c o cHl e aR an n u a l R e p oR t 2 0 1 3
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A shared
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Financial Report Cochlear Limited ACN 002 618 073 and its controlled entities for the year ended 30 June 2013
Directors’ Report Cochlear Limited for the year ended 30 June 2013
Page
Section
23
directors’ Report
83
13. Inventories
23
principal activities and review of operations
84
14. property, plant and equipment
30
Remuneration Report
85
15. Intangible assets
58
lead auditor’s Independence declaration
88
16. deferred tax assets and liabilities
59
Income statement
89
17. trade and other payables
60
statement of comprehensive Income
89
18. loans and borrowings
61
balance sheet
91
19. commitments
62
statement of changes in equity
92
20. provisions
63
statement of cash flows
93
21. contingent liabilities
64 notes to the financial statements
94
22. capital and reserves
64
1. Reporting entity
95
23. notes to the statement of cash flows
64
2. basis of preparation
96
24. controlled entities
65
3. significant accounting policies
97
25. Related parties
73
4. financial risk management
101
26. employee benefits
76
5. Revenue and expenses
105
27. financial instruments
77
6. net finance expense
112
28. events subsequent to the reporting date
77
7. auditors’ remuneration
112
29. product recall
78
8. Income tax expense
113
30. parent entity disclosures
79
9. dividends
114 directors’ declaration
79
10. operating segments
115
Independent audit Report
82
11. earnings per share
116 additional Information
83
12. trade and other receivables
117
Glossary, company asx announcement
Record and company Information
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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The directors present their report, together with the Consolidated Financial Report of the Consolidated Entity (Cochlear), being Cochlear
Limited (the Company) and its controlled entities, for the year ended 30 June 2013, and the Auditor’s Report thereon.
Directors
The directors of the Company at any time during or since the end of the financial year were Mr R Holliday-Smith, Mrs YA Allen, Mr PR Bell,
Prof E Byrne, AO, Mr A Denver, Mr DP O’Dwyer and Dr CG Roberts.
Information on the directors is presented in the Annual Report. This information includes the qualifications, experience and special
responsibilities of each director. It also gives details of the directors’ other directorships. Information on the Company Secretary including his
qualifications and experience is presented in the Annual Report.
directors’ meetings
The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the
directors of the Company during the financial year are:
Board of
directors
Audit
Committee
Medical Science
Committee
Nomination
Committee
Human Resources
Committee
Technology and
Innovation Committee
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Mr R Holliday-Smith
Mrs YA Allen
Mr PR Bell
Prof E Byrne, AO
Mr A Denver
Mr DP O’Dwyer
Dr CG Roberts
12
12
12
12
12
12
12
12
12
12
12
12
12
12
5
5
-
-
5
5
-
5
5
-
-
5
5
-
-
-
-
4
4
4
4
-
-
-
4
4
4
4
4
4
4
4
4
4
-
4
4
4
4
4
4
-
6
2
6
-
6
6
-
6
2
6
-
6
6
-
3
3
3
3
3
3
3
3
3
3
2
3
3
3
Principal activities and review of operations and results
operations
Business model
Cochlear’s mission is:
“We help people hear and be heard. We empower people to connect with others and live a full life. We transform the way people
understand and treat hearing loss. We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of
hearing outcomes.”
Cochlear’s strategy is focused on customer experience, operational excellence, product innovation, people engagement and value creation.
Cochlear’s product innovation strategy is to create and bring to market a segmented portfolio of innovative and quality products. Cochlear
offers a range of advanced solutions to address different types of hearing loss such as:
• cochlear implants, designed to help those people with moderate to profound sensorineural hearing loss; and
• bone conduction implants, designed to help those people with conductive hearing loss, mixed hearing loss or single-sided deafness.
Cochlear’s implant systems comprise an implant which is inserted during surgery and an external sound processor. This external sound
processor can be upgraded with new technology as it becomes available.
For the financial year ended 30 June 2013 (F13), 89% of Cochlear’s sales revenue was from cochlear implant (Nucleus) products and 11%
from bone conduction (Baha) products. This proportion of sales is consistent with that for the prior year.
The barriers to increasing the penetration of the candidate base include:
• awareness of implantable solutions as a viable option;
• patient motivation;
• lack of clear referral paths;
• affordability and funding availability; and
• clinic capacity.
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Cochlear operates in a complex industry. Each country has differing penetration rates and reasons for that level of penetration owing to
differing cultural and economic situations.
Cochlear estimates that more than a quarter of a million people have been implanted with one of its implants. Cochlear’s business
model includes supporting these customers with innovative and compatible products, through the sale of sound processor upgrades and
accessories and ongoing product support.
Cochlear aims to remain the market leader in implantable hearing solutions. There is no published market share data so Cochlear uses
various data points to internally estimate market share. Cochlear estimates it has a market leading share of implantable hearing solutions,
including approximately 65% share of cochlear implants.
Cochlear’s global headquarters is based on the Macquarie University campus in Sydney, Australia. At this location are the corporate offices,
manufacturing, research and development as well as the Asia Pacific regional headquarters.
Cochlear manages its sales and distribution through three regions, each comprising a main regional head office plus regional offices:
• Americas, which includes the United States of America (USA), Canada and Latin America;
• EMEA, which includes Europe, the Middle East and Africa; and
• Asia Pacific, which includes Australasia and Asia.
Cochlear has a deep geographical reach, selling in over 100 countries. Cochlear has a direct presence in approximately 20 countries and uses
distributors and agents in the balance.
Manufacturing for the cochlear implant product range continues to be based in Australia, at three sites: Lane Cove and Macquarie University,
both in Sydney, and Brisbane. Lane Cove will continue to manufacture Cochlear’s legacy products. New implant ranges will be manufactured
at Cochlear’s Macquarie University headquarters. The Brisbane site is responsible for manufacturing the non-implant components.
The bone conduction implant product range continues to be manufactured in Sweden.
Cochlear’s supply chain operates with product being distributed from its manufacturing sites in Australia and Sweden to its regional
distribution centres in the USA, the United Kingdom and Panama. The product is then further distributed to the end customer.
The proportion of Cochlear’s sales to end customers by region is approximately: Americas 40%, EMEA 40% and Asia Pacific 20%.
Foreign exchange has a significant impact on Cochlear’s consolidated results. Cochlear has a partial natural hedge with over 90% of sales in
foreign currency and over 50% of costs in foreign currency. To help manage the portion not covered by the natural hedge, foreign exchange
contracts on foreign currency cash flows back to Australia are taken out. These contracts cover a three year period at a declining level of
cover. The Australian dollar (AUD) strengthened again during the year against the Japanese yen (JPY) and Euro (EUR) and weakened slightly
against the United States dollar (USD). These are hedged currencies.
Future foreign exchange contracts are detailed in Note 27 to the financial statements.
operating result f13
Revenue
Sales of cochlear implant units were up 16% to 26,674.
Sales revenue was up 1% from that for last year to $715.0 million. In constant currency terms (ie restating F12 at F13 foreign exchange
rates), sales revenue was up 3%.
The sales to existing cochlear implant recipients or “customer base” sales are included in the sales numbers for cochlear implants. Revenue
from sound processor upgrades, that is sales of new sound processors to existing recipients, can be cyclical. F13 sound processor upgrade
sales were down $23.6 million from those for the prior year. Sound processor upgrade sales, particularly in the second half of the year, were
negatively impacted by customers holding back purchases ahead of the release of new products.
Sales of bone anchored solutions of $78.6 million were up 1% from those for last year and up 2% in constant currency terms.
Foreign currency contracts applied against foreign cash inflows resulted in a gain of $37.7 million this year (2012: gain of $74.4 million).
This was in line with movement in foreign currency rates according to Cochlear’s hedging policy. Over the past few years, the AUD has
appreciated and Cochlear’s favourable rate contracts have been rolling off and replaced with contracts at higher rates applicable at the time
they were taken out.
Regional sales
• Americas sales revenue of $284.4 million declined 4% (down 5% in constant currency). In the USA, the market softened as sales were
negatively impacted by the expectation of new product releases. Sound processor upgrade revenue was down $17.0 million as customers
held off purchases ahead of the release of Cochlear’s Nucleus 6 sound processor.
In the last quarter of F13, the USA business introduced a Future Technology Exchange Program (FTEP) where new implant recipients
could exchange their sound processors for new technology at no additional cost once the new technology is approved for sale. Revenue
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on cochlear implant system sales of $4.6 million was deferred under the FTEP and will be recognised when the new sound processor is
delivered to customers.
• EMEA sales revenue of $283.0 million decreased 1% (increased 3% in constant currency). EMEA revenue growth continues to reflect the
portfolio of geographies in the region, with varying growth rates in different countries.
In the last quarter of F13, the EMEA business introduced an FTEP in selected countries. Revenue on cochlear implant system sales of $1.8
million was deferred under the FTEP and will be recognised when the Nucleus 6 sound processor is delivered to customers.
• Asia Pacific sales revenue of $147.6 million increased 20% (increased 24% in constant currency). A Central Government tender sale into
China of approximately 2,800 units was supplied in F13. Approximately 1,800 units were delivered in the first half of F13 and the balance
in the second half. Cochlear did not recognise any Central Government of China tender sales in the prior year.
Australia continued its double digit cochlear implant unit sales growth. This demonstrates that there continues to be solid growth prospects
for the other regions. For example, sales in Canada are less than those in Australia, but the Canadian population is one and a half times the
size of that of Australia. There are no statistically different demographics applicable to hearing impairment in the two countries.
Product sales
As well as a portfolio of geographies, there is also a portfolio of products impacting Cochlear’s revenue:
• cochlear implant sales revenue increased 2% (increased 3% in constant currency) to $636.4 million. Sound processor upgrade sales fell
$23.6 million as customers held off upgrading their sound processor ahead of the release of new technology. The cochlear implant offering
covers a portfolio of electrodes including the Nucleus CI422 with Slim Straight electrode which was launched last year and has been well
received by the market;
• bone conduction implant sales revenue grew 1% (increased 2% in constant currency) to $78.6 million. There have been a number of new
entrants in the bone conduction implant industry over the last three years and Cochlear has lost market share over that time. Cochlear
introduced its Baha DermaLock Abutment for soft tissue preservation during F13; and
• the acoustics implant solutions business made its first sales during the second half of F13. This business has expanded Cochlear’s
product portfolio through the acquisition of Otologics LLC technology in F13. The Codacs product range is awaiting European regulatory
approval. Cochlear believes this segment remains an important part of its product offering and will further broaden the indications for
new candidates.
Profit
Cochlear’s cost of goods sold to sales revenue of 29.1% is marginally above that for last year of 28.9%. Over the last five years, Cochlear’s
cost of goods sold to sales revenue percentage has been maintained despite the appreciation of the AUD. This has been achieved through
productivity improvements.
The CI500 series implant was voluntarily recalled in September 2011. Recall costs of $138.8 million were recognised in the prior year as a
charge to cost of sales ($101.3 million after tax). There were no additional costs provisioned for the product recall in F13.
Selling, general and administration expenses were down 1% as a result of a disciplined approach to expenditure. Due to lower than
budgeted sales this year, short-term and long-term employee incentive costs were below 100% achievement. Cochlear upgraded its Oracle
enterprise resource planning (ERP) system to Release 12 during the year. This project and various process improvements cost approximately
$14 million and are being depreciated over seven years commencing in the last quarter of F13.
R&D expenses of $124.7 million increased 5%, reflecting the deliberate strategy to maintain momentum in the future development work
of R&D. Cochlear acquired the assets of Otologics LLC during the first half of F13, augmenting the further development of the acoustic
product range.
During F13, there was a net loss of $2.5 million (2012: loss of $0.3 million) on the translation of foreign assets. This is reported through
Note 5 to the financial statements.
The earnings before interest and tax (EBIT) of $178.9 million for F13 was $36.4 million lower than that for the prior year (excluding the
product recall costs). EBIT to total revenue of 23.8% was below that for last year of 27.6%.
Net interest expense increased $1.9 million to $6.2 million due to higher borrowings. Interest cover was 29 times (2012: 18 times).
The effective tax rate of 23.2% increased by 1.9 percentage points. Excluding the impact of the product recall in F12, last year’s tax rate was
25.1%, making this year’s rate down 1.9 percentage points.
NPAT increased 133% to $132.6 million. Excluding the product recall cost in F12, NPAT decreased 16%.
Overall, NPAT was negatively impacted by $46.0 million due to both translation and transaction movements in foreign exchange rates
during the year.
financial position
Inventories of $131.6 million were up 30% (2012: $101.3 million). Inventory days increased to 231 days (2012: 182 days). This reflects
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a planned build-up of inventories back to target levels following last financial year’s recall, a build of inventories ahead of new product
launches (particularly Nucleus 6), acquisition of inventories from Otologics LLC, and build of acoustics inventories.
Trade receivables of $187.6 million were up 30% (2012: $144.7 million). In constant currency, trade receivables were up 21%. Debtor days
increased to 80 days (2012: 73 days). Debtor days increased in the Americas and EMEA as a higher proportion of sales came from emerging
markets which have longer credit terms. A further provision of $0.6 million was made in F13, bringing the total provision to $3.6 million. In
Asia Pacific, the debtor days also increased due to the tender sale into China which is on extended credit terms. There is approximately $15
million still owing on this China tender sale at 30 June 2013 which is anticipated to be collected in F14.
Trade payables and accruals decreased by $17.8 million mainly due to the payment for assets from Otologics LLC of $10 million. This amount
was recognised as a liability at 30 June 2012. The product recall provision was reduced by $16.4 million to $36.6 million at 30 June 2013.
Intangible assets of $235.8 million (2012: $206.7 million) are a significant proportion of Cochlear’s total assets. Some $171.0 million of this
total relates to goodwill arising from the earlier acquisitions of businesses, principally the Entific business in 2005. All intangible assets are
tested for impairment on an annual basis. There were no impairments or write-downs of intangible assets in F13.
The final dividend of $1.27 per share brought the full year dividend to $2.52 per share, up 3%. This reflects the Board’s continued confidence
in Cochlear’s long-term sustainable growth. The dividend payout ratio is above Cochlear’s historic payout ratios. The plan is over time to
return the payout ratio to historic levels as profits grow.
Net debt was $117.8 million at 30 June 2013 (2012: net cash of $2.9 million). The increase in debt was driven by:
• an increase in working capital as discussed above;
• acquisition of assets from Otologics LLC of $13.6 million;
• expenditure on development of the ERP system of $14.4 million; and
• payment of dividends of $142.5 million.
At year end, debt facilities of $300 million were in place with terms of three and five years. At 30 June 2013, the unused portion of the
facility was $128.7 million. All bank covenants were met at year end.
outlook
There continue to be more people in the world diagnosed with hearing loss who could benefit from Cochlear’s products than are treated
each year. There remains a significant, unmet and addressable clinical need which will continue to underpin long-term sustainable growth.
The clinical and business environments in which Cochlear operates are dynamic and evolving. Cochlear is committed to identifying
and supporting the clinical trends as they will shape its future operating environment. A good example of this is the ongoing trend for
bilateral implantation.
F14 will continue to see the introduction of new products across Cochlear’s product range. Several are in the process of obtaining regulatory
approval. Cochlear believes these new products will continue to underpin demand and sales growth for the business.
A key product launch in F14 is the next generation sound processor, Nucleus 6. Nucleus 6 is the first of a range of products to be released
based on a new custom chipset that has been in development for over six years and contains significant new functionality improving
hearing performance and ease of use for cochlear implant recipients of all ages. Nucleus 6 includes the industry’s only auditory scene
classifier, which analyses the sound environment and automatically applies the best sound processing technology. In addition, it contains
direct wireless connectivity, integrated hearing aid functionality and the smallest and most water resistant behind the ear sound processor
on the market.
Cochlear received regulatory approval for the Nucleus 6 in Europe and limited approval in the USA in August 2013. The Nucleus 6 has now
been launched in Europe and will be launched in the USA in the first half of F14.
Cochlear is also introducing new bone conduction products in F14 and is expanding the available indications with its first successful clinical
trial of Baha Attract.
First sales of the Carina Met product, part of the acoustic implant product range, were made at the end of F13. Cochlear anticipates sales of
the acoustic implant product range to slowly build up over the coming years. In the short term, they will remain an immaterial proportion
of Cochlear’s business.
Cochlear continues to experience the portfolio effect across the range of countries it sells into. Some countries experience strong growth,
some remain flat and some experience a slowdown. Overall, the trend is for long-term sustainable growth.
Several of the emerging markets are heavily biased to tender sales, including the Central Government of China’s tenders. Cochlear reviews
these tenders carefully and participates at a level that makes commercial sense.
Cochlear remains committed to funding market growth initiatives. These include candidate identification and support; reimbursement and
government policy aimed at enhancing cochlear implantation; referral path initiatives; and geographic expansion.
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At 30 June 2013, Cochlear had foreign currency equivalent of $437.6 million in foreign exchange contracts. In F14, the average exchange
rate for the USD contracts is 0.97 and the average for EUR contracts is 0.72. At rates applicable on 30 June 2013, a net loss on foreign
exchange contracts in F14 is forecast.
business risks
Cochlear’s principal business risks are outlined below. These are significant risks that may adversely affect Cochlear’s business strategy,
financial position or future performance. It is not possible to identify every risk that could affect Cochlear’s business, and the actions taken
to mitigate the risks described below cannot provide absolute assurance that a risk will not materialise.
• Product innovation and competition
Cochlear is exposed to the risk of failing to develop and produce the most innovative products for customers. Increased competition
exposes Cochlear to the risk of losing market share as well as a decrease in average selling prices in the industry. Cochlear is also exposed
to the risk of technological advancement by third parties where alternative products are developed and sold that render Cochlear’s
products obsolete. This could result in a loss of sales.
In F13, Cochlear invested over 16% of revenue in R&D. Cochlear also works with over 100 external research partners. The creation of new
intellectual property and the protection of new and existing intellectual property are a key focus for Cochlear. Cochlear currently
has patents over a range of features of its technologies.
• Patent litigation
Cochlear operates in an industry that has substantial intellectual property and patents protecting that intellectual property. Cochlear is
exposed to the risk that it will be litigated against for claims of patent infringement. This could result in Cochlear paying royalties to be
able to continue to manufacture product, or injunctions preventing Cochlear selling products it had developed.
• Misappropriation of know-how and intellectual property
Cochlear is exposed to the risk of its know-how and intellectual property being misappropriated either through hacking of its systems or
by employees, consultants and others who from time-to-time have access to Cochlear’s know-how and intellectual property. This could
result in competitors using this information and increasing their competitiveness. Cochlear could lose market share as a result of this.
Cochlear monitors its systems and has confidentiality agreements in place with employees and third parties that are exposed to its know-
how and intellectual property.
• Regulation
Cochlear operates in a highly regulated industry. Medical devices are subject to strict regulations of regulatory bodies in the USA, Europe,
Asia and Australia as well as many other local bodies in countries where Cochlear’s products are sold. If Cochlear or a third party supplier
fails to satisfy regulatory requirements or the regulations change and amendments are not made, this could result in the imposition of
sanctions. Delays in achieving regulatory approval can impact Cochlear’s ability to sell its latest technology. These risks could result in the
loss of sales and reputational harm.
Cochlear has a worldwide quality assurance system in place.
• Reimbursement
The majority of Cochlear’s customers rely on a level of reimbursement from insurers and government health authorities to fund their
purchases. There is increasing pressure on healthcare budgets globally. Cochlear is also subject to healthcare related taxes imposed by
government agencies and this could negatively impact the ability of candidates to access Cochlear’s products (eg the Medical Device
Excise Tax in the USA).
Cochlear continues to work with reimbursement and government agencies throughout the world to emphasise the benefits and cost
effectiveness of the intervention.
• Product liability
The manufacturing, testing, marketing and sale of Cochlear’s products involve product liability risk. As the developer, manufacturer,
marketer and distributor of certain products, Cochlear may be held liable for damages arising from use of its products during development
or after the product has been approved for sale.
Cochlear maintains product liability insurance and operates a worldwide quality assurance system related to the design, testing and
manufacture of its products. In September 2011, Cochlear initiated a worldwide voluntary recall of its unimplanted Nucleus CI500
cochlear implant range. Management’s best estimate of the probable costs related to the recall was expensed and provided for in F12
as disclosed in Note 29 to the financial statements.
• Interruption to product supply
Cochlear relies on third-party companies for the supply of key materials and services. This carries the risk of delays and disruptions in
supplies. Certain materials are available from a single source only and regulatory requirements make substitution costly, time-consuming
or commercially unviable. Lifetime and strategic purchases of certain items are made.
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Cochlear manufactures its cochlear implant products in Sydney, with the latest generation products to be manufactured at Cochlear’s
Macquarie University headquarters and legacy products in Lane Cove. Cochlear manufactures its bone conduction implant products in
Sweden. There is the potential risk of disruption to sales should a manufacturing facility be unable to operate. Any new manufacturing
facility will require regulatory approval prior to being able to produce and sell product from it. This approval could take many months.
Cochlear monitors its suppliers and identifies second source supply where possible. Inventories are managed and purchased in
sufficient quantities for continued product supply in the short term. Cochlear also regularly reviews its disaster recovery plans for its
manufacturing sites.
• Foreign exchange rates
Cochlear is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional
currencies of the legal entities. The currencies in which these transactions primarily are denominated are AUD, USD, EUR, JPY, Sterling
(GBP), Swedish kroner (SEK) and Swiss francs (CHF). Over 90% of Cochlear’s revenues and over 50% of costs are denominated in
currencies other than AUD.
Currency risk is hedged in accordance with the treasury risk policy. The treasury risk policy aims to manage the impact of short-term
fluctuations on Cochlear’s earnings. Over the longer term, permanent changes in market rates will have an impact on earnings. Derivative
financial instruments (forward exchange contracts) are used to hedge exposure to fluctuations in foreign exchange rates in a declining
ratio of coverage out to three years.
• Credit
Cochlear’s exposure to credit risk is influenced mainly by the geographical location and characteristics of individual customers. Cochlear
does not have a significant concentration of credit risk with a single customer. The majority of debtors are government supported clinics
or major hospital chains.
Policies and procedures for credit management and administration of receivables are established and executed at a regional level.
Individual regions deliver reports to management and the Board on debtor ageing and collection activities on a monthly basis.
In monitoring customer credit risk, the ageing profile of total receivables balances and individually significant debtors is reported by
geographic region to the Board on a monthly basis. Regional management is responsible for identifying high risk customers and placing
restrictions on future trading, including suspending future shipments and administering dispatches on a prepayment basis.
In addition, absolute country limits are in place and Chief Financial Officer approval is required to increase a limit. These limits are
periodically reviewed by the Audit Committee.
• Interest rates
Cochlear is exposed to interest rate risks in Australia.
Interest rate risk is hedged on a case-by-case basis by assessing the term of borrowings and the purpose for which the funds are obtained.
Hedging against interest rate risk is achieved by entering into interest rate swaps. At 30 June 2013, no hedging had been entered into.
Note: The following non-IFRS financial measures are included in this document:
• excluding recall costs; and
• constant currency.
Refer to page 117 for a discussion of these items.
consolidated results
The consolidated results for the financial year are:
Revenue
Profit before income tax
Net profit after tax but before product recall costs
Product recall costs net of tax
Net profit
Basic earnings per share (cents)
Diluted earnings per share (cents)
2013
$000
752,721
172,637
132,563
-
132,563
233.0
232.4
2012
$000
778,996
72,157
158,139
101,336
56,803
100.0
99.8
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dividends
Dividends paid or declared by the Company to members since the end of the previous financial year are:
Type
Cents per share
Total amount
$000
Date of payment
%
franked
Tax rate for
franking credit
In respect of the previous financial year:
Final - ordinary shares
In respect of the current financial year:
Interim - ordinary shares
125.0
125.0
71,216
20 September 2012
71,295
12 March 2013
35%
40%
30%
30%
The final dividend in respect of the current financial year has not been provided for in the Financial Report as it was not declared until after
30 June 2013. Since the end of the financial year, the directors declared a final 127 cents per share dividend, 30% franked at the tax rate of
30%, amounting to a total of $72,441,984.
environmental regulations
Cochlear’s operations are subject to significant environmental regulations under the Commonwealth of Australia and State/Territory
legislation. The Board believes that Cochlear has adequate systems in place to manage its environmental obligations and is not aware of
any breach of those environmental requirements as they apply to Cochlear.
non-audit services
During the year, KPMG, the Company’s auditor, has performed certain other services in addition to its statutory duties. The Board has
considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of
the Audit Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did
not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:
• all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the
Audit Committee to ensure that they do not impact the integrity and objectivity of the auditor; and
• the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code
of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or
decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.
Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services during the year
are set out below:
audit services
Auditors of the Company:
KPMG:
- audit and review of financial reports
- other regulatory compliance services
total audit services
non-audit services
Auditors of the Company:
KPMG:
- taxation compliance services
total non-audit services
state of affairs
There were no significant changes to the state of affairs of Cochlear during the financial year.
Consolidated
2013
$
2012
$
1,336,981
58,925
1,395,906
1,286,910
69,672
1,356,582
1,211,162
1,211,162
1,128,460
1,128,460
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
Remuneration Report – audited
table of contents
Section
Title
Description
1.0
2.0
3.0
4.0
5.0
6.0
Introduction
Describes the scope of the Remuneration Report and the individuals whose remuneration details are disclosed.
Remuneration
governance
Describes the role of the Board and the Human Resources Committee, and the use of remuneration consultants
when making remuneration decisions.
Non-executive
director
remuneration
Provides details regarding the fees paid to non-executive directors.
Executive
remuneration
Outlines the principles applied to executive remuneration decisions and the framework used to deliver this
framework including the performance and remuneration linkages.
Employee share
scheme and other
share information
Service contracts
and employment
agreements
Provides details regarding Cochlear’s employee equity plans including that information required by the
Corporations Act 2001 and applicable accounting standards.
Provides details regarding the contractual arrangements between the Cochlear and the executives whose
remuneration details are disclosed.
1.0 Introduction
Cochlear is a geographically diverse business, subject to rapid and changing competitive forces, including currency variations, and with a
long history of growth. The Board remains committed to a strong growth focus and has developed its executive remuneration policies to
direct behaviours towards achieving sustainable growth in shareholder value over the long term. At the same time, these policies must be
flexible enough to enable Cochlear to attract, motivate and retain high performing executives in many locations in a dynamic environment.
The Board’s philosophy and approach to executive remuneration have always been to balance fair remuneration for skills and expertise
with a risk and reward framework that supports longer-term growth of Cochlear as a global business. A planned review of executive
remuneration during the financial year ended 30 June 2012 (F12) was undertaken in F13 following the Company’s last Annual General
Meeting (AGM). Key initiatives included:
• an independent assessment and evaluation of the F12 Remuneration Report;
• an independent survey of shareholders was commissioned to better understand the reasons for the ‘no’ vote on the Remuneration Report
at the 2012 AGM;
• the principal institutional proxy advisor firms were consulted for specific feedback;
• the Chairman and Human Resources Committee (HRC) Chairman met with a cross section of major shareholders to canvas their views;
• an internal review of executive key management personnel (KMP) remuneration was undertaken; and
• independent benchmark assessments were commissioned in respect of Board and selected KMP remuneration.
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Following this detailed and comprehensive review process, a number of changes have been adopted in respect of Cochlear’s executive KMP
remuneration policies. Specific details of the changes are included in the Remuneration Report and can be summarised as follows:
1. the Remuneration Report has been reformatted with improved disclosure principles adopted to ensure shareholders are presented with a
clear and comprehensive analysis of Board and executive KMP remuneration;
2. the use of performance shares for executive KMP long-term incentive (LTI) has been suspended;
3. performance rights for executive KMP LTI have been introduced;
4. changes in the eligibility criteria for participation in the Cochlear LTI will result in fewer executive participants;
5. the remuneration mix for the CEO/President and other executive KMP has been reweighted;
6. the short-term incentive (STI) opportunity for selected executives has been increased;
7. as a consequence, the deferral of STI into performance rights has been introduced effective from 1 July 2013 for up to 30% of STI cash;
8. the use of options for selected executive KMP LTI has been retained because options are consistent with our objective to continue as a
growth company. Shareholders interviewed were largely supportive and other than one shareholder they expressed no reservations with
this policy assuming an appropriate allocation methodology and market accepted hurdle conditions were applied;
9. the LTI allocation methodology (including the option valuation for LTI dollar value) has been changed. The option value will now be
calculated independently applying the ‘gross contract value’ of the option at the calculation date, before any discounts for performance
or service. The notional variable remuneration opportunity for selected executives has been adjusted to partly compensate for this
change, which is material;
10. the performance conditions to apply to the F13 LTI were reviewed. The earnings per share (EPS) hurdle rates will remain unchanged at
the high end of market expectations. The total shareholder return (TSR) hurdle rate has been modified after consideration of shareholder
feedback. See Section 4.4.2;
11. selected Board and executive KMP remuneration has been independently benchmarked to ensure the remuneration of these key roles
meets external expectations;
12. director fees will remain unchanged in F14, apart from a minor increase in Chairman fees for Audit Committee and HRC to reflect the
additional responsibilities and time commitments required; and
13. the remuneration mix for all executive KMP was reviewed to ensure it met external benchmark standards. Changes adopted have been
explained in the Remuneration Report.
On balance, Cochlear’s approach to Board and executive KMP remuneration is to adopt a fair and equitable approach which will reward and
motivate a successful and experienced executive team to deliver ongoing business growth which meets the expectations of all shareholders.
The Board welcomes feedback from shareholders on our remuneration practices or on the communication of remuneration matters in the
F13 Remuneration Report.
1.1 scope
This Remuneration Report sets out, in accordance with the relevant Corporations Act 2001 (Corporations Act) and accounting standard
requirements, the remuneration arrangements in place for KMP of Cochlear during F13.
1.2 key management personnel
Key management personnel have authority and responsibility for planning, directing and controlling the activities of Cochlear and comprise
the non-executive directors, and executive KMP (being the executive director and other senior executives named in this report). Details of
the KMP as at year end are set out in the table below:
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non-executive directors
Rick Holliday-Smith
Yasmin Allen
Paul Bell
Edward Byrne, AO
Andrew Denver
Donal O’Dwyer
title (at year end)
change in f13
Chairman
Member, Human Resources Committee
Member, Audit Committee
Chairman, Nomination Committee
Member, Technology and Innovation Committee
Director
Chairman, Audit Committee
Member, Human Resources Committee
Member, Nomination Committee
Member, Technology and Innovation Committee
Director
Chairman, Human Resources Committee
Member, Nomination Committee
Member, Technology and Innovation Committee
Director
Member, Nomination Committee
Chairman, Medical Science Committee
Member, Technology and Innovation Committee
Director
Member, Human Resources Committee
Member, Audit Committee
Member, Nomination Committee
Member, Medical Science Committee
Chairman, Technology and Innovation Committee
Director
Member, Human Resources Committee
Member, Audit Committee
Member, Nomination Committee
Member, Medical Science Committee
Member, Technology and Innovation Committee
No change. Full year
Appointed member, Technology and Innovation
Committee, April 2013
No change. Full year
Appointed member, of Human Resources Committee,
January 2013
No change. Full year
No change. Full year
Appointed member, Technology and Innovation
Committee, April 2013
No change. Full year
Appointed Chairman, Technology and Innovation
Committee, April 2013
No change. Full year
Appointed member, Medical Science and Technology
and Innovation Committees, April 2013
executive director
Chris Roberts
other executive kMp
Richard Brook
Jan Janssen
Chief Executive Officer (CEO)/President
Member, Medical Science Committee
Member, Technology and Innovation Committee
No change. Full year
President, European Region
No change. Full year
Senior Vice President, Design and Development
No change. Full year
Neville Mitchell
Chief Financial Officer and Company Secretary
No change. Full year
Mark Salmon
Chris Smith
President, Asia Pacific Region
President, Americas Region
There were no key management personnel departures during F13.
No change. Full year
No change. Full year
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2.0 Remuneration governance
This section of the Remuneration Report describes the role of the Board and the HRC, and the use of remuneration consultants when
making remuneration decisions.
2.1 Role of the board and the Human Resources committee
The Board is responsible for Cochlear’s remuneration strategy and policy. Consistent with this responsibility, the Board has established the
HRC which comprises solely independent non-executive directors (NEDs).
The role of the HRC is set out in its Charter, which is reviewed annually and was last revised and approved by the Board in December 2012.
In summary, the HRC’s role is to:
• ensure that the appropriate procedures exist to assess the remuneration levels of the Chairman, other NEDs, executive directors, direct
reports to the CEO/President, Board Committees and the Board as a whole;
• ensure that Cochlear meets the requirements of Australian Securities Exchange (ASX) Diversity Guidelines;
• ensure that Cochlear adopts, monitors and applies appropriate remuneration policies and procedures;
• ensure that reporting disclosures related to remuneration meet the Board’s disclosure objectives and all relevant legal requirements;
• develop, maintain and monitor appropriate talent management programs including succession planning, recruitment, development; and
retention and termination policies and procedures for senior management; and
• develop, maintain and monitor appropriate superannuation arrangements for Cochlear.
The HRC’s role and interaction with Board, internal and external advisors, are further illustrated below:
The Board
Reviews, applies judgement and, as appropriate, approves the HRC’s recommendations.
The Human Resources Committee
The HRC operates under the delegated authority of the Board.
The HRC is empowered to source any internal resources and obtain external independent professional
advice it considers necessary to enable it to make recommendations to the Board on the following:
Remuneration policy,
composition and
quantum of remuneration
components for executive
KMP, and performance
targets
Remuneration policy in
respect of NEDs
Talent management
policies and practices
including superannuation
arrangements
Design features of
employee and executive
STI and LTI plan awards,
including setting of
performance and other
vesting criteria
External consultants
Internal resources
Further information on the HRC’s role, responsibilities and membership is contained in the Corporate Governance Report on pages 13 to 21
of this Annual Report. The HRC terms of reference can also be viewed in the Investor Centre, Corporate Governance section of the Cochlear
website, www.cochlear.com.
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2.2 use of remuneration consultants
From 1 July 2011, the existing practice was formalised and all proposed remuneration consultancy contracts (within the meaning of section
206K of the Corporations Act) became subject to prior approval by the Board or the HRC in accordance with the Corporations Act.
During F13, several remuneration consultancy contracts were entered into by Cochlear and accordingly the disclosures required under
section 300A(1)(h) of the Corporations Act are set out as follows:
advisor/consultant — f13
services provided
Remuneration consultant for the purposes of the
corporations act
Ian Crichton, Remuneration
Consultant, CRA Plan Managers
Pty Limited
1. benchmarking of selected KMP roles, and
recommendations on CEO/President remuneration;
Yes
2. preparation and review of F13 Remuneration Report; No
3. analysis of Cochlear remuneration strategy and LTI
No
offer methodology; and
4. survey of shareholders (including selected proxy
advisor firms) to ascertain reasons for ‘no’ vote
on F12 Remuneration Report at the 2012 AGM
Ernst & Young
1. benchmarking of selected KMP roles only;
2. LTI plan review and global due diligence; and
3. remuneration review trends and benchmarking
No
No
No
No
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key questions regarding use of remuneration consultants
Did the remuneration
consultant provide
remuneration
recommendations in relation
to any of the executive KMP
for F13?
How much was the
remuneration consultant paid
by Cochlear for remuneration
related and other services?
Yes, benchmark data, recommendation and analysis provided.
CRA Plan Managers Pty Limited – remuneration services $24,127; other services $69,807.
What arrangements did
Cochlear make to ensure that
the making of the remuneration
recommendation would be free
from undue influence by the
executive KMP?
Cochlear made the following arrangements:
• Cochlear implemented a protocol to govern the procedure for procuring advice relating to KMP remuneration.
The protocol contained a summary of the process for the engagement of the remuneration consultant,
the provision of information to the remuneration consultant and the communication of remuneration
recommendations; and
• the remuneration consultant agreed to adhere to the protocol procedures and was required to advise the HRC
whether or not it had been subjected to undue influence and to provide a Statement of Independence.
Is the Board satisfied that the
remuneration information
provided was free from any
such undue influence? What
are the reasons for the Board
being so satisfied?
Yes, the Board is satisfied. The reasons are as follows:
• the Chairman of the HRC had oversight of all requests for remuneration information;
• the protocol with respect to the procurement of remuneration related advice was adhered to, including with
respect to engagement of the remuneration consultant, the provision of information to the remuneration
consultant and the communication of remuneration data requests and the provision of reports directly to the
HRC Chairman;
• at appropriate times, the remuneration consultant provided written confirmation that it had not been
subjected to any undue influence;
• the HRC met on several occasions with the remuneration consultant in the absence of executive KMP. There
were no concerns raised by the remuneration consultant with respect to any undue influence being exerted by
the executive KMP; and
• the HRC did not observe any evidence that undue influence had been applied.
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3.0 non-executive director remuneration
3.1 ned remuneration
principle
comment
Fees are set by reference to
key considerations
Fees for NEDs are based on the nature of the NEDs’ work and their responsibilities. The remuneration rates
reflect the complexity of Cochlear and the extent of the geographical regions in which Cochlear operates. In
determining the level of fees, survey data on comparable companies is considered. NEDs’ fees are recommended
by the HRC and determined by the Board. Shareholders approve the aggregate amount available for the
remuneration of NEDs. A minor increase in HRC and Audit Committee Chairman fees will be introduced in F14.
All other fees will remain unchanged.
Remuneration is structured to
preserve independence whilst
creating alignment
(see also section 3.4)
To preserve independence and impartiality, NEDs are not entitled to any form of incentive payments including
options and the level of their fees is not set with reference to measures of Cochlear performance.
However, to create alignment between directors and shareholders, the Board has adopted guidelines that
request NEDs to hold (or have a benefit in) shares in Cochlear equivalent in value to at least one year’s base fees.
Cochlear does not offer loans to fund share ownership.
Aggregate Board and
committee fees are approved
by shareholders
The total amount of fees paid to NEDs in F13 is within the aggregate amount approved by shareholders at the
AGM in October 2011 of $2,000,000 per year.
3.2 ned fees and other benefits
elements
details
Board/committee fees
per annum - F13
post-employment benefits
Superannuation
Retirement scheme
Board Chairman fee1
Board NED base fee
committee fees
Audit
Human Resources
Nomination
Medical Science
Technology and Innovation2
$438,000
$146,000
committee chair
committee member
$35,000
$25,000
No fee
$20,000
$20,000
$20,000
$10,000
No fee
$10,000
$10,000
Superannuation contributions have been made at a rate of 9% of the base fee (but only up to the Australian
Government’s prescribed maximum contributions limit) which satisfies the Company’s statutory superannuation
contributions. The contribution rate will increase in future years in line with mandated legislative increases.
Contributions are not included in the base fee.
From 2003, no new NED was entitled to join the Cochlear directors’ retirement scheme. NEDs appointed
prior to this were members of the scheme, which provided NEDs with more than five years’ service, retirement
benefits of up to three times their annual remuneration over the previous three years.
On 23 October 2006, the Board determined that it should implement changes to NED remuneration consistent
with developing market practice and guidelines, by discontinuing the ongoing accrual of benefits under the
existing retirement scheme once the remaining members of the scheme reached their five year service period.
The benefits accrued to that date are indexed by reference to the bank bill rate.
All directors transitioned from the retirement scheme during F07. As at 30 June 2013, Edward Byrne is the only
NED entitled to this benefit.
The accrued entitlement for Edward Byrne under the Cochlear directors’ retirement scheme as at 30 June 2013
was $410,817.
other benefits
Equity instruments
Other fees/benefits
NEDs do not receive any performance related remuneration, options or performance shares.
NEDs receive reimbursement for costs directly related to Cochlear business.
No payments were made to NEDs during F13 for travel allowances, extra services or special exertions.
1. Committee fees are not paid to the Chairman of the Board.
2. Fees for the Technology and Innovation Committee will only be paid commencing 1 July 2013. No fees were paid for this Committee during F13.
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3.3 ned total remuneration
Amounts $
Rick Holliday-Smith (Chairman)
Yasmin Allen1
Paul Bell
Edward Byrne
Andrew Denver1
Donal O’Dwyer
Total
Short-term
benefits
Fees
Post-employment
benefits
Termination
benefits2
Superannuation
benefits
438,000
438,000
185,192
181,000
171,000
171,000
166,000
166,000
186,000
176,000
186,000
186,000
-
-
-
-
-
-
12,293
16,485
-
-
-
-
1,332,192
1,318,000
12,293
16,485
16,470
15,775
15,888
15,295
15,338
14,880
14,940
14,672
15,753
15,088
15,961
15,503
94,350
91,213
Total
454,470
453,775
201,080
196,295
186,338
185,880
193,233
197,157
201,753
191,088
201,961
201,503
1,438,835
1,425,698
Year
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
1. Increases related to additional Board Committee responsibilities.
2. Amounts accrued for interest during the financial year relating to the directors’ retirement scheme.
3.4 Minimum shareholding guidelines
The Board has approved minimum shareholding guidelines for NEDs, the CEO/President and those executives who report directly to the
CEO/President. Under these guidelines, all NEDs are requested to accumulate a minimum shareholding in Cochlear shares equivalent in
value to one year’s base fees and all executive KMP are required to accumulate a minimum shareholding in Cochlear shares equivalent to
one year’s fixed remuneration.
The guidelines were implemented in March 2007. All current NEDs and executive KMP covered by the guidelines are holding the minimum
shareholding in conformity with these guidelines at the date of this report.
4.0 executive remuneration
4.1 executive kMp remuneration
Cochlear’s executive remuneration policies are designed to attract, motivate and retain a highly qualified and experienced group of
executives employed across diverse geographies. Fixed remuneration components are determined having regard to the specific skills and
competencies of the executive KMP with reference to both internal and external relativities, particularly local market conditions. The ‘at
risk’ components of remuneration are strategically directed to encourage management to strive for superior (risk balanced) performance
by rewarding the achievement of targets that are challenging, clearly defined, understood and communicated within the ambit of
accountability of the relevant executive KMP.
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Executive KMP remuneration objectives are exemplified through three categories of remuneration, as illustrated below:
Executive KMP remuneration objectives
Shareholder value creation
through equity components
An appropriate balance
of ‘fixed’ and ‘at risk’
components
The creation of reward
differentiation to drive
performance values and
behaviours
Attract, motivate and retain
executive talent across diverse
geographies
Total target remuneration (TTR) is set by reference to the relevant geographic market
Fixed
At risk
Total fixed remuneration (TFR)
Short-term incentives (STI)
Long-term incentives (LTI)
TFR is set based on relevant market
relativities, reflecting responsibilities,
performance, qualifications, experience and
geographic location
STI performance criteria are set by reference
to Cochlear group and/or regional revenue
and EBIT and individual performance targets
relevant to the specific position
LTI targets are linked to both Cochlear group
internal EPS growth and external relative
TSR outperformance measures
Base salary plus any fixed elements related
to local markets, including superannuation
or equivalents
Remuneration will be delivered as:
f13: Paid in cash semi-annually
f14: Part cash and part equity (performance
rights). The equity component will be
subject to service and deferred for 2 years
Part cash and part equity (from F14)
(deferred). The equity component is subject
to service and deferred for 2 years
Strategic intent and market positioning
f13: Equity in options or shares
f14: Equity in options or performance rights.
All equity is held subject to service and
performance for 3 years from grant date. The
equity is at risk until vesting. Performance is
tested once at the vesting date
TFR will generally be positioned at the
median compared to relevant market based
data considering expertise and performance
in the role
Performance incentive is directed to achieving
Board approved targets reflective of market
circumstances TFR + STI is intended to be
positioned in the 3rd quartile of the relevant
benchmark comparison
LTI is intended to reward executive KMP for
sustainable long-term growth aligned to
shareholders’ interests. LTI allocation values
are intended to be positioned at the top
of the 3rd quartile of the relevant
benchmark comparison
Total target remuneration
TTR is intended to be positioned in the 3rd quartile compared to relevant market benchmark
comparisons. 4th quartile TTR may result if outperformance is achieved
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4.2 Remuneration composition mix and timing of receipt
4.2.1 Current remuneration mix and amendments for F14
Cochlear endeavours to provide an appropriate and competitive mix of remuneration components balanced between fixed and at risk and
paid in both cash and deferred equity. The broad remuneration composition mix for executive KMP can be illustrated as follows:
Remuneration mix f13
Position
CEO/President
Other executive KMP
TFR
(Cash) at target
STI
(Cash) at target
LTI
(Equity) at target
40%
30% of TTR
30% of TTR
At least 52%
Up to 24% of TTR
Up to 24% of TFR
cochlear’s ceo/president and executive kMp remuneration composition will be changed effective from 1 July 2013 for f14.
The review of Executive remuneration involved shareholder feedback and market benchmarks to understand context and positioning and
detailed analysis of past remuneration outcomes using the new valuation methodology. Following the review of remuneration, the Board
has decided to reweight the performance based elements of total targeted remuneration and to introduce a deferred equity component to
the STI plan for executive KMP. The effect of this reweighting and by applying the new LTI allocation valuation will deliver a lower effective
LTI value ( through lower LTI allocations) offset by a higher STI opportunity but with up to 30% deferred into equity with a further two year
vesting period. In gross terms, it is not anticipated that the total cost to the company will increase. This change was made in response to
the detailed remuneration strategy review and to ensure executives are rewarded for sustained performance. The Board believes the new
arrangements better reflect contemporary standards and remuneration benchmark comparisons.
The mix of remuneration for the CEO/President and executive KMP will also change effective from 1 July 2013, as shown below:
proposed remuneration mix from 1 July 2013
Position
CEO/President
Other executive KMP
TFR
(Cash) at target
STI
(Cash and equity) at target
LTI
(Equity) at target
33.4%
33.3% of TTR
33.3% of TTR
At least 48%
Up to 26% of TTR
Up to 26% of TTR
These proposed changes appear quite simple when presented in table format, but may give the impression that total target remuneration
will increase as a result. This is not the case because there are a number of nuances that need explanation.
total fixed remuneration (tfR)
Cochlear’s approach to TFR settings will remain largely unchanged. That is, the aim is to position all executives at between the median
and 75th percentile, but at the lower end of this range where possible to control fixed costs, exchange rate movements notwithstanding.
This positioning has been confirmed by our recent independent remuneration benchmark assessments. Only modest increases in TFR are
proposed in F14 to maintain this balanced approach.
short-term incentives
Cochlear has consistently focused STI on achieving annual revenue and EBIT targets and personal objectives. To support our balanced
approach to TFR, we have set STI targets aimed at achieving a market competitive TFR + STI towards the 3rd quartile when budgets are met.
The independent remuneration benchmark assessment and our historic approach to LTI valuation indicated that Cochlear’s remuneration
strategy, if anything, was overweight in LTI and underweight in respect of STI. Hence, the proposed recalibration of the remuneration mix, as
set out in the table above.
This notional increase in STI opportunity under the proposed remuneration mix is offset in two material ways. Firstly, effective from F14,
up to 30% of STI cash target will now also be subject to an additional two year deferral (service only) and invested in performance rights
creating an alignment of interests between executives and shareholders, and secondly, by changing the LTI allocation value to be consistent
with shareholder expectations it effectively halves the number of options that will now be available for the LTI dollar value, when compared
to our historic allocation methodology.
long-term incentives
The Board has listened to shareholder concerns about the use of discounted accounting value in determining the number of options
allocated. All LTI dollar opportunity going forward will be calculated using the ‘gross contract value’. The effect of this change is material.
Based on comprehensive analysis of the last few years, the change from ‘accounting value’ to ‘gross contract value’ effectively reduces the
number of options available for the same LTI dollar value by a factor of 2:1. That is, if the LTI opportunity were maintained, executives would
now receive approximately 50% of prior equity allocations determined under the accounting value approach.
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Left unadjusted, this would simply result in a material reduction in remuneration for our key executives.
With the world economy improving, particularly in the US, this would leave us unreasonably exposed to competitive pressures. The
reweighting of STI and LTI components better meets market benchmarks and ensures each remuneration element remains fair.
total target remuneration
TTR under the reweighted remuneration mix will, in the opinion of the Board, deliver an overall risk adjusted outcome which is fair, market
competitive and at no material extra cost to the Company.
It should also be noted that Cochlear has performance hurdles, particularly for LTI that are at the higher end of the market (S&P/ASX 100
companies) in terms of degrees of difficulty. Further, any LTI award will only have value to the executive if the performance hurdles are met
to enable vesting to occur, and for option related awards, that the equity outcomes are positive in terms of share price movement (ie the
share price on vesting exceeds the exercise price).
4.2.2 Remuneration – timing of receipt of the benefit for F14 onwards
The three complementary components of executive KMP remuneration are ‘earned’ over multiple time ranges. This is illustrated in the
following chart:
Year 1
Year 2
Year 3
Year 4
Year 5
F14
F15
F16
TFR
STI cash
STI equity deferral (2 years)
LTI
TFR
STI cash
STI equity deferral (2 years)
LTI
TFR
STI cash
STI equity deferral (2 years)
LTI
Note: LTI is awarded in year 1 and earned in year 3 but expensed over the three year period.
As illustrated, executive KMP remuneration is delivered on a cascading basis, with a material component deferred for two (STI) and
three (LTI) years and awarded as equity. This remuneration mix is designed to ensure executive KMP are focused on delivering results
over the short, medium and long term if they are to maximise their remuneration opportunity. This is aligned to shareholder interests
and expectations.
4.3 total fixed remuneration explained
Total fixed remuneration (TFR) includes all remuneration and benefits paid to an executive KMP calculated on a total employment cost
basis. In addition to base salary, selected overseas executives receive benefits that may include health insurance, car allowances and
41
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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co n t e n t s
n e x t
p d f d ow n loa d s
relocation allowances. In Australia, retirement benefits are generally paid in line with the statutory Superannuation Guarantee legislation
prevailing. Legacy defined benefit plans were wound up in 2006. Globally, retirement benefits are generally paid in line with local legislation
and practice.
Executive KMP TFR is tested regularly for market competitiveness by reference to appropriate independent and externally sourced
comparable benchmark information, including for comparable ASX listed companies, and based on a range of size criteria including market
capitalisation, taking into account an executive’s responsibilities, performance, qualifications, experience and geographic location.
Job evaluation methodologies are applied to assist with managing internal relativities.
TFR adjustments, if any, are made with reference to individual performance, an increase in job role or responsibility, changing market
circumstances as reflected through independent benchmark assessments or through promotion.
Any adjustments to executive KMP remuneration are approved by the Board, based on HRC and CEO/President recommendations.
4.4 Variable (at risk) remuneration explained
As set out in section 4.2, variable remuneration forms a significant portion of the CEO/President and other executive KMP remuneration
opportunity. Apart from being market competitive, the purpose of variable remuneration is to direct executives’ behaviours towards
maximising Cochlear’s short, medium and long-term performance. The key aspects are summarised below:
4.4.1 Short-term incentives (STI)
Purpose
Performance targets
The STI arrangements at Cochlear are designed to reward executives for the achievement against annual
performance targets set by the Board at the beginning of the performance period. The STI program is reviewed
annually by the HRC and approved by the Board.
Any STI award in excess of the 100% budget opportunity is individually approved by the HRC. All STI awards
to the CEO/President and other executive KMP are approved by the HRC and Board.
The key performance objectives of Cochlear are currently directed to achieving Board approved sales revenue
and EBIT targets, and by the achievement of individual performance goals.
For the current year, sales revenue and EBIT targets had equal weighting.
The weighting between Cochlear group and regional sales revenue and EBIT will depend on the responsibilities
and scope of influence of the executive KMP. Individual performance goals account for a 20% weighting for
executive KMP based on a range of individual performance objectives including strategic objectives determined
each year.
80% of STI is based on financial targets set by the Board and having regard to prior year performance, global
market conditions, competitive environment, future prospects and the Board approved budgets. The specific
targets are not detailed in this report due to their commercial sensitivity.
Validation of performance against the measures set for:
• the CEO/President involves an independent review and endorsement by the Chief Financial Officer (CFO),
reviewed and approved by the HRC and Board; and
• other executive KMP involves a review by the CEO/President based on inputs from the CFO. Final review is
undertaken by the HRC and Board.
Any anomalies or discretionary elements are approved and validated by the Board.
Rewarding performance
The STI performance ratings are determined under a predetermined matrix with the Board determination final.
Mandatory deferral of STI –
new provision to commence in
F14 effective from 1 July 2013
Effective from 1 July 2013, there will be a mandatory deferral of a portion of STI, introduced to reinforce alignment
with shareholder interests. Grants will be earned in year 1 and then held for two years until vesting to ensure focus
on short and long-term business outcomes. In addition, this plan design will offer ancillary retention benefits.
The deferred component for F14 will be delivered as Cochlear performance rights calculated based on up to 30%
of the STI amount depending on the position.
The potential equity component will be independently determined based on the gross contract value using
Cochlear’s five day volume weighted average price (VWAP) following the announcement of year end results
in August 2014. That is, based on a Black-Scholes-Merton pricing model without discounting for service or
performance hurdles. The number of performance rights to be awarded will be subject to achievement of STI
objectives at the end of the relevant financial year and offered after the year end results announcement for that
financial year.
Once the STI awarded as performance rights has been granted, there are no further performance measures
attached to the performance rights other than continued tenure for the vesting period (two years).
42P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
table 1 - executive kMp stI opportunity and actual f13 stI awarded
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Executive KMP
Chris Roberts
Richard Brook
Jan Janssen
Position
CEO/President
President, European Region
Senior Vice President, Design
and Development
Neville Mitchell
CFO and Company Secretary
Mark Salmon
Chris Smith
President, Asia Pacific Region
President, America Region
Target STI as a %
of F13 TTR
STI awarded as a
% of TTR
Actual STI award
in F13 ($)
Actual STI
forfeited in F13 as
a % of TTR
30%
21%
22%
22%
24%
23%
20.5%
16.8%
15.3%
15.3%
20.3%
12.5%
701,125
166,468
136,314
168,523
216,151
132,934
9.5%
4.2%
6.7%
6.7%
3.7%
10.5%
STI payments are based on the achievement of revenue and EBIT and personal objectives. For F13, STI targets were not fully achieved but
there was positive progress in repositioning of the business focused towards long-term growth. STI was focused on bringing to market
as soon as possible the necessary range of new innovative hearing technologies across the full product range of cochlear implants, bone
anchored solutions and acoustic products. STI was also focused towards projects to support the growing number of recipients and the
increasing number of associated clinics with a range of customer initiatives and services that are seen to be competitively beneficial and
part of the program aimed at achieving sustainable growth.
4.4.2 Long-term incentives (LTI)
The LTI provides an annual opportunity for executive KMP and other selected executives (based on their ability to influence and
execute strategy) to receive an equity award deferred for three years, that is intended to align a significant portion of executives’ overall
remuneration to shareholder value over the longer term. All LTI awards remain at risk and subject to clawback (forfeiture or lapse) until
vesting and must meet or exceed EPS growth rates and/or relative TSR performance hurdles over the vesting period.
Purpose
To align executive KMP remuneration opportunity with shareholder value and provide retention stimulus.
Types of equity awarded
Time of grant
Time restrictions
LTI up to F13 has been provided under the Cochlear Executive Long Term Incentive Plan (CELTIP). See section 5.1
for further details.
Under the CELTIP, selected senior executives are offered options (being options to acquire ordinary shares of
Cochlear Limited), performance shares (being fully paid ordinary shares of Cochlear Limited) or a combination
of both.
Effective from F14, it is intended that performance rights will replace performance shares subject to the terms of
the Cochlear Executive Incentive Plan (CEIP).
Grants up until F13 have been made in August each year after the release of the annual financial results (excluding
the CEO/President whose grant was awarded after the AGM each year). In F14, equity grants will be made after
the 2013 AGM based on values determined as at 12 August 2013.
Equity grants awarded to the CEO/President and other executive KMP are tested against the performance
hurdles set, at the end of three years. If the performance hurdles are not met at the vesting date, performance
shares are forfeited and performance options lapse.
A minimum three years’ service and performance requirement will continue to be imposed on all future
equity grants.
Performance hurdles and
vesting schedule
Equity grants to the CEO/President and other executive KMP are subject to two performance conditions. The
performance conditions applying to the latest grant (F13) were as follows:
Compound annual growth in EPS (3 years)
Ranking of TSR against S&P/ASX 100 (3 years)
Performance
% of equity to vest
Performance
% of equity to vest
< 10%
0%
< 50th percentile
0%
10% to 20%
50% to 100% pro-rata
50th to 75th percentile
50% to 100% pro-rata
> 20%
100%
> 75th percentile
100%
Options and performance shares vest if the time restrictions and relevant performance hurdles are met. The
Board must approve any special provisions, in accordance with Company policies, in the event of termination of
employment or a change of control.
43P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
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Change in TSR hurdle for F14
After consideration of shareholder feedback, the TSR hurdle rate will be modified for future LTI grants. Effective
from F14, LTI participants will now only have 40% of their award vest at the 50th percentile for the TSR portion
of their award.
Dividends
Voting rights
Currently, dividends in respect of performance shares are paid into the Cochlear Employee Share Trust, and in
turn, paid to executives during the vesting period. Once performance shares are forfeited, dividends are no longer
payable. From F14, no dividends will be attached to performance rights.
There are no voting rights attached to options or performance rights or unvested performance shares nor vested
shares unexercised.
Retesting
There is no retesting of performance hurdles under Cochlear LTI.
LTI allocation
The size of individual LTI grants for the CEO/President and other executive KMP is determined in accordance with
the Board approved remuneration strategy mix. See section 4.2.
f13
The target LTI dollar value for each executive once determined is then converted into a number of options and/or
performance shares based on a valuation methodology determined at the grant date, as follows:
• performance share allocation = LTI dollar value determined/Cochlear share value based on five day VWAP
following year end results determined in accordance with estimated IFRS-2 value; and/or
• performance option allocation = LTI dollar value determined/option value determined in accordance with
estimated IFRS-2 value.
f14
The allocation methodology for options and performance rights will be changed effective from 1 July 2013. The
target LTI dollar value for each executive will be converted to options and/or performance rights according to
new LTI allocation values and will be independently determined based on the gross contract value of the relevant
equity instrument and based on a Black-Scholes-Merton pricing model without discounting for service or EPS
and TSR performance hurdles:
• performance right allocation (from 1 July 2013) = LTI dollar value/Black-Scholes-Merton value before service or
EPS and TSR performance discounts; and/or
• performance option allocation (from 1 July 2013) = LTI dollar value/Black-Scholes-Merton value before service
or EPS and TSR performance discounts.
table 2 – Vesting outcomes (options and performance shares granted f09 to f11)
performance shares
Grant date
Vesting timeframe
EPS 3 year
CAGR*
% vested
Relative 3 year
TSR ranking
percentile
% vested
Market price on
vesting date
18-Aug-08
17-Aug-09
16-Aug-10
options
Grant date
18-Aug-08
17-Aug-09
16-Aug-10
* Compound annual growth rate.
Vested August 2011
Vested August 2012
Vested August 2013
15.2%
-24.6%
-5.5%
75.0%
0.0%
0.0%
97th
65th
28th
100.0%
79.3%
0.0%
$74.23
$64.40
N/A
Vesting timeframe
Exercise price
EPS 3 year
CAGR*
% vested Relative 3 year
TSR ranking
percentile
Vested August 2011
Vested August 2012
Vested August 2013
$49.91
$60.04
$69.80
15.2%
-24.6%
-5.5%
75.0%
0.0%
0.0%
97th
65th
28th
% vested
100.0%
79.3%
0.0%
Net market
value at
vesting
$24.32
$4.36
N/A
44P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
4.5 other remuneration elements and disclosures relevant to executive kMp
4.5.1 Clawback
Specific clawback provisions proposed under Corporations Act amendments will be automatically complied with upon proposed legislation
taking effect. There have been no circumstances where the proposed legislation would have applied.
4.5.2 Hedging and margin lending prohibition
Under the Cochlear Trading Policy and in accordance with the Corporations Act, equity granted under Cochlear equity incentive schemes
must remain at risk until vested, or until exercised if performance options or performance rights. It is a specific condition of grant that no
schemes are entered into, by an individual or their associates that specifically protect the unvested value of performance shares, options or
performance rights allocated.
Cochlear also prohibits the CEO/President or ‘Designated Persons’ (including other executive KMP) providing Cochlear securities in
connection with a margin loan or similar financing arrangement unless that person has received a specific notice of no objection in
compliance with the policy.
Cochlear, in line with good corporate governance, has a formal policy setting down how and when employees of Cochlear may deal in
Cochlear securities.
Cochlear’s Trading Policy is available on the Cochlear website www.cochlear.com under Investor Centre, Corporate Governance.
4.5.3 Cessation of employment provisions
The provisions that apply for STI and LTI awards in the case of cessation of employment are detailed in sections 6.1 (Service contracts) and 6.2
(Employment agreements).
4.5.4 Conditions of LTI grants
The conditions under which LTI (performance shares and performance options) are granted, and are approved by the Board in accordance
with the relevant scheme rules, are as summarised in section 5.
4.5.5 Minimum shareholding guidelines
The purpose of the Cochlear NED and executive share ownership guidelines is to ensure appropriate alignment of the interests of Cochlear’s
executive KMP with the financial interests of Cochlear’s shareholders.
The guidelines aim to create a share ownership focus and culture and to build long-term commitment to the Company by providing direction
to KMP as to minimum levels of share ownership.
Each executive KMP should hold Cochlear Limited shares or vested options to an amount that is at least worth one time’s his/her prior year
annual TFR, or one time’s base annual fees for NEDs, based on the 365 day average Cochlear Limited share price.
The guidelines were introduced in March 2007 and all executive KMP were expected to acquire the relevant number of shares over three years
from implementation of the guidelines. All KMP are meeting the guideline requirements at the date of this report.
4.6 Relationship between cochlear performance and executive kMp remuneration
4.6.1 Cochlear financial performance (F09 to F13)
Sales revenue ($million)
EBIT ($million)
NPAT ($million)
Basic EPS (cents)
Total dividend per share (cents)
Share price as at 30 June ($)
TSR ranking within the S&P/ASX 100
(at year end) (percentile)
F09
711.8
183.3
130.5
233.7
175.0
57.70
4
F10
696.2
220.5
155.2
275.7
200.0
74.32
18
F11
732.2
242.7
180.1
318.2
225.0
72.00
58
F12
704.6
76.5
56.8
100.0
245.0
65.84
52
F13
715.0
178.9
132.6
233.0
252.0
61.71
78
For further explanation of details on Cochlear performance, see the principal activities and review of operations and results section of the
Directors’ Report on pages 23 to 29.
45P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
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4.6.2 Cochlear current year performance and relationship to executive KMP remuneration
Over the five year period, Cochlear has experienced significant challenges due to major shifts in the global economy including the volatility
of the Australian dollar. The Board has managed executive KMP remuneration with the aim of ensuring each element of remuneration
was market competitive and provided appropriate incentives to drive the achievement of results important for both short and long-term
success. The Board believes that Cochlear has a strong management team and that the executive KMP remuneration is appropriately
balanced, all things considered.
Explaining the direct relationship between Cochlear’s financial performance as summarised in the table above and executive KMP
remuneration over the same period requires a detailed understanding of the nuances of our business over that period.
Following the voluntary recall of the CI500 series in September 2011 and the related provision of $138.8 million in the December 2011
half year financial statements, the Board adopted a multi-year approach to executive KMP STI, commencing from January 2012, aimed at
repositioning and redirecting the Company back to sustainable growth as soon as was commercially possible.
Following the recall, Cochlear’s initial focus was on care, service and support for its product recipients, clinics and healthcare professionals.
Attention was then turned to also include the wellbeing of staff and the steps necessary to protect the Company.
These steps included the establishment of short-term targets to reprioritise the business to this new environment, to protect our standing
as the world leader in implantable hearing solutions, to understand what had happened and how to deal with the related issues, and to
establish a longer-term review and reassessment of our strategic direction that would be across the whole global business and form the
basis for a longer-term coordinated initiative to support long-term sustainable growth.
The strategic plan was totally reviewed and revamped through the ensuing 12 months and was rolled out through the company
commencing in F13.
In the second half of F12, the Board approved new financial and performance targets consistent with this approach and these became the
new base for STI awards in the six month period to June 2012.
For F13, the Board similarly determined a challenging but balanced set of targets as part of the multi-year approach. The F13 financial
targets were not wholly achieved and therefore the financial component of STI was not fully awarded. On the other hand, there was strong
performance in most areas relating to the personal objectives portion of STI. Overall, the matrix of STI performance awards for executive
KMP paid out between 54% and 85% of target for F13.
For F14, the Board has considered management’s multi-year performance plans that are now aligned with the Board approved strategic
plan that is being implemented globally across the Company. The Board has approved challenging but achievable financial targets and
performance objectives focused on the final stages of the post-recall strategy with particular emphasis on getting the planned new product
range though the regulatory approval phase and available in all markets. This coming year will also be focused on strong execution of new
product releases, active competitive engagement, new initiatives to support overall market growth, and strong support and engagement
with product recipients, clinics and healthcare professionals.
Our goal is to generate sustainable growth momentum into F15 and beyond in conjunction with the expected normalisation of foreign
exchange (FX) contract related revenues and FX impacts.
4.6.3 Cochlear EPS and TSR performance (F09 to F13) and relationship to executive KMP remuneration
As explained in section 4.1, Cochlear’s remuneration framework aims to incentivise executive KMP towards long-term sustainable growth of
the business internationally and the creation of shareholder value in the short, medium and long term. This is developed in two ways:
• cash (and equity) short-term incentives, whether paid immediately depend on sales revenue and EBIT performance and outcomes for the
completed performance year (as explained in section 4.4.1); and
• long-term incentives, in the form of options and performance shares, are linked to compound annual growth in EPS and relative TSR
performance (as explained in section 4.4.2).
EPS and relative TSR are generally accepted proxies for creation of shareholder value. It is the Board’s intention to review the suitability of
these performance criteria and settings on a regular basis to ensure they best serve shareholders’ interests.
46P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
earnings per share (eps)
Cochlear’s basic EPS over the last five years is displayed in the graph below which shows the effort to return to growth despite strong
currency barriers:
cochlear – basic earnings per share (cents)
F10 275.7
F11 318.2
F09 233.7
F13 233.0
F12 100.0
The table below illustrates Cochlear’s annual growth in basic EPS in respect of performance from F09 to F11:
Grant date
Compound EPS growth to end of financial year
EPS vesting performance
18-Aug-08
17-Aug-09
16-Aug-10
F09
12.3%
F10
15.1%
18.0%
F11
15.2%
16.7%
15.4%
F12
F13
-24.6%
-39.8%
-5.5%
75.0%
0.0%
0.0%
The EPS performance over the three year period reflects the prevailing difficult business conditions, and the impact of the product recall in
F12. Refer to the principal activities and review of operations and results on pages 23 to 29 for details on the performance of Cochlear.
total shareholder return (tsR) — unaudited
Cochlear’s relative TSR performance over the relevant performance periods up to 30 June 2013 in respect of vested equity grants is set out
below. This information is unaudited.
Grant date
18-Aug-08
17-Aug-09
16-Aug-10
Relative TSR percentile
ranking
TSR vesting performance
97th
65th
28th
100.0%
79.3%
0.0%
TSR is a function of share price growth and dividends reinvested. Cochlear’s performance, however, over time, is affected by a range
of variables, including currency volatility, global economic and geopolitical conditions, market growth for its products and other
competitive pressures.
47P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
b ac k
co n t e n t s
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p d f d ow n loa d s
4.7 executive remuneration table – audited statutory disclosure (accounting cost to cochlear)
Year
Fixed remuneration
Variable remuneration
Total
Proportion of total remuneration
Short-term
Other employment
costs
Total
Short-
term2,3
Equity
compensation3,4,5
Total
Performance related
Equity related
Amounts $
Salary
Non-
monetary
benefits1
Super-
annuation
benefits
Long
service
leave
Bonus
Value of
options
Value of
perform-
ance
shares
%
%
Chris Roberts6
f13
1,349,920
F12
1,300,385
-
-
15,775
39,809 1,355,969
403,878
321,406
16,470
36,468 1,402,858
701,125
538,118
- 1,239,243 2,642,101
46.9%
20.4%
Richard Brook
f13
461,027
65,909
77,526
F12
468,104
93,708
81,225
-
-
604,462
166,468
123,627
643,037
104,804
89,442
-
-
-
725,284 2,081,253
290,095
894,557
194,246
837,283
Jan Janssen
f13
473,605
F12
453,401
Neville Mitchell
f13
507,936
F12
483,915
Mark Salmon
f13
550,889
F12
523,181
-
-
-
-
-
-
16,470
40,906
530,981
136,314
79,450
36,435
252,199
783,180
15,775
12,390
481,566
96,412
69,133
23,340
188,885
670,451
134,724
17,895
660,555
168,523
72,697
78,284
319,504
980,059
119,417
28,318
631,650
113,705
110,631
-
224,336
855,986
16,470
(540)
566,819
216,151
50,833
102,536
369,520
936,339
15,775
16,472
555,428
117,324
117,977
-
235,301
790,729
Chris Smith
f13
540,868
20,708
12,235
F12
488,741
20,404
11,760
-
-
573,811
132,934
138,301
11,954
283,189
857,000
520,905
104,417
21,212
92,954
218,583
739,488
total
Total
f13
3,884,245
86,617
273,895
94,729 4,339,486 1,521,515 1,003,026
229,209 2,753,750 7,093,236
F12
3,717,727
114,112
259,727
96,989 4,188,555
940,540
729,801
116,294 1,786,635 5,975,190
1. Benefits include the provision of pension plans, car allowances, health insurance and relocation costs which are market based payments.
2. For F12, short-term incentive (STI) payments were paid largely for second half-yearly performance only following the product recall, whereas for F13 STI payments were made for the full year (both first and second half-
years) and calculated based on budgets set in a year of recovery.
3. Short-term and long-term incentive bonuses are awarded annually. The service and performance criteria are set out in this report. See section 4.4.1 Table 1 for more detail on F13 STI payments delivery. For F13,
incentives paid represent 70% of target for the CEO/President and between 54% and 85% of target for other executive KMP.
4. The fair value of options is calculated at the date of grant using the Black-Scholes option-pricing model discounted for vesting probabilities of non-market performance criteria. The fair value of performance shares is
calculated as the share price at the date of issue discounted for vesting probabilities of non-market performance criteria.
The fair value of options and performance shares is allocated to each reporting period evenly over the period from grant date to vesting date. The amount expensed each reporting period includes adjustments to the
life-to-date expense of grants based on the reassessed estimate of achieving non-market performance criteria and final vesting amounts for the non-market performance criteria options and performance shares.
The value disclosed above is the portion of the fair value of the options and performance shares recognised as an expense in the financial year. The ability to exercise the options and performance shares is conditional on
Cochlear achieving certain performance hurdles. Further details of options and performance shares granted during the financial year are set out in this report.
5. The total value of options and performance shares recognised in the current financial year for each executive KMP is higher than in the previous financial year due to changed assumptions on discounts used in
IFRS-2 values.
6. Chris Roberts is an executive director.
34.8%
32.4%
23.2%
32.2%
28.2%
32.6%
26.2%
39.5%
29.8%
33.0%
29.6%
38.8%
29.9%
15.4%
13.8%
10.7%
14.8%
13.8%
15.4%
12.9%
16.4%
14.9%
17.5%
15.4%
17.4%
14.2%
48P
Directors’ Report Cochlear Limited for the year ended 30 June 2013
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
4.8 executive remuneration table — unaudited
This table represents the value to the executive of cash paid and vested equity awards (intrinsic value) received during the year and unvested
equity awards (IFRS-2 value) granted during the financial year, at risk. The LTI equity granted is a value determined under IFRS-2 which
may or may not vest depending on future outcomes that are uncertain. Accordingly, this table incorporates data that could represent the
accumulation of outcomes arising from multiple years.
Year
Fixed remuneration and cash incentives received
Past at risk remuneration received
during year
Actual
remuneration
received
Future at risk remuneration
received
Amounts $
Fixed
remuneration1
Incentives2
Total cash
Intrinsic value of
vested options3
Intrinsic value
of vested
performance
shares3
Incentives
(deferred as cash)4
LTI (equity)
granted during
year5
Chris Roberts
Richard Brook
Jan Janssen
Neville Mitchell
Mark Salmon
Chris Smith
total
Total
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
f13
F12
1,366,390
780,312
2,146,702
38,802
1,316,160
445,690
1,761,850
1,413,564
604,462
162,124
766,586
13,019
643,037
134,555
777,592
422,129
490,075
148,124
638,199
9,507
469,176
110,245
579,421
345,952
642,660
183,638
826,298
13,697
603,332
129,590
732,922
499,342
567,359
192,616
759,975
12,809
538,956
161,239
700,195
466,191
573,811
160,574
734,385
14,818
-
-
-
-
-
-
-
-
-
-
-
2,185,504
299,692
1,026,353
3,175,414
378,878
986,831
779,605
84,945
184,030
1,199,721
80,600
197,122
647,706
59,602
196,030
925,373
71,412
186,731
839,995
73,590
242,593
1,232,264
88,705
231,041
772,784
115,859
254,190
1,166,386
92,324
242,126
749,203
51,748
250,102
520,905
130,860
651,765
414,180
99,418
1,165,363
79,388
218,384
4,244,757
4,091,566
1,627,388
1,112,179
5,872,145
5,203,745
102,652
3,561,358
-
99,418
5,974,797
8,864,521
685,436
791,307
2,153,298
2,062,235
1. Represents the value of base salary, non-monetary benefits and superannuation received during the year (excludes the accrued value of long service leave).
2. Represents STI payments received during the financial year. For example, F13 data includes F12 second half-year STI and F13 first-half year STI payments.
3. Reflects the intrinsic value of vested employee share scheme (ESS) benefits at the end of the financial year (refer to section 5.4).
4. Reflects STI payments related to the current financial year but paid in future years. For example, F13 data includes the F13 second half-year STI payment scheduled for payment during F14.
5. Represents the accounting value (IFRS-2) of equity grants (options and/or performance shares) awarded during the year that are unvested and will be subject to achievement of future performance hurdles.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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5.0 employee share scheme and other share information
This section provides:
1. a description of the employee share schemes (ESS) Cochlear uses to provide equity rewards to Cochlear employees;
2. disclosures required in relation to ESS grants provided to executive KMP;
3. disclosures required about ESS instruments that Cochlear has issued;
4. disclosures required in relation to Cochlear Limited shares and other ESS instruments held by executive KMP;
5. Cochlear’s share ownership guidelines; and
6. Cochlear’s Trading Policy.
5.1 employee share schemes operated by cochlear
plan details
type of instruments
details
purpose
Cochlear Employee Share Plan
(CESP)
Date established: 1999
Ordinary shares
Issue up to $1,000 worth of
shares annually.
Cochlear Executive Long Term
Incentive Plan (CELTIP)
Date established: 2003 AGM
Ordinary shares (options and/or
performance shares)
A long-term performance incentive
scheme designed to reward
participants for achieving market
competitive EPS and relative TSR,
as approved. Participants receive
options and/or ordinary shares
based on a predetermined formula.
Cochlear Executive Incentive
Plan (CEIP)
Date established: July 2013
Awards consisting of ordinary
shares; performance rights; options;
and/or share appreciation rights.
A performance incentive scheme
designed to reward participants
for achieving market competitive
business outcomes. Participants
receive an award based on a
predetermined formula, as
approved by the Board from time
to time based on market standards
and trends.
The purpose of the CESP is to
encourage general employee
equity participation through tax
concessional enabling legislation.
Under the 2012 grant, 1,254
employees each received an
award of 13 shares under the plan.
Executive KMP and other executives
rewarded under the Cochlear
Executive Long Term Incentive
Plan or the Cochlear Executive
Incentive Plan are not eligible for
this program.
The purpose of the CELTIP is
to encourage employees and
executives of Cochlear to receive
performance shares or performance
options. Vesting of performance
shares and performance options
occurs only if Cochlear achieves
challenging and market competitive
EPS growth and relative TSR
hurdles. Target allocations are made
based on seniority, the ascribed LTI
remuneration value and a value
formula approved by shareholders
in 2003.
The purpose of the CEIP is to
develop the principles established
with the CELTIP but to create
greater flexibility in award structure
to cater for Cochlear’s expanding
geography and to meet changing
market standards and expectations.
The offer terms for CEIP awards
will be flexible but will meet
contemporary LTI design standards.
There have been no awards under
the CEIP as at the date of this
report. Also refer to section 4.4.2.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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5.2 employee share scheme grants to executive kMp
5.2.1 Analysis of share based payments granted as remuneration
Details of vesting profile of the options and performance shares granted as remuneration to each executive KMP are set out below:
Grant date
Options
Performance shares
Number
granted
Number
vested
Number
forfeited
Market value of
vested options ($)1
Number
granted
Number
vested
Number
forfeited
Market value of
vested shares ($)1
Chris Roberts
18-Aug-08
101,412
88,736
12,676
17-Aug-09
58,599
23,235
35,364
16-Aug-10
86,272
15-Aug-11
117,620
13-Aug-12
231,161
-
-
-
-
-
-
1,413,564
38,802
-
-
-
total
595,064
111,971
48,040
1,452,366
Richard Brook
18-Aug-08
30,285
26,499
17-Aug-09
19,663
7,796
16-Aug-10
17,674
15-Aug-11
23,495
13-Aug-12
41,448
-
-
-
3,786
11,867
-
-
-
Jan Janssen
total
132,565
34,295
15,653
18-Aug-08
17-Aug-09
16-Aug-10
15-Aug-11
24,819
14,358
17,559
11,128
13-Aug-12
26,491
21,717
5,693
3,102
8,665
-
-
-
-
-
-
total
94,355
27,410
11,767
Neville Mitchell
18-Aug-08
35,824
31,346
4,478
17-Aug-09
20,686
8,202
12,484
16-Aug-10
15-Aug-11
21,302
27,538
13-Aug-12
10,928
-
-
-
-
-
-
total
116,278
39,548
16,962
Mark Salmon
18-Aug-08
33,446
29,265
17-Aug-09
19,344
7,670
16-Aug-10
22,363
15-Aug-11
28,859
13-Aug-12
-
-
-
-
4,181
11,674
-
-
-
Chris Smith
18-Aug-08
29,714
26,000
3,714
total
104,012
36,935
15,855
17-Aug-09
22,379
8,873
13,506
16-Aug-10
-
15-Aug-11
20,823
13-Aug-12
45,063
-
-
-
-
-
-
422,129
13,019
-
-
-
435,148
345,952
9,507
-
-
-
355,459
499,342
13,697
-
-
-
513,039
466,191
12,809
-
-
-
479,000
414,180
14,818
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,234
2,473
4,707
-
-
-
-
6,120
6,120
-
-
-
-
8,016
8,016
1,726
-
5,781
1,045
1,577
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,510
216
99,418
-
-
-
-
-
-
-
-
-
-
-
-
total
117,979
34,873
17,220
428,998
10,129
1,510
216
99,418
1.
The intrinsic value of vested options calculated as at the closing market price of shares of the Company on the ASX on 30 June of the year the award vests less the applicable exercise price times the number of
options (negative values are treated as zero in the totals) and/or vested performance shares as at the closing market price of shares of the Company on the ASX on 30 June of the year the award vests. No value
will be reflected for unvested awards, or for vested options whose exercise price was above the market price (i.e. of no value to the individual).
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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The options granted in F13 have an exercise price of $62.78 per share and an expiration date of 1 July 2017. The options granted during the
year have a fair value (IFRS-2) of $8.56 per share at grant date for options with EPS performance based conditions and $5.70 per share
at grant date for options with TSR based conditions. The performance shares granted during the financial year had a fair value (IFRS-2)
at grant date of $62.78 per share for performance shares with EPS performance based conditions and $39.55 per share at grant date for
performance shares with TSR based conditions.
5.2.2 Exercise of options and performance shares granted as remuneration
During F13, the following shares were acquired on the exercise of options previously granted as part of remuneration:
Chris Roberts1
Richard Brook1
Jan Janssen1
Neville Mitchell
Mark Salmon
Chris Smith
Number of shares Amount paid to exercise
each option ($)
Total gross transaction
value - amount paid on
exercise ($)
Net market value ($)2
-
-
-
8,202
7,670
6,000
-
-
-
60.04
60.04
49.91
-
-
-
492,448
460,507
299,460
-
-
-
44,737
41,835
122,910
1. These executives have not exercised options or performance shares in F13.
2. Represented by taxable value during the financial year.
There are no amounts unpaid on the shares issued as a result of the exercise of the options in prior years.
5.2.3 Analysis of movement in options and shares
The movement in number and value during the financial year of options over ordinary shares of Cochlear Limited acquired under the CELTIP
plan held by executive KMP is detailed below:
Opening value
Granted in year
Exercised in year
Forfeited in year
Closing value
Number
Value ($)1
Number
Value ($)2
Number
Value ($)3
Number
Value ($)3
Number
Intrinsic
value ($)4
Chris Roberts
313,750
2,367,201
231,161
1,026,355
Richard Brook
60,833
549,140
41,448
184,029
Jan Janssen
43,045
489,659
26,491
117,620
-
-
-
-
-
-
86,623
253,805
458,288
38,802
11,867
34,770
90,414
13,019
8,665
25,388
60,871
9,507
Neville Mitchell
69,526
628,080
10,928
48,520
8,202
44,737
12,484
36,578
59,768
Mark Salmon
70,566
649,628
-
-
7,670
41,835
11,674
34,205
51,222
-
-
Chris Smith
49,203
674,897
45,063
200,080
6,000
122,910
13,506
39,573
74,760
14,818
total
606,923
5,358,605
355,091
1,576,604
21,872
209,482
144,819
424,319
795,323
76,146
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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The movement in number and value during the financial year of performance shares acquired under the CELTIP held by executive KMP is
detailed below:
Opening value
Granted in year
Exercised in year
Forfeited in year
Closing value
Number
Value ($)1
Number
Value ($)2
Number
Value ($)3
Number
Value ($)3
Number
Chris Roberts
Richard Brook
-
-
-
-
-
-
-
-
Jan Janssen
2,234
93,359
2,473
78,419
Neville Mitchell
Mark Salmon
-
-
-
-
6,120
194,065
8,016
254,187
Chris Smith
6,826
281,848
1,577
50,007
total
9,060
375,207
18,186
576,678
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Intrinsic
value ($)4
-
-
-
-
4,707
290,469
6,120
377,665
8,016
494,667
8,403
518,549
27,246 1,681,350
1. The fair value derived under IFRS-2 of remaining options and/or shares granted but not yet forfeited, lapsed or exercised during the financial year is the fair value of the options calculated at grant date using the Black-
Scholes model and derived applying the valuation methodology prescribed. The total value of the options and/or shares granted is included in the table above.
2. The fair value derived under IFRS-2 of options and/or shares granted during the financial year is the fair value of the options and/or performance shares calculated at grant date using the Black-Scholes model and
derived applying the valuation methodology prescribed. The total value of the options and/or shares granted is included in the table above. This amount is allocated to remuneration over the vesting period (ie in each
of F13 to F15).
3. The calculated value of options exercised and forfeited during the year is calculated as the market price of shares of the Company on the ASX as at close of trading on the date the options were exercised or date of
forfeiture after deducting the price paid or payable to exercise the option.
4. The intrinsic value of options calculated as at the closing market price of shares of the Company on the ASX on 28 June 2013 less the applicable exercise price times the number of options (negative values are treated
as zero in the totals) and/or performance shares as at the closing market price of shares of the Company on the ASX on 28 June 2013.
5.3 potential dilution if options vest and ordinary shares issued (unaudited)
At the date of this report, the number of ordinary shares that would be issued if all options were vested, having met the service and
performance conditions, and exercised and assuming ordinary shares were issued, is as follows:
Grant date
Number of options
Exercise price per
share ($)
Exercise period
Current net value as
at 30-Jun-13 ($)2
18-Aug-08
17-Aug-09
16-Aug-10
15-Aug-11
13-Aug-12
total
Issued
Exercised
Lapsed1
At report
date
712,331
609,100
103,231
-
49.91
Aug-11 to 1-Jul-13
-
435,606
70,995
278,937
85,674
60.04
Aug-12 to 1-Jul-14
143,076
443,498
542,948
759,828
-
-
-
43,629
399,869
69.80
Aug-13 to 1-Jul-15
25,883
517,065
68.56
Aug-14 to 1-Jul-16
24,436
735,392
62.78
Aug-15 to 1-Jul-17
2,894,211
680,095
476,116
1,738,000
-
-
-
143,076
1. Lapsed options from unvested grants (granted in 2010, 2011 and 2012) relate to plan members who have departed Cochlear.
2. Price as at 28 June 2013 was $61.71 (30 June 2013 was a weekend day). The exercise price for options granted in 2010, 2011 and 2012 was below the market price as at 28 June 2013.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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5.4 kMp equity interests (unaudited)
In accordance with the Corporations Act (section 205G(1)), Cochlear is required to notify the interests (shares and rights to shares)
of directors to the ASX.
In the interests of transparency and completeness of disclosure this information is provided for each NED (as required under the
Corporations Act) and all executive KMP as well.
Please refer to sections 4.5.2 (Hedging and margin lending prohibition) and 4.5.5 (Minimum shareholding guidelines).
The table below indicates Cochlear Limited shareholding including any vested but unexercised options and performance shares:
neds
Rick Holliday-Smith
Yasmin Allen
Paul Bell
Edward Byrne
Andrew Denver
Donal O’Dwyer
total neds
executives
executive director
Chris Roberts
other executives
Richard Brook
Jan Janssen
Neville Mitchell
Mark Salmon
Chris Smith
total executives
Cochlear Limited
ordinary shares
9,250
2,950
3,000
3,250
4,000
5,000
27,450
Total intrinsic value of
Cochlear Limited securities
as at year end ($)3
570,818
182,045
185,130
200,558
246,840
308,550
1,693,941
Cochlear Limited
ordinary shares
Vested options over
Cochlear Limited
ordinary shares1
Vested performance
shares over Cochlear
Limited ordinary shares2
Total intrinsic value of
Cochlear Limited securities
as at year end ($)3
719,803
7,700
13,328
10,000
9,740
10,000
770,571
23,235
7,796
5,693
-
-
8,873
45,597
-
-
-
-
-
-
-
44,457,846
488,186
831,978
617,100
601,055
631,918
47,628,083
1. The number of vested but unexercised options.
2. The number of vested but unexercised performance shares.
3. The intrinsic value of Cochlear Limited ordinary shares and vested performance shares as at the closing Cochlear Limited share price on the ASX on 28 June 2013, plus the intrinsic value of vested options calculated as
at the closing Cochlear Limited share price on the ASX on 28 June 2013 less the applicable exercise price times the number of options (negative values are treated as zero in the totals). Please note the share ownership
guideline applies an average share price to NEDs’ and executive KMP’s holdings not intrinsic value at year end.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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The table below illustrates any unvested options and performance shares issued to executive KMP but still subject to performance hurdles:
Unvested options over Cochlear
Limited ordinary shares1
Unvested performance shares over
Cochlear Limited ordinary shares2
Total intrinsic value of unvested
options and performance shares
as at year end ($)3
executive director
Chris Roberts
other executives
Richard Brook
Jan Janssen
Neville Mitchell
Mark Salmon
Chris Smith
total executives
435,053
82,618
55,178
59,768
51,222
65,887
749,726
-
-
4,707
6,120
8,016
8,403
27,246
-
-
290,469
377,665
494,667
518,549
1,681,350
1. The number of unvested options.
2. The number of unvested performance shares.
3. The intrinsic value of unvested performance shares as at the closing Cochlear Limited share price on the ASX on 28 June 2013 and the intrinsic value of unvested options calculated as at the closing Cochlear Limited
share price on the ASX on 28 June 2013 less the applicable exercise price times the number of options (negative values are treated as zero in the totals).
6.0 service contracts and employment agreements (audited)
6.1 service contracts
Cochlear does not enter into service contracts for executive KMP, other than the CEO/President.
The following sets out details of the service contract terms for the current CEO/President, Dr Roberts:
Length of contract
Dr Roberts is on a permanent contract, which is an ongoing employment contract until notice is given by
either party.
Notice periods
In order to terminate the employment arrangements, Dr Roberts is required to provide Cochlear with six months’
written notice. Cochlear must provide Dr Roberts with 12 months’ written notice.
Termination on notice
by Cochlear
Death or total and
permanent disability
Cochlear may terminate employment by providing six months’ written notice or payment in lieu of the notice
period based on total fixed remuneration (TFR). On termination on notice by Cochlear, unless the Board determines
otherwise Dr Roberts shall receive:
• payment equivalent to 12 months’ TFR;
• pro-rated STI benefits for the months of service in the financial year to which the plan relates; and
• if determined by the Board, in its sole discretion, the entitlements (if any) to LTI benefits.
If Cochlear terminates employment for reasons of death or total and permanent disability, a severance payment
will be made that is equal to 12 months’ fixed remuneration.
All STI and LTI benefits are either:
• released in full or on a pro-rata basis; or
• remain subject to clawback and are released at the original vesting date at the discretion of the Board with
regard to the circumstances.
On death or total and permanent disability, the Board has discretion to allow unvested STI and LTI benefits to vest.
Statutory entitlements
Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.
Post-employment restraints
For a period of 12 months after termination date without the consent of Cochlear for engagement in business
competition or to induce Cochlear NEDs or staff to terminate their employment.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
6.2 employment agreements
Other executive KMP operate under employment agreements.
The following sets out details of the employment agreements relating to other executive KMP. The terms for all other executive KMP are
similar but do, on occasion, vary to suit different needs.
Length of contract
All other executive KMP are on permanent contracts, which is an ongoing employment contract until notice
is given by either party.
Notice periods
Resignation
In order to terminate the employment arrangements, other executive KMP are required to provide Cochlear with
between 60 days’ and six months’ written notice.
On resignation, unless the Board determines otherwise:
• all unvested STI or LTI benefits are forfeited.
Termination on notice
by Cochlear
Cochlear may terminate employment by providing between 60 days’ and 12 months’ written notice or
payment in lieu of the notice period based on TFR. On termination on notice by Cochlear, unless the Board
determines otherwise:
• unvested STI or LTI benefits may be exercised or paid within 30 days of notice being given.
Redundancy
If Cochlear terminates employment for reasons of redundancy, under Cochlear policy a severance payment will
be made of up to 12 months’ TFR.
All STI and LTI benefits are either:
• released in full or on a pro-rata basis; or
• remain subject to performance criteria and vesting date
at the discretion of the Board with regard to the circumstances.
Death or total and
permanent disability
On death or total and permanent disability, the Board has discretion to allow all unvested STI and LTI
benefits to vest.
Termination for
serious misconduct
Cochlear may immediately terminate employment at any time in the case of serious misconduct, and other
executive KMP will only be entitled to payment of TFR up to the date of termination.
On termination without notice by Cochlear in the event of serious misconduct:
• all unvested STI or LTI benefits will be forfeited; and
• any ESS instruments provided to the employee on vesting of STI or LTI awards that are held in trust,
will be forfeited.
Statutory entitlements
Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.
Other arrangements
Richard Brook - President, European Region will receive:
• a maximum of Swiss francs (CHF) 30,000 for repatriation costs in the case of termination or resignation; and
• redundancy benefits - refer to relevant Swiss legislation.
Post-employment restraints
All other executive KMP are subject to post-employment restraints for up to 12 months.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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Indemnification of officers
Under the terms of Article 35 of the Company’s Constitution, and to the extent permitted by law, the Company has indemnified the
directors of the Company named in this Directors’ Report, the Company Secretary, Mr NJ Mitchell, and other persons concerned in or
taking part in the management of the Consolidated Entity. The indemnity applies when persons are acting in their capacity as officers of the
Company in respect of:
• liability to third parties (other than the Company or related bodies corporate), if the relevant officer has acted in good faith; and
• costs and expenses of successfully defending legal proceedings in which relief under the Corporations Act 2001 is granted to the
relevant officer.
Insurance premiums
During the financial year, the Company paid a premium for a Directors’ and Officers’ Liability Insurance policy and a Supplementary Legal
Expenses Insurance policy. The insurance provides cover for the directors named in this Directors’ Report, the Company Secretary, and
officers and former directors and officers of the Company. The insurance also provides cover for present and former directors and officers of
other companies in the Consolidated Entity. The directors have not included in this report details of the nature of the liabilities covered and
the amount of the premium paid in respect of the Directors’ and Officers’ Liability and Supplementary Legal Expenses Insurance policies, as
such disclosure is prohibited under the terms of the contract.
Events subsequent to the reporting date
Other than the matters noted below, there has not arisen in the interval between the end of the financial year and the date of this Directors’
Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect
significantly the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years:
dividends
For dividends declared after 30 June 2013, see Note 9 to the financial statements.
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Directors’ Report Cochlear Limited for the year ended 30 June 2013
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Lead auditor’s independence declaration
The lead auditor’s independence declaration is set out on page 58 and forms part of the Directors’ Report for the financial year ended
30 June 2013.
Rounding off
The Company is of a kind referred to in Australian Securities and Investments Commission (ASIC) Class Order 98/100 dated 10 July 1998
and in accordance with that Class Order, amounts in the Directors’ Report and Financial Report have been rounded off to the nearest one
thousand dollars, unless otherwise indicated.
Dated at Sydney this 19 day of August 2013.
Signed in accordance with a resolution of the directors:
Director
Director
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Lead Auditor’s Independence Declaration
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lead auditor’s independence declaration under section 307c of the corporations act 2001
To: the directors of Cochlear Limited
I declare that, to the best of my knowledge and belief, in relation to the audit for the year ended 30 June 2013 there have been:
(i)
no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
(ii) no contraventions of any applicable code of professional conduct in relation to the audit.
KPMG
Sydney, 19 August 2013
Bruce Phillips, Partner
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Income Statement Cochlear Limited and its controlled entities for the year ended 30 June 2013
Revenue
Cost of sales
Cost of sales – product recall
Gross profit
Selling and general expenses
Administration expenses
Research and development expenses
Other income
Other expenses
Results from operating activities
Finance income
Finance expense
net finance expense
profit before income tax
Income tax expense
net profit
Basic earnings per share (cents)
Diluted earnings per share (cents)
The notes on pages 64 to 113 are an integral part of these consolidated financial statements.
2013
$000
2012
$000
752,721
778,996
(208,072)
(203,260)
-
(138,835)
544,649
436,901
(202,781)
(197,091)
(38,157)
(45,429)
(124,715)
(119,322)
2,379
(2,515)
178,860
659
(6,882)
(6,223)
172,637
(40,074)
132,563
233.0
232.4
1,745
(349)
76,455
1,852
(6,150)
(4,298)
72,157
(15,354)
56,803
100.0
99.8
Note
5(a)
5(b)
29
5(c)
5(d)
6
6
8
11
11
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Statement of Comprehensive Income Cochlear Limited and its controlled entities for the year ended 30 June 2013
net profit
other comprehensive income/(loss)
Items that may be reclassified subsequently to the income statement:
Foreign currency translation differences
Effective portion of changes in fair value of cash flow hedges, net of tax
Net change in fair value of cash flow hedges transferred to the income statement, net of tax
Total items that may be reclassified subsequently to the income statement
total other comprehensive loss
total comprehensive income
The notes on pages 64 to 113 are an integral part of these consolidated financial statements.
Note
6
6
2013
$000
2012
$000
132,563
56,803
29,179
(18,304)
(21,206)
(26,384)
(18,411)
26,639
(52,108)
(43,773)
(18,411)
(43,773)
114,152
13,030
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Balance Sheet Cochlear Limited and its controlled entities as at 30 June 2013
assets
Cash and cash equivalents
Trade and other receivables
Inventories
Current tax assets
Prepayments
total current assets
Trade and other receivables
Property, plant and equipment
Intangible assets
Deferred tax assets
total non-current assets
total assets
liabilities
Trade and other payables
Loans and borrowings
Current tax liabilities
Provisions
Deferred revenue
total current liabilities
Trade and other payables
Loans and borrowings
Provisions
total non-current liabilities
total liabilities
net assets
equity
Share capital
Reserves
Retained earnings
total equity
The notes on pages 64 to 113 are an integral part of these consolidated financial statements.
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Note
2013
$000
2012
$000
23(a)
52,689
68,486
12
13
16
12
14
15
16
17
18
16
20
17
18
20
203,748
189,085
131,574
101,298
6,207
11,004
5,763
9,249
405,222
373,881
944
65,898
235,774
56,663
11,840
59,611
206,715
50,495
359,279
328,661
764,501
702,542
96,789
100,218
3,309
6,002
63,224
22,506
45,744
19,526
78,366
18,089
191,830
261,943
13,242
167,160
35,356
215,758
735
19,928
35,056
55,719
407,588
317,662
356,913
384,880
118,788
121,136
(32,433)
(16,762)
270,558
280,506
356,913
384,880
62P
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Statement of Changes in Equity Cochlear Limited and its controlled entities for the year ended 30 June 2013
Amounts $000
2012
Issued
capital
Treasury
reserve
Translation
reserve
Hedging
reserve
Share based
payment
reserve
Retained
earnings
Total equity
Balance at 1 July 2011
123,226
(3,489)
(65,849)
56,379
32,827
360,189
503,283
125,865
(4,729)
(84,153)
30,910
36,481
280,506
384,880
Balance at 1 July 2012
125,865
(4,729)
(84,153)
30,910
36,481
280,506
384,880
total comprehensive income
Net profit
other comprehensive (loss)/income
Foreign currency translation differences
Effective portion of changes in fair value of cash
flow hedges, net of tax
Net change in fair value of cash flow hedges
reclassified to the income statement, net of tax
total other comprehensive loss
total comprehensive (loss)/income
transactions with owners, recorded directly
in equity
-
-
-
-
-
-
-
-
-
-
-
-
-
(18,304)
-
-
-
-
26,639
(52,108)
(18,304)
(25,469)
(18,304)
(25,469)
Shares issued, net
2,639
(1,240)
-
-
-
-
-
-
-
-
-
-
Share based payment transactions
Dividends to shareholders
balance at 30 June 2012
2013
total comprehensive income
Net profit
other comprehensive income/(loss)
Foreign currency translation differences
Effective portion of changes in fair value of cash
flow hedges, net of tax
Net change in fair value of cash flow hedges
reclassified to the income statement, net of tax
total other comprehensive income/(loss)
total comprehensive income/(loss)
transactions with owners, recorded directly
in equity
-
-
-
-
-
-
-
-
-
-
-
-
-
29,179
-
-
-
-
(21,206)
(26,384)
29,179
(47,590)
29,179
(47,590)
Shares repurchased, net
2,331
(4,679)
-
-
-
-
-
-
-
-
-
-
Share based payment transactions
Dividends to shareholders
balance at 30 June 2013
The notes on pages 64 to 113 are an integral part of these consolidated financial statements.
-
-
-
-
-
-
-
3,654
56,803
56,803
-
-
-
-
(18,304)
26,639
(52,108)
(43,773)
56,803
13,030
-
-
1,399
3,654
-
(136,486)
(136,486)
-
-
-
-
-
-
-
2,740
132,563
132,563
-
-
-
-
29,179
(21,206)
(26,384)
(18,411)
132,563
114,152
-
-
(2,348)
2,740
-
(142,511)
(142,511)
128,196
(9,408)
(54,974)
(16,680)
39,221
270,558
356,913
63P
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Statement of Cash Flows Cochlear Limited and its controlled entities for the year ended 30 June 2013
cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Grant and other income received
Interest received
Interest paid
Income taxes paid
net cash provided by operating activities
cash flows from investing activities
Acquisition of property, plant and equipment
Acquisition of enterprise resource planning system
Acquisition of other intangible assets
net cash used in investing activities
cash flows from financing activities
Repayments of borrowings
Proceeds from borrowings
Shares (repurchased)/issued, net
Dividends paid
net cash used in financing activities
net decrease in cash and cash equivalents
Cash and cash equivalents, net of overdrafts at 1 July
Effect of exchange rate fluctuations on cash held
cash and cash equivalents, net of overdrafts at 30 June
23(a)
The notes on pages 64 to 113 are an integral part of these consolidated financial statements.
Note
2013
$000
2012
$000
669,311
724,842
(555,798)
(512,963)
2,379
617
(6,967)
(39,815)
1,745
1,746
(5,972)
(41,118)
23(b)
69,727
168,280
(21,074)
(14,477)
(14,868)
(20,843)
(9,972)
(6,629)
(50,419)
(37,444)
(89,000)
(141,000)
195,000
143,000
(2,348)
1,399
9
(142,511)
(136,486)
(38,859)
(133,087)
(19,551)
68,486
3,754
52,689
(2,251)
72,423
(1,686)
68,486
64P
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
1. Reporting entity
Cochlear Limited (the Company) is a company domiciled in Australia. The consolidated financial statements of the Company as at and
for the year ended 30 June 2013 comprise the Company and its controlled entities (together referred to as Cochlear or the Consolidated
Entity). Cochlear is a for-profit entity and operates in the implantable hearing device industry.
2. Basis of preparation
(a) statement of compliance
The Financial Report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards
(AASBs) adopted by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements comply
with International Financial Reporting Standards (IFRS) and Interpretations adopted by the International Accounting Standards Board.
The consolidated financial statements were approved by the Board of directors on 19 August 2013.
(b) basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are
measured at fair value. The method used to measure the fair value of derivative instruments is discussed further in Note 3(e).
(c) functional and presentation currency
These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency.
The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial
information presented in Australian dollars has been rounded to the nearest one thousand dollars unless otherwise stated.
(d) use of judgements and estimates
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and then reported amounts of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the financial
year in which the estimate is revised and in any future years affected.
Management discussed with the Audit Committee the development, selection and disclosure of Cochlear’s critical accounting policies and
estimates and the application of these policies and estimates.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the
next financial year is included in the following notes:
Note 15 – Intangible assets
Note 20 – Provisions
Note 21 – Contingent liabilities
Note 26 – Employee benefits
Note 27 – Financial instruments
Note 29 – Product recall.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements and
have been applied consistently by all entities in Cochlear.
(a) basis of consolidation
Controlled entities
Controlled entities are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to
govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting
rights that presently are exercisable or convertible are taken into account. The financial statements of controlled entities are included in
the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of
controlled entities have been changed when necessary to align them with the policies adopted by the Consolidated Entity.
Acquisitions of a minority interest in a controlled entity are treated as a transaction with owners. Consequently, the difference between the
purchase consideration and the carrying amount of Cochlear’s interest in the net assets of the controlled entity is treated as goodwill.
Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in
preparing the consolidated financial statements.
Special purpose entities
Cochlear has established special purpose entities (SPEs) for trading and investment purposes. A SPE is consolidated if, based upon an evaluation
of the substance of its relationship with Cochlear and the SPE’s risks and rewards, Cochlear concludes that it controls the SPE. SPEs controlled
by Cochlear were established under terms that impose strict limitations on decision-making powers of the SPE’s management.
(b) Income recognition
Revenues are recognised at fair value of the consideration received net of the amount of goods and services tax (GST).
Sales revenue
Sales revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products or services. Revenue from
the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the
buyer. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or if there is a risk of return
of goods or there is continuing management involvement with the goods. Revenue from the sale of services is recognised when the service
has been provided to the customer and where there are no continuing unfulfilled service obligations.
The accounting policy for foreign exchange gains/losses arising from hedges of forecast sales transactions is set out in accounting policy (e).
Other income
Other income, including government grants, is recognised on a systematic basis over the years necessary to match it with the related costs
for which it is intended to compensate or, if the costs have already been incurred, in the year in which it becomes receivable. The income is
deemed to be receivable when the entitlement is confirmed. Dividend income from subsidiaries is recognised by the parent entity when the
dividends are declared by the subsidiary.
(c) Goods and services tax
Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from
the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant
taxation authority is included as a current asset or liability in the balance sheet.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and
financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows.
(d) foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of controlled entities at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated
to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at historical cost are translated using the exchange rate at the date of the transaction. Non-monetary assets and
liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at the foreign exchange
rates ruling at the date the fair value was determined.
Foreign exchange differences arising on translation are recognised in the income statement.
66P
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Financial statements of foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, generally are translated
to the functional currency at foreign exchange rates ruling at the reporting date.
The revenues and expenses of foreign operations are translated to the functional currency at rates approximating the foreign exchange rates
ruling at the dates of transactions.
Foreign currency differences arising from translation of controlled entities with a different functional currency to that of the Company are
recognised in the foreign currency translation reserve (translation reserve). When a foreign operation is disposed of, in part or in full, the
relevant amount of its translation reserve is transferred to the income statement and reported as part of the gain or loss on disposal.
Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of
which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are
recognised in other comprehensive income, and presented in the translation reserve in equity.
(e) financial instruments
Derivative financial instruments
Cochlear holds derivative financial instruments to hedge its exposure to foreign exchange risk and interest rate risk arising from operating,
investing and financing activities. In accordance with its treasury policy, Cochlear does not hold or issue derivative financial instruments for
trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
On initial designation of the hedge, Cochlear formally documents the relationship between the hedging instrument and hedged item,
including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used
to assess the effectiveness of the hedging relationship. Cochlear makes an assessment, both at inception of the hedge relationship as well
as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or
cash flows of the respective hedged items during the year for which the hedge is designated, and whether the actual results of each hedge
are within a range of 80% to 125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and
should present an exposure to variations in cash flows that could ultimately occur.
Derivative financial instruments are recognised initially at fair value. Attributable transaction costs are recognised in the income statement
when incurred. Subsequent to initial recognition, derivative financial instruments are measured at fair value with changes in fair value
accounted for as described below.
Non-derivative financial assets
Cochlear initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including
assets designated at fair value through profit or loss) are recognised initially on the trade date at which Cochlear becomes a party to the
contractual provisions of the instrument.
Cochlear derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to
receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the
financial asset are transferred. Any interest in transferred financial assets that is created or retained by Cochlear is recognised as a separate
asset or liability.
Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, Cochlear has a legal right
to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Cochlear has the following non-derivative financial assets: financial assets at fair value through profit or loss and loans and receivables.
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such upon
initial recognition. Financial assets are designated at fair value through profit or loss if Cochlear manages such investments and makes
purchase and sale decisions based on their fair value in accordance with Cochlear’s documented risk management or investment strategy.
Attributable transaction costs are recognised in profit or loss when incurred. Financial assets at fair value through profit or loss are measured
at fair value, and changes therein are recognised in profit or loss.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are
measured at amortised cost using the effective interest rate method, less any impairment losses.
Loans and receivables comprise cash and cash equivalents, and trade and other receivables.
Non-derivative financial liabilities
Cochlear initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial
liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which Cochlear
becomes a party to the contractual provisions of the instrument.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Cochlear derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, Cochlear has a legal right
to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Cochlear classified non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised
initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured
at amortised cost using the effective interest rate method.
Other financial liabilities comprise bank overdrafts, other loans and borrowings and trade and other payables.
Bank overdrafts that are repayable on demand and form an integral part of Cochlear’s cash management are included as a component of
cash and cash equivalents for the purpose of the statement of cash flows.
Accounting for finance income and expense is discussed in accounting policy (q).
Determination of fair values
The fair value of forward exchange contracts is based upon the listed market price, if available. If a listed market price is not available, the
fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual
maturity of the contract using a risk free interest rate based upon government bonds.
The fair value of interest rate swaps is based upon broker quotes which are then tested for reasonableness by discounting future estimated
cash flows based upon the terms and maturity of each contract and using market interest rates for similar instruments.
Other
Other non-derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses.
Cash flow hedges
Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognised directly in equity to the extent
that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the income statement.
If the derivative financial instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then
hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast
transaction occurs or when cash flows arising from the transaction are received.
When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated
cumulative gain or loss is removed from equity and transferred to the carrying amount of the non-financial asset or liability. If a hedge of a
forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses
that were previously recognised directly in equity are reclassified into the income statement in the same year or years during which the
asset acquired or liability assumed affects the income statement.
For cash flow hedges, other than those covered by the preceding statement, the associated cumulative gain or loss is removed from
equity and recognised in the income statement in the same year or years during which the hedged forecast transaction affects the income
statement and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognised immediately
in the income statement.
Hedges of net investment in foreign operations
Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign
operation are recognised in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the
translation reserve. To the extent that the hedge is ineffective, such differences are recognised in the income statement. When the hedged
part of a net investment is disposed of, the relevant amount in the translation reserve is transferred to the income statement as part of the
profit or loss on disposal.
(f) cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts
that are repayable on demand and form an integral part of Cochlear’s cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
(g) provisions
A provision is recognised in the balance sheet when Cochlear has a present legal or constructive obligation as a result of a past event that
can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of
money and the risk specific to the liability. The unwinding of the discount rate is recognised as a finance expense.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Warranties
Provisions for warranty claims are made for claims in relation to sales made prior to the reporting date, based on historical claim rates and
respective product populations. Warranty periods on hardware products extend for three to 10 years.
Onerous contracts
A provision for onerous contracts is recognised when expected benefits to be derived by Cochlear from a contract are lower than the
unavoidable cost of meeting contractual obligations. The provision is measured at the lower of the expected cost of terminating the
contract and the expected net cost of continuing with the contract. Before a provision is established, Cochlear recognises any impairment
loss on the assets associated with the contract.
Self-insurance
Cochlear self-insures to manage certain risks associated with operating in its line of business. Claims are recognised when an incident occurs
that may give rise to a claim and are measured at the cost that Cochlear expects to incur in settling the claims, discounted using a rate that
reflects current market assessments of the time value of money and the risks specific to the liability.
Make good lease costs
Cochlear has a number of operating leases over its offices that require the premises to be returned to the lessor in its original condition. The
operating lease payments do not include an element for the repairs/overhauls.
A provision for make good lease costs is recognised at the time it is determined that it is probable that such costs will be incurred in a future
year, measured at the expected cost of returning the asset to the lessor in its original condition. An offsetting asset of the same value is also
recognised and is classified in property, plant and equipment. This asset is amortised to the income statement over the life of the lease.
(h) Intangible assets
Goodwill
All business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the
acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGUs) and is tested annually
for impairment (see accounting policy (i)). Negative goodwill arising on an acquisition is recognised directly in the income statement.
Enterprise resource planning system
The expenditure incurred on hardware and software and the costs necessary for the implementation of the system are recognised as an
intangible asset, to the extent that Cochlear controls future economic benefits as a result of the costs incurred, and are stated at cost less
accumulated amortisation. Costs include expenditure that is directly attributable to the development and implementation of the system
and includes direct labour.
Research and development expenditure
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is
recognised in the income statement as an expense as incurred.
Development activities involve a plan or design for production of new or substantially improved products or processes before the start of
commercial production or use. Development expenditure is capitalised only if development costs can be measured reliably, the product or
process is technically and commercially feasible, future economic benefits are probable and Cochlear intends to and has sufficient resources
to complete development and use or sell the asset.
The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development
expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less
accumulated amortisation (see below) and impairment losses (see accounting policy (i)).
Other intangible assets
Other intangible assets, comprising acquired technology, patents and licences, customer relationships and intellectual property, are
acquired individually or through business combinations and are stated at cost less accumulated amortisation (see below) and impairment
losses (see accounting policy (i)). Expenditure on internally generated goodwill and brands is recognised in the income statement as an
expense as incurred.
Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the
specific asset to which it relates. All other expenditure is expensed as incurred.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Amortisation
Amortisation is calculated over the cost of the asset, or an other amount substituted for cost, less its residual value.
Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of the intangible assets from the
date they are available for use unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically
tested for impairment annually. The estimated useful lives for the current and comparative years are as follows:
Acquired technology, patents and licences
4 – 15 years
Enterprise resource planning system
2.5 – 7 years
Customer relationships
4 years
Capitalised development expenditure
1 – 3 years.
(i) Impairment
Non-financial assets
The carrying amounts of Cochlear’s non-financial assets, other than inventories (see accounting policy (k)), employee benefit assets (see
accounting policy (l)), and deferred tax assets (see accounting policy (n)), are reviewed at each reporting date to determine whether there is
any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see below).
For goodwill and intangible assets that have indefinite useful lives, and intangible assets that are not yet available for use, the recoverable
amount is estimated at each balance sheet date.
The recoverable amount of an asset or CGU is the greater of its value in use, and its fair value less costs to sell. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets are grouped together into
the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets
or groups of assets (CGU). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to CGUs
that are expected to benefit from the processes, intellectual property acquired and synergies of the combination.
An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses
are recognised in the income statement unless the asset has previously been revalued, in which case the impairment loss is recognised as a
reversal to the extent of that previous revaluation, with any excess recognised through the income statement.
Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU or
a group of units and then, to reduce the carrying amount of the other assets in the unit or a group of units on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior years are
assessed at each reporting date for indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has
been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
Financial assets
Cochlear’s financial assets (cash and cash equivalents, trade and other receivables, and investments in controlled entities) are assessed at
each reporting date to determine whether there is any objective evidence of impairment. A financial asset is considered impaired if objective
evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
The recoverable amount of financial assets is calculated as the present value of estimated future cash flows, discounted at the original
effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Financial assets with a short
duration are not discounted. An impairment loss of a financial asset is measured as the difference between the asset’s carrying amount and
its recoverable amount.
Impairment of financial assets is not recognised until objective evidence is available that a loss event has occurred. Individual significant
financial assets are individually assessed for impairment. Impairment testing of financial assets not assessed individually is performed by
placing them into portfolios of similar risk profiles and undertaking a collective assessment of impairment based on objective evidence from
historical experience adjusted for any effects of conditions existing at the balance date.
All impairment losses are recognised in the income statement. An impairment loss is reversed if the reversal can be related objectively
to an event occurring after the impairment loss was recognised. The reversal of impairment losses on financial assets is recognised in the
income statement.
In assessing collective impairment, Cochlear uses historical trends of the probability of default, timing of recoveries and the amount of loss
incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are
likely to be greater or less than suggested by historical trends.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
(j) property, plant and equipment
Owned assets
Items of property, plant and equipment are measured at cost less accumulated depreciation (see below) and impairment losses (see
accounting policy (i)). An asset’s cost is determined as the consideration provided plus incidental costs directly attributable to the acquisition.
The cost of self-constructed assets includes the cost of material and direct labour, an appropriate share of fixed and variable overheads, and
capitalised interest and any other costs directly attributable to bringing the asset to a working condition for its intended use.
Subsequent costs in relation to replacing a part of property, plant and equipment are recognised in the carrying amount of the item if it is
probable that future economic benefits embodied within the part will flow to Cochlear and its cost can be measured reliably. All other costs
are recognised in the income statement as incurred.
In respect of borrowing costs relating to qualifying assets, Cochlear capitalises borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asset.
Leased assets
Operating leases
Payments made under operating leases are expensed on a straight-line basis over the term of the lease, except where an alternative basis is
more representative of the pattern of benefits to be derived from the leased property. Minimum lease payments include fixed rate increases.
Depreciation
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its
residual value.
Depreciation is recognised in the income statement on a straight-line basis. Items of property, plant and equipment, including leasehold
assets, are depreciated using the straight-line method over their estimated useful lives, taking into account estimated residual values.
Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and
held ready for use. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that
Cochlear will obtain ownership by the end of the lease term.
Depreciation rates and methods, useful lives and residual values are reviewed at each balance sheet date. When changes are made,
adjustments are reflected prospectively in current and future financial years only. The estimated useful lives in the current and comparative
years are as follows:
Leasehold improvements
Plant and equipment
2 – 15 years
3 – 14 years.
(k) Inventories
Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary
course of business less estimated costs of completion and selling, marketing and distribution expenses.
Cost is based on the first-in-first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their
existing condition and location. In the case of manufactured inventories and work in progress, cost includes an appropriate share of both
variable and fixed overhead costs. Fixed overhead costs are allocated on the basis of normal operating capacity.
(l) employee benefits
Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which the entity pays fixed contributions into a separate entity and
will have no legal or constructive obligation to pay further amounts.
Prepaid contributions are recognised as an asset. Contributions to a defined contribution plan that are due more than 12 months after the
end of the year in which the employees render the service are discounted to their present value.
Obligations for contributions to defined contribution plans are recognised as an expense in the income statement as incurred.
Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan.
A liability or asset in respect of defined benefit plans is recognised in the balance sheet, and is measured as the present value of the defined
benefit obligation at the reporting date adjusted for unrecognised actuarial gains or losses less the fair value of the plan’s assets at that date
and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments which
arise from membership of the plan to the reporting date, calculated by independent actuaries using the projected unit credit method.
When the calculation results in plan assets exceeding liabilities to Cochlear, the recognised asset is limited to the net total of any
unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future
contributions to the plan.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Past service cost is the increase in the present value of the defined benefit obligation for employee services in prior years, resulting in the
current year from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs
may either be positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).
Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity
and currency that match the estimated future cash flows.
When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an
expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the
benefits vest immediately, the expense is recognised immediately in the income statement.
Wages, salaries and annual leave
Liabilities for employee benefits for wages, salaries and annual leave expected to settle within 12 months of the year end represent
present obligations resulting from employees’ services provided up to the reporting date, calculated at undiscounted amounts based on
remuneration wage and salary rates that Cochlear expects to pay as at the reporting date including related on-costs, such as workers’
compensation insurance and payroll tax.
Long service leave
The provision for employee benefits for long service leave represents the present value of the estimated future cash outflows to be made by
the employer resulting from employees’ services provided up to the reporting date.
The provision is calculated using expected future increases in remuneration rates, including related on-costs, and expected settlement dates
based on turnover history, and is discounted using the rates attaching to national government securities at the reporting date, which most
closely match the terms to maturity of the related liabilities. The unwinding of the discount is treated as a long service leave expense.
Share based payments
The Company has granted options and performance shares to certain employees under the Cochlear Executive Long Term Incentive Plan (CELTIP).
The fair value of options and performance shares granted is recognised as an employee benefits expense with a corresponding increase
in equity. The fair value is measured at the date the options or shares are granted taking into account market based criteria and expensed
over the vesting period after which the employees become unconditionally entitled to the options and shares. The fair value of the options
granted is measured using the Black-Scholes method, taking into account the terms and conditions attached to the options.
The fair value of the performance shares granted is measured using the weighted average share price of ordinary shares in the Company,
taking into account the terms and conditions attached to the shares.
The amount recognised as an expense is adjusted to reflect the actual number of options and shares that vest except where forfeiture is due
to market related conditions.
When the Company grants options over its shares to employees of controlled entities, the fair value at grant date is recognised as an
increase in the investment in subsidiaries, with a corresponding increase in equity over the vesting period of the grant.
Treasury shares
The Company operates the Cochlear Executive Long Term Incentive Plan (Performance Shares) Trust (Trust). The main purpose of the Trust is
to hold unvested performance shares as part of the CELTIP. Under IFRS, the Trust qualifies as an equity compensation plan special purpose
entity and its results are included in those for the Company and the Consolidated Entity.
Any shares held by the Trust are accounted for as treasury shares and treated as a reduction in the share capital of the Company and the
Consolidated Entity.
(m) Receivables
Trade and other receivables are stated at amortised cost less impairment losses (see accounting policy (i)).
(n) taxation
Income tax expense comprises current and deferred tax. Current and deferred tax are recognised in the income statement except to the
extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax
liability arising from the declaration of dividends.
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 on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects
neither accounting nor taxable profit or loss;
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
• temporary differences related to investments in controlled entities to the extent that it is probable that they will not reverse in the
foreseeable future; and
• taxable temporary differences arising on the initial recognition of goodwill.
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Consolidated Entity expects, at
the end of the financial year, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws
that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to
income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable
that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and
are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Additional income tax expenses that arise from the distribution of cash dividends are recognised at the same time that the liability to pay
the related dividend is recognised. Cochlear does not distribute non-cash assets as dividends to its shareholders.
The Company and its wholly-owned Australian resident entities are part of a tax-consolidated group. As a consequence, all members of the
tax-consolidated group are taxed as a single entity. The head entity within the tax-consolidated group is Cochlear Limited.
(o) payables
Trade and other payables are stated at amortised cost.
(p) loans and borrowings
Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, loans and
borrowings are stated at amortised cost, with any difference between amortised cost and redemption value being recognised in the income
statement over the period of the borrowings on an effective interest rate basis.
(q) finance income and expense
Interest income is recognised as it accrues in the income statement using the effective interest rate method. Borrowing costs are recognised
as they accrue in the income statement as a finance expense except to the extent that borrowing costs relate to the purchase of qualifying
assets in which case they are capitalised into the purchase cost of the qualifying asset. Debt establishment costs are capitalised and
recognised as a reduction in loans and borrowings. They are calculated based on the effective interest rate method and are amortised over the
period of the loan. Foreign exchange differences net of the effect of hedges on borrowings, are recognised in net finance income/(expense).
(r) earnings per share
Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares. Basic EPS is calculated by dividing the net profit
attributable to equity holders of the parent entity for the financial year, after excluding any costs of servicing equity (other than ordinary
shares) by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.
Diluted EPS is calculated using the basic EPS earnings as the numerator. The weighted average number of shares used as the denominator
is adjusted by the after-tax effect of financing costs associated with the dilutive potential ordinary shares and the effect on revenues and
expenses of conversion to ordinary shares associated with dilutive potential ordinary shares adjusted for any bonus issue.
(s) segment reporting
Determination and presentation of operating segments
An operating segment is a component of Cochlear that engages in business activities from which it may earn revenues and incur expenses,
including revenues and expenses that relate to transactions with any of Cochlear’s other components if separately reported and monitored.
An operating segment’s operating results are reviewed regularly by the CEO/President to make decisions about resources to be allocated to
the segment and assess its performance, and for which discrete financial information is available.
Segment results that are reported to the CEO/President include items directly attributable to a segment, as well as those that can be
allocated on a reasonable basis. Unallocated items comprise mainly corporate head office results.
(t) share capital
Ordinary shares
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of
any income tax benefit.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Repurchase of share capital (treasury shares)
When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is
recognised as a deduction from equity, net of any tax effects. Repurchased shares are classified as treasury shares and are presented as a
deduction from total equity. When treasury shares are subsequently sold or reissued, the amount received is recognised as an increase in
equity, and the surplus or deficit on the transaction is transferred to or from retained earnings.
Dividends
A liability for dividends payable is recognised in the financial year in which the dividends are declared.
(u) new standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are effective for financial years beginning after 1 July 2012, and
have not been applied in preparing these consolidated financial statements. Of the new standards, only the following are expected to have
an effect on the consolidated financial statements of Cochlear:
• AASB 9 Financial Instruments, which becomes mandatory for Cochlear’s 2016 consolidated financial statements;
• AASB 13 Fair Value Measurement, which becomes mandatory for Cochlear’s 2014 consolidated financial statements; and
• AASB 19 Employee Benefits, which becomes mandatory for Cochlear’s 2014 consolidated financial statements. This will require Cochlear
to change from the corridor method for recognising actuarial gains and losses to the direct to equity method.
Cochlear is currently assessing the impact of the changes in each of the above standards and it is not expected that the changes will have a
significant impact on Cochlear. As such, Cochlear does not plan to adopt these standards early.
4. Financial risk management
overview
Cochlear has exposure to the following risks from the use of financial instruments:
• Credit risk;
• Liquidity risk;
• Market risk; and
• Operational risk.
This note presents information about Cochlear’s exposure to each of the above risks, its objectives, policies and processes for measuring and
managing risk, and the management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
The Board of directors has overall responsibility for the establishment and oversight of the risk management framework. The fundamentals
of risk management are set by the risk policy. Under instruction of the Board, management has established a Risk Management Committee
which is responsible for monitoring operational and financial risk management throughout Cochlear. Monitoring risk management
includes ensuring appropriate policies and procedures are published and adhered to. The Risk Management Committee reports to the Audit
Committee on a regular basis.
A Treasury Management Committee has been established to administer aspects of risk management involving currency exposure and cash
and funding management in accordance with the treasury risk policy. The treasury risk policy aims to manage the impact of short-term
fluctuations on Cochlear’s earnings. Over the longer term, permanent changes in market rates will have an impact on earnings.
Cochlear is exposed to risks from movements in exchange rates and interest rates that affect revenues, expenses, assets, liabilities and
forecast transactions. Financial risk management aims to limit these market risks through ongoing operational and finance activities.
Selected derivative and non-derivative hedging instruments are used for this purpose.
Exposure to credit, foreign exchange and interest rate risks arises in the normal course of Cochlear’s business. Derivative financial
instruments are used to hedge exposure to fluctuations in foreign exchange rates and interest rates.
The Company only hedges the risks that affect the cash flows between the parent entity and the controlled entities. Cochlear does not
enter, hold or issue derivative financial instruments for trading purposes. Hedging transactions are only concluded with leading financial
institutions whose credit rating is at least A on the Standard & Poor’s rating index.
The Audit Committee oversees how management monitors compliance with Cochlear’s risk management policies and procedures and
reviews the adequacy of the risk management framework in relation to the risks faced by Cochlear. The Audit Committee is assisted in its
oversight by Internal Audit. Internal Audit undertakes regular reviews of risk management controls and procedures, the results of which are
reported to the Audit Committee.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
credit risk
Credit risk is the risk of financial loss to Cochlear if a customer or counterparty to a financial instrument fails to meet its contractual
obligations and arises principally from Cochlear’s receivables from customers.
Trade and other receivables
Cochlear’s exposure to credit risk is influenced mainly by the geographical location and characteristics of individual customers. Cochlear
does not have a significant concentration of credit risk with a single customer.
Policies and procedures of credit management and administration of receivables are established and executed at a regional level. Individual
regions deliver reports to management and the Board on debtor ageing and collection activities on a monthly basis.
In monitoring customer credit risk, the ageing profile of total receivables balances and individually significant debtors is reported by
geographic region to the Board of directors on a monthly basis. Regional management is responsible for identifying high risk customers and
placing restrictions on future trading, including suspending future shipments and administering dispatches on a prepayment basis. These
actions are also reported to the Board on a monthly basis.
Cochlear has established an allowance for impairment that represents its estimate of incurred losses in respect of trade and other
receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a
collective loss component established for groups of assets meeting certain ageing profiles and customer types.
Guarantees
Details of guarantees provided by Cochlear are provided in Note 18.
liquidity risk
Liquidity risk is the risk that Cochlear will not be able to meet its financial obligations as they fall due. Cochlear’s approach to managing
liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or risking damage to Cochlear’s reputation.
Cochlear monitors cash flow requirements and produces cash flow projections for the short and long term with a view to optimising return
on investments. Typically, Cochlear ensures that it has sufficient funds on demand to meet expected operational net cash flows for a period
of at least 30 days, including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot
reasonably be predicted, such as natural disasters. In addition, Cochlear maintains lines of credit which are set out in Note 18.
Market risk
Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect Cochlear’s net
profit or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk
exposures within acceptable parameters, while optimising the return.
Cochlear buys and sells derivatives in accordance with the treasury risk policy, and also incurs financial liabilities, in order to manage market
risks. All such transactions are carried out within the guidelines set out by the treasury risk policy. Generally, Cochlear seeks to apply hedge
accounting in order to manage volatility in earnings.
Currency risk
Cochlear is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective
functional currencies of the controlled entities, primarily Australian dollars (AUD), United States dollars (USD), Euros (EUR), Sterling (GBP),
Swedish kroner (SEK), Japanese yen (JPY) and Swiss francs (CHF). The currencies in which these transactions primarily are denominated are
AUD, USD, EUR, GBP, SEK and JPY.
Over 90% of Cochlear’s revenues and over 50% of costs are denominated in currencies other than AUD. Currency risk is hedged in
accordance with the treasury risk policy. Risk resulting from the translation of assets and liabilities of foreign operations into Cochlear’s
reporting currency is generally not hedged.
Interest rate risk
Cochlear is exposed to interest rate risks in Australia and Japan. See Note 27 for effective interest rates, repayment and repricing analysis of
outstanding debt.
Interest rate risk is hedged on a case-by-case basis by assessing the term of borrowings and the purpose for which the funds are obtained.
Hedging against interest rate risk is achieved by entering into interest rate swaps.
operational risk
Operational risk is the risk of direct and indirect loss arising from a wide variety of causes associated with Cochlear’s processes, personnel,
technology and infrastructure, and from external factors other than credit, liquidity and market risks such as those arising from legal and
regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of Cochlear’s operations.
Cochlear’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to Cochlear’s reputation
with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
The primary responsibility for the development and implementation of controls to address operational risk is assigned to the Risk
Management Committee. This responsibility is supported by the development of standards for the management of operational risk in the
following areas:
• requirements for appropriate segregation of duties, including the independent authorisation of transactions;
• requirements for the reconciliation and monitoring of transactions;
• compliance with regulatory and other legal requirements;
• documentation of controls and procedures;
• requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;
• development of contingency plans;
• training and professional development;
• ethical and business standards; and
• risk mitigation, including insurance where this is effective.
Compliance with standards is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews
are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and
senior management of Cochlear.
capital management
Cochlear’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns to shareholders,
to provide benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
The Board aims to maintain and develop a capital base appropriate to Cochlear’s objectives and monitors a number of qualitative metrics
as follows:
• net gearing ratio – defined as net debt as a proportion of net debt plus total equity;
• dividend payout ratio – defined as dividends as a proportion of net profit after tax for a given period;
• growth in EPS – defined as the compound annual growth percentage in EPS over a three year period; and
• total shareholder return (TSR) – defined as the percentage growth in share price over a three year period plus the cumulative three year
dividend return calculated against the opening share price in the same three year period.
In order to maintain or adjust the capital structure, Cochlear may adjust the amount of dividends paid to shareholders, return capital to
shareholders, issue new shares or sell assets to reduce debt.
Senior management tracks, manages and reports against these capital management metrics periodically as part of broader corporate
governance responsibilities. In addition, the Board of directors undertakes periodic reviews of Cochlear’s capital management position to
assess whether the metrics continue to be appropriate and whether the capital management structure is appropriate to meet Cochlear’s
medium and long-term strategic requirements.
Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
There were no significant changes in Cochlear’s approach to capital management during the year.
Cochlear’s net gearing ratio was as follows:
Total loans and borrowings
Less: Cash and cash equivalents
net debt/(cash)
Total equity
net gearing ratio at 30 June
2013
$000
2012
$000
170,469
65,672
(52,689)
(68,486)
117,780
356,913
25%
(2,814)
384,880
(1%)
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
5. Revenue and expenses
(a) Revenue
Sale of goods before hedging
Foreign exchange gains on hedged sales
Revenue from sale of goods
Rendering of services
total revenue
(b) expenses
cost of sales
Carrying amount of inventories recognised as an expense
Write-down in value of inventories
total cost of sales (excluding product recall)
(c) other income
Grant received or due and receivable
Other income
total other income
(d) other expenses
Net foreign exchange loss
total other expenses
(e) employee benefits expense
Wages and salaries
Contributions to superannuation plans
Increase in leave liabilities
Equity settled share based payment transactions
total employee benefits expense
(f) profit before income tax has been arrived at after charging the following items:
Operating lease rental expense
Loss on disposal of property, plant and equipment
Write-down in value of inventories – product recall
Impairment of property, plant and equipment – product recall
Impairment of intangible assets – product recall
Provision for warranty and other costs – product recall
Note
2013
$000
2012
$000
708,710
698,525
37,691
74,441
746,401
772,966
6,320
6,030
752,721
778,996
206,590
1,482
198,421
4,839
208,072
203,260
1,401
978
2,379
2,515
2,515
208,585
15,846
2,069
2,740
896
849
1,745
349
349
191,025
14,379
2,871
3,654
229,240
211,929
15,485
1,482
-
-
-
-
16,028
1,652
34,859
14,006
13,840
76,130
29
29
29
29
77P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
6. Net finance expense
Recognised in the income statement
Interest income
finance income
Interest expense
finance expense
net finance expense recognised in the income statement
Recognised in other comprehensive loss
Effective portion of changes in fair value of cash flow hedges, net of tax
Net change in fair value of cash flow hedges transferred to the income statement, net of tax
2013
$000
2012
$000
659
659
(6,882)
(6,882)
(6,223)
(21,206)
(26,384)
1,852
1,852
(6,150)
(6,150)
(4,298)
26,639
(52,108)
net finance expense recognised in other comprehensive loss, net of tax
(47,590)
(25,469)
7. Auditors’ remuneration
audit services
Auditors of the Company
KPMG:
- audit and review of financial reports
- other regulatory compliance services
total audit services
non-audit services
Auditors of the Company
KPMG:
- taxation compliance services
total non-audit services
2013
$
2012
$
1,336,981
1,286,910
58,925
69,672
1,395,906
1,356,582
1,211,162
1,128,460
1,211,162
1,128,460
78P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
8. Income tax expense
Recognised in the income statement
Current tax expense
Current year
Adjustment for prior years
deferred tax benefit
Origination and reversal of temporary differences
total income tax expense
numerical reconciliation between income tax expense and profit before income tax
Net profit/(loss)
Income tax expense/(benefit)
profit/(loss) before income tax
2013
$000
2012
$000
Note
31,440
45,335
(3,143)
(2,578)
28,297
42,757
11,777
(27,403)
16
11,777
(27,403)
40,074
15,354
2013
2012
Total
Reported
Total
Reported
$000
$000
2012
Total
Recall
$000
2012
Total
Adjusted
$000
132,563
56,803
(101,336)
158,139
40,074
15,354
(37,499)
52,853
172,637
72,157
(138,835)
210,992
Income tax expense/(benefit) using the Company’s domestic tax rate of 30% (2012: 30%)
51,791
21,647
(41,651)
63,298
Increase in income tax expense due to:
Non-deductible expenses
decrease in income tax expense due to:
Research and development allowances
Share based payment deductions
Effect of tax rate in foreign jurisdictions
Adjustment for prior years
2,637
6,274
4,152
2,122
(10,560)
(8,127)
(332)
(319)
(327)
(1,535)
-
-
-
(8,127)
(327)
(1,535)
43,217
17,932
(37,499)
55,431
(3,143)
(2,578)
-
(2,578)
Income tax expense/(benefit) on profit before income tax
40,074
15,354
(37,499)
52,853
Deferred tax recognised in other comprehensive loss relating to derivative financial instruments
(20,060)
(10,545)
total deferred tax recognised in other comprehensive loss
Deferred tax recognised directly in equity relating to share based payments
total deferred tax recognised directly in equity
16
(20,060)
(10,545)
2,537
2,537
3,733
3,733
16
2013
$000
2012
$000
Note
79P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Cents per share
Total amount $000
Franked/unfranked
Date of payment
9. Dividends
Dividends recognised in the current financial
year by the Company are:
2013
Interim 2013 ordinary
Final 2012 ordinary
total amount
2012
Interim 2012 ordinary
Final 2011 ordinary
total amount
125.0
125.0
250.0
120.0
120.0
240.0
71,295
71,216
142,511
68,315
68,171
136,486
40% Franked
12 March 2013
35% Franked
20 September 2012
60% Franked
13 March 2012
70% Franked
22 September 2011
Franked dividends declared or paid during the financial year were franked at the tax rate of 30%.
subsequent events
Since the end of the financial year, the directors
declared the following dividends:
Final 2013 ordinary
total amount
127.0
127.0
72,442
72,442
30% Franked
19 September 2013
The financial effect of the 2013 final dividend has not been brought to account in the financial statements for the year ended 30 June 2013 and will
be recognised in the subsequent financial year.
There are no further tax consequences as a result of paying dividends other than a reduction in the franking account as shown below:
Company
2013
$000
2012
$000
dividend franking account
30% franking credits available to shareholders of Cochlear Limited for subsequent financial years
1,807
13,042
The above amounts are based on the balance of the dividend franking account at year end.
The ability to utilise the franking account credits is dependent upon the ability to declare dividends. The impact on the dividend franking
account of dividends proposed after the balance sheet date but not recorded as a liability is to reduce it by $9,313,969 (2012: $10,711,769).
No additional current tax liability will arise to the extent that franking credits are available with which to pay fully franked dividends.
Dividends in excess of the balance of the dividend franking account will either be unfranked or result in a franking deficit tax liability payable
by the Company to the extent that franking credits are provided that do not exist. The Company’s policy is not to pay dividends with
franking credits that will result in a franking deficit tax liability.
10. Operating segments
Cochlear has three reportable segments, which are determined on a geographical basis and are the strategic business units of Cochlear.
Segment results, assets and liabilities include items directly attributable to a segment. Unallocated items comprise corporate and other net
expenses and corporate and manufacturing assets and liabilities.
Information about each reportable segment is included below. Performance is measured based on segment profit before income tax as
included in the internal management reports that are reviewed by Cochlear’s CEO/President, who is also the chief operating decision maker.
Segment profit before income tax is used to measure performance as management believes that such information is the most relevant in
evaluating the results of each operating segment.
80P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Information about reportable segments
Americas
EMEA(1)
Asia Pacific
Total
2013
2012
2013
2012
2013
2012
2013
2012
$000
$000
$000
$000
$000
$000
$000
$000
Reportable segment revenue
284,394 296,948 283,023
284,691
147,613
122,916
715,030 704,555
Reportable segment profit before income tax
134,439
144,720
131,523
132,795
57,672
43,893 323,634
321,408
Reportable segment assets
Reportable segment liabilities
other material items
111,905
91,081
176,594
143,081
70,146
72,093 358,645 306,255
31,349
23,853
52,164
52,612
12,633
16,482
96,146
92,947
Depreciation and amortisation
720
627
1,672
1,800
1,020
948
3,412
3,375
Write-down in value of inventories
excluding product recall
Acquisition of non-current assets
(1) Europe, Middle East and Africa.
139
1,812
-
141
534
1,035
111
922
267
255
278
821
547
389
3,102
2,277
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Revenues
Reportable segment revenue
Foreign exchange gains on hedged sales
consolidated revenue
profit or loss
Reportable segment profit before income tax
Corporate and other net expenses
Cost of sales - product recall
Net finance expense
consolidated profit before income tax
assets
Reportable segment assets
Unallocated corporate and manufacturing assets
consolidated total assets
liabilities
Reportable segment liabilities
Unallocated corporate and manufacturing liabilities
consolidated total liabilities
2013
$000
715,030
37,691
752,721
323,634
(144,774)
-
(6,223)
172,637
358,645
405,856
764,501
96,146
311,442
407,588
2012
$000
704,555
74,441
778,996
321,408
(106,118)
(138,835)
(4,298)
72,157
306,255
396,287
702,542
92,947
224,715
317,662
81
P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
2013
other material items
Depreciation and amortisation
Write-down in value of inventories excluding product recall
Acquisition of property, plant and equipment and intangible assets
2012
other material items
Depreciation and amortisation
Write-down in value of inventories excluding product recall
Acquisition of property, plant and equipment and intangible assets
Revenue by product
Cochlear implants
Bone anchored hearing aids (Baha)
total
Reportable
segment total
Corporate and
manufacturing total
Consolidated
total
$000
$000
$000
3,412
547
3,102
3,375
389
2,277
19,592
935
34,880
20,726
4,450
48,646
2013
$000
636,393
78,637
715,030
23,004
1,482
37,982
24,101
4,839
50,923
2012
$000
626,684
77,871
704,555
82P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
2013
2012
11. Earnings per share
basic earnings per share
The calculation of basic earnings per share for the year ended 30 June 2013 was based
on net profit attributable to equity holders of the parent entity of $132,563,000 (2012:
$56,803,000) and a weighted average number of ordinary shares on issue during the year
ended 30 June 2013 of 56,890,261 (2012: 56,824,604) calculated as follows:
Net profit attributable to equity holders of the parent entity
$132,563,000
$56,803,000
Weighted average number of ordinary shares (basic):
Issued ordinary shares at 1 July (number)
Effect of options and performance shares exercised (number)
Effect of shares issued under Employee Share Plan (number)
56,865,878
56,680,142
13,619
10,764
126,686
17,776
weighted average number of ordinary shares (basic) at 30 June
56,890,261
56,824,604
basic earnings per share (cents)
diluted earnings per share
The calculation of diluted earnings per share for the year ended 30 June 2013 was based
on net profit attributable to equity holders of the parent entity of $132,563,000 (2012:
$56,803,000) and a weighted average number of ordinary shares on issue during the year
ended 30 June 2013 of 57,047,096 (2012: 56,922,674) calculated as follows:
233.0
100.0
Net profit attributable to equity holders of the parent entity
$132,563,000
$56,803,000
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)
Effect of options and performance shares (number)
56,890,261
56,824,604
156,835
98,070
weighted average number of ordinary shares (diluted) at 30 June
57,047,096
56,922,674
diluted earnings per share (cents)
232.4
99.8
83P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
12. Trade and other receivables
current
Trade receivables net of allowance for impairment losses
Other receivables
Forward exchange contracts
total current trade and other receivables
non-current
Other receivables
Forward exchange contracts
total non-current trade and other receivables
13. Inventories
Raw materials and stores
Work in progress
Finished goods
total inventories
Cochlear’s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in Note 27.
2013
$000
2012
$000
187,593
144,727
12,691
3,464
11,721
32,637
203,748
189,085
46
898
944
2013
$000
48,653
15,333
67,588
50
11,790
11,840
2012
$000
25,300
13,746
62,252
131,574
101,298
84P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
14. Property, plant and equipment
leasehold improvements
At cost
Accumulated amortisation
plant and equipment
At cost
Accumulated depreciation and impairment
total property, plant and equipment, at net book value
Reconciliations
Reconciliations of the carrying amounts of each class of property,
plant and equipment are set out below:
leasehold improvements
Carrying amount at beginning of financial year
Additions
Amortisation
Effect of movements in foreign exchange
carrying amount at end of financial year
plant and equipment
Carrying amount at beginning of financial year
Additions
Impairment
Disposals
Depreciation
Effect of movements in foreign exchange
carrying amount at end of financial year
Note
2013
$000
2012
$000
23,057
(16,613)
6,444
155,923
(96,469)
59,454
65,898
5,466
2,171
(1,525)
332
6,444
54,145
18,903
22,583
(17,117)
5,466
135,726
(81,581)
54,145
59,611
6,727
1,259
(2,429)
(91)
5,466
62,630
19,584
29
-
(14,006)
(1,028)
(13,876)
1,310
59,454
(150)
(13,397)
(516)
54,145
85P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
15. Intangible assets
Intangible assets with indefinite useful lives
Goodwill, at cost
Technology relationship, at cost
total intangible assets with indefinite useful lives
Intangible assets with definite useful lives
Acquired technology, patents and licences
At cost
Accumulated amortisation and impairment
Enterprise resource planning system
At cost
Accumulated amortisation
Customer relationships
At cost
Accumulated amortisation
Capitalised development expenditure
At cost
Accumulated amortisation
Other intangible assets
At cost
Accumulated amortisation
total intangible assets with definite useful lives
total intangible assets
2013
$000
2012
$000
170,959
1,800
151,066
1,800
172,759
152,866
62,811
49,505
(28,733)
(25,340)
34,078
24,165
60,941
47,011
(33,614)
(29,290)
27,327
17,721
4,449
(4,449)
-
7,759
(7,759)
-
4,013
(2,403)
1,610
63,015
235,774
4,020
(4,020)
-
7,759
(7,759)
-
13,918
(1,955)
11,963
53,849
206,715
86P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Reconciliations
Reconciliations of the carrying amounts of each class of intangible assets are set out below:
Note
2013
$000
2012
$000
Goodwill
Carrying amount at beginning of financial year
Effect of movements in foreign exchange
carrying amount at end of financial year
technology relationship
Carrying amount at beginning of financial year
carrying amount at end of financial year
acquired technology, patents and licences
Carrying amount at beginning of financial year
Acquisitions
Impairment
Amortisation
Reclassification from other intangible assets
Effect of movements in foreign exchange
carrying amount at end of financial year
enterprise resource planning system
Carrying amount at beginning of financial year
Acquisitions
Amortisation
Disposals
Effect of movements in foreign exchange
carrying amount at end of financial year
other intangible assets
Carrying amount at beginning of financial year
Acquisitions
Amortisation
Disposals
151,066
19,893
170,959
1,800
1,800
24,165
2,431
-
(2,770)
9,934
318
34,078
17,721
14,477
(4,432)
(454)
15
27,327
11,963
-
(401)
-
29
(a)
(a)
Reclassification to acquired technology, patents and licences
(a)
(9,934)
Effect of movements in foreign exchange
carrying amount at end of financial year
(18)
1,610
159,137
(8,071)
151,066
1,800
1,800
30,808
10,174
(13,840)
(2,823)
-
(154)
24,165
14,296
9,972
(5,047)
(1,502)
2
17,721
2,509
9,934
(405)
-
-
(75)
11,963
87P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
(a) purchase of intellectual property from otologics llc
As at 30 June 2012, Cochlear recorded an asset being the “Right to acquire intellectual property” of USD10.0 million to reflect its security
interest in the intellectual property assets of Otologics LLC being the same value as its amount payable to Wells Fargo Bank as guarantor to
Otologics LLC loan following Otologics LLC’s declaration of bankruptcy.
During the year, Cochlear settled the loan and acquired intellectual property and certain other assets of Otologics LLC for a total
consideration of USD14.0 million.
amortisation charge
Amortisation is recognised in the administration expenses line in the income statement except for amortisation of capitalised development
expenditure which is recognised in the research and development expenses line.
Impairment tests for cGus
Impairment testing is performed assessing carrying amounts of goodwill, other intangible assets and property, plant and equipment at
Cochlear’s CGUs.
For the purpose of impairment testing, goodwill is allocated to Cochlear’s operating divisions which represent the lowest level within
Cochlear at which the goodwill is monitored for internal management purposes, which is not higher than Cochlear’s operating segments as
reported in Note 10.
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
Americas
EMEA
Asia Pacific
2013
$000
86,438
74,709
9,812
170,959
2012
$000
76,224
66,012
8,830
151,066
The recoverable amount of each CGU is based on value-in-use calculations. Those calculations use cash flow projections based on actual
operating results and the three year business plan. Cash flows for subsequent years are extrapolated using a conservative growth rate of 3%
(2012: 3.0%) per annum which is consistent with long-term economic growth rates. A pre-tax discount rate of 13.5% (2012: 13.5%) per
annum has been used in discounting the projected pre-tax cash flows.
The key assumptions and the approach to determining their value in the current year are:
assumption
Discount rate
How determined
Based on weighted average cost of capital
Sales volume growth rate
Based on a three year forecast taking into account historical growth rates and product lifecycle
Terminal value growth rate Based on a three year forecast taking into account historical growth rates and product lifecycle.
The recoverable amount of each CGU including unallocated corporate assets is in excess of their carrying amount and therefore no
impairment charge was required. The excess of recoverable amount over carrying amount is such that a reasonably possible change in
assumptions is unlikely to reduce the recoverable amount below the carrying amount.
88P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
16. Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Property, plant and equipment
Intangible assets
Inventories
Provisions
Deferred revenue
Forward exchange contracts
Other
Tax losses carried forward
deferred tax assets/(liabilities)
Set off of tax
4,395
55
16,063
25,567
3,382
6,407
4,713
1,297
61,879
(5,216)
Assets
Liabilities
2013
$000
2012
$000
2013
$000
5,294
(729)
57
(1,809)
24,327
30,186
1,428
-
-
-
-
-
2012
$000
(345)
(55)
-
-
-
(13,636)
Net
2013
$000
2012
$000
3,666
(1,754)
16,063
25,567
3,382
6,407
2,035
1,297
4,949
2
24,327
30,186
1,428
(13,636)
3,239
-
11,268
(2,678)
(8,029)
-
-
-
72,560
(5,216)
(22,065)
56,663
50,495
(22,065)
5,216
22,065
-
-
net deferred tax assets
56,663
50,495
-
-
56,663
50,495
unrecognised deferred tax liabilities
At 30 June 2013, a deferred tax liability of $23.3 million (2012: $24.5 million) relating to investments in subsidiaries has not been
recognised because the Company controls whether the asset will be recovered or the liability will be incurred and it is satisfied that it will
not be incurred in the foreseeable future.
current tax assets and liabilities
The current tax assets for the Consolidated Entity of $6.2 million (2012: $5.8 million) represent the amount of income taxes recoverable
in respect of current and prior years and arise from the payment of tax in excess of the amounts due to the relevant taxation authority.
The current tax liabilities for the Consolidated Entity of $6.0 million (2012: $19.5 million) represent the amount of income taxes payable in
respect of current and prior financial years.
Movement in temporary differences during the year
Carrying amount at beginning of financial year
Recognised in the income statement
Recognised in other comprehensive loss
Recognised directly in equity
Effects of movements in foreign exchange
carrying amount at end of financial year
Note
8
8
8
2013
$000
50,495
(11,777)
20,060
(2,537)
422
2012
$000
16,072
27,403
10,545
(3,733)
208
56,663
50,495
89P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
17. Trade and other payables
current
Trade payables and accruals
Other payables
Forward exchange contracts
total current trade and other payables
non-current
Other payables
Forward exchange contracts
total non-current trade and other payables
18. Loans and borrowings
current
Secured bank loans
total current loans and borrowings
non-current
Secured bank loans(i)
total non-current loans and borrowings
financing arrangements
Cochlear had access to the following lines of credit at the reporting date:
Multi-option credit facilities
Secured bank loan
Standby letters of credit
Bank guarantees
Other credit facilities
Unsecured bank overdrafts
Secured bank loan
Standby letters of credit
Bank guarantees
2013
$000
80,632
1,242
14,915
96,789
-
13,242
13,242
2013
$000
3,309
3,309
167,160
167,160
295,000
19,736
264
352
4,963
-
1,198
2012
$000
98,404
1,713
101
100,218
695
40
735
2012
$000
45,744
45,744
19,928
19,928
170,000
44,345
655
508
3,744
329
3,655
321,513
223,236
90P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
facilities utilised at the reporting date
Multi-option credit facilities
Secured bank loan
Standby letters of credit
Bank guarantees
Other credit facilities
Secured bank loan
Standby letters of credit
Bank guarantees
facilities not utilised at the reporting date
Multi-option credit facilities
Secured bank loan
Standby letters of credit
Other credit facilities
Unsecured bank overdrafts
Secured bank loan
Standby letters of credit
Bank guarantees
2013
$000
168,000
1,924
264
3,309
-
1,193
174,690
127,000
17,812
352
1,654
-
5
146,823
2012
$000
62,000
16,030
655
3,744
145
323
82,897
108,000
28,315
508
-
184
3,332
140,339
(i) Included within secured bank loans is an amount of $840,028 (2012: $71,875) in relation to unamortised loan establishment fees.
secured bank loan – multi-option credit facilities
Cochlear’s existing corporate loan facility was amended and extended in June 2013 for a period of three years. The facility is for a total
commitment limit of AUD200.0 million, with an option to allocate a letter of credit sub-facility limit of up to AUD30.0 million for the
purpose of drawing either bank guarantees or letters of credit. This letter of credit sub-limit currently sits at AUD5.0 million.
In June 2013, Cochlear negotiated a further loan facility for a period of five years. The facility has a total commitment limit of AUD115.0
million made up of an AUD100.0 million loan sub-facility limit and incorporates an existing AUD15.0 million letter of credit facility that was
negotiated in August 2011.
Both facilities are secured by interlocking guarantees provided by certain controlled entities. Interest on the facilities is variable and charged
at prevailing market rates.
91P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
unsecured bank overdrafts
Certain unsecured bank overdrafts are payable on demand and are subject to annual review. Interest on unsecured bank facilities is variable
and is charged at prevailing market rates.
secured bank loan
In September 2012, Cochlear’s JPY300.0 million bank facility was increased to JPY450.0 million. It is secured by a letter of guarantee and
reviewed annually. Interest is charged at prevailing market rates.
bank guarantees
At 30 June 2013, Cochlear has other bank guarantee facilities denominated in USD, EUR, GBP, Indian rupees and New Zealand dollars
(NZD) totalling $1.2 million (2012: $3.7 million).
19. Commitments
operating lease commitments
Future non-cancellable operating lease rentals not provided for in the financial statements are payable as follows:
Not later than one year
Later than one year but not later than five years
Later than five years
total operating lease commitments
capital expenditure commitments
Contracted but not provided for and payable:
Not later than one year
total capital expenditure commitments
2013
$000
2012
$000
21,763
62,709
100,059
184,531
20,702
67,018
109,857
197,577
1,553
1,553
3,410
3,410
Cochlear leases property under non-cancellable operating leases expiring from one to 15 years. Leases generally provide Cochlear with a
right of renewal at which time all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental.
Contingent rentals are based on movements in the Consumer Price Index.
92P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
20. Provisions
current
Employee benefits
Warranties
Legal and other
Make good lease costs
Product recall
total current provisions
non-current
Employee benefits
Warranties
Directors’ retirement scheme
Make good lease costs
Product recall
total non-current provisions
Reconciliations
Reconciliations of the carrying amounts of each class of provision,
except for the employee benefits provision, are set out below:
warranties
Carrying amount at beginning of financial year
Provisions made
Provisions used
carrying amount at end of financial year
legal and other
Carrying amount at beginning of financial year
Provisions made
Provisions used
Effects of movements in foreign exchange
carrying amount at end of financial year
Make good lease costs
Carrying amount at beginning of financial year
Provisions made
Provisions used
Provisions released
Effects of movements in foreign exchange
carrying amount at end of financial year
Note
2013
$000
2012
$000
26
29
26
26
29
30,450
13,231
7,487
-
12,056
63,224
3,589
4,683
411
2,143
24,530
35,356
13,991
29,152
(25,229)
17,914
7,523
5,218
(5,294)
40
7,487
4,024
400
(416)
(1,857)
(8)
2,143
30,068
11,053
7,523
312
29,410
78,366
4,447
2,938
399
3,712
23,560
35,056
11,818
21,874
(19,701)
13,991
5,294
3,547
(1,316)
(2)
7,523
4,840
-
(818)
-
2
4,024
93P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
directors’ retirement scheme
Carrying amount at beginning of financial year
Provisions made
carrying amount at end of financial year
product recall
Carrying amount at beginning of financial year
Provisions made
Provisions used
carrying amount at end of financial year
2013
$000
399
12
411
52,970
-
(16,384)
36,586
2012
$000
382
17
399
-
76,130
(23,160)
52,970
Note
29
29
employee benefits
Employee benefits include entitlements measured at the present value of future amounts expected to be paid, based on a 3% per annum
projected weighted average increase in remuneration rates over an average period of eight years. The present value is calculated using a
weighted average discount rate of 3% per annum based on national government securities with similar maturity terms.
warranties
See Note 3(g) for details of how the provision balance is determined.
legal and other
See Note 3(g) for details of how the provision balance is determined.
Make good lease costs
See Note 3(g) for details of how the provision balance is determined.
directors’ retirement scheme
Non-executive directors appointed prior to 2003 were entitled to retirement benefits of up to three times their annual remuneration over
the previous three years once they had more than five years’ service. The ongoing accrual of benefits under the directors’ retirement scheme
ceased from 30 June 2007. The benefits accrued to that date are indexed by reference to the bank bill rate. As at 30 June 2013, Prof E Byrne, AO
is the only non-executive director entitled to this benefit.
product recall
See Note 29 for details of how the provision balance is determined.
21. Contingent liabilities
The details of contingent liabilities are set out below. The directors are of the opinion that provisions are either adequate or are not required
in respect of these matters, as it is either not probable that a future sacrifice of economic benefits will be required, or the amount is not
capable of reliable measurement.
product liability claims
Cochlear is currently and is likely from time to time to be involved in claims and law suits incidental to the ordinary course of business,
including claims for damages relating to its products and services.
In addition, Cochlear has received legal claims in various countries and law suits in the United States by recipients who have had Cochlear
implant CI500 series devices stop functioning for the reason that led to the September 2011 voluntary recall of unimplanted CI500 series
devices. The claims are being negotiated and the law suits defended by Cochlear.
Cochlear carries product liability insurance and has made claims under the policies. The insurers have agreed to indemnify Cochlear in
accordance with the terms and conditions of the policies including deductibles and exclusions. In the opinion of the directors, the details of the
product liability insurance policies are commercially sensitive and any disclosure of these details may be prejudicial to the interests of Cochlear.
94P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
patent infringement complaints
During the year ended 30 June 2008, the Company was served with a complaint for patent infringement by the Alfred E. Mann Foundation
for Scientific Research (Mann Foundation).
The complaint, filed in the US District Court of California, alleges that two patents have been infringed.
The Company believes the Mann Foundation’s allegations are without merit and is vigorously defending the complaint.
At the date of this report, the litigation process is ongoing. No provision has been established against settlement because the probability of
a significant outflow is considered unlikely.
22. Capital and reserves
share capital
Number of issued shares in
market circulation
Number of shares held in Trust
under CELTIP
Total number of issued shares
2013
2012
2013
2012
2013
2012
On issue 1 July – fully paid
56,865,878
56,680,142
63,554
64,881
56,929,432
56,745,023
Issued for nil consideration under Employee
Share Plan
Shares purchased from the market
Issued from the exercise of options
Performance shares vesting from Trust
16,302
(68,872)
95,198
6,783
25,023
(17,021)
159,386
18,348
-
-
16,302
25,023
68,872
17,021
-
-
-
-
95,198
159,386
(6,783)
(18,348)
-
-
on issue 30 June – fully paid
56,915,289
56,865,878
125,643
63,554
57,040,932
56,929,432
Cochlear has also issued options (see Note 26(b)).
The Company does not have authorised capital or par value in respect of its issued shares.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at
shareholders’ meetings.
treasury reserve
The treasury reserve comprises the cost of shares acquired by the Trust at the date of purchase.
translation reserve
The translation reserve records the foreign currency differences arising from the translation of the financial statements of foreign operations
as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary, where their functional currency
is different to the presentation currency of the reporting entity. See Note 3(d) for further details.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related
to underlying transactions that have not yet occurred.
share based payment reserve
The share based payment reserve comprises the cost of shares distributed to eligible executives under the CELTIP, as detailed in Note 26(b).
95P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
23. Notes to the statement of cash flows
cash assets
The operating account received an average interest rate of 0.82% (2012: 1.66%) per annum.
Cash held on deposit for periods not exceeding 90 days received an average interest rate of 3.27% (2012: 2.94%) per annum.
(a) Reconciliation of cash and cash equivalents
For the purpose of the statement of cash flows, cash includes cash on hand and at bank and short-term deposits, net of outstanding bank
overdrafts. Cash and cash equivalents at the reporting date as shown in the statement of cash flows are reconciled to the related items in
the balance sheet as follows:
Cash on hand
Cash on deposit
cash and cash equivalents
(b) Reconciliation of net profit to net cash provided by operating activities
Net profit
add items classified as investing activities
Loss on disposal of property, plant and equipment
add non-cash items
Amounts set aside to provisions
Depreciation and amortisation
Impairment of property, plant and equipment and intangible assets
Equity settled share based payment transactions
net cash provided by operating activities before changes in assets and liabilities
changes in assets and liabilities
Change in trade and other receivables
Change in inventories
Change in prepayments
Change in deferred tax assets
Change in trade and other payables
Change in current tax liabilities
Change in provisions
Change in deferred revenue
Effects of movements in foreign exchange
net cash provided by operating activities
2013
$000
31,455
21,234
52,689
2012
$000
56,905
11,581
68,486
132,563
56,803
1,482
1,652
60,870
23,004
-
2,740
220,659
(43,677)
(30,276)
(2,596)
(6,168)
(6,618)
6,485
(75,712)
4,417
3,213
69,727
128,363
24,101
27,846
3,654
242,419
19,866
4,828
300
(34,423)
1,517
411
(68,597)
(643)
2,602
168,280
96P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Interest held
Country of incorporation/formation
2013
%
2012
%
24. Controlled entities
particulars in relation to controlled entities
company
Cochlear Limited
controlled entities
Acoustic Implants Limited
Cochlear AG
Cochlear Americas
Cochlear Benelux NV
Cochlear Bone Anchored Solutions AB
Cochlear Boulder LLC
Cochlear Canada Inc
Cochlear Clinical Services LLC
Cochlear Deutschland GmbH & Co KG
Cochlear Employee Share Trust
Cochlear Europe Finance GmbH
Cochlear Europe Limited
Cochlear Executive Long Term Incentive Plan (Performance Shares) Trust
Cochlear Finance Pty Limited
Cochlear France SAS
Cochlear German Holdings Pty Limited
Cochlear Holdings NV
Cochlear Incentive Plan Pty Limited
Cochlear Investments Pty Ltd
Cochlear Italia SRL
Cochlear Korea Limited
Cochlear Latinoamerica S.A.
Cochlear Malaysia Sdn. Bhd.
Cochlear Manufacturing Corporation
Cochlear Medical Device (Beijing) Co., Ltd
Cochlear Medical Device Company India Private Limited
Cochlear Nordic AB
Cochlear NZ Limited
Cochlear Research and Development Limited
Cochlear Sweden Holdings AB
Cochlear Technologies Pty Limited
Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi
Cochlear Verwaltungs GmbH
Cochlear (HK) Limited
Cochlear (UK) Limited
Isitme Implantlari Tibbi Cihazlar ve Saglik Hizmetleri Ltd Sti
Lachlan Project Development Pty Ltd
Lachlan Project Holdings Pty Ltd
Lachlan Project Security Holdings Pty Ltd
(i)
(i)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
100
100
100
100
-
100
-
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
100
100
100
Australia
UK
Switzerland
USA
Belgium
Sweden
USA
Canada
USA
Germany
Australia
Germany
UK
Australia
Australia
France
Australia
Belgium
Australia
Australia
Italy
Korea
Panama
Malaysia
USA
China
India
Sweden
New Zealand
UK
Sweden
Australia
Turkey
Germany
Hong Kong
UK
Turkey
Australia
Australia
Australia
97P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Medical Insurance Pte Limited
Miaki NV
Neopraxis Pty Limited
Nihon Cochlear Co Limited
Percutis AB
(i) Dormant.
25. Related parties
Interest held
Country of incorporation/formation
2013
%
100
100
100
100
100
2012
%
100
100
100
100
100
(i)
Singapore
Belgium
Australia
Japan
Sweden
key management personnel
The following were key management personnel of Cochlear at any time during the financial year and unless otherwise indicated were key
management personnel for the entire financial year:
Non-executive directors
Mr R Holliday-Smith (Chairman)
Mrs YA Allen
Mr PR Bell
Prof E Byrne, AO
Mr A Denver
Mr DP O’Dwyer
Executive director
Dr CG Roberts
Executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith.
key management personnel disclosures
The key management personnel compensation is included in employee benefits expense as follows:
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Directors’ retirement benefits
Share based payments
2013
$
6,824,569
368,245
94,729
12,293
1,232,235
8,532,071
2012
$
6,090,379
350,940
96,989
16,485
846,095
7,400,888
Information regarding individual directors’ and executives’ remuneration and some equity instruments disclosures as permitted by section
300A of the Corporations Act 2001 is provided in the Remuneration Report in the Directors’ Report on pages 30 to 55.
The key management personnel have not received any loans from Cochlear and there have been no other related party transactions with
any of Cochlear’s key management personnel unless where noted throughout this Financial Report.
98P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
options and performance shares granted as compensation
The movement during the financial year in the number of options over ordinary shares and performance shares of Cochlear Limited held,
directly, indirectly or beneficially, by each key management person, including their personally related entities, is as follows:
Held at
1 July 2012
Granted as
remuneration
Vested and
exercised
Forfeited
Held at
30 June 2013
Vested and
exercisable at
30 June 2013
option holdings
Executive director
Dr CG Roberts
Executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
performance share holdings
Executive director
Dr CG Roberts
Executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
313,750
231,161
(86,623)
458,288
23,235
-
-
-
(8,202)
(7,670)
(11,867)
(8,665)
(12,484)
(11,674)
41,448
26,491
10,928
-
45,063
(6,000)
(13,506)
-
-
2,473
6,120
8,016
1,577
-
-
-
-
-
-
-
-
-
-
-
-
60,833
43,045
69,526
70,566
49,203
-
-
2,234
-
-
6,826
90,414
60,871
59,768
51,222
74,760
-
-
4,707
6,120
8,016
8,403
7,796
5,693
-
-
8,873
-
-
-
-
-
-
99P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
option holdings
Executive director
Dr CG Roberts
Executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
performance share holdings
Executive director
Dr CG Roberts
Executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
Held at
1 July 2011
Granted as
remuneration
Vested and
exercised
Forfeited
Held at
30 June 2012
Vested and
exercisable at
30 June 2012
297,542
117,620
(88,736)
(12,676)
313,750
67,623
56,736
77,812
88,071
58,004
-
-
-
-
-
23,495
(26,499)
11,128
27,538
28,859
20,823
-
-
2,234
-
-
(21,717)
(31,346)
(42,183)
(25,910)
-
-
-
-
-
(3,786)
(3,102)
(4,478)
(4,181)
(3,714)
-
-
-
-
-
60,833
43,045
69,526
70,566
49,203
-
-
2,234
-
-
7,507
1,045
(1,510)
(216)
6,826
-
-
-
-
-
6,000
-
-
-
-
-
-
No options held by key management personnel were vested but not exercisable at 30 June 2013 or 2012.
The options and performance shares granted in the 2013 financial year were granted on 13 August 2012 and vest in August 2015. The
options have an exercise price of $62.78 per share and an expiration date of 1 July 2017. No options or performance shares have been
granted since the end of the financial year. The options and performance shares were provided at no cost to the recipients.
The options granted during the year have a fair value of $8.56 per share at grant date for options with EPS performance based conditions
and $5.70 per share at grant date for options with TSR based conditions. The performance shares granted during the financial year had a fair
value at grant date of $62.78 per share for performance shares with EPS performance based conditions and $39.55 per share at grant date
for performance shares with TSR based conditions.
100
P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Movement in shares
The movement during the financial year in the number of ordinary shares of Cochlear Limited held, directly, indirectly or beneficially, by
each key management person, including their related parties, is as follows:
directors
Non-executive
Mr R Holliday-Smith
Mrs YA Allen
Mr PR Bell
Prof E Byrne, AO
Mr A Denver
Mr DP O’Dwyer
Executive
Dr CG Roberts
executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
directors
Non-executive
Mr R Holliday-Smith
Mrs YA Allen
Mr PR Bell
Prof E Byrne, AO
Mr A Denver
Mr DP O’Dwyer
Executive
Dr CG Roberts
executives
Mr R Brook
Mr J Janssen
Mr NJ Mitchell
Mr MD Salmon
Mr CM Smith
Held at
1 July 2012
Purchases
Received on
exercise of
options and
performance
shares
Sales
Held at
30 June 2013
7,020
2,500
2,500
3,250
2,500
4,000
2,230
450
500
-
1,500
1,000
715,803
4,000
10,000
31,248
36,346
9,740
10,000
200
2,398
2,500
-
-
Held at
1 July 2011
Purchases
-
-
-
-
-
-
-
-
-
8,202
7,670
6,000
Received on
exercise of
options and
performance
shares
-
-
-
-
-
-
-
(2,500)
(20,318)
(37,048)
(7,670)
(6,000)
9,250
2,950
3,000
3,250
4,000
5,000
719,803
7,700
13,328
10,000
9,740
10,000
Sales
Held at
30 June 2012
5,500
2,500
2,500
2,000
2,500
3,350
1,520
-
-
1,250
-
650
-
-
-
-
-
-
-
-
-
-
-
-
7,020
2,500
2,500
3,250
2,500
4,000
725,310
-
88,736
(98,243)
715,803
8,806
32,921
33,571
9,740
10,000
1,194
-
-
-
-
26,499
21,717
31,346
42,183
27,420
(26,499)
(23,390)
(28,571)
(42,183)
(27,420)
10,000
31,248
36,346
9,740
10,000
101
P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
26. Employee benefits
current
Provision for long service leave
Provision for annual leave
Provision for short-term incentives
Wages and salaries accrued
total current employee benefits
non-current
Provision for long service leave
Provision for directors’ retirement scheme
total non-current employee benefits
total employee benefits
Note
2013
$000
2012
$000
7,325
16,850
6,275
30,450
515
6,317
14,930
8,821
30,068
409
30,965
30,477
3,589
411
4,000
4,447
399
4,846
34,965
35,323
20
20
Cochlear has benefit plans that provide pension benefits to employees upon retirement. These defined benefit plans cover, in aggregate,
75 employees. Cochlear contributed cash of $0.9 million (2012: $0.8 million) to defined benefit plans in the year ended 30 June 2013 and
expects to contribute $1.0 million in the year ending 30 June 2014.
(a) defined contribution superannuation plans
Cochlear makes contributions to defined contribution plans. The amount recognised as expense was $14.9 million for the year ended 30
June 2013 (2012: $14.4 million).
(b) share based payments
Cochlear’s Employee Share Plan (Plan) was approved by special resolution at the AGM held on 19 October 1999. Under the Plan, the
directors can at their discretion, allocate at nil consideration up to a maximum of $2,000 worth of shares per eligible employee in any one
year. The fair value of shares issued during the financial year is the market price of the Company’s shares on the ASX as at the start of trading
on the issue date. Shares under the Plan vest with the employee immediately but are non-transferable for a period of up to three years. For
the year ended 30 June 2013, the Company issued 16,302 shares under the Plan.
102
P
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
The CELTIP was approved and adopted at the AGM on 20 October 2003 and replaced the Executive Share Option Plan. The CELTIP offers a
mixture of options over unissued shares and performance shares. Both the options and the performance shares are subject to a three year
vesting period. The number of options and performance shares exercisable by the executives will depend on the performance of Cochlear
over the vesting period. Half of the offer will be assessed against the compound annual growth rate of the EPS achieved by Cochlear, and
the other half against the TSR as measured against the S&P/ASX 100 comparator group. If the minimum compound annual growth rate
in EPS of 10% is not achieved, 50% of shares will not be issued or released to the executives. If the TSR of Cochlear is below the 50th
percentile against the S&P/ASX 100 comparator group over the three years, the remaining 50% of shares will not be issued or released.
At the date of this report, unissued ordinary shares of the Company under option and issued shares held in the Trust and the terms and
conditions of the grants and issues are as follows:
Grant date
Number of
instruments
Conditions for minimum vesting
Contractual life of options
Option grant in August 2009
42,837 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
42,837 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Option grant in August 2010
199,934 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
199,935 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Option grant in August and
October 2011
258,532 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
258,533 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Option grant in August 2012
367,696 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
367,696 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
total options(1)
1,738,000
(1) No options granted in August 2008 were outstanding as at 30 June 2013.
5 years
5 years
5 years
5 years
5 years
5 years
5 years
5 years
103
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n e x t
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Issue date
Number of
instruments
Conditions for minimum vesting
Contractual life of shares in
the Trust
Performance shares issued in
August 2008
185 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
186 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Performance shares issued in
August 2009
385 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
386 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Performance shares issued in
August 2010
9,734 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
9,734 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Performance shares issued in
August 2011
11,211 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
11,211 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
Performance shares issued in
August 2012
38,299 Three years of service, a minimum compound annual
growth rate in EPS of 10%.
total performance shares
119,631
38,300 Three years of service, the Consolidated Entity’s TSR
is above the 50th percentile against the S&P/ASX
100 over three years.
5 years
5 years
5 years
5 years
5 years
5 years
5 years
5 years
5 years
5 years
104
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n e x t
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
The number and weighted average exercise prices of options are as follows:
Outstanding at 1 July
Forfeited
Exercised
Granted
outstanding at 30 June
Exercisable at 30 June
Weighted average
exercise price
$
Number of options
Weighted average
exercise price
$
Number of options
2013
64.33
61.62
52.73
62.78
65.98
60.04
2013
1,635,440
(402,069)
(255,199)
759,828
1,738,000
85,674
2012
58.72
56.59
51.37
68.56
64.33
54.99
2012
1,719,451
(149,571)
(477,388)
542,948
1,635,440
298,462
The weighted average share price at date of exercise was $69.77 (2012: $69.41).
The estimated value of options for the current financial year is calculated at the date of grant using the Black-Scholes model.
For options outstanding at 30 June 2013, 85,674 options have an exercise price of $60.04, 399,869 options have an exercise price of
$69.80, 517,065 options have an exercise price of $68.56 and 735,392 options have an exercise price of $62.78 (2012: 114,258 options at
$63.18, 184,204 options at $49.91, 396,679 options at $60.04, 409,737 options at $69.80 and 530,562 options at $68.56). The weighted
average remaining contractual life of options outstanding at the end of the year is three years (2012: three years).
Inputs for measurement of grant date fair values
The grant date fair value of options and performance shares was measured based on the Black-Scholes model. Expected volatility is estimated
by considering historic average share price volatility. The inputs used in the measurement of the fair values at grant date are the following:
Fair value of options at grant date with:
- EPS performance based conditions
- TSR based conditions
Fair value of performance shares at grant date with:
- EPS performance based conditions
- TSR based conditions
Share price at grant date
Option exercise price
Expected volatility (weighted average volatility)
Option life
Expected dividends
Risk free interest rate (based on government bonds)
(1) No performance shares were issued.
13 August 2012
15 August 2011
24 October 2011
$8.56
$5.70
$62.78
$39.55
$62.97
$62.78
23.99%
$13.45
$8.95
$68.56
$43.19
$73.75
$68.56
22.0%
$4.71
$3.14
N/A(1)
N/A(1)
$56.61
$68.56
23.8%
3 – 5 years
3 – 5 years
3 – 5 years
3.80%
2.71%
2.84%
3.89%
3.90%
3.90%
105
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co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
27. Financial instruments
credit risk
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
Cash and cash equivalents
Trade receivables and other receivables
Forward exchange contracts
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
Americas
EMEA
Asia Pacific
Impairment losses
The ageing of Cochlear’s trade receivables at the reporting date was:
Gross receivables
Not past due
Past due 0 – 30 days
Past due 31 – 120 days
Past due 121 – 270 days
Past due 271 days and over
Impairment losses
trade receivables net of allowance for impairment losses
2013
$000
52,689
200,330
4,362
257,381
2013
$000
59,110
84,173
44,310
2012
$000
68,486
156,498
44,427
269,411
2012
$000
51,548
66,364
26,815
187,593
144,727
2013
$000
138,570
18,651
15,680
5,877
12,379
191,157
(3,564)
187,593
2012
$000
101,827
20,666
12,510
6,147
6,347
147,497
(2,770)
144,727
There are certain jurisdictions in which Cochlear operates where it is customary practice for customers to make payment beyond 270 days.
As such, Cochlear discloses the balance as overdue; however, it is not indicative of a higher than normal credit risk as payments are typically
received by Cochlear within the extended timeframes.
106
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
The movement in the allowance for impairment losses in respect of trade receivables during the year was as follows:
Balance at 1 July
Net impairment losses (recognised)/utilised
Effect of movements in foreign exchange
balance at 30 June
2013
$000
(2,770)
(562)
(232)
(3,564)
2012
$000
(4,899)
2,261
(132)
(2,770)
Impairment losses recognised in the year relate to significant individual customers or portfolios of customers which have been assessed as
impaired under Cochlear’s accounting policy as detailed in Note 3(i).
Based upon past experience, Cochlear believes that no impairment allowance is necessary in respect of trade receivables not past due.
The allowance accounts used in respect of trade receivables are used to record impairment losses unless Cochlear is satisfied that no recovery
of the amount owing is possible; at that point, the amount considered non-recoverable is written off against the financial asset directly.
liquidity risk
Non-derivative assets and liabilities
The following are the contractual maturities of non-derivative financial liabilities, including estimated interest payments and excluding the
impact of netting agreements:
Effective
interest rate
Per annum
Carrying
amount
$000
Contractual
cash flows
$000
6 months
or less
$000
6 – 12
months
$000
1 – 2 years
2 – 5 years
$000
$000
More than
5 years
$000
non-derivative financial liabilities
30 June 2013
AUD floating rate loan
4.63%
167,160
190,151
3,917
JPY floating rate loan
0.67%
3,309
3,324
12
Trade and other payables
-
81,874
81,874
81,874
3,853
3,312
-
7,770
174,611
-
-
-
-
total
252,343
275,349
85,803
7,165
7,770
174,611
-
-
-
-
Effective
interest rate
Per annum
Carrying
amount
$000
Contractual
cash flows
$000
6 months
or less
$000
6 – 12
months
$000
1 – 2 years
2 – 5 years
$000
$000
More than
5 years
$000
non-derivative financial liabilities
30 June 2012
AUD floating rate loan
5.93%
42,000
44,491
1,256
43,235
-
JPY floating rate loan
0.68%
3,744
3,750
5.92%
19,928
22,139
597
3,750
Trade and other payables
-
100,953
100,953
100,218
588
20,954
-
-
-
735
total
166,625
171,333
105,821
43,823
21,689
-
-
-
-
-
-
-
-
-
-
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.
107
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Derivative assets and liabilities designated as cash flow hedges
In the year ended 30 June 2013, Cochlear designated some sales and purchases of various currencies as cash flow hedges to hedge the
amount converted into AUD for forecast future transactions. These are hedges of forecast future transactions to manage the currency risk
arising from exchange rate fluctuations. The hedged items were highly probable foreign currency transactions.
The effectiveness of the hedging relationship is calculated prospectively using regression analysis on market values. An effectiveness test
is carried out retrospectively using the cumulative dollar offset method. For this, the changes in the fair values of the hedged item and the
hedging instrument attributable to spot rate changes are calculated and a ratio is created. If this ratio is between 80% and 125%, the hedge
is effective.
All material hedges were effective at the reporting date.
The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives that are cash flow hedges are
expected to occur:
30 June 2013
Amounts $000
Forward exchange contracts
Assets
Liabilities
total
30 June 2012
Amounts $000
Forward exchange contracts
Assets
Liabilities
total
Carrying
amount
Expected cash
flows
6 months
or less
6 – 12 months
1 – 2
years
2 – 5
years
4,362
4,454
(28,134)
(29,081)
(23,772)
(24,627)
1,821
(7,097)
(5,276)
1,697
(7,999)
936
-
(9,980)
(4,005)
(6,302)
(9,044)
(4,005)
Carrying
amount
Expected cash
flows
6 months
or less
6 – 12 months
1 – 2
years
2 – 5
years
44,427
44,602
(141)
(141)
44,286
44,461
19,768
(53)
19,715
12,935
(48)
12,887
9,435
(23)
9,412
2,464
(17)
2,447
The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted above.
108
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n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Market risk
Currency risk
Exposure to currency risk
Cochlear’s exposure to foreign currency risk was as follows, based upon notional amounts:
Amounts local currency thousands
USD
EUR
GBP
SEK
JPY
30 June 2013
Trade receivables
Secured bank loans
Trade payables
Gross balance sheet exposure
62,627
38,978
-
(14,820)
47,807
-
(4,931)
34,047
3,211
-
6,100
669,529
-
(300,000)
(6,844)
(47,429)
(65,556)
(3,633)
(41,329)
303,973
Amounts local currency thousands
USD
EUR
GBP
SEK
JPY
30 June 2012
Trade receivables
Secured bank loans
Trade payables
Gross balance sheet exposure
55,311
35,053
2,368
6,039
539,297
-
(12,797)
42,514
-
(4,267)
30,786
-
-
(300,000)
(8,129)
(49,531)
(70,009)
(5,761)
(43,492)
169,288
Cochlear enters into forward exchange contracts to hedge anticipated sales and purchases in USD, EUR, SEK and JPY.
The amounts of forward cover taken are in accordance with approved policy and internal forecasts.
109
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Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
The following table sets out the gross value to be received (sell) under forward exchange contracts and the weighted average contracted
exchange rates of outstanding contracts:
Foreign exchange rates
Gross value
2013
2012
2013
$000
2012
$000
sell usd
Not later than one year
Later than one year but not later than two years
Later than two years but not later than five years
Weighted average exchange rates contracted
0.97
0.93
sell euR
Not later than one year
Later than one year but not later than two years
Later than two years but not later than five years
Weighted average exchange rates contracted
0.72
0.69
sell JpY
Not later than one year
Later than one year but not later than two years
Later than two years but not later than five years
Weighted average exchange rates contracted
83.72
75.98
The following significant exchange rates applied to Cochlear during the year:
142,467
159,957
71,113
20,256
77,290
23,768
113,740
59,473
15,111
9,246
4,960
1,259
132,671
72,903
28,689
7,540
4,317
1,821
AUD1 =
USD
EUR
GBP
SEK
JPY
Average rate
Reporting date spot rate
2013
1.022
0.794
0.654
6.796
2012
1.030
0.766
0.649
6.897
2013
0.928
0.711
0.603
6.239
89.349
81.109
90.666
2012
1.007
0.806
0.645
7.113
80.118
110
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co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Interest rate risk
Profile
At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments was as follows:
carrying amount
Variable rate instruments
Financial assets
Financial liabilities
2013
$000
2012
$000
52,689
170,469
68,486
65,672
At 30 June 2013, no interest rate hedging had been entered into.
Sensitivity analysis
In managing interest rate and currency risks, Cochlear aims to reduce the impact of short-term fluctuations on Cochlear’s earnings.
However, over the longer term, permanent changes in interest rates and foreign exchange will have an impact on profit.
For the year ended 30 June 2013, it is estimated that a general increase of one percent in interest rates would have decreased Cochlear’s
profit after income tax and equity by approximately $0.6 million (2012: $0.1 million). A one percent general decrease in interest rates would
have had the equal but opposite effect on Cochlear’s profit and equity.
It is estimated that a general increase of 10 percent in the value of the AUD against other foreign currencies would have decreased
Cochlear’s profit for the year ended 30 June 2013, including hedging results and after income tax, by approximately $6.1 million (2012:
$2.3 million) and decreased Cochlear’s equity by $14.5 million (2012: $2.3 million). A 10 percent general decrease in the value of the AUD
against other foreign currencies would have increased Cochlear’s profit by $7.2 million (2012: $5.6 million) and increased equity by $14.2
million (2012: $4.4 million).
fair values
The fair values of financial assets and liabilities, together with carrying amounts shown in the balance sheet, are as follows:
2013
2012
Cash and cash equivalents
Trade and other receivables – current
Trade and other receivables – non-current
Trade and other payables – current
Trade and other payables – non-current
Secured bank loans – current
Secured bank loans – non-current(i)
total
Note
23(a)
12
12
17
17
18
18
Carrying
amount
$000
52,689
203,748
944
(96,789)
(13,242)
(3,309)
Fair value
$000
52,689
203,748
944
Carrying
amount
$000
68,486
189,085
11,840
Fair value
$000
68,486
189,085
11,840
(96,789)
(100,218)
(100,218)
(13,242)
(3,309)
(167,160)
(168,000)
(23,119)
(23,959)
(735)
(45,744)
(19,928)
102,786
(735)
(45,744)
(20,000)
102,714
(i) Included within the carrying amount of secured bank loans is an amount of $840,028 (2012: $71,875) in relation to unamortised loan establishment fees.
basis for determining fair values
The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in
the table above.
111
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p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
Derivatives
The fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the
current forward price for the residual maturity of the contract using a risk interest free rate based on government bonds. These fair values
are provided by independent third parties.
Non-derivative financial assets and liabilities
The fair value of cash, receivables, payables and short-term borrowings is considered to approximate their carrying amount because of their
short maturity.
The directors consider the carrying amount of long-term borrowings recorded in the financial statements approximates their fair value as
interest rates on loans and borrowings are variable.
fair value hierarchy
The table below analyses financial instruments carried at fair value, by the levels in the value hierarchy. The different levels have been
defined as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: inputs other than quoted prices included within 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 market data (unobservable inputs).
30 June 2013
derivative financial assets
Forward exchange contracts used for hedging
total assets
derivative financial liabilities
Forward exchange contracts used for hedging
Other forward exchange contracts
total liabilities
30 June 2012
derivative financial assets
Forward exchange contracts used for hedging
total assets
derivative financial liabilities
Forward exchange contracts used for hedging
Other forward exchange contracts
total liabilities
Level 2
$000
4,362
4,362
(28,134)
(23)
(28,157)
44,427
44,427
(141)
(768)
(909)
Total
$000
4,362
4,362
(28,134)
(23)
(28,157)
44,427
44,427
(141)
(768)
(909)
There have been no transfers between levels during the year. There are no other financial instruments carried at fair value or valued using a Level 1
or Level 3 valuation method.
112
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co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
28. Events subsequent to the reporting date
Other than the matters noted below, there has not arisen in the interval between the reporting date and the date of this Financial Report,
any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect
the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years:
dividends
For dividends declared after 30 June 2013, see Note 9.
29. Product recall
On 11 September 2011, the Company initiated a worldwide voluntary recall of its unimplanted Nucleus CI500 cochlear implant range. The
Company had identified a recent increase in the number of Nucleus CI512 implant failures. In the event of a Nucleus CI500 series implant
failure, recipients may be re-implanted with the Nucleus CI24RE implant range which remains available and continues to be sold with
Nucleus 5 externals.
Relevant healthcare professionals and regulatory authorities were advised of this action and management continued to work with
these authorities.
On 20 December 2011, the Company announced to healthcare professionals and the ASX that it had identified the root cause of the failures
and continued to work on resolving the problem.
For the year ended 30 June 2012, $138.8 million was recognised as a charge to cost of sales in the income statement, representing
management’s best estimate of probable costs based on current available data. This takes into account inventory write-downs, property,
plant and equipment and intangible asset impairments, and warranty and other costs which include factors such as estimated return rates
for the affected units, unit replacement costs, and consulting, logistical and administration expenses directly associated with the recall.
Management has made judgements, estimates and assumptions related to probable costs arising from the recall which affect the reported
amounts of assets, liabilities, income and expenses. Actual outcomes may differ from these estimates as further information is identified.
No further amount has been recognised as a charge in the year ended 30 June 2013.
A provision of $36.6 million (2012: $53.0 million) is included in current and non-current provisions related to the costs associated with the
recall that are still to be incurred as at 30 June 2013.
Net profit includes the following items whose disclosure is relevant in explaining the financial performance of the Consolidated Entity:
product recall
Write-down in value of inventories
Impairment of property, plant and equipment
Impairment of intangible assets
Provision for warranty and other costs
Total cost of sales – product recall
Income tax benefit
total product recall cost after tax
2013
$000
-
-
-
-
-
-
-
2012
$000
34,859
14,006
13,840
76,130
138,835
(37,499)
101,336
113
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co n t e n t s
n e x t
p d f d ow n loa d s
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2013
30. Parent entity disclosures
At, and throughout the financial year ended, 30 June 2013, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity
Net profit
Other comprehensive loss
total comprehensive income
financial position of the parent entity at year end
Current assets
Total assets
Current liabilities
Total liabilities
total equity of the parent entity comprising of:
Issued capital
Treasury reserve
Hedging reserve
Share based payment reserve
Retained earnings
total equity
parent entity contingencies
The details of all contingent liabilities in respect to Cochlear Limited are disclosed in Note 21.
parent entity capital commitments for acquisition of plant and equipment
plant and equipment
Contracted but not yet provided for and payable:
Within one year
total parent entity capital commitments for acquisition of plant and equipment
Company
2013
$000
158,414
(47,449)
110,965
197,014
636,642
110,457
382,022
128,196
(9,408)
(16,557)
35,838
116,551
2012
$000
28,445
(21,905)
6,540
195,340
606,049
181,887
320,353
125,865
(4,729)
30,892
35,837
97,831
254,620
285,696
Company
2013
$000
1,553
1,553
2012
$000
3,089
3,089
114
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Directors’ Declaration Cochlear Limited and its controlled entities for the year ended 30 June 2013
1.
In the opinion of the directors of Cochlear Limited (the Company):
(a) the consolidated financial statements and notes and the Remuneration Report in the Directors’ Report set out on
pages 30 to 113, are in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2013 and of its performance
for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due
and payable.
2. The directors have been given the declarations required by section 295A of the Corporations Act 2001 from the CEO/President
and Chief Financial Officer for the financial year ended 30 June 2013.
3. The directors draw attention to Note 2(a) to the consolidated financial statements, which includes a statement of compliance
with International Financial Reporting Standards.
Signed in accordance with a resolution of the directors:
Dated at Sydney this 19 day of August 2013.
Director
Director
115
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Independent Audit Report to the Members of Cochlear Limited
Report on the financial report
We have audited the accompanying financial report of Cochlear Limited (the Company), which comprises the consolidated balance sheet
as at 30 June 2013, and consolidated income statement and consolidated statement of comprehensive income, consolidated statement
of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 30 comprising a summary of
significant accounting policies and other explanatory information and the directors’ declaration of the Consolidated Entity comprising the
Company and the entities it controlled at year’s end or from the time during the financial year.
Directors’ responsibility for the financial report
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with
Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary
to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2(a), the
directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial
statements of the Consolidated Entity comply with International Financial Reporting Standards.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian
Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and
plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures
selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the
financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall
presentation of the financial report.
We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the
Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the
Consolidated Entity’s financial position and of its performance.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.
Auditor’s opinion
In our opinion:
(a) the financial report of Cochlear Limited is in accordance with the Corporations Act 2001, including:
(i)
giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2013 and of its performance for the year
ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001.
(b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a).
Report on the remuneration report
We have audited the remuneration report included in the directors’ report for the year ended 30 June 2013. The directors of the Company are
responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001.
Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards.
Auditor’s opinion
In our opinion, the remuneration report of Cochlear Limited for the year ended 30 June 2013, complies with Section 300A of the
Corporations Act 2001.
KPMG
Sydney, 19 August 2013
Bruce Phillips, Partner
116
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Additional Information
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report – the information
presented is as at 31 July 2013:
Number of ordinary shares held
6,478,080
3,534,289
3,185,723
13,198,092
%
11.36
6.20
5.58
23.14
Number of ordinary shareholders
shareholdings
Substantial shareholders
Shareholder
Baillie Gifford & Co
Wilson HTM Group Limited
Harding Loevner LP
total
Distribution of shareholders
Number of shares held
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
total
Non-marketable parcels – 245 shareholders held less than a marketable parcel of ordinary shares
Twenty largest shareholders
Shareholder
HSBC Custody Nominees (Australia) Limited
National Nominees Limited
JP Morgan Nominees Australia Limited
Citicorp Nominees Pty Limited
JP Morgan Nominees Australia Limited (Cash income a/c)
BNP Paribas Noms Pty Ltd (DRP)
Dr Christopher Graham Roberts
HSBC Custody Nominees (Australia) Limited – a/c 2
HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp a/c)
Citicorp Nominees Pty Limited (Colonial First State Inv a/c)
BNP Paribas Nominees Pty Ltd (Agency Lending Collateral)
HSBC Custody Nominees (Australia) Limited – GSCO ECA
Citicorp Nominees Pty Limited (BHP Billiton ADR Holders a/c)
UBS Nominees Pty Limited
RBC Investor Services Australia Nominees Pty Limited (Bkcust a/c)
BNP Paribas Nominees Pty Ltd (Agency Lending DRP a/c)
AMP Life Limited
Merrill Lynch (Australia) Nominees Pty Limited
Argo Investments Limited
Cochlear Incentive Plan Pty Limited
The 20 largest shareholders held 64.91% of the ordinary shares of the Company.
on market buy-back
There is no current on market buy-back.
Number of ordinary shares held
10,611,481
9,725,353
9,445,762
1,455,571
842,132
813,312
703,803
512,817
424,129
375,117
320,000
315,903
257,507
254,506
254,343
180,511
144,768
138,994
128,000
125,643
31,880
3,491
208
100
23
35,702
%
18.60
17.05
16.56
2.55
1.48
1.43
1.23
0.90
0.74
0.66
0.56
0.55
0.45
0.45
0.45
0.32
0.25
0.24
0.22
0.22
64.91
117
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b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Glossary, Company ASX Announcement Record and Company Information
Glossary
aGM Annual General Meeting.
asIc Australian Securities and Investments Commission.
asx Australian Securities Exchange.
dps Dividends per share.
ebIt Earnings before interest and tax.
ebItda Earnings before interest, tax, depreciation
and amortisation.
eMea Europe, Middle East and Africa.
eps Earnings per share.
f11 Financial Year 2011: 1 July 2010 to 30 June 2011.
f12 Financial Year 2012: 1 July 2011 to 30 June 2012.
f13 Financial Year 2013: 1 July 2012 to 30 June 2013.
f14 Financial Year 2014: 1 July 2013 to 30 June 2014.
fda United States Food and Drug Administration.
fx Foreign exchange.
IfRs International Financial Reporting Standards.
kMp Key management personnel.
npat Net profit after tax.
previous Gaap Previous Australian Generally Accepted
Accounting Principles.
processor/sound processor
The externally worn part of the cochlear implant.
R&d Research and development.
tGa Therapeutic Goods Administration.
tsR Total shareholder return.
tuV Technical Überwachungs-Verein.
Company ASX Announcement Record
17 June 2013
UBS Australian Healthcare Conference
2013 presentation
Cochlear Limited CEO/President, Dr Chris
Roberts, gave a presentation at the UBS
Australian Healthcare Conference in Sydney
on 17 June 2013. It was an update on Cochlear
technologies and the product pipeline.
3 June 2013
Market update
Cochlear Limited updated the market on
its next generation cochlear implant sound
processor, Nucleus 6, and provided a trading
update, which anticipated a lower than
expected net profit after tax for F13.
12 March 2013
Half year report 2013
Cochlear Limited provided an F13 half
year report to shareholders listing half year
revenues and sales.
5 february 2013
First half revenue announcement
Cochlear Limited announced revenue up
1% to $391.7 million, with sales up 9% in
constant currency for the six months ended 31
Non-IFRS financial measures
December 2012. There was a net profit after
tax of $77.7 million. The interim dividend of
$1.25 per share was up 4%.
16 october 2012
Chairman’s address
Cochlear Limited Chairman, Mr Rick Holliday-
Smith, addressed shareholders at the Annual
General Meeting.
7 august 2012
Full year results for year ended 30 June 2012
Cochlear Limited announced revenue down
4% to $779 million, with sales up 1% in
constant currency. Net profit after tax was
$56.8 million, including $101.3 million after-
tax recall costs. The final dividend was $1.25
per share (35% franked), up 4%.
7 august 2012
Update on voluntary recall
Cochlear Limited provided an update to
shareholders on actions taken following the
voluntary recall of the unimplanted Nucleus
CI500 series implants.
Given the significance of the product recall and FX movements the directors believe the presentation
of non-IFRS financial measures is useful for the users of this document as they reflect the underlying
financial performance of the business.
The non-IFRS financial measures included in this document have been calculated on the following basis:
• Excluding recall costs: IFRS measures adjusted for the costs of the product recall
• Constant currency: restatement of IFRS financial measures in comparative years using F13 FX rates
• Free cash flow: IFRS cash flow from operating and investing activities excluding interest and tax
paid related to non-operating activities.
The above non-IFRS financial measures have not been subject to review or audit. However, KPMG
have separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed
to the books and records of the consolidated entity.
Company Information
stock exchange listing
Australian Securities Exchange
ASX code COH
solicitors
Clayton Utz
share registrar
Computershare Investor Services Pty Limited
Level 4, 60 Carrington Street
Sydney NSW 2000, Australia
Tel: 61 3 9415 4000
auditor
KPMG
bankers
australia Westpac Banking Corporation
and HSBC Bank Australia Limited
Japan The Bank of Tokyo-Mitsubishi UFJ, Limited
sweden Skandinaviska Enskilda Banken AB (publ)
united kingdom HSBC Bank plc
united states Wells Fargo Bank West, NA
annual General Meeting
The Annual General Meeting will be held at
10am on Tuesday 15 October 2013 at Australian
Securities Exchange, Exchange Square Auditorium,
20 Bridge Street, Sydney. A Notice of Meeting and
Proxy Form are enclosed with this Annual Report.
financial calendar
2013
Final dividend record date 29 August
Payment of final dividend 19 September
Annual General Meeting 15 October
2014
Interim profit announcement 11 February*
Interim dividend record date 6 March*
Payment of interim dividend 27 March*
Final profit announcement 5 August*
Annual General Meeting 14 October*
* Indicative dates only.
ACE, Advance Off-Stylet, AOS, AutoNRT, Autosensitivity,
Beam, Clinicnet, Cochlear, Codacs, Contour, Contour Advance,
Custom Sound, DermaLock, ESPrit, Freedom, Hear now. And
always, Hybrid, inHear, Invisible Hearing, MP3000, myCochlear,
NRT, Nucleus, Nucleus in Chinese characters, Off-Stylet,
SmartSound, Softip, SPrint, the elliptical logo and Whisper are
either trademarks or registered trademarks of Cochlear Limited.
Ardium, Baha, Baha Divino, Baha Intenso, Baha PureSound,
Baha SoftWear and Vistafix are either trademarks or registered
trademarks of Cochlear Bone Anchored Solutions AB.
design
Cross Media Communications Pty Ltd
b ac k
co n t e n t s
n e x t
p d f d ow n loa d s
Cochlear Ltd (ABN 96 002 618 073) 1 University Avenue, Macquarie University, NSW 2109, Australia Tel: +61 2 9428 6555 Fax: +61 2 9428 6352
Cochlear Bone Anchored Solutions AB Konstruktionsvägen 14, SE – 435 33 Mölnlycke, Sweden Tel: 46 31 792 4400 Fax: 46 31 792 46 95
Cochlear Americas 13059 E Peakview Avenue, Centennial, CO 80111, USA Tel: +1 303 790 9010 Fax: +1 303 792 9025
Cochlear Canada Inc 2500-120 Adelaide Street West, Toronto, ON M5H 1T1, Canada Tel: +1 416 972 5082 Fax: +1 416 972 5083
Cochlear AG EMEA Headquarters, Peter Merian-Weg 4, 4052 Basel, Switzerland Tel: +41 61 205 0404 Fax: +41 61 205 0405
Cochlear Deutschland GmbH & Co. KG Karl-Wiechert-Allee 76A, 30625 Hannover, Germany Tel: +49 511 542 770 Fax: +49 511 542 7770
Cochlear Europe Ltd 6 Dashwood Lang Road, Bourne Business Park, Addlestone, Surrey KT15 2HJ, United Kingdom Tel: +44 1932 26 3400 Fax: +44 1932 26 3426
Cochlear Benelux NV Schaliënhoevedreef 20 i, B-2800 Mechelen, Belgium Tel: +32 15 79 55 11 Fax: +32 15 79 55 70
Cochlear France S.A.S. Route de l’Orme aux Merisiers, Z.I. Les Algorithmes – Bât. Homère, 91190 Saint-Aubin, France Tel: +33 805 200 016 Fax: +33 160 196 499
Cochlear Italia S.r.l. Via Larga 33, 40138 Bologna, Italy Tel: +39 051 601 53 11 Fax: +39 051 39 20 62
Cochlear Nordic AB Konstruktionsvägen 14, 435 33 Mölnlycke, Sweden Tel +46 31 335 14 61 Fax +46 31 335 14 60
Cochlear Tıbbi Cihazlar ve Sağlık Hizmetleri Ltd. Şti. Çubuklu Mah. Boğaziçi Cad., Boğaziçi Plaza No: 6/1, Kavacık, TR-34805 Beykoz-Istanbul, Turkey
Tel: +90 216 538 5900 Fax: +90 216 538 5919
Cochlear (HK) Limited Unit 1810, Hopewell Centre, 183 Queens Road East, Wan Chai, Hong Kong SAR Tel: +852 2530 5773 Fax: +852 2530 5183
Cochlear Korea Ltd 1st floor, Cheongwon building, 828-5, Yuksam dong, Kangnam gu, Seoul, Korea Tel: +82 2 533 4663 Fax: +82 2 533 8408
Cochlear Limited (Singapore Branch) 6 Sin Ming Road, #01-16 Sin Ming Plaza Tower 2, Singapore 575585 Tel: +65 6553 3814 Fax: +65 6451 4105
Cochlear Medical Device (Beijing) Co Ltd Unit 2208 Gemdale Tower B, 91 Jianguo Road, Chaoyang District, Beijing 100022, P.R. China Tel: +86 10 5909 7800
Fax: +86 10 5909 7900
Cochlear Medical Device Company India Pvt. Ltd. Ground Floor, Platina Building, Plot No C-59, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051,
India Tel: +91 22 6112 1111 Fax: +91 22 6112 1100
Nihon Cochlear Co Ltd Ochanomizu-Motomachi Bldg, 2-3-7 Hongo, Bunkyo-Ku, Tokyo 113-0033, Japan Tel: +81 3 3817 0241 Fax: +81 3 3817 0245
www.cochlear.com
© Cochlear Limited 2013
N462066-462199 ISS1 SEPT13