Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14978
Smith & Nephew plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
15 Adam Street, London WC2N 6LA
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name on each exchange on which registered | |
| American Depositary Shares Ordinary Shares of 20¢ each |
New York Stock Exchange New York Stock Exchange* |
| * | Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 915,447,263 Ordinary Shares of 20¢ each
Indicate by check mark if the registrant is a well seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨
If this Report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:
Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
| ¨ U.S. GAAP |
x |
International Financial Reporting Standards as issued by the International Accounting Standards Board | ¨ Other |
If “Other” has been checked to the previous question indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨
If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Table of Contents
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
| |||||||
|
|
OUR BUSINESS |
OUR PERFORMANCE |
GOVERNANCE |
OUR FINANCIALS | ||||
Smith & Nephew supports healthcare professionals in more than 100 countries in their daily efforts to improve the lives of their patients.
We do this by taking a pioneering approach to the design of our advanced medical products and services, by securing wider access to our diverse technologies for more customers globally, and by enabling better outcomes for patients and healthcare systems.
Front cover image:
The ACCU-PASS¯ DIRECT was designed with size in mind, allowing surgeons to suture through the smallest tissues. To keep
the operative site in focus, our Arthroscopes and VideoArthrocopes utilise wide-angle lens technology for optimal depth of field.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
1
| ||
| ||||
What’s in this report
|
CHAIRMAN’S STATEMENT |
|
CHIEF EXECUTIVE OFFICER’S REVIEW
|
|
CHIEF FINANCIAL OFFICER’S REVIEW
|
| |||||||||
|
|
|
| ||||||||||||
|
|
|||||||||||
|
OUR GLOBAL BUSINESS ON PAGE 8 |
|
OUR BUSINESS MODEL CREATES VALUE ON PAGE 10 |
|||||||||
| Strategic report includes pages 2-49
|
||||||||||||||||||
|
|
|
|
||||||||||||||||
|
2 |
|
16 |
|
OTHER INFORMATION | ||||||||||||||
| 3 4 6 |
28 36 38 40 42 |
104 | Directors’ responsibilities for the accounts* | |||||||||||||||
| 105 | Independent auditor’s US report | |||||||||||||||||
| 106 | Independent auditor’s UK report | |||||||||||||||||
| 111 | Critical accounting policies | |||||||||||||||||
| 112 | Group accounts | |||||||||||||||||
| 119 | Notes to the Group accounts | |||||||||||||||||
|
|
|
167 | Company accounts | |||||||||||||||
|
8 |
|
50 |
|
168 | Notes to the Company accounts | |||||||||||||
| 10 | Our business model | 54 | Our Leadership Team* | 175 | Other financial information | |||||||||||||
| 12 | Our KPIs | 68 | Corporate Governance Statement* | 185 | Information for shareholders | |||||||||||||
| 14 | Our global market | 72 | Audit Committee Report* | |||||||||||||||
| 78 | Directors’ Remuneration Report |
|
FULL FINANCIAL STATEMENTS CONTENTS ON PAGE 103 | |||||||||||||||
| * | These sections and pages 49, 113, 115, 117 and 171 to 194 form the Director’s Report. | |||||||||||||||||
Table of Contents
| 2
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
A strong performance, demonstrating our
actions are translating into positive outcomes
| Dear Shareholder,
I am delighted to present Smith & Nephew’s 2015 Annual Report. During the year the Group made good financial and strategic progress. The increase in underlying revenue growth, trading profit margin and adjusted earnings year-on-year reflect management’s actions to improve both our commercial performance and operational efficiency.
Revenue was $4.6 billion, up 4% on an underlying basis before adjusting for currency and the benefits from acquisitions. Trading profit was $1.1 billion. The trading profit margin was 23.7%, up 80bps on the previous year. Adjusted earnings per share were 85.1¢, up 2%.
The Board is proposing a final dividend for the year of 19.0¢ per share, giving a total dividend distribution for 2015 of 30.8¢, up 4% year-on-year and slightly ahead of earnings growth, reflecting our confidence in the business. |
Strategy
We have continued to pursue the same strategy as in previous years, building a strong position in Established Markets, focusing on Emerging Markets, innovating for value, simplifying and improving our operating model and supplementing organic growth with acquisitions. The Board’s oversight ensures that management remains focused on these strategic priorities and that investments are made in line with these objectives
In 2015, the Board has continued our programme of understanding the business more deeply. We scheduled a number of sessions at the Board meetings held in 2015 looking at different aspects of our business, including reviews of our European business with a focus on Iberia, our Emerging Markets business with a focus on China, and the development of products for the mid-tier. Our Board site visit to Durban, South Africa gave us insights into one of our oldest and fastest growing overseas businesses.
Our annual Strategy Review in September included presentations and discussions on a wide range of different areas of our business. This meeting underpins our confidence in management’s strategic priorities and future progress. |
Members of the Board also attend significant management meetings. For instance, during 2015, I attended the Managing Director’s meeting and Robin Freestone attended the CEO led meeting for top talent. We also attend investor presentations.
Corporate governance
As a Board, we feel strongly that good corporate governance lies at the heart of a well-run Company. Openness and transparency, accountability and responsibility should run through everything that we do, both as a Board and throughout the business as a whole. The Board and I aim to set the tone at the top which pervades throughout the organisation.
Later in this report, as well as the standard corporate governance disclosures we are required to make, you will find reports from Ian Barlow, Michael Friedman, myself and Joseph Papa, the Chairmen of our Board Committees on the activities of these committees throughout the year (pages 68 to 79). These reports explain where we focused our work in 2015 and our plans for 2016.
Risk management and the Viability Statement
During 2015, we spent time considering what work would need to be done to make us feel comfortable in making the new Viability Statement. Both the Board and the Audit Committee received papers from the Group Risk Officer during the year and we discussed risk in depth at our Annual Strategy Meeting in September. |
|
Smith & Nephew’s transformation is delivering stronger growth.
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
3
| ||
|
| ||||
|
|
||||
Table of Contents
| 4
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OFFICER’S REVIEW
|
| 2015 was a good year
These strong results demonstrate the anticipated positive effects of our actions coming through across the Group. Where we have invested to improve existing businesses we are beginning to reap the benefits.
|
Dear Shareholder,
Smith & Nephew delivered an improved performance in 2015 through focused innovation, better commercial execution and greater efficiency. We began to reap the benefits of our investments and operational improvements across the Group as we continued to deliver against our strategic priorities.
A stronger commercial performance
Geographically, we drove growth in all of our regions in 2015. In our Established Markets we delivered 5% growth in the United States, our largest market, a significant improvement on the previous year. We successfully stabilised our European business which delivered a better outturn year-on-year, and our Australia, New Zealand and Japan region delivered good growth, led by the Advanced Wound Management businesses.
In the Emerging Markets we delivered 11% revenue growth in 2015 despite the slow-down in China. Whilst we expect growth in China to remain below previous levels in the near term, it remains a very attractive market and we are committed to building our business here. We continued to successfully deliver strong revenue growth across the rest of the Emerging Markets.
Global franchise highlights in 2015 included the performance of Sports Medicine, which was strengthened by the ArthroCare acquisition. The Advanced Wound Management businesses delivered a significantly better outcome following new management initiatives. Orthopaedic Reconstruction grew ahead of the market driven by our Knee Implant franchise. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
5
| ||
|
| ||||
| 1 |
The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. | |||
| 2 |
This is a non-GAAP financial measure. Explanations of non-GAAP financial measures are provided on pages 177 to 178. |
Table of Contents
| 6
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OFFICER’S REVIEW
|
| Re-invigorating Smith & Nephew
Striving to achieve ever greater efficiencies is an important element of Smith & Nephew’s strategy. It liberates resources for investment, and benefits our margin.
|
Dear Shareholder,
Group revenue in 2015 was $4,634 million (2014 – $4,617 million), an increase of 4% on an underlying basis and flat on a reported basis. Foreign exchange movements reduced revenue by 8% partially offset by acquisitions, which added 4% to the reported growth rate.
Revenue growth was 5% in the US, 1% across our Other Established Markets and 11% in the Emerging Markets.
Trading profit was $1,099 million (2014 – $1,055 million). The trading profit margin was 23.7% (2014 – 22.9%), up 80bps, reflecting the benefits from the Group Optimisation programme and synergies from the ArthroCare acquisition.
Reported operating profit of $628 million (2014 – $749 million) is after integration and acquisition costs, as well as restructuring and rationalisation costs, amortisation and impairment of acquired intangibles and legal and other items incurred in the full year. The 2015 operating profit was lowered by a $203 million accounting charge relating to a legal settlement and provision explained below.
The tax rate for the full year is 26.8% on trading results (2014 – 27.7%), a 90bps reduction year-on-year. We expect the tax rate on trading results to be 26.5% or slightly lower for 2016, barring any changes to tax legislation.
Adjusted earnings per share was 85.1¢ (170.2¢ per American Depositary Share (‘ADS’)) compared to 83.2¢ last year, up 2%, which would have been up 9% at constant exchange rates. Basic earnings per share was 45.9¢ (91.8¢ per ADS) (2014 – 56.1¢), primarily in recognition of the metal-on-metal accounting charge.
Trading cash flow was $936 million in the year. The trading profit to cash conversion ratio was 85% (2014 – 74%), a year-on-year improvement in working capital management.
Net debt was $1,361 million, down from $1,613 million at the end of Q4 2014. This represents a reported net debt/EBITDA ratio of 1.0x. The Blue Belt acquisition was completed after the year end for $279 million.
| |||
| 1 The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. 2 These are non-GAAP financial measures. Explanations of these non-GAAP financial measures are provided on pages 177 to 178. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
7
| ||
|
| ||||
| Legal settlement and provision
During the fourth quarter of 2015, Smith & Nephew settled the majority of US metal-on-metal hip claims, without admitting liability with the net cash cost after insurance recoveries being $25 million. These claims principally related to Smith & Nephew’s portfolio of modular metal-on-metal hip products (such as the R3 metal liner), which are no longer on the market.
We have taken an accounting charge of $203 million to cover both this net cost and also the present value of the estimated costs to resolve all other known and anticipated claims over the coming years. This amount does not include associated legal fees or any possible insurance recovery on these other claims as such recoveries cannot be recognised for accounting purposes until virtually certain. The Group carries considerable product liability insurance and we will continue to defend claims vigorously. The estimate is based on an actuarial model with assumptions relating to the number of claims and outcomes, and is subject to revision as circumstances evolve.
Capital returns
The efficient use of capital on behalf of shareholders is important to Smith & Nephew. The Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach is set out in our Capital Allocation Framework which we used to prioritise the use of cash and ensure an appropriate capital structure.
Our commitment, in order of priority, is to: |
Enhancing Group efficiency
We continue to simplify and improve our operating model, becoming more efficient in 2015. Our programme to realise more than $120 million of annual savings is progressing ahead of plan, and had delivered $100 million of annualised benefits at year end. The suspension of the Medical Device Excise Tax will present us with opportunities to accelerate investment in our quality and regulatory systems and health economics teams, particularly in support of the US market.
Acquisitions
We completed the acquisition of ArthroCare on 29 May 2014, further strengthening our Sports Medicine franchises. This business is performing in-line with our expectations. We are ahead of our plan to deliver $85 million of synergies by 2017 and have achieved almost all our targeted cost savings. Revenue synergies will continue to be delivered over the coming years.
Just after the year end, on 4 January 2016, we acquired Blue Belt Technologies for $279 million, giving us a leading position in the fast-growing area of orthopaedic robotics-assisted surgery. We expect strong revenue growth from Blue Belt Technologies. Investment in the combined R&D programmes and supportive clinical evidence will dilute Group trading profit margin by around 60bps in 2016, with the BlueBelt Technologies business becoming profitable in 2018. |
Outlook
In 2016, we expect to deliver continued good underlying revenue growth as we benefit from our investments in existing businesses, acquisitions and pioneering technologies.
We would have expected our trading profit margin to reach or exceed 24% in 2016, including the 60bps dilution from investing in the Blue Belt Technologies product pipeline. However, our margin will be reduced by a significant –120bps transactional currency headwind based on current exchange rates, as highlighted in our Q3 results.
We have a clear strategy that is re-invigorating Smith & Nephew and I am confident that we will continue to execute successfully in 2016 and beyond.
Yours sincerely,
Julie Brown Chief Financial Officer |
|
1. continue to invest in the business to drive organic growth;
2. maintain our progressive dividend policy;
3. realise acquisitions in-line with strategy; and
4. return any excess capital to shareholders.
This is underpinned by maintaining leverage ratios commensurate with solid investment grade credit metrics. |
| |||||||
Table of Contents
| 8 | SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Smith & Nephew is a leading global
medical technology business
We continue to invest in acquisitions that provide opportunities to supplement organic growth, strengthen our technology and product portfolios and further establish our business in the Emerging Markets.
|
TECHNOLOGY ACQUISITION
|
|
COLOMBIA ACQUISITION
|
|
RUSSIA ACQUISITION
| |||||||||
| Acquisition of Blue Belt Technologies, securing a leading position in the fast-growing area of orthopaedic robotics-assisted surgery. | Acquisition of EuroCiencia Colombia, Smith & Nephew’s sole distributor for orthopaedic reconstruction, trauma and sports medicine products in Colombia since 2006. | Acquisition of the trauma and orthopaedics business of DeOst LLC and DC LLC, a manufacturing company in the DeOst Group which has distributed Smith & Nephew’s products in Russia since 2009.
| ||||||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
9
| ||
|
| ||||
Table of Contents
| 10
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
We support healthcare professionals in their
daily efforts to improve the lives of their patients
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
11
| ||
|
| ||||
|
| ||||||||||
Table of Contents
| 12
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
How we performed
|
BUILD A STRONG POSITION |
FOCUS ON EMERGING MARKETS |
||||||||||||||
| IN ESTABLISHED MARKETS
|
||||||||||||||||
|
Established Markets for Smith & Nephew are Australia, Canada, Europe, Japan, New Zealand and the US.
Geographically, we delivered 5% growth in the United States, our largest market, a significant improvement on the previous year. We successfully stabilised our European business, which delivered a better outcome year-on-year, and our Australia, New Zealand and Japan region delivered good growth, led by the Advanced Wound Management businesses.
Global franchise highlights included good performances from Sports Medicine, strengthened by the ArthroCare acquisition; the Advanced Wound Management businesses, following new management initiatives; and Orthopaedic Reconstruction, which grew ahead of the market driven by our Knee Implant franchise.
We are further strengthening our commercial platform by aligning under a newly created role of Chief Commercial Officer, tasked with driving commercial excellence across the organisation. We are also bringing all of our US Orthopaedic Reconstruction, Sports Medicine, Trauma and Advanced Wound Management franchises under one leader, completing the roll-out of our single managing director model globally.
|
Our Emerging Markets represent those outside of the Established Markets, including the BRIC group of Brazil, Russia, India and China. These countries now represent 15% of Smith & Nephew’s revenue, up from 8% in 2010, reflecting our continuing effort to rebalance our business and build share in higher growth markets. The overall percentage of Group revenue in 2015 compared to 2014 has been impacted by the strengthening of the US dollar.
In the Emerging Markets we delivered 11% revenue growth in 2015 despite the significant slow-down in China. Whilst we expect growth in China to remain below previous levels in the near-term, it remains a very attractive market and we are committed to building our business there.
We continued to deliver strong revenue growth across the rest of the Emerging Markets, led by South Africa, India and the Middle East. Excluding China, Emerging Markets growth would have been in-line with the trend of the last five years.
We enhanced our commercial footprint and product portfolio. In Russia we acquired a trauma and orthopaedics distribution business that includes mid-tier manufacturing. In Colombia, one of the largest economies in Latin America, we acquired our distributor for orthopaedic reconstruction, trauma and sports medicine products.
|
|||||||||||||||
|
REVENUE FROM ESTABLISHED MARKETS1 |
REVENUE FROM EMERGING & INTERNATIONAL MARKETS1
|
|||||||||||||||
|
$3,919m |
+3% | $715m | +11% | |||||||||||||
|
|
|
|||||||||||||||
|
AS A PERCENTAGE OF GROUP REVENUE
|
||||||||||||||||
|
15% |
||||||||||||||||
|
|
||||||||||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
13
| ||
|
| ||||
|
INNOVATE FOR VALUE |
SIMPLIFY AND IMPROVE |
SUPPLEMENT ORGANIC |
||||||||||||||||
| OUR OPERATING MODEL
|
GROWTH WITH ACQUISITIONS
|
|||||||||||||||||
|
We continued to innovate for value in 2015. Through our Research and Development (‘R&D’) strategy we deliver pioneering products and services, and drive innovation across the markets we serve. Products such as the JOURNEY¯ II Total Knee System and our VERILAST¯ bearing surface provide our customers with unique features and successfully differentiate Smith & Nephew.
We launched many new products in 2015 and have a strong new product line-up for 2016 as the result of our internal programmes and recent acquisitions. We also made good progress with our innovative business models, including Syncera, our value solution for orthopaedic reconstruction. This completed its US pilot, and we now have a number of trained and fully operational customer sites. We are encouraged by the reception from healthcare providers.
The total investment in R&D in the year was reduced when we stopped the phase 3 programme for HP802-247 (announced 2014).
In 2015, we reiterated our commitment to innovation by announcing a single global R&D organisation to be led by a new President of Global R&D. With increased focus on R&D we will apply more resource to the development of disruptive products and services that increasingly define Smith & Nephew and will help drive our success in the future.
|
During 2014, we launched a Group Optimisation programme to target $120 million of efficiencies. We identified four main areas of activity:
1) Examining our supporting functions such as Finance, HR, IT and Legal to ensure that we are operating most effectively to support business growth.
2) Driving procurement savings to get the most value from the money we spend.
3) Optimising our footprint to ensure it matches our strategy and future aspirations.
4) Further simplifying our operating model, including aligning our management structure so that we can make decisions more quickly and effectively.
We have made significant progress delivering this programme, and at the end of 2015 were ahead of plan, having realised $100 million of annualised benefits.
We continue to look at opportunities to improve efficiency, creating global commercial and R&D organisations and implementing our single managing director model in the US at the start of 2016. The suspension of the Medical Device Excise Tax will present us with opportunities to accelerate investment in our quality and regulatory systems and health economics teams, particularly in support of the US market.
|
Smith & Nephew has established a successful acquisition track record in recent years. Our two largest acquisitions are performing strongly. With Healthpoint Biotherapeutics, acquired in 2012 for $782 million, our third year return on capital has exceeded our plan and also our weighted average cost of capital, despite certain issues we had to address with regard to facilities acquired. ArthroCare, acquired in 2014 for $1.5 billion, is performing in-line with our expectations in-line with our expectations. We are ahead of our plan to deliver $85 million of synergies by 2017 and have achieved almost all our targeted cost savings.
In 2015, we continued to invest in acquisitions that provide opportunities to supplement our organic growth, strengthening our technology and product portfolios and our Emerging Markets business. Blue Belt Technologies announced in October 2015, has given us a leading position in the fast growing area of robotics-assisted orthopaedic surgery. Its NAVIO¯ surgical system provides robotics-assistance in partial knee replacement surgery and we intend to expand it into total knee, bi-cruciate retaining knee and revision knee implants, potentially delivering significant further upside.
We also completed the acquisition of the ZUK¯ partial knee system in the US market during the year. This has given us access to many new customers and is highly complementary to Blue Belt Technologies.
|
||||||||||||||||
|
R&D EXPENDITURE1
|
TRADING PROFIT1,2
|
ACQUISITION PERFORMANCE
|
||||||||||||||||
| $222m
|
$1,099m +5%
|
Healthpoint | ||||||||||||||||
|
|
|
Third year return on capital exceeded our weighted average cost of capital. | ||||||||||||||||
|
AS A PERCENTAGE OF GROUP REVENUE
|
TRADING PROFIT MARGIN2
|
|||||||||||||||||
| 4.8%
|
23.7% +80bps
|
|||||||||||||||||
|
|
|
1 The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. 2 Explanations of these non-GAAP financial measures are provided on pages 177 to 178. |
||||||||||||||||
Table of Contents
| 14
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Our marketplace is driven by longer-term trends
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
15
| ||
|
| ||||
Table of Contents
| 16
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
The products we take to market
| Smith & Nephew has nine global product franchises.
|
Knee implants
|
Smith & Nephew offers an innovative range of products for specialised knee replacement procedures. Knee replacement surgery involves replacing the worn, damaged or diseased portion of a knee with an artificial joint. It is a routine operation for knee pain most commonly caused by arthritis. Every year more than two million patients receive total, partial or revision knee replacements.
Smith & Nephew’s knee systems include the LEGION¯/GENESIS¯ II Total Knee System, a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to revision and our JOURNEY II Family of Active Knees. JOURNEY II has been engineered to empower patients with a renewed active lifestyle by breaking through traditional knee replacement barriers and delivering function, motion and durability through PHYSIOLOGICAL MATCHINGTM.
These systems also feature VERILAST Technology, our advanced bearing surface. The LEGION Primary Knee with VERILAST Technology has been laboratory-tested to 30 years of simulated wear.
Our knee systems also utilise our VISIONAIRE¯ Patient-Matched Instrumentation. With VISIONAIRE Instrumentation, a patient’s MRI and X-rays are used to create customised cutting guides that allow the surgeon to achieve optimal mechanical axis alignment of the new implant. VISIONAIRE cutting guides also help to save time by reducing the number of procedural steps and instruments used in the operating room.
Our Knee Implant franchise delivered a strong performance in 2015. We grew revenue by 5% globally. In the US, our largest market, revenue growth of 6% was driven by our JOURNEY II Total Knee System and the benefits of a US marketing campaign for VERILAST Technology, featuring both hips and knees.
| ||||||||||||||||
| REVENUE BY PRODUCT |
||||||||||||||||||
|
|
||||||||||||||||||
| GLOBAL PRODUCT FRANCHISES | $4,634m | |||||||||||||||||
| A KNEE IMPLANTS | $883m | |||||||||||||||||
| B HIP IMPLANTS | $604m | |||||||||||||||||
| C SPORTS MEDICINE JOINT REPAIR | $606m | |||||||||||||||||
| D ARTHROSCOPIC ENABLING TECHNOLOGIES |
|
$573m | ||||||||||||||||
| E TRAUMA & EXTREMITIES | $497m | |||||||||||||||||
| F OTHER SURGICAL BUSINESSES | $205m | |||||||||||||||||
| G ADVANCED WOUND CARE | $755m | |||||||||||||||||
| H ADVANCED WOUND DEVICES | $167m | |||||||||||||||||
| I ADVANCED WOUND BIOACTIVES | $344m | |||||||||||||||||
| 2015 $ million |
2014 $ million |
2013 $ million |
||||||||||||||||
| A | KNEE IMPLANTS | 883 | 873 | 865 | ||||||||||||||
| B | HIP IMPLANTS | 604 | 654 | 653 | ||||||||||||||
| C | SPORTS MEDICINE JOINT REPAIR | 606 | 576 | 496 | ||||||||||||||
| D | ARTHROSCOPIC ENABLING TECHNOLOGIES | 573 | 542 | 441 | ||||||||||||||
| E | TRAUMA & EXTREMITIES | 497 | 506 | 486 | ||||||||||||||
| F | OTHER SURGICAL BUSINESSES | 205 | 147 | 74 | ||||||||||||||
| G | ADVANCED WOUND CARE | 755 | 805 | 843 | ||||||||||||||
| H | ADVANCED WOUND DEVICES | 167 | 192 | 213 | ||||||||||||||
| I | ADVANCED WOUND BIOACTIVES | 344 | 322 | 280 | ||||||||||||||
| Total | 4,634 | 4,617 | 4,351 | |||||||||||||||
| 1 The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. | ||||||||||||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
17
| ||
|
| ||||
| During 2015, we acquired the Zimmer® Unicompartmental High Flex Knee (‘ZUK’) system in the US market. ZUK is a clinically proven uni knee replacement introduced globally in 2004, and expands our access to the attractive area of partial knee joint reconstruction.
In early 2016 we completed the acquisition of Blue Belt Technologies, securing a leading position in the fast-growing area of orthopaedic robotics assisted surgery. Blue Belt Technologies’ Navio® surgical system provides robotics assistance in partial knee replacement surgery.
|
||||||||||
| Increased value and efficiency to hospitals and ASCs | ||||||||||
| For Smith & Nephew, this acquisition is expected to create a strong combined partial knee portfolio from which to accelerate our growth in partial knee replacement surgery. We anticipate significant upside from a range of new product launches that will expand into indications beyond partial knees. These include a total knee system, due to launch in 2017, and revision knee and bi-cruciate retaining knee systems. |
In August 2014 we announced Syncera, a disruptive orthopaedic supply chain model providing increased value and efficiency to hospitals and ambulatory surgery centres (‘ASC’) performing knee and hip replacement surgeries.
Syncera offers a different channel strategy providing attractive economics through clinically proven products and cutting-edge technology solutions within the primary reconstructive hip and knee marketplace. Its innovative business model brings value solutions to the operating room (‘OR’) with pioneering point-of-care technology that links and interfaces with the entire hospital or ASC supply chain systems. Recently acquired Syncera software platforms improve training time for OR staff and drive down cost in instrument sterilisation.
|
By using Syncera, a hospital performing 400 total hip and knee surgeries over a 3-year period, can realise estimated savings of $4 million.
Since launching our pilot in the United States, we have secured strong reference sites with hospital and surgeon advocates, now trained and fully operational with Syncera. These sites have purchased instruments and implant inventory and are using our software.
In August 2015 we had Syncera customers with potential to perform more than 3,000 annualised Syncera procedures. Our progress has also given us confidence to move forward with our plans outside of the US, with pilots launched in Europe in 2015. |
||||||||
|
ANTHEM GLOBAL KNEE
The unique design of the ANTHEM¯ Total Knee System creates a knee offering fit for all ethnicities. Based on both intraoperative measurements and the analysis of CT images from patients. ANTHEM utilises the ORTHOMATCH instrumentation platform, reduces weight, footprint and unnecessary cost without compromising on quality or clinical outcomes. Currently in limited market release, ANTHEM will provide an advanced and globally relevant knee implant that is accessible to all orthopaedic surgeons and patients in emerging markets.
|
||||||||||
|
|
||||||||||
Table of Contents
| 18
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR PRODUCTS
|
The products we take to market continued
Hip implants
|
|
Smith & Nephew’s Hip Implant franchise offers a range of specialist products for reconstruction of the hip joint. This may be necessary due to conditions such as arthritis, causing persistent pain, and/or as a result of hip fracture. Every year more than two million patients undergo total, resurfacing and revision hip replacement procedures.
For Hip Implants, Smith & Nephew has developed a range of primary hip systems. Core systems include the ANTHOLOGY¯ Hip System, SYNERGY¯ Hip System, the SMF¯ Femoral Hip System, POLARSTEM¯ Femoral Hip System, the R3¯ Acetabular System and the POLARCUP¯ Dual Mobility Hip System. This diversity exemplifies our commitment to providing surgeons with implant and instrumentation options that meet the specific demands of their preferred surgical approach, most notably the direct anterior or posterolateral approach.
Smith & Nephew’s portfolio includes the REDAPT Revision Femoral System. The need to perform a revision can occur for a variety of reasons including infection, dislocation, or failure of the implants to achieve biologic fixation. REDAPT turns such complex hip revisions into efficient, reproducible surgeries, allowing surgeons to effectively recreate a patient’s unique functionality, while quickly and easily addressing issues such as poor bone quality.
In 2015, we announced our decision voluntarily to remove from the market certain smaller sizes of the BIRMINGHAM HIP¯ Resurfacing (‘BHR’) System. This was a decision we made based on our own post-market surveillance and clinical follow-up. Many thousands of patients have benefited from BHR over the years. It continues to demonstrate very good clinical performance in male patients under 65 years of age and remains an important option for surgeons treating these patients.
Our Hip Implants franchise revenue remained flat in 2015. Excluding the headwind from the changes to BHR, performance would have increased by 1%.
This year saw the launch of collared and valgus versions of our popular POLARSTEM Cementless Hip Stem System. These new stem options join the expanding POLARSTEM family of implants which has been in use clinically since 2002. |
| ||||
| 1 |
The underlying percentage increases/ decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
19
| ||
|
| ||||
Table of Contents
| 20
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR PRODUCTS
|
The products we take to market continued
|
The combination of Blue Belt Technologies with Smith & Nephew’s Knee Implant franchise has a powerful rationale. It reinforces our distinctive orthopaedic reconstruction strategy, which combines cutting edge innovation, disruptive business models and a strong Emerging Markets platform to drive outperformance.
| ||||||||||
| Shaping the future of surgery with robotics
|
||||||||||
|
In 2015, we announced the acquisition of Blue Belt Technologies, securing a leading position in the fast-growing area of robotics-assisted surgery. Robotics is expected to become increasingly mainstream across orthopaedic reconstruction in the foreseeable future.
Blue Belt Technologies’ Navio® surgical system provides robotics-assistance in unicondylar or partial knee replacement surgery through a unique hand-held, robotic bone-shaping device. Navio brings a high degree of implant placement accuracy, combined with attractive economics and ease of use.
The acquisition will complement existing products and R&D programmes, creating a platform from which we can shape this exciting new area of surgery. It creates a
|
strong combined partial knee portfolio from which to accelerate growth in the attractive area of partial knee replacement surgery, with further opportunities for a range of new products. A total knee variant is due to be launched in 2017, bringing Navio to surgeons performing total knee procedures and supporting Smith & Nephew products such as JOURNEY II. A revision knee version is in the pipeline to bring this technology to this highly complex and fast-growing area currently not served by robotics. A bi-cruciate retaining knee programme will support our existing development work in this potential major new market. Bi-cruciate knee implants are technically demanding, and we expect they will offer patients more natural motion and greater stability by preserving the anterior and posterior cruciate ligaments.
|
|||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
21
| ||
|
| ||||
| Sports Medicine Joint Repair | ||||||||||
|
|
|
Our Sports Medicine Joint Repair franchise offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including the repair of soft tissue injuries and degenerative conditions of the knee, hip and shoulder. Our franchise operates in a large, growing market where unmet clinical needs lend room for procedural and technological innovation. Smith & Nephew is well positioned both to innovate and to reach customers globally.
Our position within the global Sports Medicine Joint Repair market was strengthened significantly in 2014, with the acquisition of ArthroCare Corporation. The transaction added technology and highly complementary products to our existing portfolio, including new shoulder anchor innovation.
Key products in this franchise include the FAST-FIX¯ family of meniscal repair systems, the ENDOBUTTON¯ family for knee ligament reconstruction, HEALICOIL¯ PK, FOOTPRINT¯ PK and TWINFIX¯ Suture anchors for repairs of the hip and rotator cuff. |
Sports Medicine Joint Repair delivered revenue growth of 7% in 2015. We produced double-digit growth in the US, driven by the benefits of our combined portfolio following the acquisition of ArthroCare. Our overall performance was held back by conditions in China, where we saw a slowdown in capital and consumable sales compounded by de-stocking in our distribution channel.
In 2015, Smith & Nephew launched its Q-FIX¯ All-suture anchor for procedures like rotator cuff repair in the shoulder and labral repair in the shoulder and hip, all procedures in which anatomic space is very limited. The new anchor delivers performance characteristics that meet or exceed those of much larger, hard anchors.2
| |||||||
| ROTATOR CUFF REPAIR
| ||||||||||
|
2015 also saw the launch of a suite of products for Rotator Cuff Repair (‘RCR’), including ULTRATAPE¯, a suture (available loose or pre-loaded into Smith & Nephew implants) that provides greater tendon-to-bone contact and may enhance repair; FIRSTPASS¯ ST, a sterile-packaged retrograde suture passer that eliminates the steps of loading and unloading needles and cartridges; and MULTIFIX¯ S, an all-PEEK knotless screw-in anchor that accommodates multiple suture limbs and/or ULTRATAPE. All of these new products can be used together or in conjunction with existing products from the Smith & Nephew portfolio in a single procedure, significantly expanding the breadth of our Rotator Cuff Repair Solutions.
| ||||||||||
|
|
SEE THE FULL RANGE OF PRODUCTS ONLINE WWW.SMITH-NEPHEW.COM
| |||||||||
|
| ||||||||||
| 1 |
The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. | |||||||||
| 2 | (P/N 54231-01 Rev. A; P/N 49193-01 Rev. A; P/N 51963-01 Rev. A)
|
|||||||||
Table of Contents
| 22
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR PRODUCTS
|
| The products we take to market continued
| ||||||||||||
| Arthroscopic Enabling Technologies | Trauma & Extremities | |||||||||||
|
Our Arthroscopic Enabling Technologies (‘AET’) franchise offers a high performance array of minimally invasive surgery-enabling systems and devices.
AET platforms work in concert to facilitate access to various joint spaces, visualise the patient’s anatomy, resect degenerated or damaged tissue and prepare the joint for a soft tissue repair construct. Products in this franchise are often used in conjunction with products from our Sports Medicine Joint Repair franchise.
Systems include anatomic repair-aiding limb positioners and holders, high definition endoscopes and image capture systems, Key products include the SPIDER2/T-MAX procedure-enabling limb positioning systems, DYONICS¯ Shaver Blades, single-use blades that provide superior resection due to their sharpness and virtually eliminate clogging with their debris evacuation capabilities, DYONICS large and small bone cordless powered instruments and accessories, ACUFEX¯ Hand Held Instruments, and a wide range of high performance COBLATION¯ Technology radio frequency (‘RF’) probes that ablate, resect and coagulate soft tissue and enable hemostasis of blood vessels.
|
| ||||||||||
| 1 | The underlying percentage increases/ |
THE EVOS MINI FRAGMENT PLATE | ||||||||||
| decreases areafter adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. |
COBLATION TECHNOLOGY |
The EVOS Mini Fragment Plate and Screw System is a dedicated Trauma mini fragment system. This is a stainless steel highly versatile system with a multitude of plate geometries and longer screw lengths than standard mini fragment systems (up to 80 mm).
Complementing this is our VLP MINI-MOD Small Bone Plating System for the fixation of small bones and small bone fragments, specifically designed to match the contour of small bones needed in treating hand, wrist, elbow, foot and ankle fractures. | ||||||||||
|
In 2015, COBLATION Technology made a strong contribution to AET’s overall performance.
The COBLATION process involves the creation and application of an energy field called ‘glow discharge plasma’, which acts to ablate molecules in the tissue.
COBLATION Technology provides advantages to the surgeon by operating at lower temperatures than other RF-based technologies, and allowing for precise removal of soft tissue with minimal damage to untargeted tissue.
|
||||||||||||
|
| |||||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
23
| ||
|
| ||||
| Other Surgical Businesses
|
||||||||||
| Our Trauma & Extremities franchise offers both internal and external fixation and tissue repair devices, as well as other products used in the stabilisation of severe fractures and deformity correction procedures. In 2015, the franchise delivered 2% revenue growth.
For extremities and limb restoration, we offer the TAYLOR SPATIAL FRAME¯ Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection and suture anchor products for orthopaedic surgeons including foot and ankle and hand and wrist specialists, and trauma surgeons.
For Trauma, the principal internal fixation products are the TRIGEN¯ family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOT¯, and TRIGEN INTERTAN¯), EVOS¯ Plating System and the PERI-LOC¯ Plating System.
Exclusively for our TAYLOR SPATIAL FRAME¯ device, our new iADJUST¯ was released this year and is an easy-to-use and one-of-a-kind mobile app designed to simplify the frame adjustment process for both physicians and patients.
We introduced the TRIGEN META-TAN¯ Nail System. This expands the clinically proven TRIGEN Nail portfolio with a versatile design that addresses a wide range of femoral fractures ranging from specific hip fractures to mid-shaft fractures and challenging fractures near the knee. |
|
The Other Surgical Businesses franchise includes our Gynaecology and our Ear, Nose & Throat (‘ENT’) businesses. This franchise delivered revenue growth of 10% in 2015.
Our primary Gynaecology product is the TRUCLEAR¯ System, a first-of-its kind hysteroscopic tissue removal system, providing safe, efficient, effective removal of intra-uterine tissue. Backed by proprietary intellectual property and strong clinical evidence differentiating it from the competition, the TRUCLEAR System has established itself as a leader in hysteroscopic tissue removal. The pioneering solution includes a total hysteroscopy system that allows surgeons to see and treat simultaneously. This approach is designed to enable a shift to in-office treatment, supporting a reduction in total healthcare expenditures.
Within ENT we offer a wide variety of products including our COBLATION Technology for tissue removal and hemostasis, various articulating instruments and implants for sinus surgery such as balloon sinuplasty, and our RAPIDRHINO¯ Carboxymethylcellulose (‘CMC’) Technology which is featured in both dissolvable and removable nasal and sinus dressings, and epistaxis treatment products.
During 2015, we launched our new NASASTENT¯ Dissolvable Nasal Dressing, a structural intranasal splint used to minimise bleeding and prevent post-operating adhesions after sinus surgery. Unlike other nasal dressings which fragment as they degrade, once the NASATENT dressing absorbs sufficient nasal fluid, it converts into hydrocolloidal gel that simply drains from the cavity as part of the natural outflow. |
| |||||||
|
The Ear, Nose & Throat (‘ENT’) business we acquired as part of ArthroCare improved its growth rate under new management in 2015. |
||||||||||
| 1 | The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. |
|
||||||||
Table of Contents
| 24
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR PRODUCTS
|
The products we take to market continued
Advanced Wound Care
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
25
| ||
|
| ||||
| Wound education and excellence
|
||||||||
|
Smith & Nephew is proud to support its customers in the Emerging Markets through professional education. In this way we ensure the safe and effective use of our products and help healthcare professionals create better outcomes for patients.
In India, we have invested in a ‘Nursing Education and Excellence in Wound Care’ programme that brings senior nursing Key Opinion Leaders (‘KOL’) together with the aim of expanding knowledge and education in wound care. This supports the evolving trend towards more highly skilled and empowered wound care nurses and tissue viability nurses in hospitals.
|
Management of wounds is also an increasing area of focus for surgeon customers. In Turkey, our ‘Approaches in General Surgery Training’ course, run in conjunction with the Turkish Surgery Association, provided a forum to learn about wound healing. Attendees were able to learn about the benefits of Smith & Nephew advanced wound care products.
Improving the skills of burn surgeons is also an important focus for Smith & Nephew. In South Africa, our courses are led by KOL surgeons and cover the entire burn continuum, including burn wound infection, anaesthesia in burns, fluid resuscitation, pain management, inhalational burns and theatre time. We also run a bi-annual ‘Burns & Scientific Symposium’, providing an academic forum for burn surgeons to congregate and share best practice. |
|
||||||
|
Through training and education, we seek to ensure the safe and effective use of our products to create better outcomes for patients.
|
||||||||
Table of Contents
| 26
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR PRODUCTS
|
The products we take to market continued
Advanced Wound Devices
|
|
Our Advanced Wound Devices (‘AWD’) franchise is comprised of our Negative Pressure Wound Therapy (‘NPWT’) and surgical debridement businesses. In 2015, revenue from this franchise fell by 3%.
In 2014, our traditional NPWT RENASYS system experienced challenges as a result of the FDA requiring suspension of commercial activity in the US while new product approvals were obtained. During 2015, we made progress securing the required approvals and began supporting existing customers. The impact of the RENASYS distribution hold was a significant headwind to overall performance in this franchise in 2015.
Outside the US, RENASYS maintained its strong presence. The RENASYS product offering now includes multiple device options, a choice of foam or gauze dressings, along with a range of drains and specialty kits.
|
In Q4, 2015 we launched outside the US the next generation of RENASYS called TOUCH¯ offering touchscreen technology. We expect to launch in 2016 in the US. We are also in the final stages of developing the first NPWT device to communicate continuously through the cloud. This will enable more efficient fleet management for institutions and care providers, lower maintenance costs and the provision of clinically relevant information in real time.
Our PICO¯ system, our single-use, canister-free NPWT solution, performed strongly in 2015. PICO brings the effectiveness of traditional NPWT in a modern, small portable system2. It is designed for both open wounds and closed incisions and leverages our leading dressing technology.
2015 has seen PICO growth accelerate in markets around the world, driven by strong value proposition that resonates with healthcare payers and providers. PICO reduces the risk of infection and other complications and lowers readmissions for surgical site infections2. It also offers simpler logistics and lower cost and may reduce nursing time and complexity3 as well as increasing patient mobility4.
The VERSAJET Hydrosurgery system, a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wound, burns and soft tissue injuries, also performed well in 2015. | ||
|
PICO SYSTEM |
||||
|
Easy to use, PICO simplifies the application of NPWT and provides an active intervention to help promote healing, leading to improved outcomes in more wound types. 2015 has seen PICO growth accelerate in markets around the world, driven by strong clinical and health economic evidence.
|
||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
27
| ||
|
| ||||
| Advanced Wound Bioactives | ||||||||
|
|
| |||||||
| Our Advanced Wound Bioactives (‘AWB’) franchise focuses on the development and commercialisation of novel, cost-effective biopharmaceuticals to provide a unique approach to debridement, dermal repair and tissue regeneration.
Bioactives represent the fastest growing segment of chronic wound care, illustrating how greater understanding of wound biology is driving the development of new biopharmaceuticals designed to stimulate the body’s own regenerative processes. The AWB business is well-positioned to benefit from this market growth with its focus on generating clinical evidence, a highly trained specialised sales force, strong performance of best-in-class products and award winning educational resources. AWB revenue growth in 2015 was 7%.
Currently, products on the market include Collagenase SANTYL® Ointment (the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns), OASIS® Wound Matrix and Ultra Tri-Layer Matrix (a naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds) and REGRANEX® (becaplermin) Gel 0.01% (an FDA-approved platelet-derived growth factor for the treatment of Diabetic Foot Ulcers).
The US is the largest market and represents the current focus for our AWB franchise. Smith & Nephew is also committed to advancing the care and treatment of wounds through the development of potential new Bioactives and support of industry-leading continuing education from THE WOUND INSTITUTE®. |
The acquisition of Healthpoint Biotherapeutics in 2012 gave us a strong position in this fast growing segment.
| |||||||
|
SANTYL® | ||||||||
|
For some patients living with wounds can be challenging. SANTYL Ointment is an FDA-approved prescription medicine that removes dead tissue from wounds so they can start to heal. Healthcare professionals have prescribed SANTYL Ointment for more than 20 years to help clean many types of wounds, including chronic dermal ulcers (such as pressure ulcers, diabetic ulcers, and venous ulcers) and severely burned areas. SANTYL is available in the US and Canada.
| ||||||||
|
| ||||||||
| 1 The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. Explanations of non-GAAP financial measures are provided on pages 177 to 178. |
||||||||
Table of Contents
| 28
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
The resources we need to deliver our products
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
29
| ||
|
| ||||
Table of Contents
| 30
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR RESOURCES
|
The resources we need to deliver our products continued
Manufacturing & Quality
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
31
| ||
|
| ||||
Table of Contents
| 32
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR RESOURCES
|
The resources we need to deliver our products continued
Manufacturing & Quality continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
33
| ||
|
| ||||
Table of Contents
| 34
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR RESOURCES
|
The resources we need to deliver our products continued
Training & Education
| Smith & Nephew is dedicated to helping healthcare professionals improve the quality of care for patients. We are proud to support the professional development of surgeons and nurses by providing them with medical education and training on our Advanced Surgical Devices and Advanced Wound Management products.
Every year, thousands of customers attend our state-of-the-art training centres in the US, UK and China and Smith & Nephew courses at multiple hospitals and facilities around the world. |
||||||||||
| The Wider Scope of Arthroscopy
|
||||||||||
|
In 2015, we provided training to more than 40,000 surgeons. Working under expert guidance, attendees refine techniques and learn new skills, to ensure the effective use of our products. We also support healthcare professionals through our online resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website.
|
Every year, Smith & Nephew hosts a Sports Medicine fellowship meeting, ‘The Wider Scope of Arthroscopy’, at its Andover, Massachusetts facility. The meeting unites promising new doctors (fellows) together with renowned orthopaedic surgeons to review, discuss and practice current and forward-looking surgical techniques in the areas of hip, knee and shoulder repair. The forum helps up-and-coming surgeons develop trust and gain the experience and confidence necessary to become experts in their field. | The curriculum focuses on the fundamentals of joint repair but also on forward-looking topics such as ‘Inventive Approach to AC Joint Reconstruction’ and ‘Alternative Management Options in Instability Surgery’.
Held in mid-September 2015, The Wider Scope of Arthroscopy was attended by nearly 140 fellows and distinguished faculty, making it one of the largest fellowship meetings Smith & Nephew has ever held. Over the years, The Wider Scope of Arthroscopy has earned a reputation as one of the most valuable and admired medical education events in the industry, according to our customers.
|
||||||||
|
|
||||||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
35
| ||
|
| ||||
Table of Contents
| 36
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR RESOURCES
|
The resources we need to deliver our products continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
37
| ||
|
| ||||
| Diversity at Smith & Nephew
We believe that diversity fuels innovation. We are committed to employment practices based on equality of opportunity, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability unrelated to the ability of the person to perform the essential functions of the job.
Smith & Nephew has a Human Resource Global Standard for diversity and inclusion in the workplace and is committed to creating an inclusive environment that embraces and promotes diversity.
|
||||||||||
| Developing & retaining talent
|
||||||||||
| The Board and Executive Officers continue to recognise the importance of diversity. Three of our 11 Board members are female.
We recruit, employ and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We do not tolerate discrimination on any grounds and provide equal opportunity based on merit.
We are committed to building diversity in a working environment where there is mutual trust and respect and where everyone feels responsible for the performance and reputation of our Company.
We are committed to providing healthy and safe working conditions for all employees. We achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and we recognise employee involvement as a key part of that process.
We do not use any form of forced, compulsory or child labour. We support the Universal Declaration of Human Rights of the United Nations. This means we respect the human rights, dignity and privacy of the individual and the right of employees to freedom of association, freedom of expression and the right to be heard. |
The best and the brightest
We aim to bring together the sharpest minds in the industry. We recognise that to achieve this we need to create an environment where talented people have the opportunity to develop and continue to grow. We have an ongoing focus on keeping our talent and leadership pipeline filled to ensure it is a sustainable, self-reinforcing cycle, creating more opportunities for growth.
Talent development
Our development philosophy is based on the 70:20:10 Model for Learning and Development. This is a form of transformational development that engages people and mirrors how they learn, helping to create change within the individual and infuse change into the organisation.
We have a comprehensive global development and capability review process |
to identify high potential employees and ensure they have robust career development plans. Talented employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences.
In 2015, we ran our CEO Forum for our Top Talent, providing them with the opportunity to work closely with our executive team and work together on strategic challenges. We also launched a modular Managing Director programme to further enhance the skills and career opportunities of key individuals pursuing a career in this critical area.
Our performance management process ensures all employees set objectives which align to our overall business goals and have clear line-of-sight to how their individual performance management system assesses and rewards both performance and behaviour. |
||||||||
|
|
||||||||||
Table of Contents
| 38
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Our future focus
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
39
| ||
|
| ||||
Table of Contents
| 40
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Financial review
The underlying increase in revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in accordance with International Financial Reporting Standards (‘IFRS’), as follows:
| 2015 $ million |
2014 $ million |
Reported growth in revenue % |
Constant effect % |
Acquisitions/ % |
Underlying % |
|||||||||||||||||||
| US | 2,217 | 2,012 | 10 | – | (5 | ) | 5 | |||||||||||||||||
|
Other Established Markets |
1,702 | 1,928 | (12 | ) | 15 | (2 | ) | 1 | ||||||||||||||||
|
Emerging Markets |
715 | 677 | 6 | 9 | (4 | ) | 11 | |||||||||||||||||
| Total | 4,634 | 4,617 | 0 | 8 | (4 | ) | 4 | |||||||||||||||||
Trading profit reconciles to operating profit, the most directly comparable financial measure calculated in accordance with IFRS, as follows:
| 2015 $ million |
2014 $ million |
|||||||
| Operating profit | 628 | 749 | ||||||
|
Acquisition related costs |
12 | 118 | ||||||
|
Restructuring and rationalising costs |
65 | 61 | ||||||
|
Amortisation of acquisition intangible and impairments |
204 | 129 | ||||||
|
Legal and other |
190 | (2 | ) | |||||
|
Trading profit |
1,099 | 1,055 | ||||||
Explanations of these non-GAAP financial measures are defined on pages 177 to 178.
| 1 | The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
41
| ||
|
| ||||
Table of Contents
| 42
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Our approach to risk
Our risk appetite
|
CATEGORY OF RISK
|
RISK PARAMETERS
| |
| Strategic
Moderate to high
|
In acquiring and developing new products and business models, moving into adjacent markets and technologies, organically or through acquisitions, and implementing innovative pricing strategies, we have a moderate to high tolerance for risk. We are willing to take certain risks in pursuit of innovation and new business.
| |
| Operational
Low to moderate
|
In operating our business, managing our suppliers, keeping control of inventory and managing our talent and our facilities, we have a low to moderate tolerance for risk. We aim to be as efficient as possible and adopt a cautious approach, but recognise that we need to take certain risks in order to take full advantage of the opportunities open to us.
| |
| Financial
Low
|
We recognise that sound financial controls are necessary in order to manage our business as effectively as possible. We therefore have a low tolerance for risk relating to financial controls and require all our operations to comply with our minimum acceptable practices. | |
| Compliance
Extremely low
|
In complying with laws and regulations and in matters relating to bribery and corruption, product safety and patient and employee safety, we have an extremely low tolerance for risk. Whilst we attempt to eradicate this risk completely, we recognise that, as in any human system, compliance failures may occur. We will respond to issues as they arise and will reassess our business scope where needed, if we judge there to be risk in these areas, which we can’t manage.
| |
Risk Management Activities in 2015
Since the year end, in February 2016, the Board has reviewed the effectiveness of the risk management process, considering the principal risks, actions taken by management to manage those risks and the Board’s risk appetite in respect of each risk. The Board considered that the risk management process was effective. We recognise that this is an ongoing process and work will continue in 2016 and beyond to ensure that this remains the case.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
43
| ||
|
| ||||
| Our risk management process
The following chart shows how our risk management process is an integral part of our business. Individual risk owners within the business areas carry out day-to-day risk management activities within the framework established by the risk management office, including the identification of risks, undertaking risk assessments and implementing mitigating actions. These activities are reviewed by internal audit and other control functions, which provide assurance to the Group Risk Committee chaired by the Chief Executive and then to the Board and its committees. |
||||
Table of Contents
| 44
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
PRINCIPAL RISKS
|
Our approach to risk continued
|
Financial |
Reputation |
Regulatory and environment & safety |
Business interruption | |||
| HIGH |
||||||
| Significant profit impact or significant reduction of market value |
Extensive US/EU national/ international media scrutiny | Product withdrawal or non-approval of key product; forced closure of critical facilities; material safety or environmental failures
|
Interruption to critical activities for long term | |||
| MEDIUM |
||||||
| Moderate profit impact or reduction in market value |
Short-term national (non US/EU) media coverage and disruption to stakeholder confidence | Key product delayed or withdrawn for intermediate period; short-term environmental damages
|
Interruption to critical activities in short-term | |||
| LOW |
||||||
| Low impact to revenue profit or market value |
Localised annoyance/ concern/ complaints; no media coverage | Regulatory action with fewer issues, smaller products involved; minor injuries or environmental impact
|
Impact can be absorbed within normal business operations | |||
The following pages provide an overview of what the Board considers to be our principal risks together with the actions management is taking to address them. These are the risks, which could cause the Group’s business, financial position and results of operations to differ materially and adversely from expected and historical levels. Additional detail may be found on pages 171 and 174 under ‘Group Risk Factors’.
|
PRODUCT PORTFOLIO DEVELOPMENT
| ||
|
The medical devices industry has rapid new product innovation. The sustainability of our business depends on finding and developing suitable products and solutions to meet the needs of our customers and patients to support long-term growth and securing appropriate protection for and defending our intellectual property.
|
| Underlying risks | Actions taken by management | |||||
| – Insufficient innovation due to low R&D investment, R&D skills gap or poor product development execution.
– Competitors may introduce a disruptive technology or business model.
– Competitors may obtain patents or other intellectual property rights that affect the Group’s competitive position.
– Failure to receive regulatory approval to commercialise a pipeline product successfully.
– Claims by third parties regarding infringement of their intellectual property rights. |
– Processes are focused on identifying new products and potentially disruptive technologies and solutions.
– Increasing prioritisation and allocation of funds for research and development.
– Pursuing business development opportunities, which augment our portfolio.
– Implementing efficient processes to roll new products out to consumers.
– Proactively clearing new products from competitive patents and monitoring pending competitor patent applications.
– Monitoring of external market trends and collation of customer insights to develop product strategies. | |||||
|
Actions during 2015 | ||||||
|
– Acquisitions of Blue Belt technologies and distributorships in Russia and Colombia.
– Progressed the implementation of the SYNCERA business model. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
45
| ||
|
| ||||
|
ACQUISITIONS AND BUSINESS DEVELOPMENT
| ||
| Failure to identify appropriate business development opportunities, to deliver value from our acquisitions or to integrate them effectively into the Group will impact our ability to achieve expected financial returns and lead to loss of reputation.
|
|
Underlying risks
|
Actions taken by management
| |||
| – Failure to identify appropriate acquisitions.
– Ineffective acquisition due diligence.
– Inflated forecasts or projections leading to over-valuation of transaction.
– Failure to embed Group standards, policies and financial controls quickly enough following acquisition.
– Integration process may identify practices that need to be ceased to meet Group standards.
– Failure to learn from past actions. |
– Acquisition activity is aligned with corporate strategy and prioritised towards products, franchises and markets identified to have the greatest long-term potential.
– Clearly defined investment appraisal process based on return on capital, in accordance with Capital Allocation Framework.
– Undertaking detailed and comprehensive cross-functional due diligence prior to acquisitions.
– Implementing consistent integration processes designed to identify and mitigate risks in the early stages post completion.
– Early embedding of our desired standards of compliance with laws, internal policies and controls.
– Comprehensive post-acquisition review programme. | |||
|
Actions during 2015
– Thorough due diligence undertaken for the acquisitions of Blue Belt Technologies and the distributorships on Colombia and Russia.
– Comprehensive Integration programme continued for the acquisition of ArthroCare in 2014.
– Post-acquisition review template revised to enable acquisitions to be evaluated on consistent basis.
|
|
GOVERNMENT ACTION, PRICING AND REIMBURSEMENT PRESSURE
| ||
| The success of our business depends on governments providing adequate funding to meet increasing demands arising from demographic trends. The prices we charge are therefore impacted by budgetary constraints, economic and political considerations, fluctuations in exchange rates and our ability to persuade governments of the economic value of our products, based on clinical data, cost, patient outcomes and comparative effectiveness.
|
|
Underlying risks
|
Actions taken by management
| |||
| – Reduced reimbursement levels and increasing pricing pressures.
– Reduced demand for elective surgery.
– Lack of compelling health economics data to support reimbursement requests.
– Government policies favouring lower prices and locally sourced products.
– Political upheavals prevent selling of products, receiving remittances of profit from a member of the Group or future investments in that country.
– Economic downturn impacts demand and collections.
– Trading margin will be impacted when the currencies in our manufacturing countries (US, UK, Costa Rica and China) strengthen against the currencies in the rest or the world where our products are exported. |
– Developing innovative economic product and service solutions for both Established and Emerging Markets, such as SYNCERA.
– Maintaining an appropriate breadth of portfolio and geographic spread to mitigate exposure to localised risks.
– Incorporating health economic components into the design and development of new products.
– Emphasising value propositions tailored to specific stakeholders and geographies through strategic investment and marketing programmes.
– Optimising cost to serve to protect margins and liberate funds for investment.
– Holding prices within acceptable ranges through global pricing corridors.
– Transacting forward foreign currency commitments when firm purchase orders are placed to reduce exposure to currency fluctuations.
Actions during 2015
– Launch of SYNCERA business model in Established Markets and commenced development of the SYNCERA range of mid-tier products in Emerging Markets.
– Established Strategic Marketing programmes to develop the economic proposition to back the clinical data. |
Table of Contents
| 46
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
PRINCIPAL RISKS
|
Our approach to risk continued
|
BUSINESS OPERATIONS, SUPPLY CHAIN AND BUSINESS RECOVERY | ||
|
Our business depends on purchasing materials, efficient manufacturing, controlled inventory management and the timely supply of our products to our customers. Some of our key products are reliant on one production facility or one supplier for raw materials, components, finished products and packaging materials.
|
|
Underlying risks
|
Actions taken by management
| |||||
| – Failure or performance issues at a critical/single source facility or supplier of key products or services may impact revenues or profits.
– If a key facility were rendered unusable by a catastrophe, or we lost a number of leaders or employees in a catastrophe, business plans and targets may not be met.
– Over production of product inventory and instruments sets may occur due to inadequate portfolio planning.
– If we fail to properly manage our inventory and financial controls around inventory we may become overcapitalised or inaccurately forecast and report data. |
– Ensuring emergency and incident management and business recovery plans are in place at major facilities and for key products and key suppliers.
– Validating second source for critical components or products.
– Undertaking of risk based review programmes for critical suppliers.
– Enhancing travel security and protection programme.
– Developing improved regional inventory metrics to drive efficiency and harmonise demand signals with factory capacity constraints.
– Managing continued reduction in SKUs through product phase outs and formal review of slow moving and obsolete inventory.
Actions during 2015
– Appointed new dedicated President of Global Operations and strengthened the supply chain organisation.
|
|
IT SYSTEM DISRUPTION AND CYBER CRIME | ||
|
Our business is heavily dependent on the integrity of our IT systems and the management of information. At the same time, cyber crime is growing exponentially in frequency and sophistication and many IT systems are exposed to these threats.
|
|
Underlying risks
|
Actions taken by management
| |||||
| – IT systems which support our business may be disrupted by man-made or natural forces or in the process of upgrades or new process implementation.
– A severe IT service interruption, a cyber attack, the unauthorised access to or a misuse of sensitive information could disable critical systems and cause loss of sensitive data with major impact for the Company, including substantial revenue or profit loss as well as material reputational damage. |
– Continuously improving the stability and reliability of IT systems and infrastructure.
– Ensuring IT disaster and data recovery plans are in place to support overall business continuity plans.
– Global management framework for the control and reporting of access to our critical IT systems.
– Following HMG GCHQ guidance, implementing the Cyber security roadmap with oversight from the Group Cyber Security Steering Committee.
– Continuously improving controls relating to mobile device and removable media, network security and monitoring and malware protection and secure configuration.
– Policies covering the protection of both business and personal information and the uses of IT systems by our employees.
– Comprehensive IT security training programmes in place for employees.
– Controls in place around the secure transmission of data.
Actions during 2015
– Board undertook a ‘deep dive’ into IT security and cyber crime in December 2015, reviewing the plans we have in place to tackle cyber crime.
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
47
| ||
|
| ||||
|
TALENT RETENTION AND ORGANISATIONAL CHANGE
| ||
| Our people are critical to the success of our business and we need to attract, motivate and retain the best talent we can, not only for our current needs, but also looking ahead to the organisation of the future. We therefore need effective succession planning at all levels and support for employees through periods of organisational change.
|
|
Underlying risks
|
Actions taken by management
| |||
| – Poor retention of high performing and high potential staff could jeopardise achieving objectives.
– Failure to ensure proactive talent management is undertaken effectively may result in business disruption.
– Failure to support executives and employees affected through periods of organisational change could result in sub-optimal performance. |
– Operating robust talent systems and processes with focus on identifying key roles and successors.
– Operating robust performance management programme, which includes regular performance reviews, underpinned by a common set of values.
– Enhancing hiring process with rigorous screening and checks.
– Running annual talent review process the results of which are reported up to the Board to aid discussions on succession planning.
– Designing competitive management incentive packages.
– Holding annual managing directors’ meeting and CEO Forum for high potential managers to encourage and develop internal talent. | |||
|
Actions during 2015
– Results of talent management process fed into the organisational changes implemented at the end of 2015.
– Coached Senior Executives and managers on how to manage effectively through change.
– Comprehensive change management programme rolled-out at multiple levels across the organisation.
– Further embedded succession planning of key roles at all levels.
|
|
PRODUCT SAFETY, QUALITY, REGULATION AND LITIGATION
| ||
|
Many of our products are designed to be implanted or used within the human body. Product safety and quality is therefore of critical importance. National regulatory authorities enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products and may also inspect for compliance with appropriate standards, including those relating to Quality Management Systems or Good Manufacturing practice regulations.
|
|
Underlying risks
|
Actions taken by management
| |||
| – Defects in design or manufacturing products sold by the Group could lead to product recalls or product removal or result in loss of life or major injury, with negative financial and reputational impacts.
– If there is significant non-compliance with policy, regulations and standards governing products and operations regarding registration, manufacturing, distribution, sales and marketing, then we could suffer fines and impacts to reputation.
– Failure in the design or manufacture of products supplied to the Company can impact the quality of products sold by the Company.
– Failure to obtain proper approvals for new or changed technologies, products or processes can result in product and registration deficiencies.
– Failure to implement programmes and supporting resources to ensure product quality and regulatory compliance.
– Failure to manage, process, respond to and analyse customer complaints and adverse event data could lead to further deficiencies and loss of reputation.
|
– Ensuring that we have comprehensive product quality processes and controls from design to customer supply.
– Ensuring that ‘design for manufacture’ is embedded into product development.
– Reviewing product safety and complaint data.
– Standardising and monitoring compliance with Group quality management and practices through Global Quality Assurance Regulatory Assurance organisation.
– Incident management teams in place to respond in the event of an incident relating to patient safety.
Actions during 2015
– Appointed new dedicated President of Global Operations and strengthened the quality and regulatory function.
– Improved performance of facilities undergoing audits by Federal Drug Administration.
|
Table of Contents
| 48
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
PRINCIPAL RISKS
|
Our approach to risk continued
|
REPUTATION, ETHICS, BRIBERY AND CORRUPTION | ||
|
There is increasing public scrutiny of ethics in business and ‘doing the right thing’ has become part of our licence to operate. Business practices in the healthcare industry are subject to increasing scrutiny by government authorities in many countries. We are also expected to have in place strong compliance programs under global anti-corruption laws and US healthcare laws.
|
|
Underlying risks
|
Actions taken by management
| |||||
| – Failure to act in an ethical manner consistent with our code of conduct can lead to reputational damage.
– Violation of global anti-corruption and healthcare laws.
– Cultures in certain geographies and in acquired businesses may not fully support the Group’s code of conduct.
– Failure to conduct adequate due diligence or to integrate appropriate internal controls into recently acquired businesses.
– An instance of fraud could severely impact our finances and our reputation.
– Serious compliance breach by employee or third party in an individual geography could threaten our ability to continue to operate in that geography. |
– Leadership from the top with Ethics & Compliance Committee at Board and Executive level overseeing our ethical and compliance practices.
– All employees globally are required to certify compliance with our Code of Conduct and Global Policies and Procedures which provide guidelines for ethical behaviour and controls for significant compliance risks.
– Training programmes in place for employees and third parties with ethical and compliance responsibilities and monitoring and auditing programmes to verify implementation.
– Independent reporting channels for employees and third parties to report concerns in confidence.
– Compliance risks included as part of due diligence reviews, integration plans and reporting for acquisitions.
– Controls in place to detect and prevent fraud.
Actions during 2015
– Active engagement in due diligence and integration projects for acquisition of Blue Belt technologies, and the distributorships in Russia and Colombia.
– Established ‘spotlight on trust’ programme to recognise employees.
– Implemented detailed additional compliance standards to distributors and agents.
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
49
| ||
|
| ||||
Our Viability Statement
Table of Contents
| 50
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
|
OUR FINANCIALS
| ||||
|
|
Governed by a Board with a wealth of skills
American/Italian 
French 
British
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
51
| ||
|
| ||||
Indian 
British 
British
Table of Contents
| 52
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR BOARD OF DIRECTORS
|
Swedish 
British 
American
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
53
| ||
|
| ||||
|
Brian Larcombe (62)
Independent Non-Executive Director
Appointed Independent Non-Executive Director in March 2002, Senior Independent Director in April 2014, Member of the Audit Committee, Nomination & Governance Committee and Remuneration Committee.
Career and Experience
Brian graduated with a Bachelor’s of Commerce degree from University of Birmingham. He spent most of his career in private equity with 3i Group plc. After leading the UK investment business for a number of years, he became Finance Director and then Chief Executive of the Group following its flotation. He has held a number of Non-Executive Directorships. He is currently Non-Executive Director of Kodak Alaris Holdings Limited and Cape plc.
Skills and Competencies
Brian’s experience in private equity is particularly useful to Smith & Nephew when evaluating acquisitions and new business opportunities. His long service as a Non-Executive Director has provided continuity throughout a period of change and his corporate memory and wise counsel continues to support our Chairman. As Senior Independent Director and member of the Nomination & Governance Committee, he plays an active role in succession planning and assisted with the search for new Non-Executive Directors in 2014 and 2015.
Nationality
|
Joseph Papa (60)
Independent Non-Executive Director
Appointed Independent Non-Executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011, Member of the Audit Committee and Ethics & Compliance Committee.
Career and Experience
Joe graduated with a Bachelor of Science degree in Pharmacy from the University of Connecticut and Master of Business Administration from Northwestern University’s Kellogg Graduate School of Management. In 2012, he received an Honorary Doctor of Science degree from the University of Connecticut School of Pharmacy. He began his commercial career at Novartis International AG as an Assistant Product Manager and eventually rose to Vice President, Marketing, having held senior positions in both Switzerland and the US. He moved on to hold senior positions at Searle Pharmaceuticals and was later President & Chief Operating Officer of DuPont Pharmaceuticals and later Watson Pharma, Inc. Between 2004 and 2006, he was Chairman and Chief Executive Officer of Cardinal Health Inc. Joe is currently Chairman and Chief Executive of Perrigo Company plc, one of the largest over-the-counter pharmaceutical companies in the US.
Skills and Competencies
With over 30 years’ experience in the global pharmaceutical industry, Joe brings deep insight into the wider global healthcare industry and the regulatory environment. As Chairman and Chief Executive of a significant US Company, Joe has a comprehensive understanding both of how to attract and retain global talent and use remuneration arrangements that incentivise performance, leading to maximum returns for investors.
Nationality
|
Susan Swabey (54)
Company Secretary
Appointed Company Secretary in May 2009.
Skills and Experience
Susan has 30 years’ experience as a company secretary in a wide range of companies including Prudential plc, Amersham plc and RMC Group plc. Her work has covered Board support, corporate governance, corporate transactions, risk, share registration, listing obligations, corporate social responsibility, pensions, insurance and employee and executive share plans. Susan is joint Vice-Chair of the GC100 Group, a member of the CBI Companies Committee and is a frequent speaker on corporate governance and related matters. She is also a Trustee of ShareGift, the share donation charity.
Nationality
|
British
American
British
Table of Contents
| 54
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
Supported by a strong leadership team
British 
Italian 
American
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
55
| ||
|
| ||||
American 
American/South African 
Portuguese
Table of Contents
| 56
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OUR LEADERSHIP TEAM
|
French 
American 
American
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smithandnephew.com
|
57
| ||
|
| ||||
| OVERVIEW
|
||||
Committed to the highest standards
of corporate governance.
|
|
|
||||||||||||||||
| LEADERSHIP |
EFFECTIVENESS |
ACCOUNTABILITY |
||||||||||||||||
| The Board sets the tone at the top of the Company through: |
The Board carries out its duties through: |
The Board delegates some of its detailed work to the Board Committees: |
||||||||||||||||
|
|
|
|
||||||||||||||||
|
A clear definition of the roles of the individual members of the Board
A comprehensive corporate governance framework
Defined processes to ensure the independence of Directors and the management of conflicts of interest
|
Regular meetings focusing on the oversight of strategy, risk, including viability and succession planning
An annual review into the effectiveness of the Board
A comprehensive programme of development activities throughout the year
|
Each Committee meets regularly and reports back to the Board on its activities
The terms of reference of each Committee may be found on the Company website at www.smith-nephew.com
A report from the Chairman of each Committee is included in this Annual Report
|
||||||||||||||||
|
|
READ MORE ABOUT OUR BOARD’S LEADERSHIP ON PAGE 60 |
|
READ MORE ABOUT OUR BOARD’S EFFECTIVENESS ON PAGE 62 |
|
READ MORE ABOUT OUR BOARD’S ACCOUNTABILITY ON PAGE 68 |
|
||||
| REMUNERATION |
||||
| Having a formal and transparent procedure for developing policy on remuneration for Executive Directors is crucial. Our remuneration policy aims to attract, retain and motivate by linking reward to performance. In this section you will find information on the remuneration policy approved by shareholders in 2014 and how we implemented it in 2015 and plan to implement it in 2016.
|
||||
|
|
READ MORE ABOUT OUR BOARD’S REMUNERATION ON PAGE 78 |
The Board is committed to the highest standards of corporate governance and we comply with all the provisions of the UK Corporate Governance Code 2014 (‘the Code’).
The Company’s American Depositary Shares are listed on the New York Stock Exchange (‘NYSE’) and we are therefore subject to the rules of the NYSE as well as to the US securities laws and the rules of the Securities Exchange Commission (‘SEC’) applicable to foreign private issuers. We comply with the requirements of the NYSE and SEC. We shall explain in this Corporate Governance Statement and in the reports on the Audit Committee, the Nomination & Governance Committee, the Ethics & Compliance Committee and the Remuneration Committee, how we have applied the provisions and principles of the Financial Conduct Authority’s (‘FCA’) Listing Rules, Disclosure & Transparency Rules (‘DTRs’) and the Code throughout the year.
The Directors’ Report comprises pages 36 to 39, 49 to 77, 104, 113, 115, 117 and pages 171 to 194 of the Annual Report.
Table of Contents
| 58
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
Leadership 
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
59
| ||
|
| ||||
Role of Directors
Table of Contents
| 60
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
COMPOSITION & ROLES
|
|
Leadership continued |
| BOARD | ||||||||||||||||||||||||||||
| | | | | | | | | | | ||||||||||||||||||||||||
|
AUDIT COMMITTEE
Provides independent assessment of the financial affairs of the Company, reviews financial statements and controls, and the risk management process. Manages use of internal and external auditors. |
REMUNERATION COMMITTEE
Determines remuneration policy and packages for Executive Directors and Executive Officers. |
NOMINATION & GOVERNANCE COMMITTEE
Reviews size and composition of the Board, succession planning, diversity and governance matters. |
ETHICS & COMPLIANCE COMMITTEE
Reviews and monitors ethics and compliance matters across the Group. Reviews and oversees quality and regulatory matters. |
AD HOC COMMITTEES
Ad hoc committees may be established to review and approve specific matters or projects.
|
||||||||||||||||||||||||
|
Read more See page 72
|
Read more See page 78 |
Read more See page 68 |
Read more See page 70 |
|||||||||||||||||||||||||
| CHIEF EXECUTIVE OFFICER | ||||
| | | | | |||
|
Supporting the Business Various committees and groups relating to the running of the business report to the Chief Executive Officer. These groups have a dual role both advising the Chief Executive Officer and also implementing the strategy throughout the business. A number of these committees also report regularly to the Board or one of its Committees.
|
Investment in the Strategic Priorities Investment in our Strategic Priorities, important for our future success, is governed through a number of committees and groups. These groups report either to the Chief Executive Officer or to one of the Executive Officers and are focused on allocating resources to and overseeing investment in the strategic priorities. Regular reports from these groups are submitted to the Board or one of its Committees.
| |||
|
Commercial & Operations Committee – Committee of the Executive Officers, advising the Chief Executive Officer on commercial and operational matters
Regional Leadership Teams – Implement work of regional presidents
Functional Leadership Teams – Implement work of functional presidents
Disclosure Committee – Approves all announcements (except routine regulatory matters) released to investors and to UKLA, London and New York Stock Exchanges, SEC and SOx compliance
Finance & Banking Committee – Approves banking and treasury matters, corporate structure changes, acquisition details
Group Risk Committee – Reviews risk registers and mitigation plans, reports to Board and Audit Committee
Health, Safety and Environment Leadership Team – Oversees health, safety and environment matters across Group, reports to Board on sustainability
|
Research & Development Council – Reviews and evaluates R&D projects, determining the allocation of resources, ensuring alignment with corporate strategy, reports regularly to the Board
Mergers & Acquisitions Council – Oversees corporate development strategy, monitors status of transactions and approves various stages of acquisition prior to presentation to Board
Capital Governance Board – Sets group level targets for capital expenditure priorities and monitors capital expenditure within the parameters set by the Board
IT Governance Board – Oversees the IT strategy and investment allocation throughout the Group, monitors IT systems and cyber security, reports regularly to the Audit Committee
Group Optimisation Steering Group – Oversees the implementation of the Group Optimisation project, reports regularly to the Board | |||
| Diversity & Inclusion Council – Implements strategies to promote diversity and inclusion across the Group
Group Benefits Committee – Oversees policies and processes relating to pension and employee benefit plans
Group Ethics & Compliance (including Quality) Committee – Monitors developments in compliance and quality matters, approves enhanced compliance programme, reports to Board Ethics & Compliance Committee
|
||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
61
| ||
|
| ||||
Table of Contents
| 62
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
RESPONSIBILITY & ACTIVITY
|
|
Effectiveness |
Responsibility of the Board
The work of the Board falls into the following key areas:
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
63
| ||
|
| ||||
Board timetable 2015
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
| JANUARY
|
FEBRUARY
|
MARCH
|
APRIL
|
MAY
|
JUNE
|
JULY
|
AUGUST
|
SEPTEMBER
|
OCTOBER
|
NOVEMBER
|
DECEMBER
| |||||||||||||||||||||||||||||||||
What we did
Table of Contents
| 64
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
RESPONSIBILITY & ACTIVITY
|
Effectiveness continued
Board and Committee Attendance
| Director |
|
Board Meetings (8 meetings) |
|
|
Audit Committee Meetings (7 meetings) |
|
|
Remuneration Committee Meetings (5 meetings) |
|
|
Nomination & Governance Committee Meetings (2 meetings) |
|
|
Ethics & Compliance Committee Meetings (4 meetings) |
| |||||
| Roberto Quarta1 | 7/8 | – | 5/5 | 2/2 | – | |||||||||||||||
| Olivier Bohuon | 8/8 | – | – | 2/2 | – | |||||||||||||||
| Julie Brown | 8/8 | – | – | – | – | |||||||||||||||
| Vinita Bali2 | 7/8 | – | 3/3 | – | 3/3 | |||||||||||||||
| Ian Barlow | 8/8 | 7/7 | – | – | 4/4 | |||||||||||||||
| Virginia Bottomley3 | 7/8 | – | 5/5 | 2/2 | – | |||||||||||||||
| Erik Engstrom4 | 7/8 | 6/7 | – | – | – | |||||||||||||||
| Robin Freestone5 | 3/3 | 2/2 | 2/2 | – | – | |||||||||||||||
| Michael Friedman | 8/8 | – | – | – | 4/4 | |||||||||||||||
| Brian Larcombe | 8/8 | 7/7 | 5/5 | 2/2 | – | |||||||||||||||
| Joseph Papa6 | 6/8 | 6/7 | 5/5 | – | 3/4 |
| 1 | Roberto Quarta was unable to attend one Board call due to a prior appointment. |
| 2 | Vinita joined the Ethics & Compliance and the Remuneration Committees from 1 April 2015. She was unable to attend one Board meeting due to a meeting arranged prior to being appointed. |
| 3 | Virginia Bottomley was unable to attend one Board meeting due to a prior appointment. |
| 4 | Erik Engstrom was appointed to the Board and Audit Committee on 1 January 2015. He was unable to attend one Board and one Audit Committee meeting due to a meeting arranged prior to being appointed. |
| 5 | Robin Freestone was appointed to the Board and Audit and Remuneration Committees on 1 September 2015. |
| 6 | Joseph Papa was unable to attend the April Board and October Board, Audit and Ethics & Compliance Committee meetings due to his company holding emergency meetings. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
65
| ||
|
| ||||
Board Effectiveness Review
The areas for attention identified in the 2014 review have been addressed as follows:
|
ACTIONS IDENTIFIED
|
ACTION TAKEN
| |
| Make more effective use of the annual Board Planner to ensure that all key strategic issues were timetabled appropriately throughout the year. |
The annual Board planner and the format of the Board agendas were redesigned during the year. This has resulted in a more logical flow of matters being discussed at each Board meeting with more time spent on matters of greater strategic importance and less on routine matters.
| |
|
Encourage the executive team to access the diverse competencies of the Non-Executive Directors more between Board meetings. |
Opportunities have been taken by the executives to access the specialist skills of some of the Non-Executive Directors during the year, particularly in the areas of risk management, cyber security and in-country knowledge of certain territories. However, the Board and the executive team recognised that this is an area which could be developed further in 2016.
| |
|
Continue the practice of inviting members of the executive team to present regularly to the Board. |
At each Board meeting during the year, there was a presentation by members of the executive team on relevant topics. This has enabled the Non-Executive Directors to meet and get to know key members of the executive team, which is helping with succession planning.
| |
Table of Contents
| 66
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
RESPONSIBILITY & ACTIVITY
|
|
Effectiveness continued |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
67
| ||
|
| ||||
Table of Contents
| 68
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
& GOVERNANCE COMMITTEE REPORT
|
|
Accountability |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
69
| ||
|
| ||||
Table of Contents
| 70
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
ETHICS & COMPLIANCE COMMITTEE REPORT
|
|
|
Accountability continued |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
71
| ||
|
| ||||
Table of Contents
| 72
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
|
|
|
Accountability continued |
|
Dear Shareholder,
It’s been a year of positive change for the Audit Committee during 2015. We have welcomed Erik Engstrom and Robin Freestone to the Committee. They both have strong FTSE 100 backgrounds – Robin Freestone was previously a Chief Financial Officer – and they provide a fresh perspective to the Committee.
Following the audit tender during 2014 and the appointment of KPMG LLP in April 2015, the Committee oversaw a smooth transition from the former auditor. This process included KPMG LLP ‘shadowing’ EY LLP through the 31 December 2014 year end audit process, along with attendance at Group Audit Committee meetings before their formal appointment.
This was supplemented by KPMG LLP performing detailed audit planning activities at all the Group’s material operating locations throughout the summer and a review of EY LLP audit files at major locations.
This is the first time in Smith & Nephew’s history as a listed company that we have changed our audit firm. Bringing in a new firm to conduct our audit has brought fresh energy to the role; risk areas have been reassessed and new questions asked. This has not been without challenge, and has required the Group to invest significantly more resources and time, especially in this first year. However, we are pleased with the way in which the change has been managed and the output of a robust audit.
At our half-year meeting we received a detailed audit plan for the 2015 financial year from KPMG LLP identifying their audit scope, planning materiality and their assessment of key risks. The audit plan for the 2015 financial year provided a different style, with further depth and coverage including 78% of Group’s revenue and 95% of adjusted Group profit before tax. |
We undertook a number of non-routine items during the year, which have provided debate and progression for the Company, including:
– Discussion of the risk framework as part of the 2015 Strategy Review. This led to further work, which enabled the completion of the first 2015 Viability Statement. This process was also reviewed by the Audit Committee.
– A deeper review of SOx work, in particular in our Emerging Markets, and following the implementation of COSO 2013, which was first applicable in 2014.
– The Minimum Acceptable Practices (‘MAPs’) were launched in December 2014 and are our minimum control procedures and best practices. They have become a standardised process across the Group and additional support has been provided to the team to ensure completion of these by year end.
– Monitoring of the Finance Transformation project throughout 2015 to ensure its risks were mitigated and timeline remained on track.
– Following the appointment of a new Head of Internal Audit in 2014, the scope and depth of the reviews across the business increased during 2015. This has led to increased oversight by the Audit Committee on issues such as the consequences on the China business and its governance framework of the slow down of the Chinese economy, and internal controls in newly acquired distributors.
– Reviewed the development of the process for monitoring the results and performance of acquisitions.
– We received a regulatory enquiry during the year. Following explanation from Julie Brown, our Chief Financial Officer and her team, this matter was dealt with to our satisfaction.
Ian Barlow Chairman of the Audit Committee
|
|||||
|
|
||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
73
| ||
|
| ||||
Table of Contents
| 74
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
AUDIT COMMITTEE REPORT
|
|
Accountability continued |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
75
| ||
|
| ||||
Table of Contents
| 76
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
AUDIT COMMITTEE REPORT
|
|
|
Accountability continued |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
77
| ||
|
| ||||
Table of Contents
| 78
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
REMUNERATION REPORT
|
|
Remuneration |
|
Dear Shareholder,
2015 was a successful year for the Company where we made both financial and strategic progress. The increase in underlying revenue growth, trading profit margin and adjusted earnings year-on-year reflect management’s actions to improve both our commercial performance and operational efficiency. Our performance on the measures we use in our variable pay plans was as follows:
– Revenue at $4,634 million showed underlying growth of 4%, twice that achieved in 2014;
– Strong trading profit led to an increase of 80bps in trading profit margin;
– Trading cash flow was $936 million with the year trading profit to cash ratio of 85% reflecting a return to stronger cash performance levels;
– Revenues from Emerging Markets at $715 million showed underlying growth of 11% in spite of the significant slow down in China;
– Share price improved from 1060p to 1212p during the year.
On these five financial measures, which are reflected in our Annual Incentive Plan and in our Performance Share Plan, the Company performed well in 2015. It is against this back drop that I should like to present our Remuneration Report for 2015.
Continued Alignment
Throughout 2015, the Remuneration Committee focused on ensuring continued alignment of our remuneration arrangements with the corporate strategy and performance of the Company. The table overleaf summarises how the measures in our incentive arrangements link to our corporate objectives, which remain unchanged from last year.
Changes in 2015
During 2015, changes to the remuneration of the Executive Directors were limited to base salary increases of 3% taking effect in April 2015. These were in line with average increases awarded across the rest of the Group. There were no changes to Annual Incentive or Performance Share Plan award levels or measures, although performance targets were updated to reflect expectations going into 2015.
|
The other change that you will notice, in direct response to feedback from our shareholders, is the retrospective disclosure of financial targets under the Annual Incentive Plan.
In respect of performance during the year, Executive Directors received cash incentive payments ranging from 104% to 112% of target and Equity Incentive Awards ranging from 55% to 65% of salary. The 2013 Performance Share Awards vested slightly above threshold at 33.5% of maximum.
2013 – 2015 PSP Awards
For over 10 years the Smith & Nephew incentive plans have included a relative Total Shareholder Return (‘TSR’) measure, reflecting investor preferences, UK market practice and the perceived alignment of shareholder and executive interests. Over this time, the level of vesting has ranged from 0% to 88%.
As noted in my introductory comments, the Company delivered excellent TSR to our shareholders over the last three years, with an investment of £100 at the end of 2012 being worth £180 at the end of 2015. This was significantly ahead of broad market indices, both in the UK and the US, against which many of our investors compare the Company. However, against the small select group of medical devices companies in our peer group, the Company’s TSR performance was just below median.
A number of factors have contributed to this result including volatility within the peer group, which reduced to just 14 peer companies over the performance period due to acquisitions; exchange rate movements, which can have a significant impact given all but two of the peer companies are US listed; and a reduced correlation between the peer companies and Smith & Nephew in terms of size and geographic exposure.
The Remuneration Committee is of the view that this outcome does not reflect either the corporate performance delivered over the three-year performance period or the strong absolute returns experienced by shareholders. We have therefore taken the highly unusual step of exercising our discretion to permit the TSR element of the 2013 Performance Share Awards to vest at threshold (25% of the shares granted). When combined with the Free Cash Flow achievement, this gives a combined vesting of 33.5% for all participants. Further details of this decision are set out on page 86. |
|||||
|
||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
79
| ||
|
| ||||
|
I wish to assure shareholders that this decision was not taken lightly and the Committee was unanimous in reaching it. We considered many factors and also took the opportunity to seek the views of some of our largest shareholders towards the end of 2015, which was most helpful. Ultimately we have made a decision that we believe to be in the best interests of shareholders, reflecting the corporate performance delivered, while continuing to engage and incentivise the Company’s senior management over the longer term.
On page 86 you will see that we have revised and expanded the TSR peer group for the awards to be made in 2016 in an attempt to reduce the risk of this situation arising again in 2019. With the continued consolidation that is expected within our industry over the coming years, this is something that we will consider as part of our review during 2016 which I discuss overleaf.
Other Matters
Other matters we considered in 2015 included the remuneration arrangements for our new Executive Officers – Elga Lohler and Matt Stober. We also looked at benchmarking analyses of the remuneration arrangements for our Executive Directors and Executive Officers comparing them against the arrangements in place at other companies for executives undertaking similar roles in comparable organisations.
Looking Forward
During 2016, we shall be undertaking a thorough review of our remuneration arrangements ahead of the shareholder vote in 2017 on our Remuneration Policy. This review will cover all aspects of our remuneration, including the structure of our incentive arrangements and the measures we use within our incentive plans, the length of vesting and holding periods applicable to our long-term share plan and the competitiveness of our remuneration arrangements in attracting global talent.
The Remuneration Committee remains committed to considering and approving remuneration arrangements which link executive reward to the shareholder experience as far as possible. Thank you for your continued support.
Joseph Papa Chairman of the Remuneration Committee |
Measures in our Variable Pay Plans
|
|||||||
| FINANCIAL MEASURES IN ANNUAL INCENTIVE PLANS
|
||||||||
| Revenue, trading profit, trading cash
Link to Strategic Priorities We need to generate cash in our Established Markets to be able to invest in Emerging Markets, innovation, organic growth and acquisitions in order to continue to grow in the future. Cash flow is therefore important and this in turn is derived from increased revenues and healthy trading profits.
|
||||||||
| BUSINESS OBJECTIVES IN ANNUAL INCENTIVE PLANS
|
||||||||
| Business process
Link to Strategic Priorities We need to release resources from the businesses through improved structures, efficiencies and business processes in order to re-invest in our higher growth areas, including Emerging & International Markets, innovation, organic growth and acquisitions.
|
||||||||
| People
Link to Strategic Priorities We need to attract and retain the right people to achieve our strategy through improving our operating model.
|
||||||||
| Customer
Link to Strategic Priorities Our mission is to deliver advanced medical technologies that help healthcare professionals, our customers, improve the quality of life of their patients.
|
||||||||
| PERFORMANCE MEASURES IN OUR PERFORMANCE SHARE PLAN
|
||||||||
| Free cumulative cash flow
Link to Strategic Priorities Cash flow from our Established Markets is necessary in order to fund growth in Emerging Markets, innovation, organic growth and acquisitions.
|
||||||||
| Revenue in Emerging Markets
Link to Strategic Priorities Our long-term strategy depends on our ability to grow in Emerging Markets.
|
||||||||
| TSR
Link to Strategic Priorities If we execute our strategy successfully, this will lead to an increased return for our shareholders.
|
||||||||
|
Compliance statement We have prepared this Directors’ Remuneration Report (the ‘Report’) in accordance with The Enterprise and Regulatory Reform Act 2012-2013 (clauses 81-84) and The Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’). The Report also meets the relevant requirements of the Financial Conduct Authority (‘FCA’) Listing Rules. The first part of the Report (pages 80 to 93) is the annual report on remuneration (the ‘Implementation Report’). The Implementation Report will be put to shareholders for approval as an advisory vote at the Annual General Meeting on 14 April 2016. The Implementation Report explains how the remuneration policy was implemented during 2015 and also how it is currently being implemented in 2016. Pages 82 to 86 and 93 have been audited by KPMG LLP, including the tables on pages 87 to 90. The second part of the Report (pages 94 to 102) is the Directors’ Remuneration Policy Report (the ‘Policy Report’) which was approved by shareholders at the Annual General Meeting held in 2014. The Policy Report describes our remuneration policy as it relates to the Directors of the Company. All payments we make to any Director of the Company will be in accordance with this remuneration policy. We intend that this remuneration policy will remain in place unchanged for the next year and will next be put to shareholder vote at the Annual General Meeting to be held in 2017. The level of base salary and benefits paid and performance measures shown in the Policy Report are as at 2014, when the Policy Report was approved by shareholders. Full details of any changes to these details since then, in accordance with the Policy Report are given in the Implementation Report.
|
||||||||
Table of Contents
| 80
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
81
| ||
|
| ||||
Table of Contents
| 82
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
Single total figure on remuneration
Executive Directors
| Fixed pay |
|
Annual variable pay |
|
Hybrid | Long-term variable pay | |||||||||||||||||||||||||||
| Director | Base salary | |
Payment in lieu
of |
|
|
Taxable benefits |
|
|
Annual Incentive Plan – cash |
|
|
Annual Incentive Plan – equity |
|
|
Performance Share Plan |
|
|
Share Option Plan |
|
Total | ||||||||||||
| Olivier Bohuon | ||||||||||||||||||||||||||||||||
| Appointed 1 April 2011 | ||||||||||||||||||||||||||||||||
| 2015 | $1,260,594 | $378,178 | $228,698 | $1,419,192 | $825,396 | $1,387,128 | $0 | $5,499,186 | ||||||||||||||||||||||||
| 2014 | $1,464,515 | $439,354 | $286,341 | $952,318 | $811,006 | $2,831,587 | – | $6,785,121 | ||||||||||||||||||||||||
| Julie Brown | ||||||||||||||||||||||||||||||||
| Appointed 4 February 2013 | ||||||||||||||||||||||||||||||||
| 2015 | $803,116 | $240,936 | $29,862 | $843,482 | $444,954 | $764,967 | $0 | $3,127,317 | ||||||||||||||||||||||||
| 2014 | $840,487 | $252,146 | $38,494 | $470,373 | $465,437 | – | – | $2,066,938 | ||||||||||||||||||||||||
The amounts for 2015 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.5281 and € to US$1.1089, and for the prior years, using exchange rates disclosed in previous years’ accounts.
Base salary: the actual salary receivable for the year.
Payment in lieu of pension: the value of the salary supplement paid by the Company in lieu of a pension.
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: the value of the cash incentive payable for performance in respect of the relevant financial year.
Annual Incentive Plan – equity: the value of the equity element awarded in respect of performance in the relevant financial year, but subject to an ongoing performance test as described on pages 83 to 85 of this report.
Performance Share Plan: the value of shares vesting that were subject to performance over the three-year period ending on 31 December in the relevant financial year, based on an estimated share price of 1124.69p per share, which was the average price of a share over the last quarter of 2015. The value of the 2012 share awards that vested in 2015 have now been restated with the share price on the date of actual vesting being 1128.7948p per share on 9 March 2015. The value of the 2013 Share Awards that will vest in March 2016 are calculated in the table by using the Q4 average share price of 1124.69 pence per share.
Other Items in the Nature of Remuneration: could also include All-Employee Share Plans and One-Off Awards.
Total: the sum of the above elements.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
83
| ||
|
| ||||
Table of Contents
| 84
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
Business Objectives
The business objectives on which performance was assessed in 2015 were business process, people and customer. For each of these measures, the Committee determined the level of expected performance in February 2015. In February 2016, the Committee reviewed performance against each of these objectives as explained in the table below. As a result of this review, the Committee determined that 45% of the target award made to Oliver Bohuon would vest in respect of these business objectives and 37.5% of the target award made to Julie Brown would vest.
| BUSINESS PROCESS |
||||
| Olivier Bohuon
|
Julie Brown
| |||
| Strengthened leadership team to deliver strong commercial performance including turnaround in AWM and Europe.
Improved efficiency and agility through Group Optimisation programme, including establishing Global Business Services.
Centralised commercial execution under Chief Commercial Officer to drive commercial excellence.
Strengthened platform through distributor acquisitions in Russia and Colombia. |
Delivered Group Optimisation programme ahead of plan, with $100 million of annualised benefits at year end contributing to trading profit margin improvement.
Further tax improvement, with a 90bps reduction year-on-year in the tax rate on trading results.
Improved trading profit to cash conversion ratio.
Shielded Group from transactional currency impact through hedging strategy.
| |||
| PEOPLE |
||||
| Olivier Bohuon
|
Julie Brown
| |||
| Continued to drive significant change across the Company to focus on new business, growth and efficiency with strong results.
Strong leadership and communication to all employees to drive strategic alignment and performance focus.
Refined leadership structure, including centralising commercial execution under Chief Commercial Officer to drive excellence.
Extended Single Managing Director model to the US, completing global roll-out.
Established leadership forum for new managing directors.
Invested directly in talent development across the Company through CEO Forum and CEO Awards.
Contributed to the roll-out of Great Place to Work accreditation, now achieved in Spain and Italy.
|
Embedded finance transformation programme through the continued simplification of financial processes, system and tools.
Standardised and improved financial controls and processes across operating entities Group-wide through introduction of minimum acceptable practices (MAPs).
Improved employee development and engagement across Finance with significant moves made to develop top talent, leading training and capability development for Finance business partners and across the finance function, with finance training across the business overall. | |||
| CUSTOMER |
||||
| Olivier Bohuon
|
Julie Brown
| |||
| Integrated ArthroCare acquisition to strengthen Sports Medicine portfolio, on-track to deliver expected synergies.
Widened access to products through continued strong Emerging Markets growth despite China slow-down.
Continued to build innovative ways to anticipate customers’ changing need (e.g. Syncera).
Developed mid-tier product portfolio including acquiring trauma manufacturing in Russia.
Maintained R&D investment, strong product pipeline for 2016, improved focus through creation of R&D global function.
Acquired Blue Belt Technologies establishing strong position in robotics.
|
Represented the Group with investors and financial analysts at one-to-one meetings and industry conferences in the UK and abroad, receiving strong positive feedback.
Delivered improved insight into the profitability by market and customer, facilitating improved resource allocation and margin improvement. | |||
| Olivier Bohuon level of award
|
Julie Brown level of award
| |||
| €515,310 representing 45% out of the 30% target award subject to business objectives. | £198,532 representing 37.5% out of the 30% target award subject to business objectives. |
The Remuneration Committee also considered whether to apply the +/– 10 multiplier to the annual incentive assessment of Olivier Bohuon and Julie Brown and agreed that no multiplier was appropriate in respect of 2015.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
85
| ||
|
| ||||
Table of Contents
| 86
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
87
| ||
|
| ||||
In addition, the Committee took account of the Plan Rules which provide for the replacement of delisted companies with substitutes as the alternative to automatic exclusion. While the use of substitutes is uncommon in the market and some of our shareholders interpreted this to be a retrospective change, concerned by industry consolidation and reduction of the peer group from 18 to 15, the Committee resolved to consider the outcome under this approach. While the Company remained below median, the gap in TSR between the Company and the peer group median reduced to 1.7%.
On balance, the Committee determined that the default outcome under the plan did not reflect the corporate performance delivered over the three-year performance period, nor the shareholder experience of absolute returns exceeding 70%. Applying the discretion permitted to the Committee under the Plan Rules and Remuneration Policy, it was concluded that the element of the awards subject to TSR performance would be deemed to vest at threshold (25%). The Committee recognised that the use of discretion was not something to be taken lightly, but after much debate felt that this was appropriate and fair in the circumstances.
This part of the award therefore vested at 25%.
50% of the award was based on cumulative free cash flow performance. The target set in 2013 was $1,780 billion. Over the three-year period, the adjusted cumulative cash free cash flow was $1,703 billion. These adjustments include items such as Board approved M&A, including the acquisitions of Healthpoint and ArthroCare and Board approved Business Plans such as the Group Optimisation programme, the Regranex hold, the Capex plan and metal-on-metal settlements. This part of the award therefore vested at 42%.
Overall therefore, the conditional awards made in 2013 will vest at 33.5% of maximum on 7 March 2016 as follows:
| Director | Date of grant | |
Number of shares under award at maximum |
|
Number vesting | |||||||||||||
| Olivier Bohuon | 7 March 2013 | 240,928 | 80,710 | |||||||||||||||
| Julie Brown | 7 March 2013 | 132,866 | 44,510 | |||||||||||||||
|
Summary of scheme interests awarded during the financial year
|
| |||||||||||||||||
| Olivier Bohuon | Julie Brown | |||||||||||||||||
| Basis on which award is made | Number of shares | Face value | Number of shares | Face value | ||||||||||||||
| Annual Equity Incentive Award (see page 85) | 38,545 | €611,480 | 24,711 | £282,700 | ||||||||||||||
| Performance Share Award at maximum (see page 85) | 133,156 | €2,112,386 | 85,366 | £976,600 | ||||||||||||||
| 190% base salary at maximum | ||||||||||||||||||
Please see Policy Table on pages 96 to 97 for details of how the above plans operate. The number of shares is calculated using the closing share price on the day before the grant, which for the awards granted on 9 March 2015 was 1144p.
Details of awards made under the Performance Share Programme
Details of conditional awards over shares granted to Executive Directors subject to performance conditions are shown on the next page. These awards were granted under the Global Share Plan 2010. The performance conditions and performance periods applying to these awards are detailed on page 85.
Table of Contents
| 88
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
| Date granted
|
Number of ordinary shares under award at maximum
|
Date of vesting
| ||||
|
Olivier Bohuon |
7 March 20131
|
240,928
|
7 March 2016
| |||
| 7 March 2014
|
180,304
|
7 March 2017
| ||||
| 9 March 2015
|
133,156
|
9 March 2018
| ||||
| Julie Brown
|
7 March 20131
|
132,866
|
7 March 2016
| |||
| 7 March 2014
|
100,688
|
7 March 2017
| ||||
| 9 March 2015
|
85,366
|
9 March 2018
|
| 1 | On 2 February 2016, 67% of the award granted at maximum to Olivier Bohuon and Julie Brown lapsed following completion of the performance period. |
Details of option grants under the All-Employee ShareSave Plan
Details of options held by Executive Directors under the Smith & Nephew ShareSave Plan (2012) are shown below.
|
Director
|
Date granted
|
Number of shares under option
|
Date of vesting
|
Exercise period
|
Option price
| |||||
|
Julie Brown
|
17 September 2013
|
2,400 ordinary shares
|
1 November 2018
|
1 November 2018 to 30 April 2019
|
£6.25
|
Single total figure on remuneration
Chairman and Non-Executive Directors
| Director | Basic annual fee1 |
|
Senior Independent Director/ Committee fee |
|
Intercontinental travel fee | Total | ||||||||||||||||||||||||||
| 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | |||||||||||||||||||||||||
| Roberto Quarta | £334,673 | £400,000 | N/A | N/A | £7,000 | £3,500 | £341,673 | £403,500 | ||||||||||||||||||||||||
| Vinita Bali | £5,250 | £63,000 | N/A | N/A | £3,500 | £17,500 | £8,750 | £80,500 | ||||||||||||||||||||||||
| $6000 | $6000 | |||||||||||||||||||||||||||||||
| Ian Barlow | £66,150 | £66,150 | £15,000 | £15,000 | £7,000 | £3,500 | £88,150 | £84,650 | ||||||||||||||||||||||||
| Virginia Bottomley | £66,150 | £66,150 | N/A | N/A | £7,000 | £3,500 | £73,150 | £69,650 | ||||||||||||||||||||||||
| Erik Engstrom2 | N/A | £66,150 | N/A | N/A | N/A | £3,500 | N/A | £69,650 | ||||||||||||||||||||||||
| Robin Freestone3 | N/A | £21,000 | N/A | N/A | N/A | £3,500 | N/A | £24,500 | ||||||||||||||||||||||||
| Michael Friedman | $126,000 | $126,000 | $11,250 | $27,000 | $35,000 | $42,000 | $172,250 | $195,000 | ||||||||||||||||||||||||
| Brian Larcombe | £66,150 | £66,150 | £10,865 | £15,000 | £7,000 | £3,500 | £84,015 | £84,650 | ||||||||||||||||||||||||
| Joseph Papa | $126,000 | $126,000 | $27,000 | $27,000 | $35,000 | $35,000 | $188,000 | $188,000 | ||||||||||||||||||||||||
| 1 | The basic annual fee includes shares purchased for the Chairman and Non-Executive Directors in lieu of part of the annual fee, details of which can be found on the table on page 101. |
| 2 | Appointed to the Board on 1 January 2015. |
| 3 | Appointed to the Board on 1 September 2015. |
Chairman and Non-Executive Director Fees
The fees paid to the Chairman and the Non-Executive Directors remained unchanged in 2015. In February 2016, the Remuneration Committee reviewed the fees paid to the Chairman and the Board reviewed the fees paid to the Non-Executive Directors and determined that with effect from 1 April, the fees paid would be as follows:
|
Annual fee paid to the Chairman
|
£412,000 of which £103,000 paid in shares (increase of 3%)
| |
| Annual fee paid to Non-Executive Directors | £68,135 of which £5,135 paid in shares (increase of 3%)
| |
| Or $129,780 of which $9,780 paid in shares (increase of 3%)
| ||
|
Intercontinental travel fee (per meeting)
|
£3,500 or $7,000 (unchanged)
| |
|
Fee for Senior Independent Director and |
£20,000 or $35,000 reflecting increased responsibilities. | |
| Committee Chairman |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
89
| ||
|
| ||||
Chief Executive Officer’s remuneration compared to employees generally
The percentage change in the remuneration of the Chief Executive Officer between 2014 and 2015 compared to that of employees generally is as follows:
|
|
Base salary % change 2015 |
|
|
Benefits % change 2015 |
|
|
Annual cash bonus % change 2015 |
| ||||
| Chief Executive Officer | 3 | –4.5 | 78 | |||||||||
| Average for all employees | 5 | N/A | N/A |
The average cost of wages and salaries for employees generally decreased by 11.6% in 2015 (see Note 3.1 to the Group accounts). Figures for annual cash bonuses are included in the numbers.
Payments made to past directors
No payments were made to former directors in the year.
Payments for loss of office
No payments were made in respect of a Director’s loss of office in 2015.
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 99 of the Policy Report.
Outside Directorships
Olivier Bohuon is a Non-Executive Director of Virbac SA and received €21,000 in respect of this appointment in 2015. He is also a Non-Executive Director of Shire Plc and received €66,491 in respect of this appointment in 2015. Julie Brown is nominated for election as a new member of the Board of Directors of Roche Holding Ltd at the Annual General Meeting on 1 March 2016, for which she will receive a fee.
Directors’ interests in ordinary shares
Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:
| Olivier Bohuon | Julie Brown | |||||||||||||||||||||||||
| 1 January 2015 | 31 December 2015 | 23 February 2016 | 1 | 1 January 2015 | 31 December 2015 | 23 February 2016 | 1 | |||||||||||||||||||
| Ordinary shares | 210,974 | 338,183 | 338,183 | 3 | 25000 | 42,945 | 56,156 | 4 | ||||||||||||||||||
| Share options | 0 | 0 | 0 | 2,400 | 2,400 | 2,400 | 5 | |||||||||||||||||||
| Performance share awards2 | 688,536 | 554,388 | 474,880 | 233,554 | 318,920 | 275,074 | ||||||||||||||||||||
| Equity Incentive awards | 147,114 | 107,142 | 107,142 | 26,497 | 42,377 | 42,377 | ||||||||||||||||||||
| Other awards | 0 | 0 | 0 | 50,000 | 25,000 | 0 | ||||||||||||||||||||
| 1 | The latest practicable date for this Annual Report. |
| 2 | These share awards are subject to further performance conditions before they may vest, as detailed on pages 83 to 84. |
| 3 | The ordinary shares held by Olivier Bohuon on 23 February 2016 represent 435.2% of his base annual salary. |
| 4 | The ordinary shares held by Julie Brown on 23 February 2016 represent 122.2% of her base annual salary. |
| 5 | This option was granted under the Smith & Nephew ShareSave Plan (2012). |
The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company. In addition, Olivier Bohuon holds 50,000 deferred shares. Following the redenomination of ordinary shares into US Dollars on 23 January 2006, the Company issued 50,000 deferred shares. These shares are normally held by the Chief Executive Officer and are not listed on any Stock exchange and have extremely limited rights attached to them.
Table of Contents
| 90
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
Beneficial interests of the Chairman and Non-Executive Directors in the ordinary shares of the Company are as follows:
| Director | |
1 January 2015 (or date of appointment) if later |
|
|
31 December 2015 (or date of retirement if earlier) |
|
23 February 2016 | 1 | |
Shareholding as % of annual fee |
2 | |||||
| Roberto Quarta | 15,136 | 19,765 | 19,765 | 56.9% | ||||||||||||
| Vinita Bali3 | 0 | 6,186 | 6,186 | 108.2% | ||||||||||||
| Ian Barlow | 18,403 | 18,556 | 18,556 | 323.2% | ||||||||||||
| Virginia Bottomley | 18,056 | 18,219 | 18,219 | 317.3% | ||||||||||||
| Erik Engstrom | 15,000 | 15,140 | 15,140 | 263.7% | ||||||||||||
| Robin Freestone | 0 | 15,000 | 15,000 | 261.2% | ||||||||||||
| Michael Friedman3 | 8,822 | 9,014 | 9,014 | 116.5% | ||||||||||||
| Brian Larcombe | 40,368 | 40,508 | 40,508 | 705.4% | ||||||||||||
| Joseph Papa3 | 12,997 | 13,197 | 13,197 | 170.5% |
| 1 | The latest practicable date for this Annual Report. |
| 2 | Calculated using the closing share price of 1152p per ordinary share and $32.57 per ADS on 23 February 2016, and an exchange rate of £1/$1.4078. |
| 3 | Vinita Bali, Michael Friedman and Joseph Papa hold some of their shares in the form of ADS. |
The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.
Relative importance of spend on pay
The following table sets out the total amounts spent in 2015 and 2014 on remuneration, the attributable profit for each year and the dividends declared and paid in each year.
| For the year to 31 December 2015 | For the year to 31 December 2014 | % change | ||||||
| Attributable profit for the year | $410m | $501m | -18.2% | |||||
| Dividends paid during the year | $272m | $250m | 8.8% | |||||
| Share buyback1 | $77m | $75m | 2.7% | |||||
| Total Group spend on remuneration | $1,193m | $1,237m | 3.6% |
| 1 | Share buy-back programme ceased during 2014 following the acquisition of Arthrocare. Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. See Note 19.2 for further information. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
91
| ||
|
| ||||
Total Shareholder Return
A graph of the Company’s TSR performance compared to that of the FTSE 100 index is shown below in accordance with Schedule 8 to the Regulations.
Seven-year Total Shareholder Return
(measured in UK Sterling, based on monthly spot values)
However, as we compare the Company’s performance to a tailored sector peer group of medical devices companies (see page 88), when considering TSR performance in the context of the Global Share Plan 2010, we feel that the following graph showing the TSR performance of this peer group is also of interest.
Seven-year Total Shareholder Return
(measured in US Dollars, based on monthly spot values)
Table of Contents
| 92
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Implementation Report continued
Table of historic data
The following table details information about the pay of the Chief Executive Officer in the previous seven years:
| Long-term incentive vesting rates against maximum opportunity | ||||||||||
| Year | Chief Executive Officer | Single figure of total remuneration $ |
Annual Cash Incentive payout against maximum % |
Performance shares % | Options % | |||||
| 2015 | Olivier Bohuon | $5,499,186 | 755 | 33.5 | N/A | |||||
| 2014 | Olivier Bohuon | $6,785,1214 | 436 | 57 | N/A | |||||
| 2013 | Olivier Bohuon | $4,692,858 | 84 | 0 | N/A | |||||
| 2012 | Olivier Bohuon | $4,956,771 | 84 | N/A | N/A | |||||
| 2011 | Olivier Bohuon1,3 | $7,442,191 | 68 | N/A | N/A | |||||
| 2011 | David Illingworth2 | $3,595,787 | 37 | 27 | 27 | |||||
| 2010 | David Illingworth | $4,060,707 | 57 | 70 | 61 | |||||
| 2009 | David Illingworth | $4,406,485 | 59 | 46 | 59 | |||||
| 1 | Appointed Chief Executive Officer on 1 April 2011. |
| 2 | Resigned as Chief Executive Officer on 1 April 2011. |
| 3 | Includes recruitment award of €1,400,000 cash and a share award over 200,000 ordinary shares with a value of €1,410,000 on grant. |
| 4 | Prior years are restated to reflect amounts not known at the date of signing the previous Annual Report. |
| 5 | Calculated as 112% (actual payout) disclosed on page 85 divided by the maximum potential payout of 150%. |
| 6 | This has been restated such that it is calculated consistently to the amounts disclosed in the current year. |
Implementation of remuneration policy in 2016
The Remuneration Committee proposes to make no changes to the way that the remuneration policy is implemented in 2016 from how it was implemented in 2015, other than increasing base salaries in line with salary increases across the Group, as explained on pages 83 and 88 and setting new targets for the Annual Incentive Plan and the Performance Share Programme, as explained on page 86.
Statement of voting at Annual General Meeting held in 2015
At the Annual General Meeting held on 9 April 2015, votes cast by proxy and at the meeting and votes withheld in respect of the votes on the Directors’ Remuneration Report were as follows:
| Resolution |
Votes for | % for | Votes against | % against | Total votes validly cast | Votes withheld | ||||||||||||||||||
|
Approval of the Directors’ |
533,724,308 | 92.09 | 45,839,876 | 7.91 | 579,564,184 | 18,275,546 | ||||||||||||||||||
| Remuneration Report |
Joseph Papa, Chairman of the Remuneration Committee has met with a number of shareholders in previous years to discuss remuneration matters. In December 2015, he met with shareholders holding around 18.4% of the Company’s shares to discuss the following issues:
| – | Previously, the Board felt that the disclosure of the financial targets used in our Annual Incentive Plan would be commercially sensitive. However, following discussions with shareholders, we agreed to look at ways of disclosing these targets retrospectively without causing us commercial concerns. The financial targets we used in our Annual Incentive Plan for 2015 are therefore disclosed on page 83. |
| – | We also discussed with shareholders whether the vesting period relating to our long-term share plans should be extended from three to five years, by requiring Directors to retain and hold vested shares for a two-year period after vesting. Whilst this is exactly what our Executive Directors do, out of choice, this is not something that is currently a condition of the Performance Share Awards. The Committee has considered this further and have agreed that this is a matter, which we would prefer to address in the context of a full review of our remuneration policy, which we shall be undertaking during 2016 ahead of putting the remuneration policy to shareholders for approval in 2017. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
93
| ||
|
| ||||
Other remuneration matters
Senior Management remuneration
The Group’s administrative, supervisory and management body (the ‘Senior Management’) is comprised for US reporting purposes, of Executive Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 54 to 56.
Compensation paid to Senior Management in respect of 2015, 2014 and 2013 was as follows:
|
|
2013
|
|
|
2014
|
|
2015
| ||||
|
Total compensation (excluding pension emoluments, but including cash payments under the performance-related incentive plans)
|
|
$14,186,000 |
|
|
$12,725,000 |
|
$13,971,000 | |||
| Total compensation for loss of office
|
|
$0
|
|
|
$2,664,000
|
|
0
| |||
| Aggregate increase in accrued pension scheme benefits
|
|
$257,000
|
|
|
$16,000
|
|
0
| |||
| Aggregate amounts provided for under supplementary schemes | $414,000 | $507,000 | $698,000 |
As at 23 February 2016, the Senior Management owned 528,367 shares and 56,970 ADSs, constituting less than 0.1% of the share capital of the Company.
Details of share awards granted during the year and held as at 23 February 2016 by members of Senior Management are as follows:
|
|
Share awards granted during the year
|
|
Total share awards held as at 23 February 2016
| |||
|
Equity Incentive awards
|
|
198,497
|
|
332,925
| ||
| Performance Share awards
|
|
508,650
|
|
1,271,834
| ||
| Conditional share awards under the Global Share Plan 2010
|
|
9,115
|
|
38,514
| ||
| Options under Employee ShareSave plans
|
|
2,675
|
|
8,940
| ||
| Options under the Global Share Plan 2010 | 0 | 110,193 |
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 ten-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 (2006 to 2015), the number of new shares issued under our share plans has been as follows:
|
All-employee share plans
|
7,530,287 (0.84% of issued share capital as at 23 February 2016)
| |
| Discretionary share plans
|
36,408,270(4.07% of issued share capital as at 23 February 2016)
|
| By order of the Board, on 24 February 2016
|
|
Joseph Papa |
| Chairman of the Remuneration Committee |
Table of Contents
| 94
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Policy Report
Future policy table
Executive Directors
The following table and accompanying notes explain the different elements of remuneration we pay to our Executive Directors:
| How the component supports the short- and long-term strategy of the Company
|
How the component operates
| |
| BASE SALARY AND BENEFITS
|
||
| BASE SALARY
|
| PAYMENT IN LIEU OF PENSION
|
| BENEFITS
|
|
ALL-EMPLOYEE ARRANGEMENTS
|
||
| ALL-EMPLOYEE SHARE PLANS
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
95
| ||
|
| ||||
|
|
||||||
| Maximum levels of payment
|
Framework in which performance is assessed | |||||
| The base salary of the Executive Directors with effect from 1 April 2014 will be as follows:
– Olivier Bohuon €1,111,782
– Julie Brown £514,000
The factors noted in the previous column will be taken into consideration when making increases to base salary and when appointing a new Director.
In normal circumstances, base salary increases for Executive Directors will relate to the geographic market and peer group. In addition, the average increases for employees across the Group will be taken into account. The Remuneration Committee retains the right to approve higher increases when there is a substantial change in the scope of the Executive Director’s role. A full explanation will be provided in the Implementation Report should higher increases be approved in exceptional cases. |
Performance in the prior year is one of the factors taken into account and poor performance is likely to lead to a zero salary increase. | |||||
| Up to 30% of base salary. | The level of payment in lieu of a pension paid to Executive Directors is not dependent on performance.
|
|||||
| The policy is framed by the nature of the benefits that the Remuneration Committee is willing to provide to Executive Directors. The maximum amount payable will depend on the cost of providing such benefits to an employee in the location at which the Executive Director is based. Shareholders should note that the cost of providing comparable benefits in different jurisdictions may vary widely.
As an indication, the cost of such benefits provided in 2013 was as follows:
– Olivier Bohuon €80,705
– Julie Brown £14,400
The maximum amount payable in benefits to an Executive Director, in normal circumstances, will not be significantly more than amounts paid in 2013 (or equivalent in local currency). The Remuneration Committee retains the right to pay more than this should the cost of providing the same underlying benefits increase or in the event of a relocation. A full explanation will be provided in the Implementation Report should the cost of benefits provided be significantly higher. |
The level and cost of benefits provided to Executive Directors is not dependent on performance but on the package of benefits provided to comparable roles within the relevant location. | |||||
| Executive Directors may currently invest up to £250 per month in the UK ShareSave Plan. The Remuneration Committee may exercise its discretion to increase this amount up to the maximum permitted by the HM Revenue & Customs. Similar limits will apply in different locations. | The potential gains from all-employee plans are not based on performance but are linked to growth in the share price. | |||||
Table of Contents
| 96
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
Future policy table
Executive Directors continued
| How the component supports the short- and long-term strategy of the Company
|
How the component operates
| |
| ANNUAL INCENTIVES
|
||
| ANNUAL INCENTIVE PLAN – CASH INCENTIVE
|
| ANNUAL INCENTIVE PLAN – EQUITY INCENTIVE
|
| LONG-TERM INCENTIVES (AWARDS ACTIVELY BEING MADE)
| ||
| PERFORMANCE SHARE PROGRAMME
|
||
| ONE-OFF SHARE AWARDS
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
97
| ||
|
| ||||
| Maximum levels of payment
|
Framework in which performance is assessed | |||||
| The total maximum payable under the Annual Incentive Plan is 215% of base salary (150% Cash Incentive and 65% Equity Incentive).
50% salary awarded for threshold performance.
100% salary awarded for target performance.
150% salary awarded for maximum performance.
Performance assessed against individual objectives and Group financial targets. |
The cash and share awards are subject to malus and clawback as detailed in the notes following this table.
70% of the cash component is based on financial performance measures, which currently include revenue, trading profit and trading cash. The Remuneration Committee retains the discretion to adopt any financial performance measure that is relevant to the Company.
30% of the cash component is based on other business goals linked to the Company’s strategy, which could include financial and non-financial measures.
The Remuneration Committee has the discretion to apply a multiplier, adjusting the outcome up or down by 10% to reward or penalise conduct in respect of leadership, corporate reputation, ethics, organisational behaviours and representing the Company both internally and externally.
The maximum opportunity shown to the left cannot be exceeded through the application of the multiplier.
|
|||||
| 0% of salary awarded for performance below target.
50% of salary awarded for target performance.
65% of salary awarded for maximum performance.
Performance assessed against individual performance which includes an element of Group financial targets. |
The Remuneration Committee will use their judgement of the individual’s performance in determining the level of equity award that may be awarded within the range of 50% to 65% of salary.
The equity component will vest in three equal tranches over a three-year period, provided that the annual performance conditions set at the beginning of each year continue to be met.
|
|||||
| Annual awards:
– 47.5% of salary for threshold performance.
– 95% of salary for target performance.
– 190% of salary for maximum performance.
|
Currently:
– 50% of the award vests on achievement of a three-year cumulative free cash flow target.
– 25% of the award vests subject to three-year Total Shareholder Return (‘TSR’) at median performance relative to industry peers.
– 25% of the award vests subject to the achievement of revenue targets in Emerging & International Markets.
– These measures are described in more detail in the notes and the targets and performance against them will be disclosed in the Implementation Report if appropriate.
– The Performance Share Award will vest on the third anniversary of the date of grant, depending on the extent to which the performance conditions are met over the three-year period commencing in the year the award was made.
– The Remuneration Committee retains the discretion to change the measures and their respective weightings to ensure continuing alignment with the Company’s strategy.
– The cash and share awards are subject to malus and clawback as detailed in the notes following this table.
Awards made prior to 2014 were subject to TSR and cash flow targets.
|
|||||
| Each award will be determined on a case-by-case basis. In normal circumstances such awards will be no more beneficial than the value of amounts forfeited by the Executive Director on leaving a previous company to join the Board. | The Remuneration Committee has the discretion to apply performance conditions to one-off awards if appropriate. However, if it is impossible to replicate the vesting conditions applicable to awards granted by other companies, awards may be made without performance conditions. | |||||
Table of Contents
| 98
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Policy Report continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
99
| ||
|
| ||||
Table of Contents
| 100
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Policy Report continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
101
| ||
|
| ||||
Future policy table
Chairman and Non-Executive Directors
The following table and accompanying notes explain the different elements of remuneration we pay to our Chairman and Non-Executive Directors. No element of their remuneration is subject to performance. All payments made to the Chairman are determined by the Remuneration Committee, whilst payments made to the Non-Executive Directors are determined by the Directors who are not themselves Non-Executive Directors, currently the Chairman, the Chief Executive Officer and the Chief Financial Officer.
| How the component supports the short- and long-term strategy of the Company
|
How the component operates
|
Maximum levels of payment
| ||
| ANNUAL FEES
|
||||
| BASIC ANNUAL FEE
|
||||
| To attract and retain Directors by setting fees at rates comparable to what would be paid in an equivalent position elsewhere.
A proportion of the fees are paid in shares in the third quarter of each year in order to align Non-Executive Directors’ fees with the interest of shareholders. |
Fees will be reviewed periodically. In future, any increase will be paid in shares until 25% of the total fee is paid in shares.
Fees are set in line with market practice for fees paid by similarly sized UK listed companies.
Annual fees are set and paid in UK Sterling or US Dollars depending on the location of the Non-Executive Director. If appropriate, fees may be set and paid in alternative currencies. |
Annual fees are currently as follows:
– £63,000 in cash plus £3,150 in shares; or
– $120,000 in cash plus $6,000 in shares.
Chairman fee:
– £400,000 plus £20,000 in shares (to April 2014).
– £300,000 plus £100,000 in shares (from April 2014).
Whilst it is not expected to increase the fees paid to the Non-Executive Directors and the Chairman by more than the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.
The total maximum aggregate fees payable to the Non-Executive Directors will not exceed £1.5 million as set out in the Company’s articles of association.
| ||
|
FEE FOR SENIOR INDEPENDENT DIRECTOR AND COMMITTEE CHAIRMEN
| ||||
| To compensate Non-Executive Directors for the additional time spent as Committee Chairmen or as the Senior Independent Director. | A fixed fee is paid, which is reviewed periodically. | – £15,000 in cash; or
– $27,000 in cash.
Whilst it is not expected that the fees paid to the Senior Independent Director or Committee Chairmen will exceed the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.
| ||
|
INTERCONTINENTAL TRAVEL FEE
| ||||
| To compensate Non-Executive Directors for the time spent travelling to attend meetings in another continent. | A fixed fee is paid, which is reviewed periodically. | – £3,500 in cash; or
– $7,000 in cash.
Whilst it is not expected to increase these fees by more than the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.
| ||
Figures as at fee levels in 2014, when the Policy Report was approved by shareholders.
Table of Contents
| 102
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
DIRECTORS’ REMUNERATION REPORT
|
The Policy Report continued
Table of Contents
Table of Contents
| 104
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
| ||||
|
GROUP FINANCIAL STATEMENTS
|
Statement of Director’s Responsibilities in respect of the Annual Report and the Financial Statements
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
105
| ||
|
| ||||
Independent auditor’s US report
Table of Contents
| 106
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
Independent auditor’s UK report
Inventory valuation: $1,217 million
| THE RISK | OUR RESPONSE AND CONCLUSIONS | |
| The Group has high levels of finished goods some of which are located at customer premises to be available for immediate use. Complete sets of products, including outsizes, have to be made available in this way, with these sizes used less frequently. Towards the end of a product’s life cycle, these inventory levels are more than is required and therefore excess to requirements.
In estimating the net realisable value for inventory, management has to apply judgement on how much of the inventory on hand will ultimately be used. |
The key inputs used in estimating the Excess and Obsolescence (E&O) provision include historic sales for significant product lines and expected future usage of inventory.
On a sample basis we corroborated historic sales back to underlying source data. We also corroborated on a sample basis the expected usage of inventory with the Director’s plans for launching new product lines or discontinuing product lines.
We considered the historical accuracy of the provision against actual inventory write-offs.
We also considered the adequacy of the Group’s disclosures in respect of inventory valuation.
As a result, we satisfied ourselves that inventory provisions have been prepared in line with policy and are supportable on the basis of historical trends as well as management’s expectations for future sales and inventory management plans.
| |
|
|
REFER TO PAGE 75 (AUDIT COMMITTEE REPORT), PAGE 111 (ACCOUNTING POLICY) AND PAGE 136 (FINANCIAL DISCLOSURES) |
|||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
107
| ||
|
| ||||
Revenue: $4,634 million
| THE RISK | OUR RESPONSE AND CONCLUSIONS | |
| Revenue is recognised when the risks and rewards are passed to the customer.
Revenue recognition is one of the key judgemental areas for our audit, particularly in respect of estimates made for contractual rebates, chargebacks and returns which are deducted in arriving at revenue from wholesale customers and distributors. |
Our principal audit procedures included: testing the Group’s controls surrounding revenue recognition and key controls in the order-to-cash transaction cycle. This included reconciliations between sales systems and the general ledger; assessing whether appropriate revenue recognition policies are applied through comparison with accounting standards; and performing testing over revenue at significant components, which included analysis of product sales year-on-year, corroborating movements compared with expectations and inspection of contracts with customers.
Our audit work in respect of the accrual rebates, chargebacks and returns involved testing key controls including the Group’s review of chargebacks, returns and rebates.
We also assessed the accuracy of the accrual calculation, corroborated inputs and key assumptions, both to source documents, and considered the historical accuracy of the accrual.
We also assessed the adequacy of the Group’s disclosures of its revenue recognition policy, the judgment involved and other related disclosures.
The results of our testing were satisfactory and we concur that revenue recognition is appropriate.
|
|
|
REFER TO PAGE 75 (AUDIT COMMITTEE REPORT) AND PAGE 121 (ACCOUNTING POLICY AND FINANCIAL DISCLOSURES) |
|||||||
Litigation reserves and contingent liabilities ($303 million included in provisions)
| THE RISK | OUR RESPONSE AND CONCLUSIONS | |
| The development, manufacture and sale of medical devices entails risk of product liability claims and patent infringement issues due to the technological nature of the products and the competitive nature of the industry. Determining the impact and likely outcome of any litigation matters is inherently subjective and the amounts involved are potentially material.
As disclosed in Note 17 a provision of $185 million has been recognised in the year in respect of potential liabilities arising from the ongoing exposure for Metal on Metal implants. |
We tested the Group’s controls surrounding litigation and contingent liabilities, inspected legal invoices and corresponded directly with external legal advisers to understand the fact patterns and ensure that all significant cases had been adequately considered.
We tested the estimates of provisions, including their assessment of potential royalties payable for past sales, and expected settlement of product liability cases. We challenged the assumptions made based on the fact pattern of similar historic cases.
For the liability recognised in respect of the expected payouts for Metal on Metal cases we involved our actuarial specialists to review the critical assumptions used in statistical projections in determining the estimate. The key assumptions included: expected number of claimants; projected value of each settlement; and the likely time period expected for settlement.
We also considered the adequacy of the Group’s disclosures in respect of litigation reserves and contingent liabilities.
The results of our testing were satisfactory and we concur that the costs in respect of litigation and contingent liabilities is appropriate.
|
|
|
REFER TO PAGE 75 (AUDIT COMMITTEE REPORT), PAGE 111 (ACCOUNTING POLICY) AND PAGE 146 (FINANCIAL DISCLOSURES) |
|||||||
Table of Contents
| 108
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
Independent auditor’s UK report continued
Valuation of acquired intangible assets (included in intangible assets of $1,502 million)
| THE RISK | OUR RESPONSE AND CONCLUSIONS | |
| The Group has capitalised acquired intangibles of which the most significant relate to recent acquisitions in respect of ArthroCare (acquired in 2014) and Healthpoint (acquired in 2012).
There is a risk that due to changes in the competitive landscape, regulatory or other external factors the acquired assets underperform in comparison to their original investment case and that the carrying value may be impaired.
An impairment charge of $40 million has been recognised in the current year in relation to an acquired brand, Oasis, from the Healthpoint acquisition which has underperformed against the original investment case. |
Our audit procedures included testing the principles and integrity of the Group’s discounted cash flow models and corroborating the assumptions made on revenue and profitability projections.
We tested the sensitivity of key assumptions to the value in use calculated. We also assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the key risks inherent in the valuation of acquired intangibles.
As a result of our work, we determined that the quantum of impairment recognised in 2015 was appropriate. For those intangible assets, where management determined no impairment was required, we found that these judgements were supported by reasonable assumptions.
|
|
|
REFER TO PAGE 75 (AUDIT COMMITTEE REPORT), PAGE 111 (ACCOUNTING POLICY) AND PAGES 133 TO 134 (FINANCIAL DISCLOSURES) |
|||||||
Tax provisioning (included in current tax payable of $ 263 million)
| THE RISK | OUR RESPONSE AND CONCLUSIONS | |
| Accruals for tax contingencies require the Directors to make judgements and estimates in relation to tax issues and exposures given that the Group operates in a number of tax jurisdictions, the complexities of transfer pricing and other international tax legislation and the time taken for tax matters to be agreed with the tax authorities. |
In this area our audit procedures included the use of our own international and local tax specialists to assess the Group’s tax positions, its correspondence with the relevant tax authorities, and to analyse and challenge the assumptions used to determine tax provisions based on our knowledge and experiences of the application of the international and local legislation by the relevant authorities and courts.
We also considered the adequacy of the Group’s disclosures in respect of tax and uncertain tax positions.
From the evidence obtained, we considered the level of provisioning to be acceptable in the context of the Group financial statements taken as a whole.
|
|
|
REFER TO PAGE 75 (AUDIT COMMITTEE REPORT), PAGE 111 (ACCOUNTING POLICY) AND PAGE 126 (FINANCIAL DISCLOSURES) |
|||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
109
| ||
|
| ||||
| The components within the scope of our work accounted for the following percentages of the Group’s results:
| ||||
| GROUP REVENUE |
GROUP PROFIT BEFORE TAX |
TOTAL ASSETS | ||
|
|
|
| ||
|
A | Audits for group reporting purposes (145 components) | ||
|
B | Audits of account balances (revenue, receivables and inventory) (9 components) | ||
|
C | Out of scope |
Table of Contents
| 110
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
Independent auditor’s UK report continued
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
111
| ||
|
| ||||
Table of Contents
| 112
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
FINANCIAL STATEMENTS
|
| Notes | Year ended 31 December 2015 $ million |
Year ended 31 December 2014 $ million |
Year ended 31 December 2013 $ million | |||||||
| Revenue | 2 | 4,634 | 4,617 | 4,351 | ||||||
|
Cost of goods sold |
(1,143) | (1,162) | (1,100) | |||||||
| Gross profit | 3,491 | 3,455 | 3,251 | |||||||
|
Selling, general and administrative expenses |
3 | (2,641) | (2,471) | (2,210) | ||||||
|
Research and development expenses |
3 | (222) | (235) | (231) | ||||||
| Operating profit | 2 & 3 | 628 | 749 | 810 | ||||||
|
Interest income |
4 | 11 | 13 | 14 | ||||||
|
Interest expense |
4 | (49) | (35) | (10) | ||||||
|
Other finance costs |
4 | (15) | (11) | (11) | ||||||
|
Share of results of associates |
11 | (16) | (2) | (1) | ||||||
| Profit before taxation | 559 | 714 | 802 | |||||||
|
Taxation |
5 | (149) | (213) | (246) | ||||||
| Attributable profit for the year1 | 410 | 501 | 556 | |||||||
| Earnings per ordinary share1 | 6 | |||||||||
|
Basic |
45.9¢ | 56.1¢ | 61.7¢ | |||||||
|
Diluted |
45.6¢ | 55.7¢ | 61.4¢ |
Group statement of comprehensive income
| Notes | Year ended 31 December 2015 $ million |
Year ended 31 December 2014 $ million |
Year ended 31 December 2013 $ million | |||||||
| Attributable profit for the year1 | 410 | 501 | 556 | |||||||
|
Other comprehensive income: |
||||||||||
|
Items that will not be reclassified to income statement |
||||||||||
|
Re-measurement of net retirement benefit obligations |
18 | (8) | (94) | 12 | ||||||
|
Taxation on other comprehensive income |
5 | 10 | 19 | (16) | ||||||
| Total items that will not be reclassified to income statement | 2 | (75) | (4) | |||||||
| Items that may be reclassified subsequently to income statement | ||||||||||
|
Cash flow hedges – interest rate derivatives |
||||||||||
|
– losses arising in the year |
– | (5) | – | |||||||
|
Cash flow hedges – forward foreign exchange contracts |
||||||||||
|
– gains/(losses) arising in the year |
34 | 31 | 8 | |||||||
|
– gains transferred to inventories for the year |
(50) | (14) | (3) | |||||||
|
Exchange differences on translation of foreign operations |
(176) | (196) | (6) | |||||||
| Total items that may be reclassified subsequently to income statement | (192) | (184) | (1) | |||||||
| Other comprehensive (expense)/income for the year, net of taxation | (190) | (259) | (5) | |||||||
| Total comprehensive income for the year1 | 220 | 242 | 551 | |||||||
| 1 | Attributable to equity holders of the Company and wholly derived from continuing operations. |
|
THE NOTES ON PAGES 119 TO 166 ARE | |
| AN INTEGRAL PART OF THESE ACCOUNTS. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
113
| ||
|
| ||||
Commentary on the Group income statement
and Group statement of comprehensive income
|
|
THE FINANCIAL COMMENTARY ON THIS PAGE FORMS PART OF THE BUSINESS REVIEW AND IS UNAUDITED. | |
| SEE PAGES 181 TO 182 FOR COMMENTARY ON THE 2014 FINANCIAL YEAR. |
Table of Contents
| 114
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
| Notes |
At 31 December 2015 $ million |
At 31 December 2014 $ million | ||||||
| Assets | ||||||||
| Non-current assets | ||||||||
| Property, plant and equipment | 7 | 932 | 891 | |||||
| Goodwill | 8 | 2,012 | 2,027 | |||||
| Intangible assets | 9 | 1,502 | 1,747 | |||||
| Investments | 10 | 13 | 5 | |||||
| Investments in associates | 11 | 115 | 112 | |||||
| Retirement benefit asset | 18 | 13 | 7 | |||||
| Deferred tax assets | 5 | 105 | 77 | |||||
| 4,692 | 4,866 | |||||||
| Current assets | ||||||||
| Inventories | 12 | 1,217 | 1,181 | |||||
| Trade and other receivables | 13 | 1,138 | 1,166 | |||||
| Cash at bank | 15 | 120 | 93 | |||||
| 2,475 | 2,440 | |||||||
| Total assets | 7,167 | 7,306 | ||||||
| Equity and liabilities | ||||||||
| Equity attributable to owners of the Company | ||||||||
| Share capital | 19 | 183 | 184 | |||||
| Share premium | 590 | 574 | ||||||
| Capital redemption reserve | 12 | 11 | ||||||
| Treasury shares | 19 | (294) | (315) | |||||
| Other reserves | (256) | (64) | ||||||
| Retained earnings | 3,731 | 3,650 | ||||||
| Total equity | 3,966 | 4,040 | ||||||
| Non-current liabilities | ||||||||
| Long-term borrowings | 15 | 1,434 | 1,666 | |||||
| Retirement benefit obligations | 18 | 184 | 233 | |||||
| Other payables | 14 | 29 | 44 | |||||
| Provisions | 17 | 133 | 63 | |||||
| Deferred tax liabilities | 5 | 77 | 98 | |||||
| 1,857 | 2,104 | |||||||
| Current liabilities | ||||||||
| Bank overdrafts and loans | 15 | 46 | 39 | |||||
| Trade and other payables | 14 | 842 | 838 | |||||
| Provisions | 17 | 193 | 67 | |||||
| Current tax payable | 263 | 218 | ||||||
| 1,344 | 1,162 | |||||||
| Total liabilities | 3,201 | 3,266 | ||||||
| Total equity and liabilities | 7,167 | 7,306 |
The accounts were approved by the Board and authorised for issue on 24 February 2016 and are signed on its behalf by:
| Roberto Quarta | Olivier Bohuon | Julie Brown | ||||
| Chairman | Chief Executive Officer | Chief Financial Officer |
|
|
THE NOTES ON PAGES 119 TO 166 ARE AN INTEGRAL PART OF THESE ACCOUNTS. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
115
| ||
|
| ||||
Commentary on the Group balance sheet
|
|
THE FINANCIAL COMMENTARY ON THIS PAGE FORMS PART OF THE BUSINESS REVIEW AND IS UNAUDITED. SEE PAGES 181 TO 182 FOR COMMENTARY ON THE 2014 FINANCIAL YEAR. |
Table of Contents
| 116
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
| Notes | Year ended 31 December 2015 $ million |
Year ended 31 December 2014 $ million |
Year ended 31 December 2013 $ million | |||||||
| Cash flows from operating activities | ||||||||||
| Profit before taxation | 559 | 714 | 802 | |||||||
| Net interest expense/(income) | 4 | 38 | 22 | (4) | ||||||
| Depreciation, amortisation and impairment | 493 | 427 | 361 | |||||||
| Loss on disposal of property, plant and equipment and software | 15 | 11 | 23 | |||||||
| Distribution from trade investments | 3 | 1 | – | |||||||
| Share-based payments expense (equity settled) | 23 | 29 | 32 | 28 | ||||||
| Share of results of associates | 11 | 16 | 2 | 1 | ||||||
| Dividends received from associates | 11 | – | – | 1 | ||||||
| Profit on disposal of manufacturing facility | 21 | – | (9) | – | ||||||
| Net movement in post-retirement benefit obligations | (57) | (81) | (27) | |||||||
| Increase in inventories | (83) | (168) | (99) | |||||||
| Increase in trade and other receivables | (26) | (76) | (70) | |||||||
| Increase in trade and other payables and provisions | 216 | 86 | 122 | |||||||
| Cash generated from operations1 | 1,203 | 961 | 1,138 | |||||||
| Interest received | 8 | 3 | 4 | |||||||
| Interest paid | (44) | (36) | (10) | |||||||
| Income taxes paid | (137) | (245) | (265) | |||||||
| Net cash inflow from operating activities | 1,030 | 683 | 867 | |||||||
| Cash flows from investing activities | ||||||||||
| Acquisitions, net of cash acquired | 21 | (44) | (1,572) | (74) | ||||||
| Capital expenditure | 2 | (358) | (375) | (340) | ||||||
| Investment in associate | 11 | (25) | (2) | – | ||||||
| Purchase of investments | 10 | (2) | (4) | – | ||||||
| Proceeds from associate loan redemption | – | 188 | – | |||||||
| Proceeds on disposal of manufacturing facility | 21 | – | 20 | – | ||||||
| Cash received on disposal of associate | – | – | 7 | |||||||
| Net cash used in investing activities | (429) | (1,745) | (407) | |||||||
| Cash flows from financing activities | ||||||||||
| Proceeds from issue of ordinary share capital | 16 | 40 | 48 | |||||||
| Purchase of own shares | (77) | (75) | (231) | |||||||
| Proceeds from borrowings due within one year | 20 | 42 | 30 | 12 | ||||||
| Settlement of borrowings due within one year | 20 | (26) | (52) | (6) | ||||||
| Proceeds from borrowings due after one year | 20 | 831 | 3,390 | 695 | ||||||
| Settlement of borrowings due after one year | 20 | (1,062) | (2,068) | (779) | ||||||
| Proceeds from own shares | 5 | 4 | 3 | |||||||
| Settlement of currency swaps | 20 | (15) | (11) | (1) | ||||||
| Equity dividends paid | 19 | (272) | (250) | (239) | ||||||
| Net cash (used in)/from financing activities | (558) | 1,008 | (498) | |||||||
| Net increase/(decrease) in cash and cash equivalents | 43 | (54) | (38) | |||||||
| Cash and cash equivalents at beginning of year | 20 | 65 | 126 | 167 | ||||||
| Exchange adjustments | 20 | (6) | (7) | (3) | ||||||
| Cash and cash equivalents at end of year2 | 102 | 65 | 126 |
| 1 | Includes $52m (2014 – $60m, 2013 – $54m) of outgoings on restructuring and rationalisation expenses, $36m (2014 – $112m, 2013 – $25m) of acquisition-related costs and $3m (2014 – $23m, 2013 – $nil) of legal and other costs. |
| 2 | Cash and cash equivalents is net of bank overdrafts of $18m (2014 – $28m). |
|
|
THE NOTES ON PAGES 119 TO 166 ARE | |
| AN INTEGRAL PART OF THESE ACCOUNTS. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
117
| ||
|
| ||||
Commentary on the Group cash flow statement
|
|
THE FINANCIAL COMMENTARY ON THIS PAGE FORMS PART OF THE BUSINESS REVIEW AND IS UNAUDITED. SEE PAGES 181 TO 182 FOR COMMENTARY ON THE 2014 FINANCIAL YEAR. |
Table of Contents
| 118
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP FINANCIAL STATEMENTS
|
Group statement of changes in equity
| |
Share capital $ million |
|
|
Share premium $ million |
|
|
Capital redemption reserve $ million |
|
|
Treasury shares2 $ million |
|
|
Other reserves3 $ million |
|
|
Retained earnings $ million |
|
|
Total equity |
| ||||||||
| At 31 December 2012 | 193 | 488 | – | (735 | ) | 121 | 3,817 | 3,884 | ||||||||||||||||||||
|
Attributable profit for the year1 |
– | – | – | – | – | 556 | 556 | |||||||||||||||||||||
|
Other comprehensive income |
– | – | – | – | (1 | ) | (4 | ) | (5 | ) | ||||||||||||||||||
|
Equity dividends declared and paid |
– | – | – | – | – | (239 | ) | (239 | ) | |||||||||||||||||||
|
Share-based payments recognised |
– | – | – | – | – | 28 | 28 | |||||||||||||||||||||
|
Taxation on share-based payments |
– | – | – | – | – | 3 | 3 | |||||||||||||||||||||
|
Purchase of own shares |
– | – | – | (231 | ) | – | – | (231 | ) | |||||||||||||||||||
|
Cost of shares transferred to beneficiaries |
– | – | – | 21 | – | (18 | ) | 3 | ||||||||||||||||||||
|
Cancellation of treasury shares |
(10 | ) | – | 10 | 623 | – | (623 | ) | – | |||||||||||||||||||
|
Issue of ordinary share capital4 |
1 | 47 | – | – | – | – | 48 | |||||||||||||||||||||
| At 31 December 2013 | 184 | 535 | 10 | (322 | ) | 120 | 3,520 | 4,047 | ||||||||||||||||||||
|
Attributable profit for the year1 |
– | – | – | – | – | 501 | 501 | |||||||||||||||||||||
|
Other comprehensive expense |
– | – | – | – | (184 | ) | (75 | ) | (259 | ) | ||||||||||||||||||
|
Equity dividends declared and paid |
– | – | – | – | – | (250 | ) | (250 | ) | |||||||||||||||||||
|
Share-based payments recognised |
– | – | – | – | – | 32 | 32 | |||||||||||||||||||||
|
Purchase of own shares |
– | – | – | (75 | ) | – | – | (75 | ) | |||||||||||||||||||
|
Cost of shares transferred to beneficiaries |
– | – | – | 25 | – | (21 | ) | 4 | ||||||||||||||||||||
|
Cancellation of treasury shares |
(1 | ) | – | 1 | 57 | – | (57 | ) | – | |||||||||||||||||||
|
Issue of ordinary share capital4 |
1 | 39 | – | – | – | – | 40 | |||||||||||||||||||||
| At 31 December 2014 | 184 | 574 | 11 | (315 | ) | (64 | ) | 3,650 | 4,040 | |||||||||||||||||||
|
Attributable profit for the year1 |
– | – | – | – | – | 410 | 410 | |||||||||||||||||||||
|
Other comprehensive income/(expense) |
– | – | – | – | (192 | ) | 2 | (190 | ) | |||||||||||||||||||
|
Equity dividends declared and paid |
– | – | – | – | – | (272 | ) | (272 | ) | |||||||||||||||||||
|
Share-based payments recognised |
– | – | – | – | – | 29 | 29 | |||||||||||||||||||||
|
Taxation on share-based payments |
– | – | – | – | – | 5 | 5 | |||||||||||||||||||||
|
Purchase of own shares |
– | – | – | (77 | ) | – | – | (77 | ) | |||||||||||||||||||
|
Cost of shares transferred to beneficiaries |
– | – | – | 38 | – | (33 | ) | 5 | ||||||||||||||||||||
|
Cancellation of treasury shares |
(1 | ) | – | 1 | 60 | – | (60 | ) | – | |||||||||||||||||||
|
Issue of ordinary share capital4 |
– | 16 | – | – | – | – | 16 | |||||||||||||||||||||
| At 31 December 2015 | 183 | 590 | 12 | (294 | ) | (256 | ) | 3,731 | 3,966 |
| 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 the difference arising as a result of translating share capital and share premium at the rate ruling on the date of redenomination instead of the rate at the balance sheet date. The cumulative translation loss within other reserves at 31 December 2015 of $254m (2014 – $78m loss, 2013 – $118m gain). |
| 4 | Issue of ordinary share capital as a result of options being exercised. |
|
|
THE NOTES ON PAGES 119 TO 166 ARE AN INTEGRAL PART OF THESE ACCOUNTS. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
119
| ||
|
| ||||
|
GROUP ACCOUNTS
|
Table of Contents
| 120
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
2 Business segment information
The Group has historically reported two operating segments, Advanced Surgical Devices (‘ASD’) and Advanced Wound Management (‘AWM’). On 1 January 2015, the Group completed its transition to a new commercial organisational structure as part of the Group Optimisation programme. The resultant effect of these restructuring activities is that the Group is now engaged in a single business activity, being the development, manufacture and sales of medical technology products and services.
Development, manufacturing, supply chain and central functions are managed globally for the Group as a whole. Sales are managed through six geographical selling regions, with each having a president who is responsible for the commercial review of that region. The Commercial Operations team (‘CommOps’), comprises geographical presidents and certain heads of function and is chaired by the Chief Executive Officer (‘CEO’). CommOps 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 CommOps, and whilst the members have individual responsibility for the implementation of decisions within their respective areas, it is at the CommOps level that these decisions are made. Accordingly, CommOps is considered to be the Group’s Chief Operating Decision Maker (‘CODM’) as defined by IFRS 8 Operating Segments.
In making decisions about the prioritisation and allocation of the Group’s resources, CommOps review financial information on an integrated basis for the Group as a whole and determines the best allocation of resources to Group-wide projects. This information is prepared substantially on the same basis as the Group’s IFRS financial statements aside from the adjustments described in Note 2.2. In assessing performance, CommOps also consider financial information presented on a geographical selling region and product franchise basis for revenue. Financial information for corporate and functional costs is presented on a Group-wide basis.
The types of products and services offered by the Group’s global business segment are as follows:
| – | Sports Medicine Joint Repair, which offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints; |
| – | Arthroscopy Enabling Technologies, which offers healthcare providers a variety of technologies such as fluid management equipment for surgical access, high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joints, radio frequency wands, electromechanical and mechanical blades, and hand instruments for removing damaged tissue; |
| – | Trauma & Extremities, consisting of internal and external devices used in the stabilisation of severe fractures and deformity correction procedures; |
| – | Other Surgical Businesses, which includes gynaecological instrumentation as well as various products and technologies to assist in surgical treatment of the ear, nose and throat; |
| – | Knee Implants, which offers an innovative range of products for specialised knee replacement procedures; |
| – | Hip Implants, which offers a range of specialist products for reconstruction of the hip joint; |
| – | Advanced Wound Care, which includes products for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and post-operative wounds; |
| – | Advanced Wound Devices, which consists of traditional and single-use Negative Pressure Wound Therapy and hydrosurgery systems; and |
| – | Advanced Wound Bioactives, which includes biologics and other bioactive technologies that provide unique approaches to debridement and dermal repair/regeneration. |
The segment information is prepared in conformity with the accounting policies of the Group and the accounting standard IFRS 8 Operating Segments.
The segment profit measure reported to CommOps for the purposes of resource allocation and assessment is trading profit before interest, and related income tax expense and excludes the effects of non-recurring income and expenditure from one-off items as discussed in Note 2.2 below. Group financing (including interest receivable and payable) is managed on a net basis outside of the business segment.
The results and other information as required of the single segment are shown below. Segment information from the prior year has been restated to conform to the one global segment view, in order to provide more meaningful comparison.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
121
| ||
|
| ||||
2.1 Revenue by business segment and geography
|
ACCOUNTING POLICY |
||||
| Revenue comprises sales of products and services to third parties at amounts invoiced net of trade discounts and rebates, excluding taxes on revenue. Revenue from the sale of products is recognised upon transfer to the customer of the significant risks and rewards of ownership. This is generally when goods are delivered to customers. There is no significant revenue associated with the provision of discrete services. Sales of inventory located at customer premises and available for customers’ immediate use are recognised when notification is received that the product has been implanted or used. Appropriate provisions for returns, trade discounts and rebates are deducted from revenue. Rebates comprise retrospective volume discounts granted to certain customers on attainment of certain levels of purchases from the Group. These are accrued over the course of the arrangement based on estimates of the level of business expected and adjusted at the end of the arrangement to reflect actual volumes.
|
||||
Segment revenue reconciles to statutory revenues and other income from continuing operations as follows:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Reportable segment revenue | ||||||
| Revenue from external customers | 4,634 | 4,617 | 4,351 | |||
|
The table below shows sales revenue by product type from continuing operations:
| ||||||
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Sales revenue by product from continuing operations | ||||||
|
Sports Medicine Joint Repair |
606 | 576 | 496 | |||
|
Arthroscopic Enabling Technologies |
573 | 542 | 441 | |||
|
Trauma & Extremities |
497 | 506 | 486 | |||
|
Other Surgical Businesses |
205 | 147 | 74 | |||
|
Knee Implants |
883 | 873 | 865 | |||
|
Hip Implants |
604 | 654 | 653 | |||
|
Advanced Wound Care |
755 | 805 | 843 | |||
|
Advanced Wound Bioactives |
344 | 322 | 280 | |||
|
Advanced Wound Devices |
167 | 192 | 213 | |||
| Consolidated sales revenue from continuing operations | 4,634 | 4,617 | 4,351 | |||
|
In presenting information on the basis of geographical segments, segment revenue is based on location of Smith & Nephew businesses:
| ||||||
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Geographical segment revenue | ||||||
|
United Kingdom |
301 | 299 | 293 | |||
|
United States of America |
2,217 | 2,012 | 1,862 | |||
|
Other |
2,116 | 2,306 | 2,196 | |||
| Consolidated sales revenue from continuing operations | 4,634 | 4,617 | 4,351 | |||
Major customers
No single customer generates revenue greater than 10% of the consolidated entity’s total revenues.
Table of Contents
| 122
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
2 Business segment information continued
2.2 Trading and operating profit by business segment
Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit: acquisition and disposal-related items including amortisation of acquisition intangibles and impairments; significant restructuring events; gains and losses arising from legal disputes; and significant uninsured losses. Further detail is provided in Notes 3.3, 3.4 and 3.5. Operating profit reconciles to trading profit as follows:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Trading profit of the business segment | 1,099 | 1,055 | 987 | |||
| Acquisition-related costs | (12) | (118) | (31) | |||
|
Restructuring and rationalisation expenses |
(65) | (61) | (58) | |||
|
Amortisation of acquisition intangibles and impairments |
(204) | (129) | (88) | |||
|
Legal and other |
(190) | 2 | – | |||
| Operating profit of the business segment | 628 | 749 | 810 | |||
| Net interest expense/(revenue) | (38) | (22) | 4 | |||
|
Other finance costs |
(15) | (11) | (11) | |||
|
Share of results of associates |
(16) | (2) | (1) | |||
|
Taxation |
(149) | (213) | (246) | |||
| Attributable profit for the year of the business segment | 410 | 501 | 556 |
2.3 Assets and liabilities by business segment and geography
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Reconciliation of assets of the business segment to the consolidated group | ||||||
|
Assets of the business segment |
6,929 | 7,129 | 5,532 | |||
|
Unallocated corporate assets: |
||||||
|
– Deferred tax assets |
105 | 77 | 145 | |||
|
– Retirement benefit assets |
13 | 7 | 5 | |||
|
– Cash at bank |
120 | 93 | 137 | |||
| Total assets of the consolidated group | 7,167 | 7,306 | 5,819 |
Segment assets are based on the location of the assets:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| United Kingdom | 366 | 379 | 255 | |||
|
United States of America |
2,982 | 3,104 | 2,086 | |||
|
Other |
1,226 | 1,299 | 1,072 | |||
| Non-current assets by geographical location1 | 4,574 | 4,782 | 3,413 |
| 1 | Non-current assets excludes retirement benefit assets and deferred tax assets. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
123
| ||
|
| ||||
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Reconciliation of liabilities of the business segment to the consolidated group | ||||||
|
Liabilities of the business segment |
1,197 | 1,012 | 917 | |||
|
Unallocated corporate liabilities: |
||||||
|
– Long-term borrowings |
1,434 | 1,666 | 347 | |||
|
– Retirement benefit obligations |
184 | 233 | 230 | |||
|
– Deferred tax liabilities |
77 | 98 | 50 | |||
|
– Bank overdrafts and loans due within one year |
46 | 39 | 44 | |||
|
– Current tax payable |
263 | 218 | 184 | |||
| Total liabilities of the consolidated group | 3,201 | 3,266 | 1,772 | |||
| Depreciation, amortisation and impairment of the business segment | ||||||
|
Depreciation of property, plant and equipment |
226 | 222 | 209 | |||
|
Amortisation of acquired intangibles |
153 | 129 | 88 | |||
|
Amortisation of other intangible assets |
66 | 62 | 64 | |||
| Total depreciation and amortisation | 445 | 413 | 361 | |||
| Impairment losses on property, plant and equipment | – | 14 | – | |||
|
Impairment losses acquired intangibles |
51 | – | – | |||
|
Impairment reversal on trade investments |
(3) | – | – | |||
| Total non-cash items1 | 493 | 427 | 361 | |||
| 1 | Impairments recognised in operating profit, within the administrative expenses line. |
Segment acquisition of property, plant and equipment and intangibles reconciles to that of the consolidated group, and comprises the following:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Additions to property, plant and equipment | 303 | 298 | 242 | |||
|
Additions to intangibles |
55 | 77 | 98 | |||
| Capital expenditure (excluding business combinations) | 358 | 375 | 340 | |||
| Trade investments | 2 | 4 | – | |||
|
Acquisitions – Goodwill |
34 | 844 | 53 | |||
|
Acquisitions – Intangible assets |
19 | 833 | 53 | |||
|
Acquisitions – Property, plant and equipment |
6 | 62 | 5 | |||
| Capital expenditure | 419 | 2,118 | 451 |
Table of Contents
| 124
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
|
ACCOUNTING POLICIES |
||||
|
Research and development
Research expenditure is expensed as incurred. Internal development expenditure is only capitalised if the recognition criteria in IAS 38 Intangible Assets have been satisfied. The Group considers that the regulatory, technical and market uncertainties inherent in the development of new products mean that in most cases development costs should not be capitalised as intangible assets until products receive approval from the appropriate regulatory body.
Payments to third parties for research and development projects are accounted for based on the substance of the arrangement. If the arrangement represents outsourced research and development activities the payments are generally expensed except in limited circumstances where the respective development expenditure would be capitalised under the principles established in IAS 38. By contrast, the payments are capitalised if the arrangement represents consideration for the acquisition of intellectual property developed at the risk of the third party.
Capitalised development expenditures are amortised on a straight-line basis over their useful economic lives from product launch.
Advertising costs
Advertising costs are expensed as incurred.
|
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Revenue | 4,634 | 4,617 | 4,351 | |||
|
Cost of goods sold1,2 |
(1,143) | (1,162) | (1,100) | |||
| Gross profit | 3,491 | 3,455 | 3,251 | |||
|
Research and development expenses |
(222) | (235) | (231) | |||
|
Selling, general and administrative expenses: |
||||||
|
Marketing, selling and distribution expenses |
(1,735) | (1,670) | (1,535) | |||
|
Administrative expenses3,4,5,6 |
(906) | (801) | (675) | |||
| (2,641) | (2,471) | (2,210) | ||||
| Operating profit | 628 | 749 | 810 |
| 1 | 2015 includes $nil of restructuring and rationalisation expenses (2014 – $12m, 2013 – $12m). |
| 2 | 2015 includes $nil of acquisition-related costs (2014 – $23m, 2013 – $5m). |
| 3 | 2015 includes $66m of amortisation of software and other intangible assets (2014 – $62m, 2013 – $64m). |
| 4 | 2015 includes $65m of restructuring and rationalisation expenses and $204m of amortisation and impairment of acquisition intangibles (2014 – $49m of restructuring and rationalisation expenses and $129m of amortisation of acquisition intangibles, 2013 – $46m of restructuring and rationalisation expenses and $88m of amortisation of acquisition intangibles). |
| 5 | 2015 includes $190m relating to legal and other exceptionals (2014 – $2m, 2013 – $nil). |
| 6 | 2015 includes $12m of acquisition-related costs (2014 – $95m, 2013 – $26m). |
Note that items detailed in 1, 2, 4, 5 and 6 are excluded from the calculation of trading profit.
Operating profit is stated after charging/(crediting) the following items:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Other operating income | (41) | (9) | – | |||
|
Amortisation of intangibles |
219 | 191 | 152 | |||
|
Impairment of intangible assets |
51 | – | – | |||
|
Depreciation of property, plant and equipment |
226 | 222 | 209 | |||
|
Loss on disposal of property, plant and equipment and intangible assets |
15 | 25 | 23 | |||
|
Operating lease payments for land and buildings |
37 | 38 | 32 | |||
|
Operating lease payments for other assets |
20 | 18 | 19 | |||
|
Advertising costs |
91 | 96 | 91 |
Other operating income primarily relates to a net gain relating to patent litigation as discussed in Note 3.5.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
125
| ||
|
| ||||
3.1 Staff costs and employee numbers
Staff costs during the year amounted to:
| Notes |
2015 $ million |
2014 $ million |
2013 $ million | |||||
| Wages and salaries | 1,193 | 1,237 | 998 | |||||
|
Social security costs |
135 | 127 | 106 | |||||
|
Pension costs (including retirement healthcare) |
18 | 58 | 17 | 72 | ||||
|
Share-based payments |
23 | 30 | 32 | 28 | ||||
| 1,416 | 1,413 | 1,204 | ||||||
|
During the year ended 31 December 2015, the average number of employees was 14,686 (2014 – 13,469, 2013 – 11,036). | ||||||||
|
3.2 Audit Fees – information about the nature and cost of services provided by auditors
| ||||||||
|
2015 $ million |
2014 $ million |
2013 $ million | ||||||
| Audit services: | ||||||||
|
Group accounts |
2 | 2 | 1 | |||||
|
Local statutory audit pursuant to legislation |
2 | 1 | 2 | |||||
|
Other services: |
||||||||
|
Non-audit services |
1 | – | – | |||||
|
Taxation services: |
||||||||
|
Compliance services |
– | 1 | 2 | |||||
|
Advisory services |
– | 1 | 1 | |||||
| Total auditors’ remuneration | 5 | 5 | 6 | |||||
| Arising: | ||||||||
|
In the UK |
2 | 3 | 3 | |||||
|
Outside the UK |
3 | 2 | 3 | |||||
| 5 | 5 | 6 | ||||||
Audit fees for the current year are those relating to KPMG LLP, the Group’s auditors. In 2014 and 2013, fees relate to EY LLP, the Group’s former auditors.
3.3 Acquisition-related costs
Acquisition-related costs of $12m (2014 – $118m, 2013 – $31m) were incurred within operating profit in the 12-month period to 31 December 2015. These costs relate to ongoing ArthroCare integration.
3.4 Restructuring and rationalisation expenses
Restructuring and rationalisation costs of $65m (2014 – $61m, 2013 – $58m) were incurred in the 12-month period to 31 December 2015. These costs primarily relate to the ongoing implementation of the Group Optimisation plan that was announced in May 2014.
3.5 Legal and other
The legal and other costs within operating profit of $190m (2014 – $2m credit, 2013 – $nil). The net charge primarily relates to $203m for known, anticipated and settled metal-on-metal hip claims and $21m for associated legal expenses. This was offset by a net gain of $33m relating to patent litigation with Arthrex and past service and curtailment gains of $19m arising on US and UK post-retirement benefits. In addition, a total of $18m charge primarily relates to final costs relating to the RENASYS distribution hold and redundancies from the decision to cease development of HP802.
Table of Contents
| 126
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
4 Interest and other finance costs
4.1 Interest income/(expense)
|
2015 $ million |
2014 $ million |
2013 $ million | ||||||
| Interest income | 11 | 13 | 14 | |||||
|
Interest expense: |
||||||||
|
Bank borrowings |
(9) | (19) | (8) | |||||
|
Private placement notes |
(37) | (14) | – | |||||
|
Other |
(3) | (2) | (2) | |||||
| (49) | (35) | (10) | ||||||
| Net interest (expense)/income | (38) | (22) | 4 | |||||
| 4.2 Other finance costs
|
||||||||
| Notes |
2015 $ million |
2014 $ million |
2013 $ million | |||||
| Retirement benefit net interest expense | 18 | (11) | (10) | (11) | ||||
|
Unwinding of purchase discount |
(3) | – | – | |||||
|
Other |
(1) | (1) | – | |||||
| Other finance costs | (15) | (11) | (11) | |||||
The retirement benefit net interest expense includes $2m of fees paid directly by the Group relating to de-risking exercises carried out in the UK.
Foreign exchange gains or losses arose primarily on the translation of intercompany and third party borrowings and amounted to a net $11m gain in 2015 (2014 – net $21m gain, 2013 – net $1m gain). These amounts were fully matched by the fair value gains or losses on currency swaps held to manage this currency risk.
|
ACCOUNTING POLICY |
||||
|
The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
The Group operates in multiple tax jurisdictions around the world and records provisions for taxation liabilities and tax audits when it is considered probable that a tax charge will arise and the amount can be reliably estimated. Although Group policy is to submit its tax returns to the relevant tax authorities as promptly as possible, at any time the Group has years outstanding and is involved in disputes and tax audits. Significant issues may take many years to resolve. In estimating the probability and amount of any tax charge, management takes into account the views of internal and external advisers and updates the amount of the provision whenever necessary. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for: temporary differences related to investments in subsidiaries and associates where the Group is able to control the timing of the reversal of the temporary difference and it is probable that this will not reverse in the foreseeable future; on the initial recognition of non-deductible goodwill; and on the initial recognition of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, does not affect the accounting or taxable profit.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date.
Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or substantively enacted by the reporting date that are expected to apply in the periods in which the asset or liability is settled. It is recognised in the income statement except when it relates to items credited or charged directly to other comprehensive income or equity, in which case the deferred tax is also recognised within other comprehensive income or equity respectively.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority, when the Group intends to settle its current tax assets and liabilities on a net basis and that authority permits the Group to make a single net payment.
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
127
| ||
|
| ||||
5.1 Taxation charge attributable to the Group
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Current taxation: | ||||||
|
UK corporation tax at 20.3% (2014 – 21.5%, 2013 – 23.3%) |
31 | 39 | 50 | |||
|
Overseas tax |
219 | 235 | 229 | |||
| Current income tax charge | 250 | 274 | 279 | |||
|
Adjustments in respect of prior periods |
(56) | (6) | (5) | |||
| Total current taxation | 194 | 268 | 274 | |||
| Deferred taxation: | ||||||
|
Origination and reversal of temporary differences |
(73) | (52) | (23) | |||
|
Changes in tax rates |
(3) | – | (4) | |||
|
Adjustments to estimated amounts arising in prior periods |
31 | (3) | (1) | |||
| Total deferred taxation | (45) | (55) | (28) | |||
| Total taxation as per the income statement | 149 | 213 | 246 | |||
|
Taxation in other comprehensive income |
(10) | (19) | 16 | |||
|
Taxation in equity |
(5) | – | (3) | |||
| Taxation attributable to the Group | 134 | 194 | 259 |
The 2015 prior period current taxation adjustments mainly relate to a reclassification from current to deferred taxation together with releases of provisions after settlement with tax authorities or the expiry of statute of limitations and tax accrual to tax return adjustments. The 2015 prior period deferred taxation adjustments mainly relate to a reclassification from current to deferred taxation and tax accrual to tax return adjustments.
The tax charge was reduced by $130m (2014 – $71m reduction and 2013 – $40m reduction) as a consequence of acquisition-related costs, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles, and legal and other.
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 tax rate changes, tax legislation changes and resolution of tax audits and disputes. At any given time the Group has years outstanding in various countries and is involved in tax audits and disputes, some of which may take several years to resolve. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.
In 2015, the UK Government enacted legislation to reduce the main rate of UK statutory corporation tax to 19.0% from 1 April 2017 and 18.0% from 1 April 2020.
The UK standard rate of corporation tax for 2015 is 20.3% (2014 – 21.5%, 2013 – 23.3%). Overseas taxation is calculated at the rates prevailing in the respective jurisdictions. The reported tax rate differs from the UK standard rate as follows:
|
2015 % |
2014 % |
2013 % | ||||
| UK standard rate | 20.3 | 21.5 | 23.3 | |||
|
Non-deductible/non-taxable items |
1.1 | 0.5 | (1.0) | |||
|
Prior year items |
(4.5) | (1.2) | (0.5) | |||
|
Tax losses incurred not relieved |
2.0 | 1.6 | 0.9 | |||
|
Overseas income taxed at other than UK standard rate |
7.8 | 7.5 | 7.8 | |||
| Reported tax rate | 26.7 | 29.9 | 30.5 |
Table of Contents
| 128
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
5 Taxation continued
5.2 Deferred taxation
Movements in the main components of deferred tax assets and liabilities were as follows:
| Accelerated tax deprecation $ million |
Intangibles $ million |
Retirement benefit obligation $ million |
Macrotexture $ million |
Inventory, provisions and other differences $ million |
Total $ million | |||||||
| At 1 January 2014 | (91) | (22) | 68 | 52 | 88 | 95 | ||||||
|
Exchange adjustment |
2 | 1 | (2) | – | (10) | (9) | ||||||
|
Movement in income statement – current year |
18 | 16 | (18) | – | 36 | 52 | ||||||
|
Movement in income statement – prior years |
1 | (1) | – | – | 3 | 3 | ||||||
|
Movement in other comprehensive income |
– | – | 22 | – | (3) | 19 | ||||||
|
Acquisitions |
– | (220) | – | – | 39 | (181) | ||||||
| At 31 December 2014 | (70) | (226) | 70 | 52 | 153 | (21) | ||||||
|
Exchange adjustment |
(1) | 7 | (1) | – | (7) | (2) | ||||||
|
Reclassifications |
(1) | (53) | (19) | – | 73 | – | ||||||
|
Movement in income statement – current year |
4 | 41 | (19) | – | 47 | 73 | ||||||
|
Movement in income statement – prior years |
6 | 9 | (1) | – | (45) | (31) | ||||||
|
Movement in other comprehensive income |
– | – | 9 | – | 1 | 10 | ||||||
|
Movement in equity |
– | – | – | – | (1) | (1) | ||||||
|
Changes in UK tax rate |
– | 2 | – | – | 1 | 3 | ||||||
|
Acquisitions |
– | (3) | – | – | – | (3) | ||||||
| At 31 December 2015 | (62) | (223) | 39 | 52 | 222 | 28 |
Represented by:
|
2015 $ million |
2014 $ million | |||
| Deferred tax assets | 105 | 77 | ||
|
Deferred tax liabilities |
(77) | (98) | ||
| Net position at 31 December | 28 | (21) |
During the year, the classification of deferred tax balances were revisited resulting in some reclassifications. There was no change in the deferred tax asset or liability balance.
The Group has unused gross tax losses of $125m (2014 – $92m) available for offset against future profits. A deferred tax asset has been recognised in respect of $29m (2014 – $47m) of these losses. No deferred tax asset has been recognised on the remaining unused tax losses as they are not expected to be realised in the foreseeable future. The aggregate amount of temporary differences in respect of investments in subsidiaries and associates for which deferred tax liabilities have not been recognised is approximately $467m (2014 – $449m).
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
129
| ||
|
| ||||
|
ACCOUNTING POLICIES |
||||
|
Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of ordinary shares in issue during the year, excluding shares held by the Company in the Employees’ Share Trust or as treasury shares.
Diluted earnings per share
Diluted earnings per share is calculated by adjusting the basic earnings per share for the effect of conversion to ordinary shares associated with dilutive potential ordinary shares, which comprise share options and awards granted to employees.
Adjusted earnings per share
Adjusted earnings per share is a trend measure, which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affects the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure. The Group has identified the following items as those to be excluded when arriving at adjusted attributable profit: acquisitions and disposals related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; significant gains and losses arising from legal disputes and significant uninsured losses; and taxation thereon.
|
The calculations of the basic, diluted and adjusted earnings per ordinary share are based on the following attributable profit and numbers of shares:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||||
| Earnings | ||||||||
| Attributable profit for the year | 410 | 501 | 556 | |||||
| Adjusted attributable profit (see below) | 761 | 743 | 693 | |||||
|
Attributable profit is reconciled to adjusted attributable profit as follows:
|
||||||||
| Notes |
2015 $ million |
2014 $ million |
2013 $ million | |||||
| Attributable profit for the year | 410 | 501 | 556 | |||||
|
Acquisition-related costs1 |
25 | 125 | 31 | |||||
|
Restructuring and rationalisation expenses |
3 | 65 | 61 | 58 | ||||
|
Amortisation of acquisition intangibles and impairments |
9 | 204 | 129 | 88 | ||||
|
Legal and other2 |
187 | (2) | – | |||||
|
Taxation on excluded items |
5 | (130) | (71) | (40) | ||||
| Adjusted attributable profit | 761 | 743 | 693 | |||||
|
1 Acquisition-related costs include $12m within operating profits (refer to Note 3.3), a $2m interest charge relating to ArthroCare financing and an $11m share of deferred consideration fair value adjustments in associates. 2 Legal and other costs include $190m within operating profits (refer to Note 3.5) and a $3m net interest credit.
The numerators used for basic and diluted earnings per ordinary share are the same. The denominators used for all categories of earnings for basic and diluted earnings per ordinary share are as follows:
| ||||||||
| 2015 | 2014 | 2013 | ||||||
| Number of shares (millions) | ||||||||
| Basic weighted number of shares | 894 | 893 | 901 | |||||
|
Dilutive impact of share options outstanding |
5 | 6 | 5 | |||||
| Diluted weighted average number of shares | 899 | 899 | 906 | |||||
| Earnings per ordinary share | ||||||||
| Basic | 45.9¢ | 56.1¢ | 61.7¢ | |||||
|
Diluted |
45.6¢ | 55.7¢ | 61.4¢ | |||||
|
Adjusted: Basic |
85.1¢ | 83.2¢ | 76.9¢ | |||||
|
Adjusted: Diluted |
84.6¢ | 82.6¢ | 76.5¢ | |||||
There were nil share options which were not included in the diluted EPS calculation because they were non-dilutive in the period (2014 – nil, 2013 – 0.5m).
Table of Contents
| 130
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
7 Property, plant and equipment
|
ACCOUNTING POLICIES |
||||
|
Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Freehold land is not depreciated. The estimated useful lives of items of property, plant and equipment is 3–20 years and for buildings is 20–50 years.
Assets in course of construction are not depreciated until they are available for use.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Finance costs relating to the purchase or construction of property, plant and equipment and intangible assets that take longer than one year to complete are capitalised based on the Group weighted average borrowing costs. All other finance costs are expensed as incurred.
Impairment of assets
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which it belongs.
An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value-in-use. In assessing value-in-use, its estimated future cash flow is discounted to its present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset.
|
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
131
| ||
|
| ||||
| Land and buildings | Plant and equipment | Assets in | ||||||||||||||
| course of | ||||||||||||||||
| Freehold | Leasehold | Instruments | Other | construction | Total | |||||||||||
| Notes | $ million | $ million | $ million | $ million | $ million | $ million | ||||||||||
| Cost | ||||||||||||||||
| At 1 January 2014 | 143 | 53 | 1,065 | 938 | 80 | 2,279 | ||||||||||
|
Exchange adjustment |
(4) | (1) | (68) | (35) | (2) | (110) | ||||||||||
|
Acquisitions |
21 | 11 | 4 | 9 | 17 | 21 | 62 | |||||||||
|
Additions |
– | – | 158 | 57 | 83 | 298 | ||||||||||
|
Disposal of business |
– | – | – | (12) | – | (12) | ||||||||||
|
Disposals |
(2) | (3) | (108) | (40) | (4) | (157) | ||||||||||
|
Transfers |
1 | 1 | 4 | 38 | (44) | – | ||||||||||
| At 31 December 2014 | 149 | 54 | 1,060 | 963 | 134 | 2,360 | ||||||||||
|
Exchange adjustment |
(3) | (1) | (63) | (26) | (1) | (94) | ||||||||||
|
Acquisitions |
21 | – | – | 6 | – | – | 6 | |||||||||
|
Additions |
4 | 1 | 152 | 78 | 68 | 303 | ||||||||||
|
Disposals |
(1) | (1) | (113) | (47) | – | (162) | ||||||||||
|
Transfers |
5 | 5 | – | 35 | (45) | – | ||||||||||
| At 31 December 2015 | 154 | 58 | 1,042 | 1,003 | 156 | 2,413 | ||||||||||
| Depreciation and impairment | ||||||||||||||||
| At 1 January 2014 | 43 | 31 | 764 | 625 | – | 1,463 | ||||||||||
|
Exchange adjustment |
(2) | – | (50) | (24) | – | (76) | ||||||||||
|
Charge for the year |
5 | 4 | 137 | 76 | – | 222 | ||||||||||
|
Impairment |
– | – | – | 3 | 11 | 14 | ||||||||||
|
Disposal of business |
– | – | – | (7) | – | (7) | ||||||||||
|
Disposals |
(1) | (3) | (107) | (36) | – | (147) | ||||||||||
| At 31 December 2014 | 45 | 32 | 744 | 637 | 11 | 1,469 | ||||||||||
|
Exchange adjustment |
(1) | – | (43) | (19) | – | (63) | ||||||||||
|
Charge for the year |
5 | 4 | 137 | 80 | – | 226 | ||||||||||
|
Disposals |
(1) | (1) | (106) | (43) | – | (151) | ||||||||||
| At 31 December 2015 | 48 | 35 | 732 | 655 | 11 | 1,481 | ||||||||||
| Net book amounts | ||||||||||||||||
| At 31 December 2015 | 106 | 23 | 310 | 348 | 145 | 932 | ||||||||||
| At 31 December 2014 | 104 | 22 | 316 | 326 | 123 | 891 | ||||||||||
Land and buildings includes land with a cost of $19m (2014 – $20m) that is not subject to depreciation. Assets held under finance leases with a net book value of $6m (2014 – $8m) are included within land and buildings.
The impairment charge in the prior year relates to certain assets which related to the production of HP802, which the Group decided not to continue.
Historically, capital expenditure represents the Group’s expected annual investment in property, plant and equipment and other intangible assets. This varies between 6% and 8% (2014 – 6% and 8%) of annual revenue.
Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $20m (2014 – $27m).
The amount of borrowing costs capitalised in 2015 and 2014 was minimal.
Table of Contents
| 132
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
|
ACCOUNTING POLICY |
||||
|
Goodwill is not amortised but is reviewed for impairment annually. Goodwill is allocated to the cash-generating unit (‘CGU’) that is expected to benefit from the acquisition. The recoverable amount of CGUs to which goodwill has been allocated is tested for impairment annually. The CGUs identified by management are at the aggregated product franchise levels of Reconstruction, Other Surgical Devices and Advanced Wound Management, in the way the business is managed and the way the core assets are used to generate cash flows.
If the recoverable amount of the cash-generating unit is less than its carrying amount then an impairment loss is determined to have occurred. Any impairment losses that arise are recognised immediately in the income statement and are allocated first to reduce the carrying amount of goodwill and then to the carrying amounts of the other assets of the CGU.
In carrying out impairment reviews of goodwill a number of significant assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes in expectations arise, impairment charges may be required which would adversely impact operating results.
|
| Notes |
2015 $ million |
2014 $ million | ||||
| Cost | ||||||
| At 1 January | 2,027 | 1,256 | ||||
|
Exchange adjustment |
(49) | (73) | ||||
|
Acquisitions |
21 | 34 | 844 | |||
| At 31 December | 2,012 | 2,027 | ||||
| Impairment | ||||||
| At 1 January and 31 December | – | – | ||||
| Net book amounts | 2,012 | 2,027 |
The Group has historically identified two CGUs, being Advanced Surgical Devices and Advanced Wound Management, and tested the goodwill balance for impairment at this level. Following the completion of the Group’s business reorganisation in 2015, management has identified four CGUs in applying the provisions of IAS 36 Impairment of Assets: Reconstruction, Other Surgical Devices, Advanced Wound Care & Devices and Bioactives.
For the purpose of goodwill impairment testing, the Advanced Wound Care & Devices and Bioactives CGUs have been aggregated (Advanced Wound Management), as this is the level at which goodwill is monitored and level at which the economic benefits relating to the goodwill within these CGUs is realised.
Goodwill is allocated to the Group’s CGUs as follows:
|
2015 $ million | ||
| Reconstruction | 557 | |
|
Other Surgical Devices |
1,140 | |
|
Advanced Wound Management |
315 | |
| 2,012 |
Impairment reviews were performed in September 2015 and 2014 by comparing the recoverable amount of each CGU with its carrying amount, including goodwill. These were updated during December, taking into account any significant events that occurred between September and December.
For each CGU, the recoverable amounts are based on value-in-use which is calculated from pre-tax cash flow projections for five years using data from the Group’s budget and strategic planning process, the results of which are reviewed and approved by the Board. These projections exclude any estimated future cash inflows or outflows expected to arise from future restructurings. The five-year period is in-line with the Group’s strategic planning process.
In determining the growth rates used in the calculations of the value-in-use, management considered annual revenue growth. Projections are based on anticipated volume and value growth in the markets served by the Group and assumptions as to market share movements. Each year the projections for the previous year are compared to actual results and variances are factored into the assumptions used in the current year. The discount rates used in the value-in-use calculations reflect management’s assessment of risks specific to the assets of each CGU.
8.1 Reconstruction CGU
The sales growth and trading profit margin used in the value-in-use calculation for the Reconstruction CGU reflects management’s distinctive orthopaedic reconstruction strategy, which combines cutting edge innovation, disruptive business models and a strong Emerging Markets platform to drive outperformance.
Revenue growth rates for the five-year period ranged from 2.1% to 8.6% for the various components of the Reconstruction CGU. The weighted average growth rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 5.6%. The pre-tax discount rate used in the Reconstruction CGU value-in-use calculation is 10.3%.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
133
| ||
|
| ||||
8.2 Other Surgical Devices CGU
The value-in-use calculation for the Other Surgical Devices CGU reflects growth rates and trading profit margins consistent with management’s strategy to rebalance Smith & Nephew towards higher growth areas such as, for example, Sports Medicine.
Revenue growth rates for the five-year period ranged from 1.2% to 13.5% for the various components of the Other Surgical Devices CGU. The weighted average growth rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 5.6%. The pre-tax discount rate used in the Other Surgical Devices CGU value-in-use calculation is 10.3%.
8.3 Advanced Wound Management CGU
The aggregated Advanced Wound Management CGU comprises the Advanced Wound Care & Devices and Bioactives CGUs.
In performing the value-in-use calculation for this combined CGU, management considered the Group’s focus across the wound product franchises, focusing on widening access to the customer, the higher added value sectors of healing chronic wounds and tissue repair using bioactives, and by continuing to improve efficiency.
Revenue growth rates for the five-year period ranged from 3.8% to 20.5% for the various components of the Advanced Wound Management CGU. The weighted average growth rate used to extrapolate the cash flows beyond the five-year period in calculating the terminal value is 6.7%. The pre-tax discount rate used in the Advanced Wound Management CGU value-in-use calculation is 10.3%.
8.4 Sensitivity to changes in assumptions used in value-in-use calculations
The calculations of value-in-use for the identified CGUs are most sensitive to changes in discount and growth rates. Management’s consideration of these sensitivities is set out below:
| – | Growth of market and market share – Management has considered the impact of a variance in market growth and market share. The value-in-use calculations shows that if the assumed long-term growth rates were reduced to nil, the recoverable amount of each CGU would still be greater than its carrying value. |
| – | Discount rate – Management has considered the impact of an increase in the discount rate applied to the value-in-use calculations. This sensitivity analysis shows that for the recoverable amount of each CGU to be less than its carrying value, the discount rate would have to be increased to 23.2% for the Reconstruction CGU, 28.1% for the Other Surgical Devices CGU and 28.5% for the Advanced Wound Products CGU. |
|
ACCOUNTING POLICIES |
||||
|
Intangible assets
Intangible assets acquired separately from a business combination (including purchased patents, know-how, trademarks, licences and distribution rights) are initially measured at cost. The cost of intangible assets acquired in a material business combination (referred to as acquisition intangibles) is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. All intangible assets are amortised on a straight-line basis over their estimated useful economic lives. The estimated useful economic life of an intangible asset ranges between three and 20 years depending on its nature. Internally-generated intangible assets are expensed in the income statement as incurred.
Purchased computer software and certain costs of information technology projects are capitalised as intangible assets. Software that is integral to computer hardware is capitalised as plant and equipment.
Impairment of intangible assets
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which it belongs.
An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value-in-use. In assessing value-in-use, its estimated future cash flow is discounted to its present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset.
In carrying out impairment reviews of intangible assets a number of significant assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes in expectations should arise, impairment charges may be required which would adversely impact operating results.
|
||||
Table of Contents
| 134
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
9 Intangible assets continued
| |
Technology $ million |
|
|
Product- related $ million |
|
|
Customer and Distribution related $ million |
|
|
Software $ million |
|
Total $ million | ||||||
| Cost | ||||||||||||||||||
| At 1 January 2014 | 7 | 1,319 | 103 | 229 | 1,658 | |||||||||||||
|
Exchange adjustment |
– | (42 | ) | (4 | ) | (11 | ) | (57) | ||||||||||
|
Acquisitions |
237 | 584 | 9 | 3 | 833 | |||||||||||||
|
Additions |
– | 23 | 5 | 49 | 77 | |||||||||||||
|
Disposals |
– | – | – | (3 | ) | (3) | ||||||||||||
| At 31 December 2014 | 244 | 1,884 | 113 | 267 | 2,508 | |||||||||||||
|
Exchange adjustment |
(9 | ) | (31 | ) | (13 | ) | (8 | ) | (61) | |||||||||
|
Acquisitions1 |
– | – | 19 | – | 19 | |||||||||||||
|
Additions |
– | 17 | – | 38 | 55 | |||||||||||||
|
Disposals |
– | (6 | ) | – | (8 | ) | (14) | |||||||||||
| At 31 December 2015 | 235 | 1,864 | 119 | 289 | 2,507 | |||||||||||||
| Amortisation and impairment | ||||||||||||||||||
| At 1 January 2014 | 3 | 455 | 42 | 104 | 604 | |||||||||||||
|
Exchange adjustment |
– | (29 | ) | – | (3 | ) | (32) | |||||||||||
|
Charge for the year |
7 | 138 | 15 | 31 | 191 | |||||||||||||
|
Disposals |
– | – | – | (2 | ) | (2) | ||||||||||||
| At 31 December 2014 | 10 | 564 | 57 | 130 | 761 | |||||||||||||
|
Exchange adjustment |
– | (11 | ) | (3 | ) | (2 | ) | (16) | ||||||||||
|
Charge for the year – amortisation |
11 | 159 | 15 | 34 | 219 | |||||||||||||
|
Charge for the year – impairment |
– | 51 | – | – | 51 | |||||||||||||
|
Disposals |
– | (4 | ) | – | (6 | ) | (10) | |||||||||||
| At 31 December 2015 | 21 | 759 | 69 | 156 | 1,005 | |||||||||||||
| Net book amounts | ||||||||||||||||||
| At 31 December 2015 | 214 | 1,105 | 50 | 133 | 1,502 | |||||||||||||
| At 31 December 2014 | 234 | 1,320 | 56 | 137 | 1,747 | |||||||||||||
|
1 This balance relates to customer relationships acquired with the purchase of distributors in Colombia and Russia. | ||||||||||||||||||
|
Amortisation and impairment of acquired intangibles is set out below:
| ||||||||||||||||||
|
|
2015 $ million |
|
2014 $ million | |||||||||||||||
| Technology | 11 | 7 | ||||||||||||||||
|
Product-related |
188 | 117 | ||||||||||||||||
|
Customer and Distribution related |
5 | 5 | ||||||||||||||||
| Total | 204 | 129 | ||||||||||||||||
Group capital expenditure relating to software contracted but not provided for amounted to $4m (2014 – $7m).
The carrying values of intangible assets are considered for indicators of impairment and where an indicator, such as declining revenues, is present a full impairment review comparing value in use to carrying value is performed.
Two product-related intangible assets were determined to have value in use below carrying value, resulting in an impairment charge being recognised. The impairment charge primarily relates to $40m from Oasis, calculated using a discount rate of 11.2% (2014 – 10.2%), a product right acquired with the Healthpoint acquisition in 2012. During the year, continued reimbursement pressure has resulted in revenues not increasing at the previously expected rate. The remaining carrying value of $45m is supported by the present value of anticipated future cash flows.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
135
| ||
|
| ||||
| ACCOUNTING POLICY
Investments, other than those related to associates, are initially recorded at fair value plus any directly attributable transaction costs on the trade date. The Group has an investments in an entity that holds mainly unquoted equity securities, which by their nature have no fixed maturity date or coupon rate. These investments are classed as ‘available-for-sale’ carried at fair value. The fair value of these investments are based on the underlying fair value of the equity securities: marketable securities are valued by reference to closing prices in the market; and non-marketable securities are estimated considering factors including the purchase price; prices of recent significant private placements of securities of the same issuer and estimates of liquidation value. Changes in fair value are recognised in other comprehensive income except where management considers that there is objective evidence of an impairment of the underlying equity securities. Objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost less any impairment loss previously recognised. Impairment losses are recognised by reclassifying the losses accumulated in other reserves to profit or loss.
|
||||
| 2015 $ million | 2014 $ million | |||
| At 1 January | 5 | 2 | ||
|
Additions |
2 | 4 | ||
|
Changes in value1 |
3 | – | ||
|
Transfer from investments in associates |
6 | – | ||
|
Distributions |
(3) | (1) | ||
| At 31 December | 13 | 5 |
| 1 | Change in value in 2015 relates to the reversal of impairment recognised in prior years. |
| ACCOUNTING POLICY |
||||
|
Investments in associates, being those entities over which the Group has a significant influence and which is neither a subsidiary nor a joint venture, are accounted for using the equity method, with the Group recording its share of the associates’ profit and loss and other comprehensive income. The Group’s share of associates’ profit or loss is included in one separate income statement line and is calculated after deduction of their respective taxes.
|
||||
At 31 December 2015 and 31 December 2014, the Group holds 49% of Bioventus LLC (‘Bioventus’). Bioventus is a limited liability company operating as a partnership. The Company’s headquarters is located in Durham, North Carolina, US. Bioventus focuses its medical product development around its core competencies of orthobiologic therapies and orthopaedic diagnostics from which it develops and markets clinically proven orthopaedic therapies and diagnostic tools, including osteoarthritis pain treatments, bone growth stimulators and ultrasound devices. Bioventus sells bone stimulation devices and is a provider of osteoarthritis injection therapies. The loss after taxation recognised in the income statement relating to Bioventus was $18m (2014 – loss after taxation $2m). Of this loss, $11m relates to a change in the acquisition fair value of the OsteoAMP liability.
In November 2015, the Group contributed $25m of capital to Bioventus as part of a rights issue, following which the Group’s shareholding in Bioventus remained at 49%. The rights issue was to fund the acquisition of Biostructures LLC, a leading medical device company focused on developing bioresorbable bone graft products for a broad range of spinal and orthopaedic fusion procedures.
The carrying amount of this investment was reviewed for impairment as at the balance sheet date. For the purposes of impairment testing the recoverable amount of this investment was based on its fair value less cost to sell, estimated using discounted cash flows. The fair value measurement was categorised as a level 3 fair value based on the inputs and valuation technique used.
The amounts recognised in the balance sheet and income statement for associates are as follows:
|
2015 $ million |
2014 $ million | |||
| Balance sheet | 115 | 112 | ||
|
Income statement loss |
(16) | (2) |
Table of Contents
| 136
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
11 Investments in associates continued
Summarised financial information for significant associates
Set out below is the summarised financial information for Bioventus, adjusted for differences with Group accounting policies:
|
2015 $ million |
2014 $ million | |||
| Summarised balance sheet | ||||
|
Non-current assets |
389 | 339 | ||
|
Current assets |
93 | 90 | ||
|
Non-current liabilities |
(235) | (220) | ||
|
Current liabilities |
(80) | (48) | ||
| Net assets | 167 | 161 | ||
| Group’s share of net assets at 49% | 82 | 79 | ||
| Group adjustments1 | 30 | 26 | ||
| Group’s carrying amount of investment at 49% | 112 | 105 | ||
|
2015 $ million |
2014 $ million | |||
| Summarised statement of comprehensive income | ||||
|
Revenue |
256 | 242 | ||
| Attributable loss for the year | (41) | (11) | ||
| Group adjustments1 | 5 | 6 | ||
| Total comprehensive loss | (36) | (5) | ||
| Group share of loss for the year at 49% | (18) | (2) |
| 1 | Group adjustments primarily relate to an adjustment to align the useful life of intangible assets with Group policy. |
At December 2015, the Group held an equity investment in one other associate (2014 – two) with a carrying value of $3m (2014 – $7m). The Group’s other associate was re-classified to an investment during the year.
|
ACCOUNTING POLICY |
||||
|
Finished goods and work-in-progress are valued at factory cost, including appropriate overheads, on a first-in first-out basis. Raw materials and bought-in finished goods are valued at purchase price. All inventories are reduced to net realisable value where lower than cost. Inventory acquired as part of a business acquisition is valued at selling price less costs of disposal and a profit allowance for selling efforts. |
||||
|
Orthopaedic instruments are generally not sold but provided to customers and distributors for use in surgery. They are recorded as inventory until they are deployed at which point they are transferred to plant and equipment and depreciated over their useful economic lives of between three and five years. |
||||
|
A feature of the orthopaedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers’ immediate use (referred to as consignment inventory). Complete sets of product, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical or forecast usage. This formula is applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience but it involves management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning systems.
|
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Raw materials and consumables | 205 | 214 | 151 | |||
|
Work-in-progress |
84 | 82 | 72 | |||
|
Finished goods and goods for resale |
928 | 885 | 783 | |||
| 1,217 | 1,181 | 1,006 |
Reserves for excess and obsolete inventories were $322m (2014 – $317m, 2013 – $354m). The increase in reserves of $5m in the year comprised $17m charged to the reserve on the write-down of inventory and $3m attributable to business combinations during the year, partially offset by foreign exchange movements of $15m.
The cost of inventories recognised as an expense and included in cost of goods sold amounted to $961m (2014 – $1,013m, 2013 – $958m). In addition, $73m was recognised as an expense within cost of goods sold resulting from inventory write-offs (2014 – $55m, 2013 – $73m).
Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
137
| ||
|
| ||||
13 Trade and other receivables
| ACCOUNTING POLICY |
||||
| Trade and other receivables are carried at amortised cost, less any allowances for uncollectible amounts. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.
The Group manages credit risk through credit limits which require authorisation commensurate with the size of the limit and which are regularly reviewed. Credit limit decisions are made based on available financial information and the business case. Significant receivables are regularly reviewed and monitored at Group level. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers and geographies. Furthermore, the Group’s principal customers are backed by government and public or private medical insurance funding, which historically represent a lower risk of default. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable. The Group does not hold any collateral as security.
|
||||
| $ |
2015 million |
|
$ |
2014 million |
|
2013 $ million | ||||
| Trade receivables | 1,003 | 1,015 | 992 | |||||||
|
Less: provision for bad and doubtful debts |
(64 | ) | (47 | ) | (57) | |||||
| Trade receivables – net (loans and receivables) | 939 | 968 | 935 | |||||||
|
Derivatives – forward foreign exchange & interest rate contracts |
33 | 49 | 28 | |||||||
|
Other receivables |
83 | 51 | 60 | |||||||
|
Prepayments and accrued income |
83 | 98 | 90 | |||||||
| 1,138 | 1,166 | 1,113 | ||||||||
|
Management considers that the carrying amount of trade and other receivables approximates to the fair value.
The provision for bad and doubtful debts is based on specific assessments of risk and reference to past default experience. The bad debt expense for the year was $25m (2014 – $4m credit, 2013 – $15m expense). Amounts due from insurers in respect of the macro textured claim of $144m (2014 – $143m, 2013 – $138m) are included within other receivables and have been provided in full.
The amount of trade receivables that were past due was as follows:
| ||||||||||
| $ |
2015 million |
|
$ |
2014 million |
|
2013 $ million | ||||
| Past due not more than three months | 154 | 181 | 206 | |||||||
|
Past due more than three months and not more than six months |
45 | 49 | 52 | |||||||
|
Past due more than six months and not more than one year |
57 | 51 | 61 | |||||||
|
Past due more than one year |
53 | 42 | 70 | |||||||
| 309 | 323 | 389 | ||||||||
|
Neither past due nor impaired |
694 | 692 | 603 | |||||||
|
Provision for bad and doubtful debts |
(64 | ) | (47 | ) | (57) | |||||
| Trade receivables – net (loans and receivables) | 939 | 968 | 935 | |||||||
|
Movements in the provision for bad and doubtful debts were as follows:
|
||||||||||
| $ |
2015 million |
|
$ |
2014 million |
|
2013 $ million | ||||
| At 1 January | 47 | 57 | 49 | |||||||
|
Exchange adjustment |
(3 | ) | (4 | ) | 1 | |||||
|
Net receivables (provision released)/provided for during the year |
25 | (4 | ) | 15 | ||||||
|
Utilisation of provision |
(5 | ) | (2 | ) | (8) | |||||
| At 31 December | 64 | 47 | 57 | |||||||
|
Trade receivables include amounts denominated in the following major currencies:
|
||||||||||
| $ |
2015 million |
|
$ |
2014 million |
|
2013 $ million | ||||
| US Dollar | 362 | 353 | 293 | |||||||
|
Sterling |
58 | 92 | 103 | |||||||
|
Euro |
192 | 225 | 271 | |||||||
|
Other |
327 | 298 | 268 | |||||||
| Trade receivables – net (loans and receivables) | 939 | 968 | 935 | |||||||
Table of Contents
| 138
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
|
2015 $ million |
2014 $ million | |||
| Trade and other payables due within one year | ||||
| Trade and other payables | 808 | 807 | ||
|
Derivatives – forward foreign exchange and currency swaps |
26 | 21 | ||
|
Acquisition consideration |
8 | 10 | ||
| 842 | 838 | |||
| Other payables due after one year | ||||
| Acquisition consideration | 19 | 23 | ||
|
Other payables |
10 | 21 | ||
| 29 | 44 | |||
|
The acquisition consideration due after more than one year is expected to be payable as follows: $7m in 2017, $7m in 2018 and $5m in 2019 (2014 – $5m in 2016, $8m in 2017 and $10m in 2018).
15.1 Net debt
Net debt comprises borrowings and credit balances on currency swaps less cash at bank.
| ||||
|
2015 $ million |
2014 $ million | |||
| Bank overdrafts and loans due within one year | 46 | 39 | ||
|
Long-term bank borrowings and finance leases |
308 | 541 | ||
|
Private placement notes |
1,126 | 1,125 | ||
| Borrowings | 1,480 | 1,705 | ||
|
Cash at bank |
(120) | (93) | ||
|
Credit/(debit) balance on derivatives – currency & interest rate swaps |
1 | 1 | ||
| Net debt | 1,361 | 1,613 | ||
Borrowings are repayable as follows:
| Within one year or on demand $ million |
Between one and two years $ million |
Between two and three years $ million |
Between three and four years $ million |
Between four and five years $ million |
After five years $ million |
Total $ million | ||||||||
| At 31 December 2015: | ||||||||||||||
|
Bank loans |
26 | – | 300 | – | – | – | 326 | |||||||
|
Bank overdrafts |
18 | – | – | – | – | – | 18 | |||||||
|
Finance lease liabilities |
2 | 2 | 3 | 3 | – | – | 10 | |||||||
|
Private placement notes |
– | – | – | 125 | – | 1,001 | 1,126 | |||||||
| 46 | 2 | 303 | 128 | – | 1,001 | 1,480 | ||||||||
| At 31 December 2014: | ||||||||||||||
|
Bank loans |
9 | 400 | – | – | 131 | – | 540 | |||||||
|
Bank overdrafts |
28 | – | – | – | – | – | 28 | |||||||
|
Finance lease liabilities |
2 | 2 | 2 | 3 | 3 | – | 12 | |||||||
|
Private placement notes |
– | – | – | – | 125 | 1,000 | 1,125 | |||||||
| 39 | 402 | 2 | 3 | 259 | 1,000 | 1,705 |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
139
| ||
|
| ||||
15.2 Assets pledged as security
Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:
|
2015 $ million |
2014 $ million | |||
| Finance lease liabilities – due within one year | 2 | 2 | ||
|
Finance lease liabilities – due after one year |
8 | 10 | ||
| Total amount of secured borrowings | 10 | 12 | ||
| Total net book value of assets pledged as security: | ||||
|
Property, plant and equipment |
6 | 8 | ||
| 6 | 8 |
15.3 Liquidity risk exposures 2015
The Board has established a set of policies to manage funding and currency risks. The Group uses derivative financial instruments only to manage the financial risks associated with underlying business activities and their financing.
Liquidity risk is the risk that the Group is not able to settle or meet its obligations on time or at a reasonable price. The Group’s policy is to ensure that there is sufficient funding and facilities in place to meet foreseeable borrowing requirements. The Group manages and monitors liquidity risk through regular reporting of current cash and borrowing balances and periodic preparation and review of short and medium-term cash forecasts, having regard to the maturities of investments and borrowing facilities.
The Group has available committed facilities of $2.4bn (2014 – $2.5bn). The interest payable on borrowings under committed facilities is either at fixed or floating rates. Floating rates are typically based on the LIBOR (or other reference rate) relevant to the term and currency concerned.
The Company is subject to restrictive covenants under its principal facility agreements. These financial covenants are tested at the end of each half year for the 12 months ending on the last day of the testing period. As of 31 December 2015, 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 principal facilities are:
| Facility | Date due | |||
| $300 million bilateral, term loan facility | April 2018 | |||
|
$1.0 billion syndicated, revolving credit facility |
March 2020 | |||
|
$80 million 2.47% Senior Notes |
November 2019 | |||
|
$45 million Floating Rate Senior Notes |
November 2019 | |||
|
$75 million 3.23% Senior Notes |
January 2021 | |||
|
$190 million 2.97% Senior Notes |
November 2021 | |||
|
$75 million 3.46% Senior Notes |
January 2022 | |||
|
$50 million 3.15% Senior Notes |
November 2022 | |||
|
$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 | |||
|
$75 million 3.99% Senior Notes |
January 2026 |
Table of Contents
| 140
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
15 Cash and borrowings continued
15.4 Year end financial liabilities by contractual maturity
The table below analyses the Group’s year end financial liabilities by contractual maturity date, including interest payments and excluding the impact of netting arrangements:
|
Within one year or on demand $ million |
Between one and two years $ million |
Between two and five years $ million |
After five years $ million |
Total $ million | ||||||
| At 31 December 2015 | ||||||||||
| Non-derivative financial liabilities: | ||||||||||
|
Bank overdrafts and loans |
44 | – | 300 | – | 344 | |||||
|
Trade and other payables |
808 | 10 | – | – | 818 | |||||
|
Finance lease liabilities |
3 | 3 | 6 | – | 12 | |||||
|
Private placement notes |
– | – | 125 | 1,001 | 1,126 | |||||
|
Acquisition consideration |
8 | 7 | 12 | – | 27 | |||||
| Derivative financial liabilities: | ||||||||||
|
Currency swaps/forward foreign exchange contracts – outflow |
2,279 | – | – | – | 2,279 | |||||
|
Currency swaps/forward foreign exchange contracts – inflow |
(2,277) | – | – | – | (2,277) | |||||
| 865 | 20 | 443 | 1,001 | 2,329 | ||||||
| At 31 December 2014 | ||||||||||
| Non-derivative financial liabilities: | ||||||||||
|
Bank overdrafts and loans |
37 | 400 | 131 | – | 568 | |||||
|
Trade and other payables |
807 | 21 | – | – | 828 | |||||
|
Finance lease liabilities |
3 | 3 | 9 | – | 15 | |||||
|
Private placement notes |
– | – | 125 | 1,000 | 1,125 | |||||
|
Acquisition consideration |
10 | 13 | 10 | – | 33 | |||||
| Derivative financial liabilities: | ||||||||||
|
Currency swaps/forward foreign exchange contracts – outflow |
1,811 | – | – | – | 1,811 | |||||
|
Currency swaps/forward foreign exchange contracts – inflow |
(1,810) | – | – | – | (1,810) | |||||
| 858 | 437 | 275 | 1,000 | 2,570 |
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.
15.5 Finance leases
| ACCOUNTING POLICY |
||||
|
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.
The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Assets held under finance leases are capitalised as property, plant or equipment and depreciated accordingly. Minimum lease payments are apportioned between the finance expense and the reduction in the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
|
||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
141
| ||
|
| ||||
Future minimum lease payments under finance leases together with the present value of the minimum lease payments are as follows:
|
2015 $ million |
2014 $ million | |||
| Within one year | 3 | 3 | ||
|
After one and within two years |
3 | 3 | ||
|
After two and within three years |
3 | 3 | ||
|
After three and within four years |
3 | 3 | ||
|
After four and within five years |
– | 3 | ||
|
After five years |
– | – | ||
| Total minimum lease payments | 12 | 15 | ||
|
Discounted by imputed interest |
(2) | (3) | ||
| Present value of minimum lease payments | 10 | 12 |
Present value of minimum lease payments can be split out as: $2m (2014 – $2m) due within one year, $8m (2014 – $10m) due between one to five years and $nil (2014– $nil) due after five years.
Liquidity and capital resources
The Group’s policy is to ensure that it has sufficient funding and facilities to meet foreseeable borrowing requirements.
At 31 December 2015, the Group held $102m (2014 – $65m, 2013 – $126m) in cash net of bank overdrafts. The Group had committed facilities available of $2,425m at 31 December 2015 of which $1,425m was drawn. Smith & Nephew intends to repay the amounts due within one year using available cash and drawing down on the longer-term facilities. In addition, the Group has finance lease commitments of $10m.
During the year ended 31 December 2014, the Group refinanced its principal banking facilities. The Group signed a new five-year committed $1bn multi-currency revolving credit facility with a maturity date of March 2019. This maturity date has since been extended to March 2020. In April 2015, the Group signed a new three year, $300m bilateral term loan with one of its relationship banks. The new term loan has a maturity date of April 2018. The proceeds of this new loan were used to repay the remaining outstanding amount on the committed term loan used to fund the ArthroCare acquisition.
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 2016, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities. The Group’s net debt decreased from $1,613m at the beginning of 2015 to $1,361m at the end of 2015, representing an overall decrease of $252m.
The Group’s planned future contributions are considered adequate to cover the current underfunded position in the Group’s defined benefit plans.
16 Financial instruments and risk management
|
ACCOUNTING POLICY |
||||
|
Derivative financial instruments
Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at subsequent balance sheet dates.
Changes in the fair value of derivative financial instruments that are designated and effective as cash flow hedges of forecast third party and intercompany transactions are recognised in other comprehensive income until the associated asset or liability is recognised. Amounts taken to other comprehensive income are transferred to the income statement in the period in which the hedged transaction affects profit and loss. Where the hedged item is the cost of a non-financial asset, the amounts taken to other comprehensive income are transferred to the initial carrying value of the asset.
Currency swaps to match foreign currency net assets with foreign currency liabilities are fair valued at year end. Changes in the fair values of currency swaps that are designated and effective as net investment hedges are matched in other comprehensive income against changes in value of the related net assets.
Interest rate 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 income/(costs) as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in other comprehensive income is retained there until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred. |
||||
Table of Contents
| 142
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
16 Financial instruments and risk management continued
16.1 Foreign exchange exposures
The Group operates in over 100 countries and as a consequence has transactional and translational foreign exchange exposure. It is Group policy for operating units not to hold material unhedged monetary assets or liabilities other than in their functional currencies.
Foreign exchange variations affect trading results in two ways. Firstly, on translation of overseas sales and profits into US Dollars and secondly, transactional exposures arising where some or all of the costs of sale are incurred in a different currency from the sale. The principal transactional exposures arise as the proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion of sales in each of these currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.
The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts. The Group uses forward foreign exchange contracts, designated as cash flow hedges, to hedge forecast third party and intercompany trading cash flows up to one year. When a commitment is entered into, forward foreign exchange contracts are normally used to increase the hedge to 100% of the exposure. Cash flows relating to cash flow hedges are expected to occur within 12 months of inception and profits and losses on hedges are expected to enter into the determination of profit (within cost of goods sold) within a further 12-month period. The principal currencies hedged by forward foreign exchange contracts are US Dollars, Euros and Sterling. At 31 December 2015, the Group had contracted to exchange within one year the equivalent of $1.9bn (2014 – $1.5bn). Based on the Group’s net borrowings as at 31 December 2015, if the US Dollar were to weaken against all currencies by 10%, the Group’s net borrowings would decrease by $1m (2014 – decrease by $6m) as the Group held a higher amount of foreign denominated cash than foreign denominated borrowings.
If the US Dollar were to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2015 would have been $42m lower (2014 – $37m). Similarly, if the Euro was to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2015 would have been $16m higher (2014 – $26m). Movements in the fair value of forward foreign exchange contracts would be recognised in other comprehensive income and accumulated in the hedging reserve.
A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2015 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.
16.2 Interest rate exposures
The Group is exposed to interest rate risk on cash, borrowings and certain currency and interest rate swaps which are at floating rates. When required the Group uses interest rate derivatives to meet its objective of protecting borrowing costs within parameters set by the Board. These interest rate derivatives are accounted for as cash flow hedges and, as such, changes in fair value resulting from changes in market interest rates are recognised in other comprehensive income and accumulated in the hedging reserve, with the fair value of the interest rate derivatives recorded in the balance sheet.
Additionally, the Group uses interest rate swaps to reduce the overall level of fixed rate debt, within parameters set by the Board. When used in this way, interest rate derivatives are accounted for as fair value hedges. The fair value movement of the derivative is offset in the income statement against the fair value movement in the underlying fixed rate debt.
Based on the Group’s gross borrowings as at 31 December 2015, if interest rates were to increase by 100 basis points in all currencies then the annual net interest charge would increase by $6m (2014 – $6m). A decrease in interest rates by 100 basis points in all currencies would have an equal but opposite effect to the amounts shown above.
16.3 Credit risk exposures
The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits. The financial exposure of a counterparty is determined as the total of cash and deposits, plus the risk on derivative instruments, assessed as the fair value of the instrument plus a risk element based on the nominal value and the historic volatility of the market value of the instrument. The Group does not anticipate non-performance of counterparties and believes it is not subject to material concentration of credit risk as the Group operates within a policy of counterparty limits designed to reduce exposure to any single counterparty.
The maximum credit risk exposure on derivatives at 31 December 2015 was $33m (2014 – $49m), 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 2015 was $120m (2014 – $93m). The Group’s exposure to credit risk is not material as the amounts are held in a wide number of banks in a number of different countries.
Credit risk on trade receivables is detailed in Note 13.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
143
| ||
|
| ||||
16.4 Currency and interest rate profile of interest bearing liabilities and assets
Short-term debtors and creditors are excluded from the following disclosures.
Currency and interest rate profile of interest bearing liabilities:
| Fixed rate liabilities | ||||||||||||||
| Weighted | ||||||||||||||
| Weighted | average time | |||||||||||||
| Gross | Currency | Total | Floating | Fixed rate | average | for which | ||||||||
| borrowings | swaps | liabilities | rate liabilities | liabilities | interest rate | rate is fixed | ||||||||
| $ million | $ million | $ million | $ million | $ million | % | Years | ||||||||
| At 31 December 2015 | ||||||||||||||
|
US Dollar |
1,439 | 310 | 1,749 | 884 | 865 | 3.5 | 7.8 | |||||||
|
Other |
41 | 60 | 101 | 101 | – | – | – | |||||||
| Total interest bearing liabilities | 1,480 | 370 | 1,850 | 985 | 865 | |||||||||
| At 31 December 2014 | ||||||||||||||
|
US Dollar |
1,685 | 208 | 1,893 | 826 | 1,067 | 3.4 | 8.3 | |||||||
|
Euro |
10 | 35 | 45 | 45 | – | – | – | |||||||
|
Other |
10 | 37 | 47 | 47 | – | – | – | |||||||
| Total interest bearing liabilities | 1,705 | 280 | 1,985 | 918 | 1,067 | |||||||||
At 31 December 2015, $10m (2014 – $12m) of fixed rate liabilities related to finance leases. In 2015, the Group also had liabilities due for deferred acquisition consideration (denominated in US Dollars and Brazilian Real) totalling $27m (2014 – $33m, 2013 – $21m) on which no interest was payable (see Note 14). There were no other significant interest bearing financial liabilities.
Floating rates on liabilities are typically based on the one, three or six-month LIBOR (or other reference rate) relevant to the currency concerned. The weighted average interest rate on floating rate borrowings as at 31 December 2015 was 2% (2014 – 1%).
Currency and interest rate profile of interest bearing assets:
| Interest | Cash | Currency | Floating | Fixed | ||||||||
| rate swaps | at bank | swaps | Total assets | rate assets | rate assets | |||||||
| $ million | $ million | $ million | $ million | $ million | $ million | |||||||
| At 31 December 2015 | ||||||||||||
|
US Dollars |
1 | 72 | 55 | 128 | 127 | 1 | ||||||
|
Other |
– | 48 | 313 | 361 | 361 | – | ||||||
| Total interest bearing assets | 1 | 120 | 368 | 489 | 488 | 1 | ||||||
| At 31 December 2014 | ||||||||||||
|
US Dollars |
– | 13 | 79 | 92 | 92 | – | ||||||
|
Other |
– | 80 | 200 | 280 | 280 | – | ||||||
| Total interest bearing assets | – | 93 | 279 | 372 | 372 | – |
Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned. There were $1m fixed rate assets at 31 December 2015 (2014 $nil).
Table of Contents
| 144
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
16 Financial instruments and risk management continued
16.5 Fair value of financial assets and liabilities
|
ACCOUNTING POLICY |
||||
|
Measurement of fair values
A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial assets and liabilities and non-financial assets acquired in a business combination (see Note 21).
When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3: inputs for the asset or liability that are not based on observable data (unobservable inputs).
The Group recognises transfers between the levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
|
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
| Carrying amount |
Fair value | |||||||||||||||||||
| At 31 December 2015 | Designated at fair value $ million |
Fair value – hedging instruments $ million |
Loans and receivables $ million |
Available for sale $ million |
Other financial liabilities $ million |
Total $ million |
Level 2 $ million |
Level 3 $ million |
Total $ million | |||||||||||
|
Financial assets measured at fair value |
||||||||||||||||||||
|
Forward foreign exchange contracts |
– | 31 | – | – | – | 31 | 31 | – | 31 | |||||||||||
|
Investments |
– | – | – | 13 | – | 13 | – | 13 | 13 | |||||||||||
|
Currency swaps |
1 | – | – | – | – | 1 | 1 | – | 1 | |||||||||||
|
Interest rate swaps |
– | 1 | – | – | – | 1 | 1 | – | 1 | |||||||||||
| 1 | 32 | – | 13 | – | 46 | 33 | 13 | 46 | ||||||||||||
|
Financial liabilities measured at fair value |
||||||||||||||||||||
|
Acquisition consideration |
(27) | – | – | – | – | (27) | – | (27) | (27) | |||||||||||
|
Forward foreign exchange contracts |
– | (23) | – | – | – | (23) | (23) | – | (23) | |||||||||||
|
Currency swaps |
(3) | – | – | – | – | (3) | (3) | – | (3) | |||||||||||
|
Private placement debt |
– | – | (201) | – | – | (201) | (201) | – | (201) | |||||||||||
| (30) | (23) | (201) | – | – | (254) | (227) | (27) | (254) | ||||||||||||
|
Financial assets not measured at fair value |
||||||||||||||||||||
|
Trade and other receivables |
– | – | 1,022 | – | – | 1,022 | ||||||||||||||
|
Cash at bank |
– | – | 120 | – | – | 120 | ||||||||||||||
| – | – | 1,142 | – | – | 1,142 | |||||||||||||||
|
Financial liabilities not measured at fair value |
||||||||||||||||||||
|
Bank overdrafts |
– | – | – | – | (18) | (18) | ||||||||||||||
|
Bank loans |
– | – | – | – | (326) | (326) | ||||||||||||||
|
Private placement debt |
– | – | – | – | (925) | (925) | (949) | – | (949) | |||||||||||
|
Finance lease liabilities |
– | – | – | – | (10) | (10) | ||||||||||||||
|
Trade and other payables |
– | – | – | – | (818) | (818) | ||||||||||||||
| – | – | – | – | (2,097) | (2,097) |
The fair value of the private placement notes is determined using a discounted cash flow model based on prevailing market rates.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
145
| ||
|
| ||||
| Carrying amount |
Fair value | |||||||||||||||||||
| At 31 December 2014 | Designated at fair value $ million |
Fair value – hedging instruments $ million |
Loans and receivables $ million |
Available for sale $ million |
Other financial liabilities $ million |
Total $ million |
Level 2 $ million |
Level 3 $ million |
Total $ million | |||||||||||
|
Financial assets measured at fair value |
||||||||||||||||||||
|
Forward foreign exchange contracts |
– | 48 | – | – | – | 48 | 48 | – | 48 | |||||||||||
|
Investments |
– | – | – | 5 | – | 5 | – | 5 | 5 | |||||||||||
|
Currency swaps |
1 | – | – | – | – | 1 | 1 | – | 1 | |||||||||||
| 1 | 48 | – | 5 | – | 54 | 49 | 5 | 54 | ||||||||||||
|
Financial liabilities measured at fair value |
||||||||||||||||||||
|
Acquisition consideration |
(33) | – | – | – | – | (33) | – | (33) | (33) | |||||||||||
|
Forward foreign exchange contracts |
– | (19) | – | – | – | (19) | (19) | – | (19) | |||||||||||
|
Currency swaps |
(2) | – | – | – | – | (2) | (2) | – | (2) | |||||||||||
| (35) | (19) | – | – | – | (54) | (21) | (33) | (54) | ||||||||||||
|
Financial assets not measured at fair value |
||||||||||||||||||||
|
Trade and other receivables |
– | – | 1,019 | – | – | 1,019 | ||||||||||||||
|
Cash at bank |
– | – | 93 | – | – | 93 | ||||||||||||||
| – | – | 1,112 | – | – | 1,112 | |||||||||||||||
|
Financial liabilities not measured at fair value |
||||||||||||||||||||
|
Bank overdrafts |
– | – | – | – | (28) | (28) | ||||||||||||||
|
Bank loans |
– | – | – | – | (540) | (540) | ||||||||||||||
|
Private placement debt |
– | – | – | – | (1,125) | (1,125) | (1,144) | – | (1,144) | |||||||||||
|
Finance lease liabilities |
– | – | – | – | (12) | (12) | ||||||||||||||
|
Trade and other payables |
– | – | – | – | (828) | (828) | ||||||||||||||
| – | – | – | – | (2,533) | (2,533) |
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 2014, other than the representation of $98m of prepayments and accrued income which is no longer presented as a financial asset.
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 contingent consideration is estimated using a discounted cash flow model. The valuation model considers the present value of expected payment, discounted using a risk-adjusted discount rate. The expected payment is determined by considering the possible scenarios, which relate to the achievement of established milestones and targets, the amount to be paid under each scenario and the probability of each scenario. As a result, contingent consideration is classified as Level 3 within the fair value hierarchy.
There were no transfers between Levels 1, 2 and 3 during 2015 and 2014.
For cash and cash equivalents, short-term loans and receivables, overdrafts and other short-term liabilities which have a maturity of less than three months, the book values approximate the fair values because of their short-term nature.
Long-term borrowings are measured in the balance sheet at amortised cost. As the Group’s long-term borrowings are not quoted publicly and as market prices are not available, their fair values are estimated by discounting future contractual cash flows to net present values at the current market interest rates available to the Group for similar financial instruments as at the year end.
Table of Contents
| 146
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
17 Provisions and contingencies
|
ACCOUNTING POLICY |
||||
|
In the normal course of business the Group is involved in various legal disputes. Provisions are made for loss contingencies when it is deemed probable that an adverse outcome will occur and the amount of the losses can be reasonably estimated. Where the Group is the plaintiff in pursuing claims against third parties, legal and associated expenses are charged to the income statement as incurred.
The recognition of provisions for legal disputes is subject to a significant degree of estimation. In making its estimates management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or as new facts emerge.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. For the purpose of calculating any onerous lease provision, the Group takes the discounted future lease payments (if any), net of expected rental income. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.
A provision for rationalisation is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for.
|
| 17.1 Provisions
|
||||||||
|
Rationalisation provisions $ million |
Metal-on-metal $ million |
Legal and other provisions $ million |
Total $ million | |||||
| At 1 January 2014 | 18 | – | 107 | 125 | ||||
|
Acquisitions |
– | – | 24 | 24 | ||||
|
Charge to income statement |
17 | – | 15 | 32 | ||||
|
Utilised |
(22) | – | (28) | (50) | ||||
|
Exchange adjustment |
(1) | – | – | (1) | ||||
| At 31 December 2014 | 12 | – | 118 | 130 | ||||
|
Charge to income statement |
23 | 185 | 18 | 226 | ||||
|
Utilised |
(11) | – | (31) | (42) | ||||
|
Transfers |
– | – | 15 | 15 | ||||
|
Exchange adjustment |
(1) | – | (2) | (3) | ||||
| At 31 December 2015 | 23 | 185 | 118 | 326 | ||||
| Provisions – due within one year | 23 | 63 | 107 | 193 | ||||
|
Provisions – due after one year |
– | 122 | 11 | 133 | ||||
| At 31 December 2015 | 23 | 185 | 118 | 326 | ||||
| Provisions – due within one year | 12 | – | 55 | 67 | ||||
|
Provisions – due after one year |
– | – | 63 | 63 | ||||
| At 31 December 2014 | 12 | – | 118 | 130 |
The principal elements within rationalisation provisions relate to the Group Optimisation programme (mainly severance) announced in May 2014 and people costs associated with the structural and efficiency programme announced in August 2011.
Following the settlement of the majority of US metal-on-metal hip claims (discussed below) the Group has estimated a provision of $185m 2014 – $nil) relating to the present value at 31 December of the estimated costs to resolve all other known and anticipated metal-on-metal hip claims. The estimated value of the provision has been determined using an actuarial model. Given the inherent uncertainty in assumptions relating to factors such as the number of claims and outcome the actual costs may differ significantly from this estimate. The provision does not include any possible insurance recoveries on these claims or legal fees associated with defending claims. The Group carries considerable product liability insurance, and will continue to defend claims vigorously.
Furthermore, for the year to 31 December 2015, included within legal and other provisions are:
| – | A provision of $5m (2014: $10m) relating to the RENASYS distribution hold. |
| – | A provision of $4m (2014: $7m) relating to the HP802 programme which was stopped during the fourth quarter of 2014. |
The remaining balance largely represents provisions for various other litigation matters.
All provisions are expected to be substantially utilised within five years of 31 December 2015 and none are treated as financial instruments.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
147
| ||
|
| ||||
17.2 Contingencies
The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for substantial damages. The outcome of these proceedings cannot readily be foreseen, but management believes none of them is likely to result in a material adverse effect on the financial position of the Group. The Group provides for outcomes that are deemed to be probable and can be reliably estimated. There is no assurance that losses will not exceed provisions or will not have a significant impact on the Group’s results of operations in the period in which they are realised.
In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its OXINIUM femoral knee components. A charge of $154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims. Most of that amount has since been applied to settlements of such claims, and almost all have been resolved. The aggregate cost at 31 December 2015 related to this matter is approximately $205m. The Group has sought recovery from its primary and excess insurers for costs of resolving the claims. The primary insurance carrier has paid $60m in full settlement of its policy liability. However, the excess carriers have denied coverage, citing defences relating to the wording of the insurance policies and other matters. In December 2004, the Group brought suit against them in the US district court for the Western District of Tennessee, for which a trial has not yet begun. An additional $22m was received during 2007 from a successful settlement with a third party.
17.3 Legal proceedings
Product liability claims
The Group faces claims from time to time for alleged defects in its products and has on occasion recalled or withdrawn products from the market. Such claims are endemic to the medical device industry. The Group maintains product liability insurance subject to limits and deductibles that management believes are reasonable. All policies contain exclusions and limitations, however, and there can be no assurance that insurance will be available or adequate to cover all claims.
In recent years, there has been heightened concern about possible adverse effects of hip implant products with metal-on-metal bearing surfaces, and the Group has incurred and will continue to incur expenses to defend claims in this area. As of February 2016, and giving effect to the US settlement described below, approximately 718 such claims were pending with the Group around the world, of which 388 had given rise to pending legal proceedings. The Group has requested indemnity from its product liability insurers for most of these metal-on-metal hip implant claims. Most claims relate to the Group’s Birmingham Hip Resurfacing (‘BHR’) product and its two modular metal-on-metal components: the Birmingham Hip Modular Head (‘BHMH’) and the optional metal liner component of the R3 Acetabular System (‘R3ML’). The BHMH and R3ML are no longer on the market: the R3ML was withdrawn in 2012 and the BHMH was phased out in 2014. In 2015, the Group ceased offering smaller sizes of the BHR and restricted instructions for BHR use in female patients. These actions were taken to ensure that the BHR is only used in those patient groups where it continues to demonstrate strong performance. These represent the vast majority of current patients.
In 2015 the Group’s US subsidiary settled the majority of its US metal-on-metal hip lawsuits, without admitting liability. Insurance receipts covered more than half of the gross settlement, with the net cash cost being $25 million. These cases had been consolidated in a state court in Memphis, Tennessee and principally related to the Group’s modular metal-on-metal hip components, which are no longer on the market. Litigation outcomes are difficult to predict and defence costs can be significant. The Group takes care to monitor the clinical evidence relating to its metal hip implant products and ensure that its product offerings are designed to serve patients’ interests.
Business practice investigations
Business practices in the healthcare industry are subject to regulation and review by various government authorities. From time to time authorities undertake investigations of the Group’s activities to verify compliance.
In January 2014, before agreeing to be acquired by the Group, ArthroCare announced a settlement of charges by the US Department of Justice relating to securities fraud in which certain members of prior management were implicated. ArthroCare paid a $30m fine and signed a deferred prosecution agreement that imposed reporting, compliance and other requirements on ArthroCare for a two-year term. That agreement expired in January 2016, and the related complaint against ArthroCare was dismissed.
Intellectual property disputes
The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over claims of patent infringement and other intellectual property matters. These disputes are being heard in courts in the US and other jurisdictions and also before agencies that examine patents. Outcomes are rarely certain and costs are often significant.
The Group won a jury verdict in the US district court for Oregon against Arthrex Inc. in 2011 for infringement of the Group’s patent relating to suture anchors. A number of issues have been disputed and appealed since the case was first filed in 2003; Arthrex paid $99m in June 2015, and most of that award (net of various expenses) was recognised in the Group’s trading profit at that time. A follow-up trial asserting the same patent against additional Arthrex products is in progress in the Oregon court. Arthrex asserted other patents against the Group in 2014 and 2015 in the US district court for the Eastern District of Texas.
Other matters
In April 2009, the Group was served with a subpoena by the US Department of Justice in Massachusetts requiring the production of documents from 1995 to 2009 associated with the marketing and sale of a bone growth stimulation product that the Group has since divested. Similar subpoenas had been served on a number of competitors in the bone growth stimulator market, and a qui tam or ‘whistle-blower’ complaint had been filed in federal court in Boston, Massachusetts. The Group cooperated with the government inquiry, defended the qui tam action, and agreed in principle to settle the latter in 2015 without admitting any liability.
Table of Contents
| 148
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
18 Retirement benefit obligations
| ACCOUNTING POLICY |
||||
| The Group sponsors defined benefit plans in a number of countries. A defined benefit pension plan defines an amount of pension benefit that an employee will receive on retirement, which is dependent on various factors such as age, years of service and final salary. The Group’s obligation is calculated separately for each plan by discounting the estimated future benefit that employees have earned in return for their service in the current and prior periods. The fair value of any plan assets is deducted to arrive at the net liability.
The calculation of the defined benefit obligation is performed annually by external actuaries using the projected unit credit method. Re-measurements arising from defined benefit plans comprise actuarial gains and losses and the return on the plan assets net of the costs of managing the plan assets. The Group recognises these immediately in other comprehensive income (‘OCI’) and all other expenses, such as service cost, net interest cost, administration costs and taxes, are recognised in the income statement.
A number of key assumptions are made when calculating the fair value of the Group’s defined benefit pension plans. These assumptions impact the balance sheet asset and liabilities, operating profit and finance income/costs. The most critical assumptions are the discount rate, the rate of inflation and mortality assumptions to be applied to future pension plan liabilities. The discount rate is based on the yield at the reporting date on bonds that have a credit rating of AA, denominated in the currency in which the benefits are expected to be paid and have a maturity profile approximately the same as the Group’s obligations. In determining these assumptions management take into account the advice of professional external actuaries and benchmarks its assumptions against external data.
The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset).
The Group also operates a number of defined contribution plans. A defined contribution plan is a pension plan under which the Group and employees pay fixed contributions to a third party financial provider. The Group has no further payment obligations once the contributions have been paid. Contributions are recognised as an employee benefit expense when they are due.
|
||||
18.1 Retirement benefit net (assets)/obligations
The Group’s retirement benefit obligations comprise:
|
2015 $ million |
2014 $ million | |||
| Funded plans: | ||||
|
UK Plan |
(7) | 16 | ||
|
US Plan |
56 | 74 | ||
|
Other plans |
48 | 42 | ||
| 97 | 132 | |||
| Unfunded plans: | ||||
|
Other plans |
44 | 48 | ||
|
Retirement healthcare |
30 | 46 | ||
| 171 | 226 | |||
| Amount recognised on the balance sheet – liability | 184 | 233 | ||
| Amount recognised on the balance sheet – asset | (13) | (7) |
The Group sponsors pension plans for its employees in 16 countries and these are established under the laws of the relevant country. Funded plans are funded by the payment of contributions and the assets are held by separate trust funds or insurance companies. In countries where there is no Company-sponsored pension plan, state benefits are considered by management to be adequate. Employees’ retirement benefits are the subject of regular management review. The Group’s defined benefit plans provide employees with an entitlement to retirement benefits varying between 1.3% and 66.7% of final salary on attainment of retirement 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 Plan was closed to future accrual in March 2014.
The UK Plan operates under trust law and responsibility for its governance lies with a Board of Trustees. This Board is composed of representatives of the Group, plan participants and an independent trustee, who act on behalf of members in accordance with the terms of the Trust Deed and Rules and relevant legislation. The UK Plan’s assets are held by the trust. Annual increases on benefits in payment are dependent on inflation. The main uncertainties affecting the level of benefits payable under the UK Plan are future inflation levels (including the impact of inflation on future salary increase) and the actual longevity of the membership. There is no legislative minimum funding requirement in the UK, however the Group has agreed with the Board of Trustees to pay a schedule of supplementary payments (see Note 18.8). The Trust Deed of the UK Plan states that any surplus is ultimately accessible by the Group as a refund. As a result the Group has recognised a surplus for the UK Plan of $7m in 2015.
The US Plan is governed by a US Pension Committee which is composed of both plan participants and representatives of the Group. In the US, the Pension Protection Act (2006) established both a minimum required contribution and a maximum deductible contribution. Failure to contribute at least the minimum required amount will subject the Company to significant penalties, and contributions in excess of the maximum deductible have negative tax consequences. The minimum funding requirement is intended to fully fund the present value of accrued benefits over seven years.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
149
| ||
|
| ||||
18.2 Reconciliation of benefit obligations and pension assets
The movement in the Group’s pension benefit obligation and pension assets is as follows:
|
2015 |
2014 | |||||||||||||
| Obligation $ million |
Asset $ million |
Total $ million |
Obligation $ million | Asset $ million |
Total $ million | |||||||||
| Amounts recognised on the balance sheet at beginning of the period | (1,637) | 1,411 | (226) | (1,581) | 1,356 | (225) | ||||||||
| Income statement expense: | ||||||||||||||
|
Current service cost |
(20) | – | (20) | (22) | – | (22) | ||||||||
|
Past service cost |
22 | – | 22 | 36 | – | 36 | ||||||||
|
Settlements |
30 | (32) | (2) | 71 | (60) | 11 | ||||||||
|
Interest (expense)/income |
(56) | 50 | (6) | (67) | 60 | (7) | ||||||||
|
Administration costs and taxes |
(3) | – | (3) | (3) | – | (3) | ||||||||
| Costs recognised in Income statement | (27) | 18 | (9) | 15 | – | 15 | ||||||||
| Re-measurements: | ||||||||||||||
|
Actuarial gain due to liability experience |
17 | – | 17 | 5 | – | 5 | ||||||||
|
Actuarial (loss)/gain due to financial assumptions change |
20 | – | 20 | (179) | – | (179) | ||||||||
|
Actuarial loss due to demographic assumptions |
– | – | – | (30) | – | (30) | ||||||||
|
Return on plan assets (less than)/greater than discount rate |
– | (45) | (45) | – | 110 | 110 | ||||||||
| Re-measurements recognised in OCI | 37 | (45) | (8) | (204) | 110 | (94) | ||||||||
| Cash: | ||||||||||||||
|
Employer contributions |
– | 66 | 66 | – | 65 | 65 | ||||||||
|
Employee contributions |
(5) | 5 | – | (5) | 5 | – | ||||||||
|
Benefits paid directly by the Group, taxes and administration costs paid from scheme assets |
3 | – | 3 | 3 | – | 3 | ||||||||
|
Benefits paid |
52 | (55) | (3) | 51 | (54) | (3) | ||||||||
| Net cash | 50 | 16 | 66 | 49 | 16 | 65 | ||||||||
| Exchange rates | 56 | (50) | 6 | 84 | (71) | 13 | ||||||||
| Amount recognised on the balance sheet | (1,521) | 1,350 | (171) | (1,637) | 1,411 | (226) | ||||||||
| Amount recognised on the balance sheet – liability | (691) | 507 | (184) | (1,611) | 1,378 | (233) | ||||||||
| Amount recognised on the balance sheet – asset | (830) | 843 | 13 | (26) | 33 | 7 | ||||||||
Represented by:
|
2015 |
2014 | |||||||||||||
| Obligation $ million |
Asset $ million |
Total $ million |
Obligation $ million |
Asset $ million |
Total $ million | |||||||||
| UK Plan | (804) | 811 | 7 | (879) | 863 | (16) | ||||||||
|
US Plan |
(460) | 404 | (56) | (482) | 408 | (74) | ||||||||
|
Other Plans |
(257) | 135 | (122) | (276) | 140 | (136) | ||||||||
| Total | (1,521) | 1,350 | (171) | (1,637) | 1,411 | (226) |
All benefits are vested at the end of each reporting period. The weighted average duration of the defined benefit obligation at the end of the reporting period is 19 years and 14 years for the UK and US Plans respectively.
Table of Contents
| 150
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
18 Retirement benefit obligations continued
18.3 Plan assets
The market value of the US, UK and Other Plans assets are as follows:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| UK Plan: | ||||||
|
Assets with a quoted market price: |
||||||
|
Cash and cash equivalents |
5 | 6 | 8 | |||
|
Equity securities |
234 | 237 | 220 | |||
|
Government bonds – fixed interest |
– | – | 61 | |||
| – index linked | – | – | 109 | |||
|
Other Bonds |
43 | – | – | |||
|
Liability driven investments |
171 | 227 | – | |||
|
Diversified growth funds |
144 | 155 | 159 | |||
| 597 | 625 | 557 | ||||
| Other assets: | ||||||
|
Insurance contract |
214 | 238 | 248 | |||
| Market value of assets | 811 | 863 | 805 | |||
| US Plan: | ||||||
|
Assets with a quoted market price: |
||||||
|
Cash and cash equivalents |
– | – | 6 | |||
|
Equity securities |
166 | 167 | 181 | |||
|
Government bonds – fixed interest |
119 | 121 | 64 | |||
|
Corporate bonds |
119 | 120 | 151 | |||
|
Hedge funds |
– | – | 15 | |||
| Market value of assets | 404 | 408 | 417 | |||
| Other Plans: | ||||||
|
Assets with a quoted market price: |
||||||
|
Cash and cash equivalents |
9 | 6 | 6 | |||
|
Equity securities |
35 | 33 | 32 | |||
|
Government bonds – fixed interest |
5 | 7 | 9 | |||
| – index linked | 9 | 13 | 11 | |||
|
Corporate bonds |
13 | 12 | 13 | |||
|
Insurance contracts |
28 | 31 | 24 | |||
|
Property |
8 | 6 | 6 | |||
| Other quoted securities | 1 | 3 | 3 | |||
| 108 | 111 | 104 | ||||
| Other assets: | ||||||
|
Insurance contracts |
27 | 29 | 29 | |||
|
Investment property |
– | – | 1 | |||
| Market value of assets | 135 | 140 | 134 | |||
| Total market value of assets | 1,350 | 1,411 | 1,356 |
No plans invest directly in property occupied by the Group or in financial securities issued by the Group.
The US and UK Plan assets are invested in a diversified range of industries across a broad range of geographies. These assets include liability matching assets and annuity policies purchased by the trustees of each plan, which aim to match the benefits to be paid to certain members from the plan and therefore remove the investment, inflation and demographic risks in relation to those liabilities.
In December 2014, the low risk asset portfolio held by the UK Plan was transferred into liability driven investments (‘LDI’) in order to maintain the same level of hedging against interest rate and inflation risks.
The UK Plan also has an insurance contract with Rothesay Life covering a subset of the UK Plan pensioner liabilities. The terms of this policy define that the contract value exactly matches the amount and timing of the pensioner obligations covered by the contract. In accordance with IAS19R Employee Benefits, the fair value of the insurance contract is deemed to be the present value of the related obligations which is discounted at the AA corporate bond rate.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
151
| ||
|
| ||||
18.4 Expenses recognised in the income statement
The total expense relating to retirement benefits recognised for the year is $58m (2014 – $17m, 2013 – $72m). Of this cost recognised for the year, $49m (2014 – $32m, 2013 – $32m) relates to defined contributions and $9m net expense (2014 – $15m net credit, 2013 – $40m expense) relates to defined benefit plans.
The cost charged in respect of the Group’s defined contribution plans represents contributions payable to these plans by the Group at rates specified in the rules of the plans. These were charged to operating profit in selling, general and administrative expenses. There were $nil outstanding payments as at 31 December 2015 due to be paid over to the plans (2014 – $nil, 2013 – $nil).
The $9m net expense for the year includes a $16m past service cost credit arising from amendments to the US Retirement Healthcare plan and a $5m gain arising from benefit options offered to members of the UK Plan, which is detailed under Inflation risk in Note 18.7.
In 2014, the $15m net credit for defined benefits plans includes a $35m past service cost credit which arose on the closure of the US Plan to future accrual and a $11m gain on settlement of benefits as a result of a member buyout.
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 $3m net interest cost, administration and taxes recognised for the UK Plan includes $2m fees paid directly by the Group relating to the de-risking options offered to members in 2015.
The defined benefit pension costs charged for the UK and US Plans are:
| 2015 | 2014 | 2013 | ||||||||||||||
| UK Plan $ million |
US Plan $ million |
UK Plan $ million |
US Plan $ million |
UK Plan $ million |
US Plan $ million | |||||||||||
| Service cost | 9 | – | 10 | 2 | 7 | 10 | ||||||||||
|
Past service cost |
(7) | – | – | (35) | – | – | ||||||||||
|
Settlement gain |
2 | – | – | (11) | – | – | ||||||||||
|
Net interest cost, administration and taxes |
3 | 4 | 3 | 3 | 1 | 7 | ||||||||||
| 7 | 4 | 13 | (41) | 8 | 17 |
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.
|
2015 % per annum |
2014 % per annum |
2013 % per annum | ||||
| UK Plan: | ||||||
|
Discount rate |
3.8 | 3.7 | 4.4 | |||
|
Future salary increases |
3.6 | 3.5 | 3.9 | |||
|
Future pension increases |
3.1 | 3.0 | 3.4 | |||
|
Inflation (RPI) |
3.1 | 3.0 | 3.4 | |||
|
Inflation (CPI) |
2.1 | 2.0 | 2.4 | |||
|
US Plan: |
||||||
|
Discount rate |
4.3 | 4.0 | 4.9 | |||
|
Future salary increases |
n/a | n/a | 3.0 | |||
|
Inflation |
n/a | n/a | 2.5 |
Table of Contents
| 152
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO
THE
|
18 Retirement benefit obligations continued
Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S1NA with projections in line with the CMI 2011 table and the US uses the RP2014 table with MP2014 scale. The current longevities underlying the values of the obligations in the defined benefit plans are as follows:
|
2015 years |
2014 years |
2013 years | ||||||
| Life expectancy at age 60 | ||||||||
|
UK Plan: |
||||||||
|
Males |
29.6 | 29.4 | 29.3 | |||||
|
Females |
31.3 | 31.2 | 31.1 | |||||
|
US Plan: |
||||||||
|
Males |
25.8 | 26.0 | 23.8 | |||||
|
Females |
28.2 | 28.5 | 25.5 | |||||
| Life expectancy at age 60 in 20 years’ time | ||||||||
|
UK Plan: |
||||||||
|
Males |
32.6 | 32.4 | 32.2 | |||||
|
Females |
33.4 | 33.3 | 33.2 | |||||
|
US Plan: |
||||||||
|
Males |
27.6 | 27.8 | 23.8 | |||||
|
Females |
29.9 | 30.2 | 25.5 |
18.6 Sensitivity analysis
The calculation of the defined benefit obligation is sensitive to the assumptions used. The following table summarises the increase/decrease on the UK and US defined benefit obligation and pension costs as a result of reasonably possible changes in some of the assumptions while holding all other assumptions consistent. The sensitivity to the inflation assumption change includes corresponding changes to the future salary increases and future pension increase assumptions. The analysis does not take into account the full distribution of cash flows expected under the plan.
Changes to the inflation assumption will not have any affect on the US Pension Plan as it was closed to future accrual in 2014.
| Increase in pension obligation | Increase in pension cost | |||||||||
| $ million | +50bps/+1yr | -50bps/–1yr | +50bps/+1yr | -50bps/–1yr | ||||||
| UK Plan: | ||||||||||
|
Discount rate |
–72 | +83 | –4 | +4 | ||||||
|
Inflation |
+80 | –70 | +4 | –3 | ||||||
|
Mortality |
+29 | –29 | +1 | –1 | ||||||
|
US Plan: |
||||||||||
|
Discount rate |
–29 | +33 | –1 | +1 | ||||||
|
Inflation |
n/a | n/a | n/a | n/a | ||||||
|
Mortality |
+11 | –11 | – | – | ||||||
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
153
| ||
|
| ||||
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.
During 2015, the Trustees of the UK Plan offered eligible retired and deferred members three benefit options which would provide them with greater flexibility to manage their final benefit. The three options further minimised the exposure of the UK Plan to inflation risk and were:
– an option to exchange future increases on pension benefits for a higher level of pension with no increases;
– an option to take a transfer and draw their pension in a more flexible form; and
– an option to take a transfer in excess of a standard cash equivalent transfer which could be taken to another pension arrangement.
The US Plan has been closed to future accrual which eliminates the exposure to this risk.
| |
| Investment risk | If the return on plan assets is below the discount rate, all else being equal, there will be an increase in the plan deficit.
In the UK, this risk is partially managed by a portfolio of liability matching assets and a bulk annuity, together with a dynamic de-risking policy to switch growth assets into liability matching assets over time.
The US Plan has a dynamic de-risking policy to shift plan assets into longer-term stable asset classes. The policy established 10 pre-determined funded status levels and when each trigger point is reached, the plan assets are re-balanced accordingly.
| |
| Longevity risk | The present value of the plans defined benefit liability is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment. An increase in the life expectancy of plan participants above that assumed will increase the benefit obligation.
The UK Plan, in order to minimise longevity risk, has entered into an insurance contract which covers a portion of pensioner obligations.
The three options offered to members in the UK during 2015 further minimised the exposure to longevity risk (see Inflation risk above).
| |
| Salary risk | The calculation of the defined benefit obligation uses the future estimated salaries of plan participants. Increases in the salary of plan participants above that assumed will increase the benefit obligation.
The exposure to salary risk in the US has been eliminated with the closure of the US Plan to future accrual.
|
18.8 Funding
A full valuation is performed by actuaries for the Trustees of each plan to determine the level of funding required. Employer contributions rates, based on these full valuations, are agreed between the trustees of each plan and the Group. The assumptions used in the funding actuarial valuations may differ from those assumptions above.
UK Plan
The most recent full actuarial valuation of the UK Plan is being undertaken as at 30 September 2015. Contributions to the UK Plan in 2015 were $37m (2014 – $33m, 2013 – $37m). This included supplementary payments of $29m (2014 – $23m, 2013 – $31m).
The Group has currently agreed to pay supplementary payments until 2017 and the agreed supplementary contribution for 2016 is $29m. A new schedule of contributions will be agreed in 2016.
US Plan
Full actuarial valuations were performed annually for the US Plan with the last undertaken as at 20 September 2013 before the closure of the Plan to future accrual. Contributions to the US Plan were $20m (2014 – $22m, 2013 – $20m) which included supplementary payments of $20m. The planned contribution for 2016 is $20m.
Table of Contents
| 154
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
|
ACCOUNTING POLICY
Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.
|
||||
| When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium.
|
19.1 Share capital
| Ordinary shares (20¢) | Deferred shares (£1.00) |
Total | ||||||||||
| Thousand | $ million | Thousand | $ million | $ million | ||||||||
| Authorised | ||||||||||||
|
At 31 December 2013 |
1,223,591 | 245 | 50 | – | 245 | |||||||
|
At 31 December 2014 |
1,223,591 | 245 | 50 | – | 245 | |||||||
|
At 31 December 2015 |
1,223,591 | 245 | 50 | – | 245 | |||||||
|
Allotted, issued and fully paid |
||||||||||||
|
At 1 January 2013 |
963,580 | 193 | 50 | – | 193 | |||||||
|
Share options |
5,587 | 1 | – | – | 1 | |||||||
|
Shares cancelled |
(51,000) | (10) | – | – | (10) | |||||||
|
At 31 December 2013 |
918,167 | 184 | 50 | – | 184 | |||||||
|
Share options |
4,180 | 1 | – | – | 1 | |||||||
|
Shares cancelled |
(4,405) | (1) | – | – | (1) | |||||||
|
At 31 December 2014 |
917,942 | 184 | 50 | – | 184 | |||||||
|
Share options |
1,855 | – | – | – | – | |||||||
|
Shares cancelled |
(4,350) | (1) | – | – | (1) | |||||||
| At 31 December 2015 | 915,447 | 183 | 50 | – | 183 |
The deferred shares were issued in 2006 in order to comply with English Company law. They are not listed on any stock exchange and have extremely limited rights and effectively have no value. These rights are summarised as follows:
| – | The holder shall not be entitled to participate in the profits of the Company; |
| – | The holder shall not have any right to participate in any distribution of the Company’s assets on a winding up or other distribution except that after the return of the nominal amount paid up on each share in the capital of the Company of any class other than the deferred shares and the distribution of a further $1,000 in respect of each such share there shall be distributed to a holder of a deferred share (for each deferred share held by him) an amount equal to the nominal value of the deferred share; |
| – | The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and |
| – | The Company may create, allot and issue further shares or reduce or repay the whole or any part of its share capital or other capital reserves without obtaining the consent of the holders of the deferred shares. |
The Group’s objectives when managing capital are to ensure the Group has adequate funds to continue as a going concern and sufficient flexibility within the capital structure to fund the ongoing growth of the business and to take advantage of business development opportunities including acquisitions.
The Group determines the amount of capital taking into account changes in business risks and future cash requirements. The Group reviews its capital structure on an ongoing basis and uses share buy-backs, dividends and the issue of new shares to adjust the retained capital.
The Group considers the capital that it manages to be as follows:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Share capital | 183 | 184 | 184 | |||
|
Share premium |
590 | 574 | 535 | |||
|
Capital redemption reserve |
12 | 11 | 10 | |||
|
Treasury shares |
(294) | (315) | (322) | |||
|
Retained earnings and other reserves |
3,475 | 3,586 | 3,640 | |||
| 3,966 | 4,040 | 4,047 |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
155
| ||
|
| ||||
19.2 Treasury shares
Treasury shares represents the holding of the Company’s own shares in respect of the Smith & Nephew Employee’s Share Trust and shares bought back as part of the share buy-back programme. On 2 May 2013, as part of the new Capital Allocation Framework, the Group announced the start of a new share buy-back programme to return $300m of surplus capital to its shareholders. The programme was suspended in February 2014 following the announcement of the ArthroCare acquisition. Shares issued in connection with the Group’s share incentive plans are bought back on a quarterly basis. During 2015, a total of 4.4m ordinary shares (0.5%) had been purchased at a cost of $77m and 4.4m (0.5%) had been cancelled. During 2014, a total of 4.4m ordinary shares (0.5%) had been purchased at a cost of $72m and 4.4m ordinary shares (0.5%) had been cancelled. The maximum number of ordinary shares held in treasury during 2015 was 25.0m (2.7%) with a nominal value of $5.0m.
The Smith & Nephew 2004 Employees’ Share Trust (‘Trust’) was established to hold shares relating to the long-term incentive plans referred to in the ‘Directors’ Remuneration Report’. The Trust is administered by an independent professional trust company resident in Jersey and is funded by a loan from the Company. The cost of the Trust is charged to the income statement as it accrues. A partial dividend waiver is in place in respect of those shares held under the long-term incentive plans. The Trust only accepts dividends in respect of nil-cost options and deferred bonus plan shares. The waiver represents less than 1% of the total dividends paid.
The movements in Treasury shares and the Employees’ Share Trust are as follows:
|
Treasury $ million |
Employees’ Share Trust $ million |
Total $ million | ||||
| At 1 January 2014 | 318 | 4 | 322 | |||
|
Shares purchased |
72 | 3 | 75 | |||
|
Shares transferred from treasury |
(11) | 11 | – | |||
|
Shares transferred to Group beneficiaries |
(8) | (17) | (25) | |||
|
Shares cancelled |
(57) | – | (57) | |||
| At 31 December 2014 | 314 | 1 | 315 | |||
|
Shares purchased |
77 | – | 77 | |||
|
Shares transferred from treasury |
(58) | 58 | – | |||
|
Shares transferred to Group beneficiaries |
(9) | (29) | (38) | |||
|
Shares cancelled |
(60) | – | (60) | |||
| At 31 December 2015 | 264 | 30 | 294 | |||
|
|
||||||
|
Number of shares million |
Number of shares million |
Number of shares million | ||||
| At 1 January 2014 | 25.5 | 0.3 | 25.8 | |||
|
Shares purchased |
4.4 | 0.2 | 4.6 | |||
|
Shares transferred from treasury |
(0.9) | 0.9 | – | |||
|
Shares transferred to Group beneficiaries |
(0.6) | (1.3) | (1.9) | |||
|
Shares cancelled |
(4.4) | – | (4.4) | |||
| At 31 December 2014 | 24.0 | 0.1 | 24.1 | |||
|
Shares purchased |
4.4 | – | 4.4 | |||
|
Shares transferred from treasury |
(4.4) | 4.4 | – | |||
|
Shares transferred to Group beneficiaries |
(0.7) | (2.2) | (2.9) | |||
|
Shares cancelled |
(4.4) | – | (4.4) | |||
| At 31 December 2015 | 18.9 | 2.3 | 21.2 | |||
| 19.3 Dividends
|
||||||
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| The following dividends were declared and paid in the year: | ||||||
|
Ordinary final of 18.6¢ for 2014 (2013 – 17.0¢, 2012 – 16.20¢) paid 6 May 2015 |
166 | 152 | 146 | |||
|
Ordinary interim of 11.8¢ for 2015 (2014 – 11.0¢, 2013 – 10.40¢) paid 27 October 2015 |
106 | 98 | 93 | |||
| 272 | 250 | 239 | ||||
A final dividend for 2015 of 19.0 US cents per ordinary share was proposed by the Board on 3 February 2016 and will be paid, subject to shareholder approval, on 11 May 2016 to shareholders on the Register of Members on 22 April 2016. The estimated amount of this dividend is $170m.
Table of Contents
| 156
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
|
ACCOUNTING POLICY |
||||
|
In the Group cash flow statement, cash and cash equivalents includes cash at bank, other short-term liquid investments with original maturities of three months or less and bank overdrafts. In the Group balance sheet, bank overdrafts are shown within bank overdrafts and loans under current liabilities.
|
Analysis of net debt
|
Borrowings | ||||||||||||||
| Cash $ million |
Overdrafts $ million |
Due within one year $ million |
Due after one year $ million |
Net currency swaps $ million |
Net interest swaps $ million |
Total $ million | ||||||||
| At 1 January 2013 | 178 | (11) | (27) | (430) | 2 | – | (288) | |||||||
|
Net cash flow |
(38) | – | (6) | 84 | 1 | – | 41 | |||||||
|
Exchange adjustment |
(3) | – | – | (1) | (2) | – | (6) | |||||||
| At 31 December 2013 | 137 | (11) | (33) | (347) | 1 | – | (253) | |||||||
|
Net cash flow |
(35) | (19) | 22 | (1,322) | 11 | – | (1,343) | |||||||
|
Exchange adjustment |
(9) | 2 | – | 3 | (13) | – | (17) | |||||||
| At 31 December 2014 | 93 | (28) | (11) | (1,666) | (1) | – | (1,613) | |||||||
|
Net cash flow |
34 | 9 | (17) | 231 | 15 | 1 | 273 | |||||||
|
Exchange adjustment |
(7) | 1 | – | 1 | (16) | – | (21) | |||||||
| At 31 December 2015 | 120 | (18) | (28) | (1,434) | (2) | 1 | (1,361) |
Reconciliation of net cash flow to movement in net debt
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Net cash flow from cash net of overdrafts | 43 | (54) | (38) | |||
|
Settlement of currency swaps |
15 | 11 | 1 | |||
|
Net cash flow from borrowings |
215 | (1,300) | 78 | |||
| Change in net debt from net cash flow | 273 | (1,343) | 41 | |||
|
Exchange adjustment |
(21) | (17) | (6) | |||
| Change in net debt in the year | 252 | (1,360) | 35 | |||
|
Opening net debt |
(1,613) | (253) | (288) | |||
| Closing net debt | (1,361) | (1,613) | (253) |
Cash and cash equivalents
For the purposes of the Group cash flow statement cash and cash equivalents at 31 December 2015 comprise cash at bank net of bank overdrafts.
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Cash at bank | 120 | 93 | 137 | |||
|
Bank overdrafts |
(18) | (28) | (11) | |||
| Cash and cash equivalents | 102 | 65 | 126 |
The Group operates in over 100 countries around the world, some of which impose restrictions over cash movement. These restrictions have only a minimal impact of the management of the Group’s cash.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
157
| ||
|
| ||||
|
ACCOUNTING POLICY |
||||
|
The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. |
||||
|
Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.
|
21.1 Acquisitions
Year ended 31 December 2015
During the year ended 31 December 2015, the Group acquired its distributor in Colombia and its distributor and a manufacturer in Russia. The acquisitions are deemed to be business combinations within the scope of IFRS 3 Business Combinations.
The aggregated total estimated fair value of the consideration is $68m and included $23m of contingent consideration and $13m through the settlement of working capital commitments. The fair values shown below have been determined on a provisional basis. If new information is obtained within the measurement period about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised.
The following table summarises the aggregate consideration transferred and the aggregate amounts of assets acquired and liabilities assumed at the acquisition date:
| $ million | ||
| Aggregate identifiable assets acquired and liabilities assumed | ||
|
Intangible assets |
19 | |
|
Other assets1 |
29 | |
|
Liabilities |
(14) | |
| Net assets | 34 | |
|
Goodwill |
34 | |
| Cost of acquisition | 68 |
| 1 | Including net cash of $1m. |
The provisional aggregated estimate of goodwill arising on the acquisitions is $34m. This is attributable to the additional economic benefits expected from the transactions, including the assembled workforces, which have been transferred as part of the acquisitions. The goodwill recognised is not expected to be deductible for tax purposes.
The contribution to revenue and attributable profit from these acquisitions for the year ended 31 December 2015 was immaterial. If the acquisitions had occurred at the beginning of the year, their contributions to revenue and attributable profit for the year ended 31 December 2015 would also have been immaterial.
Year ended 31 December 2014
Acquisition of ArthroCare
On 29 May 2014, the Group acquired 100% of the shares of ArthroCare Corporation, an innovative medical device company with a highly complementary sports medicine portfolio. The purchase price was $48.25 per share, paid in cash with the fair value of the total consideration equalling $1,715m. The acquisition was financed through existing debt facilities and cash balances, including an existing $1bn revolving credit facility and a new two-year $1.4bn term loan facility, established in February 2014.
The acquisition is deemed to be a business combination within the scope of IFRS 3 Business Combinations. The acquisition accounting was completed during 2015. The fair values shown below include measurement period adjustments recognised during the period. The goodwill arising on the acquisition is $829m. It relates to the value of the additional economic benefits expected from the transaction, including synergies and the assembled workforce. The goodwill recognised is not expected to be deductible for tax purposes.
Table of Contents
| 158
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS |
21 Acquisitions and disposals continued
The following table summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date.
| $ million | ||
| Identifiable assets acquired and liabilities assumed | ||
|
Property, plant and equipment |
60 | |
|
Inventories |
66 | |
|
Trade receivables and prepayments |
54 | |
|
Identifiable intangible assets |
817 | |
|
Investments in associates |
4 | |
|
Trade and other payables |
(74) | |
|
Provisions |
(19) | |
|
Current tax payable |
(18) | |
|
Deferred tax liabilities |
(173) | |
| Net assets | 717 | |
|
Goodwill |
829 | |
| Consideration (net of $169m of cash acquired) | 1,546 |
For the year ended 31 December 2014, ArthroCare’s contribution to Group revenue was $207m representing approximately seven months of sales. This gave rise to a pre-tax profit of $28m after amortisation of acquisition intangibles. Had ArthroCare been acquired on 1 January 2014, the Group’s revenues for 2014 would have been $147m higher and pre-tax profit would have been $5m higher.
Acquisition of Brazilian distributor
On 17 March 2014, the Group acquired certain assets and liabilities related to the distribution business for its sports medicine, orthopaedic reconstruction, and trauma products in Brazil. The acquisition was deemed to be a business combination within the scope of IFRS 3 Business Combinations. The acquisition date fair value of the consideration was $31m and included deferred consideration of $26m and $5m in relation to the settlement of working capital commitments. The deferred consideration was subsequently settled during the second quarter of 2014.
The acquisition accounting was completed during 2015. As at the acquisition date, the fair value of the net assets acquired, which includes measurement period adjustments recognised during the period, was $16m. This includes trade and other receivables of $12m, identifiable intangible assets of $16m, inventory of $4m, property, plant and equipment of $2m, trade payables of $1m, provisions of $5m, current tax payable of $4m and deferred tax liabilities of $8m. As a result, the goodwill arising on the acquisition was $15m. This is attributable to the additional economic benefits expected from the acquisition, including the assembled workforce, which has been transferred as part of the acquisition. The goodwill is not expected to be deductible for tax purposes.
The contribution to revenue and attributable profit from this acquisition for the year ended 31 December 2014 was immaterial. If the acquisition had occurred at the beginning of the year its contribution to revenue and attributable profit for the year ended 31 December 2014 would also have been immaterial.
21.2 Disposal of business
For the year ended 31 December 2015, the Group did not dispose of any businesses.
During 2014, the Group disposed of a manufacturing facility in the UK for cash consideration of $20m, resulting in a pre-tax gain on disposal of $9m. The 2014 revenue and profit contribution of the disposed business was immaterial.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
159
| ||
|
| ||||
|
ACCOUNTING POLICY |
||||
|
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. |
||||
|
Payments under operating leases are expensed in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
|
Future minimum lease payments under non-cancellable operating leases fall due as follows:
|
2015 $ million |
2014 $ million | |||
| Land and buildings: | ||||
|
Within one year |
29 | 34 | ||
|
After one and within two years |
20 | 25 | ||
|
After two and within three years |
14 | 18 | ||
|
After three and within four years |
11 | 12 | ||
|
After four and within five years |
8 | 8 | ||
|
After five years |
9 | 8 | ||
| 91 | 105 | |||
| Other assets: | ||||
|
Within one year |
16 | 15 | ||
|
After one and within two years |
9 | 9 | ||
|
After two and within three years |
5 | 4 | ||
|
After three and within four years |
2 | 3 | ||
| 32 | 31 |
Table of Contents
| 160
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
23 Other Notes to the accounts
|
ACCOUNTING POLICY |
||||
|
The Group operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value at the grant date is calculated using appropriate option pricing models. The grant date fair value is recognised over the vesting period as an expense, with a corresponding increase in retained earnings.
|
Employee plans
The Smith & Nephew Sharesave Plan (2002) (adopted by shareholders on 3 April 2002) (the Save As You Earn (‘SAYE’) plan), the Smith & Nephew International Sharesave Plan (2002), Smith & Nephew France Sharesave Plan (2002), Smith & Nephew Sharesave Plan (2012) (the Save As You Earn (‘SAYE 2012’) plan) (adopted by shareholders on 12 April 2012), Smith & Nephew International Sharesave Plan (2012) (adopted by shareholders on 12 April 2012) and Smith & Nephew France Sharesave Plan (2012) (adopted by shareholders on 12 April 2012) are together termed the ‘Employee Plans’.
The SAYE and SAYE 2012 plans are available to all employees in the UK employed by participating Group companies, subject to three months’ service. The schemes enable employees to save up to £250 per month on plans up to 2014 and £500 per month from 2015 onwards and give them an option to acquire shares based on the committed amount to be saved. The option price is not less than 80% of the average of middle market quotations of the ordinary shares on the three dealing days preceding the date of invitation. The Smith & Nephew International Sharesave Plan (2002) and Smith & Nephew International Sharesave Plan (2012) are available to employees in Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, South Korea, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland and the United Arab Emirates. Employees in Malaysia and Costa Rica became eligible to join the plan in 2015. Puerto Rico participants were eligible to receive options under the International Plans up to 2011 and are eligible to receive phantom options from 2013 onwards. The Smith & Nephew France Sharesave Plans were available to all employees in France up to 2012. The International and French plans operate on a substantially similar basis to the SAYE plans.
Employees in the US are able to participate in the Employee Stock Purchase Plan, which gives them the opportunity to acquire shares, in the form of ADSs, at a discount of 15% (or more if the shares appreciate in value during the plan’s quarterly purchase period) to the market price, through a regular savings plan.
Executive plans
The Smith & Nephew 2001 UK Approved Share Option Plan, the Smith & Nephew 2001 UK Unapproved Share Option Plan, the Smith & Nephew 2001 US Share Plan (adopted by shareholders on 4 April 2001), the Smith & Nephew 2004 Executive Share Option Plan (adopted by shareholders on 6 May 2004) and the Smith & Nephew Global Share Plan 2010 (adopted by shareholders on 6 May 2010) are together termed the ‘Executive Plans’.
Under the terms of the Executive Plans, the Remuneration Committee, consisting of Non-Executive Directors, may at their discretion approve the grant of options to employees of the Group to acquire ordinary shares in the Company. Options granted under the Smith & Nephew 2001 US Share Plan (the ‘US Plan’) and the Smith & Nephew 2004 Executive Share Option Plan are to acquire ADSs or ordinary shares. For Executive Plans adopted in 2001 and 2004, the market value is the average quoted price of an ordinary share for the three business days preceding the date of grant or the average quoted price of an ADS or ordinary share, for the three business days preceding the date of grant or the quoted price on the date of grant if higher. For the Global Share Plan adopted in 2010, the market value is the closing price of an ordinary share or ADS on the last trading day prior to the grant date. With the exception of options granted under the 2001 US Plan and the Global Share Plan 2010, the vesting of options granted from 2001 is subject to achievement of a performance condition. Options granted under the 2001 US Plan and the Global Share Plan 2010 are not subject to any performance conditions. Prior to 2008, the 2001 US Plan options became cumulatively exercisable as to 10% after one year, 30% after two years, 60% after three years and the remaining balance after four years. With effect from 2008, options granted under the 2001 US Plan became cumulatively exercisable as to 33.3% after one year, 66.7% after two years and the remaining balance after the third year. The 2001 UK Unapproved Share Option Plan was open to certain employees outside the US and the US Plan was open to certain employees in the US, Canada, Mexico and Puerto Rico. The Global Share Plan 2010 is open to employees globally. The 2004 Plan was open to Senior Executives only.
The maximum term of options granted, under all plans, is 10 years from the date of grant. All share option plans are settled in shares.
From 2012 onwards, Senior Executives were granted share awards instead of share options and from 2013 executives were granted conditional share awards instead of share options. The awards vest 33.3% after one year, 66.7% after two years and the remaining balance after the third year subject to continued employment. There are no performance conditions for executives. Vesting for Senior Executives is subject to personal performance levels. The market value used to calculate the number of awards is the closing price of an ordinary share on the last trading day prior to the grant date.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
161
| ||
|
| ||||
At 31 December 2015, 7,235,070 (2014 – 8,708,000, 2013 – 13,601,000) options were outstanding under share option plans as follows:
|
|
Number of shares thousand |
|
|
Range of option exercise prices pence |
|
Weighted average exercise price pence | ||||
| Employee Plans: | ||||||||||
|
Outstanding at 1 January 2013 |
3,162 | 380.0 – 609.0 | 473.1 | |||||||
|
Granted |
1,178 | 625.0 | 625.0 | |||||||
|
Forfeited |
(174 | ) | 380.0 – 625.0 | 488.2 | ||||||
|
Exercised |
(751 | ) | 380.0 – 609.0 | 453.8 | ||||||
|
Expired |
(128 | ) | 380.0 – 625.0 | 490.0 | ||||||
| Outstanding at 31 December 2013 | 3,287 | 380.0 – 625.0 | 530.5 | |||||||
|
Granted |
799 | 831.0 | 831.0 | |||||||
|
Forfeited |
(289 | ) | 380.0 – 831.0 | 533.8 | ||||||
|
Exercised |
(743 | ) | 380.0 – 625.0 | 436.2 | ||||||
|
Expired |
(18 | ) | 461.0 – 556.0 | 465.7 | ||||||
| Outstanding at 31 December 2014 | 3,036 | 380.0 – 831.0 | 632.7 | |||||||
|
Granted |
1,622 | 949.0 | 949.0 | |||||||
|
Forfeited |
(275 | ) | 380.0 – 949.0 | 683.6 | ||||||
|
Exercised |
(744 | ) | 380.0 – 831.0 | 514.6 | ||||||
|
Expired |
(45 | ) | 461.0 – 535.0 | 533.0 | ||||||
| Outstanding at 31 December 2015 | 3,594 | 452.0 – 949.0 | 797.3 | |||||||
| Options exercisable at 31 December 2015 | 82 | 461.0 – 556.0 | 521.4 | |||||||
|
Options exercisable at 31 December 2014 |
94 | 380.0 – 585.0 | 439.6 | |||||||
|
Options exercisable at 31 December 2013 |
71 | 461.0 – 556.0 | 467.8 | |||||||
| Executive Plans: | ||||||||||
|
Outstanding at 1 January 2013 |
16,528 | 409.5 – 680.5 | 583.3 | |||||||
|
Forfeited |
(118 | ) | 514.0 – 650.0 | 618.8 | ||||||
|
Exercised |
(5,540 | ) | 435.5 – 671.0 | 568.0 | ||||||
|
Expired |
(556 | ) | 435.5 – 650.0 | 582.3 | ||||||
| Outstanding at 31 December 2013 | 10,314 | 409.5 – 680.5 | 591.1 | |||||||
|
Forfeited |
(115 | ) | 599.0 – 650.0 | 645.0 | ||||||
|
Exercised |
(4,114 | ) | 454.0 – 671.0 | 583.0 | ||||||
|
Expired |
(413 | ) | 409.5 – 650.0 | 587.8 | ||||||
| Outstanding at 31 December 2014 | 5,672 | 470.0 – 680.5 | 596.2 | |||||||
|
Forfeited |
(8 | ) | 622.0 – 650.0 | 630.2 | ||||||
|
Exercised |
(1,841 | ) | 479.0 – 680.5 | 602.2 | ||||||
|
Expired |
(182 | ) | 479.0 – 650.0 | 604.2 | ||||||
| Outstanding at 31 December 2015 | 3641 | 470.0 – 650.0 | 592.7 | |||||||
| Options exercisable at 31 December 2015 | 3641 | 470.0 – 650.0 | 592.7 | |||||||
|
Options exercisable at 31 December 2014 |
4,713 | 470.0 – 680.5 | 585.3 | |||||||
|
Options exercisable at 31 December 2013 |
6,631 | 409.5 – 680.5 | 571.1 |
The weighted average remaining contractual life of options outstanding at 31 December 2015 was 5.1 years (2014 – 5.8 years, 2013 – 6.2 years) for Executive Plans and 2.7 years (2014 – 2.5 years, 2013 – 2.5 years) for Employee Plans.
Table of Contents
| 162
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
23 Other Notes to the accounts continued
|
2015 pence |
2014 pence |
2013 pence | ||||||||
| Weighted average share price | 1,144.4 | 994.4 | 764.7 | |||||||
|
Options granted during the year were as follows:
| ||||||||||
| Options granted thousand |
Weighted average fair value per option at grant date pence |
Weighted average share price at grant date pence |
Weighted average exercise price pence |
Weighted average option life years | ||||||
| Employee Plans | 1,622 | 293.9 | 1,155.0 | 949.0 | 3.8 | |||||
|
The weighted average fair value of options granted under Employee Plans during 2014 was 255.8p (2013 – 203.9p) and those under Executive Plans during 2014 was nil (2013 – nil).
Options granted under Employee Plans are valued using the Black-Scholes option model as management consider that options granted under these plans are exercised within a short period of time after the vesting date.
For all plans the inputs to the option pricing models are reassessed for each grant. The following assumptions were used in calculating the fair value of options granted:
| ||||||||||
| Employee Plans | ||||||||||
| 2015 | 2014 | 2013 | ||||||||
| Dividend yield % | 2.0 | 2.0 | 2.0 | |||||||
|
Expected volatility %1 |
25.0 | 20.0 | 25.0 | |||||||
|
Risk free interest rate %2 |
1.3 | 1.3 | 1.3 | |||||||
|
Expected life in years |
3.8 | 3.9 | 3.8 | |||||||
| 1 | Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options. |
| 2 | The risk free interest rate reflects the yields available on zero coupon government bonds over the option term and currency. |
Share-based payments – long-term incentive plans
In 2004, a share-based incentive plan was introduced for Executive Directors, Executive Officers and the next level of Senior Executives. The plan included a Performance Share Plan (‘PSP’) and a Bonus Co-Investment Plan (‘CIP’).
Vesting of the PSP awards is dependent upon performance relative to the FTSE 100 and an index based on major international companies in the medical devices industry.
Under the CIP, participants could elect to use up to a maximum of one-half of their annual bonus to purchase shares. If the shares are held for three years and the Group’s EPSA growth targets are achieved, participants receive an award of matching shares for each share purchased.
From 2009, the CIP was replaced by the Deferred Bonus Plan. This plan was designed to encourage Executives to build up and maintain a significant shareholding in the Company. Under the plan, up to one-third of any bonus earned at target level or above by an eligible employee was compulsorily deferred into shares which vested, subject to continued employment, in equal annual tranches over three years (i.e. one-third each year). No further performance conditions applied to the deferred shares.
From 2010, Performance Share awards were granted under the Global Share Plan 2010 for all Executives other than Executive Directors. Awards granted under both plans are combined to provide the figures below.
From 2012, Deferred Bonus Plan and GSP 2010 options for Executive Directors, Executive Officers and the next level of Senior Executives were replaced by Equity Incentive Awards (‘EIA’). EIA are designed to encourage Executives to build up and maintain a significant shareholding in the Company. EIA will vest, in equal annual tranches over three years (i.e. one-third each year), subject to continued employment and personal performance. No further performance conditions apply to the EIA.
The fair values of awards granted under long-term incentive plans are calculated using a binomial model. Performance Share awards under both the PSP and Global Share Plan 2010 contain vesting conditions based on TSR versus a comparator group which represent market-based performance conditions for valuation purposes and an assessment of vesting probability is therefore factored into the award date calculations. The assumptions include the volatilities for the comparator groups. A correlation of 35% (2014 – 40%, 2013 – 40%) has also been assumed for the companies in the medical devices sector as they are impacted by similar factors. The Performance Target for the Global Share Plan 2010 is a combination of Free Cash Flow growth, Revenue in Emerging & International Markets and the Group’s TSR performance over the three-year performance period.
The other assumptions used are consistent with the Executive scheme assumptions disclosed earlier in this Note.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
163
| ||
|
| ||||
At 31 December 2015, the maximum number of shares that could be awarded under the Group’s long-term incentive plans was:
| Number of shares in thousands | ||||||||||
| Other Awards |
EIA | PSP | Deferred Bonus Plan |
Total | ||||||
| Outstanding at January 2013 | 718 | 929 | 5,242 | 164 | 7,053 | |||||
|
Awarded |
1,179 | 785 | 1,963 | – | 3,927 | |||||
|
Vested |
(437) | (379) | (411) | (115) | (1,342) | |||||
|
Forfeited |
(11) | (51) | (1,597) | (5) | (1,664) | |||||
| Outstanding at 31 December 2013 | 1,449 | 1,284 | 5,197 | 44 | 7,974 | |||||
|
Awarded |
751 | 642 | 1,510 | – | 2,903 | |||||
|
Vested |
(583) | (751) | – | (44) | (1,378) | |||||
|
Forfeited |
(96) | (24) | (2,188) | – | (2,308) | |||||
| Outstanding at 31 December 2014 | 1,521 | 1,151 | 4,519 | – | 7,191 | |||||
|
Awarded |
661 | 592 | 1,393 | – | 2,646 | |||||
|
Vested |
(678) | (648) | (1,794) | – | (3,120) | |||||
|
Forfeited |
(93) | (84) | (138) | – | (315) | |||||
| Outstanding at 31 December 2015 | 1,411 | 1,011 | 3,980 | – | 6,402 | |||||
Other awards mainly comprises of conditional share awards granted under the Global Share Plan 2010.
The weighted average remaining contractual life of awards outstanding at 31 December 2015 was 1.1 years (2014 – 1.1 years, 2013 – 1.4 years) for the PSP, nil years (2014 – nil years, 2013 – 0.2 years) for the Deferred Bonus Plan, 1.6 years (2014 – 1.5 years, 2013 – 1.8 years) for the EIA and 1.9 years (2014 – 2.0 years, 2013 – 2.1 years) for the other awards.
Share-based payments – charge to income statement
The expense charged to the income statement for share-based payments is as follows:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Granted in current year | 11 | 9 | 10 | |||
|
Granted in prior years |
19 | 23 | 18 | |||
| Total share-based payments expense for the year1 | 30 | 32 | 28 |
| 1 | The total share-based payments expense comprises $29m taken through reserves as well as $1m cash settlements during the year. |
Under the Executive Plans, PSP, EIA and CIP the number of ordinary shares over which options and share awards may be granted is limited so that the number of ordinary shares issued or that may be issued during the 10 years preceding the date of grant shall not exceed 5% of the ordinary share capital at the date of grant. The total number of ordinary shares which may be issuable in any 10-year period under all share plans operated by the Company may not exceed 10% of the ordinary share capital at the date of grant.
23.2 Related party transactions
Trading transactions
In the course of normal operations, the Group traded with its associates detailed in Note 11. The aggregated transactions, which have not been disclosed elsewhere in the financial statements, are summarised below:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Sales to the associates |
– | – | 5 | |||
|
Purchases from the associates |
– | 1 | 2 |
All sale and purchase transactions occur on an arm’s length basis.
Key management personnel
The remuneration of executive officers (including Non-Executive Directors) during the year is summarised below:
|
2015 $ million |
2014 $ million |
2013 $ million | ||||
| Short-term employee benefits |
16 | 14 | 15 | |||
|
Share-based payments expense |
8 | 8 | 11 | |||
|
Pension and post-employment benefit entitlements |
1 | 1 | 1 | |||
|
Other benefits |
– | 3 | – | |||
| 25 | 26 | 27 |
Table of Contents
| 164
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
23 Other Notes to the accounts continued
In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries, associates, joint arrangements, joint ventures and partnerships are listed below, including their country of incorporation. All companies are 100% owned, unless otherwise indicated. Unless otherwise stated, the share capital disclosed comprises ordinary shares which are indirectly held by Smith & Nephew plc.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
165
| ||
|
| ||||
| 1 | The activity of all companies listed above is the provision of medical devices, unless indicated otherwise. |
| 2 | Directly owned by Smith & Nephew plc. |
| 3 | Holding company. |
| 4 | Dormant company. |
| 5 | Not 100% owned by Smith & Nephew Group. |
Table of Contents
| 166
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE GROUP ACCOUNTS
|
On 4 January 2016, the Group completed the acquisition of 100% of the share capital of Blue Belt Holdings, Inc., a business specialising in robotic technologies. This acquisition will be treated as a business combination under IFRS 3. The maximum consideration is $279m and a provisional fair value consideration is $265m cash. Acquired net assets have a provisional value of $1m which is not expected to have material fair value adjustments. The remaining $264m will be allocated between identifiable intangible assets including technology, research and development in-progress and goodwill, with the majority expected to be goodwill (representing know-how and workforce), and is not expected to be deductible for tax purposes.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
167
| ||
|
| ||||
|
|
||||||||
| FINANCIAL STATEMENTS
|
Company balance sheet
| Notes |
At 31 December 2015 $ million |
At 31 December 2014 $ million | ||||
| Fixed assets: | ||||||
|
Investments |
3 | 5,322 | 5,322 | |||
|
Current assets: |
||||||
|
Debtors |
4 | 2,234 | 2,143 | |||
|
Cash and bank |
6 | 47 | 1 | |||
| 2,281 | 2,144 | |||||
|
Creditors: amounts falling due within one year: |
||||||
|
Borrowings |
6 | (3) | (40) | |||
|
Other creditors |
5 | (1,881) | (1,287) | |||
| (1,884) | (1,327) | |||||
|
Net current assets |
397 | 817 | ||||
| Total assets less current liabilities | 5,719 | 6,139 | ||||
| Creditors: amounts falling due after one year: | ||||||
|
Borrowings |
6 | (1,425) | (1,655) | |||
| Total assets less total liabilities | 4,294 | 4,484 | ||||
| Equity shareholders’ funds: | ||||||
|
Called up equity share capital |
7 | 183 | 184 | |||
|
Share premium account |
7 | 590 | 574 | |||
|
Capital redemption reserve |
7 | 12 | 11 | |||
|
Capital reserve |
7 | 2,266 | 2,266 | |||
|
Treasury shares |
7 | (294) | (315) | |||
|
Exchange reserve |
7 | (52) | (52) | |||
|
Profit and loss account |
7 | 1,589 | 1,816 | |||
| Shareholders’ funds | 4,294 | 4,484 | ||||
The accounts were approved by the Board and authorised for issue on 24 February 2016 and signed on its behalf by:
| Roberto Quarta | Olivier Bohuon | Julie Brown | ||||
| Chairman | Chief Executive Officer | Chief Financial Officer |
|
|
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 167 TO 170 DO NOT FORM PART OF THE SMITH & NEPHEW’S ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC. |
Table of Contents
| 168
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
COMPANY ACCOUNTS
|
1 Basis of preparation
Smith & Nephew plc (the ‘Company’) is a public limited company incorporated in England and Wales.
The separate accounts of the Company are presented as required by the Companies Act 2006. On 1 January 2015, the Company transitioned from previously extant UK Generally Accepted Accounting Practices to Financial Reporting Standard 101 Reduced Disclosure Framework (‘Reduced Disclosure Framework’). These financial statements and accompanying notes have been prepared in accordance with the Reduced Disclosure Framework for all periods presented. There were no transitional adjustments required on adoption of the new standard. The financial information for the Company has been prepared on the same basis as the consolidated financial statements, applying identical accounting policies as outlined throughout the Notes to the Group accounts.
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:
| – | FRS 2 Share Based Payments in respect of group settled share based payments; and |
| – | Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures. |
The Company proposes to continue to adopt the reduced disclosure framework of FRS 101 in its next financial statements.
2 Results for the year
As permitted by Section 408(4) of the Companies Act 2006, the Company has not presented its own profit and loss account. Profit for the year was $107m (2014 – $922m).
3 Investments
|
ACCOUNTING POLICY |
||||
|
Investments in subsidiaries are stated at cost less provision for impairment.
|
|
2015 $ million |
2014 $ million | |||
| At 1 January | 5,322 | 3,597 | ||
|
Additions |
– | 1,725 | ||
| At 31 December | 5,322 | 5,322 |
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 23.3 of the Notes to the Group Accounts. Entities directly owned by Smith & Nephew plc are highlighted in this section.
|
|
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 167 TO 170 DO NOT FORM PART OF THE SMITH & NEPHEW’S ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
169
| ||
|
| ||||
4 Debtors
|
2015 $ million |
2014 $ million | |||
| Amounts falling due within one year: | ||||
|
Amounts owed by subsidiary undertakings |
2,169 | 2,074 | ||
|
Prepayments and accrued income |
5 | 3 | ||
|
Current asset derivatives – forward foreign exchange contracts |
30 | 46 | ||
|
Current asset derivatives – forward foreign exchange contracts – subsidiary undertakings |
21 | 19 | ||
|
Current taxation |
9 | 1 | ||
| 2,234 | 2,143 |
5 Other creditors
|
2015 $ million |
2014 $ million | |||
| Amounts falling due within one year: | ||||
|
Amounts owed to subsidiary undertakings |
1,813 | 1,212 | ||
|
Other creditors |
15 | 9 | ||
|
Current liability derivatives – forward foreign exchange contracts |
21 | 19 | ||
|
Current liability derivatives – forward foreign exchange contracts – subsidiary undertakings |
30 | 46 | ||
|
Current liability derivatives – currency swaps |
2 | 1 | ||
| 1,881 | 1,287 |
6 Cash and borrowings
|
ACCOUNTING POLICY |
||||
|
Financial instruments |
||||
|
Currency swaps are used to match foreign currency net assets with foreign currency liabilities. They are initially recorded at fair value and then for reporting purposes remeasured to fair value at exchange rates and interest rates at subsequent balance sheet dates.
|
Changes in the fair value of derivative financial instruments are recognised in the profit and loss account as they arise.
|
2015 $ million |
2014 $ million | |||
| Bank loans and overdrafts due within one year or on demand | 3 | 40 | ||
|
Bank loans due after one year |
1,425 | 1,655 | ||
| Borrowings | 1,428 | 1,695 | ||
|
Cash and bank |
(47) | (1) | ||
|
Credit balance on derivatives – forward exchange contracts and currency swaps |
2 | 1 | ||
| Net debt | 1,383 | 1,695 |
All currency swaps are stated at fair value. Gross US Dollar equivalents of $368m (2014 – $261m) receivable and $370m (2014 – $262m) payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2015 and 2014 to hedge intragroup loans.
|
|
THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 167 TO 170 DO NOT FORM PART OF THE SMITH & NEPHEW’S ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC. |
Table of Contents
| 170
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
NOTES TO THE COMPANY ACCOUNTS
|
7 Equity and reserves
| 2015 | 2014 | |||||||||||||||||
| Share capital $ million |
Share premium $ million |
Capital redemption reserve $ million |
Capital reserves $ million |
Treasury shares $ million |
Exchange reserves $ million |
Profit and loss account $ million |
Total shareholders’ funds $ million |
Total shareholders’ funds $ million | ||||||||||
| At 1 January | 184 | 574 | 11 | 2,266 | (315) | (52) | 1,816 | 4,484 | 3,816 | |||||||||
|
Attributable profit for the year |
– | – | – | – | – | – | 107 | 107 | 922 | |||||||||
|
Net losses on cash flow hedges |
– | – | – | – | – | – | 1 | 1 | (5) | |||||||||
|
Exchange adjustments |
– | – | – | – | – | – | 1 | 1 | ||||||||||
|
Equity dividends paid in the year |
– | – | – | – | – | – | (272) | (272) | (250) | |||||||||
|
Share-based payments recognised |
– | – | – | – | – | – | 29 | 29 | 32 | |||||||||
|
Cost of shares transferred to beneficiaries |
– | – | – | – | 38 | – | (33) | 5 | 4 | |||||||||
|
New shares issued on exercise of share options |
16 | 16 | 40 | |||||||||||||||
|
Cancellation of treasury shares |
(1) | – | 1 | – | 60 | – | (60) | – | – | |||||||||
|
Treasury shares purchased |
– | – | – | – | (77) | – | – | (77) | (75) | |||||||||
| At 31 December | 183 | 590 | 12 | 2,266 | (294) | (52) | 1,589 | 4,294 | 4,484 |
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 $1,243m (2014 – $1,449m). 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 $107m (2014 – $922m).
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.
8 Share-based payments
The Company operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is recognised over the vesting period. Subsidiary companies are recharged for the fair value of share options that relate to their employees.
The disclosure relating to the Company is detailed in Note 23.1 of the Notes to the Group accounts.
9 Contingencies
|
2015 $ million |
2014 $ million | |||
| Guarantees in respect of subsidiary undertakings | – | 11 |
The Company gives guarantees to banks to support liabilities and cross guarantees to support overdrafts.
The Company operated defined benefit pension plans in 2004 but at the end of 2005 its pension plan obligations were transferred to Smith & Nephew UK Limited. The Company has provided guarantees to the trustees of the pension plans to support future amounts due from participating employers (see Note 18 of the Notes to the Group accounts).
|
|
The Parent Company financial statements of Smith & Nephew plc on pages 167 to 170 do not form part of the Smith & Nephew’s Annual Report on Form 20-F as filed with the SEC. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
171
| ||
|
| ||||
|
GROUP INFORMATION
|
Business overview and Group history
Smith & Nephew’s operations are organised into geographical selling regions and product franchises within the medical technology industry.
The Group has a history dating back over 150 years to the family enterprise of Thomas James Smith who opened a small pharmacy in Hull, UK in 1856. Following his death in 1896, his nephew Horatio Nelson Smith took over the management of the business.
By the late 1990s, Smith & Nephew had expanded into being a diverse healthcare conglomerate with operations across the globe, producing various medical devices, personal care products and traditional and advanced wound care treatments. In 1998, Smith & Nephew announced a major restructuring to focus management attention and investment on three global business units – Advanced Wound Management, Endoscopy and Orthopaedics – which offered high growth and margin opportunities. In 2011, the Endoscopy and Orthopaedics businesses were brought together to create an Advanced Surgical Devices division.
Smith & Nephew was incorporated and listed on the London Stock Exchange in 1937 and in 1999 the Group was also listed on the New York Stock Exchange. In 2001, Smith & Nephew became a constituent member of the FTSE 100 index in the UK. This means that Smith & Nephew is included in the top 100 companies traded on the London Stock Exchange measured in terms of market capitalisation.
Today, Smith & Nephew is a public limited company incorporated and headquartered in the UK and carries out business around the world.
Property, plant and equipment
The table below summarises the main properties which the Group uses and their approximate areas.
| Approximate area (square feet 000’s) | ||
| Group head office in London, UK | 21 | |
|
Group research facility in York, UK |
84 | |
|
Regional headquarters in Andover, Massachusetts, US |
144 | |
|
Manufacturing and distribution facility in Hull, UK |
473 | |
|
Manufacturing facilities in Memphis, Tennessee, US |
968 | |
|
Distribution facility in Memphis, Tennessee, US |
248 | |
|
Manufacturing facility in Aarau, Switzerland |
121 | |
|
Manufacturing facility in Beijing, China |
192 | |
|
Manufacturing and warehouse facility in Tuttlingen, Germany |
64 | |
|
Distribution facility and European headquarters in Baar, Switzerland |
67 | |
|
Manufacturing facility in Mansfield, Massachusetts, US |
98 | |
|
Manufacturing facility in Oklahoma City, Oklahoma, US |
155 | |
|
Manufacturing facility in Austin, Texas, US |
198 | |
|
Manufacturing facility in La Aurora and Alayuela, Costa Rica |
292 | |
|
Research facility in Irvine, California, US |
23 | |
|
Manufacturing facility in Sangameshwar, India |
39 | |
|
Manufacturing facility in Suzhou, China |
288 | |
|
Manufacturing facility in Puschino, Russia |
9 | |
|
Bioactives headquarters and laboratory space in Fort Worth, Texas, US |
105 | |
|
Manufacturing facility in Curaçao, Dutch Caribbean |
16 |
The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee are largely freehold, a portion of Tuttlingen and the Advanced Wound Management facilities in Hull are freehold while other principal locations are leasehold. The Group has freehold and leasehold interests in real estate in other countries throughout the world, but no other is individually significant to the Group. Where required, the appropriate governmental authorities have approved the facilities.
Off-balance sheet arrangements
Management believes that the Group does not have any off-balance sheet arrangements, as defined by the SEC in item 5E of Form 20-F, that have or are reasonably likely to have a current or future effect on the Group’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Related party transactions
Except for transactions with associates (see Note 23.2 of Notes to the Group accounts), no other related party had material transactions or loans with Smith & Nephew over the last three financial years.
Risk factors
There are known and unknown risks and uncertainties relating to Smith & Nephew’s business. The factors listed on pages 172 to 174 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.
Table of Contents
| 172
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP INFORMATION
|
Highly competitive markets
The Group competes across a diverse range of geographic and product markets. Each market in which the Group operates contains a number of different competitors, including specialised and international corporations. Significant product innovations, technical advances or the intensification of price competition by competitors could adversely affect the Group’s operating results.
Some of these competitors may have greater financial, marketing and other resources than Smith & Nephew. These competitors may be able to initiate technological advances in the field, deliver products on more attractive terms, more aggressively market their products or invest larger amounts of capital and research and development (‘R&D’) into their businesses.
There is a possibility of further consolidation of competitors, which could adversely affect the Group’s ability to compete with larger companies due to insufficient financial resources. If any of the Group’s businesses were to lose market share or achieve lower than expected revenue growth, there could be a disproportionate adverse impact on the Group’s share price and its strategic options.
Competition exists among healthcare providers to gain patients on the basis of quality, service and price. There has been some consolidation in the Group’s customer base and this trend is expected to continue. Some customers have joined group purchasing organisations or introduced other cost containment measures that could lead to downward pressure on prices or limit the number of suppliers in certain business areas, which could adversely affect Smith & Nephew’s results of operations and hinder its growth potential.
Continual development and introduction of new products
The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, the Group must continue to develop innovative products that satisfy customer needs and preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain process. The Group may fail to innovate due to low R&D investment, a R&D skills gap or poor product development. A potential product may not be brought to market or not succeed in the market for any number of reasons, including failure to work optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other intellectual property rights and changes in consumer demand. The Group’s products and technologies are also subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the Group’s competitors may affect price levels in the various markets in which the Group operates. If the Group’s new products do not remain competitive with those of competitors, the Group’s revenue could decline.
The Group maintains reserves for excess and obsolete inventory resulting from the potential inability to sell its products at prices in excess of current carrying costs. Marketplace changes resulting from the introduction of new products or surgical procedures may cause some of the Group’s products to become obsolete. The Group makes estimates regarding the future recoverability of the costs of these products and records a provision for excess and obsolete inventories based on historical experience, expiration of sterilisation dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favourable than projected by management, additional inventory write-downs may be required.
Dependence on government and other funding
In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets depending on government policy. The Group is therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.
Pricing of the Group’s products is largely governed in most markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where the Group has operations. This control may be exercised by determining prices for an individual product or for an entire procedure. The Group is exposed to government policies favouring locally sourced products. The Group is also exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on revenue and operating profit. Provisions in US healthcare legislation which previously imposed significant taxes on medical device manufacturers have been suspended for two years but may be reinstated. There may be an increased risk of adverse changes to government funding policies arising from deterioration in macro-economic conditions from time to time in the Group’s markets.
The Group must adhere to the rules laid down by government agencies that fund or regulate healthcare, including extensive and complex rules in the US. Failure to do so could result in fines or loss of future funding.
World economic conditions
Demand for the Group’s products is driven by demographic trends, including the ageing population and the incidence of osteoporosis and obesity. Supply of, use of and payment for the Group’s products are also influenced by world economic conditions which could place increased pressure on demand and pricing, adversely impacting the Group’s ability to deliver revenue and margin growth. The conditions could favour larger, better capitalised groups, with higher market shares and margins. As a consequence, the Group’s prosperity is linked to general economic conditions and there is a risk of deterioration of the Group’s performance and finances during adverse macro-economic conditions.
During 2015, economic conditions worldwide continued to create several challenges for the Group, including deferrals of joint replacement procedures, heightened pricing pressure, significant declines in capital equipment expenditures at hospitals (notably in China) and increased uncertainty over the collectability of government debt, particularly those in the Emerging Markets and certain parts of southern Europe. These factors tempered the overall growth of the Group’s global markets and could have an increased impact on growth in the future.
Political uncertainties
The Group operates on a worldwide basis and has distribution channels, purchasing agents and buying entities in over 100 countries.
Political upheaval in some of those countries or in surrounding regions may impact the Group’s results of operations. Political changes in a country could prevent the Group from receiving remittances of profit from a member of the Group located in that country or from selling its products or investments in that country. Furthermore, changes in government policy regarding preference for local suppliers, import quotas, taxation or other matters could adversely affect the Group’s revenue and operating profit. War, economic sanctions, terrorist activities or other conflict could also adversely impact the Group. These risks may be greater in Emerging Markets, which account for an increasing portion of the Group’s business.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
173
| ||
|
| ||||
Currency fluctuations
Smith & Nephew’s results of operations are affected by transactional exchange rate movements in that they are subject to exposures arising from revenue in a currency different from the related costs and expenses. The Group’s manufacturing cost base is situated principally in the US, the UK, China and Switzerland, from which finished products are exported to the Group’s selling operations worldwide. Thus, the Group is exposed to fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and the currency of the Group’s selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or Swiss Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Group’s trading margin could be adversely affected.
The Group manages the impact of exchange rate movements on revenue and cost of goods sold by a policy of transacting forward foreign currency commitments when firm purchase orders are placed. In addition, the Group’s policy is for forecast transactions to be covered between 50% and 90% for up to one year. However, the Group is exposed to medium to long-term adverse movements in the strength of currencies compared to the US Dollar.
The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith & Nephew plc. The Group’s revenues, profits and earnings are also affected by exchange rate movements on the translation of results of operations in foreign subsidiaries for financial reporting purposes. See ‘Liquidity and capital resources’ on page 117.
Manufacturing and supply
The Group’s manufacturing production is concentrated at main facilities in Memphis, Mansfield and Oklahoma City in the US, Hull and Warwick in the UK, Aarau in Switzerland, Tuttlingen in Germany, Sangameshwar in India, Suzhou and Beijing in China, La Aurora in Costa Rica, Puschino in Russia and Curaçao. If major physical disruption took place at any of these sites, it could adversely affect the results of operations. Physical loss and consequential loss insurance is carried to cover such risks but is subject to limits and deductibles and may not be sufficient to cover catastrophic loss. Management of orthopaedic inventory is complex, particularly forecasting and production planning. There is a risk that failures in operational execution could lead to excess inventory or individual product shortages.
The Group is reliant on certain key suppliers of raw materials, components, finished products and packaging materials or in some cases on a single supplier. These suppliers must provide the materials and perform the activities to the Group’s standard of quality requirements.
A supplier’s failure to meet expected quality standards could create liability for the Group and adversely affect sales of the Group’s related products.
The Group may be forced to pay higher prices to obtain raw materials, which it may not be able to pass on to its customers in the form of increased prices for its finished products. In addition, some of the raw materials used may become unavailable, and there can be no assurance that the Group will be able to obtain suitable and cost effective substitutes. Any interruption of supply caused by these or other factors could negatively impact Smith & Nephew’s revenue and operating profit.
The Group will, from time to time, outsource the manufacture of components and finished products to third parties and will periodically relocate the manufacture of product and/or processes between existing facilities. While these are planned activities, with these transfers there is a risk of disruption to supply.
Attracting and retaining key personnel
The Group’s continued development depends on its ability to hire and retain highly-skilled personnel with particular expertise. This is critical, particularly in general management, research, new product development and in the sales forces. If Smith & Nephew is unable to retain key personnel in general management, research and new product development or if its largest sales forces suffer disruption or upheaval, its revenue and operating profit would be adversely affected. Additionally, if the Group is unable to recruit, hire, develop and retain a talented, competitive workforce, it may not be able to meet its strategic business objectives.
Proprietary rights and patents
Due to the technological nature of medical devices and the Group’s emphasis on serving its customers with innovative products, the Group has been subject to patent infringement claims and is subject to the potential for additional claims.
Claims asserted by third parties regarding infringement of their intellectual property rights, if successful, could require the Group to expend time and significant resources to pay damages, develop non-infringing products or obtain licences to the products which are the subject of such litigation, thereby affecting the Group’s growth and profitability. Smith & Nephew attempts to protect its intellectual property and regularly opposes third party patents and trademarks where appropriate in those areas that might conflict with the Group’s business interests. If Smith & Nephew fails to protect and enforce its intellectual property rights successfully, its competitive position could suffer, which could harm its results of operations.
Product liability claims and loss of reputation
The development, manufacture and sale of medical devices entail risk of product liability claims or recalls. Design and manufacturing defects with respect to products sold by the Group or by companies it has acquired could damage, or impair the repair of, body functions. The Group may become subject to liability, which could be substantial, because of actual or alleged defects in its products. In addition, product defects could lead to the need to recall from the market existing products, which may be costly and harmful to the Group’s reputation.
There can be no assurance that customers, particularly in the US, the Group’s largest geographical market, will not bring product liability or related claims that would have a material adverse effect on the Group’s financial position or results of operations in the future, or that the Group will be able to resolve such claims within insurance limits. During 2015, developments in the Group’s metal-on-metal hip implant claims led to a $203m charge being recognised relating to known and future claims.
Regulatory standards and compliance in the healthcare industry
Business practices in the healthcare industry are subject to regulation and review by various government authorities. In general, the trend in many countries in which the Group does business is towards higher expectations and increased enforcement activity by governmental authorities. While the Group is committed to doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. Under certain circumstances, if the Group were found to have violated the law, its ability to sell its products to certain customers could be restricted.
Table of Contents
| 174
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
GROUP INFORMATION
|
International regulation
The Group operates across the world and is subject to extensive legislation, including anti-bribery and corruption and data protection, in each country in which we operate. Our international operations are governed in part by the UK Bribery Act and the US Foreign Corrupt Practices Act (‘FCPA’) which prohibit us or our agents from making, or offering, improper payments to government officials and other persons for the purpose of obtaining or maintaining business or product approvals. Enforcement of such legislation has increased in recent years with significant fines and penalties being imposed on companies and individuals. Our international operations, particularly in the Emerging Markets, expose the Group to the risk that our employees or agents will engage in prohibited activities.
Regulatory approval
The international medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.
National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew’s products include the Food and Drug Administration (‘FDA’) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan, the China Food and Drug Administration and the Australian Therapeutic Goods Administration. At any time, the Group is awaiting a number of regulatory approvals which, if not received, could adversely affect results of operations.
The trend is towards more stringent regulation and higher standards of technical appraisal. Such controls have become increasingly demanding to comply with and management believes that this trend will continue.
Regulatory requirements may also entail inspections for compliance with appropriate standards, including those relating to Quality Management Systems or Good Manufacturing Practices regulations. All manufacturing and other significant facilities within the Group are subject to regular internal and external audit for compliance with national and Group medical device regulation and policies.
Payment for medical devices may be governed by reimbursement tariff agencies in a number of countries. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. They may also be affected by overall government budgetary considerations. The Group believes that its emphasis on innovative products and services should contribute to success in this environment.
Failure to comply with these regulatory requirements could have a number of adverse consequences, including withdrawal of approval to sell a product in a country, temporary closure of a manufacturing facility, fines and potential damage to company reputation.
Failure to make successful acquisitions
A key element of the Group’s strategy for continued growth is to make acquisitions or alliances to complement its existing business. Failure to identify appropriate acquisition targets or failure to conduct adequate due diligence or to integrate them successfully would have an adverse impact on the Group’s competitive position and profitability. This could result from the diversion of management resources towards the acquisition or integration process, challenges of integrating organisations of different geographic, cultural and ethical backgrounds, as well as the prospect of taking on unexpected or unknown liabilities. In addition, the availability of global capital may make financing less attainable or more expensive and could result in the Group failing in its strategic aim of growth by acquisition or alliance.
Relationships with healthcare professionals
The Group seeks to maintain effective and ethical working relationships with physicians and medical personnel who assist in the research and development of new products or improvements to our existing product range or in product training and medical education. If we are unable to maintain these relationships our ability to meet the demands of our customers could be diminished and our revenue and profit could be materially adversely affected.
Reliance on sophisticated information technology
The Group uses a wide variety of information systems, programmes and technology to manage our business. Our systems are vulnerable to a cyber-attack, malicious intrusion, loss of data privacy or any other significant disruption. Our systems have been and will continue to be the target of such threats. We have systems in place to minimise the risk and disruption of these intrusions and to monitor our systems on an ongoing basis for current or potential threats. There can be no assurance that these measures will prove effective in protecting Smith & Nephew from future interruptions and as a result the performance of the Group could be materially adversely affected.
Other risk factors
Smith & Nephew is subject to a number of other risks, which are common to most global medical technology groups and are reviewed as part of the Group’s risk management process.
Factors affecting Smith & Nephew’s results of operations
Government economic, fiscal, monetary and political policies are all factors that materially affect the Group’s operation or investments of shareholders. Other factors include sales trends, currency fluctuations and innovation. Each of these factors is discussed further in the ‘Our Global Market’ on pages 14 to 15, ‘Financial review’ on pages 40 to 41 and ‘Taxation information for shareholders’ on pages 191 to 192.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
175
| ||
|
| ||||
|
|
||||||||
| INFORMATION
|
|
2015 $ million |
2014 $ million |
2013 $ million |
2012 $ million |
2011 $ million | ||||||
| Income statement | ||||||||||
|
Revenue |
4,634 | 4,617 | 4,351 | 4,137 | 4,270 | |||||
|
Cost of goods sold |
(1,143) | (1,162) | (1,100) | (1,070) | (1,140) | |||||
| Gross Profit | 3,491 | 3,455 | 3,251 | 3,067 | 3,130 | |||||
|
Selling, general and administrative expenses |
(2,641) | (2,471) | (2,210) | (2,050) | (2,101) | |||||
|
Research and development expenses |
(222) | (235) | (231) | (171) | (167) | |||||
| Operating profit | 628 | 749 | 810 | 846 | 862 | |||||
|
Net interest (payable)/receivable |
(38) | (22) | 4 | 2 | (8) | |||||
|
Other finance (costs)/income |
(15) | (11) | (11) | (11) | (13) | |||||
|
Share of results of associates |
(16) | (2) | (1) | 4 | – | |||||
|
Profit on disposal of net assets held for sale |
– | – | – | 251 | – | |||||
| Profit before taxation | 559 | 714 | 802 | 1,092 | 841 | |||||
|
Taxation |
(149) | (213) | (246) | (371) | (266) | |||||
| Attributable profit for the year | 410 | 501 | 556 | 721 | 575 | |||||
| Earnings per ordinary share | ||||||||||
| Basic | 45.9¢ | 56.1¢ | 61.7¢ | 80.4¢ | 64.5¢ | |||||
|
Diluted |
45.6¢ | 55.7¢ | 61.4¢ | 80.0¢ | 64.2¢ | |||||
| Adjusted attributable profit | ||||||||||
| Attributable profit for the year | 410 | 501 | 556 | 721 | 575 | |||||
|
Acquisition related costs |
25 | 125 | 31 | 11 | – | |||||
|
Restructuring and rationalisation expenses |
65 | 61 | 58 | 65 | 40 | |||||
|
Legal and other |
187 | (2) | – | – | 23 | |||||
|
Amortisation of acquisition intangibles and impairments |
204 | 129 | 88 | 43 | 36 | |||||
|
Profit on disposal of net assets held for sale |
– | – | – | (251) | – | |||||
|
Taxation on excluded items |
(130) | (71) | (40) | 82 | (17) | |||||
| Adjusted attributable profit | 761 | 743 | 693 | 671 | 657 | |||||
| Adjusted basic earnings per ordinary share (‘EPSA’)1 | 85.1¢ | 83.2¢ | 76.9¢ | 74.8¢ | 73.7¢ | |||||
|
Adjusted diluted earnings per ordinary share2 |
84.6¢ | 82.6¢ | 76.5¢ | 74.5¢ | 73.4¢ |
| 1 | Adjusted basic earnings per ordinary share is calculated by dividing adjusted attributable profit by the average number of shares. |
| 2 | Adjusted diluted earnings per ordinary share is calculated by dividing adjusted attributable profit by the diluted number of shares. |
Table of Contents
| 176
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OTHER FINANCIAL INFORMATION
|
|
2015 $ million |
2014 $ million |
2013 $ million |
2012 $ million |
2011 $ million | ||||||
| Group balance sheet | ||||||||||
| Non-current assets | 4,692 | 4,866 | 3,563 | 3,498 | 2,542 | |||||
|
Current assets |
2,475 | 2,440 | 2,256 | 2,144 | 2,080 | |||||
|
Assets held for sale |
– | – | – | – | 125 | |||||
| Total assets | 7,167 | 7,306 | 5,819 | 5,642 | 4,747 | |||||
| Share capital | 183 | 184 | 184 | 193 | 191 | |||||
|
Share premium |
590 | 574 | 535 | 488 | 413 | |||||
|
Capital redemption reserve |
12 | 11 | 10 | – | – | |||||
|
Treasury shares |
(294) | (315) | (322) | (735) | (766) | |||||
|
Retained earnings and other reserves |
3,475 | 3,586 | 3,640 | 3,938 | 3,349 | |||||
| Total equity | 3,966 | 4,040 | 4,047 | 3,884 | 3,187 | |||||
| Non-current liabilities | 1,857 | 2,104 | 699 | 828 | 422 | |||||
|
Current liabilities |
1,344 | 1,162 | 1,073 | 930 | 1,119 | |||||
|
Liabilities directly associated with assets held for sale |
– | – | – | – | 19 | |||||
| Total liabilities | 3,201 | 3,266 | 1,772 | 1,758 | 1,560 | |||||
| Total equity and liabilities | 7,167 | 7,306 | 5,819 | 5,642 | 4,747 | |||||
| Group cash flow statement | ||||||||||
| Cash generated from operations | 1,203 | 961 | 1,138 | 1,184 | 1,135 | |||||
|
Net interest paid |
(36) | (33) | (6) | (4) | (8) | |||||
|
Income taxes paid |
(137) | (245) | (265) | (278) | (285) | |||||
| Net cash inflow from operating activities | 1,030 | 683 | 867 | 902 | 842 | |||||
|
Capital expenditure (including trade investments and net of disposals of property, plant and equipment) |
(358) | (375) | (340) | (265) | (321) | |||||
|
Acquisitions and disposals |
(46) | (1,556) | (67) | (782) | (33) | |||||
|
Proceeds on disposal of net assets held for sale |
– | – | – | 103 | – | |||||
|
Investment in associate |
(25) | (2) | – | (10) | – | |||||
|
Proceeds from associate loan redemption |
– | 188 | – | – | – | |||||
|
Proceeds from own shares |
5 | 4 | 3 | 6 | 7 | |||||
|
Equity dividends paid |
(272) | (250) | (239) | (186) | (146) | |||||
|
Issue of ordinary capital and treasury shares purchased |
(61) | (35) | (183) | 77 | 11 | |||||
| Net cash flow from financing and investing activities | 273 | (1,343) | 41 | (155) | 360 | |||||
|
Exchange adjustments |
(21) | (17) | (6) | 5 | (6) | |||||
|
Opening net debt |
(1,613) | (253) | (288) | (138) | (492) | |||||
| Closing net debt | (1,361) | (1,613) | (253) | (288) | (138) | |||||
| Selected financial ratios | ||||||||||
| Gearing (closing net debt as a percentage of total equity) | 34% | 40% | 6% | 7% | 4% | |||||
|
Dividends per ordinary share1 |
30.8¢ | 29.60¢ | 27.40¢ | 26.10¢ | 17.40¢ | |||||
|
Research and development costs to revenue |
4.8% | 5.1% | 5.3% | 4.1% | 3.9% | |||||
|
Capital expenditure (including intangibles but excluding goodwill) to revenue |
7.7% | 8.1% | 7.8% | 6.4% | 7.5% |
| 1 | The Board has proposed a final dividend of 19.0 US cents per share which together with the first interim dividend of 11.8 US cents makes a total for 2015 of 30.8 US cents. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
177
| ||
|
| ||||
Non-GAAP financial information
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, EPSA and underlying growth, exclude the effect of certain cash and non-cash items that Group management believes are not related to the underlying performance of the Group. These non-IFRS financial measures are also used by management to make operating decisions because they facilitate internal comparisons of performance to historical results on both a business segment and a consolidated Group basis.
Non-IFRS financial measures are presented in these Financial Statements as the Group’s management believe that they provide investors with a means of evaluating performance of the business segment and the consolidated Group on a consistent basis, similar to the way in which the Group’s management evaluates performance, that is not otherwise apparent on an IFRS basis, given that certain non-recurring, infrequent or non-cash 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.
Revenue
‘Underlying growth in revenue’ is used to compare the revenue in a given year to the previous year on a like-for-like basis. This is achieved by adjusting for the impact of sales of products acquired in material business combinations and for movements in exchange rates. Underlying growth in revenue is not presented in the accounts prepared in accordance with IFRS and is therefore a measure not in accordance with Generally Accepted Accounting Principles (a ‘non-GAAP’ measure).
The Group believes that the tabular presentation and reconciliation of reported revenue growth to underlying revenue growth assists investors in their assessment of the Group’s performance in each business segment and for the Group as a whole.
Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of local functional currency since it excludes those items considered to be outside the influence of local management. The Group’s management uses this non-GAAP measure in its internal financial reporting, budgeting and planning to assess performance on both a business segment and a consolidated Group basis. Revenue growth at constant currency is important in measuring business performance compared to competitors and compared to the growth of the market itself.
The Group considers that revenue from sales of products acquired in material business combinations results in a step-up in growth in revenue in the year of acquisition that cannot be wholly attributed to local management’s efforts with respect to the business in the year of acquisition. Depending on the timing of the acquisition, there will usually be a further step change in the following year. A measure of growth excluding the effects of business combinations also allows senior management to evaluate the performance and relative impact of growth from the existing business and growth from acquisitions. The process of making business acquisitions is directed, approved and funded from the Group corporate centre in line with strategic objectives.
The material limitation of the underlying growth in revenue measure is that it excludes certain factors, described above, which ultimately have a significant impact on total revenues. The Group compensates for this limitation by taking into account relative movements in exchange rates in its investment, strategic planning and resource allocation. In addition, as the evaluation and assessment of business acquisitions is not within the control of local management, performance of acquisitions is monitored centrally until the business is integrated.
The Group’s management considers that the non-GAAP measure of underlying growth in revenue and the GAAP measure of growth in revenue are complementary measures, neither of which management uses exclusively.
‘Underlying growth in revenue’ reconciles to growth in revenue reported, the most directly comparable financial measure calculated in accordance with IFRS by making two adjustments, the ‘constant currency exchange effect’ and the ‘acquisitions and disposals effect’, described below.
The ‘constant currency exchange effect’ is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.
The ‘acquisitions and disposals effect’ is the measure of the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which include acquisitions and exclude disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year. These sales are separately tracked in the Group’s internal reporting systems and are readily identifiable.
Reported revenue growth, the most directly comparable financial measure calculated in accordance with IFRS, reconciles to underlying growth in revenue as follows:
|
2015 % |
2014 % |
2013 % | ||||
| Reported revenue growth | 0 | 6 | 5 | |||
|
Constant currency exchange effect |
8 | 1 | 1 | |||
|
Acquisitions/Disposals effect |
(4) | (5) | (2) | |||
| Underlying revenue | 4 | 2 | 4 |
Table of Contents
| 178
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OTHER FINANCIAL INFORMATION
|
Trading profit, trading profit margin and trading cash flow
Trading profit, trading profit margin and trading cash flow are trend measures, which present the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group’s short-term profitability and cash flows. The Group has identified the following items, where material, as those to be excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectively: acquisition and disposal related items arising in connection with business combinations, including amortisation of acquisition intangible assets, impairments and integration costs; restructuring events; gains and losses resulting from legal disputes; and significant uninsured losses. In addition to these items, gains or 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, respectively.
Underlying growth in trading profit and trading profit margin (trading profit expressed as a percentage of revenue and trading cash flow) are measures, which present the growth trend in the long-term profitability of the Group.
Underlying growth in trading profit is used to compare the period-on-period growth in trading profit on a like-for-like basis. This is achieved by adjusting for the impact of material business combinations and disposals and for movements in exchange rates in the same manner as underlying revenue growth is determined, as described above.
Adjusted earnings per ordinary share (‘EPSA’)
EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-tax impact of specific transactions that management considers affects the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure and is determined by adjusting attributable profit for the items that are excluded from operating profit when arriving at trading profit and items that are recognised below operating profit that affect the Group’s short-term profitability. The most directly comparable financial measure calculated in accordance with IFRS is earnings per ordinary share (‘EPS’).
| For the year ended 31 December 2015 |
|
Trading results 2015 $ million |
|
|
Acquisition related costs $ million |
|
|
Restructuring and rationalisation costs $ million |
|
|
Amortisation of acquisition intangibles $ million |
|
|
Legal and other $ million |
|
|
Capital expenditure $ million |
|
Reported results 2015 $ million | |||||||
| Revenue | 4,634 | – | – | – | – | – | 4,634 | |||||||||||||||||||
|
Cost of goods sold |
(1,143) | – | – | – | – | – | (1,143) | |||||||||||||||||||
| Gross profit | 3,491 | – | – | – | – | – | 3,491 | |||||||||||||||||||
|
Selling, general and administration expenses |
(2,170) | (12) | (65) | (204) | (190) | – | (2,641) | |||||||||||||||||||
|
Research and development expenses |
(222) | – | – | – | – | – | (222) | |||||||||||||||||||
| Trading/operating profit | 1,099 | (12) | (65) | (204) | (190) | – | 628 | |||||||||||||||||||
|
Trading/operating profit margin |
23.7% | 13.6% | ||||||||||||||||||||||||
|
Interest receivable |
6 | – | – | – | 5 | – | 11 | |||||||||||||||||||
|
Interest payable |
(47) | (2) | – | – | – | – | (49) | |||||||||||||||||||
|
Other finance costs |
(13) | – | – | – | (2) | – | (15) | |||||||||||||||||||
|
Share of loss from associates |
(5) | (11) | – | – | – | – | (16) | |||||||||||||||||||
| Profit before taxation | 1,040 | (25) | (65) | (204) | (187) | – | 559 | |||||||||||||||||||
|
Taxation |
(279) | 9 | 18 | 66 | 37 | – | (149) | |||||||||||||||||||
| Adjusted attributable/attributable profit | 761 | (16) | (47) | (138) | (150) | – | 410 | |||||||||||||||||||
| EPSA/EPS | 85.1 | (1.8) | (5.3) | (15.4) | (16.7) | – | 45.9 | |||||||||||||||||||
|
Weighted average number of shares (million) |
894 | 894 | ||||||||||||||||||||||||
|
Diluted EPSA/EPS |
84.6 | (1.8) | (5.2) | (15.4) | (16.6) | – | 45.6 | |||||||||||||||||||
|
Diluted weighted average number of shares (million) |
899 | 899 | ||||||||||||||||||||||||
| Trading cash flow/cash generated from operating activities | 936 | (36) | (52) | – | (3) | 358 | 1,203 | |||||||||||||||||||
|
Trading profit to cash conversion ratio (%) |
85% |
Acquisition related costs and cash flows: For the year to 31 December 2015, these costs primarily relate to ongoing ArthroCare integration and deferred consideration for an acquisition made by an associate.
Restructuring and rationalisation costs: For the year to 31 December 2015, these costs primarily relate to the ongoing implementation of the Group Optimisation plan that was announced in May 2014.
Amortisation and impairment of acquisition intangibles: For the year ended 31 December 2015, these charges relate to the amortisation of intangible assets acquired in material business combinations and a total impairment of $51m including $40m relating to Oasis, a product acquired with the Healthpoint acquisition in 2013.
Legal and other: For the year to 31 December 2015, the net charge primarily relates to $203m for known, anticipated and settled metal on metal hip claims and associated legal expenses of $21m. This was offset by a net gain of $33m relating to patent litigation with Arthrex and past service and curtailment gains of $19m arising on US and UK post-retirement benefits.
In addition, a total of $18m charge primarily relates to final costs relating to RENASYS distribution hold and redundancies from the decision to cease development of HP802.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
179
| ||
|
| ||||
| For the year ended 31 December 2014 |
|
Trading results 2014 $ million |
|
|
Acquisition related costs $ million |
|
|
Restructuring and rationalisation costs $ million |
|
|
Amortisation of acquisition intangibles $ million |
|
|
Legal and other $ million |
|
|
Capital expenditure $ million |
|
Reported results 2014 $ million | |||||||
| Revenue | 4,617 | – | – | – | – | – | 4,617 | |||||||||||||||||||
|
Cost of goods sold |
(1,127) | (23) | (12) | – | – | – | (1,162) | |||||||||||||||||||
| Gross profit | 3,490 | (23) | (12) | – | – | – | 3,455 | |||||||||||||||||||
|
Selling, general and administration expenses |
(2,200) | (95) | (49) | (129) | 2 | – | (2,471) | |||||||||||||||||||
|
Research and development expenses |
(235) | – | – | – | – | – | (235) | |||||||||||||||||||
| Trading/operating profit | 1,055 | (118) | (61) | (129) | 2 | – | 749 | |||||||||||||||||||
|
Trading/operating profit margin |
22.9% | – | 16.2% | |||||||||||||||||||||||
|
Interest receivable |
13 | – | – | – | – | – | 13 | |||||||||||||||||||
|
Interest payable |
(28) | (7) | – | – | – | – | (35) | |||||||||||||||||||
|
Other finance costs |
(11) | – | – | – | – | – | (11) | |||||||||||||||||||
|
Share of loss from associates |
(2) | – | – | – | – | – | (2) | |||||||||||||||||||
| Profit before taxation | 1,027 | (125) | (61) | (129) | 2 | – | 714 | |||||||||||||||||||
|
Taxation |
(284) | 30 | 15 | 35 | (9) | – | (213) | |||||||||||||||||||
| Adjusted attributable/attributable profit | 743 | (95) | (46) | (94) | (7) | – | 501 | |||||||||||||||||||
| EPSA/EPS | 83.2¢ | (10.6¢) | (5.2¢) | (10.5¢) | (0.8¢) | – | 56.1¢ | |||||||||||||||||||
|
Weighted average number of shares (million) |
893 | 893 | ||||||||||||||||||||||||
|
Diluted EPSA/EPS |
82.6¢ | (10.5¢) | (5.1¢) | (10.5¢) | (0.8¢) | – | 55.7¢ | |||||||||||||||||||
|
Diluted weighted average number of shares (million) |
899 | 899 | ||||||||||||||||||||||||
|
Trading cash flow/cash generated from operating activities |
781 | (112) | (60) | – | (23) | 375 | 961 | |||||||||||||||||||
|
Trading profit to cash conversion ratio (%) |
74% |
Acquisition related costs: For the year ended 31 December 2014, these costs primarily relate to transaction and integration costs associated with the ArthroCare acquisition with a small portion of costs relating to the continued integration of Healthpoint and the recent acquisitions in the Emerging & International Markets. In addition, trading results eliminate the short-term increase in cost of goods sold from recognising acquired inventory at fair value rather than standard cost. For the year ended 31 December 2013, these costs primarily relate to the integration of the Healthpoint business.
Restructuring and rationalisation costs: For the year ended 31 December 2014, these costs relate to the Group Optimisation programme that was announced in May 2014 and the structural and efficiency programme announced in August 2011.
Amortisation of acquisition intangibles: This charge relates to the amortisation of intangible assets acquired in material business combinations.
Legal and other: For the year ended 31 December 2014, this net credit relates to a past service gain and a settlement credit on the closure of US Pension Plan of $46m and a gain on disposal of a UK manufacturing facility of $9m, offset by a charge of $25m relating to the likely costs of a distribution hold on RENASYS in the US pending new regulatory approvals and a charge of $28m relating to the HP802 programme which was stopped in the fourth quarter.
Table of Contents
| 180
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OTHER FINANCIAL INFORMATION
|
| For the year ended 31 December 2013 |
|
Trading Results 2013 $ million |
|
|
Acquisition related costs $ million |
|
|
Restructuring and rationalisation costs $ million |
|
|
Amortisation of acquisition intangibles $ million |
|
|
Legal and other $ million |
|
|
Capital expenditure $ million |
|
Reported results 2013 $ million | |||||||
| Revenue | 4,351 | – | – | – | – | – | 4,351 | |||||||||||||||||||
|
Cost of goods sold |
(1,083) | (5) | (12) | – | – | – | (1,100) | |||||||||||||||||||
| Gross profit | 3,268 | (5) | (12) | – | – | – | 3,251 | |||||||||||||||||||
|
Selling, general and administration expenses |
(2,050) | (26) | (46) | (88) | – | – | (2,210) | |||||||||||||||||||
|
Research and development expenses |
(231) | – | – | – | – | – | (231) | |||||||||||||||||||
| Trading/operating profit | 987 | (31) | (58) | (88) | – | – | 810 | |||||||||||||||||||
|
Trading/operating profit margin |
22.7% | – | 18.6% | |||||||||||||||||||||||
|
Interest receivable |
14 | – | – | – | – | – | 14 | |||||||||||||||||||
|
Interest payable |
(10) | – | – | – | – | – | (10) | |||||||||||||||||||
|
Other finance costs |
(11) | – | – | – | – | – | (11) | |||||||||||||||||||
|
Share of loss from associates |
(1) | – | – | – | – | – | (1) | |||||||||||||||||||
| Profit before taxation | 979 | (31) | (58) | (88) | – | – | 802 | |||||||||||||||||||
|
Taxation |
(286) | 6 | 11 | 23 | – | – | (246) | |||||||||||||||||||
| Adjusted attributable/attributable profit | 693 | (25) | (47) | (65) | – | – | 556 | |||||||||||||||||||
| EPSA/EPS | 76.9¢ | (2.8¢) | (5.2¢) | (7.2¢) | – | – | 61.7¢ | |||||||||||||||||||
|
Weighted average number of shares (million) |
901 | 901 | ||||||||||||||||||||||||
|
Diluted EPSA/EPS |
76.5¢ | (2.8¢) | (5.2¢) | (7.1¢) | – | – | 61.4¢ | |||||||||||||||||||
|
Diluted weighted average number of shares (million) |
906 | 906 | ||||||||||||||||||||||||
|
Trading cash flow/cash generated from operating activities |
877 | (25) | (54) | – | – | 340 | 1,138 | |||||||||||||||||||
|
Trading profit to cash conversion ratio (%) |
89% |
Acquisition related costs: For the year ended 31 December 2013, these costs primarily relate to the integration of the Healthpoint business.
Restructuring and rationalisation costs: For the year ended 31 December 2013, these costs primarily relate to the structural and efficiency programme announced in August 2011.
Amortisation of acquisition intangibles: This charge relates to the amortisation of intangible assets acquired in material business combinations.
Transactional and translational exchange
The Group’s principal markets outside the US are, in order of significance, Continental Europe, UK, Australia and Japan. Revenues in these markets fluctuate when translated into US Dollars on consolidation. During the year, the average rates of exchange against the US Dollar used to translate revenues and profits arising in these markets changed compared to the previous year as follows: the Euro weakened from 1.33 to 1.09 (–18%), Sterling weakened from 1.65 to 1.48 (–10%), the Swiss Franc weakened from 1.09 to 1.00 (–8%), the Australian Dollar weakened from 0.90 to 0.73 (–18%) and the Japanese Yen weakened from 105.84 to 120.38 (14%).
The Group’s principal manufacturing locations are in the US, Switzerland, UK and China. The majority of the Group’s selling and distribution subsidiaries around the world purchase finished products from these locations. As a result of currency movements compared with the previous year, sales from the US became relatively more profitable to all of these countries. The Group’s policy of purchasing forward a proportion of its currency requirements and the existence of an inventory pipeline reduce the short-term impact of currency movements.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
181
| ||
|
| ||||
Contractual obligations
Contractual obligations at 31 December 2015 were as follows:
| Payments due by period | ||||||||||||||
|
|
Less than 1 year $ million |
|
|
1–3 years $ million |
|
|
3–5 years $ million |
|
More than 5 years $ million | |||||
| Debt obligations | 44 | 300 | – | – | ||||||||||
|
Finance lease obligations |
2 | 5 | 3 | – | ||||||||||
|
Operating lease obligations |
45 | 48 | 21 | 9 | ||||||||||
|
Retirement benefit obligation |
49 | – | – | – | ||||||||||
|
Purchase obligations |
19 | 19 | 15 | 3 | ||||||||||
|
Capital expenditure |
24 | – | – | – | ||||||||||
| Other | 31 | 19 | – | – | ||||||||||
| 214 | 391 | 39 | 12 | |||||||||||
Other contractual obligations represent $23m of foreign exchange contracts and $27m of acquisition consideration. Provisions that do not relate to contractual obligations are not included in the above table.
The agreed contributions for 2016 in respect of the Group’s defined benefits plans are: $36m for the UK (including $29m of supplementary payments), $20m for the US Plan and $6m for other funded defined benefit plans. The table above does not include amounts payable in respect of 2016 and beyond as these are subject to future agreement and amounts cannot be reasonably estimated.
There are a number of agreements that take effect, alter or terminate upon a change in control of the Company or the Group following a takeover, such as bank loan agreements and Company share plans. None of these are deemed to be significant in terms of their potential impact on the business of the Group as a whole. In addition, there are service contracts between the Company and its Executive Directors which provide for the automatic payment of a bonus following loss of office or employment occurring because of a successful takeover bid. Further details are set out on page 100.
The Company does not have contracts or other arrangements which individually are essential to the business.
2014 Financial highlights
Revenue
Group revenue increased by $266m (6% on a reported basis), from $4,351m in 2013 to $4,617m in 2014.
The underlying increase is 2%, after adjusting for the 5% impact of the acquisitions of ArthroCare and a Brazilian distributor and 1% attributable to the unfavourable impact of currency movements. Despite flat growth in the Established Markets, growth of 17% in the Emerging & International Markets contributed to this underlying increase of 2%.
Cost of goods sold
Cost of goods sold increased by $62m (6% on a reported basis) from $1,100m in 2013 to $1,162m in 2014. The underlying movement is 5% after adjusting for the net impact of 4% from the ArthroCare acquisition and 3% attributable to the unfavourable impact of currency movements. The movement in underlying costs of goods sold of 5% is largely attributable to the increase in underlying trading.
During 2014, $12m of restructuring and rationalisation expenses (2013 – $12m) and $23m of acquisition related costs (2013 – $5m) were charged to cost of goods sold.
Selling, general and administration expenses
Selling, general and administrative expenses increased by $261m (12% on a reported basis) from $2,210m in 2013 to $2,471m in 2014. The underlying movement is 5% after adjusting for the net impact of 7% from the ArthroCare acquisition. Currency movements had no impact.
The underlying increase of 5% is due to the promotion of new product and costs associated with the RENASYS distribution hold and HP802 termination and the underlying increase in trading.
In 2014, administrative expenses included $62m of amortisation of other intangible assets (2013 – $64m), $49m of restructuring and rationalisation expenses (2013 – $46m), an amount of $129m relating to amortisation of acquisition intangibles (2013 – $88m) and $95m of acquisition related costs (2013 – $26m).
Table of Contents
| 182
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OTHER FINANCIAL INFORMATION
|
Research and development expenses
Research and development expenditure as a percentage of revenue remained broadly consistent at 5.1% in 2014 (2013 – 5.3%). Actual expenditure was $235m in 2014 compared to $231m in 2013. The Group continues to invest in innovative technologies and products to differentiate it from competitors.
Operating profit
Operating profit decreased by $61m to $749m from $810m in 2013. This comprised an increase of $6m in Advanced Surgical Devices and a decrease of $67m in Advanced Wound Management.
The movement in Advanced Surgical Devices is attributable to the continuing pressure on margins and its investment in the Emerging & International Markets. Advanced Wound Management has been adversely impacted by the costs associated with the RENASYS distribution hold and the impairment and costs associated with the termination of the HP802 programme.
Net interest receivable/(payable)
Net interest receivable increased by $26m from net $4m receivable in 2013 to a net receivable of $22m in 2014. This movement is primarily due to an increase in interest payable as a result of financing the ArthroCare acquisition. Interest receivable also decreased following the repayment by Bioventus LLC of their loan note in October 2014.
Other finance cost
Other finance costs in 2014 remained at $11m and principally relate to costs associated with the Group’s retirement benefit schemes.
Taxation
The taxation charge decreased by $33m to $213m from $246m in 2013. The reported rate of tax was 29.9%, compared with 30.5% in 2013.
After adjusting for specific transactions that management considers affect the Group’s short-term profitability, restructuring and rationalisation expenses, amortisation of acquisition intangibles, acquisition related costs and legal and other items, the tax rate on trading profit was 27.7% (2013 – 29.2%).
Commentary on the Group balance sheet
Non-current assets
Non-current assets increased by $1,303m to $4,866m in 2014 from $3,563m in 2013. This is principally attributable to the following:
| – | Property, plant and equipment increased by $75m from $816m in 2013 to $891m in 2014. Depreciation of $222m was charged during 2014, assets with a net book value of $15m were disposed of and $14m was impaired relating to HP802. These movements were offset by $298m of additions relating primarily to instruments and other plant & machinery and $62m of additions arising on acquisitions of ArthroCare. The balance relates to unfavourable currency movements totalling $34m. |
| – | Goodwill increased by $771m from $1,256m in 2013 to $2,027m in 2014. Of this movement, $829m arose on the acquisition of ArthroCare and $15m on the acquisition in Brazil. The remaining balance relates to favourable currency movements totalling $73m. |
| – | Intangible assets decreased by $693m from $1,054m in 2013 to $1,747m in 2014. Intangible assets totalling $817m and $16m arose on the acquisition of ArthroCare and Brazil respectively. Amortisation of $191m was charged during the year and assets with a net book value of $1m were disposed of. A total of $77m relates to the cost of intellectual property, distribution rights and software acquired. The balance relates to unfavourable currency movements totalling $25m. |
| – | Investment in associates of $112m in 2014 has increased from $107m in 2013. The loan to the associate was fully repaid in the year. |
| – | Deferred tax assets decreased by $68m in the year from $145m in 2013 to $77m in 2014. |
Current assets
Current assets increased by $184m to $2,440m from $2,256m in 2013. The movement relates to the following:
| – | Inventories rose by $175m to $1,181m in 2014 from $1,006m in 2013. This movement is principally attributable to the acquisitions of ArthroCare and distributor in Brazil which increased inventory by $70m and $36m relating to the purchase of an advanced quantity of an ingredient to ensure continued supply of REGRANEX. |
| – | The level of trade and other receivables increased by $53m to $1,166m in 2014 from $1,113m in 2013. The movement primarily relates to the increase in underlying revenues and $54m from the ArthroCare acquisition offset by $75m of unfavourable currency movements. |
| – | Cash at bank has fallen by $44m to $93m from $137m in 2013. |
Non-current liabilities
Non-current liabilities increased by $1,405m from $699m in 2013 to $2,104m in 2014. This movement relates to the following items:
| – | Long-term borrowings have increased from $347m in 2013 to $1,666m in 2014 as a result of the $1.1bn private placements and $400m additional long-term facility use to fund the acquisition of ArthroCare. |
| – | The Retirement benefit obligation increased by $3m to $233m in 2014 from $230m in 2013. |
| – | Deferred tax liabilities increased by $48m in the year from $50m in 2013 to $98m in 2014. |
Current liabilities
Current liabilities increased by $89m from $1,073m in 2013 to $1,162m in 2014. This movement is attributable to:
| – | Bank overdrafts and current borrowings have decreased by $5m from $44m in 2013 to $39m in 2014. |
| – | Trade and other payables have increased by $53m to $838m in 2014 from $785m in 2013. This increase includes $75m of trade and other payables arising on the acquisition of ArthroCare and distributor in Brazil offset by $34m of favourable currency movements. |
| – | Current tax payable is $218m at the end of 2014 compared to $184m in 2013. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
183
| ||
|
| ||||
Total equity
Total equity decreased by $7m from $4,047m in 2013 to $4,040m in 2014. The principal movements were:
|
Total equity $ million | ||
| 1 January 2014 | 4,047 | |
|
Attributable profit |
501 | |
|
Currency translation gains |
(196) | |
|
Hedging reserves |
12 | |
|
Actuarial losses on retirement benefit obligations |
(94) | |
|
Dividends paid during the year |
(250) | |
|
Purchase of own shares |
(75) | |
|
Taxation on other comprehensive income and equity items |
19 | |
|
Net share-based transactions |
76 | |
| 31 December 2014 | 4,040 |
2013 Financial performance by business segment
2013 Financial highlights
Revenue
Group revenue increased by $214m (5% on a reported basis), from $4,137m in 2012 to $4,351 in 2013. The underlying increase is 4% after adjusting for the net impact of 2% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the unfavourable impact of currency movements.
Costs of goods sold
Costs of goods sold increased by $30m (3% on a reported basis) from $1,070m in 2012 to $1,100m in 2013. The underlying movement is 2% after adjusting for the net impact of 2% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the favourable impact of currency movements. The movement in underlying costs of goods sold of 2% is largely attributable to the increase in underlying trading.
During 2013, $12m of restructuring and rationalisation expenses (2012 – $3m) and $5m of acquisition related costs (2012 – $nil) were charged to costs of goods sold.
Selling, general and administration expenses
Selling, general and administrative expenses increased by $160m (8% on a reported basis) from $2,050m in 2012 to $2,210m in 2013. The underlying movement is 6% after adjusting for the net impact of 3% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the favourable impact of currency movements.
The underlying increase of 6% is due to the continuing investment in Emerging & International Markets, promotion of new products in ASD and AWM and the underlying increase in trading.
In 2013, administrative expenses included $64m of amortisation of other intangible assets (2012 – $51m), $46m of restructuring and rationalisation expenses (2012 – $62m), an amount of $88m relating to amortisation of acquisition intangibles (2012 – $43m) and $26m of acquisition related costs (2012 – $11m).
Research and development expenses
Research and development expenditure as a percentage of revenue increased by 1.2% to 5.3% in 2013 (2012 – 4.1%). Actual expenditure was $231m in 2013 compared to $171m in 2012. The Group continues to invest in innovative technologies and products to differentiate it from competitors.
Table of Contents
| 184
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
OTHER FINANCIAL INFORMATION
|
Operating profit
Operating profit decreased by $36m to $810m from $846m in 2012. This comprised a decrease of $12m in Advanced Surgical Devices and a decrease of £24m in Advanced Wound Management.
The movement in Advanced Surgical Devices is attributable to the continuing pressure on margins and its investment in the Emerging & International Markets. Advanced Wound Management has continued to invest in new products and new geographic markets throughout the year.
Net interest receivable/(payable)
Net interest receivable increased by $2m from net $2m receivable in 2012 to a net receivable of $4m in 2013. This increase is principally a consequence of the interest receivable on the Bioventus LLC (‘Bioventus’) loan note issued following the disposal of the Clinical Therapies business which has been in place for a full year in 2013 compared to eight months in 2012. This loan note was repaid in full in 2014.
Other finance cost
Other finance costs in 2013 remained at $11m and principally relate to costs associated with the Group’s retirement benefit schemes.
Taxation
The taxation charge decreased by $125m to $246m from $371m in 2012. The reported rate of tax was 30.5%, compared with 33.7% in 2012.
After adjusting for specific transactions that management considers affect the Group’s short-term profitability (profit on disposal of the Clinical Therapies business, restructuring and rationalisation expenses, amortisation of acquisition intangibles and acquisition related costs) the tax rate on trading profit was 29.2% (2012 – 29.9%).
Group balance sheet
The following table sets out certain balance sheet data as at 31 December of the years indicated:
| 2013 $ million |
2012 $ million | |||
| Non-current assets | 3,563 | 3,498 | ||
|
Current assets |
2,256 | 2,144 | ||
|
Total assets |
5,819 | 5,642 | ||
|
Non-current liabilities |
699 | 828 | ||
|
Current liabilities |
1,073 | 930 | ||
|
Total liabilities |
1,772 | 1,758 | ||
| Total equity | 4,047 | 3,884 | ||
| Total equity and liabilities | 5,819 | 5,642 |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
185
| ||
|
| ||||
|
|
||||||||
| SHAREHOLDERS
|
Financial calendar
| Annual General Meeting | 14 April 2016 | |
| First quarter trading report | 5 May 2016 | |
| Payment of 2015 final dividend | 11 May 2016 | |
| Half year results announced | 28 July 20161 | |
| Third quarter trading report | 3 November 2016 | |
| Payment of 2016 interim dividend | November 2016 | |
| Full year results announced | February 20171 | |
| Annual Report available | February/March 2017 | |
| Annual General Meeting | April 2017 |
| 1 | Dividend declaration dates. |
Annual General Meeting
The Company’s Annual General Meeting (‘AGM’) will be held on 14 April 2016 at 2:00pm at No. 11 Cavendish Square, London W1G 0AN. Registered shareholders have been sent either a Notice of Annual General Meeting or notification of availability of the Notice of Annual General Meeting.
Corporate headquarters and registered office
The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam Street, London W2N 6LA, UK. Registered in England and Wales No. 324357. Tel. +44 (0)20 7401 7646 website: www.smith-nephew.com
Ordinary shareholders
Registrar
All general enquiries concerning shareholdings, dividends, changes to shareholders’ personal details and the AGM should be addressed to:
Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
Tel: 0371 384 2081*
Tel: +44 (0) 121 415 7072 from outside the UK
Website: www.shareview.co.uk
| * | Lines are open from 8:30am to 5:30pm Monday to Friday, excluding public holidays in England and Wales. |
Shareholder facilities
Shareview
Equiniti’s on-line enquiry and portfolio management service for shareholders. To view information about your shareholdings online, register at www.shareview.co.uk. Once registered for Shareview, you will also be able to elect to receive future shareholder communications via the Company’s website (www.smith-nephew.com), update your address details or dividend payment instructions and register your proxy instructions on-line.
E-communications
We encourage you to elect to receive communications via e-mail as this has significant environmental and cost benefits. You may register for this service through Equiniti, at www.shareview.co.uk. You will receive a confirmation letter from Equiniti at your registered address, containing an Activation Code for future use.
Payment of dividends direct to your bank or building society account
If you wish to avoid the risk of your dividend awards getting lost or mislaid you can arrange to have your cash dividends paid directly to a bank or building society account. This facility is available to UK resident shareholders who receive Sterling dividends. If you do not live in the UK you may be able to register for the overseas payment service. Further information is available at www.shareview.co.uk or by contacting Equiniti (UK and overseas helpline numbers as above).
Dividend Re-Investment plan (‘DRIP’)
The Company offers shareholders (except those in North America) the opportunity to participate in a DRIP. This enables you to reinvest your cash dividends in further ordinary shares of Smith & Nephew plc. These are purchased in the market at competitive dealing costs. For further details plus an application form to reinvest future dividends, contact Equiniti.
Duplicate accounts
If you have more than one account due to inconsistency in account details, you may avoid duplicate mailings by contacting Equiniti and requesting an amalgamation of your share accounts.
Keep your personal details up to date
Please remember to tell Equiniti if you move house or change bank details or there is any other change in your account information. You can update your information on-line via the Shareview portfolio if you are a Smith & Nephew Shareview member. If you do not have a portfolio you will need to write to Equiniti or complete a change of address form which can be downloaded from Shareview. If you hold 2,500 shares or fewer, you can also change your address or update your bank details quickly and easily over the phone using the contact details provided.
Table of Contents
| 186
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Individual savings account (‘ISA’)
Shareholders who are UK resident may hold Smith & Nephew plc shares in an ISA, which is administered by the Company’s registrar. For information about this service please contact Equiniti.
Shareholder communications
We make quarterly financial announcements which are made available through Stock Exchange announcements and on the Group’s website (www.smith-nephew.com). Copies of recent Annual Reports, press releases, institutional presentations and audio webcasts are also available on the website.
We send paper copies of the Notice of Annual General Meeting and Annual Report only to those shareholders and ADS holders who have elected to receive shareholder documentation by post. Electronic copies of the Annual Report and Notice of Annual General Meeting are available on the Group’s website at www.smith-nephew.com. Both ordinary shareholders and ADS holders can request paper copies of the Annual Report, which the Company provides free of charge. The Company will continue to send to ordinary shareholders by post the Form of Proxy notifying them of the availability of the Annual Report and Notice of Annual General Meeting on the Group’s website. If you elect to receive the Annual Report and Notice of Annual General Meeting electronically you are informed by e-mail of the documents’ availability on the Group’s website. ADS holders receive the Form of Proxy by post, but will not receive a paper copy of the Notice of Annual General Meeting.
Investor communications
The Company maintains regular dialogue with individual institutional shareholders, together with results presentations. To ensure that all members of the Board develop an understanding of the views of major investors, the Executive Directors review significant issues raised by investors with the Board. Non-Executive Directors are sent copies of analysts’ and brokers’ briefings. There is an opportunity for individual shareholders to question the Directors at the Annual General Meeting and the Company regularly responds to letters from shareholders on a range of issues.
UK capital gains tax
For the purposes of UK capital gains tax, the price of the Company’s ordinary shares on 31 March 1982 was 35.04p.
Smith & Nephew share price
The Company’s ordinary shares are quoted on the London Stock Exchange under the symbol SN. The Company’s share price is available on the Smith & Nephew website www.smith-nephew.com and at www.londonstockexchange.com where the live financial data is updated with a 15-minute delay.
ShareGift
If you hold a small number of shares, which would cost more to sell than they are worth, you may wish to consider donating them to the charity ShareGift (Registered Charity no. 1052686) which specialises in accepting such shares as donations. There are no implications for Capital Gains Tax purposes (no gain or loss) and it may also be possible to obtain income tax relief. The relevant stock transfer form may be obtained from Equiniti at the address given on page 185.
Further information about ShareGift is available at www.sharegift.org or by contacting ShareGift at:
ShareGift, PO Box 72253, London SW1P 9LQ
Tel: (+44) (0) 20 7930 3737
Unauthorised brokers (boiler room scams)
You are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. These are typically from overseas-based ‘brokers’ who target UK shareholders offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as ‘boiler rooms’.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme if things go wrong. If you receive any unsolicited investment advice, obtain the correct name of the person and organisation and check that they are properly authorised by the FCA by visiting www.fca.org.uk/register/.
If you think you have been approached by an unauthorised firm you should contact the FCA consumer helpline on 0800 111 6768 or e-mail consumer.queries@fca.org.uk.
More detailed information can be found on the FCA website at www.fca.org.uk/consumers/protect-yourself/unauthorised-firms.
Social media
Smith & Nephew has a presence across a range of social media channels, including Twitter, Facebook and LinkedIn, which are linked below. Information provided by Smith & Nephew through social media channels is not incorporated by reference herein and does not form part of our Annual Report or Form 20-F.
twitter.com/SmithNephewPLC |
facebook.com/SmithNephewPlc |
linkedin.com/company/smith-&-nephew |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
187
| ||
|
| ||||
American Depositary Shares (ADSs) and American Depositary Receipts (ADRs)
In the USA, the Company’s ordinary shares are traded in the form of ADSs, evidenced by ADRs, on the New York Stock Exchange under the symbol SNN. Each American Depositary Share represents two ordinary shares. Deutsche Bank is the authorised depositary bank for the Company’s ADR programme.
ADS enquiries
All enquiries regarding ADS holder accounts and payment of dividends should be addressed to:
Deutsche Bank Shareholder Services
American Stock Transfer and Trust Company
Operations Centre 6201 15th Avenue
Brooklyn, New York
NY 11219
Tel: +1 866 249 2593 (toll free)
E-mail: DB@amstock.com
Website: www.adr.db.com
The Deutsche Bank Global Direct Investor Services Program is available for US residents, enabling investment directly in ADSs with reduced brokerage commissions and service costs. For further information on Global Direct contact Deutsche Bank Shareholder Services (as above) or visit www.adr.db.com.
The Company provides Deutsche Bank, as depositary, with copies of Annual Reports containing Consolidated Financial Statements and the opinion expressed thereon by its independent auditor. Such financial statements are prepared under IFRS. Deutsche Bank will send these reports to recorded ADS holders who have elected to receive paper copies. The Company also provides to Deutsche Bank all notices of shareholders’ meetings and other reports and communications that are made generally available to shareholders of the Company. Deutsche Bank makes such notices, reports and communications available for inspection by recorded holders of ADSs and sends voting instruction forms by post to all recorded holders of ADSs.
Smith & Nephew ADS price
The Company’s ADS price can be obtained from the official New York Stock Exchange website at www.nyse.com, the Smith & Nephew website www.smith-nephew.com, and is quoted daily in the Wall Street Journal where the live financial data is updated with a 15-minute delay.
ADS payment information
The Company hereby discloses ADS payment information for the year ended 31 December 2015 in accordance with the Securities and Exchange Commission rules 12.D.3 and 12.D.4 relating to Form 20-F filings by foreign private issuers. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors, including payment of dividends by the Company by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fee for those services are paid.
| Persons depositing or withdrawing shares must pay | For | |
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) $0.05 (or less) per ADS |
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 | Depositary services | |
| Registration or transfer fees | 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 |
During 2015, a fee of one US cent per ADS was collected on the 2014 final dividend paid in May and a fee of one US cent per ADS was collected on the 2015 interim dividend paid in October. In the period 1 January 2015 to 23 February 2016, the total program payments made by Deutsche Bank Trust Company Americas were $517,700.19.
Table of Contents
| 188
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Dividend history
Smith & Nephew has paid dividends on its ordinary shares in every year since 1937. Following the capital restructuring and dividend reduction in 2000, the Group adopted a policy of increasing its dividend cover (the ratio of EPSA, as set out in the ‘Selected financial data’, to ordinary dividends declared for the year). This was intended to increase the financing capability of the Group for acquisitions and other investments. From 2000 to 2004, the dividend increased in line with inflation and, in 2004, dividend cover stood at 4.1 times. Having achieved this level of dividend cover the Board changed its policy, from that of increasing dividends in line with inflation, to that of increasing dividends for 2005 and after by 10%. Following the redenomination of the Company’s share capital into US Dollars, the Board re-affirmed its policy of increasing the dividend by 10% a year in US Dollar terms.
On 2 August 2012, the Board announced its intention to pursue a progressive dividend policy, with the aim of increasing the US Dollar value of ordinary dividends over time broadly based on the Group’s underlying growth in earnings, while taking into account capital requirements and cash flows.
At the time of the full year results, the Board reviews the appropriate level of total annual dividend each year. The Board intends that the interim dividend will be set by a formula and will be equivalent to 40% of the total dividend for the previous year. Dividends will continue to be declared in US Dollars with an equivalent amount in Sterling payable to those shareholders whose registered address is in the UK, or who have validly elected to receive Sterling dividends.
An interim dividend in respect of each fiscal year is normally declared in August and paid in November. A final dividend will be recommended by the Board of Directors and paid subject to approval by shareholders at the Company’s Annual General Meeting.
Future dividends of Smith & Nephew will be dependent upon: future earnings; the future financial condition of the Group; the Board’s dividend policy; and the additional factors that might affect the business of the Group set out in ‘Special note regarding forward-looking statements’ and ‘Risk Factors’.
Dividends per share
The table below sets out the dividends per ordinary share in the last five years.
| Years ended 31 December | ||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||
| Pence per share: | ||||||||||
|
Interim |
8.533 | 7.578 | 7.211 | 6.811 | 4.639 | |||||
|
Final1,2 |
13.496 | 13.711 | 11.233 | 11.778 | 7.444 | |||||
| Total | 22.029 | 21.289 | 18.444 | 18.589 | 12.083 | |||||
| US cents per share: | ||||||||||
|
Interim |
13.111 | 12.222 | 11.556 | 11.000 | 7.333 | |||||
|
Final2 |
19.000 | 20.667 | 18.889 | 18.000 | 12.000 | |||||
| Total | 32.111 | 32.889 | 30.445 | 29.000 | 19.333 | |||||
| 1 | Translated at the Bank of England rate on 23 February 2016. |
| 2 | 2015 final dividend does not include a UK tax credit. See below. |
Dividends above include the associated UK tax credit of 10%, but exclude the deduction of withholding taxes, up to and including the interim dividend for 2015. From 6 April 2016, please note that dividends below £5,000 per tax year will be tax free and dividends above £5,000 per tax year will be subject to personal income tax at the rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. A self-assessment form will therefore be required. This will apply to both cash and DRIP dividends, although dividends paid on shares held within pensions and ISAs will be unaffected, remaining tax free.
Since the second interim dividend for 2005, all dividends have been declared in US cents per ordinary share.
The 2015 final dividend will be payable on 11 May 2016, subject to shareholder approval.
In respect of the proposed final dividend for the year ended 31 December 2015 of 19.0 US cents per ordinary share, the record date will be 22 April 2016 and the payment date will be 11 May 2016. The Sterling equivalent per ordinary share will be set following the record date. Shareholders may elect to receive their dividend in either Sterling or US Dollars and the last day for election will be 22 April 2016. The ordinary shares will trade ex-dividend on both the London and New York Stock Exchanges from 21 April 2016.
The proposed final dividend of 19.0 US cents per ordinary share, which together with the interim dividend of 11.8 US cents, makes a total for 2015 of 30.8 US cents.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
189
| ||
|
| ||||
Share prices
The table below sets out, for the periods indicated, the highest and lowest middle market quotations for the Company’s ordinary shares (as derived from the Daily Official List of the UK Listing Authority) and the highest and lowest sales prices of its ADSs (as reported on the New York Stock Exchange composite tape).
| Ordinary shares | ADSs | |||||||||
| High £ |
Low £ |
High US$ |
Low US$ | |||||||
| Year ended 31 December: | ||||||||||
| 2011 | 7.42 | 5.21 | 60.19 | 42.17 | ||||||
|
2012 |
6.93 | 5.80 | 56.13 | 45.13 | ||||||
|
2013 |
8.68 | 6.80 | 71.85 | 52.90 | ||||||
|
20141 |
11.93 | 8.57 | 97.27 | 29.39 | ||||||
|
2015 |
12.12 | 10.60 | 37.78 | 32.48 | ||||||
| Quarters in the year ended 31 December: | ||||||||||
| 2014: | ||||||||||
|
1st Quarter |
9.60 | 8.57 | 80.18 | 70.84 | ||||||
|
2nd Quarter |
11.00 | 8.61 | 97.27 | 73.17 | ||||||
|
3rd Quarter |
10.80 | 9.86 | 90.45 | 82.91 | ||||||
|
4th Quarter1 |
11.93 | 9.06 | 83.14 | 29.39 | ||||||
| 2015: | ||||||||||
|
1st Quarter |
12.00 | 11.13 | 36.85 | 33.44 | ||||||
|
2nd Quarter |
11.95 | 10.72 | 35.80 | 33.68 | ||||||
|
3rd Quarter |
12.03 | 10.68 | 37.78 | 33.24 | ||||||
|
4th Quarter |
12.12 | 10.60 | 35.88 | 32.48 | ||||||
| 2016: | ||||||||||
|
1st Quarter (to 23 February 2016) |
11.79 | 10.51 | 34.80 | 30.55 | ||||||
| Last six months: | ||||||||||
| August 2015 | 12.03 | 10.71 | 37.78 | 33.62 | ||||||
|
September 2015 |
11.81 | 11.22 | 36.32 | 34.13 | ||||||
|
October 2015 |
11.69 | 10.96 | 35.81 | 33.57 | ||||||
|
November 2015 |
11.33 | 10.70 | 34.38 | 32.74 | ||||||
|
December 2015 |
12.12 | 10.60 | 35.88 | 32.48 | ||||||
|
January 2016 |
11.79 | 10.82 | 34.80 | 31.47 | ||||||
|
February 2016 (to 23 February 2016) |
11.61 | 10.51 | 33.66 | 30.55 |
| 1 | On 14 October 2014, the ratio of ordinary shares per ADS changed from five ordinary shares per ADS to two ordinary shares per ADS. |
Table of Contents
| 190
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Share Capital
The principal trading market for the ordinary shares is the London Stock Exchange. The ordinary shares were listed on the New York Stock Exchange on 16 November 1999, trading in the form of ADSs evidenced by ADRs. Each ADS represents two ordinary shares from 14 October 2014, before which time one ADS represented five ordinary shares. The ADS facility is sponsored by Deutsche Bank acting as depositary.
All the ordinary shares, including those held by Directors and Executive Officers, rank pari passu with each other. On 23 January 2006, the ordinary shares of 12 2⁄9p were redenominated as ordinary shares of US 20 cents (following approval by shareholders at the Extraordinary General Meeting in December 2005). The new US Dollar ordinary shares carry the same rights as the previous ordinary shares. The share price continues to be quoted in Sterling. In 2006, the Company issued £50,000 of shares in Sterling in order to comply with English law. These were issued as deferred shares, which are not listed on any stock exchange. They have extremely limited rights and therefore effectively have no value. These shares were allotted to the Chief Executive Officer, although the Board reserves the right to transfer them to another member of the Board should it so wish.
Shareholdings
As at 23 February 2016, to the knowledge of the Group, there were 17,487 registered holders of ordinary shares, of whom 91 had registered addresses in the USA and held a total of 187,058 ordinary shares (0.02% of the total issued). Because certain ordinary shares are registered in the names of nominees, the number of shareholders with registered addresses in the USA is not representative of the number of beneficial owners of ordinary shares resident in the USA.
As at 23 February 2016, 28,257,095 ADSs equivalent to 56,514,190 ordinary shares or approximately 6.31% of the total ordinary shares in issue, were outstanding and were held by 87 registered ADS holders.
Major shareholders
As far as is known to Smith & Nephew, the Group is not directly or indirectly owned or controlled by another corporation or by any government and the Group has not entered into arrangements, the operation of which may at a subsequent date result in a change in control of the Group.
As at 23 February 2016, no persons are known to Smith & Nephew to have any interest (as defined in the Disclosure and Transparency Rules of the FCA) in 3% or more of the ordinary shares, other than as shown below. The following tables show changes over the last three years in the percentage and numbers of the issued share capital owned by shareholders holding 3% or more of ordinary shares, as notified to the Company under the Disclosure and Transparency Rules:
| As at 31 December | ||||||||
| 23 February 2016 % |
2015 % |
2014 % |
2013 % | |||||
| BlackRock, Inc. | 5.2 | 5.2 | 5.5 | 4.7 | ||||
|
Invesco |
6.0 | 5.7 | 5.3 | 12.1 | ||||
| As at 31 December | ||||||||
| 23 February 2016 ’000 |
2015 ’000 |
2014 ’000 |
2013 ’000 | |||||
| BlackRock, Inc. | 46,427 | 46,427 | 49,008 | 41,870 | ||||
|
Invesco |
53,693 | 51,539 | 47,508 | 107,823 |
The Company is not aware of any person who has a significant direct or indirect holding of securities in the Company, and is not aware of any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of the Company.
Purchase of ordinary shares on behalf of the Company
At the AGM, the Company will be seeking a renewal of its current permission from shareholders to purchase up to 10% of its own shares. In order to avoid shareholder dilution, shares allotted to employees through employee share schemes are bought back on a quarterly basis and subsequently cancelled by the Company. From 1 January 2015 to 23 February 2016, in the months listed below, the Company has purchased 4,564,065 ordinary shares at a cost of US$77,532,429.17.
| Total shares purchased (000s) |
Average price paid per share (pence) |
Approximate US$ value of shares purchased under the plan | ||||
| 6–20 May 2015 | 1,830 | 1,129.1436 | 32,007,094 | |||
|
7–8 September 2015 |
505 | 1,164.3216 | 9,105,910 | |||
|
18–24 November 2015 |
965 | 1,112.5264 | 16,403,478 | |||
|
9–19 February 2016 |
1,264 | 1,099.4366 | 20,015,947 |
The shares were purchased in the open market by JP Morgan Cazenove Limited and Merrill Lynch International on behalf of the Company.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
191
| ||
|
| ||||
Exchange controls and other limitations affecting security holders
There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that affect the payment of dividends, interest or other payments to non-resident holders of Smith & Nephew’s securities, except for certain restrictions imposed from time to time by Her Majesty’s Treasury of the United Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964, against the government or residents of certain countries.
There are no limitations, either under the laws of the UK or under the Articles of Association of Smith & Nephew, restricting the right of non-UK residents to hold or to exercise voting rights in respect of ordinary shares, except that where any overseas shareholder has not provided to the Company a UK address for the service of notices, the Company is under no obligation to send any notice or other document to an overseas address. It is, however, the current practice of the Company to send every notice or other document to all shareholders regardless of the country recorded in the register of members, with the exception of details of the Company’s dividend reinvestment plan, which are not sent to shareholders with recorded addresses in the USA and Canada.
Taxation information for shareholders
The comments below are of a general and summary nature and are based on the Group’s understanding of certain aspects of current UK and US federal income tax law and practice relevant to the ADSs and ordinary shares not in ADS form. The comments address the material US and UK tax consequences generally applicable to a person who is the beneficial owner of ADSs or ordinary shares and who, for US federal income tax purposes, is a citizen or resident of the USA, a corporation (or other entity taxable as a corporation) created or organised in or under the laws of the USA (or any State therein), or an estate or trust the income of which is included in gross income for US federal income tax purposes regardless of its source (each a ‘US Holder’). The comments set out below do not purport to address all tax consequences of the ownership of ADSs or ordinary shares that may be material to a particular holder and in particular do not deal with the position of shareholders who directly or indirectly own 10% or more of the Company’s issued ordinary shares. This discussion does not apply to (i) persons whose holding of ADSs or ordinary shares is effectively connected with or pertains to either a permanent establishment in the UK through which a US Holder carries on a business in the UK or a fixed base from which a US Holder performs independent personal services in the UK, or (ii) persons whose registered address is inside the UK. This discussion does not apply to certain investors subject to special rules, such as certain financial institutions, tax-exempt entities, insurance companies, broker-dealers and traders in securities that elect to use the mark-to-market method of tax accounting, partnerships or other entities treated as partnerships for US federal income tax purposes, US Holders holding ADSs or ordinary shares as part of a hedging, conversion or other integrated transaction or whose functional currency for US federal income tax purposes is other than the US Dollar and US Holders liable for alternative minimum tax. In addition, the comments below do not address the potential application of the provisions of the United States Internal Revenue Code, known as the Medicare contribution tax, or any US state, local or non-US (other than UK) taxes. The summary deals only with US Holders who hold ADSs or ordinary shares as capital assets. The summary is based on current UK and US law and practice which is subject to change, possibly with retroactive effect. US Holders are recommended to consult their own tax advisers as to the particular tax consequences to them of the ownership of ADSs or ordinary shares. The Company believes, and this discussion assumes, that the Company was not a passive foreign investment company for its taxable year ended 31 December 2015.
This discussion is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. For purposes of US federal income tax law, US Holders of ADSs will generally be treated as owners of the ordinary shares represented by the ADSs. However, the US Treasury has expressed concerns that parties to whom depositary shares are released before shares are delivered to the depositary (‘pre-released’) may be taking actions that are inconsistent with the claiming of foreign tax credits by owners of depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate US Holders. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate US Holders of ADSs could be affected by actions that may be taken by parties to whom ADSs are pre-released.
Taxation of dividends in the UK and the USA
The UK does not currently impose a withholding tax on dividends paid by a UK corporation, such as the Company.
Distributions paid by the Company will be treated for US federal income tax purposes as foreign source ordinary dividend income to a US Holder to the extent paid out of the Company’s current or accumulated earnings and profits as determined for US federal income tax purposes. 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.
Table of Contents
| 192
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Taxation of capital gains
US Holders, who are not resident or ordinarily resident for tax purposes in the UK, will not generally be liable for UK capital gains tax on any capital gain realised upon the sale or other disposition of ADSs or ordinary shares unless the ADSs or ordinary shares are held in connection with a trade carried on in the UK through a permanent establishment (or in the case of individuals, through a branch or agency). Furthermore, UK resident individuals who acquire ADSs or ordinary shares before becoming temporarily non-UK residents may remain subject to UK taxation of capital gains on gains realised while non-resident.
For US federal income tax purposes, gains or losses realised upon a taxable sale or other disposition of ADSs or ordinary shares by US Holders generally will be US source capital gains or losses and will be long-term capital gains or losses if the ADSs or ordinary shares were held for more than one year. The amount of a US Holder’s gain or loss will be equal to the difference between the amount realised on the sale or other disposition and such holder’s tax basis in the ADSs, or ordinary shares, each determined in US Dollars.
Inheritance and estate taxes
The HM Revenue & Customs imposes inheritance tax on capital transfers which occur on death, and in the seven years preceding death. The HM Revenue & Customs considers that the US/UK Double Taxation Convention on Estate and Gift Tax applies to inheritance tax. Consequently, a US citizen who is domiciled in the USA and is not a UK national or domiciled in the UK will not be subject to UK inheritance tax in respect of ADSs and ordinary shares. A UK national who is domiciled in the USA will be subject to both UK inheritance tax and US federal estate tax but will be entitled to a credit for US federal estate tax charged in respect of ADSs and ordinary shares in computing the liability to UK inheritance tax. Conversely, a US citizen who is domiciled or deemed domiciled in the UK will be entitled to a credit for UK inheritance tax charged in respect of ADSs and ordinary shares in computing the liability for US federal estate tax. Special rules apply where ADSs and ordinary shares are business property of a permanent establishment of an enterprise situated in the UK.
US information reporting and backup withholding
Payments of dividends on, or proceeds from the sale of, ADSs or ordinary shares that are made within the USA or through certain US-related financial intermediaries generally will be subject to US information reporting, and may be subject to backup withholding, unless a US Holder is an exempt recipient or, in the case of backup withholding, provides a correct US taxpayer identification number and certain other conditions are met. US backup withholding may apply if there has been a notification from the US Internal Revenue Service of a failure to report all interest or dividends.
Any backup withholding deducted may be credited against the US Holder’s US federal income tax liability, and, where the backup withholding exceeds the actual liability, the US Holder may obtain a refund by timely filing the appropriate refund claim with the US Internal Revenue Service.
Certain US Holders who are individuals (and under proposed Treasury regulations, certain entities) may be required to report information relating to securities issued by a non-US person (or foreign accounts through which the securities are held), subject to certain exceptions (including an exception for securities held in accounts maintained by US financial institutions). US Holders should consult their tax advisers regarding their reporting obligations with respect to the ordinary shares or ADSs.
UK stamp duty and stamp duty reserve tax
UK stamp duty is charged on documents and in particular instruments for the transfer of registered ownership of ordinary shares. Transfers of ordinary shares in certificated form will generally be subject to UK stamp duty at the rate of 1⁄2% 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 1⁄2% (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 1⁄2%, and this will apply whether or not the transfer is effected in the UK and whether or not the parties to it are resident or situated in the UK.
A charge of stamp duty or SDRT at the rate of 1 1⁄2% of the consideration (or, in some circumstances, the value of the shares concerned) will arise on a transfer or issue of ordinary shares to the depositary or to certain persons providing a clearance service (or their nominees or agents) for the conversion into ADRs and will generally be payable by the depositary or person providing clearance service. In accordance with the terms of the Deposit Agreement, any tax or duty payable by the depositary on deposits of ordinary shares will be charged by the depositary to the party to whom ADRs are delivered against such deposits.
No liability for stamp duty or SDRT will arise on any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS, provided that the ADS and any instrument of transfer or written agreement to transfer remains at all times outside the UK, and provided further that any instrument of transfer or written agreement to transfer is not executed in the UK and the transfer does not relate to any matter or thing done or to be done in the UK (the location of the custodian as a holder of ordinary shares not being relevant in this context). In any other case, any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS could, depending on all the circumstances of the transfer, give rise to a charge to stamp duty or SDRT.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
193
| ||
|
| ||||
Articles of Association
The following summarises certain material rights of holders of the Company’s ordinary shares under the material provisions of the Company’s Articles of Association and English law. This summary is qualified in its entirety by reference to the Companies Act and the Company’s Articles of Association. In the following description, a ‘shareholder’ is the person registered in the Company’s register of members as the holder of an ordinary share.
The Company is incorporated under the name Smith & Nephew plc and is registered in England and Wales with registered number 324357.
The Company’s ordinary shares may be held in certificated or uncertificated form. No holder of the Company’s shares will be required to make additional contributions of capital in respect of the Company’s shares in the future. In accordance with English law, the Company’s ordinary shares rank equally.
Directors
Under the Company’s Articles of Association, a Director may not vote in respect of any contract, arrangement, transaction or proposal in which he, or any person connected with him, has any material interest other than by virtue of his interests in securities of, or otherwise in or through, the Company. This is subject to certain exceptions relating to proposals (a) indemnifying him in respect of obligations incurred on behalf of the Company, (b) indemnifying a third party in respect of obligations of the Company for which the Director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities in which he will be interested as an underwriter, (d) concerning another body corporate in which the Director is beneficially interested in less than 1% of the issued shares of any class of shares of such a body corporate, (e) relating to an employee benefit in which the Director will share equally with other employees and (f) relating to any insurance that the Company is empowered to purchase for the benefit of Directors of the Company in respect of actions undertaken as Directors (and/or officers) of the Company.
A Director shall not vote or be counted in any quorum present at a meeting in relation to a resolution on which he is not entitled to vote.
The Directors are empowered to exercise all the powers of the Company to borrow money, subject to the limitation that the aggregate amount of all monies borrowed after deducting cash and current asset investments by the Company and its subsidiaries shall not exceed the sum of $6,500,000,000.
Any Director who has been appointed by the Directors since the previous Annual General Meeting of shareholders, either to fill a casual vacancy or as an additional Director holds office only until the conclusion of the next Annual General Meeting and then shall be eligible for re-election by the shareholders. The other Directors retire and are eligible for re-appointment at the third Annual General Meeting after the meeting at which they were last re-appointed. If not re-appointed, a Director retiring at a meeting shall retain office until the meeting appoints someone in his place, or if it does not do so, until the conclusion of the meeting. The Directors are subject to removal with or without cause by the Board or the shareholders. Directors are not required to hold any shares of the Company by way of qualification.
Under the Company’s Articles of Association and English law, a Director may be indemnified out of the assets of the Company against liabilities he may sustain or incur in the execution of his duties.
Rights attaching to ordinary shares
Under English law, dividends are payable on the Company’s ordinary shares only out of profits available for distribution, as determined in accordance with accounting principles generally accepted in the UK and by the Companies Act 2006. Holders of the Company’s ordinary shares are entitled to receive final dividends as may be declared by the Directors and approved by the shareholders in general meeting, rateable according to the amounts paid up on such shares, provided that the dividend cannot exceed the amount recommended by the Directors.
The Company’s Board of Directors may declare such interim dividends as appear to them to be justified by the Company’s financial position. If authorised by an ordinary resolution of the shareholders, the Board may also direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid up shares or debentures of the Company).
Any dividend unclaimed after 12 years from the date the dividend was declared, or became due for payment, will be forfeited and will revert to the Company.
There were no material modifications to the rights of shareholders under the Articles during 2016.
Voting rights of ordinary shares
Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly demanded and held. On a show of hands, every shareholder who is present in person at a general meeting has one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by proxy has one vote for each ordinary share held by that shareholder. A poll may be demanded by any of the following:
| – | the chairman of the meeting; |
| – | at least five shareholders present or by proxy entitled to vote on the resolution; |
| – | any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the resolution; or |
| – | any shareholder or shareholders holding shares conferring a right to vote on the resolution on which there have been paid-up sums in aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. |
A form of proxy will be treated as giving the proxy the authority to demand a poll, or to join others in demanding one, as above.
The necessary quorum for a general meeting is two shareholders present in person or by proxy carrying the right to vote upon the business to be transacted.
Table of Contents
| 194
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Matters are transacted at general meetings of the Company by the processing and passing of resolutions of which there are two kinds; ordinary or special resolutions:
| – | Ordinary resolutions include resolutions for the re-election of Directors, the approval of financial statements, the declaration of dividends (other than interim dividends), the appointment and re-appointment of auditors or the grant of authority to allot shares. An ordinary resolution requires the affirmative vote of a majority of the votes of those persons voting at the meetings at which there is a quorum. |
| – | Special resolutions include resolutions amending the Company’s Articles of Association, dis-applying statutory pre-emption rights or changing the Company’s name; modifying the rights of any class of the Company’s shares at a meeting of the holders of such class or relating to certain matters concerning the Company’s winding up. A special resolution requires the affirmative vote of not less than three-quarters of the votes of the persons voting at the meeting at which there is a quorum. |
Annual General Meetings must be convened upon advance written notice of 21 days. Other general meetings must be convened upon advance written notice of at least 14 clear days. The days of delivery or receipt of notice are not included. The notice must specify the nature of the business to be transacted. Meetings are convened by the Board of Directors. Members with 5% of the ordinary share capital of the Company may requisition the Board to convene a meeting.
Variation of rights
If, at any time, the Company’s share capital is divided into different classes of shares, the rights attached to any class may be varied, subject to the provisions of the Companies Act, with the consent in writing of holders of three-quarters in nominal value of the issued shares of that class or upon the adoption of a special resolution passed at a separate meeting of the holders of the shares of that class. At every such separate meeting, all the provisions of the articles of association relating to proceedings at a general meeting apply, except that the quorum is to be the number of persons (which must be two or more) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class and at any such meeting a poll may be demanded in writing by any person or their proxy who hold shares of that class. Where a person is present by proxy or proxies, he is treated as holding only the shares in respect of which the proxies are authorised to exercise voting rights.
Rights in a winding up
Except as the Company’s shareholders have agreed or may otherwise agree, upon the Company’s winding up, the balance of assets available for distribution:
| – | after the payment of all creditors including certain preferential creditors, whether statutorily preferred creditors or normal creditors; and |
| – | subject to any special rights attaching to any other class of shares; |
| – | is to be distributed among the holders of ordinary shares according to the amounts paid-up on the shares held by them. This distribution is generally to be made in US Dollars. A liquidator may, however, upon the adoption of any extraordinary resolution of the shareholders and any other sanction required by law, divide among the shareholders the whole or any part of the Company’s assets in kind. |
Limitations on voting and shareholding
There are no limitations imposed by English law or the Company’s Articles of Association on the right of non-residents or foreign persons to hold or vote the Company’s ordinary shares or ADSs, other than the limitations that would generally apply to all of the Company’s shareholders.
Transfers of shares
The Board may refuse to register the transfer of shares held in certificated form which:
| – | are not fully paid (provided that it shall not exercise this discretion in such a way as to prevent stock market dealings in the shares of that class from taking place on an open and proper basis); |
| – | are not duly stamped or duly certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty, lodged at the Transfer Office or at such other place as the Board may appoint and (save in the case of a transfer by a person to whom no certificate was issued in respect of the shares in question) accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do; |
| – | are in respect of more than one class of shares; or |
| – | are in favour of more than four transferees. |
Deferred shares
Following the re-denomination of share capital on 23 January 2006, the ordinary shares’ nominal value became 20 US cents each. There were no changes to the rights or obligations of the ordinary shares. In order to comply with the Companies Act 2006, a new class of Sterling shares was created, deferred shares, of which £50,000 were issued and allotted in 2006 as fully paid to the Chief Executive Officer though the Board reserves the right to transfer them to another member of the Board should it so wish. These deferred shares have no voting or dividend rights and on winding up only are entitled to repayment at nominal value only if all ordinary shareholders have received the nominal value of their shares plus an additional $1,000 each.
Amendments
The Company does not have any special rules about amendments to its Articles of Association beyond those imposed by law.
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
195
| ||
|
| ||||
Cross Reference to Form 20-F
This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.
| Part I | 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 – Selected Financial Data | 175–176 | |||
| B – Capitalization and Indebtedness | n/a | |||
| C – Reason for the Offer and Use of Proceeds | n/a | |||
| D – Risk Factors | 171–174 | |||
| Item 4 | Information on the Company | |||
| A – History and Development of the Company | 171 | |||
| B – Business Overview | 3, 8–48, 120–123, 171–174, 181–184 | |||
| C – Organizational Structure | 8, 135–136, 164–165 | |||
| D – Property, Plant and equipment | 130–131, 171 | |||
| Item 4A | Unresolved Staff Comments | None | ||
| Item 5 | Operating and Financial Review and Prospects | |||
| A – Operating results | 9, 12–13, 16, 40–41, 113, 115, 117, 181–184 | |||
| B – Liquidity and Capital Resources | 117, 138–141, 156 | |||
| C – Research and Development, patents and licences, etc. | 3, 13, 28 | |||
| D – Trend information | 14–15, 111, 171–174 | |||
| E – Off Balance Sheet Arrangements | 171 | |||
| F – Tabular Disclosure of Contractual Obligations | 181 | |||
| G – Safe Harbor | 200 | |||
| Item 6 | Directors, Senior Management and Employees | |||
| A – Directors and Senior Management | 50–56, 58–60 | |||
| B – Compensation | 78–102 | |||
| C – Board Practices | 50–56, 58–77 | |||
| D – Employees | 9, 36–37, 125 | |||
| E – Share Ownership | 89–90, 160–163 | |||
| Item 7 | Major shareholders and Related Party Transactions | |||
| A – Major shareholders | 190 | |||
| – Host Country shareholders | 190 | |||
| B – Related Party Transactions | 163, 171 | |||
| C – Interests of experts and counsel | n/a | |||
| Item 8 | Financial information | |||
| A – Consolidated Statements and Other Financial Information | 104–166 | |||
| – Legal Proceedings | 146–147 | |||
| – Dividends | 188 | |||
| B – Significant Changes | None | |||
| Item 9 | The Offer and Listing | |||
| A – Offer and Listing Details | 189–191 | |||
| B – Plan of Distribution | n/a | |||
| C – Markets | 190 | |||
| D – Selling shareholders | n/a | |||
| E – Dilution | n/a | |||
| F – Expenses of the Issue | n/a |
Table of Contents
| 196
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
| Part I | Page | |||
| Item 10 | Additional Information | |||
| A – Share capital | n/a | |||
| B – Memorandum and Articles of Association | 193–194 | |||
| C – Material Contracts | 117, 157–158 | |||
| D – Exchange Controls | 191 | |||
| E – Taxation | 191–192 | |||
| F – Dividends and Paying Agents | n/a | |||
| G – Statement by Experts | n/a | |||
| H – Documents on Display | 200 | |||
| I – Subsidiary Information | 164–165 | |||
| Item 11 | Quantitative and Qualitative Disclosure about Market Risk | 141–145, 171–174 | ||
| 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 Depository shares | 187 | |||
| Part II | ||||
| 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 | 72–77, 105 | ||
| Item 16 | (Reserved) | n/a | ||
| Item 16A | Audit Committee Financial Expert | 73 | ||
| Item 16B | Code of Ethics | 77 | ||
| Item 16C | Principal Accountant Fees and Services | 76–77, 125 | ||
| Item 16D | Exemptions from the Listing Standards for Audit Committees | n/a | ||
| Item 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 155, 190 | ||
| Item 16F | Change in Registrant’s Certifying Accountant | 76 | ||
| Item 16G | Corporate Governance | 2, 57 | ||
| Item 16H | Mine Safety Disclosure | n/a | ||
| Part III | ||||
| Item 17 | Financial Statements | n/a | ||
| Item 18 | Financial Statements | 104–166 | ||
| Item 19 | Exhibits |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
197
| ||
|
| ||||
Glossary of terms
Unless the context indicates otherwise, the following terms have the meanings shown below:
| Term | Meaning | |
| ACL | The anterior cruciate ligament (ACL) is one of the four major ligaments in the human knee. | |
| ADR | In the US, the Company’s ordinary shares are traded in the form of ADSs evidenced by American Depository Receipts (‘ADRs’). | |
| ADS | In the US, the Company’s ordinary shares are traded in the form of American Depositary Shares (‘ADSs’). | |
| Advanced Surgical Devices | A product group comprising products for orthopaedic replacement and reconstruction, endoscopy devices and trauma devices. Products for orthopaedic replacement include systems for knees, hips, and shoulders. Endoscopy devices comprise of support products for orthopaedic surgery such as computer assisted surgery and minimally invasive surgery techniques using specialised viewing and access devices, surgical instruments and powered equipment. Orthopaedics trauma devices are used in the treatment of bone fractures including rods, pins, screws, plates and external frames. | |
| Advanced Wound Management | A product group comprising products associated with the treatment of skin wounds, ranging from products that provide moist wound healing using breathable films and polymers to products providing active wound healing by biochemical or cellular action. | |
| AGM | Annual General Meeting of the Company. | |
| Arthroscopy | Endoscopy of the joints is termed ‘arthroscopy’, with the principal applications being the knee and shoulder. | |
| ASD | Advanced Surgical Devices division. | |
| AWM | Advanced Wound Management division. | |
| 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. | |
| EBITA | Earnings before interest, tax and amortisation. | |
| EBITDA | Earnings before interest, tax, depreciation and amortisation. | |
| Emerging Markets | Emerging Markets include Greater China, India, Brazil and Russia. | |
| EPSA | EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-tax impact of specific transactions that management considers affects the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure and is determined by adjusting attributable profit for the items that are excluded from operating profit when arriving at trading profit and items that are recognised below operating profit that affect the Group’s short-term profitability. | |
| Endoscopy | Through a small incision, surgeons are able to see inside the body using a monitor and identify and repair defects. | |
| ERP | Enterprise Resource Planning: a software system which integrates internal and external management information, facilitating the flow of information across an organisation. | |
| Established Markets | Established Markets include 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. | |
| External fixation | The use of wires or pins transfixed through bone to hold a frame to the position of a fracture. | |
| 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. | |
| GMP | Good manufacturing practice or ‘GMP’ is the guidance that outlines the aspects of production and testing that can impact the quality of a product. | |
| Group or Smith & Nephew | Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context otherwise requires. |
Table of Contents
| 198
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
| Term | Meaning | |
| 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. | |
| IFRIC | International Financial Reporting Interpretations as adopted by the EU and as issued by the International Accounting Standards Board. | |
| IFRS | International Financial Reporting Standards as adopted by the EU and as issued by the International Accounting Standards Board. | |
| International Markets | International Markets include Middle East, North Africa, Southern Africa, Latin America, ASEAN, South Korea and Eastern Europe. | |
| LSE | London Stock Exchange. | |
| Metal-on-metal hip resurfacing | A less invasive surgical approach to treating arthritis in certain patients whereby only the surfaces of the hip joint are replaced leaving the hip head substantially preserved. | |
| Negative Pressure Wound Therapy | 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. | |
| NYSE | New York Stock Exchange. | |
| Orthobiologics products | Any product that is primarily intended to act as a scaffold and/or actively stimulates bone growth. | |
| 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. Clinical therapies products include joint fluid therapy for pain reduction of the knee and an ultrasound treatment to accelerate the healing of bone fractures. | |
| 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 | Smith & Nephew plc. | |
| Pound Sterling, Sterling, £, pence or p | References to UK currency. 1p is equivalent to one hundredth of £1. | |
| Repair | A product group within ASD comprising specialised devices, fixation systems and bio-absorbable materials to repair joints and associated tissue. | |
| Resection | Products that cut or ablate tissue within ASD comprising mechanical blades, radio frequency wands, electromechanical and hand instruments for resecting tissue. | |
| SEC | US Securities and Exchange Commission. | |
| Trading results | Trading profit, trading profit margin and trading cash flow are trend measures, which present the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group’s short-term profitability and cash flows. The Group has identified the following items, where material, as those to be excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectively: acquisition and disposal related items arising in connection with business combinations, including amortisation of acquisition intangible assets, impairments and integration costs; restructuring events; gains and losses resulting from legal disputes and significant uninsured losses. In addition to these items, gains or 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, respectively. | |
| UK | United Kingdom of Great Britain and Northern Ireland. | |
| UK GAAP | Accounting principles generally accepted in the United Kingdom. | |
| Underlying growth | Growth after 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, US $ or cents | References to US currency. 1 cent is equivalent to one hundredth of US$1. | |
| US GAAP | Accounting principles generally accepted in the United States of America. | |
| Visualisation | Products within ASD comprising digital cameras, light sources, monitors, scopes, image capture, central control and multimedia broadcasting systems for use in endoscopic surgery with visualisation. | |
| Wound bed | An area of healthy dermal and epidermal tissue of a wound. |
Table of Contents
| SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
199
| ||
|
| ||||
Table of Contents
| 200
|
SMITH & NEPHEW ANNUAL REPORT 2015
|
www.smith-nephew.com
|
|
OVERVIEW
|
OUR BUSINESS
|
OUR PERFORMANCE
|
GOVERNANCE
|
OUR FINANCIALS
| ||||
|
INFORMATION FOR SHAREHOLDERS
|
Table of Contents
| The inks used are renewable, biodegradable and emit fewer Volatile Organic Compounds (VOCs) than mineral-oil inks. They are based on high levels of renewable raw materials such as vegetable oils and naturally occurring resin. The inks do not contain any toxic heavy metals and therefore, do not pose a problem if placed in landfill.
Designed by Radley Yeldar. Printed by RR Donnelley 472599. |
|
Table of Contents
Smith & Nephew plc
15 Adam Street
London WC2N 6LA
United Kingdom
T +44 (0) 20 7401 7646
enquiries@smith-nephew.com
www.smith-nephew.com
Table of Contents
SIGNATURE
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| Smith & Nephew plc (Registrant) | ||||||
| By: | /s/ Susan Swabey | |||||
| Susan Swabey | ||||||
| Company Secretary | ||||||
London, England
March 4, 2016
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Description of Document | Incorporated Herein by Reference To | Filed Herewith | |||||
| 1 | Articles of Association | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978) | ||||||
| 2 | Smith & Nephew plc is not party to any single instrument relating to long-term debt pursuant to which a total amount of securities exceeding 10% of Smith & Nephew plc’s total assets (on a consolidated basis) is authorized to be issued. Smith & Nephew plc hereby agrees to furnish to the SEC, upon its request, a copy of any instrument defining the rights of holders of its long-term debt or the rights of holders of the long-term debt of any of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the SEC. | |||||||
| 4 | (a) (i) | Material contract: Agreement and Appendices dated 3 February 2014 by and among Smith & Nephew plc, Barclays Bank Plc, The Financial Institutions in Schedule 1, Barclays Bank Plc and J.P. Morgan Chase Bank, N.A. and J.P. Morgan Europe Limited. | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | |||||
| (ii) | Material contract: Agreement and Plan Merger dated 2 February 2014 by and among ArthroCare Corporation Smith & Nephew, Inc. and Smith & Nephew plc. | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | ||||||
| (iii) | Material contract: Agreement and Appendices dated 24 March 2014 by and among Smith & Nephew plc, Barclays Bank Plc; J.P. Morgan Limited; Bank Of America Merrill Lynch International Limited; Bank Of China Limited, London Branch; The Bank Of Tokyo-Mitsubishi Ufj, Ltd.; HSBC Bank Plc; Mizuho Bank, Ltd.; National Australia Bank Limited; The Royal Bank Of Scotland Plc; Societe Generale; Sumitomo Mitsui Banking Corporation; Wells Fargo Bank International and Deutsche Bank Ag, London Branch. | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | ||||||
Table of Contents
| Exhibit No. | Description of Document | Incorporated Herein by Reference To | Filed Herewith | |||||
| 4 | (a) (iv) | Material contract: Agreement and Appendices dated 19 November 2014 by and among Smith & Nephew plc and the purchasers listed in Schedule A. | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | |||||
| 4 | (c) (i) | Service Agreement of Olivier Bohuon | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978) | |||||
| (ii) | Retirement provisions for David J Illingworth | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978) | ||||||
| (iii) | Service Agreement of Julie Brown | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978) | ||||||
| (iv) | Side Letter to the Service Agreement of Julie Brown | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978) | ||||||
| (v) | Letter of Appointment of Ian Barlow | Form 20-F for the year ended December 31, 2009 filed on March 26, 2010 (File No. 1-14978) | ||||||
| (vi) | Letter of Appointment of The Rt. Hon Baroness Virginia Bottomley | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978) | ||||||
| (vii) | Letter of Appointment of Michael Friedman | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978) | ||||||
| (viii) | Letter of Appointment of Ajay Piramal | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978) | ||||||
| (ix) | Letter of Re-Appointment of Rolf Stomberg | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978) | ||||||
| (x) | Letter of Re-Appointment of Richard De Schutter | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | ||||||
| (xi) | Letter of Re-Appointment of Pamela Kirby | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | ||||||
Table of Contents
| Exhibit No. | Description of Document | Incorporated Herein by Reference To | Filed Herewith | |||||
| 4 | (c) (xii) | Letter of Re-Appointment of Brian Larcombe | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | |||||
| (xiii) | Letter of Re-Appointment of Joseph Papa | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | ||||||
| (xiv) | Letter of Appointment of Roberto Quarta | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978) | ||||||
| (xv) | Letter of Appointment of Vinita Bali | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | ||||||
| (xvi) | Letter of Appointment of Erik Engstrom | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | ||||||
| (xvii) | Letter of Re-Appointment of Brian Larcombe | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | ||||||
| (xviii) | Letter of Re-Appointment of The Rt. Hon Baroness Virginia Bottomley DL | Form 20-F for the year ended December 31, 2014 filed on March 5, 2015 (File No.1-14978) | ||||||
| (xix) | Letter of Appointment of Robin Freestone | X | ||||||
| (xx) | Letter of Re-Appointment of Ian Barlow | X | ||||||
| (xxi) | Letter of Re-Appointment of Michael Friedman | X | ||||||
| (xxii) | Letter of Re-Appointment of Brian Larcombe | X | ||||||
| (xxiii) | The Smith & Nephew 2001 UK Approved Share Option Plan | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | ||||||
| (xxiv) | The Smith & Nephew 2001 UK Unapproved Share Option Plan | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | ||||||
| (xxv) | The Smith & Nephew 2001 US Share Plan | Registration Statement on Form S-8 No. 333-13694 filed on July 9, 2001 (File No. 1-14978) | ||||||
| (xxvi) | The Smith & Nephew Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
Table of Contents
| Exhibit No. | Description of Document | Incorporated Herein by Reference To | Filed Herewith | |||||
| 4 | (c) (xxvii) |
The Smith & Nephew International Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978) | |||||
| (xxviii) |
The Smith & Nephew Italian Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
| (xxix) |
The Smith & Nephew Dutch Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed in April 25, 2003 (File No. 1-14978) | ||||||
| (xxx) |
The Smith & Nephew Belgian Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
| (xxxi) |
The Smith & Nephew French Sharesave Plan (2002) | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978) | ||||||
| (xxxii) |
Smith & Nephew Irish Employee Share Option Scheme | Form 20-F for the year ended December 31, 2003 filed on March 26, 2004 (File No. 1-14978) | ||||||
| (xxxiii) |
Smith & Nephew 2004 Executive Share Option Scheme | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
| (xxxiv) |
Smith & Nephew 2004 Performance Share Plan | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
| (xxxv) |
Smith & Nephew 2004 Co-investment Plan | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) | ||||||
| (xxxvi) |
Smith & Nephew U.S. Employee Stock Purchase Plan | Registration statement on Form S-8 No. 333-12052 filed on May 30, 2000 (File No. 1-14978) | ||||||
| (xxxvii) |
Smith & Nephew Long Service Award Scheme | Registration Statement on Form S-8 No. 33-39814 filed on April 5, 1991 (File No. 1-14978) | ||||||
| (xxxviii) |
Smith & Nephew 2004 Performance Share Plan | Registration statement on Form S-8 No. 333-155172 filed on November 7, 2008 (File No. 1-14978) | ||||||
Table of Contents
| Exhibit No. | Description of Document | Incorporated Herein by Reference To | Filed Herewith | |||||
| 4 | (c) (xxxix) | Smith & Nephew 2001 US Share Plan | Registration statement on Form S-8 No. 333-155173 filed on November 7, 2008 (File No. 1-14978) | |||||
| (xxxx) | Smith & Nephew plc Deferred Bonus Plan | Registration statement on Form S-8 No. 333-158239 filed on March 27, 2009 (File No. 1-14978) | ||||||
| (xxxxi) | Smith & Nephew plc Global Share Plan 2010 | Registration statement on Form S-8 No. 333-168544 filed on August 5, 2010 (File No. 1-14978) | ||||||
| (xxxxii) | Smith & Nephew ShareSave Plan (2012) | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978) | ||||||
| (xxxxiii) | Smith & Nephew International ShareSave Plan (2012) | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978) | ||||||
| (xxxxiv) | Smith & Nephew plc Global Share Plan 2010 | Registration statement on Form S-8 No. 333-199117 filed on October 2, 2014 (File No.1-14978) | ||||||
| 8 | Principal Subsidiaries | X | ||||||
| 12 | (a) | Certification of Olivier Bohuon, filed pursuant to Exchange Act Rule 13a -14(a) | X | |||||
| (b) | Certification of Julie Brown filed pursuant to Exchange Act Rule 13a -14(a) | X | ||||||
| 13 | (a) | Certification of Olivier Bohuon and Julie Brown furnished pursuant to Exchange Act Rule 13a – 14(b) | X | |||||
| 15.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm | X | ||||||
| 15.2 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | X | ||||||
| 15.3 | Report of Independent Registered Public Accounting Firm by Ernst & Young LLP in respect of the financial statements as of and for the years ending December 31, 2013 and 2014 | X | ||||||
| 15.4 | Ernst & Young LLP’s letter to the SEC confirming their agreement with the statements pursuant to the disclosure requirements of Item 16 of the Form 20-F | X | ||||||