Correspondence 0000950103-24-017789 from SMITH & NEPHEW PLC (SNN, SNNUF) (CIK 0000845982) (SNN)
SMITH & NEPHEW PLC (SNN, SNNUF) (CIK 0000845982)
Date: Dec. 16, 2024 · CIK: 0000845982 · Accession: 0000950103-24-017789
AI Filing Summary & Sentiment
File numbers found in text: 001-14978
Letter
December 16, 2024
By EDGAR Submission
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549
Attention:
Jeanne Baker
Al Pavot
Division of Corporation Finance, Office of Industrial Applications and Services
Re: Smith & Nephew plc
Form 20-F for the fiscal year ended December 31, 2023
Filed March 11, 2024
File No. 001-14978
Ladies and Gentlemen,
Smith & Nephew plc (“SNN”, “the Company” or “we”) is submitting this letter in response to a second set of written comments of the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), dated November 18, 2024 (the “Comment Letter”), on SNN’s Annual Report on Form 20-F filed with the Commission on March 11, 2024 for the fiscal year ended December 31, 2023 (the “2023 Form 20-F”).
Set forth below is the heading and text of the Staff’s comment followed by our response.
Form 20-F for the Fiscal Year Ended December 31, 2023
Note 2 Business segment information, page 180
1. We note your response to prior comment 2. Please more fully explain your statement that "...aggregating these operating segments into a single operating segment (which is itself also a reportable segment) is acceptable because such presentation most properly reflects its operations and because separate reporting of such segment information would not significantly enhance an investor’s understanding of the Company’s business, financial position and operating results." Ensure your response addresses the following:
· We note that the internal reorganization in 2023 resulted in the appointment of separate Presidents for Sports Medicine and ENT while previously Sports Medicine and ENT were led by one individual. Explain your reasons for the reorganization. In light of this reorganization, explain why you believe the aggregation of these operating segments reflects your current operations.
· To support your belief that the Sports Medicine and ENT operating segments are economically similar and that separate reporting would not significantly enhance an investor’s understanding of the Company’s business, financial position and operating results, please supplementally provide us with revenues from external customers, segment profit and gross profit for Sports Medicine and ENT for the last 5 fiscal years. Your response should address any discrepancies in the trends depicted.
Response
Background to reorganization:
The Company respectfully advises the staff that the Company implemented an internal reorganisation in 2023 as a result of a strategic review of the Company as a whole. As part of the reorganisation a full review was undertaken of our organisational structure leading to a business unit focus on commercial delivery rather than a regional focus in our Europe, Middle East and Africa and Asia Pacific regions. This was a fundamental change in the operations of the Company and resulted in the appointment of separate Presidents for Sports Medicine and ENT. The Company’s operating structure continues to be based on global business units consistent with prior years as the monitoring of the performance of the Company and the allocation of resources is primarily on this basis, therefore the Company believes that the determination of operating segments on this basis is consistent with the core principle of IFRS 8.
The Presidents of these operating segments are in these positions to ensure a dedicated focus on growth objectives, as opposed to having responsibility for the whole value chain due to the operational overlap between these segments for which production takes place in the same facility and involves cross-sharing of resources and the products are distributed in the same channels.
Following the reorganisation, the Company determined that Sports Medicine and ENT represented separate operating segments (on the basis that they each met the criteria in IFRS 8.5) but that the aggregation criteria in IFRS 8.12 were met to aggregate the two operating segments for reporting purposes. As part of its internal reporting, the Company provides aggregated financial information for Sports Medicine and ENT segments to the Executive Committee (“ExCo”). In addition, financial information for the Sports Medicine and ENT operating segments is also provided to the ExCo on an individual basis. The ExCo is considered to be SNN’s chief operating decision maker (“CODM”) as defined by IFRS 8.7 and considers the financial information for these segments both individually and in aggregate as part of decision-making process.
Depiction of current operations and alignment to IFRS 8:
The Company believes that the aggregation of these operating segments is appropriate on the basis that it reflects its current operations and is consistent with the core principle of IFRS 8 given the segments have similar economic characteristics. ENT and Sports Medicine products are manufactured in the same facility, have the same sales volume metrics on which they are assessed i.e. based on the number of procedures, are distributed in the same channels, and ENT derives significant synergistic benefits from the significantly larger pre-existing footprint of Sports Medicine in the geographies that the ENT segment operates in due to such similarities including technology, manufacturing activities and distribution channels (the ENT business was acquired as part of the acquisition of ArthroCare in 2014). The Company also considered that ENT is a significantly smaller operating segment relative to Sports Medicine (ENT and Sports Medicine represent circa 3% and 27% of the Company’s revenue respectively) and is subject to similar competitive, operating and financial risks as Sports Medicine. Based on these factors, and those set out in our response dated November 8, 2024, the Company exercised judgement and concluded that the aggregation of these operating segments is appropriate in accordance with the requirements of IFRS 8 and reflects the Company’s current operations enabling users of the financial statements to evaluate the nature and financial effects of the business activities in which the Company engages and the economic environment in which the Company operates.
Quantitative data:
The revenues from external customers, gross profit and segment profit for Sports Medicine and ENT operating segments for the last 5 fiscal years, individually and in aggregate, are summarised below:
Sports Medicine
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
1,533
1,437
1,429
1,227
1,385
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
***
***
***
***
***
Segment Margin
***
***
***
***
***
ENT
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
***
***
***
***
***
Segment Margin
***
***
***
***
***
Sports Medicine & ENT
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
1,729
1,590
1,560
1,333
1,536
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
Segment Margin
29.1%
29.7%
29.4%
23.0%
31.8%
Analysis of trends:
The Company advises the staff that the Covid pandemic had a dissimilar impact on the Sports Medicine and ENT operating segments, as ENT procedures are more elective in nature compared to Sports Medicine. As a result, ENT experienced a sharp decline in revenue in 2020 and recovered to 2019 levels in 2022, whereas Sports Medicine experienced a relatively smaller decline and recovered to 2019 levels in 2021. In addition, as a result of the backlog in the elective procedures market and the impact of the Covid pandemic subsided, revenue for ENT increased significantly in 2023. The Company expects the ENT revenue growth rate to stabilise at the same levels as the Sports Medicine revenue growth rate and does not believe that the relative outperformance in 2023 is indicative of a long-term sustainable trend. This conclusion is underpinned by the Company’s expectation that the addressable market for these segments is expected to exhibit similar growth rates over the long-term and that the Company will have to continue to invest in research and development to maintain its market position in the context of the competitive landscape.
The gross profit margins of these segments between 2019 and 2023 were broadly similar as ENT products are produced in the same facility as Sports Medicine and the products are sold in the same markets as Sports Medicine. The longer-term gross margins are expected to align, as demonstrated in 2023.
The segment profit margin of ENT was higher than Sports Medicine in 2019. This is due to the synergistic benefits associated with the significantly larger pre-existing footprint of Sports Medicine in the geographies that the ENT segment operates in resulting in a relatively lower sales and marketing expense coupled with the benefit ENT derives from the research and development expense incurred by Sports Medicine on the COBLATION surgical method. The Company further considers that the segment profit margin of ENT would be relatively lower in the absence of these synergistic benefits and following the reorganisation has never sought to revisit individual cost allocations between ENT and Sports Medicine on the basis that the existing individual and aggregated operating results are sufficient to allow the CODM to make informed decisions about resources to be allocated to each of the segments that exist and any reallocations would be immaterial both quantitatively and qualitatively. Overall, the segment profit of these segments declined in 2020 due to the Covid impact with ENT experiencing a larger decline due to the relatively larger impact on revenue as compared to Sports Medicine on the basis that ENT procedures are more elective in nature, as noted earlier. Segment profit margin of Sports Medicine recovered to 2019 levels in 2021 aligned with the recovery in revenue, however, segment margin of ENT recovered more gradually as the 2019 revenue levels were achieved slightly later, from 2022. The segment profit margin of ENT was higher than Sports Medicine in 2023 on account of the operating leverage achieved from a significant increase in revenue coupled with the synergistic benefits it derives from Sports Medicine.
Based on the above factors, and in conjunction with the aligned geographic footprint of operations, the Company believes that the competitive, operating and financial risks associated with these segments are broadly similar.
Core principle of IFRS 8:
In considering the core principle of IFRS 8 to ensure sufficient information is disclosed “to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates” the Company also took into account the size of the ENT segment relative to the aggregated size of the Sports Medicine and ENT segment and that of the Company as a whole to determine whether separate reporting of the Sports Medicine and ENT operating segments would significantly enhance an investor’s understanding of the Company’s business. Based on the assessment performed, as summarized below, the Company determined that the ENT segment does not represent a material part of the Company’s business and therefore separate reporting would not significantly enhance a user’s ability to evaluate the Company’s business, financial position and operating results.
Company
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
5,549
5,215
5,212
4,560
5,138
Segment Trading Profit (consolidated)
1,373
1,291
1,300
1,011
1,525
ENT Quantitative Assessment
$ million
$ million
$ million
$ million
$ million
ENT Revenue as a percentage of Company Revenue from External Customers
3.5%
2.9%
2.5%
2.3%
2.9%
ENT Revenue as a percentage of aggregated Sports Medicine and ENT Revenue
11.3%
9.6%
8.4%
8.0%
9.8%
ENT Segment Profit as a percentage of Company Segment Trading Profit (consolidated)
***
***
***
***
***
ENT Segment Profit as a percentage of aggregated Sports Medicine and ENT Segment Profit
***
***
***
***
***
As set out above, ENT revenue represents around 3% of the Company’s revenue from external customers and around 10% of the aggregate revenue of Sports Medicine and ENT and is therefore not material in the context of the Company’s business as a whole. ENT segment profit represents a small proportion of the Company’s consolidated segment trading profit as well as that of the aggregated segment profit of Sports Medicine and ENT.
The Company also considered the segment margin of Sports Medicine relative to that of the aggregated Sports Medicine and ENT segments as set out below.
Segment Margin variance
$ million
$ million
$ million
$ million
$ million
Aggregated Segment Margin of Sports Medicine and ENT
29.1%
29.7%
29.4%
23.0%
31.8%
Segment Margin Sports Medicine
***
***
***
***
***
Variance
***
***
***
***
***
The segment margin of Sports Medicine is very similar to the aggregated segment margin of Sports Medicine and ENT which indicates that the ENT operating segment has a highly immaterial impact on the aggregated segment margin of Sports Medicine and ENT. In addition, the aggregated segment margin trend over the last 5 years is broadly similar to that of the Sports Medicine segment margin trend.
Therefore, the Company believes that separate reporting would not significantly impact a user’s ability to evaluate the Company’s business, financial position and operating results.
Based on the above conclusion, the Company did not perform a detailed allocation exercise to ascribe a value to the synergistic benefits due to the materiality of amounts involved. However, in assessing the synergistic benefits qualitatively, the Company considered the benefit ENT derives from research and development expenses incurred by Sports Medicine as well as sales and marketing expense as a percentage of revenue and ascribed the relatively lower expense for ENT segment to the synergistic benefits noted above. The Company believes that the segment margin of ENT will continue to be comparatively higher than Sports Medicine due to the synergistic benefits. The Company expects the difference in segment margin of Sports Medicine and ENT to be lower than that seen in 2023 as the ENT segment is expe
Show Raw Text
CORRESP
1
filename1.htm
December 16, 2024
By EDGAR Submission
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549
Attention:
Jeanne Baker
Al Pavot
Division of Corporation Finance, Office of Industrial Applications and
Services
Re: Smith & Nephew plc
Form 20-F for the fiscal year ended December 31, 2023
Filed March 11, 2024
File No. 001-14978
Ladies and Gentlemen,
Smith & Nephew plc (“SNN”, “the Company”
or “we”) is submitting this letter in response to a second set of written comments of the staff (the “Staff”)
of the Securities and Exchange Commission (the “Commission”), dated November 18, 2024 (the “Comment Letter”),
on SNN’s Annual Report on Form 20-F filed with the Commission on March 11, 2024 for the fiscal year ended December 31, 2023 (the
“2023 Form 20-F”).
Set forth below is the heading and text of the Staff’s comment
followed by our response.
Form 20-F for the Fiscal Year Ended December 31, 2023
Note 2 Business segment information, page 180
1. We note your response to prior comment 2. Please more fully explain
your statement that "...aggregating these operating segments into a single operating segment (which is itself also a reportable segment)
is acceptable because such presentation most properly reflects its operations and because separate reporting of such segment information
would not significantly enhance an investor’s understanding of the Company’s business, financial position and operating results."
Ensure your response addresses the following:
· We note that the internal reorganization in 2023 resulted in the appointment
of separate Presidents for Sports Medicine and ENT while previously Sports Medicine and ENT were led by one individual. Explain your reasons
for the reorganization. In light of this reorganization, explain why you believe the aggregation of these operating segments reflects
your current operations.
· To support your belief that the Sports Medicine and ENT operating segments
are economically similar and that separate reporting would not significantly enhance an investor’s understanding of the Company’s
business, financial position and operating results, please supplementally provide us with revenues from external customers, segment profit
and gross profit for Sports Medicine and ENT for the last 5 fiscal years. Your response should address any discrepancies in the trends
depicted.
Response
Background to reorganization:
The Company respectfully advises the staff that the Company implemented
an internal reorganisation in 2023 as a result of a strategic review of the Company as a whole. As part of the reorganisation a full review
was undertaken of our organisational structure leading to a business unit focus on commercial delivery rather than a regional focus in
our Europe, Middle East and Africa and Asia Pacific regions. This was a fundamental change in the operations of the Company and resulted
in the appointment of separate Presidents for Sports Medicine and ENT. The Company’s operating structure continues to be based on
global business units consistent with prior years as the monitoring of the performance of the Company and the allocation of resources
is primarily on this basis, therefore the Company believes that the determination of operating segments on this basis is consistent with
the core principle of IFRS 8.
The Presidents of these operating segments are in these positions to
ensure a dedicated focus on growth objectives, as opposed to having responsibility for the whole value chain due to the operational overlap
between these segments for which production takes place in the same facility and involves cross-sharing of resources and the products
are distributed in the same channels.
Following the reorganisation, the Company determined that Sports Medicine
and ENT represented separate operating segments (on the basis that they each met the criteria in IFRS 8.5) but that the aggregation criteria
in IFRS 8.12 were met to aggregate the two operating segments for reporting purposes. As part of its internal reporting, the Company provides
aggregated financial information for Sports Medicine and ENT segments to the Executive Committee (“ExCo”). In addition, financial
information for the Sports Medicine and ENT operating segments is also provided to the ExCo on an individual basis. The ExCo is considered
to be SNN’s chief operating decision maker (“CODM”) as defined by IFRS 8.7 and considers the financial information for
these segments both individually and in aggregate as part of decision-making process.
Depiction of current operations and alignment to IFRS 8:
The Company believes that the aggregation of these operating segments
is appropriate on the basis that it reflects its current operations and is consistent with the core principle of IFRS 8 given the segments
have similar economic characteristics. ENT and Sports Medicine products are manufactured in the same facility, have the same sales volume
metrics on which they are assessed i.e. based on the number of procedures, are distributed in the same channels, and ENT derives significant
synergistic benefits from the significantly larger pre-existing footprint of Sports Medicine in the geographies that the ENT segment operates
in due to such similarities including technology, manufacturing activities and distribution channels (the ENT business was acquired as
part of the acquisition of ArthroCare in 2014). The Company also considered that ENT is a significantly smaller operating segment relative
to Sports Medicine (ENT and Sports Medicine represent circa 3% and 27% of the Company’s revenue respectively) and is subject to
similar competitive, operating and financial risks as Sports Medicine. Based on these factors, and those set out in our response dated
November 8, 2024, the Company exercised judgement and concluded that the aggregation of these operating segments is appropriate in accordance
with the requirements of IFRS 8 and reflects the Company’s current operations enabling users of the financial statements to evaluate
the nature and financial effects of the business activities in which the Company engages and the economic environment in which the Company
operates.
Quantitative data:
The revenues from external customers, gross profit and segment profit
for Sports Medicine and ENT operating segments for the last 5 fiscal years, individually and in aggregate, are summarised below:
2023
2022
2021
2020
2019
Sports Medicine
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
1,533
1,437
1,429
1,227
1,385
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
***
***
***
***
***
Segment Margin
***
***
***
***
***
2023
2022
2021
2020
2019
ENT
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
196
153
131
106
151
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
***
***
***
***
***
Segment Margin
***
***
***
***
***
2023
2022
2021
2020
2019
Sports Medicine & ENT
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
1,729
1,590
1,560
1,333
1,536
Gross Profit
***
***
***
***
***
Gross Margin
***
***
***
***
***
Segment Profit
503
472
459
306
489
Segment Margin
29.1%
29.7%
29.4%
23.0%
31.8%
Analysis of trends:
The Company advises the staff that the Covid pandemic had a dissimilar
impact on the Sports Medicine and ENT operating segments, as ENT procedures are more elective in nature compared to Sports Medicine. As
a result, ENT experienced a sharp decline in revenue in 2020 and recovered to 2019 levels in 2022, whereas Sports Medicine experienced
a relatively smaller decline and recovered to 2019 levels in 2021. In addition, as a result of the backlog in the elective procedures
market and the impact of the Covid pandemic subsided, revenue for ENT increased significantly in 2023. The Company expects the ENT revenue
growth rate to stabilise at the same levels as the Sports Medicine revenue growth rate and does not believe that the relative outperformance
in 2023 is indicative of a long-term sustainable trend. This conclusion is underpinned by the Company’s expectation that the addressable
market for these segments is expected to exhibit similar growth rates over the long-term and that the Company will have to continue to
invest in research and development to maintain its market position in the context of the competitive landscape.
The gross profit margins of these segments between 2019 and 2023 were
broadly similar as ENT products are produced in the same facility as Sports Medicine and the products are sold in the same markets as
Sports Medicine. The longer-term gross margins are expected to align, as demonstrated in 2023.
The segment profit margin of ENT was higher than Sports Medicine in
2019. This is due to the synergistic benefits associated with the significantly larger pre-existing footprint of Sports Medicine in the
geographies that the ENT segment operates in resulting in a relatively lower sales and marketing expense coupled with the benefit ENT
derives from the research and development expense incurred by Sports Medicine on the COBLATION surgical method. The Company further considers
that the segment profit margin of ENT would be relatively lower in the absence of these synergistic benefits and following the reorganisation
has never sought to revisit individual cost allocations between ENT and Sports Medicine on the basis that the existing individual and
aggregated operating results are sufficient to allow the CODM to make informed decisions about resources to be allocated to each of the
segments that exist and any reallocations would be immaterial both quantitatively and qualitatively. Overall, the segment profit of these
segments declined in 2020 due to the Covid impact with ENT experiencing a larger decline due to the relatively larger impact on revenue
as compared to Sports Medicine on the basis that ENT procedures are more elective in nature, as noted earlier. Segment profit margin of
Sports Medicine recovered to 2019 levels in 2021 aligned with the recovery in revenue, however, segment margin of ENT recovered more gradually
as the 2019 revenue levels were achieved slightly later, from 2022. The segment profit margin of ENT was higher than Sports Medicine in
2023 on account of the operating leverage achieved from a significant increase in revenue coupled with the synergistic benefits it derives
from Sports Medicine.
Based on the above factors, and in conjunction with the aligned geographic
footprint of operations, the Company believes that the competitive, operating and financial risks associated with these segments are broadly
similar.
Core principle of IFRS 8:
In considering the core principle of IFRS 8 to ensure sufficient information
is disclosed “to enable users of its financial statements to evaluate the nature and financial effects of the business activities
in which it engages and the economic environments in which it operates” the Company also took into account the size of the ENT segment
relative to the aggregated size of the Sports Medicine and ENT segment and that of the Company as a whole to determine whether separate
reporting of the Sports Medicine and ENT operating segments would significantly enhance an investor’s understanding of the Company’s
business. Based on the assessment performed, as summarized below, the Company determined that the ENT segment does not represent a material
part of the Company’s business and therefore separate reporting would not significantly enhance a user’s ability to evaluate
the Company’s business, financial position and operating results.
2023
2022
2021
2020
2019
Company
$ million
$ million
$ million
$ million
$ million
Revenue from External Customers
5,549
5,215
5,212
4,560
5,138
Segment Trading Profit (consolidated)
1,373
1,291
1,300
1,011
1,525
2023
2022
2021
2020
2019
ENT Quantitative
Assessment
$ million
$ million
$ million
$ million
$ million
ENT Revenue as a percentage of Company Revenue from
External Customers
3.5%
2.9%
2.5%
2.3%
2.9%
ENT Revenue as a percentage of aggregated Sports
Medicine and ENT Revenue
11.3%
9.6%
8.4%
8.0%
9.8%
ENT Segment Profit as a percentage of Company Segment
Trading Profit (consolidated)
***
***
***
***
***
ENT Segment Profit as a percentage of aggregated
Sports Medicine and ENT Segment Profit
***
***
***
***
***
As set out above, ENT revenue represents around 3% of the Company’s
revenue from external customers and around 10% of the aggregate revenue of Sports Medicine and ENT and is therefore not material in the
context of the Company’s business as a whole. ENT segment profit represents a small proportion of the Company’s consolidated
segment trading profit as well as that of the aggregated segment profit of Sports Medicine and ENT.
The Company also considered the segment margin of Sports Medicine relative
to that of the aggregated Sports Medicine and ENT segments as set out below.
2023
2022
2021
2020
2019
Segment Margin variance
$ million
$ million
$ million
$ million
$ million
Aggregated Segment Margin of Sports Medicine and ENT
29.1%
29.7%
29.4%
23.0%
31.8%
Segment Margin Sports Medicine
***
***
***
***
***
Variance
***
***
***
***
***
The segment margin of Sports Medicine is very similar to the aggregated
segment margin of Sports Medicine and ENT which indicates that the ENT operating segment has a highly immaterial impact on the aggregated
segment margin of Sports Medicine and ENT. In addition, the aggregated segment margin trend over the last 5 years is broadly similar to
that of the Sports Medicine segment margin trend.
Therefore, the Company believes that separate reporting would not significantly
impact a user’s ability to evaluate the Company’s business, financial position and operating results.
Based on the above conclusion, the Company did not perform a detailed
allocation exercise to ascribe a value to the synergistic benefits due to the materiality of amounts involved. However, in assessing the
synergistic benefits qualitatively, the Company considered the benefit ENT derives from research and development expenses incurred by
Sports Medicine as well as sales and marketing expense as a percentage of revenue and ascribed the relatively lower expense for ENT segment
to the synergistic benefits noted above. The Company believes that the segment margin of ENT will continue to be comparatively higher
than Sports Medicine due to the synergistic benefits. The Company expects the difference in segment margin of Sports Medicine and ENT
to be lower than that seen in 2023 as the ENT segment is expe