uncertainty make
forecasting more challenging. It also
increases the risk of customer defaults.

Actions taken by management
– Ensured every user has access to and is using a secure
Virtual Private Network (VPN) when connecting to
S+N networks to safeguard increased remote working
due to COVID-19.

– Increased COVID-19 security awareness activities including
email communications, intranet posts, visuals, video’s and
more COVID-19 related email phishing training activities.
– Accelerated the adoption of multi-factor authentication

tools to reduce the likelihood of remote attacks.
– Security information and event management (SIEM)
put in place to provide real-time analysis of security
alerts generated by applications and network hardware.

– Regular penetration testing and frequent vulnerability

scanning undertaken. Endpoint protection and intrusion
detection/prevention implemented.

– Security governance structure in place including

a Cybersecurity Steering Committee.

– Further strengthened governance including a programme

to monitor cybersecurity capabilities and controls.
– Monitor developments from governments and raise
changes and developments with Global IT security.

Change from 2019
The cybersecurity risk likelihood has increased due
to a higher proportion of employees working remotely
and growing product digitalisation and connectivity.

Actions taken by management
– Improved credit management controls.
– Financial procedures in place to manage customer

payment status to address emergent issues.

– Group Treasury continue to operate a foreign exchange

hedging programme.

– The Group raised its first public bond in 2020, diversifying

its liquidity base.

– Improved in-year, year-end and post year-end review

of entity forecast profitability.

– Comprehensive financial controls framework ensuring
compliance with Sarbanes-Oxley legislation including
Minimum Acceptable Practices.

– Group Tax continually monitor developments
in tax legislation and obtain external advice
where relevant.

– Experienced Finance team.
– Internal Audit and Audit Committee oversight.
– Transfer pricing team works closely with the business
to implement agreed processes and procedures for
transfer pricing.

– Robust counterparty credit risk monitoring and

diversification of our deposits with well-rated banks.

Oversight
Audit Committee

Link to strategy
Our Strategic Imperative to ‘Become the
best owner’ requires us to comply with
financial reporting and tax obligations and
manage our financial risks appropriately.

Change from 2019
Our net risk rating of the likelihood and impact for the
Finance risk is currently unchanged. The Group started
2020 with a strong balance sheet and has increased focus
on forecasting and maintained prudent cost management.

Smith+Nephew Annual Report 2020

Global supply chain*
Our ability to make products
available to customers in over
100 countries requires complex
manufacturing and supply chain
processes. Increased outsourcing,
more sophisticated materials and
the speed of technological change
in an already complex manufacturing
process leads to greater potential
for disruption in our supply chain.

* The breadth of the risk has expanded from

Supply to the full Global Supply Chain, which now
includes manufacturing and third party suppliers,
specifically due to COVID-19.

Oversight
Board

Examples of risks
– Inventory grows as a result of reduced
procedure through-put due to COVID-19
restrictions on surgical procedures.
– Failure or significant performance

issues experienced at critical/single
source facilities.

– Disruption to manufacturing at
a single source facility (lack of
manufacturing redundancy).

Actions taken by management
– Launched a crisis management team to reposition and

manage limited assets to respond to COVID-19 impacts.
– Implementation of technology to enforce manufacturing

social distancing.

– Flexible/remote work policy, split team shift patterns
and limitation on number of people allowed on a site
at one time.

– Comprehensive product quality processes in place

from design to customer supply.

– Supplier failure impacts ability to meet
customer demand (single source supplier).

– Global Operations transformation programme to
optimise manufacturing and distribution centres.

– Inadequate sales and operational
planning impacts ability to meet
customer demand for product.

– Manufacturing and supply

chain capacity not adequate to
support growth.

– Failure of suppliers and distribution
partners to achieve and maintain
regulatory compliance.

COVID-19 Impact
The COVID-19 pandemic increased the
Global Supply Chain risk through disruptions
in supply caused by government restrictions
on imports and exports, decreased access
to supply channels caused by travel
restrictions, disruptions at critical suppliers,
challenges to supply planning caused by
declines in and cancellations of elective
procedures at medical facilities and
disruptions at manufacturing facilities
due to COVID-19 related absences.

Link to strategy
Our Strategic Imperative to ‘Achieve the
full potential of our portfolio’ requires us
to optimise the supply chain to support
business growth.

– Risk-based review programmes undertaken

for critical suppliers.

– Business continuity plans developed and alternate

source options identified for critical suppliers.

– Executive oversight of sales and operational planning.
– Supplier contract agreements entered into achieve

and manage regulatory compliance.

Change from 2019
Our net risk rating of the likelihood and impact for
Global Supply Chain is currently unchanged.

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» Read about our

response to COVID-19
on pages 10–13

Smith+Nephew Annual Report 2020

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Risk report continued

2020 principal risks continued

Legal and compliance risks
We are committed to doing business
with integrity and believe that
‘doing the right thing’ is part of our
mandate to operate. We operate in
multiple countries and regulatory
authorities in each jurisdiction
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, corruption
and privacy, with poor legal and
compliance practices can lead to
fines, penalties, reputational risk
and competitive disadvantage.

Oversight
Compliance & Culture Committee

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.
Failure to identify appropriate
acquisition targets or failure to conduct
adequate due diligence or to integrate
them successfully would have an
adverse impact on our competitive
position and profitability.

Oversight
Board

Examples of risks
– Failure to act in an ethical manner

consistent with our Code of
Conduct and Business Principles.

– 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.
– The development, manufacture and sale
of medical devices entail risk of product
liability claims or recalls.

Actions taken by management
– Group Ethics & Compliance Committee oversees

our ethical and compliance practices.

– Global compliance programme, policies and procedures.
– All employees required to undertake annual

training, including privacy, and to certify compliance
on an annual basis with our Code of Conduct
and Business Principles.

– Code of Conduct was refreshed in 2019.
– Issued an enhanced third party guide to doing

business with S+N.

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

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 mandate to operate.

Examples of risks
– Failure to identify appropriate acquisitions.
– Failure to conduct effective acquisition

due diligence.

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

COVID-19 Impact
Conducting due diligence processes
remotely presents potential risks that some
information is not fully assessed. Similarly,
integrations become more complex without
physical on-site presence.

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

Change from 2019
Our net risk rating of the likelihood and impact for
Legal and Compliance is currently unchanged.

Actions taken by management
– Acquisition activity 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
range of valuation metrics including return on invested
capital, in accordance with Capital Allocation Framework
and comprehensive post-acquisition review programme.

– Detailed and comprehensive cross-functional due

diligence undertaken prior to acquisitions.

– Compliance risks included as part of due diligence

reviews, integration plans and reporting for acquisitions.

– Deal-specific integration committee review, approval
of integration plans and monitoring of ongoing process.

– Improved deal retrospective reviews.
– Enhanced diligence procedures and review process
to help mitigate impact of COVID-19 restrictions.

Change from 2019
Our net risk rating of the likelihood and impact for
Mergers and Acquisitions is currently unchanged.

Smith+Nephew Annual Report 2020

New product innovation,
design & development
including intellectual
property
Our new product innovation pipeline is
becoming larger and increasingly complex
as we focus our efforts on high growth
markets like China and procedure
innovation using digital technologies
such as connectivity and predictive data
analytics. As a result, we need to continue
to better understand unmet customer
needs, drivers of surgical efficiency,
superior patient outcomes, new country/
region standards and regulations such
as cybersecurity, and requirements
and laws related to the protection of
intellectual property. 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.

Oversight
Board

Examples of risks
– Failure to develop, partner or acquire a
competitively differentiated innovation.

Actions taken by management
– Continued product and technology acquisitions

and product launches despite COVID-19.

– Insufficient long-term planning to
respond to competitor disruptive
entries into marketplace.

– Inadequate innovation due to low
Research & Development (R&D)
investment, R&D skills gap or ineffective
product development execution.

– Loss of proprietary data due to natural
disasters or failure of Product Lifecycle
Management (PLM) systems.

– Competitors may assert patents or

other intellectual property rights against
the Company, or fail to respect the
Company’s intellectual property rights.
– COVID-19 related limitations on ability

to conduct live product trials.

– 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.

– Strengthened Clinical Affairs programme.
– Cross functional New Product Design and R&D

processes focused on identifying new products and
potentially disruptive technologies and solutions.

– Replacing global PLM systems.
– Monitored external market trends and collated
customer insights to develop product strategies.

– Careful attention to intellectual property considerations.
– Identified alternatives to live trials for new products

and evidence generation.

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.

Change from 2019
Our net risk rating of the likelihood and impact
for New product innovation, design & development
including intellectual property is currently unchanged.

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» Read about how we

delivered innovation in
2020 on pages 36–40

Smith+Nephew Annual Report 2020

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Risk report continued

2020 principal risks continued

Political and economic
We operate a global business
and are exposed to the effects of
political and economic risks including
Brexit, changes in the regulatory
and competitive landscape, trade
policies, political upheaval, changes
in government policy regarding
healthcare priorities, preference
for local suppliers, import quotas,
war, economic sanctions, and
terrorist activities.

Oversight
Board

Pricing and reimbursement
Our success depends on our ability to sell
our products profitably, despite increasing
pricing pressures from customers, and
the availability of adequate government
funding to meet increasing demands
for our products arising from patient
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 market changes,
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.

Oversight
Board

Examples of risks
– Global or regional recession due

to COVID-19 significantly reduces
customer capital spending and
customer financial strength.

– Brexit impacts on UK regulation and

supply chain, specifically border delays,
continue into 2021.

– Global political and economic

uncertainty and conflict.

– Implementation of healthcare reforms
and/or protectionist measures, eg
US/China trade, and regulations in
local markets.

– The availability of markets and market

access rights.

– Increases in import and labour costs.
– Increases in tariffs and restrictions

on global trade.

COVID-19 Impact
The impact of COVID-19 on global and
regional economic conditions affects
our global business.

Link to strategy
Our Strategic Imperative to ‘Become
the best owner’ requires us to operate
effectively within different global political
situations, which change constantly.
Further, the Strategic Imperative
to ‘Expand in high-growth segments’
includes an Emerging Market focus.

Actions taken by management
– Established new financing programs to ease financial
burden of customers and increase placements.
– Standard financial procedures in place regarding

customer payment status to address emergent issues.
– The Group has a Brexit Council which meets regularly
and addresses all affected areas including regulation
and supply chain.

– Continued engagement with governments,

administrations and regulatory bodies to enhance
education and advocacy efforts with policymakers.
– Actively participate in trade associations to enhance
education and advocacy efforts with policymakers.
– Ongoing engagement and monitoring/lobbying on

localisation initiatives.

Change from 2019
Our net risk rating of the likelihood and impact
for Political and Economic is currently unchanged.
The increased risk of economic recession is set off
against reduction in our Brexit risk.

Examples of risks
– Reduced reimbursement levels
and increasing pricing pressures.

– Systemic challenge on number

of elective procedures.

Actions taken by management
– Franchise structure and enhanced franchise
reporting to improve visibility of profitability.

– Developed innovative economic product and service
solutions for both Established and Emerging Markets.

– Lack of compelling health economics

data to support reimbursement requests.

– Unilateral price controls/reductions

imposed on medical devices.

– Appropriate breadth of portfolio and geographic
spread to mitigate exposure to localised risks.
– Incorporated health economic components into
the design and development of new products.

– Emphasised the value propositions tailored to specific

stakeholders and geographies through strategic
investment and marketing programmes.

– Increased engagement with payer bodies to influence
reimbursement mechanisms to reward innovation.
– Steps into telehealth to enable lower cost pre and

post-operative care.

– Establishing Malaysia manufacturing capability.

Change from 2019
Our net risk rating has increased.

COVID-19 Impact
As customers and public health systems
recover from the pandemic, it is possible
that we will see further price pressures.
During 2020, reimbursement codes were
more widely interpreted to provide for
remote delivery of healthcare services.

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.

Smith+Nephew Annual Report 2020

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 Regulation, the Medical
Device Single Audit Programme and
multiple other global regulations and
standard changes have increased
the focus on clinical and technical
evidence, supplier controls and
product performance transparency.

Oversight
Compliance & Culture Committee

Talent management
We recognise that people
management, effective succession
planning and the ability to engage,
retain and attract talent is of great
importance to the success of our
Company. Retention of top talent
in a safe and productive working
environment is a critical risk which
requires a strong engagement
process. Failure to do so can result
in risks in our ability to execute the
Group strategy and be effective in
the chosen market/discipline.

Oversight
Board

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Examples of risks
– New EU Medical Device Regulation
effective May 2021, impacts ability
to meet customer demand.

– New and updated Regulatory Frameworks
emerging. For example, introduction of
new legislation in the UK due to Brexit,
effective 1 January 2021 with future
demands to be clarified.

– Increase in time required by Notified

Bodies to review product submissions and
site quality systems’ certification time
impacts ability to meet customer demand.

– 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, design, manufacturing,
distribution, sales or marketing.
– Failure to obtain proper approvals

for products or processes.

– More stringent local requirements for
clinical data across APAC markets.

COVID-19 Impact
Restrictions may impact the ability of some
regulatory bodies to assess our products or
operations, potentially delaying necessary
regulatory approvals for product launches
or operations.

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

Examples of risks
– Increased absenteeism due to COVID-19.
– 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.

COVID-19 Impact
During 2020, COVID-19 has increased the
risk to our people’s health and wellbeing.
Uncertainty, threat of illness and restricted
travel, work and personal activities have
affected people globally.

Link to strategy
Our Strategic Imperative ‘Strengthen
talent and capabilities’ underpins all other
strategic imperatives to ensure that we
have the right talent within our organisation
to deliver in everything we do and to build
strong leaders for the future.

Actions taken by management
– EU Medical Device Regulation Steering Group regularly

monitors preparation activities to comply with
new requirements.

– Regular engagement with Notified Body, MHRA and

regulatory representatives to monitor regulatory changes
and understand interpretation of legislation.

– Transition of Europe distribution centre from Switzerland

to Netherlands.

– Brexit working group is following their planned mitigations.
– Comprehensive and documented product quality
processes and controls from design to customer
distribution in place, with the addition of cybersecurity to
new product development projects for relevant products.

– Standardised monitoring and compliance with quality

management practices through our Global Quality and
Regulatory Affairs organisation.

– Incident management teams in place to provide

timely response 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.

– Local clinical evidence requirements are included in

global new product development projects.

Change from 2019
Our net risk rating of the likelihood and impact
for Quality and Regulatory is currently unchanged.
Increasing regulation is addressed by corresponding
management actions.

Actions taken by management
– Flexible/remote work policy, split team shift patterns
and limitation on number of people allowed in a site
at one time.

– COVID-19 Control Impact Assessment 2020:

Succession planning, performance management
and bonuses.

– COVID-19 commission support programme implemented.
– Talent planning and people development processes

well established across the Group. Talent and succession
planning discussed annually by the Board and regularly
by the Executive Committee and Nomination &
Governance Committee.

– Identification of high value roles and ensuring that these
roles are filled with our high performance individuals
with strong succession plans in place.

– Developed strategic skills resourcing plan by

functional areas.

– Provided employees with access to tools and resources

to manage their emotional, physical and mental wellness.

Change from 2019
Our net risk rating of the likelihood and impact for
Talent Management is currently unchanged. During 2020,
the Group has prioritised Employee and Customer health
and wellbeing through comprehensive management
actions in response to COVID-19.

Smith+Nephew Annual Report 2020

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 53–63
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 Team, explaining
the processes followed by management
in identifying and managing risk
throughout the business.

– In May 2020, the Executive Committee
(‘ExCo’) met as a Risk Committee
to: (1) review the 2020 principal risks
(the top down risk review process),
(2) review lessons learnt from COVID-19
risk management and discuss emerging
risks, and (3) discuss risk appetite
and tolerance. The ExCo was 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.

– All ExCo members nominated the
Risk Champions and have worked
with them to prepare risk registers.
The Risk Champions nominated by
the ExCo are senior, trained in risk
management and the majority of
the team have at least two years
of experience in the Company.

– Using the outputs from the Business
Area ‘bottom-up’ risk identification
completed in September 2020 and
following ‘top-down’ discussions
with ExCo, the most significant risks
affecting our organisation were
presented to ExCo for approval in
October as the draft 2020 Principal
Risks facing the Company.

– ExCo agreed to retain the twelve

principal risks from 2019. They agreed
that COVID-19 is specifically included
in the business continuity principal risk.
While COVID-19 risk is not a separate
principal risk, a number of principal
risks are impacted by COVID-19.

– All relevant executives have attested
alignment to the Group’s Enterprise
Risk Management Process as part of
the annual certification on governance,
risks and compliance.

– Final Principal Risks were presented

to the Audit Committee and the Board
in February 2021 for their consideration
and approval.

– As part of the strategy business
updates in November, the Board
considered ‘Grey Swan’ risks which
are potentially very significant events
that are considered unlikely to happen
but still possible. The 12 principal
risks and proposed 2020 risk appetite
were also provided to the Board
during the meeting.

– Throughout the year, a number

of reviews into different risks were
conducted by the Board, the Audit
Committee and the Compliance
& Culture Committee looking into
the nature of the risks and how
they were mitigated.

Assessment period
The Board have determined that the
three-year period to December 2023
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, which could threaten
the viability or existence of the Company.
These have been modelled as follows:

– In carrying out scenario modelling

of the Principal 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 56–63 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 2021. In our long-term
planning we consider horizons of between
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 the Strategic
Plan approved by the Board in February
2021. However COVID-19 continues
to cause uncertainty to our business
forecasts which might cause us to adapt
our strategic plan. We will continue to
evaluate any additional risks involved
which might impact the business model.

By order of the Board, on 18 February 2021.

Susan Swabey
Company Secretary

Smith+Nephew Annual Report 2020

2020 Scenarios modelled

Scenario 1 – Pandemic business disruption and pricing and reimbursement pressures

Business Continuity (Principal Risk) – Elective surgery delays leading
to a major loss of revenues and profits.

Action taken: We have modelled global volume reduction of 18% for
the first six months of 2021 and a further impact in Q4 2021 and Q1 2022
to reflect COVID-19 outbreaks in the winter season in our key markets.

Pricing and reimbursement pressures (Principal Risk) – leading to a major
loss of revenues and profits.

Action taken: We have modelled additional annual price erosion of 1%
from 2022 to 2023.

Link to strategy
– Achieve the full potential of our portfolio.

Scenario 2 – Operational risk

Link to principal risks
– Business Continuity.
– Pricing and Reimbursement.
– Political and Economic.

Execution risk – our inability to launch new products losing significant
market share to the competition.

Action taken: We have modelled revenue growth for China at 50% of the
growth planned over the three-year period.

Key supplier disruption – resulting in our inability to manufacture
or supply a few key products for a full year.

Action taken: We have modelled an interruption to receiving goods from
a key supplier for a period of one year in 2022.

Temporary loss of key production capability – resulting in our inability
to manufacture several key products for one year.

Action taken: We have modelled the loss of strategic production machinery,
resulting in the loss of production and sales of several key products for one
year in 2022.

Product liability claim – giving rise to significant claim or loss.

Action taken: One-off significant loss occurring due to a product defect.

Link to strategy
– Become the best owner.
– Transform the business through enabling technologies.
– Achieve the full potential of our portfolio.

Link to principal risks
– Global Supply Chain.
– New Product Innovation, Design & Development including

Intellectual Property.
– Commercial Execution.
– Business Continuity and Business Change.
– Talent Management.

Scenario 3 – Finance, legal regulatory and compliance risks

One-off tax payment.

Action taken: We have modelled a one-off tax payment of $150 million
for EU state aid in 2021.

Regulatory measures – impacting our ability to continue to sell key products. Action taken: We have modelled the complete loss of revenue from a key

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Data privacy failure – giving rise to a significant fine or loss.

Link to strategy
– Become the best owner.

Scenario 4 – Cybersecurity

Inability to issue invoices or collect money for a period of time.

Link to strategy
– Transform the business through enabling technologies.
– Become the best owner.

Scenario 5 – Mergers and acquisitions

product effective in mid-2021 for two years and returning back in lower
volumes in mid-2023.

Action taken: We have assumed a one-off significant fine (2% of revenue)
or loss resulting from a data privacy issue in 2022.

Link to principal risks
– Legal and Compliance.
– Quality and Regulatory.
– Finance.

Action taken: We have modelled one of our key regions being unable
to invoice for a month in 2022 due to an IT disruption.

Link to principal risks
– Cybersecurity.

Failure to integrate newly acquired business effectively to achieve
expected growth.

Action taken: We have modelled a scenario of zero growth in a recently
acquired business over the three-year period.

Link to strategy
– Achieve the full potential of our portfolio.

Link to principal risks
– Mergers and Acquisitions.

Smith+Nephew Annual Report 2020

Governance

The Board responded to the challenges
of 2020 by putting our Employees and
other Stakeholders first.

Board Leadership and Purpose
Letter from the Chair
Board of Directors
Executive team
Division of Responsibilities
Roles and composition
Corporate governance framework
Responsibilities of the Board
Composition, Succession and Evaluation
Board effectiveness review
Board development
Nomination & Governance Committee report
Audit, Risk and Control
Audit Committee report
Compliance & Culture
Committee report
Our approach to stakeholders
Remuneration
Directors’ Remuneration report
Directors’ Remuneration Policy

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74

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85

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102

106
128

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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 and the Chair of
each Board Committee discusses the
activities of that Committee during the
past year. In addition, we provide insight
into our stakeholder engagement.

The impact of the COVID-19
pandemic on Board operations
As Roland and I have both discussed earlier,
the COVID-19 pandemic has affected
not only our business, but also the way
the Board works and collaborates. Since
March 2020, all our Board and Committee
meetings have been conducted virtually.
As we are a global Board, the times
of our meetings have also shifted to
accommodate multiple time zones.
I am grateful to those Board colleagues,
who due to their location have attended
meetings very early in the morning
or late at night on multiple occasions.
For some of the meetings when lockdown
restrictions were eased, some directors
were also able to meet in different
company locations in small groups. Whilst
this was a practical solution under present
circumstances and we were delighted to
have 100% attendance at every meeting,
we all look forward to the time when
we can all physically meet again.

In spite of the challenges, we have
functioned well and have continued to
support and to challenge management.
We have ensured that we have considered
the interests of our stakeholders when
making decisions.

» See pages 69–73

for the full biography
of each director
» See pages 74–77
to read more on our
Executive team

Out of a total of 11 Board
meetings during the year, the
Board met virtually 10 times.

Smith+Nephew Annual Report 2020

Executive team
Last year saw further changes to our
executive team. In April, Graham Baker
stepped down as Chief Financial Officer
in order to pursue his career elsewhere
and Ian Melling, our current Senior Vice
President, Group Finance stepped into
the Chief Financial Officer’s position on
an interim basis, until Anne-Françoise
Nesmes joined us in July. I should like to
thank Ian for his dedication and leading
the Finance team at a particularly difficult
time through the first COVID-19 lockdown.
He continues to provide support to
Anne-Françoise. Anne-Françoise Nesmes
has strong FTSE 100 financial leadership
experience and joins us from Merlin
Entertainments, where she was Chief
Financial Officer. Prior to that, she
was Chief Financial Officer at Dechra
Pharmaceuticals plc. She is also a
Non-Executive Director and Chair of the
Audit Committee at Compass Group plc.
We encourage our Executive Directors
to take up Non-Executive roles as we
believe that this gives them a broader
understanding of the different role the
Non-Executive Directors bring to
the Board.

Non-Executive team
We have also welcomed three new
Non-Executive Directors to the Board
during 2020.

Following the appointment of Robin
Freestone as Senior Independent
Director last year, Rick Medlock joined
as Non-Executive Director in April
and was appointed Chair of our Audit
Committee in September. Rick has 30 years’
experience in financial management
in large international companies and
was formerly Chief Financial Officer of
Worldpay plc, Misys plc and Inmarsat plc.
He is now an experienced Non-Executive
Director as member of the Audit, Risk
and Compliance Committee of Datatec
Limited and Chair of the Audit Committee
at Deliveroo.

We also strengthened the medical
devices experience on the Board with
the appointment of Bob White in May and
Katarzyna Mazur-Hofsaess in November.
Bob has over 25 years’ global medical
devices experience and is a member of
Medtronic’s executive team, heading up
their Medical Surgical Portfolio. Katarzyna
has a strong track record in medical
devices including eight years’ as President
of EMEA for Zimmer Biomet. She is
currently Chief Executive Officer of the
EMEA business of Fresenius Medical Care
AG & Co. KgaA.

Vinita Bali stepped down as a member
of the Board at the end of 2020 following
six years’ service. We always valued
her useful insights with her focus on the
customer and the end patient as well
as our go-to-market strategies. She was
engaged and active throughout her tenure
visiting local hospitals and meeting with
local surgeons and our employees.

Virginia Bottomley will be leaving the
Board at the Annual General Meeting
following nine years’ service. Virginia
brought useful insights to the Board,
particularly around her knowledge of
UK government practices. She also has
a strong people focus and encouraged
and supported our inclusion and
diversity initiatives.

I should like to thank both Vinita and
Virginia for their service to the Company
during their periods of tenure.

Our new Board members have yet to
meet physically with the full Board due
to the COVID-19 related restrictions.
They have all undertaken tailored
induction programmes, meeting virtually
with fellow Board members, members
of the executive team, other senior
employees and some of our external
advisers. Whilst these remote sessions
have progressed well, they are all looking
forward to continuing these induction
programmes with physical meetings,
the opportunity to handle and understand
our products better and to join our sales
representatives in the field, as and when
travel and meeting restrictions are eased.

Changes to the Board in 2020/2021
1. Rick Medlock was appointed to the
Board on 9 April 2020. He became
Chair of the Audit Committee
with effect from 1 September 2020.

2. Bob White was appointed to the Board
on 1 May 2020. Bob has since become
a member of the Remuneration and
Compliance & Culture Committees
with effect from 28 July and 27 July
2020 respectively.

3. Anne-Françoise Nesmes was appointed
to the Board as Chief Financial Officer
on 27 July 2020, following the resignation
of Graham Baker on 9 April 2020.

4. Katarzyna Mazur-Hofsaess was
appointed to the Board on
1 November 2020.

5. John Ma was appointed to the Board

on 17 February 2021.

» Please see pages 69–73 for the
full biography of each director

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Due to the restrictions posed by COVID-19,
taking photos of our new Board members
became a challenge. Our photographer’s
mobile studio solution enabled us to take
their photos in a safe and COVID-19
secure way.

new members of the
Board were appointed
in 2020.

We have also welcomed three
new Non-Executive Directors
to the Board during 2020.

Smith+Nephew Annual Report 2020

Governance continued

Stakeholders
You will read elsewhere in this report
on pages 102–105 about how we have
enhanced the ways that we ensure that
we consider the views of our stakeholders
in our decision making process and in
particular the successful establishment
of Board/employee listening sessions
led by Marc Owen and the Compliance &
Culture Committee. Greater engagement
with our stakeholders and our employees
in particular is providing the Board with
richer context and background for when
we make major decisions in the future.
Whilst most of these sessions were held
remotely throughout 2020, we are looking
forward to holding more physical sessions
during 2021 and meeting with more
of our employees.

Shareholder engagement
Members of the Board have also met
virtually with shareholders. We have
been interested to see how in addition to
strategy and performance, shareholders
have been interested in the Board’s
oversight of stakeholder engagement,
the impact of climate change, product
quality, cybersecurity, governance,
business ethics and inclusion and diversity
matters. We welcome such conversations
which are indicative of the matters that
are becoming more important not only
to our shareholders but the wider world
and our other stakeholders. Further
information on these topics can be
found in the Sustainability Report.
» Read more on how we engage

with our stakeholders on page 52

Annual General Meeting
We were disappointed that we were
unable to hold our usual physical Annual
General Meeting last year. You may recall
that lockdown in the UK commenced
shortly after we had posted the Notice
of Meeting and government advice at that
time was changing daily. In accordance
with government instructions and taking
the safety of our shareholders and
employees into account, we decided to
hold a closed meeting to enable the formal
business of the meeting to be transacted
in accordance with the proxies cast
before the meeting. We were however
also keen to ensure that our shareholders
were still able to hear and see the formal
presentations and to submit questions

for the Board virtually. We therefore held
a one way audio call. Roland and I gave
our presentations and answered the
questions, which had been submitted by
shareholders in advance of the meeting.
We also responded by email to all
shareholders who had contacted us.
We would like to thank those shareholders
who attended the call and who submitted
questions. We are disappointed that very
few shareholders dialled into this call, but
understand that this was a difficult time
for us all, when everything was changing,
including our meeting arrangements.

For 2021, we recognise that it is likely that
by the time of the Annual General Meeting
in April, we may still be subject to meeting
and travel restrictions in the UK. To avoid
the uncertainty we faced last year and
in accordance with the guidance from
the Financial Reporting Council, we will
therefore be holding a hybrid Annual
General Meeting. There will be a small
physical meeting at our UK headquarters
in Watford, which will be livestreamed to
shareholders. Shareholders will be able
to attend, vote and submit questions
virtually. This will also enable shareholders
who do not live within easy access of
London to participate. Further details
of how to access this event are included
in the Notice of Meeting. We strongly urge
shareholders not to attend this meeting
physically, as we anticipate that meeting
restrictions will still be in place and we
are anxious to ensure the safety of all
employees, shareholders and visitors
on-site.

On your behalf, I should like to thank
all the Board for their dedication and
considered approach during 2020 and
in particular the assistance they provided
to new Board members, some of whom
they are still yet to meet face-to-face.
I should also like to thank you, our
shareholders, for your patience during
this challenging year and we look forward
to meeting with you physically again at
some point. We very much look forward
to that time, hopefully in 2022.

Roberto Quarta
Chair

Statement of Compliance
The Board is committed to the highest standards
of corporate governance. We comply with all
the provisions and principles of the UK Corporate
Governance Code 2018 (2018 Code). The Company’s
American Depositary Shares and bonds 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 and 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 US and UK corporate governance standards.

We explain in this ‘Governance’ section how we
comply with and have applied the 2018 Code
during the year. The 2018 Code can be found at
www.frc.org.uk/getattachment/88bd8c45-50ea-
4841-95b0-d2f4f48069a2/2018-UK-Corporate-
Governance-Code-FINAL.pdf. We also explain
how we have complied with the Financial Conduct
Authority’s (FCA) Listing Rules, Disclosure &
Transparency Rules (DTRs) throughout the year.

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Smith+Nephew Annual Report 2020

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Board leadership and purpose

Board of Directors

Roberto Quarta (71)
Chair
Joined the Board in December 2013
and appointed Chair following election
by shareholders at the 2014 Annual
General Meeting.

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 Chief Executive Officer and
then as Chair, until 2007. In 2001, he joined
Clayton Dubilier & Rice, LLC (CD&R) as Partner
and is currently Chair of CD&R Europe.

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 S.p.A., Rexel SA, IMI plc and
SPIE SA. Roberto was also a former member
of the Investment Committee of Fondo
Strategico Italiano S.p.A.

Other current appointments
– Chair of WPP plc.
– Partner at Clayton Dubilier & Rice, LLC

and Chair of CD&R Europe.

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 chair of a number of UK and
international companies.

During 2020, Roberto conducted a
comprehensive review of the Smith+Nephew
Board, being mindful of the required skills,
knowledge, experience and diversity.
In conjunction with the Nomination &
Governance Committee, he has appointed
four new Non-Executive Directors during
the COVID-19 pandemic, including John Ma
on 17 February 2021. These appointments
included three Directors with specific medical
devices experience and a new Chair of the
Audit Committee, with relevant financial
experience. Anne-Françoise Nesmes also
joined the Board on 27 July 2020 as Chief
Financial Officer following the resignation
of Graham Baker in early 2020.

Nationality

American/Italian

Committee key

Member of the
Audit Committee

Member of the Compliance
& Culture Committee

Member of the Nomination
& Governance Committee

Member of the Remuneration
Committee

Committee Chair

Roland Diggelmann (53)
Chief Executive Officer
Appointed in November 2019.
Previously Independent Non-Executive
Director and Member of the Audit Committee
between 1 March 2018 until 21 October 2019.
Roland is based in Zug, Switzerland.

Career and experience
Roland studied Business Administration at the
University of Bern. In 1995, he joined Sulzer
Medica 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 AG
(later known as Centerpulse AG).

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.

Other current appointments
– Director of Igenomix.
– Director of Heart Force AG.
– NED of Accelerate Diagnostics, Inc., which
is listed on NASDAQ (NASDAQ: AXDX).
Roland will not stand for re-election
at their AGM in April 2021.

– NED of Sonova Holding AG with effect

from their AGM in June 2021.

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

Smith+Nephew Annual Report 2020

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Board of Directors continued

Anne-Françoise Nesmes (49)
Chief Financial Officer
Appointed on 27 July 2020. Anne-Françoise
is based in Watford, UK.

Career and experience
Anne-Françoise holds an MA degree in
Management Sciences from Grenoble Ecole
de Commerce and an MBA from Henley
Management College. She qualified as a
Chartered Management Accountant in 1996.
Anne-Françoise joined GlaxoSmithKline plc in
1997 where she worked for 16 years, holding
multiple senior roles, including Vice President
and Finance Controller, Europe (2003–2006),
Vice President Forecasting and Planning, US
Pharmaceutical (2006–2009) and Senior Vice
President Finance, Global Vaccines (2009–2013).
She demonstrates a high level of passion
towards life science companies where she has
spent the majority of her senior career. Anne-
Françoise served as Chief Financial Officer for
Dechra Pharmaceuticals plc in 2013 where she
successfully implemented financial strategies
to support the growth of the business.
Most recently, she was Chief Financial Officer
of Merlin Entertainments Limited (formerly
Merlin Entertainments plc).

Other current appointments
– NED and Chair of the Audit Committee

at Compass Group plc.

Skills and competencies
Anne-Françoise has worked as a senior finance
executive in global FTSE listed companies
for many years, which alongside a strong
business acumen and deep sector knowledge
provides her with the experience required
to be part of the Smith+Nephew leadership
team. She demonstrates a high competency
for delivering operational excellence across
different geographic markets and leading
large teams who are responsible for significant
budgets. She has an impressive background
and her ability to translate financial insights
into results helps guide Smith+Nephew.

Nationality

British/French

Erik Engstrom (57)
Independent Non-Executive Director
Appointed in January 2015.

Robin Freestone (62)
Independent Non-Executive Director
Appointed in September 2015.

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
Chief Operating Officer of Random House Inc.
and as President and Chief Executive Officer
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 Chief Executive Officer of Elsevier,
the division specialising in scientific and
medical information and then from 2009
Chief Executive Officer of RELX Group.

Other current appointments
– Member of Bonnier Group’s Board.
– Chief Executive Officer 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 Chief Executive Officer of a global
company gives him valuable insights as a
member of our Audit and Nomination &
Governance Committees.

Nationality
Swedish

Robin was appointed Senior Independent
Director in April 2019.

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 Chief Financial
Officer and then later the Chief Financial Officer
of Pearson plc between 2006 and August 2015.
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 was also
previously Chair of the Audit Committee of
MoneySupermarket.com Group plc.

Other current appointments
– NED and Chair of the Audit Committee

at Capri Holdings Ltd.

– Chair of the ICAEW Corporate

Governance Committee.

– Chair of the Board and Nomination

Committee of MoneySupermarket.com
Group plc.

– NED of Aston Martin Lagonda Global

Holdings plc.

Skills and competencies
Robin has been a well-regarded FTSE 100 Chief
Financial Officer who has been heavily involved
with both transformation and diversification.
His acquisition experience in the healthcare
sector brings value to Smith+Nephew as it
continues to grow into different markets.
He brings financial expertise and insight
as a member of the Audit Committee and
understands how to attract and retain global
talent as a member of the Remuneration
Committee. His experience as a Chair brings
a strong Senior Independent Director to the
Smith+Nephew Board.

Nationality
British

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John Ma (58)
Independent Non-Executive Director
Appointed on 17 February 2021.

Katarzyna Mazur-Hofsaess (57)
Independent Non-Executive Director
Appointed on 1 November 2020.

Rick Medlock (60)
Independent Non-Executive Director
Appointed on 9 April 2020.

Career and experience
John graduated from Wayne State University
with an MSc and a Ph.D. in Materials Science
and Engineering. In 1995, John became a
Manager of International Operations at the
Performed Line Products Company. After five
years he joined GE Healthcare and became
Vice President and General Manager of their
Global Product Company in China. In 2002,
John was promoted and became responsible
for GE Healthcare’s commercial division across
central China where he successfully led sales,
marketing and customer service teams for
their $200m diagnostics medical imaging
business. John has also held a number of
senior positions as President of Asia Pacific
regions at Pentair Inc., Vice President of
Express Scripts Inc., and Global Partner of
Fosun Group. He initially joined Fosun Pharma
to lead their medical device business and in
2014 became President of Fosun Healthcare
Holdings. He served as a key member of their
healthcare investment committee which went
on to establish a global presence across the US,
Europe, Israel and China. In 2017, John joined
Intuitive Surgical as their Senior Vice President
of Strategic Growth Initiatives. He has
previously served as a NED for both Haier
Electronics Group and Clinical Innovations LLC.

Other current appointments
– Founder, Chair and Chief Executive Officer

of Ronovo Surgical.

Skills and competencies
John has an impressive track record in medical
device businesses and his contribution provides
value as Smith+Nephew continues to develop
innovative ways to grow and serve our markets
with a focus towards Asia Pacific regions.
He is an established healthcare leader and has
strong experience of driving market entry and
growth within emerging markets.

Nationality
American

Career and experience
Katarzyna qualified as a medical doctor (Ph.D.)
from the Medical University of Gdańsk, Poland
in 1987 and completed an Executive MBA
at the University of Minnesota, US, in 2002.
Katarzyna commenced her corporate career
in 1998 at Roche as a Business Unit Manager
prior to becoming General Manager for Poland
of Allergy Therapeutics plc. In 2001, Katarzyna
was recruited by Abbott Laboratories where
she successfully managed their diabetes care
division in Poland. Over the next nine years,
her career progressed at Abbott Laboratories
to Divisional Vice President for Europe. In 2010,
she continued her career at Zimmer as
President of their EMEA region. Following her
appointment as an executive committee
member prior to the Biomet acquisition,
Katarzyna supported the operations of the
Zimmer Biomet portfolio covering sales,
marketing, logistics, and clinical support.
Since 2018, Katarzyna has served as Chief
Executive Officer for the €2.7 billion EMEA
business of Fresenius Medical Care AG & Co.
KGaA, the German-listed renal care company.

Other current appointments
– Chief Executive Officer, EMEA, at Fresenius

Medical Care AG & Co. KGaA.

– NED at Vifor Fresenius Medical Care Renal

Pharma Ltd.

Skills and competencies
Katarzyna demonstrates a true passion for
customer focus and maintains an impressive
track record in senior leadership within the
MedTech industry. She is a qualified medical
doctor (Ph.D.) with vast experience in medical
devices and orthopaedic sectors. Her Chief
Executive Officer experience of a global
company and valuable industry knowledge
will help drive innovation and ensure the
continued development of Smith+Nephew.

Nationality

German/Polish

Rick was appointed Chair of the Audit
Committee on 1 September 2020.

Career and experience
Rick graduated from Cambridge University
with a BA in Economics. In 1982, he joined
Arthur Andersen LLP where he qualified as
a Chartered Accountant. Rick has had a highly
successful career as a strong commercial
Chief Financial Officer in the technology
industry, working for a range of international
FTSE 100 and NASDAQ listed businesses
during periods of high growth. He has held
a number of Chief Financial Officer positions
throughout his career, including at NDS Group
plc, Inmarsat plc and Worldpay Group plc.
Rick brings a wealth of experience as a former
NED and Audit Committee Chair of several
technology driven businesses, such as Sophos
Group plc, Edwards Vacuum, and Thus plc.
Rick was also previously Chair of Momondo
Group and Chair of the Audit Committee
for LoveFilm UK Limited.

Other current appointments
– NED and member of the Audit, Risk and
Compliance Committee at Datatec Ltd.
– NED and Chair of the Audit Committee

at Deliveroo.

Skills and competencies
Rick has extensive experience and a deep
understanding of technology focused
R&D businesses. He has driven value and
transformation throughout his executive
career which will further reinforce the ability
of Smith+Nephew to grow and develop
into new and existing markets. Rick brings
significant financial expertise as a well-
regarded former FTSE 100 Chief Financial
Officer, NED and Audit Committee Chair.

Nationality
British

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Board of Directors continued

A C

C R

Marc Owen (61)
Independent Non-Executive Director
Appointed in October 2017.

Angie Risley (62)
Independent Non-Executive Director
Appointed in September 2017.

Bob White (58)
Independent Non-Executive Director
Appointed on 1 May 2020.

Marc was appointed as a Member of the
Nomination & Governance Committee on
28 March 2020.

Angie was appointed as a Member of the
Compliance & Culture Committee on
8 April 2020.

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 2001, Marc
joined McKesson Corporation and served as
Executive Vice President and member of their
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 market intelligence, supply chain
services, patient access to therapy, provider and
patient engagement and clinical trial support.
In 2014, 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.

Other current appointments
– N/A.

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

Career and experience
After graduating from Exeter University, Angie
joined United Biscuits followed by Pizza Hut
(UK) Ltd as Human Resources Director, a joint
venture between PepsiCo, Inc. and Whitbread
plc. After five years she joined Whitbread plc,
becoming an Executive Director responsible
for HR and Corporate Social Responsibility
in 2004. Between 2007–2013 she was the
Group HR Director for Lloyds Banking Group,
joining J Sainsbury plc as Group HR Director
and a member of their Operating Board 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 Group plc she
was the Chair of the Remuneration Committee.
Previously she has attended Remuneration
Committees of Whitbread plc, Lloyds Banking
Group, Arriva and now J Sainsbury plc.

Other current appointments
– J Sainsbury plc Group HR Director and

member of their Operating 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

Bob was appointed a Member of the
Compliance & Culture Committee on 27 July
2020 and as a Member of the Remuneration
Committee on 28 July 2020.

Career and experience
Bob graduated from Cleveland State University
in 1985 with a BBA in Marketing and later
achieved an MBA from Case Western Reserve
University. He is a Fellow of the American
College of Healthcare Executives.

In 1986, Bob joined IBM Corporation and
progressed to become their Healthcare
Solutions General Manager in 1995 for EMEA
regions. Bob has held a number of senior Vice
President positions throughout his career,
including at Chemdex Corporation, Accelrys
Inc., SourceOne Healthcare Technologies,
Inc., GE Healthcare and Covidien as President
for Emerging Markets and President for
Respiratory and Monitoring Solutions. He then
became Senior Vice President and President
of Medtronic Asia Pacific, having led the
integration of Covidien Asia Pacific when
it was acquired by Medtronic plc in 2015.
Bob is currently a member of the Medtronic
Executive Committee.

Other current appointments
– Executive Vice President and President,

Medical Surgical Portfolio at Medtronic plc.

Skills and competencies
Bob is an experienced leader with more
than 25 years’ worth of industry relevant
experience. He is an influential and well-known
figure in the medical technology sector and has
an impressive track record in delivering growth
and fostering innovation. He brings valuable
global medical technology insight to the Board,
which will prove fundamental in helping to shape
and develop the future strategic direction of
Smith+Nephew.

Nationality
American

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Vinita Bali (65)
Independent
Non-Executive Director
Appointed in December 2014.

Prior to her retirement from the Board,
Vinitia was a 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 spent her career
working for large global companies –
Cadbury Schweppes plc and The Coca-
Cola Company, holding senior positions
in marketing and general management.
Vinita was Managing Director and Chief
Executive Officer of Britannia Industries
Limited, a leading Indian publicly listed
food company from 2005 to 2014.

Other current appointments
– NED of Syngene International Limited.
– NED of Bunge Limited.
– NED of CRISIL India (a Standard &

Poor company).

– Member of the Advisory Board of

PwC India.

– NED of Cognizant Technology Solutions
Corporation, which is listed on NASDAQ
(NASDAQ: CTSH).

Vinita retired as a Non-Executive Director
of Smith & Nephew plc on 31 December
2020, on completion of six years’ service.

Nationality
Indian

The Rt. Hon Baroness
Virginia Bottomley
of Nettlestone DL (72)
Independent
Non-Executive Director
Appointed in April 2012.

Virginia will continue to serve as a
Member of the Remuneration Committee,
Nomination & Governance Committee and
Compliance & Culture Committee until her
retirement from the Board at the Annual
General Meeting in April 2021. She will not
stand for re-election.

Career and experience
Virginia was a Member of Parliament
between 1984 and 2005. She served
successively as Secretary of State for
Health and then Culture, Media and
Sport. She became a Life Peer in 2005.
Virginia was formerly a Director of Bupa
and AkzoNobel N.V.

Other current appointments
– Director of International Resources Group
Limited, where she is Chair of Board &
Chief Executive Officer Practice at
Odgers Berndtson.

– Member of the International Advisory
Council of Chugai Pharmaceutical Co.

– Chancellor of University of Hull.
– Sheriff of Kingston upon Hull.
– Trustee of The Economist Newspaper.

Virginia will retire as a Non-Executive
Director of Smith & Nephew plc at the
Annual General Meeting in April 2021,
following completion of nine years’ service.

Nationality
British

Susan Swabey (59)
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. Susan is based in
Watford, UK.

Other current appointments
– Chair of the CBI Companies Committee.
– Chair of ShareGift, the share

donation charity.

– Member of the Financial Reporting Council

Lab Steering Group.

Skills and experience
Susan holds an MA from Corpus Christi College
Oxford in Literae Humaniores and is a Fellow
of The Chartered Governance Institute.

Susan has over 35 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 is a frequent
speaker on corporate governance and
related matters.

Nationality
British

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Executive team

Roland Diggelmann is supported in the
day-to-day management of the Group
by Anne-Françoise Nesmes, Chief Financial
Officer, and a strong team of Executives.

Brad Cannon (53)
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. Brad 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
plc’s Spine and Biologics division. From 2009,
he was responsible for Medtronic plc’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

Peter Coenen (59)
President EMEA Region
Joined Smith+Nephew in September 2020
with responsibility for Europe, the Middle
East and Africa (EMEA). Peter is based in Zug,
Switzerland.

Skills and experience
Peter is an experienced cross-cultural leader
and is adept at delivering results by building
successful teams. Most recently, Peter was
President of Terumo Interventional Systems,
a Japan-based medical device company that is
part of the Terumo Corporation. In addition to
this role, Peter also acted as Terumo’s General
Manager of its CEEMEA region (Central and
Eastern Europe, the Middle East and Africa).
During his seven-year tenure with Terumo, Peter
helped drive growth by more than doubling both
revenue and profitability. Prior to Terumo, Peter
held a number of senior roles in Europe, the
Middle East, Africa, Asia and Latin America with
Guidant Corporation, Haemonetics Corporation
and Boston Scientific Corporation.

Peter has a wealth of operational experience
that will help drive business performance and
bolster the future success of the EMEA region.

Nationality
German

Our commercial model

Chief Executive Officer

President Advanced
Wound Management

President APAC Region

Chief Business Development
& Corporate Affairs Officer

Chief Legal &
Compliance Officer

President Orthopaedics

President EMEA Region

Chief Financial Officer

President Operations & GBS

President Sports
Medicine & ENT

Chief HR Officer

President Research
& Development

Chief Quality &
Regulatory Affairs Officer

Smith+Nephew Annual Report 2020

Phil Cowdy (53)
Chief Business Development
& Corporate Affairs Officer
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. Phil is based in Watford, UK.

Skills and experience
Prior to joining Smith+Nephew, Phil served
as a senior Director at Deutsche Bank AG
and predecessor firms 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

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Myra Eskes (49)
President APAC Region
Joined Smith+Nephew in May 2019 with
responsibility for Asia Pacific. Myra is based
in Singapore.

Skills and experience
Myra is a strong and highly respected leader
with deep cross-cultural experience bringing
more than two decades of enterprise-
wide experience in finance, manufacturing,
operations, sales and marketing. Most recently,
Myra was President and Chief Executive
Officer of GE Healthcare Southeast Asia,
Korea, Australia and New Zealand, reporting
directly to the Chief Executive Officer as part
of the global management team. In this role,
she was responsible for the diagnostic and
interventional imaging, patient monitoring,
healthcare digital and life sciences businesses.

Prior to this, Myra led the GE Life Sciences
business for the Eastern & African growth
markets, covering Turkey, the Middle East,
Africa and Russia/Commonwealth of
Independent States (CIS) countries. There,
she drove growth in the region by working
with customers who were investing in life
sciences technologies and research, including
pharmaceutical diagnostics, bioprocessing,
services and in-vitro diagnostics. In addition
to her diverse operational experience in
complex and broad-based businesses around
the world, Myra has a proven track record of
driving strong revenue growth and increasing
profitability. She has created high performing
teams to deliver innovative medical devices
and life sciences solutions on three continents
and has a true passion for customers and
improving access to quality healthcare.

Nationality
Dutch

Simon Fraser (53)
President Advanced
Wound Management
Joined Smith+Nephew in January 2019
with commercial leadership responsibility
for Advanced Wound Management in the
US and global marketing for the Advanced
Wound Management Franchise. Simon is
based in Fort Worth, US.

Skills and experience
Simon brings 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 Inc., 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

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Executive team continued

Mark Gladwell (45)
President Operations
& GBS
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. From 2019 Mark also
took responsibility for Global Business Services.
Mark is based in Watford, UK.

Skills and experience
Mark joined Smith+Nephew from QIAGEN N.V.,
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 de
Nemours, Inc., 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.

Nationality
British

Melissa Guerdan (46)
Chief Quality & Regulatory
Affairs Officer
Joined Smith+Nephew in July 2018 with
responsibility for Quality and Regulatory Affairs
and assumed additional responsibility in 2019
for the Portfolio Compliance organisation,
inclusive of the Group EU MDR. Melissa 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 Inc.,
Baxter International Inc., Covidien and Alere
Inc. Most recently, Melissa was Senior Vice
President, Quality and Regulatory for Alere
Inc., 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

Skip Kiil (46)
President 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, Inc., 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 surgical
business across both developed and emerging
growth markets.

Before joining Alcon, Skip had a successful
12-year career with Stryker Corporation
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

Smith+Nephew Annual Report 2020

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Catheryn O’Rourke (48)
Chief Legal & Compliance Officer
Joined Smith+Nephew in February 2013
and became Chief Legal Officer in May 2017
and Chief Legal & Compliance Officer in
July 2018. Catheryn heads up the Global
Legal and Compliance functions and also
serves as the Chief Risk Officer. Catheryn
is based in Andover, US.

Skills and experience
Prior to being appointed Chief Legal
& Compliance Officer, Catheryn had
various responsibilities within Legal as
Assistant General Counsel – Litigation and
Investigations. Prior to joining Smith+Nephew,
Catheryn spent 11 years of her career with
Davis Polk & Wardwell LLP.

Catheryn is a graduate of Princeton
University and Harvard Law School.

Nationality
American

Elga Lohler (53)
Chief HR 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 Global Human
Resources and Internal Communication.
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
SOC Ltd, Sensormatic (now Tyco International
plc) and Advanced Tissue Sciences, Inc.,
which was acquired by Smith+Nephew in
2002. Through these roles, Elga has developed
deep expertise in strategic planning and
development, organisational design and
effectiveness, restructuring and integration,
and transformational change in support of
business objectives. In her current role, Elga
is responsible for driving Smith+Nephew’s
human capital strategy across the enterprise
in support of Smith+Nephew’s overall strategy.

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

Vasant Padmanabhan (54)
President Research & Development
Joined Smith+Nephew in August 2016 and
is responsible for Research and Innovation,
New Product Development, Clinical and
Medical Affairs, and Clinical Operations.
Vasant is based in Andover, US.

Skills and experience
Vasant is a medical technology executive
with over 25 years of global R&D leadership
experience. He holds a doctorate in Biomedical
Engineering and has a proven track record of
driving and delivering innovation from concept-
to-commercialisation. Prior to Smith+Nephew,
Vasant served as the 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 multiple
technical functions including global R&D,
Programme Management, Quality Affairs, and
Operations. Prior to Thoratec Corporation and
its successful acquisition by St. Jude Medical,
Inc. in 2015, Vasant had an 18-year career
at Medtronic plc, starting as a Staff Scientist
and, progressing through more senior roles,
ultimately becoming Vice President of
Connected Care R&D Operations (2008-2012)
and Vice President of Product Development
for the Implantable Defibrillator Business
(2012-2014). Vasant holds an MSc and a
Ph.D. in Biomedical Engineering from Rutgers
University and an MBA from the University of
Minnesota – Carlson School of Management.

Nationality
American

Smith+Nephew Annual Report 2020

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Division of responsibilities

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

Senior Independent Director

– Building a well-balanced Board.
– Chairing Board meetings and setting Board agendas.
– Ensuring effectiveness of the Board and enabling the annual

review of effectiveness.

– Chairing meetings in the absence of the Chair.
– Acting as a sounding board for the Chair on Board-related matters.
– Acting as an intermediary for the other Directors where necessary.
– Available to shareholders and stakeholders on matters

– Encouraging constructive challenge and facilitating effective

which cannot otherwise be resolved.

communication between Board members.

– Promoting effective Board relationships.
– Holding meetings with Non-Executive Directors in the absence

of Executive Directors.

– Ensuring one-to-one discussions with each Board Member.
– 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.

– Leading the annual evaluation into the Board’s effectiveness.
– Leading the search for a new Chair, if necessary.

Chief Executive Officer

Chief Financial Officer

Company Secretary

– 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.

– Advising the Board on matters

of corporate governance.
– Supporting the Chair and
Non-Executive Directors.

– Point of contact for investors on

matters of corporate governance.
– Ensuring good governance practices

at Board level and throughout
the Group.

– Developing and implementing

Group strategy.

– Recommending the annual budget and
long-term strategic and financial plan.

– Ensuring coherent leadership of

the Group.

– Managing the Group’s risk profile and

establishing effective internal controls.

– Regularly reviewing organisational

structure, developing executive team
and planning for succession.

– Ensuring the Chair and Board are

kept advised and updated regarding
key matters.

– Maintaining relationships with
shareholders and advising the
Board accordingly.

– Setting the tone at the top with

regard to culture, compliance and
sustainability matters.

– Day-to-day running of the business.

Non-Financial Reporting Regulations
In accordance with The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 information
can be found on the following pages of this 2020 Annual Report relating to the environment (pages 24–27 of this report and the 2020
Sustainability Report), social (pages 28–35 of this report and the 2020 Sustainability Report), anti-corruption and anti-bribery matters
(pages 27 and 33), employees (pages 28–35) and human rights (page 29).

Smith+Nephew Annual Report 2020

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Corporate governance framework

The Board is responsible to shareholders and stakeholders 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:

Our Board

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.
Manages use of internal
and external auditors.
» See page 88

Remuneration Committee
Determines Remuneration
Policy and packages
for Executive Directors
and Executive Officers,
having regard to pay
across our workforce.
Ensures alignment with
our purpose, values and
long-term strategy.

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

Compliance &
Culture Committee
Reviews and monitors
and has oversight of
ethics and compliance,
quality and regulatory,
culture, sustainability,
stakeholder relationships
and related legal matters
across the Group.

» See page 106

» See page 85

» See page 98

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

The Board delegates certain matters, as follows, to Board Committees, consisting of senior executives:

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

Disclosures Committee
Approves release of communications to investors and Stock Exchanges.
Reviews whether communications are inside information.

The Board delegates the day-to-day running of the business to Roland Diggelmann, Chief Executive Officer, who is assisted in his role
by the Executive Committee comprising the executive team shown on pages 74–77. The governance framework below outlines
the Executive Committee responsibilities and the structure of sub-committees reporting into the Executive Committee.

Executive Committee

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, monitors succession planning and talent pipeline below Board level,
reviews major investments, divestment and capital expenditure proposals and approves business development projects. During 2020, an
additional Committee named the Crisis Management team, was formed to manage the Company’s response to the COVID-19 pandemic.

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

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

New Product Development
Defines portfolio allocation principles,
reviewing and challenging current
shape of portfolio, identifying gaps
and opportunities and re-prioritising
segments and geographies.

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

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

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

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

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

Sustainability Council
Monitors sustainability strategy
and delivers agreed plan.

Smith+Nephew Annual Report 2020

Division of responsibilities continued

Responsibilities
of the Board

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.

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.

February
– Reviewed and approved three-year

strategic plan.

– Reviewed capital allocation policies.
– Reviewed APEX restructuring plans.

April
– Reviewed 2020 funding actions in response

to COVID-19.

July
– Received Corporate Development update.
– Reviewed preparations for bond issue.

September
– Received Corporate Development update.
– Considered and approved bond issue.

November
– Reviewed the strategic plan for 2021–2023.

December
– Received business update from Chief
Executive Officer and considered the
impact of COVID-19.

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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.

February
– Considered COVID-19 impact on the

Company’s business.

– Reviewed financial performance.
– Considered payment of final dividend.
– Approved and noted Board and Committee
membership changes, including changes
in relation to the Chief Financial Officer.

Early and late March
– Considered COVID-19 impact scenarios.
– Reconfirmed payment of dividend in

response to COVID-19.

April
– Considered COVID-19 impact on

the Company’s business, employees
and customers.

– Reviewed financial performance.
– Received update on Advanced

Wound Management.

May
– Considered COVID-19 impact on

the Company’s business, employees
and customers.

– Reviewed financial performance.

July
– Approved and declared payment

of interim dividend.

– Considered COVID-19 impact on the
Company’s business, employees
and customers.

– Received updates on Orthopaedics franchise.
– Reviewed financial performance.

September
– Reviewed financial performance.
– Received review of the performance
of the business franchises, including
Sports Medicine, ENT and Robotics.
– Received updates on Global Operations.

October
– Reviewed financial business performance.

November
– Considered succession and

development plans.

Smith+Nephew Annual Report 2020

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.

February
– Approved Preliminary Announcement 2019.
– Approved the Annual Report for 2019.
– Approved Notice of the 2020 Annual

General Meeting.

April
– Noted updated arrangements and

preparations for the 2020 Annual General
Meeting and shareholder audiocast to be
held later that day.

May
– Approved Q1 2020 Trading Report.

July
– Approved H1 2020 Results Announcement.
– Considered Company response to

ethnic diversity.

October
– Approved Q3 2020 Trading Report.

November
– Approved holding the 2021 Annual General

Meeting as a hybrid meeting.

– Approved the commencement of share

forfeiture programme.

Risk
– Overseeing the Group’s risk
management programme.

– Regularly reviewing the risk register.
– Overseeing risk management processes
(see pages 53–65 for further details).

Other matters
February
– Approved Directors & Officers’ liability

insurance renewal.

– Approved 2019 Board evaluation proposals.
– Received Legal update.

February
– Received Annual Risk Management update.

April
– Approved appointment of Rick Medlock

on 9 April 2020.

– Received Legal update.

May
– Approved appointment of Bob White

on 1 May 2020.

July
– Approved appointment of Anne-Françoise

Nesmes on 27 July 2020.

September
– Received Legal update.

November
– Received Legal update.
– Approved appointment of Katarzyna

Mazur-Hofsaess on 1 November 2020.

December
– Discussed and approved the findings
from the 2020 Board Effectiveness
Review undertaken by the Senior
Independent Director.

– Noted the resignation of Vinita Bali

on 31 December 2020.

October
– Attended an interactive discussion on key
risks facing the Company and considered
principal risks.

Stakeholders
– Overseeing and maintaining

relationships with stakeholders including
shareholders, employees, customers,
suppliers, regulators and governments.

February
– Approved Sustainability Report 2019.
– Approved Modern Slavery Statement 2019.

March
– Considered COVID-19 impact upon

employees and customers.

April
– Reviewed and approved updated APEX

restructuring plans noting impact
upon stakeholders.

June
– Discussed company response

to ethnic diversity.

July
– Considered COVID-19 impact on the
Company’s employees, customers
and suppliers.

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The newest Board members
have conducted most of
our induction programmes
virtually and have yet
to meet our fellow
directors face to face.”

Rick Medlock
Chair of the
Audit Committee

Smith+Nephew Annual Report 2020

Division of responsibilities continued

Responsibilities
of the Board

Board and Committee attendance

Board

Audit Remuneration
6

Committee

Nomination
& Governance
3

Compliance
& Culture
4

Appointed

March 2017

December 2013 11/11
5/5
December 2014 11/11
April 2012 11/11
March 2018 11/11
January 2015 11/11
September 2015 11/11
October 2017 11/11

1 November
2020
9 April 2020

3/3
8/8

27 July 2020

6/6
September 2017 11/11
7/7

1 May 2020

–
–
–
–
–
8/8
8/8
8/8

–
5/5

–
–
–

6/6
–
6/6
6/6
–
–
6/6
–

–
–

–
6/6
3/3

3/3
–
–
3/3
–
3/3
3/3
2/2

–
–

–
–
–

–
–
4/4
4/4
–
–
–
4/4

–
–

–
3/3
2/2

Total meetings

Roberto Quarta
Graham Baker1
Vinita Bali2
Virginia Bottomley3
Roland Diggelmann
Erik Engstrom
Robin Freestone4
Marc Owen5
Katarzyna Mazur-
Hofsaess6
Rick Medlock7
Anne-Françoise
Nesmes8
Angie Risley9
Bob White10

1 Graham Baker resigned from the Board on 9 April 2020.
2 Vinita Bail retired from the Board on 31 December 2020, after six years’ of service.
3 Virginia Bottomley is due to retire from the Board at the Annual General Meeting on 14 April 2021, after 9 years’ of service.
4 Robin Freestone resigned as Chair of the Audit Committee on 1 September 2020. He remains Senior Independent Director

and a member of the Audit Committee.

5 Marc Owen joined the Nomination & Governance Committee on 28 March 2020.
6 Katarzyna Mazur-Hofsaess was appointed to the Board on 1 November 2020.
7 Rick Medlock was appointed to the Board and Audit Committee on 9 April 2020. He was appointed as Chair of the Audit

Committee on 1 September 2020.

8 Anne-Françoise Nesmes was appointed to the Board as Chief Financial Officer on 27 July 2020.
9 Angie Risley joined the Compliance & Culture Committee on 8 April 2020.
10 Bob White was appointed to the Board on 1 May 2020. He joined the Compliance & Culture Committee on 27 July 2020

and the Remuneration Committee on 28 July 2020.

In advance of the Board and Committee
meetings, the Chair met with the
Non-Executive Directors in the absence
of Executive Directors. In addition,
the Chair held one-to-one discussions
with each Board Member throughout
the year.

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. The
Board considers all external directorships
prior to appointment, reviewing any
potential conflict of interests and time
commitment for both Executive Directors
and Non-Executive Directors.

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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
12 February 2021.

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, the situations that could
potentially give rise to a conflict of interest
have been identified and duly authorised
by the Board and are reviewed on an
annual basis.

Smith+Nephew Annual Report 2020

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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. During
2020, Roland Diggelmann was also a
Non-Executive Director of Accelerate
Diagnostics, Inc. listed on the NASDAQ.
Anne-Françoise Nesmes is also a
Non-Executive Director of Compass Group
plc listed on the London Stock Exchange.
Anne-Françoise’s external appointment
was known at the time of joining
Smith+Nephew and the Chair and Board
was satisfied that she had the capacity
for the time commitment required.

Re-appointment of directors
In accordance with the Code, all Directors
offer themselves to shareholders for
re-election annually, except those who
are retiring immediately after the Annual
General Meeting. Each Director may
be removed at any time by the Board
or the shareholders.

Director indemnity arrangements
Each Director is covered by appropriate
directors’ and officers’ liability insurance
and there are also Deeds of Indemnity
in place between the Company and each
Director. These Deeds of Indemnity mean
that the Company indemnifies Directors
in respect of any proceedings brought
by third parties against them personally
in their capacity as Directors of the
Company. The Company would also fund
ongoing costs in defending a legal action
as they are incurred rather than after
judgement has been given. In the event
of an unsuccessful defence in an action
against them, individual Directors would
be liable to repay the Company for any
damages and to repay defence costs
to the extent funded by the Company.

Purchase of ordinary shares
Prior to May 2020, in order to avoid
shareholder dilution, shares allotted
to employees through employee share
schemes were bought back on a quarterly
basis and subsequently cancelled as
stated in Note 19.2 of the Group accounts
on page 197. The share buy-back
programme for 2020 has been suspended
in light of the COVID-19 pandemic.
The programme remains under review.

Composition, succession
and evaluation

Board effectiveness
review

The Board effectiveness review in
2020 was internally facilitated by Robin
Freestone, Senior Independent Director,
assisted by the Company Secretary. The
2020 review comprised a questionnaire
completed by each member of the Board.
This questionnaire focused on the progress
made addressing the issues raised in
previous Board evaluations, as well as
looking into how the Board had handled
particular topics throughout the year.
Robin Freestone then conducted individual

interviews with each Board member,
where he also specifically discussed the
performance of the Chair. In October
2020, he prepared a report, detailing his
findings, which he shared with the Chair.
The report was then discussed by the full
Board in December 2020. In discussion,
we concluded the Board operated
effectively in spite of the challenges
during the year. It looks forward to
meeting physically again. Collectively,
there was a good breadth of skills,
backgrounds and experiences on the
Board. The culture was open and
collaborative and visits to different
markets would return when possible.
We did identify three key areas
of improvement and the following
recommendations were made:

Recommendation 1

Recommendation 2

Recommendation 3

It would be useful to
have external speakers
presenting on industry and
market competitiveness,
to augment the internal
perspective provided
by management.

Further improvements could
be made to the measures
in place to ensure that the
views of stakeholders are
considered at the time
of every Board decision,
by ensuring that presenters
to the Board specifically
address the potential
impact of Board proposals
on stakeholders.

Arrangements should
be made to facilitate
informal Board interaction
with each other and the
executive team within
a virtual environment
to supplement formal
Board discussions.

The areas for attention identified in the 2019 review have been addressed as follows:

Actions identified

Action taken

The recent change in Chief Executive Officer,
after a relatively short period of tenure
had highlighted the need for increased
oversight at Board level of executive
succession planning.

The Board discussed succession planning
during the year and in depth at the 2020
Board Strategy Review.

The full Board would welcome more
involvement in the appointment of
additional Non-Executive Directors.

Additional Board Directors were involved
at the interview stages in the appointment
of the new Directors during 2020.

Positive feedback had been received on
the Board site visits in 2019 to Memphis
and to the Schulthess Klinik in Switzerland
and more visits such as these would
be welcomed.

The travel restrictions during 2020 from the
impact of COVID-19 meant the programme
(which was to involve a visit to our robotics
facility in Pittsburgh) had inevitably taken a step
backwards. Whilst the Board enjoyed having
virtual updates, including meeting a robotics
surgeon, we look forward to meeting our
stakeholders again physically when safe to do so.

The Compliance & Culture Committee
Chair would work with the Committee
and the Chief Executive Officer to further
develop an employee engagement
programme for 2020.

In spite of the restrictions on travel and
meetings during 2020, five Board/employee
listening sessions were held, four of them
virtually. Further detail is provided on
page 103.

The last externally facilitated Board effectiveness review was carried out in 2018 by
Dr Tracy Long of Boardroom Review, who will be facilitating our next external review
in 2021. The reviews in 2019 and 2020 were facilitated internally and led by the
Senior Independent Director, supported by the Company Secretary.

Smith+Nephew Annual Report 2020

Composition, succession
and evaluation continued

Board development

Timeline 2020

Board development
February
– Board/employee listening session in Watford.

Summer
– Further Board/employee listening sessions

in EMEA and APAC.

September
– Meeting with leading robotics surgeon –

Dr Jimmy Chow.

November
– Virtual meeting with entire

Executive Committee.

December
– Received business update from

Chief Executive Officer.

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Induction for new Directors
During 2020, we offered induction
programmes for each of our new Directors:
Anne-Françoise Nesmes, Rick Medlock,
Bob White and Katarzyna Mazur-Hofsaess.
These programmes were tailored to their
individual 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.

– Meetings with our external advisers
for example Slaughter and May,
our corporate lawyers, KPMG LLP,
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.

– Bob White attended an induction

session focused on UK governance
requirements relating to remuneration
matters prior to joining the
Remuneration Committee.

Most of the programmes were held
virtually due to travel and meeting
restrictions, although Rick Medlock was
able to attend our Watford office in the
period between lockdowns, where he
met with a number of members of the
finance team, toured our Expert Connect
Centre and attended a hands-on product
demonstration. Once travel and meeting
restrictions are lifted, our new Directors
look forward to continuing their induction
programmes with site visits, meeting
customers and employees and getting
more familiar with our products.

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 and
stakeholders 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.
The opportunities for such visits have been
limited in 2020 due to travel restrictions
and social distancing measures. We look
forward to resuming these site visits as
soon as we are able.

We have however continued to provide
our Directors with virtual opportunities to
understand the business better as follows:
– At our Board meeting in September, our

Chief R&D Officer, Vasant Padmanabhan
presented on the latest developments
in our Robotics strategy following the
recent launch of the CORI platform.
He was accompanied by Dr Jimmy Chow,
the first surgeon to use this product
and whose insights had helped with
its development. This was a useful
opportunity for the Board both to learn
about an important new product and
also to meet with a key customer.
– At our virtual strategy meeting in

November, the Board met with the entire
executive team and heard presentations
on all areas of the business, learning
about new products in the pipeline and
innovative commercial strategies.

– Members of our Compliance & Culture
Committee have held a number of
Board/employee listening sessions both
physically and virtually, where they
have talked with employees and heard
from them their views on what it means
to work for Smith+Nephew. These
sessions are discussed in more detail
on pages 99 and 103.

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

Smith+Nephew Annual Report 2020

Nomination & Governance
Committee report

Membership

Member
from
Roberto Quarta (Chair) April 2014
April 2019
Erik Engstrom
April 2019
Robin Freestone
Virginia Bottomley1
April 2014
Marc Owen2
March 2020

Meetings
attended
3/3
3/3
3/3
3/3
2/2

1 Virginia Bottomley is due to retire from the Board

and the Committee at the Annual General Meeting
on 14 April 2021, after 9 years of service.

2 Mark Owen joined the Committee on 28 March 2020.

Recent appointments
to the Board have
strengthened our
medical devices
knowledge.”

Roberto Quarta
Chair of the Nomination
& Governance Committee

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

In 2020, we held three 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.

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

During the year, there were four new
Board appointments. Members of the
Committee were involved in the interview
and selection process in each case and
recommended the appointments to
the full Board.

Appointment of
Chief Financial Officer
In April, we announced the appointment
of Anne-Françoise Nesmes as Chief
Financial Officer, replacing Graham Baker,
who left the Company in May to pursue
his career elsewhere. Anne-Françoise
has strong FTSE 100 financial leadership
experience and joined us from Merlin
Entertainments, where she was Chief
Financial Officer. Prior to that, she
was Chief Financial Officer at Dechra
Pharmaceuticals plc. She is also a
Non-Executive Director and Chair of the
Audit Committee at Compass Group plc.
She joined us on 27 July 2020.

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Non-Executive Directors
The Committee has reviewed the
composition of the Board and its
committees to ensure that it continues
to evolve to align with the new Strategic
Imperatives and with the developing
external regulatory environment.

The Committee appointed Rick
Medlock in April 2020 as an additional
Non-Executive Director with recent
and relevant financial experience to
strengthen the financial expertise on
the Board. In September 2020, Rick took
over as Chair of the Audit Committee
replacing Robin Freestone, who continues
in his role as Senior Independent Director
and remains a member of the Audit
Committee. Rick has 30 years’ experience
in financial management in large
international companies and was formerly
Chief Financial Officer of Worldpay plc,
Misys plc and Inmarsat plc.

Following the appointment of Roland
Diggelmann in 2019 as our Chief Executive
Officer, who had previously been one of our
Non-Executive Directors, the Committee
identified the need to strengthen the
medical devices experience on the Board.
We appointed Bob White in May 2020 and
Katarzyna Mazur-Hofsaees in November
2020. Bob has over 25 years’ global
medical devices experience and is a
member of Medtronic’s executive team,
heading up their Medical Surgical Portfolio.
Katarzyna has a strong track record in
medical devices including eight years as
President of EMEA for Zimmer Biomet.
She is currently Chief Executive Officer
of the EMEA business of Fresenius.

Vinita Bali stepped down as a member
of the Board at the end of 2020 following
six years’ service and Virginia Bottomley
will be retiring from the Board at the
Annual General Meeting, when she
will have completed nine years’ service
with the Company.

Russell Reynolds advised the Committee
on these appointments ensuring that
in all cases, we were presented with
a diverse set of candidates to consider.

On 17 February 2021, we also appointed
John Ma as a member of the Board. John is
an established leader within the MedTech
industry with a deep knowledge of the
Asia-Pacific region and of surgical robotics,
both significant areas of opportunity for
Smith+Nephew.

Smith+Nephew Annual Report 2020

Composition, Succession
and Evaluation continued

Nomination & Governance
Committee report
continued

Diversity
We aim for our Board to have 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 stronger and better
equipped to consider matters from a broader
perspective, understanding the views of our
stakeholders as well as our shareholders
and therefore come to decisions that have
considered a wider range of issues and
perspectives than would be the case in
a more homogenous Board.

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

Diversity is not simply a matter of gender,
ethnicity, social or other 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 and
the needs of our stakeholders. 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, ethnicity, industry,
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 should also
provide a new way of looking at things.

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
Following the changes to the executive
team in 2018 and 2019 and the move to the
franchise led organisational structure, 2020
has been a period of greater stability. The
new executive team has been completed
with the appointment of Anne-Françoise
Nesmes as Chief Financial Officer and Peter
Coenen as President of EMEA. The Board
and Nomination & Governance Committee
have monitored the changes to the
organisational structure and approved
changes to key leadership roles. Individual
Directors have acted as a sounding board
for the executive team when considering
succession plans in key areas. In November,

the Board as a whole reviewed succession
plans for Executives below Board level.
These plans included consideration of
diversity in the executive pipeline. Pages
74–77 gives details of the members of the
Executive Committee, over a third of whom
are female, with one member of Asian
ethnicity. The Committee will continue to
monitor diversity in the executive pipeline.

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.

During 2021 our focus
will include:
– Continued oversight of succession

planning below Board level.

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Chair of the Nomination
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Skills and experience matrix

CEO

Financial

International

Six members of the Board
are either current or
recent Chief Executive
Officers.

Three members of
the Board have recent
and relevant financial
experience.

Ten members of the
Board have international
experience.

Emerging Market

Six members of the
Board have Emerging
Market experience.

Healthcare/
Medical Devices

Eight members of the
Board have different
levels of experience
within the Healthcare
industry and five
members have medical
devices experience.

UK Governance

Remuneration

Gender

Ethnic

Other

Seven members of the
Board have considerable
experience of working in a
UK listed environment and
six members of the Board
have experience of the US
listed environment.

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

Eight members of
the Board are male
and four are female.

Eleven members of the
Board are white and one
is of Asian ethnicity.

Various Board members
bring experiences
in a variety of fields
including customer
focus, investment
markets, government
affairs, sustainability
and digital.

Smith+Nephew Annual Report 2020

Responsibilities of the
Nomination & Governance Committee

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.

February
– Reviewed and approved the Schedule
of Matters Reserved to the Board
and the Terms of Reference of the
Board Committees.

Board composition
– Reviewing the size and composition

of the Board.

– Overseeing Board succession plans.
– Recommending the appointment

of Directors.

– Monitoring Board diversity.

February
– 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.
– Reviewed and updated the Committee
membership, including approval of the
Audit Chair Elect appointment.

– Approved appointment of Anne-Françoise

Nesmes, as Chief Financial Officer.

– Received an update on the search for an
additional Non-Executive Director with
international medical devices experience.
– Considered succession planning required
with regard to ensuring the promotion
of diversity of gender, social and ethnic
backgrounds on the Board.

March
– Approved the appointment of Bob White as
Non-Executive Director with international
medical devices experience.

September
– Approved the appointment of Katarzyna

Mazur-Hofsaess as additional Non-Executive
Director with international medical
devices experience.

– Received an update on the progress of the

appointment of a Non-Executive Director
with focused healthcare experience and
a broader portfolio focus with regard
to ensuring diversity of experience.

– Approved the additional external

appointment of Anne-Françoise Nesmes
as Audit Chair of Compass Group plc.

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Diversity of outlook
and approach ensures
the right balance of
challenge and support.”

Roberto Quarta
Chair of the Nomination
& Governance Committee

Smith+Nephew Annual Report 2020

Audit, Risk and Control

Audit Committee report

This is my first Audit Committee report
for Smith+Nephew, having taken over
the role of Chair from Robin Freestone
on 1 September 2020. I’d like to thank
Robin for his smooth handover, following
the half-year announcement and
reiterate how grateful the Committee
is that he has remained a member.
His historical knowledge of both the
Company and the Committee are
both utilised and appreciated.

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 2020 have included:

– Reviewed and closely monitored the

impact of COVID-19 upon our financial
statements including the impact upon
funding/liquidity and going concern
to ensure the published information
has not only been rigorously challenged
by the Committee, but firmly stress
tested by management and the Auditor
and provides the usual fair, balanced
and understandable statement in
these challenging times.

Membership

Member
from
Rick Medlock (Chair)1,3 9 April 2020
Robin Freestone1,2 September 2015
January 2015
Erik Engstrom
October 2017
Marc Owen

Meetings
attended
5/5
8/8
8/8
8/8

1 Designated financial experts under the SEC Regulations
or recent and relevant financial experience under the
UK Corporate Governance Code.

2 Robin Freestone resigned as Chair of the Audit
Committee on 1 September 2020. He remains
Senior Independent Director and member of the
Audit Committee.

3 Rick Medlock was appointed to the Board and

Audit Committee on 9 April 2020. He was appointed
Chair of the Audit Committee on 1 September 2020.

Reviewing and
closely monitoring the
impact of COVID-19
upon our financial
statements.”

Rick Medlock
Chair of the Audit
Committee

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– Challenged the work to improve

the effectiveness of US collections.
Thoroughly understanding the impact
of COVID-19 and monitoring those
improvements to the collection
process identified.

– Continued vigilance over our IT control

environment and cybersecurity,
which has been heightened during
the pandemic. The IT Controls process
improvement plan has been closely
monitored by the Committee. Following
the Audit Committee’s recommendation,
IT controls are now part of certain
employees’ objectives.

– Increased monitoring of risk reporting
to the Committee. This was partly
in response to the increased level
of uncertainty during the COVID-19
pandemic.

– Consideration of the extent to which

we will be able to embed the Task Force
on Climate-related Financial Disclosures
(TCFD) framework into our decision
making process in order to enable us
to report against the TCFD framework
in future years. We assessed the impact
of climate change upon our financial
statements and concluded there was
no material impact.

– Monitored the impact of COVID-19
upon the physical verification of
inventory and the ability to enter
hospitals or third party warehouses.
The Committee challenged management
to ensure that sufficient evidence was
obtained on the existence of
this inventory.

In addition, the Committee reviewed
letters received from and the response
to our regulators, the Financial Reporting
Council (FRC)1 and SEC, where no matters
of significance were raised. The FX related
HMRC case was closely monitored by
the Committee, who were pleased
with the outcome, along with the first
phase of the APEX project, which should
complete in 2021. In December, the
Committee received a report from
management on the acquisition,
which closed on 4 January 2021, of
the Integra business, outlining not only
financial matters, but its timetable
and a governance update.

Smith+Nephew Annual Report 2020

Our focus for 2021 will include:
– Monitoring ESG planning and
reporting, including progress
on TCFD and embedding it into
decision making from the Executive
Committee to the Board.
– Continued oversight of risk

management process.

– Monitoring the process improvement

plan for IT Controls.

– Further monitoring the impact of

COVID-19 on the financial statements.
– Ensuring that we review and consider
all UK governance changes following
the establishment of Audit Reporting
and Governance Authority (ARGA).

Rick Medlock
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.

1 The letter from the FRC noted that its review provided

no assurance that the Report and Accounts are correct in
all material respects, and that the FRC’s role is not to verify
the information provided, but to consider compliance with
the reporting requirements. The FRC’s review is based
on a review of the Annual Accounts and does not benefit
from detailed knowledge of the business.

As newly appointed Chair of
the Committee, I have requested
additional updates on cybersecurity,
Risk Management and Internal Controls.
My appointment was shortly after
Anne-Françoise Nesmes’ appointment
as Chief Financial Officer; we have been
able to share our initial positive insights.
Much of the work at the December
meeting related to preliminary financial
matters for the 2020 year end, including
internal controls and any impact from
the letters and guidance published
throughout the year from the FRC,
which the Committee felt had been
appropriately considered by management.

The Committee has been well briefed
by the Company Secretary on the
impending transition from the FRC to
the Audit Regulatory and Governance
Authority (ARGA) and recommendations
will be considered when implemented,
potentially in 2021.

KPMG have now completed their sixth
year’s audit and continue to provide
robust challenge to both management
and the Committee. Areas of challenge
by KPMG and the Committee are
highlighted on page 90.

We have negotiated and will continue
to monitor auditor fees. From 1 January
2019, a new senior lead partner, Kamran
Walji headed up our audit, under the
guidance of our previous lead partner
Stephen Oxley, whose five year tenure
completed on 31 December 2019.
The newly rotated senior partner was
able to seamlessly and independently
continue his position for the 2020 audits.
We would like to thank KPMG for its
work in conducting such a rigorous audit,
most of which was done virtually.

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Smith+Nephew Annual Report 2020

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Audit, Risk and Control continued

Audit Committee report
continued

Significant matters related to the financial statements
We considered the following key areas of judgement in relation to the 2020 financial statements 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 Orthopaedics franchise (which accounts for
approximately 60% of the Group’s total inventory and approximately
80% of the total provision for excess and obsolete 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. The impact of COVID-19
on the provision for excess and obsolete inventory has been assessed,
specifically considering the impact of lower sales demand and increased
inventory levels.

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
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 2020 (16% as at
31 December 2019). We challenged the basis of the provisions and
concluded that the proposed levels were appropriate and have
been consistently estimated.
Challenge by KPMG:
During 2020, KPMG challenged management’s approach to inventory
provisioning in light of the changes in product demand and inventory
levels caused by COVID-19 and potential future changes.

Our action
As members of the Board, we receive regular updates from the Chief Legal &
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 $336 million as of 31 December
2020. 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 $14 million
during the year, primarily due to an increase in the metal-on-metal provision.
We have determined that the proposed levels of provisioning at year end
of $369 million included within ‘provisions’ in Note 17.1 in 2020 (2019:
$355 million) were appropriate in the circumstances.
Challenge by KPMG:
KPMG challenged management’s assumptions in determining the provisions
for metal-on-metal hip claims including the work of management appointed
actuaries.

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. Additionally,
the non-current assets held by the Group at 31 December 2020
have been assessed to identify any indicators of impairment as a
result of COVID-19, and several downside sensitivity analyses have
been undertaken.

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 challenged the
downside sensitivity analyses undertaken. 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.
Challenge by KPMG:
KPMG challenged management on the impairment conclusions and the
basis of the assessment with a particular focus on the recently completed
Osiris acquisition.

Smith+Nephew Annual Report 2020

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Other matters related to
the financial statements
As well as the identified significant
matters, other matters that the Audit
Committee considered during 2020 were:

Going concern
The uncertainty as to the future impact
on the financial performance and cash
flows of the Group as a result of the
COVID-19 pandemic has been considered
as part of the adoption of the going concern
basis in these financial statements.
We reviewed three-year projections as
part of the Group’s Strategic Plan, and
also more detailed cash flow scenarios
to 31 December 2022 for going concern
purposes and concurred with management
that the continued adoption of the going
concern basis is appropriate.

Taxation
The Group operates in numerous
tax jurisdictions around the world and
is subject to factors that may affect
future tax charges. We annually review
policies and approve the principles for
management of tax risks. We review
quarterly reports from management
evaluating the existing tax profile, tax
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.

Trade receivables
We received reports from management
assessing the impact of COVID-19 on the
expected credit loss allowance against
trade receivables. Current and expected
collection of trade receivables since the
start of the COVID-19 pandemic has been
reflected in country-specific expected
credit loss models on a reasonable and
supportable basis where possible, taking
into account macroeconomic factors
such as government support. We concur
with management that the expected
recoverability of trade receivables
balances has been reflected in the
expected credit loss allowance.

Post-retirement benefits
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
2020, Annual Report and Accounts for
2020, 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 16–17, 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. Kamran Walji became the
Company’s Audit Partner with effect
from 1 January 2019, following the
five-year tenure of Stephen Oxley on
31 December 2019. The Audit Committee
confirms it has complied with the provision
of the Competition and Markets Authority
(CMA) Order 2014.

Effectiveness of external auditor
We conducted a review into the
effectiveness of the external audit
as part of the 2020 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
2020 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 14 April
2021 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 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.

Smith+Nephew Annual Report 2020

Audit, Risk and Control continued

Audit Committee report
continued

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.

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 Chair of the Audit Committee.
If unforeseen additional permitted
services are required, or any which
exceed the amounts approved, again
pre-approval by the Chair of the
Audit Committee is required.

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The following reflects the non-audit
fees incurred with KPMG in 2020,
which were approved by the Chair of
the Audit Committee. This fee relates
to routine services provided by the
Auditor in respect of the bond issue
in September 2020 and was deemed
by the Committee not to infringe
auditor objectivity or independence.

Audit related services

2020
$ million
0.4

2019
$ million
0.3

The ratio of non-audit fees to audit fees
for the year ended 31 December 2020
is 0.06. The ratio of non-audit fees to audit
fees for the year ended 31 December
2019 was 0.05.

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

2020
$ million
7.0
0.4
7.4

2019
$ million
6.5
0.3
6.8

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.

During the year, the team completed
36 risk-based audits and reviews across
the Group. These included: financial
controls effectiveness reviews across
the EMEA, APAC, US and LATAM regions;
IT and various programme assurance
reviews ranging from cybersecurity,
EU MDR preparedness, IT controls
effectiveness; and Group-level reviews
of Enterprise Risk Management
effectiveness, Shared Services operations,
and benefits arising from change
programmes and acquisitions. Key issues
noted during reviews included the need
for all controls operation to always be
fully documented. Management has taken
swift action to implement Internal Audit’s
recommendations. The team was able
to continue to operate successfully during
the COVID-19 pandemic. Although
it was not possible to travel, extensive
use was made of data extraction and
analysis techniques, supplemented by
documentation review and interviews.

The function carries out its work in
accordance with the standards and
guidelines of the Institute of Internal
Auditors. Its performance is annually
assessed using a structured questionnaire,
allowing Non-Executive, 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 2020,
has satisfied itself that adequate, objective
internal audit standards and procedures
exist within the Group and that the
Internal Audit function is effective.

Smith+Nephew Annual Report 2020

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 2020 and monitored
performance against that programme,
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 2020 followed the updated risk
management policy and manual
rolled out across the Company in 2020.
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
where the risk profile was changing.

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 2020 and up to the date
of approval of this Annual Report was
effective. Work will continue in 2021
and beyond to continue to enhance
the process.
» See pages 53–65 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. Management have
considered various scenarios in assessing
the impact of COVID-19 on future financial
performance and cash flows, with the key
judgement applied being the speed and
sustainability of the return to a normal
volume of elective procedures in key
markets, including the impact of a further
extended wave of restrictions on elective
procedures in the first half of 2021 and
the subsequent recovery. 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 64.

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Smith+Nephew Annual Report 2020

Audit, Risk and Control continued

Responsibilities of
the Audit Committee

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.

Early February
– Reviewed Q4 2019 accounting and

reporting matters.

– Report from KPMG on 2019 results, audit

and Sarbanes-Oxley (SoX).

– Reviewed draft 2019 Annual Report,

including report of the Audit Committee.

– Assessed compliance with UK and US

governance requirements.

Late February
– Approved the Annual Report and Accounts

for 2019, including report of the Audit
Committee – confirming fair, balanced
and understandable.

– Noted draft 2019 full year results announcement.
– Reviewed effectiveness of KPMG, including
collation of senior stakeholders’ views.
– Report from KPMG on 2019 statements –

Unqualified Opinion.

– Approved letter of representation for 2019.
– Confirmed Going Concern and

Viability Statement.

– Reviewed draft Q4 audited press release
and Chief Financial Officer presentation.

April
– Debrief of 2019 annual report process

and reviewed plan and timetable for 2020.
– Reviewed summary of Group Company audits.
– Approved Senior Finance Officers Code

of Ethics.

May
– Reviewed and endorsed 2020 Q1 Trading
Report, announcement and presentation,
including the impact of COVID-19.

– Noted KPMG’s update.

July
– Reviewed and endorsed H1 results, and
announcement, considering the impact
of COVID-19, including on going concern.

– Report from KPMG on H1 results.
– Approved letter of representation for H1 2020.
– Approved 2020 external audit

engagement letter.

September
– Noted an update on progress in reducing

the level of US receivables.

October
– Reviewed and endorsed Q3 Trading Report

and announcement, including impact
of COVID-19.

– Noted update from KPMG on review

of Q3 Trading Report.

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December
– Reviewed accounting and reporting matters

for 2020, including impact of COVID-19.

– Reviewed and approved trading/non-trading
policy, previously approved in February 2020.
– Reviewed 2020 Annual Report timeline and

design work.

– Reviewed KPMG’s Audit and Controls update,

including the impact of COVID-19.

Risk management
– On behalf of the Board, reviewing and
ensuring oversight of the processes
by which risks are managed, through
regular functional reports and
presentations and reporting any issues
arising out of such reviews to the Board.

– Reviewing the process undertaken
and deep-dive work required to
complete the Viability Statement and
recommending its adoption to the Board.

– Reviewing the impact of risk

management and internal controls
and working closely with the
Compliance & Culture Committee.

– Overseeing risk management processes
(see pages 53–65 for further details).

Early February
– Risk management update.
– Review of principal risks through

endorsement of Viability Statement.

July
– Received risk management update,
including the impact of COVID-19.

September
– Received interim risk management

update for new Chair.

December
– Received a risk management update.

Smith+Nephew Annual Report 2020

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.

Late February
– Reviewed effectiveness of Internal

Audit including the collation of senior
stakeholders’ views.

April
– Received an update on progress and the
2020 Internal Audit Plan, including the
impact of COVID-19.

July
– Reviewed progress on the 2020 Internal

Audit Plan, including the impact
of COVID-19.

September
– Received an update on 2020 progress,
including the impact of COVID-19.

December
– Reviewed progress against the Internal
Audit Plan and approved 2021 Internal
Audit Plan and 2021 Internal Audit Charter.

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.

Early February
– Approved 2019 external audit fees.
– Noted independence of KPMG.

Late February
– Reviewed effectiveness and independence

and concluded their effectiveness.

April
– Noted external audit plan.
– Approved external auditor fees for 2020.

July
– Approved engagement letter for 2020.
– Noted external audit plan updates.

October
– Approved KPMG 2020 fee schedule.

Other matters
Early February
– Approved 2019 external non-audit fees.

Late February
– Noted consulting fees to PwC,

EY and Deloitte for 2019.

– Approved Terms of Reference.

April
– Noted appointment of Rick Medlock

as Independent Non-Executive Director
and Chair Elect of the Committee and
resignation of Graham Baker, Chief
Financial Officer.

– Received treasury, pensions, insurance

and covenant updates.
– Cybersecurity update.
– Project APEX update.
– Approved the Company’s policy and report
on Conflict Minerals for submission to NYSE.

July
– Noted appointment of Anne-Françoise

Nesmes, Chief Financial Officer.

– Approved non-audit fees in relation to

the Company’s bond issue.

September
– Noted the appointment of Rick Medlock

as Chair of the Committee.

– Update on tax matters.
– Update on cybersecurity, including impact

of COVID-19.

– Project reports including APEX.

December
– Received updates on cybersecurity,

inventory, including impact of COVID-19
Sustainability, TCFD, the Integra acquisition
and the Finance Talent Review.

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Internal controls
– Monitoring the effectiveness of internal
controls and compliance with the UK
Corporate Governance Code 2018 and
the SoX Act, specifically sections 302
and 404.

– Reviewing the operation of the Group’s

risk mitigation processes and the control
environment over financial risk.

Early February
– Considered SoX 2019 audit process

and MAPs update.

Late February
– Reviewed effectiveness of Internal Controls

over financial reporting and SoX.

– Reviewed S302 and S906 certifications.

April
– Considered SoX and MAPs Planning

for 2020 including S404 scope.

July
– Reviewed new process for the completion
of SoX and MAPs year end work, including
the impact of COVID-19.

September
– Considered SoX and MAPs progress.

October
– Reviewed update on IT controls.

December
– Considered SoX and MAPs progress,
including the impact of COVID-19.

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.

Early February
– Reviewed year end report, including fraud.

I should like to thank Robin
Freestone for his smooth
handover to me. We value
his historical knowledge
of the Company and
the Committee.”

Rick Medlock
Chair of the
Audit Committee

Smith+Nephew Annual Report 2020

Audit, Risk and Control continued

Responsibilities of
the Audit Committee
continued

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 on pages 20–23 and 53–65.

The financial position of the Group, its
cash flows, liquidity position and borrowing
facilities are described on page 20–23.

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 uncertainty as to the future impact on
the financial performance and cash flows
of the Group as a result of the COVID-19
pandemic has been considered as part of
the adoption of the going concern basis in
these financial statements. 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; reviewing testing
performed in-country; or utilising a
qualified third party to perform this
management testing on its behalf.

– The Group Finance Manual sets

out financial and accounting policies,
and is updated regularly. The Group’s
Minimum Acceptable Practices (MAPs)
were updated in 2020 with a new
manual. The business is required to
self-assess their level of compliance
with the MAPs on a regular basis
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. The technology solution
to facilitate the real time monitoring
of the operation and testing of controls
has been partially implemented in 2020
and this will be completed in 2021.

– There are clearly defined lines

of accountability and delegations
of authority.

– 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.

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– The Audit Committee reviews regular
reports from the Financial Controls
& Compliance Group with regard to
compliance with the SoX Act including
the scope and results of management’s
testing and progress regarding any
remediation, as well as the aggregated
results of MAPs self-assessments
performed by the business.

– Business continuity planning, including

preventative and contingency measures,
back-up capabilities and the purchase
of insurance.

– Risk management policies and

procedures including segregation
of duties, transaction authorisation,
monitoring, financial and managerial
review and comprehensive reporting
and analysis against approved
standards and budgets.

– A treasury operating framework and
Group treasury team, accountable
for all treasury activities, which
establishes policies and manages
liquidity and financial risks, including
foreign exchange, interest rate and
counterparty exposures. Treasury
policies, risk limits and monitoring
procedures are reviewed regularly by
the Audit Committee, or the Finance
& 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 continued

to receive and review reports on the
progress of the Finance Transformation
element of the APEX programme
during 2020 and the mitigation of
the associated risks.

Smith+Nephew Annual Report 2020

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
internally by the Senior Independent
Director.

The review by the Audit Committee
found the following:

Composition

Performance &
Effectiveness

Rick Medlock has now
been appointed as Chair,
with further recent
and relevant financial
experience.

The Audit Committee,
performs well. A new
Chair brings fresh ideas.
An efficient use of
time and high quality
information is provided.

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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.

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 2020
and up to the date of approval of this
Annual Report. No concerns were raised
with us in 2020 regarding possible
improprieties in matters of
financial reporting.

This process complies with the FRC’s
‘Guidance on Risk Management, Internal
Control and Related Financial and Business
Reporting’ under the UK Corporate
Governance Code and additionally
contributes to our compliance with the
obligations under the SoX 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 2020 and included
the period up to the approval of this
Annual Report. The main elements
of this review are as follows:
– The Chief Executive Officer and the
Chief Financial Officer evaluated the
effectiveness of the design and operation
of the Group’s disclosure controls and
procedures as at 31 December 2020.
Based upon the evaluation, the Chief
Executive Officer and Chief Financial
Officer concluded on 18 February 2021
that the disclosure controls and
procedures were effective as at
31 December 2020.

– 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
2020 in accordance with the
requirements in the US under section
404 of the SoX 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 2020, 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, audited the financial
statements included in the 2020 Annual
Report, containing the disclosure required
by this item, issued an attestation
report on the Group’s internal control
over financial reporting as at
31 December 2020.

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 2020 or up until 18 February 2021.
A copy of the Code of Ethics for Senior
Financial Officers can be found on our
website at www.smith-nephew.com.

Smith+Nephew Annual Report 2020

Audit, Risk and Control continued

Compliance & Culture
Committee report

Membership

Marc Owen (Chair)
Vinita Bali1
Virginia Bottomley2
Angie Risley3
Bob White4

Member
from
March 2018
April 2015
April 2019
8 April 2020
27 July 2020

Meetings
attended
4/4
4/4
4/4
3/3
2/2

1 Vinita Bail retired from the Board and the Committee

on 31 December 2020, after 6 years’ service.
2 Virginia Bottomley is due to retire from the Board

and the Committee at the Annual General Meeting
on 14 April 2021, after 9 years’ service.

3 Angie Risley joined the Committee on 8 April 2020.
4 Bob White joined the Committee on 27 July 2020.

Our virtual Board/
employee listening
sessions give us
valuable insight into
what is important
for our employees.”

Marc Owen
Chair of the Compliance
& Culture Committee

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

In 2020, we held four meetings. Each
meeting was attended by all members of
the Committee. The Company Secretary,
the Chief Legal & Compliance Officer
and the Chief Quality & Regulatory
Affairs Officer, Chief HR Officer, President
of Global Operations, responsible for
Sustainability and Deputy Company
Secretary also attended all or part
of the meetings by invitation.

The Committee had expected 2020
to be the year that we fully began
our journey of listening to the Employee
Voice in accordance with the 2018 Code.
Though the global pandemic forced
us to adapt our plans, our progress
continued. We did manage to have
one physical Board/employee listening
session at our Watford site in February
before further global lockdowns. Even
though we could not conduct face-to-
face Board/employee listening sessions
from March 2020, we continued
with our programme virtually. Physically
meeting people cannot be underestimated,
but the virtual setting worked well. We
had calls with a number of employees
globally in APAC, Germany, EMEA and
the US, whilst Vinita Bali held a call with
employees across EMEA. Interestingly,
the themes from these sessions were
consistent and the learnings we
have described later in this report.

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At each meeting of the Committee,
we continued to note and consider
the activities of compliance and
enforcement agencies (an important
stakeholder of Smith+Nephew) and
investigation of any possible improprieties.
At every meeting a report on the Quality
and Regulatory Affairs (Q/RA) function
was provided along with updates of
product complaint trends, particular
focus was given to topics including
the impact of Brexit and the EU
MDR framework.

The Conflict Minerals filing was noted
and The Modern Slavery Statement was
approved. During 2020 management
reviewed Smith+Nephew’s partners
to ensure they were aligned with our
own roadmap for Modern Slavery. An
in-depth review of compliance training
was also provided. With some employees
unable to complete their usual work due
to the impact of COVID-19, Smith+Nephew
took the opportunity to roll out training
to its employees on compliance and
Smith+Nephew’s code of conduct.

In addition, our Chief HR Officer was
able to share the high level results of
the Gallup survey, discussed further
on page 28 and the actions from that
survey. She also provided an insight
into how employees and stakeholders
were living the Smith+Nephew culture
during COVID-19.

Sustainability has been a focus for
the Committee during 2020 and this
will continue in 2021 with reporting
in-line with the TCFD framework being a
focus for 2021 for our Audit Committee.
The President of Global Operations,
responsible for Sustainability and Director
of Sustainability provided updates on
the Sustainability Engagement Plan and
priorities or areas of focus by investors
and customers. The sustainability
strategy, including performance against
its 2020 targets was also reviewed by
the Committee. The impact of COVID-19
had meant some of these targets were
yet to be met, but good progress has been
made in the last year and monitoring
the performance of the sustainability
strategy will be an area of focus for
the Committee during 2021.

Smith+Nephew Annual Report 2020

Oversight of quality
& regulatory matters
Product safety and effectiveness 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 received summary reports and
provided oversight regarding the general
quality and regulatory activities of our
business. At each meeting, we received a
report on quality and regulatory matters
from the Chief Quality & Regulatory
Affairs Officer.

We reviewed the results of external
regulatory inspections and audits
conducted by the FDA and other
regulatory agencies. We also reviewed
results of internal quality audits and key
performance metrics associated with
critical quality and regulatory compliance
processes. We received reports regarding
work being undertaken to prepare our
manufacturing and design sites for future
inspections, and also received updates on
the important efforts to ensure compliance
with the EU Medical Device Regulation.
During the year we also reviewed progress
in areas of focus such as vigilance
reporting, acquisition integrations, global
regulatory agency interactions and
improvements to the Global
Quality Framework.

Oversight of ethics & compliance
The sustainability of our business
depends on ‘Doing the right thing’.
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 & 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
approval of consulting services and grants
and fellowships. For distributors and other
high risk third parties, our programme
includes screening, contracts with
compliance terms, compliance training
and certification, 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 also oversee and receive
updates on the Company’s
Privacy programme.

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.

Oversight of culture
During 2020, the Company built on its
core purpose of Life Unlimited, and with
this, supporting culture pillars of Care,
Collaboration and Courage. Together
with our new strategic imperatives,
these have created greater alignment
across our business and stronger
understanding by employees of their
role in supporting our collective success.

The Internal Audit department will now
embed an assessment of culture into
its reports as a further input of
the Committee.

The Committee was provided with
regular updates from the Chief HR Officer
throughout 2020 on culture. From Q2 2020,
this included updates on the impact of
COVID-19 upon our employees, customers
and suppliers. The Chief HR Officer outlined
the communication methods and
messaging used by management to these
key stakeholders, who were informed and
engaged during this unprecedented time.
Live global employee webcasts continued,
led by our Chief Executive Officer and
members of the executive team, were
welcomed by employees. The Committee
was given an overview of their content.

Our 2020 Gallup global employee survey
results were shared with the Committee.
These results, which allow Smith+Nephew
to benchmark against similar companies in
our industry, showed marked improvement
over the previous year indicating improved
levels of engagement across the Company.

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The Board and management are proud of
these results. Together with the Board/
employee listening sessions conducted
during the year, the survey results give
the Committee useful information from
the employee perspective. From the
Board/employee listening sessions,
the Committee concluded that:

– Employees have a strong affinity

with the business, Company, purpose
and culture pillars.

– Care and Collaboration were well
understood but more work could
be done on embedding Courage
in the organisation.

During the year it became clear that
the impact of COVID-19 would result in
a ‘new normal’ across our markets and
in workplaces worldwide. A specific
programme was initiated to determine
what this would mean for Smith+Nephew,
and the Committee was provided updates
on this regularly. This work included
requesting feedback from employees on
new working practices. The Committee
was pleased that 7,000 employees
responded to this request.

During the year, the Chief HR Officer
also informed the Committee about the
expansion of Smith+Nephew’s Inclusion
and Diversity strategy, in particular work
to acknowledge racial injustice, spurred
by events in the US. The Committee
received updates on the ‘Standing
Together@Smith+Nephew’ programme,
which focused on increasing ethnic
diversity and leadership training on
unconscious bias being addressed
through courageous conversations.

For specific issues where employees
may not feel comfortable articulating
their views we have a whistleblowing policy
and confidential line, as discussed above.

The Committee has had good oversight
on Culture, and indeed Sustainability
during this challenging year. The Board/
employee listening sessions have been
beneficial for all involved, supported by
dialogue between executive management
and Committee members. The journey
will continue and further progress will
be made in 2021.

Smith+Nephew Annual Report 2020

Our focus for 2021 will include:
– Widening the programme of Board/
employee listening sessions to
enable the Board to further monitor
and assess the corporate culture
in other jurisdictions. Some of the
newer Committee members to
be involved with such sessions.

– Monitor the actions taken by

management following 2020’s
Board/employee listening sessions.
– Review further employee feedback
gathered through the annual survey
and other mechanisms to ensure
the Board is aware of employees’
views and any actions required by
management from that feedback.
Recent survey results are discussed
on page 28.

– Continued oversight of the Company’s
sustainability programme, including
targets and monitor its roll-out to the
organisation which was impacted
by COVID-19 during 2020.
– Formulate a programme for

the Committee and Board to meet
and receive direct feedback from
our other stakeholders.

– Ensure stakeholder considerations
are further embedded into many
of the Board’s decisions.

This year was my second report to you
as Chair of the Compliance & Culture
Committee. Even though our progress
was slightly impacted by COVID-19,
we’re proud of the work undertaken
and the valuable insights shared by
our employees. These sessions provided
further colour around the Gallup global
employee survey and we enjoyed meeting
Smith+Nephew’s talent. We hope 2021
will provide an opportunity to continue
our work with stakeholders, monitor the
impressive work our management team
continues to do on culture and oversee
the attainment of key milestones with
our sustainability programme.

Marc Owen
Chair of the Compliance
& Culture Committee

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Audit, Risk and Control continued

Compliance & Culture
Committee report
continued

Sustainability
We regularly review management’s
sustainability programme to ensure
alignment with our stakeholders’
expectations and monitor management’s
actions taken against our targets.

In April, the Committee was updated
on Smith+Nephew’s slightly altered
products targets:

– We changed 30% recycled content
in ‘all’ packaging materials to 30%
recycled content in ‘non-sterile’
packaging materials based on the
ISO standard for medical device
packaging; and

– We added a target around sustainable
sourcing. We were also provided
with an in-depth comparison of our
investor and customer priorities and
our strategy and targets and how
these are connected.

In October, the Committee reviewed
how Smith+Nephew’s sustainability
strategy ties into Grow + Together +
Effectively through our strategic
imperative of Becoming the Best
Owner and our culture pillars.

In addition detailed actions taken towards
reaching Smith+Nephew’s sustainability
targets, an update on a pilot safety
programme in Commercial, with highlights/
additional actions in progress were also
monitored by the Committee during 2020.

100

Smith+Nephew Annual Report 2020

Responsibilities of the
Compliance & Culture
Committee

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 Chief

Legal & Compliance Officer.

February
– Approval of the Modern Slavery Statement
for the year ended 31 December 2019.

– Received a Legal & Compliance

Report update.

April
– Noted conflict mineral report.
– Received a Legal & Compliance Report

update, including a review of the compliance
training and new effectiveness measures.

July
– Received a Legal & Compliance Report
update, including a follow up report on
the results of the Internal Audit of the
Compliance Validation Assignments (CVA)
programme.

October
– Received a Legal & Compliance Report
including, update on the progress of the
annual code of conduct certification.

Culture
– Oversight of our relationship with

stakeholders, including the employee
voice and sustainability.

– Receiving and assessing regular

functional reports and presentations
from the Chief Human Resources Officer.

February
– Received an update on the

Company’s culture.

– Noted updates from the Board/employee

listening session held at the Watford, UK site.

April
– Noted impact of COVID-19 on the

Company from a cultural perspective.

July
– Received an update on the Company’s

culture including a review of the Engagement
Survey results and noted the focus for the
next steps.

– Noted the inclusion and diversity strategy.
– Noted the actions taken by management in

relation to its stakeholders due to COVID-19,
which had been linked back to the Company
culture pillars of Care, Collaboration
and Courage.

– Received an update on how the Board

listening sessions would continue virtually
during the COVID-19 pandemic.

October
– Received Governance update on recent

developments likely to impact the work of
the Committee noting the increasing focus
on culture and purpose, climate change and
sustainability and stakeholder engagement.
– Received an update on the Company culture

and roadmap.

– Addressed next steps in Company’s

employee engagement plan.

– Update on three virtual Board/employee
listening sessions with members of the
Committee held in Germany, EMEA
and APAC.

During 2021, we
will develop ways
of listening to other
stakeholders as well
as our employees.”

Marc Owen
Chair of the Compliance
& Culture Committee

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Quality and Regulatory
Affairs (Q/RA)
– 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 & Regulatory
Affairs Officer.

February
– Reviewed Quality & Regulatory report
noting status of various Quality and
Regulatory metrics and initiatives.

April
– Reviewed Quality & Regulatory report
noting status of various quality and
regulatory metrics and initiatives including
updates on audit results, EU MDR.

July
– Reviewed Quality & Regulatory report
noting status of various quality and
regulatory metrics and initiatives.

October
– Reviewed the Global Quality & Regulatory

report, including an update on the impact of
Brexit and the MHRA framework guidance.

Sustainability
– Overseeing the sustainability

strategy and reviewing targets.
– Receiving and assessing regular
functional reports from the
President Operations & GBS.

February
– Received an update on the Company’s

sustainability framework.

April
– Received an update on sustainability.

October
– Reviewed sustainability strategy,

including purpose, vision and metrics.

Other Matters
February
– Approved updated Terms of Reference.

July
– Noted the appointment of Angie Risley
on 8 April 2020 and Bob White on
27 July 2020 to the Committee.

101

Smith+Nephew Annual Report 2020

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Stakeholder statement

Our approach
to stakeholders

Directors’ duties
In accordance with section 172 of
the Companies Act 2006 and the UK
Corporate Governance Code 2018,
the Board considers the potential impact
on the Company’s key stakeholders
and takes their views and interests into
account when making decisions. All
Board papers requiring a Board decision
include a section discussing the potential
impact on our key stakeholders and
how that decision links into our business
model and strategic imperatives where
appropriate. The Board also takes
the opportunity to engage with our
stakeholders, as appropriate. Whilst this
has been challenging during 2020 due
to the COVID-19 pandemic, virtual
arrangements have been made where
possible. Direct engagement with our
stakeholders supplements the information
provided in formal Board presentations and
enriches the context for our decisions.

Investors

Our equity investors are the owners of our business and it is important for us to understand their perspectives
on capital allocation and how the Company is run.

Areas of interest
– Strategy.
– Performance.
– Dividend.
– Leadership.
– Succession planning.
– Remuneration.

How we engage
– The Chair and Non-Executive

Directors are available to meet
with investors physically or
virtually on request.

– The Board receives reports on

meetings taking place between
investors and Board members
and also reviews significant
changes to the share register
at each Board meeting.

– Board members receive regular

copies of analyst reports.
– The Chief Executive Officer
and Chief Financial Officer
meet with investors.

2020 Highlights
– Executive Directors held 81 meetings with investors

representing 51.72% of the Company’s Share Capital.
47 of these meetings were held virtually. Main topics
for discussion related to performance throughout the
COVID-19 pandemic and strategies for recovery.

– Roberto Quarta and Marc Owen met with shareholders.
Their discussions included topics such as ESG, culture,
product quality, business ethics, cybersecurity, climate change,
governance and Board changes. We have seen increased
interest from shareholders in stakeholder engagement
and Board oversight of such matters.

– Unable to meet retail shareholders at 2020 AGM due to

COVID-19 pandemic and therefore provided opportunity for
shareholders to submit questions ahead of the meeting, which
were addressed in an audio call following the formal meeting.
– We welcomed bond investors as new investors at the time
of our bond issue in October 2020. In the lead up to this
bond issue, members of management, including the Chief
Financial Officer, met virtually with a potential 102 bond
investors through 11 group meetings.

– Continued to pay dividends in spite of COVID-19 impact

upon our business. Only paid following rigorous stress testing,
but considered important to our shareholders, whilst balancing
against the needs of all our stakeholders.

2021 Actions
– The Board will continue to be available to meet with shareholders. Please contact the Company Secretary,

if you have matters you wish to raise with the Non-Executive team.

– The 2021 Annual General Meeting will be held as a hybrid meeting. Shareholders are discouraged from

attending in person due to ongoing concerns around the COVID-19 pandemic, but the meeting will be live
streamed, enabling shareholders to attend, vote and ask questions remotely, in-line with the guidance
from the FRC and feedback from shareholders.

227 Shareholder
information

102

Smith+Nephew Annual Report 2020

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Employees

Our employees are crucial to the success of the business and many of the key decisions made by the Board have
an impact on them. Our fourth strategic imperative is to strengthen talent and capability. It is therefore important
for us to understand the employee perspective and take their views into account. We believe that an engaged
workforce is better for business.

Areas of interest
– Talent.
– Engagement with purpose of
Life Unlimited and our culture
pillars of Care, Collaboration
and Courage.

– Innovation.
– Society and the environment.
– Strategy.
– Customers.

How we engage
– The Board discusses results
and next steps of annual
Gallup survey.

– Updates on culture, people,

inclusion & diversity at
every Compliance & Culture
Committee meeting.
– The Board meets with

employees on-site visits,
or virtually.

– Board/employee
listening sessions.

2020 Highlights
– The Board focused on the impact of the COVID-19 pandemic

on employees’ safety and wellbeing.

– Board oversight of management’s response to ethnic diversity.
– One physical Board/employee listening session held prior

to COVID-19 related restrictions.

– Four further Board/employee listening sessions held virtually.
– Significant improvement in Gallup survey results.

2021 Actions
– Additional Board/employee listening sessions, returning to physical meetings as soon as practicable.
– Continued monitoring of management actions relating to culture, inclusion & diversity, with specific focus

on the management response on ethnic diversity.

98 Compliance &

Culture Committee

28 People

Engaging with
our Employees

» Compliance &

Culture Committee
page 98
» People page 28

In February, Marc Owen visited
our Head Office in Watford, UK and
met with a number of employees.
He discussed the Company
purpose with employees and
listened to how the three culture
pillars were embedded. He also
toured our Expert Connect Centre,
where we train surgeons and sat
in on a number of customer
service calls.

Due to the COVID-19 pandemic,
we held virtual Board/employee
listening sessions. Marc Owen
hosted virtual meetings with
employees across the
APAC region and from the DACH
(Germany, Austria, Switzerland)
region.

Vinita Bali also hosted a virtual
session with EMEA employees.

In each of these sessions, employees
were interested to learn about the
role of the Board and to talk about
the issues, which interested them
including: inclusion & diversity;
and the impact of COVID-19.

Marc Owen hosted a virtual
session with employees in Memphis,
where the main focus was on
our Standing Together initiative.

These discussions give the
Board greater insight into what
is happening in the Company,
a hands-on understanding as
to how well the culture pillars,

particularly Care and Collaboration,
are being embedded across the
organisation and gives us the
employee context for when we later
make decisions which will impact
our employees. These discussions
have not led to specific decisions
at Board level, but have added a
new perspective to our discussions
and highlighted the need for
increased focus on the culture
pillar of Courage. In addition, it has
provided an opportunity for our
employees to better understand the
role of the Board and reinforces the
Board’s commitment to our culture
pillars and connects the Board
directly with our employees and
what is important to them.

Board/employee
listening sessions give
us additional insight into
what is happening in
the Company and adds
a new perspective to the
Board presentations.”

Marc Owen
Chair of Compliance &
Culture Committee

103

Smith+Nephew Annual Report 2020

Stakeholder statement continued

Customers and suppliers

Our business model creates value through customer centricity. The better we understand the needs of
our customers, the better we are able to serve them and this helps to grow our business. Working in partnership
with our suppliers ensures we have the right resources to support this growth.

Areas of interest
– Acting in partnership together,
supporting their needs and
responding to their requirements.

– Acting ethically and fairly.
– Ensuring product quality,

compliant with regulations.

– Prompt and fair payment.

How we engage
– Updates on product

quality, regulatory matters
and complaints.

– Updates on ethical and
compliance matters
and complaints.

2020 Highlights
– The Board and Audit Committee received updates on Brexit and
management plans to ensure as smooth a transition as possible.

– The Compliance & Culture Committee received regular

reports on the transition to EU MDR, effective 26 May 2021.
– The Board met with a leading robotics surgeon as part of an

R&D presentation on our new CORI platform.

– The Board meets with key

– Site visits and accompanying sales representatives have

customers such as surgeons and
leading hospital administrators
during site visits and virtually.

– The Board receives regular
updates on supplier and
customer relationships.
– Individual Board members

generally not been possible during 2020.

– In January 2020 Marc Owen spent a day with a Sports

Medicine sales representative in Los Angeles.

– The Compliance & Culture Committee received regular
reports on how customers were being communicated
with during the COVID-19 pandemic.

– The Board was made aware by management that

accompany sales representatives
visiting customers.

suppliers’ payments would not be delayed during the
COVID-19 pandemic.

2021 Actions
– Board will meet with more surgeons and hospitals, when physical meetings are again possible.
– Board members will resume programme of spending time with sales representatives in the field.

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98 Compliance &

Culture Committee

Our response
to COVID-19

At the beginning of the COVID-19
pandemic, the Board discussed
our response. We were clear that
putting our stakeholders first
would ensure that we got through
the crisis together:

– The health and safety of our
employees was our utmost
priority. Safe working practices
were immediately implemented
in our factories and our offices
switched to predominantly
home based working.

– We wanted to play our part
to support the fight against
COVID-19 to support our
customers and patients.
Our factory in Hull worked
on the ventilator project and
pioneered the Bump system
whilst our factory in Memphis
made face shields.

– We chose not to lay off or
furlough any employees.
Instead, we provided paid leave
for employees who are registered
healthcare professionals to
volunteer their time in healthcare
systems across the world, whilst
others were focused on training

and medical education to
prepare for recovery.

– Mindful of our shareholders,
we maintained our dividend
payment whilst suspending
the small buy-back programme
to retain cash. We also
strengthened our balance sheet
by making our first bond issue.
– We worked with and supported
if needed our suppliers to ensure
that relationships were maintained
throughout the crisis.

The Board believes that by focusing
on the needs of our stakeholders
during the crisis, we have put the
Company in the best position for
all of us to succeed after the
pandemic passes.

From day one, our response
to the COVID-19 pandemic
has been to put our
stakeholders first.”

Roberto Quarta
Chair

» You can read
about these
actions in
more detail on
pages 10–13

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Smith+Nephew Annual Report 2020

Governments and regulators

We are subject to the laws and regulations of many governments and regulators across the world and
understanding their requirements is important for us to ensure not only product safety and compliance with
relevant legislation, but in-line with our first strategic imperative to achieve the full potential of our portfolio.

Areas of interest
– Product safety.
– Compliance with local legal
regulatory requirements.

– Competition issues.
– Social and economic concerns.

How we engage
– Management is responsible

for ensuring compliance with
applicable laws and regulations
and direct engagement between
the Board and our regulators is
therefore not always appropriate.

– Updates on product quality,
regulatory matters and
complaints at every Compliance
& Culture Committee meeting.

– Updates on ethical and

compliance matters and
complaints at every Compliance
& Culture Committee meeting.

– The Chief Executive Officer

met with the UK government
and regulators.

2020 Highlights
– Marc Owen participated in a Financial Reporting Council

Research Project into approaches to workplace engagement.
– Roberto Quarta participated in a Financial Reporting Council

Research Project into Boardroom Dynamics.

– The Board considered the recommendations of the

Financial Reporting Council on Annual General Meetings
and decided to hold the 2021 meeting as a hybrid meeting.

– The Board supported management’s decision to work

with the UK government developing ventilators for patients
with COVID-19.

– The Board were regularly updated on the impact of Brexit
upon Smith+Nephew’s regulators and notified bodies.

2021 Actions
– The Board and the Compliance & Culture Committee will continue to maintain oversight of all matters
pertaining to the Company’s relationship with governments and regulators across the world through
regular updates.

43 Quality & Regulatory

Further information about our relationship with other stakeholders including the local communities in which we operate and our
impact on the environment and the impact of climate change on our business can be found in our Sustainability Report and on
pages 24–27. The Compliance & Culture Committee regularly receives updates on our sustainability programme and our progress
towards the achievement of our 2030 sustainability goals.

The Directors’ Report, prepared in accordance with the requirements of the Companies Act 2006 and the UK Listing Authority’s Listing
Rules comprising pages 1–137 and 227–241, was approved by the Board on 18 February 2021.

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Susan Swabey
Company Secretary

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Smith+Nephew Annual Report 2020

Remuneration

Directors’ Remuneration report

Membership

Member
from
Angie Risley (Chair) September 2017
Vinita Bali1
April 2015
Virginia Bottomley2
April 2014
September 2015
Robin Freestone
April 2014
Roberto Quarta
Bob White3
28 July 2020

Meetings
attended
6/6
6/6
6/6
6/6
6/6
3/3

1 Vinita Bali retired from the Board and the Committee

on 31 December 2020.

2 Virginia Bottomley will retire from the Board and the

Committee at the Annual General Meeting on
14 April 2021.

3 Bob White joined the Committee on 28 July 2020.

We are hugely
impressed by the
extraordinary efforts
made by employees
and management
alike across the
organisation.”

Angie Risley
Chair of the
Remuneration
Committee

Dear Shareholder,
2020 was an extraordinary year for us all.
Elsewhere in this Annual Report, you will
read about the impact that the COVID-19
pandemic had on our business during
2020 and how management and the
Board responded to that impact, placing
our employees and other stakeholders
at the heart of that response. The
Remuneration Committee has been
hugely impressed by the extraordinary
efforts made by employees and management
alike across the organisation. These efforts
have focused primarily on the safety of
our employees and our customers and
also ensured that the Company is ready
for the recovery when it comes.

During the year, the Remuneration
Committee focused on implementing
the Remuneration Policy approved by
over 97% of the shareholders who voted
at the 2020 Annual General Meeting,
whilst considering how the pay of our
Executive Directors and other employees
would be impacted by the business
performance as a result of the impact
of COVID-19.

We give a warm welcome to
Anne-Françoise Nesmes, our new
Chief Financial Officer, who joined us
in July 2020 and is already making
a positive impact.

Review of 2020 Performance
During the year, the Company performed
significantly below our expectations at the
beginning of the year. Full year revenue was
$4.6 billion, which was down -11.2% on
a reported basis, reflecting the impact of
COVID-19 on our business through the year,

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with a significant recovery in the second
half. Trading profit was $683 million,
down -42%.

The impact of COVID-19 was most
pronounced on our Orthopaedic
Reconstruction, Sports Medicine and ENT
businesses, driven by lower levels of
elective surgery. Our Advanced Wound
Management and Trauma businesses
remained more resilient. Overall, revenue
from our Orthopaedics franchise declined
-13.7%, Sports Medicine & ENT was
down -13.2% and AWM down -5.1% on
a reported basis.

Across the year, the US, our largest market
globally, was down -8.3%. Emerging
Markets revenue was down -19.4%.

While the COVID-19 pandemic was a
headwind through the year, the resilience
of our business, and the strength of our
balance sheet means that we’re able to
maintain our progressive dividend policy.

Performance against targets
We approved the financial targets for
the performance conditions for both
the Annual Bonus Plan 2020 and the
Performance Share Plan 2020 in February
before the full global impact of the
COVID-19 pandemic was realised and
inevitably our financial performance
has fallen well behind these targets.
The Remuneration Committee monitored
performance against these targets
and also against the targets under the
2018 Performance Share Programme
throughout the year. Aligning pay for
performance is an important principle
in our remuneration strategy and the
Remuneration Committee therefore
agreed that it would not be appropriate
to adjust these targets to reflect the
significantly changed market conditions.

Annual Bonus Plan
Therefore, under the Annual Bonus Plan
2020, the financial targets remained
as determined in February 2020. Both
revenue growth and trading profit margin
were below these targets and therefore
there was no payout in respect of the
financial targets under this plan.

The Remuneration Committee reviewed
the performance of the Executive Directors
against their individual business objectives.
We concluded that both Roland Diggelmann
and Anne-Françoise Nesmes had performed
against these individual business objectives,
receiving an “achieved” rating. In spite of
the significant challenges to the business
during the year, our Executive Directors
have focused the Company on preparations

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Smith+Nephew Annual Report 2020

for post-COVID-19 recovery, they have
placed the wellbeing of our employees
at the heart of their decisions and focused
on the interests of all our stakeholders.
We have seen significantly improved
results in response to our annual employee
survey and during the pandemic, our
employees have supported customers,
patients and suppliers. We have also
strengthened our balance sheet through
our bond issue and have continued to pay
dividends throughout 2020. In a normal
year, performance such as this against
these business objectives would lead
to comparable payouts.

However, the Remuneration Committee
did not consider, in a year when performance
against the financial targets has not been
met, that our Executive Directors should
receive a bonus pay-out for their business
objectives. Roland Diggelmann and
Anne-Françoise Nesmes will therefore
receive no bonus payout in either cash
or shares in respect of 2020. This decision
does not reflect our recognition of their
leadership and strong focus on preparing
the business for the recovery, but
acknowledges the need for their pay
to align with the financial experience of
our investors and other stakeholders.

The targets for the 2021 Annual Bonus
Plan have been determined by reference
to expectations for our performance
in 2021.

Performance Share Programme
Similarly, the Remuneration Committee
reviewed performance over the
past three years against the targets
determined in 2018 for the Performance
Share Programme and determined
that these awards should vest at 47%.
This reflects the performance against
the targets over the three-year period
from 1 January 2018. Neither Roland
Diggelmann nor Anne-Françoise Nesmes
was employed by the Company in an
executive role in 2018 and therefore
they did not hold these awards.

Going forward, we recognise that
the business performance in 2020 will
impact performance against the targets
under the 2019 and 2020 Performance
Share Awards. In-line with our approach
this year, we will not make any adjustment
to these targets when considering the
vesting of these awards in future years.

In early 2021, the Remuneration Committee
considered the performance framework
for the Performance Share Programme
(PSP) awards due to be made in 2021.

The Committee was satisfied that the
existing measures – indexed TSR, return
on invested capital, sales growth and
cumulative free cash flow – remain
appropriate, and is not proposing any
change to these. However, the Committee
considers that with COVID-19 continuing
to cause significant disruption and
uncertainty to our business forecasts,
it is impractical at this time to set
meaningful and robust performance
targets until there is more clarity externally.
The risk of setting targets which, with
subsequent hindsight, are either unrealistic
or insufficiently stretching is material.
As such, the Committee is proposing to
delay granting the 2021 PSP awards for a
period of up to 3 months in order that we
can have a much clearer understanding
of how COVID-19 will impact our business
over 2021–23. This will enable a more
rigorous target-setting process to
be performed.

We recognise that this means that
shareholders will be voting on the 2020
Remuneration Report without the
benefit of seeing these targets, but we
firmly believe that this approach is in
the best interests of all stakeholders,
helping to ensure we have stretching,
but realistic, three-year business targets
in place. Disclosure of the targets will
be provided to shareholders at the point
the awards are made later in 2021.

Appointment of Anne-Françoise
Nesmes as Chief Financial Officer
The Remuneration Committee approved
the remuneration arrangements for
Anne-Françoise Nesmes, who joined
the Company as Chief Financial Officer in
July 2020. Her remuneration arrangements
are in-line with the Remuneration Policy
approved by shareholders in April 2020
and no buy-out awards were required
at the time of her appointment.

The wider workforce
The Remuneration Committee maintains
oversight of the pay arrangements
for the wider workforce and has been
very pleased that no employees were
laid off or placed on furlough as a result
of the pandemic. We have learned about
the special efforts made by many of our
employees during the pandemic, either
working in our factories or volunteering
to support health systems across
the world. In-line with the provisions
of the UK Corporate Governance Code,
we continue to expand the amount
of information with which we are
presented in this area, both in terms

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of the pay frameworks in place throughout
our organisation, and also wider
employment conditions and other
factors of interest.

We have reviewed the gender pay
ratio and are delighted to note that
we continue to make positive progress
year-on-year, partly as a result of the
new initiatives focusing on inclusion
and diversity, described more fully on
pages 32 and 33. The Board and the
Remuneration Committee have monitored
these initiatives throughout the year.

Angie Risley
Chair of the Remuneration Committee

Looking forward – Remuneration
Committee’s focus for 2021
During 2021, the Remuneration
Committee intends to:

– Determine meaningful targets

for the 2021 Performance Share
Programme awards.

– Continue to monitor business

performance against the targets
under our incentive plans to ensure
they remain fit for purpose in a
changing business environment.
– Continue to oversee remuneration
arrangements across the Company
as a whole, monitoring wider
employee pay initiatives and our
gender pay performance.

107

Smith+Nephew Annual Report 2020

Remuneration continued

Directors’ Remuneration
report continued

Measures in our variable pay plans
Performance measures in Annual Bonus Plan for 2021

Revenue (40%)

Top-line growth is essential for continued progress and long-term
value creation.

Trading Margin (40%)

Trading margin focuses on profit and removes volatility.

Business Objectives
(20%)

Individual business objectives linked to the strategic imperatives
to ensure alignment across the Company.

Performance measures in our Performance Share Programme for 2021

Revenue Growth (25%)

Return on Invested
Capital (25%)

Cumulative Free Cash
Flow (25%)

Top-line growth leading to value creation is a key goal for
Smith+Nephew over the next three to five years.
Winning market shares is important to create a competitive
advantage for Smith+Nephew in driving growth.

Provides focus on long-term efficiency and profitability.
Bottom-line performance provides balance to revenue measure.
Important measure for our investors.

Essential to fund investment, pay down debt and take
advantage of market opportunities.
Important measure for our investors and forms part
of management conversations with the market.

TSR performance against
an Index (25%)

Total Shareholder Return aligns Executive reward to the
shareholder experience.
An indexed approach avoids an anomalous result which can
arise if there is a small number of extreme outliers in the Group.

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 Companies (Directors’ Remuneration Policy and Directors’
Remuneration Report) Regulations 2019 and The Companies (Miscellaneous Reporting) Regulations 2018. The Report
also meets the relevant requirements of the Financial Conduct Authority (FCA) Listing Rules.

The first part of the Report (pages 106–127) 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 14 April 2021. The Implementation Report explains how the Remuneration Policy was implemented during 2020.
The following sections have been audited by KPMG: The Single Figure Tables on Remuneration including related notes
(pages 111–121); details of awards made under the Performance Share Programme (pages 116–118); Summary of Scheme
Interests during the year (page 120); Payments to former Directors (page 121); Payments made to past Directors (page 121);
Directors interests in ordinary shares (page 122) and Senior Management Remuneration (page 127) have all been audited
by KPMG LLP.

The second part of the Report (pages 128–137) is the Directors’ Remuneration Policy Report (the Policy Report)
which was approved by shareholders at the Annual General Meeting on 9 April 2020. This Policy Report describes our
Remuneration Policy as it relates to the Directors of the Company. All payments we make in relation to Directors of the
Company will be in accordance with this Remuneration Policy. This Policy remains unchanged in 2021 and it is intended
that it will next be put to shareholders’ vote at the Annual General Meeting to be held in 2023.

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Smith+Nephew Annual Report 2020

Remuneration
implementation
report

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 14 April 2021. 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 2020
In 2020, we held six meetings and
determined two further matters by written
resolution. Each meeting was attended by
all members of the Committee. The Chief
Executive Officer and the Chief Human
Resources Officer, 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, Deloitte LLP
(Deloitte), the remuneration advisors
to the Committee.

Since the year end, we have also
reviewed the financial results for 2020
against the targets under the short-term
and long-term incentive arrangements
jointly with the Audit Committee, and
have agreed the targets for the Annual
Bonus Plan 2021.

We have also determined that there will
be no base salary increases for Executive
Directors and Executive Officers in April
2021 and that there will be no payment
to Executive Directors under the 2020
Annual Bonus Plan. We have determined
the vesting under the Performance Share
Plan 2018 and considered the impact
of COVID-19 on the total remuneration
of our Executive Directors and Executive
Officers, putting in place measures
to continue to motivate and retain
our Executive Officers. Finally, we
approved the wording of the Directors’
Remuneration Report.

Independent Remuneration
Committee advisors
During the year, the Committee received
information and advice from Deloitte.
Deloitte is a global firm, which provides
many services to the Company, including
tax and consultancy services. Deloitte
was appointed by the Committee
following a full tender process in 2018
to provide remuneration advice to the
Committee, independent from
management.

During the year, Deloitte provided advice
on market trends and remuneration
issues in general, attended Committee
meetings, assisted in the review of
the Directors’ Remuneration report,
undertook calculations relating to the
TSR performance conditions and advised
on annual bonus reviews impacted
by COVID-19.

The fees paid to Deloitte for advice
to the Committee during 2020, charged
on a time and expense basis, were
£103,225 ($132,374). Deloitte complies
with the Code of Conduct in relation to
Executive Remuneration Consulting in
the United Kingdom and the Committee
is satisfied that their advice is objective
and independent. In addition Willis Towers
Watson also provided advice to the
Committee around the measures used
as part of the Performance Share and
Annual Bonus Programme to understand
the probability of achievement of the
five financial metrics, being ‘Revenue’
and ‘Trading Margin’ metrics for the
Annual Bonus Plan and ‘Revenue growth’,
‘ROIC’ and ‘Cumulative FCF’ for the
Performance Share Plan, the fee for
which was £23,000 ($29,495).

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Smith+Nephew Annual Report 2020

Determination of
Remuneration Policy
and packages continued
July
– Reviewed the schedule of plans and targets

for awards.

– Noted share awards made to

senior executives.

– Reviewed Remuneration Strategy for

Executive Officers and senior executives.

September
– Reviewed the 2020 Remuneration

Strategy for direct reports to the Chief
Executive Officer.

– Reviewed schedule of plans and targets.
– Noted sign-on share awards and share
awards made to senior executives.

November
– Reviewed the 2020 Remuneration
Strategy for direct reports to the
Chief Executive Officer.

– Reviewed and approved objective measures

for senior executives.

– Reviewed the schedule of plans and targets.
– Noted sign-on share awards and share
awards made to senior executives
and employees.

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.

Early February
– Reviewed and approved the rules
of the Global Share Plan 2020 and
Deferred Share Bonus Plan 2020.

– Monitored adherence to shareholding
guidelines for Executive Directors,
Executive Officers and senior executives.

July
– Monitored adherence to shareholding
guidelines for Executive Directors,
Executive Officers and senior executives.

– Approved rules of the Deferred Bonus

Plan 2020.

– Monitored dilution limits and the number
of shares available for use in respect of
discretionary and all-employee share plans.

– Approved shareholding guidelines for

Executive Directors, Executive Officers
and senior executives.

Remuneration continued

Responsibilities of the
Remuneration Committee

Determination of
Remuneration Policy
and packages
– Determination of Remuneration Policy

for Executive Directors, Executive
Officers and senior executives.

– Approval of individual remuneration

packages for Executive Directors and
Executive Officers, at least annually,
and any major changes to individual
packages throughout the year.

– Consideration of remuneration policies and
practices across the Group 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,
Executive Officers and senior executives.
– Determination of pay-outs under short-
term and long-term incentive plans for
Executive Directors, Executive Officers
and senior executives.

Early February
– Approved quantum of cash payments and

awards to Executive Directors and Executive
Officers under the Annual Incentive Plan,
the Equity Incentive Programme and
Performance Share Programme.

– Agreed the targets for the short-term

and long-term incentive plans for 2020.

– Approved salary increases for 2020.
– Reviewed the schedule of plans and

targets made in 2017, 2018, 2019 and
to be made in 2020.

– Considered and approved remuneration
arrangements for the Chief Financial
Officer, subject to shareholders approval
of Remuneration Policy.

– Reviewed and approved remuneration
arrangements for Executive Directors
and Executive Officers in 2020.

– Noted the Gender Pay Gap and CEO

Pay Ratio figures.

– Approved retention awards for

Executive Officers.

– Reviewed and approved the proposed
2020 business plan for the Committee.

– Reviewed and approved Chair of the
Board and Company Secretary’s pay.

Late February
– Reviewed Executive Incentive Arrangements
for Executive Officers and senior executives.

April
– Reviewed and approved Executive

Incentive Arrangements for 2021 for
Executive Officers and senior executives.

Reporting and engagement
with shareholders on
remuneration matters
– Approval of the Directors’ Remuneration

report ensuring compliance with
related governance provisions.

– Continuation of constructive

engagement on remuneration matters
with shareholders.

Early February
– Reviewed draft Remuneration report.

Late February
– Approved Remuneration report.

July
– Reviewed matters arising from

Annual General Meeting and proposals
for Investor engagement.

– Update on the development of a dashboard.

November
– Considered and approved proposal for
shareholder engagement programme.

Other matters
Early February
– Audit Committee in attendance to answer
questions related to audited numbers
and provide assurance.

– Approved Terms of Reference.

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We seek to align
pay with financial
performance.”

Angie Risley
Chair of the Remuneration
Committee

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Smith+Nephew Annual Report 2020

Single total figure on remuneration (audited)
The amounts for 2020 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.28238 and CHF
to US$1.065417 (2019: £ to US$1.2757 and CHF to US$1.0063).

Fixed pay

Base salary
Pension payments
Taxable benefits
Annual variable pay

Annual Incentive Plan/Annual Bonus
Plan – cash element

Hybrid

Annual Incentive Plan/Annual Bonus
Plan – equity element
Long-term variable pay

Performance Share Programme

Total

Base salary
Pension payments

Taxable benefits
Annual Incentive Plan –
cash element/Annual Bonus Plan
Annual Incentive Plan –
equity element/Annual Bonus Plan
Performance Share Programme

Total

Roland Diggelmann
Appointed 1 November 2019

Anne-Françoise Nesmes
Appointed 27 July 2020

Graham Baker
Appointed 1 March 2017 (resigned
from the Board 9 April 2020)

2020

2019

2020

2019

2020

2019

$1,470,275
$176,433
$51,065

$231,449
$27,775
$6,590

$324,211
$38,905
$6,942

–

–
$1,697,773

–
$265,814

–
$370,058

–
–
–

–

–
–

$217,644
$39,367
$9,296

–

$707,252
$217,014
$29,869

$726,646

$353,627

–
$266,307

$816,640
$2,851,048

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.
the value of the cash incentive payable for performance in respect of the relevant financial year.

the value of the equity element awarded in respect of performance in the relevant financial year,
but subject to an ongoing performance test as described on page 113 of this report.
the value of shares vesting that were subject to performance over the three-year period ending
on 31 December in the relevant financial year. For awards vesting in early 2021 this is based on an
estimated share price of 1,487.50p per share, which was the average price of a share over the last
quarter of 2020. The amount of this award that will be attributable to share price increase from the date
of grant to 1,487.50p per share was £66,369 for Namal Nawana.
The value of the 2017 share awards that vested in 2020 have now been restated. Graham Baker’s 2017
Performance Share Programme vested on 9 March 2020, the actual vesting share price was 1,576.22p
per share. His total Performance Share Programme received for 2019 is restated as $816,640 using the
2019 £:US$ exchange rate of US$1.2757 for that calculation. Under the Global Share Plan 2010 rules
good leavers vest a week earlier than employees. Therefore, Olivier Bohuon’s 2017 Performance Share
Programme vested on 3 March 2020, the actual vesting share price was 1,797.50p per share. His total
Performance Share Programme remuneration received for 2019 is restated as $1,130,232, using the
same 2019 £:US$ exchange rate.
the sum of the above elements.

All data is presented in our reporting currency of US Dollars (USD). Amounts for Roland Diggelmann have been converted from Swiss
Francs and from GBP for Anne-Françoise Nesmes and Graham Baker using average exchange rates. Given currency movements in 2020,
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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Smith+Nephew Annual Report 2020

Remuneration continued

Remuneration implementation report continued

Fixed pay

Base salary

Executive base salaries are usually reviewed in February each year, with any changes to take effect from 1 April. It was agreed
upon Roland Diggelmann’s appointment as Chief Executive Officer on 1 November 2019 that his base salary would be CHF1,380,000
and no review of that base salary would take place until 2021.

Graham Baker’s base salary increased by 2% to £568,277 with effect from 1 April 2020. He resigned from the Company on
30 April 2020.

Anne-Françoise Nesmes was appointed Chief Financial Officer on 27 July 2020 and received a base salary of £580,000.

In February 2021, we reviewed the base salaries of the Executive Directors, and determined that there would be no change to their
base salaries. This decision aligns to our approach across the entire Company, except for employees in lower paid roles, China and certain
countries, where statutory increases are mandatory. These employees will receive salary increases in line with local rates of inflation.

Pension payments

Roland Diggelmann participates in the Swiss Profond pension plan. He is employed under a Swiss contract, which is where he is
domiciled. During 2020, total Company pension contributions for Roland amounted to CHF165,600, which is equivalent to 12%
of his base salary.

Anne-Françoise Nesmes receives a salary supplement of 12% of basic salary to apply towards her retirement savings, in lieu of
membership of one of the Company’s pension schemes. This is in-line with the pension arrangement for the wider UK workforce.

Graham Baker received a salary supplement of 20% of his basic salary, which totalled £30,698 between 1 January 2020 and
9 April 2020 when he was a member of the Board.

Benefits

In 2020, our Executive Directors, Roland Diggelmann, Anne-Françoise Nesmes (and Graham Baker for the period he served during 2020)
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. Each Executive Director received health cover for themselves and their families, a car
allowance and financial consultancy advice. The same arrangements will apply in 2021 for Roland Diggelmann and Anne-Françoise
Nesmes. The following table summarises the value of benefits in respect of 2019 and 2020.

Health cover
Car and fuel allowance
Financial consultancy advice

2020

CHF6,893
CHF32,400
£7,175

Roland Diggelmann

2019

CHF1,149
CHF5,400
–

Anne-Françoise Nesmes
Appointed 27 July 2020

Graham Baker
Resigned on 9 April 2020

2020

£444
£4,969
–

2019

–
–
–

2020

£356
£5,915
£978

2019

£1,318
£21,052
£1,044

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Smith+Nephew Annual Report 2020

Annual incentives

Annual Bonus Plan 2020

Following the approval of the Remuneration Policy at the 2020 Annual General Meeting, the maximum opportunity under the Annual
Bonus Plan for Executive Directors is 215% of base salary, subject to satisfactory performance against the performance measures
detailed below. 50% of the award is paid in cash and 50% is deferred into shares which will vest after three years.

The performance measures and weightings which applied to the Annual Bonus Plan 2020 were as follows:

Revenue
Trading Margin
Business Objectives

Weighting

40%
40%
20%

Threshold as a
percentage
of salary

Target as a
percentage
of salary

Maximum as a
percentage
of salary

12.8%
12.8%
6.4%

43%
43%
21.5%

86%
86%
43%

The 2020 targets for revenue and trading margin are shown below and were determined in February 2020 prior to the point at which the
COVID-19 virus became a pandemic, affecting our global business:

Revenue
Trading Margin

1 At constant exchange rates. See page 222.

Threshold

$5,279m
22.5%

Target

$5,436m
23%

Maximum

$5,592m
23.8%

Actual1

$4,590m
14.9%

The revenue target for 2020 was set by reference to our expectations for growth for the year at the beginning of 2020. Threshold was
set at 3 percentage points below target and maximum was set at 3 percentage points above target.

The trading margin target was set by reference to our expectations for growth for the year. Threshold was set at 50bps below target
and maximum was set 80bps above target.

Accordingly, the following amounts have been earned by Roland Diggelmann and Anne-Françoise Nesmes for 2020 under the Annual
Incentive Plan in respect of their financial objectives.

Roland Diggelmann
Anne-Françoise Nesmes

CHF 0
£0

As well as considering the monetary outcome of the formulaic calculation of these awards, the Committee considered that this
performance fairly represented the overall financial performance during the year.

Business Objectives
In determining performance against the Business Objectives, the Executive Directors have been assessed on the same basis as applies
to all employees across the Group using a four-point rating scale reflecting both what has been achieved and how it has been achieved.
At the beginning of the year, specific business objectives were determined relating to achievement of the corporate strategy. For 2020,
these objectives were Growth, People and Business processes as in 2019. Performance against these business objectives was considered
alongside consideration of how the Executive Director performed in respect of our culture pillars of Care, Collaboration and Courage.
This includes consideration of performance against sustainability, compliance and quality metrics. Their overall performance has been
assessed according to the extent to which the Executive Directors have met the expectations of the Board. The 20% of the Annual
Bonus Plan which is attributable to Business Objectives will be paid out as follows:

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Performance

Below expectations

Partially met expectations

In-line with expectations

Above expectations

% of base salary

Nil

6.4%

21.5%

43%

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Remuneration continued

Remuneration implementation report continued

Annual incentives continued
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 Directors 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 below sets out how Roland
Diggelmann and Anne-Françoise Nesmes have performed against the business objectives of Growth, People and Business Processes.

Roland Diggelmann

Growth

– Against target to lead execution of New Product Development
programme from ideation to successful full commercial launch
achieved significant new launches in orthopaedics (OR30◊ Dual
Mobility Hip), robotics (CORI◊), enabling technologies (INTELLIO◊),
sports medicine (HEALICOIL◊ Knotless) and ENT (Tula◊).

– Against target to deliver and integrate acquisitions to capture

valuable technology achieved acquisitions in high growth segments
of extremities (Integra’s Extremities Orthopaedics business),
ENT (Tusker) and ASCs (multiple acquisitions supporting launch
of Positive Connections programme and ARIA◊ platform).

People

Anne-Françoise Nesmes

– Against target to build understanding of customer base, portfolio

and segmentation achieved a strong understanding of our customer
base, our business, our product portfolio and our acquisition strategy.

– Against target of embedding culture pillars and purpose, and

– Against target to build understanding of and relationships with

business, including Executive Committee, Board and senior leaders
completed in-depth induction plan and achieved positive feedback.
– Against target to assess Finance and IT function to support business
most effectively completed review, identified actions and filled open
position in leadership team.

– Against target to define strategy for Finance along with 2021 priorities
achieved overall vision for the function and defined strategic priorities.

– Against target to ensure 2021 budget reflects COVID-19 related
business uncertainty achieved fiscal planning with agreement
from Executive Committee and Board.

– Against target to launch Group’s debut bond, secured $1 billion
bond issue providing attractive long-term funding to invest in
delivering strategic imperatives.

improving employee engagement as measured by the Gallup Q12,
increased cadence of employee communication, including virtual
town halls, and exceeded target for both participation and
engagement in annual employee survey.

– Against target to build a high performance executive management
team that models the culture and demonstrates proven business
results successfully filled open Chief Financial Officer and President
EMEA positions.

– Against target to drive increased gender diversity increased female
representation in senior management positions at Vice-President
and above by 7% and reduced attrition.

Business processes

– Against target to simplify our organisation and end-to-end processes
initiated New Normal programme to respond to changed employee
and customer expectations; continued operations and commercial
excellence programme to improve efficiency, delivering to plan
in 2020; and significantly enhanced sales force effectiveness training
utilising downtime during lockdown; recruited new medical education
leader and significantly increased training provision through
deployment of digital tools.

– Against target to uphold the highest standards of quality and
compliance optimised regulatory frameworks and deployed
enhanced processes and technology; enhanced compliance
programme by implementing new systems, simplified processes and
adapted monitoring to address new risks caused by the pandemic.

– Against delivering the long-term sustainability strategy targets,
progress has been made in sourcing renewable electricity and
zero waste to landfill at our largest sites in the US; on track with
recyclable and responsible sourcing packaging milestones, with
product donations and volunteering held back by COVID-19 impact.

This resulted in a calculated bonus achievement of 23% of salary
in respect of Roland Diggelmann.

This resulted in a calculated bonus achievement of 20% of salary
in respect of Anne-Françoise Nesmes.

However, the Remuneration Committee have determined that in a year when performance against the financial targets has not been
met, it would be inappropriate to pay our Executive Directors a bonus in respect of their business objectives, notwithstanding the work
they both did in 2020 to prepare the Company for recovery post-COVID-19 and their focus on our employees, customers, investors
and other stakeholders. Therefore, no annual bonus will be paid to the Executive Directors in respect of 2020.

114

Smith+Nephew Annual Report 2020

Annual Bonus Plan 2021

The maximum opportunity under the Annual Bonus Plan for Executive Directors will be 215% of base salary, subject to satisfactory
performance against the performance measures detailed below. 50% of the award will be paid in cash and 50% will be deferred into
shares which will vest after three years and which will be subject to a further two-year holding period.

The performance measures and weightings which apply to the Annual Bonus Plan 2021 are as follows:

Revenue
Trading Margin
Business Objectives

Weighting

40%
40%
20%

Threshold as a
percentage
of salary

Target as a
percentage
of salary

Maximum as a
percentage
of salary

12.8%
12.8%
6.4%

43%
43%
21.5%

86%
86%
43%

For reasons of commercial sensitivity, we are unable to disclose the precise targets for revenue and trading margin for 2021 now,
but they will be disclosed retrospectively in the 2021 Annual Report, when performance against those targets are determined.

The revenue target for 2021 is set by reference to our expectations for growth for the year. Due to the uncertainty caused by the impact
of COVID-19 we have set a wider vesting range than previous years. Threshold is set at 8 percentage points below target and maximum
is set at 8 percentage points above target.

The trading margin target is set by reference to our expectations for growth for the year. Threshold is set at 140bps below target
and maximum is set 120bps above target.

In determining performance against the Business Objectives, the Executive Directors will be assessed on the same basis as applies
to all employees across the Group using a four-point rating scale reflecting both what has been achieved and how it has been achieved.
At the beginning of the year, specific business objectives are determined relating to achievement of the corporate strategy. For 2021,
these objectives will be Growth, People and Business processes as in 2020. Performance against these business objectives will be
considered alongside consideration of how the Executive Director performed in respect of our culture pillars of Care, Collaboration and
Courage. This includes consideration of performance against sustainability, compliance and quality metrics. Their overall performance
will be assessed according to the extent to which the Executive Director has met the expectations of the Board and the 20% of the
Annual Bonus Plan which is attributable to Business Objectives will be paid out as follows:

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Performance

Below expectations

Partially met expectations

In-line with expectations

Above expectations

% of base salary

Nil

6.4%

21.5%

43%

115

Smith+Nephew Annual Report 2020

Remuneration continued

Remuneration implementation report continued

Long-term incentives

Performance Share Programme

Performance Share Programme 2018
Since the end of the year, the Committee has reviewed the vesting of conditional awards made to former Executive Directors in 2018
under the Global Share Plan 2010. Neither of the existing Executive Directors were employed as Executive Directors when the awards
were made in 2018. Vesting of the conditional awards made in 2018 was subject to performance conditions based on equal weighting
of 25% TSR, global revenue growth, cumulative free cash flow and return on invested capital measured over a three-year period
commencing 1 January 2018.

25% of the award was based on the Company’s TSR relative to two equally weighted peer groups against which the Company’s TSR
performance was measured and defined at the start of each performance period (in this case 1 January 2018) 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’). Against this peer group, the Company was 36th in a peer group of 39. Therefore
there was 0% payout against this element.

– 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. Against this peer group, the Company was
22nd in a peer group of 59. There was therefore a 170% payout against this element.

The total payout against the TSR measure was therefore 21% out of the 25% target.

25% of the award was based on Global Revenue Growth. The threshold set in 2018 was $15,346 million with a target of $15,777 million.
Over the three-year period, the adjusted revenues in Global Revenue Growth were $14,639 million. These adjustments include
translational foreign exchange and Board approved M&A. This part of the award therefore vested at 0% out of the 25% target.

25% of the award was based on cumulative free cash flow performance. The target set in 2018 was $1,810 million with maximum
at $2,046 million. Over the three-year period, the adjusted cumulative free cash flow was $1,817 million which was just above target.
These adjustments include items such as Board approved M&A and restructuring programmes and translational foreign exchange.
This part of the award therefore vested at 26% of the 25% target.

25% of the award was subject to return on invested capital (ROIC). ROIC was defined as:

Operating Profit1 less Adjusted Taxes2
(Opening Net Operating Assets + Closing Net Operating Assets)3 ÷ 2

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, IFRS 16 lease liabilities and right-of-use assets, and Cash at bank.

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The target set in 2018 was an average over three years of 12.9% with maximum at 14.1%. The adjusted average ROIC measurement
for the three years was 10.7%. These adjustments include Board approved M&A. This part of the award therefore vested at 0% of
the 25% target.

In summary therefore, the Performance Share Programme award made in 2018 will vest at 47% of target.

TSR
Global Revenue Growth
Cumulative Free Cash Flow

Return on Invested Capital

Threshold
Median
$15,346m
$1,575m

11.6%

Target
–
$15,777m
$1,810m

12.9%

Maximum
Upper Quartile
$16,251m
$2,046m

Actual
Above Median
$14,639m
$1,817m

14.1%

10.7%

Percentage
Vesting
21%
0%
26%

Neither of the existing Executive Directors were employed as Executive Directors when the awards were made in 2018.

Overall therefore, the conditional awards made in 2018 will vest at 47% of target (23.5% of maximum) on 9 March 2020. For awards
vesting in early 2021 this is based on an estimated share price of 1,487.50p per share, which was the average price of a share over the
last quarter of 2020.

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.

Performance Share Programme 2020
In accordance with the Remuneration Policy approved by shareholders at the Annual General Meeting held on 9 April 2020,
performance share awards were granted to the Executive Directors under the Global Share Plan 2020 approved by shareholders
at the Annual General Meeting in 2020 to a maximum value of 275% of salary (137.5% for target performance) measured over the
three financial years commencing 1 January 2020 against four equally weighted performance measures: Indexed TSR, return on invested
capital, sales growth and cumulative free cash flow. The performance conditions for these awards were determined in February 2020,
prior to the point at which the COVID-19 virus became a pandemic affecting our global business. The award made to Anne-Françoise
Nesmes was pro-rated to reflect her length of service in 2020. Maximum payout under each element will only be for significant
outperformance. The targets at maximum were therefore set at higher levels than in previous years. 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.

The Company’s TSR performance will be measured against two equally weighted peer groups which 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’).

– FTSE 100 constituents excluding financial services and commodities companies. 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.

TSR performance is relative to the two separate indices as follows:

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Relative TSR
Below the index
Equalling the index
8% above the index

Sector Based Peer Group
Nil
8.6%
34.4%

Award vesting as % of salary at date of grant
FTSE 100 Peer Group
Nil
8.6%
34.4%

Awards will vest on a straight-line basis between these points. The maximum has been set significantly above target reflecting the
maximum opportunity for outperformance.

117

Smith+Nephew Annual Report 2020

Remuneration continued

Remuneration implementation report continued

Long-term incentives continued

Performance Share Programme continued

Return on invested capital (ROIC) will be measured as follows for the 2020 grants:

ROIC is defined as:

Adjusted Operating Profit1 less Adjusted Taxes2
(Opening Adjusted Net Operating Assets + Closing Adjusted Net Operating Assets)3 ÷ 2

1 Adjusted Operating Profit is as disclosed in the Group income statement in the Annual Report less amortisation of acquired intangible assets.
2 Adjusted Taxes represents our taxation charge per the Group income statement adjusted for the impact of tax on items not included in Adjusted Operating Profit notably amortisation

of acquired intangible assets, 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: accumulated amortisation of acquired intangible assets,
Investments, Investments in associates, Retirement benefit assets and liabilities, Long-term borrowings, Bank overdrafts, borrowings and loans, IFRS 16 lease liabilities and right-of-use assets,
and Cash at bank.

The targets are as follows:

Return on Invested Capital (three-year average)
Below Threshold 10.5%
Threshold 10.5% (–1.5% of target)
Target 12.0%
Maximum or above 13.5% (+1.5% of target)

Award vesting as % of salary
Nil
17.2%
34.4%
68.8%

Awards will vest on a straight-line basis between these points.

Revenue growth focuses on growth in both Established Markets and Emerging Markets and the targets are as follows:

Revenue growth over three-year period commencing 1 January 2020
Below Threshold
Threshold (–2% of target)
Target – set by reference to our expectations
Maximum or above (+4% of target)

Award vesting as % of salary
Nil
17.2%
34.4%
68.8%

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 2022 Annual
Report, when the Committee will discuss performance against the target. The maximum has been set significantly above target
reflecting the increased maximum opportunity for outperformance.

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 Directors’ award 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:

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Cumulative free cash flow
Below $2,057m
$2,057m (–10% of target)
$2,285m
$2,742m or more (+20% of target)

The maximum has been set significantly above target reflecting the maximum opportunity for outperformance.

Award vesting as % of salary
Nil
17.2%
34.4%
68.8%

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Smith+Nephew Annual Report 2020

Performance Share Programme 2021
In early 2021, the Remuneration Committee considered the performance framework for Performance Share Programme awards due to
be made in 2021. The Committee was satisfied that the existing measures – relative TSR, ROIC, sales growth and cumulative free cash
flow – remain appropriate, and is not proposing any change to these. However, the Committee considers that with COVID-19 continuing
to cause significant disruption and uncertainty to our business forecasts, it is impractical at this time to set meaningful and robust
performance targets until there is more clarity externally. The risk of setting targets which, with subsequent hindsight, are either
unrealistic or insufficiently stretching is material. As such, the Committee is proposing to delay granting the 2021 Performance Share
Programme awards for a period of up to three months, from the usual March grant date, in order that we can have a much clearer
understanding of how COVID-19 will impact our business over 2021–23. This will enable a more rigorous target-setting process to
be performed.

TSR performance
The Company’s TSR performance will be measured against two equally weighted peer groups which 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 the same sector-based peer group as 2019 and 2020.

– FTSE 100 constituents excluding financial services and commodities companies. 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.

ROIC

ROIC will be defined as:

Adjusted Operating Profit1 less Adjusted Taxes2
(Opening Adjusted Net Operating Assets + Closing Adjusted Net Operating Assets)3 ÷ 2

of acquired intangible assets, interest income and expense, other finance costs and share of results of associates.

The targets will be disclosed at the time the Performance Share Programme awards are made.

Revenue growth will be determined at the time the Performance Share Programme awards are made and will be disclosed in the 2023
Annual Report, when the Committee will discuss performance against the target. It is not possible to disclose precise targets at the time
of grant, as this will give commercially sensitive information to our competitors concerning our growth plans and would be potentially
price-sensitive.

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Smith+Nephew Annual Report 2020

Remuneration continued

Remuneration implementation report continued

Long-term incentives continued

Performance Share Programme continued

Cumulative free cash flow will be disclosed at the time the performance share awards are made.

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 prior to 9 April 2020 and under the Global Share Plan 2020 after
9 April 2020. The performance conditions and performance periods applying to these awards are detailed below:

Roland Diggelmann
Anne-Françoise Nesmes

Date granted

21 May 2020
21 December 2020

Number of ordinary shares
under award at maximum

193,072
42,726

Date of vesting

21 May 2023
21 December 2023

Summary of scheme interests awarded during the financial year (audited)

Director
Annual Equity Incentive Programme award
Performance Share Programme award at maximum
(see pages 117–118)

Roland Diggelmann

Number
of shares
–

Face value
–

Anne-Françoise Nesmes2
Number
of shares
–

Face value
–

Number
of shares
16,601

Graham Baker1, 3

Face value
£278,564

193,072

£3,207,891

42,726

£688,529

–

1 Annual Equity Incentive Programme awards granted in 2020 were based on performance for 2019.
2 Anne-Françoise Nesmes was appointed as Chief Financial Officer on 27 July 2020. Due to an administrative oversight, a Performance Share Programme award was not made to Anne-Françoise

Nesmes on 13 August 2020, as had been the original intention (13 August 2020 being the quarterly date on which share awards were made to certain other employees). When this administrative
oversight came to light in December 2020, a Performance Share Programme award was made to Anne-Françoise Nesmes in respect of the same number of shares she would have received had
the award been made on the correct date in August 2020, calculated by reference to the closing share price of 1,611.5p on 12 August 2020. This was because the share price on 18 December
2020 (closing share price the day before the date of grant under the Global Share Plan 2020 rules) of 1,534.5p would have resulted in her receiving more shares than she would have done in
August 2020. The Performance Share Programme award made to Anne-Françoise Nesmes has been pro-rated to reflect her length of service in 2020.

3 Graham Baker resigned from the Board on 9 April 2020. Any outstanding awards under the Performance Share Programme or Equity Incentive Programme lapsed upon his leaving date.

Please see Policy Table on pages 130–132 for details of how the above plans operate. Following approval of the 2020 Remuneration Policy,
no further Annual Equity Incentive Programme awards will be granted. The number of shares is calculated using the closing share price
on the day before grant, which for the Annual Equity Incentive Programme awards granted on 9 March 2020 was 1,678.0p and for
the Performance Share Programme award granted on 21 May 2020 was 1,661.5p.

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Single total figure on remuneration
Chair and Non-Executive Directors (audited)

Director
Roberto Quarta
Vinita Bali
Virginia Bottomley
Erik Engstrom
Robin Freestone
Katarzyna Mazur-Hofsaess2
Rick Medlock3
Marc Owen
Angie Risley
Bob White4

2020

Basic annual fee1
2019
£427,069 £420,240
$129,780 $129,780
£69,500
£69,500
£69,500
£69,500
£69,500
£69,500
–
£10,500
–
£52,377
$129,780 $129,780
£69,500
£69,500
–
$89,780

Committee Chair/
Senior Independent
Director fee
2019
–
–
–
–
£20,000
–
–
$25,039
£20,000
–

2020
–
–
–
–
£20,000
–
£6,667
$35,000
£20,000
–

Intercontinental
travel fee
2019

2020
–
$7,000
–
–
–
–
–
$7,000
–
–

2020

Total
2019
– £427,069 £420,240
$49,000 $136,780 $178,780
£73,000
£69,500
£73,000
£69,500
£93,000
£89,500
–
£10,500
–
£59,044
$42,000 $171,780 $196,819
£89,500
£89,500
–
$89,780

£3,500
£3,500
£3,500
–
–

–
–

1 The basic annual fee includes shares purchased for the Chair and Non-Executive Directors in lieu of part of the annual fee, details of which can be found on the table below.
2 Katarzyna Mazur-Hofsaess was appointed as a Non-Executive Director with effect from 1 November 2020.
3 Rick Medlock was appointed as a Non-Executive Director with effect from 9 April 2020. He was appointed as Chair of the Audit Committee on 1 September 2020.
4 Bob White was appointed as a Non-Executive Director with effect from 1 May 2020.

Chair and Non-Executive Director Fees
In February 2021 the Committee reviewed the fees paid to the Chair and determined that with effect from 1 April 2021 the fees
paid would remain unchanged:

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 Chair

£428,645 of which £107,161 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 to former directors (audited)
Share awards granted to Graham Baker lapsed on his resignation from the Company on 30 April 2020. These included outstanding
shares awarded under the Performance Share Programme, Equity Incentive Programme and ShareSave options:

Year Awarded
2018
2019
2020

Performance
Share Programme
Number of Shares
75,058
70,960

Lapsed awards/options
ShareSave
Options
Number of Options
2,734

Equity Incentive
Programme
Number of Shares
7,245
12,096
16,601

Payments made to other past Directors (audited)
No payments were made to other past Directors in 2020.

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 135 of the Policy Report.

Outside directorships
Roland Diggelmann is a Non-Executive Director of Accelerate Diagnostics Inc. His remuneration for this role is paid entirely in stock options.
On 1 April 2020, he received a stock option in respect of 13,779 shares which vested and became exercisable in 12 equal monthly
instalments from 1 May 2020 at an option price of $8.33.

Anne-Françoise Nesmes is a Non-Executive Director of Compass Group plc and received £35,868 in respect of this appointment
for the period 27 July 2020 to 31 December 2020.

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Remuneration continued

Remuneration implementation report continued

Directors’ interests in ordinary shares (audited)
Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:

Ordinary shares
Share options
Performance Share Programme awards
Equity Incentive Programme awards

1 January
2020
6,668
–
–
–

31 December
2020
18,168
–
193,0725
–

Roland Diggelmann
12 February
20212
18,1684
–
193,0725
–

Anne-Françoise Nesmes1
12 February
20212
–
–
42,7265
–

31 December
2020
–
–
42,7265
–

27 July
2020
–
–
–
–

1 January
2020
14,205
2,7346
225,1846
32,6286

Graham Baker
9 April
20203
42,605
2,7346
146,0186
35,9426

1 Anne-Françoise Nesmes was appointed to the Board as Chief Financial Officer on 27 July 2020.
2 The latest practicable date for this Annual Report.
3 Graham Baker resigned from the Board on 9 April 2020.
4 The ordinary shares held by Roland Diggelmann on 12 February 2021 represent 25.53% of his base annual salary.
5 These share awards are subject to further performance conditions before they may vest, as detailed on pages 117–118.
6 Graham Baker’s Performance Share Programme awards of 75,058 (at maximum) granted on 7 March 2018 and 70,960 (at maximum) granted on 7 March 2019 lapsed in full upon his resignation.
Furthermore, Graham Baker’s Equity Incentive Programme awards of 7,245 granted on 7 March 2018, 12,096 granted on 7 March 2019 and 16,601 granted on 9 March 2020 lapsed in full upon
his resignation. His 2,734 share options granted on 18 September 2018 under his ShareSave plan also lapsed upon his resignation.

The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company.

Beneficial interests of the Chair and Non-Executive Directors in the ordinary shares of the Company are as follows:

Director
Roberto Quarta4
Graham Baker5
Vinita Bali4, 6
Virginia Bottomley
Roland Diggelmann
Erik Engstrom
Robin Freestone
Katarzyna Mazur-Hofsaess
Rick Medlock
Anne-Françoise Nesmes
Marc Owen4
Angie Risley
Bob White4

1 January 2020
(or date of
appointment
if later)
59,429
14,205
7,394
19,252
6,668
15,973
15,951
–
–
–
7,508
4,541
–

31 December 2020
(or date of
retirement
if earlier)
63,319
42,605
7,672
19,546
18,168
16,200
16,178
–
249
–
7,786
4,769
6,270

12 February
20211
63,319
N/A
N/A
19,546
18,168
16,200
16,178
–
249
–
7,786
4,769
6,270

Shareholding as %
of annual fee2,3
233.58
N/A
N/A
442.25
25.53
366.54
366.04
–
5.63
–
132.11
107.90
106.38

1 The latest practicable date for this Annual Report.
2 Calculated using the closing share price of 1,572.5p per ordinary share and $44.04 per ADS on 12 February 2021, and an exchange rate of £1:$1.38.
3 All Non-Executive Directors in office since 1 January 2020 held the required shareholding during the year. Due to their length of service some Non-Executive Directors have not met their

shareholding requirements, but this will continue to be monitored in accordance with the Remuneration Policy.

4 Roberto Quarta, Vinita Bali, Marc Owen and Bob White hold some of their shares in the form of ADS.
5 Graham Baker resigned from the Board as an Executive Director with effect from 9 April 2020.
6 Vinita Bali retired as a Non-Executive Director with effect from 31 December 2020.

The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.

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Chief Executive Officer remuneration compared to employees generally
The percentage change in the remuneration of the Chief Executive Officer between 2019 and 2020 compared to that of employees
generally was as follows:

Chief Executive Officer
Chief Financial Officer
Roberto Quarta
Virginia Bottomley
Erik Engstrom
Robin Freestone
John Ma
Katarzyna Mazur-Hofsaess
Rick Medlock
Marc Owen
Angie Risley
Bob White
Average for all employees

Base salary %
change
2020
0%
4%1
2%
0%
0%
0%
N/A
N/A
N/A
0%
0%
NA
3.3%

Benefits
% change
2020
0%
-57%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

Annual cash
bonus %
change
2020
0%
-100%2
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

1 Represents the difference between the annual salary of Graham Baker for 2019 and Anne-Françoise Nesmes for 2020.
2 Represents the difference in the annual cash bonus for Graham Baker for 2019 and Anne-Françoise Nesmes for 2020.

The average cost of wages and salaries for employees generally decreased by 5.9% in 2020 (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 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. Executive Directors participate in the same senior executive incentive plans, (currently the Annual Bonus
Programme and the Performance Share Programme) as other Executive Officers and senior executives. The level of award reflects
the differing seniority of participants and the market the Executive is located. Performance conditions for the Performance Share
Programme are the same for Executive Directors and Executive Officers. Executives however have only three measures with no
reference to ROIC. For the Annual Bonus Plan (ABP) Performance Measures apply to all Executives consistently however weighting
between Financials and Non-Financials differs based on the position.

Chief Executive Officer pay ratio
The regulations provide three options which may be used to calculate the pay for the employees at the 25th percentile, median
and 75th percentile. We have used option A (as set out in the Companies (Miscellaneous Reporting) Regulations 2018), following
guidance issued by some proxy advisers and institutional shareholders. The ratio has been calculated by comparing against the
full-time equivalent pay of all UK employees within the Group including both our entities Smith & Nephew UK Limited and
T.J.Smith and Nephew, Limited.

Option A calculates pay for all employees on the same basis as the single figure for remuneration calculated for Executive Directors.
The period for which the employee pay has been calculated under Option A is the calendar year 2020. The single figure for remuneration
for each employee includes earned salary, annual incentive, allowance, pension and benefits for 2020. Part-time employees have been
excluded for the purpose of calculations.

Comparisons have been made with employees at median (P50), lower (P25) and upper (P75) quartiles. We have used the actual
salaries paid to our employees in UK. The values were listed lowest to highest and three percentiles were identified. We are confident
this methodology gives us the most reflective pay at the median. 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.

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Smith+Nephew Annual Report 2020

Remuneration continued

Remuneration implementation report continued

The table below sets out the ratio at the median, lower and upper quartiles:

Year
2018 – voluntary

2019

2020

P25 (lower
quartile)
142:1

116:1

42:1

P50
(median)
95:1

81:1

29:1

P75 (upper
quartile)
59:1

51:1

19:1

In 2020 the ratio reduced due to impact of COVID-19 on bonuses paid to the Chief Executive Officer.

The table below provides the total pay figure used for each quartile employee, and the salary component within this.

Component
Salary
Total pay

CEO1
$1,470,275
$1,697,773

P25 (lower
quartile)
$40,201
$40,201

P50
(median)
$52,668
$57,880

P75 (upper
quartile)
$64,054
$91,178

1 Roland Diggelmann is paid in Swiss Francs and this figure was converted into US Dollars for comparative reasons using CHF to US$1.065417.

Relative importance of spend on pay
When considering remuneration arrangements for our Executive Directors and employees as a whole, the 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 2020 and 2019 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 buy-back1
Total Group spend on remuneration

For the year to
31 December
2020
$448m
$328m
$16m
$1,392m

For the year to
31 December
2019
$600m
$318m
$63m
$1,435m

% change
-25%
+3%
-75%
-3%

1 Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. The share buy-back programme for 2020 has been suspended in light of the

COVID-19 pandemic and remains under review.

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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.

Ten-year Total Shareholder Return
(measured in UK Sterling, based on monthly spot values)

450

400

350

300

250

200

150

100

1 Jan 2011
Source: DataStream

1 Jan 2012

1 Jan 2013

1 Jan 2014

1 Jan 2015

1 Jan 2016

1 Jan 2017

1 Jan 2018

1 Jan 2019

1 Jan 2020

1 Jan 2021

Smith & Nephew plc

FTSE 100

However, as we also compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 116),
when considering TSR performance in the context of the Global Share Plan 2010 and Global Share Plan 2020, we feel that the following
graph showing the TSR performance of this peer group is also of interest.

Ten-year Total Shareholder Return
(measured in US Dollars, based on monthly spot values)

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400

350

300

250

200

150

100

1 Jan 2012

1 Jan 2011
Source: DataStream
Medical Devices comparators that are still trading for awards made since 2012

1 Jan 2013

1 Jan 2015

1 Jan 2014

1 Jan 2016

Smith & Nephew plc

Medical Devices – Median

1 Jan 2017

1 Jan 2018

1 Jan 2019

1 Jan 2020

1 Jan 2021

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Remuneration 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 10 years:

Year
2020
2019
2019
2018
2018
2017
2016
2015
2014
2013
2012
2011
2011

Chief Executive Officer
Roland Diggelmann
Roland Diggelmann1
Namal Nawana2
Namal Nawana
Olivier Bohuon3
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon
Olivier Bohuon4,5
David Illingworth6

Long-term incentive vesting rates
against maximum opportunity

Single figure of total
remuneration $
$1,697,773
$265,8147
$4,489,3747
$2,883,632
$2,383,582
$5,116,689
$3,332,850
$5,342,377
$6,785,121
$4,692,858
$4,956,771
$7,442,191
$3,595,787

Annual Cash
Incentive payout
against maximum %
09
–
718
69
63
61
30
75
43
84
84
68
37

Performance
shares %
–
–
–
–
46.5
54
8
33.5
57
0
–
–
27

Options %
–
–
–
–
–
–
–
–
–
–
–
–
27

1 Appointed Chief Executive Officer on 1 November 2019.
2 Appointed Chief Executive Officer on 7 May 2018 and resigned on 31 October 2019.
3 Retired as Chief Executive Officer on 7 May 2018.
4 Appointed Chief Executive Officer on 1 April 2011.
5
6 Resigned as Chief Executive Officer on 1 April 2011.
7 Prior years are restated to reflect amounts not known at the date of signing the previous Annual Report.
8 Calculated as 106.7% for Namal Nawana (disclosed on page 108 of the Company’s Annual Report for the year ended 31 December 2019), divided by the maximum potential payout of 150%.
9 Due to the impact of COVID-19 upon the Chief Executive Officer’s financial targets, a cash award of 0% was achieved.

Includes recruitment award of €1,400,000 cash and a share award of over 200,000 ordinary shares with a value of €1,410,000 on grant.

Gender Pay ratio
In 2020, the Committee reviewed our UK Gender Pay ratio. It was noted that today our Gender Pay gap is greater than we would like
it to be, but we have seen an improvement in our mean and median pay gap in the UK. The mean pay gap has reduced from 28%
in 2019 to 22% in 2020 and the median pay gap from 18% to 16% for the same period. We shall continue to review these figures.

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 her salary. Executive Directors have five years from their appointment within which to meet that holding requirement.
Due to the tenure of the Executive Directors neither have met their shareholding requirements, but this will continue to be monitored
in accordance with the Remuneration Policy.

Post cessation shareholding requirements
In addition, Executive Directors are expected to hold vested shares for up to two years post-vesting of the Performance Share
Programme and Deferred Bonus Shares. They are expected to hold up to their shareholding requirement only. These shares are held
in the Vested Share Account provided by the Company’s share plan administrator.

Statement of voting at Annual General Meeting
At the Annual General Meeting held on 9 April 2020, votes cast by proxy and at the meeting and votes withheld in respect of the votes
on the Directors’ Remuneration report and Directors’ Remuneration Policy are noted below:

Resolution
Approval of the Directors’
Remuneration Policy
Approval of the Directors’
Remuneration report
(excluding policy)

Votes for

% for

Votes
against

% against

Total
votes validly cast

Votes
withheld

676,749,445

97.71

15,843,720

2.29

692,593,165

352,762

681,744,061

98.43

10,850,266

1.57

692,594,327

351,642

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Senior management remuneration (audited)
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 69–77.

Compensation paid to senior management in respect of 2018, 2019 and 2020 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

2020

2019

2018

$12,369,000
–

–
$1,753,000

$17,020,000
$5,559,000

–
$1,564,000

$15,935,000
$433,000

–
$1,570,000

As at 12 February 2021, senior management owned 367,570 shares and 10,934 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
12 February 2021 by members of senior management are as follows:

Equity Incentive Programme awards
Performance Share Programme awards at maximum
Conditional Share Awards under the Global Share Plan 2010
Conditional Share Awards under the Global Share Plan 2020
Options under Employee ShareSave plans

Share awards
granted during
the year
155,849
524,332
240,829
13,120
437

Total share
awards held as at
12 February
2021
223,850
838,346
295,137
–
1,162

The Smith+Nephew Employee Share Trust
Note 19.2 of these accounts states the movement in Treasury Shares and the Trust during 2020. No more shares are held within
the Trust than are required for the next six months’ of anticipated vestings. Any unvested shares held in the Trust are not voted
upon at shareholder meetings. No more than 5% of the issued share capital at 31 December 2020 is held within the Trust.
At 31 December 2020 shares were held in the Trust representing 0.14% of the issued share capital.

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 (2011 to 2020), the number of new shares issued under our share plans has been as follows:

All-employee share plans
Discretionary share plans

By order of the Board, on 18 February 2021

Angie Risley
Chair of the Remuneration Committee

7,407,929 (0.84% of issued share capital as at 12 February 2021)
27,873,044 (3.15% of issued share capital as at 12 February 2021)

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Smith+Nephew Annual Report 2020

• If considering the former Equity

Incentive Plan as a form of deferred
bonus, for the annual incentive
arrangements as a whole the
amount deferred into shares has
been increased from around a third
of the total amount to 50%, with the
time period for release lengthened
from evenly over three years to
all after three years.

– The maximum annual opportunity

under the Performance Share
Programme has been increased
from 190% to 275% of base salary.

– Incorporates post-employment

shareholding guidelines, which have
been introduced from 1 January 2020.

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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.

Remuneration continued

The Policy report

The following section sets out
our Directors’ Remuneration Policy
(‘Policy’). This Policy was approved
by shareholders at the Annual General
Meeting held on 9 April 2020 and all
financial amounts are as at that date.

In designing the Policy, the Committee
followed a robust process which included
discussions on the content of the Policy at
four Committee meetings. The Committee
considered input from management and
our independent advisors, and sought
the views of the Company’s major
shareholders and other stakeholders,
including employees.

Changes to policy
The 2020 Remuneration Policy made
the following changes to the 2017
Remuneration Policy:
– For new appointments and the current
Chief Executive Officer, the maximum
cash allowance paid in lieu of pension
has reduced from 30% to 12% of
base salary, to bring it fully into line
with the wider UK workforce. For the
Chief Financial Officer, the maximum
amount will taper over the life of the
Policy such that it also reaches 12%
of base salary by 1 January 2022,
compared to 30% under the
previous policy.

– The former Annual Cash Incentive

Plan (CIP) and Annual Equity Incentive
Plan (EIP) have been simplified and
amalgamated into an integrated
Annual Bonus Plan, which is
structured as a 50% cash bonus
and 50% deferred share award:

• The aggregate maximum opportunity
of 215% of base salary is unchanged;

• The aggregate target opportunity

has reduced from 70% of maximum
to 50% of maximum;

Future policy table – Executive Directors

Base salary and benefits

Base salary

Core element of remuneration, paid for doing the expected day-to-day job.

How the component operates

Salaries are normally reviewed annually
with any increase applying from 1 April.
Salary levels and increases take account of:
– Scope and responsibility of position;
– Skill/experience and performance of the

individual Executive Director;

– General economic conditions in the relevant

geographical market;

– Average increases awarded across the
Company, with particular regard to
increases in the market in which the
Executive Director is based; and

Maximum levels of payment
The base salary of the Executive Directors
with effect from 1 April 2020 will be as follows:
– Roland Diggelmann CHF 1,380,000.
– Graham Baker £568,277.
While there is no maximum salary level,
any increases will normally be in-line with
the wider employee population within the
relevant geographic area.
Higher increases may be made under certain
circumstances, at the Committee’s discretion.
For example, this may include:
– increase in the scope and/or responsibility

– Market movements within a peer group

of the individual’s role; and

of similarly sized listed companies.

– development of the individual within the role.
A full explanation will be provided in the
Implementation Report should higher increases
be approved in exceptional cases.
In addition, where an Executive Director has
been appointed to the Board at a lower than
typical salary, larger increases may be awarded
to move them closer to market practice as
their experience develops.

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Smith+Nephew Annual Report 2020

Pension and payment in lieu of pension

Provide Executive Directors with an allowance for retirement planning.

How the component operates

Executive Directors receive a cash allowance
in lieu of membership of a Company-run
pension scheme.
In jurisdictions where the local law requires
employees to participate in a Company-run
pension scheme, Executive Directors
participate in the local pension scheme to
the extent of the amount paid in respect
of the majority of our UK-based workforce.
Base salary is the only component of
remuneration which is pensionable.

Maximum levels of payment
The current Chief Executive Officer participates
in the Swiss pension plan, and the Company
contribution is 12% of his base pay in-line
with the wider UK workforce. For any newly
appointed Executive Directors, the maximum
cash allowance payable in lieu of a pension
is 12% of base salary.
For the current Chief Financial Officer, the
maximum cash allowance payable in lieu
of a pension over the life of this Policy will
be as follows:
– 2020: 20% of base salary.
– 2021: 12% of base salary.

Benefits

Provide employees with a market competitive benefits package.

How the component operates

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 Director’s location.
Where applicable, relocation costs may be
provided in-line with the Company’s relocation
policy for senior executives, which may include,
amongst other items: removal costs, assistance
with accommodation, living expenses for self
and family and financial consultancy advice.
In some cases, such payments may be
grossed up.

Maximum levels of payment
While no maximum level of benefits is
prescribed, they are set at an appropriate
market competitive level, taking into account
a number of factors, which may include:
– The jurisdiction in which the individual

is based.

– The level of benefits provided for other

employees within the Company.

– Market practice for comparable roles
within appropriate pay comparators.
The actual amount payable will depend
on the cost of providing such benefits to
an employee in the location at which
the Executive Director is based.
The Committee keeps the benefit policy
and benefit levels under regular review.

Framework in which performance is assessed
None.

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Smith+Nephew Annual Report 2020

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Remuneration continued

The Policy report
continued

All-employee arrangements

All-employee share plans

To enable Executive Directors to participate in all-employee share plans on a similar basis as other employees.

Maximum levels of payment
Executive Directors may currently invest up
to £500 per month in the UK ShareSave Plan,
in-line with UK participants. The Committee
may exercise its discretion to increase this
amount up to the maximum permitted by
HM Revenue & Customs. Similar limits
will apply in different locations.

Framework in which performance is assessed
None.

How the component operates

ShareSave Plans are operated in the UK and
32 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.

Annual incentives

Annual Bonus Plan

Incentivises delivery of the business plan on an annual basis. Rewards performance against key performance indicators which are critical to the
delivery of our business strategy.

Maximum levels of payment
The maximum opportunity is 215%
of base salary.
50% of maximum is payable for on-target
performance (107.5% of base salary).
15% of maximum is payable for threshold
performance (32% of base salary).

How the component operates

The Annual Bonus Plan is designed to reward
performance over the year against financial
and business objectives determined at the
start of the year.
At the end of the year, the Committee
determines pay out levels based on the
extent to which performance against
these objectives has been achieved.
The Committee has full discretion to adjust
outcomes under the Annual Bonus Plan where
the amount that a participant would/could
receive under an Award would result in
the participant receiving an amount which
the Committee considers cannot be justified
or which the Committee considers to be an
unfair or undeserved benefit to the Participant.
In exercising this discretion, the Committee
may consider all circumstances, including
(but not limited to): the financial performance
of the Company; any changes in the Company’s
share price; and the performance, conduct
and contribution of the participant.
Malus and clawback provisions apply,
as detailed in the notes to this table.
Half of the award is paid in cash after the end
of the performance year and half is deferred
into shares under the Deferred Share Bonus
Plan (DSBP), which vest after three years.

Framework in which performance is assessed
The Committee will determine the appropriate
performance measures at the start of each
financial year, in order to ensure that the
Annual Bonus Plan focuses on key business
priorities for the Company.
Typically, 80% of the annual bonus will be
based on financial performance measures.
For 2020, the Committee has determined
that these should be Revenue growth (40%)
and Trading Profit Margin (40%).
The remainder will usually be based on
business objectives linked to key areas
of strategic focus.
The Committee retains the discretion to
adjust the relative weightings of the financial
and strategic components and to adopt
any performance measure that is relevant
to the Company.
Under whatever measures are chosen, the
Committee will set appropriately challenging
targets at the start of each year. In doing so,
they will take into account a number of internal
and external reference points, including the
Company’s key strategic objectives for
the year.
The Committee may amend the performance
conditions applicable to an award in
accordance with the terms of the performance
conditions or if events happen which cause
the Committee to consider that it fails to
fulfil its original purpose and would result in
an unfair benefit for the participant in the
reasonable opinion of the Committee.

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Long-term incentives

Performance Share Programme

To motivate and reward 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.

Maximum levels of payment
The maximum annual opportunity is 275%
of base salary.
For on-target levels of performance, 50%
of the award vests (137.5% of base salary).
For threshold levels of performance, 25%
of the award vests (68.75% of base salary).

How the component operates

Awards are granted pursuant to the terms
of the Performance Share Programme. Awards
are normally made in the form of conditional
share awards, but may be awarded in other
forms if appropriate, including nil cost options
or a combination thereof.
Awards vest after three years, subject to
the achievement of stretching performance
targets linked to the Company’s strategy.
The Committee has full discretion to adjust
outcomes under the Performance Share
Programme where the amount that a
participant would/could receive under an
Award would result in the participant receiving
an amount which the Committee considers
cannot be justified or which the Committee
considers to be an unfair or undeserved benefit
to the Participant. In exercising this discretion,
the Committee may consider all circumstances,
including (but not limited to): the financial
performance of the Company; any changes
in the Company’s share price; and the
performance, conduct and contribution
of the participant.
Participants may receive an additional number
of shares equivalent to the amount of dividend
payable on ordinary shares 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.
The Committee may, in the event of any
variation of the Company’s share capital,
demerger, delisting, or other event which
may affect the value of awards, adjust or
amend the terms of awards in accordance
with the plan rules.
Malus and clawback provisions apply,
as detailed in the notes to this table.

Framework in which performance is assessed
The Committee aims to align the Performance
Share Programme performance measures
with the Company’s key long-term strategic
objectives. In this manner, strong performance
against the measures should lead to long-term
sustainable value creation for our shareholders.
Measures used will typically include:
– Financial measures – to reflect the financial
performance of our business and a direct
and focused measure of Company success.
– Shareholder return measures – a measure
of the ultimate delivery of shareholder
returns, providing direct alignment.
– Strategic measures – aligned with the

Company’s long-term strategy.

The make-up and weighting of each measure will
be determined by the Committee each year
to reflect the particular strategic objectives
over the relevant performance period.
For the 2020 awards, it is proposed to use the
following four measures, all equally weighted:
– Revenue growth.
– Return on Invested Capital.
– Cumulative free cash flow.
– Total Shareholder Return (TSR)

performance against:
• An index of Global Healthcare

companies; and
• The FTSE 100 index.

Maximum Payment will only be made
for significant outperformance.
The Committee may amend the performance
conditions applicable to an award in
accordance with the terms of the performance
conditions or if events happen which cause
the Committee to consider that it fails to
fulfil its original purpose and would result in
an unfair benefit for the participant in the
reasonable opinion of the committee.

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Smith+Nephew Annual Report 2020

Remuneration continued

The Policy report
continued

Shareholding guidelines

Within-employment shareholding guidelines

To align Executive Directors with shareholders and the long-term success of the Company.

Maximum levels of payment
Not Applicable.

Framework in which performance is assessed
None.

How the component operates

The Chief Executive Officer is expected to
build a shareholding of 300% of base salary
and the Chief Financial Officer is expected
to build a shareholding of 200% of base salary.
The Committee expects Executive Directors
to satisfy this requirement within 5 years.
Until the relevant shareholding guidelines have
been met, Executive Directors are required to
hold 50% of any shares vesting from Company
incentive plans after tax.

Post-employment shareholding guidelines

To provide extended alignment with shareholders post-departure from the Company.

How the component operates

Executive Directors will normally be required
to maintain their within employment
shareholding guideline (or their actual holding
if lower) for a period following cessation.
At the current time, the Committee requires
Executive Directors to maintain 100% of their
guideline for two years following departure.

Maximum levels of payment
Not Applicable.

Framework in which performance is assessed
None.

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Smith+Nephew Annual Report 2020

Notes to future policy table –
Executive Directors

Malus and clawback
At any time prior to the vesting of
an award or payment of a cash bonus,
the Committee may determine that an
unvested award or part of an award may
not vest, including to zero on the
occurrence of a Trigger Event, as defined
below (regardless of whether or not the
performance conditions have been met).
At any time up to three years after the
vesting of an award or payment of a cash
bonus, the Committee may determine
that any cash bonus, vested shares, or
their equivalent value in cash be returned
to the Company on the occurrence of a
Trigger Event. A Trigger Event shall occur
if any of the following matter is
discovered where:
– there has been a misstatement of

the Company’s financial results which
has resulted in a material overpayment
to participants, which is in the form
of Awards under the Plan or otherwise,
irrespective of whether the relevant
participants are at fault;

– there has been an error in determining

the size of the Award or to the extent to
which the performance conditions have
been satisfied, or erroneous or misleading
data, which has resulted in the vesting
of an Award which would not otherwise
have vested or which would otherwise
have vested to a materially lesser extent;

– there has been a significant adverse
change in the financial performance
or reputation of the Company, including
corporate failure and/or any significant
loss at a general level or in respect of
a global business unit or function in
which a participant worked; and/or
– the Committee determines that the
conduct, capability or performance
of a participant or any team, business
area or profit centre warrants a review.

These provisions will apply under the
Global Share Plan 2020 and the Annual
Bonus Plan 2020.

Legacy matters
The Committee can make remuneration
payments and payments for loss of office
outside of the Policy set out above where
the terms of the payment were agreed
(i) before the Policy set out in this report
came into effect, provided the terms of

the payment were consistent with any
applicable policy in force at the time they
were agreed; or (ii) at a time when the
relevant individual was not an Executive
Director of the Company (or other person
to whom the Policy set out above applies)
and that, in the opinion of the Committee,
the payment was not in consideration
for the individual becoming an Executive
Director of the Company (or such other
person). This includes the exercise of any
discretion available to the Committee
in connection with such payments.
For these purposes, payments include the
Committee satisfying awards of variable
remuneration and, in relation to an award
over shares, the terms of the payment are
agreed at the time the award is granted.

The Policy set out above applies equally
to any individual who would be required to
be treated as an Executive Director under
the applicable regulations. The Committee
can make remuneration payments and
payments for loss of office outside of the
Policy set out above if such payments are
required by law in a relevant country.

Consideration of employment
conditions elsewhere in the
Company and differences between
arrangements for Executive
Directors and workforce as a whole
The Committee discusses, and takes
into account pay arrangements across
the Company when determining the
pay of Executive Directors in the
following ways:

Base salary
Increases to Executive Director base
salaries are generally in-line with base
salary budgets in the geography in which
the Executive Director is based, although
the Committee will also have oversight of
base salary budgets across the Company
more generally when making the decision.

Pension contributions and
payments in lieu of a pension
A range of different pension arrangements
operate across the Group depending
on location and/or length of service.
Executive Directors either participate
in pension arrangements relevant to
their local market or receive a cash
payment in lieu of a pension.

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Benefits
Benefit packages vary across the world
depending on local market practice.
Executive Directors receive a range
of benefits in-line with the standard
executive benefits package in the
geography in which they are based.

Annual Bonus Plan
Nearly all employees have performance-
based pay, primarily in form of the
Annual Bonus. Employees at different
levels throughout the group participate
in Annual Bonus Plans with different
payment outcomes. The annual
performance objectives are cascaded
down to all employees from the objectives
set at the beginning of the year for the
Executive Directors and Executive Officers,
to ensure that the performance of all
employees is linked to the Strategic
Imperatives. In 2019, 9 Executive Officers
and 37 senior executives participated in
the Annual Bonus Plan on the same basis
as the Executive Directors subject to
lower limits.

All Employee Share Plans
We operate two all-employee share
plan arrangements depending on
the most appropriate arrangement for
different geographies. In 2019, in the US,
2,651 employees participated in the
Employee Stock Purchase Plan. In 2019,
in the UK and 32 other countries, 2,770
employees participated in the ShareSave
Plan. Executive Directors, Executive
Officers and senior executives participated
in these plans depending on where they
are located.

Long term incentives
10 Executive Officers and 38 senior
executives participate in the Performance
Share Programme on the same basis as
the Executive Directors subject to
lower limits.

Shareholding requirements
Executive Officers and senior executives
who participate in the Annual Bonus Plan
and the Performance Share Programme
are also required to build a significant
shareholding in the Company.

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Smith+Nephew Annual Report 2020

Remuneration continued

The Policy report
continued

Chief Executive Officer
Current

Minimum %

100 CHF1,585k

Illustrations of the application
of the Remuneration Policy 2020
The following charts show the potential
split between the different elements of the
Executive Directors’ remuneration under
four different performance scenarios:

Target %

Maximum %

Maximum+ %*

Proposed

CHF4,966k

37 CHF7,174k

CHF8,485k

Minimum %

100 CHF1,585k

Target %

Maximum %

Maximum+ %*

Chief Financial Officer
* + 50% share price growth
Current

Fixed pay

Minimum %

100 £762k

38 CHF4,966k

CHF8,347k

CHF10,244k

Cash incentive

Equity incentive

Annual bonus

PSP

Target %

36 26

£2,153k

Maximum %

Maximum+ %*

24 10

35 £3,062k

£3,602k

Proposed

Minimum %

100 £705k

Target %

Maximum %

Maximum+ %*

37 £2,097k

£3,488k

£4,269k

* + 50% share price growth

Fixed pay

Cash incentive

Equity incentive

Annual bonus

PSP

Assumed
performance
All performance
scenarios

Fixed
pay

Assumptions used for proposed Policy

– Consists of total fixed pay, including base salary and pension allowance

(as at 1 April 2020) and benefits (as received during 2019).

Variable
pay

Minimum
Performance

– No pay out under the Annual Bonus Plan.
– No vesting under the Performance Share Programme.

Target
Performance

Maximum
Performance

Maximum
performance
(including 50%
share price
growth scenario)

– 50% of maximum payout under the Annual Bonus Plan (ie 107.5% of salary).
– 50% vesting under the Performance Share Programme (ie 137.5% of salary).

– 100% of the maximum pay out under the Annual Bonus Plan

(ie 215% of salary).

– 100% vesting under the Performance Share Programme (ie 275% of salary).

– 100% of the maximum pay out under the Annual Bonus Plan

(ie 215% of salary).

– 100% vesting under the Performance Share Programme (ie 275% of salary).
– 50% growth in share price.

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Performance Share Programme awards
have been shown at face value with no
discount rate assumptions.

The charts provide illustrative values
of the remuneration package in 2020.
Actual outcomes may differ from
those shown.

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 Committee will determine
a base salary in-line with the Policy
and having regard to the parameters set
out in the Future Policy Table. Incoming
Executive Directors will be entitled
to pension (or cash payment in lieu
of pension), benefits and incentive
arrangements aligned with those set
out in the Policy table above. On that
basis, the aggregate annual opportunity
under their incentive arrangements
would not exceed 490% 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 may also pay relocation and
related costs, in-line with the relocation
arrangements we operate across
the Group.
For external appointments, the Committee
may award compensation for the forfeiture
of remuneration awards from a previous
employer. In doing so, the Committee
would aim to structure the replacement
awards in a like-for-like manner to the
extent possible, taking into account
relevant factors, including:
– The form of the forfeited awards

(eg cash or shares);

– Any performance conditions attached
to them and the likelihood of these
conditions being satisfied; and

– The proportion of the vesting and/or

performance period remaining.

The Committee will have regard to the
best interests of both Smith+Nephew
and its shareholders and is conscious of
the need to pay no more than is necessary,
particularly when determining buy-
out arrangements.

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Smith+Nephew Annual Report 2020

In making buy-out awards to new
appointments, the Committee may
grant awards under the relevant provision
in the Financial Conduct Authority Listing
Rules, which allows for the granting of
awards specifically to facilitate, in unusual
circumstances, the recruitment of an
Executive Director, without seeking prior
shareholder approval. In doing so, it will
comply with the provisions in force at
the date of this report.

The overall approach outlined above
would also apply to internal appointments,
with the proviso that any commitments
entered into before promotion which are
inconsistent with the Policy will continue
to be honoured.

We will aim to provide 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 twelve 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 his or her notice period and pay
them an amount equivalent to the base
salary, pension contributions (or 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 Directors’
service contracts, 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: Building 5, Croxley Park, Hatters
Lane, Watford, Hertfordshire WD18 8YE.

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Policy for payment for loss of office
Our policy regarding termination payments
to departing Executive Directors is to limit
severance payments to pre-established
contractual terms. 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 rule 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, pension contributions (or 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, the costs of
meeting any settlement agreement,
and legal and financial advice.
In the event that an Executive Director
dies or leaves for reasons of ill-health,
redundancy or retirement in agreement
with the Company, or for any other reason
for which the Committee determines
that good leaver treatment is appropriate:
– They may be eligible to receive an

annual bonus on a time pro-rated basis
for the period of the year that they have
worked. The annual bonus will typically
be subject to business and individual
performance in the same manner as
for the continuing Executive Directors,
and paid at the usual time. In-line with
Company policy for all our employees,
Executive Directors leaving in the last
three months of the year may be eligible
to receive a full year bonus, while those
joining in the last three months of the
year may not be eligible to receive
any bonus.

– Outstanding Deferred Share Bonus

Plan awards will subsist and be released
in-line with their original timeframes,
unless the Committee determines
otherwise. They will not normally
be pro-rated.

– Outstanding Performance Share

Programme awards will typically be
pro-rated for the time worked during
the relevant performance period,
and tested for performance at the
end of the performance period, unless
the Committee determines otherwise.
The two-year holding period will usually
continue to be enforced.

– Any outstanding awards under

the Deferred Share Bonus Plan or
Performance Share Programme will
remain subject to the same terms
and conditions (including, malus and
clawback) as applied at time of grant.

For participants who leave for any other
reason, outstanding Deferred Share Bonus
Plan and Performance Share Programme
awards will lapse in full.

One-off awards granted on appointment
will normally lapse on leaving except in
cases of death, retirement, redundancy
or ill-health. The Committee has discretion
to permit such awards to vest in other
circumstances and will be subject to
satisfactorily meeting applicable
performance conditions.

We will supply details via an announcement
to the London Stock Exchange of a
departing Executive Director’s termination
arrangements as soon as is practicable.

Policy on shareholding requirements
The Committee believes that one of
the best ways our Executive Directors’
interests can be aligned with that
of shareholders is for them to hold
a significant number of shares in the
Company. The Chief Executive Officer
is therefore expected to build a holding
of Smith+Nephew shares worth three
times his or her base salary and the Chief
Financial Officer is expected to build a
holding of two times his or her base salary.
Executive Directors are required to retain
at least 50% of the shares after tax)
vesting under Company incentive plans
until this shareholding requirement has
been met, recognising that differing
international tax regimes affect the pace
at which Executive Directors may fulfil
the shareholding requirement.

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Smith+Nephew Annual Report 2020

Consultation with employees
relating to Executive Director
remuneration
While the Committee does not directly
consult with our employees as part of
the process of determining executive pay,
the Committee does receive feedback
from employee surveys and takes this into
account when reviewing executive pay.
In addition, a significant number of our
employees are shareholders and so are
able to express their views in the same
way as other shareholders. During 2019,
no comments from employees relating
to Executive Remuneration were raised
during Board site visits.

Statement of consideration
of shareholder views
Angie Risley, the Committee Chair,
engaged extensively with shareholders
during development of the 2020
Remuneration Policy. The feedback
received was presented to and discussed
at length by the Committee, and informed
the final shape of the proposals which
are being put to the 2020 AGM.

Angie met with shareholders holding
in excess of 38% of the Company’s Share
capital, and corresponded with a further
8.5%, meaning that almost half of our
register were asked for their views. This
included 17 of our top 20 shareholders
plus a number of shareholders who,
although holding a smaller number of
shares, had indicated earlier in the year
that they would be interested in engaging
with the Company on remuneration
matters. In addition, we met with the
Investment Association, ISS and Glass
Lewis to obtain their input.

The Chair appreciated the positive and
constructive tone of the consultation.
It was pleasing that shareholders were
on the whole supportive of the proposals,
particularly the:
– Emphasis on long-term

sustainable performance;

– Simplification of the short-term

incentive plans;

– Increased deferral of the short-term

incentive opportunity;

– Reduction in target opportunity
in the short-term arrangements;
– Reduction in pension payments; and
– Introduction of post-cessation
shareholding requirements.

Some shareholders were cautious
about the increase in maximum
opportunity under the Performance
Share Programme, and in particular
looked for reassurance that maximum
vesting under the plan would only be
achieved for very stretching performance.

The Committee took all comments
received on board during its subsequent
discussions. With respect to the latter
concern raised by some shareholders,
in setting targets for the 2020 Performance
Share Programme cycle, the Committee
considers that the upper end of the
performance ranges will require significant
outperformance of internal and external
forecasts for performance, as well as of
the FTSE 100 and our direct peers. Further
information is shown on page 112–113
of the 2019 Annual Report.

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Remuneration continued

The Policy report
continued

When calculating whether or not this
requirement has been met, Ordinary
Shares or ADRs held by the Executive
Directors and their immediate family
are included, as are unvested awards
under the Deferred Share Bonus
Plan (on a net-of-tax basis), but not
Performance Share Programme awards.
Ordinarily we would expect Executive
Directors to achieve their shareholding
requirement within a period of five years
from the date of appointment.

Executive Directors are also required
to hold any shares vesting under the
Performance Share Programme for
a period of two years after vesting.

The 10 Executive Officers and 38 senior
executives who participate in the
Annual Bonus Plan and Performance
Share Programme are also required to
build a significant shareholding in the
Company, extending the principle of
alignment with our shareholders across
the senior management team.

Policy on post cessation shareholding
Executive Directors are required to retain
any shareholding up to the applicable
shareholding requirement (or their actual
holding on departure if lower) for a period
of two years after cessation of employment.

In order to reinforce this expectation,
and to the extent that the shareholding
requirement has not been reached,
all vested Deferred Share Bonus Plan and
Performance Share Programme shares
will be held in a Vested Share Account,
which will not be accessible until two
years post cessation of employment.
In addition, former Executive Directors
will be required to seek permission to
deal during this period.

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Smith+Nephew Annual Report 2020

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Future policy table – Chair and Non-Executive Directors
The following table and accompanying notes explain the different elements of remuneration we pay to our Chair and Non-Executive
Directors. This Policy is unchanged from 2017. No element of their remuneration is subject to performance. All payments made to
the Chair are determined by the Remuneration Committee, whilst payments made to the Non-Executive Directors are determined by
those Directors who are not themselves Non-Executive Directors, currently the Chair, Chief Executive Officer and 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 further align Non-Executive Directors’ fees with the interests
of shareholders.

How the component operates

Fees will be reviewed on an annual basis. In future, any increase
will be paid in shares until 25% of the total fees is paid in shares.
Fees are set in-line with market practice for fees paid by similar
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.

Maximum levels of payment
Annual fees are currently as follows:
– £63,000 in cash plus £6,500 in shares; or
– $120,000 in cash plus $9,780 in ADRs.
Chair fees:
– £315,180 in cash plus £105,060 in shares.
Whilst it is not expected to increase the fees paid to the Non-Executive
Directors and the Chair 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 £1.5m as set out in the Company’s Articles
of Association.

Fee for Senior Independent Director and Committee Chair

To compensate Non-Executive Directors for the additional time spent as Committee Chair or Senior Independent Director.

How the component operates

A fixed fee is paid, which is reviewed annually.

Maximum levels of payment
– £20,000 in cash.
– $35,000 in cash.
Whilst it is not expected that the fees paid to the Senior Independent
Director or Committee Chairs 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

A fixed fee is paid, which is reviewed annually.

Maximum levels of payment
– £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.

Notes to future policy table –
Non-Executive Directors

Additional duties undertaken
by Non-Executive Directors
In the event that the Chair or a Non-
Executive Director is required to undertake
significant 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 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 Chair, fee levels
will take account of market rates, the
individual’s profile and experience, the
time required to undertake the role and
general business conditions. In addition,
the Committee retains the right to authorise
the payment of relocation assistance
or an accommodation allowance in the
event of the appointment of a Chair not
currently based in the UK.

Letters of appointment
The Chair and Non-Executive Directors
have letters of appointment which set
out the terms under which they provide

their services to the Company. These are
available for inspection at the Company’s
registered office: Building 5, Croxley Park,
Hatters Lane, Watford, Hertfordshire
WD18 8YE, United Kingdom.

The appointment of the 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 Chair
is subject to a notice period of six months.

The Chair and Non-Executive Directors
are required to acquire a shareholding
in the Company equivalent in value to
one time their basic fee within two years
of their appointment to the Board.

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Smith+Nephew Annual Report 2020

Accounts

Statement of Directors’ responsibilities

Independent auditor’s UK report

Group financial statements

Notes to the Group accounts

Company financial statements

Notes to the Company accounts

139

140

148

152

205

207

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– 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 comply 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 1–65.

The Directors’ Report, prepared in
accordance with the requirements of the
Companies Act 2006 and the UK Listing
Authority’s Listing Rules, and Disclosure
Rules and Transparency Rules, comprising
pages 1–137 and 227–241, was approved
by the Board and signed
on its behalf.

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 18 February 2021

Susan Swabey
Company Secretary

Statement of Directors’
responsibilities in respect
of the Annual Report and
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 accounting
standards in conformity with the
requirements of the Companies Act 2006
and applicable law and have elected to
prepare the Parent Company financial
statements in accordance with UK
accounting standards and applicable law,
including FRS 101 Reduced Disclosure
Framework. In addition the Group financial
statements are required under the Disclosure
Guidance and Transparency Rules to be
prepared in accordance with International
Financial Reporting Standards (‘IFRS’)
adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European
Union (‘IFRS as adopted by the EU’) and the
Directors have also chosen to prepare the
Group financial statements in accordance
with IFRS as issued by the International
Accounting Standards Board (IASB).

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 international
accounting standards in conformity with
the requirements of the Companies Act
2006, IFRS as adopted by the EU and
IFRS as issued by the IASB;

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Smith+Nephew Annual Report 2020

Additional opinion in relation
to IFRSs as issued by the IASB
As explained in the accounting policies
set out in the consolidated financial
statements in addition to complying with
its legal and regulatory obligation to apply
international accounting standards in
conformity with the requirements of the
Companies Act 2006, the Group has also
applied IFRS as issued by the International
Accounting Standards Board (IASB).
In our opinion, the consolidated 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 first appointed as auditor
by the shareholders on 9 April 2015.
The period of total uninterrupted
engagement is for the 6 financial years
ended 31 December 2020. 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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2. Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters
that, in our professional judgement,
were of most significance in the audit
of the financial statements and include
the most significant assessed risks of
material misstatement (whether or not
due to fraud) identified by us, including
those which had the greatest effect on:
the overall audit strategy; the allocation
of resources in the audit; and directing
the efforts of the engagement team.
We summarise below the key audit
matters, in decreasing order of audit
significance, in arriving at our audit
opinion above, together with our key audit
procedures to address those matters and,
as required for public interest entities,
our results from those procedures. These
matters were addressed, and our results
are based on procedures undertaken,
in the context of, and solely for the purpose
of, our audit of the financial statements as
a whole, and in forming our opinion thereon,
and consequently are incidental to that
opinion, and we do not provide a separate
opinion on these matters. Our identification
of key audit matters remains unchanged
from 2019 with the following exceptions:
(i) we have removed the key audit matter
related to the Osiris Therapeutics, Inc.
(‘Osiris’) business combination as this
transaction was executed and accounted
for in 2019; and (ii) we have removed
the key audit matter related to the
evaluation of uncertain tax positions
following the conclusion of tax audits
leading to a significant release of provisions.
We continue to perform audit procedures
in respect of this matter.

Independent auditor’s
UK report

Independent auditor’s report to
the members of Smith & Nephew Plc

1. Our opinion is unmodified
We have audited the financial statements
of Smith & Nephew plc (“the Company”)
for the year ended 31 December 2020
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.

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 2020 and of the
Group’s profit for the year then ended;
– the Group financial statements have

been properly prepared in accordance
with international accounting standards
in conformity with the requirements
of the Companies Act 2006;
– 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 to the extent applicable.

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Smith+Nephew Annual Report 2020

Provision for metal-on-metal hip products

Risk vs 2019:

The risk

Our response

Subjective estimate
As discussed in note 17 to the financial statements, the Group
holds a provision of $336 million (2019: $315 million) in respect
of potential liabilities arising from the ongoing exposure to
legal claims for metal-on-metal hip products.

The estimate for this provision requires the Group to use an
actuarial model and make a number of key assumptions relating
to the number of claimants and settlement outcome. Given the
limited historical track record of metal-on-metal claims settled,
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 17.1) disclose the range estimated
by the Group.

Refer to page 90 (Audit Committee Report),
page 187 (accounting policy) and
pages 154, 187–188 (financial disclosures)

Our procedures included:
– Control operation: We evaluated the design and tested the

operating effectiveness of certain internal controls over the Group’s
legal provision process. This included controls over the Group’s
review, challenge and assessment of the metal-on-metal provision
and related key assumptions including estimating the number of
claimants and the settlement outcomes.

– Enquiry of lawyers: We obtained correspondence directly from

the Group’s external counsel on the status of open metal-on-metal
court proceedings and settlement negotiations. We compared
the number of open metal-on-metal claims per the Company’s
records against these confirmations, and considered any relevant
information provided in our evaluation of the related exposure.

– Our actuarial expertise: We involved actuarial specialists with
relevant skills and knowledge, who assisted in challenging the
number of claimants and settlement outcomes used in statistical
projections in determining the provision, as well as the range
of reasonably possible outcomes determined by the Group, by
reference to historical data including settlement amounts, number
of new claimants, and experience of other cases. In addition, the
actuarial professionals assisted in evaluating whether the statistical
model applied by the Group is in line with actuarial professional
standards and industry practice for similar product liability claims.
We evaluated the scope, competency, and objectivity of the Group’s
experts involved in developing the actuarial model used in the
determination of the provision by considering the work they were
engaged to perform, their professional qualifications,
and reporting lines.

– Assessing disclosures: We assessed the Group’s disclosures in

respect of the metal-on-metal hip provision, including disclosures
on how sensitive the provision is to changes in key assumptions
and the range of possible outcomes.

Our results
We found the level of provisioning and disclosures in respect of
metal-on-metal hip products to be acceptable (2019: acceptable).

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Independent auditor’s
UK report continued

Excess and Obsolescence (E&O) provision for Orthopaedics Inventory

Risk vs 2019:

The risk

Our response

Subjective estimate
The Group has high levels of Orthopaedics inventory that is
available for customers’ immediate use. Complete sets of
products including large and small sizes (which are used less
frequently) have to be made available to customers at their
premises. An assessment is made by the Group to identify
excess or obsolete inventory.

As a result, the Group has recognised a provision for excess and
obsolete inventory (E&O provision) for Orthopaedics which is
approximately 80% of the total E&O provision. As discussed in
note 12 to the consolidated financial statements, the Group’s
total E&O provision is $377 million (2019: $308 million).

The key input into this provision is the estimate of the future
utilisation of inventory on hand.

There was a high degree of subjectivity in assessing a number
of the assumptions applied by the Group in calculating the future
utilisation of inventory. Future utilisation is based on assumptions
of historical sales of inventory adjusted for internal or external
factors such as effectiveness of inventory deployment, length
of product lives and planned phase out of products which may
impact the demand for the product. In addition, COVID-19 has
brought greater volatility to historical sales of inventory and
greater uncertainty to future utilisation leading to a high level
of measurement uncertainty.

Refer to page 90 (Audit Committee Report),
page 174 (accounting policy) and
pages 153 and 175 (financial disclosures)

Our procedures included:
– Control operation: We evaluated the design and tested the
operating effectiveness of certain internal controls over the
Group’s process for assessing the E&O provision, including
controls over the assumptions listed to the left to determine
expected future utilisation of Orthopaedics inventory.

– Test of detail: We assessed and challenged the assumptions
listed to the left, in the E&O provision through a combination
of interviews of finance and operations personnel and inspection
of internal budgets, including a selection of product plans to
assess the impact of plans for phasing out product lines on
future utilisation of Orthopaedics inventory.

– Historical comparisons: We evaluated the Group’s ability to

accurately estimate the E&O provision by comparing historically
recorded provisions to actual results and historically estimated
future utilisation to actual utilisation.

– Sensitivity analysis: We assessed the sensitivity of the key

assumptions, listed to the left, incorporating the recent volatility
in sales of inventory, to consider their impact on the Group’s
determination of the calculation of the provision recognised.

– Assessing disclosures: 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 level of E&O provision for Orthopaedics inventory to be acceptable
(2019: acceptable).

Parent company financial statements only: Recoverability of Parent Company’s investment in subsidiaries

Risk vs 2019:

The risk

Our response

Low risk, high value
The carrying amount of the Parent Company’s investments
in subsidiaries held at cost less impairment represents 61%
(2019: 75%) of the Parent Company’s total assets.

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.

Our procedures included:
– Test of detail: Comparing a sample of the highest value investments
representing 98% (2019: 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 teams and on that sample of subsidiaries, consider
the results of their work on profits and net assets.

Our results
We found the Directors’ assessment of the recoverability of the
investment in subsidiaries to be acceptable (2019: acceptable).

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Group revenue

Group materiality

$4,560m
2019
(Group normalised
profit before tax)
$961m

$36m
2019
$49m

$36m

$27m

$1.8m

$36m
(2019: $49m)

$27m
(2019: $36m)

$1.8m
(2019: $2.5m)

Group revenue

Group materiality

Whole financial
statements materiality

Group performance
materiality

Misstatements reported
to the Audit Committee

3. Our application of materiality
and an overview of the scope
of our audit
Materiality
Materiality for the group financial
statements as a whole was set at
$36 million (2019: $49 million), determined
with reference to a benchmark of Group
revenue, of which it represents 0.79%
(2019: benchmark of Group profit
before tax, normalised to exclude 2019
restructuring costs of $134 million, legal
& other charges of $50 million and a charge
of $34 million related to acquisition and
disposal related items as disclosed in
note 6, of which it represented 5.1%).

As a result of the Covid-19 pandemic,
the profit of the Group for the year ended
31 December 2020 was significantly
impacted with profit before tax declining
by 67%, however the overall size of
the business, both geographically and
in terms of products, did not reduce. In
these situations, auditing standards allow
for an alternative benchmark to be used
in determining materiality that is most
likely to influence the decision making
of the users of the financial statements
and appropriately reflects the size of the
business. We determined that revenue
was the most appropriate alternative
benchmark in these circumstances
to determine materiality.

In line with our audit methodology, our
procedures on individual account balances
and disclosures were performed to a lower
threshold, performance materiality, so as
to reduce to an acceptable level the risk
that individually immaterial misstatements
in individual account balances add up to
a material amount across the financial
statements as a whole.

Materiality for the parent company
financial statements as a whole was set at
$32 million (2019: $36 million), determined
with reference to a benchmark of company
total assets, of which it represents 0.3%
(2019: 0.4%).

Performance materiality for the group
and parent company was set at 75%
(2019: 75%) of materiality for the financial
statements, which equates to $27 million
(2019: $37 million), and 75% (2019: 65%)
for the parent company, which equates to
$24 million (2019: $23 million). We applied
this percentage in our determination of

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performance materiality because we did
not identify any factors indicating an
elevated level of risk.

We agreed to report to the Audit
Committee any corrected or uncorrected
identified misstatements exceeding
$1.8 million (2019: $2.5 million), in addition
to other identified misstatements that
warranted reporting on qualitative grounds.

Scoping
Of the group’s 118 (2019: 111) reporting
components, we subjected 6 (2019: 7) to
full scope audits for group purposes and 34
(2019: 29) to audits of specified account
balances and specific risk focussed
audit procedures focussed on revenue,
receivables and cash (8 (2019: 7)) and
inventory (6 (2019: 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.

The components within the scope of
our work accounted for the percentages
illustrated opposite.

The remaining 14% (2019: 15%) of total
group revenue, 12% (2019: 13%) of group
profit before tax and 8% (2019: 18%) of
total group assets is represented by 78
(2019: 75) reporting components, none
of which individually represented more
than 2% (2019: 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
the component materialities, which
ranged from $5 million to $28 million
(2019: $5 million to $37 million), having
regard to the mix of size and risk profile
of the Group across the components.
The work on 18 of the 40 components
(2019: 18 of the 36 components) was
performed by component auditors
and the rest, including the audit of the
parent company, was performed by
the Group team.

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Independent auditor’s
UK report continued

Group revenue

86%
2019
85%

20 17

Group total assets

Group revenue
92%
2019
82%

20 17

Group revenue
Group total assets
Group proﬁt before tax

15
8

20 17

18
12

19 16

54 36

Group profit before tax

Group proﬁt before tax

Group proﬁt before tax
88%
2019
87%

19 16

Full scope for group audit
purposes 2020

19 16

Audit of speciﬁc account
balances 2020

Full scope for group audit
purposes 2019

Audit of speciﬁc account
balances 2019

Residual components

Full scope for group audit purposes 2020

Audit of specific account balances and specific
risk-focused audit procedures 2020

Full scope for group audit purposes 2019

Audit of specific account balances and specific
risk-focused audit procedures 2019

Residual components

The Group audit team had planned
to visit component locations in the USA,
China, UK, Germany, South Africa and
Costa Rica; however, these visits were
prevented by movement restrictions
relating to the COVID-19 pandemic.
Instead, senior members of the group
engagement team used video
conferencing to oversee the component
Group total assets
auditor work and had video discussions
with management of the 6 component
locations in scope of the group audit
we had planned to visit (USA, China, UK,
Germany, South Africa and Costa Rica).
In addition, in all locations except China,
the group audit team conducted remote
file reviews by senior members of the
audit team to evaluate whether work
performed over key areas of the audit
Group total assets
was sufficient. The Group audit team also
attended local final audit closing meetings
via conference call. Due to regulatory
restrictions, a remote file review was
Full scope for group audit
purposes 2020
not possible for the Chinese component;
Audit of speciﬁc account
therefore, the Group audit team increased
balances 2020
54 36
progress calls, obtained extended reporting
Full scope for group audit
purposes 2019
and held an expanded closing meeting
Audit of speciﬁc account
with the Chinese component audit team
balances 2019
to understand, assess and challenge the
audit approach and findings.

Residual components

54 36

Audit of speciﬁc account
balances 2020

4. We have nothing to report
on going concern
Full scope for group audit
purposes 2020
The Directors have prepared the financial
statements on the going concern basis as
they do not intend to liquidate the Group
Full scope for group audit
purposes 2019
or the Company or to cease their
Audit of speciﬁc account
operations, and as they have concluded
balances 2019
that the Group’s and the Company’s
Residual components
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 22 months from the date of approval
of the financial statements (“the going
concern period”).

We used our knowledge of the Group,
its industry, and the general economic
environment to identify the inherent risks
to its business model 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 risk that we considered
most likely to adversely affect the Group’s

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and Company’s available financial
resources and metrics relevant to debt
covenants over this period was an
extended downturn in elective surgery
volumes as a consequence of COVID-19,
leading to a sustained medium-term
decline in revenue and profits.
We also considered less predictable
but realistic second order impacts,
such as adverse working capital
movements, including delays in customer
payments, due to COVID-19, temporary
loss of key production capability (caused
by COVID-19 driven labour shortages
or otherwise) resulting in an inability to
manufacture key products for a period
of time, new product liability claims giving
rise to significant claims and legal fees and
pricing and reimbursement pressures or
a currency exchange volatility leading to a
long-term decline in revenue and profits.

We considered whether these risks could
plausibly affect the liquidity or covenant
compliance in the going concern period by
comparing severe, but plausible downside
scenarios that could arise from these risks
individually and collectively against the
level of available financial resources and
covenants indicated by the Group’s
financial forecasts.

Our procedures also included:
– Critically assessing assumptions in

the base case and downside scenarios,
particularly in relation to revenues and
its impact on forecast liquidity and
covenant compliance, by comparing
to historical trends in severe economic
situations (primarily 2020 financial
performance), overlaying knowledge
of the entity’s plans based on approved
budgets, as well as our knowledge of
the entity and the sector in which
it operates.

– Considering whether the going concern
disclosure in note 1 to the financial
statements gives a full and accurate
description of the Directors’ assessment
of going concern, including the identified
risks, and related sensitivities.

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Our conclusions based on this work:
– we consider that the directors’ use of
the going concern basis of accounting
in the preparation of the financial
statements is appropriate;

– we have not identified, and concur

with the directors’ assessment that
there is not, a material uncertainty
related to events or conditions that,
individually or collectively, may cast
significant doubt on the Group’s or
Company’s ability to continue as a
going concern for the going
concern period;

– we have nothing material to add

or draw attention to in relation to the
directors’ statement in note 1 to the
financial statements on the use of the
going concern basis of accounting with
no material uncertainties that may
cast significant doubt over the Group
and Company’s use of that basis for
the going concern period, and we found
the going concern disclosure in note 1
to be acceptable; and

– the related statement under the

Listing Rules set out on page 23 is
materially consistent with the financial
statements and our audit knowledge.

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 above conclusions are not a guarantee
that the Group or the Company will
continue in operation.

5. Fraud and breaches of laws
and regulations – ability to detect
Identifying and responding to risks of
material misstatement due to fraud
To identify risks of material misstatement
due to fraud (“fraud risks”) we assessed
events or conditions that could indicate
an incentive or pressure to commit fraud
or provide an opportunity to commit fraud.
Our risk assessment procedures included:
– Enquiring of directors, the Audit

Committee, internal audit, compliance
officers and inspection of policy
documentation as to the Group’s
high-level policies and procedures to
prevent and detect fraud, including the
internal audit function, and the Group’s
channel for “whistleblowing”, as well as
whether they have knowledge of any
actual, suspected or alleged fraud.

– Reading Board and all relevant

committee minutes.

– Considering remuneration incentive
schemes (primarily the annual bonus
plan) and performance targets for
management and directors, including
revenue and trading margin targets
for management remuneration.

– Using analytical procedures to identify
any usual or unexpected relationships.

– Using our own forensic specialists to

assist us in identifying fraud risks based
on discussions of the circumstances
of the Group and Company.

We communicated identified fraud risk
factors throughout the audit team and
remained alert to any indications of
fraud throughout the audit. This included
communication from the group component
audit teams of relevant fraud risk factors
identified at the Group level and request
to component audit teams to report to
the Group audit team any instances of
fraud that could give rise to a material
misstatement at the group level.

As required by auditing standards,
and taking into account our overall
knowledge of the control environment,
we perform procedures to address the
risk of management override of controls,
in particular the risk that Group and
component management may be in a
position to make inappropriate accounting
entries and the risk of bias in accounting
estimates and judgements such as
inventory provisioning and expected
credit losses.

On this audit we do not believe there is a
fraud risk related to revenue recognition
based on the following assessment:
– The accounting for the majority of

the Group’s sales is non-complex, and
subject to limited levels of judgment
with limited opportunities for manual
intervention in the sales process to
fraudulently manipulate revenue.
There is also a short time period
between order and delivery.
– Revenue related rebates and

deductions are relevant for sales made
to distributors in certain markets, and
the calculation of these includes a level
of estimation which may be subject to
management bias. However, given the
materiality of the respective accruals,
their contractual terms, and the historic
profile of these deductions, including
frequency of settlement, we are satisfied

that there is no significant risk of
fraud associated with these sales.
We are also satisfied that there are
no significant risks around fraudulent
sales to distributors, including channel
stuffing, given the materiality of
these arrangements, number and
size of agreements and levels of
channel inventory.

We did not identify any additional
fraud risks.

In determining the audit procedures,
we took into account the results of our
evaluation and testing of the operating
effectiveness of the Group-wide fraud
risk management controls.

We also performed procedures including:
– Identifying journal entries and

other adjustments to test for all full
scope components based on specific
risk-based criteria and comparing
the identified entries to supporting
documentation. These included those
posted by senior finance management,
those posted to unusual accounts,
and those with missing user
identification; and

– Assessing significant accounting

estimates for bias.

We discussed with the Audit Committee
other matters related to actual or
suspected fraud, (over and above
allegations of possible violations of
anti-corruption laws in India detailed
on page 217) for which disclosure is
not necessary, and considered any
implications for our audit.

Identifying and responding to risks
of material misstatement due to non-
compliance with laws and regulations
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, 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 engaged forensic specialists to assist
in the review of relevant correspondence
and attend discussions with management
on relevant matters.

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Independent auditor’s
UK report continued

As the Group is regulated, our assessment
of risks involved gaining an understanding
of the control environment including the
entity’s procedures for complying with
regulatory requirements.

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 the Group level, and a request for
component auditors to report to the group
team any instances of non-compliance
with laws and regulations that could give
rise to a material misstatement at group.

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 these laws
and regulations as part of our procedures
on the related financial statement items.

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 license
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. Therefore, if a breach of operational
regulations is not disclosed to us or evident
from relevant correspondence, an audit
will not detect that breach.

We assessed the disclosures in the
principal risks section of the Annual
Report on page 56 related to allegations
of possible violations of anti-corruption
laws in India compared to our knowledge
based on discussion with the Company’s
external legal advisors and review
of documentation including
whistleblowing reports.

Context of the ability of the audit to detect
fraud or breaches of law or regulation
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 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 fraud, as these may involve collusion,
forgery, intentional omissions,
misrepresentations, or the override of
internal controls. Our audit procedures are
designed to detect material misstatement.
We are not responsible for preventing
non-compliance or fraud and cannot be
expected to detect non-compliance
with all laws and regulations.

6. We have nothing to report
on the other information in
the Annual Report
The directors are responsible for the other
information presented in the Annual Report
together with the financial statements.
Our opinion on the financial statements
does not cover the other information and,
accordingly, we do not express an audit
opinion or, except as explicitly stated
below, any form of assurance
conclusion thereon.

Our responsibility is to read the other
information and, in doing so, consider
whether, based on our financial statements
audit work, the information therein is
materially misstated or inconsistent with
the financial statements or our audit
knowledge. Based solely on that work we
have not identified material misstatements
in the other information.

Strategic report and directors’ report
Based solely on our work on the
other information:
– we have not identified material

misstatements in the strategic report
and the directors’ report;

– in our opinion the information given

in those reports for the financial year
is consistent with the financial
statements; and

– in our opinion those reports have

been prepared in accordance with
the Companies Act 2006.

Directors’ remuneration report
In our opinion the part of the Directors’
Remuneration Report to be audited has
been properly prepared in accordance
with the Companies Act 2006.

Disclosures of emerging and principal
risks and longer-term viability
We are required to perform procedures
to identify whether there is a material
inconsistency between the directors’
disclosures in respect of emerging and
principal risks and the viability statement,
and the financial statements and our
audit knowledge.

Based on those procedures, we have
nothing material to add or draw attention
to in relation to:
– the directors’ confirmation within

the viability statement on pages 64
that they have carried out a robust
assessment of the emerging and
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 how emerging risks are
identified, and explaining how they are
being managed and mitigated; and

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Smith+Nephew Annual Report 2020

– 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.

We are also required to review the viability
statement, set out on page 64 under
the Listing Rules. Based on the above
procedures, we have concluded that the
above disclosures are materially consistent
with the financial statements and our
audit knowledge.

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 perform procedures
to identify whether there is a material
inconsistency between the directors’
corporate governance disclosures and
the financial statements and our
audit knowledge.

Based on those procedures, we have
concluded that each of the following is
materially consistent with the financial
statements and our audit knowledge:
– 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;

– the section of the Annual Report
describing the work of the Audit
Committee, including the significant
issues that the Audit Committee
considered in relation to the financial

statements, and how these issues
were addressed; and

– the section of the Annual Report that

describes the review of the effectiveness
of the Group’s risk management and
internal control systems.

We are required to review the part
of Corporate Governance Statement
relating to the Group’s compliance with
the provisions of the UK Corporate
Governance Code specified by the
Listing Rules for our review. We have
nothing to report in this respect.

7. We have nothing to report on
the other matters on which we are
required to report by exception
Under the Companies Act 2006, we are
required to report to you if, in our opinion:
– adequate accounting records have

not been kept by the parent Company,
or returns adequate for our audit have
not been received from branches not
visited by us; or

– the parent Company financial

statements and the part of the
Directors’ Remuneration Report to
be audited are not in agreement with
the accounting records and returns; or

– certain disclosures of directors’

remuneration specified by law are
not made; or

– we have not received all the

information and explanations we
require for our audit.

We have nothing to report in these respects.

8. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement
set out on page 139, 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.

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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 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 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.

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

Zulfikar Walji (Senior Statutory Auditor)
for and on behalf of KPMG LLP,
Statutory Auditor

Chartered Accountants
15 Canada Square
London E14 5GL

18 February 2021

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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 before taxation
Taxation
Attributable profit for the year1
Earnings per ordinary share1
Basic
Diluted

Notes
2

3
3
2 & 3
4
4
4
11

Year ended

31 December
2020
$ million
4,560
(1,396)
3,164
(2,562)
(307)
295
6
(62)
(7)
14
246
202
448

31 December
2019
$ million
5,138
(1,338)
3,800
(2,693)
(292)
815
10
(65)
(18)
1
743
(143)
600

Year ended
31 December
2018
$ million
4,904
(1,298)
3,606
(2,497)
(246)
863
8
(59)
(20)
(11)
781
(118)
663

51.3¢
51.2¢

68.6¢
68.4¢

76.0¢
75.7¢

The Group has adopted IFRS 16 Leases from 1 January 2019 using the modified retrospective approach. Under this approach comparative information is not restated. Refer to Note 7
for further details.

Group statement of comprehensive income

Attributable profit for the year1
Other comprehensive income:
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations
Taxation on other comprehensive income
Total items that will not be reclassified to income statement

Items that may be reclassified subsequently to income statement
Cash flow hedges – forward foreign exchange contracts

(Losses)/gains arising in the year
(Gains)/losses transferred to inventories for the year
Exchange differences on translation of foreign operations
Taxation on other comprehensive income
Total items that may be reclassified subsequently to income statement
Other comprehensive income/(loss) for the year, net of taxation
Total comprehensive income for the year1

Year ended

31 December
2020
$ million
448

31 December
2019
$ million
600

Year ended
31 December
2018
$ million
663

Notes

18
5

10
(4)
6

(24)
(6)
21
4
(5)
1
449

(14)
2
(12)

14
(19)
21
–
16
4
604

11
(1)
10

21
2
(132)
(3)
(112)
(102)
561

The Group has adopted IFRS 16 Leases from 1 January 2019 using the modified retrospective approach. Under this approach comparative information is not restated. Refer to Note 7
for further details.

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

The Notes on pages 152–204 are an integral part of these accounts.

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Smith+Nephew Annual Report 2020

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 receivables1
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 and lease liabilities
Retirement benefit obligations
Other payables
Provisions
Deferred tax liabilities

Current liabilities
Bank overdrafts, borrowings, loans and lease liabilities
Trade and other payables
Provisions
Current tax payable

Total liabilities
Total equity and liabilities

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At
31 December
2020
$ million

At
31 December
2019
$ million

Notes

7
8
9
10
11
13
18
5

12
13
15

15
18
14
17
5

15
14
17

1,449
2,928
1,486
9
108
33
133
202
6,348

1,691
1,211
1,762
4,664
11,012

177
612
18
(157)
(329)
4,958
5,279

3,353
163
94
294
141
4,045

337
1,022
123
206
1,688
5,733
11,012

1,323
2,789
1,567
7
103
35
106
150
6,080

1,614
1,328
277
3,219
9,299

177
610
18
(189)
(324)
4,849
5,141

1,975
136
102
214
167
2,594

72
1,046
203
243
1,564
4,158
9,299

149

1 Trade and other receivables includes a current tax receivable of $95m (31 December 2019: $21m).
The accounts were approved by the Board and authorised for issue on 18 February 2021 and are signed on its behalf by:
Roberto Quarta
Chair

Anne-Françoise Nesmes
Chief Financial Officer

Roland Diggelmann
Chief Executive Officer

The Notes on pages 152–204 are an integral part of these accounts.

Smith+Nephew Annual Report 2020

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
Net movement in post-retirement benefit obligations
Increase in inventories
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables and provisions
Cash generated from operations1
Interest received
Interest paid
Income taxes refunded/(paid)
Net cash inflow from operating activities
Cash flows from investing activities
Acquisitions, net of cash acquired
Capital expenditure
Net (purchase)/proceeds from sale of investments
Distribution from associate
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
Purchase of own shares
Payment of capital element of lease liabilities
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 from/(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

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Year ended
31 December
2020
$ million

Year ended
31 December
2019
$ million

Year ended
31 December
2018
$ million

Notes

22
11

20
20
20
20
20

20
19

20
20

246
56
562
34
26
(14)
1
(45)
209
(103)
972
2
(61)
22
935

(170)
(443)
(2)
9
(606)

2
(16)
(55)
–
(5)
1,950
(400)
9
7
(328)
1,164
1,493
257
1
1,751

743
55
502
16
32
(1)
(4)
(204)
30
201
1,370
4
(56)
(150)
1,168

(869)
(408)
23
3
(1,251)

2
(63)
(46)
–
(125)
1,290
(740)
9
(2)
(318)
7
(76)
333
–
257

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

The Group has adopted IFRS 16 Leases from 1 January 2019 using the modified retrospective approach. Under this approach comparative information is not restated. Refer to Note 7
for further details.

Includes $117m (2019: $123m, 2018: $83m) of outgoings on restructuring and rationalisation expenses, $24m (2019: $36m, 2018: $3m) of acquisition and disposal related items and $75m
(2019: $105m inflow, 2018: $104m outflow) of legal and other items.

2 Cash and cash equivalents is net of bank overdrafts of $11m (2019: $20m, 2018: $32m).

The Notes on pages 152–204 are an integral part of these accounts.

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Group financial statements continuedSmith+Nephew Annual Report 2020

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Group statement of changes in equity

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 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 capital5
At 31 December 2018
Attributable profit for the year
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 capital5
At 31 December 2019
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 capital5
At 31 December 2020

Capital
redemption
reserve

Share
capital

Share
premium

Other
reserves3

Treasury
shares2

Retained
earnings4

Total
equity
$ million $ million $ million $ million $ million $ million $ million
4,644
(11)
4,633
663
(102)
(321)
35
1
(48)
10
–
3
4,874
600
4
(318)
32
1
(63)
9
–
2
5,141
448
1
(328)
26
(4)
(16)
9
–
2
5,279

4,329
(11)
4,318
663
10
(321)
35
1
–
(30)
(51)
–
4,625
600
(12)
(318)
32
1
–
(29)
(50)
–
4,849
448
6
(328)
26
(4)
–
(28)
(11)
–
4,958

(228)
–
(228)
–
(112)
–
–
–
–
–
–
–
(340)
–
16
–
–
–
–
–
–
–
(324)
–
(5)
–
–
–
–
–
–
–
(329)

(257)
–
(257)
–
–
–
–
–
(48)
40
51
–
(214)
–
–
–
–
–
(63)
38
50
–
(189)
–
–
–
–
–
(16)
37
11
–
(157)

605
–
605
–
–
–
–
–
–
–
–
3
608
–
–
–
–
–
–
–
–
2
610
–
–
–
–
–
–
–
–
2
612

178
–
178
–
–
–
–
–
–
–
(1)
–
177
–
–
–
–
–
–
–
–
–
177
–
–
–
–
–
–
–
–
–
177

17
–
17
–
–
–
–
–
–
–
1
–
18
–
–
–
–
–
–
–
–
–
18
–
–
–
–
–
–
–
–
–
18

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 2020 was $297m (2019: $318m loss, 2018: $339m loss).

4 Within retained earnings is a capital reserve of $2,266m (2019: $2,266m, 2018: $2,266m).
5

Issue of ordinary share capital in connection with the Group’s share incentive plans.

The Notes on pages 152–204 are an integral part of these accounts.

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Group financial statements continued

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.

The Group has prepared its accounts in accordance with International Accounting Standards in conformity with the requirements of
the Companies Act 2006 and in accordance with International Financial Reporting Standards (IFRS) adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union. 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 2020. IFRSs as adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union 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, liability provisions and impairment. These are discussed in Note 1.2 below. 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 uncertainty as to the future impact on the financial performance and cash flows of the Group as a result of the COVID-19
pandemic has been considered as part of the Group’s adoption of the going concern basis in these financial statements. The Directors
have prepared three-year projections as part of our Strategic Plan and also more detailed cash flow scenarios to 31 December 2022
for going concern purposes.

The Group had access to $1,751m of cash and cash equivalents at 31 December 2020. The Group’s net debt, excluding lease liabilities,
at 31 December 2020 was $1,722m with access to committed facilities of $4.5bn with an average maturity of 5.2 years. At the date
of approving these consolidated financial statements the funding position of the Group has remained unchanged and the cash position
is not materially different other than the payment associated with the acquisition of the Extremity Orthopaedics business of Integra
LifeSciences Holdings Corporation as described in note 23.

The Group has $265m of private placement debt due for repayment in 2021. $1,550m of private placement debt is subject to financial
covenants. The principal covenant on the private placement debt is a leverage ratio of <3.5x which is measured on a rolling 12-month
basis at half year and year end. There are no financial covenants in any of the Group’s other facilities.

The Directors have considered various scenarios in assessing the impact of COVID-19 on future financial performance and cash
flows, with the key judgement applied being the speed and sustainability of the return to a normal volume of elective procedures
in key markets, including the impact of a further extended wave of restrictions on elective procedures in the first half of 2021 and
the subsequent recovery. Throughout these scenarios, which include a severe but plausible outcome, the Group continues to have
headroom on its borrowing facilities and financial covenants.

The Directors have a reasonable expectation that the Company and the Group are well placed to manage their business risks, have
sufficient funds to continue to meet their liabilities as they fall due and to continue in operational existence for a period of at least
22 months from the date of the approval of the financial statements. The financial statements have therefore been prepared on a
going concern basis.

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 2020
A number of new standards are effective from 1 January 2020 but they do not have a material effect on the Group’s financial
statements. The Group applied the interest rate benchmark reform amendments retrospectively to hedging relationships that
existed at 1 January 2020 or were designated thereafter and that are directly affected by interest rate benchmark reform.

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 2021 and
earlier application is permitted; however, the Group has not early adopted them in preparing these consolidated financial statements.
The Group had a number of interest rate swaps outstanding at 31 December 2020 which all mature in 2021 and for which published
US Dollar LIBOR rates will still be available. The Group has a revolving credit facility of $1,000m and private placement notes of $25m
which will be subject to IBOR reform. The Group expects that the interest rates for both will be changed to SOFR (Secured Overnight
Financing Rate) in 2021 and that no significant modification gain or loss will arise as a result. The other new standards and amendments
to standards are not expected to have a significant impact on adoption.

152

Smith+Nephew Annual Report 2020

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-terminous 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 Critical judgements and estimates
The Group prepares its consolidated financial statements in accordance with IFRS as issued by the IASB and IFRS adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union, the application of which often requires judgements and estimates
to be made by management when formulating the Group’s financial position and results. Under IFRS, the Directors are required to adopt
those accounting policies most appropriate to the Group’s circumstances for the purpose of presenting fairly the Group’s financial
position, financial performance and cash flows.

The Group’s accounting policies do not include any critical judgements. The Group’s accounting policies are set out in Notes 1–23 of
the Notes to the Group accounts. Of those, the policies which require the most use of management’s estimation are outlined below.
The critical estimates are consistent with 31 December 2019 except for business combinations, which is not a critical estimate at
31 December 2020 as there were no significant acquisitions in the year, and taxation, which is not a critical estimate at 31 December
2020 following the conclusion of tax audits leading to a significant release of provisions (see Note 5 for further details). Management’s
assessment of the impact of COVID-19 on critical and other estimates is also outlined below.

Valuation of inventories
A feature of the Orthopaedics franchise (which accounts for approximately 60% of the Group’s total inventory and approximately
80% of the total provision for excess and obsolete 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 and phase-out of old products.
See Note 12 for further details.

COVID-19 impact assessment: Management have assessed the impact of COVID-19 on the provision for excess and obsolete inventory,
specifically considering the impact of lower sales demand and increased inventory levels. Where possible, management have taken
steps to reduce manufacturing output and purchase levels to respond to actual demand. Management have not changed their policy for
calculating the provision since 31 December 2019, nor is a change in the key assumptions underlying the methodology expected in the
next 12 months. As a result of decreased sales demand and increased inventory levels, of which COVID-19 was a significant contributing
factor, the provision has increased from $308m at 31 December 2019 to $377m at 31 December 2020. The provision for excess and
obsolete inventory is not considered to have a range of potential outcomes that is significantly different to the $377m at 31 December
2020 barring unforeseen changes in sales demand like those experienced in 2020.

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Notes to the Group accounts continued

1 Basis of preparation continued
Liability provisioning
The recognition of provisions for legal disputes related to metal-on-metal cases 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 value of
provisions may require future adjustment if experience such as number, nature or value of claims or settlements changes. Such a change
may be material in 2021 or thereafter. 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. See Note 17 for further details.

COVID-19 impact assessment: Management considered whether there had been any changes to the number and value of claims due
to COVID-19 and to date have not identified any changes in trends. If the experience changes in the future the value of provisions may
require adjustment.

Impairment
In carrying out impairment reviews of intangible assets and 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. This critical estimate is not considered to have a significant risk of material adjustment in 2021 or thereafter
based on sensitivity analyses undertaken (as outlined below). See Notes 8 and 9 for further details on impairment reviews.

COVID-19 impact assessment: Management have assessed the non-current assets held by the Group at 31 December 2020 to
identify any indicators of impairment as a result of COVID-19. Where an impairment indicator has arisen, impairment reviews have
been undertaken by comparing the expected recoverable value of the asset to the carrying value of the asset. The recoverable
amounts are based on cash flow projections using the Group’s base case scenario in its going concern models, which was reviewed
and approved by the Board. Additionally, severe downside sensitivity analyses have been undertaken on the base case scenario.
No material impairments were identified as a result of the impairment reviews and sensitivity analyses undertaken.

1.3 Other estimates
Management have also considered the impact of COVID-19 on other estimates:

Trade receivables
Management have assessed the impact of COVID-19 on the expected credit loss allowance against trade receivables. Current and
expected collection of trade receivables since the start of the COVID-19 pandemic has been reflected in country-specific expected
credit loss models on a reasonable and supportable basis where possible, taking into account macroeconomic factors such as
government support. In some instances, it was not possible to incorporate the specific effects of COVID-19 and macroeconomic
factors on a reasonable and supportable basis. Where the effects of COVID-19 could not be reflected in expected credit loss models,
further adjustments to the models were considered. These adjustments were based on the most recent information on the expected
recoverability of trade receivable balances. The Group’s expected credit loss allowance increased from $59 million at 31 December
2019 to $71 million at 31 December 2020. This estimate is not considered to have a significant risk of material adjustment in 2021
or thereafter.

1.4 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
at the exchange rate as 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.

154

Group financial statements continuedSmith+Nephew Annual Report 2020

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

2020

2019

2018

1.28
1.14
1.07

1.37
1.23
1.14

1.28
1.12
1.01

1.32
1.12
1.04

1.33
1.18
1.02

1.28
1.14
1.02

2 Business segment information
From 1 January 2019 onwards, with the Group’s operating structure organised around three global franchises, the chief operating
decision maker began 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 new operating structure led to the appointment of three
franchise presidents. The franchise presidents have responsibility for upstream marketing, driving product portfolio and technology
acquisition decisions, and full commercial responsibility for their franchise in the US. Regional presidents in EMEA and APAC are
responsible for the implementation of the global franchise strategy in their respective regions.

Based on the aforementioned changes, the Group has concluded that there are three reportable segments from January 2019.
The Group has not restated comparative information, other than revenue, as historical financial information is not available
on a franchise basis.

The Executive Committee (‘ExCo’) comprises the Chief Financial Officer (‘CFO’), the three franchise presidents, the two regional
presidents and certain heads of function, and is chaired by the Chief Executive Officer (‘CEO’). ExCo is the body through which the CEO
uses the authority delegated to him by the Board of Directors to manage the operations and performance of the Group. All significant
operating decisions regarding the allocation and prioritisation of the Group’s resources and assessment of the Group’s performance are
made by ExCo, and whilst the members have individual responsibility for the implementation of decisions within their respective areas,
it is at the ExCo level that these decisions are made. Accordingly, ExCo is considered to be the Group’s chief operating decision maker
as defined by IFRS 8 Operating Segments.

In making decisions about the prioritisation and allocation of the Group’s resources, ExCo reviews financial information for the three
franchises (Orthopaedics, Sports Medicine & ENT, and Advanced Wound Management) and determines the best allocation of resources
to the franchises. 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. Financial information for corporate costs is presented on a Group-wide basis. The ExCo is not
provided with total assets and liabilities by segment, and therefore these measures are not included in the disclosures below. The results
of the segments are shown below.

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Notes to the Group accounts continued

2 Business segment information continued
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 fulfilled within
one year. There is no significant revenue associated with the provision of 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 third party purchases product from a wholesaler at
its agreed price plus a mark-up. The wholesaler in turn charges the Group for the difference between the price initially paid by the
wholesaler and the agreed price. The provision for chargebacks is based on expected sell-through levels by the Group’s wholesalers
to such customers, as well as estimated wholesaler inventory levels.

Orthopaedics and Sports Medicine & ENT (Ear, Nose & Throat)
Orthopaedics and Sports Medicine & ENT consists of the following businesses: Knee Implants, Hip Implants, Other Reconstruction,
Trauma, Sports Medicine Joint Repair, Arthroscopic Enabling Technologies and ENT. 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 business in Established Markets is direct to hospitals and ambulatory surgery centers whereas in the Emerging Markets
we generally sell through distributors.

Advanced Wound Management
Advanced Wound Management consists of the following businesses: 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. When control is transferred to a wholesaler or distributor, revenue is recognised accordingly.
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:

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Reportable segment revenue
Orthopaedics
Sports Medicine & ENT
Advanced Wound Management
Revenue from external customers

2020
$ million

2019
$ million

2018
$ million

1,917
1,333
1,310
4,560

2,222
1,536
1,380
5,138

2,168
1,461
1,275
4,904

156

Group financial statements continuedSmith+Nephew Annual Report 2020

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
Other Reconstruction
Trauma
Orthopaedics
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
ENT (Ear, Nose and Throat)
Sports Medicine & ENT
Advanced Wound Care
Advanced Wound Bioactives
Advanced Wound Devices
Advanced Wound Management
Consolidated revenue from continuing operations

2020
$ million

20191
$ million

20181
$ million

822
567
68
460
1,917
710
517
106
1,333
647
431
232
1,310
4,560

1,042
613
79
488
2,222
794
591
151
1,536
701
436
243
1,380
5,138

1,017
613
62
476
2,168
717
600
144
1,461
727
333
215
1,275
4,904

Included within the 2019 and 2018 analysis is a reclassification of $13m (2018: $13m) of revenue formerly included in the Advanced Wound Care franchise of which $12m (2018: $13m) is now
included in the Advanced Wound Bioactives franchise and $1m (2018: $nil) in the Advanced Wound Devices franchise in order to present consistent analysis to the 2020 results. There has been
no change in total revenue for the year ended 31 December 2019 and 31 December 2018.

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
centers 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 centers.
The disaggregation by Established Markets and Emerging Markets also reflects their differing economic factors including volatility in
growth and outlook.

2020

2019

2018

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Orthopaedics, Sports Medicine & ENT
Advanced Wound Management
Total

Established

Total

Established

Emerging
Markets

Emerging
Markets1
Total
Markets
$ million $ million $ million $ million $ million $ million $ million $ million $ million
3,629
2,619
1,275
1,170
4,904
3,789

3,758
1,380
5,138

3,250
1,310
4,560

2,944
1,103
4,047

2,986
1,195
4,181

685
172
857

772
185
957

631
140
771

Emerging
Markets

Established

Markets1

Total

1 Established Markets comprises the US, Australia, Canada, Europe, Japan and New Zealand.

US revenue for 2020 was $2,339m (2019: $2,551m, 2018: $2,354m), China revenue for 2020 was $318m (2019: $336m, 2018: $270m)
and UK revenue for 2020 was $166m (2019: $211m, 2018: $211m).

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Notes to the Group accounts continued

2 Business segment information continued
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 2020. As of 31 December 2020, 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 2020 was $97m (2019: $82m) with $445m being recognised in revenue in 2020.

Major customers
No single customer generates revenue greater than 10% of the consolidated revenue.

2.2 Trading and operating profit by business segment
Trading profit is a trend measure which presents the profitability of the Group excluding the impact of specific transactions that
management considers affect the Group’s short-term profitability and the comparability of results. 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, 2.5 and 2.6.

Segment trading profit is reconciled to the statutory measure below:

Segment profit
Orthopaedics
Sports Medicine & ENT
Advanced Wound Management
Segment trading profit
Corporate costs
Group trading profit
Acquisition and disposal related items
Restructuring and rationalisation expenses
Amortisation and impairment of acquisition intangibles
Legal and other
Group operating profit

1 Historical financial information is not available on a franchise basis.

2020
$ million

2019

$ million

20181
$ million

389
306
316
1,011
(328)
683
(4)
(124)
(171)
(89)
295

666
489
370
1,525
(356)
1,169
(32)
(134)
(143)
(45)
815

1,123
7
(120)
(113)
(34)
863

2.3 Acquisition and disposal related items
For the year to 31 December 2020 costs primarily relate to the acquisition of Tusker and prior year acquisitions, partially offset by credits
relating to remeasurement of contingent consideration for prior year acquisitions.

For the year to 31 December 2019 costs primarily relate to the acquisitions of Ceterix, Osiris, Leaf, Brainlab OJR and Atracsys.

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.

2.4 Restructuring and rationalisation costs
For the year ended 31 December 2020 these costs relate to the implementation of the Accelerating Performance and Execution (APEX)
programme that was announced in February 2018 and the operations and commercial excellence programme announced in February
2020. For the years ended 31 December 2019 and 31 December 2018 costs relate to the APEX programme.

158

Group financial statements continuedSmith+Nephew Annual Report 2020

2.5 Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2020, 2019 and 2018 these costs relate to the amortisation and impairment of intangible assets
acquired in material business combinations.

2.6 Legal and other
For the year ended 31 December 2020 charges primarily relate to legal expenses for ongoing metal-on-metal hip claims and an
increase of $17m in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated metal-
on-metal hip claims. The year to 31 December 2020 also includes costs for implementing the requirements of the EU Medical Device
Regulations that will apply from May 2021.

For the year ended 31 December 2019 charges primarily relate to legal expenses for ongoing metal-on-metal hip claims and an
increase of $121m in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated
metal-on-metal hip claims. The year to 31 December 2019 also includes costs for implementing the requirements of the EU Medical
Device Regulations that will apply from May 2021. These charges in the year to 31 December 2019 were partially offset by a credit
of $147m relating to insurance recoveries for ongoing metal-on-metal hip claims.

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 2021. 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.

2.7 Non-current assets by geography
The following table presents the non-current assets of the Group based on their location:

United Kingdom
United States of America
Other
Total non-current assets of the consolidated Group1

1 Non-current assets excludes retirement benefit assets and deferred tax assets.

3 Operating profit

2020
$ million
403
4,093
1,517
6,013

2019
$ million
385
4,034
1,405
5,824

2018
$ million
354
3,186
1,224
4,764

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Accounting policy
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.

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Notes to the Group accounts continued

3 Operating profit continued

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

2020
$ million
4,560
(1,396)
3,164
(307)

(1,773)
(789)
(2,562)
295

2019
$ million
5,138
(1,338)
3,800
(292)

(1,911)
(782)
(2,693)
815

2018
$ million
4,904
(1,298)
3,606
(246)

(1,820)
(677)
(2,497)
863

1 2020 includes $6m charge relating to legal and other items and $15m charge relating to restructuring and rationalisation expenses (2019: $5m charge relating to legal and other items

and $7m charge relating to restructuring and rationalisation expenses, 2018: $4m of legal and other items).

2 2020 includes $28m charge relating to legal and other items (2019: $24m, 2018: $9m).
3 2020 includes $63m of amortisation of software and other intangible assets (2019: $61m, 2018: $63m).
4 2020 includes $171m of amortisation and impairment of acquisition intangibles and $109m of restructuring and rationalisation expenses (2019: $143m of amortisation and impairment
of acquisition intangibles and $127m of restructuring and rationalisation expenses, 2018: $113m of amortisation and impairment of acquisition intangibles and $120m of restructuring
and rationalisation expenses).

5 2020 includes $55m charge relating to legal and other items (2019: $16m charge, 2018: $21m charge).
6 2020 includes $4m charge of acquisition and disposal related items (2019: $32m charge, 2018: $7m credit).

Note that items detailed in 1, 2, 4, 5 and 6 are excluded from the calculation of trading profit, the segments’ 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
Fair value remeasurement of trade investments
Depreciation of property, plant and equipment1
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

1 The 2020 depreciation charge includes $51m (2019: $50m, 2018: $nil) related to right-of-use assets.

2020
$ million

–
234
12
5
–
311
34
–
–
66

2019
$ million
(147)
204
2
4
12
292
16
–
–
85

2018
$ million
(107)
176
3
5
9
251
19
32
25
88

In 2019 other operating income comprises insurance recoveries for ongoing metal-on-metal hip claims (2018: insurance recovery relating
to product liability claims involving macrotextured components voluntarily withdrawn from the market in 2003 and a gain relating to
patent litigation). In 2019, $147m (2018: $84m) of other operating income was included with legal and other items, as explained in
Note 2.6, and does not form part of trading profit, the segments’ profit measure.

160

Group financial statements continuedSmith+Nephew Annual Report 2020

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3.1 Staff costs and employee numbers
Staff costs during the year amounted to:

Wages and salaries
Social security costs
Pension costs (including retirement healthcare)
Share-based payments

Notes

18
22

2020
$ million
1,392
190
78
26
1,686

2019
$ million
1,435
193
76
32
1,736

2018
$ million
1,330
176
65
35
1,606

During the year ended 31 December 2020, the average number of employees was 18,581 (2019: 18,030, 2018: 16,681).

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:

Audit related 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
Lease liabilities
Corporate bond
Other

Net interest expense

4.2 Other finance costs

Retirement benefit net interest expense
Unwinding of discount
Other
Other finance costs

2020
$ million

2019
$ million

2018
$ million

5.0
2.0

0.4
7.4

3.6
3.8
7.4

3.8
2.7

0.3
6.8

3.0
3.8
6.8

2.6
3.4

–
6.0

2.4
3.6
6.0

2020
$ million

(4)
(42)
(6)
(5)
(5)
(62)
(56)

2019
$ million
10

2018
$ million
8

(7)
(41)
(6)
–
(11)
(65)
(55)

(11)
(38)
–
–
(10)
(59)
(51)

Notes
18

2020
$ million

2019
$ million

(2)
(11)
6
(7)

(2)
(8)
(8)
(18)

2018
$ million
(3)
(9)
(8)
(20)

161

Smith+Nephew Annual Report 2020

Notes to the Group accounts continued

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 non-deductible.
It is calculated using tax rates that have been enacted or substantively enacted as at the balance sheet date.

The Group operates in numerous tax jurisdictions around the world. At any given time, the Group typically is involved in tax audits
and other disputes and will have other 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 where considered appropriate. The ultimate tax liability may differ from the
amount provided depending on factors including interpretations of tax law and settlement negotiations.

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 taking into account the recoverability of the deferred tax assets,
future profitability and any restrictions on use. The Group considers available evidence to assess future profitability over a reasonably
foreseeable time period, depending on the circumstances and typically a minimum of five years. Any material unrecognised deferred
tax assets are disclosed in Note 5.

Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or substantively enacted as at the
balance sheet date that are expected to apply in the periods in which the asset or liability is settled. It is recognised in the income
statement except when it relates to items credited or charged directly to other comprehensive income or equity, in which case
the deferred tax is also 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, the Group
intends to settle its current tax assets and liabilities on a net basis, offset is permissible according to the relevant jurisdiction’s
tax laws and that authority permits the Group to make a single net payment.

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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 (credit)/charge attributable to the Group

2020
$ million

2019
$ million

2018
$ million

16
40
56
(191)
(135)

(49)
(12)
(6)
(67)
(202)
–
4
(198)

27
140
167
(11)
156

(9)
3
(7)
(13)
143
(2)
(1)
140

27
131
158
(33)
125

(3)
1
(5)
(7)
118
(4)
(1)
113

162

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The 2020 net prior period adjustment of $197m is explained predominantly by a current tax credit resulting from the successful UK tax
litigation outcome (see below), and releases of provisions following the conclusion of tax audits and other settlements. The 2019 and
2018 net prior period adjustments of $18m and $38m respectively 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 total taxation credit as per the income statement of $202m includes a $274m net credit (2019: $68m net credit, 2018: $51m net
credit) as a consequence of the successful outcome of the UK tax litigation, restructuring and rationalisation related costs, acquisitions
and disposal related items, amortisation and impairment of acquisition intangibles, legal and other charges.

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
transfer pricing, tax rate changes, tax legislation changes, tax authority interpretation, expiry of statute of limitations, tax litigation,
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 any audit or dispute. Management considers 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. Total tax liabilities
include $162m (2019: $201m) in relation to uncertain tax positions which relate to multiple issues across the jurisdictions in which the
Group operates. Other payables includes $15m (2019: $17m) of other interest on these provisions. Other receivables includes $95m
(2019: $21m) of tax receivables relating to payments on account and repayments due in a number of jurisdictions, principally relating
to the US.

The Group believes that it has made adequate provision in respect of additional tax liabilities that may arise from unagreed years, tax
audits and disputes, the majority of which relate to transfer pricing matters, as would be expected for a Group operating internationally.
However, the actual liability for any particular issue may be higher or lower than the amount provided, resulting in a negative or positive
effect on the tax charge in any given year. A reduction in the tax charge may also arise for other reasons such as an expiry of the relevant
statute of limitations. Depending on the final outcome of certain tax audits which are currently in progress, possible statute of limitations
expiry and other factors, an impact on the tax charge could arise. Whilst such an impact can vary from year to year, we believe the
possibility of a material impact on the tax charge for 2021 is unlikely.

UK tax litigation
In December 2016, the Group appealed to the First Tier Tribunal against a decision by HM Revenue & Customs (HMRC) relating to the
UK tax deductibility of historic foreign exchange losses totalling £675m. The decision of the First Tier Tribunal upheld the Group’s appeal.
HMRC’s subsequent appeal was heard by the Upper Tribunal in June 2018 which upheld the decision of the First Tier Tribunal. HMRC was
granted leave to appeal in the Court of Appeal, which was heard in October 2019 and (following adjournment) in January 2020. In March
2020, the Court of Appeal published its decision again upholding the Group’s position. In June 2020, the Group received confirmation that
HMRC had not appealed to the Supreme Court, making the Group’s right to the deductions conclusive. As a result, full benefit for these
deductions has been recognised in the Group’s financial statements (no tax benefit for these losses was recognised in previous periods),
within current tax, and within deferred tax to the extent that losses not yet utilised are reasonably expected to be realised in the future.
In the second half of 2020 the Group has received a cash tax refund of $100m (£78m) in addition to accrued interest of $6m, in respect
of tax previously overpaid; and a deferred tax asset of $42m has been recognised in respect of the losses not yet utilised. There is an
unrecognised deferred tax credit of $47m in relation to losses arising from the decision which are not considered to have a realistically
foreseeable potential to be utilised at the current time.

EU state aid
A factor that may have a future effect on our tax charge is the decision by the European Commission (EC), published in April 2019, that
the UK CFC financing exemption (FCPE) rules between 2013 and 2018 partially constituted illegal State Aid. The UK government and
many potentially affected taxpayers, including us, have applied to the Court of Justice of the European Union (CJEU) for annulment
of the EC’s decision. At the EC’s request, HMRC requested, from potentially affected companies, certain information and facts in
order to review whether there may be a potential liability, were the EC’s position to be upheld, to which we fully responded within
HMRC’s specified timeframe. The amount of tax ultimately due, if any, will depend both on generic technical legislative interpretation
and company-specific facts and circumstances. HMRC is under a legal obligation to collect potentially underpaid tax ahead of the
determination of the appeals by the CJEU, and by virtue of a recent law change, any assessment raised by HMRC could be appealed
but the tax charged under it could not be postponed.

As of 12 February 2021, we had received no assessment or other demand, nor any other communication from HMRC following our most
recent information submission. If the EC decision were ultimately to be upheld on generic technical legislative grounds, subject to any
relief based on company-specific facts and circumstances, we calculate our maximum potential liability as at 31 December 2020 to be
approximately $155m. Based on current information, we do not consider it can reasonably be concluded that it is more likely than not
that any liability would arise, and therefore no provision has been recognised.

163

Smith+Nephew Annual Report 2020

Notes to the Group accounts continued

5 Taxation continued
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. On 11 March 2020, the UK Government announced that the planned corporation tax reduction to 17.0%
would be postponed and the UK corporation tax rate would be maintained at 19.0% for the financial years starting 1 April 2020
and 2021. Therefore UK deferred tax has been calculated for the purposes of the 2020 financial statements based on a 19.0% rate
whereas 17.0% was assumed in the 2019 financial statements.

The UK standard rate of corporation tax for 2020 is 19.0% (2019: 19.0%, 2018: 19.0%). 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% (2019: 19.0%, 2018: 19%)
Differences in overseas taxation rates1
R&D credits
Tax losses and other deferred tax assets not recognised
Recognition of previously unrecognised tax losses2
Expenses not deductible for tax purposes
Change in tax rates

Withholding tax on unremitted earnings
Adjustments in respect of prior years3
Total taxation (credit)/charge as per the income statement

2020
$ million
246
47
(37)
(9)
15
(45)
29
(12)

7
(197)
(202)

2019
$ million
743
141
5
(8)
–
(2)
18
3

(18)
143

2018
$ million
781
148
(6)
(6)
4
(1)
15
1

(38)
118

In 2020 this principally relates to the carry back of losses relating to non-trading items.
In 2020 this principally relates to the recognition of previously unrecognised brought forward losses following the successful UK tax litigation outcome.

1
2
3 The adjustments in respect of prior years are explained on page 162.

5.2 Deferred taxation
Movements in the main components of deferred tax assets and liabilities were as follows:

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At 31 December 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
Acquisitions
At 31 December 2019
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 2020

Accelerated
tax
depreciation

$ million
(52)
–
19

Intangibles

$ million
(126)
(1)
11

(3)
–
–
(1)
–
(37)
–
(23)
(3)
–
–
2
–
(61)

–
–
–
1
(106)
(221)
–
20
3
–
–
6
(17)
(209)

Retirement
benefit
obligations

$ million

5
–
–

–
1
–
1
–
7
2
–
–
(4)
–
–
–
5

Inventory,
provisions
and other
differences

Total

$ million $ million
27
(1)
9

172
–
(2)

Losses
$ million
28
–
(19)

–
–
–
–
37
46
–
51
3
–
–
–
23
123

10
–
1
(4)
11
188
8
1
3
2
(4)
4
1
203

7
1
1
(3)
(58)
(17)
10
49
6
(2)
(4)
12
7
61

164

Group financial statements continuedSmith+Nephew Annual Report 2020

Represented by:

Deferred tax assets
Deferred tax liabilities
Net position at 31 December

2020
$ million
202
(141)
61

2019
$ million
150
(167)
(17)

The deferred tax asset of $203m relating to inventory, provisions and other differences includes inventory ($131m), provisions and other
short-term temporary differences ($61m) and bad debt provisions ($11m).

The Group has gross unused trading and non-trading tax losses of $771m (2019: $219m), the increase being mainly attributable to the
successful UK tax litigation case and losses inherited from US acquisitions, and gross unused capital losses of $109m (2019: $104m),
available for offset against future profits, of which $3m of trading losses will expire within five years from the balance sheet date if not
utilised. A deferred tax asset of $123m (2019: $46m) has been recognised in respect of $451m (2019: $116m) 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.

6 Earnings per ordinary share

Accounting policy
Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of
ordinary shares in issue during the year, excluding shares held by the Company in the Employees’ Share Trust or as treasury shares.

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 (or adjusted basic earnings per share) is a trend measure which presents the long-term profitability
of the Group excluding the impact of specific transactions that management considers affects the Group’s short-term profitability.
The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator
used for this measure. The Group has identified the following items as those to be excluded when arriving at adjusted attributable
profit: acquisition and disposal related items including amortisation and impairment of acquisition intangible assets; significant
restructuring programmes; significant gains and losses arising from legal disputes and other significant items (including UK tax
litigation) and taxation thereon. Adjusted diluted earnings per share is calculated by adjusting the adjusted 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.

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165

Smith+Nephew Annual Report 2020

Notes to the Group accounts continued

6 Earnings per ordinary share continued
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 items1
Restructuring and rationalisation costs
Amortisation and impairment of acquisition intangibles2
Legal and other3
UK tax litigation
Taxation on excluded items
Adjusted attributable profit

2020
$ million

2019
$ million

2018
$ million

448
564

600
893

663
881

Notes

3
9

5
5

2020
$ million
448
4
124
171
91
(142)
(132)
564

2019
$ million
600
34
134
143
50
–
(68)
893

2018
$ million
663
(7)
120
118
38
–
(51)
881

1 Acquisition and disposal related items includes a $4m charge within operating profit (2019: $32m charge, 2018: $7m credit) and a $nil charge within share of result of associates

(2019: $2m, 2018: $nil).
In 2020 amortisation and impairment of acquisition intangibles includes a $171m charge within operating profit (2019: $143m charge within operating profit, 2018: $113m charge within
operating profit and a $5m charge within share of result of associates).

3 Legal and other charge in 2020 includes $89m (2019: $45m charge, 2018: $34m charge) within operating profit (refer to Note 2.6) and a $8m charge (2019: $5m charge, 2018: $4m 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 2020, other finance costs includes a credit
of $6m for interest on a tax refund relating to the UK tax litigation case (see Note 5).

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:

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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
Adjusted:
Basic
Diluted

2020

2019

2018

875
2
877

51.3¢
51.2¢

64.6¢
64.4¢

874
3
877

873
3
876

68.6¢
68.4¢

76.0¢
75.7¢

102.2¢
101.9¢

100.9¢
100.6¢

166

Group financial statements continuedSmith+Nephew Annual Report 2020

7 Property, plant and equipment

Accounting policy
Property, plant and equipment
Owned assets
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.

Leased assets
On 1 January 2019, the Group adopted IFRS 16 Leases using the modified retrospective approach and the right-of-use asset on
transition equalled the lease liability, adjusted by the amount of any rent-free period accruals. The cumulative effect of initially
adopting IFRS 16 is recognised as an adjustment at 1 January 2019 with no restatement of comparative information.

The assessment of whether a contract is or contains a lease takes place at the inception of the contract. The assessment involves
whether the Group obtains substantially all the economic benefits from the use of that asset and whether the Group has the right
to direct the use of the asset. The Group allocates the consideration in the contract to each lease and non-lease component. The
non-lease component, where it is separately identifiable, is not included in the right-of-use asset.

The Group leases many assets including properties, motor vehicles and office equipment. The Group availed itself of the exemptions
for short-term leases and leases of low-value items for leases other than those for properties and motor vehicles. The use of these
exemptions does not have a material impact. The Group recognises a right-of-use asset and a lease liability at the commencement
of the lease. The right-of-use asset is initially measured based on the present value of lease payments that are not paid at the
commencement date plus initial direct costs less any incentives received. The lease payments are discounted using an incremental
borrowing rate which is country-specific and reflective of the lease term. The right-of-use asset is depreciated over the shorter
of the lease term or the useful life of the underlying asset.

Cash flows arising on lease interest payments are included in operating cash flows whereas cash flows arising on the capital
repayments of the lease liability are included in financing cash flows. Prior to the adoption of IFRS 16, cash flows associated with
lease payments were presented in operating cash flows.

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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167

Smith+Nephew Annual Report 2020

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Notes to the Group accounts continued

7 Property, plant and equipment continued

Land and
buildings
$ million

Notes

Instruments

$ million

Other
$ million

Plant and equipment

Assets in
course of
construction

$ million

Total
$ million

Cost
At 31 December 2018
Recognition of right-of-use asset on initial application of IFRS 16
Adjusted balance at 1 January 2019
Exchange adjustment
Acquisitions
Additions
Disposals
Impairment
Transfers
At 31 December 2019
Exchange adjustment
Acquisitions
Additions
Disposals
Impairment
Transfers
At 31 December 2020
Depreciation and impairment
At 1 January 2019
Exchange adjustment
Charge for the year
Disposals
Transfers
At 31 December 2019
Exchange adjustment
Charge for the year
Impairment
Disposals
At 31 December 2020
Net book amounts
At 31 December 2020
At 31 December 2019

335
134
469
2
7
42
(11)
–
24
533
15
5
80
(23)
(8)
14
616

109
1
51
(6)
–
155
5
57
(5)
(13)
199

417
378

1,388
–
1,388
(2)
–
198
(72)
–
–
1,512
45
–
203
(74)
–
(10)
1,676

1,001
(2)
157
(60)
(1)
1,095
34
165
–
(61)
1,233

443
417

1,032
25
1,057
8
2
37
(19)
–
57
1,142
26
1
37
(21)
(5)
64
1,244

711
5
84
(17)
1
784
20
89
(3)
(19)
871

373
358

128
–
128
1
–
128
(2)
(4)
(81)
170
–
–
132
(1)
–
(85)
216

–
–
–
–
–
–
–
–
–
–
–

216
170

2,883
159
3,042
9
9
405
(104)
(4)
–
3,357
86
6
452
(119)
(13)
(17)
3,752

1,821
4
292
(83)
–
2,034
59
311
(8)
(93)
2,303

1,449
1,323

Land and buildings includes land with a cost of $22m (2019: $24m) that is not subject to depreciation. Transfers from assets in course
of construction includes $10m (2019: $nil) of software. Assets under construction reflect that the Group is undergoing investment in its
manufacturing facilities including its new facility in Malaysia. Instrument transfers include $7m (2019: $nil) to inventory. Group capital
expenditure relating to property, plant and equipment contracted but not provided for amounted to $56m (2019: $33m). The amount
of borrowing costs capitalised in 2020 and 2019 was minimal.
Information about the Group’s right-of-use assets is outlined below:

2020
Additions
Depreciation charge in the year
Net book value at 31 December

Land and
buildings
$ million
70
38
173

Plant and
equipment
$ million
10
13
23

168

Group financial statements continuedSmith+Nephew Annual Report 2020

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,
Sports Medicine & ENT 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 and net book value
At 1 January
Exchange adjustment
Acquisitions
At 31 December

Notes

2020
$ million

2019
$ million

2,789
43
96
2,928

2,337
11
441
2,789

Management has identified four CGUs in applying the provisions of IAS 36 Impairment of Assets: Orthopaedics, Sports Medicine & ENT,
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:

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Orthopaedics
Sports Medicine & ENT
Advanced Wound Management

2020
$ million
830
1,462
636
2,928

2019
$ million
787
1,364
638
2,789

Impairment reviews were performed as of September 2020 and September 2019 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.

The impact of COVID-19 was considered in the goodwill impairment reviews and recoverable amounts were based on cash flow
projections using the Group’s base case scenario in its going concern models. Additionally, severe downside sensitivity analyses have
been undertaken on the base case scenario. No impairment was identified as a result of the impairment reviews and sensitivity
analyses undertaken.

169

Smith+Nephew Annual Report 2020

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Notes to the Group accounts continued

8 Goodwill continued
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.

8.1 Orthopaedics CGU
The cash flows 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.

The compound annual revenue growth rate for the three-year period was 11.7% (2019: 6.0%) 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% (2019: 2.0%). The pre-tax discount rate used in the Orthopaedics CGU value-in-use calculation reflects the geographical
mix and is 9.4% (2019: 9.5%).

8.2 Sports Medicine & ENT CGU
The value-in-use calculation for the Sports Medicine & ENT CGU reflects growth rates and cash flows consistent with management’s
strategy to rebalance Smith+Nephew towards higher growth areas such as Sports Medicine.

The compound annual revenue growth rate for the three-year period was 12.2% (2019: 5.8%) for the various components of the Sports
Medicine & ENTs 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% (2019: 2.0%). The pre-tax discount rate used in the Sports Medicine & ENT CGU value-in-use calculation
reflects the geographical mix of the revenues and is 9.4% (2019: 9.5%).

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.

The compound annual revenue growth rate for the three-year period was 5.7% (2019: 4.8%) 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% (2019: 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 9.4% (2019: 9.5%).

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 show 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 14.98% for the Orthopaedics CGU, 12.43% for the Sports Medicine & ENT CGU and 14.39% for the Advanced
Wound Management CGU. Such increases in discount rates are not considered to be reasonably possible.

170

Group financial statements continuedSmith+Nephew Annual Report 2020

9 Intangible assets

Accounting policy
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 software ranges between three
and seven years. The estimated useful economic life of technology assets ranges between 6–20 years, product-related assets ranges
between 2–20 years, and customer and distribution assets ranges between 2–14 years. 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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9 Intangible assets continued

Cost
At 1 January 2019
Exchange adjustment
Acquisitions
Additions
Disposals
Transfers
At 31 December 2019
Exchange adjustment
Acquisitions
Additions
Disposals
Transfers
At 31 December 2020
Amortisation and impairment
At 1 January 2019
Exchange adjustment
Charge for the year
Impairment
Disposals
At 31 December 2019
Exchange adjustment
Charge for the year
Impairment
Disposals
At 31 December 2020
Net book amounts
At 31 December 2020
At 31 December 2019

Technology

Notes

$ million

Product-
related
$ million

Customer and
distribution
related
$ million

Assets
in course of
construction

$ million

Software
$ million

Total
$ million

354
(1)
75
–
–
–
428
10
57
–
–
–
495

74
–
28
–
–
102
4
36
–
–
142

353
326

1,836
3
350
1
(1)
–
2,189
42
4
1
–
–
2,236

1,081
4
118
–
–
1,203
36
129
5
–
1,373

863
986

112
–
90
6
–
–
208
(7)
–
25
–
–
226

95
(1)
15
–
–
109
(8)
25
–
–
126

100
99

413
–
–
12
(3)
6
428
6
–
26
(3)
20
477

268
–
43
2
(3)
310
2
44
7
(2)
361

116
118

13
1
–
30
–
(6)
38
–
–
26
–
(10)
54

–
–
–
–
–
–
–
–
–
–
–

54
38

2,728
3
515
49
(4)
–
3,291
51
61
78
(3)
10
3,488

1,518
3
204
2
(3)
1,724
34
234
12
(2)
2,002

1,486
1,567

Transfers into software and assets in course of construction includes $10m (2019: $nil) of software transferred from property,
plant and equipment. Group capital expenditure relating to software contracted but not provided for amounted to $9m (2019: $5m).

Additions in 2020 include $7m of accrued capital spend. Amortisation and impairment of acquisition intangibles is set out below:

Technology
Product-related
Customer and distribution related
Total

2020
$ million
37
119
15
171

2019
$ million
28
104
11
143

Management have assessed the acquisition intangible assets held by the Group to identify any indicators of impairment as a result
of COVID-19. Where an impairment indicator has arisen, impairment reviews have been undertaken by comparing the expected
recoverable value of the asset to the carrying value of the asset. As a result there was an impairment charge of $4m booked in 2020
(2019: $nil) in relation to an immaterial product asset in acquisition intangibles.

172

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The table below provides further detail on the largest intangible assets and their remaining amortisation period:

Intangibles acquired as part of the ArthroCare acquisition
Intangibles acquired as part of the Osiris acquisition
Intangibles acquired as part of the Healthpoint acquisition

10 Investments

Carrying value

$ million
427
299
252

Remaining
amortisation
period
3–13 years
8 years
2–7 years

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.

At 1 January
Acquisitions
Additions
Fair value remeasurement
Distributions received
Disposals
Transfers to cash and cash equivalents
At 31 December

11 Investments in associates

Notes

2020
$ million

7
–
2
–
–
–
–
9

2019
$ million
34
17
1
12
(2)
(46)
(9)
7

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 2020, the Group holds 47.6% (2019: 49%) of Bioventus LLC (Bioventus). Bioventus is a limited liability company
operating as a partnership. Subsequent to the year end, Bioventus commenced trading on the Nasdaq Global Market (see Note 23
for further details). The company’s headquarters is located in Durham, North Carolina, US. Bioventus focuses its medical product
development around active healing therapies and the surgical performance of orthobiologics. The active healing therapies product
line supports accelerated and more complete healing of bone fractures, and treats the chronic pain associated with osteoarthritis.
The Group’s ability to recover the value of its investment is dependent upon the ongoing clinical and commercial success of these
products. The profit after taxation recognised in the income statement relating to Bioventus was $14m (2019: $1m). The balance sheet
carrying value relating to Bioventus is $105m (2019: $100m).

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 costs to sell, estimated using discounted cash flows.
The amounts recognised in the balance sheet and income statement for associates are as follows:

Balance sheet
Income statement profit

2020
$ million
108
14

2019
$ million
103
1

173

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Notes to the Group accounts continued

11 Investments in associates continued

Summarised financial information for significant associates
Set out below is the summarised financial information for Bioventus, adjusted for differences with Group accounting policies:

Summarised statement of comprehensive income
Revenue
Attributable profit for the year
Group adjustments1
Total comprehensive profit
Group share of profit for the year at 47.6% (2019: 49%)

Summarised balance sheet
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Non-controlling interest
Net equity attributable to owners
Group’s share of net assets at 47.6% (2019: 49%)
Group adjustments1
Group’s carrying amount of investment at 47.6% (2019: 49%)

2020
$ million

2019
$ million

311
19
11
30
14

342
8
(6)
2
1

2020
$ million

2019
$ million

283
210
(223)
(117)
153
(1)
152
72
33
105

297
183
(241)
(87)
152
(10)
142
70
30
100

1 Group adjustments include an adjustment to align the useful life of intangible assets with Group policy.

During the year the Group received a $9m (2019: $3m) cash distribution from Bioventus.

At December 2020, the Group held equity investments in two other associates (2019: one) with a carrying value of $3m (2019: $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.

174

Group financial statements continuedSmith+Nephew Annual Report 2020

Raw materials and consumables
Work-in-progress
Finished goods and goods for resale

2020
$ million
370
61
1,260
1,691

2019
$ million
287
100
1,227
1,614

2018
$ million
219
88
1,088
1,395

Management have assessed the impact of COVID-19 on the provision for excess and obsolete inventory, specifically considering
the impact of lower sales demand and increased inventory levels. Management have not changed their policy for calculating the
provision since 31 December 2019, nor is a change in the key assumptions underlying the methodology expected in the next 12 months.
As a result of decreased sales demand and increased inventory levels, of which COVID-19 was a significant contributing factor, the
provision has increased from $308m at 31 December 2019 to $377m at 31 December 2020. The provision also increased as a result
of 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 $377m held at 31 December 2020.

The cost of inventories recognised as an expense and included in cost of goods sold amounted to $1,129m (2019: $1,147m,
2018: $1,126m). Net adverse manufacturing variances of $85m generated by factory specific shutdowns or reductions in scheduled
production due to COVID-19 were directly expensed to the cost of goods sold. In addition, $144m was recognised as an expense
within cost of goods sold resulting from inventory write-offs and provision increases (2019: $70m, 2018: $94m).

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 when they are classified as non-
current assets.

The Group manages credit risk through credit limits which require authorisation commensurate with the size of the limit and
which are regularly reviewed. Credit limit decisions are made based on available financial information and the business case.
Significant receivables are regularly reviewed and monitored at Group level. The Group has no significant concentration of credit risk,
with exposure spread over a large number of customers and geographies. Furthermore, the Group’s principal customers are backed
by government and public or private medical insurance funding, which historically represent a lower risk of default. The maximum
exposure to credit risk at the reporting date is the fair value of each class of receivable. The Group does not hold any collateral as
security. 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).

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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
Current tax receivable
Prepayments

Due after more than one year
Other non-current assets

2020
$ million

2019
$ million

2018
$ million

982
(71)
911
24
100
95
81
1,211

33
1,244

1,141
(59)
1,082
26
124
21
75
1,328

35
1,363

1,166
(62)
1,104
37
107
–
69
1,317

16
1,333

175

Smith+Nephew Annual Report 2020

Notes to the Group accounts continued

13 Trade and other receivables continued
Other non-current assets primarily relate to long-term prepayments and contingent consideration. Trade receivables are classified as
loans and receivables. Management considers that the carrying amount of trade and other receivables approximates 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 relating to other receivables is de minimis.

Management have assessed the impact of COVID-19 on the expected credit loss allowance against trade receivables. Current and
expected collection of trade receivables since the start of the COVID-19 pandemic has been reflected in country-specific expected
credit loss models on a reasonable and supportable basis where possible, taking into account macroeconomic factors such as
government support. In some instances, it was not possible to incorporate the specific effects of COVID-19 and macroeconomic
factors on a reasonable and supportable basis. Where the effects of COVID-19 could not be reflected in expected credit loss models,
further adjustments to the models were considered. These adjustments were based on the most recent information on the expected
recoverability of trade receivable balances. The Group’s expected credit loss allowance increased from $59m at 31 December 2019
to $71m at 31 December 2020. The loss allowance expense for the year was $25m (2019: $15m, 2018: $14m).

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 more than 3 months
Past due more than 6 months

Loss allowance
Trade receivables – net

2020 Weighted
average loss
rate
%
-0.4%
-0.9%
-4.5%
-38.4%

2020 Loss
allowance
$ million
(2)
(2)
(4)
(63)
(71)

2020 Gross
carrying amount

2019 Gross
carrying amount

$ million
510
220
88
164
982
(71)
911

$ million
681
190
85
185
1,141
(59)
1,082

2018 Gross
carrying amount
$ million
647
271
78
170
1,166
(62)
1,104

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 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:

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At 31 December in prior year
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

2020
$ million
59

2019
$ million
62

1
–
–
25
(14)
71

62
(1)
–
9
15
(26)
59

2020
$ million
380
34
198
299
911

2019
$ million
493
41
211
337
1,082

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$ million
69
14
83
(3)
(8)
–
14
(24)
62

2018
$ million
527
45
201
331
1,104

176

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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

2020
$ million

2019

$ million

891
59
72
1,022

93
1
94

941
23
82
1,046

99
3
102

The acquisition consideration includes $128m (2019: $141m) contingent upon future events.

The acquisition consideration due after more than one year is expected to be payable as follows: $33m in 2022, $32m in 2023,
$15m in 2024, $8m in 2025, and $5m due in over five years (2019: $61m in 2021, $20m in 2022, $7m in 2023, $3m in 2024, and $8m
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

Corporate bond

Private placement notes
Borrowings
Cash at bank
Credit balance on derivatives – interest rate swaps
Net debt
Non-current lease liabilities
Current lease liabilities
Net debt including lease liabilities

2020
$ million
279
930

992
1,285
3,486
(1,762)
(2)
1,722
146
58
1,926

2019
$ million
26
851

–

1,000
1,877
(277)
–
1,600
124
46
1,770

177

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15 Cash and borrowings continued
Borrowings are repayable as follows:

At 31 December 2020
Bank loans
Bank overdrafts

Corporate bond
Private placement notes
Lease liabilities¹

At 31 December 2019
Bank loans
Bank overdrafts
Private placement notes
Lease liabilities¹

Within
one year or
on demand

Between
one and
two years

Between
two and
three years

Between
three and
four years

$ million

Between
four and
five years
$ million

After
five years
$ million

Total
$ million

1
11

–
267
58
337

6
20
–
46
72

604
–

–
125
44
773

553
–
265
39
857

326
–

–
105
30
461

–
–
125
30
155

–
–

–
430
21
451

298
–
105
20
423

–
–

–
–
15
15

–
–
430
14
444

–
–

992
625
47
1,664

–
–
75
37
112

931
11

992
1,552
215
3,701

857
20
1,000
186
2,063

1 The lease liabilities presented above of $215m (2019: $186m) are on an undiscounted basis. The lease liabilities on a discounted basis, as outlined on the prior page, are $204m (2019: $170m).

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 $4.5bn (2019: $2.9bn).
During 2020, the Group issued its first corporate bond, in the form of $1bn (before expenses and underwriting discounts) of notes bearing
an interest rate of 2.032% repayable in 2030. Euro term loans of €492m have been extended from May 2021 to mature in May 2022.

The interest payable on borrowings under committed facilities is either at fixed or floating rates. Floating rates are typically based on
the LIBOR (or other reference rate) relevant to the term and currency concerned. The Company is subject to financial covenants under
its private placement agreements. The 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 2020 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.

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The Group’s committed facilities at 31 December 2020 are:

Facility
$75 million 3.23% Senior Notes
$190 million 2.97% Senior Notes
$75 million 3.46% Senior Notes
€223 million bilateral, term loan facility
€269 million bilateral, term loan facility
$50 million 3.15% Senior Notes
€265 million bilateral, term loan 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
$1.0 billion syndicated revolving credit facility
$75 million 3.99% Senior Notes
$140 million 2.83% Senior Notes
$60 million 2.90% Senior Notes
$100 million 2.97% Senior Notes
$95 million 2.99% Senior Notes

$1.0 billion 2.032% Corporate Bond

$155 million 3.09% Senior Notes

Date due
January 2021
November 2021
January 2022
May 2022
May 2022
November 2022
April 2023
November 2023
January 2024
November 2024
November 2024
June 2025
January 2026
June 2027
June 2028
June 2029
June 2030

October 2030

June 2032

15.3 Year end financial liabilities by contractual maturity
The table below analyses the Group’s year end financial liabilities by contractual maturity date, including contractual interest payments
and excluding the impact of netting arrangements:

Within one
year or on
demand
$ million

Between
one and
two years

$ million

Between
two and
five years
$ million

After
five years
$ million

Total
$ million

At 31 December 2020
Non-derivative financial liabilities:

Bank overdrafts and loans
Corporate bond
Trade and other payables
Private placement notes
Acquisition consideration

Derivative financial instruments:

Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – inflow

At 31 December 2019
Non-derivative financial liabilities:

Bank overdrafts and loans
Trade and other payables
Private placement notes
Acquisition consideration

Derivative financial instruments:

Currency swaps/forward foreign exchange contracts – outflow
Currency swaps/forward foreign exchange contracts – inflow

12
20
891
311
72

2,581
(2,544)
1,343

26
941
33
83

2,331
(2,331)
1,083

604
20
1
165
34

–
–
824

553
1
297
63

–
–
914

326
61
–
623
59

–
–
1,069

298
1
721
32

–
–
1,052

–
1,102
–
691
5

–
–
1,798

–
1
79
10

–
–
90

942
1,203
892
1,790
170

2,581
(2,544)
5,034

877
944
1,130
188

2,331
(2,331)
3,139

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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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 2020, the Group held $1,751m (2019: $257m, 2018: $333m) in cash net of bank overdrafts. The Group had committed
facilities available of $4,480m at 31 December 2020 of which $3,480m was drawn.

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 2021, 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 including leases increased from $1,770m at the beginning of 2020 to $1,926m at the end
of 2020, representing an overall increase of $156m.

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.

On adoption of IFRS 9 on 1 January 2018, the Group elected to continue to apply the hedge accounting guidance in IAS 39 Financial
Instruments: Recognition and Measurement. 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 to profit or loss.

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.

180

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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 2020,
the Group had contracted to exchange within one year the equivalent of $2.2bn (2019: $2.1bn). Based on the Group’s net borrowings
as at 31 December 2020, if the US Dollar were to weaken against all currencies by 10%, the Group’s net borrowings would increase
by $84m (2019: $78m) principally due to the Euro-denominated term loans.

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 2020 would have been $48m lower (2019: $52m 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 2020 would have been $30m higher
(2019: $26m 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 2020 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.

The Group applied the interest rate benchmark reform amendments retrospectively to hedging relationships that existed at 1 January
2020 or were designated thereafter and that are directly affected by interest rate benchmark reform. The Group had a number of
interest rate swaps outstanding at 31 December 2020 which all mature in 2021 and for which published US Dollar LIBOR rates will still
be available. The Group has a revolving credit facility of $1,000m and private placement notes of $25m which will be subject to IBOR
reform. The Group expects that the interest rates for both will be changed to SOFR in 2021 and that no significant modification gain
or loss will arise as a result.

Based on the Group’s gross borrowings and cash as at 31 December 2020, if interest rates were to increase by 100 basis points in all
currencies then the annual net interest charge would increase by $5m (2019: $9m). 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 2020 was $24m (2019: $26m), 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 2020
was $1,762m (2019: $277m). The Group’s exposure to credit risk on cash is mitigated as the amounts are held in a wide number of high
credit quality financial institutions. 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:

Nominal
amount

Carrying
amount
assets

Carrying
amount
liabilities

$ million $ million $ million

Changes in
fair value
in OCI
$ million

Hedge
ineffectiveness
in profit or loss

Amounts reclassified
from hedging reserve
to profit or loss

$ million

Line item in
profit or loss

At 31 December 2020
Foreign currency risk
Forward exchange contracts1

Interest rate risk
Interest rate swaps2
At 31 December 2019
Foreign currency risk
Forward exchange contracts1

Interest rate risk
Interest rate swaps2

2,581

(59)

(30)

(120)

–

2,331

(120)

–

(5)

–

(6)

Cash flow hedges

–

N/A

(19)

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 receivables on the Balance Sheet.

16.4 Net investment hedge
Part of the Group’s net investment in its Euro subsidiaries is hedged by €757m ($930m equivalent) of term loans which mitigate
the foreign currency risk arising from the subsidiaries’ net assets. The loans are designated as hedging instruments for the changes
in the value of the net investment that is attributable to changes in the EUR/USD spot rate.

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 profile of interest bearing liabilities and assets
Short-term receivables and payables are excluded from the following disclosures.

Currency and interest rate profile of interest bearing liabilities:

Gross
borrowings

$ million

Currency
swaps
$ million

Interest
rate
swaps
$ million

Total
liabilities
$ million

Floating
rate liabilities

$ million

Fixed rate
liabilities
$ million

At 31 December 2020
US Dollar
Other
Total interest bearing liabilities
At 31 December 2019
US Dollar
Other
Total interest bearing liabilities

(2,548)
(938)
(3,486)

(1,005)
(872)
(1,877)

(240)
(141)
(381)

(118)
(97)
(215)

–
–
–

(2,788)
(1,079)
(3,867)

(1,123)
(969)
(2,092)

(391)
(1,079)
(1,470)

(268)
(969)
(1,237)

(2,397)
–
(2,397)

(855)
–
(855)

Fixed rate liabilities
Weighted

Weighted
average
interest rate

average

time
for which
rate is fixed
Years

2.7
–

3.4
–

7.1
–

3.8
–

In 2020, the Group also had liabilities due for deferred and contingent acquisition consideration (denominated in US Dollars, Swiss Francs
and Euros) totalling $165m (2019: $181m, 2018: $127m) 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 2020 was less than 1% (2019: less than 1%).

182

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Currency and interest rate profile of interest bearing assets:

At 31 December 2020
US Dollar
Other

Total interest bearing assets
At 31 December 2019
US Dollar
Other
Total interest bearing assets

Cash
at bank
$ million

Currency
swaps
$ million

Interest rate

swaps
$ million

Total assets

Floating
rate assets

$ million

Fixed
rate assets
$ million

1,648
114
1,762

181
96
277

139
242
381

96
119
215

2
–
2

–
–
–

1,789
356
2,145

277
215
492

1,787
356
2,143

277
215
492

2
–
2

–
–
–

Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned.

16.6 Fair value of financial assets and liabilities

Accounting policy
Measurement of fair values
A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial assets
and liabilities and non-financial assets acquired in a business combination (see Note 21).

When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values
are categorised into different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly (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 2019.

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 2020 and 2019. 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. The corporate bond issued in October 2020 is publicly
listed and a market price is available. The Group’s other long term borrowings are not quoted publicly, 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.

Carrying
amount

Fair value

At 31 December 2020
Financial assets measured
at fair value
Forward foreign exchange contracts
Investments
Contingent consideration receivable
Interest rate swaps
Currency swaps

Financial liabilities measured
at fair value
Acquisition consideration
Forward foreign exchange contracts
Currency 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
Corporate bond
Private placement debt in a
hedge relationship
Private placement debt not in a
hedge relationship
Trade and other payables

Fair value –
hedging
instruments

Amortised
cost

Fair value
through
OCI

Fair value
through
profit
or loss

Other
financial
liabilities

Total
$ million $ million $ million $ million $ million $ million $ million $ million $ million

Level 2

Level 3

Total

20
–
–
2
2

–
9
37
–
–

20
9
37
2
2

–
(57)
(2)

(128)
–
–

(128)
(57)
(2)

20
–
–
–
–
20

–
(57)
–
(57)

986
–
986

–
–
–
–

–

–
–

–

–
–
–
–
–
–

–
–
–
–

–
1,762
1,762

–
–
–
–

–

–
–

–

–
–
–
2
2
4

–
–
(2)
(2)

–
–
–

–
–
–
–

–

–
–

–

–
9
37
–
–
46

(128)
–
–
(128)

–
–
–

–
–
–
–

–

–
–

–
–
–
–
–
–

–
–
–
–

–
–
–

(37)
(11)
(931)
(992)

20
9
37
2
2
70

(128)
(57)
(2)
(187)

986
1,762
2,748

(37)
(11)
(931)
(992)

(122)

(1,430)
(892)

–

(4,415)

At 31 December 2020, the market value of the corporate bond ($992m) was $1,017m. At 31 December 2020, the fair value of the private
placement debt ($1,552m) was $1,642m. At 31 December 2019, the fair value of the private placement debt was not materially different
to the carrying value.

During the year ended 31 December 2020, acquisition consideration decreased by $16m due to $67m of payments for acquisitions made
in the current year and prior years, and $9m of remeasurement and discount unwind which were partially offset by a $60m increase
relating to 2020 acquisitions. 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.

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Group financial statements continuedSmith+Nephew Annual Report 2020

At 31 December 2019
Financial assets measured
at fair value
Forward foreign exchange contracts
Investments
Contingent consideration receivable
Currency swaps

Financial liabilities measured
at fair value
Acquisition consideration
Forward foreign exchange contracts
Currency 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

Amortised
cost

Fair value
through
OCI

Fair value
through
profit
or loss

Other
financial
liabilities

Total
$ million $ million $ million $ million $ million $ million $ million $ million $ million

Level 3

Level 2

Total

Carrying
amount

Fair value

25
–
–
1

–
7
39
–

25
7
39
1

–
(22)
(1)

(141)
–
–

(141)
(22)
(1)

25
–
–
–
25

–
(22)
–
(22)

–
–
–
–
–

–
–
–
–

1,184
–
1,184

–
277
277

–
–
–

–

–
–
–

–

–
–
–

–
–
–
1
1

–
–
(1)
(1)

–
–
–

–

–
–
–

–
7
39
–
46

(141)
–
–
(141)

–
–
–

–

–
–
–

–
–
–
–
–

–
–
–
–

–
–
–

25
7
39
1
72

(141)
(22)
(1)
(164)

1,184
277
1,461

(40)
(20)
(857)

(120)

(880)
(944)
(2,861)

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The fair value of contingent acquisition consideration is estimated using a discounted cash flow model. The valuation model considers
the present value of risk adjusted expected payments, discounted using a risk-free 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 acquisition consideration is classified as Level 3 within
the fair value hierarchy.

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16 Financial instruments and risk management continued
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.

The movements in 2020 and 2019 for financial instruments measured using Level 3 valuation methods are presented below:

Investments
At 1 January
Acquisitions
Additions
Fair value remeasurement
Distributions received
Disposals
Transfers
At 31 December

Contingent consideration receivable
At 1 January
Arising on acquisitions
Arising on disposals

Receipts

At 31 December

Acquisition consideration liability
At 1 January
Arising on acquisitions
Payments
Transfers
Remeasurements
Discount unwind
At 31 December

2020
$ million

2019
$ million

7
–
2
–
–
–
–
9

39
–
–

(2)

(141)
(49)
51
–
12
(1)
(128)

34
17
1
12
(2)
(46)
(9)
7

–
22
17

–

(99)
(103)
51
13
–
(3)
(141)

186

Group financial statements continuedSmith+Nephew Annual Report 2020

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. Insurance recoveries are recognised when the
inflow of benefits is virtually certain, and are presented within other receivables.

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.

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 2019
Net charge to income statement
Unwinding of discount
Utilised
Acquisitions
Exchange adjustment
At 31 December 2019
Charge to income statement
Unwinding of discount
Utilised
Acquisitions
Exchange adjustment
At 31 December 2020
Provisions – due within one year
Provisions – due after one year
At 31 December 2020
Provisions – due within one year
Provisions – due after one year
At 31 December 2019

Rationalisation

provisions

Metal-on-metal

Notes

$ million

35
134
–
(130)
–
1
40
124
–
(136)
–
1
29
29
–
29
40
–
40

$ million
192
121
5
(3)
–
–
315
17
8
(4)
–
–
336
53
283
336
112
203
315

Legal and other

provisions

$ million

47
5
–
(7)
17
–
62
10
–
(17)
(3)
–
52
41
11
52
51
11
62

Total
$ million
274
260
5
(140)
17
1
417
151
8
(157)
(3)
1
417
123
294
417
203
214
417

The principal elements within rationalisation provisions relate to the implementation of the Accelerating Performance and Execution
(APEX) programme that was announced in February 2018, and the operations and commercial excellence programme announced in
February 2020.

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17 Provisions and contingencies continued
The Group has estimated a provision of $336m (2019: $315m) relating to the present value at 31 December 2020 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 including sensitivity to factors such as the number,
outcome and value of claims the actual costs may differ significantly from this estimate. A range of expected outcomes between the
10th and 90th percentile generated by the actuarial model would not give rise to a material adjustment. The potential for more adverse
outcomes exists and for example at the 95th percentile a charge similar to that incurred in 2019 would be required, in 2021 or thereafter.
The provision does not include any possible further 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 Group had a receivable
of $nil related to insurance recoveries at 31 December 2020 (2019: $nil).

Management considered whether there had been any changes to the number and value of claims due to COVID-19 and to date
have not identified any changes in trends. If the experience changes in the future the value of provisions may require adjustment.

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 2020 and none are treated as financial instruments.

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.

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.

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 December 2020, approximately
1,400 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 used only in those patient groups where it continues to
demonstrate strong performance.

In 2015 and 2016, the Group’s US subsidiary entered into two group settlements in the US 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 December 2020, there were
approximately 868 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 December 2019, all of the BHR lawsuits pending against the Group in England
and Wales had been discontinued.

The Group requested indemnity from its product liability insurers for most of these metal-on-metal hip implant settlements.
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 indemnified the Group in respect of these claims up to the limits of those
insurances. The Group 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. That dispute was resolved in September 2019 for the full amount of the policy limits.
Subsequently, other insurers indemnified the Group to the limits of their respective applicable policies, resulting in collection of $147m
in insurance recoveries in 2019.

188

Group financial statements continuedSmith+Nephew Annual Report 2020

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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 engages, 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.

Arthrex asserted 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 $17m. In February 2017, the parties reached a settlement resulting in the dismissal of all patent litigation.
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 August 2019, the Court of
Appeals for the Federal Circuit affirmed an earlier US Patent & Trademark Office ruling invalidating one of the asserted Arthrex patents.
In 2020, the United States Supreme Court denied Arthrex’s request for certiorari. In October 2019, the Court of Appeals for the Federal
Circuit vacated an earlier US Patent & Trademark Office ruling invalidating the other asserted Arthrex patent, and remanded the
proceeding (on constitutional grounds) back to the US Patent & Trademark Office. In 2020, the United States Supreme Court granted
certiorari, and the Group’s appeal is scheduled to be heard on 1 March, 2021. The Group has adequately provided for any possible
additional payment relating to its historical sales.

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. Provisions are based on best estimates and management’s judgements concerning the likely
ultimate outcome of any audit or dispute. Management considers 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. The Group believes
that it has made adequate provision in respect of additional tax liabilities that may arise. See Note 5 for further details.

18 Retirement benefit obligations

Accounting policy
The Group sponsors defined benefit plans in a number of countries. A defined benefit pension plan defines an amount of pension
benefit that an employee will receive on retirement or a minimum guaranteed return on contributions, which is dependent on various
factors such as age, years of service and final salary. The Group’s obligation is calculated separately for each plan by discounting
the estimated future benefit that employees have earned in return for their service in the current and prior periods. The fair value
of any plan assets is deducted to arrive at the net liability.

The calculation of the defined benefit obligation is performed annually by external actuaries using the projected unit credit method.
Remeasurements arising from defined benefit plans comprise actuarial gains and losses and the return on the plan assets in excess
of the discount rate 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 takes 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.

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18 Retirement benefit obligations continued
18.1 Retirement benefit 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

2020
$ million

2019

$ million

82
47
(50)
79

(94)
(15)
(30)
(163)
133

75
27
(37)
65

(79)
(16)
(30)
(136)
106

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.

The 2018 and 2020 court cases in relation to Guaranteed Minimum Pensions do not impact the UK Plan as members were not
contracted out of the State Earnings Related Pension (Serps) between 1990 and 1997.

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.

There is no legislative minimum funding requirement in the UK. 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 Board of Trustees and US Pension 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.

190

Group financial statements continuedSmith+Nephew Annual Report 2020

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18.2 Reconciliation of retirement benefit obligations and pension assets
The movement in the Group’s pension benefit obligation and pension assets is as follows:

Amounts recognised on the balance sheet
at beginning of the period
Income statement expense:

Current service cost
Past service credit

Settlements
Interest (expense)/income
Administration costs and taxes

Costs recognised in income statement
Remeasurements:

Actuarial gain due to liability experience
Actuarial loss due to financial assumptions
change
Actuarial gain due to demographic
assumptions
Return on plan assets greater than discount
rate

Remeasurements 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 movements
Amount recognised on the balance sheet
Amount recognised on the balance sheet –
liability
Amount recognised on the balance sheet –
asset

Represented by:

UK Plan
US Plan
Other Plans
Total

Obligation
$ million

Asset
$ million

Total
$ million

Obligation

$ million

Asset
$ million

2020

2019
Total
$ million

(1,572)

1,542

(30)

(1,410)

1,388

(12)
5

7
(33)
(2)
(35)

(130)

–
(117)

–
(3)
2

68
67

–
–

(7)
33
–
26

–

127
127

8
3
–

(68)
(57)

(12)
5

–
–
(2)
(9)

(11)
3

–
(41)
(2)
(51)

(130)

(192)

127
10

–
(152)

8
–
2

–
10

–
(3)
2

69
68

–
–

–
41
–
41

–

138
138

13
3
(2)

(69)
(55)

(57)
(1,714)

46
1,684

(11)
(30)

(27)
(1,572)

30
1,542

(22)

(11)
3

–
–
(2)
(10)

(192)

138
(14)

13
–
–

–
13

3
(30)

(312)

149

(163)

(282)

146

(136)

(1,402)

1,535

133

(1,290)

1,396

106

Obligation
$ million
(881)
(494)
(339)
(1,714)

Asset
$ million
963
541
180
1,684

2020

Total
$ million
82
47
(159)
(30)

Obligation
$ million
(794)
(471)
(307)
(1,572)

Asset
$ million
869
498
175
1,542

2019
Total
$ million
75
27
(132)
(30)

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.

191

Smith+Nephew Annual Report 2020

18 Retirement benefit obligations continued
18.3 Plan assets
The market value of the US, UK and Other Plans assets are as follows:

UK Plan:
Assets with a quoted market price:

Cash and cash equivalents
Equity securities
Other bonds

Short dated credit fund

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

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$ million

2019
$ million

2018
$ million

10
91
49
127
347
89
713

250
963

2
60
163
316
541

5
51
9
4
10
37
23
5
144

3
103
44
119
264
97
630

239
869

–
50
152
296
498

4
47
6
4
10
41
25
5
142

2
127
41
–
246
138
554

241
795

–
79
91
267
437

2
42
3
3
13
34
20
4
121

36
180
1,684

33
175
1,542

35
156
1,388

192

Group financial statements continuedSmith+Nephew Annual Report 2020

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.

18.4 Expenses recognised in the income statement
The total expense relating to retirement benefits recognised for the year is $78m (2019: $76m, 2018: $65m). Of this cost recognised
for the year, $69m (2019: $66m, 2018: $57m) relates to defined contribution plans and $9m (2019: $10m, 2018: $8m) 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 costs of goods sold, selling, general and administrative
expenses, and research and development expenses. There were $nil outstanding payments as at 31 December 2020 due to be paid
over to the plans (2019: $nil, 2018: $nil).

Defined benefit plan costs comprise service cost which is charged to operating profit in selling, general and administrative expenses
and net interest cost and administration costs and taxes which are reported as other finance costs.

The defined benefit pension costs charged for the UK and US Plans are:

Service cost
Past service cost
Settlement loss
Net interest expense, administration and taxes

UK Plan
$ million

2020

US Plan
$ million

UK Plan
$ million

2019

US Plan
$ million

UK Plan
$ million

–
–
–
–
–

–
–
–
(1)
(1)

–
–
–
–
–

2018
US Plan
$ million
–
–
–
–
–

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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.

2018
% per annum % per annum % per annum

2020

2019

UK Plan:

Discount rate
Future salary increases
Future pension increases
Inflation (RPI)
Inflation (CPI)

US Plan:

Discount rate
Future salary increases
Inflation

1.3
n/a
2.9
2.9
2.1

2.4
n/a
n/a

1.9
n/a
3.0
3.0
2.2

3.2
n/a
n/a

2.7
n/a
3.2
3.2
2.2

4.2
n/a
n/a

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Smith+Nephew Annual Report 2020

18 Retirement benefit obligations continued
Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S3NA with projections in-line with
the CMI 2018 table and the US uses the PRI-2012 table with MP-2020 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

2020
years

2019
years

2018
years

27.6
30.1

24.7
26.8

29.1
31.5

24.6
27.3

27.5
30.0

25.0
27.2

29.0
31.4

25.2
27.8

28.9
30.4

24.9
27.1

31.1
31.9

25.1
27.7

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.

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UK Plan:

Discount rate
Inflation
Mortality

US Plan:

Discount rate
Mortality

Increase in pension obligation

+50bps/+1yr

-50bps/-1yr +50bps/+1 yr

Increase in pension cost
-50bps/-1yr

-78.0
80.0
42.0

-25.0
14.0

88.0
-73.0
-41.0

28.0
-14.0

-2.0
1.0
–

-1.0
–

1.0
-1.0
-1.0

1.0
–

194

Group financial statements continuedSmith+Nephew Annual Report 2020

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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 that is designed
to stabilise funding status by reducing the plan’s exposure to return-seeking assets.

Longevity risk

The present value of the plan’s 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 contribution
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 the accounting assumptions set out above.

UK Plan
The most recent full actuarial valuation of the UK Plan was undertaken as at 30 September 2018. The next full actuarial valuation as at
30 September 2020 has commenced. Future accruals to the UK Plan ceased as at 31 December 2016. Contributions to the UK Plan in
2020 were $nil (2019: $6m, 2018: $25m). This included supplementary payments of $nil (2019: $6m, 2018: $25m).

Following the completion of the 30 September 2018 valuation, it was determined that the Group is not required to make any future
supplemental payments to the UK Plan unless, following a future valuation, the Group and Trustees determine that supplemental
payments are required.

US Plan
The most recent full actuarial valuation of the US Plan was undertaken as at 1 January 2020. The next full actuarial valuation will
take place as at 1 January 2021. Future accruals to the US Plan ceased as at 31 March 2014. Contributions to the US Plan were
$nil (2019: $nil, 2018: $10m) which represented supplementary payments of $nil (2019: $nil, 2018: $10m).

There are no planned supplementary contributions to the US Plan for 2021.

195

Smith+Nephew Annual Report 2020

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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 2018
At 31 December 2019
At 31 December 2020
Allotted, issued and fully paid
At 1 January 2018
Share options
Shares cancelled
At 31 December 2018
Share options
Shares cancelled
At 31 December 2019
Share options
Shares cancelled
At 31 December 2020

Ordinary shares (20¢)

Deferred shares (£1.00)

Thousand

$ million

Thousand

$ million

Total
$ million

1,223,591
1,223,591
1,223,591

890,855
418
(3,321)
887,952
350
(3,095)
885,207
327
(649)
884,885

245
245
245

178
–
(1)
177
–
–
177
–
–
177

50
50
50

50
–
–
50
–
–
50
–
–
50

–
–
–

–
–
–
–
–
–
–
–
–
–

245
245
245

178
–
(1)
177
–
–
177
–
–
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.

196

Group financial statements continuedSmith+Nephew Annual Report 2020

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

2020
$ million
177
612
18
(157)
4,629
5,279

2019
$ million
177
610
18
(189)
4,525
5,141

2018
$ million
177
608
18
(214)
4,285
4,874

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 2020 the Group purchased a total of 0.6m shares for a cost of
$16m. In 2019 the Group purchased a total of 3.1m shares for a cost of $63m 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 2019
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2019
Shares purchased
Shares transferred from treasury
Shares transferred to Group beneficiaries
Shares cancelled
At 31 December 2020

Treasury
$ million
189
63
(21)
(12)
(50)
169
16
(26)
(12)
(11)
136

Employees’
Share Trust

$ million
25
–
21
(26)
–
20
–
26
(25)
–
21

Total
$ million
214
63
–
(38)
(50)
189
16
–
(37)
(11)
157

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Smith+Nephew Annual Report 2020

19 Equity continued

19.3 Dividends

The following dividends were declared and paid in the year:
Ordinary final of 23.1¢ for 2019 (2018: 22.0¢, 2017: 22.7¢) paid 6 May 2020
Ordinary interim of 14.4¢ for 2020 (2019: 14.4¢, 2018: 14.0¢) paid 28 October 2020

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Treasury

Number
of shares

Employees’
Share Trust

Number
of shares

million
12.2
3.1
(1.3)
(0.7)
(3.1)
10.2
0.6
(1.5)
(0.8)
(0.6)
7.9

million
1.7
–
1.3
(1.7)
–
1.3
–
1.5
(1.6)
–
1.2

Total

Number
of shares
million
13.9
3.1
–
(2.4)
(3.1)
11.5
0.6
–
(2.4)
(0.6)
9.1

2020
$ million

2019
$ million

2018
$ million

202
126
328

192
126
318

198
123
321

A final dividend for 2020 of 23.1 US cents per ordinary share was proposed by the Board on 18 February 2021 and will be paid, subject
to shareholder approval, on 12 May 2021 to shareholders on the Register of Members on 6 April 2021. The estimated amount of this
dividend is $202m. 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. In 2020, given the earnings
decline, the Board chose to keep the interim dividend flat on the prior 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 2020 amounted to $2,205m.

198

Group financial statements continuedSmith+Nephew Annual Report 2020

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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,
borrowings, loans and lease liabilities under current liabilities.

Analysis of net debt including lease liabilities

Borrowings

At 1 January 2018
Net cash flow/debt movement
Exchange adjustment
At 31 December 2018
Net cash flow/debt movement
Exchange adjustment
At 31 December 2019
IFRS 16 lease liabilities
Net debt including lease
liabilities at 31 December 2019
Net cash flow/debt movement
Exchange adjustment
Corporate bond issuance expense
IFRS 16 lease liabilities movement
Net debt including lease
liabilities at 31 December 2020

Net
currency
swaps

Net
interest
swaps

Cash Overdrafts

Due within
one year

Due after
Total
one year
$ million $ million $ million $ million $ million $ million $ million
(1,281)
197
(20)
(1,104)
(499)
3
(1,600)
(170)

(1,423)
126
(4)
(1,301)
(550)
–
(1,851)
(124)

(13)
(118)
(1)
(132)
125
1
(6)
(46)

169
200
(4)
365
(88)
–
277
–

(14)
(18)
–
(32)
12
–
(20)
–

2
8
(11)
(1)
2
(1)
–
–

(2)
(1)
–
(3)
–
3
–
–

277
1,484
1
–
–

(20)
9
–
–
–

(52)
(260)
(2)
–
(12)

(1,975)
(1,285)
(79)
8
(22)

1,762

(11)

(326)

(3,353)

–
(7)
7
–
–

–

–
–
2
–
–

(1,770)
(59)
(71)
8
(34)

(1,926)

199

Smith+Nephew Annual Report 2020

20 Cash flow statement continued
Reconciliation of net cash flow to movement in net debt including lease liabilities

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
IFRS 16 lease liabilities
Exchange adjustment

Corporate bond issuance expense
Change in net debt in the year
Opening net debt1
Closing net debt1

1 Includes IFRS 16 lease liabilities from 1 January 2019.

2020
$ million
1,493
(7)
(1,545)
(59)
(34)
(71)

8
(156)
(1,770)
(1,926)

2019
$ million
(76)
2
(425)
(499)
(170)
3

–
(666)
(1,104)
(1,770)

2018
$ million
182
8
7
197
–
(20)

–
177
(1,281)
(1,104)

Cash and cash equivalents
For the purposes of the Group cash flow statement cash and cash equivalents at 31 December 2020 comprise cash at bank net
of bank overdrafts.

Cash at bank
Bank overdrafts
Cash and cash equivalents

2020
$ million
1,762
(11)
1,751

2019
$ million
277
(20)
257

2018
$ million
365
(32)
333

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 on the Group’s cash.

Cash outflows/(inflows) arising from financing activities

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Repayment

Borrowing

Proceeds from

Repayment

of bank
loans1
$ million
405
–
405

of bank
loans1
$ million
(950)
–
(950)

Corporate
Bond issue
$ million
(1,000)
–
(1,000)

of lease

liabilities
$ million
55
–
55

Cash
outflow

from other
$ million
(7)
–
(7)

Dividends
$ million
–
328
328

Purchase of
own shares
$ million
–
16
16

Proceeds from own

shares/issue of
ordinary shares
$ million
–
(11)
(11)

Total
$ million
(1,497)
333
(1,164)

865
–
865

(1,290)
–
(1,290)

401
–

401

(394)
–

(394)

–
–
–

46
–
46

–
–
–

2
–
2

–
318
318

8
–
8

–

321
321

–
63
63

–
48
48

1 This includes drawdown and repayment of the syndicated revolving credit facility.

–
(11)
(11)

(377)
370
(7)

–
(13)
(13)

15
356
371

200

2020
Debt
Equity

Total

2019
Debt
Equity

Total

2018
Debt
Equity

Total

Group financial statements continuedSmith+Nephew Annual Report 2020

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21 Acquisitions

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.

Year ended 31 December 2020
On 23 January 2020, the Group completed the acquisition of 100% of the share capital of Tusker Medical, Inc. (‘Tusker’), a developer
of an innovative in-office solution for tympanostomy (ear tubes) called Tula. The acquisition was deemed to be a business combination
within the scope of IFRS 3 Business Combinations. The acquisition supports the Group’s strategy to invest in innovative technologies
that address unmet clinical needs. The maximum consideration is $140m and the provisional fair value of consideration is $139m and
includes $6m of deferred consideration and $35m of contingent consideration. The goodwill represents the control premium, the
acquired workforce and the synergies expected from integrating Tusker into the Group’s existing business, and is not expected to be
deductible for tax purposes.

For the year ended 31 December 2020, the contribution to revenue and profit from Tusker was immaterial. If the business combination
had occurred at the beginning of the year the contribution to revenue and profit would also have been immaterial.

The provisional fair value of assets acquired and liabilities assumed are set out below:

Intangible assets – Product-related
Property, plant & equipment
Other receivables
Trade and other payables
Non-current liabilities
Net deferred tax asset
Net assets
Goodwill
Consideration (net of $nil cash acquired)

Tusker
$ million
53
6
1
(6)
(3)
5
56
83
139

During the year ended 31 December 2020, the Group also completed two other smaller acquisitions in the spheres of remote physical
therapy and arthroscopic enabling technology. The maximum aggregated consideration is $41m and the provisional fair value of
consideration is $26m and includes $3m of deferred consideration and $17m of contingent consideration. The fair value of aggregate
assets acquired is: intangible assets of $8m, property and other net assets of $2m. The goodwill arising on these acquisitions is $16m,
which is not expected to be deductible for tax purposes, and is attributable to future iterations of the technologies and the synergies
that can be expected from integrating these acquisitions into the Group’s existing business.

For the year ended 31 December 2020, the contribution to revenue and profit from the business combinations was immaterial. If the
business combinations had occurred at the beginning of the year, the contribution to revenue and profit would have been immaterial.

The cash outflow from acquisitions of $170m (2019: $869m) comprises payments of consideration relating to acquisitions completed
in the current year of $117m (2019: $796m) and payments of deferred and contingent consideration of $53m (2019: $73m) relating
to acquisitions completed in prior years.

The carrying value of goodwill increased from $2,789m to $2,928m as a result of acquisitions ($99m) and foreign exchange movements
($43m) which were partially offset by an IFRS 3 measurement period adjustment ($3m) in relation to the Osiris Therapeutics, Inc.
acquisition as outlined on the next page.

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21 Acquisitions continued
Year ended 31 December 2019
The Group acquired five medical technology businesses deemed to be business combinations within the scope of IFRS 3 Business
Combinations during the year ended 31 December 2019. The acquisition accounting for these business combinations was completed
in 2020 with no adjustments to the provisional fair value disclosed in the Group’s 2019 Annual Report other than in relation to the
Osiris Therapeutics, Inc. acquisition as outlined below.

On 22 January 2019, the Group completed the acquisition of 100% of the share capital of Ceterix Orthopaedics, Inc. (‘Ceterix’),
a developer of a meniscus repair system. The acquisition supports the Company’s strategy to invest in innovative technologies that meet
unmet clinical needs. The maximum consideration payable of $105m has a fair value of $96m, which includes deferred consideration of
$5m and contingent consideration of $47m. The fair value of the contingent consideration is determined from the acquisition agreement,
the risk adjusted cash flows from the Board-approved acquisition model and a risk-free discount rate of 3.3%. The maximum contingent
consideration is $55m. The goodwill is attributable to the control premium, the acquired workforce and the synergies expected from
integrating Ceterix into the Group’s existing business.

On 17 April 2019, the Group completed the acquisition of 100% of the share capital of Osiris Therapeutics, Inc. (‘Osiris’), a fast growing
company delivering regenerative medicine products including skin, bone graft and articular cartilage substitutes that will further
expand and differentiate the Group’s Advanced Wound Management portfolio. This acquisition provides the Group with a fast growing
portfolio with strong clinical evidence addressing critical needs in the skin substitute marketplace. It is one of the highest growth
and high potential markets in wound management, filling an important need not previously adequately addressed in our portfolio.
Cash consideration was $660m with no deferred or contingent consideration payable. The goodwill is attributable to the control
premium, the acquired workforce and the synergies that can be expected from integrating Osiris into the Group’s existing business.
During the year ended 31 December 2020, adjustments were made to the fair value of the provisions, net deferred tax liability and trade
and other payables. These adjustments were made during the one year measurement period in accordance with the requirements
of IFRS 3. The net impact of these adjustments was $3m and has been reflected in the fair value of goodwill, reducing it from $301m
to $298m.

Also on 17 April 2019, the Group completed the acquisition of 85.5% of the share capital of Leaf Healthcare, Inc. (‘Leaf’), a developer of
the unique Leaf Patient Monitoring System for pressure injury prevention and patient mobility monitoring, which is highly complementary
to the Group’s existing wound portfolio. This acquisition brings the Group’s total shareholding in Leaf to 100%. The Group’s existing
holding of 14.5% of the share capital, with a carrying value of $6m, was remeasured to fair value resulting in a $1m gain which is included
in selling, general and administrative expenses in the income statement. The maximum consideration payable of $75m for 100%
of the share capital has a fair value of $52m, which includes deferred consideration of $4m and contingent consideration of $12m.
The fair value of the contingent consideration is determined from the acquisition agreement, the risk adjusted cash flows from the
Board-approved acquisition model and a risk-free discount rate of 3.0%. The maximum contingent consideration is $35m. The goodwill
is attributable to the control premium, the acquired workforce, future iterations of the technology and the synergies that can be
expected from integrating Leaf into the Group’s existing business.

On 31 May 2019, the Group completed the acquisition of the Brainlab Orthopaedic Joint Reconstruction business (‘Brainlab OJR’).
The acquisition supports the Group’s strategy to invest in best-in-class technologies that further its multi-asset digital surgery and
robotic ecosystem. The maximum consideration payable of $108m has a fair value of $107m, which includes contingent consideration
of $57m. The fair value of the contingent consideration is determined from the acquisition agreement, the risk adjusted cash flows
from the Board-approved acquisition model and a risk-free discount rate of 2.3%. The maximum contingent consideration is $58m.
The goodwill is attributable to the control premium, the acquired workforce, future iterations of the technology and the synergies
that can be expected from integrating the orthopaedic joint reconstruction business into the Group’s existing business.

On 1 July 2019, the Group completed the acquisition of 100% of the share capital of Atracsys Sàrl (‘Atracsys’), a Switzerland-based
provider of optical tracking technology used in computer-assisted surgery. The acquisition supports the Group’s long-term commitment
to develop its multi-asset digital surgery and robotics ecosystem to empower surgeons and improve clinical outcomes. The fair value of
consideration is $42m which includes $14m of deferred consideration and $5m of contingent consideration. The fair value of contingent
consideration is determined from the acquisition agreement, the risk-adjusted cash flows from the Board approved acquisition model
and a risk-free discount rate of 2.3%. The maximum contingent consideration is $6m. The goodwill represents the control premium,
the acquired workforce and the synergies expected from integrating Atracsys into the Group’s existing business.

Amounts allocated to goodwill arising on acquisitions during the year ended 31 December 2019 in the table below are not deductible
for tax purposes, except in the case of the Brainlab OJR acquisition.

202

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For the year ended 31 December 2019, the contribution to revenue from the Ceterix, Leaf, Brainlab OJR and Atracsys business
combinations was immaterial and the contribution from the Osiris business combination was $114m. For the year ended 31 December
2019, the contribution to profit from the Ceterix, Leaf, Brainlab OJR, Osiris and Atracsys business combinations was immaterial.

If the business combinations had occurred at the beginning of the year, the contribution to revenue from the Ceterix, Leaf, Brainlab
OJR and Atracsys business combinations would have been immaterial and the contribution from the Osiris business combination
would have been $160m. If the business combinations had occurred at the beginning of the year, the contribution to profit from
the Ceterix, Leaf, Brainlab OJR, Osiris and Atracsys business combinations would have been immaterial.

The fair values of assets acquired and liabilities assumed are set out below:

Intangible assets – Product-related
Intangible assets – Technology
Intangible assets – Customer-related
Property, plant & equipment
Investments
Other non-current assets
Inventory
Trade and other receivables
Trade and other payables
Provisions
Non-current liabilities
Net deferred tax asset/(liability)
Net assets
Goodwill
Consideration (net of cash acquired1)

Ceterix
$ million
43
–
–
2
–
–
2
1
(4)
–
–
1
45
49
94

Osiris
$ million
284
–
80
6
17
4
9
49
(34)
(14)
(7)
(56)
338
298
636

Leaf
$ million
14
–
–
–
–
–
1
1
(1)
–
–
1
16
37
53

Brainlab OJR
$ million
–
75
9
–
–
–
–
–
–
–
–
–
84
23
107

Atracsys
$ million
9
–
1
1
–
–
1
1
(1)
–
–
(1)
11
31
42

1 Cash acquired is as follows: Ceterix: $2m; Osiris: $24m; Leaf: $1m; Brainlab OJR: $nil; and Atracsys: $nil.

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.

22 Other notes to the accounts
22.1 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 Global Share Plan 2020, Smith & Nephew ShareSave plan (2012) and Smith & Nephew International ShareSave Plan (2012).
At 31 December 2020, 4,582,000 options (2019: 4,519,000, 2018: 4,911,000) were outstanding with a range of exercise prices from
599 to 1,541 pence.

At 31 December 2020, the maximum number of shares that could be awarded under the Group’s long-term incentive plans was
4,704,000 (2019: 4,947,000, 2018: 5,678,000). 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 and Global Share Plan 2020.

The expense charged to the income statement for share-based payments for the year is $26m (2019: $32m, 2018: $35m).

203

Smith+Nephew Annual Report 2020

22 Other notes to the accounts continued
22.2 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 (2019: $nil, 2018: $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

2020
$ million
12
5
2
–
19

2019
$ million
18
5
2
6
31

2018
$ million
18
10
2
–
30

Directors’ remuneration disclosures are included on pages 106–127.

23 Post balance sheet events
On 4 January 2021 the Group completed the acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation (‘Integra Extremities‘). The acquisition significantly strengthens the Group’s extremities business by adding a combination of
a focused sales channel, complementary shoulder replacement and upper and lower extremities portfolio, and a new product pipeline.
This acquisition will be treated as a business combination under IFRS 3. The maximum consideration is $240m with no deferred or
contingent consideration payable. The provisional value of acquired net tangible assets is $91m and is not expected to have material fair
value adjustments. The remaining consideration will be allocated between identifiable intangible assets and goodwill. Intangible assets
will primarily comprise product-related and customer and distribution related assets. Goodwill will represent the control premium, the
acquired workforce and the synergies expected from integrating Integra Extremities into the Group’s existing business, and is expected
to be largely deductible for tax purposes.

On 11 February 2021 Bioventus LLC (‘Bioventus’), an associate undertaking of the Group, commenced trading on the Nasdaq Global
Select Market via its holding company, Bioventus Inc., under the symbol ‘BVS’. As a consequence of this public offering and the raising
of approximately $96.7m before expenses through issuing new common stock, the equity holding of the Smith+Nephew Group has
decreased from approximately 47.6% at 31 December 2020 to approximately 38% at 11 February 2021. The carrying value of the
investment in Bioventus at 31 December 2020 was $105m and the fair value of the approximately 38% at the market value on
12 February 2021 was approximately $380m. Smith+Nephew continues to have the ability to appoint two Board members of Bioventus
Inc. and is subject to customary post-IPO selling restrictions that restrict the sale of Bioventus Inc. stock by Smith+Nephew for 180 days
after the listing.

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204

Group financial statements continuedSmith+Nephew Annual Report 2020

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 assets/(liabilities)
Total assets less current liabilities
Creditors: amounts falling due after one year
Borrowings
Total assets less total liabilities

Equity shareholders’ funds
Share capital
Share premium
Capital redemption reserve
Capital reserve
Treasury shares
Exchange reserve
Profit and loss account
Shareholders’ funds

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At 31 December At 31 December
2019
$ million

2020
$ million

Notes

3
5

5
4

7,092

2,918
1,629
4,547

(270)
(2,884)
(3,154)
1,393
8,485

(3,207)
5,278

177
612
18
2,266
(157)
(52)
2,414
5,278

2,265
163
2,428

(5)
(2,543)
(2,548)
(120)
6,972

(1,851)
5,121

177
610
18
2,266
(189)
(52)
2,291
5,121

The accounts were approved by the Board and authorised for issue on 18 February 2021 and signed on its behalf by:

Roberto Quarta
Chair

Roland Diggelmann
Chief Executive Officer

Anne-Françoise Nesmes
Chief Financial Officer

Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages 205–213 do not form part of
the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.

205

Smith+Nephew Annual Report 2020

Statement of changes in equity

At 1 January 2019
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 2019
Attributable profit for the year
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 2020

Share
capital

Share
premium

$ million $ million
608
–
–
–
–
–

177
–
–
–
–
–

–
–
–
177
–
–
–
–

–
–
–
177

2
–
–
610
–
–
–
–

2
–
–
612

Capital
reserve

Treasury
shares

Exchange
reserve

Capital
redemption
reserve
$ million $ million $ million $ million
(52)
–
–
–
–
–

2,266
–
–
–
–
–

(214)
–
–
–
–
38

18
–
–
–
–
–

–
–
–
18
–
–
–
–

–
–
–
2,266
–
–
–
–

–
–
–
18

–
–
–
2,266

–
50
(63)
(189)
–
–
–
37

–
11
(16)
(157)

–
–
–
(52)
–
–
–
–

–
–
–
(52)

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Profit and
loss account

$ million
2,540
115
1
(318)
32
(29)

–
(50)
–
2,291
464
(328)
26
(28)

–
(11)
–
2,414

Total

shareholders’
funds
$ million
5,343
115
1
(318)
32
9

2
–
(63)
5,121
464
(328)
26
9

2
–
(16)
5,278

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 22.1 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 $2,205m (2019: $2,050m). 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 $464m (2019: $115m).

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.

206

Company financial statements continuedSmith+Nephew Annual Report 2020

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. These financial statements and
accompanying notes have been prepared in accordance with the Financial Reporting Standard 101 Reduced Disclosure Framework
(‘Reduced Disclosure Framework’) for all periods presented. 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 and 31 December

2020
$ million
7,092

2019
$ million
7,092

Investments represent holdings in subsidiary undertakings. 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.

3 Debtors

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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 asset derivatives – interest rate swaps

2020
$ million

2019
$ million

2,836
1
20
57
2
2
2,918

2,217
–
25
22
1
–
2,265

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 de minimis (2019: de minimis).

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Smith+Nephew Annual Report 2020

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Notes to the Company accounts continued

4 Other creditors

Amounts falling due within one year:

Amounts owed to subsidiary undertakings
Other creditors
Current liability derivatives – forward foreign exchange contracts
Current liability derivatives – forward foreign exchange contracts – subsidiary undertakings
Current liability derivatives – currency swaps

2020
$ million

2019
$ million

2,790
15
57
20
2
2,884

2,487
8
22
25
1
2,543

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, borrowing and overdrafts due within one year or on demand
Borrowings due after one year
Borrowings
Cash at bank
Credit balance on derivatives – interest rate swaps
Net debt

2020
$ million
270
3,207
3,477
(1,629)
(2)
1,846

2019
$ million
5
1,851
1,856
(163)
–
1,693

All currency swaps are stated at fair value. Gross US Dollar equivalents of $381m (2019: $215m) receivable and $381m (2019: $215m)
payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2020 and 2019 to hedge
intra-group loans.

6 Contingencies

Guarantees in respect of subsidiary undertakings

2020
$ million
–

2019
$ million
–

The Company gives guarantees to banks to support liabilities and cross guarantees to support overdrafts.

The Company operated defined benefit pension plans in 2004 but at the end of 2005 its pension plan obligations were transferred to
Smith & Nephew UK Limited. The Company has provided guarantees to the trustees of the pension plans to support future amounts
due from participating employers (see Note 18 of the Notes to the Group accounts).

7 Deferred taxation
The Company has gross unused capital losses of $85m (2019: $81m) 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.

208

Company financial statements continuedSmith+Nephew Annual Report 2020

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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 as at 31 December 2020, 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.

Country of
operation and
incorporation

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
England & Wales
England & Wales

Company name
UK
Blue Belt Technologies UK Limited2
Michelson Diagnostic Limited3 (7.5%)
Neotherix Limited3 (24.9%)
Plus Orthopedics (UK) Limited7
Smith & Nephew (Overseas) Limited1,5
Smith & Nephew ARTC Limited4
Smith & Nephew Beta Limited2
Smith & Nephew China Holdings
UK Limited1
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 Lilia Limited2
Smith & Nephew Medical Fabrics Limited2
Smith & Nephew Medical Limited
Smith & Nephew Nominee
Company Limited2
Smith & Nephew Nominee Services Limited2 England & Wales
England & Wales
Smith & Nephew Orthopaedics Limited
England & Wales
Smith & Nephew Pensions
Nominees Limited7
Smith & Nephew Pharmaceuticals Limited2 England & Wales
Smith & Nephew Raisegrade Limited1,2
England & Wales
Smith & Nephew Rareletter Limited2
England & Wales
Smith & Nephew Trading Group Limited1
England & Wales
England & Wales
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

England & Wales
England & Wales
England & Wales
England & Wales
Scotland

England & Wales
England & Wales
England & Wales
England & Wales

England & Wales
England & Wales

Registered
Office

Watford
Kent
York
Watford
Watford
Watford
Watford
Watford

Watford

Watford
Hull
Watford
Watford
Hull
Watford

Watford
Watford
Hull
Watford

Watford
Watford
Watford

Hull
Watford
Watford
Watford
Watford

Watford
Watford

Watford
Watford
Hull
Watford
Edinburgh

Company name
Rest of Europe
Smith & Nephew GmbH
ArthroCare Belgium SPRL2
Smith & Nephew S.A.-N.V
Smith & Nephew A/S
Smith & Nephew Oy
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
Smith & Nephew (Ireland) Trading Limited
Smith & Nephew Finance Ireland Limited4
Smith & Nephew S.r.l.
ArthroCare Luxembourg S.a.r.l.2

Smith & Nephew International S.A.1

Smith & Nephew (Europe) B.V.1

Smith & Nephew B.V.

Smith & Nephew Nederland CV

Smith & Nephew Operations B.V.

Serda B.V.3 (49.0%)

Smith & Nephew A/S
Smith & Nephew sp. z.o.o.
Smith & Nephew Lda
S&N Orion Prime, S.A.
DC LLC

Smith & Nephew LLC

Smith & Nephew S.A.U
Smith & Nephew Aktiebolag

Country of
operation and
incorporation

Registered
Office

Vienna
Austria
Zaventem
Belgium
Zaventem
Belgium
Hoersholm
Denmark
Finland
Helsinki
France Neuilly-sur-
Seine
France Neuilly-sur-
Seine
Hamburg

Germany

Hamburg

Germany

Hamburg

Germany
Germany
Ireland
Ireland
Italy

Hamburg
Tuttlingen
Dublin 2
Dublin 1
Milan
Luxembourg Luxembourg,
8030
Luxembourg Luxembourg,
2350
Netherlands Amsterdam,
2132NP
Netherlands Amsterdam,
2132NP
Netherlands Amsterdam,
2132NP
Netherlands Amsterdam,
2132NP
Netherlands Amsterdam,
1105BP
Oslo
Warsaw
Lisbon
Coimbra
Puschino

Norway
Poland
Portugal
Portugal
Russian
Federation
Russian
Federation
Spain
Sweden

Moscow

Barcelona
Molndal

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8 Group companies continued

Company name
Lumina Adhesives AB3 (3.04%)
Atracsys Sàrl
Plus Orthopedics Holding AG1
Smith & Nephew Manufacturing AG
Smith & Nephew Orthopaedics AG1
Smith & Nephew Schweiz AG
Smith & Nephew AG
Smith & Nephew Orthopaedics AG
Aarau Branch6
US
Arthrocare Corporation1
Austin Miller Trauma LLC
Bioventus LLC3 (47.62%)
Blue Belt Holdings, Inc.1
Blue Belt Technologies, Inc.1
Ceterix Orthopaedics, Inc.
CRES Holdings, Inc.3 (0.99%)
Healicoil, Inc.
Hipco, Inc.
Leaf Healthcare Inc.
Memphis Biomed Ventures I, LP3 (4.6%)
MiJourney, LLC
Miach Orthopaedics, Inc3 (10.3%)
Oratec Interventions, Inc.
Orthopaedic Biosystems Ltd., Inc.
Osiris Therapeutics, Inc.
OsteoBiologics, Inc.
Plus Orthopedics LLC
Rotation Medical, Inc.
Sinopsys Surgical, Inc.3 (1.44%)
Smith & Nephew AG US Branch2,6
Smith & Nephew Consolidated, Inc.1
Smith & Nephew OUS, Inc.
Smith & Nephew, Inc.1
Surgical Frontiers Series I, LLC3 (33.46%)
Trice Medical Inc.3 (4.5%)

Tusker Medical, Inc.

Country of
operation and
incorporation

Registered
Office
Sweden Gothenburg
Puidoux
Zug
Aarau
Zug
Zug
Zug
Aarau

Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland
Switzerland

United States Wilmington
United States Wilmington
United States Wilmington
United States Wilmington
United States Philadelphia
United States Wilmington
United States
Dover NBR
United States Wilmington
United States Wilmington
United States Wilmington
United States
Dover GD
United States Pennsylvania
United States
Sherborn
United States Wilmington
Phoenix
United States
United States
Columbia
United States Wilmington
United States Wilmington
United States Wilmington
United States Wilmington
United States
Boston
United States Wilmington
United States Wilmington
United States Wilmington
United States
Dover GD
United States Wilmington
19808
United States Wilmington
19808

Company name
Africa, Asia, Australasia and Other Americas
Smith & Nephew Argentina S.R.L.2
Smith & Nephew Pty Limited
Smith & Nephew Surgical Holdings
Pty Limited1,2
Smith & Nephew Surgical Pty Limited2
Smith & Nephew Comercio de Produtos
Medicos LTDA
Smith & Nephew (Alberta) Inc.2
Smith & Nephew Inc.1
Tenet Medical Engineering, Inc.
Smith & Nephew Finance Holdings Limited5

TEAMfund, LP3 (6.765%)

ArthoCare Medical Devices (Beijing)
Co. Limited4

Plus Orthopedics (Beijing) Co. Limited2

Smith & Nephew Medical (Shanghai) Limited

Smith & Nephew Medical (Shanghai) Limited
Beijing Branch6
Smith & Nephew Medical (Shanghai) Limited
Chengdu Branch6
Smith & Nephew Medical (Shanghai) Limited
Guangzhou Branch6
Smith & Nephew Medical (Shanghai) Limited
Shanghai Branch6
Smith & Nephew Medical (Shanghai) Limited
Shanghai Second Branch6

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.

Country of
operation and
incorporation

Registered
Office

Argentina Buenos Aires
Australia North Ryde
Australia North Ryde

Australia North Ryde
São Paulo

Brazil

China

Canada
Canada
Canada

Calgary
Toronto
Calgary
Cayman Islands George Town
1104
Cayman Islands George Town
9008
Chao Yang
District,
Beijing
Shunyi
District,
Beijing
Shanghai
Free Trade
Test Zone
China Dong Cheng

China

Wu Hou

China

Yue Xiu

China

Jing’an

China
China

China Shanghai Pilot
Free Trade
Zone
Suzhou City
Beijing
Economic
and Technical
Development
Area
Bogota
Bogota
Alajuela
Curaçao Willemstad

Colombia
Colombia
Costa Rica

210

Notes to the Company accounts continuedCompany financial statements continuedSmith+Nephew Annual Report 2020

Company name
Smith & Nephew Beijing Holdings Limited1
Smith & Nephew Limited
Smith & Nephew Suzhou Holdings Limited1
Adler Mediequip Private Limited
ArthoCare India Medical Device
Private Limited4
Smith & Nephew Healthcare Private Limited
Smith & Nephew KK
Smith & Nephew Chusik Hoesia

Smith & Nephew Healthcare Sdn. Bhd
Smith & Nephew Operations Sdn. Bhd
Smith & Nephew Services Sdn. Bhd
Smith & Nephew S.A. de C.V.
Smith & Nephew Limited1
Smith & Nephew Superannuation
Scheme Limited
Smith & Nephew (Overseas) Limited
Philippines Branch2,6
Smith & Nephew, Inc.
Smith & Nephew Asia Pacific Pte. Limited1

Smith & Nephew Pte Limited

Smith & Nephew (Pty) Limited1
Smith & Nephew Pharmaceuticals
(Proprietary) Limited2
Smith & Nephew (Overseas) Limited
Taiwan Branch6
Smith & Nephew Limited

Sri Siam Medical Limited

Smith ve Nephew Medikal Cihazlar Ticaret
Limited Sirketi
Smith & Nephew FZE

Smith & Nephew FZE (DHCC Branch)6

Smith & Nephew USD Limited DHCC
Branch6,8

Country of
operation and
incorporation
Hong Kong
Hong Kong
Hong Kong
India
India

India
Japan
Korea,
Republic of

Registered
Office
Hong Kong
Hong Kong
Hong Kong
Pune
Mumbai

Mumbai
Tokyo
Seoul

Malaysia Kuala Lumpur
Malaysia Kuala Lumpur
Malaysia Kuala Lumpur
Mexico Mexico City
Auckland
Auckland

New Zealand
New Zealand

Philippines

Manila

Puerto Rico
Singapore

Singapore

South Africa
South Africa

San Juan
Singapore
138565
Singapore
048623
Westville
Westville

Taiwan

Taipei

Turkey

Thailand

Thailand Huai Khwang
District,
Bangkok
Lumpini
Phatumwan,
Bangkok
Sariyer,
Istanbul
Jebel Ali,
Dubai
HealthCare
City, Dubai 1
HealthCare
City, Dubai 2

United Arab
Emirates
United Arab
Emirates
United Arab
Emirates

Registered Office addresses
UK
Watford

Kent

York
Hull
Edinburgh
Rest of Europe
Vienna

Zaventem
Hoersholm
Helsinki
Neuilly-sur-Seine
Hamburg
Tuttlingen
Dublin 1

Building 5, Croxley Park, Hatters Lane, Watford,
Hertfordshire, WD18 8YE
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
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

Dublin 2
Milan
Luxembourg 8030 163, Rue de Kiem, L-8030 Strassen, Luxembourg
Luxembourg 2350 1A, Rue Jean Piret, L-2350, Luxembourg, Luxembourg
Amsterdam 2132NP Bloemlaan 2, 2132NP, Hoofddorp, The Netherlands
Amsterdam 1105BP Paasheuvelweg 25, 1105BP, Amsterdam, Netherlands
Oslo
Warsaw
Lisbon

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
Rua Pedro Nunes, Instituto Pedro Nunes, Edificio IPN-C,
3030-199, Coimbra, 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
Route du Verney 20, 1070, Puidoux, Switzerland
Theilerstrasse 1A, 6300, Zug, Switzerland
Schachenallee 29, 5000, Aarau, Switzerland

Coimbra

Moscow

Puschino

Barcelona

Molndal
Gothenburg
Puidoux
Zug
Aarau

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In liquidation.

1 Holding company.
2 Dormant company.
3 Not 100% owned by Smith & Nephew Group.
4
5 Directly owned by Smith & Nephew plc.
6 Branch of a company in Smith & Nephew Group.
7 Application to strike off approved by company directors on 18 December 2020.
8 Application to strike off approved by company directors on 23 December 2020.

211

Smith+Nephew Annual Report 2020

8 Group companies continued
Registered Office addresses
US
Wilmington

Philadelphia

Dover NBR

Dover GD
Sherborn

Phoenix

Columbia

Boston

CT Corporation, 1209 Orange Street, Wilmington
DE 19801, USA
CT Corporation 1515 Market Street, Philadelphia,
PA 19102, USA
850 New Burton Road, Suite 201, City of Dover,
County of Kent DE 19904, USA
160 Greentree Drive, Suite 101, Dover, DE, 19904, USA
c/o Martha Murray 19 Saddlebrook Road Sherborn,
MA 01770, USA
CT Corporation System, 3800 North Central Avenue,
Phoenix AZ 85012, USA
7015 Albert Einstein Dr., Columbia, Howard County
MD 21046 USA
CT Corporation, 155 Federal Street Suite 700,
Boston MA 02210, United States

Wilmington 19808 251 Little Falls Drive, Wilmington DE 19808, USA
Africa, Asia, Australasia and Other Americas
Buenos Aires
North Ryde
São Paulo

Maipu 1300, 13th Floor, Buenos Aires, Argentina
85 Waterloo Road, North Ryde, NSW 2113, Australia
Av. das Nações Unidas, 14171- 23º andar – Torre
C-Crystal, Vila Gertrudes, São Paulo, CEP 043794-000,
Brazil
3500-855-2 Street SW, Calgary 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

Calgary
Toronto

Georgetown 1104

Georgetown 9008 Walkers Corporate Limited, Cayman Corporate Centre,

27 Hospital Road, George Town, Grand Cayman,
KY1-9008, Cayman Islands
Room 17-021, Internal B17 floor, B3-24th floor, No 3
Xin Yuan South Rd, Chao Yang District, Beijing, China
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

Chao Yang District,
Beijing
Shunyi District,
Beijing
Shanghai Free
Trade Test Zone
Dong Cheng District Unit B1, 2/F, Tower A, East Gate Plaza No.9,

Wu Hou District

Dongshong Street Dong Cheng District, Beijing, China
No 5. 15th Floor, Unit 1, Building, 1 Li Bao Building,
No 62 North Ke Hua Rd, Wu Hou District,
Chengdu, China

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Registered Office addresses

Yue Xiu District

Jing’an District

Shanghai Pilot Free
Trade Zone

Suzhou City

Beijing Economic
and Technical
Development Area
Bogota
Alajuela

Room 2503, No 33, 6th Jian She Rd, Yue Xiu District,
Guang Zhou, China
Unit 09, Nominal Level 12 (Actual Level 11), Central
Section of Bohua Square Office Tower, No. 669 Xinzha
Road, Jing’an District, Shanghai, China
Room 102, Floor 1, Building 3 (B1), No. 1599, Xin Jin Qiao
Road China (Shanghai) Pilot Free Trade 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

Pune

Mumbai

Tokyo
Seoul

Willemstad
Hong Kong

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
Podium Floor Tower 4, World Trade Center S No1
Kharadi, Pune, Maharashtra-MH, 411014, India
501-B – 509-B Dynasty Business Park, Andheri Kurla
Road, Andheri East, Mumbai-59, Maharashtra, India
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
36a Hillside Road, Wairau Valley, Auckland, 0627 NZ,
New Zealand
6/F Alfaro St, Salcedo Village, Makati City, Metro Manila,
Philippines
Edificio Cesar Castillo, Calle Angel Buonomo #361,
Hato Rey, 00917, Puerto Rico
Singapore 048623 50 Raffles Place, #32-01 Singapore Land Tower,

Kuala Lumpur

Mexico City

Auckland

San Juan

Manila

048623, Singapore

Singapore 138565 29 Media Circle, #06-05, Alice@Mediapolis, Singapore,

138565, Singapore

212

Notes to the Company accounts continuedCompany financial statements continuedSmith+Nephew Annual Report 2020

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Registered Office addresses

Westville

Taipei

Huai Khwang
District, Bangkok

Lumpini Phatumwan,
Bangkok

30 The Boulevard, Westway Office Park, Westville,
3629, South Africa
9F-2, No. 50, Sec. 1, Xinsheng South Road, Zhongzheng
District Taipei City 10059, Taiwan
16th Floor Building A, 9th Tower Grand Rama 9,
33/4 Rama 9 Road, Huai Khwang District, Bangkok,
10310, Thailand
16th Floor, GPF Witthayu Tower A, 93/1 Wireless Road,
Lumpini, Phatumwan, Bangkok, 10330, Thailand

Sariyer, Istanbul

Jebel Ali, Dubai

HealthCare City,
Dubai 1
HealthCare City,
Dubai 2

Bahcekoy Merkez Mah. Ergene Nehri SK No:8/4
Bahcekoy Sariyer Istanbul, Turkey
PO Box 16993 LB02016, Jebel Ali, Dubai, United
Arab Emirates
401-404 & 406-407, Floor 4, Building 47, Dubai
Healthcare City, Dubai, United Arab Emirates
101-104, 1st Floor, Building 47, Dubai HealthCare City,
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 2020:
– 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)

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Group information

Business overview and Group history
Since 2019, Smith+Nephew’s operations
have been organised into three global
franchises (Orthopaedics, Sports
Medicine & ENT, and Advanced Wound
Management) within the medical
technology industry.

The Group has a history dating back more
than 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.

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.

Related party transactions
Except for transactions with associates
(see Note 22.2 of Notes to the Group
accounts), no other related party had
material transactions or loans with
Smith+Nephew over the last three
financial years.

Properties
The table below summarises the main properties which the Group uses and their approximate areas.

Group head 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
Surgical training and office facilities in Memphis, Tennessee, US
Manufacturing facility in Suzhou, China
Manufacturing facility in Alajuela, Costa Rica
Distribution facility in Memphis, Tennessee, US
Manufacturing facility in Oklahoma City, Oklahoma, US
Office facilities and laboratory space in Fort Worth, Texas, US
Manufacturing facility in Aarau, Switzerland
Office facilities in Andover, Massachusetts, US
Manufacturing facility in Beijing, China
Manufacturing facility in Mansfield, Massachusetts, US
Business services centre in Pune, India
Research & development and office facility in Austin, Texas, US
Research & development facility in Pittsburgh, Pennsylvania, US
Manufacturing facility in Columbia, Maryland, US
Business services centre in Wroclaw, Poland
Manufacturing facility in Tuttlingen, Germany

Approximate area
(square feet 000’s)
60
968
473
292
288
270
248
155
139
116
112
109
98
74
68
65
61
52
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.

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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.

Risk factors
There are known and unknown risks and
uncertainties relating to Smith+Nephew’s
business. The factors listed on pages
215–219 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.

Business continuity and business change
The COVID-19 pandemic
Widespread outbreaks of infectious
diseases, such as the COVID-19 pandemic,
create uncertainty and challenges for
the Group. The challenges created by the
COVID-19 pandemic include, but are not
limited to, declines in and cancellations
of elective procedures at medical
facilities and the resulting increase in
commercial execution risk, disruptions at
manufacturing facilities and disruptions
in supply and other commercial activities
due to travel restrictions and government
restrictions on exports. The length,
severity and geographical variation of
the outbreak and pace of recovery are
not clear and there could be an increased
impact on us depending on these factors.
By franchise, the impact of the COVID-19
pandemic has been most pronounced on
our Orthopaedics and Sports Medicine &
ENT businesses. The negative impact on
these businesses was principally driven by
lower levels of elective surgery (including a
significant reduction in knee and hip implant
procedures in Orthopaedics and nose and
throat procedures in ENT). Our Advanced
Wound Management franchise was also

significantly negatively affected, with the
negative impact principally due to deferrals
of elective surgery, temporary closures of
wound clinics and falling numbers in long-
term care facilities, many of which were
closed to new residents as a result of the
COVID-19 pandemic.
The impact of the COVID-19 pandemic on
our businesses worldwide has been strongly
correlated with lockdown restrictions
and the easing thereof. Despite rebounds
in some markets, including China, sales
volumes have continued to lag in others,
such as the United Kingdom. Any additional
restrictions placed on elective procedures
would have an adverse impact on the
Group’s revenue growth and operating
and trading profit margins. The extent of
the impact would depend on the length,
severity and geographical variation of
restrictions on elective procedures.
The impacts of the COVID-19 pandemic
and related response measures worldwide,
including those described above, have had
and may continue to have an adverse effect
on global economic conditions, as well
as on our business, results of operations,
cash flows and financial condition and the
COVID-19 pandemic may also have the
effect of heightening many of the other
risk factors described below.

Commercial execution
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.

Additional commercial execution risks
include medical facilities stopping or
severely restricting sales rep access due
to ongoing COVID-19 precautions and the
COVID-19 pandemic driving a shift from
clinic to home care.

Relationships with healthcare professionals
The Group seeks to maintain effective
and ethical working relationships with
physicians and medical personnel who
assist in the 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.

Pricing and reimbursement
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

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Group information
continued

Risk factors continued
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,
including as a result of financial pressure on
governments and hospitals caused by the
COVID-19 pandemic, which may have an
adverse impact on revenue and operating
profit. During 2020, reimbursement codes
were more widely interpreted to provide
for remote delivery of healthcare services.
Provisions in United States healthcare
legislation which previously imposed
significant taxes on medical device
manufacturers were permanently repealed
effective 1 January 2020. There may also
be an increased risk of adverse changes to
government funding policies arising from
deterioration in macroeconomic 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 United States.
Failure to do so could result in fines or loss
of future funding.

New product innovation, design &
development, including intellectual
property
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. COVID-19 has resulted in
limitations on ability to conduct live
product trials. Furthermore, there has been
an adverse impact on relationships with
healthcare professionals involved in R&D,
marketing and sale of products and services,
due to limited access to such professionals
as a result of restricted hospital access,
shutdowns and travel restrictions imposed
in response to the COVID-19 pandemic.

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.

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. In addition, intellectual property
rights may not be protectable to the
same extent in all countries in which the
Group operates.

Cybersecurity
Reliance on sophisticated information
technology and cybersecurity
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 digitally enabled including
connection to networks and/or the
internet. Our systems and the systems
of the entities we acquire are vulnerable
to a cyber-attack, theft of intellectual
property, malicious intrusion, loss of data
privacy or other significant disruption.
Our systems have been and will continue
to be the target of such threats, including
as a result of increased levels of remote
working due to the COVID-19 pandemic.
There is increasing government focus on
cybersecurity including changes in the
regulatory environment.

Cybersecurity is a multifaceted discipline
covering people, process and technology.
It is also an area where more can always
be done; it is a continually evolving practice.
We have a layered security approach
in place to prevent, detect and respond,
in order 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.

Legal and compliance risks including
international regulation, product liability
claims and loss of reputation
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 United
Kingdom Bribery Act and the United States
Foreign Corrupt Practices Act which prohibit
us or our representatives from making or
offering improper payments to government

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Smith+Nephew Annual Report 2020

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. In this regard,
the Group is investigating allegations of
possible violations of anti -corruption laws in
India and responding to related requests for
information from the SEC. It is not possible
to predict the nature, scope or outcome of
the investigations, including the extent to
which, if at all, this could result in any liability
to the Group.

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 GDPR, US state privacy laws
including California Consumer Privacy
Act (CCPA), and the recent invalidation
of the EU-U.S. Privacy Shield by the Court
of Justice of the European Union, 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 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.

Operating in multiple jurisdictions
also subjects the Group to local laws
and regulations related to tax, pricing,
reimbursement, regulatory requirements,
trade policy and varying levels of protection
of intellectual property. This exposes the
Group to additional risks and potential costs.

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 United States, 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 2020, a provision of
$336m 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.
See Note 17 to the Group accounts for
further details.

Financial reporting, compliance and control
Our financial results depend on our ability
to comply with financial reporting and
disclosure requirements, comply with
tax laws, appropriately manage treasury
activities and avoid significant transactional
errors and customer defaults (the risk
of which has been heightened due to the
COVID-19 pandemic). Failure to comply
with our financial reporting requirements
or relevant tax laws can lead to litigation
and regulatory activity and ultimately to
material loss to the Group. Potential risks
include failure to report accurate financial
information in compliance with accounting
standards and applicable legislation, failure
to comply with current tax laws, failure to
manage treasury risk effectively and failure
to operate adequate financial controls
over business operations.

Political and economic
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

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conditions and there is a risk of deterioration
of the Group’s performance and finances
during adverse macroeconomic conditions.
The impact of COVID-19 on global and
regional economic conditions affects
our global business. The ongoing effects
of the COVID-19 pandemic on global
economies and financial markets could
trigger a recession or slowdown which
would significantly reduce customer capital
spending and customer financial strength.
Economic conditions worldwide continue
to create several challenges for the Group,
including the United States Administration’s
approach to trade policy, heightened pricing
pressure, significant declines in capital
equipment expenditures at hospitals and
increased uncertainty over the collectability
of government debt, particularly in the
Emerging Markets. These factors could have
an increased impact on growth in the future.

Political uncertainties, including Brexit
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 remains a level of political and
regulatory uncertainty in the United
Kingdom following the exit from the
European Union and new trade agreement
between the UK and Europe. Remaining risks
relate to the appointment of the Medicines
and Healthcare products Regulatory
Agency (MHRA) as the UK’s standalone
medicines and medical devices regulator
(responsible for designating Review Bodies),
effective 1 January 2021, and the related
introduction of new legislation in the UK,
the provisions of which remain to be clarified.
Further MHRA guidance is anticipated in
the coming months. Also, supply chain risks,
specifically border delays, continue into
2021. Smith+Nephew needs to prepare for
new regulations within the United Kingdom,

217

Smith+Nephew Annual Report 2020

Group information
continued

Risk factors continued
which accounts for approximately 4%
of global Group revenue. There is also
uncertainty around United States-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 United
States, the United Kingdom, 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 United States Dollar, Sterling
and Swiss Franc and the currency of the
Group’s selling operations, particularly the
Euro, Chinese Yuan, Australian Dollar and
Japanese Yen.

If the United States 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
operating profit by a policy of transacting
forward foreign currency contracts when
firm commitments exist. 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 still
exposed to medium to long-term adverse
movements in the strength of currencies
compared to the United States Dollar.
The Group uses the United States Dollar as
its reporting currency. The United States
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 180.

Global supply chain
The Group’s manufacturing production is
concentrated at main facilities in Memphis,
Mansfield, Columbia and Oklahoma City
in the United States, Hull and Warwick in
the United Kingdom, Aarau in Switzerland,
Tuttlingen in Germany, Suzhou and Beijing
in China and Alajuela in Costa Rica. If major
physical disruption took place at any of
these sites, it could adversely affect the
results of operations. Further, disruptions
which have taken place at these sites as a
result of the COVID-19 pandemic (including
government restrictions on imports and
exports and decreased access to supply
channels due to travel restrictions) have had
and may continue to have an adverse effect
on the results of operations. Physical loss
and consequential loss insurance is carried
to cover major physical disruption to these
sites but is subject to limits and deductibles,
generally does not cover COVID-19
pandemic related disruptions, 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. Disruptions in the
supply chains and operations of our suppliers
as a result of the COVID-19 pandemic
could result in an increase in our costs of
production and distribution. These suppliers
must provide the materials in compliance
with legal requirements and perform the
activities to the Group’s standard of quality
requirements. A supplier’s failure to comply
with legal requirements or otherwise 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. Interruption of
supply caused by these or other factors has
had and may continue to have a negative
impact on Smith+Nephew’s revenue and
operating profit.

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The Group will, from time to time, including
as part of the Accelerating Performance and
Execution (APEX) programme or operations
and commercial excellence programme,
outsource or insource the manufacture
of components and finished products to
or from 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.

Natural disasters can also lead to
manufacturing and supply delays, product
shortages, excess inventory, unanticipated
costs, lost revenues and damage to
reputation. In addition, new environmental
regulation or more aggressive enforcement
of existing regulations can impact the
Group’s ability to manufacture, sterilise and
supply product. In addition, our physical
assets and supply chains are vulnerable to
weather and climate change (eg sea level
rise, increased frequency and severity of
extreme weather events, and stress on
water resources).

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 an initial expected three-year
transition period until May 2020. Due to
the COVID-19 pandemic, the European
Commission published a formal proposal
in April 2020, announcing the delay to
the implementation by 12 months to
26 May 2021. The regulation includes new
requirements for the manufacture, supply
and sale of all CE marked products sold in
Europe (ie those products that conform with
health, safety and environmental protection
standards within the European Economic
Area) and requires the re-registration of all
medical devices, regardless of where they
are manufactured. Smith+Nephew expects
there will be significant capacity constraints
under the new European system, given the
small number of notified bodies certified
under MDR to date. This could cause
delays for medical device approvals for the
industry more broadly and may result in
delays for patients. Other critical features
of the system are also far from completion
and many of the major implementing acts
remain to be completed. The European
Commission has taken some important

218

Smith+Nephew Annual Report 2020

steps to aid implementation, including
delaying the EU database (EUDAMED) and
passing a Corrigendum to give a longer
implementation timeline for certain Class 1R
devices (ie reusable surgical instruments),
which helps address certain of the capacity
constraint concerns. The Group operates
with a global remit and the speed of
technological change in an already complex
manufacturing process leads to greater
potential for disruption. Additional risks
to supply include inadequate sales and
operational planning and inadequate supply
chain capacity to support customer demand
and growth.

Quality and regulatory
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.

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 United States,
the Medicines and Healthcare products
Regulatory Agency in the United Kingdom,
the Ministry of Health, Labour and Welfare
in Japan, the National Medical Products
Administration in China 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 with an initial expected three-year
transition period until May 2020. Due to
the COVID-19 pandemic, the European
Commission published a formal proposal in
early April 2020, announcing the delay to the
implementation by 12 months, to 26 May
2021. The increase in the time required
by Notified Bodies to review product
submissions and site quality systems’
certification time has had and may continue
to have an adverse impact on our ability to
meet customer demand.

The trend is towards more stringent
regulation and higher standards of technical
appraisal. Specifically, there are more
stringent local requirements for clinical
data across APAC markets. Such controls
have become increasingly demanding to
comply with and management believes
that this trend will continue. Privacy laws
(including Health Insurance Portability
and Accountability Act of 1996 (HIPAA)
in the United States and GDPR in the
United Kingdom) and environmental
regulations have also become more
stringent. 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

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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.

Mergers and acquisitions
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
from 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. The COVID-19
pandemic and measures imposed in
response to it have introduced additional
risks. Conducting due diligence processes
remotely presents potential risks that some
information is not fully assessed. Similarly,
integrations become more complex without
physical on-site presence.

Talent management
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. During 2020, the COVID-19
pandemic has increased the risk to the
health and wellbeing of our personnel.
Uncertainty, threat of illness and restricted
travel, work and personal activities have
affected people globally. We have seen
increased absenteeism due to COVID-19.
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.

219

Smith+Nephew Annual Report 2020

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Other information

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 global markets’ on pages 14–15, the ‘Financial review’ on pages 20–23 and ‘Taxation information for shareholders’ on
pages 230–231.

2020
$ million

2019
$ million

2018
$ million

2017
$ million

2016
$ million

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
UK tax litigation
US tax reform
Taxation on excluded items
Adjusted attributable profit
Adjusted earnings per ordinary share (EPSA)3

4,560
(1,396)
3,164
(2,562)
(307)
295
(56)
(7)
14
–
246
202
448

51.3¢
51.2¢
875
877

448
4
124
91
171
–
(142)
–
(132)
564
64.4¢

5,138
(1,338)
3,800
(2,693)
(292)
815
(55)
(18)
1
–
743
(143)
600

68.6¢
68.4¢
874
877

600
34
134
50
143
–
–
–
(68)
893

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

101.9¢

100.6¢

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¢

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 222–226.
3 Adjusted earnings per ordinary share is calculated by dividing adjusted attributable profit by the basic weighted number of ordinary shares.

Reconciliation of operating profit to trading profit

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

2020
$ million
295

4
124
171
89
683

2019
$ million
815
32
134
143
45
1,169

2018
$ million
863
(7)
120
113
34
1,123

2017
$ million
934
(10)
–
140
(16)
1,048

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¢

2016
$ million
801
9
62
178
(30)
1,020

220

Smith+Nephew Annual Report 2020

Group balance sheet data
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 data and net debt
Cash generated from operations
Net interest paid
Income taxes refunded/(paid)
Net cash inflow from operating activities
Capital expenditure (including net trade investments
and net of disposals of property, plant and equipment)
Acquisitions and disposals
Proceeds on disposal of business (net of tax)
Distribution from associate
Payment of capital element of lease liabilities
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
Corporate bond issuance expense
Lease liabilities
Opening net debt
Closing net debt (including lease liabilities from 1 January 2019)

Selected financial ratios
Gearing (closing net debt as a percentage of total equity)
Dividends per ordinary share
Research and development costs to revenue
Capital expenditure (including intangibles but excluding trade
investments and assets acquired in a business combination)
to revenue

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2020
$ million

2019
$ million

2018
$ million

2017
$ million

2016
$ million

6,348
4,664
11,012
177
612
18
(157)
4,629
5,279
4,045
1,688
5,733
11,012

972
(59)
22
935

(445)
(170)
–
9
(55)
9
(328)
(14)
(59)
–
(71)
8
(34)
(1,770)
(1,926)

6,080
3,219
9,299
177
610
18
(189)
4,525
5,141
2,594
1,564
4,158
9,299

1,370
(52)
(150)
1,168

(385)
(869)
–
3
(46)
9
(318)
(61)
(499)
–
3
–
(170)
(1,104)
(1,770)

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)

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)

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)

36.5%
37.5¢1
6.7%

34.4%
37.5¢
5.7%

22.7%
36.0¢
5.0%

27.6%
35.0¢
4.7%

39.2%
30.8¢
4.9%

9.7%

7.9%

7.1%

7.9%

8.4%

The Group has adopted IFRS 16 Leases from 1 January 2019 using the modified retrospective approach. Under this approach comparative information is not restated.

1 The Board has proposed a final dividend of 23.1 US cents per share which together with the interim dividend of 14.4 US cents makes a total for 2020 of 37.5 US cents.

221

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The Group’s management considers
that the non-IFRS measure of underlying
revenue growth and the IFRS measure
of growth in revenue are complementary
measures, neither of which management
uses exclusively.

Underlying revenue growth reconciles to
reported revenue growth, 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 includes
acquisitions and excludes 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.

Other information continued

Non-IFRS financial
information –
Adjusted measures

These financial statements include
financial measures that are not prepared
in accordance with International
Financial Reporting Standards (IFRS).
These measures, which include trading
profit, trading profit margin, tax rate on
trading results, EPSA, ROIC, trading cash
flow, free cash flow, trading profit to trading
cash conversion ratio, leverage ratio, and
underlying revenue 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
segments 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.

The Group adopted IFRS 16 Leases
from 1 January 2019 using the modified
retrospective approach. Under this
approach comparative information is
not restated therefore impacting the
comparability of the non-financial
information presented below. Payments
of lease liabilities are included in trading
cash flow. From 2019, IFRS 16 right-of-
use assets and IFRS 16 lease liabilities
are included in net operating assets in
arriving at ROIC.

Underlying revenue growth
‘Underlying revenue growth’ 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 revenue growth is considered
by the Group to be an important measure
of performance as 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
revenue growth 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.

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Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying
revenue growth as follows:

2020

Consolidated revenue by franchise
Knee Implants
Hip Implants
Other Reconstruction
Trauma
Orthopaedics
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
ENT (Ear, Nose and Throat)
Sports Medicine & ENT
Advanced Wound Care
Advanced Wound Bioactives
Advanced Wound Devices
Advanced Wound Management
Total

2019
Consolidated revenue by franchise
Knee Implants
Hip Implants
Other Reconstruction
Trauma
Orthopaedics
Sports Medicine Joint Repair
Arthroscopic Enabling Technologies
ENT (Ear, Nose and Throat)
Sports Medicine & ENT
Advanced Wound Care1
Advanced Wound Bioactives1
Advanced Wound Devices1
Advanced Wound Management
Total

Reported growth
%

Underlying growth
%

(21.1)
(7.5)
(12.9)
(5.7)
(13.7)
(10.5)
(12.6)
(29.9)
(13.2)
(7.7)
(1.1)
(4.8)
(5.1)
(11.2)

(21.0)
(7.4)
(26.1)
(5.1)
(14.0)
(10.2)
(12.4)
(29.7)
(13.0)
(7.5)
(10.5)
(4.8)
(8.1)
(12.1)

Reported growth
%

Underlying growth
%

2.5
–
27.9
2.4
2.5
10.8
(1.5)
4.9
5.2
(3.5)
30.9
13.0
8.3
4.8

4.4
2.1
12.6
4.3
4.0
12.3
0.8
6.7
7.0
(0.2)
(0.4)
15.9
2.2
4.4

Acquisitions/disposals
%
–
–
13.1
–
0.6
–
–
–
–
–
9.5
0.2
3.1
1.1

Acquisitions/disposals
%
–
–
17.5
–
0.5
0.9
–
–
0.5
–
31.7
0.6
8.7
2.6

Reconciling items
Currency impact
%
(0.1)
(0.1)
0.1
(0.6)
(0.3)
(0.3)
(0.2)
(0.2)
(0.2)
(0.2)
(0.1)
(0.2)
(0.1)
(0.2)

Reconciling items
Currency impact
%
(1.9)
(2.1)
(2.2)
(1.9)
(2.0)
(2.4)
(2.3)
(1.8)
(2.3)
(3.3)
(0.4)
(3.5)
(2.6)
(2.2)

1 The growth rates Included within the 2019 analysis reflect a reclassification of $13m (2018: $13m) of revenue formerly included in the Advanced Wound Care franchise of which $12m
(2018: $13m) is now included in the Advanced Wound Bioactives franchise and $1m (2018: $nil) in the Advanced Wound Devices franchise in order to present consistent analysis to the
2020 results. There has been no change in total revenue or growth rates for the year ended 31 December 2019 and 31 December 2018.

Trading profit, trading profit margin, trading cash flow and trading profit to cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a percentage of revenue), trading cash flow and trading profit to cash
conversion ratio (trading cash flow expressed as a percentage of trading profit) are trend measures, which present the 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, and the comparability of results. 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; and 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
contributions to fund defined benefit pension schemes that are closed to future accrual are excluded from cash generated from
operations when arriving at trading cash flow. Payment of lease liabilities is included within trading cash flow.

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Other information continued

Non-IFRS financial information – Adjusted measures continued

Adjusted earnings per ordinary share (EPSA)
EPSA is a trend measure, which presents the profitability of the Group excluding the post-tax impact of specific transactions that
management considers affect the Group’s short-term profitability and comparability of results. 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).

2020 Reported
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other7
UK tax litigation
Lease liability payments
Capital expenditure
2020 Adjusted

Revenue

Operating
profit1

Profit before
tax2

Taxation3

$ million $ million
295
4
124

4,560
–
–

$ million $ million
202
(5)
(40)

246
4
124

Attributable
profit4
$ million
448
(1)
84

Cash generated
from operations5

$ million
972
24
117

–
–
–
–
–
4,560

171
89
–
–
–
683

171
91
–
–
–
636

(46)
(41)
(142)
–
–
(72)

125
50
(142)
–
–
564

–
75
–
(55)
(443)
690

Earnings
per share6
¢
51.3
(0.1)
9.6

14.3
5.7
(16.2)
–
–
64.6

Acquisition and disposal related items: For the year to 31 December 2020 costs primarily relate to the acquisition of Tusker and prior
year acquisitions, partially offset by credits relating to remeasurement of contingent consideration for prior year acquisitions.

Restructuring and rationalisation costs: For the year to 31 December 2020 these costs relate to the implementation of the Accelerating
Performance and Execution (APEX) programme that was announced in February 2018 and the operations and commercial excellence
programme announced in February 2020.

Amortisation and impairment of acquisition intangibles: For the year to 31 December 2020 charges relate to the amortisation and
impairment of intangible assets acquired in material business combinations.

Legal and other: For the year ended 31 December 2020 charges primarily relate to legal expenses for ongoing metal-on-metal hip claims
and an increase of $17m in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated
metal-on-metal hip claims. The year to 31 December 2020 also includes costs for implementing the requirements of the EU Medical
Device Regulations that will apply from May 2021.

UK tax litigation: For the year ended 31 December 2020 the $142m tax credit in the table above relates to the UK tax litigation matter.

2019 Reported
Acquisition and disposal related items
Restructuring and rationalisation costs
Amortisation and impairment of acquisition
intangibles
Legal and other7
Lease liability payments
Capital expenditure
2019 Adjusted

Revenue

Operating
profit1

Profit before
tax2

Taxation3

$ million $ million
815
32
134

5,138
–
–

$ million $ million
(143)
(6)
(25)

743
34
134

Attributable
profit4
$ million
600
28
109

–
–
–
–
5,138

143
45
–
–
1,169

143
50
–
–
1,104

(32)
(5)
–
–
(211)

111
45
–
–
893

Cash generated
from operations5

$ million
1,370
36
123

–
(105)
(46)
(408)
970

Earnings
per share6
¢
68.6
3.4
12.5

12.6
5.1
–
–
102.2

224

Smith+Nephew Annual Report 2020

Acquisition and disposal related items: For the year to 31 December 2019 costs primarily relate to the acquisitions of Ceterix, Osiris,
Leaf, Brainlab OJR and Atracsys.

Restructuring and rationalisation costs: For the year to 31 December 2019 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 2019 charges relate to the amortisation and
impairment of intangible assets acquired in material business combinations.

Legal and other: For the year ended 31 December 2019 charges primarily relate to legal expenses for ongoing metal-on-metal hip
claims and an increase of $121m in the provision that reflects the present value of the estimated costs to resolve all other known and
anticipated metal-on-metal hip claims. The year to 31 December 2019 also includes costs for implementing the requirements of the
EU Medical Device Regulations that will apply from May 2021. These charges in the year to 31 December 2019 were partially offset by
a credit of $147m relating to insurance recoveries for ongoing metal-on-metal hip claims. Trading cash flow additionally excludes $6m
of cash funding to closed defined benefit pension schemes and a $35m receipt (held as a receivable as at 31 December 2018) relating
to settlements with insurers related to product liability claims involving macrotextured components withdrawn from the market in 2003.

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 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 cash generated from operations less: capital expenditure and cash flows from interest and income taxes.
A reconciliation from cash generated from operations, the most comparable IFRS measure, to free cash flow is set out below:

Cash generated from operations1
Capital expenditure
Interest received
Interest paid
Payment of lease liabilities
Income taxes refunded/(paid)
Free cash flow

1 See Group Cash Flow Statement on page 150.

Leverage ratio

2020
$ million
972
(443)
2
(61)
(55)
22
437

2019
$ million
1,370
(408)
4
(56)
(46)
(150)
714

2018
$ million
1,108
(347)
2
(54)
–
(125)
584

The leverage ratio is net debt including lease liabilities to adjusted EBITDA. 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.

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The calculation of the leverage ratio is set out below:

Net debt including lease liabilities

Trading profit
Depreciation of property, plant and equipment
Amortisation of other intangible assets
Adjustment for items already excluded from trading profit
Adjusted EBITDA
Leverage ratio (x)

2020
$ million
1,926

2019
$ million
1,770

683
311
63
(7)
1,050
1.8

1,169
292
61
–
1,522
1.2

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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: Operating Profit less Adjusted Taxes/((Opening Net Operating Assets + Closing Net Operating Assets)/2).

Operating profit
Taxation
Taxation adjustment1
Operating profit less adjusted taxes

Total equity
Retirement benefit assets
Investments
Investments in associates
Right-of-use assets
Cash at bank
Long-term borrowings and lease liabilities
Retirement benefit obligations
Bank overdrafts, borrowings, loans and lease liabilities
Net operating assets
Average net operating assets
Return on invested capital

1 Being the taxation on interest income, interest expense, other finance costs and share of results of associates.

Contractual obligations
Contractual obligations at 31 December 2020 were as follows:

Debt obligations
Private placement notes
Purchase obligations
Corporate bonds
Lease liabilities
Capital expenditure
Other

2020
$ million
295
202
(12)
485

2019
$ million
815
(143)
(14)
658

5,279
(133)
(9)
(108)
(196)
(1,762)
3,353
163
337
6,924
6,800
7.1%

5,141
(106)
(7)
(103)
(156)
(277)
1,975
136
72
6,675
6,266
10.5%

2018
$ million
863
(118)
(14)
731

4,874
(92)
(34)
(105)
–
(365)
1,301
114
164
5,857
5,856
12.5%

Less than
one year
$ million
12
311
204
20
58
65
131
801

One to
three years

$ million
930
307
10
41
74
–
65
1,427

Three to
five years
$ million

Payments due by period
More than
five years
$ million
–
691
–
1,102
47
–
5
1,845

–
481
4
41
36
–
23
585

Other contractual obligations represent $59m of derivative contracts and $165m of acquisition consideration. Provisions that do not
relate to contractual obligations are not included in the above table.

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 under the circumstances
outlined on page 135.

The Company does not have contracts or other arrangements which individually are essential to the business.

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Smith & Nephew plc ADS price
The Company’s ADS price can be
obtained from the official New York Stock
Exchange website at www.nyse.com
and the Group’s 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 2020 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.

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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 put their
questions to the Directors at the Annual
General Meeting. 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 plc 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 Group’s
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. J.P. Morgan Chase Bank N.A.
is the authorised depositary bank for
the Company’s ADR programme.

ADS enquiries
All enquiries regarding ADS holder
accounts and payment of dividends
should be addressed to:
EQ Shareowner Services
P.O. Box 64504
St Paul, MN 55164-0504

US toll free phone: +1-800-990-1135
Online: Visit www.shareowneronline.com
and select ‘Contact Us’.
www.adr.com

Shareholder information

Ordinary shareholders
Registrar
All general enquiries concerning
shareholdings, dividends, changes
to shareholders’ personal details and
the Annual General Meeting (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
www.investorcentre.co.uk

* Lines are open from 8:30 am to 5:30 pm 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 email
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.

227

Smith+Nephew Annual Report 2020

Shareholder information continued

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

During 2020, a fee of 1 US cent per ADS
was collected by J.P. Morgan Chase Bank
N.A. on the 2019 final dividend paid in May
2020 and a fee of 1 US cent per ADS was
collected on the 2020 interim dividend paid
in October. In the period 1 January 2020
to 12 February 2021, the total programme
payments made by J.P. Morgan Chase
Bank N.A. was $890,644.47.

Dividend history
Smith & Nephew plc 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.

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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 plc
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.

From 6 April 2018 dividends below
£2,000 per tax year became tax free for
UK income tax purposes and dividends
above £2,000 per tax year became subject
to UK 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 UK 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.

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

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.
In 2020, given the expected earnings
decline for the full year, the Board chose
to keep the interim dividend flat on the
prior year. Dividends will continue

Dividends per share

Pence per share:

Interim
Final

Total

US cents per share:

Interim
Final

Total

2020

2019

2018

2017

2016

Years ended 31 December

11.07
16.741

27.81

14.40
23.10

37.50

11.19
18.66

29.85

14.40
23.10

37.50

10.67
16.99

27.66

14.00
22.00

36.00

9.34
16.24

25.58

12.30
22.70

35.00

10.08
14.42

24.50

12.30
18.50

30.80

1 Translated at the Bank of England rate on 12 February 2021.

228

Smith+Nephew Annual Report 2020

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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 paid prior to 6 April 2016,
included the associated UK tax credit
of 10%, but excluded 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 2020
of 23.10 US cents per ordinary share,
the record date will be 6 April 2021 and
the payment date will be 12 May 2021.
The Sterling equivalent per ordinary
share will be set following the record date.

Shareholders may elect to receive their
dividend in either Sterling or US Dollars
and the last day for election will be
20 April 2021. The ordinary shares will
trade ex-dividend on both the London
and New York Stock Exchanges from
1 April 2021.

The proposed final dividend of 23.10 US
cents per ordinary share, which together
with the interim dividend of 14.4 US cents,
makes a total for 2020 of 37.50 US cents.

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 J.P.
Morgan Chase Bank N.A. 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.

Major shareholders

BlackRock, Inc.

12 February 2021
%*
5.2

12 February 2021
’000
46,427

2020
%*
5.2

2020
’000
46,427

* Percentage of ordinary shares in issue, excluding Treasury shares.

As at 31 December

2018
%*
5.2

As at 31 December

2018
’000
46,427

2019
%*
5.2

2019
’000
46,427

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 12 February 2021, to the knowledge
of the Group, there were 14,511 registered
holders of ordinary shares, of whom
92 had registered addresses in the US and
held a total of 160,713 ordinary shares
(0.018% of the total issued). Because
certain ordinary shares are registered in
the names of nominees, the number of
shareholders with registered addresses in
the US is not representative of the number
of beneficial owners of ordinary shares
resident in the US.

As at 12 February 2021, 45,245,317
ADSs equivalent to 90,490,634 ordinary
shares or approximately 10.32% of
the total ordinary shares in issue, were
outstanding and were held by 89 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 12 February 2021, 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 above, 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 table above 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.

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.
The share buy-back programme for
2020 has been suspended in light of the
COVID-19 pandemic. The programme
remains under review.

From 1 January 2020 to 12 February 2021,
as listed below, the Company has purchased
649,529 ordinary shares at a cost of
$15,797,489.93.

The shares were purchased in the open
market by Merrill Lynch International
on behalf of the Company.

The authority to purchase ordinary shares
is only exercised if the Directors believe
that to do so would result in an increase
in earnings per share and would be likely
to promote the success of the Company
for the benefit of its shareholders as
a whole.

Purchase of ordinary shares on behalf of the Company

24–25 February 2020

650

1,877.1808

$15,797,490

Total
shares
purchased
000’s

Average price
paid per share
pence

Approximate
US$ value of
shares purchased
under the plan

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Shareholder information
continued

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 plc’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 plc,
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.

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 USA (or any State therein or the
District of Columbia), or an estate or trust
the income of which is included in gross
income for US federal income tax purposes
regardless of its source (each a US Holder).
The comments set out below do not
purport to address all tax consequences
of the ownership of ADSs or ordinary
shares that may be material to a particular
holder and in particular do not deal with
the position of US Holders who directly,
indirectly or constructively own 10% or
more of the Company’s issued ordinary
shares. This discussion does not apply to (i)
US Holders 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) US Holders whose
registered address is inside the UK. This
discussion does not apply to certain US
Holders 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 2020.

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.

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.

For US federal income tax purposes,
distributions paid by the Company
will generally be 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 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.

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Smith+Nephew Annual Report 2020

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.

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.

Transfers of ordinary shares into CREST
(an electronic transfer system) are exempt
from stamp duty so long as the transferee
is a member of CREST who will hold the
ordinary shares as a nominee for the
transferor and the transfer is in a form
that will ensure that the securities become
held in uncertificated form within CREST.
Paperless transfers of ordinary shares
within CREST for consideration in money
or money’s worth are liable to SDRT
rather than stamp duty. SDRT on relevant
transactions will be collected by CREST
at ½%, and this will apply whether or
not the transfer is effected in the UK
and whether or not the parties to it are
resident or situated in the UK.

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UK legislation provides for a charge
to stamp duty (in the case of transfers)
or SDRT to be payable at the rate of 1.5%
of the consideration (or, in some cases,
the value of the shares concerned) where
ordinary shares are issued or transferred
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.
Following litigation on the subject, HMRC
has accepted that it will no longer seek
to apply the 1.5% SDRT charge when new
shares are issued to a clearance service
or depositary receipt system on the basis
that the charge was not compatible with
EU law. HMRC has confirmed that it will
not reintroduce the 1.5% charge on the
issue of shares (and transfers integral to
the raising of capital) into clearance service
or depositary receipt systems following
the UK’s exit from the EU and the expiry
of the associated implementation period,
unless the relevant UK legislation is
amended. In HMRC’s view, the 1.5% SDRT
or stamp duty charge continues to apply
to transfers of shares into a clearance service
or depositary receipt system unless they
are an integral part of an issue of share
capital. Specific professional advice should
be sought before paying the 1.5% SDRT or
stamp duty charge in any circumstances.

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.

231

Smith+Nephew Annual Report 2020

Shareholder information
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,
being those which were adopted at the
2019 Annual General Meeting 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 she,
or any person connected with him or her,
has any interest which is to his or her
knowledge a 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

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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.

The Company’s Board of Directors may
declare such interim dividends as appear
to them to be justified by the Company’s
financial position.

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 Board is 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 $8,500,000,000.

Any Director who has been appointed
by the Board since the previous Annual
General Meeting of shareholders, either
to fill a casual vacancy or as an additional
Director, holds office only until the
conclusion of the next Annual General
Meeting (notice of which was given after
his or her appointment) and then shall be
eligible for re-election by the shareholders.
The Company’s Articles of Association
provide that all Directors are subject to
annual re-election in accordance with
the UK Corporate Governance Code.
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.

If authorised by an ordinary resolution
of the shareholders, the Board may also
make a 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.
Provided that during this 12-year period,
at least three dividends whether interim
or final on or in respect of the share
in question have become payable, and
provided further the Company has
taken steps which the Board considers
reasonable during this 12-year period
to trace the shareholder (including,
if appropriate, engaging a professional
tracing agent) and has sent notice of
the Board’s intention to sell the shares,
the Board can sell the shares and use
such proceeds for any purpose that
the Board thinks fit.

There were no material modifications
to the rights of shareholders under the
Company’s Articles of Association during
2020. A resolution proposing the adoption
of new Articles of Association is included
within the business for the 2021 Annual
General Meeting. In light of recent
advances in technology, and in the context
of lessons learned during the COVID-19
pandemic and in line with the views
expressed by various shareholder bodies
and regulators including the Financial
Reporting Council, the Board has decided
that it is appropriate that the Company
should have additional flexibility in
conducting its General Meetings in future.
Accordingly, among other consequential
and minor changes, it is proposed that the
current Articles of Association be amended
to set forth the basis upon which the
Company could choose to hold ‘hybrid’
General Meetings (that is, a General
Meeting at which Shareholders would be
entitled to attend and participate remotely
by means of electronic facilities). The
proposed amendments do not permit
the Company to hold entirely ‘virtual’
or ‘electronic-only’ meetings and
shareholders will still be entitled to attend
in person if they wish to do so (subject
always to any security, health or safety
measures or guidance imposed by the
Government at the relevant time).

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Smith+Nephew Annual Report 2020

A summary of the material changes
proposed to the current Articles of
Association is set out in the explanatory
notes within the 2021 Notice of Annual
General Meeting.

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.

Matters are transacted at General Meetings
of the Company by the processing and
passing of resolutions of which there are
two kinds; ordinary and 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.

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– 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.
Members with 5% of the ordinary share
capital of the Company may requisition
the Board to convene a meeting. Any
two Members may call a General Meeting
in order to appoint one or more additional
Directors in the event that there are
insufficient Directors to be able to call
a General Meeting, or where they are
unwilling to do so.

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;

– Subject to any special rights attaching

to any other class of shares; and

– 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;

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Shareholder information
continued

– 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 shares of
£1 each 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 are only
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.

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 2020 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 2020, Smith+Nephew’s gross revenues
from sales to Iran were US$nil and net
losses were approximately US$0.4m.

The Group is reporting the entire gross
revenues and net losses 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
$4.6bn in 2020. 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 2020. 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 2020, Smith+Nephew’s operations were
organised into three global franchises
(Orthopaedics, Sports Medicine & ENT,
and Advanced Wound Management)
within the medical technology industry.

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.

The terms ‘Group’ and ‘Smith+Nephew’
are used to refer to Smith & Nephew plc
and its consolidated subsidiaries, unless
the context requires otherwise.

For the convenience of the reader,
a Glossary of terms used in this document
is included on page 237.

The product names referred to in
this document are identified by use of
capital letters and the ◊ symbol (on first
occurrence on a particular page) and
are trademarks owned by or licensed
to members of the Group.

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
plc 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 12 February 2021,
the latest practicable date for this Annual
Report, the Bank of England rate was
US$1.38 per £1.00.

234

Smith+Nephew Annual Report 2020

Corporate headquarters
and registered office
The corporate headquarters is in the
UK and the registered office address is:

Smith & Nephew plc,
Building 5, Croxley Park,
Hatters Lane, Watford,
Hertfordshire WD18 8YE UK.

Registered in England and Wales
No. 324357.

Tel. +44 (0)1923 477 100
www.smith-nephew.com

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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; manufacturing and supply related
risk; 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 and cybersecurity. Specific
risks faced by the Group are described
under ‘Risk factors’ on pages 215–219
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 on Form 20-F and
some of the other information submitted
by the Group to the SEC may be accessed
through the SEC website.

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Cross reference to Form 20-F

This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.

Part I
Item 1 Identity of Directors, Senior Management

and Advisers

Item 2 Offer Statistics and Expected Timetable

Item 3 Key Information

A – Selected Financial Data

B – Capitalization and Indebtedness

C – Reason for the Offer and Use of Proceeds

D – Risk Factors

Item 4 Information on the Company

Page

n/a

220–226

n/a

215–219

A – History and Development of the Company

207, 214, 234–235

Part I
Item 10 Additional Information

A – Share Capital

B – Memorandum and Articles of Association

C – Material Contracts

D – Exchange Controls

E – Taxation

F – Dividends and Paying Agents

G – Statement by Experts

H – Documents on Display

I – Subsidiary Information

Page

n/a

232–234

None

230

230–231

n/a

235

209–213

B – Business Overview

C – Organizational Structure

2–63, 156–157

Item 11 Quantitative and Qualitative Disclosure

180–186, 215–219

173–174, 209–213

about Market Risk

D – Property, Plant and Equipment

167–168, 214

Item 12 Description of Securities other than Equity Securities

Item 4A Unresolved Staff Comments

None

A – Debt Securities

Item 5 Operating and Financial Review and Prospects

B – Warrants and Rights

A – Operating results

1, 15, 18–23, 215–219

C – Other Securities

B – Liquidity and Capital Resources

23, 177–180, 199–200

D – American Depositary Shares

Part II
Item 13 Defaults, Dividend Arrearages and Delinquencies

Item 14 Material Modifications to the Rights of Security

Holders and Use of Proceeds

Item 15 Controls and Procedures

Item 16 (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

Part III
Item 17 Financial Statements

Item 18 Financial Statements

Item 19 Exhibits

C – Research and Development, Patents

1, 36–40, 160

and Licences, etc.

D – Trend Information

E – Off Balance Sheet Arrangements

F – Tabular Disclosure of Contractual Obligations

G – Safe Harbor

Item 6 Directors, Senior Management and Employees

A – Directors and Senior Management

B – Compensation

C – Board Practices

D – Employees

E – Share Ownership

Item 7 Major Shareholders and Related Party Transactions

A – Major shareholders

B – Related Party Transactions

C – Interests of Experts and Counsel

Item 8 Financial information

A – Consolidated Statements and
Other Financial Information

Legal Proceedings

Dividends

B – Significant Changes

Item 9 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

14–15, 21–23,
214–219

204, 215

226

235

69–77

106–137

67–110, 135

28–35, 161

120–122, 203

229

204, 214

n/a

148–204

187–189

228–229

None

227–229

n/a

227–228

n/a

227–228

Page

None

96–97

n/a

92, 161

n/a

197, 229

n/a

Page

n/a

139, 148–204,
222–226

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Glossary

Unless the context indicates otherwise, the following terms have the meanings shown below:

Term
ADR

ADS

Arthroscopic
Enabling
Technologies

Advanced
Wound
Bioactives

Advanced
Wound Care

Advanced
Wound
Devices

Meaning
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, and regenerative medicine
products including skin, bone graft and articular
cartilage substitutes.

Term
IFRS

Knee
implants

LSE

MDR

MHRA

Negative
Pressure
Wound
Therapy

NHS

NYSE

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.

Orthopaedic
products

Meaning
International Financial Reporting Standards as adopted
by the EU and as issued by the International Accounting
Standards Board.

A product group which includes an innovative range of
products for specialised knee replacement procedures.

London Stock Exchange.

Medical Device Regulations.

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 traditional and single-use
Negative Pressure Wound Therapy, a patient monitoring
system for pressure injury prevention and patient mobility
monitoring, and hydrosurgery systems.

AGM

Annual General Meeting of the Company.

Arthroscopy

Endoscopy of the joints is termed ‘arthroscopy’, with the
principal applications including the knee and shoulder.

ASC

Ambulatory Surgical Center.

Basis Point

One hundredth of one percentage point.

Chronic
wounds

Company

Companies
Act

Emerging
Markets

EPSA

Endoscopy

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.

Adjusted earnings per ordinary share as defined on page 224.

Through a small incision, surgeons are able to see inside
the body using a monitor and identify and repair defects.

ENT

Ear, Nose and Throat.

Established
Markets

Euro or €

FDA

Financial
statements

FTSE 100

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.

Group or
Smith+Nephew

Used for convenience to refer to the Company and its
consolidated subsidiaries, unless the context otherwise requires.

Health
economics

Hip
Implants

IFRIC

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.

Other
Reconstruction

A product group which includes robotics-assisted surgery,
bone cement and accessory products.

OXINIUM

Parent
Company

Pound Sterling,
Sterling, £,
pence or p

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.

SEC

US Securities and Exchange Commission.

Sports
Medicine
Joint Repair

Trading
results

Trauma

Underlying
growth

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 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, and comparability of results. Refer to page 223 for
further information.

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.

US Dollars,
$ or cents or ¢

References to US currency. 1 cent is equivalent to one hundredth
of US$1.

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Smith+Nephew Annual Report 2020

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References from Advanced Wound Management (page 50)
1 Buzza K. Smith and Nephew 2018. Use of Moisture Vapour
Permeability* (MVP) and Moisture Vapour Transmission
Rate* (MVTR).

2 Tiscar-González V, Rodriguez MJM, Rabadán Sainz C, et al.

Clinical and economic impact of wound care using a
polyurethane foam multi-layer dressing versus standard
dressings on delayed healing ulcers. Adv Skin Wound Care.
3 Moore Z, Dowsett C, Smith G, et al. TIME CDST: an updated
tool to address the current challenges in wound care. J
Wound Care 2019; 28(3):154-161.

4 Kirsner R et al. A prospective, randomized, controlled

clinical trial on the efficacy of a single-use negative pressure
wound therapy system, compared to traditional negative
pressure wound therapy in the treatment of chronic ulcers
of the lower extremities. Wound Rep Reg 2019; 27:
519–529.

5 Saunders et al. Single-use negative-pressure wound

therapy versus conventional dressings for closed surgical
incisions: systematic literature review and meta-analysis.
BJS Open, 2021; 00: 1–8.

6 Pickham D et al. Effect of a wearable patient sensor on care
delivery for preventing pressure injuries in acutely ill adults:
A pragmatic randomized clinical trial (LS-HAPI study).
Int J Nurs Stud. 2018; Apr; 80:12-19.

7 NICE Medical Technology Guidance MTG43. PICO Negative
Pressure Wound Dressings for closed surgical incisions.
May 9th 2019 https://www.nice.org.uk/

8 Hyldig N, Vinter CA, Kruse M, et al. Prophylactic incisional
negative pressure wound therapy reduces the risk of
surgical site infection after caesarean section in obese
women: A pragmatic randomised clinical trial. BJOG. 2018;
Aug 1. (Epub ahead of print) Available at: British Journal of
Obstetrics and Gynaecology https://obgyn.onlinelibrary.
wiley.com/doi/abs/10.1111/1471-0528.15413.

¥ P < .001

References from Franchise areas

A Patient Testimonials

The patient testimonial(s) depicted herein represents
the individual patient’s own opinions, findings, beliefs,
and/or experiences. Patients featured may have been
compensated by Smith+Nephew for their time. Individual
results will vary. Not everyone who receives a product
or treatment will experience the same or similar results;
results may vary depending on a number of factors,
including each patient’s specific circumstances and
condition, and compliance with the applicable Instructions
for Use. Smith+Nephew is not responsible for the selection
of any treatment by a healthcare professional to be
used on a particular patient. Smith+Nephew makes no
representations, warranties, guarantees or assurances
as to the availability, accuracy, currency or completeness
of the information presented or its contents.

References from the Chief Executive Officer’s review (page 7)
1 Australian Orthopaedic Association National Joint

Replacement Registry (AOANJRR). Hip, Knee & Shoulder
Arthroplasty: 2019 Annual Report. Adelaide: AOA, 2019.
Accessed March 30, 2020.

2 Atrey A, Ancarani C, Fitch D, Bordini B. Impact of bearing
couple on long-term component survivorship for primary
cementless total hip replacement in a large arthroplasty
registry. Poster presented at: Canadian Orthopedic
Association; June 20–23, 2018; Victoria, British Columbia,
Canada.

3 Peters RM, Van Steenbergen LN, Stevens M, Rijk PC, Bulstra
SK, Zijlstra WP. The effect of bearing type on the outcome
of total hip arthroplasty. Acta Orthop. 2018:89;163–169.
4 Davis ET, Pagkalos J, Kopjar B. Bearing surface and survival
of cementless and hybrid total hip arthroplasty in the
National Joint Registry of England, Wales, Northern Ireland
and the Isle of Man. JBJS OA. 2020;5:e0075.

5 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.
6 Papannagari, R, Hines G, Sprague J, Morrison M, Long-term

wear performance of an advanced bearing knee
technology. ISTA, Dubai, UAE, Oct 6-9, 2010.

References from Orthopaedics (page 46)
1 Murakami K, Hamai S, Okazaki K, et al. Knee kinematics
in bi-cruciate stabilized total knee arthroplasty during
squatting and stair-climbing activities. J Orthop.
2018;15:650-654.

2 Carpenter RD, Brilhault J, Majumdar S, Ries MD. Magnetic
resonance imaging of in vivo patellofemoral kinematics
after total knee arthroplasty. Knee. 2009;16(5):332-336.
Iriuchishima T, Ryu K. A comparison of Rollback Ratio
between Bicruciate Substituting Total Knee Arthroplasty
and Oxford Unicompartmental Knee Arthroplasty.
J K nee Surg. 2018;31(6):568-572.

4 Data on file with Smith+Nephew. 05036 V2 TRIGEN

INTERTAN Claims Brochure 0817.

References from Sports Medicine & ENT (page 49)
1 Schlegel TF, Abrams JS, Bushnell BD, Brock JL, Ho CP.
Radiologic and clinical evaluation of a bioabsorbable
collagen implant to treat partial-thickness tears: a
prospective multicenter study. J Shoulder Elbow Surg. 2017.
doi: http://dx.doi.org/10.1016/j.jse.2017.08.023.

2 Bokor DJ, Sonnabend D, Deady L et al. Evidence of healing

of partial-thickness rotator cuff tears following
arthroscopic augmentation with a collagen implant: a
2-year MRI follow-up. MLTJ. 2016;6(1):16-25.
3 Van Kampen C, Arnoczky S, Parks P, et al. Tissue-

engineered augmentation of a rotator cuff tendon using a
reconstituted collagen scaffold: a histological evaluation in
sheep. Muscles Ligaments Tendons J. 2013;3(3):229-235.

4 Bokor DJ, Sonnabend DH, Deady L, et al. Healing of

partial-thickness rotator cuff tears following arthroscopic
augmentation with a highly porous collagen implant: a
5-year clinical and MRI follow-up. Muscles, Ligaments
Tendons J 2019;9(3):338-347.

5 Mcelvany MD, Mcgoldrick E, Gee AO, Neradilek MB, Matsen
FA, 3rd. Rotator cuff repair: published evidence on factors
associated with repair integrity and clinical outcome.
Am J Sports Med. 2015;43(2):491-500.

6 Vonhoegen J, John D, Hägermann C. Osteoconductive

resorption characteristics of a novel biocomposite suture
anchor material in rotator cuff repair. Orthop Traumatol
Surg Res. 2019;14(1):12.

7 Smith+Nephew 2010. Micro-CT and histological evaluation
of specimens from resorbable screw study (RS-II / OM1-08)
24-month post-implantation. Internal Report WRP-
TE045-700-08.

8 Smith+Nephew 2016. Healicoil Regenesorb Suture Anchor
– a study to assess implant replacement by bone over a
2 year period. NCS248.

9 Metcalf MH, Barrett GR. AJSM. 2004;32(3):675-680.
10 Amiel D, et al. Arthroscopy. 2004;20(5):503-510.
11 Woloszko J, et al. Proc of SPIE. 2003;4949:341-352.

Tula is a Trademark of Tusker Medical, Inc., a subsidiary
of Smith+Nephew.

238

Smith+Nephew Annual Report 2020

Index

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

Chair’s statement

Chief Executive Officer’s review

Company balance sheet

Company notes to the accounts

Contingencies

Contractual obligations

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

Employee share plans

Executive Officers

Factors affecting results
of operations

Financial instruments

Financial review

Glossary of terms

Goodwill

Group balance sheet

Group cash flow statement

Group companies

Group history

Group income statement

Group notes to the accounts

Group overview

Group statement of changes
in equity

Group statement of
comprehensive income

152–155

Intangible assets

235

Intellectual property

7, 37, 201–203

Interest and other finance costs

158, 224–225

Inventories

227–228

232–234

92, 161

69–73

Investments

Investment in associates

Key Performance Indicators

Legal and other

Legal proceedings

171–173

189

161

174–175

173

173–174

18–19

159, 224–225

188–189

2–3, 209–213

14–15, 44–51,
155–159

177–180

4–5

6–9

205

207

Liquidity and capital resources

23, 178–179

Manufacturing and quality

Medical education

New accounting standards

Off-balance sheet arrangements

Operating profit

Other finance costs

40–41

152

215

159–160

161

187–189, 208

Our approach to stakeholders

52, 102–105

226

153–154

236

218

154–155

164–165

106–137

139

23, 198, 228–229

1, 21, 165–166

203

74–77

220

Our global markets

Outlook and trend information

People/Employees

Post balance sheet events

Provisions

Property, plant and equipment

Regulation

Related party transactions

Research & development

Restructuring and
rationalisation expenses

Retirement benefit obligations

Risk factors

Risk report

Selected financial data

180–186

Share-based payments

20–23

Share capital

237

Shareholder information

169–170

149

150

209–213

214

148

152–204

2–3, 214

151

148

Staff costs and
employee numbers

Stakeholder statement

Statement of compliance

Strategic imperatives

Sustainability

Taxation

Taxation information
for shareholders

Total shareholder return

Trade and other payables

Trade and other receivables

14–15

14–15, 18–19,
20–23, 214–219

28–35

204

187–189

167–168

14–15, 63

204, 215

36–40

158, 224–225

189–195

215–219

53–65

220–221

203

196–198

227–234

161

102–105

8–9

24–27

162–165

230–231

125

177

175–176

197–198

Independent auditor’s report

140–147

Treasury shares

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239

Smith+Nephew Annual Report 2020

Financial calendar

Annual General Meeting
The Company’s Annual General Meeting (‘AGM’)
will be held on Wednesday, 14 April 2021 at
4:00 pm at our Expert Connect Centre, Building 5,
Croxley Park, Hatters Lane, Watford, WD18 8YE.
In light of the COVID-19 pandemic and the social distancing restrictions and
measures in place, aimed at reducing the transmission of the virus, we will
be conducting our 2021 AGM as a hybrid meeting, enabling shareholders to
attend and participate by electronic means. The physical location of the AGM
is to be at Smith+Nephew’s Expert Connect Centre, Building 5, Croxley Park,
Hatters Lane, Watford, WD18 8YE. The physical meeting will merely ensure
the minimum necessary quorum, with the majority of our Directors attending
electronically rather than in person. Shareholders will be able to participate
(voting and raising questions) electronically, in accordance with the UK
Corporate Governance Code 2018 (the ‘Code’) and the Annual General
Meeting Guidance published by the Financial Reporting Council (‘FRC’)
in October 2020.

Registered shareholders have been sent either a Notice of Annual
General Meeting or notification of availability of the Notice of Annual
General Meeting, which contains further information on how to join
the meeting electronically.

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Annual General Meeting

First quarter Trading Report

Payment of 2020 final dividend

Half year results announced

2021

14 April

11 May

12 May

29 July1

Third quarter Trading Report

4 November

Payment of 2021
interim dividend

Full year results announced

October/
November

2022

February1

Annual Report available

February/March

Annual General Meeting

April

1 Dividend declaration dates.

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.

Smith & Nephew plc
Building 5, Croxley Park
Hatters Lane, Watford
Hertfordshire WD18 8YE
United Kingdom

T +44 (0)1923 477100

enquiries@smith-nephew.com