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VOL. 128 | NO. 23 | Monday, February 4, 2013

Smith & Nephew Tax Break in Jeopardy

By Andy Meek

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Smith & Nephew Inc. could be in danger of losing some or all of the 15-year tax incentive the company received in 2009 as part of its $42 million investment to convert a Memphis office complex into a centralized hub for research, marketing and medical education.

Whether that happens, and to what degree, depends on the results of a study being finished now.

Companies like Smith & Nephew that get a payment-in-lieu-of-taxes (PILOT) benefit are required to submit a report each year attesting to where they are regarding various levels of the PILOT agreement, said Reid Dulberger, president and CEO of the city-county Economic Development Growth Engine.

If a company does not fulfill its promised level of new jobs, for example, it could factor into a decision to rescore, reduce the term for or even claw back a PILOT benefit.

“Based on those reports, if a company is not in compliance we would then do a recalculation,” Dulberger said.

The London-based medical device maker eliminated nearly 100 jobs in Memphis and Andover, Mass., on Thursday, Jan. 31, part of a step the company said it was taking to offset tax hikes included in the Affordable Care Act. The legislation includes a 2.3 percent medical device tax, which took effect Jan. 1.

The London-based company, which employs about 1,800 people in Memphis, said the new tax will cost the industry about $30 billion over 10 years.

“Unfortunately, and in order to absorb this cost burden into our business, this has meant less than 100 positions have been made redundant across various departmental functions in our Tennessee and Massachusetts sites,” Joe Metzger, senior vice president of corporate communications for Smith & Nephew, said in a statement. “The company is providing the affected employees with a comprehensive severance package and outplacement support.”

The new cuts come on top of the company cutting about 80 positions in December 2011. That would seemingly put it upside down on its agreement to create 160 jobs in exchange for the 2009 PILOT incentive.

Metzger was unavailable for comment Friday, Feb. 1, on the company’s plan to meet the PILOT requirements.

Shelby County Mayor Mark Luttrell said the re-evaluation of PILOTs when companies’ circumstances change is a “routine part of the EDGE board’s work” and that he’d let that process unfold before commenting further.

It’s exclusively in the purview of the EDGE board, he said, although he added the question of what might happen to Smith & Nephew’s terms “is a fair question.”

There has been no move from economic development officials yet to look at changing Smith & Nephew’s PILOT terms in response to the 2011 cuts, Dulberger said, because the company’s 2011 evaluation is being wrapped up now.

Dulberger said that evaluation didn’t get finished as soon as it otherwise might have because of a broad transition in the local area’s economic development governance. It was around that time that the EDGE body was being created, and work previously done by bodies like the Industrial Development Board were being incorporated into the plan for EDGE.

Dulberger said the results of that 2011 evaluation could be presented to the EDGE board as soon as next month. It would not include any change to Smith & Nephew’s PILOT terms as a result of the newest round of job cuts.

Any change there would be a result of the company’s 2012 evaluation, forms for which have already gone out to PILOT recipients.

“We don’t react to headlines. We have a process,” Dulberger said, in explaining why a change in Smith & Nephew’s PILOT terms, if there is any, wouldn’t be reflected immediately because of the new job cuts.

The Memphis-Shelby County Industrial Development Board approved a PILOT benefit worth $6.2 million in incentives for Smith & Nephew in December 2009 as part of the company’s Goodlett Farms expansion. At the time, the company said it would create 160 jobs and generate $13 million in annual payroll at an average annual wage of $93,427 excluding benefits.

It was intended for the site to host the research, marketing and development functions of Smith & Nephew’s orthopedics division. The company planned to spend $32 million for the property and invest another $10 million for furniture and equipment.

Smith & Nephew bought the Goodlett Farms Parkway property in January 2010 as part of a $42 million expansion of the global headquarters for the then-orthopedics division. That division was later consolidated with operations in Andover, and the division was split between Memphis and Andover.

Both locations saw job cuts in December 2011 in a move to eliminate duplicate positions and the continued restructuring of Smith & Nephew. The president of the Memphis division, Joseph DeVivo, left the company that August as Mike Frazzette in Andover became president of the new division.

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