Annual Report 2022
Life Unlimited
Contents
Strategic report
Our performance
IFC
Who we are
4
Chair’s statement
6
Chief Executive Officer’s review
8
Our business model
14
Key Performance Indicators
16
Financial review
18
Serving healthcare customers
24
Manufacturing and quality
46
Strengthening our Culture
through leadership
48
For a healthy and
sustainable future
56
Risk report
69
Our stakeholders
80
Governance
Letter from the Chair
84
Board leadership and purpose
86
Nomination & Governance
Committee report
98
Audit Committee report
101
Compliance & Culture
Committee report
108
Engaging with stakeholders
112
Directors’ Remuneration report
116
Accounts
Statement of Directors’
responsibilities
147
Independent auditor’s
UK report
148
Group income statement
164
Group statement of
comprehensive income
164
Group balance sheet
165
Group cash flow statement
166
Group statement of changes
in equity
167
Notes to the Group accounts
168
Company financial statements
221
Notes to the Company accounts
223
Other information
Group information
229
Other information
230
Shareholder information
240
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
Our performance
$5,215m
Group revenue
37.5¢
Unchanged
Dividend per share
Reported
+0.1%
Underlying
1
+4.7%
$450m
-24%
Operating profit
8.6%
-280bps
Operating profit margin
$901m
-4%
Trading profit
1
17.3%
-70bps
Trading profit margin
1
25.5¢
-57%
Earnings per share (EPS)
81.8¢
+1%
Adjusted earnings
per share
1
(EPSA)
$581m
-45%
Cash generated
from operations
$444m
-46%
Trading cash flow
1
$345m
-3%
R&D investment
6.6%
-150bps
Return on invested
capital
1
(ROIC)
The images used throughout the report represent the ways that Smith+Nephew is
taking the limits off living and helping patients live Life Unlimited. Images used are not
photographs of our patients unless expressly indicated.
Smith+Nephew
Annual Report 2022
Physical health is never just about
our body. It’s our mind, feelings and
ambitions. When something holds
us back, it’s our whole life on hold.
We’re here to change that, to
use technology to take the limits
off living, and help other medical
professionals do the same.
So that farmworkers, athletes,
grandads, parents and rugby players
stare down fear, see that anything is
possible, then go on stronger. Inspired
by a simple promise. Two words that
bring together all we do…
Life Unlimited
To learn more about our purpose visit
www.smith-nephew.com
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Smith+Nephew
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Smith+Nephew
Annual Report 2022
2
Getting a
farmer back
to work
Life Unlimited
Our technology takes
the limits off living
3
Smith+Nephew
Annual Report 2022
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We are a leading
portfolio medical
technology company.
We exist to restore
people’s bodies and
their self-belief.
Who we are
19,000
Employees supporting
healthcare professionals
worldwide
121,963
Medical training
sessions provided by
Smith+Nephew in 2022
Sports Medicine & ENT
Our Sports Medicine & Ear, Nose and
Throat (ENT) businesses offer advanced
products and instruments used to repair
or remove soſt 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 and services to meet broad
and complex clinical needs, delivering
on our mission to shape what is
possible in wound care.
We serve our markets through three global
franchises of Orthopaedics, Sports Medicine
& ENT and Advanced Wound Management.
Serving healthcare customers
Orthopaedics
Orthopaedics includes an innovative range
of Hip and Knee Implants used to replace
diseased, damaged or worn joints, robotics-
assisted and digital enabling technologies
and services that empower surgeons,
and Trauma & Extremities products used
to stabilise severe fractures and correct
hard tissue deformities.
28
34
40
4
Smith+Nephew
Annual Report 2022
We strive to build a purpose-driven culture
based on strong and authentic values of Care,
Courage and Collaboration.
Care:
A culture of empathy and
understanding for each other, our
customers and patients.
Courage:
A culture of continuous learning,
innovation and accountability.
Collaboration:
A culture of teamwork,
based on mutual trust and respect.
Building a winning culture
Innovation:
Developing new technology
through our Research & Development
(R&D) programme, and acquiring
exciting technologies where we can
add value.
75
Medical education:
Supporting the
safe and effective use of our products
and providing opportunities to learn
innovative surgical techniques.
26–27
Sustainability:
Addressing the
requirements of our stakeholders,
creating a lasting positive difference
for our customers and minimising our
impact on the environment.
56–68
Working with integrity,
transparency and accountability
100+
A presence in more
than 100 countries
5+
Smith+Nephew’s
Academies provide
medical education
in the US, Europe
and Asia Pacific
Improving outcomes across the globe
49
Global Head Office
Major manufacturing sites
Smith+Nephew Academies
Smith+Nephew Academy
opening in 2023
Africa
Asia
Europe
Americas
Australasia
Middle East
5
Smith+Nephew
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Chair’s statement
Dear Shareholder
Smith+Nephew delivered a mixed
performance in 2022. Revenue growth
was in the upper half of our guided range
for the year, but our trading profit margin
was below expectations, primarily due to
the significant number of macro factors
which impacted our industry in 2022.
Under the leadership of our new Chief
Executive Officer, Dr Deepak Nath, the
management team is working to realise
maximum value from the opportunities
we have built, and address the challenges.
We believe we are on the path to sustained
higher revenue growth while also improving
our trading profit margin over time.
Focused on improvement
The Board feels that the Company, under
new leadership, has a renewed energy and
all Board members strongly support the
actions being taken to move the Company
forward, including to address performance
in our Orthopaedics franchise and improve
productivity to support margin expansion.
Focused on
improving
performance
and shareholder
value
37.5¢
Dividend per share
Read about our
Memphis visit
Read about
our culture
49
110–111
6
Smith+Nephew
Annual Report 2022
The Board seeks to foster an environment
where there is a shared urgency to see
measurable improvements in performance
whilst recognising that leadership needs
time to effect lasting positive change.
We reviewed and endorsed the 12-point
plan brought forward by Deepak and his
leadership team, welcoming the deep
root-cause analysis, focused programme
of actions, pace of execution and
commitment to demonstrable outcomes.
The Board regularly monitors progress and
is encouraged by the early successes which
Deepak describes in the next few pages.
Shareholder value
Stock markets were challenging in 2022,
and Smith+Nephew’s share price reflected
this as well as our recent performance.
While our shares performed in line with or
better than many of our European medtech
peers during the year, we continued to lag
behind our US counterparts. Delivering our
commitments with urgency to deliver
value to our shareholders is a priority for
the Board and management team.
For 2022 the Board is recommending a Final
Dividend of 23.1¢ per share. Together with
the Interim Dividend of 14.4¢ per share this
will give a total distribution of 37.5¢ per share,
unchanged from 2021.
The Board welcomes discussion with
shareholders and during the year we
engaged with many of our larger investors.
We also received regular communication
from private shareholders and welcomed
the opportunity to meet face-to-face
at our Annual General Meeting (AGM),
which was also live-streamed to enable
maximum participation during the meeting.
Culture and sustainability
The Board puts great value on how
Smith+Nephew operates, and invests
considerable time in meeting employees
and understanding their experience and
commitment to the Company.
During the year members of the Board
met with employees, both virtually
and in person, and were impressed
by their enthusiasm for the work they
do. In September, the Board had the
opportunity to meet with employees at
the Company’s Memphis site and learn
about both our exciting product portfolio
and scrutinise our plans to improve
manufacturing productivity.
The Board was pleased to see that
external benchmarking highlighted a strong
employee connection to the purpose of
Life Unlimited and an overall upward trend
in engagement compared with last year.
Management continues to work to build
the culture and during the year the Board
approved new Commitments which define
the specific ways in which the Company
expects employees to demonstrate our
culture every day. On behalf of the whole
Board I would like to take this opportunity
to thank all the employees for their
contributions during 2022.
Sustainability has continued to receive
focus and scrutiny from the Board
and its Committees to ensure our
sustainability programme is aligned with
our stakeholders’ expectations and to
monitor actions and progress against
our targets, including towards net zero
carbon emissions by 2045. We welcomed
the decision to strengthen executive
oversight of sustainability with the
creation of the ESG Operating Committee,
formed in January 2023, comprising
experienced executives from across
many Smith+Nephew functions.
Reflections and thanks
As this will be my final year on the Board
and as your Chair, I wanted to take the
opportunity to reflect on events during
my time at Smith+Nephew. In 2014
when I was formally appointed as Chair,
no one had any indication of the scale
of the global challenges and uncertainty
we would all come to experience, in terms
of political and geographical upheaval,
the pandemic and the impact it would
have on our economies, supply chains
and ways of working.
During the early years of my tenure, I was
privileged to have been part of driving
the growth and success achieved by
the Company. The Board supported the
Company’s strategic expansion into higher
growth markets and segments through
organic growth and acquisition, all guided
by the renewed purpose, enthusiasm
and winning culture of Life Unlimited.
However, my time as Chair has not been
without its disappointments. As a Board,
we have always made every effort to
support the Company through the changes
required to deliver value and growth for all
stakeholders and to enable the Company
to achieve its full potential. The loss of
momentum emerging from the pandemic
was something that the Board was very
keen to address with the appointment
of Deepak in April 2022 to accelerate
business recovery. The Board have been
impressed with the way that Deepak has
quickly made every effort to evaluate,
analyse and improve the business at pace
in alignment with the purpose, strategy
and values of the Company.
I will retire as Chair of Smith+Nephew
in 2023 with a proposed transition over
the next few months to our new Chair,
Rupert Soames OBE, subject to shareholder
approval. I firmly believe the management
alignment and focus on execution at pace,
the strong culture embedded within the
organisation, and our leading portfolio of
innovation together give Smith+Nephew
the platform to deliver its full potential.
Roberto Quarta
Chair
“The Board feels that the Company, under
new leadership, has a renewed energy and all
Board members strongly support the actions
being taken to move the Company forward.”
Read about
Governance
84
Link to
AGM
IBC
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Chief Executive Officer’s review
We delivered 4.7% underlying revenue
growth
1
in 2022 (0.1% reported), operating
profit margin of 8.6% and a trading
profit margin
1
of 17.3%. Performance in
Orthopaedics and manufacturing and
supply chain, alongside the difficult macro
environment, held back our growth and
trading profit margin during the year.
We worked hard to closely manage the
impact of the widely reported global
shortages of some raw materials and
components. We are benefitting from
our increased investment in innovation,
with more than 60% of growth in 2022
coming from products launched in the
last five years. We exited the year with
good momentum, with all three global
franchises contributing to a strong finish
to the year, and all accelerated revenue
growth over the first nine months.
Executing our 12-point plan
In July 2022 we announced a 12-point
plan to fundamentally change the
way Smith+Nephew operates, to drive
higher growth and improve productivity,
maximising the opportunities we have built,
and addressing the challenges. Through this
plan, we expect to accelerate delivery of
our Strategy for Growth and deliver on our
ambition to transform to a consistently
higher-growth company.
Our Strategy for Growth is based on
three pillars:
– First,
Strengthen
the foundations
of Smith+Nephew. A solid base in
commercial and manufacturing will
enable us to serve customers sustainably
and simply, and deliver the best from
our core portfolio.
– Second,
Accelerate
our growth
profitably, through more robust
prioritisation of resources and
investment, and with continuing
customer focus.
–
Third, continue to
Transform
ourselves for higher long-term growth,
through investment in innovation
and acquisitions.
The 12-point plan supports the growth
pillars to Strengthen and Accelerate,
and is focused on:
–
Fixing Orthopaedics
, to regain momentum
across hip and knee implants, robotics
and trauma, and earn market share
with our differentiated technology;
–
Improving productivity
, to support
trading profit margin expansion; and
– Further
accelerating growth
in our
already well-performing Advanced
Wound Management and Sports
Medicine & ENT.
Dear Shareholder
It was an honour to be appointed
Chief Executive Officer in April 2022
and I am pleased to have this opportunity
to review the last year, and outline what
we are doing to transform performance
at Smith+Nephew.
When I joined Smith+Nephew I found
a company that had many more
opportunities than challenges, despite the
backdrop of a difficult macro environment,
including the impacts of higher inflation,
war in Ukraine and Covid in China.
We are a company with innovation at our
core, with leading technology across the
business. We have a strong, energised
management team and employees who
are deeply committed to our purpose of
Life Unlimited. Together, we are working
to improve our execution to realise our
opportunities and deliver greater value
for our customers, investors, employees
and other stakeholders.
Transforming to
consistently higher growth
Read about our CORI
◊
Surgical System
32
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
8
Smith+Nephew
Annual Report 2022
Since July we have embedded the
teams and structures to drive this
work, established internal KPIs to drive
accountability, and have made meaningful
early progress in delivery. We expect to
continue to accumulate operational and
financial benefits as we progress through
the two-year life of the plan.
While there is still much work to be done to
improve our performance in Orthopaedics
we are pleased with our progress in the
first few months, including reducing our
overdue orders by 35% from the peak in
the first half of the year and improving the
percentage of customer orders that are
completely filled, moving towards normal
industry standards.
In our global operations, we opened
a new high technology orthopaedics
manufacturing facility in Malaysia.
We also announced plans for a new
Advanced Wound Management facility
in the UK. Further benefits are expected
to come from driving lean methodologies
across our manufacturing operations,
pursuing opportunities for additional
network optimisation and targeting
direct procurement savings.
Our Advanced Wound Management
franchise has delivered above market
performance since 2021 following
extensive work to improve commercial
execution, and we expect to build on
this strong position going forward.
Growth drivers include our portfolio
breadth and extensive evidence-base.
Both are differentiators and we see
significant opportunities for further
growth, particularly in Negative
Pressure Wound Therapy.
Read about our
REGENETEN
◊
Bioinductive Implant
36–37
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Chief Executive Officer’s review
continued
Our Sports Medicine business has delivered
above market growth consistently for
many years, building on our reputation for
innovation. Many of the drivers for further
growth are already in place, including
expanding both our REGENETEN
◊
biologics
platform into new indications and our
technology leadership by adding advanced
surgical capability onto our surgical tower.
For ENT, we have a favourably positioned
tonsil and adenoid business and are in the
early stages of the roll-out of our unique
Tula
R
System for in-office delivery of
ear tubes.
We expect to continue to deliver further
operational and financial benefits as
we progress through the two-year life
of the plan.
Innovation-led
Our commitment to innovation is central to
our Strategy for Growth and we continued
to invest behind recent product launches
and in our R&D programme as well as
clinical evidence to drive future growth.
New product launches in Orthopaedics
included expanding our robotics-enabled
CORI
◊
Surgical System by bringing both
cementless total knee and total hip
arthroplasty onto the platform. We also
became the first company to receive
FDA 510(k) clearance for a revision knee
indication using a robotics-assisted
platform and completed the first cases
on CORI. Revisions account for around
10% of all knee procedures in the US.
In Sports Medicine, we announced
encouraging evidence supporting
REGENETEN, which delivered a significant
86% reduction in rotator cuff re-tear rates
at 12 months in interim results from a
randomised controlled trial (see page 37).
Read about
our KPIs
16–17
–
More opportunities than challenges.
–
Multiple positive factors coming together in Orthopaedics.
– Next wave of innovative implants coming to market.
– Unique expansions for CORI.
– Revitalised management team in place.
– Rewiring our commercial delivery underway.
–
Reinforcing our AWM and Sports Medicine leadership positions.
–
Bringing together leading technology and execution to drive performance.
The ‘Now’ of the opportunity
Transform
Through innovation
and acquisition
Accelerate
Profitable growth
through prioritisation and
customer focus
Strengthen
The foundation to serve
customers sustainably and simply
The ‘What’
of our strategy
Fixing Orthopaedics, to
regain momentum across
hip and knee implants,
robotics and trauma,
and win share with our
differentiated technology:
–
Rewire Orthopaedics
commercial delivery.
–
Earn market share with
our technology.
–
Streamline our
reconstruction portfolio.
Improving productivity,
to support trading profit
margin expansion:
–
Improve value and
cash processes.
–
Optimise procurement.
–
Manufacturing
optimisation.
Further accelerating
growth in our already
well-performing
Advanced Wound
Management and Sports
Medicine & ENT
businesses, representing
approximately 60%
of Group revenue:
–
Scale Negative Pressure
Wound Therapy.
–
Drive cross-selling in
Ambulatory Surgery
Centers (ASCs).
The ‘How’ – Executing our 12-point plan
Fixing
Orthopaedics
Improving
productivity
Accelerating
Sports Med
and AWM
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Annual Report 2022
Building a winning culture
Our strong culture and connection to
our purpose of Life Unlimited helped
us navigate the challenges of 2022.
We improved our employee engagement
scores as measured by Gallup, and made
good progress in building a diverse and
inclusive workplace through our Employee
Inclusion Groups (EIGs). I have spent time
with employees at many of our sites and
through our global town hall meetings,
and was impressed by their welcome
and the enthusiasm to go the extra mile
to serve our customers. I would like to
thank every one of our colleagues for
their dedication and care.
We continue to work to build our culture,
and to ensure it supports our Strategy for
Growth, and during the year we defined
the specific expectations and behaviours
we believe are needed, introducing our
Commitments. We also took steps to
support our employees as the cost of
living rose sharply in some of our locations.
You can read more about these and
other initiatives on pages 48–53.
Supporting Net Zero
Our Strategy for Growth also embraces
sustainability, and this report details our
progress made against our commitment to
achieve net zero carbon emissions by 2045.
Our Scope 1 and Scope 2 greenhouse
gas emissions were independently
assured in 2022 and we have reported
our 2021 baseline Scope 3 emissions for
eight categories. We are developing our
Scope 3 emissions reduction roadmap
in preparation for submitting this to the
Science Based Target Initiative (SBTi)
for validation. You can read more about
our progress across our sustainability
focus areas of People, Planet and
Products on pages 59–63.
Transforming Smith+Nephew
We will continue to face macroeconomic
headwinds in 2023. However, I believe
the drivers of further growth are in place,
including leading technologies across
all three franchises. With our 12-point
plan, we are fundamentally changing the
way Smith+Nephew operates to drive
higher growth and improve productivity.
Overall, we expect to deliver both faster
revenue growth and margin expansion in
the coming year, and are setting a solid
foundation for our midterm ambitions
as we transform to a consistently
higher growth company.
Deepak Nath, PhD
Chief Executive Officer
In Advanced Wound Management,
we introduced the WOUND COMPASS
◊
Clinical Support App, a comprehensive
digital support tool for healthcare
professionals that aids wound assessment
and decision making to help reduce
practice variation, and launched our
DURAMAX
◊
S Silicon Super Absorbent
Dressing for high exuding wounds in Europe,
where superabsorbers are one of the
fastest growing categories of dressings.
We continued to deliver successful
acquisitions, bringing novel and disruptive
technologies into our portfolio. In January
2022 we acquired Engage Surgical, owner
of the only cementless partial knee
system commercially available in the US.
The system will have an application on
CORI in the future.
Finally, we made further investment behind
medical education. I was proud to attend
the opening of a new Smith+Nephew
Academy in Singapore. Our Academies in
the US, Europe and now Asia Pacific, as
well as our online resources, provide tens
of thousands of healthcare professionals
with opportunities to evaluate the
latest evidence, learn innovative clinical
techniques as well as safe and effective
use of our products through hands-on
and state-of-the-art digital interactive
learning experiences.
“In July 2022 we announced a 12-point
plan to fundamentally change the way
Smith+Nephew operates, to drive higher
growth and improve productivity.”
Read about our
WOUND COMPASS
Clinical Support App
45
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Smith+Nephew
Annual Report 2022
Helping an
athlete back
to competing
Life Unlimited
Our technology takes
the limits off living
13
Smith+Nephew
Annual Report 2022
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Our business model
People
A purpose-driven culture based
on authentic values committed
to doing business the right way.
Sustainability
Addressing the long-term needs of our
customers, employees, communities
and stakeholders, reducing our impact
on the environment.
R&D
Innovation is at the heart of
our business and we prioritise
investment in new products,
technologies and services.
Global operations
Resilient manufacturing and
supply chains to ensure quality
and competitiveness.
Medical education
Committed to educating and
training healthcare professionals
on the safe and effective use
of our products.
Financial strength
A robust balance sheet and capital
allocation framework balancing
investments in the future and
returns today.
What we need to create value
Delivering value for stakeholders
Community
Volunteer hours
11,500
Employees
Engagement score
4.12
+0.04
Customers
Training sessions
121,963
Product launches
12
Investors
Dividend
$327m
Group revenue
$5,215m
+0.1%
Operating profit
$450m
-24%
Trading profit
1
$901m
-4%
Trading profit
margin
1
17.3%
-70bps
Through our business model we strive to transform outcomes
for the patients we serve, for clinicians and the healthcare
systems we support, for the company and our shareholders.
Our Strategy for Growth focuses our efforts, and our purpose
of Life Unlimited inspires us every single day.
How we create value
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
Operating
profit margin
8.6%
-280bps
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Smith+Nephew
Annual Report 2022
How we create value
Innovative
technology
We offer a broad portfolio of
differentiated products and
services that meet oſten-complex
clinical needs, including digital
and robotic technologies, driving
procedural innovation.
Product
development
and acquisition
R&D model that provides for
customer and franchise focused
innovation and acquiring
technologies needing
further development and
commercialisation.
Expertise
and support
Our sales force support
customers and work with
healthcare systems to address
complex business and
reimbursement requirements.
Education
and learning
academies
We support the safe and effective
use of our products, skill
development and procedural
innovation through our Academy
medical education programme.
Go to market
Three franchises set product
strategy which is executed by
our selling organisations in the
Americas, EMEA and APAC.
Customer
feedback
Building close relationships with
customers to ensure a deep
understanding of unmet clinical
needs and changing financial
and sustainability priorities
within healthcare systems.
6
2
5
3
4
1
Customer centricity
15
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Smith+Nephew
Annual Report 2022
Key Performance Indicators
12-point plan KPIs
Multiple KPIs are used to measure delivery
against the 12-point plan. These examples
express some of the process improvement
elements of the plan. KPIs covering R&D and
growth elements, such as a new product
acceleration metric, are commercially
sensitive and not disclosed externally.
Orthopaedics non-set line-item fill rate
16
Percentage point improvement in the US
year-on-year to 31 December 2022
This KPI helps us track improving
performance in filling customer orders.
Orthopaedic Reconstruction set turns
23%
Improvement from 2021 baseline
This KPI helps us measure improvements in
utilisation of Orthopaedic Reconstruction
surgical instrument sets, enabling more
procedures and supporting sales.
Procurement improvements
0%
Reduction since 2022 peak
This KPI enables us to track our productivity
by measuring our success reducing direct
and indirect spend (including transportation)
as a percentage of revenue.
Manufacturing conversion cost
95bps
Reduction since 2022 peak
This KPI measures the cost to convert raw
materials to finished products as a percentage
of revenue to track manufacturing
efficiency improvements.
+0.1%
Revenue growth
Reported revenue growth
includes a foreign exchange
headwind of 460bps.
Revenue growth allows management and
investors to measure our relative performance.
We are targeting underlying revenue growth
of 5%+ in the medium term.
Revenue growth – reported
%
+4.7%
All franchises and
geographies delivered
revenue growth in 2022.
Revenue growth – underlying
1
%
8.6%
Profit margin
Reported profit margin
reflects restructuring costs,
as well as acquisition and
disposal-related items,
amortisation and legal
and other items.
Profit margin allows management and
investors to determine our relative performance.
We are targeting at least a 20% trading profit
margin in 2025, with improvements year-on-year.
Operating profit margin
%
17.3%
Trading profit margin
reflects the impact of
higher input inflation
in 2022.
Trading profit margin
1
%
Financial Key Performance Indicators
6.6%
Return on invested capital
1
The lower ROIC reflected
the fall in operating profit
and higher average net
operating assets.
ROIC allows management and investors to
measure the return generated on capital invested,
providing a metric for long-term value creation.
37.5¢
Dividend per share
Total distribution of 37.5¢
per share, unchanged
from 2021.
Dividend payments allow investors
to receive a cash return on their
investment in Smith+Nephew.
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
Smith+Nephew uses a number of financial and non-financial Key Performance Indicators
(KPIs) to track and evaluate performance and delivery against its Strategy for Growth
and other business objectives. Those KPIs in the public domain are consolidated below.
A number of other KPIs are commercially sensitive and are not published but are used
internally to drive performance and growth.
Measuring our progress
¢
%
2020
-12.1
2022
4.7
2021
10.3
2020
15.0
2022
17.3
2021
18.0
2020
8.0
2022
6.6
2021
8.1
2020
-11.2
2022
0.1
2021
14.3
2020
6.5
2022
8.6
2021
11.4
2020
37.5
2022
37.5
2021
37.5
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Smith+Nephew
Annual Report 2022
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.
Achieve net zero
Achieve net zero Scope 1 and Scope 2
greenhouse gases (GHGs) by 2040 and
Scope 3 GHGs by 2045, beginning by
achieving a 70% reduction in Scope 1
and Scope 2 GHGs by 2025.
Scope 1 and 2 (market-based)^
27%
Reduction since 2019.
Hours volunteered
11,500
Each year employees are encouraged
to use paid volunteering time.
Waste to landfill
26%
Less waste to landfill versus 2019.
Product donations
$5.0m
Each year we donate products to
support underserved communities.
^ Please refer to page 67 for our emissions
reporting methodology, materiality
and scope.
Employee engagement score
The Gallup Global Engagement Survey allows
management and investors to assess how
engaged our employees are, which is a key
driver of business performance.
Engagement
4.12
Our Grand Mean score of 4.12 positioned
us in the 73rd percentile in Gallup’s
database (2021: 71st percentile).
88% of employees participated.
Non-financial Key Performance Indicators
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.
This KPI helps investors understand how
we support the safe and effective use
of our products through the provision
of medical education.
Practitioner training sessions
121,963
Quality and safety
This KPI allows management and investors
to verify that we are operating a safe
working environment at high standards.
Headline safety rate
Medical education
New product launches
12
This KPI helps us track the number
of on-time new product launches
to drive future revenue growth.
Acquisitions
1
This KPI tracks acquisitions that enhance our
portfolio and pipeline, including technology
that can change the standard of care and
assets in high-growth categories.
In January 2022, we acquired Engage Surgical,
owner of the only cementless partial knee
system commercially available in the US.
This gives us a unique position as the only
company offering total and partial cemented
and cementless knees in the US, our
largest market.
$345m
Investment in innovation
In 2022, we continued to
protect our R&D investment
and launched multiple new
products from our organic
pipeline and acquisitions.
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.
For more about our
sustainability strategy
For more about our employee
engagement score
For details of the actions
we are undertaking to meet
our commitments
For more about medical education
R&D investment
$
48–49
56–68
74
217–219
75
48–49
26–27
56–68
2020
0.30
2022
0.22
2021
0.23
2020
307
2022
345
2021
356
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Financial review
We made good progress in 2022 as
we focused on driving better execution
and improving productivity.
2022 performance
Group revenue in 2022 was $5,215 million,
an increase of 0.1% on a reported basis
and 4.7% on an underlying basis
1
excluding a
460bps headwind from foreign exchange,
within the revenue guidance range of
4.0% to 5.0% we had provided for 2022.
We exited the year with good momentum,
with fourth quarter revenue up 1.4% on a
reported basis and 6.8% on an underlying
basis
1
excluding a 540bps foreign exchange
headwind. All three global franchises
contributed to this strong finish to the year,
with all accelerating revenue growth over
the first nine months of the year.
The operating profit was $450 million
with an operating profit margin of 8.6%
(2021: 11.4%) aſter acquisition and
disposal related items, restructuring and
rationalisation costs, amortisation and
impairment of acquisition intangibles
and legal and other items.
Trading profit
1
for 2022 was $901 million
(2021: $936 million) with a trading profit
margin
1
of 17.3% (2021: 18.0%) reflecting
higher inflation in freight and logistics,
the impact of China volume-based
procurement (VBP), as well as sales and
marketing expenditure levels returning
to more normal levels. The trading profit
margin
1
was below the updated guidance
of 17.5% we gave on 28 July 2022.
The reported profit before tax was
$235 million (2021: $586 million)
aſter adjusting for an impairment loss
of $109 million in our investment in
our associate, Bioventus.
Building
a stronger
Smith+Nephew
18
Smith+Nephew
Annual Report 2022
Group performance
2022
$ million
2021
$ million
Change
$ million
Revenue
5,215
5,212
3
Operating profit
450
593
(143)
Trading profit
1
901
936
(35)
Profit before tax
235
586
(351)
Attributable profit
223
524
(301)
EPS
25.5¢
59.8¢
(34.3)¢
EPSA
1
81.8¢
80.9¢
0.9¢
Non-IFRS measures
The underlying increase in revenue by market reconciles to reported growth, the most
directly comparable financial measure calculated in accordance with International
Financial Reporting Standards (IFRS), as follows:
2022
$ million
2021
$ million
Reported
growth
%
Underlying
growth
%
Reconciling items
Acquisitions/
Disposals
%
Currency
impact
%
US
2,764
2,658
4.0
4.0
–
–
Other Established Markets
2
1,504
1,.638
(8.2)
3.3
–
(11.5)
Total Established Markets
4,268
4,296
(0.7)
3.7
–
(4.4)
Emerging Markets
947
916
3.5
9.1
–
(5.6)
Total
5,215
5,212
0.1
4.7
–
(4.6)
Trading profit
1
reconciles to operating profit, the most directly comparable financial
measure calculated in accordance with IFRS, as follows:
2022
$ million
2022
%
2021
$ million
2021
%
Operating profit
450
8.6
593
11.4
Acquisition and disposal related items
4
0.1
7
0.1
Restructuring and rationalisation costs
167
3.2
113
2.2
Amortisation and impairment
of acquisition intangibles
205
4.0
172
3.3
Legal and other
75
1.4
51
1.0
Trading profit
1
901
17.3%
936
18.0%
Efficiency
In July 2022, we announced a 12-point
plan to improve execution and drive our
Strategy for Growth. The plan focuses on
fixing Orthopaedics, improving productivity,
and accelerating growth in Advanced
Wound Management and Sports Medicine.
We are making good progress
embedding the plan and are seeing
early improvements.
The efficiency and productivity elements
of the 12-point plan bring in a range of
actions across the areas of cost of goods
from our Global Operations and sales &
marketing and general & administrative
costs from our commercial and corporate
activities. In aggregate, the benefits from
these actions are expected to result
in more than $200 million of annual
savings by 2025. The work to finalise
the associated cost is ongoing and will
be reported alongside our Q1 results
on 26 April 2023.
Earnings per share
Basic earnings per share (‘EPS’) was
down 57% to 25.5¢ primarily due to an
impairment loss in our investment in our
associate, Bioventus. Adjusted earnings
per share
1
(‘EPSA’) was up 1% at
81.8¢, reflecting the improved trading
performance, lower trading tax rate
1
and lower number of outstanding shares
due to the share buyback.
Capital allocation
In December 2021 we announced an
updated capital allocation policy to
prioritise the use of cash as follows:
1. Invest in innovation to drive organic
growth, and to meet our sustainability
targets and further embed our
ESG agenda.
2. Acquire new technologies and expand
in higher growth segments, that have
a strong strategic fit and meet our
financial criteria.
3. Maintain investment grade credit
metrics, our existing progressive
dividend policy, and an optimal
balance sheet position.
4. Return surplus capital to shareholders
through buybacks.
“For the midterm, the Group is focused on
delivering consistently higher revenue growth
while also expanding its trading profit margin.”
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
2
Other Established Markets are Europe, Canada, Japan, Australia and New Zealand.
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OTHER INFORMATION
Financial review
continued
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 including
payroll (employee) taxes, sales (indirect)
taxes and customs duties.
During 2022, we made global tax payments
of $818 million (2021: $725 million). This
comprised of $241 million of taxes borne by
Smith+Nephew (corporate income taxes,
employer social security contributions
and customs duties) and $577 million
of taxes collected from employees and
customers on behalf of governments
(employee income taxes and social security
contributions and net indirect tax payable).
Balance sheet data and net debt
Our balance sheet remains strong.
Key movements are outlined below.
Overall goodwill and intangible assets
decreased by $120 million. Goodwill increased
by $42 million as a result of acquisitions of
$84 million, which was partially offset by
foreign exchange movements of $42 million.
Intangible assets decreased by $162 million
primarily because of amortisation and
impairment of $268 million and foreign
currency movements of $14 million
being partially offset by acquisitions of
$44 million and additions of $77 million.
The acquisition of intangible assets
relates to the Engage acquisition.
Other non-current assets decreased by
$266 million primarily due to a decrease of
$58 million in property, plant and equipment,
a $141 million decrease in investment in
associates and a $41 million decrease
in retirement benefit assets. The decrease
in the investment in associates primarily
relates to an impairment loss of $109 million
in Bioventus Inc.
Current assets decreased by $568 million
primarily due to a $940 million decrease
in cash at bank, relating to the Engage
Surgical acquisition, payment of dividends,
share buybacks and repayment of debts.
This was partially offset by a $361 million
increase in inventories driven by strategic
raw material buys, as part of managing
disruption to certain global raw material
and component supply, inflation raising
the average value of our inventory, and
increased inventory to support growth
including new product launches, safety
stock, or in markets where we expect
growth acceleration.
Non-current liabilities decreased by
$229 million primarily due to a $105 million
reclassification of borrowings to current
liabilities to reflect repayments due in
2023, and an increase in retirement
benefit obligations primarily due to higher
discount rates in 2022 to reflect the
current economic environment.
Current liabilities decreased by
$416 million primarily related to the
repayment of $407 million debt in
2022 and movements in provisions.
The 2022 share buyback programme
commenced on 23 February 2022 and
$150 million was completed by 12 August
2022. As macroeconomic conditions
continued to be uncertain, including higher
inflation, the Board decided it was prudent
to delay further buybacks until conditions
improved. We remain committed to
returning surplus cash to shareholders
over time.
Investments
In January 2022, we completed the
acquisition of Engage Uni, LLC (operating
as Engage Surgical), owner of the
only cementless partial knee system
commercially available in the US.
This acquisition strongly supports
Smith+Nephew’s Strategy for Growth
by transforming our business through
innovation and acquisition, while also
providing differentiation for our customers.
The maximum consideration, all payable
in cash, is $135 million and the fair value
consideration is $131 million and includes
$32 million of contingent consideration.
We made further investment behind
medical education with the opening of a
new Smith+Nephew Academy in Singapore,
a major medical education and digital
innovation centre covering the Asia-Pacific
region. The Group is planning to open a
similar new Smith+Nephew Academy in
Munich in 2023.
In 2022, we also announced plans to build a
new Advanced Wound Management facility
on the outskirts of Hull, UK. The design of the
new facility takes into account sustainability
factors and standards with a focus on
energy and resource efficiency.
Dividends
The 2021 final dividend of 23.1¢ per ordinary
share, totalling $202 million, was paid on
11 May 2022. The 2022 interim dividend
of 14.4¢ per ordinary share, totalling
$125 million, was paid on 26 October 2022.
Taxation
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.
2022
$ million
2021
$ million
Change
$ million
Cash generated from operations
581
1,048
(467)
Trading cash flow
1
444
828
(384)
Free cash flow
1
56
410
(354)
2022
$ million
2021
$ million
Change
$ million
Goodwill and intangible assets
4,267
4,387
(120)
Other non-current assets
1,843
2,109
(266)
Current assets
3,856
4,424
(568)
Total assets
9,966
10,920
(954)
Total equity
5,259
5,568
(309)
Non-current liabilities
2,992
3,221
(229)
Current liabilities
1,715
2,131
(416)
Total liabilities
4,707
5,352
(645)
Total liabilities and equity
9,966
10,920
(954)
Net debt
2
including lease liabilities
2,535
2,049
486
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
2
Net debt is reconciled in Note 15 to the Group accounts.
20
Smith+Nephew
Annual Report 2022
Cash flow
Cash generated from operations was
$581 million aſter paying out $22 million
of acquisition and disposal related items,
$120 million of restructuring and rationalisation
expenses and $133 million for legal and
other items.
Trading cash flow
1
decreased by $384 million
driven by adverse working capital movements,
primarily from inventory including from spot
buying of raw materials and components
to secure supply and mitigate the risk of
shortages, and as we continued to invest in
capital expenditure, including progressing
changes to our manufacturing network.
The free cash flow
1
decreased to $56 million
from $410 million in the prior year because
of the decrease in trading cash flow. As a
result of the working capital movement,
the trading profit to cash conversion
1
ratio deteriorated to 49% (2021: 88%).
We expect a reduction in inventory levels,
and for cash conversion to return to historic
levels, as we deliver the 12-point plan.
In 2022, the Group purchased a total
of 10.1 million ordinary shares at a cost
of $158 million.
Liquidity and capital resources
At 31 December 2022, the Group had access
to $344 million (2021: $1,285 million) in
cash net of bank overdraſts. The Group’s
debt facilities comprised a $1,000 million
USD corporate bond, a €500 million EUR
corporate bond valued at $533 million, a
$1,000 million revolving credit facility and
$1,160 million of private placement debt.
The Group had committed facilities
of $3.7 billion at 31 December 2022
of which $2.7 billion was drawn.
The Group’s net debt
2
increased from
$2,049 million at the beginning of
2022 to $2,535 million at the end of
2022, representing an overall increase
of $486 million as a result of dividend
payments ($327 million), the acquisition
of Engage Surgical ($89 million), and
share repurchases ($158 million).
Return on invested capital
Return On Invested Capital (ROIC)
1,3
is a
measure of the return generated on capital
invested by the Group. It encourages
compounding reinvestment within the
business and discipline around acquisitions.
ROIC decreased from 8.1% in 2021 to 6.6%
in 2022 due to lower operating profit
and higher average net operating assets.
Going concern
The Directors have considered various
scenarios in assessing the future
financial performance and cash flows.
Throughout these scenarios, modelled
on severe but plausible outcomes, 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
the period to 30 March 2024. Accordingly,
the Directors continue to adopt the going
concern basis in preparing the consolidated
financial statements.
Outlook
For 2023 we are targeting both revenue
growth and trading profit margin above
2022 levels.
For revenue, we expect to deliver underlying
revenue growth in the range of 5.0% to 6.0%.
Within this, we expect continued strong
growth from our Sports Medicine & ENT and
Advanced Wound Management franchises,
and further improvement in Orthopaedics
as we continue to execute on the 12-point
plan. On a reported basis the guidance
equates to a range of around 5.0% to 6.0%
based on exchange rates prevailing on
13 February 2023.
In terms of phasing, we expect the first
quarter to be impacted by the renewed Covid
waves in China reducing surgical-volumes,
as well as the continuing headwind of VBP
in Orthopaedics. We expect the business
to accelerate from the second quarter
for the remainder of the year.
For trading profit margin, we expect to
deliver at least 17.5% as the positive
operating leverage from revenue growth,
productivity improvements and the early
benefits of our cost-saving initiatives more
than offset continuing macroeconomic
headwinds from raw material cost inflation,
higher wages and a 100bps headwind from
transactional foreign exchange. The tax
rate on trading results for 2023 is forecast
to be around 19% subject to any material
changes to tax law or other one-off items.
For the midterm, the Group is focused on
consistently delivering higher revenue growth
while also expanding its trading profit margin.
We are now targeting underlying revenue
growth consistently 5%+ (previously 4-6%),
driven by return on innovation investments
and execution of the 12-point plan, and
trading profit margin expansion to at
least 20% in 2025, driven by productivity
improvements (previously 21% in 2024).
Anne-Françoise Nesmes
Chief Financial Officer
Available debt facilities by maturity date ($m)
1
These non-IFRS financial measures are explained and reconciled to the most directly
comparable financial measure prepared in accordance with IFRS on pages 236–240.
2
Net debt is reconciled in Note 15 to the Group accounts.
3
ROIC is defined as: Operating profit (before amortisation and impairment of acquisition intangibles)
less adjusted taxes/(Operating net operating assets + Closing net operating assets)/2.
2024
430
430
105
2023
105
2025
1,000
1,000
2026
75
75
2027
140
140
2028
60
60
2029
633
100
533
2030
1,095
95
1,000
2031
0
2032
155
155
Revolving credit facility undrawn
USD corporate bond
EUR term loans
Private placement debt
Maturity by date
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STRATEGIC REPORT
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ACCOUNTS
OTHER INFORMATION
Getting a
grandad back
to playing with
his grandchild
Life Unlimited
Our technology takes
the limits off living
22
Smith+Nephew
Annual Report 2022
23
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Serving
healthcare
customers
Our customers are healthcare
professionals. 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.
Our franchise model
Smith+Nephew has a global franchise
structure with three franchises:
Orthopaedics, Sports Medicine & ENT
and Advanced Wound Management.
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. The franchises work
closely with R&D to ensure we are
developing products that address unmet
needs and with Global Operations to
ensure we have appropriate product
availability to meet customer needs.
During 2022, our Orthopaedics and Sports
Medicine & ENT were led by one leadership
team under the President Orthopaedics,
Sports Medicine & ENT and Americas,
reporting to the Chief Executive Officer.
Advanced Wound Management was
led by the President Advanced Wound
Management and Global Commercial
Operations, reporting to the Chief
Executive Officer. Global Commercial
Operations include medical education,
sales training, marketing services and
healthcare economics and serves all
our franchises and regions.
Our regional organisations sell to our
customers. In the US, our largest market,
the commercial teams were organised
by franchise and led by the franchise
presidents. The President Orthopaedics,
Sports Medicine & ENT and Americas also
led our teams in LATAM and Canada.
Our EMEA commercial organisation,
headquartered in Zug, Switzerland,
was led by the President EMEA Region.
Our APAC commercial organisation,
headquartered in Singapore, was led
by the President APAC Region.
24
Smith+Nephew
Annual Report 2022
Putting customers at the heart of our business
Regions
Three regional organisations
sell to our customers
Franchise areas
Three franchises set
global product strategy
Europe, Middle East & Africa
Our EMEA commercial organisation is headquartered
in Zug, Switzerland and led by the President
of EMEA Region.
Our APAC commercial organisation is headquartered
in Singapore and led by the President of APAC Region.
Orthopaedics includes Hip and Knee Implants
used to replace diseased, damaged or worn joints,
robotics-assisted and digital enabling-technologies
and services that empower surgeons, and Trauma
& Extremities products used to stabilise severe
fractures and correct hard tissue deformities.
Our Sports Medicine & Ear, Nose and Throat (ENT)
businesses offer advanced products and instruments
used to repair or remove soſt tissue.
Our Advanced Wound Management portfolio provides
a comprehensive set of products and services to meet
broad and complex clinical needs of products and
services to meet broad and complex clinical needs.
In the US, our largest market, the commercial teams
are organised by franchise and led by the franchise
presidents. The President Orthopaedics, Sports
Medicine & ENT and Americas also led our teams
in LATAM and Canada.
Asia Pacific
US/Americas
Orthopaedics
Sports Medicine & ENT
Surgeons
Healthcare
systems
Hospitals
Nurses
Payers
Patients
Advanced Wound Management
28
34
40
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OTHER INFORMATION
Serving healthcare customers
continued
Our salesforce
Our sales representatives
support our customers through
their technical knowledge.
Depending on their area of specialism,
representatives in our surgical businesses
not only know the products that they
sell and the surgical instruments used
to implant them, but are also expected
to have an 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 in the
safe and effective use of our advanced
medical technologies, or identifying
and contacting new customers.
In Advanced Wound Management, sales
representatives develop their knowledge
of how clinicians seek to prevent and
treat wounds, as well as understand
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. Our Global Commercial
Training and Education team delivers a
consistent content and curriculum-based
approach, coupled with commercial
training specialisation in key markets.
Smith+Nephew Academy
Smith+Nephew is committed to educating
and training healthcare professionals on
the safe and effective use of our products.
Every year we provide tens of thousands
of surgeons and nurses with opportunities
to evaluate the latest evidence, and
learn innovative surgical techniques and
effective use of our products through
our medical education programmes.
Central to Smith+Nephew’s commitment
to being a global leader in medical
education and improving patient outcomes
is providing a comprehensive accessible
learning environment tailored to the
needs of the healthcare professional.
Through the Smith+Nephew Academy,
introduced in 2022, we are actively
transforming the way we educate our
customers around the world by surrounding
them with leading-edge technology,
clinical content and scientific data.
The multiple elements of the
Smith+Nephew Academy offer a blended
learning environment inclusive of state-
of-the-art digital interactive learning,
symposia, procedure-based education
through hands-on experiences inclusive
of Virtual Reality (VR) simulations,
customised curriculum and programming
specifically designed to meet the needs
of the accomplished physician, resident,
fellow and allied health professionals.
Smith+Nephew has three Academies in
the US (Memphis, TN, Andover, MA and
Pittsburgh, PA) as well as Academy London
and Academy Singapore. Smith+Nephew
Academy Munich is due to open in 2023.
In addition we have smaller training
facilities in Phoenix, AZ, Austin, TX
and Minneapolis, MN.
Innovative
medical
education
121,963
Smith+Nephew medical education
sessions attended by healthcare
professionals in 2022, accessing
in-person and virtual resources
26
Smith+Nephew
Annual Report 2022
Supporting Smith+Nephew’s purpose
of Life Unlimited, the S+N Academy
Singapore offers an engaging, immersive
and interactive training environment
for healthcare professionals to experience
the latest products and technologies,
and refine their techniques under the
guidance of expert peers.
S+N Academy Singapore includes a
state-of-the-art digital operating suite,
including handheld robotics and a virtual
reality simulation studio, as well as fully
equipped surgical super-stations for
hands-on procedural training.
In 2022, we opened the
Smith+Nephew Academy
Singapore, a major medical
education and digital
innovation centre covering
the Asia-Pacific region.
Smith+Nephew Academy Singapore was opened
by our CEO Deepak Nath on 9 November 2022.
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OTHER INFORMATION
Serving healthcare customers
continued
Smith+Nephew’s Orthopaedic franchise
vision is to improve mobility and outcomes,
with unique and differentiated technologies
that allow patients to live a Life Unlimited.
Our innovative implants seek to mimic
natural movement, are manufactured using
materials with a track record of longevity
and performance, and are accompanied
by our enabling robotic technologies.
We are well positioned as the supplier
of choice for surgeons across the globe.
Smith+Nephew’s Orthopaedics franchise
includes an innovative range of hip and
knee implants used to replace diseased,
damaged or worn joints, robotics-assisted
enabling technologies that improve
accuracy and facilitate precision during the
surgical procedure, and trauma products
used to stabilise fractures and correct
bone deformities.
In Orthopaedic Joint Reconstruction,
we have a broad, clinically proven and what
we believe to be a differentiated portfolio
that allows us to compete effectively
across a market worth around $14.7 billion
b
annually. This portfolio includes our
proprietary OXINIUM
◊
material which we
consider offers a clear advantage over
competitors (see page 31).
In addition, we believe our CORI
◊
Surgical System is strongly positioned
to take advantage of the trends
towards robotic-assisted surgery and
outpatient joint replacement seen across
the segment. We are already a leader in-
industry with CORI being the first robotic-
assisted surgery system indicated for
revision knee procedures in the US.
The Trauma & Extremities market is worth
over $12.7 billion
b
annually, and we are
well positioned to compete effectively in
this segment. The simplicity and efficiency
of our EVOS
◊
Plating System gives us
an advantage in the largest segment in
Trauma, and our TRIGEN
◊
INTERTAN
◊
Intertrochanteric Nail is backed by the
clinical and economic data to position it
as the standard of care for hip fracture,
1,2
the second largest segment. In Extremities,
following a portfolio acquisition in 2021,
we are excited by our next generation
shoulder implant, the AETOS
◊
Shoulder
System, due to launch in 2023, and
expanding our presence in Foot & Ankle.
Highlights
Orthopaedics revenue
$2,113m
2021: $2,156m
Reported
-2.0%
Underlying
a
+1.9%
Orthopaedics trading profit
$383m
2021: $367m
2022
Revenue
2022
Reported
growth
2022
Underlying
growth
a
Knee Implants
$899m
+2.5%
+6.8%
Hip Implants
$584m
-4.4%
-0.2%
Other
Reconstruction
$87m
-5.6%
-1.8%
Trauma &
Extremities
$543m
-5.7%
-2.6%
a
These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial
measure prepared in accordance with IFRS on
pages 236–240.
OR3O
◊
Dual Mobility with
OXINIUM DH Technology.
A leading portfolio of Hip and Knee Implants, robotics
and digital enabling technologies and Trauma products
Orthopaedics
28
Smith+Nephew
Annual Report 2022
CONCELOC
◊
technology allows
for bony ingrowth
Smith+Nephew’s CONCELOC Advanced
Porous Titanium is a patented, proprietary,
3D printed porous structure technology
used in Smith+Nephew’s leading REDAPT
◊
Revision Hip System and new LEGION
◊
CONCELOC Cementless Total Knee
System (TKS).
CONCELOC is created in a virtual
environment and manufactured through
3D printing additive manufacturing to
optimise its porous structure to allow
for bony ingrowth.
3–6
2022 performance
Orthopaedics revenue declined -2.0%
on a reported basis in 2022, including a
390bps headwind from foreign exchange.
Revenue was up 1.9% on an underlying
basis
a
. The performance reflects the
implementation of the previously disclosed
hip and knee volume-based procurement
(VBP) programme in China.
Within this, our Knee Implant segment
performed strongly, offsetting declines in
our other segments. Other Reconstruction
was held back by global shortages of
semiconductors. Franchise trading profit
was up 4%, although the Orthopaedics
trading profit margin of 18.1% remained
below that of our other franchises.
Strategy
Our Orthopaedic business has an
innovative portfolio that allows us
to compete in joint reconstruction,
robotically enabled procedures, and
Trauma & Extremities markets. We are
building on our strong foundation to build
momentum and unlock opportunity.
Our areas of focus include optimised
supply planning and delivery as well
as improved asset deployment.
Our initiatives are designed to drive growth
across the Orthopaedic franchise. In Joint
Reconstruction and Robotics we aim to
accelerate growth by focusing on robotically
enabled procedures in total knee and
hip arthroplasty with the CORI Surgical
System. Additionally, we will continue to
leverage the unique material properties in
OXINIUM across the knee and hip platform.
For Trauma & Extremities, Smith+Nephew
expects to globally scale the EVOS Plating
System portfolio to compete more broadly
in Trauma centres. In addition, the launch
of our AETOS Total Shoulder System
is expected to expand our footprint in
the Shoulder Replacement market.
Global market share
In our Orthopaedics franchise we are
one of four leading players, competing
against US-based companies Stryker,
Zimmer Biomet and DePuy Synthes.
b
Data used in 2021 and 2022 estimates generated by
Smith+Nephew is based on publicly available sources
and internal analysis and represents an indication
of market shares and sizes.
c
A division of Johnson & Johnson.
Global market size 2022
b
Hip and Knee Implants
$14.7bn +4%
2021: $14.1bn +11%
A
Smith+Nephew
10%
B
Zimmer Biomet
32%
C
Stryker
23%
D
DePuy Synthes
c
20%
E
Others
15%
A
Smith+Nephew
4%
B
DePuy Synthes
c
26%
C
Stryker
22%
D
Zimmer Biomet
11%
E
Others
37%
Trauma & Extremities
$12.7bn +3%
2021: $12.2bn +10%
OXINIUM Tour of Change
During 2022, the Tour of Change mobile exhibit
visited leading Orthopaedic centres across the
US, providing healthcare professionals with an
opportunity to learn how OXINIUM Technology
is a truly differentiated implant material, how
an implant is made, and how it has been applied
clinically during the last 20 years in over
two million cases, delivering proven clinical
performance in hip and knee replacements.
OXINIUM Technology has established
itself as the best performing bearing
with the lowest risk of revision in total hip
arthroplasty (THA) at 9–18 years,
7–10
alongside
strong clinical performance in knees.
10
A
C
B
D
E
A
C
B
D
E
29
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Serving healthcare customers
continued
Orthopaedics
continued
R3 is the primary cup
used by Smith+Nephew
surgeons globally.
In 2016, I was winning medals in
national powerliſting competitions.
By 2018, I was walking with a cane.
My many years in sports had finally
caught up with me – the wrestling,
marathon running, martial arts,
and weightliſting. I was 63 years
old with a degenerative leſt hip
and so much pain that I couldn’t
take my dog for a walk.
I had spent much of my life guiding
and motivating others, both as
a physical trainer and a counsellor
of at-risk youth, but it was my
turn to seek help. I went to
Dr Trey Remaley at AdventHealth
Wesley Chapel. He recommended
full replacement with the R3 Hip
System with OXINIUM
◊
.
Flash forward to 2022: I’m back
doing what I love and competing
in powerliſting. I won first place
in the Florida Senior Games for
my age and weight division, and
I’m able to help other people
who need training and support.
I like to think of each day as an
experiment. What else can I do?
How much stronger can I get?
Building strength with
the R3
◊
Hip System
Getting a weightliſter back to competing.
Patient: Mike
Our technology takes the limits off living:
For patient testimonial
reference
256
30
Smith+Nephew
Annual Report 2022
OXINIUM Technology is a strong,
resilient and advanced implant
material that is only found in
Smith+Nephew’s portfolio of
joint replacement systems.
OXINIUM Oxidised Zirconium has
been used clinically for over 20
years as part of over two million
procedures. On a global scale,
OXINIUM Technology demonstrates
excellent survivorship across a
range of patients in hip and knee
replacement surgery.
Delivering
innovation
POLAR3
◊
System is a total
hip solution, meaning that
it includes a hip stem, a hip
head and an acetabular
cup. Together, these three
components are designed to
replace the ball and socket
structure of a natural hip.
R3 Acetabular Cup
provides a porous coating
designed to enhance fixation
and bony in-growth.
4,5,11,12
R3 Hip System
with OXINIUM
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
31
Serving healthcare customers
continued
Orthopaedics
continued
First to market
In September 2022, we were proud to announce
the first cases for revision knee replacement
utilising our CORI Surgical System. We are
the first orthopaedics company to receive
US Food and Drug Administration (FDA)
510(k) clearance for a revision indication
using a robotics-assisted platform.
RI.KNEE ROBOTICS utilises image-free
smart mapping, eliminating the need
for pre-operative CT/MRI scans and
the potential for image distortion
due to in situ components from the
primary procedure.
RI.HIP NAVIGATION further expands
indications on the CORI System, bringing
a computer-guided total hip application
to a platform previously dedicated
to robotic-assisted knee procedures.
When combined with Smith+Nephew
hip implants, like the POLAR3
◊
Total Hip
Solution and OR3O
Dual Mobility System,
and complementary tools to assess
spinopelvic mobility (RI.HIP MODELER) and
digital templating (TraumaCad
TM
), RI.HIP
on CORI delivers a comprehensive solution
for navigated total hip arthroplasty.
RI.HIP NAVIGATION and RI.HIP MODELER
are designed to help maximise accuracy
and reproducibility by delivering patient-
specific component alignment.
During 2022, we successfully expanded the
capabilities of the CORI Surgical System.
With the addition of a first-in-market
indication in the US for robotic-assisted
revision knee using LEGION
◊
Revision
Knee System, the CORI System is currently
the only solution indicated for robotic-
enabled knee procedures across the full
continuum of care – partial, total, and
revision knee arthroplasty. Furthermore,
new indications for LEGION CONCELOC
Cementless Total Knee System and
RI.HIP NAVIGATION were added to
CORI. In addition, RI.INSIGHTS, a data
management solution, provides surgeon
access to on-demand case information
with patient-reported outcome measures
(PROMs) for hip and knee procedures
completed with the CORI Surgical System.
Key products by segment
Knee Implants
In Knee Implants, Smith+Nephew’s
specialised systems include leading
products for total primary replacement
and revision, as well as partial and
patellofemoral joint resurfacing procedures,
offering surgeons and patients the benefits
of many proprietary technologies.
These include a unique kinematic knee,
the JOURNEY
◊
II Total Knee Arthroplasty
system, which has been shown to replicate
normal knee positions, shapes and
motions.
13–15
and utilises OXINIUM
◊
, and
a new LEGION
◊
CONCELOC
◊
Cementless
Total Knee System (TKS), the first release
in a multi-year roll-out of our family of
cementless knee implant products.
In 2022, we brought these technologies
together in the JOURNEY II ROX
◊
Total Knee
Solution, a new procedural product solution
which aims to provide surgeons with the
normal kinematics
13–19
of JOURNEY II TKA,
the cementless technology of CONCELOC
Advanced Porous Titanium and the wear
resistance
20,21
of OXINIUM Technology.
We also offer strong differentiation in
partial knees. In January 2022, we acquired
the ENGAGE
◊
Cementless Partial Knee
System, the only cementless partial
knee system commercially available in
the US. With this acquisition, we are the
only company offering total and partial
cemented and cementless knees in the US,
our largest market. The partial knee market
is expected to grow faster than the total
knee market and we expect cementless
partial knees to grow ahead of overall
partial knees, in line with recent patterns
seen in the total knee segment.
Hip Implants
The Hip Implants portfolio is headlined
by the POLAR3
◊
Total Hip Solution, that
has among the lowest revision rates.
22–26
Our OR3O
◊
Dual Mobility is the first system
to use the latest OXINIUM DH advanced
bearing technology. Dual mobility hip
implants are used in primary as well as
revision procedures. In addition, we offer
a full breadth of stems to address global
philosophies including the ANTHOLOGY
◊
Hip System. For revisions, the REDAPT
◊
Revision Hip System features CONCELOC
Technology. Bridging primary and revision
hips is the OR3O Dual Mobility with
OXINIUM DH Liner Technology.
Other Reconstruction
Our Other Reconstruction business includes
the CORI
◊
Surgical System, one of the most
advanced and efficient*
27
solutions on the
market. The CORI system is a smaller*
28
,
portable solution capable of performing
robotic-assisted knee and computer-
guided hip surgery on a single platform.
In robotic-assisted knee procedures,
CORI utilises handheld precision milling
which allows surgeons to execute TKA
and UKA procedures with reproducible
accuracy**
29–33
Unlike other systems, the
proprietary smart mapping feature creates
a 3-D image of the patient’s anatomy
in surgery, eliminating time, costs, and
radiation exposure
33
associated with
preoperative CT scans.
For a full list of references
254–256
32
Smith+Nephew
Annual Report 2022
Trauma & Extremities
Smith+Nephew’s portfolio includes
differentiated technology across the
major categories of Plates and Screws,
Intramedullary Nails, Hip Fracture,
Limb Restoration, Extremities, and
Shoulder Replacement.
Leading products include the new EVOS
◊
Plating System which includes a wide
range of clinical indications from mini and
small to large fragment and periprosthetic.
Designed to offer surgeons an all-inclusive,
expansive plating portfolio, EVOS provides
the simplicity of logically organised
instrumentation with advanced implant
solutions that meets the demands and
expectations of trauma surgeons.
The portfolio also includes the TRIGEN
◊
INTERTAN
◊
Hip Fracture System, which
is backed by many years of strong clinical
evidence.
1,2
For Extremities, the launch of
SMART TSF
◊
expanded the capabilities of the
TAYLOR SPATIAL FRAME
◊
External Fixator.
In January 2021, we completed the
acquisition of an exciting Extremity
Orthopaedics portfolio which has
strengthened our business by adding a
focused sales channel, complementary
shoulder replacement and upper and
lower extremities portfolio, and an
exciting new product pipeline.
In July 2022, we announced a pilot with
a third party, Rods&Cones, to provide
smart surgery glasses and digital remote
assistance to customers. This enables
Smith+Nephew representatives to
‘see’ through the eyes of the surgeon,
instrumentalist nurse, or any healthcare
professional using them, enabling
continuous remote support before,
during, and aſter surgical interventions.
Initially used in the UK to support the
NHS and other customers, this solution
allows Smith+Nephew to increase its
ability to offer technical support for safe
and effective use of its products at the
right time from anywhere in the world.
The increased complexity of surgery,
advancement of technologies, and need
for productivity and efficiency is enabled
by ensuring a specialist is available
remotely to support healthcare
professionals upon request in a way
which is not disruptive to the procedure.
Smart trauma technology
The SMART TSF is used in the management
of fractures and correction of long bone
deformities, including for fracture reduction
and limb correction, lengthening and/or
straightening. It is a circular, metal frame
with two rings that connect with six telescopic
struts that can be independently lengthened
or shortened relative to the rest of the frame.
This allows for six different axes of movement,
which gives the TAYLOR SPATIAL FRAME
the ability to correct even the most difficult
congenital deformities and trauma cases.
The SMART TSF application generates a
prescription of strut adjustments which the
patient can perform at a rate and rhythm
determined by their surgeon, potentially
reducing the need for travel and face-to-
face consultation.
Bringing
innovation
into the NHS
33
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Serving healthcare customers
continued
Elevating the Standard of Care
Sports Medicine & ENT
Smith+Nephew’s Sports Medicine & ENT
franchise vision is to lead with innovative
procedural solutions and elevate the
standard of care in Sports Medicine &
ENT. With a comprehensive procedural
offering and differentiated technologies,
we help healthcare professionals get
their patients back to a Life Unlimited.
Smith+Nephew’s Sports Medicine &
ENT franchise operates in growing
markets where unmet clinical needs
provide opportunities for procedural
and technological innovation.
Smith+Nephew is a global leader in Sports
Medicine, a $5.5 billion
b
market annually.
Sports Medicine spans a broad patient
population, including athletes. People of
all ages are more active than ever before,
and whenever they seek treatment for an
injury or a degenerative condition, they
expect a fast recovery and rapid return
to activity. The surgeons who serve these
patients want to treat them as efficiently
and as minimally invasively as possible
while ensuring the best possible outcomes.
We have 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 soſt tissue
injuries and degenerative conditions of
the shoulder, knee, hip and small joints.
Ear Nose and Throat (ENT) is also an
attractive, growing market segment
offering the opportunity to address unmet
needs with differentiated procedural
solutions. The positive momentum is
driven by emerging therapies, changes
in the point of care, mainly to the office
setting, and increasing global access for
ENT procedures. We offer a portfolio
of technologies focused on the unmet
needs of some of the most common
procedures general and paediatric ENT
surgeons perform today. These include
tonsillectomies, epistaxis (severe nose
bleeds) and tympanostomies (insertion
of ear tubes).
2022 performance
Sports Medicine & ENT delivered revenue
growth on a reported basis of 1.9%
including a 480bps headwind from foreign
exchange. Underlying growth
a
was 6.7%.
Within this, all segments contributed
positive growth. Sports Medicine Joint
Repair performed strongly, in line with
previous years, reflecting the strength
of our portfolio. Arthroscopic Enabling
Technology performance was held back
by global shortages of semiconductors.
ENT grew strongly as procedure volumes
recovered from the impact of Covid.
Franchise trading profit was up 3%
with a trading profit margin of 29.7%.
Highlights
Sports Medicine & ENT revenue
$1,590m
2021: $1,560m
Reported
+1.9%
Underlying
a
+6.7%
Sports Medicine & ENT trading profit
$472m
2021: $459m
2022
Revenue
2022
Reported
growth
2022
Underlying
growth
a
SMJR
$870m
+3.6%
+8.7%
AET
$567m
-3.8%
+0.9%
ENT
$153m
+17.1%
+20.4%
a
These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial
measure prepared in accordance with IFRS on
pages 236–240.
34
Smith+Nephew
Annual Report 2022
Strategy
We have a strong Sports Medicine & ENT
business and are well positioned for long-
term leadership and delivering our vision of
advancing standards of care. Our franchise
is driven by the three strategic priorities
– innovation, market development and
commercial execution.
Smith+Nephew’s Sports Medicine &
ENT business is founded on procedural
innovation, with differentiated technologies
that shape clinical outcomes across
the globe. Our portfolio continues to
demonstrate strong growth across key
segments, and we have an innovative
pipeline in development.
In line with our vision, our emphasis
on market development will help shiſt
standards of care to technologies and
procedures that deliver on the promise
of Life Unlimited. We are committed to
investments in key areas such as clinical
evidence, medical education, and surgeon
training for continued market development
around key procedures. Our commercial
initiatives reflect balanced selling across
segments and regions, aligned priorities,
and a customer-centric, winning mentality.
Global market share
In Sports Medicine, Smith+Nephew holds
a leading position behind Arthrex (US),
and also competes against Stryker and
DePuy Mitek.
Global market size 2022
b
Sports Medicine
c
$5.5bn
+4%
2021: $5.3bn +13%
A
Smith+Nephew
27%
B
Arthrex
32%
C
Stryker
11%
D
DePuy Mitek
d
10%
E
Others
20%
b
Data used in 2021 and 2022 estimates generated by
Smith+Nephew is based on publicly available sources
and internal analysis and represents an indication
of market shares and sizes.
c
Representing repair products and arthroscopic
enabling technologies, and excluding ENT.
d
A division of Johnson & Johnson.
Arthroscopy Solutions for the OR
We are driven to design products that
enable better outcomes and improved
quality of care.
We work with customers to ensure their
arthroscopy suite is complete, robust
and ready to perform. Whether they need
a comprehensive visualisation system,
or our COBLATION
◊
Technology.
Our INTELLIO
◊
Connected Tower Solution
provides sports medicine surgeons with a
complete suite of enabling technologies in the
operating room (OR). It uses a centralised app
to wirelessly connect and control the major
components of an arthroscopy surgical
tower from outside the sterile field,
helping to streamline procedure support.
A
C
B
D
E
35
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Serving healthcare customers
continued
Sports Medicine & ENT
continued
I didn’t see how a ‘patch’ was going
to fix my shoulder, let alone get me
out on the golf course again. But aſter
several years of dealing with chronic
pain in my right shoulder, I figured
it was worth a shot. I had always
been active – from my early years in
professional hockey to my later years
in golf – and I wasn’t ready to give
up competing.
The REGENETEN Implant was
recommended by my surgeon
and friend, Dr. Scott Sigman at
Orthopaedic Surgical Associates.
He said the ‘patch’ was really an
implant for the damaged part
of my shoulder, and that it could
help with the partial tear in my
rotator cuff.
That was in 2018. Since then,
my shoulder has healed to 100%,
and I don’t have to think about
pain anymore. I can sleep better
at night, enjoy my work during
the day, and I’ve been out playing
golf tournaments from Florida
to Maine.
I tell my old friend Dr. Sigman that
I’ll never have to see him again –
except for a round of golf, of course.
Patient: Colin
Supporting new tendon
growth with REGENETEN
◊
Back on the green and back in the swing.
Our technology takes the limits off living:
For patient testimonial
reference
256
36
Smith+Nephew
Annual Report 2022
The REGENETEN Implant
stimulates the body’s natural
healing response to support
new tendon growth.
1,15
-86%
Delivered an 86%
reduction in rotator
cuff re-tear rates
at 12 months.
1–15,30
Delivering
innovation
Revolutionising
rotator cuff repair
Rotator cuff disease is a significant
and costly problem that causes
ongoing pain and limits patients’
mobility. Progressive in nature,
small tears tend to grow in size
and severity over time, eventually
requiring surgery.
The REGENETEN Implant supports
the body’s natural healing response
to promote the grown of tendon-
like tissue and change the course of
tear progression.
1,15,16,28,29
Derived
from highly purified bovine Achilles
tendon, it creates an environment
that is conducive to healing.
1,15
In 2022, the results of a new
randomised controlled trial showed
that the addition of Smith+Nephew’s
REGENETEN Implant delivered a
significant reduction in rotator cuff
re-tear rates at 12 months.
30
Rotator cuff
disease is a significant
and costly problem.
REGENETEN
Bioinductive Implant
37
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Serving healthcare customers
continued
Sports Medicine & ENT
continued
Key products by segment
Sports Medicine Joint Repair
Our Sports Medicine Joint Repair business
offers innovative procedural solutions
for repairing soſt tissue injuries.
For shoulder repair, we develop products
for Rotator Cuff Repair (RCR) and
instability repair to help address pain
and restore function.
Advanced Healing Solutions for RCR
include the innovative REGENETEN
◊
Implant.
With at least 12 published clinical studies
including 709 patients,
1–12
the REGENETEN
Implant has been shown to change
the course of tear progression in early
studies,
1,13–16
aid return to normal activity
13
and reduce re-tears versus conventional
surgery.
17,18
The HEALICOIL
◊
Platform
of Shoulder Anchors features an open
architecture design to facilitate healing
19
and is available in our REGENESORB
◊
material which is designed to be
absorbed and replaced by bone within
24 months.
20–22
In knee repair, arthroscopic repair
techniques have become more prevalent
and widely recognised for the treatment
of meniscal tears in recent years.
23
Our All Tears, All Repairs Meniscal
Repair Portfolio provides surgeons with
unsurpassed options and possibilities for
meniscal repair, including the FAST-FIX
◊
FLEX Meniscal Repair System, launched
in 2021, which enables all-zone all-inside
meniscal repair to treat tears previously
not accessible.*
24–26
Our portfolio also contains the
NOVOSTITCH
◊
PRO Meniscal Repair
System, which addresses complex
meniscal tear patterns, including horizontal
cleavage tears affecting approximately
one-third of meniscal repair patients.
27
We also offer a comprehensive ligament
portfolio of high-quality products and
thoughtful techniques to address the full
spectrum of ligament pathologies and
concomitant injuries. Building upon our
trusted legacy of data-driven solutions,
we continue to innovate in this space.
Our hip preservation portfolio contains a
comprehensive offering of technologies and
techniques, establishing Smith+Nephew
as a leader and innovator in the hip repair
segment. The recently launched CAP-FIX
◊
Capsular Management Family addresses
all capsular management needs, from open
to close. We are committed to Redefining
Healing Potential in gluteus medius repairs,
with the use of the REGENETEN Implant.**
Arthroscopic Enabling
Technologies (AET)
In Arthroscopic Enabling Technologies, our
products facilitate arthroscopic surgical
procedures. The INTELLIO
◊
Connected
Tower Solution unites high-definition
imaging solutions, energy-based and
mechanical resection platforms, fluid
management and access technologies.
The LENS
◊
4K Surgical imaging system
uses 4K UHD image quality and network
connectivity in a 3-in-1 console for
multi-speciality environments.
Our WEREWOLF
◊
Controller enables
surgeons to remove soſt tissue precisely.***
31
in a variety of arthroscopic procedures.
With COBLATION treatment, patients
experienced significantly less bleeding
post-operatively.****
32
The WEREWOLF FASTSEAL 6.0 Hemostasis
Wand, launched in 2021, is used in
orthopaedic procedures for hemostasis of
soſt and hard tissues bringing a technology
widely used in sports medicine to
orthopaedic customers.
Ambulatory Surgery Centers (ASCs)
At Smith+Nephew, we go beyond
product to deliver a comprehensive
offering for ASCs. There continues to
be a shiſt of both sports medicine and
orthopaedic procedures from Hospital
to ASC outpatient settings. We are
uniquely positioned to meet the needs
of the market with procedural solutions
spanning across sports medicine, hip and
knee reconstruction, robotics, trauma,
extremities, and post-surgical wound care.
Smith+Nephew offers a custom approach
to the ASC, where we leverage not only our
best-in-class products, but also introduce
power up their ASC. As the ASC market
evolves, Smith+Nephew will continue to
meet the unique needs of this segment
with procedure innovation and tailored
programmes for growth.
FAST-FIX FLEX
Meniscal Repair
System
38
Smith+Nephew
Annual Report 2022
Ear, Nose and Throat (ENT)
In Ear, Nose and Throat, our COBLATION
Plasma Technology, which has been used
to remove tonsils and adenoids for over
15 years,
34,35
has an ability to remove
tissue at low temperatures with minimal
damage to surrounding tissue.
36–41
Evidence shows that COBLATION
◊
Intracapsular Tonsillectomy (CIT)
procedures offer less pain, quicker recovery
and a decreased risk of post-operative
bleeding with similar outcomes to total
tonsillectomies.
35–41
Smith+Nephew
offers a full portfolio of COBLATION
Wands for CIT procedures.
Our Tula System provides an in-office
solution for placement of tympanostomy
tubes.
In addition, we market a range of dissolvable
and removable post-operative nasal
dressings, as well as a comprehensive
portfolio of epistaxis (nosebleed) solutions.
WEREWOLF
FASTSEAL 6.0
Hemostasis Wand
Delivering
Innovation
with Tula
®
Smith+Nephew’s Tula System gives ENT
surgeons an option to place ear tubes
in an awake child during an office visit
without the need for general anaesthetic.
The physician numbs the eardrum using a
novel, child-friendly anaesthetic while the
patient may sit up, play, and remain with
their parent. A specialised tube delivery
system allows the physician to place
an ear tube in less than half a second,
minimising the amount of time the child
needs to remain still. Most children
return to normal activities immediately
following the Tula procedure.
42
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ACCOUNTS
OTHER INFORMATION
Smith+Nephew’s Advanced Wound
Management franchise vision is to
Shape What’s Possible in Wound Care.
Through our extensive portfolio, designed
to meet broad and complex clinical needs,
we help healthcare professionals solve
the challenges of preventing and
healing wounds.
The global wound care market is worth
around $10.7 billion
b
globally per annum.
Long-term growth has been driven
by the needs of an aging population in
many markets and as we experience
lifestyle-related health conditions, such as
increasing prevalence of obesity, diabetes
and vascular disease. These conditions
are key drivers of wound prevalence
which contribute to the pressure on
healthcare spending.
In Advanced Wound Management, we
seek to help healthcare systems through
innovation in products and services, to
deliver accelerated healing or preventing
wounds, and to do more with less, such
as enabling patients to be treated faster
requiring fewer resources, or moved from
acute to homecare settings. We do this
across our three segments of Advanced
Wound Care (AWC), Advanced Wound
Bioactives (AWB) and Advanced Wound
Devices (AWD).
Serving healthcare customers
continued
Shaping What’s Possible in Wound Care
Advanced Wound Management
2022 performance
Advanced Wound Management delivered
revenue growth on a reported basis of
1.1% including a 530bps headwind from
foreign exchange. Underlying growth
a
was 6.4%.
Within this, all segments contributed
positive growth. Advanced Wound Care’s
performance reflected the breadth of
our portfolio, Advanced Wound Bioactives
delivered sustained good growth from
our skin substitutes portfolio, and the
strong growth from Advanced Wound
Devices was driven by our PICO
◊
Single
Use Negative Pressure Wound Therapy
System. Franchise trading profit
was
down 8% with a trading profit margin
of 28.8%.
Strategy
Our vision of Shaping What’s
Possible in Wound Care is delivered
through the two strategic levers
of portfolio enhancement and ever
improving commercial execution.
Portfolio enhancement includes new
product development, line extensions
and acquisitions. To drive ever
improving commercial execution
Highlights
Advanced Wound Management revenue
$1,512m
2021: $1,496m
Reported
+1.1%
Underlying
a
+6.4%
Advanced Wound Management
trading profit
$436m
2021: $474m
2022
Revenue
2022
Reported
growth
2022
Underlying
growth
a
AWC
$712m
-2.6%
+5.2%
AWB
$520m
+4.9%
+5.4%
AWD
$280m
+4.3%
+11.6%
a
These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial
measure prepared in accordance with IFRS on
pages 236–240.
DURAMAX S Silicone
Superabsorbent
Dressing for highly
exuding wounds
launched in 2022.
GRAFIX
◊
Placental Membranes form
our skin substitute product range.
40
Smith+Nephew
Annual Report 2022
we seek to inspire, engage and align
on our global strategy across all regions
and functions as efficiently as possible.
Through these strategic priorities we
are driving performance and supporting
delivery of Smith+Nephew’s global
strategy to Strengthen, Accelerate and
Transform through the 12-point plan.
Global market share
We operate in all three categories in
wound care, and have the second largest
business globally in terms of revenue.
In the Advanced Wound Care segment
we compete in dressings with Mölnlycke
(Sweden), Coloplast (Denmark) 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 a number of
our respective categories.
Global market size 2022
b
Advanced Wound Management
$10.7bn
+4%
2021: $10.3bn +11%
A
Smith+Nephew
14%
B
3M
17%
C
Mölnlycke
10%
D
ConvaTec
6%
E
Others
53%
b
Data used in 2021 and 2022 estimates generated by
Smith+Nephew is based on publicly available sources
and internal analysis and represents an indication
of market shares and sizes.
RENASYS
◊
NPWT
System offers options
for the hospital and
home setting.
The future of pressure injury prevention
Hospital-acquired pressure injuries (HAPIs)
are on the rise.
Despite a decrease in other hospital-acquired
conditions, HAPIs are up 6%.
38
* Each year,
complications from pressure injuries result
in an estimated 60,000 deaths in the US.
The average incremental cost of treating
a pressure injury is $21,767.
Smith+Nephew’s LEAF
◊
Patient Monitoring
System promotes adherence to patient
turning procedures.
41,42
Visual alerts in the patient room and at the
nurses’ station make it easy for the whole
team to see who needs to be turned and
when
43
. Plus, the LEAF System’s Integrated
Positioning Technology is the first tool that
measures the quality and effectiveness
of patient turning, including patient turn
frequency and turn angle.
Alongside our ALLEVYN
◊
LIFE Dressings,
which are multi-layered and uniquely
constructed for protecting intact skin
against pressure injury onset as part of a
pressure injury/ulcer prevention protocol
44–46
and the SECURA
◊
range of skin care products,
– Smith+Nephew offers a powerful portfolio
to help facilities follow evidence-based
protocols, and develop improved practices
to prevent HAPIs.
51
*
Between 2014 and 2017 in the US.
A
C
B
D
E
41
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OTHER INFORMATION
Serving healthcare customers
continued
Advanced Wound Management
continued
ALLEVYN LIFE Foam
Dressings are designed
to be leſt in-situ for up to
five or seven days.
22,23,24
*
When Allan, a once active sportsman,
developed diabetes 15 years ago
he soon found that his passions,
interests and many day-to-day
tasks suddenly became out of
reach. Although he recognised that
diabetes was something he needed
to manage, pain and discomfort
permeated his everyday life to the
point that even a leisurely stroll
was impossible.
Aſter several complications, with the
possibility of foot amputation, it was
finally suggested that Allan managed
the wound using ALLEVYN LIFE
Dressings and the effect on his life
was transformational. Recounting the
simplicity of using ALLEVYN LIFE
Dressings (even administering them
himself, as directed by his healthcare
professional), he described how our
unique foam dressing technology
cushioned his wound and helped
to alleviate his pain.
“Given me a new lease of life.”
Now rediscovering many of the small
things he took for granted – such as
gardening, mowing the lawn, or even
taking his son a cup of tea – Allan
accredits much of his progress to our
dressing technology. In a seemingly
small treatment intervention,
ALLEVYN LIFE Dressings made all
the difference in the world to Allan;
helping to put him back on a path
to Life Unlimited.
Patient: Allan
A new lease of
ALLEVYN
◊
LIFE
Rediscovering many of the small things we take for granted.
Our technology takes the limits off living:
For patient testimonial
reference
256
42
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Annual Report
2022
Reducing the burden on
nurses through shared-care
In June 2022, a new peer-reviewed
article in Wounds International
proposed that an estimated 3.5 billion
hours of nursing time could be
released globally by 2030 if shared-
care approaches between nurses and
patients are adopted in chronic wound
care alongside long-wear advanced
foam dressings.
18
Shared-care is the clinical practice
of involving patients in the ongoing
delivery of care, whilst supported and
guided by a healthcare professional.
Patients with chronic wounds may
be encouraged to have greater
involvement in dressing changes,
lifestyle and nutrition factors, and
monitoring and reporting. The success
of shared-care is evidenced in
other chronic conditions such as
diabetes
19
, stoma management
20
and incontinence.
21
ALLEVYN LIFE Foam Dressings
complement a shared wound
care approach by enabling nurses
and patients to support healing.
The dressings are designed to be leſt
in-situ for up to 5 or 7 days,
22–24
*
manage exudate with visible change
indicators and are comfortable
to wear.
25–29
*
Up to 5 days for the sacral area.
ALLEVYN LIFE dressings
manage exudate with visible
change indicators and are
comfortable to wear.
25,26,27,28,29
ALLEVYN LIFE
Dressing
Delivering
innovation
43
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Smith+Nephew
Annual Report 2022
Serving healthcare customers
continued
Advanced Wound Management
continued
Advanced Wound Bioactives (AWB)
Our Advanced Wound Bioactives
portfolio provides a unique approach to
debridement, dermal repair, and tissue
substitutes with considerable evidence
supporting their clinical application.
Collagenase SANTYL
◊
Ointment (250 units/
gram) is the only FDA-approved biologic
enzymatic debridement agent available
in the US market, and is indicated for
dermal ulcers, severely burned areas and
moderate to severe soſt tissue burns.
REGRANEX
◊
gel is the only FDA-approved
Platelet-Derived Growth Factor for the
treatment of diabetic neuropathic ulcers,
formulated to act as a first-line treatment
following effective ulcer care.
In our skin substitute product range,
GRAFIX
◊
Placental Membranes and
STRAVIX
◊
Umbilical Tissues retain the
extracellular matrix, growth factors and
native placental components to support
wound closure.
30,31
They are intended for
application directly to acute and chronic
wounds and as a surgical cover or barrier.
In addition, we offer OASIS
®
* Matrix and
OASIS MICRO products, which are naturally
derived scaffolds of extracellular matrix
(ECM), composed of porcine small intestinal
submucosa (SIS) and indicated for the
management of a wide range of acute
and chronic wounds, burns and surgical
interventions.
32
*
OASIS is manufactured by Cook Biotech, Inc.
Advanced Wound Devices (AWD)
In Advanced Wound Devices, our portfolio
helps improve healing outcomes in
chronic wounds, reduces surgical site
complications and facilitates preventative
care for pressure injuries. Within the
negative pressure wound therapy (NPWT)
category, we offer single-use and
traditional (cannister-based) solutions
offering customers a one-stop-shop
with great flexibility.
Our PICO
◊
range of single-use negative
pressure wound therapy systems with its
proprietary AIRLOCK
◊
Technology layer
has demonstrated significant healing
outcomes for chronic wounds
35
*
,34
and in
the reduction of surgical site complications
in closed incisions,
35†
in a highly portable
form that allows patients to return to
their lives.
36,37
Our traditional RENASYS
◊
NPWT System offers options for the
hospital and home setting.
AWD also includes the LEAF Patient
Monitoring System that supports a
hospital’s pressure injury prevention
strategy, and the VERSAJET
◊
Hydrosurgery
System, a surgical debridement device.
*
Compared to baseline trajectory, n=52 wounds; p<0.006.
†
Compared to care with standard dressings; p<0.00001;
meta-analysis of 29 studies (odds ratio (OR): 0.37).
PICO
PICO Single Use Negative Pressure Wound
Therapy System (sNPWT) is cost effective and
improved outcomes compared with standard
care to help prevent surgical site complications
in patients with surgically closed incisions.
A systematic literature review and meta-
analysis of 19 studies involving 4,530 patients
showed a 63% reduction in the odds of
developing surgical site infections with the
prophylactic use of PICO sNPWT compared
with standard care.
35
Key products by segment
Advanced Wound Care (AWC)
Smith+Nephew started as a wound care
company and through our Advanced
Wound Care business we have grown to be
a leader in the segment. Today our portfolio
includes products that are designed to
manage exudate and infection, protect the
skin and help prevent pressure injuries.
In exudate management, our products
provide appropriate wound fluid handling
and absorption to help promote an
optimal wound healing environment.
1–3
Our ALLEVYN
◊
LIFE Foam Dressing is
uniquely differentiated, with its EXUMASK
◊
change indicator and hyper-absorbent
lock away layer with EXULOCK
◊
technology
for odour control and fluid lock-in.
2,4,5
The effectiveness of the ALLEVYN Dressing
range has been demonstrated across
138 publications in 19 countries on over
12,000 patients and volunteers.
6
In 2022,
we introduced in Europe and the USA our
DURAMAX
◊
S Silicone Superabsorbent
Dressing for highly exuding wounds.
Superabsorbers are one of the fastest
growing categories of dressings in Europe.
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
our range of IODOSORB
◊
Cadexomer Iodine
products provide clinicians with a range
of solutions to address bacterial burden,
biofilm and infection.
7–17
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Smith+Nephew
Annual Report 2022
Smith+Nephew’s Advanced Wound
Management franchise is also focused
on utilising digital technology and data
analytics to provide new forms of value
to our customers. We aim to help optimise
outcomes, prevent unnecessary wounds
and complications, support patient care
self-management where appropriate,
drive transition to new efficient business
models and establish data as a
strategic asset.
In 2022, we launched the award-winning
WOUND COMPASS
◊
Clinical Support App,
a comprehensive digital support tool
for healthcare professionals that helps
reduce practice variation.
52
This simple and easy-to-use app
52
is
accompanied by additional educational
resources, images, and diagrams and
can be customised to local customer
formulary.
52
Hospital-acquired pressure
injuries (HAPIs) are on the rise
38
Despite a decrease in other hospital-
acquired conditions, HAPIs are
+6%
38
*
Each year, complications from
pressure injuries result in an estimated
60,000
deaths in the US
39
The average incremental cost
of treating a pressure injury is
$21,767
40
*
Between 2014 and 2017 in the US.
Delivering
Innovation
For detailed product information, including the indications
for use, contraindications, effects, precautions and warnings,
please consult the product’s Instructions for Use (IFU)
prior to use.
45
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Smith+Nephew
Annual Report 2022
Our Global Operations team supports
the delivery of the Group’s strategy
by ensuring that we respond efficiently
to demand, new product development
and changing regulatory requirements.
We operate manufacturing facilities in
countries across the globe, and have
central distribution facilities in the
US, Europe and Asia. Products for our
Orthopaedics franchise are primarily
manufactured at facilities in Memphis (US),
Penang (Malaysia), Aarau (Switzerland),
Tuttlingen (Germany), Beijing (China) and
Warwick (UK). Sports Medicine products
are primarily manufactured at the Alajuela
(Costa Rica) and Mansfield (US) facilities.
Our major manufacturing sites for
Advanced Wound Management products
are Hull (UK), Fort Worth (US), Columbia,
Maryland (US) and Suzhou (China).
During 2022 our global operations were
subject to disruption from a number of
factors including the impact of the war
in Ukraine on the access and cost of
supply channels, the widely reported
global shortages of some raw materials
and components, and localised factors
including Covid-related lockdowns in China.
During the year we worked to closely
manage the impact of these factors on
our business.
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.
Our procurement team aims to contract
to ensure value based on total spend
across the Group. All our suppliers are
subject to our Third Party Guide to Working
with Smith+Nephew meaning they
agree to conduct business on our behalf
in an ethical manner that is compliant
with all applicable laws, regulations and
industry codes of conduct, and to manage
their suppliers in accordance with the
same standards.
Manufacturing
and quality
Smith+Nephew takes great pride
in its manufacturing expertise
and commitment to distributing
innovative, quality products globally.
46
Smith+Nephew
Annual Report 2022
We work closely with our suppliers to
ensure high quality, delivery performance
and continuity of supply. During 2022
we saw the impact of significant inflation
across our supply chain.
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 as
well as compliance with our Third Party
Guide to working with Smith+Nephew.
Improving productivity
The 12-point plan (see pages 8–11)
includes focus on improving productivity
to support trading profit margin
expansion. Areas of opportunity include
driving lean methodologies across our
manufacturing operations, further
network optimisation and direct and
indirect procurement savings.
We are reviewing lean methodologies
across our operations to simplify processes,
drive greater standardisation, and
reduce scrap. We expect to roll out the
lean programme in a phased approach,
focusing initially on the greatest potential
by product category and location, and
with the oversight and accountability
to make improvements sustainable.
We will continue to review our network
for further strategic opportunities.
We are also targeting procurement
savings to help mitigate cost inflation.
Opportunities include where spend is
fragmented between large numbers
of suppliers, or disproportionately
using providers in high-cost countries.
Quality and Regulatory Affairs
Our 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
with 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.
The European Union Medical Device
Regulation (EU MDR) is a significant
regulatory change whereby medical
devices carrying a CE mark now face
greater scrutiny than ever before to
ensure they are effective and safe.
Our Regulatory Affairs is working with
our Notified Bodies to certify our portfolio
to EU MDR during the transition period
which is currently scheduled to finish
on 25 May 2024.
We are also monitoring the progress of the
European Commission’s proposal to amend
the EU MDR transitional period including
extending the transitional period.
Building a world-class network
Aligned to our Strategy for Growth
pillar to strengthen our foundation,
we are undertaking major investment
in our manufacturing network to enable
Smith+Nephew to serve customers
and their patients sustainably through
advanced manufacturing.
In Malaysia we opened our new high
technology manufacturing facility Penang
in June 2022. The 277,000 square-foot
facility will primarily support the Company’s
Orthopaedics business, which is expected
to grow strongly in the Asia Pacific region.
In the UK we announced plans in June 2022
to build a new facility for our Advanced
Wound Management franchise on the
outskirts of Hull, UK. The design of the new
facility takes into account sustainability
factors and standards with a focus on
energy and resource efficiency.
Smith+Nephew
Annual Report 2022
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47
At Smith+Nephew, we know that our
people enable our business strategy. That’s
why our comprehensive people strategy
is focused on making Smith+Nephew a
workplace that talented people want to
join and stay, creating positive and simple
processes to support our employees in the
‘moments that matter’, from recruitment
to retirement, and building a high performing
and inclusive culture where everyone
feels a sense of respect and belonging.
Our Culture of Care, Courage and
Collaboration is central to all we do.
In 2022, we advanced this culture
through strengthening and embedding
our Inclusion, Diversity and Equity (IDE)
initiatives, expanding our wellbeing
offerings, engaging employees in their
role and connection to our business
strategy and empowering and enabling
our people leaders.
An engaged team
For the fourth year, we conducted
our annual Global Employee Survey
administered by Gallup, a leader in survey
research, using the Q12 survey tool.
The Q12 tool measures the key aspects
of employee engagement which creates
an environment of trust and enables
business performance.
Strengthening
our Culture through
leadership
Our Culture of Care, Courage and
Collaboration sets Smith+Nephew
apart. Our leaders – current and
future – set the tone for our culture
and the example for our global team
to follow. We believe developing our
current and future people leaders is
an investment that benefits the
entire organisation. Engaged leaders
create engaged employees and
contribute to a high-performing
and purpose-driven company.
48
Smith+Nephew
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The Q12 survey tool focuses strongly on
the role of the people leader in engaging
their team. People leaders are provided
with their individual survey scores and
conduct team sessions where the results
are discussed and actions agreed –
both to improve on opportunity areas
and to maintain strengths. These action
plans continued throughout the year
and are assessed at our annual Gallup
Accountability Check-in Survey to
determine whether employees are
seeing improvements.
In 2022, we saw a strong response rate
of 88% and an overall upward trend
of our results compared with last year.
Our overall Company engagement score
was 4.12, is a slight increase from last year
(4.08), putting us in the 73rd percentile
of Gallup’s database. This gives us a good
foundation on which to build.
The survey highlighted overall strengths
in employee connection to our purpose
and culture and the feeling that opinions
count. Given some of the recent
challenges around supply chain it was
not surprising to see that our greatest
areas of opportunity, where our scores
fell slightly (down 0.02 points), are having
the materials and equipment, as well as
overall satisfaction with Smith+Nephew
as a place to work.
Introducing our Commitments
In 2022, using results from our Global
Employee Survey as well as inputs
from leaders and employees across
the business, we defined the specific
expectations and behaviours needed
to deliver our strategy and support
our culture. Our Commitments, which
take effect from 2023, define the
specific ways in which we expect our
employees to demonstrate our culture
every day. These Commitments were
launched through a leader-led cascade
so that our leaders truly owned them
and made them relevant for their teams.
Life Unlimited
A culture of empathy
and understanding
for each other, our
customers and patients.
Deliver for our customers
Understand our
customer needs.
Constantly deliver the
products and services
they need, when they
need them, every time.
Show empathy
Be authentic, respectful
and transparent.
Listen, seek to
understand and
adapt appropriately.
Develop and grow
Foster your own
development and that
of your teams. Share
honest feedback,
coach, support and
celebrate progress.
Take initiative
Pursue possibilities
and take appropriate
risks. Speak up
and respectfully
challenge to improve
our Company.
Take accountability
Set priorities and
associated KPIs.
Take ownership for
your decisions, actions
and outcomes.
Be adaptable
Learn from successes
and failures. Be brave,
challenge and be open
to change. Try new things
and celebrate our wins.
Be inclusive
Value difference and
foster diversity and
open communication.
Always encourage and
respect alternative
perspectives.
Build trust
Act with integrity,
honesty and
consistency. Keep
commitments and
deliver on promises.
Find solutions
Work together to
address the root cause
of issues. Have the
difficult conversations
and make decisions.
Act in the best interest
of our Company.
A culture of continuous
learning, innovation
and accountability.
A culture based on
mutual trust, respect
and belonging.
Our Purpose
Our Culture
Our new Commitments
www.smith-nephew.com
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OTHER INFORMATION
Gender ratios
Overall, we saw an increase of female
representation in senior roles, up
to 33% in 2022 from 31% in 2021.
The percentage of female Board
members was 36% in 2022, up from
33% in 2021.
Total employees
1
19,012
Male
57%
Female
43%
Senior managers and above
2
1,099
Male
67%
Female
33%
Board of Directors
11
Male
64%
Female
36%
Strengthening our Culture through leadership
continued
Inclusion, Diversity & Equity
We want Smith+Nephew to be recognised
as a place where every individual feels
they belong, are empowered, valued,
and have access to opportunities to build
great careers, thrive and achieve their
fullest potential.
Our Employee Inclusion Groups (EIGs)
cover a broad spectrum of diversity and
provide a network for employees to engage
and collaborate. Each group is sponsored
by a member of our Executive Committee
who takes an active role in the Group’s
development and serves as a champion
for their respective focus area.
During 2022, we had 10 EIGs covering
gender, race and ethnicity, veterans, mental
health and physical wellbeing, generations,
and LGBTQ+. We officially launched our
tenth EIG, EMPOWER (centred around the
differently abled/disabled area of diversity)
in December 2022 to coincide with disability
awareness month. EIGs currently reach
over 3,000 employees, with more than
20 engagement activities per month.
Leaders also take an active role on
our Life Councils, which are employee
groups at a site or country level aimed
at strengthening employee engagement
in the workplace and through
community activities.
We continue to actively engage
externally to attract diverse talent. In 2022,
we sponsored the Scientist Mentoring
Diversity Program, the National Society of
Black Engineers and the Society of Women
in Engineering, for which we are also a key
corporate sponsor. Our EIGs were involved
as brand ambassadors in activities that
promote recruitment of diverse talent.
In 2022, Smith+Nephew was recognised
by Forbes as a ‘Top Female Friendly
Company’ for a second year running.
EMPOWER
EMPOWER is the voice within Smith+Nephew
for all employees affected by or living with
a visible or invisible disability, chronic health
condition, neurodiversity, and/or mental
health difficulties. Together we can improve
the experience of our differently abled
colleagues throughout support, advocacy
and education.
1
Number of employees at 31 December 2022
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 at
31 December 2022.
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Wellness
Wellness – physical, mental and financial –
plays a critical part in enabling employees
to engage and focus on delivering
their objectives.
With this in mind, and based on feedback
from our Global Employee survey, in
2022 we reviewed several areas of
our global rewards programme and
implemented several initiatives to
support employee wellbeing.
We expanded our global wellness
programme to offer a wider range of
resources in multiple languages through
local Care EIG groups and content on
our intranet SNLife. We held wellbeing
webinars in local languages several times
this year allowing the local teams to pick
the topics of most relevance for their
populations/countries.
We also improved our Employee
Assistance plan to include an enhanced
global emotional wellness solution to
address mental health concerns. This will
provide timely mental health appointments
and a care navigator as well as financial,
legal and work/life support such as finding
day care or elder care for dependants.
Responding to the significant impact of
high rates of inflation in a number of our
markets on our employees, we made an
exceptional off-cycle base pay adjustment
for eligible employees in many markets,
including the UK and US.
At Smith+Nephew we promote flexibility
in where, how, and when we work. This
means looking at the spaces in which we
work, the ways we work and our work
patterns. We believe our approach is an
important differentiator, and helps our
employees balance work and home life.
Our Global Flexibility Principles serve as
the guiding philosophy for identifying flexible
work solutions that foster productivity
and wellbeing while supporting our
culture. While the principles are consistent
globally, specific flexibility options will
vary depending upon the individual,
role and site/country/region.
Wellbeing award
In 2022, we were honoured to be one
of only four organisations awarded a
Gold level Cigna Healthy Workforce
Designation for having created a healthy
work culture through our employee
wellbeing and engagement programme.
Cigna is an American multinational
managed healthcare and insurance
company and Smith+Nephew’s
designated insurance provider for
employees in the US.
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Strengthening our Culture through leadership
continued
Supporting learning
and growth
To truly live our purpose of Life Unlimited,
we must realise every employee’s full
potential. To achieve this, all our employees
have robust 70-20-10 development
plans, which 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.
Our performance management process
aligns each individual’s objectives with
our strategy.
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 save plan to the
majority of employees globally.
Leadership development
There has been a five-fold increase in
the number of leadership programme
participants in 2022 compared to
the previous year, with almost 1,900
employees successfully completing
programmes. These programmes range
from Introductions to leadership for
first-time leaders to aspiring Managing
Director and Executive Development
Programmes. We collaborate with other
companies on strategic-level problem-
solving development challenges, and offer
courses from a range of business schools.
In 2022, we launched the People
Leader Hub, which contains resources
to support our key people practices,
skills and behaviours and includes more
than 400 learning and development
resources. By year end the People Leader
Hub had more than 20,000 views and
10,000 users.
Elevate
200 participants signed up for our
Elevate programme to support female
professional development in 2022 as we
continue to build engagement and retention
in our female talent pipeline. Also in 2022,
we enhanced and streamlined our female
sponsorship programme, which is now
called our Diverse Sponsorship programme.
We have 12 senior-level employees
strategically aligned to each Executive
Committee leader to foster leadership
transfer of knowledge and professional
development.
In 2022, more than 2,000 leaders globally
took training to reduce bias in the
interview process. We aim to practise
‘bias interruption’, which involves diverse
sourcing, diverse slates of candidates,
and diverse interview panels.
We will continue to emphasise diverse
talent across all management levels and
we continue to see progress in female
representation. We aim to strengthen
our approach towards diversity by setting
more goals to progress our racial and
ethnic diversity in 2023–2024.
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Achieving results
with responsibility
Our Global Compliance Programme helps
our business to comply with applicable
laws, regulations and industry code
requirements in the markets in which we
operate. Our comprehensive programme
includes policies, guidance, role-based
training, monitoring and validation
processes supported by data analytics
and reporting channels. Our Compliance
teams work closely with business partners
to ensure that our programme evolves
in parallel with business changes and
emerging risks in the sector. Data Privacy
is an integral part of our Programme
and regulation in this area continues to
increase. During 2022, we increased our
focus on Data Privacy and have added
resource and expertise to our team,
notably in the US and APAC regions.
We are committed to helping our employees
and third-party partners to do business
in the right way through simplification of
Compliance programme requirements and
by embedding key Compliance controls
into business processes. We regularly
review our Global Policies and associated
tools. Through our global intranet,
we provide these and other resources
to guide employees to make decisions
that comply both with the law and
our Code of Conduct.
Our business models require that we
work closely with third-party distributors,
agents and others, and in many countries
these partners sell product on our behalf.
We have a well-established risk-based
Third Party Compliance Programme
which includes ongoing due diligence,
training and oversight of these partners.
We have a strong ethics, compliance
and governance infrastructure with
oversight from the Board Compliance &
Culture Committee, to ensure managers,
employees and third parties act with
integrity. Data Privacy has now been
fully integrated into the Compliance
governance framework. We ensure
appropriate oversight of significant
interactions with healthcare professionals
or government officials, and we comply
with all national and state transparency
reporting laws which require reporting
of physician compensation.
All employees have a responsibility to
report violations of our Code. This may
be done via their manager, directly
to Compliance, HR or Legal functions,
or through an externally managed
reporting channel where anonymous
reports may be made.
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.
www.smith-nephew.com
Our Code of Conduct and Business
Principles are available on our website
www.smith-nephew.com
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Helping a
parent back to
a normal life
Life Unlimited
Our technology takes
the limits off living
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For a healthy
and sustainable
future
Our sustainability strategy is built
on our purpose – Life Unlimited,
our Strategy for Growth and
our culture of Care, Courage
and Collaboration.
Protecting the future
Through our Strategy for Growth we are
working to strengthen the foundation
of our business to serve customers
sustainably and simply, to accelerate
profitable growth through prioritisation
and customer focus, and to transform
our business through innovation
and acquisition.
Our Strategy for Growth is underpinned
by our Capital Allocation Framework,
which has as its first priority investing in
innovation and our sustainability agenda.
You can read more about our Strategy
for Growth on pages 8–11, and our Capital
Allocation Framework on pages 19–20.
We strive to deliver our sustainability
strategy in the communities where we
live and work through the application
of our values:
–
We demonstrate
Care
by respecting
our global resources and striving
to protect the safety and wellbeing
of our employees.
–
We demonstrate
Courage
by setting
ambitious goals to increase our
volunteerism, reduce waste and
greenhouse gas emissions, and by
operating responsibly and sustainably.
–
We demonstrate
Collaboration
by
working together with our partners
who share our commitment and
contribute to our communities
through individual and team
volunteerism.
Our sustainability strategy supports
these value drivers by helping us
to address the requirements of our
stakeholders, creating a lasting positive
difference to our communities, and
protecting our environment.
Our sustainability strategy is inspired
by the United Nations’ Sustainable
Development Goals (SDGs). It takes
into account the social, environmental
and economic aspects of our business
and reflects the fact that sustainability
and financial performance are closely
linked. As a profit-seeking business,
we aim to meet our economic objectives
whilst at the same time managing
the social and environmental impacts
of our business activities.
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Our stakeholders’ priorities
Through our sustainability strategy we
are addressing the needs and expectations
of our stakeholders.
Customers
Building sustainability principles into
the delivery of healthcare is of growing
importance to our customers. Increasingly,
customers require us to provide details
of our sustainability strategy and targets.
Customers place increasing importance
on these responses when making
contract decisions.
Employees
Employees are looking for companies
with strong values and culture, that
operate with integrity, transparency and
accountability, and offer satisfying career
opportunities for all. Living our values
and being a force for positive change is
part of our sustainability strategy.
Investors
Investors are prioritising investments
based on corporate ESG programmes
and outputs. Our sustainability programme
provides evidence of our progress in
these areas.
Communities
The communities where we are located
want to see support for local education,
health and volunteer programmes
from businesses which operate there.
Our sustainability strategy prioritises
giving back to local communities,
for example through employee
volunteering programmes.
People
Creating a lasting positive
impact on our communities
Planet
Aiming to reduce our impact
on the environment
Products
Innovating sustainably
What our customers
are asking
We aim to address the questions
our customers are asking us through
our disclosures in this Annual Report,
and the more extensive disclosures
and narrative in our Sustainability
Report, available on our website
www.smith-nephew.com.
What is your sustainability strategy
and how does it help us achieve ours?
Can you help us meet our net zero targets?
Do your products use reusable plastics?
How do you ship products?
How does your local manufacturing
operation reduce carbon?
What are you doing locally to reduce
carbon emissions?
How will you reduce and minimise
single-use plastic?
How are you reducing carbon emissions
in your supply chain?
What materials make up your packaging?
Can you use cardboard instead
of plastic for transit protection?
Why do you ship so much air in
your packaging?
More information on our activities can be
found in our 2022 Sustainability Report
available on our website.
Read more about
our stakeholders
112
www.smith-nephew.com
Our sustainability strategy focuses
on three areas: People, Planet and
Products. Our targets and progress
against these are summarised on
pages 59–63.
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Sustainability governance
In January 2023, we streamlined the
governance and operational structure
around the delivery of our ESG strategy.
We established the ESG Operating
Committee to implement and execute
our ESG strategy across all business areas,
reporting directly into the Executive
Committee. The Executive Committee
will continue to formulate and drive our
ESG strategy with oversight from the
Board and its Committees.
The Board reviews the sustainability
strategy, key risks and opportunities and
progress on a regular basis and three Board
Committees review implementation:
Compliance & Culture Committee, Audit
Committee and Remuneration Committee.
For further information on our governance
see the Governance Report from page 84
and our Task Force on Climate-related
Financial Disclosures (TCFD) reporting
on pages 64–67.
Our sustainability strategy focuses on
three areas: People, Planet and Products.
Within these three areas we have
developed comprehensive targets to help
us deliver on our sustainability ambitions.
Each year we measure and report progress
against these targets. We recognise
that in some areas, such as employee
volunteering and product donations,
we are behind where we expected to
be at this stage. During 2023, we intend
to review options to ensure our targets
remain meaningful. In 2022, we revised
our Products supply chain due diligence
target (see page 62).
We are proud of our many achievements
over the years, including our recurring
inclusion in leading indices, such as
FTSE4Good, ISS and the Dow Jones
Sustainability Index. We achieved an ‘A’
rating in the most recent MSCI ESG Ratings.
We have reported our 2021 baseline
Scope 3 greenhouse gas (GHG) emissions
from eight categories and are developing
our Scope 3 GHG emissions reduction
roadmap in preparation for submitting
this to the Science Based Target initiative
(SBTi) for validation.
Climate change
During 2022, we have continued to
consider the potential impact of climate
change on our business operations.
The Group announced its plans to build
a new Advanced Wound Management
facility at Melton, on the outskirts of Hull
(UK). The new facility sits at a higher
elevation and is further inland, and
accordingly has a significantly lower
exposure to sea-level rise compared to
the current site. The Group also opened
its new manufacturing facility in Malaysia.
The internal compound road level and
internal floor levels of the facility were
all raised to a height of 3 metres or more
above sea-level to mitigate against the
impacts of rising sea levels.
Our physical assets and supply chains are
vulnerable to weather and climate change,
for example through sea-level rise, more
frequent extreme weather events and
more severe extreme weather events.
Patients are vulnerable to a potential
rise in infectious disease propagation.
Governments and corporations alike are
under increasing pressure to mitigate
the expected effects of climate change,
potentially resulting in infrastructure
projects which would require large
capital outlays and further increase
pressure on healthcare payments.
In 2021, we made a commitment to net
zero. It is in our roadmap to achieve net
zero Scope 1 and Scope 2 GHG emissions
by 2040 and net zero Scope 3 GHG
emissions by 2045, beginning by achieving
a 70% reduction in Scope 1 and Scope 2
GHG emissions by 2025.
We are on track to achieve a 70%
reduction in Scope 1 and Scope 2 GHG
emissions by 2025 compared to the
2019 baseline.
We aim to minimise the disruption
to our manufacturing and distribution
network. We understand how important
it is to balance environmental initiatives
with business activities, and strive to
reduce emissions through new technology
development, renewable energy use
and other measures.
Our facilities in Memphis (US), our single
largest manufacturing location, continued
to source electricity from renewable wind
energy in 2022, accounting for over 40%
of our Group’s total electricity usage.
Our reporting against the TCFD framework
and the Sustainability Accounting
Standards Board (SASB) framework for
our sector of Medical Equipment and
Supplies can be found on pages 64–67
and 250–251 respectively. The Compliance
& Culture Committee and the Audit
Committee received updates on TCFD
and SASB reporting during 2022.
As part of our Enterprise Risk Management
process, we have a sustainability risk
register and a business resilience process
review built into our review of our Principal
Risks (see pages 71–77). Our Principal
Risks capture our physical and transitional
climate-related risks in our Enterprise
Risk Management process. We believe
climate change is not currently a Principal
Risk for Smith+Nephew as we do not
expect it to fundamentally alter the
demand for our products or our ability
to manufacture and supply them.
However, we will continue to monitor
and mitigate risks as appropriate.
Read our TCFD reporting
64
For a healthy and sustainable future
continued
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People
Creating a lasting positive
impact on our communities
People are at the heart of our purpose –
Life Unlimited.
We prioritise people in three ways:
–
We support our own employees’ wellbeing
by ensuring their work environment is
healthy and safe, and by continuing to
build employee wellness programmes
that enable healthy life choices.
–
We help improve patients’ wellbeing and
empower the healthcare professionals
who treat them.
–
We engage with the communities where
we operate. We encourage our people
to volunteer in local communities, offer
paid volunteering time and match eligible
employees’ charitable donations up to
$500 per employee on an annual basis.
We have continued to offer additional
volunteering for employees with
healthcare training to serve on the front
line when crisis response is needed, as it
was during the pandemic.
Encouraging STEM careers
with Migrant Leaders
In 2022, Smith+Nephew partnered with
Migrant Leaders, an independent UK charity
that “inspires and develops disadvantaged
young migrants across the UK to broaden
their horizons and capture opportunities
well beyond their aspirations”. Young adults
studying in sixth form were invited to spend
the day at the Smith+Nephew Academy
London, where they toured the facilities,
learned about our business and products,
and discovered the range of science,
technology, engineering and mathematics
(STEM) careers available at Smith+Nephew.
Our giving activities during the year totalled
donations of $5.16 million. These consisted
of $5.03 million in product donations,
including $3.5 million of wound care
products to support those affected by
the war in Ukraine, and $0.13 million from
matching employee giſts to qualified
charities. Since inception in 2020, our
employee volunteering and product
donation strategies have been held
back by the impacts of Covid.
Employee engagement is important to
us and is measured by the Gallup Global
Engagement Survey (see pages 48–49).
Our Employee Inclusion Groups (EIGs)
continued to flourish during the year,
promoting inclusion, and we strengthened
our wellness programmes, including
additional support to help employees
facing an increased cost of living.
Read about our culture
48
Our targets
Our progress
in 2022
Progress since
2020 baseline
Between 2020 and
2030, contribute
1 million
volunteer hours
to the communities in
which we live and work.
11,500 hrs
29,500 hrs
Between 2020 and 2030,
donate
$125 million
in
products to underserved
communities.
$5.0m
$11.1m
Empower and promote
the
inclusion of all
.
10
Global Employee
Inclusion Groups
are now established.
3,000+
Employees now engaged
with Employee Inclusion
Groups.
Responding to the war in Ukraine
In 2022, in partnership with the Polish
Red Cross, we donated over $3.5 million
of wound care products to support those
impacted by the war in Ukraine. Additionally,
we have matched individual employee
donations and provided extra support
to colleagues in Poland, many of whom
opened their homes to refugees.
Our colleagues in Russia continue to work
to provide our products to patients in need;
we believe all people deserve to live their
lives fully and peacefully.
We donated all profits from our Russian
business in 2022 to humanitarian causes
through International Red Cross and
Médecins Sans Frontières.
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Planet
Aiming to reduce our impact
on the environment
We recognise the need to protect our
planet and help mitigate against the
impacts of climate change. In response,
we manage resources efficiently, reduce
our emissions where possible and are
mindful of the impact our decisions
have on the environment.
In 2022, our impact on the environment
continued to be affected by the global
pandemic, with many colleagues
choosing to adopt remote or hybrid
working. Accordingly, some offices
continued to see lower occupancy levels.
Combined home and office-working can
have a higher environmental impact as
the conditioning of our buildings is oſten
independent of occupancy levels.
Along with our customers and
stakeholders, we work to manage the
environmental footprint of our products
and services. Internally, we have made
progress over several years, improving
our performance in waste recycling,
water use and GHG emissions.
We are mindful of the importance of
biodiversity, particularly in some of the
countries in which we operate including
Costa Rica and Malaysia. The impact on
local biodiversity is one of our considerations
when we approve capital expenditure
within our Global Operations business.
Biodiversity will also be considered in the
planning for our new Advanced Wound
Management facility at Melton (UK)
including impacts on the local landscape,
ecosystems and climate stability.
Tree-planting in the UK
Our Hull Leadership Council worked with
the Plant A Tree Today (PATT) foundation
to provide a new woodland for the local
community. Over 150 employees participated,
representing around 600 volunteering hours
clearing 10 acres of land owned by a charitable
trust in Cottingham and planting over 6,000
trees over a five-day period.
Our targets
Our progress
in 2022
Progress since
2019 baseline
Achieve
net zero
Scope 1
and Scope 2 GHG
emissions by 2040
and Scope 3 GHG
emissions by 2045,
beginning by achieving
a 70% reduction in
Scope 1 and Scope 2
GHG emissions by 2025.
A carbon reduction roadmap
for Scopes 1 and 2 through
2025 has been developed
and a roadmap for Scope 3
is being developed. We have
calculated baseline 2021
Scope 3 emissions data.
Scopes 1 and 2 (total)
73,985
tonnes
CO
2
e emitted
(location-based)
1
48,847
tonnes
CO
2
e emitted
(market-based)
1
Our manufacturing sites in
Malaysia and Suzhou have
installed solar photovoltaic
panels and will start
generating on-site renewable
energy in early 2023.
Scope 3
1.6 million
tonnes
CO
2
e emitted
Scopes 1 and 2 (total)
4%
reduction
CO
2
e emitted
(location-based)
1
27%
reduction
CO
2
e emitted
(market-based)
1
All
Sites in Memphis
continued to source
renewable electricity.
Achieve
zero waste to
landfill
at our facilities
in Memphis and Malaysia
by 2025 and at all our
strategic manufacturing
facilities by 2030.
1,473 tonnes
Waste sent to landfill
from the Group.
1
Our Malaysia facility has
achieved zero waste
to landfill.
The Memphis facilities sent
1,106 tonnes of waste to
landfill compared to 1,462
tonnes in 2019.
26%
Less waste was sent
to landfill during 2022
compared to 2019.
The Memphis facilities
sent 24% less waste
to landfill.
For a healthy and sustainable future
continued
1
Data independently assured by ERM CVS, more details and the full assurance statement are available
in the 2022 Sustainability Report on pages 60–61.
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Reducing our GHG emissions
Our approach to reducing emissions
includes tackling energy efficiency,
generating our own renewable energy,
and sourcing lower-carbon energy.
In-line with our long-term target to achieve
net zero emissions by 2045, we have been
working with our global energy partner.
We have assessed our Scope 1 and Scope 2
GHG emissions and formulated a carbon
reduction roadmap for key locations,
aimed at reducing them by 70% by 2025
compared to a 2019 baseline. During 2022,
we calculated our 2021 baseline Scope 3
GHG emissions for eight categories, and
in 2023 we plan to develop a roadmap for
reduction. See page 68 for more details.
Our Scope 1 and Scope 2 carbon reduction roadmap steps
We have been working with our global energy partner to develop a carbon reduction roadmap aimed at delivering
our sustainability targets in the short, medium and long term. These are defined as within one year, within three years
and aſter more than three years respectively. Following a detailed carbon emissions benchmarking project, again with
our global energy partner, the roadmap identified the following initiatives:
1
3
2
4
Carbon emissions
benchmarking
Establish an accurate
benchmark for
Scope 1 and Scope 2
GHG emissions.
Complete.
Power purchase
agreements
Long-term agreement
(10+ years) to buy
power from new
renewable resources.
We are investigating
global opportunities
to source power
purchase agreements.
On-site renewables
Implement on-
site solar energy
generation.
Solar energy
generation projects in
Malaysia and Suzhou
(China) are expected
to be operational
in early 2023.
Energy efficiency
Conduct energy
efficiency studies
at major sites.
We carried out
energy efficiency
audits in Memphis
and Costa Rica
during 2022.
Renewable energy
certificates
Procure renewable
energy certificates
(RECs) for remaining
consumption.
RECs purchased
in Memphis
and Malaysia.
In order of priority
In 2022, we continued to source renewable
wind energy for all our locations in
Memphis (US). This is significant, as the
Memphis sites consume over 40% of
the Group’s total electricity. Sourcing
renewable energy reduces our market-
based GHG emissions, ie the emissions
from the electricity we purchase.
In support of our carbon reduction
roadmap steps and our roadmap to net
zero, we have installed solar photovoltaic
panels at two of our manufacturing sites
in Asia. We have installed a 1.7 megawatt
(MW) capacity system in Suzhou (China)
and a 1.4 MW system in Malaysia.
Both systems will be operational in early
2023. We expect the two solar-powered
systems to reduce our Scope 2 GHG
emissions by over 2,000 tonnes of CO
2
e
in 2023 and beyond.
Highlights
Installation of new solar
photovoltaic panels at our
manufacturing sites in Asia
2 sites
Expected reduction in annual
Scope 2 GHG emissions
in 2023 and beyond
2,000 tonnes
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continued
Products
Innovating sustainably
We aim to develop products with
sustainable attributes, increase access
to care, improve our environmental
impact and reduce costs. Manufacturing
and supplying safe and effective products
is at the heart of our business.
Our people, processes and technology
are structured to support progress toward
the goal of innovating sustainably. All these
key product attributes are ‘locked in’ during
new product development or product
acquisition and are difficult to change later.
We have integrated a sustainability review
into our NPD process to ensure that
we intentionally discuss, consider and
implement sustainability and efficiency in
our product design. This will ensure that our
future product portfolio becomes one that
has intentional consideration for material
and energy usage during production,
the recyclability of waste products and
a reduced product footprint for shipping
and transportation.
Our customers are increasingly requesting
information on the chemical components
and recyclability of our products and
packaging. Our focus on products will
assist our customers in reaching their
sustainability goals.
Packaging sustainability to minimise
environmental impact, both for new
products and our existing portfolio
continues to be a key area of opportunity,
as does moving to digital Instructions
For Use (IFU). An initiative to reduce
packaging dimensions for our ALLEVYN
◊
LIFE Foam Dressings is shown on page 63,
this resulted in reduced volumes of
packaging materials being used and
lower GHG emissions.
By 2025, we aim to have completed a
focused risk-based due diligence of our
Tier 1 suppliers, including a risk-based
analysis of sub-tier suppliers. Supplier risk
criteria include country, commodity and
spend, and we have updated our global
process for managing Corporate Social
Responsibility (CSR) supplier risk. In 2022,
we completed internal screening due
diligence with 100% of our Tier 1 suppliers
with additional due diligence with identified
potential high-risk Tier 1 suppliers.
Our targets
Our progress in 2022
By 2022, include sustainability review
in New Product Development (NPD)
phase reviews for
all new products
and product acquisitions.
Complete.
Sustainability is embedded as part
of our NPD phase review process,
ensuring that we discuss, consider
and implement sustainability in
our design of new products.
By 2025, incorporate
at least 30%
post-consumer recycled content into
all non-sterile packaging materials.
Identified US-based paper board for
packaging that contains up to 30%
recycled content. Formal testing is
planned to start in 2023. On successful
completion of testing, non-sterile
material specifications will be updated
to allow the use of this material before
the 2025 target.
By 2025, incorporate packaging
materials from
sustainable sources
for new packaging parts.
Established packaging sustainability
strategy and roadmap. Supply
chain challenges continued to limit
our ability to pursue innovative,
more sustainable materials.
By 2025, complete a focused risk-based
due diligence of our
Tier 1 suppliers
,
including risk-based analysis of sub-tier
suppliers, to assure compliance with
our sustainability requirements.
a
We have completed due diligence and
assessments of all Tier 1 suppliers
according to our risk-based procedure.
We have implemented a supplier
on-site audit programme for suppliers
identified through risk-based analysis.
On-site audits include worker
interviews and practical assessment of
the implementation of supplier policies
and procedures to assure compliance
with modern slavery, human trafficking,
HSE and sustainability requirements.
a
We have revised our Products supply chain due diligence target as a result of a strategic and operational review which took
into account a range of factors including the impact of the pandemic on access to supplier locations, supplier resources and
availability of data sets required to verify compliance with the target. We will continue to take a risk-based, proportionate
approach to supply chain verification in compliance with all applicable laws and regulations. We will also continue to drive
continuous improvement in our programmes in line with guidance and we will continue dialogue with suppliers to proactively
guide improvement in their approach to sustainability, aligned with our policies and procedures.
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What we have completed in 2022
–
Conducted a detailed analysis of our energy usage data.
–
Actioned our carbon reduction roadmap (see page 61).
–
Measured and reported our 2021 baseline Scope 3 GHG emissions
from eight categories.
–
Sourced renewable electricity for our manufacturing facility in Memphis (US)
and installed solar photovoltaic panels to generate renewable electricity
in Malaysia and Suzhou (China) (see page 61).
What we are currently doing
–
Preparing a carbon reduction roadmap to reduce Scope 3 GHG emissions.
–
Sourcing renewable energy opportunities at all our strategic manufacturing sites.
–
Converting our European and UK leased car fleet to electric vehicles (EVs).
–
Expanding our supplier engagement through CDP.
–
Launching a salary sacrifice scheme in the UK to enable employees to drive EVs.
Roadmap to net zero
What we expect to do next
–
Implement renewable electricity at all our strategic manufacturing sites by 2025.
–
Convert our remaining global leased car fleet to electric vehicles.
–
Encourage our suppliers to set their own net zero targets.
Our net zero targets
Achieve Scope 1 and Scope 2
net zero GHG emissions by
2040
Achieve Scope 3 net zero
GHG emissions by 2045
Begin by reducing Scope 1
and Scope 2 GHG emissions
by 70% by 2025
Organisations around the world are
making pledges to reduce GHG emissions.
These commitments can play a key role
in achieving the Paris Agreement, which
aims to curb global emissions enough to
cap global mean temperature increase to
1.5–2ºC relative to the pre-industrial era.
‘Net zero’ means that the activities within
a company’s value chain result in no net
impact on the climate from GHGs.
Committed to net zero
In 2021, we made a commitment to
net zero. It is in our roadmap to achieve net
zero Scope 1 and Scope 2 GHG emissions
by 2040 and Scope 3 GHG emissions
by 2045. We are on track to achieve a
70% reduction in Scope 1 and Scope 2
GHG emissions by 2025 compared to
a 2019 baseline.
Our facilities in Memphis (US), our single
largest manufacturing location, continued
to source electricity from renewable
wind energy, accounting for around
40% of our total electricity usage.
Our roadmap to net zero is outlined below.
These are our current targets and actions,
which will be updated in the coming years
as our plans develop.
Net zero
Less waste, more care
Daily wound care practice involves the
routine use of supplies that, in turn, creates
substantial amounts of packaging waste.
With a focus on reducing carbon emissions
and respectful use of global resources,
our Advanced Wound Management business
spearheaded a 2022 initiative to optimise
packaging across a range of dressings.
The new reduced packaging dimensions
eliminate some of the ‘air’ that was being
shipped therefore reducing the overall
volume of packaging being used. The redesign
will eliminate the need for 334 tonnes of
packaging material for our bordered dressings,
equating to 2.7 million square metres.
Ultimately, this could save 92 tonnes of
GHG emissions (equivalent to 13 car trips
around the globe) when compared to 2021.
1,2
Retaining the same high standards
of manufacturing and sterilisation, as an
example, the ALLEVYN LIFE Foam Dressings
will now use 28% less packaging material
compared to our 2021 design.
3
For healthcare practices and clinicians,
we hope this translates to efficiencies in
the use of storage space and alignment
with their own sustainability objectives.
Packaging material for our
bordered dressings reduced by
334 tonnes
1
Smith+Nephew 2022. Internal report CSD. AWM.22.064.
2
Smith+Nephew 2022. Internal report CSD. AWM.22.072.
3
Smith+Nephew 2022. Internal report CSD. AWM.22.045.
63
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OTHER INFORMATION
For a healthy and sustainable future
continued
TCFD reporting
Pages 64–67 set out Smith+Nephew’s disclosures which are
consistent with the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD) framework. By this we
mean the four TCFD recommendations and the eleven recommended
disclosures set out in Figure 6 of Section B of the report entitled
‘Implementing the Recommendations of the Task Force on Climate-
related Financial Disclosures’ published in October 2021 by the TCFD.
Governance
The way in which we evaluate, manage and
embed sustainability within our business
and culture is directly linked to our Strategy
for Growth through a focus on People,
Planet and Products. Oversight of our
sustainability strategy is one of the Matters
Reserved to the Board. The Board reviews
the sustainability strategy, key risks and
opportunities, and progress on a regular
basis and approves the Sustainability
Report annually, and reviews and approves
the sustainability, TCFD and SASB reporting
in the Annual Report.
Three Board Committees are also closely
involved in reviewing the elements of
sustainability that impact the key areas
of our business. All Committees receive
regular updates on sustainability strategy,
implementation, objectives and targets,
and climate-related financial risks and
opportunities. The Committee Chairs
report to the Board at each Board meeting:
–
The Compliance & Culture Committee,
chaired by Marc Owen, assesses how we
implement our sustainability strategy
in the core areas of People, Planet and
Products, encompassing the Group’s
impact on employees, the environment,
the local communities in which it
operates, customers, suppliers and
other key stakeholders. The Compliance
& Culture Committee also tracks
progress of the delivery on sustainability
objectives and metrics, including a
regular review of our net zero emissions
progress at each Committee meeting.
–
The Audit Committee, chaired by Rick
Medlock, is responsible for ensuring
oversight of the process by which risks
relating to the Group and its operations
are managed and reported. The Audit
Committee assesses the extent to which
climate change and other sustainability
risks are likely to have a material impact
upon our financial statements by
reviewing the possible impact of different
scenarios related to climate change.
–
The Remuneration Committee,
chaired by Angie Risley, is responsible
for ensuring that the Remuneration
Policy and related incentive schemes
incorporate sustainability targets and
metrics where appropriate to do so.
Board:
–
Oversight of sustainability strategy
and risk management programme.
Audit Committee:
–
Oversight of the risk management process
and reviewing its operating effectiveness.
–
Receives regular updates on
sustainability and climate-related
financial risks and opportunities.
–
Assesses whether climate change
has a material impact on our
financial statements.
–
Ensures the Company reports in line
with the recommendations of the
TCFD framework.
Compliance & Culture Committee:
–
Oversight of sustainability policy
and performance versus targets,
with reviews undertaken at each
committee meeting.
–
Receives regular updates on
sustainability and climate-related
risks and opportunities.
Remuneration Committee:
–
Oversight and review of sustainability
metrics within Remuneration Policy,
and compensation and incentive
plans generally.
–
Determined that effective from
the 2022 financial year, 5% of the
Annual Bonus Plan for Executive
Directors would be dependent on the
achievement of ESG targets.
Executive Committee:
–
Driven by the Chief Executive Officer,
determination and management of
sustainability strategy, with President
Global Operations accountable for
leading the implementation of the
sustainability strategy.
–
Ensures that sustainability risks and
opportunities are included in decision
making as part of each project,
initiative and the 12-point plan.
Sustainability Council:
–
Develops and implements our
sustainability strategy.
–
Responsibility for setting, implementing
and achieving operational objectives,
KPIs and targets.
–
Membership includes: Human Resources,
Global Operations, Quality and
Regulatory Affairs, Research
& Development, Public Policy &
Government Affairs, Commercial,
Finance, Procurement and
Supply Chain.
–
The Sustainability Council ceased to
operate in January 2023 as a result of
changes to the governance structure.
See page 65 for details of the ESG
Operating Committee that was
established in January 2023.
Audit Committee membership
101
Compliance & Culture
Committee membership
108
Remuneration Committee membership
116
Executive Committee membership
89
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Our Chief Executive Officer sets strategy
together with the Executive Committee,
and President Global Operations is
responsible for the implementation
and regularly reports on our progress
to the Board, its Committees and our
Executive Committee. In January 2023,
we streamlined the governance and
operational structure around the delivery
of our ESG strategy. We established the
ESG Operating Committee to implement
and execute our ESG strategy across all
business areas, reporting directly into the
Executive Committee. The Sustainability
Council no longer operates as a result of
the changes to the governance structure.
The Executive Committee will continue
to formulate and drive our ESG strategy
with oversight from the Board and
its Committees.
Smith+Nephew leaders consider
sustainability risks and opportunities
in their decision making. For example,
when evaluating options for new or
extensions of manufacturing sites in
Malaysia, UK and Costa Rica, analysis
of sustainability requirements and risks
was undertaken as part of the project
and decision making. In addition, papers
which are submitted to the Board by
management for review include an analysis
of sustainability issues and opportunities
where appropriate to enable the Board
to consider these factors in decision
making and to ensure effective Board
oversight on sustainability strategy, risks
and opportunities. Detailed information
on our sustainability risks can be found
in our Sustainability Report.
Strategy
Our sustainability strategy is built
on our purpose – Life Unlimited, our
Strategy for Growth and our culture
of Care, Courage and Collaboration.
Our sustainability strategy, which
was developed by our Sustainability
Council in 2019 and approved by the
Board, is inspired by the United Nations’
Sustainable Development Goals.
Our strategy reflects the importance
of social, environmental and economic
aspects of sustainable development.
Our Principal Risks capture our physical
and transitional climate-related risks
in our Enterprise Risk Management
(ERM) process:
–
Business continuity and business change:
impact to our business due to severe
weather patterns, global temperature
rise and sea-level rise.
–
Commercial execution: inability
to satisfy customers’ sustainability
requirements and expectations.
–
Global supply chain: severe weather
patterns as a result of climate change
cause damage to manufacturing or
distribution facilities impacting ability
to meet customer demand.
–
Legal and compliance: failure to identify
existing or new legal or regulatory
requirements including sanctions
programmes and ESG matters which
result in non-compliance with applicable
laws and regulations. Failure to meet
the needs of stakeholders relating to
increased focus on and regulation of
ESG reporting requirements.
–
New product innovation, design &
development including intellectual
property: sustainability in new products.
–
Political and economic: failure to meet
the sustainability targets and public
policy changes.
–
Pricing and reimbursement: limited
ability to pass on the cost of
sustainability improvements.
–
Quality and regulatory: failure to meet
stakeholder expectations with regard
to increasing sustainability regulations
and reporting requirements.
The transitional and physical risks above
are primarily expected to occur over the
long term (as defined on page 66). Based on
the work undertaken to date, these risks
are not expected to have fundamental
impacts on our business model. See page 66
for further details.
We address climate-related risk primarily
through business strategies in our
global operations functions including
facilities, health & safety and business
continuity management. Refer to the
Risk Management section on page 66
and the Risk report on page 69 for more
details on our risk management process.
Climate-related opportunities:
Climate-related opportunities are identified
and addressed through our sustainability
strategy and programmes. Through this
process we have identified a number of
climate-related opportunities relating to
energy sourcing, energy efficiency and
packaging reduction initiatives.
In 2020, all our locations in Memphis (US)
began sourcing electricity from renewable
wind energy via the procurement of
renewable energy certificates (RECs)
and this has continued through 2022.
We completed construction of our Malaysia
facility in 2021, and have now completed
the installation of solar photovoltaic panels
on site. Similarly at our facility in Suzhou
(China) we have installed solar photovoltaic
panels to generate on-site renewable
energy. We expect both systems to be fully
operational in early 2023. In December
2022, we sourced additional renewable
energy via the procurement of RECs in
Malaysia. The UK sites have sourced a
green tariff for the supply of electricity
from renewable sources beginning in
October 2023.
In 2021, we aligned with the
recommendations of the Intergovernmental
Panel on Climate Change and published
our commitment to achieve net zero
Scope 1 and Scope 2 GHG emissions by
2040 and Scope 3 GHG emissions by 2045,
beginning by achieving a 70% reduction
in Scope 1 and Scope 2 GHG emissions
by 2025. We understand how important
it is to balance environmental initiatives
with business activities and strive to
reduce emissions through new technology.
We have conducted a review of our current
state and captured related business risks
in our risk register.
Energy efficiency audits have been carried
out at sites in Memphis (US) and Costa
Rica. All of the ‘easy to implement’
recommendations have been carried out
and the remaining recommendations have
been added to improvement action plans.
The new UK site at Melton, on the
outskirts of Hull, will be designed to high
sustainability standards with a focus on
energy and resource efficiency. The site
aims to generate on-site renewable energy.
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continued
TCFD reporting
continued
In 2021, we revised our annual and three-
year financial planning, and our capital
expenditure planning processes to begin
to require climate-related risk information
and specific sustainability considerations.
We maintain a separate sustainability
risk register where risk owners consider
how sustainability and climate risks affect
our Principal Risks. These are managed
through our ERM process. In 2022, we ran
a cross-functional sustainability workshop
where risk champions brainstormed
and discussed how climate change
and sustainability risks could impact
their Principal Risks and business areas.
Aſter assessing our business activities,
we have determined that climate change
is not currently a Principal Risk to the
business as we do not expect climate
change to fundamentally alter the
demand for our products or our ability to
manufacture and supply them. As outlined
on page 65, our Principal Risks capture
climate-related risks in our ERM process.
Detailed information on our ERM process
can be found on page 69 of the Annual
Report and in our Sustainability Report.
Metrics and targets
We have published an annual Sustainability
Report since 2001 detailing progress
against our global targets. We have targets
in each of our priority areas: People,
Planet and Products. Our key climate-
related metrics are greenhouse gas
emissions and waste to landfill. Our key
targets in relation to these metrics are
net zero greenhouse gas emissions by
2045 and zero waste to landfill at our
strategic manufacturing facilities by 2030.
Detailed information about our targets
and progress made against those targets
can be found on pages 59–63 of the
Annual Report and in our Sustainability
Report. The Remuneration Committee
determined that with effect from 2022,
5% of the Annual Bonus Plan for Executive
Directors will be dependent on the
achievement of ESG targets linked to our
sustainability strategy.
We have mapped our Scope 1 and Scope 2
GHG emissions, and during 2022 we also
began to map our Scope 3 GHG emissions
in order to meet our target of reducing total
life cycle GHG emissions to net zero by
2045. In 2021, we also established interim
carbon reduction targets to 2025. See
page 63 for details on our Scope 1 and
Scope 2 net zero roadmap.
Scenario analysis:
The 2021 scenario analysis focused
on our critical manufacturing sites and
modelled the potential financial impact
of three scenarios:
–
a 5-metre sea-level rise;
–
a global temperature rise of at least
4°C; and
–
extreme weather.
The modelling focused on the material
impacts on our business and was based
on our current business activities and
assumed no mitigation. Based on the
analysis undertaken, global temperature
rise and extreme weather were not
expected to have fundamental impacts
on our business model. However, we
noted that the Group has a number of
manufacturing sites in coastal locations
which are at low elevations and these
could be impacted by a 5-metre sea-
level rise. Existing flood defences are
expected to mitigate any near-term
impacts and the longer-term impact on
the Group’s manufacturing footprint is
an area of focus being taken into account
in our manufacturing strategy.
Based on our high level assessment, the
impact of a 2°C global temperature rise is
not expected to have a material impact on
our business. As outlined on page 65, our
physical and transition risks are captured
in our ERM process. Refer to our Risk
Report on page 69 for further details.
Further work was undertaken in 2022
to better understand the full impact of
potential sea-level rises and whether
any remedial action is necessary and
over what time frame. We noted that in
2013 our Hull (UK) facility was impacted
by highly unusual levels of flooding,
with the site incurring damage across
its entire ground floor, including in the
manufacturing facility and office areas.
Since then, we have invested £3 million
into new flood defences to help protect
the site against repeat events. Based on
a number of considerations, including
sea-level rise, the Group announced in
2022 its plans to build a new Advanced
Wound Management facility at Melton on
the outskirts of Hull. The new facility sits
at a higher elevation and is further inland,
and accordingly has a significantly lower
exposure to sea-level rise compared to the
current site. The facility will be designed
to high sustainability standards with a
focus on energy and resource efficiency.
In 2022, the Group opened its new high
technology manufacturing facility in
Malaysia. The internal compound road level
and internal floor levels of the facility were
all raised to a height of 3 metres or more
above sea-level to mitigate against the
impacts of rising sea-levels.
During 2022, we expanded our scenario
analysis to better understand the
exposure of more than 30 facilities to
extreme climate events. This analysis
continues to support the prior year
conclusions that global temperature rise
and extreme weather are not expected
to have fundamental impacts on our
business model, while work continues on
determining the full impact of sea-level
rises on our manufacturing footprint and
whether any further remedial action is
necessary and over what time frame.
In 2022, we began preparations to screen
and identify suppliers in order to better
understand how to incorporate them
into our scenario analysis. This work will
continue into 2023 to better inform our
strategic and financial planning.
Risk management
Climate-related risks are managed through
our comprehensive risk governance
framework. At the top of our structure, the
Board sets our risk appetite and monitors
the application of our risk framework,
including strategy, execution and outputs
of risk reviews by the business and the
Group Risk team. The Board cascades our
risk appetite throughout our organisation
through the Executive Committee, the 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. Refer to pages 69–70 for
more detail.
Climate-related risks
We identify climate-related risks based
on short-, medium- and long-term horizons.
We consider short term to be within one
year, medium term to be within three years
and long term to be greater than three
years. Short-term risks are captured in our
annual financial planning process; medium-
and long-term risks are captured within our
global footprint planning process.
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In 2021, we worked with our global
energy partner to model our Scope 1
and Scope 2 GHG emissions in line with
scenarios limiting global temperature
rises to 2°C and 1.5°C. The outputs of
these analyses are being used to inform
decisions and prioritise actions. In 2022,
we published our 2021 baseline Scope 3
GHG emissions, including data from eight
of the fiſteen categories. Our Scope 1, 2
and 3 GHG emissions data are provided on
page 68 of the Annual Report with more
detailed information also available in our
Sustainability Report.
In 2022, our location-based and market-
based Scope 1 and Scope 2 GHG emissions
reduced by 4% and 27% respectively
compared to 2019, and we sent 26%
less waste to landfill compared to 2019.
We did, however, see a small annual
increase in energy usage and market-
based GHG emissions as a result of the
new facility in Malaysia opening and further
expansion of our facility in Costa Rica.
During 2022, driver appetite for electric
vehicles continued to grow. In the UK,
over 26% of our leased car fleet is now
fully electric and over 45% of new cars
on order, awaiting delivery, are electric
vehicles. Fully electric business miles
driven in the UK since the introduction of
electric vehicles in 2021 are now in excess
of 650,000. In addition to the UK, the electric
vehicle policy is now implemented in the
Netherlands, Denmark, Finland, Norway,
Sweden, Germany and Ireland, and is in
progress in France and Spain.
The in-country charging infrastructure
and the current supply chain issues for the
delivery of new vehicles has hindered the
speed of the transition as we estimate
approximately 6% of the European leased
car fleet is now fully electric. This is a great
step towards our commitment to achieve
net zero carbon emissions. In addition,
our employees view this as a positive way
to help them reduce their own personal
carbon footprint. Being able to choose
fully electric vehicles has brought increased
motivation and satisfaction among our
company car driver population.
In January 2023, we launched a salary
sacrifice scheme to make electric vehicles
available to all employees in the UK.
With electric vehicle chargers in place
at the majority of our UK offices and
manufacturing facilities, all employees
are being encouraged to commute with
more consideration for the environment.
CO
2
e reporting methodology,
materiality and scope
We report the carbon footprint of our
Scope 1 and Scope 2 GHG emissions
in tonnes of CO
2
equivalent from our
business operations for the year ended
31 December 2022. We are including
UK specific energy and emissions data
to satisfy the Streamlined Energy and
Carbon Reporting (SECR) requirements.
We also report our 2021 baseline Scope 3
GHG emissions.
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 2022 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 three scopes:
–
Scope 1: 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 have
included UK vehicle emissions from
leased cars since 2020.
–
Scope 2: Indirect sources of emissions
such as purchased electricity and steam
we use at our sites.
–
Scope 3: Indirect value chain emissions
that arise as a result of activities from
assets or processes not owned or
controlled by Smith+Nephew, these
can be further divided into upstream
and downstream emissions and fall
into 15 defined categories. During 2022,
we have worked on assessing our 2021
baseline Scope 3 GHG emissions and
have data available for eight categories.
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 2022.
We have applied the emission factors
most relevant to the source data,
including Defra 2022 (for UK locations),
IEA 2020 (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 2022.
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 for
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
2022. Some of these savings include:
independent energy audits; detailed
analysis of our energy usage data to
identify saving opportunities; the use of
Building Energy Management Systems
(BEMS) to control equipment for maximum
efficiency; and the installation of solar
photovoltaic panels in Malaysia and China.
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.
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CO
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e reporting methodology, materiality and scope
continued
This year we also continued to convert
our company car fleet in Europe to electric
vehicles where appropriate.
In Memphis during 2022, we purchased
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.
Reporting our Scope 3 emissions
During 2022, we have worked with our
global energy partner to measure our 2021
baseline Scope 3 GHG emissions for the
first time using a recognised protocol,
CEDA (Comprehensive Environmental
Data Archive). Our estimation of our
2021 baseline Scope 3 GHG emissions
was 1.6 million tonnes of carbon dioxide
equivalent from the eight categories
that we measured. We will increase the
number of categories reported and refine
the quantity as we continue to reassess
our GHG emissions.
This estimate was from the best
available 2021 data and is intended to
be a baseline benchmark from which we
will begin our Scope 3 carbon reduction
journey. As expected, in line with our
peer group, purchased goods and
services contributes the most significant
proportion of our Scope 3 GHG emissions,
over 80%, which we believe will remain
the case as we calculate more categories.
Further details are available in the 2022
Sustainability Report on page 59. In 2023,
we intend to prepare an emissions
transition plan which will cover all three
emission scopes.
Independent assurance
In 2022, selected Scope 1 and Scope 2
GHG emissions data were independently
assured by ERM CVS. The assurance
covered both the current year and the
2019 baseline for Scope 1 and Scope
2 GHG emissions. More details and the
full limited assurance statement can be
found in the 2022 Sustainability Report
on pages 60–61.
www.smith-nephew.com/
sustainability
2022
2021
2019 (baseline year)
UK
Global
(excluding UK)
Total
UK
Global
(excluding UK)
Total
UK
Global
(excluding UK)
Total
CO
2
e emissions (tonnes) from:
Direct emissions (Scope 1)
1
5,563
6,605
12,168
2
5,892
5,443
11,335
4,747
5,141
9,888
2
Indirect emissions (Scope 2)
(location-based)
3,856
57,961
61,817
2
3,900
60,987
64,887
4,911
62,413
67,324
2
Total (location-based)
9,419
64,566
73,985
2
9,792
66,430
76,222
9,658
67,554
77,212
2
Indirect emissions (Scope 2)
(market-based)
5,205
31,474
36,679
2
5,088
30,374
35,462
5,072
52,080
57,152
2
Total (market-based)
10,768
38,079
48,847
2
10,980
35,817
46,797
9,819
57,221
67,040
2
Energy consumption to calculate
Scope 1+2 emissions (GWh)
49
188
237
49
183
232
45
168
213
Intensity ratio (location-based):
CO
2
e (t) per $m sales revenue
14.2
14.7
15.1
CO
2
e (t) per full-time employee
3.9
4.0
4.3
Other indirect emissions (Scope 3)
3
1,614,573
1
UK vehicle data included in Scope 1 GHG emissions since 2020.
2
Data independently assured by ERM CVS, more details and the full assurance statement are available in the 2022 Sustainability Report on pages 60–61.
3
Estimation of 2021 Scope 3 GHG emissions from the eight categories measured. Refer to ‘Reporting our Scope 3 emissions’ above for more details.
2022 data includes recent acquisitions completed and new site openings during 2021.
Revenue: 2022: $5.2bn, 2021: $5.2bn; 2019: $5.1bn. Full-time employee data: 2022: 19,094; 2021: 18,976; 2019: 18,030.
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Our risk management process
Successful identification and 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 our Corporate Governance.
As in previous years our Enterprise Risk
Management (ERM) 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 ERM is aligned
with the strategic and operational goals
of the organisation. Our process and
governance structure achieve this.
2022 has seen a further maturing of risk
management. We introduced quarterly
Risk Champion workshops focused on topics
such as Data Privacy, Supply Chain and
Sustainability, which increased awareness
of risks and management actions across
the Group. We implemented a new
and easier to use central risk register
system with built in quality checks to
ensure consistency in the analysis and
management of risk. We also developed
data analytics and reporting dashboards
to share regular ERM insights with
Risk Champions and our Executive
Management. Executive Committee risk
owners report and discuss Principal Risk
trends from an operational perspective in
monthly Executive Committee meetings.
Emerging risks
Executive Committee Risk Owners continue
to scan the horizon for new and emerging risks
and these are discussed and considered in the
top down risk discussion. Emerging risks that
were identified this year are covered within
our existing Principal Risks and include:
–
The impact of macroeconomic factors such
as inflation and global recession. Similar to
our peers in healthcare, we are limited in
the extent to which we can pass increased
costs onto customers and payers. We take
steps to mitigate this risk through our
pricing initiative in our 12-point plan.
–
Localised lockdowns in China and the
war in Ukraine impact our global supply
chain and operations. This risk is being
mitigated through initiatives in our
12-point plan.
–
New and increased medical device
regulations in the EU and globally will
require increased resources in our
priority markets and delays experienced
in interactions with notified bodies may
further compound the impact on our
business. There has been a reduction in
the capacity of notified bodies leading
to an increase in registration timelines,
which impacts our route to market.
This risk is being managed under our
Quality and Regulatory principal risk.
–
Our customers, investors and other
internal and external stakeholders are
increasingly focused on our approach to
Environmental, Social and Governance
(ESG) matters and how we embed
ESG considerations into all areas of our
business. In 2022, we have responded
to this increased interest by enhancing
our ESG governance structure, ensuring
that ESG considerations are taken into
account in decision making processes
and are reflected within each of our
Principal Risks as appropriate.
–
The competition for talent has impacted
all employers globally. We are managing
this risk by continuing to focus on various
initiatives to ensure that our purpose
and values are ingrained within the
culture of the organisation which
supports engagement, attraction and
retention of new and existing employees.
Risk report
Like all businesses,
we face risks and
uncertainties
1. Risk identification
2. Gross (inherent)
risk assessment
3. Current control
identification
4. Net (residual) risk
assessment
5. Risk response
planning
6. Risk reporting
7. Monitoring and review
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Risk report
continued
Risk management life cycle
Annual improvement and refinement of our
risk management process ensures that it
remains aligned with strategy and operations.
Our Risk Management Policy, sponsored
by our Chief Executive Officer, is driven 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 on this page.
2023 Risk Management Plan
Our work will continue to evolve in 2023
with a particular focus on strengthening
cross-functional risk management in
alignment with the 12-point plan.
This will include deep-dive sessions into
specific risks with cross-functional teams.
We will work with the new sustainability risk
champion to further develop the risk register
in this area. The Group Risk team will also
continue to influence decision making through
effective challenge to Risk Owners and Risk
Champions in the quarterly review process.
Our risk governance framework
At the very top of our structure is our
Board with responsibility for oversight of risk
management, 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’ risk management 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.
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.
Executive Committee
–
Identifies and ensures
the management of risks
that would prevent the
Company from achieving
our strategic 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.
Board of Directors
and Board Committees
–
The Board is responsible
for 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.
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.
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.
Board of
Directors and
Board Committees
Executive Committee
Business Area
Group Risk Team
Internal Audit
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Annual Report 2022
Risk change from 2021 key
Increased risk
Reduced risk
No change
Business continuity and business change
Examples of risks
–
Multiple change initiatives, including those
within our 12-point plan could distract
management from delivering business
as usual objectives.
–
Widespread outbreaks of infectious
diseases, including new Covid variants.
–
Natural disaster causes disruption
to manufacturing and/or distribution
at single or sole source facility.
–
Severe weather patterns, global
temperature rise and sea-level
rise caused by climate change or
natural disaster causes damage
to manufacturing or distribution
facilities, impacting ability to meet
customer demand.
–
Disruption to the business due to
critical system infrastructure and
applications being unavailable.
–
Failure to effectively implement core
elements of business change prevents
our projects and programmes achieving
the intended benefits and disrupts
existing business activities.
–
Failure to transform to achieve
our sustainability targets.
Actions taken by management
–
Dedicated Acceleration Office and
Executive Steering Committee led
by our CEO to monitor the successful
delivery of the 12-point plan.
–
Global, regional, and local crisis
management governance in place.
–
Emergency and incident management
and business recovery plans in place
at major facilities and for key products
and key suppliers.
–
IT disaster recovery policy in place.
–
Project management governance
and toolkits and project steering
committee oversight to support
successful execution of programme
and projects.
–
A new ESG Operating Committee
implements and operationalises
ESG strategy and provides data and
metrics to monitor implementation.
Our business requires continuous improvement and
depends on our ability to execute business change
programmes such as the 12-point plan at pace, whilst
continuing to operate business as usual. 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.
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 locations. Damage caused by
environmental and climate change factors, including
natural disasters and severe weather, can and do
threaten our critical sites. Widespread outbreaks of
infectious diseases and the local and global actions
and requirements to deal with them, such as the
Covid pandemic, create uncertainty and challenges
for the Group and our customers.
Oversight
Board
Link to Strategy
1. Strengthen
3. Transform
3
1
Change from 2021
2022 Principal Risks
We assess our Principal Risks in terms of their potential impact on our
ability to deliver our business strategy. The Principal Risks are presented
in alphabetical order below. Sustainability risks are embedded and run
through the Principal Risks as appropriate.
3
2
1
Our Strategy for Growth
1
Strengthen
the
foundation to serve
customers sustainably
and simply
2
Accelerate
profitable
growth through
prioritisation and
customer focus
3
Transform
our
business through
innovation and
acquisition
For further information on our Strategy for Growth
8
71
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Risk report
continued
2022 Principal Risks
continued
Cybersecurity
Examples of risks
–
Loss of confidential or sensitive
information, intellectual property
and/or data privacy breach.
–
Inadequate consideration of
cybersecurity in the design of new
products, systems and/or processes.
–
Disruption to business operations due
to a significant cybersecurity incident.
–
Increased government focus on
cybersecurity and changes in
regulatory environment.
–
Increasing demand for cybersecurity
expertise could impact our ability to
attract and retain cybersecurity talent.
Actions taken by management
–
Ensured every user has access to
and is using a secure Virtual Private
Network (VPN) when connecting
to Smith+Nephew networks to
safeguard remote working.
–
Continued security awareness
activities including email communications,
intranet posts, visuals, videos and
more Covid-related email phishing
training activities.
–
Multi-factor authentication tools
reduce the likelihood of remote attacks.
–
Security information and event
management (SIEM) 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 Security & Privacy
Steering Committee.
–
Monitor developments from
governments and raise changes and
developments with Global IT Security.
–
Cybersecurity Maturity Programme
monitored by the Audit Committee.
We depend on a wide variety of information systems,
programmes and technology to run our business
effectively. We also develop and sell certain digitally
enabled products that connect to proprietary and
third-party networks and/or the internet.
Our systems and the systems of the entities we
acquire may be vulnerable to a cyber-attack, theſt 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, to minimise the risk and disruption
of any intrusions and to monitor our systems on
an ongoing basis for current or potential threats.
Oversight
Audit Committee
Link to Strategy
1. Strengthen
3. Transform
3
1
Change from 2021
Commercial execution
Examples of risks
–
Failure to execute our strategy
adequately from high-level ambition
to specific actions to make the
ambition a reality.
–
Inability to keep pace with significant
product innovation and technical
advances to develop commercially
viable products.
–
Failure to 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.
–
Inability to satisfy customers’
sustainability requirements
and expectations.
–
Limited healthcare professional
access to medical education.
–
Failure to achieve potential from
acquisitions due to integration
challenges.
Actions taken by management
–
Strategic planning process clearly
linked to business and Group risk.
–
Continued new product launches and
monitoring of innovation pipeline.
–
An enhanced Sales Inventory and
Operations (SI&OP) process to
improve demand and supply planning.
–
Enhanced accessible digital sales
information and training modules
for sales staff.
–
Enhanced Virtual Medical Education
platforms and opening of the
Smith+Nephew Academy in Singapore.
–
Integration committee to review/
approve integration plans and monitor
ongoing processes.
The long-term success of our business depends
on setting the right strategic priorities such as the
12-point plan and our three-year strategic plan and
executing on our plans to deliver priority initiatives
in highly competitive markets.
This requires effective communication and
engagement both internally on a cross-functional
basis (for example in order to drive procedure-based
selling models) and with our customers, suppliers
and other stakeholders. We must also successfully
embed the right governance structures, accountability
and capabilities across the Group and ensure we
adjust and refine strategic priorities and business
models when necessary. Failure to set and execute
on priorities and drive cross functional accountability
within our business will impact our ability to continue
to grow our business profitably and sustainably and
to serve our customers.
Oversight
Board
Link to Strategy
1. Strengthen
2. Accelerate
3. Transform
3
1
2
Change from 2021
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Annual Report 2022
Global supply chain
Examples of risks
–
Disruption to manufacturing
at a single source facility (lack of
manufacturing redundancy).
–
Manufacturing and supply chain capacity
not adequate to support growth.
–
Risks associated with the transition
of warehouse and distribution activities
to external supplier impacting inbound
and outbound logistics.
–
Supplier failure impacts ability
to meet customer demand
(single source supplier).
–
Inadequate sales and operational
planning impacts ability to meet
customer demand for product.
–
Excess inventory due to incorrect
demand forecasts, inaccurate
demand signals and unexpected
changes in demand.
–
Failure of suppliers and distribution
partners to achieve and maintain
regulatory compliance.
–
Increasing costs of raw materials
and freight.
–
Increasing salary and wage costs
for manufacturing and distribution
employees and contractors.
–
Severe weather patterns caused
by climate change causes damage
to manufacturing or distribution
facilities, impacting ability to meet
customer demand.
–
Disruption to the business due to
critical system infrastructure and
applications being unavailable.
–
Critical material shortages leading
to supply challenges.
–
Increased freight cycle times,
increasing in-network inventory
while disrupting customer supply.
–
Labour attrition and delays
in backfilling.
Actions taken by management
–
Our 12-point plan includes initiatives
to improve product availability and
inventory, enhance procurement
and management of transportation
costs, focus on lean manufacturing
and quality and optimise our
manufacturing network.
–
Delivering Global Operations
transformation programme to
optimise manufacturing and
distribution centres and reduce
single source limitations.
–
Global Operations project
management governance and
toolkits to support successful
execution of transformation
programmes.
–
Risk-based review programmes
undertaken for critical suppliers.
–
Business continuity plans
developed and alternative source
options identified for critical suppliers.
–
Executive oversight of sales and
operational planning.
–
Increased co-ordination between
commercial, supply chain and logistics
to improve forecast accuracy.
–
Comprehensive product quality
processes in place from design
to customer supply.
–
Supplier contract agreements achieve
and manage regulatory compliance.
–
Initiatives to improve manufacturing
efficiency and reduce overhead costs.
–
IT disaster recovery policy in place.
–
Leadership taskforce established to
resolve cumulative impact of global
supply chain events.
Our ability to make, distribute and sell medical
products to customers in over 100 countries involves
complex manufacturing and supply chain processes.
Increased outsourcing, sophisticated materials, and
the speed of technological change in an already
complex manufacturing process leads to greater
potential for disruption in our supply chain. Post-Covid
lack of availability of raw materials and components
and localised lockdowns such as in China compound
supply and business disruption.
Capacity constraints and the regulatory environment,
including the increased focus on global regulation of
sustainability, increase our exposure to supply chain
disturbance. Increasingly frequent climate events
increase the likelihood and impact of disruptions
to our supply chain.
Increased inflationary pressure on production,
freight and warehousing and distribution costs
increases our risk of failing to achieve accelerated
profitable growth.
Oversight
Board
Link to Strategy
1. Strengthen
2. Accelerate
1
2
Change from 2021
73
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Risk report
continued
2022 Principal Risks
continued
Mergers and acquisitions
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.
–
Failure to deliver on plans to achieve
the acquisition business case.
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 by experienced
internal and external experts
(including the integration team).
–
Compliance and other risks included
as part of due diligence reviews,
integration plans and reporting
for acquisitions.
–
Integration committee review,
approval of integration plans and
monitoring of ongoing process.
–
Board has annual post-deal
review session.
As the Group 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
or products 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,
to conduct adequate due diligence or to integrate
them successfully or to deliver on the acquisition
business case would have an adverse impact on
our competitive position and profitability.
Oversight
Board
Link to Strategy
3. Transform
3
Change from 2021
Legal and compliance
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.
–
Failure to identify changes in or new
legal or regulatory requirements
including sanctions programmes
and ESG matters which result in
non-compliance with applicable
laws and regulations.
–
Failure to meet needs of
stakeholders relating to increased
focus on and regulation of ESG
reporting requirements.
Actions taken by management
–
Board Compliance & Culture
Committee oversees our ethical
and compliance practices.
–
Global compliance programme,
policies and procedures.
–
Annually all employees required
to undertake training and certify
compliance with our Code of
Conduct and Business Principles.
–
Group monitoring and auditing
programmes in place.
–
Launched enhanced confidential
independent reporting channels
for employees and third parties
to report concerns.
–
Trade compliance programme,
policies and procedures.
–
The ESG Operating Committee
assesses new and enhanced
regulations and reporting
requirements and works cross-
functionally to ensure compliance.
–
Monitoring new regulatory and
enforcement trends.
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
an increasingly complex pattern of laws and regulations
that govern the design, development, approval,
manufacture, labelling, marketing, sale and operation
of both traditional and digital healthcare products
and services.
Operating across this complex and dynamic legal and
compliance environment, which includes regulations
on bribery, corruption, privacy, sustainability and trade
compliance, increases the risk of fines, penalties, and
reputational damage. We mitigate this through legal
and compliance policies, procedures, training and
practices designed to prevent and detect violations
of law, regulations and industry codes.
Oversight
Compliance &
Culture Committee
Link to Strategy
1. Strengthen
2. Accelerate
3. Transform
3
1
2
Change from 2021
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Annual Report 2022
New product innovation, design & development including intellectual property
Examples of risks
–
Failure to develop, partner or acquire a
competitively differentiated innovation.
–
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 market share due to critical
gaps in product portfolio not filled.
–
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 Group or fail to respect
the Group’s intellectual property rights.
–
Failure to ensure sustainability in
new products.
Actions taken by management
–
Our 12-point plan includes an initiative
to reposition our knee and hip portfolio.
–
Continued product and technology
acquisitions and product launches
and effective implementation of new
product launches.
–
Global R&D organisation and
governance framework providing
strategic direction for allocation of
R&D investment across all businesses.
Clear stage-gate process to continually
evaluate R&D investment decisions
and development of new products.
–
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.
–
Sustainability criteria built into new
product development processes.
Our product innovation pipeline is becoming
broader in scope and increasingly complex, as we
focus our efforts on procedure innovation using
digital technologies such as connectivity, machine
learning, and artificial intelligence. Our focus on high
growth and profitable markets requires us to better
understand unmet customer needs, drivers of surgical
efficiency and patient outcomes, and new country/
regional regulations including requirements related
to cybersecurity and sustainability. Our innovation
pipeline needs to be sufficiently differentiated
from our competition in order for us to deliver
our commercial ambition.
If Smith+Nephew fails to protect and enforce
its intellectual property rights successfully, its
competitive position could suffer, which could
impact profitable, sustainable growth.
Political and economic
Examples of risks
–
Global or regional recession and
increasing macroeconomic controls
due to Covid impact on customer
financial strength.
–
Global political and economic
uncertainty and conflict.
–
Failure to meet the sustainability
targets and public policy changes.
–
Failure to pivot on business strategy
in light of increased sanction
programmes globally.
–
Market access rights.
–
Increases in import and labour costs.
–
Increases in tariffs and restrictions
on global trade.
–
Inflationary pressures impacting
raw materials, freight, salaries
and wages.
Actions taken by management
–
Built sustainability strategy on
our purpose, business strategy,
and culture pillars, and tracked
and benchmarked targets within
the industry.
–
A new ESG Operating Committee
implements and operationalises
ESG strategy and provides data and
metrics to monitor implementation.
–
Continued engagement with
governments, administrations,
and regulatory bodies to enhance
education and advocacy efforts
with policymakers.
–
Global trade compliance programme,
policies and procedures.
–
Actively participate in trade
associations to enhance
education and advocacy efforts
with policymakers.
–
Ongoing engagement and monitoring/
lobbying on localisation initiatives.
We operate a global business and are exposed
to the effects of political and economic risks,
changes in the regulatory and competitive landscape,
trade policies and trade compliance requirements,
war, political upheaval, changes in government policy
regarding healthcare priorities and sustainability
expectations, increasing inflationary pressure and tax
rates, preference for local suppliers, import quotas,
economic sanctions and terrorist activities.
Oversight
Board
Link to Strategy
3. Transform
3
Change from 2021
Oversight
Board
Link to Strategy
1. Strengthen
2. Accelerate
1
2
Change from 2021
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Risk report
continued
2022 Principal Risks
continued
Quality and regulatory
Examples of risks
–
Transition to EU MDR impacts
ability to meet customer demand.
–
Increase in time required by Notified
Bodies to review product submissions
and site quality systems’ certification
time for new products 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 various
markets globally.
–
Failure to meet stakeholder
expectations with regard to increasing
sustainability regulations and
reporting requirements.
Actions taken by management
–
EU MDR Steering Group regularly
monitors activities to comply with
new requirements.
–
Regular engagement with Notified Bodies,
MHRA and regulatory representatives
to monitor regulatory changes and
understand interpretation of legislation.
–
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 a 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.
Global regulatory bodies continue to increase their
expectations of manufacturers and distributors
of medical devices not only in respect of quality
and regulation of products but also in respect of
sustainability requirements. Our products are used
in the human body and therefore patient safety is
of paramount importance. The European Medical
Device Regulation (EU MDR), and multiple other global
regulations and changes in standards have increased
the focus on clinical and technical evidence, supplier
controls and product performance transparency.
Our customers and other stakeholders also require
us to explain our approach to and demonstrate
compliance with increasing sustainability regulations
and reporting requirements.
Oversight
Compliance &
Culture Committee
Link to Strategy
1. Strengthen
2. Accelerate
1
2
Change from 2021
Pricing and reimbursement
Examples of risks
–
Reduced reimbursement levels
and increasing pricing pressures.
–
Systemic challenge on number
of elective procedures.
–
Lack of compelling health
economics data to support
reimbursement requests.
–
Unilateral price controls/reductions
imposed on medical devices.
–
Price-driven tendering/
procurement processes.
–
Volume-based procurement
in China and other markets.
–
Limited access to non-clinical
decision makers.
–
Limited ability to pass on
increased costs such as raw materials,
freight, sustainability improvements
and the cost of compliance with
regulations to our customers.
Actions taken by management
–
Our 12-point plan includes an initiative
which focuses on pricing strategy
and execution in order to mitigate
some of the impact of inflation.
–
Developed innovative economic
product and service solutions
for both established and
emerging markets.
–
Incorporated health economic
components into the design and
development of new products.
–
Sales training to improve capability
to communicate the clinical and
economic value proposition to
non-clinical decision makers.
–
Implementing innovative contracting
models designed to lessen the
risk of adoption and coverage for
healthcare providers and payers.
–
Increased engagement with payer
bodies to influence reimbursement
mechanisms to reward innovation.
–
Optimise portfolio mix and promote
differentiated products.
–
Consideration of price increases.
Our success depends on our ability to sell our
products profitably, despite increasing inflation and
costs associated with improving the sustainability
of our products, pricing pressures from customers
and the availability of and access to adequate
government funding and reimbursement 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.
Market developments such as China volume-based
procurement, consolidation of customers into buying
groups, inflation, increasing professionalisation of
procurement departments and the commoditisation
of entire product groups, continue to challenge prices.
We mitigate this through price increases to mitigate
the impact of inflation where possible, portfolio mix
and promotion of differentiated products, including
a compelling clinical and economic value proposition.
Oversight
Board
Link to Strategy
1. Strengthen
2. Accelerate
1
2
Change from 2021
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Talent management
Examples of risks
–
Loss of key talent, high attrition
and lack of appropriate succession
planning in context of required
skillsets for future business needs.
–
Loss of competitive advantage
due to an inability to attract
and retain top talent.
–
Loss of intellectual capital
due to poor retention of talent.
–
Failure to attract talented
and capable candidates.
–
Increased talent movement
globally due to shiſting personal
work-life balance priorities.
–
Increased salaries globally,
particularly in the Cybersecurity,
ESG, Research & Development,
Quality and Regulatory Affairs,
Manufacturing and Distribution
functions.
Actions taken by management
–
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.
–
Enhanced Inclusion, Diversity and Equity
(IDE) policy, including establishment of
Employee Inclusion Groups (EIGs) and
IDE Council in order to foster culture
of belonging within the organisation
and promote engagement, attraction
and retention of top talent.
–
Ongoing segmentation of specific job
roles and applying focused rewards
to ensure we are competitive and
attractive to candidates.
In the current market, recruitment and retention
of top talent and minimising attrition is a critical
risk which requires a strong engagement process.
We recognise that people leadership, effective
succession planning and the ability to engage,
retain and attract talent is a key lever of success
for our business. Failure to do so places our ability
to execute the Group strategy and to be effective
in the chosen market/discipline at risk.
Oversight
Board
Link to Strategy
1. Strengthen
2. Accelerate
1
2
Change from 2021
Taxation and foreign exchange
Examples of risks
–
Potential for significant tax rate
changes and/or base broadening
measures in key jurisdictions where
we operate including OECD proposals
and US tax reform.
–
Failure to comply with current tax laws.
–
Transfer pricing policy not correctly
implemented or monitored.
–
Risk of adverse trading margins due to
fluctuating foreign currency exchange
rates between our main manufacturing
operations (the US, UK, Costa Rica,
Malaysia and China) and where our
products are sold.
–
Changing legislation in the US
and other key markets may require
changes to our operating model.
Actions taken by management
–
The Group Tax team continually
monitor developments in tax
legislation and obtain external
advice where relevant.
–
The Group Tax team, supported by
external advisers, work closely with
the business to implement agreed
processes and procedures.
–
A foreign exchange hedging programme
is operated and is overseen centrally
by the Group Treasury team.
–
The Finance and Banking Committee
monitors ongoing treasury and
tax matters including foreign
exchange exposure.
–
Internal Audit and Audit
Committee oversight.
–
Seeking appropriate independent
third-party advice when required.
We operate a global business and are therefore
required to comply with tax legislation in multiple
jurisdictions and are also exposed to exchange
rate volatility. Adverse changes to tax legislation,
including those driven by international agreements
such as the Organisation for Economic Co-operation
and Development (OECD) global minimum tax rate,
and volatility in foreign currency exchange rates
can impact our results and it may not be possible
to fully mitigate against them.
Oversight
Audit Committee
Link to Strategy
1. Strengthen
1
Change from 2021
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ACCOUNTS
OTHER INFORMATION
Risk report
continued
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 71–77
of this Annual Report.
In reaching our Viability Statement
conclusion, we have undertaken the
following process:
–
The Audit Committee reviewed the Risk
Management process at their meetings
in February, April, July and December,
receiving presentations from the Group
Risk team, explaining the processes
followed by management in identifying
and managing risk throughout
the business.
–
In August and November 2022, the
Executive Committee met to review
the 2022 Principal Risks (the top-down
risk review process). The Executive
Committee was asked to consider the
significant risks which they believed
could seriously impact the profitability
and prospects of the Group and the
principal risks that would threaten its
business model, future performance,
solvency or liquidity.
–
All Executive Committee members
nominated the Risk Champions and
have worked with them to prepare risk
registers. The Risk Champions nominated
by the Executive Committee are senior
employees and in risk management.
–
Using the outputs from the Business
Area ‘bottom-up’ risk identification
completed in September 2022 and
following ‘top-down’ discussions
with the Executive Committee, the
most significant risks affecting our
organisation were presented to the
Executive Committee for approval in
November as the draſt 2022 Principal
Risks facing the Company and again
in January 2023 as final disclosures.
–
Executive Committee agreed to retain
the 12 Principal Risks from 2021 with
amendments to the descriptions
within each Principal Risk to reflect
the implementation of the 12-point plan
and macro and internal factors to be
taken into account in 2022.
–
In assessing our TCFD risks we
concluded that climate-related risks
are not significant in our viability horizon
of three years. Nonetheless, we have
included an extreme weather event in
our Business Continuity and Business
Change scenario.
–
All relevant executives have attested
alignment to the Group’s Enterprise
Risk Management Process as part of
the annual certification on governance,
risk, and compliance.
–
The Board debated and agreed the
risk appetite for each of the Principal
Risks in February 2022.
–
Final Principal Risks were presented
to the Audit Committee and the
Board in February 2022 for their
consideration and approval.
–
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 2025
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
To test 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 Group.
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 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 71–77 of this Annual Report.
We recognise, however, that the long-
term viability of the Group could also be
impacted by other, as yet unforeseen,
risks or that the mitigating actions we
have put in place could turn out to be
less effective than intended.
Viability Statement
Having assessed the Principal Risks,
the Board has determined that we
have a reasonable expectation that
the Group will be able to continue
in operation and meet its liabilities
as they fall due over a period of three
years from 1 January 2023. In our
long-term planning we consider horizons
of between five and 10 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 reviewed by the Board in January
2023. We will continue to evaluate any
additional risks which might impact
the business model.
By order of the Board, on 21 February 2023.
Helen Barraclough
Company Secretary
Our Viability Statement
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Smith+Nephew
Annual Report 2022
2022 Scenarios modelled
Scenario 1: Global Economic Downturn
Significant global economic recession, leading to sustained lower healthcare
spending across both public and private systems.
Action taken:
We have modelled 10% lower revenue throughout 2023
and 5% lower revenue throughout 2024.
Reduced reimbursement levels and increasing pricing pressures.
Action taken:
We have modelled annual price erosion of 1% impacting
all product lines, along with a full drop through impact on profit in each
of the periods 2023–2025.
Link to strategy
–
Accelerate profitable growth through prioritisation
and customer focus.
Link to Principal Risks
–
Business continuity and business change.
–
Global supply chain.
–
Commercial execution.
–
Political and economic.
–
Pricing and reimbursement.
Scenario 2: Operational risk
Inability to keep pace with significant product, innovation, and technical
advances to develop commercially viable products, losing significant
market share to the competition.
Action taken:
We have modelled 1% lower growth than planned for a key
product range in the US in 2023 and 2024.
Disruption to a Global Distribution Centre (GDC) preventing our ability to supply
our customers with all products from the applicable GDC for one quarter.
Action taken:
We have modelled an inability to supply products from
one of our GDCs for one quarter of 2024.
Key Supplier Disruption – resulting in our inability to manufacture and 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 2023.
Increases in raw materials, freight and labour costs.
Action taken:
We have modelled an increase in our input costs by an
additional 5% in 2023 and 2024, due to continued inflationary pressures.
Product Liability Claim.
Action taken:
we have modelled a group of product liability claims
resulting in a settlement agreement requiring cash payment in 2024
and 2025, without any insurance coverage.
Link to strategy
–
Strengthen the foundation to serve customers sustainably and simply.
–
Transform our business through innovation and acquisition.
Link to Principal Risks
–
Commercial execution.
–
New product innovation, design & development including
intellectual property.
–
Global supply chain.
–
Business continuity and business change (weather-related disruption).
–
Legal and compliance.
–
Political and economic.
–
Talent management.
Scenario 3: Tax, foreign exchange, legal, regulatory and compliance risks
Data privacy failure – giving rise to a significant fine or loss.
Action taken:
We have modelled a one-off significant fine from regulator
of 2% of revenue or loss resulting from a data privacy issue in 2024.
Failure to obtain proper regulatory approvals for products or processes
impacting our ability to sell products.
Action taken:
We have modelled the complete loss of revenue from a
key product effective in mid-2023 for two years, and returning to lower
volumes in mid-2025.
Risk of adverse trading margins due to fluctuating foreign currency
exchange rates across our markets.
Action taken:
We have modelled a reduction in profitability in 2024 and
2025 due to a weakening in other currencies relative to the US Dollar by 5%.
Link to strategy
–
Strengthen the foundation to serve customers sustainably and simply.
Link to Principal Risks
–
Legal and compliance.
–
Quality and regulatory.
–
Taxation and foreign exchange.
Scenario 4: Cybersecurity
Disruption to business operations due to a significant cybersecurity incident.
Action taken:
We have modelled one of our key regions being unable
to invoice also affecting shipping and tracking of deliveries for one month
due to a disruption to our IT infrastructure in 2024.
Link to strategy
–
Strengthen the foundation to serve customers sustainably and simply.
Link to Principal Risks
– Cybersecurity.
Scenario 5: Mergers and acquisitions
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 2023 and 2024.
Link to strategy
–
Transform our business through innovation and acquisition.
Link to Principal Risks
–
Mergers and acquisitions.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Our 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. Pages 109–115, as well as
the pages referenced below, form part of this
statement and provide examples of how
each of our key stakeholders have been
considered and engaged.
Section 172 statement
How we engage with
our main stakeholders
112
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.
Governments 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.
109
48–53
112
115
46
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Smith+Nephew
Annual Report 2022
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.
Investors
Our investors are the owners of
our business and it is important
for us to understand their
perspectives on performance,
value, risk and governance.
Environment and community
People, Planet and Products are
at the heart of our sustainability
strategy aiming to create a positive
impact on our communities reducing
the impact on our environment and
enabling us to innovate sustainably.
Read more on pages
56–68 and in our 2022
Sustainability Report
Read more on investors
www.smith-nephew.com
Our Investor presentations
are available to download
on our website
240–248
114
14–15
24–45
113
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Getting a rugby
player back to
the game
Life Unlimited
Our technology takes
the limits off living
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Annual Report 2022
83
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Governance
Board leadership and purpose
Letter from the Chair
84
Board of Directors
86
Executive Committee
89
Division of responsibilities
Roles and composition of the Board
90
Corporate governance framework
92
Board activities
94
Composition, succession and evaluation
Board effectiveness review
96
Board development
97
Nomination & Governance Committee report
98
Audit, Risk and Control
Audit Committee report
101
Compliance & Culture
Committee report
108
Engaging with stakeholders
112
Remuneration
Directors’ Remuneration report
116
Statement of Compliance
The Board is committed to the highest standards of corporate
governance. We comply with 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 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 and
Disclosure & Transparency Rules (DTRs) throughout the year.
Letter from the Chair
Dear Shareholder
On behalf of the Board, I am pleased
to present the governance section of
our Annual Report, which sets outs the
Board’s structure, roles, responsibilities,
activities and stakeholder engagement
during 2022.
Supporting strategic and
operational improvement
Despite intense macroeconomic and
geopolitical headwinds, the Board has
remained focused on strategy and value
creation. Following Deepak’s arrival in April
2022, urgent focus was required in order to set
the Company on a trajectory to achieve its full
potential and deliver value for shareholders.
The executive directors and management
focused on core business strategy and value
creation opportunities under the 12-point
plan to fix orthopaedics, improve margin
and accelerate growth in our Advanced
Wound Manufacturing (AWM) and Sports
businesses. In parallel, the Board maintained
scrutiny over the implementation of the
Strategy for Growth in line with the Board’s
risk appetite to ensure high standards of
corporate governance were maintained and
that decisions were considered in the interests
of the Company’s stakeholders and in the
best interests of the Company as a whole.
From a governance perspective, the Board
has continued to drive improvements in our
enterprise risk management programme in
order to positively impact the risk culture of
the Company. The refreshed focus on our
governance structure in order to provide
further oversight on environmental, social
and governance (ESG) matters has also
been a focus for the Board this year.
Board changes in 2022
Deepak joined us at an inflection point
for the business and within his first
100 days conducted a deep dive review
84
Smith+Nephew
Annual Report 2022
and assessment of the opportunities and
challenges facing the Company and then
presented his 12-point plan to the Board,
supported by key KPIs and metrics to
execute and deliver on the Company’s
significant potential for accelerated growth.
Jo Hallas was appointed as a Non-Executive
Director to the Board on 1 February 2022
and was subsequently appointed as a
member of the Audit Committee with effect
from 1 September 2022. Jo’s experience
on sustainability matters has enhanced
Board expertise in this area.
Robin Freestone, our Senior Independent
Director took the decision to step down as
a Non-Executive Director on 30 September
having completed 7 years of service. We wish
to thank him for his support to me as Chair, to
the Board and the Company more broadly.
Marc Owen was appointed as Senior
Independent Director with effect from
Robin’s departure and led the search for my
successor. We also took the opportunity to
strengthen the Nomination & Governance
Committee, appointing Angie Risley with
effect from 1 September 2022.
Board and leadership
succession planning
During my tenure we have strengthened
the capabilities of the Board in terms
of skills, composition and diversity and
have appointed Board members with
industry specific knowledge and broad
geographical experience.
As succession planning is a key focus
from both a leadership and governance
perspective, we have developed a board
composition and skills matrix which feeds
into a formal rolling succession plan for
directors. We have also worked with an
independent third party to review our
profile for the Company’s Chief Executive
Officer and continue to review internal
talent pipeline development as part of
executive succession planning.
Chair search
The Nomination & Governance Committee
and the Board were aligned on three core
characteristics which would be required
for a successful Chair: (i) a proven track
record of delivering shareholder value; (ii)
a strong background in governance, ideally
within a UK FTSE environment; and (iii) the
ability to support and develop the Chief
Executive Officer, either through previous
CEO experience or within a Chair role.
Marc engaged with various shareholders
as part of the search process, who agreed
with the characteristics determined by the
Board and acknowledged that given the
recent changes to Board and management,
it was important to take the time to find
the right fit for the new Chair.
Aſter an extensive search, we announced on
17 February 2023 that subject to shareholder
approval, Rupert Soames OBE will be
appointed to the Board as a Non-Executive
Director and Chair-designate at our AGM
and will join the Nomination & Governance
and Remuneration Committees upon
appointment. In order to ensure a smooth
transition to Rupert, I have agreed to remain
as Chair until 15 September 2023 and will
put myself forward for re-election at the
AGM on this basis.
Rupert has extensive global leadership
experience, a strong track record of delivering
shareholder value and a deep understanding
of the UK corporate governance
environment. For more than eight years as
Chief Executive Officer of
Serco Group plc,
Rupert led the transformation of the business
and delivered significant improvements to
profitability as he transitioned the Group’s
strategy from turnaround to growth.
Rupert was a Non-Executive Director of
DS Smith, the FTSE 100 packaging company
until September 2022 and was also Senior
Independent Director of Electrocomponents
plc (now RS Group). He was a member of
the Remuneration, Nomination and Audit
Committees at both companies.
On behalf of the Board, I am delighted to
welcome Rupert as my successor as Chair.
I am confident that he is the right person
to support the management team, the
organisation and the Board through the next
stage of Smith+Nephew’s transformation.
Stakeholders
Pages 111–115 provide further insight into
how the Board engage with and consider the
views of our stakeholders in our decision-
making process, with one key example being
the decision to invest in a new greenfield
AWM site in Melton near Hull. The Board
evaluated the benefit and impact on
employees, customers, suppliers, investors,
governments and regulators, the local
communities and other stakeholders
as part of decision making.
Following easing of restrictions post Covid,
various Board members visited our Hull and
Memphis sites in May and September 2022
respectively, which provided opportunities
for Board members (especially those who
had joined during or since the pandemic) to
understand more about the core business
strategy, value creation opportunities and
challenges and the impact of key initiatives
and projects on our stakeholders.
Human capital issues including culture and
workforce transformation also continue
to be important agenda items for the
Board. This year the Board amplified its
listening session programme, holding
five sessions with employees from diverse
regional and workforce stakeholder groups.
The session with Employee Interest Group
(EIG) leadership in particular provided
strong insights for the Board in terms of
employee-driven initiatives on Inclusion,
Diversity and Equity (IDE). Further details
can be found on pages 110–112.
Annual General Meeting
Our 2023 AGM will be held at our
Croxley offices on 26 April 2023 at 12pm.
We strongly encourage shareholders to
attend in person to listen to the proceedings,
ask questions and vote. Further details of the
AGM are included in the Notice of Meeting.
My thanks go to the Board for their
commitment, contribution and dedication
during 2022. I would also like to thank all of
our shareholders for their continued patience
during a challenging year for the Company.
It has been an honour to serve as your Chair
and I will follow the Company with interest
as management and the Board continue
to partner together to execute on strategy
and create and deliver further value for
shareholders. 2023 looks set to be a year
in which the resilience of Boards, CEOs and
executives will continue to be tested and
I believe that the current Board with the
new Chair in place will be well positioned
to provide support and oversight in a
fast-changing environment.
Roberto Quarta
Chair
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Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Board leadership and purpose
Board of Directors
Key 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.
Current external appointments:
–
Chair of WPP plc.
–
Partner at Clayton Dubilier & Rice,
LLC and Chair of CD&R Europe.
–
Independent Non-Executive
Director of Gulf Capital.
Previous experience:
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 a former
member of the Investment Committee
of Fondo Strategico Italiano S.p.A.
Nationality:
American/Italian
Roberto Quarta
Chair
Appointed as an Independent
Non-Executive Director in December
2013 and appointed Chair at the
2014 Annual General Meeting
Deepak Nath
Chief Executive Officer
Appointed Chief Executive Officer
in April 2022
Key skills and competencies:
Deepak brings global leadership and
risk-management expertise and has
a track record of driving growth at
major healthcare companies through
delivering a significant improvement
in execution and building a strong
results-focused culture.
Current external appointments:
None.
Previous experience:
He began his career as a scientist in
computational physics at Lawrence
Livermore National Laboratory and
holds a BSc and MSc in Mechanical
Engineering and a PhD in Theoretical
Mechanics from the University of
California, Berkeley. Prior to joining
Siemens Healthineers, he held roles
at both Amgen and McKinsey and
spent 10 years at Abbott Laboratories,
Inc. culminating in his appointment
as President of Abbott Vascular.
At Siemens Healthineers (2018–2022)
he was President of the Diagnostics
business responsible for $6 billion
of revenue and 15,000 employees.
Nationality:
American
Key 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.
Current external appointments:
–
NED and Chair of the Audit
Committee at Compass Group plc.
Previous experience:
Anne-Françoise joined GlaxoSmithKline
plc in 1997 where she worked for
16 years, holding multiple senior
roles including Senior Vice President,
Global Vaccines. 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. She was
Chief Financial Officer of Merlin
Entertainments Limited (formerly
Merlin Entertainments plc from
2016 to 2020.
Nationality:
British/French
Anne-Françoise Nesmes
Chief Financial Officer
Appointed Chief Financial Officer
in July 2020
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Committee key
Committee Chair
Member of the
Audit Committee
Member of the
Remuneration Committee
Member of the Nomination
& Governance Committee
Member of the Compliance
& Culture Committee
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Rupert Soames
Chair Designate
To be appointed as Non-Executive Director on
26 April 2023 subject to shareholder approval.
Member of the Nomination & Governance
and Remuneration Committees upon
appointment and will succeed Roberto
Quarta as Chair in September 2023
Key skills and competencies:
Rupert has extensive global
leadership experience, a proven track
record of delivering shareholder
value and a deep understanding of
UK corporate governance. For more
than eight years as Chief Executive
Officer of Serco Group plc, Rupert
led the transformation and delivered
significant improvements to
profitability transitioning the group’s
strategy from turnaround to growth.
Current external appointments:
–
Advisor to Serco Group plc, will
retire in September 2023.
Previous experience:
Rupert stepped down in December
2022 as Group Chief Executive
from Serco Group plc, the specialist
services business in Health,
Defence, Transport and Immigration,
employing c.53,000 people and
operating in 16 countries. He joined
Serco Group plc from Aggreko plc
where he was Chief Executive Officer
for 11 years and prior to that he was
at soſtware company Misys plc as
Chief Executive of its Banking and
Securities Division. He spent the first
16 years of his career at GEC plc.
He studied Politics, Philosophy &
Economics at Oxford University and
was President of the Oxford Union.
Rupert was a Non-Executive Director
of DS Smith the FTSE 100 packaging
company until September 2022 and
was previously Senior Independent
Director of Electrocomponents plc
(now RS Group). He was a member
of the Audit, Remuneration and
Nomination Committees for both
companies. Rupert is a Visiting Fellow
at Oxford University, and a Visiting
Professor of Aston University.
Nationality:
British
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Marc Owen
Senior Independent Director
Appointed Independent Non-Executive
Director in October 2017 and Senior
Independent Director in September 2022
Key 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.
Current external appointments:
None.
Previous experience:
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.
Nationality:
British/American
Erik Engstrom
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in January 2015
Key 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.
Current external appointments:
–
Chief Executive Officer of
RELX Group.
Previous experience:
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, the division specialising
in scientific and medical information
and then from 2009 Chief Executive
Officer of RELX Group.
Nationality:
Swedish
Jo Hallas
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in February 2022
Key skills and competencies:
Jo has extensive international
experience focused on business
transformation through both organic
and acquisitive growth in global
industrial and consumer sectors.
She brings valuable expertise which
will help Smith+Nephew build upon
and achieve our strategic ambitions.
Current external appointments:
–
Chief Executive Officer
of Tyman plc.
Previous experience:
Jo commenced her career at Procter
& Gamble based in Germany, the
US, Thailand and the Netherlands.
She then joined Bosch where she
held a business unit leadership role
in their Power Tools division followed
by Invensys in 2009 where she ran
their global heating controls business
unit including launching its first smart
home offer. She then moved to Spectris
plc, where she had responsibility for a
portfolio of global industrial technology
businesses, as well as for the Group’s
digital strategy. Since 2019, Jo has
served as Chief Executive Officer
for Tyman plc where she has made
sustainability a core foundation of
the group’s strategy. Jo was also
previously Chair of the Remuneration
Committee for Norcros plc.
Nationality:
British
John Ma
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in February 2021
Key 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.
Current external appointments:
–
Founder, Chair and Chief Executive
of Ronovo Surgical.
Previous experience:
In 2000, John joined GE Healthcare and
became Vice President and General
Manager of their Global Product
Company in China. 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.
Nationality:
American
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OTHER INFORMATION
Board leadership and purpose
continued
Board of Directors
continued
Rick Medlock
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in April 2020
Angie Risley
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in September 2017
Key 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 and risk management
expertise as a well-regarded former
FTSE 100 Chief Financial Officer,
NED and Audit Committee Chair.
Current external appointments:
–
NED and member of the Audit,
Risk and Compliance Committee
at Datatec Ltd.
–
NED and Chair of the Audit
Committee at Deliveroo.
Previous experience:
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 BluJay
Solutions Ltd, Chair of Momondo Group
and Chair of the Audit Committee
for LoveFilm UK Limited.
Nationality:
British
Key skills and competencies:
Angie 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.
Current external appointments:
–
J Sainsbury plc Group HRD and
member of their Operating Board.
Previous experience:
Between 2007–2013 Angie 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 Bank.
Nationality:
British
Bob White
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director on 1 May 2020
Key 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
healthcare expertise.
Current external appointments:
–
Executive Vice President and
President, Medical Surgical
Portfolio at Medtronic plc.
Previous experience:
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.
Nationality:
American
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Helen Barraclough
Group General Counsel
and Company Secretary
Appointed Company Secretary
in April 2022
Key skills and competencies:
Helen is a qualified Solicitor admitted in England & Wales
and a Chartered Governance Professional. She also serves
as the Chief Risk Officer for Smith+Nephew.
Previous experience:
Helen started her career with Allen & Overy LLP and prior
to joining Smith+Nephew held senior legal roles at WPP plc
and Nomura International plc.
Katarzyna Mazur-Hofsaess
Independent
Non-Executive Director
Appointed Independent Non-Executive
Director in November 2020
Key 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 (PhD), has an Executive MBA
from the University of Minnesota and
has a wealth of 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.
Current external appointments:
–
Chief Executive Officer, EMEA,
at Fresenius Medical Care AG & Co.
KgaA.
Previous experience:
Katarzyna commenced her corporate
career in 1998 at Roche in Poland, prior
to becoming General Manager for Poland
of Allergy Therapeutics plc. In 2001,
Katarzyna joined Abbott Laboratories
initially to manage their diabetes care
division in Poland and became country
General Manager. Over the next nine
years, her career at Abbott progressed
becoming Divisional Vice President
Abbott Diagnostics for Europe. In 2010,
she became President of EMEA at Zimmer
and then led the operations of Zimmer
Biomet in EMEA. In 2018, Katarzyna
became Chief Executive Officer for the
€2.7 billion EMEA renal care business of
Fresenius Medical Care, and in January
2022 took over responsibility for the
Care Enablement organisation.
Nationality:
German/Polish
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Simon Fraser
President Advanced Wound
Management and Global
Commercial Operations
Simon brings more than 30 years
of experience across the sector.
Prior to joining Smith+Nephew, Simon
held senior roles at Dentsply Sirona,
Abbott Laboratories, Alere Inc and
Johnson & Johnson. Simon will
retire in April 2023.
Nationality:
American/Canadian
Location:
Fort Worth, US
Myra Eskes
President APAC Region
& Global Service
Prior to joining Smith+Nephew,
Myra was President and Chief
Executive Officer of GE Healthcare
Southeast Asia, Korea, Australia
and New Zealand and led the GE
Life Sciences business for the
Eastern & African growth markets.
Nationality:
Dutch
Location:
Singapore
Phil Cowdy
Chief Corporate Development
& Corporate Affairs Officer
Prior to joining Smith+Nephew, Phil
served as a senior Director at Deutsche
Bank AG for 13 years specialising in
corporate finance and equity capital
markets. He qualified as a chartered
accountant with EY. Phil serves as
the representative of Smith+Nephew
on the Board of Bioventus Inc.
Nationality:
British
Location:
Watford, UK
Executive
Committee
Elga Lohler
Chief HR Officer
Prior to joining Smith+Nephew,
Elga held Human Resources roles
at Transnet SOC Ltd, Sensormatic
(now Tyco International plc) and
Advanced Tissue Sciences, Inc.
(acquired by Smith+Nephew in 2002).
Nationality:
American/South African
Location:
Fort Worth, US
The Executive Committee
of Smith+Nephew is
responsible for leading the
Company and executing
on its strategy.
Helen Barraclough
Group General Counsel
and Company Secretary
Prior to joining Smith+Nephew,
Helen started her career at Allen &
Overy LLP and held senior roles at
WPP plc and Nomura International
plc. She also serves as the Chief
Risk Officer for Smith+Nephew.
Nationality:
British
Location:
Watford, UK
Vasant Padmanabhan
President Research
& Development
Vasant has over 25 years of global
med-tech leadership experience.
Prior to Smith+Nephew, Vasant held
senior roles at Thoratec Corporation
and Medtronic plc as Vice President of
Connected Care R&D and Operations
and Vice President of Product
Development for the Implantable
Defibrillator Business.
Nationality:
American
Location:
Andover, US
Alison Parkes
Chief Compliance Officer
Prior to moving into her current role,
Alison served as the Compliance
Officer for the Global Advanced
Wound Management business,
APAC and Emerging Markets
and established and led the Global
Compliance Programme Effectiveness
& Improvement team.
Nationality:
British
Location:
Fort Worth, US
Brad Cannon
President Orthopaedics,
Sports Medicine & ENT
and Americas
Brad brings more than 25 years of
experience across medical devices and
medtech. Prior to Smith+Nephew, Brad
worked in Medtronic plc’s Spine and
Biologics division and previously served
as Chief Marketing Officer and President
of Europe and Canada at Smith+Nephew.
Nationality:
American
Location:
Andover, US
Paul Connolly
President Global Operations
Paul brings more than 30 years
of global manufacturing and supply
chain experience at multinational
companies with a strong track record
in delivering operational excellence
and transformation programmes.
Prior to joining Smith+Nephew, Paul
held senior roles at Goodyear, DePuy,
Inc., and other Johnson & Johnson
family companies.
Nationality:
American/Irish
Location:
Andover, US
Mizanu Kebede
Chief Quality &
Regulatory Affairs Officer
Mizanu brings more than 20 years
of leadership experience in Quality
and Regulatory Affairs. Prior to
Smith+Nephew, Mizanu held senior
roles at Avanos Medical, Life
Technologies Corporation, Johnson
& Johnson and STERIS Corporation.
Nationality:
American
Location:
Georgia, US
Executive Officers
whose tenure ceased
Peter Coenen, President
EMEA Region, served until
31 December 2022.
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ACCOUNTS
OTHER INFORMATION
Roles and composition of the Board
Chair
Roberto Quarta
–
Responsible for the effective leadership and operation of
the Board and for facilitating the review of its composition,
effectiveness and development.
–
Promotes effective board relationships, encouraging constructive
challenge and facilitating effective communication between
Board members and supporting a culture of openness,
challenge and debate.
–
Ensures that the Board understand the views and needs of the
Company’s stakeholders and facilitates effective communication
and dialogue, whilst maintaining an appropriate balance
between stakeholders.
–
Leads relations with shareholders in order to understand
their views on governance and performance against strategy
–
Responsible for promoting high standards of governance by
the Board and its Committees.
The Chair achieves this through effective chairing of Board meetings;
setting a board agenda which focuses on strategy, performance,
value creation, risk management, culture, stakeholders and
accountability; enabling an annual review of Board effectiveness;
holding discussions with Board members both inside and outside
the boardroom and ensuring appropriate Board induction and
development programmes are in place.
Senior Independent Director
Marc Owen
–
Acts as a sounding board for the Chair and as an intermediary
for other Directors and stakeholders as necessary.
–
As a member of the Nomination & Governance Committee,
leads the Board evaluation process and search for Chair
and Independent Non-Executive Directors to ensure
effective succession.
–
Acts as an alternative contact for stakeholders to raise
concerns (in addition to Chair and senior management).
Independent Non-Executive Directors
Erik Engstrom, Jo Hallas, John Ma,
Katarzyna Mazur-Hofsaess, Rick Medlock,
Angie Risley and Bob White
–
Comprise more than half of Board membership in order
to meet the independence criteria set out in the 2018 Code.
–
Ensure that no individual/small group can dominate
the Board’s decision making.
–
Provide constructive challenge, give strategic guidance,
offer specialist advice and hold executive management
to account.
Chief Executive Officer
Deepak Nath
–
Responsible for delivering and
implementing Group strategy and
management of the organisation as
a whole. Provides information and
participates in Board discussions
regarding Group management and
operational matters.
–
Leads the Executive Committee and
ensures its effectiveness in managing
the overall operations and resources
of the Group.
–
Sets tone at the top with regard
to culture, compliance and
sustainability matters.
–
Ensures the Chair and Board are
updated regularly regarding key
matters and maintains relationships
with shareholders, advising the
Board accordingly.
Chief Financial Officer
Anne-Françoise Nesmes
–
Supports the Chief Executive Officer
in developing and implementing
Group strategy.
–
Responsible for ensuring effective
financial reporting, investor relations,
tax, treasury and financial controls
are in place within the Group.
–
Provides information and participates
in Board discussions regarding
financial matters.
–
Leads global finance function,
developing key finance talent
and succession planning.
Company Secretary
Helen Barraclough
–
Supports the Chair and ensures
Board members have access
to the information required to
perform their duties.
–
Advises the Board on legal and
corporate governance matters and
supports the Board in applying the
2018 Code and complying with UK
listing obligations, and other statutory
and regulatory requirements.
–
Provides a channel for Board and
Committee communications
and a link between the Board
and management.
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 2022 Annual Report relating to the environment (pages 48–68 of this report and the 2022 Sustainability Report),
social (pages 48–53 of this report and the 2022 Sustainability Report), anti-corruption and anti-bribery matters (page 53), employees (pages 48–53)
and human rights (page 53).
Division of responsibilities
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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 receive 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.
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
21 February 2023.
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 at least
on an annual basis.
Bob White is President of the Medtronic
Medical Surgical Portfolio at Medtronic plc,
a situation which the Board has identified
and duly authorised as potentially giving
rise to a conflict of interest. Mr White
is recused from any matters discussed
at a meeting of the Board or of a Board
Committee which the Board or relevant
committee consider may pose a
potential conflict.
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.
Anne-Françoise Nesmes is a Non-Executive
Director of Compass Group plc which is
listed on the London Stock Exchange.
Re-appointment of Directors
In accordance with the 2018 Code, all
Directors offer themselves to shareholders
for re-election annually, except those who
are retiring immediately aſter the Annual
General Meeting. Each Director may be
removed at any time by the Board or
the shareholders.
Board support
Together with the Chief Executive Officer
and the Group General Counsel and
Company Secretary, the Chair ensures
that the Board is kept properly informed.
Each Director has access to the Group
General Counsel and Company Secretary,
who helps to ensure that Board procedures
and good corporate governance practices
are followed. Directors are permitted to
take independent professional advice at
the Company’s expense if required in order
to enable them to fulfil their duties.
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 aſter judgment has
been given. In the event of an unsuccessful
defence in an action against them,
individual Directors would be liable to repay
the Company for any damages and to
repay defence costs to the extent funded
by the Company.
Purchase of ordinary shares
In December 2021, we announced an
updated capital allocation policy to
prioritise the use of cash. The 2022
share buyback programme commenced
on 23 February 2022 and $150 million
was completed by 12 August 2022.
As macroeconomic conditions continued
to be uncertain, including higher input cost
inflation, the Board decided it was prudent
to delay further buybacks until conditions
improved. We remain committed to
returning surplus cash to shareholders
over time.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Division of responsibilities
continued
Corporate governance framework
Our Board
The Board is accountable to shareholders for the performance and long-term sustainable success of the Company. It approves the strategy of
the Group, evaluates and monitors the management of risk, and oversees the implementation of the strategy in order to achieve sustainable growth.
The Board delegates certain matters to the Audit, Remuneration, Nomination & Governance and Compliance & Culture committees which support
the Board in carrying out its responsibilities. Full details of the Matters Reserved to the Board can be found on the Company’s website.
www.smith-nephew.com
The Executive Committee forms subcommittees including those listed below:
Group Ethics
& Compliance
Committee
ESG Operating
Committee
Mergers &
Acquisitions
Investment
Committee
Global Benefits
Committee
Health, Safety
& Environment
Committee
Quarterly Business
Review and Franchise/
Function/Regional
Leadership Team
Meetings
Global Crisis
Management
Team
New Product
Development
Committee
Inclusion,
Diversity and
Equity Council
Security and
Privacy Steering
Committee
Audit Committee
Ensures the integrity of the Company’s
financial reporting, systems and controls.
Oversight of risk management process.
Reviews and monitors climate change
disclosures and related ESG financial
reporting obligations.
Ensures effectiveness of internal
and external audit functions.
Finance & Banking Committee
A Committee comprising senior executives
which approves banking and treasury matters,
guarantees and Group structure changes
relating to mergers, acquisitions and disposals.
Disclosures Committee
A Committee comprising senior executives which
oversees and approves public announcements
and communications to investors and
Stock Exchanges. Reviews communications
and reporting requirements in respect
of market sensitive information.
Nomination &
Governance Committee
98
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 matters
and metrics, stakeholder relationships and
related legal matters across the Group.
Remuneration Committee
116
Determines Remuneration Policy
and packages for Executive Directors
and senior management, having regard
to pay across our workforce.
Ensures reward strategy aligns with our
purpose, values and long-term strategy.
Executive Committee
89
The Board delegates the day-to-day operational management and implementation of Group strategy to the Chief Executive Officer and Executive
Committee (see page 89). The Executive Committee recommends, and following Board approval, implements strategy, budget and three-year
strategic plan within the Group. It ensures cross-functional alignment in order to deliver on strategy and reviews major investments, divestments
and capital expenditure proposals. The Executive Committee also focuses on people and organisational culture, reviewing recruitment, attrition
and development initiatives within the Company and developing and monitoring succession planning and talent pipeline below Board level.
The Executive Committee meets at least 10 times per year to review commercial and operating results against budget, key initiatives,
KPIs and performance metrics aligned to deliver Group strategy.
101
108
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Board and Committee attendance
Board
Audit
Remuneration
Nomination
& Governance
Compliance
& Culture
Total meetings
Appointed
7
8
8
6
4
Roberto Quarta
1
December 2013
7/7
–
7/8
5/6
–
Roland Diggelmann
2
March 2018
1/1
–
–
–
–
Deepak Nath
3
April 2022
6/6
Erik Engstrom
January 2015
7/7
8/8
–
6/6
–
Robin Freestone
4
September 2015
5/5
6/6
7/7
5/5
–
John Ma
5
February 2021
6/7
4/4
Katarzyna Mazur-Hofsaess
November 2020
7/7
–
–
–
4/4
Rick Medlock
April 2020
7/7
8/8
–
–
–
Anne-Françoise Nesmes
July 2020
7/7
–
–
–
–
Marc Owen
6
October 2017
7/7
8/8
–
6/6
4/4
Angie Risley
7
September 2017
7/7
–
8/8
2/2
4/4
Bob White
May 2020
7/7
–
8/8
–
4/4
Jo Hallas
8
February 2022
7/7
3/3
1
Due to unforeseen travel disruption, Roberto Quarta was prevented from attending the July 2022 Remuneration and Nominations
& Governance Committee meetings.
2
Roland Diggelmann stepped down as Chief Executive Officer and Executive Director with effect from 31 March 2022.
3
Deepak Nath has been appointed as the Company’s new Chief Executive Officer (CEO) with effect from 01 April 2022.
4
Robin Freestone stepped down as Senior Independent Director and as a Non-Executive Director with effect from 30 September 2022.
5
Due to prior commitments, John Ma was not in attendance at the 27 April Board meeting however, he gave his comments to the Chair
before the meeting.
6
Marc Owen has been appointed as Senior Independent Director with effect from 30 September 2022.
7
Angie Risley joined the Nominations & Governance Committee on 1 September 2022.
8
Jo Hallas joined the Audit Committee on 1 September 2022.
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OTHER INFORMATION
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Annual Report 2022
Group Purpose
and Culture
48
Employees
108
Compliance & Culture Committee report
–
Reviewing and monitoring Group
strategy in alignment to the Purpose of
Life Unlimited and culture pillars of Care,
Collaboration and Courage.
–
Monitoring and ensuring the scope and
focus of strategic projects and initiatives
support the Group’s purpose and
culture pillars.
–
Review of Sustainability strategy,
climate related disclosures and
key performance metrics.
–
Review of initiatives to support employee
wellbeing including further improvement
of the employee assistance programme.
–
Review of initiatives to strengthen
and embed Inclusion, Diversity and
Equity throughout the Group, including
receiving reports on engagement
with employee interest groups at
Board listening sessions.
–
Review of initiatives to increase
manager competencies and
capabilities at the Compliance &
Culture Committee meetings.
Strategy and
transformation
84
Letter from the Chair
18
Financial Review
–
Setting priorities for capital
investment across the Group.
–
Reviewing and monitoring progress
against the 12-point plan and related
metrics in support of the Group strategy.
–
Approving annual budget, financial plan,
three-year strategic plan.
–
Approving major borrowings and
finance and banking arrangements.
–
Issuance of debut €500 million EUR
Corporate Bond.
–
Repayment of €757 million of EUR bank
term loans and $125 million of private
placement debt.
–
Approving changes to the composition
of the Board, its Committees and
the Executive Committee.
–
Approving Group policies relating
to sustainability, health and safety,
Code of Conduct and Code of
Share Dealing and other matters.
Division of responsibilities
continued
Board activities
The following pages provide an overview
of the key topics reviewed, monitored,
considered and debated by the Board
in the year to 31 December 2022.
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Performance
108
Compliance & Culture Committee report
101
Audit Committee report
–
Reviewing performance against
strategy, budgets and financial
and business plans.
–
Approving half-year, full-year
and trading updates.
–
Strategic deep dives on global and
regional franchise plans in Orthopaedics,
Sports Medicine & ENT and Advanced
Wound Management aligned to 12-point
plan initiatives and broader long-term
strategic initiatives.
–
Monitoring Group operations updates
and response to external and internal
challenges in line with 12-point plan
key metrics and deliverables.
–
Determining the dividend policy
and dividend recommendations.
–
Overseeing succession planning at
Board and senior management level.
–
Approving the appointment and
removal of the External Auditor
on the recommendation of the
Audit Committee.
–
Approving significant changes to
accounting policies or practices.
–
Approving the use of the Company’s
shares for the Company’s Share Plans.
–
Review of performance and return
on investment of acquisitions and
integration planning.
–
Review of global innovation pipeline
and product portfolio with a focus on
differentiation and delivery for our
customers, patients and stakeholders.
–
Continuing review and monitoring
of impact of external factors such
as inflation, supply constraints and
localised lockdowns on ability to
deliver on strategic objectives.
Stakeholders
80
Our stakeholders
112
Engaging with Stakeholders
–
Overseeing and maintaining relationships
with stakeholders including employees,
customers, suppliers, investors,
regulators and governments.
Further details of Board interactions
with stakeholders can be found on
pages 111–115.
–
Review of gender pay gap data
and reporting.
–
Reviewing investor perspectives with
external analysts in September and
December 2022.
–
Reviewing Gallup results.
–
Reviewing Management Talent
Pipeline and Succession Planning.
–
Engaging with shareholders throughout
the year on key issues such as strategy
and operational performance,
governance and succession planning
with a focus on chair succession and
ESG and related governance matters.
–
Reviewing the fees of the
Non-Executive Directors.
Risk
69
Risk report
105
Risk management programme
–
Overseeing the Group’s risk management
programme and related processes.
See pages 69–77 for further details.
–
Evaluation of risk with regard to
initiatives within the 12-point plan.
–
Review of the risk register and annual
review of the Board appetite for risk.
–
Review and approval of Principal Risks
of the Group.
–
Ongoing consideration of key risks within
all Board discussions including impact
of inflation, ESG considerations and
reporting requirements, investment
in IT and workforce engagement.
–
Discussion at Board and Committee
meetings on key topics including
the potential impact of cybersecurity
attacks and breaches in the current
geopolitical context, regulatory changes,
supply chain disruption, global talent
outlook and post pandemic constraints
and trends.
Our Investor presentations
are available to download
on our website
www.smith-nephew.com
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Composition, succession and evaluation
The Board effectiveness review in 2022
was conducted internally by the Senior
Independent Director Marc Owen
supported by the Company Secretary.
Mr Owen reviewed the results of the
internal Board Evaluation conducted
by Robin Freestone in 2020 and the
external review conducted by Dr Tracy
Long in 2021. Mr Owen spoke with
Non-Executive Directors, the Chair
and CEO in one-to-one discussions in
November 2022 prior to summarising
his findings which he presented to the
Board for discussion in December 2022.
Mr Owen noted that 2022 has seen
a period of significant change for the
Company. Against a backdrop of external
and internal operational challenges and
share price performance, the Company
has been through a CEO transition, SID
transition and will undertake an upcoming
Chair transition. He noted that this
creates a Board environment where there
is a shared urgency to see measurable
improvements in performance whilst
recognising that leadership needs time
to effect lasting positive change.
The evaluation demonstrated the view
that overall the Board operates effectively
and that post pandemic the opportunity to
meet in person and spend time informally
with other Board members has been widely
welcomed. It was felt that the Company,
under new leadership, has a renewed
energy and all Board members are anxious
to support the actions being taken to
improve performance. Feedback on Board
mechanics was positive, with the number
and duration of meetings being highly
rated, the induction process positively
regarded, and Board succession planning
working well.
During the 2021 review, enhanced
collaboration between Executive and
Non-Executive Directors was highlighted
as being an area for further development.
As part of the 2022 Evaluation discussion,
the Board continued to challenge themselves
in terms of discussing the best way to
constructively support and build trust
with management and how best to
focus on longer-term strategies to create
shareholder value for the Company.
The areas for attention identified in the 2021 review externally facilitated by
Dr Tracy Long, have been addressed as follows:
The reviews in 2023 and 2025 will be facilitated internally and led by the Senior
Independent Director, supported by the Company Secretary. The 2024 review will
be facilitated externally.
Ensure that Executive succession
planning is discussed more
frequently by the Board.
The Board skills and composition matrix
was discussed at Nomination & Governance
Committee in July 2022 and circulated to
the full Board for review. The matrix outlines
tenure, skills and succession planning relating
to a number of core metrics, which include
the key areas on which the Board is required
to report.
Focus on longer-term strategic
value and management support.
Emphasis at each Board meeting on
constructive support and building trust
and focusing on longer-term strategy.
Actions identified
Focus on enhancing communication
between the Board and management
team between meetings, to develop
a shared purpose.
Action taken
Informal Monthly Board Meetings were
established as regular touchpoints for
the Board to communicate and hear
from the Chief Executive Officer and
the Chief Financial Officer directly.
Actions identified
Management talent development –
assess long-term approach to internal
talent development and the Board’s
role in supporting this process.
Actions Proposed/Taken
In 2022, the Board undertook an external
evaluation and review of the CEO profile
and internal talent succession in order to
understand the strategic and operational
needs and requirements of the Company
and the desire to build an internal
talent pipeline.
Commence the search for a new
Chair to replace Roberto Quarta,
who will complete nine years’
service at the end of 2022.
The Senior Independent Director led an
extensive search, Rupert Soames OBE to be
appointed as Non-Executive Director and
Chair Designate with effect from 26 April
2023, subject to shareholder approval.
External perspectives to inform Board
discussions, with more information
on industry trends and competitors.
As part of the 2023 Yearly Planner,
sessions and speakers with external
perspectives are planned covering the
medical devices regulatory environment,
ESG and customer views on the Company.
Board effectiveness review
As a result of the internal evaluation, the Board has agreed the following actions
for the next 12 months:
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Board development
Board development programme
Our Board development programme is
directed to the specific needs and interests
of our Directors. We focus the development
sessions on facilitating a greater awareness
and understanding of our business and
stakeholders rather than formal training
in what it is to be a Director. In 2022,
we were able to resume in person visits
and sessions within our Smith+Nephew
facilities. Jo Hallas and Rick Medlock visited
the Hull site in May which focused on our
AWM business. Board members heard
from the AWM global marketing team,
the new Operations management team
at the site and heard more about the
Melton site project and other key initiatives.
Board members were also able to tour
the manufacturing facility and engage
in discussions with the R&D team and
other key employees during the visit.
In September, prior to the full Board
meeting, various Smith+Nephew sites in
Memphis hosted the Board including the
Brooks Road manufacturing facility and
Appling Road. The Board also attended
the Power of One exhibition where Board
members were shown current products
and our innovation pipeline, enhancing
understanding of the differentiated
offering through procedural selling within
Orthopaedics and Sports Medicine.
We have also continued to provide our
Directors with both virtual and physical
opportunities to understand the business
better as follows:
–
At our Board meeting in September, our
Chief R&D Officer, Vasant Padmanabhan
and his R&D team presented on the
global product innovation strategy
across each of our franchises and
our differentiated product pipeline
demonstrating the future of innovation.
–
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 110
and 112.
The Chair regularly reviews the development
needs of individual Directors and the Board
as a whole.
Induction for new Directors
During 2022, we implemented induction
programmes for our CEO Deepak Nath
who joined on 1 April 2022 and for
Jo Hallas who had recently joined as
a Non-Executive Director.
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
including brokers, external counsel,
remuneration consultants and auditors,
to explain the legal and regulatory
background to their role on our Board
and how these matters are approached
at Smith+Nephew.
–
Strategic presentations and site visits
which were tailored to Executive and
Non-Executive needs respectively in
order to provide a strong foundation to
learn about the organisation, its history,
current and future opportunities and
challenges and to give Board members
an opportunity to ask questions and
interact with our wider workforce.
Timeline 2022
May
–
Site visit to Hull for Jo Hallas
and Rick Medlock to meet with
AWM Marketing Franchise leads,
new Operations leadership,
the Melton site project team
and groups of key employees.
September
–
Board listening session with
teams at manufacturing sites
in Memphis, US.
–
Site visit to manufacturing
facilities in Memphis and the
Power of One tour which provided
an exhibition of Robotics and Real
Intelligence strategy, innovation
pipeline and differentiated sales
and marketing strategies.
December
–
Interactive session with external
expert on macro factors likely to
impact global markets and within
the healthcare industry in 2023
and beyond.
–
Strategy review session with
all key franchise leads and senior
management to deep dive into key
metrics for the 12-point plan and
longer term plans for each global
and regional franchise.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Composition, succession and evaluation
continued
Roberto Quarta
Chair of the Nomination & Governance Committee
Nomination & Governance
Committee report
www.smith-nephew.com/investor-
centre/about-us/governance/corporate-
documents-and-policies/terms-of-
reference/
The Terms of Reference for the Nomination & Governance
Committee describe the role and responsibilities of the
Nomination & Governance Committee more fully and
can be found on our website.
1
Due to unforeseen travel disruption, Roberto Quarta was prevented from attending the July 2022 Committee meeting.
2
Robin Freestone stepped down as a member of the Committee on 30 September 2022.
3
Angie Risley joined the Committee with effect from 1 September 2022.
Membership
Member
from
Meetings
attended
Roberto Quarta (Chair)
1
April 2014
5/6
Erik Engstrom
April 2019
6/6
Robin Freestone
2
April 2019
5/5
Marc Owen
March 2020
6/6
Angie Risley
3
September 2022
2/2
In 2022, the Committee held six meetings
together with a number of informal
updates for Committee and Board
members, which reflects the increased
focus on Board succession planning
including the Chair succession and search
process. In addition to members of the
Committee, the Company Secretary and
Chief Executive Officer also attended
these meetings as appropriate.
The following matters and actions were
undertaken by the Committee in 2022:
–
Recommended the appointment to
the Board of the Chief Executive Officer,
Deepak Nath, effective 1 April 2022.
The Board has been impressed and
encouraged with the speed at which
Deepak has engaged with and developed
a deeper understanding of the business
and the urgency with which the 12-point
plan has been developed, implemented
and communicated both internally and
externally aligned with our Strategy
for Growth.
–
Engaged with shareholders in relation
to the chair search process.
–
Continued to review the composition
of the Board and its committees to
ensure alignment with the Company’s
strategic objectives and culture pillars
and with the developing external
regulatory environment.
Our focus for 2023 will include:
–
Search for Non-Executive Director
to replace Erik Engstrom following
completion of his 9 year tenure,
in addition to the proposed
replacement for Robin Freestone.
–
Continuous review of Board
composition to ensure alignment
with the Company’s strategic
objectives and culture pillars.
–
Continued oversight of succession
planning below Board level.
Responsibilities of the Nomination
& Governance Committee
Board composition
–
Reviewing the size and composition
of the Board.
–
Overseeing Board succession plans.
–
Recommending the appointment
of Directors.
–
Monitoring Board diversity.
Corporate governance
–
Overseeing governance aspects
of the Board and its Committees.
–
Overseeing the review into the
effectiveness of the Board.
–
Considering and updating the
Schedule of Matters Reserved
to the Board and the Terms of
Reference of the Board Committees.
–
Monitoring external corporate
governance activities and keeping
the Board updated.
–
Overseeing the Board Development
Programme and the induction
process for new Directors.
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–
Reviewed and approved the updated
Board Skills Composition Matrix (please
see table on page 100) which sets out
the tenure, skills, competencies and
diversity of the Board to enable effective
succession planning for Non-Executive
and Executive Directors.
–
Following Robin Freestone’s decision
to step down as Senior Independent
Director and member of the
Nomination & Governance and Audit
Committees, it was recommended
that Marc Owen be appointed as
Senior Independent Director in
light of his skills, competencies and
knowledge of the Company, the
industry in which it operates and his
commitment to best practice in terms
of corporate governance.
–
Strengthened the Nomination &
Governance Committee with the
appointment of Angie Risley and the
Audit Committee with the appointment
of Jo Hallas in September 2022 to add
diversity of perspective.
–
Circulated and discussed a refreshed
CEO profile with a view to succession
planning in respect of both internal and
external candidates, taking into account
the challenges and opportunities facing
the Company, the skills and expertise
likely to be required by the Board in the
future and the benefits of diversity in
its widest sense.
–
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.
–
Discussed succession plans with
management for executives below Board
level. These plans included consideration
of diversity in the executive pipeline.
Page 89 gives details of the members of
the Executive Committee, 40% of whom
are female, one of whom is of African
heritage and one of Asian ethnicity.
The Committee will continue to monitor
diversity in the executive pipeline.
–
Conducted a mid year review of conflicts
of interest in order to review and ensure
the continued independence of the
Non-Executive Directors.
–
Reviewed the governance of the Board
and its Committees, approving the Terms
of Reference of the Board Committees
and the Matters Reserved to the Board.
–
Led by the Senior Independent Director,
ensured oversight of the internal Board
Evaluation process and recommended
follow-up actions to the Board following
the Evaluation review in December 2022.
Chair and Non-Executive
Director search
Following Robin Freestone’s departure,
Marc Owen drove the continued search
for our new Chair. Russell Reynolds
1
was
appointed as search agent to progress
the Chair search at pace, ensuring
that we were presented with a diverse
set of candidates for consideration.
The Committee recommended and the
Board aligned on three core characteristics
required for the new Chair: (i) a proven
track record of demonstrating creation
and delivery of shareholder value; (ii) a
strong background in governance, ideally
within a UK FTSE environment; and (iii) the
ability to support and develop the Chief
Executive Officer, either through previous
CEO experience or through development
of a CEO as part of a Board role.
The Committee also considered the
criteria of healthcare industry experience
and corporate finance experience but the
search was focused on finding a Chair who
demonstrates performance ethic and track
record, UK governance experience and CEO
development. In advance of finalising the
shortlist of candidates for the new Chair,
Marc Owen engaged with shareholders
on the proposed criteria which resonated
well with the consultation group based
on feedback received.
Aſter an extensive search, it was announced
on 17 February 2023 that subject to
shareholder approval, Rupert Soames
will be appointed to the Board as a Non-
Executive Director and Chair-designate
at our AGM and will join the Nomination
& Governance and Remuneration
Committees upon appointment. In order
to ensure a smooth transition to Rupert,
Roberto Quarta has agreed to remain as
Chair until 15 September 2023 and will put
himself forward for re-election at the AGM
on this basis.
Diversity
The Committee believes that a
balanced, diverse Board is stronger
and better equipped to consider the
risks, opportunities and challenges
facing the Company, understanding the
views of all stakeholders, including our
shareholders, in order to reach decisions
which take into account a wider range of
perspectives. The aim is for the Board to
have a wide range of backgrounds, skills
and experiences and value a diversity
of outlook, approach and style in Board
members. The Committee believes the
Board’s composition gives us the necessary
balance of diversity, skills, experience,
independence and knowledge to ensure
continued efficiency in running the business
and delivery of sustainable growth.
In order to ensure that the Board
remains diverse and that members
have the skillsets to support and deliver
shareholder value as the business evolved,
the Committee analyses the skills and
experiences required on an ongoing basis
against the skills and experiences of
the Board using the matrix on page 100.
The Committee review this matrix
regularly to ensure that it is refreshed to
meet the changing needs and strategic and
operational imperatives 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
competence on governance and 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.
To perform effectively, the Board needs
to be both supportive and challenging.
When selecting new directors for the Board,
the Committee looks for members with
suitable professional backgrounds, who
provide new perspectives. The Committee
will continue to appoint Directors on merit,
valuing the unique contribution that they
will bring to the Board, regardless of gender,
ethnicity or any other diversity measure.
The diversity statement is located on our
website: www.smith-nephew.com/en/
about-us/corporate-governance/diversity-
statements.
1
Russell Reynolds was also selected by the Company in
2022 to act as agent for two other senior management
search processes.
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ACCOUNTS
OTHER INFORMATION
Composition, succession and evaluation
continued
Nomination & Governance Committee report
continued
Skills and experience matrix
CEO
Financial
International
Healthcare/
Medical Devices
Emerging
Markets
UK
Governance Remuneration
Roberto Quarta
Deepak Nath
Anne-Françoise
Nesmes
Erik Engstrom
Jo Hallas
John Ma
Katarzyna
Mazur-Hofsaess
Rick Medlock
Marc Owen
Angie Risley
Bob White
Board and Leadership
Succession Planning
In order to support the Company
to meet its strategic objectives, the
Committee has aimed to strengthen
the capabilities of the Board in terms
of skills, composition and diversity and
have appointed Board members with
industry specific knowledge and broad
geographical experience. The Committee
has also sought to enhance the induction
programmes for new Board members who
had joined during the pandemic through
site visits, listening sessions and focused
Board sessions relating to strategic
and macroeconomic matters.
Succession planning is a key focus for
the Board from both a leadership and
governance perspective. The Board
composition and skills matrix feeds into a
formal rolling succession plan for Directors.
The Committee starts board recruitment
well ahead of retirements, understanding
the competitiveness of the market.
Priorities for recruiting and succession
planning include the ability to respond
to evolving strategic imperatives for the
company, adding and enhancing Board
skills including in the areas of healthcare
sector perspectives, operational
experience and ESG and enhancing
diversity in the boardroom.
The Committee has also worked with
an independent third party to review
the profile of the Chief Executive Officer
role and has developed a profile focused
on the skills required to lead the business
moving into the future. The Committee
also focused on development for leaders
to ensure that the potential internal
pipeline of candidates is strengthened.
Russell Reynolds, a third party search
agent, has been appointed to find a
candidate with the requisite financial skills
and experience to provide support to the
Board and particularly to Rick Medlock
on the Audit Committee following Robin
Freestone’s departure. The Board will
provide an update on this search process
once a recommendation has been
considered and approved.
During 2022, the Board has benefitted
from the diversity of experience,
background and global and regional
expertise of its members. As a new Chair
takes the reins, the Board will continue to
evaluate the requirements of a Company
which is dual listed on the London and
New York Stock Exchanges with its
focus on key priority markets.
The balance on the Board of strong
industry knowledge and experience with
a solid appreciation of the UK environment
will enable the Board to continue to
support and challenge effectively in the
years to come.
Board tenure
Board nationality
Board ethnicity
63.7% male
36.3% female
Board gender diversity
Under 12 months
2
1–3 years
5
4–8 years
3
>9 years
1
American
3
British
3
German/Polish
1
Swedish
1
British/American
1
British/French
1
American/Italian
1
Ethnic Minority
American
2
White American
1
White European
6
White American/
European
2
FTSE 350 companies to have
at least one woman in the
Chair or Senior Independent
director role on the Board,
and/or one woman in the
Chief Executive or Finance
Director role in the company
by the end of 2025.
Year achieved
2020
Anne-Françoise Nesmes
was appointed
Chief Financial Officer
in July 2020.
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Audit, Risk and Control
Rick Medlock
Chair of the Audit Committee
Audit Committee report
Membership*
Member
from
Meetings
attended
Rick Medlock (Chair)
1
April 2020
8/8
Erik Engstrom
January 2015
8/8
Robin Freestone
2
September 2015
6/6
Marc Owen
October 2017
8/8
Jo Hallas
3
September 2022
3/3
1
Designated financial expert under the SEC Regulations
or recent and relevant financial experience under the
UK Corporate Governance Code.
2
Robin Freestone stepped down as member of the
Committee on 30 September 2022.
3
Jo Hallas joined the Audit Committee on
1 September 2022.
*
All members of the Committee are deemed to be
independent Directors.
Our focus for 2023 will include:
–
Monitoring ESG and TCFD reporting.
–
Continued oversight of risk
management process.
–
Monitoring of Cybersecurity controls.
–
Supporting the transition of the
external auditors.
–
Ensuring that we review and consider
all UK governance changes following
the establishment of Audit Reporting
and Governance Authority (ARGA).
Responsibilities of
the Audit Committee
The Committee’s key roles are to:
–
Ensure the integrity of the Company’s
financial reporting to shareholders
and any announcements relating to
the Group’s financial performance.
–
Ensure financial statements
comply with UK and US
statutory requirements.
–
Review the content of the Annual
Report and Accounts and advise the
Board on whether, taken as a whole,
it is fair, balanced and understandable
and provides the information necessary
for shareholders to assess the
Company’s performance, business
model and strategy.
–
Monitor the effectiveness of internal
controls and compliance with the
2018 UK Corporate Governance
Code and the SOX Act.
–
Ensure the effectiveness of the
internal audit function, agree audit
plans and consider outcomes of
internal audits.
–
Review the operation of the Group’s
risk management framework.
–
On behalf of the Board, carry out a
robust assessment of the principal
and emerging risks facing the Group.
–
Ensure the effectiveness of the
external audit function, agree
the scope of the audits (including
materiality thresholds and areas
of risk for focus) and the auditor’s
fees and terms of engagement.
–
Consider any reported frauds
and any concerns raised by the
Company’s whistleblowing process.
–
Oversee other matters, including
cybersecurity, IT governance,
ESG, tax and treasury.
www.smith-nephew.com
The Terms of Reference of the Audit Committee describe
the role and responsibilities more fully and can be found
on our website.
The Committee met eight times during
the year, with meetings timed to coincide
with the financial and reporting cycles of
the Company. In addition the Committee
met with both the Company’s external
auditor and Group Head of Internal Audit
without management present.
During 2022, outside of the routine matters
undertaken by the Committee (as set out
in its Terms of Reference), the Committee
has focused on the following matters:
–
Monitored progress on and enhancement
of our ESG reporting plan including TCFD.
–
Continued oversight of the governance
and maturity plan for our IT framework
and controls.
–
Implemented the recommendations
from the external review of the Internal
Audit function that was carried out
in 2021.
–
Carried out a deep dive on information
security and cyber resilience.
The Committee also accelerated the audit
tender process, which resulted in Deloitte
being recommended to the Board as the
Company’s new auditors, effective from
1 January 2024. Information on the tender
process can be found on page 104 of
my report.
The Committee has satisfied itself that
the Smith & Nephew plc 2022 annual
report and accounts is fair, balanced and
understandable. The Committee therefore
supports the Board in making its formal
statement on page 147.
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ACCOUNTS
OTHER INFORMATION
Significant matters related to the financial statements
We considered the following key areas of judgement in relation to the 2022 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 typically 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 and phase-out of old products.
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 21% at 31 December 2022 (2021: 21%).
We challenged the basis of the provisions and concluded that
the proposed levels were appropriate and have been
consistently estimated.
Challenge by KPMG
During 2022 KPMG challenged management’s approach to
inventory provisioning considering recovery of demand in 2022.
Liability provisioning
The recognition of provisions for legal disputes is subject to a significant
degree of estimation. Provision is made for loss contingencies when it is
considered probable that an adverse outcome will occur and the amount
of the loss can be reasonably estimated. In making its estimates,
management takes into account the advice of internal and external
legal counsel and uses third-party actuarial modelling where appropriate.
Provisions are reviewed regularly and amounts updated where necessary
to reflect developments in the disputes. The ultimate liability may
differ from the amount provided depending on the outcome of court
proceedings and settlement negotiations or if investigations bring
to light new facts.
Our action
As members of the Board, we receive regular updates from the Group
General Counsel & Company Secretary. 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 $239 million as of 31 December 2022. 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 decreased by
$56 million during the year, primarily due to utilisation of the metal-on-
metal provision. We have determined that the proposed levels of
provisioning at year end of $264 million included within ‘provisions’
in Note 17.1 in 2022 (2021: $320 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 goodwill and acquisition intangible
assets, a number of significant assumptions have to be made when
preparing cash flow projections. These include the future rate of market
growth, discount rates, the market demand for the products acquired,
the future profitability of acquired businesses or products, levels of
reimbursement and success in obtaining regulatory approvals. If actual
results should differ or changes in expectations arise, impairment
charges may be required, which would adversely impact
operating results.
Our action
We reviewed management’s reports on the key assumptions with
respect to goodwill and acquisition intangible assets – particularly
the forecast future cash flows and discount rates used to make
these calculations. We had a particular focus on goodwill impairment
testing for the Orthopaedics CGU as the level of headroom has decreased
and is sensitive to a reasonably possible change in assumptions.
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.
Audit, Risk and Control
continued
Audit Committee report
continued
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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 2022 were:
Going concern
The impact of a global economic recession
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 30 March
2024 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.
We noted The Financial Reporting
Council (FRC) included the Group’s
financial statements for the year ended
31 December 2021 in their selection
for the thematic review of companies’
disclosures relating to deferred tax assets.
The FRC completed a limited scope
review of the Group’s 2021 Annual Report
and, based on their review, the FRC has
not raised any questions to date with
the Group.
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.
Climate change
The impact of climate change has
been considered as part of our review
of the impairment testing of goodwill
and acquired intangible assets, and the
going concern assessment. We have
also considered the disclosures on
climate change and considered
them appropriate.
Since the year end
Since the year end, we have also reviewed
the results for the full year 2022, Annual
Report and Accounts for 2022, 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 14–15,
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 is 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. Paul Nichols was appointed
as our senior lead audit partner on
1 January 2022.
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 2022 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
2022 effectively.
The Audit Committee continues
to review the effectiveness of the
external auditor, KPMG.
Appointment of external auditor
at Annual General Meeting
Resolutions will be put to the Annual
General Meeting to be held on 26 April
2023 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.
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OTHER INFORMATION
Audit Tender
KPMG has been our auditors since 2015
and during the year we recommended to
the Board that the audit tender process
be accelerated with a view to appointing
new auditors from 1 January 2024. As well
as KPMG, two other firms were invited to
submit tenders. The audit tender process
was led by me as Chair of the Audit
Committee and a robust process was
carried out.
We had a common set of criteria for
evaluating the proposals including:
–
Audit approach and quality.
–
The lead partner and their audit team.
–
Sector experience.
–
Approach to resolving issues or matters
of judgement.
–
Transition plans.
–
Use of technology.
The proposals presented by the firms
were subject to detailed evaluation
and discussion which enabled us to
recommend to the Board the appointment
of Deloitte as the preferred new auditor.
The Board endorsed this recommendation.
Deloitte will begin transitioning in 2023
and become auditors from 1 January 2024,
subject to shareholders’ approval at the
Annual General Meeting in 2024.
Disclosure of information
to the auditor
In accordance with Section 418 of
the Companies Act 2006, the Directors
serving at the time of approving the
Directors’ Report confirm that, to the
best of their knowledge and belief, there
is no relevant audit information of which
the auditor, KPMG, is unaware and the
Directors also confirm that they have
taken reasonable steps to be aware of any
relevant audit information and, accordingly,
to establish that the auditor is aware
of such information.
Non-audit fees paid to the auditor
Non-audit fees are subject to approval
in-line with the Auditor Independence
Policy which is reviewed annually and
forms part of the Terms of Reference
of the Audit Committee.
The Audit Committee recognises the
importance of the independence of the
external auditor and ensures that the
auditor’s independence should not be
breached. The Audit Committee ensures
that the auditor does not receive a fee
from the Company or its subsidiaries
that would be deemed large enough to
impact its independence or be deemed a
contingent fee. The total fees for permitted
non-audit services shall be no more than
70% of the average of the fees paid in
the last three consecutive financial years
for the statutory audits of the Company
and its subsidiaries.
Any pre-approved aggregate, individual
amounts up to $25,000 may be authorised
by the Group Treasurer and SVP 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.
The following reflects the non-audit
fees incurred with KPMG in 2022,
which were approved by the Chair
of the Audit Committee.
2022
$ million
2021
$ million
Audit-related services
0.4
0.1
Audit related fees in 2022 primarily consist
of routine services provided in respect
of the EUR bond issue and was deemed
by the Committee not to infringe auditor
objectivity or independence. The ratio of
non-audit fees to audit fees for the year
ended 31 December 2022 is 0.04. The ratio
of non-audit fees to audit fees for the year
ended 31 December 2021 was 0.01.
Full details are shown in Note 3.2 to 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:
2022
$ million
2021
$ million
Audit fees
9.4
7.5
Audit-related fees
0.4
0.1
Total
9.8
7.6
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, commercial, 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
35 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 end user computer
security to IT controls effectiveness; and
an ERP pre-implementation review in
Malaysia. Group-level reviews included
enterprise risk management effectiveness,
data privacy controls, ESG governance,
capital expenditure controls, shared
services operations and fraud risk
management effectiveness. Key issues
noted during reviews included the need
for all documentation relating to controls
operation to be stored in the central
repository. Management has taken swiſt
action to implement Internal Audit’s
recommendations. The team was able to
travel to a number of locations, following
the relaxing of Covid-related restrictions
and there was continued use of data
extraction and analysis techniques
during all work.
Audit, Risk and Control
continued
Audit Committee report
continued
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Smith+Nephew
Annual Report 2022
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. In addition,
Grant Thornton carried out an evaluation
of the function and concluded that it
was operating effectively. The Audit
Committee, which re-approved the
function’s charter in December 2022,
has satisfied itself that adequate,
objective internal audit standards and
procedures exist within the Group
and that the Internal Audit function
is effective.
Risk management programme
Whilst the Board is responsible for
ensuring oversight of strategic risks
relating to the Company, determining
an appropriate level of risk appetite,
and monitoring risks through a range of
Board and Board Committee processes,
the Audit Committee is responsible for
ensuring oversight of the processes by
which operational risks, relating to the
Company and its operations are managed
and for reviewing financial risks and the
operating effectiveness of the Group’s
Risk Management process.
During the year, we reviewed our Risk
Management processes and progress was
discussed at our meetings in February,
April, July, and December. We approved
the Risk Management programme for 2022
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
followed the risk management policy and
manual communicated company-wide
in 2022. 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
2022 and up to the date of approval of
this Annual Report was effective. Work will
continue in 2023 and beyond to continue
to enhance the process.
Risk Report
69
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 a global economic recession, with the
key judgement applied being the speed
and sustainability of the return to a normal
volume of elective procedures in key
markets. This assessment included stress
and sensitivity analyses of these risks
to enable us to evaluate the impact of a
severe but plausible combination of risks.
We then considered whether additional
financing would be required in such
eventualities. Based on this analysis, we
recommended to the Board that it could
approve and make the Viability Statement
on pages 78–79.
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 on
pages 18–21 and the Principal Risks
on pages 71–77.
The financial position of the Group,
its cash flows, liquidity position and
borrowing facilities are described on
pages 18–21. 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 continued uncertainty as to the future
impact on the financial performance
and cash flows of the Group as a result
of a global economic recession 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.
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ACCOUNTS
OTHER INFORMATION
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, by either: 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 2022 emphasising the
timing of control operation and splitting
controls between Key and Non-Key
controls within the Risk and Control
Matrix. The business is required to self-
assess their level of compliance with the
MAPs on a monthly basis and remediate
any gaps.
–
MAPs compliance is validated through
spot-checks conducted by the Financial
Controls & Compliance Group and
Internal Audit, as well as during wider
Internal Audit reviews performed
throughout the year. The technology
solution to facilitate the real time
monitoring of the operation and testing
of controls is now fully operational
and has driven improvements in the
control environment.
–
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.
–
The Audit Committee reviews regular
reports from the Financial Controls
& Compliance Group with regard to
compliance with the SOX (Sarbanes
Oxley) Act including the scope and
results of management’s testing and
progress regarding any remediation, as
well as the aggregated results of MAPs
self-assessments using dashboards
which are updated on a daily basis.
–
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
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.
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 effectiveness
of the Company’s internal controls over
financial reporting. The Company’s
assessment included documenting,
evaluating and testing the design and
operating effectiveness of its internal
controls over financial reporting. Based
on this evaluation, we have satisfied
ourselves that we are meeting the
required standards and that our internal
control over financial reporting is effective
both for the year ended 31 December
2022 and up to the date of approval
of this Annual Report. No concerns
were raised with us in 2022 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.
Audit, Risk and Control
continued
Audit Committee report
continued
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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 2022 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 2022. Based upon the
evaluation, the Chief Executive Officer
and Chief Financial Officer concluded
on 21 February 2023 that the disclosure
controls and procedures were effective
as at 31 December 2022.
–
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 2022 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 Organizations of the
Treadway Commission in Internal
Control-Integrated Framework
(2013). Based on their assessment,
management concluded and reported
that, as at 31 December 2022, 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 2022 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 2022.
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 2022 or up until
21 February 2023. A copy of the Code
of Ethics for Senior Financial Officers
can be found on our website.
In addition, every individual in the finance
function certifies to the Chief Financial
Officer that they have complied with
the Finance Code of Conduct.
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Audit, Risk and Control
continued
Marc Owen
Chair of the Compliance & Culture Committee
Compliance & Culture
Committee report
In 2022, the Committee held four
meetings. Each meeting was attended by
all members of the Committee. The Group
General Counsel and Company Secretary,
the Chief Compliance Officer, the Chief
Quality & Regulatory Affairs Officer,
Chief HR Officer and President of Global
Operations (responsible for reporting
on sustainability) also attended all
or part of the meetings by invitation.
Membership
Member
from
Meetings
attended
Marc Owen (Chair)
March 2018
4/4
John Ma
December 2021
4/4
Katarzyna
Mazur-Hofsaess
April 2021
4/4
Angie Risley
April 2020
4/4
Bob White
July 2020
4/4
Our focus for 2023 will include:
–
Continued oversight of the Company’s
sustainability programme, including
targets and monitoring its roll-out
to the Group.
–
Assist with determining appropriate
ESG metrics for the Performance
Share Programme.
–
Monitoring the progress of the
Company’s commitment to its net
zero roadmap by 2045.
–
Ensure stakeholder considerations
continue to be embedded into all
Board decisions.
–
Continue to monitor regulatory
developments which may impact the
Strategy for Growth and 12-point plan.
–
Further Board/employee listening
sessions to enable the Board to further
monitor and assess the corporate
culture globally taking into account
post pandemic considerations and
impact of localised lockdowns.
–
Monitor the actions taken by
management following 2022’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 resulting actions required by
management. Recent survey results
are discussed on page 48–49.
–
Developing the programme for
the Committee and Board to
meet and receive direct feedback
from our other stakeholders with
a focus on ESG considerations
which are of interest to specific
stakeholder groups.
Responsibilities of the Compliance & Culture Committee
Ethics and 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.
–
Discussion of allegations of significant
potential compliance issues.
–
Receiving reports from the Group
General Counsel and Company
Secretary and Chief Compliance Officer.
–
Reviewing data privacy elements of
the Global compliance programme
and related regulatory developments
which impact our business.
Sustainability
–
Overseeing the sustainability strategy
and reviewing targets and metrics,
particularly with regard to the Scope
3 roadmap and new and enhanced
reporting regulations on ESG matters.
–
Receiving and assessing regular
functional reports from the ESG
Operating Committee and Global
President Operations.
Culture
–
Oversight of our relationship
with stakeholders, including the
employee voice and sustainability.
–
Receiving and assessing regular reports
and presentations from the Chief
Human Resources Officer relating to
key employee issues such as purpose
and culture, talent, engagement and
Inclusion, Diversity and Equity (“IDE”).
Quality and regulatory Affairs (QARA)
–
Overseeing the processes by which
regulatory and quality risks relating
to the Company and its operations
are identified and managed.
–
Receiving and assessing regular
functional reports and presentations
from the Chief Quality & Regulatory
Affairs Officer.
www.smith-nephew.com/investor-centre/about-us/governance corporate-documents-and-policies/terms-of-reference/
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.
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Ethics and compliance
As stated in the Code of Conduct, the
sustainability of our business depends
on doing business the right way and
ensuring the third parties that we
work with share our perspective.
This year the Committee maintained
oversight of our ethics and compliance
programme activities within our business
and continued to review external factors
which could impact the business. The
Chief Compliance Officer provided regular
reports demonstrating the effectiveness
of the Global Compliance programme as
well as continuous improvement efforts
to ensure our ethics and compliance
programme activities are evolving in
alignment with our strategy for growth
and 12-point plan objectives.
The Committee is provided with updates
on allegations of potentially significant
issues which are raised through the
Company’s hotline or to our Compliance
team and the Company’s response to such
matters, and also receive an annual review
of investigations and enforcement trends
in the industry.
The Committee also received an update on
the progress of a continuous improvement
plan for the Compliance Validation
Assignment (CVA) programme and noted
significant improvements including reduced
report times, enhancements to the risk
assessment process for third parties, and
increased collaboration and best-practice
sharing with other assurance providers.
The Committee received a report from
a self-assessment of the Compliance
programme, which we understand will
be conducted on an annual basis.
These reports demonstrated that the
organisation has established, mature
processes and controls over ethics
reporting and investigations.
The Committee received regular updates
on findings from compliance verification
activities and the adaptation of processes
to accommodate restrictions and altered
risk profiles post pandemic.
During 2022, the Committee also received
an update on our privacy programme,
with a specific focus on evolution of the
programme in light of changing regulatory
environments in many of the markets
in which we operate.
Sustainability
In 2022, sustainability and ESG matters
more generally have continued to
receive focus and scrutiny from the
Board and its Committees with strong
focus on the Company’s sustainability
strategy and agenda. The Committee
reviewed the Company’s sustainability
programme to ensure alignment with
stakeholder expectations and monitored
management’s actions taken against
our targets.
Throughout the year, the Committee
received updates from the Global President
Operations on our performance against
Scope 1 and 2 emissions and received an
update on the proposed development of
the Scope 3 roadmap demonstrating our
progress towards our net zero commitment
by 2045. We also received updates on our
network optimisation projects and the
ways in which ESG considerations have
been considered within our facilities in
Malaysia, Costa Rica and the proposed
new Advanced Wound Management
facility at Melton near Hull. In February
2022 we reviewed and approved the
2021 Sustainability Report and in April
we reviewed and approved the Conflict
Minerals declaration and Modern
Slavery statements, in each case prior
to Board approval.
The Company has engaged with ISS and
other institutional investment teams to
understand how the Company benchmarks
against others in the industry and to
seek further ways to demonstrate our
performance to investors.
Customers are increasingly requiring
Smith+Nephew to align with and
demonstrate shared sustainability goals.
The Committee reviewed the reporting
requirements around climate change,
reporting against the TCFD and SASB
frameworks, and approved our revised
carbon reduction target. Since the year
end, the Committee has approved the
2022 Sustainability Report.
Sustainability
56
Quality and regulatory affairs
Product safety and effectiveness is
at the foundation 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 2022, the Committee
received and reviewed summary reports
of the Company’s performance against
internal and external KPIs and metrics,
which display oversight regarding the
quality and regulatory activities of
our business.
At each meeting, the Committee received
a briefing on key matters from the Chief
Quality & Regulatory Affairs Officer.
The Committee reviewed results of
external regulatory inspections and audits
conducted by the FDA and other regulatory
agencies. The Committee also reviewed
results of internal quality audits and key
performance metrics associated with
critical quality and regulatory compliance
processes. The Committee received
reports regarding preparation for emerging
regulations applicable to our business and
also received updates on the important
efforts to ensure compliance with the EU
Medical Device Regulation.
During the year, the Committee reviewed
progress in areas of focus such as design
for manufacturability at our Malaysia site
and overall quality and manufacturing
improvements at key sites across the
business. The Committee also discussed
our continued efforts on Quality System
simplification leading to continued
efficiency across our network.
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Culture
During 2022, the Company’s core purpose
of Life Unlimited and the supporting culture
pillars of Care, Courage and Collaboration
continued to be embedded. Our strategic
objectives and culture pillars provide
alignment across our business and stronger
understanding by employees of their
role in supporting our collective success.
The Committee was provided with
regular updates on culture from the
Chief HR Officer throughout 2022.
The specific actions for the year relating
to culture included the plan for engaging
and developing our future leaders, the
plans in place to ensure leadership and
employees are engaged and contribute
to a high performing and purpose driven
company; the continuation of Board/
employee listening sessions; the launch
of the People Leader Hub containing
resources to support key management/
employee practices, skills and behaviours;
a continued focus on inclusion, diversity and
equity through employee inclusion groups
(EIGs) and internal and external initiatives;
and monitoring success through the
annual Gallup engagement survey.
The Committee received an update on
how the Company had defined the specific
expectations and behaviours needed
to deliver on its strategy and support the
Company’s culture. Our Commitments
were approved by the Board and define
the specific ways in which the Company
expects employees to demonstrate our
culture. In 2022, the nine Commitments
and three behaviours defining each of
our culture pillars were launched to all
employees through a leader-led cascade.
From the nine culture Commitments, the
initial focus for 2023 is on three that are
most critical to delivering our strategy and
12-point plan: Deliver for Customers (Care);
Take Accountability (Courage) and Find
Solutions (Collaboration).
During 2022, the Committee received an
update on the ten EIGs covering gender,
race and ethnicity, veterans, mental health
and physical wellbeing, generations,
the differently abled and LGBTQ+.
Katarzyna Mazur-Hofsaess met
with leadership from two of the EIGs in
December 2022 and was impressed by
the passion, drive and grassroots support
for the EIGs within the organisation.
The 2022 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 a strong employee
response rate of 88%. The Committee was
pleased to see that the survey highlighted
overall strengths in employee connection to
the purpose of Life Unlimited and an overall
upward trend of our results compared
with last year.
For specific issues where employees
may not feel comfortable articulating their
views, we have a whistle-blowing policy
and confidential line, as discussed above.
Audit, Risk and Control
continued
Compliance & Culture Committee report
continued
Employees
The Board proactively support and
further reinforce the Purpose of Life
Unlimited and culture pillars of Care,
Courage and Collaboration through
informal board listening sessions.
These sessions give the Board the
opportunity to hear directly from
employees and understand thoughts
and perspectives on a number of
topics in connection with our purpose
and culture.
Marc Owen hosted Board listening
sessions for over 80 of our employees in the
Americas at our Memphis manufacturing
sites in January 2022 where topics
discussed included Talent, IDE strategy,
linking strategy and Purpose within the
Company, and sustainability initiatives
and the Company’s impact on society
and local communities.
Employees provided further background
on the Company’s approach to attracting,
retaining and developing talent and
the implementation of IDE strategy.
The employee team mission to add
value and be part of the solution was a
message which came through clearly from
those sessions and employees outlined
the various recognition programmes
in place. New employee induction and
training were highlighted as a key priority
which will form part of the Committee’s
continued monitoring and follow up
with management in 2023.
“In our session with EIG leaders
in particular, I was struck by the
strength of internal support for grass
roots employee initiated IDE groups,
programmes and events. My dialogue
with EIG programme leaders has been
a true inspiration – I was impressed by
their commitment to Smith+Nephew
and conviction that the EIGs make
a positive impact on the culture
of the Company.”
Katarzyna Mazur-Hofsaess
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Smith+Nephew
Annual Report 2022
Board members Rick Medlock and Jo Hallas
visited the Hull site and attended a session on
our AWM Global Strategy led by our Marketing,
Supply Chain and Operations teams based in
the UK. This was followed by a tour of the Hull
site where Board members were able to see our
manufacturing operations in action, including
our ALLEVYN
◊
production and assembly
capabilities. The AWM R&D team presented
on our product pipeline and innovation which
was followed by a product demonstration
of a range of AWM products.
Our Board members engaged with our Hull Site
Leadership during lunch and had an informal
employee engagement session with various
groups of employees including those
undertaking apprenticeships with S+N
and top talent.
Board members also attended in depth sessions
which provided a view of future opportunities
for value creation, including a presentation on
our new site in Melton and our AWM strategic
response to supply chain resilience. Both of
these sessions were framed to provide the
Board with an overview of the impact of
these projects on key stakeholders including
employees, suppliers, customers, regulators,
government, investors, local communities
and the environment.
The site visit programmes to Memphis
and Hull focused on strategic and
operational capabilities and initiatives
and sought to highlight areas of interest
aligned with key priorities for the Board,
including core business strategy, value
creation opportunities, culture and
workforce, operational transformation
and ESG and stakeholder considerations
in key projects.
“The presentations from the teams
were thoughtful and focused on Board
priorities. Having joined the Board earlier
this year, the Hull factory tour and the
product demonstrations were essential
for understanding more about the
business. The opportunity to meet local
leadership and employees at the site
was invaluable in providing additional
insight on the company’s culture and
employee engagement.”
Jo Hallas
“Having joined the Board at the start
of the pandemic, the Hull site visit was
incredibly worthwhile to learn more
about our UK AWM manufacturing
capabilities and see our products
in action. We were impressed by the
knowledge, energy and enthusiasm
of the teams for our business.”
Rick Medlock
“It was important for Board members
to visit, and for some to return, to our
Memphis hub in 2022 given the Strategy
for Growth focus on fixing Orthopaedics
and improving trading margin through
productivity and supply chain resilience.
It was also gratifying to engage with our
Memphis workforce across manufacturing,
marketing, R&D and functional teams
to hear the passion, enthusiasm and
pride in innovation and the business
more generally.”
Roberto Quarta
Board Visits
In Memphis, Board members started the visit
with a tour of the Brooks Road manufacturing
site to review the strategic and operational
developments and improvements in progress
as part of the 12-point plan and operational
transformation.
The morning began with an employee-led
wellness session including exercises and
movement to start the day. The Board then
toured the manufacturing site, experiencing 3D
printing capabilities and manufacturing facilities
at the Brooks Road site. Board members visited
the Power of One Robotics and Real Intelligence
platform tour hosted by cross functional teams
from Recon, Robotics and Trauma in our “Ox
Truck” which tours the US. The Board also
attended three “innovation rooms” which
showcased the pipeline for future procedural
innovation and product development which
were hosted by Marketing, R&D and other
functional leads. Bob White attended the
Appling Road facility and reported back to the
Board on the improvements in supply chain and
operational efficiency supporting increased
completion of sets and inventory turn.
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OTHER INFORMATION
Engaging with
stakeholders
The Board understands the importance
of ensuring that the views and interests
of all stakeholders are considered in the
delivery and oversight of the Company’s
strategy and culture.
Although members of the Board engage
directly with stakeholders as part of site
visits or employee engagement meetings,
engagement with stakeholders mostly
takes place at an operational level
and the Board forms its views through
reports and information presented to
it by management. Management are
asked to outline and present the potential
impacts on stakeholders to the Board
where appropriate.
Employees
2022 Highlights
–
The Board focused on the impact of localised Covid lockdowns on
employees’ safety and wellbeing (eg in Shanghai), with the Culture
and Compliance Committee receiving reports on the implementation
of action plans to support employees.
–
On 14 June 2022, Angie Risley and Katarzyna Mazur-Hofsaess held
a listening session with EMEA Commercial team members which
centred on a number of key topics: (i) Leadership inspiration and
trust; (ii) Employee engagement where employees shared examples
of how people managers are working to engage and provide
development opportunities, with employees sharing positive career
development stories and experiences; and (iii) Strengths and areas
for improvement. Issues were also raised to the Board regarding
operational and supply chain challenges. Positive comments were
provided supporting the KPI driven cultural step-change within the
Company following the arrival of Deepak Nath as CEO in April 2022.
–
The September Board meeting incorporated a visit to our offices
in Memphis, where the Board met with various employee groups.
See page 111 for further details.
–
On 1 December 2022, Katarzyna Mazur-Hofsaess hosted a listening
session with leaders of three of the EIGs (Empower, Unity and the
S+N Global female employee network, GAIN).
–
The Board were updated on the activities of our Employee
Interest Groups, particularly relating to diversity, mental health
and volunteering programmes.
–
On 22 December 2022, Angie Risley chaired a listening session with
UK employees to discuss highlights of 2022, areas for focus in 2023
and an overview of executive remuneration with an opportunity
for questions and comments.
2023 Actions
–
Further Board/employee listening sessions planned for site visits.
–
Monitoring of management actions with regard to talent pipeline,
leadership and succession.
–
Further review of culture, inclusion and diversity initiatives with a
focus on monitoring the development of EIGs within the organisation.
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. It is important for us
to understand the employee perspective and take
their views into account in our decision making.
The Board proactively support and further reinforce the purpose of
Life Unlimited and culture pillars of Care, Collaboration and Courage
through informal board listening sessions. These sessions give the
Board the opportunity to hear directly from employees and understand
thoughts and perspectives on a number of topics in connection with
our purpose and culture.
Marc Owen hosted three Board listening sessions for over 80 of our
employees in the Americas at our Memphis manufacturing sites on
18 January (Brooks Road) and 19 January (Holmes Road) where topics
discussed included Talent, Inclusion, Diversity and Equity (IDE) strategy,
linking strategy and purpose within the Company, and sustainability
initiatives and the Company’s impact on society and local communities.
Employees provided further background on the Company’s approach
to attracting, retaining and developing talent and the implementation of
IDE strategy and the ways in which the company is advancing inclusion,
diversity and equity, wellbeing and a purpose-driven culture of belonging.
The Board heard about the various recognition programmes, employee
engagement and the steps taken by site leadership and people managers
to connect teams to the purpose of Life Unlimited. Visibility of leaders
was a topic that had previously been raised and employees provided
feedback that this was now being addressed at the sites in response to
comments received on previous sessions. Areas of opportunity identified
were to optimise and utilise engagement team and EIGs to support
employees, improve communication from management on links to
strategy and purpose, development opportunities and improvement
on change management.
Areas of interest
–
Engagement with purpose
of Life Unlimited and our
culture pillars of Care,
Collaboration and Courage.
–
Talent, retention
and development.
–
Employee wellbeing
and cost of living.
–
Leadership and
succession planning.
–
Diversity, Inclusion
and Equity.
– Innovation.
–
Society and the environment.
– Strategy.
– Customers.
How we engage
–
Updates on leadership and talent
development, succession planning
and inclusion, diversity and equity
are provided at Compliance &
Culture Committee meetings.
–
The Board meets with employees
on-site visits, or virtually.
–
Board/employee listening sessions.
–
The Board discusses results and
next steps of annual Gallup survey.
108
Compliance &
Culture Committee
People
48
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Investors
2022 Highlights
–
Executive Directors held 121 meetings with investors
representing 46% of the Company’s Share Capital.
–
The Chair and Senior Independent Director met with shareholders
regularly throughout the year. Their discussions focused on business
and share performance and also the chair succession search.
Investors were also interested in key topics such as ESG, culture
and purpose of the Company, CEO and Board succession planning
and Board governance more broadly.
–
Our Chair of the Remuneration Committee engaged with investors
regarding the approach to our 2023 Remuneration Policy and
discussed issues such as addressing the cost of living crisis and
ESG metrics related to incentive plans and compensation.
–
The Company continued to pay dividends and undertake share
buybacks to shareholders in line with our strategy and capital
allocation policy (see pages 19 and 20 for further details).
–
MSCI upgraded the Company’s ESG rating from BBB to A in 2022.
2023 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 Annual General Meeting will be held in person in our auditorium
at our headquarters in Watford enabling shareholders to attend,
vote and ask questions in person to our Chair, CEO, CFO and the
Chairs of each of our Board Committees.
Our investors are the owners of our business and it
is important to understand investor perspective and
approach on strategy, performance and governance.
In 2022, the Board has engaged with a number of investors, groups and
teams covering a wide range of topics of interest including strategy and
operations, supply, governance, succession planning and ESG matters.
Following the appointment of Deepak Nath as CEO in April 2022 and
the subsequent development and implementation of the 12-point plan
aligned with the Strategy for Growth, investors wanted to understand
from the Board their impressions on how the new CEO was settling into
role. The Board engaged with a number of investors to provide further
context on Board oversight and governance around the onboarding of
the new CEO and scrutiny relating to the plans for the Company and
the 12-point plan.
Another key topic of interest in 2022 was Board succession planning.
Upon coming into role in September 2022, Marc Owen our Senior
Independent Director engaged with investors on the chair search
process and outlined the 3 key criteria the Board were looking for in a
new Chair being a proven track record of shareholder value, strong UK
corporate governance experience and experience of developing senior
executives either whilst in a CEO or Chair role. Investors indicated that
they appreciated the dialogue and these characteristics seemed to
resonate with the Company’s investors, shaping the search and final
selection and appointment of Rupert Soames as Chair Designate.
The Board continues to see strong interest from our shareholders in
ESG and sustainability matters and has engaged with a number of
specialist investor teams who focus on ESG and sustainability. These
investor interactions help the Board to frame the approach to ESG
strategy and the issues which have importance to investors, enabling
the Board and management to further evaluate how we report on
the impact of sustainability on our business to ensure we are providing
investors with clear communication in this area.
Areas of interest
–
Succession planning.
– Strategy.
– Performance.
– Dividend.
– Leadership.
– 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.
–
The Board engage with and obtain
feedback and advice from their
brokers on key issues of importance
to the Company.
–
The Board also receive presentations
and regular reports from the investor
relations team on external market
perceptions of the Company.
Shareholder
information
240
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Engaging with stakeholders
continued
Customers and suppliers
2022 Highlights
–
The Board has been kept updated of the supply chain issues
affecting the Company and the Orthopaedics franchise in
particular and have been actively engaged with management
to resolve these issues in alignment with 12-point plan initiatives.
–
The Compliance & Culture Committee received regular reports on the
challenges and impact of the transition to EU MDR throughout 2022.
–
In response to customer need, a revision knee application was
launched on our robotics platform in 2022.
–
Management has reported to the Board on the importance
of sustainability matters to our customers and in turn how
we engage with our suppliers to ensure they share our view
on sustainability matters.
–
The Board recognises that supply chain resilience is critical for the
success of the Group and in evaluating the recent decision to move
to Melton took into account the following: employees; shareholders,
sustainability requirements; customers; suppliers; regulators;
and governments.
–
Post-pandemic there are a number of additional requirements
which make it challenging for Board members to accompany
our sales representatives in the field. The Board will seek to find
alternative ways to understand more on the customer perspective
moving forward.
2023 Actions
–
The 2023 Board plan provides further opportunities for the Board
to hear from external speakers.
–
Given the additional challenges post-pandemic in accompanying
sales representatives in the field, we will look at alternative ways
to understand more on the customer perspective.
Our Strategy for Growth, 12-point plan and
our Commitments are focused on creating
value by delivering for customers.
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.
Our customers are increasingly focused on ensuring that ESG
and sustainability are taken into account in our decision making
aligned with their own policies and procedures.
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.
–
The Board receives regular updates
on supplier and customer relationships.
108
Compliance &
Culture Committee
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Further information about our relationship
with other stakeholders, including the local
communities in which we operate and
our impact on the environments and the
impact of climate change on our business,
can be found in the Sustainability Report
and on pages 56–68. The Compliance
& Culture Committee regularly received
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 IFC–115 and 240–IBC was approved
by the Board on 21 February 2023.
Helen Barraclough
Company Secretary
The Strategic Report comprising
pages IFC–81 was approved by
the Board on 21 February 2023.
Deepak Nath
Chief Executive
Governments and regulators
2022 Highlights
–
The Compliance & Culture Committee received regular reports
from Mizanu Kebede, our Chief Quality & Regulatory Affairs Officer,
on the results of FDA inspections at our manufacturing facilities.
–
The Compliance & Culture Committee also received reports on
the enhancements being made to the data privacy programme
to take into account the fast paced regulatory changes relating to
data privacy legislation and the roadmap relating to these changes.
–
As part of the proposal for the new Melton site, the Board
received a report on the terms of engagement with the UK
central and local government with regard to the proposed site
and the communications plan to ensure stakeholder views
had been considered.
2023 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.
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 also in order to implement
our Strategy for Growth and our initiatives under
our 12-point plan.
Areas of interest
–
Product safety.
–
Compliance with local
legal and regulatory
requirements.
–
Competition issues.
–
Social and economic
concerns.
–
Investment and innovation
in local communities.
–
Understanding how the
Company’s business
impacts local communities
and global business.
How we engage
–
Management is responsible
for ensuring compliance with
applicable laws and regulations.
Direct engagement between
the Board and our regulators is
therefore not always appropriate.
–
Updates on product quality,
regulatory matters and complaints
at every meeting of the Compliance
& Culture Committee.
–
Updates on ethical and compliance
matters, and complaints at every
meeting of the Compliance
& Culture Committee.
–
The Chief Executive Officer meets
with UK government and regulators.
Quality & Regulatory
47
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
Angie Risley
Chair of the Remuneration Committee
Directors’ Remuneration report
Membership*
Member
from
Meetings
attended
Angie Risley (Chair)
September 2017
8/8
Robin Freestone
1
September 2015
7/7
Roberto Quarta
2
April 2014
7/8
Bob White
July 2020
8/8
Dear Shareholder
2022 has been a challenging year for
our employees given the macroeconomic
environment. One of the key focus
areas of the Remuneration Committee
(the “Committee”) this year has therefore
been on remuneration and wellness
issues across the Group. Additionally,
given our current Remuneration Policy
(the “Policy”), which was originally
approved by shareholders at the 2020
Annual General Meeting, will shortly expire
we have reviewed and will present our
new Policy to shareholders for approval
at our 2023 Annual General Meeting.
We also welcomed Deepak Nath to the
Company as our new CEO in April 2022.
Since joining the Company, Deepak has
made assessments of the opportunities
and challenges facing the Company and
has launched his 12-point plan to deliver
and accelerate the Company’s potential
for growth. You can read more about
the 12-point plan on pages 8–10.
Broader employee experience
Although this report deals primarily with
the remuneration of our Directors, much
of the Committee’s focus during the past
year has been on remuneration issues
across the wider workforce during what
has been a particularly challenging year
for so many of our people. In December,
I chaired a Board listening session with
some of our employees from our UK teams
to explain our remuneration policy, in
particular how it aligns to the Company’s
purpose, values and delivery of the
Company’s long-term strategy. We also
discussed the fall in disposable incomes.
In response to the current cost of living
crisis, the Company felt it was important
to undertake an off-cycle salary review
Looking forward –
Remuneration Committee’s
focus for 2023
During 2023, the Remuneration
Committee intends to:
–
Determine the appropriate ESG
metrics to introduce into our
Performance Share Programme.
–
Continue to focus on key
remuneration challenges faced
by our employees.
–
Appoint a new advisor to replace
Deloitte who have been appointed
our Auditors from 2024.
1
Robin Freestone stepped down as a member of the
Committee with effect from 30 September 2022.
2
Due to prior commitments, Roberto Quarta was
not in attendance at the July 2022 meeting.
3
These non-IFRS financial measures are explained and
reconciled to the most directly comparable financial
measures prepared in accordance with IFRS on
pages 236–240.
for employees. The 2.5% increase was
determined by undertaking a thorough
review of external data of inflation rates
in the markets in which we operate and
was applied to employees below senior
management level in the markets where
the gap between their 2022 annual pay
increase and the rate of inflation was
above a certain level.
We review annually the gender pay
ratio and we continue to make positive
progress. The Board and the Committee
continue to monitor the pay arrangements
for the wider workforce throughout the
year to ensure our people are paid fairly
and equitably for the work they do.
More broadly, under Deepak’s leadership, our
culture of Care, Courage and Collaboration
continues to be strengthened and embedded
by focusing on three key areas in 2022:
–
Introduction of our Commitments –
aligned to each culture pillar along with
our People Leader Hub to clearly define
the specific behaviours and expectations
to deliver against our strategy.
–
Global wellness – increase employee
engagement and productivity through
wellbeing programs, enhanced
employee assistance programmes
and tools to support managers in
increasing their teams’ overall wellbeing.
Examples of events/programmes held
include Nutrition Awareness month
and Mental Health Awareness month.
–
Expansion to 10 Employee Inclusion
Groups with 3,000+ members globally
and the training of over 2,000 managers
to drive inclusion in our interviewing
and hiring practices.
You can read more about these initiatives
together with our new Commitments
on pages 48–53.
The Committee’s role
The Committee’s role is to ensure
that our Remuneration Policy and
practices are aligned to the business
strategy and promotes long-term
sustainable success. We make sure the
Remuneration of our Executive Officers
is aligned to the Company’s purpose
and values and is clearly linked to the
successful delivery of the 12-point plan
going forward.
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ESG and our Incentive Plans
The Committee recognises that ESG
performance forms an important part
of Smith+Nephew’s short-term and
long-term strategic priorities.
As disclosed last year, we took the decision
to allocate a minimum of 5% of the
performance measures in the 2022 Annual
Bonus Plan to ESG and this remains in place
for our 2023 Plan.
For long-term incentives, a suitable ESG
metric is still under development and the
intention is that an ESG objective will be
introduced for the awards granted under
the Performance Share Programme
in 2024.
Review of 2022 Performance
In 2022 the Group delivered revenue
growth in line with its guidance issued
in May 2022, but trading profit margin
was below guidance. Revenue was
$5,215 million, up 0.1% on a reported
basis and 4.7% on an underlying basis.
3
Operating profit was $450 million, and
the trading profit
3
was $901 million with
a trading profit margin
3
of 17.3% reflecting
higher input inflation.
Good progress was made across 2022
and we ended the year in a much stronger
position than we started. We continued to
outperform in Sports Medicine & ENT and
Advanced Wound Management, which
account for around 60% of Group sales,
and even though we are early in our work
to fix Orthopaedics, growth improved
here too. All three franchises contributed to
the 6.8% underlying revenue growth in the
fourth quarter. However, we will continue
to face macroeconomic headwinds in 2023.
Information on operational improvements
made during the year can be found on
pages 8–11.
Remuneration Outcomes
for 2022
Annual Bonus Plan
Performance against the financial targets
under the Annual Bonus Plan was therefore
above target for Revenue but below
threshold for trading margin, resulting in
an aggregated payout of 53% of target
in respect of the financial objectives.
The Remuneration Committee reviewed
the performance of the Executive Directors
against their individual business objectives.
We concluded both Deepak and Anne-
Françoise achieved against their individual
business objectives in terms of what they
did and exceeded in terms of how they
performed and they consequently received
an on target payout in relation to this
element of their bonus. Our assessment in
relation to Roland Diggelmann, our former
CEO, was that he had partially achieved his
objectives during the first quarter of 2022.
These ratings combined with performance
against the financial objectives resulted
in an overall bonus amounting to 63% of
target for Deepak and Anne-Françoise.
Payouts to both Deepak and Roland were
appropriately pro-rated to reflect their
period of employment during 2022.
We also considered whether these
outcomes fairly represented the
performance of the Company and
the Executive Directors in 2022.
We acknowledged that during 2022,
the share price had slightly fallen, that
the Company had delivered a mixed
performance albeit ending the year in a
much stronger position than we started
and that there had been no reputational
risk issues. We therefore determined that
these outcomes were a fair representation
of performance and there was no
need to apply discretion to these
formulaic outcomes.
Performance Share Programme
Similarly, the Remuneration Committee
reviewed performance over the
past three years against the targets
determined in 2020 for the Performance
Share Programme and determined
that these awards should vest at 0%.
This reflects performance against the
targets over the three-year performance
period since 1 January 2020. Deepak Nath
was not employed by the Company at
the time the awards were granted under
the 2020 Performance Share Programme
and therefore did not receive an award.
Measures in our variable pay plans
Performance measures in Annual Bonus Plan for 2023
Revenue (40%)
Top-line growth is essential for continued progress and long-term value creation.
Trading margin (40%)
Trading margin focuses on profit.
Business objectives (15%)
Individual business objectives linked to the strategic imperatives to ensure alignment across the Company.
ESG objectives (5%)
Doing the right thing with regard to our employees, the environment and other stakeholders ensures
a sustainable business for the future.
Performance measures in our Performance Share Programme for 2023
Revenue growth (25%)
Top-line growth leading to value creation is a key goal for Smith+Nephew over the next three to five years.
Earning market share is important to create a competitive advantage for Smith+Nephew in driving growth.
Return on invested capital (25%)
Provides focus on long-term efficiency and profitability.
Bottom-line performance provides balance to revenue measure.
Important measure for our investors.
Cumulative free
cash flow (25%)
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 (TSR) 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.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Directors’ Remuneration report
continued
Proposed Remuneration Policy
We are required at the 2023 Annual
General Meeting to seek the standard
triennial shareholder approval for a new
Remuneration Policy (the “new Policy”).
Ahead of this vote, the Committee has
been carefully considering whether existing
remuneration arrangements, as set
out in our current Policy, are consistent
with delivery of the 12-point plan.
The Committee has concluded that no
immediate, substantive changes should
be made to the Policy. However, we intend
to keep this issue under careful review
during 2023.
The Committee additionally took the
opportunity to review the current Policy
against the UK Corporate Governance
Code (the “Code”), shareholder guidance
and general market practice. Following that
review, a few minor changes are proposed
to the new Policy, details of which are
summarised below. Any use of the
discretions available to the Committee in
this new Policy would be fully explained
and justified in the relevant Remuneration
Report and, where appropriate, discussed
in advance with major shareholders.
–
Pension:
The Executive Director pension
arrangements have been updated and
are compliant with the Code.
–
Incentive plans:
Consistent with
emerging market practice, the new
Policy contains scope for the Committee
to set and measure bonus targets
other than on an annual basis. Use of
this option will be reserved for unusual
circumstances, for example where there
is exceptional economic volatility (as in
the recent Covid affected period) and
a consequent limited visibility to set
robust 12-month targets. In line with the
Investment Association guidance, the
new Policy also provides for appropriate
discretion so that the Committee may
ensure incentive outturns properly
reflect the performance of the
executives and their contribution to
overall corporate performance, the
experience of shareholders in terms of
value creation, the experience of wider
stakeholders and the general market
environment. Limitations on the use of
this discretion are fully outlined in the
Annual Bonus Plan and Performance
Share Programme sections of the Policy.
–
Shareholding guidelines:
Whilst
the default position in the new Policy
remains for a post-employment
shareholding guideline to apply for
two years aſter an Executive Director
ceases employment, there is discretion
for the Committee to, exceptionally,
adjust or waive the guideline in
circumstances where the Board believes
its application would be inappropriate
(e.g. in the event of death).
–
Recruitment arrangements:
Consistent
with market practice, the new Policy
contains flexibility for the reimbursement
of legal or other professional fees
approved by the Committee incurred
by an individual in relation to their
appointment. The Committee will also
have the flexibility to determine whether
a new Executive Director should be
subject to a different set of criteria
for annual and/or long-term incentive
performance measures (within the
existing parameters for these plans in
this new Policy) during the first twelve
months following appointment.
–
Pay for Loss of Office:
Consistent
with market practice, the new Policy
contains flexibility to make payments
to a departing Director in discharge
of an existing legal obligation or
by way of settlement of any claim
arising in connection with cessation of
employment. Minor amendments also
permit the Committee to determine
the form and basis of calculation of a
departing Director’s annual bonus in
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), sections 420 to 422
of the Companies Act 2006 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.
Pages 129–145 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 26 April 2023. The Implementation Report explains how the Remuneration Policy was implemented during 2022. The following sections have been audited by KPMG:
The Single Figure Tables on Remuneration including related notes (pages 130–139); details of awards made under the Performance Share Programme (pages 135–138); Summary of Scheme
Interests during the year (page 138); Payments to former Directors (page 135); Payments made to other past Directors (page 139); Directors interests in ordinary shares (page 140) and
Senior Management Remuneration (page 145).
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. The Policy will be put to shareholders’ vote at the Annual General Meeting on 26 April 2023.
a manner appropriate to the particular
circumstances (albeit any such bonus
will continue to be time pro-rated
and subject to performance).
–
Non-Executive Director (NED) fees:
Where a NED takes on additional
responsibilities that involve additional
time commitment, consistent with
market practice, the new Policy will
contain the flexibility to pay an associated
supplementary fee. The new Policy
also clarifies the flexibility to approve
additional benefits (e.g. liability insurance)
and to reimburse business expenses to
the Chair and NEDs in connection with the
performance of their duties. In addition,
the new Policy also provides flexibility for
fees to be delivered either in a mixture
of cash and shares or wholly in cash with
an accompanying commitment from the
Chair or NED to separately purchase
the required number of shares.
I would like to thank our shareholders for
their support and engagement during
the year.
Angie Risley
Chair of the Remuneration Committee
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Directors’ remuneration policy
Proposed implementation of new Policy in 2023
Base salary
–
2022 salaries: CEO $1,475,000;
CFO £615,960.
–
2023 salaries: CEO $1,526,625; CFO
£637,519 (3.5% increase). For context,
the average 2023 increases for our US
and UK workforce (inclusive of a 2.5%
off-cycle increase) are 6.5% and 6%
respectively.
Pension
–
CEO: 7.5% of capped salary
(aligned with US employees).
–
CFO: 12% of salary
(aligned with UK employees).
Annual Bonus
–
2023 opportunity for CEO and CFO:
215% of salary (unchanged from 2022).
–
50% paid in cash, 50% deferred
in shares for three years.
–
Performance measures: 40% revenue
growth, 40% trading profit margin,
20% business objectives including
ESG metrics (unchanged from 2022).
Performance Share Programme
–
2023 award for CEO and CFO:
275% of salary (unchanged from 2022).
–
Three-year performance period plus
two-year holding period.
–
Performance measures: 25% relative
TSR, 25% ROIC, 25% revenue growth,
25% free cash flow (unchanged
from 2022).
Shareholding guideline
–
Whilst in employment, build up
and maintain shareholding worth
at least 300%/200% of salary
for CEO/CFO.
–
Aſter ceasing employment,
remain compliant with their
‘in employment’ guideline for
two years aſter stepping down
as Director.
Compliance with the UK
Corporate Governance Code
The new Remuneration Policy has been
developed taking into account the
following principles set out in Provision
40 of the Code:
–
Simple and clear:
Our remuneration
structure is straightforward and
transparent with Executive Directors’
variable pay consisting of an annual
bonus and a single long-term
incentive plan.
–
Aligned to culture, purpose and
strategy:
The remuneration structure
has been designed to support our culture
and business purpose with particular
attention being paid to remuneration
throughout the organisation to ensure
that arrangements are appropriate
in the context of our approach to
reward for the wider workforce.
Performance measures used in the
incentive plans are aligned with key
strategic objectives and the principle
of long-term sustainable value creation.
–
Predictability:
Incentive awards are
capped so that the maximum potential
award under each plan is transparent.
The charts on page 125 provide an
illustration of the potential total reward
opportunity for the Executive Directors.
–
Proportionality and mitigating risk:
Our variable remuneration arrangements
are designed to provide a fair and
proportionate link between Group
performance and reward whilst
mitigating risk where appropriate.
The Committee has overriding discretion
that allows it to adjust formulaic
annual bonus or PSP outcomes so as
to prevent disproportionate results
and Policy provisions allow for the
application of malus and/or clawback
in specific circumstances. Additionally,
there is a clear link between executive
remuneration and the longer-term
performance of the Group through
a combination of bonus deferral into
shares, five-year release periods for
PSP awards and stretching shareholding
requirements that apply during and
post employment.
Changes to policy
The new Policy contains no substantive
changes to the 2020 Remuneration Policy.
The handful of minor changes proposed
in the new Policy are summarised on
page 118.
In designing the directors’ remuneration
policy set out on pages 120–128
(the “Policy”), the Smith & Nephew
plc Remuneration Committee (the
“Committee”) followed a robust process
which included discussions on the content
of the Policy at several Committee meetings
and engagement with our shareholders.
In order to avoid any conflicts of
interest, the Committee is composed
entirely of independent Non-Executive
Directors. The Committee considered
input from management, while ensuring
that conflicts of interest were suitably
mitigated, and our independent advisors,
and sought the views of Smith & Nephew
plc (the Company) major shareholders
and other stakeholders, including
employees. If approved by shareholders,
the Policy will take effect from the date
of that approval.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Directors’ remuneration policy
continued
Future policy table – Executive Directors
Base salary and benefits
Base salary
Core element of remuneration, paid for doing the expected day-to-day job to recruit and retain Executive Directors of the calibre required to deliver
the Company’s strategy.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
Salaries are normally reviewed annually
with any increase usually applying from 1 April.
Salary levels and increases take into account:
–
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
–
market movements within a peer group
of similarly sized listed companies.
While there is no maximum salary level,
any increases will normally not exceed the
typical increase for 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
of the individual’s role; and
–
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.
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.
Pension and payment in lieu of pension
Provide Executive Directors with an allowance for retirement planning to recruit and retain Executive Directors of the calibre required to deliver
the Company’s strategy.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
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.
Base salary is the only component
of remuneration which is pensionable.
The maximum pension allowance for an
Executive Director will be no more than
the percentage of salary contribution paid
in respect of the majority of our UK workforce
(currently 12% of salary) unless the percentage
of salary contribution paid in respect of the
majority of the workforce in the Executive
Director’s home country or the country in
which the Executive Director is based is lower,
in which case that lower percentage of salary
contribution would usually be offered.
None.
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Benefits
Provide Executive Directors with a market competitive benefits package to recruit and retain Executive Directors of the calibre required to deliver
the Company’s strategy.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
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, or, in connection with an
Executive Director’s recruitment, the country
from which the Executive Director is recruited.
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, tax and/or
legal consultancy advice. In some cases,
such payments may be grossed up.
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 regularly reviews the
benefit policy and benefit levels.
None.
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OTHER INFORMATION
Remuneration
continued
Directors’ remuneration policy
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.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
ShareSave Plans are operated in the UK
and 31 other countries internationally.
In the US, an Employee Stock Purchase Plan
is operated. These plans enable employees
to save on a regular basis and then buy shares
in the Company. Executive Directors are able
to participate in such plans on a similar basis
to other employees, depending on where
they are located.
Executive Directors may currently invest up
to £500 per month in the UK ShareSave Plan,
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.
None.
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.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
The Annual Bonus Plan is designed to reward
performance over the year against financial
and business objectives.
The Committee determines pay out levels
based on the extent to which performance
against these objectives has been achieved.
The Committee retains discretion, in
exceptional circumstances, to pay bonuses
in respect of the half year and/or full year.
The Committee has full discretion to adjust
outcomes under the Annual Bonus Plan
where: (i) the occurrence of certain events
would unfairly advantage or disadvantage
participants, in the reasonable opinion of
the Committee and/or (ii) 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 unfairly disadvantage or
advantage a 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.
Normally, half of the award is paid in cash
aſter the end of the performance year
and half is deferred into an award of shares
under the Deferred Share Bonus Plan (DBP),
which normally vests aſter three years.
The Committee has full discretion to authorise
the payment of dividend equivalent payments
on DBP awards to the extent they vest.
The maximum opportunity is 215%
of base salary.
50% of maximum is payable for on-target
performance. Up to 15% of maximum is
payable for threshold performance.
The Committee will determine the appropriate
performance measures for 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.
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 maximum performance targets
and additionally, where appropriate, targets
for threshold and/or on-target performance.
In doing so, they will take into account a
number of internal and external reference
points, including the Company’s key strategic
objectives. 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 participants being unfairly advantaged
or disadvantaged.
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Long-term incentives
Performance Share Programme (PSP)
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 PSP awards are linked to our corporate strategy.
How the component operates
Maximum levels of payment
Framework in which performance is assessed
Awards are granted pursuant to the terms
of the PSP.
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 of awards.
Awards usually vest aſter three years, subject
to the achievement of stretching performance
targets linked to the Company’s strategy.
The performance period is usually 3 years.
The Committee has full discretion to adjust
outcomes under the PSP where: (i) the
occurrence of certain events would unfairly
advantage or disadvantage participants in
the reasonable opinion of the Committee;
and/or (ii) 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 unfairly
disadvantage or advantage a 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 (or, exceptionally, cash) equivalent
to the amount of dividends payable on ordinary
shares subject to the award that vest during
the period up to vesting. On vesting, a number
of shares are sold to cover the tax liability.
The remaining shares are usually required to be
held by the Executive Director for a further two
year holding period.
Malus and clawback provisions apply as
detailed in the notes to this table.
The maximum annual opportunity
is 275% of base salary.
For on-target levels of performance,
50% of the award vests.
For threshold levels of performance,
25% of the award vests.
The Committee aims to align the PSP
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.
Maximum pay-outs will only be made
for significant outperformance.
Under whatever performance measures are
chosen, the Committee will set appropriately
challenging maximum performance targets
and additionally, where appropriate,
targets for threshold and/or on-target
performance. In doing so, they will take into
account a number of internal and external
reference points, including the Company’s
key strategic objectives.
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 it appropriate to
do so provided that this would not result in,
in the Committee’s reasonable opinion,
an unfair benefit to the Executive Director.
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OTHER INFORMATION
Remuneration
continued
Directors’ remuneration policy
continued
Notes to future policy table –
Executive Directors
Share awards
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 DBP or PSP awards
in accordance with the plan rules.
Malus and clawback
At any time prior to the vesting of a
PSP or DBP 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
aſter the vesting of a PSP or DBP 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
will occur if any of the
following matters 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 applicable programme
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 2023 and the Annual
Bonus Plan 2023.
In addition to (and without limiting)
the foregoing, the Company is intending
to adopt an additional clawback policy
pursuant to listing standards that have
been released by the New York Stock
Exchange, pursuant to the final rule
adopted by the United States Securities
and Exchange Commission enacting the
clawback standards applying to U.S.
listed companies under the Dodd-Frank
Act. In accordance with this policy, the
Committee or the Board is also intending
to adopt policies requiring repayment of
any amounts of incentive compensation
from its “executive officers”, which may
include the Executive Directors, that was
calculated erroneously based on financial
statements that were required to be
restated due to material noncompliance
with financial reporting requirements,
to the extent required under the new
clawback policy.
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 came into effect, provided the
terms of the payment were consistent with
any applicable policy in force at the time
they were agreed or the terms were agreed
before the date on which the Company first
obtained shareholder approval for a Directors’
remuneration policy; 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
Group and differences between
arrangements for Executive
Directors and workforce as a whole
When setting the Policy for Director’s
Remuneration, the Committee discusses,
and takes into account of pay arrangements
and employment conditions of employees
across the Group when determining
the pay of Executive Directors in the
following ways:
Base salary
Increases to Executive Director base
salaries will generally not exceed 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.
Recent off-cycle base salary increase
adjustments made by the Company in 2022
to its employees in certain geographies
to respond to inflation and cost of living
challenges were limited to employees
within the company three tiers below
senior management level and were
not awarded to Executive Directors.
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 wider
workforce in their local market or receive
a cash allowance payable in lieu of a
pension at a percentage of base salary
in line with the wider workforce in the
geography in which they are based.
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 available to the wider
executive workforce 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
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Officers, to ensure that the performance
of all employees is linked to the Company’s
strategy and the objectives of the Executive
Directors and senior management as
applicable. In 2022, Executive Officers and
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 2022, US employees
participated in the Employee Stock Purchase
Plan. In 2022, UK and international employees
from 31 other countries, participated in
the ShareSave Plan. Executive Directors,
executive officers and senior executives
participated in these plans aligned to the
geography in which they operate.
Long term incentives
Executive Officers and senior executives
participate in the PSP 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 PSP are also required to build a
significant shareholding in the Company.
Corporate events
If there is a takeover of the Company,
awards under the PSP and DBP will
normally vest early at the time of the
transaction. DBP awards will normally
vest in full. The extent to which awards
under the PSP vests will be determined
by the Committee, taking into account,
where considered to be appropriate in
all the circumstances, the actual or likely
achievement of the relevant performance
conditions and, unless the Committee
determines otherwise, the awards will
be time pro-rated by reference to the
proportion of the relevant performance
period that has elapsed. Any post-vesting
holding will normally cease to apply.
In these circumstances, the Committee
reserves the discretion to treat the
payment of annual bonuses for the
financial year in which the takeover
takes place in such manner as it
considers appropriate (subject to the
limit set out in the Policy table above).
If there is a demerger or other transaction
that is likely to materially affect the
Company’s share price, the Committee
may allow awards to vest and bonus
to be paid early on the same basis as
set out above for a takeover.
Assumed
performance
Assumptions used for proposed Policy
Fixed
pay
All performance
scenarios
–
Consists of total fixed pay, including base salary and pension allowance
(as at 1 April 2023) and benefits (as received during 2022).
–
Pro-rated for Deepak Nath.
Variable
pay
Minimum
Performance
–
No pay out under the Annual Bonus Plan.
–
No vesting under the PSP.
Target
Performance
–
50% of maximum pay out under the Annual Bonus Plan (i.e. 107.5%
of salary).
–
50% vesting under the PSP (i.e. 137.5% of salary).
Maximum
Performance
–
100% of the maximum pay out under the Annual Bonus Plan
(i.e. 215% of salary).
–
100% vesting under the PSP (i.e. 275% of salary).
Maximum performance +
50% share price growth
–
As Maximum Performance but this column assumes that the face value
of the PSP award increases by 50% as a result of share price growth.
PSP awards have been shown at face value with no discount rate assumptions.
The charts provide illustrative values of the remuneration package in 2023.
Actual outcomes may differ from those shown.
Illustrations of the application of the Remuneration Policy 2023
The following charts show the potential split between the different elements of
the Executive Directors’ remuneration under four different performance scenarios:
Chief Executive Officer
Chief Financial Officer
100
$1,666k
31
30
39 $5,406k
18
36
29
56
46 $9,147k
15
$11,246k
Minimum %
Target %
Maximum %
Maximum+ %*
Current
[Proposed]
100
£726k
32
38
30
£2,288k
18
29
36
56
46 £3,850k
15
£4,727k
Minimum %
Target %
Maximum %
Maximum+ %*
Current
[Proposed]
Fixed pay
Annual bonus
PSP
* + 50% share price growth
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ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Directors’ remuneration policy
continued
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. In addition, where a new Executive
Director requires legal or other professional
advice related to the appointment with
the Company, we may agree to pay directly
or reimburse the Executive Director for
fees and expenses reasonably and properly
incurred including the provision of advice to
enable the Executive Director to understand
the obligations, duties and legal and
regulatory requirements of the new role.
The Committee also has the discretion
to determine whether a new Executive
Director should be subject to a
different set of criteria for annual and/
or long-term incentive performance
measures during the first twelve months
following appointment.
For external appointments, the Committee
may award compensation for the forfeiture
of remuneration awards or compensation
arrangements 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
(e.g. 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.
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.
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.
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
their notice period and pay them (in phased
instalments or as a lump sum) an amount
equivalent to the base salary, contributions
to a pension or equivalent savings plan (or
payment in lieu thereof) and benefits they
would have received if they had been required
to work their notice period. The Executive
Directors may become entitled to additional/
alternative sums if termination occurs within
12 months of a change in control (as further
described in the following section “Policy
for payment for loss of office”).
Directors’ service contracts are available
for inspection at the Company’s registered
office: Building 5, Croxley Park, Hatters
Lane, Watford, Hertfordshire WD18 8YE,
United Kingdom
Policy for payment for loss of office
Our usual policy regarding termination
payments to departing Executive
Directors is to limit severance payments
to pre-established contractual terms.
Where necessary to comply with the
mandatory laws of the jurisdiction in which
the Executive Director is resident, the
Committee may authorise remuneration
payments or payments for loss of office in
excess of the pre-established contractual
terms. In the event that the employment
and/or office of an Executive Director
ends, any compensation payable will
be determined in accordance with the
terms of the service contract between
the Company and the Executive Director,
as well as the rules of any incentive plans
and the Policy. In addition, the Committee
will have the discretion to make payments
in discharge of an existing legal obligation
(or by way of damages for breach of
such obligation) or by way of settlement
of any claim arising in connection with
the cessation of office or employment.
Under normal circumstances (excluding
termination for gross misconduct and
certain other terminations for ‘cause’) all
leavers are entitled to receive a termination
payment (in phased instalments or as a
lump sum) in lieu of notice equal to base
salary, pension contributions (or payment
in lieu of pension) and benefits. The leaver
may also be paid a payment in lieu of
accrued but untaken holiday leave.
Payments may also include (but are
not limited to) costs associated with
relocation/repatriation, the costs of legal
advice, financial (including tax) advice
and outplacement services in connection
with cessation of office or employment.
In the event of termination in connection
with a change in control of the Company,
in circumstances where there is a
diminution of status, a reduction in salary
or benefits, a mandatory relocation
or where termination results from the
change in control, the payment in lieu
of notice will be payable as a lump sum,
the Committee will consider to what
extent an annual bonus award should
be made, and the leaver will receive
reasonable outplacement costs.
In the event that an Executive Director
dies or ceases to be an employee because
of ill-health, injury, disability, redundancy,
retirement with the agreement with the
Company, the sale of their employing
company or business out of the Group,
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. The annual bonus may be paid in
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such proportion of cash and shares and
subject to such deferral arrangements
as the Committee may determine.
The Committee will have the discretion
to take into account performance over
the full financial year or up to the date
of cessation of employment based on
appropriate performance measures
determined by the Committee in line
with the Policy.
–
Outstanding PSP awards will typically,
unless the Committee determines
otherwise, be pro-rated for the
proportion of the relevant performance
period that has elapsed at the time
Executive Director leaves, and be
tested for performance at the end
of the performance period, unless
the Committee determines to test
performance otherwise. The two-year
post-vesting holding period will, unless
the Committee determines otherwise,
continue to be enforced. If an Executive
Director dies, awards will normally vest
early and only be time pro-rated if the
Committee considers it appropriate.
Any outstanding awards under the PSP
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 PSP awards
will lapse in full.
–
If an Executive Director leaves for any
reason other than dismissal or any other
reason that the Committee determines,
any outstanding DBP awards will
remain subject to the same terms
and conditions (including malus and
clawback) as applied at time of grant
and vest as if the Executive Director had
not leſt. In the event of termination in
connection with a change in control of
the Company or, if an Executive Director
dies, any outstanding DBP awards will
vest. In any other circumstances any
unvested DBP awards will lapse.
One-off awards granted on appointment
will normally lapse on leaving except in
cases of death, retirement, redundancy
or ill-health. The Committee has discretion
to permit such awards to vest in other
circumstances or to agree to make a cash
payment in respect of such an award 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
base salary and the Chief Financial Officer is
expected to build a holding of two times base
salary. Executive Directors are required to
retain at least 50% of the shares (aſter 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, unless the Committee
determines otherwise.
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 DBP
(on a net-of-tax basis), but not PSP 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 usually
required to hold any shares vesting
under the PSP for a period of two years
aſter vesting.
The Executive Officers and senior
executives who participate in the Annual
Bonus Plan and PSP 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 usually 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 aſter cessation of
employment. This post employment holding
requirement does not apply to shares
purchased by an Executive Director in the
market which have not been awarded as
part of remuneration.
In order to reinforce this expectation,
and to the extent that the shareholding
requirement has not been reached,
all relevant vested DBP and PSP shares will
be held in a vested share plan account,
which will not usually 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.
The Committee retains the discretion
to adjust or waive all or part of the post
employment shareholding requirement in
appropriate circumstances. In exercising
this discretion, the Committee may
consider circumstances including (but
not limited to) the performance, conduct
and contribution of the participant.
Limited discretion to make
minor amendments to Policy
The Committee retains the discretion to
make minor amendments to the Policy as
may be required or reasonably necessary
for administrative reasons or to the extent
required or reasonably necessary to comply
with applicable laws and regulations.
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 Chair provided an overview of
the compensation of Executive Officers
at one of our Board Listening Sessions.
No comments were raised by the
employees attending that session.
Statement of consideration
of shareholder views
Angie Risley, the Committee Chair,
engaged with shareholders during
development of the Policy. The feedback
received was presented to and discussed
by the Committee and informed the
final shape of the proposed Policy
which is being put to the 2023 AGM.
The Committee Chair corresponded with
our top twenty shareholders regarding
our proposed 2023 Remuneration Policy
and also offered meetings to discuss our
remuneration arrangements. This included
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.
The Committee Chair and shareholders
appreciated the engagement and the
Committee took all comments received
on board during its subsequent discussions
and ensured further clarity was included
in the narrative detailing the proposed
changes to the new Policy (see page 118).
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OTHER INFORMATION
Remuneration
continued
Directors’ remuneration policy
continued
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 will
be payable. These fees will not exceed
the amounts which would normally be
paid to a permanent Executive Director
undertaking such duties and will not
include participation in short or long-term
incentive arrangements or benefit plans.
Additional Benefits
The Committee will have the discretion
to approve such additional benefits
for Non-Executive Directors as may
be required or reasonably necessary
in connection with the performance of
their duties, including without limitation
expenses and associated taxes.
Policy on recruitment arrangements
Any new Non-Executive Director will 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: (i) 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; and (ii) authorise the
payment of a contribution towards ongoing
administrative support services as may be
required or reasonably necessary to enable
the Chair to fulfil the required duties and
obligations of the role.
Terms 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 Committee has the discretion
to waive all or a portion of the notice period
of six months applicable for the Chair.
The Chair and Non-Executive Directors are
encouraged to acquire a shareholding in the
Company equivalent in value to their basic
fee within two years of their appointment
to the Board.
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.
No element of their remuneration is subject to performance. All payments made to the Chair are determined by the 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 is usually paid in shares in the third quarter of each year in order to further align Non-Executive Directors’ fees with the interests of shareholders.
Where appropriate, the Chair or Non-Executive Director may be provided with an alternative option of receiving their fee wholly in cash in return for them entering into a
commitment to separately purchase the required number of shares to comply with the above requirement.
How the component operates
Maximum levels of payment
Fees will be reviewed on an annual basis. In future, any increase will usually
be paid in shares until 25% of the total fees is paid in shares.
Fees are set in-line with market practice for companies of a similar size
and complexity.
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 and exchange rate fluctuation will be taken
into account when determining fees to be paid in alternative currencies.
Whilst it is not usually expected to increase the fees paid to the Non-Executive
Directors and the Chair by more than the increases paid to employees generally,
in certain circumstances (including periodic and substantial increases in activity
or time commitment), higher fees might become payable.
The total maximum aggregate fees payable to the Non-Executive Directors
will not exceed the limit set out in the Company’s Articles of Association.
Additional Fees
To compensate Non-Executive Directors for additional responsibilities such as Committee Chair or Senior Independent Director reflecting additional time involved
in such roles.
How the component operates
Maximum levels of payment
A fixed fee is paid, which is reviewed annually.
The aggregate amount of fees payable to the Non-Executive Directors may
not exceed the limit set out in the Company’s Articles of Association.
Intercontinental travel
To compensate Non-Executive Directors for the time spent travelling to attend meetings in another continent.
How the component operates
Maximum levels of payment
A fixed fee is paid, which is reviewed annually.
The aggregate amount of fees payable to the Non-Executive Directors may
not exceed the limit set out in the Company’s Articles of Association.
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Annual Report 2022
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 26 April 2023. 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 2022
In 2022, we held eight meetings and
determined two further matters by written
resolution. The Chief Executive Officer
and the Chief Human Resources Officer,
key members of the HR and Finance
functions, the Company Secretary and
Deputy Company Secretary also attended
all or part of some of the meetings, except
when their own remuneration was being
discussed. Attendance by the members
of the Committee at each meeting is set
out on page 116 of this Annual Report.
We also met with the independent
remuneration consultants, Deloitte LLP
(Deloitte), the remuneration advisors to
the Committee. The work carried out
by the Committee during the year is set
out on pages 116–118.
Since the year end, we have reviewed
the financial results for 2022 against
the targets under the short-term and
long-term incentive arrangements
jointly with the Audit Committee.
We have also determined base salary
increases for Executive Directors and
Executive Officers with effect from April
2023 and have determined the payouts
under the 2022 Annual Bonus Plan and
the vesting under the Performance
Share Programme 2020.
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 Policy,
undertook calculations relating to
the TSR performance conditions and
advised on annual bonus reviews.
The fees paid to Deloitte for advice to
the Committee during 2022, charged on
a time and expense basis, were £103,725
($127,696). Deloitte complies with the
Code of Conduct in relation to Executive
Remuneration Consulting in the UK and
the Committee is satisfied that their
advice is objective and independent.
Deloitte are to be appointed external
auditors of the Group effective from
1 January 2024. As a result Deloitte
are to be replaced as advisors to
the Remuneration Committee at the
conclusion of the Annual General
Meeting in April 2023. A tender
process is currently underway.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
Role of the Remuneration Committee
Main Responsibilities
–
Determination of Remuneration Policy for
the Chair, 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.
–
Engage with major shareholders and ensure
their views are sought and considered when
determining the Remuneration Policy.
Key activities of the Committee
during the year
–
Considered the terms of remuneration
for the outgoing and incoming CEO.
–
Reviewed the Remuneration Strategy for
the Executive Directors, Executive Officers
and senior executives.
–
Reviewed out-turns for determining payouts
to Executive Directors and Executive
Officers under the 2019 Performance Share
Programme, and 2021 Annual Bonus Plan.
–
Approved quantum of cash payments and
awards to Executive Directors and Executive
Officers under the 2021 Annual Bonus Plan
and 2019 Performance Share Programme.
–
Approved the 2021 Directors’ Remuneration
Report.
–
Considered principles for setting the targets
for the Annual Bonus Plan 2022 and 2022
Performance Share Programme.
–
Approved financial targets for the 2022
Annual Bonus Plan for Executive Directors,
Executive Officers and senior executives.
–
Approved financial measures and targets
for 2022 Performance Share Programme for
Executive Directors and Executive Officers.
–
Reviewed and consulted with shareholders on
changes proposed for the new Remuneration
Policy for approval by shareholders at the
Annual General Meeting in 2023.
–
Approved the TSR Peer Group for Performance
Share Awards to be made in 2022.
–
Noted Gender Pay Report and CEO Pay
Ratio figures.
–
Reviewed Chair fees.
–
Approved 2022 Remuneration Committee
Business Plan.
–
Reviewed the performance against the
targets under the 2022 Annual Bonus Plan,
and 2020, 2021 & 2022 Performance
Share Programme.
–
Commenced the search for a new
Remuneration Advisor.
Matters of a routine nature
considered by the Committee
–
Reviewed current plans and performance
versus targets.
–
Received updates on the external market
context and data.
–
Noted grants of awards under the
Company’s Share Plans.
–
Monitored dilution limits and the number
of shares available for use in respect of
discretionary and all-employee share plans.
–
Monitored adherence to shareholding
guidelines for Executive Directors.
Executive Officers and senior executives.
–
Received regulatory/best practice updates
from Deloitte and other consulting groups.
–
Reviewed and approved the Committee’s
Terms of Reference.
Single total figure on remuneration (audited)
The amounts for 2022 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.2311
(2021: £ to US$1.3753) and CHF to US$1.0469 (2021: CHF to US$1.0939).
Deepak Nath
Appointed 1 April 2022
Anne-Françoise Nesmes
Appointed 27 July 2020
Roland Diggelmann
Appointed 1 November 2019
1
2022
2021
2022
2021
2022
2021
Fixed pay
Base salary
$1,083,558
–
$747,224
$797,674
$361,181
$1,509,582
Pension payments
$22,875
–
$89,667
$95,721
$43,342
$182,587
Taxable benefits
$18,874
–
$15,248
$17,005
$10,284
$65,923
Total Fixed Pay
$1,125,243
–
$852,139
$910,400
$414,807
$1,758,092
Annual variable pay
Annual Incentive Plan/
Annual Bonus Plan – cash element
$371,888
–
$251,194
$398,053
$94,148
$672,167
Annual Incentive Plan/
Annual Bonus Plan – equity element
$371,887
–
$251,193
$398,053
$94,148
$672,167
Long-term variable pay
Performance Share Programme
–
–
–
–
–
–
Total Variable Pay
$743,775
–
$502,387
$796,106
$188,296
$1,344,334
Forfeited Incentives
2
Cash Bonus
$371,414
–
–
–
–
–
Non-Performance Based Awards
$2,132,844
–
–
–
–
–
Performance Based Award
$1,581,970
–
–
–
–
–
Total Forfeited Incentives
$4,086,228
Total Pay
$5,955,246
–
$1,354,526
$1,706,506
$603,103
$3,102,426
1
Stepped down from the Board on 31 March 2022.
2
Cash bonus and performance based award are part of annual variable pay and the non-performance based award is part of fixed pay. Total variable pay is $2,697,159. Total fixed pay is $3,258,119.
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Annual Report 2022
Base salary
The actual salary receivable for the year.
Pension payments
The value of the salary supplement in lieu of pension or contribution to any pension scheme
made by the Company.
Taxable benefits
The gross value of all taxable benefits (or benefits that would be taxable in the UK) received
in the year.
Annual Incentive Plan –
cash element/Annual Bonus Plan
The value of the cash incentive payable for performance in respect of the relevant financial year.
Annual Incentive Plan –
equity element/Annual Bonus Plan
The value of the equity element awarded in respect of performance in the relevant financial year
as described on pages 132–135 of this report.
Performance Share Programme
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 2023 this is based on
an estimated share price of 1,056.07p per share, which was the average price of a share over
the last quarter of 2022.
Total
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 (CHF) and for Anne-Françoise Nesmes from Sterling (GBP) using average exchange rates. Given currency movements in 2022,
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.
Forfeited Incentives
These relate to buy-out awards received by Deepak Nath in respect of outstanding incentives he forfeited on leaving his former
company (details of which were outlined on page 129 of the 2021 Annual Report). They comprise:
–
A cash bonus of $371,414 paid in November 2022 in respect of a forfeited 2022 cash bonus. This relates to legacy arrangements
implemented by his previous employer and was based on an estimate of the bonus he forfeited upon leaving Siemens Healthineers (“SH”).
The calculated value of the bonus was determined following confirmation from SH of performance against the targets attached to
the forfeited bonus.
–
Awards of 132,048 Restricted Stock Units (RSU) in respect of forfeited restricted share awards of an equivalent face value.
RSU awards over a total of 96,907 shares vested on 16 and 23 May 2022. RSU awards over a total of 12,161 shares vested on 8
and 14 November 2022. The shares are valued at 1,312p being the share price at the date of grant (29 April 2022). More details
are on page 138.
–
117,245 performance shares that vested in December 2022 in respect of a forfeited performance share award of an equivalent face
value originally granted in 2018. The number of shares that vested was determined following confirmation of performance against
the targets attached to the original award. The shares are valued at 1096p being the share price at the date of vesting on 8 December
2022. More details of this award are on page 138 alongside details of the additional 182,228 performance shares awarded to Deepak
that will vest, and will be included in the single figure table, in 2023 and 2024.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
Fixed pay
Base salary
As normal, the base salaries of the Executive Directors were reviewed in February 2023 and it was determined that their salaries
be increased by 3.5%. The general increase to base pay in 2023 (inclusive of a 2.5% off-cycle increase), 6.5% for US and 6% for
UK employees.
Deepak Nath was appointed as Chief Executive Officer on 1 April 2022 with a base salary of $1,475,000. This has increased by 3.5%
to $1,526,625 effective from 1 April 2023.
Anne-Françoise Nesmes’ base salary also increased by 3.5% to £637,519 (2022: £615,960) effective from 1 April 2023.
Pension payments
Deepak Nath received a Company pension contribution of $22,875 in line with the limits set forth by the US tax authority and the
pension arrangement for the wider US workforce.
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.
Roland Diggelmann participated in the Swiss Profund pension plan. He was employed under a Swiss contract, which is where he
was domiciled. Between 1 January and 31 March 2022 (the period in which he was CEO and a member of the Board), total Company
pension contributions for Roland amounted to CHF41,400, which is equivalent to 12% of his base salary for that period.
Benefits
In 2022, Deepak Nath received life insurance cover of $1 million plus accidental death and dismemberment insurance of $1 million.
Anne-Françoise Nesmes received life insurance cover of seven times basic salary for the period 1 January 2022 to 31 March 2022
which was changed to four times basic salary in line with the changes made to the wider UK workforce. Roland Diggelmann received
death in service cover of seven times basis salary.
Each Executive Director received health cover for themselves and their families, a car and fuel allowance and financial consultancy
advice. The same arrangements will apply in 2023. The following table summarises the value of benefits in respect of 2022 and 2021.
Deepak Nath
(Appointed 1 April 2022)
Anne-Françoise Nesmes
Roland Diggelmann
(Stepped down from the Board
on 31 March 2022)
2022
2021
2022
2021
2022
2021
Health cover
$8,871
–
£986
£965
CHF1,723
CHF6,893
Car and fuel allowance
$8,467
–
£11,400
£11,400
CHF8,100
CHF32,400
Financial consultancy advice
£1,248
–
–
–
–
£16,680
Annual incentives
Annual Bonus Plan 2022
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 aſter three years.
The performance measures and weightings which applied to the Annual Bonus Plan 2022 were as follows:
Weighting
Threshold as
a percentage
of salary
Target as a
percentage
of salary
Maximum as
a percentage
of salary
Revenue
40%
12.8%
43%
86%
Trading margin
40%
12.8%
43%
86%
Business (including ESG) Objectives
1
20%
6.4%
21.5%
43%
1
25% of this element of the bonus was based on ESG objectives.
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Annual Report 2022
The 2022 targets and outturn for revenue and trading margin are shown below:
Threshold
Target
Maximum
Actual
1
Revenue
$5,140m
$5,372m
$5,493m
$5,380m
Trading Margin
18.0%
18.4%
18.9%
17.2%
1
Actual revenue and trading margin is compared with the target range at constant exchange rates to ensure a like-for-like comparison. See page 236.
Financial objectives
The revenue target for 2022 is set by reference to our expectations for growth for the year. Threshold was set at 4.3 percentage points
below target and maximum was set at 2.3 percentage points above target.
The trading margin target was set by reference to budgeted trading profit margin for the year. Threshold and maximum were set
at 93.6% and 105% of budgeted trading profit margin, divided by threshold and maximum revenue respectively.
Performance resulted in an overall payout of 53% of target against the financial objectives.
Accordingly, the following amounts have been earned by Deepak Nath, Anne-Françoise Nesmes and Roland Diggelmann for 2022
under the Annual Bonus Plan in respect of their financial objectives.
Deepak Nath
$505,931
Anne-Françoise Nesmes
£277,591
Roland Diggelmann
CHF157,782
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 and ESG objectives
In determining performance against the business and ESG 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 objectives were determined relating to achievement of the corporate strategy.
For 2022, these objectives were Growth, People and Business processes as in 2021. Performance against these business objectives
was considered alongside how the Executive Directors 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 and ESG objectives will be paid out as follows:
Performance
% of base salary
Below expectations
Nil
Partially met expectations
6.4%
In-line with expectations (100% of target)
21.5%
Above expectations
43%
When setting 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 and ESG objectives. The table below sets out how the Chair
and the Board have assessed how Deepak Nath and Anne-Françoise Nesmes have performed against the objectives of Growth, People
and Business Processes.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
Annual incentives
continued
Annual Bonus Plan 2022
Deepak Nath
Anne-Françoise Nesmes
People
–
Exceeded against target to continue to embed the culture pillars
and purpose to drive engagement and continuity as evidenced
by improved Gallup engagement.
–
Achieved against target to strengthen Executive Committee
effectiveness aligned to new strategy with clear objectives to
measure performance.
–
Partially achieved against target to have talent in place to deliver
success and make progress to build a more diverse and inclusive
workforce. Missed target of voluntary attrition and incumbent roles
filled from our talent pipeline of high value roles. Exceeded target
of women in senior leadership with additional focus required on
increasing women in middle-management roles.
–
Achieved against target to continue development and succession
planning for leadership team roles with internal successors identified.
–
Achieved against target to implement people Finance priorities
per roadmap with launch of the Finance Competency Framework.
–
Achieved against target to put in place IT and GBS succession plans,
strengthening GBS leadership with a clear organisational design.
–
Achieved against target to drive IDE, holding immersion sessions
on Culture Commitments to foster adoption.
Organisation and Process
–
Achieved against target to strengthen, accelerate and transform
Smith+Nephew for structurally higher growth and greater patient
impact. Defined a clear 12-point plan to transform the organisation
with established KPIs, governance and milestones.
–
Achieved against our target to reduce Scope 1 & 2 greenhouse
gasses by 70% by the end of 2025 with a carbon roadmap developed.
–
Achieved against the delivery of our waste to landfill target for
Malaysia and Memphis sites.
–
Partially achieved against the target of a clear Scope 3 plan and
milestones outline, with the roadmap for Scope 3 under development.
–
Achieved against target to uphold the highest standards of Quality
and Compliance.
–
Achieved against target to partner with Executive Committee
to drive trading margin improvement, supporting 12-point plan
milestones with financial actions and milestones.
–
Achieved against target to define IT/Enterprise Resource Planning
strategy for medium to long term, including assessment of SAP,
enterprise strategy and roadmap.
–
Achieved against target to provide stronger data and insights
to support decision making including market analysis.
–
Lead the efforts to produce TCFD reporting resulting in
integrated ESG reporting and a clear plan for Scope 3 disclosures.
Leveraged framework tools to identify risks and opportunities
and developed scenario analysis for climate related financial
risks and opportunities.
–
Achieved against target to improve Finance and IT control
environment, ensuring cyber security plans and IT Sox controls
are implemented.
Customer
–
Achieved against the target of 80% delivery of successful launches
for our top 10 NPD programs.
–
Achieved against the target to launch at scale through the
prioritization of development programmes.
–
Achieved against target of seamless integration of value-creating
acquisitions and performance against plan. Achieved against target
to actively engage with key stakeholders to build support for our
new strategy and highlight progress.
–
Drove rollout of the sales, inventory and operations planning (SIOP)
process and on track to deliver order-to-cash process.
–
Achieved against target to ensure comprehensive disclosure
and reporting that meets the needs of stakeholders
This resulted in a calculated bonus achievement of 100% of
target in respect of Deepak Nath’s business and ESG objectives.
This resulted in a calculated bonus achievement of 100% of
target in respect of Anne-Françoise Nesmes’ business and
ESG objectives.
Roland departed on 31 March 2022. The rating of Partially achieved reflects the performance against business and ESG objectives for
the period for which he was employed.
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Annual Report 2022
Therefore the total amount earned by Executive Directors in 2022 under the Annual Bonus Plan 2022 is:
Amount earned
in respect of
financial objectives
Amount earned
in respect of
business objectives
Total
amount earned
Total
as percentage
of target
Total
as percentage
of salary
Roland Diggelmann
1
CHF157,782
CHF22,080
CHF179,862
48.5%
52%
Deepak Nath
2
$505,931
$237,844
$743,775
63%
67%
Anne-Françoise Nesmes
£277,591
£130,499
£408,090
63%
67%
1
Bonus paid is for employment during the period 1 January 2022 to 31 March 2022.
2
Bonus paid is for employment during the period 1 April 2022 to 31 December 2022.
The Board has reviewed the formulaic calculation of these figures. We acknowledged that during 2022, the share price had slightly fallen,
that the Company had delivered a mixed performance ending the year in a much stronger position and that there had been no reputational
risk issues during the year. We therefore determined this fairly represents the performance of the Company and of the Executive
Directors during 2022.
50% of the total amount earned will be paid in cash and the remaining 50% will be deferred into shares which will vest aſter three years.
2023 Annual Bonus
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 aſter three years.
The performance measures and weightings which apply to the Annual Bonus Plan 2023 are as follows:
Weighting
Threshold as
a percentage
of salary
Target as a
percentage
of salary
Maximum as
a percentage
of salary
Revenue
40%
12.8%
43%
86%
Trading margin
40%
12.8%
43%
86%
Business objectives
15%
4.8%
16.125%
32.25%
ESG objectives
5%
1.6%
5.375%
10.75%
For reasons of commercial sensitivity, we are unable to disclose the precise targets for revenue and trading margin for 2023 now, which
are both set by reference to our expectations for growth for the year. They will be disclosed retrospectively in the 2023 Annual Report,
when performance against those targets are determined.
Long-term incentives
Performance Share Programme
Performance Share Programme 2020
Since the end of the year, the Committee has reviewed the vesting of conditional awards made to former Executive Directors in 2020
under the Global Share Plan 2020. Vesting of the conditional awards made in 2020 was subject to performance against four equally
weighted performance measures – TSR, global revenue growth, cumulative free cash flow and return on invested capital – measured
over a three-year period commencing 1 January 2020.
TSR performance
25% of the award was based on the Company’s TSR performance relative to two equally weighted peer groups
against which the Company’s TSR performance was measured as follows:
–
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’). The Company’s TSR was -33.7% against an index TSR for the peer group of 14.2%.
–
FTSE 100 constituents excluding financial services and commodities companies. This is in response to shareholders who assess
our performance not based on sector, but instead based on the index we operate in. The Company’s TSR was -33.7% against an
index TSR for the peer group of -8.1%.
In aggregate therefore, the Company’s TSR performance results in a final vesting outcome of 0% out of the 25% target.
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ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
Long-term incentives
continued
Performance Share Programme
continued
Global revenue growth
25% of the award was based on global revenue growth. The threshold set in 2020 was $16,628 million
with a target of $16,968 million. Over the three-year period, the adjusted revenues in Global Revenue Growth were $14,918 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.
Cumulative free cash flow performance
25% of the award was based on cumulative cash flow performance. The target set in 2020
was $2,285 million with maximum at $2,742 million. Over the three-year period, the adjusted cumulative free cash flow was $958 million
which was below threshold. These adjustments include items such as Board-approved M&A, restructuring programmes and translational
foreign exchange.
This part of the award therefore vested at 0% out of the 25% target.
Return on invested capital (ROIC)
25% of the award was based on return on invested capital defined as follows:
Operating profit
1
less adjusted taxes
2
(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 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 overdraſts, borrowings and loans, IFRS 16 lease liabilities and right-of-use assets,
and cash at bank.
The target set in 2020 was an average over three years of 12.0% with maximum at 13.5%. The adjusted average ROIC measurement
for the three years was 8.2%. 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 2020 vested at 0% of target as follows:
Threshold
Target
Maximum
Actual
Percentage
Vesting
TSR
Equal to Index
–
8% Above Index
Below Index
0%
Global revenue growth
$16,628m
$16,968m
$17,646m
$14,918m
0%
Cumulative free cash flow
$2,057m
$2,285m
$2,742m
$958m
0%
Return on invested capital
10.5%
12.0%
13.5%
8.2%
0%
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 2022
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 to a maximum value of 275%
of salary (137.5% for target performance) measured over the three financial years commencing 1 January 2022 against four equally
weighted performance measures: Indexed TSR, Global Revenue Growth, ROIC and Cumulative Free Cash Flow. The performance
conditions for these awards were determined in April 2022 and the awards were made in May 2022. The maximum payout under
each element will only be for significant outperformance. 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.
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TSR performance
25% of the award is based on the Company’s TSR performance measured against two equally weighted peer groups
as defined for the awards made in 2020.
TSR performance is relative to the two separate indices as follows:
Relative TSR
Award vesting as % of salary at date of grant
Sector Based Peer Group
FTSE 100 Peer Group
Below the index
Nil
Nil
Equalling the index (Threshold vesting at 50% of target)
8.6%
8.6%
8% above the index (Maximum vesting at 200% of target)
34.4%
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.
Global revenue growth
25% of the award is based on global revenue growth against the following targets:
Revenue growth over three-year period commencing 1 January 2022
Award vesting as % of salary
Below Threshold
Nil
Threshold (–5% of target)
17.2%
Target – set by reference to our expectations
34.4%
Maximum or above (+5% of target)
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 considered to be potentially price-sensitive information. This target however will be disclosed in
the 2024 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.
Return on invested capital (ROIC)
25% of the award is based on ROIC, as defined for the awards made in 2020, with the
following targets:
Return on Invested Capital (three-year average)
Award vesting as % of salary
Below Threshold 8%
Nil
Threshold 8% (–1% of target)
17.2%
Target 9%
34.4%
Maximum or above 10.5% (+1.5% of target)
68.8%
Awards will vest on a straight-line basis between these points.
Cumulative free cash flow
25% of the award is based on cumulative cash flow performance defined for the awards made in 2020,
with the following targets:
Cumulative free cash flow
Award vesting as % of salary
Below $1,535m
Nil
$1,535m (–20% of target)
17.2%
$1,913m
34.4%
$2,104m or more (+10% of target)
68.8%
The maximum has been set significantly above target reflecting the maximum opportunity for outperformance.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
Performance Share Programme 2023
In early 2023, the Remuneration Committee considered the performance framework and determined the targets for the Performance
Share Programme (“PSP”) awards due to be made in 2023. It was agreed that performance would be measured under the same four
equally weighted performance measures which applied in 2022 – indexed TSR, Global Revenue Growth, ROIC, and Cumulative Free
Cash Flow, as set out below. The Executive Directors will each be granted an award under the PSP on 9 March 2023 to the value of 275%
of their base salary.
TSR performance
25% of the award will be based on the Company’s TSR performance, measured against the same peer groups and
with the same targets as the awards made in 2022.
Revenue growth
25% of the award will be based on global revenue growth. 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 considered to be potentially
price-sensitive information.
ROIC
25% of the award will be based on ROIC as defined for the awards made in 2022. Targets will be 8.5% at Threshold, 9.5% at Target
and 10.5% at Maximum.
Cumulative free cash flow
25% of the award will be based on cumulative cash flow as defined for the awards made in 2022. It is not
possible to disclose precise targets for this measure as this is considered to be commercially sensitive information.
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 2020. The performance conditions and performance periods applying to
these awards are detailed below:
Date granted
Outstanding number of
ordinary shares
under award at maximum
Date of vesting
Deepak Nath
20 May 2022
259,422
20 May 2025
Anne-Françoise Nesmes
20 May 2022
134,648
20 May 2025
Anne-Françoise Nesmes
21 May 2021
102,936
21 May 2024
Anne-Françoise Nesmes
21 Dec 2020
2
42,726
21 Dec 2023
Roland Diggelmann
1
21 May 2021
55,282
21 May 2024
Roland Diggelmann
1
21 May 2020
2
135,766
21 May 2023
1
Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022. The awards shown have been pro-rated based on the length of service during the
performance period.
2
The awards granted on 21 May 2020 and 21 December 2020 did not achieve the performance conditions and lapsed in full on 21 February 2023.
Summary of scheme interests awarded during the financial year (audited)
Director
Deepak Nath
1,2
Anne-Françoise Nesmes
Roland Diggelmann
3
Number
of shares
Face value
Number
of shares
Face value
Number
of shares
Face value
Performance Share Programme award
at maximum (see pages 135–137)
259,422
£3,263,528.76
134,648
£1,693,871.84
0
£0
Deferred Share Bonus Plan award
(2021 bonus)
0
£0
24,169
£289,423.78
42,113
£504,303.18
Buy-out award agreement
1
441,737
£5,795,589.44
N/A
N/A
N/A
N/A
1
As outlined on page 129 of the 2021 Annual Report, Deepak Nath’s buy-out awards are in respect of outstanding equity incentives he forfeited on leaving his former company. All awards have
been provided on a like-for-like basis in terms of the value provided and their performance and/or vesting periods. The awards (granted on 29 April 2022) comprised the following: 132,048 RSUs
vesting between May 2022 and November 2025 127,461/84,868/97,360 performance shares vesting in November 2022/2023/2024 subject to the original performance conditions applicable
to the forfeited performance share awards granted to Deepak by Siemens Heathineers AG (“SH”) in November 2018/2019/2020.
2
As noted above, a performance award over 127,461 shares was granted to Deepak Nath with vesting subject to the performance conditions applicable to the performance share award over SH
shares originally granted to Deepak by SH in November 2018. Following completion of the performance measurement period, SH provided confirmation that 91.985% of the original award would
have vested. Accordingly, 117,245 shares from the buy-out award vest with the balance, 10,216 shares, lapsing.
3
Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.
Please see Policy Table contained within the Annual Report 2020 on pages 128–137 on our website at www.smith-nephew.com
for details of how the above plans operate. Following approval of the 2020 Remuneration Policy, no Annual Equity Incentive Programme
awards were granted during 2022. The number of shares is calculated using the closing share price on the day before grant, which for
the Performance Share Programme award granted on 20 May 2022 was 1,258.0p. The Deferred Share Bonus Plan award granted on
9 March 2022 is calculated using the closing share price on the day before grant being 1,197.5p. The buy-out award agreement granted
on 29 April 2022 to Deepak Nath is calculated using the closing share price on the day before grant being 1,312.0p.
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Annual Report 2022
Single total figure on remuneration
Chair and Non-Executive Directors (audited)
Director
Basic annual fee
1
Committee Chair/
Senior Independent
Director fee
Intercontinental
travel fee
Total
2022
2021
2022
2021
2022
2021
2022
2021
Roberto Quarta
£428,645
£428,645
–
–
£3,500
–
£432,145
£428,645
Jo Hallas
2
£64,250
£18,173
–
–
£3,500
–
£67,750
£18,173
Erik Engstrom
£69,500
£69,500
–
–
–
–
£69,500
£69,500
Robin Freestone
3
£53,750
£69,500
£15,000
£20,000
–
–
£68,750
£89,500
John Ma
$129,780
$113,472
–
–
$21,000
–
$150,780
$113,472
Katarzyna Mazur-Hofsaess
£69,500
£69,500
–
–
£3,500
–
£73,000
£69,500
Rick Medlock
£69,500
£69,500
£20,000
£20,000
£3,500
–
£93,000
£89,500
Marc Owen
4
$129,780
$129,780
$35,000
$35,000
$21,000
$7,000
$185,780
$171,780
Angie Risley
£69,500
£69,500
£20,000
£20,000
£3,500
–
£93,000
£89,500
Bob White
$129,780
$129,780
–
–
$7,000
–
$136,780
$129,780
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
Jo Hallas was appointed as a Non-Executive Director with effect from 1 February 2022.
3
Robin Freestone retired as a Non-Executive Director with effect from 30 September 2022.
4
Marc Owen waived his right to receive a $35,000 increase in fees pursuant to his appointment as Senior Independent Director on 1 October 2022.
Chair and Non-Executive Director fees
In February 2023 the fees paid to the Chair and the other Non-Executive directors were reviewed and it was determined that with effect
from 1 April 2023 the fees paid will remain unchanged:
Annual fee paid to the Chair
£428,645 of which £107,161 paid in shares
Annual fee paid to Non-Executive Directors
£69,500 of which £6,500 paid in shares or $129,780 of which $9,780 paid in shares
Intercontinental travel fee (per meeting)
£3,500 or $7,000
Fee for Senior Independent Director and Committee Chair
£20,000 or $35,000
As part of the appointment of the new Chair, the Committee undertook the first detailed review of the associated fee since 2014 when
the current Chair was first appointed. The review took into account a range of factors including relevant market data and the anticipated
time commitment involved with the role. The resulting fee agreed by the Committee is £450,000 effective from 15 September 2023
and the new Chair will be required, each year, to purchase shares worth at least 25% of his post-tax annual fee.
Payments made to former Directors (audited)
Roland Diggelmann ceased to be Chief Executive Officer and a member of the Board on 31 March 2022. As detailed in last year’s
Remuneration Report, in accordance with his employment agreement and with the Remuneration Policy approved by shareholders
on 9 April 2020, Roland Diggelmann continued to receive his base salary of CHF1,380,000, pension payments and benefits up to
28 February 2023.
Roland Diggelmann holds an award over 42,113 shares under the Deferred Share Bonus Plan (“DBP”) which was granted on 9 March
2022. This represented 50% of his 2021 bonus which vests aſter three years in line with the Remuneration Policy. He will receive a
further award under the DBP on 9 March 2023 to the value of 50% of his 2022 annual bonus. Roland also holds awards (in aggregate)
over 191,048 shares at maximum under the Performance Share Programme, exclusive of dividend equivalents. These shares were
pro-rated to his date of leaving and vest subject to achievement of the relevant performance conditions.
Legal fees incurred in connection with Roland Diggelmann’s stepping down from the Board of up to CHF 5,000 for Swiss legal advice
and of up to £5,000 for English law advice are payable by the Company.
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 125 of the Policy Report contained within the
Annual Report 2020.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
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:
Deepak Nath
Roland Diggelmann
3
Anne-Françoise Nesmes
1 January
2022
31 December
2022
10 February
2023
1
1 January
2022
31 December
2022
10 February
2023
1
1 January
2022
31 December
2022
10 February
2023
1
Ordinary shares
–
97,784
2
97,784
2
18,207
N/A
N/A
–
–
–
Share options
–
–
–
2,534
–
–
1,621
1,621
1,621
Deferred Share Bonus Plan award
(2021 bonus)
–
–
–
–
42,113
42,113
–
24,169
24,169
Buy-out award agreement
–
205,208
205,208
–
–
–
–
–
–
Performance Share Programme awards
2
–
259,422
259,422
385,420
191,048
191,048
145,662
280,310
280,310
1
The latest practicable date for this Annual Report.
2
These share awards are subject to further performance conditions before they may vest. The awards granted on 21 May 2020 and 21 December 2020 did not achieve the performance conditions
and therefore lapsed in full on 21 February 2023 (see page 138 for further details).
3
Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.
The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company.
Beneficial interests of the Directors in the ordinary shares of the Company are as follows:
Director
1 January 2022
(or date of
appointment
if later)
31 December 2022
(or date of
retirement
if earlier)
10 February
2023
1
Shareholding as %
of annual salary/
fee
2,3,9
Roberto Quarta
4
67,468
73,300
73,300
196.51
Roland Diggelmann
5
18,207
18,207
18,207
37.68
Erik Engstrom
16,442
16,774
16,774
276.95
Robin Freestone
6
16,420
16,752
N/A
N/A
Jo Hallas
7
–
5,332
5,332
95.23
John Ma
4
296
924
924
9.94
Katarzyna Mazur-Hofsaess
366
880
880
14.53
Rick Medlock
3,264
3,564
3,564
58.84
Deepak Nath
8
–
97,784
97,784
92.14
Anne-Françoise Nesmes
–
–
–
23.86
Marc Owen
4
8,072
16,478
16,478
177.25
Angie Risley
5,011
5,343
5,343
88.22
Bob White
4
6,656
7,284
7,284
78.35
1
The latest practicable date for this Annual Report.
2
Calculated using the closing share price of 1,147.5p per ordinary share and $27.92 per ADS on 10 February 2023, and an exchange rate of £1:$1.21125.
3
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, John Ma, Marc Owen and Bob White hold some of their shares in the form of ADS.
5
Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.
6
Robin Freestone retired from the Board as a Non-Executive Director with effect from 30 September 2022.
7
Jo Hallas was appointed Non-Executive Director with effect from 1 February 2022.
8
Deepak Nath was appointed Chief Executive Officer with effect from 1 April 2022.
9
For the purposes of calculating an Executive Director’s performance against their shareholding requirement, ordinary shares or ADRs held by the individual and their immediate family are included
as are unvested awards under the DBP (on a net of tax basis) but not awards subject to an ongoing performance condition. The percentages in this column are consistent with this methodology.
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 2021 and 2022 compared to that of employees
generally was as follows:
% change 2021/2022
% change 2020/2021
% change 2019/2020
Salary/fees
Taxable
benefits
Annual
incentive
Salary/fees
Taxable
benefits
Annual
incentive
Salary/fees
Taxable
benefits
Annual
incentive
Executive Directors
CEO
1
Deepak Nath
0%
-55.54%
44.89%
0%
0%
N/A
0%
0%
N/A
Roland Diggelmann
CFO
Anne Françoise Nesmes
4.62%
3.97%
-29.50%
0%
0%
N/A
4.00%
-57.00%
-100.00%
Graham Baker
Non Executive Directors
2
0%
0%
N/A
0%
0%
N/A
0%
N/A
N/A
Average of all employees
5.95%
N/A
N/A
1.64%
N/A
N/A
3.30%
N/A
N/A
1
Represents the difference between Roland Diggelmann and Deepak Nath.
2
There was no change to the fees paid to Non-Executive Directors during 2022.
The average cost of wages and salaries for employees generally decreased by 1.19% in 2022 (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 Plan
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 where 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.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Remuneration
continued
Remuneration implementation report
continued
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 2022. Figures are calculated by
reference to 31 December 2022 using actual pay data from 1 January 2022 to 31 December 2022. The single figure for remuneration
for each employee includes earned salary, annual incentive, allowance, pension and benefits for 2022. Part-time employees have
been excluded for the purpose of calculations. The Chief Executive Office single figure is an amalgamation of the data for the two
individuals who held the post during the year.
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 the 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.
The table below sets out the ratio at the median, lower and upper quartiles:
Year
P25 (lower
quartile)
P50
(median)
P75 (upper
quartile)
2019
116:1
81:1
51:1
2020
42:1
29:1
19:1
2021
71:1
49:1
32:1
2022
160:1
107.1
70:1
In 2022, the ratio increased due to the impact of the buy-out award agreement made to Deepak Nath. Excluding this one-off
arrangement, the median ratio would have been 47:1.
The table below provides the total pay figure used for each quartile employee, and the salary component within this.
Component
CEO
1
P25 (lower
quartile)
P50
(median)
P75 (upper
quartile)
Salary
$1,816,153
$38,619
$59,669
$52,021
Total pay
$6,103,705
$40,977
$61,046
$93,464
1
Roland Diggelmann is paid in Swiss Francs and this figure was converted into US Dollars for comparative reasons using CHF to US$1.046901.
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 2022 and 2021 on remuneration, the attributable profit for each year and the
dividends declared and paid in each year.
For the year to
31 December
2022
For the year to
31 December
2021
% change
Attributable profit for the year
$223m
$524m
-57%
Dividends paid during the year
$327m
$329m
0%
Share buy-back
1
$158m
$0m
+100%
Total Group spend on remuneration
$1,565m
$1,562m
0%
1
Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. In December 2021 we announced an updated capital allocation policy to
prioritise the use of cash. The 2022 share buyback programme commenced on 22 February 2022 and $150 million was completed by 31 August 2022. As macroeconomic conditions continued
to be uncertain, including higher cost inflation, the Board decided it was prudent to delay further buybacks until conditions improved. We remain committed to returning surplus cash to
shareholders over time.
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Annual Report 2022
Total Shareholder Return
A graph of the Company’s TSR performance compared to that of the FTSE 100 index, of which the Company, is a constituent is shown
below in accordance with Schedule 8 to the Regulations.
Dec 2014
Dec 2012
Dec 2013
Dec 2015
Dec 2016
Dec 2018
Dec 2019
Dec 2022
Dec 2021
Dec 2020
Dec 2017
Source: DataStream
Smith & Nephew plc
FTSE 100
Ten-year Total Shareholder Return
(measured in UK Sterling, based on monthly spot values)
350
300
250
200
150
100
50
0
As we also compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 135),
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.
Source: DataStream
Medical Devices comparators that are still trading for awards made since 2012
Dec 2014
Dec 2012
Dec 2013
Dec 2015
Dec 2016
Dec 2018
Dec 2019
Dec 2022
Dec 2021
Dec 2020
Dec 2017
Smith & Nephew plc
Medical Devices
Ten-year Total Shareholder Return
(measured in US Dollars, based on monthly spot values)
1,000
800
600
400
200
0
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
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
Long-term incentive vesting rates
against maximum opportunity
Chief Executive Officer
Single figure of total
remuneration $
Annual Cash Incentive
payout against maximum %
Performance Share
Programme shares %
2022
Deepak Nath
1
$5,955,246
32
–
2022
Roland Diggelmann
$603,103
24
–
2021
Roland Diggelmann
$3,102,426
41
–
2020
Roland Diggelmann
$1,697,773
0
5
–
2019
Roland Diggelmann
2
$265,814
–
–
2019
Namal Nawana
3
$4,489,374
71
6
–
2018
Namal Nawana
$2,883,632
69
–
2018
Olivier Bohuon
4
$2,383,582
63
46.5
2017
Olivier Bohuon
$5,116,689
61
54
2016
Olivier Bohuon
$3,332,850
30
8
2015
Olivier Bohuon
$5,342,377
75
33.5
2014
Olivier Bohuon
$6,785,121
43
57
2013
Olivier Bohuon
$4,692,858
84
0
1
Appointed Chief Executive Officer on 1 April 2022.
2
Appointed Chief Executive Officer on 1 November 2019 and stepped down on 31 March 2022.
3
Appointed Chief Executive Officer on 7 May 2018 and resigned on 31 October 2019.
4
Retired as Chief Executive Officer on 7 May 2018.
5
Due to the impact of Covid upon the Chief Executive Officer’s financial targets, a cash award of 0% was achieved.
6
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%.
Gender pay ratio
In 2022, 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 are seeing improvements year-on-year. Our mean pay gap for the UK has decreased from 20% in 2021 to 16% in 2022,
and the median gap has decreased from 17% in 2021 to 16% in 2022. 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 Share Bonus Plan. They are expected to hold up to their shareholding requirement only. These shares are held
in the vested Share Plan Account provided by the Company’s share plan administrator.
Statement of voting at Annual General Meeting
At the Annual General Meeting held on 13 April 2022, votes cast by proxy and at the meeting and votes withheld in respect of the
votes on the Directors’ Remuneration Report are noted below. In addition, votes cast by proxy and at the meeting and votes withheld
in respect of the votes on the Directors’ Remuneration Policy, which was last approved by shareholders on 9 April 2020 are noted below:
Resolution
Votes for
% for
Votes
against
% against
Total votes
validly cast
Votes
withheld
Approval of the Directors’ Remuneration report
(excluding policy)
647,076,103
96.71
22,010,946
3.29
669,087,049
1,731,661
Approval of the Directors’ Remuneration Policy
at the 2020 Annual General Meeting
676,749,445
97.71
15,843,720
2.29
692,593,165
352,762
144
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Annual Report 2022
Senior management remuneration
The Group’s administrative, supervisory and management body (senior management) comprises for US reporting purposes,
Executive Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 86–89.
Compensation paid to senior management in respect of 2020, 2021 and 2022 was as follows:
2022
2021
2020
Total compensation (excluding pension emoluments, but including cash payments
under the performance-related incentive plans)
$17,211,000
$15,795,000
$12,369,000
Total compensation for loss of office
–
–
–
Aggregate increase in accrued pension scheme benefits
–
–
–
Aggregate amounts provided for under supplementary schemes
$1,626,000
$1,454,000
$1,753,000
As at 10 February 2023, senior management owned 530,016 shares and 8,457 ADSs, constituting less than 0.063% 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 10 February
2023 by members of senior management are as follows:
Share awards
granted during
the year
Total share
awards held as at
10 February
2023
Equity Incentive Programme awards
0
99,066
Deferred Share Bonus Plan awards
161,396
108,506
Performance Share Programme awards at maximum
1,400,882
2,121,358
Performance Share Programme – Supplementary awards
0
41,898
Conditional Share Awards under the Global Share Plan 2020
126,337
229,896
Buy-Out Award Agreement
441,737
205,208
Options under Employee ShareSave plans
2,135
3,756
The Smith+Nephew Employee Share Trust
Note 19.2 of these accounts states the movement in Treasury Shares and the Trust during 2022. No more shares are held within the
Trust than are required for the next twelve 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 2022 is held within the Trust. At 31 December
2022 shares were held in the Trust representing 0.37% 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 (2013 to 2022), the number of new shares issued under our share plans has been as follows:
All-employee share plans
7,102,563 (0.81% of issued share capital as at 10 February 2023)
Discretionary share plans
15,478,364 (1.77% of issued share capital as at 10 February 2023)
By order of the Board, on 21 February 2023
Angie Risley
Chair of the Remuneration Committee
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Statement of Directors’ responsibilities
147
Independent auditor’s UK report
148
Group financial statements
164
Notes to the Group accounts
168
Company financial statements
221
Notes to the Company accounts
223
Accounts
146
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Annual Report 2022
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 UK-adopted international
accounting standards 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 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 UK-adopted
international accounting standards
and IFRS as issued by the IASB;
–
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.
In accordance with Disclosure Guidance
and Transparency Rule 4.1.14R, the
financial statements will form part of
the annual financial report prepared
using the single electronic reporting
format under the TD ESEF Regulation.
The auditor’s report on these financial
statements provides no assurance
over the ESEF format.
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 IFC–81.
The Directors’ Report, prepared in
accordance with the requirements of
the Companies Act 2006 and the UK
Listing Authority’s Listing Rules, and
Disclosure Guidance and Transparency
Rules, comprising pages 7, 20–21, 29–45,
47, 48–53, 56–68, 69–80, 84, 92–93,
97–100, 103–107, 108–109, 112–115,
197–198, 220, 225–228 and 240–248,
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 21 February 2023
Helen Barraclough
Company Secretary
Statement of Directors’ responsibilities in respect
of the Annual Report and Financial Statements
147
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s report to the
members of Smith & Nephew Plc
What our opinion covers
We have audited the Group and Parent Company financial statements of Smith & Nephew plc (“the Company”) for the year ended
31 December 2022 (FY22) included in the Annual Report, which comprise:
Group (Smith & Nephew plc and its subsidiaries)
Parent Company (Smith & Nephew plc)
–
The Group Income Statement.
–
Group Statement of Comprehensive Income.
–
Group Balance Sheet.
–
Group Cash Flow Statement.
–
Group Statement of Changes in Equity.
Notes 1 to 23 to the Group financial statements,
including the accounting policies in note 1.
–
Company Balance Sheet.
–
Company Statement of Changes in Equity.
Notes 1 to 9 to the Parent Company financial statements,
including the accounting policies in note 1.
Additional opinion in relation to IFRS as adopted by the IASB
As explained in Note 1 to the Group financial statements, the Group, in addition to complying with its legal obligation to apply
UK-adopted international accounting standards, has also applied IFRS as issued by the International Accounting Standards Board (IASB).
In our opinion, the Group financial statements have been properly prepared in accordance with IFRS as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit
opinion and matters included in this report are consistent with those discussed and included in our reporting to the Audit Committee (“AC”).
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.
1. Our opinion is unmodified
In our opinion:
–
the financial statements of Smith & Nephew plc give a true and fair view of the state of the Group’s and of the Parent Company’s
affairs as at 31 December 2022, and of the Group’s profit for the year then ended;
–
the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;
–
the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including
FRS 101 Reduced Disclosure Framework; and
–
the Group and Parent Company financial statements have been prepared in accordance with the requirements of the Companies
Act 2006.
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Annual Report 2022
2. Overview of our audit
Factors driving our view of risks
Following our FY21 audit, and considering developments affecting
the Group since then, we have updated our risk assessment.
Consistent with FY21 audit, we determined Provision for metal-on-
metal hip products and Excess and Obsolescence (E&O) provision
for Orthopaedics inventory as key audit matters due to a high
degree of estimation uncertainty, with a potential range of outcomes
greater than our materiality for the financial statements as a whole.
We have identified Recoverability of the Orthopaedics CGU goodwill
as a new key audit matter. The profitability of the Orthopaedics
business remains below historic levels, which combined with higher
input inflation and supply chain challenges means that reasonably
possible changes in assumptions could lead to a material impairment.
Parent company financial statements only: Recoverability of Parent
Company’s investments in subsidiaries – 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.
Key Audit Matters
Vs FY21
Item
Recoverability of the
Orthopaedics CGU goodwill
4.1
Provision for metal-on-metal
hip products
4.2
Excess and Obsolescence
(E&O) provision for
Orthopaedics Inventory
4.3
Parent company financial statements
only: Recoverability of Parent
Company’s investment in subsidiaries
4.4
Audit Committee interaction
During the year, the AC met 8 times. KPMG are invited to attend all AC meetings and are provided with an opportunity to meet with the AC
in private sessions without the Executive Directors being present. For each Key Audit Matter, we have set out communications with the AC
in section 4, including matters that required particular judgement for each.
The matters included in the Audit Committee report on page 101 are materially consistent with our observations of those meetings.
Our independence
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.
We have not performed any non-audit services during FY22 or
subsequently which are prohibited by the FRC Ethical Standard.
We were first appointed as auditor of the Company in 2015 following
a competitive tender in 2014. The period of total uninterrupted
engagement is for the 8 financial years ended 31 December 2022.
This is Paul Nichols first year as a group engagement partner.
The average tenure of partners responsible for component audits
as set out in section 7 below is 3.2 years, with the shortest being
1 and the longest being 6.
Total audit fee
$9.4m
Audit related fees
(including interim review)
$0.4m
Non-audit fee as a % of total audit
and audit related fee %
4%
Date first appointed
31 December 2015
Uninterrupted audit tenure
8 years
Tenure of Group engagement partner
1 year
Average tenure of component
signing partners
3.2 years
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
2. Overview of our audit
continued
Materiality (Item 6 below)
The scope of our work is influenced by our view of
materiality and our assessed risk of material misstatement.
We have determined overall materiality for the Group financial
statements as a whole at $35m (FY21: $35m) and for the
Parent Company financial statements as a whole at $32m
(FY21: $32m).
Consistent with FY21, we determined that adjusted profit
before tax remains the benchmark for the Group as we
consider it to be the primary measure by which users
of the accounts assess the performance of the Group.
As such, we based our Group materiality on adjusted profit
before tax, of which it represents 5.15% (FY21: 5.13%).
Materiality for the Parent Company financial statements
was determined with reference to a benchmark of
Parent Company total assets of which it represents
0.3% (FY21: 0.3%).
Group scope (Item 7 below)
We have performed risk assessment and planning procedures
to determine which of the Group’s components are likely to
include risks of material misstatement to the Group financial
statements, the type of procedures to be performed at
these components and the extent of involvement required
from our component auditors around the world.
Of the Group’s 121 (FY21: 112) reporting components, we
subjected 3 (2021: 6) to full scope audits for group purposes,
33 (FY21: 34) to audits of specific account balances and
specified risk focussed audit procedures focussed over
revenue, receivables and cash (5 (FY21: 6)), inventory
(6 (FY21: 6)) and property, plant and equipment (2 (FY21: 1).
The components within the scope of our work accounted
for the percentages illustrated opposite.
In addition, we have performed Group level analysis on
the remaining components to determine whether further
risks of material misstatement exist in those components.
We consider the scope of our audit, as communicated
to the Audit Committee, to be an appropriate basis for
our audit opinion.
35
Group
Materiality
35
Group
Performance
Materiality
26.2
26.2
Highest
Component
Materiality
24
29
Parent
Company
Materiality
32
32
Lowest
Component
Materiality
6
6
Audit
Misstatement
Posting
Threshold
1.8
1.8
FY22 $m
FY21 $m
Profit before tax
Materiality levels used in our audit
Coverage of Group financial statements
Revenue
Total assets
Full scope audits
63%
Audit of specific account balances
18%
Remaining components
19%
Full scope audits
37%
Audit of specific account balances
48%
Remaining components
15%
Full scope audits
60%
Audit of specific account balances
17%
Remaining components
23%
150
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Annual Report 2022
The impact of climate change on our audit
In planning our audit, we considered the potential impacts of climate change on the Group’s business and its financial statements.
The Group has set out in the Strategic Report its commitment to achieving net zero Scope 1 and Scope 2 greenhouse gas emissions (GHGs)
by 2040 and Scope 3 GHGs by 2045 and its commitment to several other shorter-term targets.
As a part of our audit, we have performed a risk assessment, including enquiries of management, to understand how the impact of
commitments made by the Group in respect of climate change, as well as the physical or transition risks of climate change, may affect
the financial statements and our audit. There was no impact of this work on our key audit matters.
Based on the procedures we performed in reviewing and challenging the Group’s Road map for transitioning to net zero Scope 1 and
Scope 2 GHGs, we did not identify any significant risk in this period of climate change having a material impact on the Group’s critical
accounting estimates. This is due to the shorter-term nature of certain estimates (inventory provisioning) and the nature of the estimate itself
(metal on metal liabilities). In addition, we did not identify any significant risks in this period to the carrying value and useful economic lives
of property, plant and equipment or intangible assets caused by the projected physical risks of climate change or the transition to a net
zero operating model.
We have read the disclosures of climate related information in the annual report and considered their consistency with the financial statements
and our audit knowledge.
3. Going concern, viability and principal risks and uncertainties
The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the
Parent Company or to cease their operations, and as they have concluded that the Group’s and the Parent Company’s financial position
means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt
over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going
concern period”).
Going concern
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 risks that we considered most likely
to adversely affect the Group’s and Company’s available financial
resources and metrics relevant to debt covenants over this period
relates to supply chain disruption and macroeconomic factors,
including inflation. This could lead 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, new product liability claims giving
rise to significant claims and legal fees, pricing and reimbursement
pressures, and 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.
We considered 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.
Our conclusions
–
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 Parent 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
Parent 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 84
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
Parent Company will continue in operation.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
3. Going concern, viability and principal risks and uncertainties
continued
Disclosures of emerging and principal risks and longer-term viability
Our responsibility
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
page 78 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 Emerging and Principal Risks disclosures describing these risks
and how emerging risks are identified and explaining how they are
being managed and mitigated; and
–
the directors’ explanation in the viability statement of how they have
assessed the prospects of the Group, over what period they have
done so and why they considered that period to be appropriate, and
their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet
its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary
qualifications or assumptions.
We are also required to review the viability statement set out on
page 78 under the Listing Rules.
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 Parent Company’s longer-term viability.
Our reporting
We have nothing material to add or draw attention to in relation
to these disclosures.
We have concluded that these disclosures are materially consistent
with the financial statements and our audit knowledge.
4. Key audit matters
What we mean
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 include below the Key Audit Matters in decreasing order of audit significance together with our key audit procedures to address those
matters and our results from those procedures. These matters were addressed, and our results are based on procedures undertaken,
for the purpose of our audit of the financial statements as a whole. We do not provide a separate opinion on these matters.
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Annual Report 2022
4.1 Recoverability of orthopaedics CGU goodwill (Group)
Financial statement elements
FY22
FY21
Goodwill (Orthopaedics CGU)
$953m
$897m
Our assessment of risk vs FY21
We have identified recoverability of the
Orthopaedics CGU goodwill as a new
key audit matter. The profitability of the
Orthopaedics business remains below
historic levels, which combined with
higher input inflation and supply chain
challenges means that reasonably possible
changes in assumptions could lead to a
material impairment.
Our results
FY22:
Acceptable
FY21:
Acceptable
Description of the key audit matter
Our response to the risk
Forecast-based valuation
As discussed in Note 8 to the consolidated financial statements, the
goodwill balance as of 31 December 2022 was $3,031 million, of which
$953 million related to the Orthopaedics cash generating unit (CGU).
The Group performs an impairment test for goodwill annually,
and additionally whenever an indicator of impairment is identified.
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 and extrapolated
for a further two years. The headroom for the Orthopaedics CGU has
decreased from $1.1bn in the prior year to $0.6bn in the current year,
primarily due to higher input inflation and supply chain challenges.
We identified the recoverability of Orthopaedics CGU goodwill and
related disclosure as a key audit matter. Significant auditor judgment
was required to evaluate the key assumptions used in the Group’s
impairment test, specifically the revenue growth rates and trading
profit margins. The effect of these matters is that, as part of our risk
assessment, we determined that the value in use of goodwill 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, and possibly many times that amount. The financial statements
(Note 8.4) disclose the sensitivity estimated by the Group.
Disclosure quality
The financial statements (note 8.4) disclose the sensitivity estimated
by the Group. These disclosures give relevant information about
the estimation uncertainty including the risk of a reduction in the
headroom or need for an impairment as a result of a reasonably
possible change in one or more of the key assumptions.
Our procedures to address the risk included:
–
Control operation:
We evaluated the design and implementation
and tested the operating effectiveness of certain internal
controls over the Group’s goodwill impairment process,
including controls over the key assumptions.
–
Benchmarking assumptions and historical comparison:
We
assessed the revenue growth rates and trading profit margins
assumptions by comparing them to external industry forecasts;
and analysts’ reports.
–
Our sector experience:
We involved valuations experts with
specialised skills and knowledge, who assisted in developing
a range of Orthopaedics CGU enterprise values using market
based valuation techniques and compared their results to the
value in use valuation calculated by management.
–
Sensitivity analysis:
we performed a sensitivity analysis over
the key assumptions listed to the leſt to assess the impact
on the value in use.
–
Historical comparisons:
We evaluated the Group’s ability
to forecast the cash flow projections by comparing historical
actual results to the approved budgets in the previous years.
–
Assessing transparency:
We assessed whether the Group’s
disclosures about the sensitivity of the outcome of the
impairment assessment to a reasonably possible change in
the key assumptions listed to the leſt, reflects the risks inherent
in the estimation of the recoverable amount of goodwill.
Communications with the Smith & Nephew plc Audit Committee
Our discussions with and reporting to the Audit Committee included:
–
Our risk assessment and planned substantive procedures and the extent of our control reliance.
–
The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.
Areas of particular auditor judgement
We identified the following as the areas of particular auditor judgement:
–
Assumptions used by management in the value in use calculation relate to the revenue growth rates and trading profit margins.
Our results
We found the Group’s conclusion that there is no impairment of Orthopaedics CGU’s goodwill to be acceptable (2021: acceptable)
and we found the sensitivity disclosures made to be acceptable (2021: acceptable).
Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the
Audit Committee considered Impairment of Goodwill attributable to Orthopaedics CGU as an area of significant attention, page 170
for the accounting policy on Impairment of Goodwill attributable to Orthopaedics CGU, and note 8 for the financial disclosures.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
4. Key audit matters
continued
4.2 Provision for metal-on-metal hip products (Group)
Financial statement elements
FY22
FY21
Provision for metal-on-metal
hip products
$239m
$289m
Our assessment of risk vs FY21
Our assessment is that the risk is similar to FY21.
We identify provision for metal-on-metal hip
products to be a key audit matter due to a high
degree of estimation uncertainty involved.
Our results
FY22:
Acceptable
FY21:
Acceptable
Description of the key audit matter
Our response to the risk
Subjective estimate
As discussed in note 17.1 to the consolidated financial
statements, the Group holds a provision of $239 million
(FY21: $289 million) relating to the present value at 31 December
2022 of the estimated costs to resolve all other known and
anticipated metal-on-metal hip claims globally.
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 outcomes.
We identified the evaluation of the provision for metal-on-metal
hip products and related disclosure for these potential liabilities
as a key audit matter because especially challenging auditor
judgement and specialised skills and knowledge was required in
assessing the key assumptions above. Minor changes to these
assumptions would have a significant effect on the provision.
Our procedures to address the risk included:
–
Control operation:
We evaluated the design and implementation and
tested the operating effectiveness of certain internal controls over
the Group’s legal provision process. This included controls related to
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 Group’s records against this
correspondence, 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 the statistical model applied by the Group 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 sensitivity disclosures
in respect of the metal-on-metal hip provision over how sensitive the
provision is to changes in the key assumptions and how the range of
possible outcomes reflect the underlying facts and circumstances.
Communications with the Smith & Nephew plc Audit Committee
Our discussions with and reporting to the Audit Committee included:
–
Our approach to the audit of the provision for metal-on-metal hip including details of our planned substantive procedures and the extent
of our control reliance.
–
Our conclusions on the appropriateness of Smith & Nephew plc’s provisioning methodology and policy.
–
The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.
Areas of particular auditor judgement
We identified the following as the areas of particular auditor judgement:
–
Assumptions relating to the number of claimants and settlement outcome, which are used in the actuarial model.
Our results
We found the level of provisioning in respect of metal-on-metal hip products to be acceptable (FY21: acceptable).
Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the
Audit Committee considered the Provision for metal-on-metal hip products as an area of significant attention, page 170 for the
accounting policy on Provision for metal-on-metal hip products, and note 17.1 for the financial disclosures.
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4.3 Excess and obsolescence (E&O) provision for orthopaedics inventory (Group)
Financial statement elements
FY22
FY21
E&O Provision for
Orthopaedics inventory
$504m
$430m
Our assessment of risk vs FY21
Our assessment is that the risk is similar to FY21.
We identify E&O provision for Orthopaedics
inventory to be a key audit matter due to a high
degree of estimation uncertainty involved.
Our results
FY22:
Acceptable
FY21:
Acceptable
Description of the key audit matter
Our response to the risk
Subjective estimate
As discussed in notes 1.2 and 12 to the consolidated financial
statements, the Group’s total E&O provision is $504 million
(FY21: $430 million), approximately 80% of which is related
to Orthopaedics. The Group has high levels of Orthopaedics
inventory that is available for customers’ immediate use.
Complete sets of products including large and small sizes of
inventory (which are used less frequently) have to be available
to customers at their premises. An assessment is made by the
Group to identify excess or obsolete inventory. The key input
into this provision is the estimate of the forecasted usage of
inventory on hand.
There is 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 which is based on
assumptions of historical sales of inventory adjusted for other
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.
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 over the longer term.
Our procedures to address the risk included:
–
Control operation:
We evaluated the design and implementation and
tested the operating effectiveness of certain internal controls over
the Group’s process for assessing the E&O provision, including controls
over the key assumptions used to determine forecasted usage of
Orthopaedics inventory.
–
Test of detail:
We assessed and challenged the key assumptions
used to determine the E&O provision through a combination of
interviews of both 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 forecasted
usage 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 inventory write-offs and historic estimates
of forecasted usage to actual usage.
–
Sensitivity analysis:
We assessed the sensitivity of the key
assumptions, listed to the leſt, incorporating the recent volatility
in sales of inventory, to consider their impact on the Group’s
determination of the provision recognised.
–
Assessing disclosures:
We assessed the adequacy of the Group’s
disclosures in respect of the E&O provision.
Communications with the Smith & Nephew plc Audit Committee
Our discussions with and reporting to the Audit Committee included:
–
Our approach to the audit of E&O provision including details of our planned substantive procedures and the extent of our control reliance.
–
Our conclusions on the appropriateness of Smith & Nephew plc’s provisioning methodology and policy.
–
The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.
Areas of particular auditor judgement
We identified the following as the areas of particular auditor judgement:
–
Assumptions used by management in relation to future utilisation of provision.
Our results
We considered the level of E&O provisions for orthopaedics inventory to be acceptable (FY21: acceptable).
Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the
Audit Committee considered E&O provision for Orthopaedics Inventory as an area of significant attention, page 169 for the
accounting policy on E&O provision for Orthopaedics Inventory, and note 12 for the financial disclosures.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
4. Key audit matters
continued
4.4 Recoverability of Parent Company’s investment in subsidiaries (Parent Company only)
Financial Statement Elements
FY22
FY21
Investments in subsidiaries
$7,092m
$7,092m
Our assessment of risk vs FY21
There are no significant new factors, which
affected our risk assessment in FY22 and the risk
level is unchanged as compared to FY21.
Our results
FY22:
Acceptable
FY21:
Acceptable
Description of the key audit matter
Our response to the risk
Low risk, high value
The carrying amount of the Parent Company’s investments
in subsidiaries held at cost less impairment represents 69%
(FY21: 64%) 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.
We performed the tests below rather than seeking to rely on any of the
Company’s controls because the annual assessment meant that detailed
testing is inherently the most effective means of obtaining audit evidence.
Our procedures to address the risk included:
–
Test of detail:
Comparing a sample of the highest value investments
representing 98% (FY21: 98%) of the total investment balance with the
relevant subsidiaries’ draſt 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 on that sample of subsidiaries and considering
the results of their work on those subsidiaries’ profits and net assets.
Communications with the Smith & Nephew plc Audit Committee
Our discussions with and reporting to the Audit Committee included:
–
Our audit response to the Key Audit Matter which included challenge of the key aspects of management’s impairment assessment
and the range of reasonably possible alternatives for significant assumptions.
Areas of particular auditor judgement
There are no areas of significant auditor judgement in relation to this Key audit matter.
Our results
We found the Directors’ assessment of the recoverability of the investment in subsidiaries to be acceptable (FY21: acceptable).
Further information in the Annual Report and Accounts: See page 223 for the accounting policy on Recoverability of Parent Company’s
investment in subsidiaries, and page 223 for the financial disclosures.
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5. Our ability to detect irregularities, and our response
Fraud – Identifying and responding to risks of material misstatement due to fraud
Fraud risk assessment
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.
–
Inspecting management’s own fraud risk assessment and considering the applicability of identified
risk factors.
–
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 unusual 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.
Risk communications
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 audit team to all
in-scope 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.
Fraud risks
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. 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 judgement with limited opportunities for manual intervention in the sales process to fraudulently
manipulate revenue. There is also a short period of time 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.
Procedures to address
fraud risks
In determining the audit procedures, we considered 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.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
5. Our ability to detect irregularities, and our response
continued
Laws and regulations – Identifying and responding to risks of material misstatement relating to compliance with laws
and regulations
Laws and regulations
risk assessment
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.
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.
Risk communications
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 audit
team to all in-scope component audit teams of relevant laws and regulations identified at the Group level,
and a request for component auditors to report to the group audit team any instances of non-compliance
with laws and regulations that could give rise to a material misstatement at the Group level.
Direct laws context
and link to audit
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.
Most significant indirect
law/regulation areas
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.
Actual or suspected
breaches discussed
with AC
We discussed with the Audit Committee other matters related to actual or suspected breaches of laws
or regulations, for which disclosure is not necessary, and considered any implications for our audit.
Context
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 fraud 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.
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6. Our determination of materiality
The scope of our audit was influenced by our application of materiality. We set quantitative thresholds and overlay qualitative
considerations to help us determine the scope of our audit and the nature, timing and extent of our procedures, and in evaluating
the effect of misstatements, both individually and in the aggregate, on the financial statements as a whole.
$35m
(FY21: $35m)
Materiality for the Group
financial statements as
a whole
What we mean
A quantitative reference for the purpose of planning and performing our audit.
Basis for determining materiality and judgements applied
Materiality for the Group financial statements as a whole was set at $35m (FY21: $35m).
This was determined with reference to a benchmark of Group’s adjusted profit before tax.
Consistent with FY21, we determined that Group adjusted profit before tax remains the main benchmark
for the Group as we consider it to be the primary measure by which users of the accounts assess the
performance of the Group.
Our Group materiality of $35m was determined by applying a percentage to the profit before tax, adjusted
to exclude this year’s restructuring costs of $168 million, legal & other charges of $82 million, a charge
of $162 million related to acquisition and disposal related items as disclosed in note 3 and excluding
charge for impairment of acquisition intangible assets of $32 million, as disclosed in note 9.
When using a benchmark of adjusted profit before tax to determine overall materiality, KPMG’s approach
for listed entities considers a guideline range 3%–5% of the measure. In setting overall Group materiality,
we applied a percentage of 5.15% (FY21: 5.13%) to the benchmark.
Materiality for the Parent Company financial statements as a whole was set at $32m (FY21: $32m),
determined with reference to a benchmark of Parent Company total assets, of which it represents 0.3%
(FY21: 0.3%).
$26.2m
(FY21: $26.2m)
Performance materiality
What we mean
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.
Basis for determining materiality and judgements applied
We have considered performance materiality at a level of 75% (FY21: 75%) of materiality for
Smith & Nephew plc’s Group financial statements as a whole to be appropriate.
The Parent Company performance materiality was set at $24m (FY21: $24m), which equates to 75%
(FY21: 75%) of materiality for the Parent Company financial statements as a whole.
We applied this percentage in our determination of performance materiality because we did not identify
any factors indicating an elevated level of risk.
$1.8m
(FY21: $1.8m)
Audit misstatement
posting threshold
What we mean
This is the amount below which identified misstatements are considered to be clearly trivial from a
quantitative point of view. We may become aware of misstatements below this threshold which could
alter the nature, timing and scope of our audit procedures, for example if we identify smaller misstatements
which are indicators of fraud.
This is also the amount above which all misstatements identified are communicated to the
Smith & Nephew plc Audit Committee.
Basis for determining materiality and judgements applied
We set our audit misstatement posting threshold at 5% (FY21: 5%) of our materiality for the Group
financial statements. We also report to the Audit Committee any other identified misstatements that
warrant reporting on qualitative grounds.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
6. Our determination of materiality
continued
The overall materiality for the Group financial statements of $35m (FY21: $35m) compares as follows to the main financial statement
caption amounts:
Total Group Revenue
Group adjusted profit before tax
Total Group Assets
FY22
FY21
FY22
FY21
FY22
FY21
Financial statement caption
$5,215m
$5,212m
$679m
$682m
$9,966m
$10,920m
Group Materiality as % of caption
0.7%
0.7%
5.15%
5.13%
0.4%
0.3%
7. The scope of our audit
Group scope
What we mean
How the Group audit team determined the procedures to be performed across the Group.
Of the Group’s 121 (FY21: 112) reporting components, we subjected 3 (2021: 6) to full scope audits for
group purposes and 33 (FY21: 34) to audits of specific account balances and specified risk focussed audit
procedures focussed over revenue, receivables and cash (5 (FY21: 6)), inventory (6 (FY21: 6)) and property,
plant and equipment (2 (FY21: 1)).
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 remaining 23% (FY21: 16%) of total group revenue, 23% (FY21: 18%) of group profit before tax
and 15% (FY21: 9%) of total group assets is represented by 85 (FY21: 72) reporting components, none
of which individually represented more than 5% (FY21: 4%) of any of total group revenue, group profit
before tax or total group assets. For these residual components, we performed analysis at an aggregated
group level to re-examine our assessment that there were no significant risks of material misstatement
within these.
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 $6 million to $24 million (FY21: $6 million to $29 million),
having regard to the mix of size and risk profile of the Group across the components. The work on 10 of
the 36 components (FY21: 15 of the 40 components) was performed by component auditors and the rest,
including the audit of the Parent Company, was performed by the Group team.
Scope
Number of components
Range of materiality applied
Full scope audit
3
$6m–$24m
Audit of one or more account balances
33
$6m–$12m
We have also performed audit procedures centrally across the Group, and beyond the components scope
set out above, in the following areas:
–
Testing of IT Systems;
–
The items excluded from adjusted group profit before tax;
–
Goodwill and acquired intangible assets impairment assessment; and
–
Defined benefit pension.
In addition, we have performed Group level analysis on the remaining components to determine whether
further risks of material misstatement exist in those components.
We were able to rely upon the Group’s internal control over financial reporting in several areas of our
audit, where our controls testing supported this approach, which enabled us to reduce the scope of our
substantive audit work; in the other areas the scope of the audit work performed was fully substantive.
Group audit
team oversight
What we mean
The extent of the Group audit team’s involvement in component audits.
Senior members of the Group engagement team oversaw the component auditor work, by performing
site visits and video conference discussions with management of the component locations in scope of
the Group audit. In the course of the year the Group audit team visited component audit teams in the
US, China, Japan, UK and Netherlands and in addition visited local/regional management in Switzerland
and Poland. The Group engagement team assessed the audit risk and strategy and directed the audit
work of component auditors. The Group audit team also evaluated the sufficiency of the audit evidence
obtained through discussions and remote review of the audit working papers of component teams.
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8. 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.
All other information
Our responsibility
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.
Our reporting
Based solely on that work we have not identified material
misstatements or inconsistencies in the other information.
Strategic report and Directors’ report
Our responsibility and reporting
Based solely on our work on the other information described above
we report to you as follows:
–
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
Our responsibility
We are required to form an opinion as to whether the part of the
Directors’ Remuneration Report to be audited has been properly
prepared in accordance with the Companies Act 2006.
Our reporting
In our opinion the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
Corporate governance disclosures
Our responsibility
We are required to perform procedures to identify whether there
is a material inconsistency between the financial statements
and our audit knowledge, and:
–
the directors’ statement that they consider that the annual report
and financial statements taken as a whole is fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Group’s position and performance,
business model and strategy;
–
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.
Our reporting
Based on those procedures, we have concluded that each
of these disclosures is materially consistent with the financial
statements and our audit knowledge.
We are also required to review the part of the 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.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Independent auditor’s UK report
continued
Other matters on which we are required to report by exception
Our responsibility
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.
Our reporting
We have nothing to report in these respects.
8. Other information in the annual report
continued
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9. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 147, the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group
and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using
the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations,
or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or 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.
The Company is required to include these financial statements in an annual financial report prepared using the single electronic reporting
format specified in the TD ESEF Regulation. This auditor’s report provides no assurance over whether the annual financial report has
been prepared in accordance with that format.
10. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006
and the terms of our engagement by the company. Our audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s report, and the further matters we are required to state
to them in accordance with the terms agreed with the company, and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit
work, for this report, or for the opinions we have formed.
Paul Nichols (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
21 February 2023
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ACCOUNTS
OTHER INFORMATION
Group financial statements
Group income statement
Group statement of comprehensive income
Year ended
Year ended
Year ended
31 December
31 December
31 December
2022
2021
2020
Notes
$ million
$ million
$ million
Attributable profit for the year
1
Other comprehensive income:
Items that will not be reclassified to income statement
Remeasurement of net retirement benefit obligations
18
Taxation on other comprehensive income
5
(7 )
(22 )
(4 )
Total items that will not be reclassified to income statement
Items that may be reclassified subsequently to income statement
Cash flow hedges – forward foreign exchange contracts
Gains/(losses) arising in the year
(24 )
(Gains)/losses transferred to inventories for the year
(37 )
(6 )
Exchange differences on translation of foreign operations
(102 )
(53 )
Taxation on other comprehensive income
5
(5 )
Total items that may be reclassified subsequently to income statement
(113 )
(17 )
(5 )
Other comprehensive (loss)/income for the year, net of taxation
(90 )
Total comprehensive income for the year
1
1
Attributable to equity holders of the Company and wholly derived from continuing operations.
Year ended
Year ended
Year ended
31 December
31 December
31 December
2022
2021
2020
Notes
$ million
$ million
$ million
Revenue
2
Cost of goods sold
(1,540 )
(1,543 )
(1,396 )
Gross profit
Selling, general and administrative expenses
3
(2,880 )
(2,720 )
(2,562 )
Research and development expenses
3
(345 )
(356 )
(307 )
Operating profit
2 & 3
Interest income
4
Interest expense
4
(80 )
(80 )
(62 )
Other finance costs
4
(8 )
(17 )
(7 )
Share of results of associates
11
(141 )
Gain on disposal of interest in associate
11
Profit before taxation
Taxation
5
(12 )
(62 )
Attributable profit for the year
1
Earnings per ordinary share
1
6
Basic
Diluted
The Notes on pages 168–220 are an integral part of these accounts.
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Group balance sheet
At
At
31 December
31 December
2022
2021
Notes
$ million
$ million
Assets
Non-current assets
Property, plant and equipment
7
Goodwill
8
Intangible assets
9
Investments
10
Investments in associates
11
Other non-current assets
13
Retirement benefit assets
18
Deferred tax assets
5
Current assets
Inventories
12
Trade and other receivables
13
Current tax receivable
Cash at bank
15
Total assets
Equity and liabilities
Equity attributable to owners of the Company
Share capital
19
Share premium
Capital redemption reserve
Treasury shares
19
(118 )
(120 )
Other reserves
(459 )
(346 )
Retained earnings
Total equity
Non-current liabilities
Long-term borrowings and lease liabilities
15
Retirement benefit obligations
18
Other payables
14
Provisions
17
Deferred tax liabilities
5
Current liabilities
Bank overdraſts, borrowings, loans and lease liabilities
15
Trade and other payables
14
Provisions
17
Current tax payable
Total liabilities
Total equity and liabilities
The accounts were approved by the Board and authorised for issue on 21 February 2023 and are signed on its behalf by:
Roberto Quarta
Deepak Nath, PhD
Anne-Françoise Nesmes
Chair
Chief Executive Officer
Chief Financial Officer
The Notes on pages 168–220 are an integral part of these accounts.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Group cash flow statement
The Notes on pages 168–220 are an integral part of these accounts.
Year ended
Year ended
Year ended
31 December
31 December
31 December
2022
2021
2020
Notes
$ million
$ million
$ million
Cash flows from operating activities
Profit before taxation
Net interest expense
4
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment and soſtware
Share-based payments expense (equity-settled)
22
Share of results of associates
11
(9 )
(14 )
Gain on disposal of interest in associate
11
(75 )
Net movement in post-retirement benefit obligations
Increase in inventories
(407 )
(151 )
(45 )
(Increase)/decrease in trade and other receivables
(103 )
(81 )
(Decrease)/increase in trade and other payables and provisions
(25 )
(103 )
Cash generated from operations
1
Interest received
Interest paid
(73 )
(80 )
(61 )
Income taxes (paid)/refunded
(47 )
(97 )
Net cash inflow from operating activities
Cash flows from investing activities
Acquisitions, net of cash acquired
(113 )
(285 )
(170 )
Capital expenditure
(358 )
(408 )
(443 )
Purchase of investments
(2 )
(2 )
(2 )
Distribution from associate
11
Net cash used in investing activities
(472 )
(691 )
(606 )
Cash flows from financing activities
Proceeds from issue of ordinary share capital
20
Purchase of own shares
20
(158 )
(16 )
Payment of capital element of lease liabilities
20
(54 )
(59 )
(55 )
Settlement of borrowings due within one year
20
(407 )
(267 )
(5 )
Proceeds from borrowings due aſter one year
20
Settlement of borrowings due aſter one year
20
(474 )
(400 )
Proceeds from own shares
20
Settlement of currency swaps
20
(4 )
Equity dividends paid
19
(327 )
(329 )
(328 )
Net cash (used in)/from financing activities
(926 )
(645 )
Net (decrease)/increase in cash and cash equivalents
(930 )
(459 )
Cash and cash equivalents at beginning of year
20
Exchange adjustments
20
(11 )
(7 )
Cash and cash equivalents at end of year
2
1
Includes $120 m (2021: $108 m, 2020: $117 m) of outgoings on restructuring and rationalisation expenses, $22 m (2021: $28 m, 2020: $24 m) of outgoings on acquisition and disposal-related items
and $133 m outflow (2021: $111 m, 2020: $75 m) of legal and other items.
2
Cash and cash equivalents is net of bank overdraſts of $6 m (2021: $5 m, 2020: $11 m).
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Group statement of changes in equity
The Notes on pages 168–220 are an integral part of these accounts.
Capital
Share
Share
redemption
Treasury
Other
Retained
Total
capital
premium
reserve
shares
2
reserves
3
earnings
4
equity
$ million
$ million
$ million
$ million
$ million
$ million
$ million
At 31 December 2019
(189 )
(324 )
Attributable profit for the year
1
Other comprehensive income
(5 )
Equity dividends declared and paid
(328 )
(328 )
Share-based payments recognised
Taxation on share-based payments
(4 )
(4 )
Purchase of own shares
(16 )
(16 )
Cost of shares transferred to beneficiaries
(28 )
Cancellation of treasury shares
(11 )
Issue of ordinary share capital
5
At 31 December 2020
(157 )
(329 )
Attributable profit for the year
1
Other comprehensive income
(17 )
Equity dividends declared and paid
(329 )
(329 )
Share-based payments recognised
Taxation on share-based payments
(1 )
(1 )
Cost of shares transferred to beneficiaries
(25 )
Issue of ordinary share capital
5
At 31 December 2021
(120 )
(346 )
Attributable profit for the year
1
Other comprehensive income
(113 )
(90 )
Equity dividends declared and paid
(327 )
(327 )
Share-based payments recognised
Taxation on share-based payments
(3 )
(3 )
Purchase of own shares
(158 )
(158 )
Cost of shares transferred to beneficiaries
(26 )
Cancellation of treasury shares
(2 )
(129 )
Issue of ordinary share capital
5
At 31 December 2022
(118 )
(459 )
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 2022 was $452 m (2021: $350 m, 2020: $297 m).
4
Within retained earnings is a capital reserve of $2,266 m (2021: $2,266 m, 2020: $2,266 m).
5
Issue of ordinary share capital in connection with the Group’s share incentive plans.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Basis of preparation
means the Company and all its subsidiaries. The principal activities of the Group are to develop, manufacture, market and sell medical
The Group has prepared its accounts in accordance with UK-adopted International Accounting Standards. 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 2022 .
IFRS as adopted in the UK 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 uncertainties as to the future impact on the financial performance and cash flows of the Group as a result of the current challenging
economic environment have been considered as part of the Group’s adoption of the going concern basis in these financial statements,
in which context the Directors reviewed cash flow forecasts prepared for a period of at least 12 months from the date of approval
of these financial statements. Having carefully reviewed those forecasts, the Directors concluded that it was appropriate to adopt
the going concern basis of accounting in preparing these financial statements for the reasons set out below.
The Group had access to $344m of cash and cash equivalents at 31 December 2022. The Group’s net debt, excluding lease liabilities,
at 31 December 2022 was $2,339m with access to committed facilities of $3.7bn with an average maturity of 5.1 years. At the date
of approving these financial statements the funding position of the Group has remained unchanged and the cash position is not
materially different.
The Group has $105m of private placement debt due for repayment in 2023. $1,160m of private placement debt is subject to financial
covenants. The principal covenant on the private placement debt is a leverage ratio of <3.5 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 the economic environment 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 significant global economic recession, leading to lower healthcare spending
across both public and private systems. 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 12 months from the date of the approval of these 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 these financial statements.
A number of new amendments to standards are effective from 1 January 2022 but they do not have a material effect on the Group’s
financial statements.
Accounting standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual periods beginning aſter 1 January 2022 and earlier
Notes to the Group accounts
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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 coterminous 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
Critical judgements and estimates
The Group prepares its consolidated financial statements in accordance with IFRS as issued by the IASB and IFRS adopted in the
UK, the application of which oſten 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 2021. Management have considered the impact of the uncertainties around
the current challenging economic environment 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 typically 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.
Current economic environment impact assessment: In assessing the increase in provision for excess and obsolete inventory,
management have considered the impact of higher input cost inflation on increased inventory levels. Management have not changed
their accounting policy since 31 December 2021, nor is a change in the key assumptions underlying the methodology expected in
the next 12 months. Primarily due to inventory growth, the provision has increased from $430m at 31 December 2021 to $504m
at 31 December 2022. The provision for excess and obsolete inventory is not considered to have a range of potential outcomes that
is significantly different to the $504m at 31 December 2022 in the next 12 months. The provision has a high degree of estimation
uncertainty given the range of products and sizes, with a potential range of reasonable outcomes that could be material over the
longer term.
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
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 2023 or thereaſter. 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.
Current economic environment impact assessment: Management considered whether there had been any changes to the number
and value of claims due to current challenging economic environment and to date have not identified any significant 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. There has been a decrease in the level of headroom in relation to goodwill impairment testing for the
Orthopaedics CGU which is sensitive to a reasonably possible change in assumptions. For other intangible assets and goodwill CGUs, this
critical estimate is not considered to have a significant risk of material adjustment in 2023 or thereaſter based on sensitivity analyses
undertaken (as outlined below). See Notes 8 and 9 for further details on impairment reviews.
Current economic environment impact assessment: Management have assessed the non-current assets held by the Group at 31 December
2022 to identify any indicators of impairment as a result of current economic environment. 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. Impairments of $39m, related to immaterial product intangible assets, were identified as a result
1.3
Climate change considerations
The impact of climate change has been considered as part of the assessment of estimates and judgements in preparing the
Group accounts. The climate change scenario analyses undertaken this year in line with TCFD recommendations did not identify
any material financial impact. The following considerations were made in respect of the financial statements:
–
The impact of climate change on the going concern assessment and the viability of the Group over the next three years.
–
The impact of climate change on the cash flow forecasts used in the impairment assessments of non-current assets including goodwill.
–
The impact of climate change on the carrying value and useful economic lives of property, plant and equipment.
Foreign currencies
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
Foreign operations
Balance sheet items of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into US
Dollars on consolidation at the exchange rates at the reporting date. Income statement items and the cash flows of foreign operations
are translated at average rates as an approximation to actual transaction rates, with actual transaction rates used for large
one-off transactions.
Foreign currency differences are recognised in ‘Other comprehensive income’ and accumulated in ‘Other reserves’ within equity.
These include: exchange differences on the translation at closing rates of exchange of non-US Dollar opening net assets; the differences
arising between the translation of profits into US Dollars at actual (or average, as an approximation) and closing exchange rates; to the
extent that the hedging relationship is effective, the difference on translation of foreign currency borrowings or swaps that are used
to finance or hedge the Group’s net investments in foreign operations; and the movement in the fair value of forward foreign exchange
contracts used to hedge forecast foreign exchange cash flows.
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The exchange rates used for the translation of currencies into US Dollars that have the most significant impact on the Group results were:
2022
2021
2020
Average rates
Sterling
1.23
1.38
1.28
Euro
1.05
1.18
1.14
Swiss Franc
1.05
1.09
1.07
Year end rates
Sterling
1.21
1.35
1.37
Euro
1.07
1.13
1.23
Swiss Franc
1.08
1.10
Business segment information
The Group’s operating structure is organised around three global franchises and the chief operating decision maker monitors performance,
makes operating decisions and allocates resources on a global franchise basis. Accordingly, the Group has concluded that there are
three reportable segments.
Franchise presidents have responsibility for upstream marketing, driving product portfolio and technology acquisition decisions, and full
commercial responsibility for their franchises in the US. Regional presidents in EMEA and APAC are responsible for the implementation
of the global franchise strategy in their respective regions.
The Executive Committee (‘ExCo’) comprises the Chief Financial Officer (‘CFO’), the franchise presidents, the 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 while 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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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
2
Business segment information
continued
Revenue by business segment and geography
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 & Extremities, 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.
Segment revenue reconciles to statutory revenues from continuing operations as follows:
2022
2021
2020
$ million
$ million
$ million
Reportable segment revenue
Orthopaedics
2,113
2,156
1,917
Sports Medicine & ENT
1,590
1,560
1,333
Advanced Wound Management
1,512
1,496
1,310
Revenue from external customers
5,215
5,212
4,560
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Disaggregation of revenue:
The following table shows the disaggregation of Group revenue by product franchise:
2022
2021
2020
$ million
$ million
$ million
Revenue by product from continuing operations
Knee Implants
899
876
822
Hip Implants
584
612
567
Other Reconstruction
87
92
68
Trauma & Extremities
543
576
460
Orthopaedics
2,113
2,156
1,917
Sports Medicine Joint Repair
870
839
710
Arthroscopic Enabling Technologies
567
590
517
ENT (Ear, Nose and Throat)
153
131
106
Sports Medicine & ENT
1,590
1,560
1,333
Advanced Wound Care
712
731
647
Advanced Wound Bioactives
520
496
431
Advanced Wound Devices
280
269
232
Advanced Wound Management
1,512
1,496
1,310
Consolidated revenue from continuing operations
5,215
5,212
4,560
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 product 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.
2022
2021
2020
Established
Markets
1
Emerging
Markets
Total
Established
Markets
1
Emerging
Markets
Total
Established
Markets
1
Emerging
Markets
Total
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
Orthopaedics, Sports Medicine & ENT
2,949
754
3,703
2,969
747
3,716
2,619
631
3,250
Advanced Wound Management
1,319
193
1,512
1,327
169
1,496
1,170
140
1,310
Total
4,268
947
5,215
4,296
916
5,212
3,789
771
4,560
1
Established Markets comprises the US, Australia, Canada, Europe, Japan and New Zealand.
US revenue for 2022 was $2,764m (2021: $2,658m, 2020: $2,339m), China revenue for 2022 was $319m (2021: $352m, 2020: $318m)
and UK revenue for 2022 was $186m (2021: $189m, 2020: $166m).
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GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
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 2022. As of 31 December 2022, contract assets principally comprise
trade receivables and contract liabilities principally comprise rebates (as described in the accounting policy above). The accrual for
rebates at 31 December 2022 was $103m (2021: $97m) with $369m being recognised in revenue in 2022.
Major customers
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; significant restructuring programmes;
amortisation and impairment of acquisition intangibles; 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:
2022
2021
2020
$ million
$ million
$ million
Segment profit
Orthopaedics
383
367
389
Sports Medicine & ENT
472
459
306
Advanced Wound Management
436
474
316
Segment trading profit
1,291
1,300
1,011
Corporate costs
(390)
(364)
(328)
Group trading profit
901
936
683
Acquisition and disposal-related items
(4)
(7)
(4)
Restructuring and rationalisation expenses
(167)
(113)
(124)
Amortisation and impairment of acquisition intangibles
(205)
(172)
(171)
Legal and other
(75)
(51)
(89)
Group operating profit
450
593
295
2.3
Acquisition and disposal-related items
For the year to 31 December 2022, costs primarily relate to the acquisition of Engage and prior year acquisitions, partially offset
by credits relating to remeasurement of deferred and contingent consideration for prior year acquisitions.
For the year to 31 December 2021, costs primarily relate to the acquisition of Extremity Orthopaedics and prior year acquisitions,
partially offset by credits relating to remeasurement of contingent consideration for prior year acquisitions.
For the year to 31 December 2020, costs primarily relate to the acquisitions of Tusker and prior year acquisitions, partially offset
by credits relating to remeasurement of contingent consideration from prior year acquisitions.
2.4
Restructuring and rationalisation costs
For the year ended 31 December 2022, these costs include efficiency and productivity elements of the 12-point plan.
For the years ended 31 December 2022, 2021 and 2020, these costs also relate to the Operations and Commercial
Excellence programme.
For the years ended 31 December 2021 and 2020, the costs also include the implementation of the Accelerating Performance
and Execution (APEX) programme that was announced in February 2018.
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2.5
Amortisation and impairment of acquisition intangibles
For the years ended 31 December 2022, 2021 and 2020, 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 2022, charges primarily relate to legal expenses for ongoing metal-on-metal hip claims and an increase
of $19m in the provision that reflects the present value of the estimated costs to resolve all other known and anticipated metal-on-metal
hip claims. These charges in the year to 31 December 2022 were partially offset by a credit of $7m relating to insurance recoveries for
ongoing metal-on-metal hip claims.
For the year ended 31 December 2021, charges primarily relate to legal expenses for ongoing metal-on-metal hip claims. These charges
in the year to 31 December 2021 were partially offset by a credit of $35m relating to insurance recoveries for ongoing metal-on-metal
hip claims.
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 years ended 31 December 2022, 2021 and 2020 also include costs for implementing the requirements of the EU Medical Device
Regulation which came into effect in May 2021 with a transition period to May 2024.
2.7
Non-current assets by geography
The following table presents the non-current assets of the Group based on their location:
2022
2021
2020
$ million
$ million
$ million
United Kingdom
487
541
403
United States of America
3,918
4,125
4,093
Other
1,387
1,447
1,517
Total non-current assets of the consolidated Group
1
5,792
6,113
6,013
1
Operating profit
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
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
3
Operating profit
continued
2022
2021
2020
$ million
$ million
$ million
Revenue
5,215
5,212
4,560
Cost of goods sold
1
(1,540)
(1,543)
(1,396)
Gross profit
3,675
3,669
3,164
Research and development expenses
2
(345)
(356)
(307)
Selling, general and administrative expenses:
Marketing, selling and distribution expenses
(2,066)
(2,013)
(1,773)
Administrative expenses
3,4,5,6
(814)
(707)
(789)
(2,880)
(2,720)
(2,562)
Operating profit
450
593
295
1
2022 includes $4m charge relating to legal and other items, $20m charge relating to restructuring and rationalisation expenses and $5m charges relating to acquisition and disposal-related
items (2021: $7m charge relating to legal and other items and $29m charge relating to restructuring and rationalisation expenses, 2020: $6m charge relating to legal and other items and
$15m charge relating to restructuring and rationalisation expenses).
2
2022 includes $35m charge relating to legal and other items (2021: $39m, 2020: $28m), $5m charge relating to acquisition and disposal-related items (2021: $7m, 2020: $nil) and $5m charge
relating to restructuring and rationalisation expenses (2021: $nil, 2020: $nil).
3
2022 includes $56m of amortisation of soſtware and other intangible assets (2021: $65m, 2020: $63m).
4
2022 includes $205m of amortisation and impairment of acquisition intangibles and $142m of restructuring and rationalisation expenses (2021: $172m of amortisation and impairment
of acquisition intangibles and $84m of restructuring and rationalisation expenses, 2020: $171m of amortisation and impairment of acquisition intangibles and $109m of restructuring
and rationalisation expenses).
5
2022 includes $36m charge relating to legal and other items (2021: $5m charge, 2020: $55m charge).
6
2022 includes $6m credit relating to acquisition and disposal-related items (2021: $nil, 2020: $4m charge).
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 aſter charging/(crediting) the following items:
2022
2021
2020
$ million
$ million
$ million
Other operating income
(7)
(35)
–
Amortisation of intangible assets
229
237
234
Impairment of intangible assets
39
2
12
Impairment of property, plant and equipment
30
1
5
Fair value remeasurement of trade investments
–
1
–
Depreciation of property, plant and equipment
1
319
326
311
Loss on disposal of property, plant and equipment and intangible assets
11
14
34
Advertising costs
92
81
66
1
The 2022 depreciation charge includes $56m (2021: $56m, 2020: $51m, ) related to right-of-use assets.
In 2022, other operating income comprises insurance recoveries for ongoing metal-on-metal hip claims of $7m (2021: $35m, 2020: $nil).
In 2022, $7m (2021: $35m, 2020: $nil) 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.
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Staff costs and employee numbers
Staff costs during the year amounted to:
2022
2021
2020
Notes
$ million
$ million
$ million
Wages and salaries
1,565
1,562
1,392
Social security costs
215
223
190
Pension costs (including retirement healthcare)
18
88
93
78
Share-based payments
22
40
41
26
1,908
1,919
1,686
Audit Fees – information about the nature and cost of services provided by the auditor
2022
2021
2020
$ million
$ million
$ million
Audit services:
Group accounts
7.2
5.5
5.0
Local statutory audit pursuant to legislation
2.2
2.0
2.0
Other services:
Audit-related services
0.4
0.1
0.4
Total auditor’s remuneration
9.8
7.6
7.4
Arising:
In the UK
5.3
3.5
3.6
Outside the UK
4.5
4.1
3.8
9.8
7.6
4
Interest and other finance costs
Interest income/(expense)
2022
2021
2020
$ million
$ million
$ million
Interest income
14
6
6
Interest expense:
Bank borrowings
(3)
(3)
(4)
Private placement notes
(39)
(46)
(42)
Lease liabilities
(6)
(7)
(6)
Corporate bond
(27)
(21)
(5)
Other
(5)
(3)
(5)
(80)
(80)
(62)
Net interest expense
(66)
(74)
Other finance costs
2022
2021
2020
Notes
$ million
$ million
$ million
Retirement benefit net interest expense
18
(2)
(3)
(2)
Unwinding of discount
(9)
(10)
(11)
Other
3
(4)
6
Other finance costs
(8)
(17)
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
Taxation
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.
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 5.2.
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
5.1
Taxation charge attributable to the Group
2022
2021
2020
$ million
$ million
$ million
Current taxation:
UK corporation tax
17
14
16
Overseas tax
104
126
40
Current income tax charge
121
140
56
Adjustments in respect of prior periods
(10)
(33)
(191)
Total current taxation
111
107
(135)
Deferred taxation:
Origination and reversal of temporary differences
(77)
(35)
(49)
Changes in tax rates
(5)
(14)
(12)
Adjustments to estimated amounts arising in prior periods
(17)
4
(6)
Total deferred taxation
(99)
(45)
(67)
Total taxation as per the income statement
12
62
(202)
Taxation in other comprehensive income
5
27
–
Taxation in equity
3
1
4
Taxation charge/(credit) attributable to the Group
20
90
(198)
178
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Annual Report 2022
The 2022 and 2021 net prior period adjustments of $27m and $29m respectively relate principally to provision releases following the
resolution of tax audits and other uncertain tax matters, and other one-off items. The 2020 net prior period adjustment of $197m
is explained predominantly by a $100m prior year current tax credit due to the successful outcome of UK tax litigation, releases
of provisions following the conclusion of tax audits, and loss carry-backs to prior periods.
The total taxation charge of $12m as per the income statement includes a $127m net credit (2021: $85m net credit, 2020: $274m net
credit) as a consequence of restructuring and rationalisation-related costs, acquisition and disposal-related items, amortisation and
impairment of acquisition intangibles, legal and other items. The 2020 net credit was significantly higher predominantly as a result of
refunds and future recoverable amounts recognised following the successful outcome of the UK tax litigation disclosed in the 2020
Annual Report ($142m), and also a one-off carry-back of losses attributable to non-trading costs to prior periods taxable at a higher rate.
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 $150m (2021: $152m) in relation to uncertain tax positions which relate to multiple issues across the jurisdictions in which
the Group operates. Other payables include $10m (2021: $14m) of interest on these provisions. There are $37m (2021: $106m) 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 tax audits which are currently in progress, 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, these releases depend on
factors which are uncertain, both as to outcome and timing. However, at the current time, we believe the possibility of a material impact
on the tax charge for 2023 is unlikely.
OECD BEPS 2.0 – Pillar Two
The OECD Pillar Two Globe Rules introduce a global minimum corporate tax rate of 15% applicable to multinational enterprise (MNE)
groups with global revenue over €750m. All participating OECD members are required to incorporate these rules into national legislation.
On 2 February 2023, the OECD published its Agreed Administrative Guidance for the Pillar Two Globe Rules providing greater detail on
the application of the rules. The Group will be subject to the Pillar Two Model Rules which is likely to result in an increase in our Group tax
rate from 2024 onwards. The Group does not meet the threshold for application of the Pillar One transfer pricing rules.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
5
Taxation
continued
The UK standard rate of corporation tax for 2022 is 19.0% (2021: 19.0%, 2020: 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.
The UK Government announced on 14 October 2022 that the UK corporation tax rate will increase to 25% from 1 April 2023 as already
enacted in the UK Finance Act 2021. The impact of this rate change is reflected in the calculation of the taxation charge, and in the tax
reconciliation below.
2022
2021
2020
$ million
$ million
$ million
Profit before taxation
235
586
246
Expected taxation at UK statutory rate of 19.0% (2021: 19.0%, 2020: 19%)
45
111
47
Differences in overseas taxation rates
(19)
(17)
(37)
Innovation reliefs
(10)
(12)
(9)
Tax losses and other deferred tax assets not recognised
–
7
15
Recognition of previously unrecognised tax losses
(4)
(2)
(45)
Expenses not deductible for tax purposes
1
31
22
29
Change in tax rates
2
(5)
(14)
(12)
Withholding tax on unremitted earnings
1
(4)
7
Adjustments in respect of prior years³
(27)
(29)
(197)
Total taxation charge/(credit) as per the income statement
12
62
(202)
1
In 2022, this includes a $7m impact of non-tax deductible impairment on UK owned investments (2021: $17m impact of non-taxable accounting gains recognised on UK-owned investments).
2
In 2022, the tax rate changes primarily relate to an increase in deferred tax resulting from the increase in the UK corporation tax rate due to come into effect on 1 April 2023. In 2021, the net
impact to deferred tax assets and liabilities was $6m which comprised $14m in the income statement and $8m in other comprehensive income as shown in the table below.
3
The adjustments in respect of prior years are explained on page 179.
Deferred taxation
Movements in the main components of deferred tax assets and liabilities were as follows:
Inventory,
Accelerated
Retirement
Losses
provisions
tax
benefit
and other
and other
depreciation
Intangibles
obligations
tax attributes
differences
Total
$ million
$ million
$ million
$ million
$ million
$ million
At 31 December 2020
(61)
(209)
5
123
203
61
Exchange adjustment
–
–
(1)
–
(7)
(8)
Movement in income statement – current year
16
24
1
4
(10)
35
Movement in income statement – prior years
(2)
10
–
(10)
(2)
(4)
Movement in other comprehensive income
–
–
(15)
–
(5)
(20)
Movement in equity
–
–
–
–
(1)
(1)
Changes in tax rate
–
(2)
(8)
10
6
6
Acquisitions
2
(22)
–
3
5
(12)
At 31 December 2021
(45)
(199)
(18)
130
189
57
Exchange adjustment
–
1
2
–
(10)
(7)
Movement in income statement – current year
(28)
15
1
1
88
77
Movement in income statement – prior years
–
4
1
9
3
17
Movement in other comprehensive income
–
–
(7)
–
2
(5)
Movement in equity
–
–
–
–
(3)
(3)
Changes in tax rate
(2)
(2)
–
–
9
5
At 31 December 2022
(75)
(181)
(21)
140
278
141
Represented by:
2022
2021
$ million
$ million
Deferred tax assets
177
201
Deferred tax liabilities
(36)
(144)
Net position at 31 December
141
57
180
Smith+Nephew
Annual Report 2022
The deferred tax asset of $278m (2021: $189m) relating to inventory, provisions and other differences comprises deferred tax relating
to inventory of $117m (2021: $116m), provisions and other short-term temporary differences of $153m (2021: $65m) and bad debt
provisions of $8m (2021: $8m).
The Group has gross unused trading and non-trading tax losses of $839m (2021: $841m), gross unused research and development
tax credits of $24m (2021: $21m) and gross unused capital losses of $97m (2021: $108m), available for offset against future profits.
None of these amounts are due to expire within five years from the balance sheet date if not utilised.
A deferred tax asset of $140m (2021: $130m) has been recognised in respect of $541m (2021: $508m) of the trading and non-trading
tax losses and $12m (2021: $21m) of research and development tax credits. No deferred tax asset has been recognised on the remaining
unused tax losses as it is not probable that future taxable profits will be available against which they can be utilised.
Management will reassess the recoverability of deferred tax assets at each balance sheet date by taking into account all relevant and
available information. The Group assesses the likelihood of these being recovered within a reasonably foreseeable timeframe, being
typically a minimum of five years, taking into account the future expected profit profile and business model of each relevant company
or country, and any potential legislative restrictions on use. Short-term timing differences are generally recognised ahead of losses
Earnings per ordinary share
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
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
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:
2022
2021
2020
$ million
$ million
$ million
Earnings
Attributable profit for the year
223
524
448
Adjusted attributable profit (see below)
713
710
564
Attributable profit is reconciled to adjusted attributable profit as follows:
2022
2021
2020
Notes
$ million
$ million
$ million
Attributable profit for the year
223
524
448
Acquisition and disposal-related items
1
162
(73)
4
Restructuring and rationalisation costs
2
3
168
113
124
Amortisation and impairment of acquisition intangibles
3
9
205
172
171
Legal and other
4
82
59
91
UK tax litigation
5
–
–
(142)
Taxation on excluded items
5
(127)
(85)
(132)
Adjusted attributable profit
713
710
564
1
Acquisition and disposal-related items includes a $4m charge within operating profit (2021: $7m charge, 2020: $4m charge) and a $158m charge within share of result of associates
(2021: $5m credit, 2020: $nil) and a $nil gain on disposal of interest in associate (2021: $75m gain, 2020: $nil). See details in Note 11.
2
Restructuring and rationalisation costs include a $167m charge within operating profit (2021: $113m, 2020: $124m) and a $1m charge within share of result of associates (2021: $nil, 2020: $nil).
3
In 2022, amortisation and impairment of acquisition intangibles includes a $205m charge within operating profit (2021: $172m charge with operating profit, 2020: $171m charge within
operating profit).
4
Legal and other charge in 2022 includes $75m (2021: $51m charge, 2020: $89m charge) within operating profit (refer to Note 2.6) and a $7m charge (2021: $8m charge, 2020: $8m 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:
2022
2021
2020
Number of shares (millions)
Basic weighted number of shares
872
877
875
Dilutive impact of share incentive schemes outstanding
1
1
2
Diluted weighted average number of shares
873
878
877
Earnings per ordinary share
Basic
25.5¢
59.8¢
51.3¢
Diluted
25.5¢
59.7¢
51.2¢
Adjusted:
Basic
81.8¢
80.9¢
64.6¢
Diluted
81.6¢
80.8¢
182
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Annual Report 2022
Property, plant and equipment
Property, plant and equipment
Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.
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.
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.
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
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
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
7
Property, plant and equipment
continued
Plant and equipment
Assets in
Land and
course of
buildings
Instruments
Other
construction
Total
Notes
$ million
$ million
$ million
$ million
$ million
Cost
At 1 January 2021
616
1,676
1,244
216
3,752
Exchange adjustment
(9)
(53)
(16)
(1)
(79)
Acquisitions
21
9
9
2
2
22
Additions
53
151
40
161
405
Disposals
(10)
(88)
(28)
2
(124)
Impairment
–
–
(6)
–
(6)
Transfers
29
(1)
46
(77)
(3)
At 31 December 2021
688
1,694
1,282
303
3,967
Exchange adjustment
(18)
(66)
(39)
(6)
(129)
Acquisitions
21
–
2
–
–
2
Additions
51
129
24
136
340
Disposals
(45)
(58)
(49)
(1)
(153)
Impairment
–
–
–
(3)
(3)
Transfers
50
9
114
(173)
–
At 31 December 2022
726
1,710
1,332
256
4,024
Depreciation and impairment
At 1 January 2021
199
1,233
871
–
2,303
Exchange adjustment
(4)
(43)
(13)
–
(60)
Charge for the year
62
178
86
–
326
Impairment
–
–
(5)
–
(5)
Disposals
(10)
(75)
(25)
–
(110)
Transfers
2
(1)
(1)
–
–
At 31 December 2021
249
1,292
913
–
2,454
Exchange adjustment
(8)
(52)
(29)
–
(89)
Charge for the year
62
172
85
–
319
Impairment
18
8
1
–
27
Disposals
(37)
(58)
(47)
–
(142)
Transfers
–
4
(4)
–
–
At 31 December 2022
284
1,366
919
–
2,569
Net book amounts
At 31 December 2022
442
344
413
256
1,455
At 31 December 2021
439
402
369
303
1,513
Land and buildings includes land with a cost of $22m (2021: $23m) that is not subject to depreciation. Transfers from assets in course of
construction includes $nil (2021: $3m) of soſtware. Assets under construction in 2022 reflect that the Group is undergoing investment in
its manufacturing facilities including expanding facilities in Malaysia and Costa Rica, and the development of new manufacturing facility
in Hull, UK. Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $20m
(2021: $52m). The amount of borrowing costs capitalised in 2022 and 2021 was minimal.
Information about the Group’s right-of-use assets is outlined below:
Land and
buildings
Plant and
equipment
2022
$ million
$ million
Additions
49
10
Depreciation charge in the year
44
12
Net book value at 31 December
160
184
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Annual Report 2022
Goodwill
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
2022
2021
Notes
$ million
$ million
Cost and net book value
At 1 January
2,989
2,928
Exchange adjustment
(42)
(35)
Acquisitions
21
84
96
At 31 December
3,031
2,989
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:
2022
2021
$ million
$ million
Orthopaedics
953
897
Sports Medicine & ENT
1,455
1,457
Advanced Wound Management
623
635
3,031
2,989
Impairment reviews were performed as of September 2022 and September 2021 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 current challenging economic environment, including inflation, 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. Although the headroom for the Orthopaedics CGU has
decreased and is sensitive to a reasonably possible change in assumptions, no impairment was identified as a result of the impairment
reviews and sensitivity analyses undertaken.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
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 were extrapolated for a further two years to reflect expected growth in the CGUs above the terminal
growth rate which is based on long term GDP growth. The initial 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.
The discount rates are calculated using the weighted average cost of capital which includes a risk-free rate, based on government
bond yields, and an equity risk premium specifically adjusted to the medical technology industry.
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 headroom for the Orthopaedics CGU has decreased from $1.1bn in the prior year to $0.6bn in the current year, primarily due to
higher input inflation and supply chain challenges. Revenue is expected to grow above market growth rates due to new product launches
and improved commercial execution. The trading profit margin is expected to grow over the five-year period as a result of revenue
growth as well as productivity and efficiency improvements related to the 12-point plan. The average growth rate used to extrapolate
the cash flows beyond the five-year period (2021: three-year period) in calculating the terminal value is 2.0% (2021: 2.0%). The pre-tax
discount rate used in the Orthopaedics CGU value-in-use calculation reflects the geographical mix and is 10.1% (2021: 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 weighted average growth rate used to extrapolate the cash flows beyond the five-year period (2021: three-year period) in
calculating the terminal value is 2.0% (2021: 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 10.1% (2021: 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 weighted average growth rate used to extrapolate the cash flows beyond the five-year period (2021: three-year period) in
calculating the terminal value is 2.0.% (2021: 2.0%). The pre tax discount rate used in the Advanced Wound Management CGU
value-in-use calculation reflects the geographical mix and industry sector and is 10.1% (2021: 9.5%).
8.4
Sensitivity to changes in assumptions used in value-in-use calculations
Management have performed a sensitivity analysis of the value-in-use calculations for the identified CGUs and there was no impact
on the reported amounts of goodwill as a result of this review for the Sports Medicine & ENT and Advanced Wound Management CGUs.
The calculation of value-in-use for the Orthopaedics CGU is sensitive to reasonably possible changes in assumptions. Management’s
consideration of these sensitivities is set out below:
Revenue and
trading profit margin
– management has considered the impact of a decrease in the trading profit margin. This sensitivity
analysis shows that for the recoverable amount of the Orthopaedics CGU to be less than its carrying value, the trading profit margin
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Annual Report 2022
Intangible assets
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 soſtware 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 soſtware and certain costs of information technology projects
are capitalised as intangible assets. Soſtware that is integral to computer hardware is capitalised as plant and equipment.
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
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
9
Intangible assets
continued
Customer and
Assets
Product-
distribution-
in course of
Technology
related
related
Soſtware
construction
Total
Notes
$ million
$ million
$ million
$ million
$ million
$ million
Cost
At 1 January 2021
495
2,236
226
477
54
3,488
Exchange adjustment
(8)
(26)
(6)
(7)
(2)
(49)
Acquisitions
101
–
11
–
–
112
Additions
–
1
4
27
24
56
Disposals
–
(1)
(4)
(17)
–
(22)
Impairment
–
(4)
–
–
–
(4)
Transfers
–
–
–
11
(8)
3
At 31 December 2021
588
2,206
231
491
68
3,584
Exchange adjustment
(6)
(21)
(2)
(14)
(2)
(45)
Acquisitions
21
–
44
–
–
–
44
Additions
–
3
7
32
35
77
Disposals
–
–
(1)
(5)
–
(6)
Impairment
–
–
–
–
(1)
(1)
Transfers
–
–
–
4
(4)
–
At 31 December 2022
582
2,232
235
508
96
3,653
Amortisation and impairment
At 1 January 2021
142
1,373
126
361
–
2,002
Exchange adjustment
(3)
(20)
(4)
(7)
–
(34)
Charge for the year
41
131
23
42
–
237
Impairment
–
(2)
–
–
–
(2)
Disposals
–
–
–
(17)
–
(17)
At 31 December 2021
180
1,482
145
379
–
2,186
Exchange adjustment
(2)
(19)
(2)
(8)
–
(31)
Charge for the year
46
123
17
43
–
229
Impairment
4
28
–
6
–
38
Disposals
–
–
–
(5)
–
(5)
At 31 December 2022
228
1,614
160
415
–
2,417
Net book amounts
At 31 December 2022
354
618
75
93
96
1,236
At 31 December 2021
408
724
86
112
68
1,398
Transfers into soſtware and assets in course of construction includes $nil (2021: $3m) of soſtware transferred from property,
plant and equipment. Group capital expenditure relating to soſtware contracted but not provided for amounted to $7m (2021: $10m).
Amortisation and impairment of acquisition intangibles is set out below:
2022
2021
$ million
$ million
Technology
51
41
Product-related
142
118
Customer and distribution-related
12
13
Total
205
172
188
Smith+Nephew
Annual Report 2022
Management have assessed the acquisition intangible assets held by the Group to identify any indicators of impairment as of
September 2022. These were updated during December to take into account any significant events that occurred between September
and December. Where an impairment indicator has arisen, impairment reviews have been undertaken by comparing the expected
recoverable value of assets to the carrying value of assets. In 2022, the Group booked $32m (2021: $nil) of impairment charge in
relation to immaterial product assets in acquisition intangibles.
The table below provides further detail on the largest intangible assets and their remaining amortisation period:
Remaining
Carrying value
amortisation
$ million
period
Intangibles acquired as part of the ArthroCare acquisition
306
1–11 years
Intangibles acquired as part of the Osiris acquisition
204
2–6 years
Intangibles acquired as part of the Healthpoint acquisition
179
Investments
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; 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
2022
2021
$ million
$ million
At 1 January
10
9
Additions
2
2
Fair value remeasurement
–
(1)
At 31 December
12
Investments in associates
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 aſter deduction of their respective taxes.
The carrying amounts of investments in associates are reviewed for impairment as at the balance sheet date. For the purposes of
impairment testing, the recoverable amounts of these investments would be based on their observable market value. Any impairment
At 31 December 2022, the Group holds 28.3% (2021: 29.2%) of Bioventus Inc. (Bioventus) which is the holding company of Bioventus LLC.
The decrease in the Group’s holding between 2022 and 2021 was because of the exercise of Bioventus employee share options.
The company’s headquarters is located in Durham, North Carolina, US, and its medical product development is focused 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 loss aſter taxation recognised in the income statement relating to Bioventus was $141m (2021: $84m profit) which comprises
the Group’s share of loss of $32m (2021: $9m profit), $nil gain (2021: $75m gain) on disposal of interest in associate, and an impairment
loss of $109m (2021: $nil). The balance sheet carrying value relating to Bioventus is $46m (2021: $186m). The Group’s ability to recover
the value of its investment is dependent upon the ongoing clinical and commercial success of these products.
On 11 February 2021, Bioventus commenced trading on the Nasdaq Global Select Market via its holding company, Bioventus Inc.,
under the symbol ‘BVS’. Since its IPO in February 2021, Bioventus’s trading share price has decreased significantly and the company
has disclosed a substantial doubt about their ability to continue as a going concern. Given these impairment indicators, management
performed an impairment review by comparing the fair value of Bioventus using its market share price of $2.61 as at 30 December 2022
less costs of disposal to its carrying amount and concluded that an impairment loss of $109m should be charged (2021: $nil).
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
11
Investments in associates
continued
The amounts recognised in the balance sheet and income statement for associates are as follows:
2022
2021
$ million
$ million
Balance sheet
46
188
Income statement (loss)/profit
(32)
9
Impairment of interest in associate
(109)
–
Gain on disposal of interest in associate
–
75
Summarised financial information for significant associates
Set out below is the summarised financial information for Bioventus, adjusted for differences with Group accounting policies. For the
2022 financial year, full-year information for Bioventus has not been released at the date of approval of these financial statements and
is market sensitive given Bioventus is a publicly traded company. Accordingly, the summary financial information for 2022 is presented
for a nine-month period, with adjustments made for any significant transactions or events which occur in the fourth quarter.
2022
2021
$ million
$ million
Summarised statement of comprehensive income
Revenue
386
300
Attributable (loss)/profit for the year
(129)
22
Group adjustments
1
17
10
Total comprehensive profit
(112)
32
Group share of profit for the year at 28.3% (2021: 29.2%)
(32)
9
2022
2021
$ million
$ million
Summarised balance sheet
Non-current assets
1,128
1,021
Current assets
271
229
Non-current liabilities
(730)
(542)
Current liabilities
(288)
(191)
Net assets
381
517
Net equity attributable to owners
381
517
Group’s share of net assets at 28.3% (2021: 29.2%)
108
151
Group adjustments
1
47
35
Impairment loss
(109)
—
Group’s carrying amount of investment at 28.3% (2021: 29.2%)
46
186
1
Group adjustments include adjustments to align with Group policy.
The investment in Bioventus had a fair value less costs of disposal of $46m as at 31 December 2022.
During the year, the Group received a $1m (2021: $4m) cash distribution from its associates.
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Annual Report 2022
Inventories
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
2022
2021
$ million
$ million
Raw materials and consumables
474
424
Work-in-progress
78
79
Finished goods and goods for resale
1,653
1,341
2,205
1,844
Management have not changed their policy for calculating the provision since 31 December 2021, nor is a change in the key assumptions
underlying the methodology expected in the next 12 months. As a result of increased inventory levels, the provision has increased
from $430m at 31 December 2021 to $504m at 31 December 2022. The provision, however, reduced as a result of foreign exchange
movements of $15m. 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. The provision for excess and obsolete inventory is not considered
to have a range of potential outcomes that is significantly different to the $504m at 31 December 2022 in the next 12 months.
The provision has a high degree of estimation uncertainty given the range of products and sizes, with a potential range of reasonable
outcomes that could be material over the longer term.
The cost of inventories recognised as an expense and included in cost of goods sold amounted to $1,302m (2021: $1,407m, 2020: $1,129m).
No adverse manufacturing variances generated by factory specific shutdowns or reductions in scheduled production due to Covid
were directly expensed to cost of goods sold in 2022 (2021: $nil, 2020: $85m). In addition, $117m was recognised as an expense within
cost of goods sold resulting from inventory write-offs and provision increases (2021: $105m, 2020: $144m).
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
Trade and other receivables
Trade and other receivables are carried at amortised cost, less any allowances for uncollectable amounts. They are included
in current assets, except for maturities greater than 12 months aſter 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
2022
2021
$ million
$ million
Trade and other receivables due within one year
Trade receivables
1,076
1,028
Less: loss allowance
(49)
(57)
Trade receivables – net
1,027
971
Derivatives – forward foreign exchange, currency swaps and interest rate contracts
47
39
Other receivables
114
95
Prepayments
76
79
1,264
1,184
Due aſter more than one year
Other non-current assets
12
15
1,276
1,199
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.
The loss allowance expense for the year was $4m (2021: $3m, 2020: $25m).
The following table provides information about the ageing of and expected credit losses for trade receivables:
2022 Weighted
average loss
rate
2022 Loss
allowance
2022 Gross
carrying
amount
2021 Gross
carrying
amount
%
$ million
$ million
$ million
Not past due
-0.3%
(2)
610
595
Past due not more than 3 months
-0.4%
(1)
228
217
Past due more than 3 months
-1.0%
(1)
97
88
Past due more than 6 months
-31.9%
(45)
141
128
(49)
1,076
1,028
Loss allowance
(49)
(57)
Trade receivables – net
1,027
971
192
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Annual Report 2022
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:
2022
2021
$ million
$ million
At 1 January
57
71
Exchange adjustment
(3)
(3)
Net receivables provided during the year
4
3
Utilisation of provision
(9)
(14)
At 31 December
49
57
Trade receivables include amounts denominated in the following major currencies:
2022
2021
$ million
$ million
US Dollar
465
429
Sterling
37
34
Euro
215
201
Other
310
307
Trade receivables – net
1,027
Trade and other payables
2022
2021
$ million
$ million
Trade and other payables due within one year
Trade and other payables
1,029
1,043
Derivatives – forward foreign exchange, currency swaps and interest rate contracts
43
19
Acquisition consideration
26
34
1,098
1,096
Other payables due aſter one year
Acquisition consideration
66
57
Derivatives – forward foreign exchange, currency swaps and interest rate contracts
13
–
Other payables
11
10
90
67
The acquisition consideration includes $78m (2021: $84m) contingent upon future events.
The acquisition consideration due aſter more than one year is expected to be payable as follows: $29m in 2024, $35m in 2025
193
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
Cash and borrowings
Net debt
Net debt comprises borrowings and credit balances on currency swaps less cash at bank.
2022
2021
$ million
$ million
Bank overdraſts, borrowings and loans due within one year
111
435
Long-term bank borrowings
–
554
Corporate bond
1,510
993
Private placement notes
1,055
1,160
Borrowings
2,676
3,142
Cash at bank
(350)
(1,290)
Credit balance on derivatives – interest rate swaps
13
–
Net debt
2,339
1,852
Non-current lease liabilities
147
141
Current lease liabilities
49
56
Net debt including lease liabilities
2,535
2,049
Borrowings are repayable as follows:
Within
Between
Between
Between
Between
one year or
one and
two and
three and
four and
Aſter
on demand
two years
three years
four years
five years
five years
Total
$ million
$ million
$ million
$ million
$ million
$ million
$ million
At 31 December 2022
Bank overdraſts
6
–
–
–
–
–
6
Corporate bond
–
–
–
–
–
1,510
1,510
Private placement notes
105
430
–
75
140
410
1,160
Lease liabilities
1
49
42
32
24
18
45
210
160
472
32
99
158
1,965
2,886
At 31 December 2021
Bank loans
305
554
–
–
–
–
859
Bank overdraſts
5
–
–
–
–
–
5
Corporate bond
–
–
–
–
–
993
993
Private placement notes
125
105
430
–
75
550
1,285
Lease liabilities
1
56
33
33
23
18
47
210
491
692
463
23
93
1,590
3,352
1
194
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Annual Report 2022
Liquidity risk exposures
The Board has established a set of policies to manage funding and currency risks. The Group only uses derivative financial instruments
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 $3.7bn
(2021: $4.1bn). During 2022, the Group issued its debut EUR Corporate Bond, in the form of €500m (before expenses and underwriting
discounts) of notes bearing an interest rate of 4.565% repayable in 2029. In addition, the Group repaid its €269m, €223m and €265m
EUR term loan facilities, as well as $125m of private placement debt.
The interest payable on borrowings under committed facilities is either at fixed or floating rates. Euro floating rates are typically
based on EURIBOR and US Dollar rates are typically based on the Secured Overnight Financing Rate (SOFR). 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 2022, the Company was in compliance with these covenants.
The facilities are also subject to customary events of default, none of which are currently anticipated to occur.
The Group’s committed facilities at 31 December 2022 are:
Facility
Date due
$105 million 3.26% Senior Notes
November 2023
$100 million 3.89% Senior Notes
January 2024
$305 million 3.36% Senior Notes
November 2024
$25 million Floating Rate Senior Notes
November 2024
$1.0 billion syndicated revolving credit facility
June 2025
$75 million 3.99% Senior Notes
January 2026
$140 million 2.83% Senior Notes
June 2027
$60 million 2.90% Senior Notes
June 2028
$100 million 2.97% Senior Notes
June 2029
€500 million 4.565% EUR Corporate Bond
October 2029
$95 million 2.99% Senior Notes
June 2030
$1.0 billion 2.032% USD Corporate Bond
October 2030
$155 million 3.09% Senior Notes
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
15
Cash and borrowings
continued
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
Between
Between
year or on
one and
two and
Aſter
demand
two years
five years
five years
Total
$ million
$ million
$ million
$ million
$ million
At 31 December 2022
Non-derivative financial liabilities:
Bank overdraſts and loans
6
–
–
–
6
Corporate bond
37
37
111
1,620
1,805
Trade and other payables
1,029
–
–
–
1,029
Private placement notes
143
461
265
444
1,313
Acquisition consideration
26
31
39
–
96
Derivative financial instruments:
Currency swaps/forward foreign exchange contracts – outflow
2,598
–
–
–
2,598
Currency swaps/forward foreign exchange contracts – inflow
(2,601)
–
–
–
(2,601)
1,238
529
415
2,064
4,246
At 31 December 2021
Non-derivative financial liabilities:
Bank overdraſts and loans
310
554
–
–
864
Corporate bond
20
20
61
1,077
1,178
Trade and other payables
1,043
–
–
–
1,043
Private placement notes
165
142
574
599
1,480
Acquisition consideration
35
19
42
–
96
Derivative financial instruments:
Currency swaps/forward foreign exchange contracts – outflow
2,322
–
–
–
2,322
Currency swaps/forward foreign exchange contracts – inflow
(2,342)
–
–
–
(2,342)
1,553
735
677
1,676
4,641
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.
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 2022, the Group held $344m (2021: $1,285m, 2020: $1,751m) in cash net of bank overdraſts. The Group had committed
facilities available of $3.7bn at 31 December 2022 of which $2.7bn 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 2023, 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 $2bn at the beginning of 2022 to $2.5bn at the end of 2022,
196
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Annual Report 2022
Financial instruments and risk management
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. 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
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 the
Group’s policy for operating units not to hold material unhedged monetary assets or liabilities other than in their functional currencies.
Foreign exchange variations affect trading results in two ways. Firstly, on translation of overseas sales and profits into US Dollars
and secondly, transactional exposures arising where some, or all of the costs of sale are incurred in a different currency from the sale.
The principal transactional exposures arise as the proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion
of sales in each of these currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.
The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts.
The Group uses forward foreign exchange contracts, designated as cash flow hedges, to hedge forecast third-party 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 2022, the Group had contracted to exchange within one year the equivalent of $2.2bn (2021: $2.0bn). Based on
the Group’s net borrowings as at 31 December 2022, if the US Dollar were to weaken against all currencies by 10%, the Group’s
net borrowings would increase by $41m (2021: $75m) principally due to the Euro-denominated term loans.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
16
Financial instruments and risk management
continued
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 2022 would have been $50m lower (2021: $44m 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 2022 would have been $35m higher
(2021: $26m higher). Movements in the fair value of forward foreign exchange contracts would be recognised in other comprehensive
income or in the income statement.
A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2022 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.
In 2022, the Group entered into a new €500m fixed to floating interest rate swap.
Based on the Group’s gross borrowings and cash as at 31 December 2022, if interest rates were to increase by 100 basis points in all
currencies, then the annual net interest charge would increase by $4m (2021: $3m). A decrease in interest rates by 100 basis points
in all currencies would have an equal but opposite effect to the amounts shown above.
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 2022 was $47m (2021: $39m), 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 2022
was $350m (2021: $1,290m). 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.
198
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Annual Report 2022
The amounts relating to items designated as hedging instruments were as follows:
Carrying
Carrying
Changes in
Hedge
Amounts reclassified
Nominal
amount
amount
fair value
ineffectiveness
from hedging reserve
amount
assets
liabilities
in OCI
in profit or loss
to profit or loss
Line item in
$ million
$ million
$ million
$ million
$ million
$ million
profit or loss
At 31 December 2022
Foreign currency risk
Forward exchange contracts
1
2,598
47
(43)
(13)
–
(37)
Cash flow hedges
Interest rate risk
Interest rate swaps
2
(500)
–
(13)
–
–
–
Fair value hedge
At 31 December 2021
Foreign currency risk
Forward exchange contracts
1
2,322
39
(19)
41
–
7
Cash flow hedges
Interest rate risk
Interest rate swaps
2
–
–
–
–
–
–
N/A
1
Presented in Trade and other receivables and Trade and other payables on the Balance Sheet.
2
16.4
Net investment hedge
Part of the Group’s net investment in its Euro subsidiaries is hedged by €500m ($533m equivalent) of our debut EUR Corporate Bond
which mitigates the foreign currency risk arising from the subsidiaries’ net assets. The Bond is designated as a hedging instrument for
the changes in the value of the net investment that is attributable to changes in the EUR/USD spot rate.
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 Corporate Bond 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:
Fixed rate liabilities
Weighted
average
Interest
Weighted
time
Gross
Currency
rate
Total
Floating
Fixed rate
average
for which
borrowings
swaps
swaps
liabilities
rate liabilities
liabilities
interest rate
rate is fixed
$ million
$ million
$ million
$ million
$ million
$ million
%
Years
At 31 December 2022
US Dollar
(2,159)
(163)
–
(2,322)
(193)
(2,129)
2.7
5.9
Other
(517)
(206)
(13)
(736)
(220)
(516)
Total interest bearing liabilities
(2,676)
(369)
(13)
(3,058)
(413)
(2,645)
At 31 December 2021
US Dollar
(2,278)
(201)
–
(2,479)
(226)
(2,253)
2.7
6.5
Other
(864)
(136)
–
(1,000)
(1,000)
–
–
–
Total interest bearing liabilities
(3,142)
(337)
–
(3,479)
(1,226)
(2,253)
In 2022, the Group also had liabilities due for deferred and contingent acquisition consideration (denominated in US Dollars, Swiss Francs
and Euros) totalling $92m (2021: $91m, 2020: $165m) on which no interest was payable (see Note 14). There were no other significant
interest bearing or non-interest bearing financial liabilities. Euro floating rates are typically based on EURIBOR and US Dollar rates are
typically based on SOFR. The weighted average interest rate on floating rate borrowings as at 31 December 2022 was over 3% (2021:
less than 1%).
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
16
Financial instruments and risk management
continued
Currency and interest rate profile of interest bearing assets:
Cash
Currency
Interest rate
Floating
Fixed
at bank
swaps
swaps
Total assets
rate assets
rate assets
$ million
$ million
$ million
$ million
$ million
$ million
At 31 December 2022
US Dollar
207
205
–
412
412
–
Other
143
164
–
307
307
–
Total interest bearing assets
350
369
–
719
719
–
At 31 December 2021
US Dollar
1,156
135
–
1,291
1,291
–
Other
134
202
–
336
336
–
Total interest bearing assets
1,290
337
–
1,627
1,627
–
Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned.
Fair value of financial assets and liabilities
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
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 2021.
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 2022 and 2021. For cash
and cash equivalents, short-term loans and receivables, overdraſts 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 bonds issued in October 2020 and October
2022 are 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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Annual Report 2022
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
Fair value –
hedging
instruments
Amortised
cost
Fair value
through
OCI
Fair value
through
profit
or loss
Other
financial
liabilities
Total
Level 2
Level 3
Total
At 31 December 2022
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
Financial assets measured
at fair value
Forward foreign exchange contracts
46
–
–
–
–
46
46
–
46
Investments
–
–
–
12
–
12
–
12
12
Contingent consideration receivable
–
–
–
18
–
18
–
18
18
Currency swaps
–
–
1
–
–
1
1
–
1
46
–
1
30
–
77
Financial liabilities measured
at fair value
Acquisition consideration
–
–
–
(78)
–
(78)
–
(78)
(78)
Forward foreign exchange contracts
(42)
–
–
–
–
(42)
(42)
–
(42)
Interest rate swaps
(13)
–
–
–
–
(13)
(13)
–
(13)
Currency swaps
–
–
(1)
–
–
(1)
(1)
–
(1)
(55)
–
(1)
(78)
–
(134)
Financial assets not measured
at fair value
Trade and other receivables
1,123
–
–
–
–
1,123
Cash at bank
–
350
–
–
–
350
1,123
350
–
–
–
1,473
Financial liabilities not measured
at fair value
Acquisition consideration
–
–
–
–
(14)
(14)
Bank overdraſts
–
–
–
–
(6)
(6)
Corporate bond not in a hedge
relationship
–
–
–
–
(994)
(994)
Corporate bond in a hedge
relationship
–
–
–
–
(516)
(516)
Private placement debt not in a
hedge relationship
–
–
–
–
(1,160)
(1,160)
Trade and other payables
–
–
–
–
(1,040)
(1,040)
–
–
–
–
(3,730)
(3,730)
At 31 December 2022, the book value and market value of the USD corporate bond were $994m and $783m respectively (2021: $993m
and $962m), the book value and market value of the EUR Corporate bond were $516m and $531m respectively. The book value and fair
value of the private placement debt were $1,160m and $987m respectively (2021: $1,285m and $1,316m).
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
16
Financial instruments and risk management
continued
During the year ended 31 December 2022, acquisition consideration increased by $1m due to $42m increase for acquisitions being
partially offset $24m of payments for acquisitions made in the current and prior years, and $17m of remeasurement and discount
unwind. 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.
Carrying
amount
Fair value
Fair value –
hedging
instruments
Amortised
cost
Fair value
through
OCI
Fair value
through
profit
or loss
Other
financial
liabilities
Total
Level 2
Level 3
Total
At 31 December 2021
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
Financial assets measured
at fair value
Forward foreign exchange contracts
37
–
–
–
–
37
37
–
37
Investments
–
–
–
10
–
10
–
10
10
Contingent consideration receivable
–
–
–
20
–
20
–
20
20
Currency swaps
–
–
2
–
–
2
2
–
2
37
–
2
30
–
69
Financial liabilities measured
at fair value
Acquisition consideration
–
–
–
(84)
–
(84)
–
(84)
(84)
Forward foreign exchange contracts
(17)
–
–
–
–
(17)
(17)
–
(17)
Currency swaps
–
–
(2)
–
–
(2)
(2)
–
(2)
(17)
–
(2)
(84)
–
(103)
Financial assets not measured
at fair value
Trade and other receivables
1,046
–
–
–
–
1,046
Cash at bank
–
1,290
–
–
–
1,290
1,046
1,290
–
–
–
2,336
Financial liabilities not measured
at fair value
Acquisition consideration
–
–
–
–
(7)
(7)
Bank overdraſts
–
–
–
–
(5)
(5)
Bank loans
–
–
–
–
(859)
(859)
Corporate bond
–
–
–
–
(993)
(993)
Private placement debt not in a
hedge relationship
–
–
–
–
(1,285)
(1,285)
Trade and other payables
–
–
–
–
(1,053)
(1,053)
–
–
–
–
(4,202)
(4,202)
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.
202
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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 2022 and 2021 for financial instruments measured using Level 3 valuation methods are presented below:
2022
2021
$ million
$ million
Investments
At 1 January
10
9
Additions
2
2
Fair value remeasurement
–
(1)
At 31 December
12
10
Contingent consideration receivable
At 1 January
20
37
Remeasurements
–
1
Receipts
(2)
(18)
At 31 December
18
20
Acquisition consideration liability
At 1 January
(84)
(128)
Arising on acquisitions
(32)
–
Payments
20
23
Remeasurements
19
21
Discount unwind
(1)
–
At 31 December
(78)
203
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
Provisions and contingencies
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
17.1
Provisions
Rationalisation
Legal and other
provisions
Metal-on-metal
provisions
Total
$ million
$ million
$ million
$ million
At 1 January 2021
29
336
52
417
Charge to income statement
115
–
13
128
Release to income statement
(2)
–
(1)
(3)
Unwinding of discount
–
8
–
8
Utilised
(124)
(55)
(13)
(192)
Exchange adjustment
–
–
(1)
(1)
At 31 December 2021
18
289
50
357
Charge to income statement
169
19
19
207
Release to income statement
(2)
–
(5)
(7)
Unwinding of discount
–
7
–
7
Utilised
(154)
(76)
(6)
(236)
Exchange adjustment
(1)
–
–
(1)
At 31 December 2022
30
239
58
327
Provisions – due within one year
30
165
48
243
Provisions – due aſter one year
–
74
10
84
At 31 December 2022
30
239
58
327
Provisions – due within one year
18
263
41
322
Provisions – due aſter one year
–
26
9
35
At 31 December 2021
18
289
50
357
The principal elements within rationalisation provisions relate to the Operations and Commercial Excellence programme announced
in February 2020 and the efficiency and productivity elements of the 12-point plan.
204
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The Group has estimated a provision of $239m (2021: $289m) relating to the present value at 31 December 2022 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 60th and
85th 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 ($121m) would be required in 2023 or thereaſter.
The provision does not include any possible further insurance recoveries on these claims or legal fees associated with defending claims.
Management considered whether there had been any changes to the number and value of claims due to Covid 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. The Group
carries considerable product liability insurance, and will continue to defend claims vigorously.
All provisions are expected to be substantially utilised within five years of 31 December 2022 and none are treated as
financial instruments.
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
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.
This includes matters raising concerns about possible adverse effects of hip implant products with metal-on-metal (MoM) bearing
surfaces for which the Group has incurred and will continue to incur expenses to defend claims in this area.
As of December 2022, approximately 1,160 such claims were pending with the Group around the world. This includes approximately
720 cases associated with a Multidistrict Litigation (MDL) pending in Baltimore, Maryland due to a 5 April 2017 court order consolidating
Smith+Nephew Birmingham Hip
◊
Resurfacing (BHR
◊
) cases pending or later filed in US federal court for pre-trial proceedings. Most claims
relate to the Group’s BHR product, including 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.
Through the end of 2022, entities of the Group have entered into several group, as well as individual, MoM related settlements without
admitting liability. The Group requested indemnity from its product liability insurers for most of these MoM hip implant settlements
and insurers have indemnified the Group to the limits of their respective applicable policies.
Litigation outcomes are difficult to predict and defence costs can be significant. The Group takes care to monitor the clinical evidence
relating to its products, including its metal hip implant products, to help ensure that its product offerings are designed to serve
patients’ interests.
205
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
17
Provisions and contingencies
continued
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 heard in courts in the US and other jurisdictions and also before agencies
that examine patents. Outcomes are rarely certain and costs are oſten 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 February 2017, the parties reached a settlement resulting in the dismissal of all patent litigation. Smith+Nephew agreed to pay
additional payments contingent on the outcome of patent validity proceedings pending at the US Patent & Trademark Office. In August
2019, the Court of Appeals for the Federal Circuit affirmed US Patent & Trademark Office ruling invalidating one of the asserted Arthrex
patents. 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. The United States Supreme Court granted certiorari. The Supreme Court ruling allowed Arthrex
to petition the Director of the US Patent & Trademark Office to review the decision invalidating the second asserted Arthrex patent.
The US Patent & Trademark Office declined Arthrex’s rehearing request in October 2021. In May 2022, the Court of Appeals for the
Federal Circuit affirmed the US Patent & Trademark Office’s invalidity ruling and its denial of Arthrex’s rehearing request. Arthrex has
petitioned the United States Supreme Court to review the US Patent & Trademark Office’s denial of Arthrex’s rehearing request.
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
Retirement benefit obligations
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
206
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Annual Report 2022
18.1
Retirement benefit net assets/(obligations)
The Group’s retirement benefit assets/(obligations) comprise:
2022
2021
$ million
$ million
Funded plans:
UK Plan
114
137
US Plan
24
40
Other plans
(5)
(18)
133
159
Unfunded plans:
Other plans
(52)
(91)
Retirement healthcare
(10)
(13)
71
55
Amount recognised on the balance sheet – liability
(70)
(127)
Amount recognised on the balance sheet – asset
141
182
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 Scheme (SERPS) between 1990 and 1997.
The US Plan is governed by a US Pension Committee which comprises 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.
In October 2022, US Pension plan members were notified that Smith & Nephew Inc. would begin the termination process for the plan.
This process is expected to be finalised by late 2023 or early 2024 with no impact in 2022.
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.
207
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
18
Retirement benefit obligations
continued
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:
2022
2021
Obligation
Asset
Total
Obligation
Asset
Total
$ million
$ million
$ million
$ million
$ million
$ million
Amounts recognised on the balance sheet at
beginning of the period
(1,582)
1,637
55
(1,714)
1,684
(30)
Income statement expense:
Current service cost
(9)
–
(9)
(12)
–
(12)
Past service credit
–
–
–
(1)
–
(1)
Settlements
4
(4)
–
1
(1)
–
Interest (expense)/income
(29)
30
1
(25)
25
–
Administration costs and taxes
(3)
–
(3)
(3)
–
(3)
Costs recognised in income statement
(37)
26
(11)
(40)
24
(16)
Remeasurements:
Actuarial (loss)/gain due to liability experience
(43)
–
(43)
2
–
2
Actuarial gain due to financial assumptions
change
503
–
503
43
–
43
Actuarial gain due to demographic assumptions
1
–
1
25
–
25
Return on plan assets (less)/greater than
discount rate
–
(431)
(431)
–
9
9
Remeasurements recognised in OCI
461
(431)
30
70
9
79
Cash:
Employer contributions
–
6
6
–
14
14
Employee contributions
(3)
3
–
(3)
3
–
Benefits paid directly by the Group
2
–
2
2
–
2
Benefits paid, taxes and administration costs
paid from scheme assets
81
(83)
(2)
79
(79)
–
Net cash
80
(74)
6
78
(62)
16
Exchange movements
94
(103)
(9)
24
(18)
6
Amount recognised on the balance sheet
(984)
1,055
71
(1,582)
1,637
55
Amount recognised on the balance sheet –
liability
(194)
124
(70)
(271)
144
(127)
Amount recognised on the balance sheet –
asset
(790)
931
141
(1,311)
1,493
182
Represented by:
2022
2021
Obligation
Asset
Total
Obligation
Asset
Total
$ million
$ million
$ million
$ million
$ million
$ million
UK Plan
(438)
552
114
(819)
956
137
US Plan
(336)
360
24
(463)
503
40
Other Plans
(210)
143
(67)
(300)
178
(122)
Total
(984)
1,055
71
(1,582)
1,637
55
The actuarial gain on obligation of $461m primarily relates to the increase in discount rates in 2022, which is partially offset by an
actuarial loss from the return on plan assets of $431m, which is due to investment returns being less than the discount rates.
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 14 years and 9 years for the UK and US Plans respectively.
208
Smith+Nephew
Annual Report 2022
18.3
Plan assets
The market value of the US, UK and Other Plans assets are as follows:
2022
2021
2020
$ million
$ million
$ million
UK Plan:
Assets with a quoted market price:
Cash and cash equivalents
2
4
10
Equity securities
3
84
91
Other bonds
30
50
49
Short dated credit fund
81
126
127
Liability driven investments
225
370
347
Diversified growth funds
55
89
89
396
723
713
Other assets:
Insurance contract
156
233
250
Market value of assets
552
956
963
US Plan:
Assets with a quoted market price:
Cash and cash equivalents
120
6
2
Equity securities
–
50
60
Government bonds – fixed interest
43
201
163
Corporate bonds
197
246
316
Market value of assets
360
503
541
Other Plans:
Assets with a quoted market price:
Cash and cash equivalents
7
5
5
Equity securities
49
55
51
Government bonds – fixed interest
7
5
9
Government bonds – index linked
–
4
4
Corporate and other bonds
10
11
10
Insurance contracts
21
33
37
Property
22
23
23
Other quoted securities
5
8
5
121
144
144
Other assets:
Insurance contracts
22
34
36
Market value of assets
143
178
180
Total market value of assets
1,055
1,637
1,684
209
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
18
Retirement benefit obligations
continued
No plans invest directly in property occupied by the Group or in financial securities issued by the Group.
Both the UK and US Plans hold predominantly 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.
There has been no material change in the Pension Plans’ investment strategies.
18.4
Expenses recognised in the income statement
The total expense relating to retirement benefits recognised for the year is $88m (2021: $93m, 2020: $78m). Of this cost recognised
for the year, $77m (2021: $77m, 2020: $69m) relates to defined contribution plans and $11m (2021: $16m, 2020: $9m) 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 2022 due to be paid
over to the plans (2021: $nil, 2020: $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 $nil (2021: $nil, 2020: $nil).
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.
2022
2021
2020
% per annum
% per annum
% per annum
UK Plan:
Discount rate
4.8
1.9
1.3
Future salary increases
n/a
n/a
n/a
Future pension increases
3.3
3.4
2.9
Inflation (RPI)
3.3
3.4
2.9
Inflation (CPI)
2.3
2.7
2.1
US Plan:
Discount rate
5.3
2.7
2.4
Future salary increases
n/a
n/a
n/a
Inflation
n/a
n/a
n/a
210
Smith+Nephew
Annual Report 2022
Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S3NA with projections in line with
the CMI 2021 table and the US uses the PRI-2012 table with MP-2021 scale. The Directors have considered the impact of the Covid
pandemic and, at the present time, do not believe that there is sufficient evidence to require a change in the long-term mortality
assumptions. The Directors will continue to monitor any potential future impact on the mortality assumptions used.
The current longevities underlying the values of the obligations in the defined benefit plans are as follows:
2022
2021
2020
years
years
years
Life expectancy at age 60
UK Plan:
Males
27.4
27.6
27.6
Females
30.1
30.1
30.1
US Plan:
Males
24.9
24.7
24.7
Females
27.1
26.8
26.8
Life expectancy at age 60 in 20 years’ time
UK Plan:
Males
28.9
29.1
29.1
Females
31.5
31.5
31.5
US Plan:
Males
24.9
24.6
24.6
Females
27.6
27.3
27.3
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.
Increase in pension obligation
Increase in pension cost
$ million
+50bps/+1yr
-50bps/-1yr
+50bps/+1 yr
-50bps/-1yr
UK Plan:
Discount rate
(29.0)
32.0
(1.0)
2.0
Inflation
29.0
(27.0)
2.0
–
Mortality
16.0
(17.0)
1.0
–
US Plan:
Discount rate
(14.0)
14.0
–
–
Mortality
8.0
(8.0)
–
–
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
18
Retirement benefit obligations
continued
18.7
Risk
The pension plans expose the Group to the following risks:
Interest rate risk
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.
Inflation 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 shiſt 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 aſter 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/Pension Committee of each plan to determine the level of funding required.
Employer contribution rates, based on these full valuations, are agreed between the Trustees/Pension Committee 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 2020. Future accruals to the UK Plan ceased
as at 31 December 2016. Contributions to the UK Plan in 2022 were $nil (2021: $7m, 2020: $nil). This included supplementary payments
of $nil (2021: $7m, 2020: $nil).
Following the completion of the 30 September 2020 valuation, a dynamic contribution mechanism was agreed. Under that dynamic
contribution mechanism, no further contributions were required in 2021 or 2022.
US Plan
The most recent full actuarial valuation of the US Plan was undertaken as at 1 January 2022. The next full actuarial valuation will
take place as at 1 January 2023. Future accruals to the US Plan ceased as at 31 March 2014. Contributions to the US Plan were $nil
(2021: $nil, 2020: $nil) which represented supplementary payments of $nil (2021: $nil, 2020: $nil).
212
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Annual Report 2022
Equity
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
Share capital
Ordinary shares (20¢)
Deferred shares (£1.00)
Total
Thousand
$ million
Thousand
$ million
$ million
Authorised
At 31 December 2020
1,223,591
245
50
–
245
At 31 December 2021
1,223,591
245
50
–
245
At 31 December 2022
1,223,591
245
50
–
245
Allotted, issued and fully paid
At 1 January 2020
885,207
177
50
–
177
Share options
327
–
–
–
–
Shares cancelled
(649)
–
–
–
–
At 31 December 2020
884,885
177
50
–
177
Share options
306
–
–
–
–
At 31 December 2021
885,191
177
50
–
177
Share options
229
–
–
–
–
Shares cancelled
(7,770)
(2)
–
–
(2)
At 31 December 2022
877,650
175
50
–
175
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 aſter the return of the nominal amount paid up on each share in the capital of the Company of any class other than
the deferred shares and the distribution of a further $1,000 in respect of each such share there shall be distributed to a holder
of a deferred share (for each deferred share held) an amount equal to the nominal value of the deferred share;
–
The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and
–
The Company may create, allot and issue further shares or reduce or repay the whole or any part of its share capital or other
capital reserves without obtaining the consent of the holders of the deferred shares.
The Group’s objectives when managing capital are to ensure the Group has adequate funds to continue as a going concern and sufficient
flexibility within the capital structure to fund the ongoing growth of the business and to take advantage of business development
opportunities including acquisitions.
The Group determines the amount of capital taking into account changes in business risks and future cash requirements. The Group
reviews its capital structure on an ongoing basis and uses share buy-backs, dividends and the issue of new shares to adjust the
retained capital.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
19
Equity
continued
The Group considers the capital that it manages to be as follows:
2022
2021
2020
$ million
$ million
$ million
Share capital
175
177
177
Share premium
615
614
612
Capital redemption reserve
20
18
18
Treasury shares
(118)
(120)
(157)
Retained earnings and other reserves
4,567
4,879
4,629
5,259
5,568
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 2022, the Group purchased a total of 10.1m shares (2021: nil shares)
for a cost of $158m (2021: $nil).
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:
Employees’
Treasury
Share Trust
Total
$ million
$ million
$ million
At 1 January 2021
136
21
157
Shares transferred from treasury
(30)
30
–
Shares transferred to Group beneficiaries
(13)
(24)
(37)
At 31 December 2021
93
27
120
Shares purchased
150
8
158
Shares transferred from treasury
(41)
41
–
Shares transferred to Group beneficiaries
(6)
(25)
(31)
Shares cancelled
(129)
–
(129)
At 31 December 2022
67
51
118
Employees’
Treasury
Share Trust
Total
Number
Number
Number
of shares
of shares
of shares
million
million
million
At 1 January 2021
7.9
1.2
9.1
Shares transferred from treasury
(1.7)
1.7
–
Shares transferred to Group beneficiaries
(0.8)
(1.3)
(2.1)
At 31 December 2021
5.4
1.6
7.0
Shares purchased
9.7
0.4
10.1
Shares transferred from treasury
(2.6)
2.6
–
Shares transferred to Group beneficiaries
(0.4)
(1.4)
(1.8)
Shares cancelled
(7.8)
–
(7.8)
At 31 December 2022
4.3
3.2
214
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Annual Report 2022
Dividends
2022
2021
2020
$ million
$ million
$ million
The following dividends were declared and paid in the year:
Ordinary final of 23.1¢ for 2021 (2020: 23.1¢, 2019: 23.1¢) paid 11 May 2022
202
203
202
Ordinary interim of 14.4¢ for 2022 (2021: 14.4¢, 2020: 14.4¢) paid 26 October 2022
125
126
126
327
329
328
A final dividend for 2022 of 23.1 US cents per ordinary share was proposed by the Board on 21 February 2023 and will be paid, subject
to shareholder approval, on 17 May 2023 to shareholders on the Register of Members on 31 March 2023. The estimated amount of this
dividend is $201m. 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. 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
Cash flow statement
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 overdraſts. In the Group balance sheet, bank overdraſts are shown within bank overdraſts,
Analysis of net debt including lease liabilities
Borrowings
Cash
Overdraſts
Due within
one year
Due aſter
one year
Net
currency
swaps
Net
interest
swaps
Total
$ million
$ million
$ million
$ million
$ million
$ million
$ million
At 1 January 2020
277
(20)
(6)
(1,851)
–
–
(1,600)
IFRS 16 lease liabilities
–
–
(46)
(124)
–
–
(170)
Net debt including lease
liabilities at 1 January 2020
277
(20)
(52)
(1,975)
–
–
(1,770)
Net cash flow/debt movement
1,484
9
(260)
(1,285)
(7)
–
(59)
Exchange adjustment
1
–
(2)
(79)
7
2
(71)
Corporate bond issuance expense
–
–
–
8
–
–
8
IFRS 16 lease liabilities movement
–
–
(12)
(22)
–
–
(34)
At 31 December 2020
1,762
(11)
(326)
(3,353)
–
2
(1,926)
Net cash flow/debt movement
(466)
7
(162)
429
4
–
(188)
Exchange adjustment
(6)
(1)
–
72
(4)
(2)
59
Corporate bond issuance expense
–
–
–
(1)
–
–
(1)
IFRS 16 lease liabilities movement
–
–
2
5
–
–
7
At 31 December 2021
1,290
(5)
(486)
(2,848)
–
–
(2,049)
Net cash flow/debt movement
(931)
1
302
94
(3)
–
(537)
Exchange adjustment
(9)
(2)
23
45
3
(13)
47
Corporate bond issuance expense
–
–
–
3
–
–
3
IFRS 16 lease liabilities movement
–
–
7
(6)
–
–
1
Net debt including lease
liabilities at 31 December 2022
350
(6)
(154)
(2,712)
–
(13)
(2,535)
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
20
Cash flow statement
continued
Reconciliation of net cash flow to movement in net debt including lease liabilities
2022
2021
2020
$ million
$ million
$ million
Net cash flow from cash net of overdraſts
(930)
(459)
1,493
Settlement of currency swaps
(3)
4
(7)
Net cash flow from borrowings
396
267
(1,545)
Change in net debt from net cash flow
(537)
(188)
(59)
IFRS 16 lease liabilities
1
7
(34)
Exchange adjustment
47
59
(71)
Corporate bond issuance expense
3
(1)
8
Change in net debt in the year
(486)
(123)
(156)
Opening net debt
(2,049)
(1,926)
(1,770)
Closing net debt
(2,535)
(2,049)
(1,926)
For the purposes of the Group cash flow statement, cash and cash equivalents at 31 December 2022 comprise cash at bank net
of bank overdraſts.
2022
2021
2020
$ million
$ million
$ million
Cash at bank
350
1,290
1,762
Bank overdraſts
(6)
(5)
(11)
Cash and cash equivalents
344
1,285
1,751
The Group operates in over 100 countries around the world, some of which impose restrictions over cash movement. These restrictions
Cash outflows/(inflows) arising from financing activities
Repayment
Borrowing
Proceeds from
Repayment
Cash outflow/
Proceeds from own
of bank
of bank
Corporate
of lease
(inflow)
Purchase of
shares/issue of
loans
1
loans
1
Bond issue
liabilities
from other
Dividends
own shares
ordinary shares
Total
2022
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
Debt
881
–
(485)
54
(3)
–
–
–
447
Equity
–
–
–
–
–
327
158
(6)
479
Total
881
–
(485)
54
(3)
327
158
(6)
926
2021
Debt
267
–
–
59
4
–
–
–
330
Equity
–
–
–
–
–
329
–
(14)
315
Total
267
–
–
59
4
329
–
(14)
645
2020
Debt
405
(950)
(1,000)
55
(7)
–
–
–
(1,497)
Equity
–
–
–
–
–
328
16
(11)
333
Total
405
(950)
(1,000)
55
(7)
328
16
(11)
(1,164)
1
216
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Annual Report 2022
Acquisitions
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
Year ended 31 December 2022
On 18 January 2022, the Group completed the acquisition of 100% of the share capital of Engage Uni, LLC (doing business as Engage
Surgical), owner of the only cementless unicompartmental (partial) knee system commercially available in the US. This acquisition
strongly supports Smith+Nephew’s Strategy for Growth by transforming our business through innovation and acquisition, while also
providing differentiation for our customers.
The maximum consideration, all payable in cash, is $135 million and the provisional fair value consideration is $131 million and includes
$32 million of contingent consideration. The goodwill represents the control premium, the acquired workforce and the synergies
expected from integrating Engage Surgical into the Group’s existing business. The majority of the consideration is expected to be
deductible for tax purposes.
The fair value of assets acquired and liabilities assumed are set out below:
Engage
Surgical
$ million
Intangible assets – Product-related
44
Property, plant and equipment
2
Inventory
2
Trade and other payables
(1)
Net assets
47
Goodwill
84
Consideration (net of $nil cash acquired)
131
The product-related intangible assets were valued using a relief-from-royalty methodology with the key inputs being revenue,
profit and discount rate. The cash outflow from acquisitions of $113m (2021: $285m) comprises payments of consideration of
$89m (2021: $236m) relating to acquisitions in the current year and payments of deferred and contingent consideration of $24m
(2021: $49m) relating to acquisitions completed in prior years.
The carrying value of goodwill increased from $2,989m at 31 December 2021 to $3,031m at 31 December 2022. The acquisition in
the year ended 31 December 2022 increased goodwill by $84m, this was partially offset by foreign exchange movements of $42m.
For the year ended 31 December 2022, the contribution from Engage Surgical to revenue and to profit was immaterial. If the business
combination had occurred at the beginning of the year the contribution to revenue and profit would not have been materially different.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
21
Acquisitions
continued
Year ended 31 December 2021
On 4 January 2021, the Group completed the acquisition of the Extremity Orthopaedics business of Integra LifeSciences Holdings
Corporation (‘Extremity Orthopaedics’). 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. The transaction comprised the acquisition of the entire issued share capital of two wholly owned US subsidiaries
of Integra LifeSciences Holdings Corporation group and certain assets of the Extremity Orthopaedics business held both in and
outside the US. The maximum consideration is $240m and the fair value of consideration is $236m and includes no deferred
or contingent consideration.
The goodwill represents the control premium, the acquired workforce and the synergies expected from integrating Extremity
Orthopaedics into the Group’s existing business, and is expected to be partly deductible for tax purposes.
The fair value of assets acquired and liabilities assumed are set out below:
Extremity
Orthopaedics
$ million
Intangible assets – Product-related
101
Intangible assets – Customer-related
11
Property, plant and equipment
22
Inventory
41
Other payables
(23)
Net deferred tax asset
(12)
Net assets
140
Goodwill
96
Consideration (net of $nil cash acquired)
236
The product-related intangible assets were valued using an excess earnings methodology with the key inputs being revenue, profit
and discount rate. The cash outflow from acquisitions of $285m (2020: $170m) comprises payments of consideration of $236m
(2020: $117m) relating to the acquisition which completed in the current year and payments of deferred and contingent consideration
of $49m (2020: $53m) relating to acquisitions completed in prior years.
The carrying value of goodwill increased from $2,928m at 31 December 2020 to $2,989m at 31 December 2021. The acquisition in
the year ended 31 December 2021 increased goodwill by $96m, this was partially offset by foreign exchange movements of $35m.
For the year ended 31 December 2021, the contribution from Extremity Orthopaedics to revenue was $82m and to profit was
immaterial. If the business combination had occurred at the beginning of the year the contribution to revenue and profit would not
have been materially different.
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 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.
The acquisition accounting was completed in 2021 with no adjustments to the fair value disclosed in the Group’s 2020 Annual Report.
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.
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Annual Report 2022
The fair values of assets acquired and liabilities assumed are set out below:
Tusker
$ million
Intangible assets – Product-related
53
Property, plant and equipment
6
Other receivables
1
Trade and other payables
(6)
Non-current liabilities
(3)
Net deferred tax asset
5
Net assets
56
Goodwill
83
Consideration (net of $nil cash acquired)
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 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
219
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Group financial statements
continued
Notes to the Group accounts
continued
22
Other notes to the accounts
Share-based payments
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 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 2022, 5,202,000 options (2021: 4,472,000, 2020: 4,582,000) were outstanding with a range of
exercise prices from 843 to 1,541 pence.
At 31 December 2022, the maximum number of shares that could be awarded under the Group’s long-term incentive plans was
7,371,000 (2021: 5,997,000, 2020: 4,704,000). 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.
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 (2021: $nil, 2020: $nil).
The remuneration of Executive Officers (including Non-Executive Directors) during the year is summarised below:
2022
2021
2020
$ million
$ million
$ million
Short-term employee benefits
17
16
12
Share-based payments expense
10
7
5
Pension and post-employment benefit entitlements
2
1
2
29
24
19
Retirement benefit schemes
Post balance sheet events
There have been no events between the balance sheet date, and the date on which the financial statements were approved by the
220
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Annual Report 2022
Company balance sheet
Company financial statements
At 31 December
At 31 December
2022
2021
Notes
$ million
$ million
Fixed assets
Investments
2
7,092
7,092
Current assets
Debtors
3
2,991
2,852
Cash at bank
5
190
1,142
3,181
3,994
Creditors: amounts falling due within one year
Borrowings
5
(109)
(432)
Other creditors
4
(947)
(949)
(1,056)
(1,381)
Net current assets
2,125
2,613
Total assets less current liabilities
9,217
9,705
Creditors: amounts falling due aſter one year
Borrowings
5
(2,565)
(2,707)
Other creditors
4
(13)
–
(2,578)
(2,707)
Total assets less total liabilities
6,639
6,998
Equity shareholders’ funds
Share capital
175
177
Share premium
615
614
Capital redemption reserve
20
18
Capital reserve
2,266
2,266
Treasury shares
(118)
(120)
Exchange reserve
(52)
(52)
Profit and loss account
3,733
4,095
Shareholders’ funds
6,639
6,998
The accounts were approved by the Board and authorised for issue on 21 February 2023 and signed on its behalf by:
Roberto Quarta
Deepak Nath, PhD
Anne-Françoise Nesmes
Chair
Chief Executive Officer
Chief Financial Officer
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
221
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Company financial statements
continued
Statement of changes in equity
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
Capital
Total
Share
Share
redemption
Capital
Treasury
Exchange
Profit and
shareholders’
capital
premium
reserve
reserve
shares
reserve
loss account
funds
$ million
$ million
$ million
$ million
$ million
$ million
$ million
$ million
At 1 January 2021
177
612
18
2,266
(157)
(52)
2,414
5,278
Attributable profit for the year
–
–
–
–
–
–
1,994
1,994
Equity dividends paid in the year
–
–
–
–
–
–
(329)
(329)
Share-based payments recognised
1
–
–
–
–
–
–
41
41
Cost of shares transferred to beneficiaries
–
–
–
–
37
–
(25)
12
New shares issued on exercise of share options
–
2
–
–
–
–
–
2
At 31 December 2021
177
614
18
2,266
(120)
(52)
4,095
6,998
Attributable profit for the year
–
–
–
–
–
–
80
80
Equity dividends paid in the year
–
–
–
–
–
–
(327)
(327)
Share-based payments recognised
1
–
–
–
–
–
–
40
40
Cost of shares transferred to beneficiaries
–
–
–
–
31
–
(26)
5
New shares issued on exercise of share options
–
1
–
–
–
–
–
1
Cancellation of treasury shares
(2)
–
2
–
129
–
(129)
–
Treasury shares purchased
–
–
–
–
(158)
–
–
(158)
At 31 December 2022
175
615
20
2,266
(118)
(52)
3,733
6,639
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 $3,563m (2021: $3,923m). 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 $80m (2021: $1,994m). The decrease in attributable profit from the prior
year is primarily due to lower dividends received from subsidiaries.
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.
222
Smith+Nephew
Annual Report 2022
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
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.
Accounting standards issued but not yet effective: A number of new standards and amendments to standards are effective for periods
beginning aſter 1 January 2022 and earlier application is permitted; however, the Company has not early adopted them in preparing
these financial statements.
2
Investments
Accounting policy
Investments in subsidiaries are stated at cost less provision for impairment.
2022
2021
$ million
$ million
At 1 January and 31 December
7,092
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
2022
2021
$ million
$ million
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
2,896
2,795
Prepayments and accrued income
6
–
Current asset derivatives – forward foreign exchange contracts
46
37
Current asset derivatives – forward foreign exchange contracts – subsidiary undertakings
42
18
Current asset derivatives – currency swaps
1
2
2,991
2,852
223
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Company financial statements
continued
Notes to the Company accounts
continued
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
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 (2021: de minimis).
4
Other creditors
2022
2021
$ million
$ million
Amounts falling due within one year:
Amounts owed to subsidiary undertakings
837
881
Other creditors
21
12
Current liability derivatives – forward foreign exchange contracts
42
17
Current liability derivatives – forward foreign exchange contracts – subsidiary undertakings
46
37
Current liability derivatives – currency swaps
1
2
947
949
Amounts falling due aſter one year:
Non-current liability derivatives – interest rate swaps
13
–
13
–
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.
2022
2021
$ million
$ million
Bank loans, borrowing and overdraſts due within one year or on demand
109
432
Borrowings due aſter one year
2,565
2,707
Borrowings
2,674
3,139
Cash at bank
(190)
(1,142)
Credit balance on derivatives – interest rate swaps
13
–
Net debt
2,497
1,997
All currency swaps are stated at fair value. Gross US Dollar equivalents of $369m (2021: $337m) receivable and $369m (2021: $337m)
payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2022 and 2021 to hedge intra-group loans.
6
Contingencies
2022
2021
$ million
$ million
Guarantees in respect of subsidiary undertakings
–
–
The Company gives guarantees to banks to support liabilities and cross guarantees to support overdraſts.
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 $75m (2021: $84m) 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.
224
Smith+Nephew
Annual Report 2022
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
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
2022, including their country of incorporation. All companies
are 100% owned, unless otherwise indicated. The share capital
disclosed comprises ordinary shares which are indirectly held
by Smith & Nephew plc, unless otherwise stated.
Company name
Country of
operation and
incorporation
Registered
Office
UK
Michelson Diagnostic Limited
3
(6.4%)
England & Wales
Kent
Neotherix Limited
3
(24.9%)
England & Wales
York
Smith & Nephew (Overseas) Limited
1,5
England & Wales
Watford
Smith & Nephew Beta Limited
2
England & Wales
Watford
Smith & Nephew China Holdings
UK Limited
1
England & Wales
Watford
Smith & Nephew Employees
Trustees Limited
2
England & Wales
Watford
Smith & Nephew ESN Limited
2
England & Wales
Watford
Smith & Nephew Extruded Films Limited
2
England & Wales
Hull
Smith & Nephew Finance
2
England & Wales
Watford
Smith & Nephew Finance Oratec
2
England & Wales
Watford
Smith & Nephew Group Services Limited
England & Wales
Watford
Smith & Nephew Healthcare Limited
2
England & Wales
Hull
Smith & Nephew Investment
Holdings Limited
1
England & Wales
Watford
Smith & Nephew Lilia Limited
2
England & Wales
Watford
Smith & Nephew Medical Fabrics Limited
2
England & Wales
Watford
Smith & Nephew Medical Limited
England & Wales
Hull
Smith & Nephew Nominee
Company Limited
2
England & Wales
Watford
Smith & Nephew Nominee Services Limited
2
England & Wales
Watford
Smith & Nephew Orthopaedics Limited
England & Wales
Watford
Smith & Nephew Pharmaceuticals Limited
2
England & Wales
Hull
Smith & Nephew Raisegrade Limited
1,2
England & Wales
Watford
Smith & Nephew Rareletter Limited
2
England & Wales
Watford
Smith & Nephew Trading Group Limited
1
England & Wales
Watford
Smith & Nephew UK Executive Pension
Scheme Trustee Limited
2
England & Wales
Watford
Smith & Nephew UK Limited
1,5
England & Wales
Watford
Smith & Nephew UK Pension Fund
Trustee Limited
2
England & Wales
Watford
Smith & Nephew USD Limited
1
England & Wales
Watford
Smith & Nephew USD One Limited
1
England & Wales
Watford
T.J.Smith and Nephew,Limited
England & Wales
Hull
The Albion Soap Company Limited
2
England & Wales
Watford
TP Limited
1
Scotland
Edinburgh
Company name
Country of
operation and
incorporation
Registered
Office
Rest of Europe
Smith & Nephew GmbH
Austria
Vienna
Smith & Nephew S.A.-N.V
Belgium
Zaventem
Smith & Nephew A/S
Denmark
Kobenhavn
Smith & Nephew Oy
Finland
Helsinki
Smith & Nephew France SAS
1
France
Neuilly-sur-
Seine
Smith & Nephew S.A.S.
France
Neuilly-sur-
Seine
Smith & Nephew Business Services GmbH
& Co. KG
1
Germany
Hamburg
Smith & Nephew Business Services
Verwaltungs GmbH
Germany
Hamburg
Smith & Nephew Deutschland (Holding)
GmbH
1
Germany
Hamburg
Smith & Nephew GmbH
Germany
Hamburg
Smith & Nephew Orthopaedics GmbH
Germany
Tuttlingen
Smith & Nephew Robotics GmbH
Germany
Munich
Smith & Nephew (Ireland) Trading Limited
Ireland
Dublin
Smith & Nephew S.r.l.
Italy
Milan
Smith & Nephew International S.A.
1
Luxembourg
Luxembourg
Smith & Nephew (Europe) B.V.
1
Netherlands
Amsterdam,
2132NP
Smith & Nephew B.V.
Netherlands
Amsterdam,
2132NP
Smith & Nephew Nederland CV
Netherlands
Amsterdam,
2132NP
Smith & Nephew Operations B.V.
Netherlands
Amsterdam,
2132NP
Serda B.V.
3
(48.32%)
Netherlands
Amsterdam,
1105BP
Smith & Nephew AS
Norway
Oslo
Smith & Nephew sp. z.o.o.
Poland
Warsaw
Smith & Nephew Lda
Portugal
Forte da Casa
S&N ORION PRIME, S.A.
Portugal
Coimbra
DC LLC
Russian
Federation
Puschino
Smith & Nephew LLC
Russian
Federation
Moscow
Smith & Nephew S.A.U
Spain
Barcelona
Smith & Nephew Aktiebolag
Sweden
Molndal
Lumina Adhesives AB
3
(3.04%)
Sweden
Gothenburg
Atracsys Sàrl
Switzerland
Puidoux
Plus Orthopedics Holding AG
1
Switzerland
Zug
Smith & Nephew Manufacturing AG
Switzerland
Aarau
Smith & Nephew Orthopaedics AG
1
Switzerland
Zug
Smith & Nephew Schweiz AG
Switzerland
Zug
Smith & Nephew AG
Switzerland
Zug
Smith & Nephew Orthopaedics AG
Aarau Branch
6
Switzerland
Aarau
225
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Company financial statements
continued
Notes to the Company accounts
continued
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
Company name
Country of
operation and
incorporation
Registered
Office
US
Arthrocare Corporation
United States
Wilmington
Ascension Orthopedics, Inc.
United States
Wilmington
Centreville
Austin Miller Trauma LLC
United States
Wilmington
Bioventus Inc.
3,7
(28.32%)
United States
Wilmington
Bioventus LLC
3,8
(20.31%)
United States
Wilmington
Blue Belt Technologies, Inc.
United States
Philadelphia
Ceterix Orthopaedics, Inc.
United States
Wilmington
Engage Uni LLC
United States
Wilmington
19808
Integrated Shoulder Collaboration, Inc.
United States
Wilmington
19808
Leaf Healthcare Inc.
United States
Wilmington
Miach Orthopaedics, Inc
3
(10.09%)
United States
Dover GD
Orthopaedic Biosystems Ltd., Inc.
United States
Phoenix
Osiris Therapeutics, Inc.
United States
Columbia
Rotation Medical, Inc.
United States
Wilmington
1908
Sinopsys Surgical, Inc.
3
(1.44%)
United States
Wilmington
Smith & Nephew Consolidated, Inc.
1
United States
Wilmington
Smith & Nephew, Inc.
1
United States
Wilmington
Surgical Frontiers Series I, LLC
3
(42.16%)
United States
Dover GD
Trice Medical Inc.
3
(2.8%)
United States
Wilmington
19808
Tusker Medical, Inc.
United States
Wilmington
19808
Africa, Asia, Australasia and Other Americas
Smith & Nephew Argentina S.R.L.
2
Argentina
Buenos Aires
Smith & Nephew Pty Limited
Australia
Macquarie
park
Smith & Nephew Surgical Holdings
Pty Limited
1,2
Australia
Macquarie
park
Smith & Nephew Surgical Pty Limited
2
Australia
Macquarie
park
Smith & Nephew Comercio de Produtos
Medicos LTDA
Brazil
São Paulo
Smith & Nephew Comercio de Produtos
Medicos LTDA, Diadema Branch
6
Brazil
Diadema
Smith & Nephew Comercio de Produtos
Medicos LTDA, Rio de Janeiro Branch
6
Brazil
Rio de
Janeiro
Smith & Nephew Comercio de Produtos
Medicos LTDA, São José dos Campos Branch
6
Brazil
São José
Smith & Nephew (Alberta) Inc.
2
Canada
Calgary
Smith & Nephew Inc.
1
Canada
Toronto
Tenet Medical Engineering, Inc.
Canada
Calgary
Smith & Nephew Finance Holdings Limited
5
Cayman Islands
George Town
1104
TEAMfund, LP
3
(6.765%)
Cayman Islands
George Town
9008
Company name
Country of
operation and
incorporation
Registered
Office
Smith & Nephew Chile SpA
Chile
Chile
ArthoCare Medical Devices (Beijing)
Co. Limited
4
China
Chao Yang
District,
Beijing
Plus Orthopedics (Beijing) Co. Limited
2
China
Shunyi
District,
Beijing
Smith & Nephew Medical (Shanghai) Limited
China
Shanghai
Ao Na Rd
Smith & Nephew Medical (Shanghai) Limited
Beijing Branch
6
China
Dong Cheng
Smith & Nephew Medical (Shanghai) Limited
Chengdu Branch
6
China
Wu Hou
Smith & Nephew Medical (Shanghai) Limited
Guangzhou Branch
6
China
Yue Xiu
Smith & Nephew Medical (Shanghai) Limited
Shanghai Branch
6
China
Jing’an
Smith & Nephew Medical (Shanghai) Limited
Shanghai Second Branch
6
China
Shanghai
Xin Jin Qiao
Rd
Smith & Nephew Medical (Suzhou) Limited
China
Suzhou City
Smith & Nephew Orthopaedics
(Beijing) Co., Ltd
China
Kechuang
Dongliujie
S&N Holdings SAS
1
Colombia
Bogota
Smith & Nephew Colombia S.A.S
Colombia
Bogota
ArthroCare Costa Rica Srl
Costa Rica
Alajuela
Smith & Nephew Curaçao N.V.
2
Curaçao
Willemstad
Smith & Nephew Beijing Holdings Limited
1
Hong Kong
Hong Kong
Smith & Nephew Limited
Hong Kong
Hong Kong
Smith & Nephew Suzhou Holdings Limited
1
Hong Kong
Hong Kong
Smith & Nephew GBS Private Limited
India
Pune
Smith & Nephew Healthcare Private Limited
India
Mumbai
Smith & Nephew KK
Japan
Tokyo
Smith & Nephew Chusik Hoesia
Korea,
Republic of
Seoul
Smith & Nephew Healthcare Sdn. Bhd
Malaysia
Kuala Lumpur
Smith & Nephew Operations Sdn. Bhd
Malaysia
Kuala Lumpur
Smith & Nephew Services Sdn. Bhd
Malaysia
Kuala Lumpur
Smith & Nephew S.A. de C.V.
Mexico
Mexico City
Smith & Nephew Limited
1
New Zealand
Auckland
Smith & Nephew Superannuation
Scheme Limited
New Zealand
Auckland
Smith & Nephew (Overseas) Limited
Philippines Branch
2,6
Philippines
Manila
Smith & Nephew, Inc.
Puerto Rico
San Juan
Smith & Nephew Asia Pacific Pte. Limited
1
Singapore
Singapore
Smith & Nephew Pte Limited
Singapore
Singapore
Smith & Nephew (Pty) Limited
1
South Africa
Westville
Smith & Nephew Pharmaceuticals
(Proprietary) Limited
2
South Africa
Westville
8
Group companies
continued
226
Smith+Nephew
Annual Report 2022
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
Company name
Country of
operation and
incorporation
Registered
Office
Smith & Nephew (Overseas) Limited
Taiwan Branch
6
Taiwan
Taipei
Smith & Nephew Limited
Thailand
Huai Khwang
District,
Bangkok
Smith ve Nephew Medikal Cihazlar Ticaret
Limited Sirketi
Turkey
Istanbul
Smith & Nephew FZE
United Arab
Emirates
Jebel Ali,
Dubai
Smith & Nephew FZE (DHCC Branch)
6
United Arab
Emirates
HealthCare
City, Dubai
The Representative Office Of Smith &
Nephew Asia Pacific Pte. Limited
Vietnam
Ho Chi Minh
City
1 Holding company.
2 Dormant company.
3
Not 100% owned by Smith & Nephew Group.
4 In liquidation.
5
Directly owned by Smith & Nephew plc.
6
Branch of a company in Smith & Nephew Group.
7
Represents 28.32% voting rights and 8.01% economic interest.
8
Represents 20.31% economic interest.
Registered Office addresses
UK
Watford
Building 5, Croxley Park, Hatters Lane, Watford,
Hertfordshire, WD18 8YE
Kent
Ground Floor, Eclipse House, Eclipse Park,
Sittingbourne Road, Maidstone, Kent, ME14 3EN
York
25, Carr Lane, York, YO26 5HT
Hull
101 Hessle Road, Hull, HU3 2BN
Edinburgh
4th Floor, 115 George Street, Edinburgh, EH2 4JN
Rest of Europe
Vienna
Concorde Business Park, 1/C/3 2320,
Schwechat, Austria
Zaventem
Ikaroslaan 45, Gebouw D, 1930 Zaventem, Belgium
Kobenhavn
Kay Fiskers Plads 9,1. 2300. Kobenhavn S, Denmark
Helsinki
Ayritie 12 C, 01510, Vantaa, Finland
Neuilly-sur-Seine
40-52, Boulevard du Parc, 92200 Neuilly-sur-Seine,
France
Hamburg
Friesenweg 4, Haus 21, 22763, Hamburg, Germany
Munich
Konrad-Zuse-Platz 8, 81829, Munich, Germany
Tuttlingen
Alemannenstrasse 14, 78532, Tuttlingen, Germany
Dublin
13-18 City Quay, Dublin 2, D02 ED70, Ireland
Milan
Sesto San Giovanni (MI) Viale T. Edison 110 CAP 20099
Italy
Luxembourg
1A, rue Jean Piret, L-2350, Luxembourg, Luxembourg
Amsterdam 2132NP Bloemlaan 2, 2132NP, Hoofddorp, The Netherlands
Amsterdam 1105BP
Paasheuvelweg 25, 1105BP, Amsterdam,
The Netherlands
Oslo
Snaroyveien 36, FORNEBU, 1364, Norway
Warsaw
Ul Osmanska 12, 02-823, Warsaw, Poland
Registered Office addresses
Forte da Casa
Rua do Parque Tejo, numbers 7, 7-A and 7-B 2625-437
Forte da Casa, Povoa de Santa Iria and Forte da Casa,
Vila Franca de Xira, Portugal
Coimbra
Rua Pedro Nunes, Instituto Pedro Nunes, Edificio IPN-D,
3030-199, Coimbra, Portugal
Moscow
2nd Syromyatnichesky Lane, Moscow, 105120,
Russian Federation
Puschino
8/1 Stroiteley Street, 142290, City of Puschino,
Moscow Region, Russian Federation
Barcelona
Edificio Conata I, c/Fructuos Gelabert 2 y 4,
San Joan Despi – 08970, Barcelona, Spain
Molndal
Krokslatts fabriker 39 431 37 Molndal, Sverige, Sweden
Gothenburg
Varbergsgatan 2A/412 65 Göteborg, Sweden
Puidoux
Route du Verney 20, 1070, Puidoux, Switzerland
Zug
Theilerstrasse 1A, 6300, Zug, Switzerland
Aarau
Schachenallee 29, 5000, Aarau, Switzerland
US
Wilmington
CT Corporation, 1209 Orange Street, Wilmington
DE 19801, USA
Wilmington
Centreville
Corporation Services Company, Suite 400, 2711,
Centreville Road, Wilmington DE, USA
Philadelphia
CT Corporation 1515 Market Street, Philadelphia,
PA 19102, USA
Wilmington 19808
251 Little Falls Drive, Wilmington DE 19808, USA
Dover GD
160 Greentree Drive, Suite 101, Dover, DE, 19904, USA
Pennsylvania
63 Burke Road, Cranberry Township, Butler County
PA 16066, USA
Phoenix
CT Corporation System, 3800 North Central Avenue,
Phoenix AZ 85012, USA
Columbia
7015 Albert Einstein Dr., Columbia, Howard County
MD 21046 USA
Africa, Asia, Australasia and Other Americas
Buenos Aires
Maipu 1300, 13th Floor, Buenos Aires, Argentina
Macquarie park
Suite 1.01, Level 1, Building B, Pinnacle Office Park,
4 Drake Avenue, Macquarie park
São Paulo
Av. das Nações Unidas, 14171- 23º andar – Torre
C-Crystal, Vila Gertrudes, São Paulo, CEP 043794-000,
Brazil
Diadema
Avenida Fagundes de Oliveira, 538, Piraporinha,
Mbigucci Diadema Business Park, Module B21 and B22,
City of Diadema São Paulo CEP 09950-300 Brazil
Rio de Janeiro
Rua Francisco de Sousa e Melo, 1590, Galpao 3
Armazem 103 parte, Bairro Cordovil, Rio de Janeiro,
CEP 21010-900, Brazil
São José
Rua Dionizio Chinelato Nr. 100 – Complemento
Galpão 01 – Sala o1 CEP 12.238-578 Bairro – Eldorado,
Municipio São José dos Campos SP
Calgary
3500-855-2 Street SW, Calgary AB T2P 4J8, Canada
Toronto
199, Bay Street, 4000, Toronto, Ontario M5L 1A9,
Canada
Georgetown 1104
c/o Maples Corporate Services Limited, P.O. Box 309,
Ugland house, Grand Cayman, KY1-1104,
Cayman Islands
227
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Company financial statements
continued
Notes to the Company accounts
continued
Excluding Note 8 ‘Group Companies’, the Parent Company financial statements of Smith & Nephew plc on pages
221–228 do not form part of the Smith & Nephew plc Annual Report on Form 20-F as filed with the SEC.
Registered Office addresses
Georgetown 9008
Walkers Corporate Limited, Cayman Corporate Centre,
27 Hospital Road, George Town, Grand Cayman,
KY1-9008, Cayman Islands
Chao Yang District,
Beijing
Room 17-021, Internal B17 floor, B3-24th floor, No 3
Xin Yuan South Rd, Chao Yang District, Beijing, China
Shunyi District,
Beijing
22 Linhe Avenue, Linhe Economic Development Zone,
Shunyi District, Beijing, 101300, China
Shanghai Ao Na Rd
Part B, 4th Floor, Tong Yong Building, No 188 Ao Na Rd,
Shanghai Free Trade Test Zone, Shanghai, China
Dong Cheng District
Unit B1, 2/F, Tower A, East Gate Plaza No.9,
Dongshong Street Dong Cheng District, Beijing, China
Wu Hou District
No 5. 15th Floor, Unit 1, Building, 1 Li Bao Building,
No 62 North Ke Hua Rd, Wu Hou District,
Chengdu, China
Yue Xiu District
Room 2503, No 33, 6th Jian She Rd, Yue Xiu District,
Guang Zhou, China
Jing’an District
Unit 09, Nominal Level 12 (Actual Level 11), Central
Section of Bohua Square Office Tower, No. 669 Xinzha
Road, Jing’an District, Shanghai, China
Shanghai Xin Jin
Qiao Rd
Room 102, Floor 1, Building 3 (B1), No. 1599, Xin Jin Qiao
Road China (Shanghai) Pilot Free Trade Zone, Shanghai,
China
Suzhou City
12, Wuxiang Road, West Area of Comprehensive
Bonded Zone, Suzhou Industrial Park, Suzhou City, SIP,
Jiangsu Province, China
Kechuang Dongliujie No. 98 Kechuang Dongliujie, Beijing Economic
and Technical Development Area, Beijing, China
Bogota
Calle 100 No. 7 – 33 to 1 P3, Bogota D.C., Colombia
Alajuela
Building B32, 50 meters South of Revisión Téchnica
Vehicular, Province de Alajuela, Canton Alajuela,
Coyol Free Zone, District San José, Costa Rica
Willemstad
Pietermaai 15, PO Box 4905, Curaçao
Hong Kong
Unit 813 – 816, 8/F, Delta House, 3 On Yiu Street,
Shatin, New Territories, Hong Kong
Pune
Podium Floor Tower 4, World Trade Center S No1
Kharadi, Pune, Maharashtra-MH, 411014, India
Registered Office addresses
Mumbai
501-B – 509-B Dynasty Business Park, Andheri Kurla
Road, Andheri East, Mumbai-59, Maharashtra, India
Tokyo
2-4-1, Shiba-Koen, Minato-Ku, Tokyo 105 0011, Japan
Seoul
13th Floor, ASEM Tower, Gangnam-gu 13th Floor,
ASEM Tower, 159-1 Samsung-dong, Seoul, Korea
Kuala Lumpur
Level 25, Menara Hong Leong, NO. 6 Jalan Damanlela
Bukit Damansara Kuala Lumpur W.P. 50490
Kuala Lumpur, Malaysia
Mexico City
Av. Insurgentes Sur, numero 1602, Piso No.7, Oficina 702,
Colonia Credito, Constructor, Delegacion Benito Juarez,
C.P. 03940, Mexico
Auckland
621 Rosebank Road, Avondale, Auckland, 1026,
New Zealand
Manila
6/F Alfaro St, Salcedo Village, Makati City, Metro Manila,
Philippines
San Juan
Edificio Cesar Castillo, Calle Angel Buonomo #361,
Hato Rey, 00917, Puerto Rico
Singapore
29 Media Circle, #06-05, Alice@Mediapolis, Singapore,
138565, Singapore
Westville
30 The Boulevard, Westway Office Park, Westville,
3629, South Africa
Taipei
9F-2, No. 50, Sec. 1, Xinsheng South Road, Zhongzheng
District Taipei City 10059, Taiwan
Huai Khwang
District, Bangkok
16th Floor Building A, 9th Tower Grand Rama 9,
33/4 Rama 9 Road, Huai Khwang District, Bangkok,
10310, Thailand
Istanbul
Mahmutbey Mahallesi, 2538. Sokak, Kısık Plaza Apt.
No:6/Z1, Istanbul, Bağcılar, Turkey
Jebel Ali, Dubai
PO Box 16993 LB02016, Jebel Ali, Dubai,
United Arab Emirates
HealthCare City,
Dubai
Floor 1, Building 52, Dubai Healthcare City, Dubai,
United Arab Emirates
Ho Chi Minh City
Room 02, 18th floor, TNR building, 180-192, Nguyen
Cong Tru street, Nguyen Thai Binh Ward, District 1,
Ho Chi Minh City, Vietnam
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 2022:
–
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)
8
Group companies
continued
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Properties
The table below summarises the main properties which the Group uses and their approximate areas.
Approximate area
(square feet 000’s)
Group head office and surgical training facility in Watford, UK
60
Manufacturing and office facilities in Memphis, Tennessee, US
923
Wound management manufacturing, research and office facility in Hull, UK
473
Surgical training and office facilities in Memphis, Tennessee, US
292
Manufacturing facility in Suzhou, China
288
Manufacturing facility in Penang, Malaysia
277
Manufacturing facility in Alajuela, Costa Rica
270
Manufacturing facility in Oklahoma City, Oklahoma, US
155
Manufacturing, Office facilities and laboratory space in Fort Worth, Texas, US
139
Research & development and office facility in Austin, Texas, US
125
Manufacturing facility in Aarau, Switzerland
116
Logistic facility in Lawrenceville, US
115
Office facilities in Andover, Massachusetts, US
112
Manufacturing facility in Beijing, China
109
Manufacturing facility in Mansfield, Massachusetts, US
98
Business services centre in Pune, India
74
Research & development facility in Pittsburgh, Pennsylvania, US
65
Manufacturing, Office facility in Tuttlingen, Germany
64
Manufacturing facility in Columbia, Maryland, US
61
The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Orthopaedics manufacturing
facilities in Memphis 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.
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.
Group information
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OTHER INFORMATION
Other information
There are known and unknown risks and
uncertainties relating to Smith+Nephew’s
business. The factors listed on pages
230–235 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.
Global supply chain
The Group’s manufacturing production is
concentrated at main facilities in Memphis,
Mansfield, Columbia and Oklahoma City in
the US, Hull and Warwick in the UK, Aarau
in Switzerland, Tuttlingen in Germany,
Suzhou and Beijing in China, Penang
in Malaysia and Alajuela in Costa Rica.
If major physical disruption or unavailability
of critical system infrastructure and
applications 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 localised lockdowns in China and the
impact of geopolitical events such as the
war in Ukraine on the access to and cost
of supply channels and supply constraints
on raw materials and components
have had and may continue to have an
adverse effect on the Group’s 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 pandemic or
war 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. Further, as the Group continues
to move and operationalise its warehouse
and distribution functions externally, there
is a risk that, if the transition and ongoing
operations do not go as planned, the
supply of products to its markets may be
disrupted and impact its performance.
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 the Group’s suppliers,
increased freight costs and cycle times
and increased sanctions and import and
export controls resulting from geopolitical
events such as the war in Ukraine
could result in a continued increase in
the Group’s costs of production and
distribution. These suppliers must provide
the materials in compliance with legal
and regulatory requirements and perform
the activities to the Group’s standard
of quality requirements. A supplier’s
failure to comply with legal or regulatory
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 and/or to sterilize
its products, which it may not be able to
pass on to its customers in the form of
increased prices for its finished products.
This risk is particularly relevant in the
medical devices sector due to complex
supply chains and the potential for
healthcare budgets globally to be reduced.
In addition, some of the raw materials
used may become unavailable and/or
capacity for sterilization services may
become constrained, in particular due to
post-pandemic manufacturing and supply
challenges and increased regulation,
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.
The Group will, from time to time, including
as part of the 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.
Natural disasters, weather and climate
change related events and unavailability
of critical system infrastructure and
applications can also lead to manufacturing
and supply delays, product shortages,
excess inventory, unanticipated costs,
lost revenues and damage to reputation.
In addition, the pace of development
and expansion of environmental and
sustainability regulations globally, coupled
with more aggressive enforcement
of regulations can impact the Group’s
ability to manufacture, sterilise and
supply product. In addition, the Group’s
physical assets and supply chains are also
vulnerable to weather and climate change
(e.g. sea level rise, increased frequency
and severity of extreme weather events,
and stress on water resources). Where such
events impact a manufacturing facility,
the Group may be unable to manufacture
products. In this case, if there is no
manufacturing alternative for the relevant
products, the Group may not be able to
supply those products to its customers.
The Group is exposed to increasing salary
and wage costs for its employees and
contractors due to global inflation and the
cost of living crisis. This, combined with
labour attrition and longer cycle times to
backfill roles, may adversely impact the
Group’s performance. Requirements of
global regulatory agencies have become
more stringent in recent years and
the Group expects this to continue.
The Group’s Quality and Regulatory
Affairs team is leading a cross functional
Group-wide programme to implement
and transition to the EU Medical Devices
Regulation (MDR) regulatory regime.
MDR includes new requirements for
the manufacture, supply and sale of all
CE marked products sold in Europe (i.e.
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
continues to make substantial progress
towards Group compliance to the new
regulation, however expects that there
will continue to be significant capacity
constraints in implementing MDR given
the small number of notified bodies
certified under MDR. This could continue
to cause delays for medical device
approvals for the industry more broadly
and may result in delays for patients.
Risk factors
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The European Commission has taken some
important steps to aid implementation,
including delaying the EU database
(EUDAMED) and passing a Corrigendum
to give a longer implementation
timeline for certain Class lR devices
(i.e. reusable surgical instruments).
More recently the EU Commission has
proposed draſt revisions to transitional
requirements which if approved should
support products to continue to be made
available. This supports both the Group as
well as supporting capacity constraints
within the Notified Bodies.
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
or manufacturing capacity to support
customer demand and growth.
Business continuity and business change
Widespread outbreaks of infectious
diseases, including new Covid variants
and restrictions and lockdowns arising
therefrom, can create uncertainty and
challenges for the Group. These include,
but are not limited to, declines in and
cancellations of elective procedures at
medical facilities, reduction in staffing and
other support within institutions, disruptions
at manufacturing facilities and disruptions
in supply and other commercial activities
due to travel restrictions and government
restrictions on exports.
The Group’s business requires continuous
improvement and depends on its ability
to execute business change programmes
such as the 12-point plan at pace, whilst
continuing to operate business as usual.
The pace and scope of the Group’s business
change initiatives may increase execution
risk for the change programmes as well
as for the Group’s business-as-usual
activities. The Group’s business depends on
its ability to plan for and be resilient in the
face of events that threaten one or more
of its key locations. Damage caused by
environmental and climate change factors,
including natural disasters and severe
weather can and do threaten the Group’s
critical sites and supply chains.
Commercial execution
Strong commercial execution requires
effective cross functional alignment,
accountability, engagement and
communication across the Group within
embedded governance structures and
frameworks. Effective engagement
with customers, suppliers and other
stakeholders is also a crucial factor to
ensure strong commercial execution.
Failure to effectively implement the
Group’s programmes within appropriate
governance frameworks or failure to
understand or take into account customer,
supplier and stakeholder needs and
requirements could adversely affect
the Group’s performance.
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 representative
access due to increased post-pandemic
pressure on these facilities and their staff.
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 its existing product
range or in product training and medical
education. lf the Group is unable to
maintain these relationships its ability
to meet the demands of its customers
could be diminished and the Group’s
revenue and profit could be materially
adversely affected.
Customer and other stakeholder
sustainability expectations
The Group’s customers have developed
or are developing more stringent
sustainability requirements that they
request or expect Smith+Nephew to
implement or adhere to. A failure to
meet customer’s expectations may
adversely impact upon the Group’s
financial performance.
Acquisitions
Challenges in integration of new acquisitions
may arise following completion of the deal.
This may lead to the Group not achieving
the planned synergies and results from
the acquisition.
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 and healthcare systems.
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.
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Other information
continued
Risk factors
continued
Pricing of the Group’s products is
largely governed in most markets by
governmental reimbursement authorities.
Initiatives sponsored by government
agencies, legislative bodies and the private
sector to limit the growth of healthcare
costs, including price regulation, excise
taxes and competitive pricing, are
ongoing in markets where the Group has
operations. This control may be exercised
by determining prices for an individual
product or for an entire procedure.
The Group is exposed to government
policies favouring locally sourced products.
The Group is also exposed to changes
in reimbursement policy, tax policy and
pricing, including as a result of financial
pressure on governments and hospitals
caused by recession and inflation in its
markets, which may have an adverse
impact on revenue and operating profit.
During 2021 and 2022, reimbursement
codes were more widely interpreted to
provide for remote delivery of healthcare
services which indicates a proposed
shiſt in site of care and management of
related healthcare budgets away from
traditional inpatient focused treatment.
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 US. Failure to
do so could result in fines, reputational
damage and/or loss of future funding.
Procurement processes
Global recessionary and inflationary
pressures and the commoditisation of
entire product groups have led to more
price driven approaches to customer
procurement processes and tenders,
such as the value-based procurement
programme in China and further
consolidation of customer buying groups.
Further, non-clinical staff are oſten key
decision makers in customer’s procurement
processes, with access to these
decision-makers being limited with some
customers. These changes are occurring
at a time when the input cost to the
Group’s products is continuing to increase.
The effect of these procurement changes
can adversely impact the pricing that the
Group achieves for its products in parallel
with a continued increase in the cost
of production of those products.
New product innovation,
design & development, including
intellectual property
Continual development and introduction
of new products
The medical devices industry has a
high level of new product introduction.
In order to remain competitive, the Group
must continue to develop innovative
products that satisfy customer needs and
preferences and/or provide cost or other
advantages. Developing new products is
a costly, lengthy and uncertain process.
The Group may fail to innovate due to
insufficient 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. Although most countries have
eased Covid restrictions, during 2022
localised Covid lockdowns and restrictions
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 in these markets.
The Group’s products and technologies
are also subject to marketing challenge 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.
All new products that the Group develops
need to be designed and manufactured in a
sustainable manner. A failure in this aspect
may impact the willingness of customers to
purchase the new products and adversely
impact the Group’s ability to continue
selling the product.
Where the Group has critical gaps in its
product portfolio that are not filled by new
products there is a risk that the Group will
lose market share to competitors that
can offer a broader product portfolio.
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 engage in dispute resolution
and if unsuccessful, 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 protects its intellectual
property and opposes third-party
patents and trademarks where it deems
appropriate. If Smith+Nephew fails
to protect and enforce its intellectual
property rights effectively, 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 its business.
The Group also develops and sells certain
products that are or will be digitally
enabled including connection to networks
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and/or the internet. The Group’s systems
and the systems of the entities it acquires
are vulnerable to a cyber-attack, theſt of
intellectual property, malicious intrusion,
loss of data privacy or other significant
disruption. The Group’s systems have been
and will continue to be the target of such
threats, including as a result of remote
working. 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.
The Group has 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 its
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
business operations could be disrupted
and 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 complex
legislation and regulation, including with
respect to anti-bribery and corruption
and data protection, in each country in
which the Group operates. The Group’s
international operations are governed by
the UK Bribery Act and the US Foreign
Corrupt Practices Act which prohibit
the Group or its representatives from
making or offering improper payments to
government officials and other persons
or accepting payments for the purpose
of obtaining or maintaining business.
The Group’s international operations which
operate through distributors increase our
Group exposure to these risks. The Group
undertakes investigations into allegations of
possible violations of laws and regulations,
supported by external counsel where
appropriate. It is not possible to predict the
nature, scope or outcome of 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 data privacy laws
and regulations in the markets in which
it operates which impose additional
obligations regarding the handling of
personal data. As privacy and data
protection have become more sensitive
issues for regulators and consumers, new
and enhanced privacy and data protection
laws and regulations and enforcement
frameworks, continue to develop at pace
globally. Ensuring compliance with evolving
privacy and data protection laws and
regulations on a global basis may require
the Group to change or develop its current
business models and practices and
may increase its cost of doing business.
Despite those efforts, there is a risk that
the Group may be subject to fines and
penalties, litigation and reputational
harm in connection with its 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, could adversely affect
the Group’s business, reputation, 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, product safety, sustainability
compliance and reporting requirements
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 entails risk of product
liability claims or recalls. Design and
manufacturing defects with respect
to products sold by the Group or by
companies it has acquired could damage,
or impair the repair of, body functions.
The Group may become subject to liability,
which could be substantial, because of
actual or alleged defects in its products.
In addition, product defects could lead to
the need to recall from the market existing
products, which may be costly and harmful
to the Group’s reputation. There can be no
assurance that customers, particularly in
the US, the Group’s largest geographical
market, will not bring product liability or
related claims that would have a material
adverse effect on the Group’s financial
position or results of operations in the
future, or that the Group will be able to
resolve such claims within insurance limits.
As at 31 December 2022, a provision of
$239m 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
The Group’s financial results depend on its
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
post-pandemic). Failure to comply with the
Group’s 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 conditions and there
is a risk of deterioration of the Group’s
performance and finances during adverse
macroeconomic conditions. The impact
of geopolitical conditions such as the war
in Ukraine and the continuing impacts of
the Covid pandemic on global economies
and financial markets may trigger a
recession or slowdown in various markets
in which the Group operate which would
significantly reduce customer capital
spending and customer financial strength.
Economic conditions worldwide continue
to create several challenges for the Group,
including the US Administration’s approach
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OTHER INFORMATION
Other information
continued
Risk factors
continued
to trade policy, increased global sanctions
and countersanctions in response to local
or global conflicts, heightened inflation and
pricing pressure (arising across the costs
of raw materials, freight and employee
salaries and wages), increasing tax rates,
significant declines in capital equipment
expenditures at hospitals and increased
uncertainty over the collectability of
government debt. These factors could
have an increased impact on growth
in the future.
The Group is increasingly seeing
sustainability targets and public policies
being promulgated in the markets in
which the Group operates as well as
by its customers, suppliers and other
stakeholders. A failure to meet these
targets and policies could impact the
Group’s sales and growth in those markets.
Political uncertainties
The Group operates on a worldwide basis
and has distribution channels, agents and
purchasing 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 whether in
terms of increased compliance resources
and cost to serve, market exit, disruption
to operations and/or reputational damage.
There remains a level of political and
regulatory uncertainty in the UK following
the exit from the European Union and the
introduction of new legislation in the UK.
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 may 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 US, the
Medicines and Healthcare products
Regulatory Agency in the UK, 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 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 the
Group’s ability to meet customer demand.
The trend is towards more stringent
regulation and higher standards of
technical appraisal and there are
increasingly stringent local requirements
for clinical data across many of the
markets globally in which the Group
operates. Such controls have become
increasingly demanding to comply with and
management believes that this trend will
continue. Privacy laws and environmental
regulations have also become more
stringent, supported by enhanced
enforcement frameworks and resources.
There is also an increase in regulation
relating to labelling and reporting in the
markets in which the Group operates
which results in increased resourcing and
cost to the Group. Regulatory requirements
may also entail inspections for compliance
with appropriate standards, including those
relating to Quality Management Systems or
Good Manufacturing Practices regulations.
All manufacturing and other significant
facilities within the Group are subject to
regular internal and external audit for
compliance with national medical device
regulation and Group policies. Payment for
medical devices may be governed by
reimbursement tariff agencies in a number
of countries. Reimbursement rates may
be set in response to perceived economic
value of the devices, based on clinical
and other data relating to cost, patient
outcomes and comparative effectiveness.
They may also be affected by overall
government budgetary considerations.
The Group believes that its emphasis on
innovative products and services should
contribute to success in this environment.
Failure to comply with these regulatory
requirements could have a number
of adverse consequences, including
withdrawal of approval to sell a product
in a country, temporary closure of a
manufacturing facility, fines and potential
damage to Company reputation.
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
234
Smith+Nephew
Annual Report 2022
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 and increased interest rates
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.
Talent management
The Group’s continued development
depends on its ability to hire, successfully
engage and retain highly skilled
personnel with particular expertise.
This is critical, particularly in general
management, research, new product
development and in the sales force.
The Covid pandemic has increased the
risk to the health and wellbeing of the
Group’s personnel. Uncertainty, threat
of illness and restricted travel, work and
personal activities have affected people
globally. Employee priorities have shiſted
in terms of work life equilibrium resulting
in increased global movement of talent.
Increased salaries in particular sectors
(such as Cybersecurity, Digital, IT and
ESG) have also impacted businesses
globally lf Smith+Nephew is unable to
attract and 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 fails to engage
in and implement effective succession
planning, it may not be able to meet its
strategic business objectives, may lose
competitive advantage and intellectual
capital due to retention failure.
Environment and sustainability
Climate change and sustainability related
risks have the potential to impact the
Group’s business model and performance.
The impacts of climate change on
the Group’s business may arise from
new regulations and requirements to
obtain certain sustainability standards,
international sustainability accords and
agreements, and changing business
practices and trends to accommodate
climate-change risks. Further, the Group
will be exposed to the physical impacts
of climate change, which may impact
the manufacture of its products and the
supply chain to deliver them to its markets.
The Group may need to adapt its business
model and processes to accommodate
the changes brought about by climate-
related issues and increased focus and
regulation of sustainability requirements
by governments, regulators, customers,
investors and other stakeholders. If the
Group does not achieve the climate
change and sustainability targets and
objectives set by the Group, or set by
the governments and regulators in the
markets where it operates, or by its
customers, there may be an impact on the
Group’s performance and ability to grow.
Taxation and Foreign Exchange
The Group operates a global business and
is therefore required to comply with tax
legislation in multiple jurisdictions and is
also exposed to exchange rate volatility.
There is the potential for an adverse impact
on the Group’s financial performance
due to significant tax rate changes,
or broadening of the tax base, in key
jurisdictions in which the Group operates.
These include OECD Pillar Two (as outlined
on page 179) and US tax reform proposals.
These external factors may require the
Group to adjust its operating model.
Currency fluctuations
Smith+Nephew’s results of operations
are affected by transactional exchange
rate movements in that they are subject
to exposures arising from revenue in a
currency different from the related costs
and expenses. The Group ‘s manufacturing
cost base is situated principally in the US,
the UK, China, Costa Rica, Malaysia and
Switzerland, from which finished products
are exported to the Group’s selling
operations worldwide. Thus, the Group is
exposed to fluctuations in exchange rates
between the US Dollar, Sterling and Swiss
Franc and the currency of the Group’s
selling operations, particularly the Euro,
Chinese Yuan, Australian Dollar, Malaysian
Ringgit and Japanese Yen.
If the US Dollar, Sterling or Swiss Franc
should strengthen against the Euro,
Australian Dollar and the Japanese Yen, the
Group’s trading margin could be adversely
affected. The Group manages the impact
of exchange rate movements on 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 US Dollar. The Group uses
the US Dollar as its reporting currency.
The US Dollar is the functional currency
of Smith & Nephew plc. The Group’s
revenues, profits and earnings are also
affected by exchange rate movements
on the translation of results of operations
in foreign subsidiaries for financial reporting
purposes. See ‘Liquidity and capital
resources’ on page 196.
Factors affecting 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 ‘Serving
healthcare customers’ on pages 24–45,
the ‘Manufacturing and quality’ on
pages 46–47, the ‘Financial review’
on pages 18–21 and ‘Taxation information
for shareholders’ on pages 243–245.
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OTHER INFORMATION
Other information
continued
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, trading profit
before tax, adjusted attributable profit,
tax rate on trading results (trading tax
expressed as a percentage of trading profit
before tax), 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.
Payments of lease liabilities are included
in trading cash flow. 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.
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.
Non-IFRS financial
information –
Adjusted measures
236
Smith+Nephew
Annual Report 2022
Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying
revenue growth as follows:
Reconciling items
2022
Reported growth
Underlying growth
Acquisitions/disposals
Currency impact
Consolidated revenue by franchise
%
%
%
%
Knee Implants
2.5
6.8
–
(4.3)
Hip Implants
(4.4)
(0.2)
–
(4.2)
Other Reconstruction
(5.6)
(1.8)
–
(3.8)
Trauma & Extremities
(5.7)
(2.6)
–
(3.1)
Orthopaedics
(2.0)
1.9
–
(3.9)
Sports Medicine Joint Repair
3.6
8.7
–
(5.1)
Arthroscopic Enabling Technologies
(3.8)
0.9
–
(4.7)
ENT (Ear, Nose and Throat)
17.1
20.4
–
(3.3)
Sports Medicine & ENT
1.9
6.7
–
(4.8)
Advanced Wound Care
(2.6)
5.2
–
(7.8)
Advanced Wound Bioactives
4.9
5.4
–
(0.5)
Advanced Wound Devices
4.3
11.6
–
(7.3)
Advanced Wound Management
1.1
6.4
–
(5.3)
Total
0.1
4.7
–
(4.6)
Reconciling items
2021
Reported growth
Underlying growth
Acquisitions/disposals
Currency impact
Consolidated revenue by franchise
%
%
%
%
Knee Implants
6.6
5.1
–
1.5
Hip Implants
7.8
5.8
–
2.0
Other Reconstruction
34.1
32.2
–
1.9
Trauma & Extremities
25.4
5.6
18.0
1.8
Orthopaedics
12.5
6.4
4.3
1.8
Sports Medicine Joint Repair
18.2
15.9
–
2.3
Arthroscopic Enabling Technologies
14.1
11.7
–
2.4
ENT (Ear, Nose and Throat)
23.3
20.6
–
2.7
Sports Medicine & ENT
17.0
14.6
–
2.4
Advanced Wound Care
12.9
9.5
–
3.4
Advanced Wound Bioactives
15.1
14.8
–
0.3
Advanced Wound Devices
16.0
13.0
–
3.0
Advanced Wound Management
14.2
11.8
–
2.4
Total
14.3
10.3
1.9
2.1
Trading profit, trading profit margin, trading cash flow and trading profit to trading cash conversion ratio
Trading profit, trading profit margin (trading profit expressed as a percentage of revenue), trading cash flow and trading profit to trading
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, the most directly comparable IFRS measures, 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.
237
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
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).
Operating
Profit before
Attributable
Cash generated
Earnings
Revenue
profit
1
tax
2
Taxation
3
profit
4
from operations
5
per share
6
$ million
$ million
$ million
$ million
$ million
$ million
¢
2022 Reported
5,215
450
235
(12)
223
581
25.5
Acquisition and disposal-related items
–
4
162
(31)
131
22
15.1
Restructuring and rationalisation costs
–
167
168
(30)
138
120
15.8
Amortisation and impairment of acquisition
intangibles
–
205
205
(45)
160
–
18.4
Legal and other
7
–
75
82
(21)
61
133
7.0
Lease liability payments
–
–
–
–
–
(54)
–
Capital expenditure
–
–
–
–
–
(358)
–
2022 Adjusted
5,215
901
852
(139)
713
444
81.8
Acquisition and disposal-related items:
For the year to 31 December 2022, costs primarily relate to the acquisition of Engage and
prior year acquisitions, partially offset by credits relating to remeasurement of deferred and contingent consideration for prior year
acquisitions. Adjusted profit before tax additionally excludes losses of $158m related to the Group’s shareholding in Bioventus.
This primarily includes an impairment charge of $109m and the Group’s share of impairment recognised by Bioventus in its
financial statements.
Restructuring and rationalisation costs:
For the year to 31 December 2022, these costs relate to the implementation of the Operations
and Commercial Excellence programme announced in February 2020 and also includes efficiency and productivity elements of the 12-point
plan. Adjusted profit before tax additionally excludes $1m of restructuring costs related to the Group’s share of results of associates.
Amortisation and impairment of acquisition intangibles:
For the year to 31 December 2022, charges relate to the amortisation and
impairment of intangible assets acquired in material business combinations.
Legal and other:
For the year ended 31 December 2022, charges primarily relate to legal expenses for ongoing metal-on-metal hip claims
and an increase of $19m in the provision that reflects the present value of the estimated cost to resolve all other known and anticipated
metal-on-metal hip claims. Charges also include the costs for implementing the requirements of the EU Medical Device Regulation that
was effective from May 2021 with a transition period to May 2024. These charges in the year to 31 December 2022 were partially offset
by a credit of $7m relating to insurance recoveries for ongoing metal-on-metal hip claims.
Operating
Profit before
Attributable
Cash generated
Earnings
Revenue
profit
1
tax
2
Taxation
3
profit
4
from operations
5
per share
6
$ million
$ million
$ million
$ million
$ million
$ million
¢
2021 Reported
5,212
593
586
(62)
524
1,048
59.8
Acquisition and disposal-related items
–
7
(73)
(3)
(76)
28
(8.8)
Restructuring and rationalisation costs
–
113
113
(22)
91
108
10.3
Amortisation and impairment of acquisition
intangibles
–
172
172
(38)
134
–
15.4
Legal and other
7
–
51
59
(22)
37
111
4.2
Lease liability payments
–
–
–
–
–
(59)
–
Capital expenditure
–
–
–
–
–
(408)
–
2021 Adjusted
5,212
936
857
(147)
710
828
80.9
Acquisition and disposal-related items:
For the year to 31 December 2021, costs primarily relate to the acquisition of Extremity
Orthopaedics and prior year acquisitions, partially offset by credits relating to remeasurement of deferred and contingent consideration
for prior year acquisitions. Adjusted profit before tax additionally excludes gains of $75m associated with the two transactions resulting
in the dilution of the Group’s shareholding in Bioventus and $5m of other gains relating to the Bioventus IPO.
Restructuring and rationalisation costs:
For the year to 31 December 2021, 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.
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Annual Report 2022
Amortisation and impairment of acquisition intangibles:
For the year to 31 December 2021, charges relate to the amortisation
and impairment of intangible assets acquired in material business combinations.
Legal and other:
For the year ended 31 December 2021, charges primarily relate to legal expenses for ongoing metal-on-metal hip claims
and also includes costs for implementing the requirements of the EU Medical Device Regulation that was effective from May 2021
with a transition period to May 2024. These charges in the year to 31 December 2021, were partially offset by a credit of $35m relating
to insurance recoveries for ongoing metal-on-metal hip claims.
Trading cash flow additionally excludes $7m of cash funding to closed defined benefit schemes. Taxation also includes the effect of
an increase in deferred tax assets on non trading items resulting from the prospective UK tax rate increase from 19% to 25% effective
from 1 April 2023.
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 aſter 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:
2022
2021
2020
$ million
$ million
$ million
Cash generated from operations
1
581
1,048
972
Capital expenditure
(358)
(408)
(443)
Interest received
7
6
2
Interest paid
(73)
(80)
(61)
Payment of lease liabilities
(54)
(59)
(55)
Income taxes (paid)/refunded
(47)
(97)
22
Free cash flow
56
410
437
1
See Group cash flow statement on page 166.
Leverage ratio
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 and impairment of property, plant and equipment and amortisation
and impairment of other intangible assets.
The calculation of the leverage ratio is set out below:
2022
2021
$ million
$ million
Net debt including lease liabilities
2,535
2,049
Trading profit
901
936
Depreciation of property, plant and equipment
319
326
Amortisation of other intangible assets
56
65
Impairment of property, plant and equipment
1
30
–
Impairment of other intangible assets
1
7
–
Adjustment for items already excluded from trading profit
(31)
(11)
Adjusted EBITDA
1,282
1,316
Leverage ratio (x)
2.0
1.6
1 Impairments in 2021 were immaterial and did not impact the leverage ratio.
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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Other information
continued
Non-IFRS financial information – Adjusted measures
continued
Return on invested capital
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 (before amortisation and impairment of acquisition intangibles) less Adjusted Taxes/
((Opening Net Operating Assets + Closing Net Operating Assets)/2). The ROIC calculation has been updated to reflect the definition
of ROIC used in the Performance Share Programme 2020.
2022
2021
2020
$ million
$ million
$ million
Operating profit
450
593
295
Amortisation and impairment of acquisition intangibles
205
172
171
Operating profit before amortisation and impairment of acquisition intangibles
655
765
466
Taxation
(12)
(62)
202
Taxation adjustment
1
(86)
(55)
(57)
Operating profit before amortisation and impairment of acquisition intangibles less adjusted
taxes
557
648
611
Total equity
5,259
5,568
5,279
Accumulated amortisation and impairment of acquisition intangibles net of associated tax
1,175
1,035
926
Retirement benefit assets
(141)
(182)
(133)
Investments
(12)
(10)
(9)
Investments in associates
(46)
(188)
(108)
Right-of-use assets
(187)
(191)
(196)
Cash at bank
(350)
(1,290)
(1,762)
Long-term borrowings and lease liabilities
2,712
2,848
3,353
Retirement benefit obligations
70
127
163
Bank overdraſts, borrowings, loans and lease liabilities
160
491
337
Net operating assets
8,640
8,208
7,850
Average net operating assets
2
8,424
8,029
7,681
Return on invested capital
6.6%
8.1%
8.0%
1
Being the taxation on amortisation and impairment of acquisition intangibles, interest income, interest expense, other finance costs and share of results of associates.
2
(Opening Net Operating Assets + Closing Net Operating Assets)/2
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.
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.
240
Smith+Nephew
Annual Report 2022
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’.
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 2022 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.
During 2022, a fee of 1 US cent per ADS
was collected by J.P. Morgan Chase Bank
N.A. on the 2021 final dividend paid in May
2022 and a fee of 1 US cent per ADS was
collected on the 2022 interim dividend paid
in October. In the period 1 January 2022
to 10 February 2023, the total programme
payments made by J.P. Morgan Chase
Bank N.A. was $815,663.15.
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 aſter
by 10%. Following the redenomination
of the Company’s share capital into US
Dollars, the Board reaffirmed its policy
of increasing the dividend by 10% a year
in US Dollar terms.
On 2 August 2012, the Board announced
its intention to pursue a progressive
dividend policy, with the aim of increasing
the US Dollar value of ordinary dividends
over time broadly based on the Group’s
underlying growth in earnings, while
taking into account capital requirements
and cash flows.
At the time of the full year results, the
Board reviews the appropriate level of
total annual dividend each year. The Board
intends that the interim dividend will be
set by a formula and will be equivalent to
40% of the total dividend for the previous
year. Dividends will continue to be declared
in US Dollars with an equivalent amount
in Sterling payable to those shareholders
whose registered address is in the UK,
or who have validly elected to receive
Sterling dividends.
An interim dividend in respect of each
fiscal year is normally declared in July or
August and paid in October or November.
Persons depositing or
withdrawing shares must pay
For
$5.00 (or less) per 100 ADSs
(or portion of 100 ADSs)
$0.05 (or less) per ADS
–
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
$0.05 (or less) per ADS per calendar year
Registration or transfer fees
–
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
Taxes and other governmental charges
the depositary or the custodian have
to pay on any ADS or share underlying an
ADS, for example, stock transfer taxes,
stamp duty or withholding taxes
–
As necessary
Any charges incurred by the depositary
or its agents for servicing the
deposited securities
–
As necessary
241
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Shareholder information
continued
Dividends per share
Years ended 31 December
2022
2021
2020
2019
2018
Pence per share:
Interim
12.91
10.50
11.07
11.19
10.67
Final
19.07
1
18.40
16.62
18.66
16.99
Total
31.98
28.90
27.69
29.85
27.66
US cents per share:
Interim
14.40
14.40
14.40
14.40
14.00
Final
23.10
23.10
23.10
23.10
22.00
Total
37.50
37.50
37.50
37.50
36.00
1
Translated at the Bank of England rate on 10 February 2023.
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.
Dividends below £2,000 per tax year are
tax free for UK income tax purposes and
dividends above £2,000 per tax year are
subject to UK personal income tax at
the rate of 8.75% for basic rate taxpayers,
33.75% for higher rate taxpayers and
39.35% for additional rate taxpayers. If you
need to pay UK tax, how you pay depends
upon the amount of dividend income
you receive in a year. For the tax year
2023–2024, the £2,000 dividend nil rate
will be reduced to £1,000, falling to £500
for the tax year 2024–25 and subsequent
tax years. 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.
US Dollar ordinary shares carry the same
rights as the previous ordinary shares.
The share price continues to be quoted
in Sterling. In 2006, the Company issued
£50,000 of shares in Sterling in order to
comply with English law. These were issued
as deferred shares, which are not listed on
any stock exchange. They have extremely
limited rights and therefore effectively
have no value. These shares are held by
the Company Secretary, although the
Board reserves the right to transfer them
to a member of the Board should it so wish.
Shareholdings
As at 10 February 2023, to the knowledge
of the Group, there were 12,079 registered
holders of ordinary shares, of whom
94 had registered addresses in the US
and held a total of 156,389 ordinary
shares (0.017% 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 10 February 2023, 45,620,821 ADSs
equivalent to 91,241,642 ordinary shares
or approximately 10.45% of the total
ordinary shares in issue, were outstanding
and were held by 84 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 10 February 2023, 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 on page 243, 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 on page 243 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.
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 2022
of 23.1 US cents per ordinary share, the
record date will be 31 March 2023 and
the payment date will be 17 May 2023.
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
24 April 2023. The ordinary shares will
trade ex-dividend on both the London
and New York Stock Exchanges from
30 March 2023. The proposed final
dividend of 23.1 US cents per ordinary
share, which together with the interim
dividend of 14.4 US cents, makes a
total for 2022 of 37.5 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
242
Smith+Nephew
Annual Report 2022
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 December 2021,
we announced an updated capital
allocation policy to prioritise the use of
cash. The 2022 share buyback programme
commenced on 23 February 2022 and
$150 million was completed by 12 August
2022. As macroeconomic conditions
continued to be uncertain, including higher
input cost inflation, the Board decided it
was prudent to delay further buybacks
until conditions improved. We remain
committed to returning surplus cash to
shareholders over time.
From 1 January 2022 to 10 February 2023,
in the months listed below, the Company
has purchased 9,693,476 ordinary shares
at a cost of $150,174,989.80.
The shares were purchased in the open
market by Merrill Lynch International
and J.P. Morgan Securities plc on behalf
of the Company.
Exchange controls and other
limitations affecting security holders
There are no UK governmental laws, decrees
or regulations that restrict the export or
import of capital or that affect the payment
of dividends, interest or other payments to
non-resident holders of Smith & Nephew
plc’s securities, except for certain restrictions
imposed from time-to-time by His 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 US (or any State therein or the
District of Columbia), or an estate or trust
the income of which is included in gross
income for US federal income tax purposes
regardless of its source (each a US Holder).
The comments set out below do not
purport to address all tax consequences
of the ownership of ADSs or ordinary
shares that may be material to a particular
holder and in particular do not deal with
the position of 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 US 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 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 2022.
This discussion 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.
Major shareholders
As at 31 December
2022
%*
2021
%*
2020
%*
10 February 2023
%*
BlackRock, Inc.
5.2
5.2
5.2
5.2
As at 31 December
10 February 2023
’000
2022
’000
2021
’000
2020
’000
BlackRock, Inc.
46,427
46,427
46,427
46,427
*
Percentage of ordinary shares in issue, excluding Treasury shares.
Purchase of ordinary shares on behalf of the Company
Total shares
purchased
000’s
Average price
paid per share
pence
Approximate value
of shares purchased
$ million
23 February – 13 April 2022
7,770,113
1,224.5255
125
9–12 August 2022
1,923,363
1,068.6719
25
243
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Shareholder information
continued
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 Giſt Tax applies
to inheritance tax. Consequently, a US
citizen who is domiciled in the US and is
not a UK national or domiciled in the UK
will not be subject to UK inheritance tax
in respect of ADSs and ordinary shares.
A UK national who is domiciled in the
US will be subject to 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.
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.
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.
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
244
Smith+Nephew
Annual Report 2022
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.
Any UK stamp duty or SDRT imposed
upon transfers of ADSs or ordinary shares
will not be treated as a creditable foreign
tax for US federal income tax purposes.
US Holders should consult their tax
advisers regarding whether any such UK
stamp duty or SDRT may be deductible
or reduce the amount of gain (or increase
the amount of loss) recognized upon a
sale or other disposition of the ADSs or
ordinary shares.
Charitable and Political Donations
The Group made no political
donations during the year (2021: $nil).
Details of charitable donations can be
found on page 59.
Suppliers’ Payment Policy
Terms of payment are agreed with
individual suppliers prior to supply.
The Group aims to pay its creditors
promptly, in accordance with terms
agreed for payment. Further information
can be obtained from the government
payment practice reporting portal.
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 2021
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
Company is empowered to purchase for
the benefit of Directors of the Company in
respect of actions undertaken as Directors
(and/or officers) of the Company.
A Director shall not vote or be counted
in any quorum present at a meeting in
relation to a resolution on which he is
not entitled to vote.
The 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
aſter 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 aſter
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
245
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Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Shareholder information
continued
by the Directors and approved by the
shareholders in a general meeting, rateable
according to the amounts paid up on such
shares, provided that the dividend cannot
exceed the amount recommended by
the Directors.
The Company’s Board of Directors may
declare such interim dividends as appear
to them to be justified by the Company’s
financial position.
If authorised by an ordinary resolution
of the shareholders, the Board may also
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 aſter 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 2022.
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.
–
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:
–
Aſter 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.
246
Smith+Nephew
Annual Report 2022
Limitations on voting and shareholding
There are no limitations imposed by
English law or the Company’s Articles of
Association on the right of non-residents
or foreign persons to hold or vote the
Company’s ordinary shares or ADSs, other
than the limitations that would generally
apply to all of the Company’s shareholders.
Transfers of shares
The Board may refuse to register the transfer
of shares held in certificated form which:
–
Are not fully paid (provided that it shall
not exercise this discretion in such a
way as to prevent stock market dealings
in the shares of that class from taking
place on an open and proper basis);
–
Are not duly stamped or duly certified
or otherwise shown to the satisfaction
of the Board to be exempt from stamp
duty, lodged at the Transfer Office
or at such other place as the Board
may appoint and (save in the case of
a transfer by a person to whom no
certificate was issued in respect of the
shares in question) accompanied by
the certificate for the shares to which it
relates, and such other evidence as the
Board may reasonably require to show
the right of the transferor to make the
transfer and, if the instrument of transfer
is executed by some other person on
his behalf, the authority of that person
so to do;
–
Are in respect of more than one class
of shares; or
–
Are in favour of more than
four transferees.
Deferred shares
Following the re-denomination of share
capital on 23 January 2006, the ordinary
shares’ nominal value became 20 US
cents each. There were no changes to the
rights or obligations of the ordinary shares.
In order to comply with the Companies
Act 2006, a new class of Sterling shares
was created, deferred shares, of which
50,000 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$1,000 each.
Amendments
The Company does not have any special
rules about amendments to its Articles of
Association beyond those imposed by law.
Iran notice
Section 13(r) of the Exchange Act requires
issuers to make specific disclosure in
their annual reports of certain types of
dealings with Iran, including transactions
or dealings with Iranian government-
owned entities, as well as dealings with
entities sanctioned for activities related
to terrorism or proliferation of weapons
of mass destruction, even when those
activities are not prohibited by US law
and do not involve US persons.
The Group does not have a legal entity
based in Iran, but in 2021 it exported
certain medical devices to Iran, via sales
by non-US entities, to a privately-owned
Iranian distributor for sale in Iran. Sales
by the distributor were made to hospitals
that we understand are owned or
controlled by the Government of Iran.
The Group’s direct and indirect sales of
US origin medical devices into Iran are
permitted pursuant to section 560.530(a)
(3)(i) of the Iranian Transactions and
Sanctions Regulations, and its indirect
sales of non-US origin medical devices
into Iran are made in accordance with
applicable law. The Group also provides
training to its distributor(s) and surgeons
in Iran as necessary and ordinarily incident
to the safe and effective use of the
medical devices, which is also permitted
by applicable law.
In 2022, Smith+Nephew’s gross revenues
from sales to Iran were US$nil and net
losses were approximately US$0.0m.
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
$5.2bn in 2022. 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 2022. 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 2022, 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 252.
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.
247
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Shareholder information
continued
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 10 February 2023,
the latest practicable date for this Annual
Report, the Bank of England rate was
US$1.21 per £1.00.
The results of the Group, as reported in
US Dollars, are affected by movements
in exchange rates between US Dollars
and other currencies.
The Group applied the average exchange
rates prevailing during the year to translate the
results of companies with functional currency
other than US Dollars. The currencies
which most influenced these translations
in the years covered by this report were
Sterling, Swiss Franc and the Euro.
The Accounts of the Group in this Annual
Report are presented in millions (m)
unless otherwise indicated.
Special note regarding
forward-looking statements
The Group’s reports filed with, or
furnished to, the US Securities and
Exchange Commission (SEC), including
this document and written information
released, or oral statements made, to
the public in the future by or on behalf
of the Group, contain ‘forward-looking
statements’ within the meaning of the
US Private Securities Litigation Reform
Act of 1995, that may or may not prove
accurate. For example, statements
regarding expected revenue growth and
trading profit margins discussed in the
‘Strategic Report’, 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:
risks related to the impact of Covid, such
as the depth and longevity of its impact,
government actions and other restrictive
measures taken in response, material
delays and cancellations of elective
procedures, reduced procedure capacity
at medical facilities, restricted access for
sales representatives to medical facilities,
or our ability to execute business continuity
plans as a result of Covid; economic and
financial conditions in the markets we
serve, especially those affecting healthcare
providers, payers and customers (including,
without limitation, as a result of Covid);
price levels for established and innovative
medical devices; developments in
medical technology; regulatory approvals,
reimbursement decisions or other
government actions; product defects or
recalls or other problems with quality
management systems or failure to
comply with related regulations; litigation
relating to patent or other claims; legal
and financial compliance risks and related
investigative, remedial or enforcement
actions; disruption to our supply chain
or operations or those of our suppliers
(including, without limitation, as a result
of Covid); competition for qualified
personnel; strategic actions, including
acquisitions and dispositions, 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 organization to adapt to market
developments; disruptions due to natural
disasters, weather and climate change
related events; changes in customer
and other stakeholder sustainability
expectations; changes in taxation
regulations; effects of foreign exchange
volatility; 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 230–235 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 Fiſth 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.
Corporate headquarters
and registered office
The corporate headquarters is in the
Smith & Nephew plc,
Hatters Lane, Watford,
Hertfordshire, WD18 8YE,
Registered in England and Wales
No. 324357.
Tel. +44 (0)1923 477 100
www.smith-nephew.com
248
Smith+Nephew
Annual Report 2022
Cross-reference to Form 20-F
Part I
Page
Item 1
Identity of Directors, Senior Management
and Advisers
n/a
Item 2
Offer Statistics and Expected Timetable
n/a
Item 3
Key Information
A – (Reserved)
n/a
B – Capitalization and Indebtedness
n/a
C – Reason for the Offer and Use of Proceeds
n/a
D – Risk Factors
230–235
Item 4
Information on the Company
A –
History and Development
of the Company
10–11, 17, 20, 32, 164–220,
238, 240–241, 247–248, IBC
B – Business Overview
IFC–81, 171–175, 229–235
C – Organizational Structure
189–190, 225–228
D – Property, Plants and Equipment
183–184, 229
Item 4A
Unresolved Staff Comments
None
Item 5
Operating and Financial Review and Prospects
A – Operating Results
IFC, 14, 16–21, 230–235
B – Liquidity and Capital Resources
21, 194–196, 215–216
C –
Research and Development, Patents
and Licences, etc.
IFC, 10, 14–15, 17, 75,
175, 232
D – Trend Information
21, 28–47, 62–63, 229–235
E – Critical Accounting Estimates
169–171
Item 6
Directors, Senior Management and Employees
A – Directors and Senior Management
86–91
B – Compensation
116–145, 206–212
C – Board Practices
84–115
D – Employees
48–53, 177
E – Share Ownership
117, 119, 122–123, 125, 127, 135–138,
140, 144–145, 213–214, 220
F –
Disclosure of a Registrant’s
Action to Recover Erroneously
Awarded Compensation
n/a
Item 7
Major Shareholders and Related Party Transactions
A – Major Shareholders
242–243
B – Related Party Transactions
220, 229
C – Interests of Experts and Counsel
n/a
Item 8
Financial information
A –
Consolidated Statements and
Other Financial Information
148–220
Legal Proceedings
205–206
Dividends
241–242
B – Significant Changes
None
Item 9
The Offer and Listing
A – Offer and Listing Details
214, 240–243
B – Plan of Distribution
n/a
C – Markets
84, 229, 240–242, 247
This table provides a cross-reference from the information
included in this Annual Report to the requirements of Form 20-F.
Part I
Page
D – Selling Shareholders
n/a
E – Dilution
n/a
F – Expenses of the Issue
n/a
Item 10
Additional Information
A – Share Capital
n/a
B – Memorandum and Articles of Association
245–247
C – Material Contracts
None
D – Exchange Controls
243
E – Taxation
243–245
F – Dividends and Paying Agents
n/a
G – Statement by Experts
n/a
H – Documents on Display
248
I
– Subsidiary Information
225–228
Item 11
Quantitative and Qualitative Disclosure
about Market Risk
197–203, 230–235
Item 12
Description of Securities other than Equity Securities
A – Debt Securities
n/a
B – Warrants and Rights
n/a
C – Other Securities
n/a
D – American Depositary Shares
241
Part II
Page
Item 13
Defaults, Dividend Arrearages and Delinquencies
None
Item 14
Material Modifications to the Rights of Security
Holders and Use of Proceeds
None
Item 15
Controls and Procedures
101, 104–107, 148–163
Item 16
(Reserved)
n/a
A – Audit Committee Financial Expert
88, 101
B – Code of Ethics
107
C – Principal Accountant Fees and Services
104, 177
D –
Exemptions from the Listing Standards
for Audit Committees
n/a
E –
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers
214, 243
F –
Change in Registrant’s
Certifying Accountant
n/a
G – Corporate Governance
84
H – Mine Safety Disclosure
n/a
I
–
Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections
n/a
Part III
Page
Item 17
Financial Statements
n/a
Item 18
Financial Statements
147, 164–220,
236–240
Item 19
Exhibits
249
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Topic
Metric
2022 Reporting
Code
Affordability
and pricing
Ratio of weighted average rate of
net price increases (for all products)
to the annual increase in the US
Consumer Price Index.
Smith+Nephew considers pricing
disclosures to be commercially sensitive.
Smith+Nephew does not measure price
increase relative to the US Consumer Price
Index for our business purposes.
HC-MS-240a.1
Description of how price information
for each product is disclosed to
customers or to their agents.
Smith+Nephew uses several methods
to disseminate price information to
customers, including quotes, agreements,
responses to requests for proposal,
tender bid submissions, discount
and rebate reporting and through
large group purchasing organisation/
integrated delivery network customers
to their members.
HC-MS-240a.2
Product safety
Number of recalls issued,
total units recalled.
In 2022, Smith+Nephew reported 7 recalls
globally. A total of 6,339 units were
impacted globally. All impacted products
were either removed from the market or
corrected per the applicable regulations
and/or standards.
HC-MS-250a.1
List of products listed in the
FDA’s MedWatch Safety
Alerts for Human Medical
Products database.
Smith+Nephew reports all data as required
by FDA. The MedWatch database is
available at https://www.fda.gov/safety/
medwatch-fda-safety-information-and-
adverse-event-reporting-program
HC-MS-250a.2
Number of fatalities related to
products as reported in the FDA
Manufacturer and User Facility
Device Experience (MAUDE).
Smith+Nephew reports all data as required
by FDA. The FDA MAUDE database is
available at https://www.accessdata.fda.
gov/scripts/cdrh/cfdocs/cfmaude/
search.cfm
HC-MS-250a.3
Number of FDA enforcement
actions taken in response
to violations of current Good
Manufacturing Practices (cGMP),
by type.
In 2022, Smith+Nephew received:
–
1 Form 483 (4 observations in total).
–
0 Warning letters.
–
0 Seizures.
–
3 Recalls (FDA reportable events).
–
0 Consent decrees.
HC-MS-250a.4
Ethical
marketing
Description of code of ethics
governing promotion of off-label
use of products.
See the Product Promotion and
Scientific Disclosures section of our
Code of Conduct and Business Principles
(www.smith-nephew.com) and the Acting
with Integrity section of our Sustainability
Report for additional information.
HC-MS-270a.2
SASB reporting
250
Smith+Nephew
Annual Report 2022
Topic
Metric
2022 Reporting
Code
Product design
and lifecycle
management
Discussion of process to assess and
manage environmental and human
health considerations associated
with chemicals in products, and meet
demand for sustainable products.
Sustainability reviews are incorporated
in New Product Development phase
reviews for new products and acquisitions.
Additionally, regulatory changes regarding
chemicals in products are tracked and
actioned, as appropriate.
See our Sustainability Report for
more information.
HC-MS-410a.1
Total amount of products accepted
for takeback and reused, recycled,
or donated, broken down by:
(1) devices and equipment and
(2) supplies.
Smith+Nephew operates takeback
schemes where required by law.
Smith+Nephew does not measure
the amount of products reused or
recycled for our business purposes.
See the People section of our
Sustainability Report for information
on product donations.
HC-MS-410a.2
Supply chain
management
Percentage of (1) entity’s facilities
and (2) Tier 1 suppliers’ facilities
participating in third-party audit
programmes for manufacturing
and product quality.
All Smith+Nephew direct and third-party
manufacturing locations are certified
to ISO13485. Additionally, all Tier 1
material suppliers are compliant
with ISO13485.
HC-MS-430a.1
Description of efforts to
maintain traceability within
the distribution chain.
All Smith+Nephew products are labelled
with either Unique Device Identifiers or
HIBC barcodes to maintain traceability.
HC-MS-430a.2
Description of the management
of risks associated with the use
of critical materials.
Supply chain risks are captured within
Smith+Nephew’s Enterprise Risk
Management process. Both Business
continuity and business change and
Global supply chain are identified as
Principal Risks.
See our Risk Report on page 69 and our
Conflict Minerals Disclosure Report on
our website (www.smith-nephew.com)
for additional information.
HC-MS-430a.3
Business ethics
Total amount of monetary losses as a
result of legal proceedings associated
with bribery or corruption.
In 2022, Smith+Nephew did not have
monetary losses due to legal proceedings
associated with bribery or corruption.
HC-MS-510a.1
Description of code of ethics
governing interactions with health
care professionals.
See our website
(www.smith-nephew.com) for our Code
of Conduct and Business Principles, our
Anti-Bribery Policy, our Annual Report,
and also the Acting with Integrity
section of our Sustainability Report
for additional information.
HC-MS-510a.2
Activity metric
Number of units sold
by product category.
Smith+Nephew considers the number
of units sold by product category to be
commercially sensitive.
HC-MS-000.A
You can learn more about our sustainability targets and strategy in our
2022 Sustainability Report at www.smith-nephew.com/sustainability
251
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
Glossary
Term
Meaning
ADR
In the US, the Company’s ordinary shares are traded in the
form of American Depositary Shares evidenced by American
Depositary Receipts (ADRs).
ADS
In the US, the Company’s ordinary shares are traded in the
form of American Depositary Shares (ADSs).
Arthroscopic
Enabling
Technologies
(AET)
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.
Advanced
Wound
Bioactives
(AWB)
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 graſt and articular
cartilage substitutes.
Advanced
Wound Care
(AWC)
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.
Advanced
Wound Devices
(AWD)
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 Surgery Center.
Basis Point
One hundredth of one percentage point.
Chronic
wounds
Chronic wounds are those with long or unknown healing times
including leg ulcers, pressure sores and diabetic foot ulcers.
Company
Smith & Nephew plc or, where appropriate, the Company’s
Board of Directors, unless the context otherwise requires.
Companies
Act
Companies Act 2006, as amended, of England and Wales.
Emerging
Markets
Emerging Markets include Latin America, Asia (excluding Japan),
Middle East, Africa and Russia.
EPSA
Adjusted earnings per ordinary share as defined on page 238.
Endoscopy
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
Established Markets are United States of America, Europe,
Australia, New Zealand, Canada and Japan.
Euro or €
References to the common currency used in the majority
of the countries of the European Union.
FDA
US Food and Drug Administration.
Financial
statements
Refers to the consolidated Group Accounts
of Smith & Nephew plc.
FTSE 100
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
A branch of economics concerned with issues related to
efficiency, effectiveness, value and behaviour in the production
and consumption of health and healthcare.
Hip
Implants
A product group which includes specialist products for
reconstruction of the hip joint.
IFC
Inside Front Cover.
IBC
Inside Back Cover.
Term
Meaning
IFRS
International Financial Reporting Standards issued by the
International Accounting Standards Board.
Knee
implants
A product group which includes an innovative range of
products for specialised knee replacement procedures.
LSE
London Stock Exchange.
MDR
Medical Device Regulation.
MHRA
The Medicines and Healthcare products Regulatory Agency
in the UK.
Negative
Pressure
Wound
Therapy (NPNT)
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.
NHS
The UK National Health Service.
NYSE
New York Stock Exchange.
Orthopaedic
products
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.
Other
Reconstruction
A product group which includes robotics-assisted surgery,
bone cement and accessory products.
OXINIUM
OXINIUM material is an advanced load bearing technology.
It is created through a proprietary manufacturing process
that enables zirconium to absorb oxygen and transform to a
ceramic on the surface, resulting in a material that incorporates
the features of ceramic and metal. Management believes
that OXINIUM material used in the production of components
of knee and hip implants exhibits unique performance
characteristics due to its hardness, low-friction and
resistance to roughening and abrasion.
Parent
Company
Pound Sterling,
Sterling, £,
pence or p
References to UK currency. 1p is equivalent to one hundredth
of £1.
SEC
US Securities and Exchange Commission.
Sports
Medicine
Joint Repair
The Sports Medicine Joint Repair franchise includes instruments,
technologies and implants necessary to perform minimally
invasive surgery of joints.
Trading
results
Trading profit, trading profit margin (trading profit expressed
as a percentage of revenue), trading cash flow and trading
profit to trading 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 237 for further information.
Trauma &
Extremities
A product group which includes internal and external devices
used in the stabilisation of severe fractures and deformity
correction procedures.
UK
United Kingdom of Great Britain and Northern Ireland.
Underlying
growth
Growth aſter adjusting for the effects of currency translation
and the inclusion of the comparative impact of acquisitions
and exclusion of disposals.
US
United States of America.
US Dollars,
$, or cents or ¢
References to US currency. 1 cent is equivalent to one hundredth
of US$1.
Unless the context indicates otherwise, the following terms have
the meanings shown below:
252
Smith+Nephew
Annual Report 2022
Index
Accounting policies
168–220
Accounts presentation
248
Acquisitions
10, 15–17, 20, 74,
217–219, 234–235
Acquisition and disposal related items
19, 174, 238–239
American Depositary Shares
241
Articles of Association
245–247
Audit fees
104, 177
Board
86–89
Business overview
4–5, 225–228
Business segment information
28–45, 171–175
Cash and borrowings
194–196
Chair’s statement
6–7
Chief Executive Officer’s review
8–11
Company balance sheet
165
Company notes to the accounts
223–228
Contingencies
204–206, 224
Critical judgements and estimates
169–170
Cross-reference to Form 20-F
249
Currency fluctuations
235
Currency translation
170–171
Deferred taxation
180–181
Directors’ Remuneration Report
116–145
Directors’ responsibility statement
147
Dividends
20, 215, 241–242
Earnings per share
IFC, 19, 181–182
Employee share plans
220
Executive team
89
Factors affecting results of operations
235
Financial instruments
197–203
Financial review
18–21
Free cash flow
239
Glossary of terms
252
Goodwill
185–186
Group balance sheet
165
Group cash flow statement
166
Group companies
225–228
Group history
229
Group income statement
164
Group notes to the accounts
168–220
Group overview
4–5, 229
Group statement of changes in equity
167
Group statement of comprehensive income
164
Independent auditor’s report
148–163
Intangible assets
187–189
Intellectual property disputes
206
Interest and other finance costs
177
Inventories
191
Investments
189
Investment in associates
189–190
Key Performance Indicators
16–17
Legal and other
175, 238–239
Legal proceedings
205–206
Leverage ratio
239
Liquidity and capital resources
21, 195
Manufacturing and quality
46–47
Medical education
26–27
Net debt
194
New accounting standards
168
Operating profit
175–176
Other finance costs
177
Our approach to stakeholders
81, 112–115
Our global markets
24–25
Outlook and trend information
24–25, 16–17, 18–21, 230–235
People/Employees
59
Post balance sheet events
220
Provisions
204–206
Property, plant and equipment
183–184
Regulation
47, 76
Related party transactions
220, 229
Research & development
75
Restructuring and rationalisation expenses
174, 238–239
Retirement benefit obligations
206–212
Return on invested capital (ROIC)
21, 240
Risk factors
230–235
Risk report
69–80
SASB reporting
250–251
Share-based payments
220
Share capital
213–214
Shareholder information
240–248
Staff costs and employee numbers
177
Stakeholder statement
112–115
Statement of compliance
84
Strategy for Growth
8–11
Sustainability
56–68
Taxation
178–181
Taxation information for shareholders
243–245
TCFD reporting
64–67
Total shareholder return
143
Trade and other payables
193
Trade and other receivables
192–193
Treasury shares
214
253
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
References from Franchise areas
References from Orthopaedics (pages 28–33)
1
Date A, Panthula M, Bolina A. Comparison of clinical and
radiological outcomes in intertrochanteric fractures treated
with InterTAN nail against conventional cephalomedullary
nails: a systematic review. Future Sci OA. 2020;7(1):FSO668.
2
Onggo JR, Nambiar M, Onggo JD, Ambikaipalan A, Singh PJ,
Babazadeh S. Integrated dual lag screws versus single lag
screw cephalomedullary nail constructs: a meta-analysis
and systematic review. Hip Int. 2021.
3
Smith+Nephew 2019. Technical Memo TM-19-067.
4
Kienapfel H, Sprey C, Wilke A, Griss P. Implant fixation
by bone ingrowth. J Arthroplasty. 1999;14(3):355–368.
5
Bobyn J, Pilliar R, Cameron H, Weatherly G. The optimum
pore size for the fixation of porous-surfaced metal
implants by the ingrowth of bone. Clin Orthop Relat Res.
1980(150):263–270.
6
Williams M, Dodd J, Milner R, Hall M, Morrison ML.
Osseointegration of an additive-manufactured,
randomized porous structure in a load-bearing animal
model. Presented at ORS 2016 Annual Meeting,
Poster No. 2005.
7
Peters RM, Van Steenbergen LN, Stevens M, et al. The effect
of bearing type on the outcome of total hip arthroplasty.
Acta Orthopaedica. 2018; 89(2):163–169.
8
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.
9
Australian Orthopaedic Association National Joint
Replacement Registry (AOANJRR) Hip, Knee & Shoulder
Arthroplasty: 2022 Annual Report. Figure HT40. Available
at http://aoanjrr.sahmri.com/annual-reports-2022
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10 The Orthopaedic Data Evaluation Panel (ODEP).
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11 Naudie D, et al. J Arthroplasty. 2013;28(8 Suppl):48–52.
12 Bourne R, et al. Orthopedics. 2008;31(12 Suppl 2).
13 Iriuchishima T, Ryu K. A Comparison of Rollback Ratio
between Bicruciate Substituting Total Knee Arthroplasty
and Oxford Unicompartmental Knee Arthroplasty.
J Knee Surg. 2018;31(6):568–572.
14 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(2):650–654.
15 Carpenter RD, Brilhault J, Majumdar S, Ries MD. Magnetic
resonance imaging of in vivo patellofemoral kinematics
aſter total knee arthroplasty. Knee. 2009;16(5):332–336.
16 Grieco TF, Sharma A, Dessinger GM, Cates HE, Komistek RD.
In Vivo Kinematic Comparison of a Bicruciate Stabilized
Total Knee Arthroplasty and the Normal Knee Using
Fluoroscopy. J Arthroplasty. 2018;33(2):565–571.
17 Murakami K, Hamai S, Okazaki K, et al. In vivo kinematics
of gait in posterior-stabilized and bicruciate-stabilized
total knee arthroplasties using image-matching techniques.
Int Orthop. 2018;42(11):2573–2581.
18 Smith LA, Nachtrab J, LaCour M, et al. In Vivo Knee
Kinematics: How Important Are the Roles of Femoral
Geometry and the Cruciate Ligaments? J Arthroplasty.
2021;36:1445–1454.
19 Catani F, Ensini A, Belvedere C, et al. In vivo kinematics
and kinetics of a bi-cruciate substituting total knee
arthroplasty: a combined fluoroscopic and gait analysis
study. J Orthop Res. 2009;27(12):1569–1575.
20 Parikh A, Hill P, Pawar V, Sprague J. Long-term Simulator
Wear Performance of an Advanced Bearing Technology
for THA. Poster presented at: 2013 Annual Meeting
of the Orthopaedic Research Society. Poster no. 1028.
21 Papannagari R, Hines G, Sprague J, Morrison M. Long-term
wear performance of an advanced bearing technology
for TKA. Poster presented at: 2011 Annual Meeting of
the Orthopaedic Research Society. Poster no. 1141.
22 National Joint Registry for England, Wales and Northern
Ireland: 19th Annual Report. Table 3.H7. Available at
http://reports.njrcentre.org.uk. Accessed 12 December
2022. Fewer than 250 cases remained at risk at this
time point.
23 Australian Orthopaedic Association National Joint
Replacement Registry (AOANJRR). Hip, Knee & Shoulder
Arthroplasty: 2022 Annual Report. Adelaide: AOA, 2022.
24 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.
25 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.
26 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.
27 Data on file with Smith+Nephew and NAVIO technical
specification comparison. March 2020. Internal Report
ER0488 REVB.
28 Smith+Nephew 2020. Comparison of operating room
footprint for robotic-assisted knee arthroplasty systems.
Internal Report. EO.REC.PCS015.002.v1.
29 Gregori A, Picard F, Bellemans J, Smith JR, Simone A.
Handheld Precision Sculpting Tool for Unicondylar Knee
Arthroplasty. A Clinical Review. Poster presented at:
15th EFORT Congress; 4–6 June, 2014; London, UK.
30 Bollars P, Boeckxstaens A, Mievis J, Janssen D.
The Learning Curve and Alignment Assessment of an
Image-Free Handheld Robot in TKA: The First Patient Series
in Europe. Poster presented at: 19th Annual Meeting of the
International Society for Computer Assisted Orthopaedic
Surgery 2019; New York, USA.
31 Kopjar B, Schwarzkopf R, Chow J, et al. NAVIO Robotic
Assisted Surgical System for Total Knee Arthroplasty
Using JOURNEY II Guided-Motion Total Knee System.
Poster presented at: ISTA 2–5 October, 2019; Toronto,
Canada.
32 Geller JA, Rossington A, Mitra R, Jaramaz B, Khare R,
Netravali NA. Rate of learning curve and alignment
accuracy of an image-free handheld robot for total
Knee Arthroplasty. European Knee Society Arthroplasty
Conference;2019; Valencia, Spain.
33 Gregori A, Picard F, Lonner JH, Smith JR, Jaramaz B.
Accuracy of Imageless Robotically Assisted Unicondylar
Knee Arthroplasty. International Society for Computer
Assisted Orthopaedic Surgery (CAOS) 15th Annual
Meeting; 2015; Vancouver, Canada.
34 Ponzio DY, Lonner JH. Preoperative Mapping in
Unicompartmental Knee Arthroplasty Using Computed
Tomography Scans Is Associated with Radiation Exposure
and Carries High Cost. J Arthroplasty. 2015;30(6):964–967.
*
Compared to NAVIO (trademark diamond) Surgical System.
** With use of handpiece.
References from Sports Medicine & ENT (pages 34–39)
1
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. Muscles, Ligaments Tendons J
2016;6(1):16–25.
2
McIntyre LF, McMillan S, Trenhaile SW, Bishai SK, Bushnell
BD. Full-Thickness Rotator Cuff Tears Can Be Safely Treated
With a Resorbable Bioinductive Bovine Collagen Implant:
One-Year Results of a Prospective, Multicenter Registry.
Arthrosc Sports Med Rehabil. 2021 Aug 20;3(5):e1473-e1479.
3
Bushnell BD, Connor P, Harris HW, Ho CP, Trenhaile SW,
Abrams JS. Two-year outcomes with a bioinductive
collagen implant used in augmentation of arthroscopic
repair of full-thickness rotator cuff tears: Final results of
a prospective multi-center study. J Shoulder Elbow Surg.
2022 Jul 1:S1058–2746.
4
Micheloni GM, Salmaso G, Zecchinato G, Giaretta S,
Barison E, Momoli A. Bio-inductive implant for rotator cuff
repair: our experience and technical notes. Acta Biomed.
2020 Dec 30;91(14-S).
5
Thon SG, O’Malley L 2nd, O’Brien MJ, Savoie FH 3rd.
Evaluation of Healing Rates and Safety With a Bioinductive
Collagen Patch for Large and Massive Rotator Cuff Tears:
2-Year Safety and Clinical Outcomes. Am J Sports Med.
2019 Jul;47(8):1901–1908.
6
Arnoczky SP, Bishai SK, Schofield B, Sigman S, Bushnell BD,
Hommen JP, Van Kampen C. Histologic Evaluation of Biopsy
Specimens Obtained Aſter Rotator Cuff Repair Augmented
With a Highly Porous Collagen Implant. Arthroscopy.
2017 Feb;33(2):278–283.
7
Camacho-Chacon JA, Cuenca-Espierrez J, Roda-Rojo V,
Martin-Martinez A, Calderon-Meza JM, Alvarez-Alegret R,
Martin-Hernandez C. Bioinductive collagen implants
facilitate tendon regeneration in rotator cuff tears.
J Exp Orthop. 2022 Jun 8;9(1):53.
8
Bushnell BD, Bishai SK, Krupp RJ, McMillan S, Schofield BA,
Trenhaile SW, McIntyre LF. Treatment of Partial-Thickness
Rotator Cuff Tears With a Resorbable Bioinductive Bovine
Collagen Implant: 1-Year Results From a Prospective
Multicenter Registry. Orthop J Sports Med. 2021 Aug
13;9(8).
9
Dai A, Campbell A, Bloom D, Baron S, Begly J, Meislin R.
Collagen-Based Bioinductive Implant for Treatment
of Partial Thickness Rotator Cuff Tears. Bull Hosp Jt Dis
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10 Schlegel TF, Abrams JS, Angelo RL, Getelman MH, Ho CP,
Bushnell BD. Isolated bioinductive repair of partial-
thickness rotator cuff tears using a resorbable bovine
collagen implant: two-year radiologic and clinical outcomes
from a prospective multicenter study. J Shoulder Elbow
Surg. 2021 Aug;30(8):1938–1948.
11 Yeazell S, Lutz A, Bohon H, Shanley E, Thigpen CA,
Kissenberth MJ, Pill SG. Increased stiffness and reoperation
rate in partial rotator cuff repairs treated with a bovine
patch: a propensity-matched trial. J Shoulder Elbow Surg.
2022 Jun;31(6S):S131–S135.
12 Bokor DJ, Sonnabend D, Deady L et al. Preliminary
investigation of a biological augmentation of rotator cuff
repairs using a collagen implant: a 2-year MRI follow-up.
MLTJ. 2015;5(3):144–150.
13 McIntyre L, Bishai SK, Brown PB, Bushnell BD, Trenhaile SW.
Patient-Reported Outcomes Following Use of a
Bioabsorbable Collagen Implant to Treat Partial and
Full-Thickness Rotator Cuff Tears. Arthroscopy. 2019
35(8):2262–2271.
14 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. Muscles, Ligaments Tendons J
2016;6(1):16–25.
254
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Annual Report 2022
13 Smith+Nephew 2007. Antimicrobial Activity of Allevyn Ag
Non-Adhesive Dressing against a Broad Spectrum of
Microorganisms. Internal Report. DOF 0703006.
14 Smith+Nephew 2007. Antimicrobial activity of ALLEVYN Ag
dressings against a broad spectrum of wound pathogens
using a dynamic shake flask method. Internal Report.
DOF 0707052.
15 Smith+Nephew 2008. A multi-centre in-market evaluation
of ALLEVYN Ag dressings. Internal Report. SR/CIME/009.
16 Smith+Nephew 2018. PMCF Research for Allevyn Ag
Adhesive. Internal Report. PMS-273-01.
17 Smith+Nephew 2007. Antimicrobial Activity of ALLEVYN Ag
Adhesive Dressing Against a Broad Spectrum of
Microorganisms. Internal Report. DOF 0703007.
18 Moore Z et al. Wounds International. 2022;13(2):32–8.
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21 Spinks J. Self care in urinary incontinence. SelfCare.
2011;2(6):160–166.
22 Smith+Nephew 2016.Wound Model Testing of New
ALLEVYN Life Gen2 wcl Dressing using Horse Serum at a
Flow Rate Modelling that of a Moderately Exuding Wound.
DS/14/303/R.
23 Smith+Nephew 2016. Product Performance of Next
Generation ALLEVYN Life Internal Report. (HVT080)
GMCA-DOF/08.
24 Lisco C. Evaluation of a new silicone gel-adhesive
hydrocellular foam dressing as part of a pressure ulcer
prevention plan for ICU patients. In: WOCN; 2013.
25 Rossington A, Drysdale K, Winter R. Clinical performance
and positive impact on patient wellbeing of ALLEVYN Life.
Wounds UK. 2013;9(4):91–95.
26 Stephen-Haynes J, Bielby A, Searle R. The clinical
performance of a silicone foam in an NHS community trust.
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27 Simon D, Bielby A. A structured collaborative approach
to appraise the clinical performance of a new product.
Wounds UK. 2014;10(3):80–87.
28 Smith+Nephew 2012. Simulated Wound Model Testing
of ALLEVYN Life and Mepilex Border. Internal Report.
DS/12/130/DOF.
29 Smith+Nephew. Subjective comparison of masking ability
of the New ALLEVYN LIFE versus Current ALLEVYN LIFE
by Healthcare Professionals. Internal Report. 2016;
DS/16/061/R.
30 Lavery et al. Int Wound J. 2014; 11(5): 554–560.
31 McGinness K, Kurtz Phelan DH. Wounds. 2018; 30(4):
90–95.
32 Nherera et al. Ostomy Wound Manage. 2017;63(12):38–47.
33 Dowsett C, Hampton K, Myers D, Styche T. Use of PICO to
improve clinical and economic outcomes in hard-to-heal
wounds. Wounds International. 2017;8(2):52–58.
34 Kirsner R, Dove C, Reyzelman A, Vayser D, Jaimes H. A
Prospective, Randomised, 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 Repair Regen. 2019;27(5):519–529.
35 Saunders C, Nherera LM, Horner A, Trueman P. Single-Use
negative-pressure wound therapy versus conventional
dressings for closed surgical incisions: systematic literature
review and meta-analysis. BJS Open. 2021;0(0):1–8.
36 Gilchrist B, Robinson M, Jaimes H. Performance, safety,
and efficacy of a single use negative pressure wound
therapy system for surgically closed incision sites and
skin graſts: A prospective multi-centre follow-up study.
Paper presented at: SAWC; 2020; Virtual.
15 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.
2018 27(2):242–251.
16 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.
17 Bokor DJ, Sonnabend D, Deady L et al. Preliminary
investigation of a biological augmentation of rotator cuff
repairs using a collagen implant: a 2-year MRI follow-up.
MLTJ. 2015;5(3):144–150.
18 Smith+Nephew 2019. An overview of the outcomes
associated with the standard of care for the surgical
treatment of rotator cuff tears. Internal Report EO/SPM/
REGENETEN/005/v1.
19 Chahla J, Liu JN, Manderle B, et al. Bony ingrowth of
coil-type open-architecture anchors compared with
screw-type PEEK anchors for the medial row in rotator
cuff repair: a randomized controlled trial. Arthroscopy.
2019 Dec 3. Epub ahead of print.
20 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.
21 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.
22 Smith+Nephew 2016. Healicoil Regenesorb Suture
Anchor – a study to assess implant replacement by
bone over a 2 year period. NCS248.
23 Konan S, Haddad F. Outcomes of Meniscal Preservation
Using All-inside Meniscus Repair Devices. Clin Orthop
Relat Res. 2010;468:1209–1213.
24 Smith+Nephew 2021.Validation, FAST-FIX FLEX.
Internal Report. 15010267 Rev A.
25 Smith+Nephew 2021.Validation, FAST-FIX FLEX.
Attachment B. Internal Report. 15010267 Rev A.
26 Smith+Nephew 2021. FAST-FIX FLEX-Surgeon Surveys.
Internal Memo.
27 Saliman, JD. Circumferential Compression Stitch for
Meniscus Repair. Arthroscopy Tech. 2013; V2(3); e257–262.
28 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.
29 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.
30 Ruiz Iban MA, Navlet MG, Marco SM, et al. The Effect
on healing rate of the addition of a bioinductive implant
to a rotator cuff repair. Preliminary report presented at:
The European Society for Surgery of the Shoulder and
Elbow (SECEC) Annual Congress; September 7–9,
2022; Dublin, Ireland.
31 ArthroCare 2014.Comparative Performance of the
FLOW 50 Wand and the Predicate Wands in Tissue Models.
P/N 52918-01.
32 Spahn G, Kahl E, Muckley T, Hofmann GO, Klinger HM.
Arthroscopic knee chondroplasty using a bipolar
radiofrequency-based device compared to mechanical
shaver: results of a prospective, randomized, controlled
study. Knee Surg Sports Traumatol Arthrosc.
2008;16(6):565–573.
33 Data on file at Smith+Nephew, report 15005165.
34 Smith+Nephew 2017. Coblation Dissection Versus
Monopolar Dissection – A Systematic Review and
Meta-analysis P/N 91999 Rev. A.
35 Temple RH, Timms MS. Paediatric coblation tonsillectomy.
Int J Pediatr Otorhinolaryngol. 2001;61(3):195–198.
36 Smith+Nephew 2019. HALO and PROCISE XP Peak
Electrode Temperature, ENC053 P/N 108740 Rev. A.
37 Roje Z, Racic G, Dogas Z, Pesutić Pisac V, Timms M.
Postoperative morbidity and histopathologic
characteristics of tonsillar tissue following coblation
tonsillectomy in children: A prospective randomized
single-blind study. Coll Antropol. 2009;33:293–298.
38 ArthroCare 2014. EVAC 70 Xtra Comparative Thermal
Measurement Bench-top Study P/N 60735-01 Rev. A.
39 ArthroCare 2014. PROCISE XP Comparative Thermal
Measurement Bench-Top Study P/N 60736-01 Rev. A.
40 Magdy EA, Elwany S, El-Daly AS, Abdel-Hadi M, Morshedy
MA. Coblation tonsillectomy: A prospective, double-blind,
randomised, clinical and histopathological comparison
with dissection-ligation, monopolar electrocautery and
laser tonsillectomies. J Laryngol Otol. 2008;122:282–290.
41 EA/ENT/COBLATION/002/v4.
42 Lustig LR, Ingram A, Vidrine M, et. al. In-Office
Tympanostomy Tube Placement in Children Using
Iontophoresis and Automated Tube Delivery.
Laryngoscope 130; S1-S9, 2020. Satisfaction results
from parents of children who participated in the
Tula pivotal clinical study, n=201.
*
Compared to predicate device.
**
The REGENETEN Implant is cleared for use on any tendon
where there is not substantial loss of tendon tissue.
REGENETEN Bone Anchors are only indicated for use
in rotator cuff repair. Published clinical outcomes are
for rotator cuff. The REGENETEN Implant is currently
approved for use in treating Gluteus Medius and Achilles
tears only in the U.S.
*** As compared to mechanical debridement for knee
chondroplasty; n=60; p<0.001.
References from Advanced Wound Management
(pages 40–45)
1
Smith+Nephew 2016.New ALLEVYN Life Gen2 wcl –
Physical Testing. Internal Report. DS/15/025/R.
2
Rossington A, Drysdale K, Winter R. Clinical performance
and positive impact on patient wellbeing of ALLEVYN Life.
Wounds UK. 2013;9(4):91–95.
3
Smith+Nephew 2018. Use of Moisture Vapour Permeability*
(MVP) and Moisture Vapour Transmission Rate** (MVTR)
data to support product claims referring to moist wound
healing. Internal Report. EO.AWM.PCSgen.001.v2.
4
Smith+Nephew 20 June 2016.A Randomised Cross-Over
Clinical Evaluation to Compare Performance of ALLEVYN™
Life and Mepilex® Border Dressings on Patient Wellbeing-
Related Endpoints. Internal Report. CE/047/ALF.
5
Smith+Nephew 14 June 2012. Odour reducing properties
of ALLEVYN Life. Internal Report. DS/12/127/DOF.
6
Smith+Nephew 2021. Internal Report. EA/AWM/
ALLEVYN/001v4.
7
Smith+Nephew Internal Report. 151008.
8
Nherera LM et al. Wound Repair Regen. 2017;25(4):707–721.
9
Smith+Nephew Internal Report. RR-WMP07330-10-03.
10 Skog E et al. British Journal of Dermatology. 1983;109:77–83.
11 Fitzgerald DJ et al. Wound Repair Regen. 2016;25(1):13–24.
12 Roche ED, Woodmansey EJ, Yang Q, et al. Cadexomer iodine
effectively reduces bacterial biofilm in porcine wounds
ex vivo and in vivo. Int Wound J. 2019;16(3):674–83.
255
Smith+Nephew
Annual Report 2022
STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION
37 Hurd T, Trueman P, Rossington A. Use of a Portable,
Single-use Negative Pressure Wound Therapy Device
in Home Care Patients with Low to Moderately Exuding
Wounds: A Case Series. Ostomy Wound Manage.
2014;60(3):30–36.
38 National Scorecard on Hospital-Acquired Conditions,
Agency for Healthcare Research and Quality (AHRQ).
January 2019 update. AHRQ National Scorecard on
Hospital-Acquired Conditions Updated Baseline Rates
and Preliminary Results 2014–2017.
39 Agency for Healthcare Research and Quality website.
Preventing pressure ulcers in hospitals: a toolkit for
improving quality of care. Updated October 2014.
Accessed February 2021. https://www.ahrq.gov/
professionals/systems/hospital/pressureulcertoolkit/
putool1.html
40 Wassel C, Delhougne G, Gayle J et al. Risk of readmissions,
mortality, and hospital-acquired conditions across
hospital-acquired pressure injury (HAPI) stages in a
US National Hospital discharge database. Int Wound J.
2020; 1–11.
41 Schutt SC, Tarver C, Pezzani M. Pilot study: Assessing
the effect of continual position monitoring technology
on compliance with patient turning protocols. Nurs Open.
2017;5(1):21–28.
42 Pickham D, Berte N, Pihulic M, Valdez A, Mayer B, Desai M.
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;80:12–19.
43 Klaeb M, Kra K, Walters B, Lowe J, Cooley A. The Influence
of Wearable Technology on Nursing Attitudes and
Adherence to Patient Turning and Repositioning. Poster
presented at: Patient Handling and Mobility Annual
Conference; March 5–March 7, 2019; Orlando, Florida, USA.
44 Forni C, D’alessandro F, Gallerani P, et al. Effectiveness
of using a new polyurethane foam multi-layer dressing
in the sacral area to prevent the onset of pressure ulcer in
the elderly with hip fractures: A pragmatic randomised
controlled trial. Int Wound J. 2018;15(3):1–8.
45 Smith+Nephew 2018.Pressure Redistribution Testing of
ALLEVYN Life vs Mepilex Border and Optifoam Gentle SA.
Internal Report. DS/18/351/R
46 Smith+Nephew 2019. Properties of ALLEVYN LIFE
advanced wound care dressing that can contribute to
the effective use as part of a Pressure Injury Prevention
protocol. Internal Report. RD/19/177.
47 Cunarro Alonso JM, Martinez Sanchez P, Puerta Morales G.
Use of the non-irritating skin protector No Sting Skin Prep
in a series of cases in the social health field. Poster presented
at: XIII National Symposium on Pressure Ulcers and Wounds
Heritage2010; Spain.
48 Francisco JGJ, Del Mar AGM, Maria PPJ, Enric TIBJ,
Jesus MM, Javier EMF. Assessment of a new non-irritating
skin protector for different skin disorders. Poster presented
at: XIII National Symposium on Pressure Ulcers and Wounds
Heritage2010; Spain.
49 Porras Pastor JM, Roman Manzano A, Jiminez Garcia JF,
Estevez Ferron V, Segado Manzuco D, Galdeano Fernandez N.
Effectiveness of a non-irritating skin protectant in a series
of clinical cases in primary care. Poster presented at:
XIII National Symposium on Pressure Ulcers and Wounds
Heritage2010; Spain.
50 Segovia Gomez T, Bermejo Martinez M, Montero de la
Pena MV, Arrontes Cabellero G, Segade Alvarez MJ,
Munoz Garcia L. Protection and treatment of perilesional
skin at risk from external contaminants or forces with
a non-irritating skin protector in hospital patients.
Poster presented at: XIII National Symposium on
Pressure Ulcers and Wounds Heritage2010; Spain.
51 European Pressure Ulcer Advisory Panel, National
Pressure Injury Advisory Panel and Pan Pacific Pressure
Injury Alliance. Prevention and Treatment of Pressure
Ulcers/Injuries: Clinical Practice Guideline. Emily Haesler
(Ed.) EPUAP/NPIAP/PPPIA: 2019.
52 Smith+Nephew 2021. Clinical Support App Pilot
Survey Results. Internal Report. CSD. AWM.21.002.
Patient testimonials (pages 30, 36, 42)
These patient testimonials represent the individual patient’s
own opinions, findings, beliefs and/or experiences. 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 Franchise areas
continued
256
Smith+Nephew
Annual Report 2022
Financial calendar
Annual General Meeting
The Company’s Annual General Meeting (‘AGM’) will
be held on Wednesday, 26 April 2023 at 12:00pm at
Smith+Nephew Academy London, Building 5, Croxley
Park, Hatters Lane, Watford, Hertfordshire, WD18 8YE.
Please refer to the Notice of Meeting for detailed information on how to vote
and submit your questions.
The meeting will commence at 12:00pm with doors opening from 11.00am.
Registered shareholders have been sent either a Notice of Annual General
Meeting or notification of availability of the Notice of Annual General Meeting.
This report was printed by Park Communications, a
certified carbon neutral print company, on Galerie Satin
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ensures responsible use of the world’s forest resources.
Park works to the EMAS standard and its Environmental
Management System is certified to ISO 14001. This
publication has been manufactured using 100% offshore
wind electricity sourced from UK wind. 100% of the inks
used are vegetable oil based, 95% of press chemicals are
recycled for further use and, on average 99% of any
waste associated with this production will be recycled
and the remaining 1% used to generate energy. This is a
climate neutral print product for which carbon emissions
have been calculated and offset by supporting
recognised carbon offset projects.
Designed and Produced by Radley Yeldar.
2023
Annual General Meeting
26 April
First quarter Trading Report
26 April
Payment of 2022 final dividend
17 May
Half-year results announced
3 August
1
Third quarter Trading Report
2 November
Payment of 2023 interim dividend
October/November
2024
Full year results announced
February
1
Annual Report available
February/March
Annual General Meeting
April
1
Dividend declaration dates.
CBP017447
