COCHLEAR ANNUAL REPORT
2015 Hearing Performance
32
Financial Report Cochlear Limited ACN 002 618 073 and its controlled entities for the year ended 30 June 2015
Pg
Additional Reporting
103 Directors’ Declaration
104 Independent Audit Report
108 Additional Information
Pg
Financial Report
Pg
Notes to Financial Statements
33 Directors’ Report
33
41
67
68
69
70
71
72
Principal activities and
review of operations
and results
Remuneration Report
Lead Auditor’s
Independence Declaration
Income Statement
Statement of
Comprehensive Income
Balance Sheet
Statement of Changes
in Equity
Statement of Cash Flows
73
73
73
1.0 Basis of preparation
1.1 Reporting entity
1.2 Basis of preparation
74
2.0 Performance for
the year
74
76
76
77
77
78
79
80
80
81
82
82
82
83
85
2.1 Operating segments
2.2 Revenue
2.3 Expenses
2.4 Other income
2.5 Earnings per share
2.6 Dividends
2.7 Notes to the statement
of cash flows
3.0 Income taxes
3.1 Income tax expense
3.2 Current and
deferred tax assets
and liabilities
4.0 Employee benefits
4.1 Employee expenses
4.2 Employee benefit
liabilities
4.3 Share based payments
4.4 Key management
personnel
86
86
86
87
89
90
5.0 Operating assets
and liabilities
5.1 Inventories
5.2 Property, plant
and equipment
5.3 Intangible assets
5.4 Provisions
5.5 Contingent liabilities
91
6.0 Capital and financial
structure
6.1 Capital management
6.2 Capital and reserves
6.3 Net debt and
finance costs
6.4 Financial risk
management
7.0 Other notes
7.1 Auditors’ remuneration
7.2 Commitments
91
91
92
94
99
99
99
100 7.3 Controlled entities
101 7.4 Parent entity
disclosures
102 7.5 Changes in
accounting policies
102 7.6 New standards and
interpretations not
yet adopted
102 7.7 Events subsequent to
the reporting date
33
Directors’ Report Cochlear Limited for the year ended 30 June 2015
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 2015, 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 (Chairman), Mrs YA Allen,
Mr PR Bell, Mr G Boreham, AM, Prof E Byrne, AC, Ms A Deans, 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
Human Resources
Committee
Medical Science
Committee
Nomination
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 Bell1
Mr G Boreham, AM2
Prof E Byrne, AC
Ms A Deans2
Mr A Denver
Mr DP O’Dwyer
Dr CG Roberts
10
10
5
3
10
3
10
10
10
10
9
5
3
10
3
10
10
10
5
5
-
-
-
-
5
5
-
5
5
-
-
-
-
5
5
-
3
3
1
1
-
-
-
-
-
3
3
1
1
-
-
-
-
-
-
-
-
-
1
-
1
1
1
-
-
-
-
1
-
1
1
1
4
4
3
-
4
-
4
4
-
4
3
3
-
4
-
4
4
-
-
-
-
-
3
1
3
3
3
-
-
-
-
2
1
3
3
3
1. Mr PR Bell retired 17 October 2014.
2. Mr G Boreham, AM and Ms A Deans were appointed on 1 January 2015.
Principal activities and review of operations and results
Operations
Strategy
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.”
To deliver its mission, Cochlear has five business objectives. These are:
• customer experience;
• operational excellence;
• product innovation;
• people engagement; and
• value creation.
These objectives are detailed through a strategic roadmap.
Cochlear’s customer experience strategy is to provide customers throughout their hearing journey with a convenient, seamless and
consistent experience, delivering a lifetime of positive hearing outcomes. Cochlear aims to actively grow the market for implantable hearing
solutions. Part of this strategy is increasing Cochlear’s support for the market. This is being done through directed programs including greater
direct to consumer connection, and increased consumer awareness.
Cochlear’s operational excellence strategy is to establish a dynamic, agile operation with scalable, compliant and performance focused
processes, designed to deliver a positive experience for professionals and customers.
34
Cochlear’s product innovation strategy is to create and bring to market an extensive segmented portfolio of innovative and quality products
that combine leading technology with a strong focus on the context and needs of the professional and the customer to advance hearing
outcomes. 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;
• bone conduction implants, designed to help those people with conductive hearing loss, mixed hearing loss or single-sided deafness; and
• acoustic implants, designed to help those people with moderate to severe sensorineural or mixed hearing loss.
Cochlear’s people engagement strategy is to establish an organisation that attracts and retains the best people. Cochlear aims to engage and
empower them to take initiative and be accountable to deliver a positive experience for professionals and customers.
Cochlear’s value creation strategy is to create sustainable shareholder value, delivering high growth and strong returns today and into the
future, while making a significant contribution to social good.
Business model
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 2015 (F15), 88% of Cochlear’s sales revenue was from cochlear implant (Nucleus) products and 12%
from bone anchored and acoustic implant (Baha) products. Cochlear implant sound processor upgrade sales revenue accounted for 17%
of total sales revenue (20% of the cochlear implant products sales).
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.
Cochlear operates in a global environment. Each of the over 100 countries that Cochlear sells into has differing penetration rates and reasons
for that level of penetration owing to differing cultural and economic situations.
Cochlear estimates that over 400,000 ears have been implanted with one of its implants. Cochlear’s business model includes supporting
its customers with innovative and compatible products, through the sale of sound processor upgrades and accessories and ongoing product
support. The launch of the Nucleus® 6 Sound Processor into major markets in F14 led to an increase in upgrade sales in F15, as customers
upgraded to the new technology.
Cochlear aims to remain the market leader in implantable hearing solutions. There is no independent published market share data but
Cochlear estimates it has a market leading share of implantable hearing solutions.
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 geographical regions. There are several principal regional head offices plus many
local offices:
• Americas, which includes the United States of America (US), Canada and Latin America;
• EMEA, which includes Europe, 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 other areas.
Manufacturing for the cochlear implant product range is based in Australia, at three sites: Lane Cove and Macquarie University, in Sydney, and
Brisbane. Lane Cove continues to manufacture Cochlear’s legacy products. New implant ranges are manufactured at Cochlear’s Macquarie
University headquarters including the Nucleus Profile implant. The Brisbane site is responsible for manufacturing non-implant components.
The bone conduction implant product range is manufactured in Sweden.
The acoustic implant product range is manufactured across sites in Australia, the US and Belgium.
Cochlear’s supply chain operates with product being distributed from its manufacturing sites in Australia and Sweden to its regional
distribution centres in the US, the United Kingdom and Panama. The product is then further distributed to the end customer.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 35
The proportion of Cochlear’s sales revenue to end customers by region is approximately: Americas 43%, EMEA 40% and Asia Pacific 17%.
Foreign exchange has a significant impact on Cochlear’s consolidated results. Cochlear has a partial natural hedge with over 90% of revenues
in foreign currency and over 50% of costs in currencies other than the Australian dollar (AUD). 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 AUD strengthened during the year against the Japanese yen (JPY), weakened against the US dollar
(USD) and was largely unchanged compared to the Euro (EUR). These are hedged currencies.
Operating result F15
Revenue
A focus for F15 was continuing the momentum for products launched in F14.
In addition, further products were launched during F15 including:
• Nucleus Profile with Slim Straight electrode in Europe;
• Nucleus Profile with Contour Advance® electrode in the US;
• Wireless Accessories for Nucleus 6 in all regions;
• SmartSound® iQ for Nucleus 6 Hybrid in the US;
• Aqua+ Accessory for Nucleus 6 in Europe; and
• Baha® 5 Sound Processor.
Feedback on these new products has been positive. These products continue to improve the lives of the hearing impaired in line with
Cochlear’s mission.
F15 total revenue, which includes losses on FX contracts, was $925.6 million, up 15% on F14. Sales revenue was also up 15% from last year to
$941.9 million. In constant currency terms (i.e. restating F14 at F15 foreign exchange rates), sales revenue was up 10%.
Cochlear implant sales revenue, which included sound processor upgrades, was up 15% to $826.8 million, and up 11% in constant currency.
Revenue from sound processor upgrades (i.e. sales of new sound processors to existing recipients) can be cyclical.
In F15, sound processor upgrade sales were up 50% to $162.1 million from those for the prior year and up 45% in constant currency.
This reflects strong market uptake of the Nucleus 6 Sound Processor.
Sales of cochlear implant units were up 3% to 26,838 for the year. Cochlear implant unit growth was stronger in developed countries, for
example Western Europe up 7% and North America up 15%. This was offset by weaker cochlear implant unit tender sales in developing
countries, particularly in the Middle East.
Bone anchored and acoustic implant sales of $115.1 million were up 15% and up 9% in constant currency, again reflecting the impact of the
Baha® 4 and Baha Attract Systems. Baha 5 was released late in the fourth quarter of F15.
The AUD depreciated against the USD during the year which benefits foreign sales when translated into AUD. From a translation perspective,
sales benefited by net $32.7 million. Offsetting this was a loss on FX contract losses of $16.3 million for F15 (loss of $16.0 million in F14).
Future foreign exchange contracts are detailed in Note 6.4 to the financial statements and indicate future foreign exchange contract rates
close to the current spot rates for the EUR and JPY. USD contract rates are at 0.84.
Regional sales
• Americas sales revenue of $403.0 million increased 26% (up 15% in constant currency). The launch of the Nucleus 6, Aqua+ Accessory and
the Hybrid System drove strong sales in the second half (H2) of F14 and the momentum continued into F15.
• EMEA sales revenue of $377.6 million increased 5% (increased 6% in constant currency). EMEA revenue growth continues to reflect the
portfolio of geographies in the region, with varying growth rates in different countries. Sales in Western Europe grew 11%, with Middle East
sales below F14 levels.
• Asia Pacific sales revenue of $161.3 million increased 14% (increased 9% in constant currency). Asia Pacific revenue growth continues to
reflect the portfolio of geographies in the region, with varying growth rates in different countries.
A Central Government tender sale into China of approximately 1,900 units was recognised in F15 (in line with the amount recognised in F14).
Profit
Cost of goods sold (COGS) of $275.3 million gave a COGS to sales revenue margin of 29.2% (F14: 30.2%). COGS in F15 includes a
write-down in value for obsolete and slow moving inventories of $10.1 million (F14: $1.5 million).
Expenses of $443.9 million were up 9% on F14, excluding the F14 patent dispute provision of $22.5 million.
A provision of $22.5 million was expensed in F14 in relation to the patent dispute lawsuit by the Alfred E. Mann Foundation for Scientific
Research (AMF) and Advanced Bionics LLC (AB) in the US. No further amount has been expensed or released from this provision during F15.
36
Selling, general and administration (SG&A) expenses were up 15% to $320.3 million, up 12% in constant currency, including an increase for
short and long-term incentives, and costs incurred to support the products launched during the year. Incentives in F14 were less than 100%
of target. In F15, an additional provision of $2.2 million was made for doubtful debts including in developing countries.
Investment in research and development (R&D) of $128.0 million was flat with F14. This reflects the deliberate strategy to hold the F15 R&D
expenditure at approximately the F13 levels. R&D expenses for F15 were 13.8% of total revenue compared to 15.8% of total revenue for F14
and 16.6% in F13.
Full year earnings before interest and tax (EBIT) of $206.4 million was 62% higher than that for the prior year. EBIT to total revenue was
22.3%, higher than last year’s 15.8%.
Excluding the patent dispute provision in F14, EBIT in F15 of $206.4 million was 38% higher than F14. EBIT to total revenue was 22.3%,
higher than last year’s 18.6%.
Net interest expense increased 1% to $10.1 million. Interest cover was 20 times (2014: 13 times).
The effective tax rate was 25.7% (F14: 20.0%). Excluding the patent dispute provision in F14, the effective tax rate increased by
4.1 percentage points in F15, reflecting mainly a reduction in the R&D tax concession benefit, based on Australian legislation changes to
reduce the rate of benefit.
Net profit after tax (NPAT) increased 56% to $145.8 million.
Excluding the patent dispute provision made in F14, NPAT increased 33%.
Overall, NPAT was positively impacted by $24.9 million due to both translation and transaction movements in foreign exchange rates during
the year.
Financial position
Inventories of $145.9 million at 30 June 2015 were up 13% from 30 June 2014 ($128.6 million). Inventory days increased to 193 days
(30 June 2014: 189 days). The increase reflects timing on a build-up of inventories ahead of tender shipments due in H1 F16.
Trade receivables of $236.7 million were up 18% from 30 June 2014 ($201.3 million). In constant currency, trade receivables were up 10%.
Debtors days increased to 83 days (30 June 2014: 74 days), reflecting the timing of tender sales which have extended credit terms.
The net liability associated with forward exchange contracts at 30 June 2015 was $29.4 million compared to a net asset at 30 June 2014 of
$0.7 million, reflecting the fall in the AUD against the USD.
The product recall provision was utilised by a net $5.7 million, with $15.9 million remaining at 30 June 2015. No further amount has been
recognised as a charge or released as a credit in F15.
The provision for patent dispute was set in AUD based on the value at 30 June 2014. The provision at 30 June 2015 remained unchanged at
$21.3 million.
Intangible assets of $228.5 million (30 June 2014: $234.1 million) are a significant proportion of Cochlear’s total assets. Amortisation
accounted for $10.4 million of the decrease. Some $170.5 million of the total for intangible assets 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 F15.
The Board has declared a final dividend of $1.00 per share, franked to 100%, which will be paid on 1 October 2015 based on a record date
of 10 September 2015. This brings the full year dividend to $1.90 per share. This is consistent with the August and October 2014 payout
guidance of approximately 70% of NPAT.
Net debt was $140.5 million at 30 June 2015 (30 June 2014: $181.3 million). The decrease in net debt was driven by:
• cash generated from operating activities of $188.7 million; used for
• payment of dividends of $123.8 million.
At 30 June 2015, debt facilities of $350.0 million were in place. The $250.0 million facility matures in June 2016 and is classified as
current, with the $100.0 million facility having a remaining term of three years. At 30 June 2015, the unused portion of the facilities
was $135.0 million. All bank covenants were met at year end.
Net cash generated from operating and investing activities for F15 was $160.3 million, up from $79.5 million in F14.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 37
Outlook
There continues to be more people in the world that are born or go deaf 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.
The impact of recently launched products as well as the impact of new products to be launched in F16 will continue to underpin demand and
sales growth for the business.
Cochlear benefits from a geographic portfolio effect, selling into a range of countries. In any year, some countries experience strong growth,
some remain flat and some experience a slowdown. Overall, the trend is for long-term sustainable growth.
Cochlear’s strong relationships with its customers and professionals will continue to underpin demand and sales growth for the business.
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. In F15, the Chinese tender of approximately 1,900 units was
delivered in H2. The future outcome of tender sales is uncertain, but Cochlear has been awarded a tender of 2,000 units for delivery in H1 F16.
Cochlear operates in a complex global environment and in F15 Cochlear made steady progress across its portfolio of products and
geographies. This resulted in improved sales performance and profitability, and, more importantly, significant improvements in Cochlear’s
recipients’ hearing experience.
Cochlear anticipate that it will again make steady progress in F16 and will continue to underpin the long-term growth of the Company by
ongoing investments in technology and market expansion activities.
The profit guidance for F16 is for an NPAT range of $165 million to $175 million at FX rates of USD/AUD of approximately 75 cents.
At 30 June 2015, Cochlear had foreign currency equivalent of $563.3 million in foreign exchange contracts. In F16, the average exchange
rate for the USD contracts is 0.87 and the average for EUR contracts is 0.67. At rates applicable on 30 June 2015, a loss on foreign exchange
contracts in F16 is forecast.
Business risks
Cochlear has a sound and robust Risk Management Framework to identify, assess and appropriately manage risks. Details of Cochlear’s Risk
Management Framework can be found in the Corporate Governance Statement 2015 on page 18.
Cochlear’s principal business risks are outlined below. These are significant risks that may materially 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.
Risk
Product innovation
and competition
Infringement litigation
Description and potential consequences
Strategies used by Cochlear to mitigate the risk
Cochlear is exposed to the risk of failing to develop
and produce 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 medical, biological and/or technological
advancement by third parties where alternative products
or treatments are developed and commercialised that
render Cochlear’s products obsolete. This could result in
a loss of business.
In F15, Cochlear invested nearly 14% of total 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 has a comprehensive patent portfolio across
its technologies.
Cochlear operates in an industry that has substantial
intellectual property and patents, designs and
trademarks protecting that intellectual property.
Cochlear is exposed to the risk that it will be litigated
against for claims of 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.
In F14, a provision was expensed in relation to a patent
infringement lawsuit by AMF and AB in the US. The
directors are of the opinion that the facts and the
law do not support the Judgment and Cochlear has
appealed the Judgment to the United States Court of
Appeals for the Federal Circuit.
No amount has been provided or released in relation to
this patent dispute provision during F15.
38
Misappropriation of know-how
and intellectual property
Regulation
Reimbursement
Product liability
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 operates in a highly regulated industry.
Medical devices are subject to strict regulations,
including data security, of regulatory bodies in the
US, Europe, Asia and Australia as well as many other
local bodies in countries where Cochlear’s products are
sold. Regulatory bodies periodically perform audits at
Cochlear’s manufacturing sites.
If Cochlear or a third-party supplier fails to satisfy
regulatory requirements or the regulations change
and modifications are not made, this could result in
the imposition of sanctions or Cochlear’s products
being subject to recall and/or the loss of sales and
reputational harm.
Delays in achieving regulatory approval can impact
Cochlear’s ability to sell its latest technology.
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 may
also be subject to healthcare related taxes imposed by
government agencies and this could negatively impact
the ability of candidates to access Cochlear’s products.
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.
Interruption to product supply Cochlear relies on third-party suppliers 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.
Cochlear manufactures its cochlear implant products
from two sites in Sydney. The latest generation products
are manufactured at Cochlear’s Macquarie University
headquarters and legacy products at a manufacturing
site in Lane Cove. Cochlear manufactures its bone
conduction implant products in Sweden. The acoustic
implant product range is manufactured across sites in
Australia, the US and Belgium.
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 systems and has appropriate
safeguards and processes in place. Confidentiality
agreements are in place with key employees and third
parties that are exposed to Cochlear’s know-how and
intellectual property.
Cochlear has a worldwide quality assurance system
in place.
Cochlear continues to work with reimbursement
and government agencies throughout the world to
emphasise the benefits and cost effectiveness of
the intervention.
Cochlear maintains product liability insurance and
operates a worldwide quality assurance system related
to the design, testing and manufacture of its products.
Cochlear monitors its suppliers and identifies any
available second-source supply. Inventories are
managed and purchased in sufficient quantities for
continued product supply in the short term. Where
appropriate, lifetime buys, strategic raw materials
purchases and supply chain interventions are made.
Cochlear also regularly reviews its disaster recovery
plans for its manufacturing sites.
Two discreet approved manufacturing sites for implants
will be maintained.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 39
Political, economic or
social instability
Foreign exchange rates
Cochlear sells in over 100 countries. Several of the
emerging markets are heavily biased to tender sales,
including the Central Government of China’s tenders.
The future outcome of tender sales is uncertain.
Regional political, economic or social instability could
negatively impact sales and the receipt of payment
for sales.
Cochlear assesses the countries it sells into and does
not have a significant concentration of sales in countries
impacted by political, economic or social instability.
Cochlear utilises a global scanning software to assess
partners, distributors and suppliers against sanctions
and police checklists on an ongoing basis.
Cochlear reviews tenders carefully and participates at a
level that makes commercial sense.
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,
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 Board
approved 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 level of cover out to
three years.
Credit
Cochlear’s exposure to credit risk is influenced 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.
Interest rates
Cochlear is exposed to interest rate risks in Australia.
Operations
Operational risk is the risk of direct and indirect loss
arising from a wide variety of causes associated with
Cochlear’s processes, personnel (including executive
transitions), technology and infrastructure and generally
accepted standards of corporate behaviour.
Operational risks arise from all of Cochlear’s operations.
These risks could result in the loss of sales and
reputational harm.
Policies and procedures for credit management and
administration of receivables are established and
executed at a regional level.
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, where appropriate, 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 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 2015, no hedging
had been entered into.
Standards for the management of operational risk are in
place in the following areas:
• requirements for appropriate segregation of duties,
including the independent authorisation
of transactions;
• requirements for the reconciliation and monitoring
of transactions;
• 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;
• internal and external audit programs;
• development of contingency plans;
• succession planning for key management personnel;
• training and professional development; and
• ethical and business standards.
Note: Given the significance of the patent dispute and foreign exchange movements, the directors believe the presentation of non-International Financial Reporting Standards (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 patent dispute provision: IFRS measures adjusted for the expense of the patent dispute provision; and
• constant currency: restatement of IFRS measures in comparative years using F15 foreign exchange rates.
These non-IFRS financial measures have not been subject to review or audit. However, KPMG has separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed to the books and records of the
Consolidated Entity.
40
Consolidated results
The consolidated results for the financial year are:
Revenue
Profit before income tax
Net profit after tax but before patent dispute provision1
Patent dispute provision, net of tax1
Net profit
Basic earnings per share (cents)
Diluted earnings per share (cents)
2015
$000
925,630
196,303
145,840
-
145,840
256.1
254.8
2014
$000
804,936
117,114
109,490
15,781
93,709
164.6
164.2
1. The patent dispute provision was nil for F15 and was $22,545,000 before tax and $15,781,000 after tax for F14.
Dividends
Dividends paid or declared by the Company to members since the end of the previous financial year are:
Cents per share
Total amount $000
Franked/unfranked
Date of payment
Interim 2015 ordinary
Final 2014 ordinary
Total amount
Subsequent event
Since the end of the financial year, the directors
declared the following dividends:
Final 2015 ordinary
Total amount
90.0
127.0
217.0
100.0
100.0
51,374
72,469
123,843
57,082
57,082
35% Franked
26 March 2015
20% Franked
25 September 2014
100% Franked
1 October 2015
The financial effect of the 2015 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2015.
Franked dividends paid or declared during the financial year were franked at the tax rate of 30% (2014: 30%).
Environmental regulations
Cochlear’s operations are subject to 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, 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.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 41
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
– audit and review of financial reports
– other regulatory compliance services
Total audit services
Non-audit services
– taxation compliance services
Total non-audit services
Consolidated
2015
$
1,559,738
72,094
1,631,832
988,156
988,156
2014
$
1,422,391
42,875
1,465,266
818,282
818,282
State of affairs
There were no significant changes to the state of affairs of Cochlear during the financial year.
Remuneration Report
Contents
Section
1.0
Title
Introduction
Description
Describes the scope of the Remuneration Report and the individuals whose remuneration details are disclosed.
2.0
3.0
4.0
5.0
6.0
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 the
various components of remuneration, including explanation of 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 Cochlear and the executives whose
remuneration details are disclosed.
42
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 designs its executive remuneration strategies to direct
behaviours towards achieving sustainable growth in shareholder value over the long term. Cochlear’s policies must also be flexible enough to
enable the Company 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.
The remuneration policies in respect of Cochlear’s executive key management personnel (KMP) are reviewed annually. During F15, we had
the retirement of our President, Asia Pacific Region, Mark Salmon, and the appointment of Dig Howitt on 29 September 2014, an internal
replacement. Cochlear also announced the transition of the Chief Executive Officer (CEO)/President role from Chris Roberts to Chris Smith on
1 September 2015. Chris Smith will also replace Chris Roberts as the executive director on 1 September 2015. This report provides shareholders
with information about the way we are managing the related end of service payments. Dr Roberts was appointed on 1 February 2004 and his
end of service payments reflect the contractual obligations established at that time and are compliant with the Corporations Act 2001
(Corporations Act) limits.
During F15, the Company grew net profit after tax (NPAT) by 56% and sales revenue grew by 15%, representing strong year-on-year
performance and overachievement against our business targets. The Board believes Cochlear’s approach to Board and executive KMP
remuneration remains balanced, fair and equitable and rewards and motivates a successful and experienced executive team to deliver
ongoing business growth which meets the expectations of shareholders over the long term.
The Board also changed its composition with Paul Bell stepping down and the appointment of two new Board members, Glen Boreham and
Alison Deans, bringing new skills and expertise to support the business.
1.1 Scope
This Remuneration Report sets out, in accordance with the relevant Corporations Act and accounting standard requirements, the
remuneration arrangements in place for KMP of Cochlear during F15.
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 (NEDs), and executive KMP (being the executive director and other senior executives named in this report).
Details of the KMP during the year are set out in the table below:
Non-executive directors
Rick Holliday-Smith
Yasmin Allen
Paul Bell
Glen Boreham, AM
Title
Chairman
Member, Audit Committee
Member, Human Resources Committee
Chairman, Nomination Committee
Director
Chairman, Audit Committee
Member, Human Resources Committee
Member, Nomination Committee
Director
Chairman, Human Resources Committee
Member, Nomination Committee
Director
Chairman, Human Resources Committee
Member, Nomination Committee
Change in F15
No change. Full year
No change. Full year
Retired on 17 October 2014
Appointed director on 1 January 2015
Directors’ Report Cochlear Limited for the year ended 30 June 2015 43
Title
Director
Chairman, Medical Science Committee
Member, Nomination Committee
Member, Technology and Innovation Committee
Director
Member, Nomination Committee
Member, Technology and Innovation Committee
Director
Member, Audit Committee
Member, Medical Science Committee
Member, Nomination Committee
Chairman, Technology and Innovation Committee
Director
Member, Audit Committee
Member, Medical Science Committee
Member, Nomination Committee
Member, Technology and Innovation Committee
Change in F15
No change. Full year
Appointed director on 1 January 2015
No change. Full year
No change. Full year
CEO/President
Member, Medical Science Committee
Member, Technology and Innovation Committee
No change. Full year
Edward Byrne, AC
Alison Deans
Andrew Denver
Donal O’Dwyer
Executive director
Chris Roberts
Other executive KMP
Richard Brook
President, European, Middle East and African Regions
No change. Full year
Dig Howitt
Jan Janssen
President, Asia Pacific Region
Appointed on 29 September 2014
Senior Vice President, Design and Development,
Clinical and Regulatory
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
Retired on 26 September 2014
No change. Full year
44
2.0 Remuneration governance
This section of the Remuneration Report describes the role of the Board and the Human Resources Committee (HRC), and the use of
remuneration consultants when making remuneration decisions.
2.1 Role of the Board and the HRC
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 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 February 2015.
In summary, the HRC’s role includes:
• 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 the ASX Corporate Governance Council’s gender diversity principles and recommendations,
and other relevant 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 and other pension benefit 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
short-term incentive and
long-term incentive 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 Statement 2015. The HRC
terms of reference can also be viewed in the Investor Centre, Corporate Governance section of the Cochlear website, www.cochlear.com.
Directors’ Report Cochlear Limited for the year ended 30 June 2015
45
2.2 Use of remuneration consultants
During F15, 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 — F15
Services provided
Remuneration consultant for the purpose of the
Corporations Act
Ian Crichton, Remuneration
Consultant, Crichton &
Associates Pty Limited
Review of F15 Remuneration Report
No
Key questions regarding use of remuneration consultants
Did the remuneration
consultant provide
remuneration
recommendations in relation
to any of the KMP for F15?
No
How much was the
remuneration consultant paid
by Cochlear for remuneration
related and other services?
What arrangements
did Cochlear make to
ensure that the making
of the remuneration
recommendations would be
free from undue influence by
the executive KMP?
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?
Crichton & Associates Pty Limited – review of F15 Remuneration Report $8,118; other services nil.
Cochlear maintains a protocol which governs the procedure for procuring advice relating to KMP remuneration.
The protocol contains 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.
Yes, the Board is satisfied. The reasons are as follows: the Chairman of the HRC had oversight of all requests for
remuneration information; and the protocol with respect to the procurement of remuneration related advice
remains in place.
3.0 Non-executive director remuneration
3.1 NED remuneration
Principle
Fees are set by reference to
key considerations
Comment
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.
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 NEDs and shareholders, the Board has adopted guidelines that request
NEDs to hold (or have a benefit in) shares in Cochlear equivalent in value to one year’s 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 F15 amounted to $1,528,625 in total which is 76.4% of the aggregate
amount approved by shareholders at the AGM in October 2011 of $2,000,000 per year.
46
3.2 NED fees and other benefits
Elements
Board/committee fees
per annum – F15
Post-employment benefits
Superannuation
Retirement scheme
Details
Board Chairman fee1
Board NED base fee
Committee fees
Audit
Human Resources
Medical Science
Nomination
Technology and Innovation
$438,000
$146,000
Committee Chair
Committee member
$40,000
$30,000
$20,000
No fee
$20,000
$20,000
$10,000
$10,000
No fee
$10,000
Superannuation contributions have been made at a rate of 9.5% of the base fee (but only up to the Australian
Government’s prescribed maximum contributions limit) which satisfies the Company’s statutory superannuation
contributions. 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 2015, 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 2015 was $432,448.
Other benefits
Equity instruments
Other fees/benefits
NEDs do not receive any performance related remuneration, options or performance shares/rights.
NEDs receive reimbursement for costs directly related to Cochlear business.
1. Committee fees are not paid to the Chairman of the Board.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 3.3 NED total remuneration
Amounts $
Rick Holliday-Smith (Chairman)
Yasmin Allen
Glen Boreham2
Paul Bell3
Edward Byrne
Alison Deans2
Andrew Denver
Donal O’Dwyer
Total4
Short-term benefits
Post-employment benefits
Year
F15
F14
F15
F14
F15
F15
F14
F15
F14
F15
F15
F14
F15
F14
F15
F14
Fees
438,000
438,000
196,000
196,000
85,969
54,154
176,000
176,000
176,000
76,200
196,000
196,000
186,000
186,000
1,408,323
1,368,000
Accrued
interest1
Superannuation
benefits
-
-
-
-
-
-
-
10,729
10,902
-
-
-
-
-
18,783
17,775
17,986
17,255
8,167
5,145
16,280
16,720
16,280
7,239
17,986
17,255
17,547
16,828
10,729
10,902
109,573
101,673
47
Total
456,783
455,775
213,986
213,255
94,136
59,299
192,280
203,449
203,182
83,439
213,986
213,255
203,547
202,828
1,528,625
1,480,575
1. Amounts accrued for interest during the financial year relating to the directors’ retirement scheme.
2. Appointed 1 January 2015.
3. Retired 17 October 2014.
4. The year-on-year changes in Board fees reflect the increased superannuation guarantee levy and the appointment of an additional director. There have been no increases in Board NED base fees for four years.
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 the prior year’s fees and all executive KMP are requested to accumulate a minimum shareholding in Cochlear shares or vested
options equivalent to the prior year’s total fixed remuneration, calculated based on the 365 day average Cochlear Limited closing share
price for the prior year.
The guidelines were implemented in March 2007. By the completion of the August 2015 trading window, all NEDs and executive KMP are
anticipated to be compliant with the policy for the F16 requirements.
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.
48
Executive KMP remuneration objectives are exemplified through three categories of remuneration, as illustrated below:
Executive KMP remuneration objectives
Attract, motivate and retain
executive talent across diverse
geographies
The creation of reward
differentiation to drive
performance values and
behaviours components
An appropriate balance
of ‘fixed’ and ‘at risk’
components
Shareholder value creation
through equity components
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
Remuneration will be delivered as:
Base salary plus any fixed elements related
to local markets, including superannuation
or equivalents
Part cash and part equity (performance
rights). The equity component will be
subject to service and deferred for 2 years
Equity in options and/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
Strategic intent and market positioning
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 comparisons
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 comparisons
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.
The remuneration structure is designed to ensure top quartile executive KMP remuneration is only achieved if Cochlear outperforms
Directors’ Report Cochlear Limited for the year ended 30 June 2015
49
4.2 Remuneration composition mix and timing of receipt
4.2.1 Current remuneration mix
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 for F15
The remuneration mix for F15 is illustrated below:
Position
CEO/President
Other executive KMP
TFR
(cash) at target
33.4% of TTR
STI
at target
LTI
at target
33.3% of TTR
33.3% of TTR
At least 45.1% of TTR
Up to 32.3% of TTR
Up to 22.6% of TTR
The mix of remuneration for the CEO/President and other executive KMP will remain unchanged in F16.
Total fixed remuneration (TFR)
Cochlear’s approach to TFR settings is to aim to position all executives between the median and 75th percentile, but at the lower end of this
range where possible to control fixed costs, exchange rate movements notwithstanding. Only modest increases in TFR were approved in F15
to maintain this balanced approach. Cochlear’s approach to TFR settings will remain largely unchanged in F16.
Short-term incentives (STI)
Cochlear has consistently focused STI on achieving sales revenue and EBIT targets and personal objectives. To support Cochlear’s balanced
approach to TFR, Cochlear has set STI targets aimed at achieving a market competitive TFR + STI between the median and the 75th percentile
when budgets are met and provides for a capped level of overachievement to encourage outperformance. Deferred STI is equivalent to 30%
of STI cash earned, deferred into equity. Cochlear’s approach to STI settings will remain largely unchanged in F16, but during F16 Cochlear will
conduct a review of the structure of our STI plan and LTI plan.
Long-term incentives (LTI)
The LTI opportunity is calculated using the ‘gross contract value’, which refers to a Black-Scholes-Merton pricing model without discounting
for service or performance hurdles. Cochlear’s approach to LTI settings will remain largely unchanged in F16, but during F16 Cochlear will
conduct a review of the structure of our STI plan and LTI plan.
Total target remuneration (TTR)
TTR under the remuneration mix adopted will, in the opinion of the Board, deliver an overall risk adjusted reward opportunity which is fair and
market competitive.
Shareholders should note 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 degree 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, the equity outcomes are positive in terms of share price movement (i.e. the share price
on vesting exceeds the exercise price). In F15, the LTI program granted in F12 delivered a nil outcome. The STI program outcome was within a
range at or above target achievement, driven by achievement of revenue and EBIT targets based on budgets set by the Board.
50
4.2.2 Remuneration – Timing of receipt of remuneration
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
F15
F16
F17
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 at the end of year 3 but expensed over the three year service 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. The Board believes this approach aligns executive KMP
remuneration to shareholder interests and expectations.
4.3 Total fixed remuneration explained
Total fixed remuneration (TFR) includes all remuneration and benefits paid to 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 relocation
allowances. In Australia, retirement benefits are generally paid in line with the statutory superannuation guarantee legislation prevailing.
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, and changing market
circumstances as reflected through independent benchmark assessments or promotion.
Any adjustments to executive KMP remuneration are approved by the Board, based on HRC and CEO/President recommendations.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 51
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 the achievement of individual performance goals.
For the current year (F15), 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
individual 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 validated and approved by the Board.
Rewarding performance
The STI performance ratings are determined under a predetermined matrix, with the Board determination final.
Mandatory deferral of STI
A mandatory deferral of a portion of STI (in the form of performance rights) is intended to reinforce alignment
with shareholder interests. Grants are calculated at the end of each year based on sales revenue, EBIT and
individual performance outcomes and then held for two years until vesting. This achieves additional retention and
alignment of executives with shareholder interests.
The deferred STI component related to F14 was granted in August 2014 in performance rights subject to a two
year deferral period. The deferred STI component for F15 will be calculated based on 30% of the STI cash amount
earned and will also be delivered as performance rights.
The equity component will be independently determined based on the gross contract value using Cochlear’s five
day volume weighted average price following the announcement of full year results in August 2015, that is, based
on a Black-Scholes-Merton pricing model without discounting for service or performance hurdles.
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).
52
Table 1 – Executive KMP STI opportunity and actual F15 STI awarded1
Executive KMP
Position
Target STI as a %
of F15 TTR
STI awarded as a
% of target STI
STI forfeited in
F15 as a % of
target STI
Actual cash and
deferred STI
award in F15 ($)
Chris Roberts
CEO/President
Richard Brook
President, European, Middle East and
African Regions2,3
Dig Howitt
President, Asia Pacific Region
Jan Janssen
Senior Vice President, Design and
Development, Clinical and Regulatory
Neville Mitchell
CFO and Company Secretary
Mark Salmon
Chris Smith
Former President, Asia Pacific Region
President, Americas Region3
33.3%
31.4%
32.3%
32.3%
32.3%
32.3%
31.3%
120.0%
101.8%
97.9%
106.6%
106.8%
100.0%
109.4%
-
-
1,740,000
445,497
2.1%
276,136
-
-
-
-
404,625
496,222
23,397
604,248
Includes the monetary value of STI cash combined with the monetary value of STI deferral.
1.
2. STI opportunity was increased for the President, European Middle East and African Regions to align his target opportunity with that of other executive KMP.
3. European and US based Regional Presidents’ total target remuneration is benchmarked and paid in local currency.
F15 STI payments are higher than those paid in F14 for the KMP due to the fact that last year payments reflected lower than target
performance and this year payments reflect outperformance against targets. The increases reflect:
• strong business performance with sales revenue growth of 15%, EBIT growth of 62% and accomplishment of individual outcomes to
support long-term growth resulting in payments within a range between 97.9% and 120.0% of target; and
• currency fluctuations impact year-on-year comparisons for Mr Brook and Mr Smith.
The increase in target STI for Mr Brook and base salary for both Mr Brook and Mr Smith in F15 also increased the STI target opportunity. These
outcomes are consistent with the Board’s aim to reward executives between the median and 75th percentile for strong business performance.
4.4.2 Long-term incentives (LTI)
The LTI provides an annual opportunity for executive KMP and other selected senior 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 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
LTI up to F13 was provided under the Cochlear Executive Long Term Incentive Plan (CELTIP). See section 5.1 for
further details.
The Cochlear Executive Incentive Plan (CEIP) was introduced in July 2013. See section 5.1 for further details.
Under the CEIP, selected senior executives are offered options (being an option at a pre-set exercise price to
acquire ordinary shares of Cochlear Limited) or performance rights (being a nil exercise price right to fully paid
ordinary shares of Cochlear Limited) or a combination of both.
Time of grant
All equity grants will be made after the AGM each year but based on values determined in the preceding August.
Time restrictions
Equity grants awarded to the CEO/President and other executive KMP are tested against the performance hurdles
set, at the end of three financial years. If the performance hurdles are not met at the vesting date, options or
performance rights lapse.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 53
Performance hurdles and
vesting schedule
Equity grants to the CEO/President and other executive KMP are in two equal tranches assigned 50% to
compound annual growth in EPS and 50% subject to ranking of TSR against the S&P/ASX 100.
The performance conditions applying to the latest grant (F15) 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
40% to 100% pro-rata
> 20%
100%
> 75th percentile
100%
Options and performance rights 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. After the three year vesting schedule, any vested options expire after seven
months if they have not been exercised.
Dividends
No dividends are attached to options or performance rights.
Voting rights
There are no voting rights attached to options or performance rights.
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.
The target LTI dollar value for each executive is converted to options and/or performance rights according to LTI
allocation values 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 option allocation = LTI dollar value/Black-Scholes-Merton value before service or EPS and TSR
performance discounts; and/or
• performance right allocation = LTI dollar value/Black-Scholes-Merton value before service or EPS and TSR
performance discounts.
Table 2 – Vesting outcomes (performance shares and options granted F11 to F13)
Performance shares
Grant date
Vesting timeframe1
EPS 3 year
CAGR2
% vested3
% forfeited3 Relative 3 year
TSR ranking
percentile
% vested3
% forfeited3 Market price as
at 30 June
16-Aug-10
Vested June 2013
15-Aug-11
Vested June 2014
13-Aug-124
Vested June 2015
-5.5%
-19.7%
36.8%
0.0%
0.0%
100.0%
100.0%
100.0%
0.0%
28th
32nd
38th
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
N/A
N/A
$80.15
Options
Grant date
Vesting timeframe1
Exercise price
EPS 3 year
CAGR2
% vested3 % forfeited3
16-Aug-10
Vested June 2013
15-Aug-11
Vested June 2014
13-Aug-124
Vested June 2015
$69.80
$68.56
$62.78
-5.5%
-19.7%
36.8%
0.0%
0.0%
100.0%
100.0%
100.0%
0.0%
Relative 3
year TSR
ranking
percentile
28th
32nd
38th
% vested3 % forfeited3
Net market
value as at
30 June
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
N/A
N/A
$17.37
1.
While the vesting period ends on 30 June of each year, participants are not able to exercise any awards until the Board approves the opening of the first trading window under the Cochlear Trading Policy
(typically immediately following the Cochlear full-year results announcement).
2. Compound annual growth rate.
3. All plan participants had the same vesting and forfeiture percentage outcome.
4. The performance hurdles for the LTI plans are considered demanding such that this is the first time in the last three years that the plan has provided executives with an award.
54
4.5 Other remuneration elements and disclosures relevant to executive KMP
4.5.1 Clawback
Cochlear implemented a clawback policy to take effect from 1 July 2014 to ensure compliance with ASX requirements. There have been no
circumstances to date where the policy 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 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).
Mark Salmon, former President, Asia Pacific Region, retired on 26 September 2014. His final arrangements included the payment of previously
expensed statutory entitlements due to accrued long service of $97,303 and annual leave entitlements of $39,233.
The Board used its discretion to permit Mr Salmon to retain 8,016 performance shares in the 2012 CELTIP subject to existing performance
hurdles and timeframes. Existing awards from the 2013 CEIP were forfeited (see the table in section 5.2.1 for more details).
Paul Bell, former NED, retired on 17 October 2014. Mr Bell was not entitled to any termination related payments.
On 26 May 2015, the Company announced that Dr Roberts would be stepping down as CEO/President on 31 August 2015. This report
includes details of the proposed end of service payments to Dr Roberts. In keeping with the terms of Dr Roberts’ executive service contract
entered into on 1 February 2004, Dr Roberts is entitled to an end of service payment of $137,617 in statutory entitlements and $1,410,801 in
accordance with Cochlear’s contractual obligations. In line with IFRS, these were accrued at 30 June 2015 and will be paid on 31 August 2015.
The Board plans to use its discretion to permit Dr Roberts to retain 123,023 options from the 2013 CEIP and 2,781 performance rights from
the 2013 CEIP (STI Deferral) subject to existing performance hurdles and timeframes. Existing awards from the 2014 CEIP LTI grant will be
forfeited when Dr Roberts departs on 31 August 2015 (see the table in section 5.2.1 for more details).
4.5.4 Conditions of LTI grants
The conditions under which LTI (performance rights and 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
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 equivalent to the prior year’s TFR, or one
year’s fees for NEDs, based on the 365 day average Cochlear Limited closing share price for the prior year.
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. During the year, Cochlear’s NED and executive share ownership guidelines were reviewed and
amended to align with ASX practice. By the completion of the August 2015 trading window, all NEDs and executive KMP are anticipated to be
compliant with the policy for the F16 requirements.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 4.6 Relationship between Cochlear performance and executive KMP remuneration
4.6.1 Cochlear financial performance (F11 to F15)
Sales revenue ($million)
EBIT ($million)
NPAT ($million)
Basic EPS (cents)
Total dividend per share (cents)
Share price as at 30 June ($)
F11
732.2
242.7
180.1
318.2
225.0
72.00
F121
704.6
76.5
56.8
100.0
245.0
65.84
F13
715.0
178.9
132.6
233.0
252.0
61.71
F142
820.9
127.1
93.7
164.6
254.0
61.70
55
F15
941.9
206.4
145.8
256.1
190.0
80.15
1. F12 includes product recall expenses of $138.8 million before tax and $101.3 million after tax.
2. F14 includes the patent dispute provision of $22.5 million before tax and $15.8 million after tax.
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 33 to 41.
4.6.2 Cochlear current year performance and relationship to executive KMP remuneration
Cochlear sales revenue grew 15% year on year. New product launches combined with investments in market growth initiatives drove this
growth. Earnings per share in F15 of 256.1 cents was 56% above that for F14.
The STI payouts to KMP this year ranged from 97.9% to 120.0% of their target STI opportunity, reflecting the strong performance against targets.
The executive KMP again performed at expectations with respect to their personal objectives.
The payout ratios on STI in F15 reflect individual, business and Cochlear performance against targets in accordance with plan rules. The Board
has worked to ensure the overall executive KMP remuneration recognises Company performance and enables the business to retain a talented
leadership team, of 11 executives and allowing Cochlear to promote internal candidates to three KMP roles (including one new KMP for F16).
4.6.3 Cochlear EPS and TSR performance (F11 to F15) 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) STI, whether paid immediately or deferred, depend on sales revenue and EBIT performance and outcomes for the
completed performance year (as explained in section 4.4.1); and
• LTI, in the form of options and performance rights, are linked to compound annual growth in EPS and relative TSR performance (as explained
in section 4.4.2).
EPS (internal) and relative TSR (external) 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.
Earnings per share (EPS)
Cochlear’s basic EPS over the last five years is displayed in the graph below:
318.2
100.0
233.0
164.6
256.1
F11
F12
F13
F14
F15
For more information, see the principal activities and review of operations and results section of the Directors’ Report.
56
The table below illustrates Cochlear’s compound annual growth in basic EPS in respect of performance for grants from F11 to F13:
Grant date
16-Aug-10
15-Aug-11
13-Aug-12
Compound annual EPS growth
EPS vesting performance
F11
15.4%
F12
-39.8%
-68.6%
F13
-5.5%
-14.4%
133.0%
F14
F15
-19.7%
28.3%
36.8%
0.0%
0.0%
100.0%
Refer the principal activities and review of operations and results section of the Directors’ Report on pages 33 to 41 for details on the
performance of Cochlear.
As a result of Cochlear meeting the EPS growth targets set, 100% of the 2012 equity grants related to EPS hurdles vested. The achievement of
256.1 cents per share demonstrates positive momentum for the business and achievement against performance hurdles.
Total shareholder return (TSR) – Unaudited
Cochlear’s relative TSR performance over the relevant performance periods up to 30 June 2015 in respect of vested equity grants is set out
below. This information is unaudited.
Grant date
16-Aug-10
15-Aug-11
13-Aug-12
Relative 3 year TSR
percentile ranking
TSR vesting performance
28th
32nd
38th
0.0%
0.0%
0.0%
TSR is a function of share price growth and dividends reinvested. Cochlear’s performance over time is affected by a range of variables,
including currency volatility, global economic and geopolitical conditions, market growth for its products and variability in other sectors.
Cochlear did not meet the minimum threshold of TSR performance for the 2012 equity grants, therefore none of the 2012 equity grants
related to TSR hurdles vested.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 57
4.7 Executive remuneration table – Audited statutory disclosure (accounting cost to Cochlear)
Year
Fixed remuneration
Variable remuneration
Amounts $
Name
Short-term
Other employment costs
Total
Salary
Non-
monetary
benefits1
Super-
annuation
benefits
Long
service
leave
Short-
term2
Bonus
Deferred
STI3,4
Value of
options
Long-
term5,6,7
Total
Value of
perform-
ance
shares/
rights
End of
service8
Total
Proportion
of total
remuneration
Performance
related
%
18,783
32,349 1,482,161 1,338,462
518,549 1,055,244
- 2,912,255 1,548,418
5,942,834
49.0%
Chris Roberts9
F15
1,431,029
F14
1,384,305
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,853,452
49.5%
1,405,338
42.5%
1,107,836
35.1%
791,315
49.2%
1,098,771
50.8%
844,573
38.1%
1,404,735
48.9%
1,069,326
37.5%
301,687
47.4%
983,413
37.5%
1,635,078
49.3%
1,190,249
40.7%
48.4%
42.0%
17,775
40,218 1,442,298
585,055
58,506
767,593
-
1,411,154
611,858
91,970
103,860
550,499
77,685
90,433
14,088
-
-
-
807,688 342,690
55,609
141,217
58,134
597,650
718,617
213,405
21,340
126,994
27,480
389,219
401,797
212,412
21,145
51,190
104,771
389,518
387,709
515,161
487,444
543,609
524,363
143,181
567,844
-
-
-
-
-
-
-
18,783
6,416
540,360
311,250
46,396
115,591
85,174
558,411
17,775
17,165
522,384
152,708
15,271
82,980
71,230
322,189
157,325
17,325
718,259
381,709
56,973
78,902
168,892
686,476
129,280
15,001
668,644
188,025
18,803
90,228
103,626
400,682
5,743
9,852
158,776
23,397
(15,737)
(10,692)
145,943
142,911
17,775
28,534
614,153
157,372
15,737
64,668
131,483
369,260
Richard Brook10
Dig Howitt11
Jan Janssen
Neville Mitchell12
Mark Salmon13
Chris Smith14
Total15
Total
F15
F14
F15
F15
F14
F15
F14
F15
F14
F15
F14
F15
F14
786,650
26,797
16,290
670,243
22,264
13,562
-
-
829,737 464,806
72,305
186,605
81,625
805,341
706,069
258,245
25,824
140,147
59,964
484,180
4,419,197
118,767
334,872
65,942 4,938,778 3,074,726
755,240 1,618,057
644,539 6,092,562 1,548,418
12,579,758
4,184,698
99,949
286,600
100,918
4,672,165
1,554,810
155,481
1,272,610
393,783
3,376,684
-
8,048,849
1. Benefits include car allowances and health insurance which are market based payments.
2.
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 F15 STI payments delivery. For F15, STI paid
represent 97.9% to 120.0% of executive KMP opportunity.
Deferred STI is granted in performance rights and deferred for two years. The cost of the plan is expensed across three years. The F15 amount represents the portion of the F14 and F15 STI deferral expensed in F15. The F14
amount represents the portion of the F14 STI deferral expensed in F14.
Deferred STI for Chris Roberts includes an expense of $298,234 that would normally have been amortised over future years for awards that remain subject to vesting timeframes. Also includes a credit of $15,737 for
Mark Salmon, reversing prior years’ expenses on plans that have been forfeited.
The value of options and performance shares/rights is calculated at the date of grant using the Black-Scholes-Merton pricing model discounted for vesting probabilities of performance criteria. The value of options and
performance shares/rights 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 of options and performance shares/rights.
The value disclosed above is the portion of the value of the options and performance shares/rights recognised as an expense in the financial year. The ability to exercise the options and performance shares/rights is
conditional on Cochlear achieving certain performance hurdles. Further details of options and performance rights granted during the financial year are set out in this report.
Includes an expense of $391,834 for Chris Roberts and $34,179 for Mark Salmon that would normally have been amortised over future years for awards that remain subject to vesting hurdles and timeframes and may not
be paid out. Also includes a credit of $46,401 for Mark Salmon, reversing prior years’ expenses on plans that have been forfeited.
3.
4.
5.
6.
7. The total value of options and performance shares/rights recognised in F15 for each executive KMP (excluding Mark Salmon) is higher than in F14 due to higher vesting probabilities related to plans that are yet to vest.
8. Accrual of contractual end of service payments of approximately one year of salary for Chris Roberts, payable at the end of his employment, and statutory entitlements. In F16, Dr Roberts will not accrue any more end of
service amounts.
9. Chris Roberts is an executive director.
10. Richard Brook’s STI opportunity was increased to 55% of base salary from F15 to align with that of other executive KMP.
11. Dig Howitt became a KMP on 29 September 2014. Values in this table relate only to the period he was a KMP.
12. Neville Mitchell remains on a defined contribution superannuation plan based on a fixed percentage of salary.
13. Mark Salmon retired on 26 September 2014.
14. Chris Smith’s remuneration increase reflects an increase in base salary, overachievement on STI and USD/AUD currency variations.
15. The increase in total remuneration from F14 reflects improved STI performance with underachievement against target last year and overachievement in F15, incremental salary package increases and accrual of end of
service payments to Chris Roberts.
58
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 discounted
for vesting probabilities of performance criteria 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
Deferred STI5
LTI (equity)
granted during
year6,7
Chris Roberts
Richard Brook
Dig Howitt8
Jan Janssen
Neville Mitchell
Mark Salmon9
Chris Smith
Total
Total
F15
F14
F15
F14
F15
F15
F14
F15
F14
F15
F14
F15
F14
F15
F14
1,449,812
818,068
2,267,880
1,402,080
509,264
1,911,344
807,688
264,801
1,072,489
718,617
167,620
886,237
401,797
86,034
487,831
533,944
213,287
747,231
505,219
114,439
619,658
700,934
262,827
963,761
653,643
141,000
794,643
148,924
112,690
261,614
585,619
160,541
746,160
829,737
318,067
1,147,804
706,069
161,941
868,010
4,872,836
2,075,774
6,948,610
4,571,247
1,254,805
5,826,052
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,267,880
895,877
401,538
1,300,967
1,911,344
375,483
175,517
1,030,699
1,072,489
208,619
102,807
249,928
886,237
130,730
64,021
170,649
487,831
126,378
63,724
234,804
747,231
195,834
93,375
238,188
619,658
97,871
45,813
156,874
963,761
239,497
114,513
281,347
794,643
120,615
56,408
204,133
261,614
23,397
-
-
746,160
112,690
47,212
185,579
1,147,804
294,791
139,442
329,947
868,010
148,052
77,473
222,477
6,948,610
1,984,393
5,826,052
985,441
915,399
466,444
2,635,181
1,970,411
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, F15 data includes F14 second half-year STI and F15 first half-year STI payments.
3. Reflects the intrinsic value of vested employee share scheme benefits at the end of the financial year.
4. Reflects STI payments related to the current financial year but paid in future years. For example, F15 data includes the F15 second half-year STI payment scheduled for payment during F16.
5.
Deferred STI in F15 reflects STI achievement of between 97.9% and 120.0%, whereas deferred STI in F14 reflected STI achievement of between 49.1% and 54.9% with the exception of the President of the Americas Region
and the President of the European, Middle East and African Regions who earned 70.3% and 86.1% of their opportunity respectively.
Represents the value of equity grants (options and/or performance rights) calculated at the date of grant using the Black-Scholes-Merton pricing model discounted for vesting probabilities of performance criteria.
These grants were awarded during the year, are unvested and will be subject to achievement of future performance hurdles.
6.
7. The value of LTI granted during the year for each KMP (excluding Mark Salmon) is higher than that in the previous financial year due to a higher vesting probability of the plan granted during the current financial year.
8. Dig Howitt became a KMP on 29 September 2014. Values included in this table relate only to the period he was a KMP. Both the deferred STI value (scheduled for conversion to performance rights in August 2015) and the
LTI value (granted in October 2014) are included as they were granted after he became a KMP.
9. Mark Salmon retired on 26 September 2014.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 59
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 in relation to ESS instruments that Cochlear has issued; and
4. disclosures required in relation to Cochlear Limited shares and other ESS instruments held by executive KMP.
5.1 Employee share schemes operated by Cochlear
Plan details
Cochlear Employee Share Plan
(CESP)
Date established: 1999
Type of instruments
Ordinary shares
Details
Issue of ordinary shares annually
to eligible employees.
Cochlear Executive Long Term
Incentive Plan (CELTIP)
Date established: 2003 AGM
Ordinary shares (options and/or
performance shares)
Cochlear Executive Incentive
Plan (CEIP)
Date established: July 2013
Awards consisting of ordinary shares;
performance rights; options; and/or
share appreciation rights
A long-term performance incentive
scheme designed to reward
participants for achieving market
competitive EPS growth and
relative TSR hurdles, as approved.
Participants receive options and/or
performance shares based on
a predetermined formula.
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.
Purpose
The purpose of the CESP is to
encourage general employee
equity participation through tax
concessional legislation which
currently facilitates tax effective
issues of up to $1,000 worth
of shares annually per eligible
employee. Under the September
2014 (F15) grant, 1,317 employees
each received an award of 15 shares.
Executive KMP and other executives
rewarded under 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 options or
performance shares. Vesting of
options or performance shares
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. No grants have been made
under the CELTIP since F13.
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 are
flexible but meet contemporary
LTI design standards. The first grant
of options and performance rights
under this plan was made on
15 October 2013, and a grant of
options and performance rights was
made on 14 October 2014. Also refer
to section 4.4.2.
60
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/rights granted as remuneration to each executive KMP are set out below:
Chris Roberts
Richard Brook
Dig Howitt
Jan Janssen
Neville Mitchell
Mark Salmon
Chris Smith
Grant date
Number
granted
Number
vested
15-Aug-11
13-Aug-12
117,620
231,161
15-Oct-13
123,023
12-Aug-144
-
14-Oct-145
60,771
Total
532,575
15-Aug-11
13-Aug-12
15-Oct-13
12-Aug-144
14-Oct-14
Total
15-Aug-11
13-Aug-12
23,495
41,448
7,249
-
7,256
79,448
21,942
-
15-Oct-13
21,900
12-Aug-144
14-Oct-14
Total
15-Aug-11
13-Aug-12
15-Oct-13
12-Aug-144
14-Oct-14
Total
15-Aug-11
13-Aug-12
15-Oct-13
12-Aug-144
14-Oct-14
Total
15-Aug-11
13-Aug-12
-
10,970
54,812
11,128
26,491
6,664
-
11,127
55,410
27,538
10,928
13,723
-
8,168
60,357
28,859
-
15-Oct-13
10,239
12-Aug-144
14-Oct-14
-
-
Total
39,098
15-Aug-11
13-Aug-12
15-Oct-13
12-Aug-144
14-Oct-14
Total
20,823
45,063
14,955
-
15,412
96,253
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Options
Number
forfeited/
lapsed
117,620
-
-
-
-
117,620
23,495
-
-
-
-
23,495
21,942
-
-
-
-
21,942
11,128
-
-
-
-
11,128
27,538
-
-
-
-
27,538
28,859
-
10,239
-
-
39,098
20,823
-
-
-
-
20,823
Performance shares/rights2
Intrinsic value of
exercised options ($)1
Number
granted
Number
vested
Number
forfeited/
lapsed
Intrinsic value of
vested performance
shares/rights ($)3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,781
11,821
14,602
-
-
3,617
993
3,293
7,903
-
6,095
-
714
2,133
8,942
2,234
2,473
3,325
725
2,164
10,921
-
6,120
2,934
893
3,707
13,654
-
8,016
3,284
-
-
11,300
1,045
1,577
3,198
1,199
2,998
10,017
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,234
-
-
-
-
2,234
-
-
-
-
-
-
-
-
3,284
-
-
3,284
1,045
-
-
-
-
1,045
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1. The intrinsic value of exercised options calculated as the closing market price of shares of the Company on the ASX on the date of exercise less the applicable exercise price times the number of options.
2.
For grants made under the CELTIP from 2011 to 2012, participants were granted either options or performance shares, so all holdings referred to under the “Performance shares/rights” columns granted from 2011 to 2012 represent
performance shares. Under the CEIP, participants were granted either options or performance rights, so all holdings referred to under “Performance shares/rights” columns granted from 2013 onwards represent performance rights.
3. The intrinsic value of vested performance shares calculated as the closing market price of shares of the Company on the ASX on the date of vesting times the number of performance shares.
4. The 12 August 2014 grant represented the grant of performance rights under the CEIP STI Deferral.
5. This award is planned to be forfeited at the discretion of the Board at the end of Dr Roberts’ service on 31 August 2015.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 61
The options granted in F15 have an exercise price of $68.56 and an expiration date of 9 March 2018. The options granted during the year
have a fair value (IFRS-2) of $11.93 at grant date for options with EPS performance based conditions and $11.33 at grant date for options with
TSR based conditions. The performance rights granted during F15 had a fair value (IFRS-2) at grant date of $61.33 for performance rights with
EPS performance based conditions and $39.21 at grant date for performance rights with TSR based conditions.
5.2.2 Exercise of options and performance shares/rights granted as remuneration
During F15, no options were exercised by the CEO/President or other executive KMP. The F12 CELTIP grant did not meet the performance
hurdles so there was no vesting from this grant.
There are no amounts unpaid on the shares issued as a result of the exercise of the options in prior years.
5.2.3 Analysis of movement in options and shares
The movement in number and value during F15 of options over ordinary shares of Cochlear Limited acquired under the CELTIP and CEIP LTI
held by executive KMP is detailed below:
Opening
Granted in year
Exercised in year
Number
Number
Value ($)1
Number
Forfeited/lapsed
in year
Closing
Number
Number
Intrinsic
value ($)2
Chris Roberts3
Richard Brook
Dig Howitt
Jan Janssen
Neville Mitchell
Mark Salmon4
Chris Smith
471,804
72,192
43,842
44,283
52,189
39,098
80,841
60,771
7,256
10,970
11,127
8,168
-
15,412
706,767
84,382
127,573
129,399
94,988
-
179,231
Total
804,249
113,704
1,322,340
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
117,620
23,495
21,942
11,128
27,538
39,098
20,823
414,955
55,953
32,870
44,282
32,819
N/A
75,430
261,644
656,309
The movement in number and value during F15 of performance shares/rights acquired under the CELTIP, CEIP LTI and CEIP STI Deferral held
by executive KMP is detailed below:
Opening
Granted in year
Exercised in year
Number
LTI number
LTI value
($)1
Deferred STI
number
Deferred STI
value ($)5
Number
Intrinsic
value ($)6
Forfeited/
lapsed in year
Closing
Number
Number
Chris Roberts3
Richard Brook
Dig Howitt
Jan Janssen
Neville Mitchell
Mark Salmon4
Chris Smith
-
3,617
6,095
8,032
9,054
11,300
5,820
11,821
3,293
2,133
2,164
3,707
-
594,242
165,546
107,231
108,789
186,359
-
2,781
175,509
993
714
725
893
-
62,668
45,061
45,755
56,357
-
2,998
150,716
1,199
75,669
Total
43,918
26,116
1,312,883
7,305
461,019
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,234
14,602
7,903
8,942
8,687
-
13,654
3,284
1,045
N/A
8,972
6,563
62,760
1.
The value derived under IFRS-2 of options and performance rights granted during the financial year is the value of the options and performance rights calculated at grant date using the Black-Scholes-Merton pricing model
discounted for vesting probabilities of performance criteria. The total value of the options and rights granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in each of
F15 to F17).
2. The intrinsic value of exercised options is calculated as the closing market price of shares of the Company on the ASX on the date of exercise less the applicable exercise price times the number of options.
3. The “Granted in year” LTI options and performance rights are likely to be forfeited at the discretion of the Board at the end of Dr Roberts’ service on 31 August 2015.
4. For Mark Salmon, the closing balance as at 30 June 2015 has not been disclosed as he retired on 26 September 2014.
5. Deferred STI value represents performance rights under the CEIP STI Deferral plan.
6. The intrinsic value of vested performance shares calculated as at the closing market price of shares of the Company on the ASX on the date of vesting times the number of performance shares.
62
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
($)
Exercise period
15-Aug-112
13-Aug-123
15-Oct-134
14-Oct-14
Total
Issued
Exercised
484,887
707,127
224,314
138,963
1,555,291
-
-
-
-
-
Forfeited/
lapsed
484,887
At report
date
-
21,331
685,796
10,239
214,075
68.56
Aug-14 to 30-Jun-16
62.78
Aug-15 to 30-Jun-17
59.13
Aug-16 to 10-Mar-17
-
138,963
68.56
Aug-17 to 9-Mar-18
516,457 1,038,834
Current net value of
outstanding options as
at 30 June 2015
($)1
-
11,912,277
4,499,857
1,610,581
18,022,715
1. Share price as at 30 June 2015 was $80.15.
2. No options from the F12 grant vested.
3. Lapsed options from unvested grants relate to plan members who have departed Cochlear.
4. Lapsed options from unvested grants relate to plan members who have departed Cochlear.
5.4 KMP equity interests – Audited
In accordance with the Corporations Act (section 205G(1)), Cochlear is required to notify the interests (shares and rights to shares) of
directors to the ASX.
In the interests of transparency and completeness of disclosure, this information is provided for each NED (as required under the Corporations
Act) and all executive KMP as well.
Please refer sections 4.5.2 (Hedging and margin lending prohibition) and 4.5.5 (Minimum shareholding guidelines).
The table below indicates Cochlear Limited shareholding:
NEDs
Held at 1 July 2014
Purchases
Sales
Rick Holliday-Smith
Yasmin Allen
Glen Boreham
Paul Bell2
Edward Byrne
Alison Deans
Andrew Denver
Donal O’Dwyer
Total NEDs
9,250
2,950
-
3,000
3,250
-
4,000
6,000
-
550
-
N/A
-
2,000
-
-
28,450
2,550
-
-
-
N/A
-
-
-
-
-
Cochlear Limited
ordinary shares held as
at 30 June 2015
Total intrinsic value
of Cochlear Limited
securities as at year end
($)1
9,250
3,500
-
N/A
3,250
2,000
4,000
6,000
741,388
280,525
-
N/A
260,488
160,300
320,600
480,900
28,000
2,244,201
Directors’ Report Cochlear Limited for the year ended 30 June 2015
63
The table below indicates Cochlear Limited shareholding including any vested but unexercised options and performance shares:
Executive KMP
Held at 1 July
2014
Purchases
Received on
exercise of
options and
performance
shares
Sales
Cochlear
Limited
ordinary shares
held as at 30
June 2015
Vested options
over Cochlear
Limited
ordinary
shares3
Vested
performance
shares over
Cochlear
Limited
ordinary
shares4
Total intrinsic
value of
Cochlear
Limited
securities as at
year end ($)1
Executive director
Chris Roberts
Other executive KMP
Richard Brook
Dig Howitt
Jan Janssen
Neville Mitchell
Mark Salmon5
Chris Smith6
Total executive KMP
719,803
-
-
108,534
611,269
7,700
34,151
5,898
10,000
8,148
-
785,700
-
-
-
1,000
N/A
-
1,000
-
-
-
-
N/A
-
-
-
12,800
-
-
N/A
-
121,334
7,700
21,351
5,898
11,000
N/A
-
657,218
-
-
-
-
-
N/A
-
-
-
48,993,210
-
-
-
-
N/A
-
-
617,155
1,711,283
472,725
881,650
N/A
-
52,676,023
1.
The intrinsic value of Cochlear Limited ordinary shares and vested performance shares calculated as the closing Cochlear Limited share price on the ASX on 30 June 2015 times the number of shares and performance
shares, plus the intrinsic value of vested options calculated as at the closing Cochlear Limited share price on the ASX on 30 June 2015 less the applicable exercise price times the number of options (negative values are
treated as zero in the totals). Please note the share ownership guidelines apply an average share price to NEDs’ and executive KMP’s holdings, not intrinsic value at year end.
2. For Paul Bell, the closing balance as 30 June 2015 has not been disclosed as he retired on 17 October 2014.
3. The number of vested but unexercised options.
4. The number of vested but unexercised performance shares.
5. For Mark Salmon, the closing balance as of 30 June 2015 has not been disclosed as he retired on 26 September 2014.
6. At the completion of the August 2015 trading window, vested awards and purchased shares will result in compliance with the minimum shareholding requirements.
The table below indicates any unvested options and performance shares/rights issued to executive KMP but still subject to performance
hurdles and STI deferral service conditions:
Unvested options over Cochlear
Limited ordinary shares1
Unvested performance shares/
LTI rights over Cochlear Limited
ordinary shares2
Unvested STI Deferral
rights over Cochlear Limited
ordinary shares3
Total intrinsic value of unvested
options and performance
shares/rights as at year end ($)4
Executive director
Chris Roberts
Other executive KMP
Richard Brook
Dig Howitt
Jan Janssen
Neville Mitchell
Mark Salmon5
Chris Smith
Total executive KMP
414,955
55,953
32,870
44,282
32,819
N/A
75,430
656,309
11,821
6,910
8,228
7,962
12,761
N/A
7,773
55,455
2,781
993
714
725
893
N/A
1,199
7,305
8,475,896
1,589,848
1,304,182
1,425,451
1,667,312
N/A
1,994,829
16,457,518
1. The number of unvested options.
2. The number of unvested CELTIP performance shares and CEIP LTI performance rights.
3. The number of unvested CEIP STI Deferral performance rights.
4.
The intrinsic value of unvested performance shares/rights calculated as at the closing Cochlear Limited share price on the ASX on 30 June 2015 times the number of performance shares/rights and the intrinsic value of
unvested options calculated as at the closing Cochlear Limited share price on the ASX on 30 June 2015 less the applicable exercise price times the number of options (negative values are treated as zero in the totals).
5. For Mark Salmon, the closing balance as of 30 June 2015 has not been disclosed as he retired on 26 September 2014.
64
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, which is also reflected in his end of
service payment:
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’ TFR.
All STI and LTI benefits are either:
• released in full or on a pro-rata basis; or
• remain subject to performance requirements 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.
Directors’ Report Cochlear Limited for the year ended 30 June 2015 65
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 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, Middle East and African Regions will receive:
• a maximum of CHF 30,000 for repatriation costs in the case of termination or resignation.
Post-employment restraints
All other executive KMP are subject to post-employment restraints for up to 12 months.
66
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. 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 matter 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 2015, see Note 2.6 to the financial statements.
Lead auditor’s independence declaration
The lead auditor’s independence declaration is set out on page 67 and forms part of the Directors’ Report for the financial year ended
30 June 2015.
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 11th day of August 2015.
Signed in accordance with a resolution of the directors:
Director
Director
Directors’ Report Cochlear Limited for the year ended 30 June 2015 67
Lead Auditor’s Independence Declaration
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 2015 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, 11 August 2015
Cameron Slapp, Partner
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
68
Income Statement Cochlear Limited and its controlled entities for the year ended 30 June 2015
Revenue
Cost of sales
Gross profit
Selling and general expenses
Administration expenses
Patent dispute provision
Research and development expenses
Other income
Other expenses
Results from operating activities
Finance income – interest
Finance expense – interest
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 73 to 102 are an integral part of these consolidated financial statements.
Note
2.2
2.3(a)
5.4
2.4
2.3(b)
3.1
2.5
2.5
2015
$000
2014
$000
925,630
804,936
(275,320)
(248,285)
650,310
(266,483)
(53,862)
-
(127,985)
4,428
-
556,651
(234,711)
(44,162)
(22,545)
(127,562)
2,532
(3,112)
206,408
127,091
300
(10,405)
(10,105)
196,303
(50,463)
145,840
256.1
254.8
324
(10,301)
(9,977)
117,114
(23,405)
93,709
164.6
164.2
69
Statement of Comprehensive Income Cochlear Limited and its controlled entities for the year ended 30 June 2015
Net profit
Other comprehensive (loss)/income
Items that will not be reclassified subsequently to the income statement:
Defined benefit plan actuarial (losses)/gains
Total items that will not be reclassified subsequently to the income statement
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
Other comprehensive (loss)/income for the period, net of tax
Total comprehensive income
The notes on pages 73 to 102 are an integral part of these consolidated financial statements.
2015
$000
2014
$000
145,840
93,709
(1,806)
(1,806)
20,089
(32,412)
11,389
(934)
(2,740)
143,100
306
306
2,344
6,007
11,149
19,500
19,806
113,515
70
Balance Sheet Cochlear Limited and its controlled entities as at 30 June 2015
Assets
Cash and cash equivalents
Trade and other receivables
Forward exchange contracts
Inventories
Current tax assets
Prepayments
Total current assets
Other receivables
Forward exchange contracts
Property, plant and equipment
Intangible assets
Deferred tax assets
Total non-current assets
Total assets
Liabilities
Trade and other payables
Forward exchange contracts
Loans and borrowings
Current tax liabilities
Employee benefit liabilities
Provisions
Deferred revenue
Total current liabilities
Forward exchange contracts
Loans and borrowings
Employee benefit liabilities
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
Retained earnings
Total equity
The notes on pages 73 to 102 are an integral part of these consolidated financial statements.
Note
2.7(a)
6.4(b)
5.1
3.2
5.2
5.3
3.2
6.3
3.2
4.2
5.4
6.3
4.2
5.4
2015
$000
72,208
249,744
3,853
145,861
3,606
13,754
2014
$000
56,127
210,394
4,559
128,613
8,600
12,586
489,026
420,879
63
1,910
80,809
228,531
68,717
380,030
869,056
99,858
24,162
168,159
20,645
43,223
26,652
20,585
55
5,450
75,776
234,115
52,761
368,157
789,036
78,644
6,643
3,141
8,442
31,065
26,492
15,151
403,284
169,578
10,961
44,552
11,479
43,394
110,386
513,670
355,386
144,136
(26,201)
237,451
2,624
234,274
8,752
44,603
290,253
459,831
329,205
144,136
(32,191)
217,260
355,386
329,205
Statement of Changes in Equity Cochlear Limited and its controlled entities for the year ended 30 June 2015
71
Amounts $000
2014
Balance at 1 July 2013
Total comprehensive income
Net profit
Other comprehensive income
Defined benefit plan actuarial gains
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 other comprehensive income
Total comprehensive income
Transactions with owners, recorded directly
in equity
Treasury shares issued to employees
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2014
2015
Issued capital
Treasury
reserve
Translation
reserve
Hedging
reserve
Share based
payment
reserve
Retained
earnings
Total equity
128,196
(9,408)
(54,974)
(16,680)
39,221
268,156
354,511
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
945
-
-
-
-
-
2,344
-
-
2,344
2,344
-
-
-
-
-
-
-
-
6,007
11,149
17,156
17,156
-
-
-
-
-
-
-
-
-
-
-
-
93,709
93,709
306
-
-
-
306
306
2,344
6,007
11,149
19,806
94,015
113,515
(24,403)
(945)
4,971
1,119
-
-
-
-
-
-
4,971
1,119
-
(144,911)
(144,911)
152,599
(8,463)
(52,630)
476
19,963
217,260
329,205
Transfer between reserves
24,403
Balance at 1 July 2014
152,599
(8,463)
(52,630)
476
19,963
217,260
329,205
Total comprehensive income/(loss)
Net profit
Other comprehensive (loss)/income
Defined benefit plan actuarial losses
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 other comprehensive income/(loss)
Total comprehensive income/(loss)
Transactions with owners, recorded directly
in equity
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2015
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,089
-
-
-
-
-
(32,412)
11,389
20,089
(21,023)
20,089
(21,023)
-
-
-
-
-
-
-
145,840
145,840
(1,806)
(1,806)
-
-
-
(1,806)
20,089
(32,412)
11,389
(2,740)
144,034
143,100
-
-
-
-
-
-
6,004
920
-
-
6,004
920
-
(123,843)
(123,843)
152,599
(8,463)
(32,541)
(20,547)
26,887
237,451
355,386
The notes on pages 73 to 102 are an integral part of these consolidated financial statements.
72
Statement of Cash Flows Cochlear Limited and its controlled entities for the year ended 30 June 2015
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
Dividends paid
Net cash used in financing activities
Net increase 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
2.7(a)
The notes on pages 73 to 102 are an integral part of these consolidated financial statements.
Note
2015
$000
2014
$000
919,280
809,039
(694,288)
(665,370)
2.7(b)
3,250
297
(7,627)
(32,211)
188,701
(23,897)
(4,530)
-
2,532
344
(10,558)
(24,570)
111,417
(23,497)
(6,997)
(1,452)
(28,427)
(31,946)
(148,701)
123,701
2.6
(123,843)
(148,843)
11,431
56,127
4,650
72,208
(79,500)
146,500
(144,911)
(77,911)
1,560
52,689
1,878
56,127
73
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015
1. Basis of preparation
This section sets out the Company’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is
specific to one note, the policy is described in the note to which it relates.
1.1 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 2015 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.
1.2 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 Board of directors approved the consolidated financial statements on 11 August 2015.
(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 fair value measurement method of derivative instruments is discussed further in Note 6.4(d).
(c) Functional and presentation currency
These consolidated financial statements are presented in Australian dollars (AUD), 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 AUD has been rounded to the nearest one thousand dollars unless otherwise stated.
(d) Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of 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.
Financial statements of foreign operations
The assets and liabilities of foreign operations are translated to the Company’s functional currency at foreign exchange rates ruling at the
reporting date.
The revenues and expenses of foreign operations are translated to the Company’s functional currency at rates approximating the foreign
exchange rates ruling at the dates of transactions.
Foreign currency differences arising from translation of controlled entities are recognised in the foreign currency translation reserve
(translation reserve) in equity. 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.
(e) 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 the 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.
74
1. Basis of preparation (continued)
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 critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the
consolidated financial statements is included in the following notes:
Note 4.2 – Employee benefit liabilities
Note 4.3 – Share based payments
Note 5.3 – Intangible assets
Note 5.4 – Provisions
Note 5.5 – Contingent liabilities
Note 6.4 – Financial risk management.
(f) Basis of consolidation
Controlled entities
The Consolidated Entity controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and
has the ability to affect those returns through its power over the entity. 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.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised 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 investment purposes. A SPE is consolidated if 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.
(g) Changes to the presentation of the financial statements and notes to the financial statements
To make the financial statements and notes easier to understand, Cochlear has changed the location and wording used to describe certain
accounting policies within the notes, reordered certain sections and removed immaterial disclosures. In applying materiality to financial
statement disclosures, Cochlear consider both the nature and amount of each item.
(h) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the amount of GST. Where the amount of GST incurred is not recoverable from the
taxation authority, 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.
2. Performance for the year
2.1 Operating segments
Cochlear’s three reportable segments, determined on a geographical basis, are the strategic business units of Cochlear. Segment results,
assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated
items comprise corporate and other net expenses and corporate and manufacturing assets and liabilities.
Performance is measured based on segment earnings before interest and income tax (EBIT) as included in the internal management reports
that are reviewed by Cochlear’s CEO/President, who is also the chief operating decision-maker.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 75
Information about reportable segments
Americas
EMEA1
Asia Pacific
Total
2015
$000
2014
$000
2015
$000
2014
$000
2015
$000
2014
$000
2015
$000
2014
$000
Reportable segment revenue
402,962
320,800
377,633
358,459
161,305
141,604
941,900 820,863
Reportable segment EBIT
Reportable segment assets
204,879
149,083
172,113
167,182
47,292
43,464 424,284
359,729
149,767
111,592
225,300
194,073
89,096
81,231
464,163 386,896
Reportable segment liabilities
41,524
24,029
42,721
39,174
18,719
13,009
102,964
76,212
Other material items
Depreciation and amortisation
Write-down in value of inventories
Acquisition of non-current assets
1 . Europe, Middle East and Africa.
865
14
351
850
310
478
2,097
534
1,842
1,997
112
2,547
1,180
308
347
920
133
568
4,142
3,767
856
555
2,540
3,593
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Cochlear implants
excluding sound
processor
upgrades
$000
664,680
612,738
Sound processor
upgrades
Total Cochlear
implants
Bone anchored
and acoustic
implants
Reportable
segment revenue
Foreign exchange
losses on hedged
sales
Consolidated
revenue
$000
162,124
108,024
$000
826,804
720,762
$000
115,096
100,101
$000
941,900
820,863
$000
(16,270)
(15,927)
$000
925,630
804,936
Reportable
segment EBIT
Corporate and
other net expenses
$000
424,284
359,729
$000
(201,606)
(194,166)
Foreign exchange
losses on
hedged sales
$000
(16,270)
(15,927)
Reportable
segment assets
$000
464,163
386,896
Corporate and
manufacturing
assets
$000
404,893
402,140
Consolidated
total assets
$000
869,056
789,036
Patent dispute
provision
Net finance
expense
$000
-
(22,545)
Reportable
segment
liabilities
$000
102,964
76,212
$000
(10,105)
(9,977)
Corporate and
manufacturing
liabilities
$000
410,706
383,619
Consolidated
profit before
income tax
$000
196,303
117,114
Consolidated
total liabilities
$000
513,670
459,831
Other material items
Reportable segment total
Corporate and
manufacturing total
Consolidated total
Depreciation and amortisation
Write-down in value
of inventories
Acquisition of non-current assets
2015
$000
4,142
856
2,540
2014
$000
3,767
555
3,593
2015
$000
26,110
9,269
25,887
2014
$000
23,088
981
28,353
2015
$000
30,252
10,125
28,427
2014
$000
26,855
1,536
31,946
Revenues
2015
2014
Profit or loss
2015
2014
Assets and liabilities
2015
2014
76
2.2 Revenue
Sales revenue is revenue earned from the provision of products or services, net of returns, discounts and allowances.
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer,
recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing
management involvement with the goods and the amount of revenue can be measured reliably.
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 Note 6.4.
Sale of goods before hedging
Foreign exchange losses on hedged sales
Revenue from sale of goods
Rendering of services
Total revenue
2.3 Expenses
(a) Cost of sales
Carrying amount of inventories recognised as an expense
Other
Write-down in value of inventories
Total cost of sales
(b) Other expenses
Net foreign exchange loss
Total other expenses
2015
$000
931,390
(16,270)
915,120
10,510
925,630
2015
$000
256,593
8,602
10,125
275,320
-
-
2014
$000
813,004
(15,927)
797,077
7,859
804,936
2014
$000
239,462
7,287
1,536
248,285
3,112
3,112
(c) Profit before income tax has been arrived at after charging the following item:
Operating lease rental expense
24,420
20,415
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 77
2.4 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. If the costs have already been incurred, the amount is recognised in the year the entitlement is confirmed.
Grant received or due and receivable
Net foreign exchange gain
Other income
Total other income
2.5 Earnings per share
2015
$000
1,809
1,178
1,441
4,428
2014
$000
1,378
-
1,154
2,532
Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares.
Basic earnings per share
The calculation of basic EPS has been based on the following net profit attributable to equity holders of the parent entity and weighted
average number of ordinary shares of the Company:
Net profit attributable to equity holders of the parent entity
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)
Weighted average number of ordinary shares (basic) at 30 June
Basic earnings per share (cents)
2015
2014
$145,840,000
$93,709,000
56,937,519
56,915,289
-
13,693
599
14,848
56,951,212
56,930,736
256.1
164.6
Diluted earnings per share
The calculation of diluted EPS has been based on the following net profit attributable to equity holders of the parent entity and weighted
average number of shares outstanding after adjustments for the effects of all dilutive potential ordinary shares:
Net profit attributable to equity holders of the parent entity
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)
Effect of options and performance shares and rights unvested (number)
Weighted average number of ordinary shares (diluted) at 30 June
Diluted earnings per share (cents)
2015
2014
$145,840,000
$93,709,000
56,951,212
277,028
56,930,736
124,501
57,228,240
57,055,237
254.8
164.2
78
2.6 Dividends
A liability for dividends payable is recognised in the financial year in which the dividends are declared.
Dividends recognised in the current financial year by the Company are:
Cents per share
Total amount $000
Franked/unfranked
Date of payment
2015
Interim 2015 ordinary
Final 2014 ordinary
Total amount
2014
Interim 2014 ordinary
Final 2013 ordinary
Total amount
Subsequent event
90.0
127.0
217.0
127.0
127.0
254.0
51,374
72,469
123,843
72,469
72,442
144,911
35% Franked
26 March 2015
20% Franked
25 September 2014
0% Franked
27 March 2014
30% Franked
19 September 2013
Since the end of the financial year, the directors declared the following dividends:
Final 2015 ordinary
Total amount
100.0
100.0
57,082
57,082
100% Franked
1 October 2015
The financial effect of the 2015 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2015.
Dividend franking account
Franked dividends paid during the financial year were franked at the tax rate of 30% (2014: 30%). There are no further tax consequences as
a result of paying dividends other than a reduction in the franking account.
At 30 June 2015, there are $21,820,000 franking credits (2014: $2,392,000) available to shareholders of Cochlear Limited for subsequent
financial years.
The dividend franking account at year end is adjusted for:
• franking credits that will arise from the payment of the current tax liability;
• franking debits that will arise from the payment of dividends recognised as a liability at the year end; and
• franking credits that the Company may be prevented from distributing in subsequent financial years.
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 $24,463,618 (2014: $6,211,608).
Dividends in excess of the dividend franking account balance will be unfranked.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 79
2.7 Notes to the statement of cash flows
(a) 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.
Cash and cash equivalents at the reporting date as shown in the statement of cash flows are 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:
Depreciation and amortisation
Reversal of impairment of property, plant and equipment
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 assets/liabilities
Change in employee benefit liabilities
Change in provisions
Change in deferred revenue
Effects of movements in foreign exchange
Net cash provided by operating activities
2015
$000
46,864
25,344
72,208
2014
$000
41,432
14,695
56,127
145,840
93,709
617
2,611
30,252
-
6,004
182,713
(39,358)
(17,248)
(1,168)
(5,536)
21,214
17,197
14,885
(1,049)
5,434
11,617
188,701
26,855
(6,346)
4,971
121,800
(10,119)
2,961
(1,582)
(2,706)
(3,230)
47
2,206
6,965
(7,355)
2,430
111,417
The operating cash account received an average interest rate of 0.58% (2014: 0.58%) per annum. Cash held on deposit for periods not
exceeding 90 days received an average interest rate of 1.70% (2014: 1.77%) per annum.
80
3. Income taxes
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.
3.1 Income tax expense
Income tax expense includes current and deferred tax. Current and deferred tax are recognised in the income statement except to the extent
that they relate to items recognised directly in other comprehensive income or equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable in respect
of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date.
Income tax expense recognised in the income statement
Current year
Adjustment for
prior years
Total current
tax expense
$000
54,051
25,412
$000
1,028
(420)
$000
55,079
24,992
Origination and
reversal of temporary
differences
$000
(4,616)
(1,587)
Total deferred
tax benefit
Total income
tax expense
$000
(4,616)
(1,587)
$000
50,463
23,405
2015
2014
Consolidated Entity – Numerical reconciliation between income tax expense and profit before income tax
Profit before income tax
Tax at the Australian tax rate of 30% (2014: 30%)
Increase in income tax expense due to:
Non-deductible expenses
Decrease in income tax expense due to:
Research and development allowances
Effect of tax rate in foreign jurisdictions
Adjustment for prior years
Reported
Reported
Patent
dispute
provision
Before patent
dispute
provision
2015
$000
2014
$000
2014
$000
2014
$000
196,303
117,114
22,545
139,659
58,891
35,134
6,764
41,898
1,252
1,080
(9,029)
(11,221)
(1,679)
49,435
1,028
(1,168)
23,825
(420)
-
-
-
6,764
-
1,080
(11,221)
(1,168)
30,589
(420)
Income tax expense on profit before income tax
50,463
23,405
6,764
30,169
Tax expense relating to items relating to other comprehensive (loss)/income or equity
Total deferred tax recognised in other comprehensive (loss)/income relating to
derivative financial instruments
Total deferred tax recognised directly in equity relating to share based payments
Note
3.2
3.2
2015
$000
(9,010)
(920)
2014
$000
7,353
(1,119)
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015
81
Cochlear Limited’s Australian tax-consolidated group – Numerical reconciliation between income tax expense and profit before
income tax
Profit before income tax (excluding dividends from wholly owned
foreign subsidiaries)
Add: Dividends from wholly owned foreign subsidiaries
Profit before income tax
Tax at the Australian tax rate of 30% (2014: 30%)
Increase in income tax expense due to:
Controlled foreign company income
Decrease in income tax expense due to:
Research and development allowances
Exempt foreign sourced dividends from wholly owned subsidiaries
Other non-assessable income
Adjustment for prior years
Income tax expense on profit before income tax
3.2 Current and deferred tax assets and liabilities
Reported
Reported
Patent
dispute
provision
Before patent
dispute
provision
2015
$000
2014
$000
2014
$000
2014
$000
154,528
65,608
22,545
88,153
14,068
71,570
-
71,570
168,596
137,178
22,545
159,723
50,579
41,153
6,764
47,917
851
1,086
(8,417)
(10,507)
(4,220)
(21,471)
(1,037)
37,756
(321)
37,435
(372)
9,889
(1,210)
8,679
-
-
-
-
6,764
-
1,086
(10,507)
(21,471)
(372)
16,653
(1,210)
6,764
15,443
Deferred tax is recognised on all temporary differences between the carrying amounts of assets and liabilities for financial reporting and
taxation purposes.
The measurement of deferred tax mirrors the tax consequences that the Consolidated Entity expects 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.
A deferred tax asset is recognised 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 if it is no longer probable that the related tax benefit will be realised.
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
Net deferred tax assets
Assets
Liabilities
Net
2015
$000
98
57
23,575
30,338
1,380
8,808
10,244
563
75,063
(6,346)
68,717
2014
$000
3,608
53
17,519
29,665
792
-
5,806
1,118
2015
$000
(1,523)
(1,893)
-
-
-
-
2014
$000
(977)
(1,610)
-
-
-
(229)
(2,930)
(2,984)
-
-
2015
$000
(1,425)
(1,836)
23,575
30,338
1,380
8,808
7,314
563
2014
$000
2,631
(1,557)
17,519
29,665
792
(229)
2,822
1,118
58,561
(6,346)
(5,800)
68,717
52,761
(5,800)
52,761
6,346
5,800
-
-
-
-
68,717
52,761
82
3.2 Current and deferred tax assets and liabilities (continued)
Unrecognised deferred tax liabilities
At 30 June 2015, a deferred tax liability of $16.7 million (2014: $37.6 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.
Movement in temporary differences during the year
Carrying amount at beginning of financial year
Recognised in the income statement
Recognised in other comprehensive (loss)/income
Recognised directly in equity
Effects of movements in foreign exchange
Carrying amount at end of financial year
Note
3.1
3.1
3.1
2015
$000
52,761
4,616
9,010
920
1,410
68,717
2014
$000
57,422
1,587
(7,353)
1,119
(14)
52,761
Current tax assets and liabilities
The current tax assets for the Consolidated Entity of $3.6 million (2014: $8.6 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 $20.6 million (2014: $8.4 million) represent the amount of income taxes payable
in respect of current and prior financial years.
4. Employee benefits
4.1 Employee expenses
Wages and salaries
Contributions to superannuation plans
Increase in leave liabilities
Equity settled share based payment transactions
End of service payment
Total employee expenses
4.2 Employee benefit liabilities
2015
$000
243,822
19,007
2,806
6,004
1,548
2014
$000
233,432
17,633
488
4,971
-
273,187
256,524
Wages, salaries and annual leave
Liabilities for employee benefits for wages, salaries and annual leave are recognised in other payables and provisions if Cochlear has a present
obligation to pay an amount as a result of past services provided by the employee. The liability is calculated on remuneration rates as at the
reporting date including related on-costs, such as workers’ compensation insurance and payroll tax.
Long service leave
The provision for long service leave is the present value of the estimated future cash outflows as a result of services provided by the employee
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 corporate bond rates which most closely match the terms to maturity of the
related liabilities.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 83
Defined benefit plans
The defined benefit obligations are calculated annually by a qualified actuary using the projected unit credit method. Remeasurements of the
net defined benefit liability (excluding interest) are recognised immediately in other comprehensive income.
The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning of the period to the opening net defined benefit liability (asset), adjusted
for any changes in the net defined benefit liability (asset) during the period resulting from contributions and benefit payments. Net interest
expense related to defined benefit plans is recognised in the income statement.
These defined benefit plans cover, in aggregate, 91 employees. Cochlear contributed cash of $1.3 million (2014: $1.1 million) to defined
benefit plans in the year ended 30 June 2015 and expects to contribute $2.0 million in the year ending 30 June 2016.
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 2015,
Prof E Byrne, AC is the only non-executive director entitled to this benefit.
Current
Provision for long service leave
Provision for annual leave
Provision for short-term incentives
Provision for end of service
Total current employee benefit liabilities
Non-current
Provision for long service leave
Defined benefit plan
Provision for directors’ retirement scheme
Total non-current employee benefit liabilities
Total employee benefit liabilities
4.3 Share based payments
2015
$000
7,370
18,582
15,723
1,548
43,223
5,105
5,941
433
11,479
54,702
2014
$000
6,016
17,035
8,014
-
31,065
5,200
3,130
422
8,752
39,817
From 1 July 2013, the Company grants options and performance rights to certain employees under the Cochlear Executive Incentive Plan
(CEIP). Prior to July 2013, the Company granted options and performance shares to certain employees under the Cochlear Executive Long
Term Incentive Plan (CELTIP).
The fair value of options, performance shares and performance rights granted is recognised as an employee expense, with a corresponding
increase in equity. The expense is adjusted by the actual number of options, shares and rights that are expected to vest except where forfeiture
is due to market related conditions.
The fair value is measured using the Black-Scholes-Merton pricing model at the date the options, performance shares or performance rights
are granted, taking into account market based criteria and the terms and conditions attached to the instruments. The options, performance
shares or performance rights are expensed over the vesting period after which the employees become unconditionally entitled to them.
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 in the Company’s accounts.
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.
84
4.3 Share based payments (continued)
At 30 June 2015, unissued ordinary shares of the Company under option and rights, and issued shares held in the Trust and the terms and
conditions of the grants and issues are as follows:
Grant date
August 20121
October 20131
August 20142
October 20141
Total
Exercise price of
options
Number of
options
Number of
performance
shares
Number of
performance
rights
Contractual life
$62.78
$59.13
N/A
685,796
214,075
-
$68.56
138,963
62,092
-
-
-
-
16,419
33,952
30,523
1,038,834
62,092
80,894
5 years
4 years
2 years
4 years
1. Options and performance shares/rights offered under long-term incentives.
2. Performance rights offered under deferred short-term incentives.
Grants are split between short-term incentives (STI) and long-term incentives (LTI). For STI, certain employees under the CEIP are granted
performance rights based on achievement of a mandatory portion of their STI. Grants are calculated at the end of each year and then held
for two years until vesting.
Grants under LTI are in two equal tranches assigned to compound annual growth in EPS and ranking of TSR against the S&P/ASX 100.
The conditions for minimum vesting are three years of service and:
• a minimum compound annual growth rate in EPS of 10% assigned to 50% of grant; or
• the Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years assigned to 50% of grant.
The grant date fair value of options, performance rights and performance shares was measured based on the Black-Scholes-Merton pricing
model. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair
values at the grant date are the following:
Fair value of options at grant date
Fair value of performance rights at grant date
Share price at valuation date
Option exercise price
Expected volatility (weighted average volatility)
Option life
Expected dividends
Risk free interest rate (based on government bonds)
14 October 2014
12 August 2014
15 October 2013
EPS
performance
based conditions
TSR based
conditions
STI deferral
service based
conditions
EPS
performance
based conditions
TSR based
conditions
$11.93
$61.33
$67.85
$68.56
29.49%
$11.33
$39.21
$67.85
$68.56
29.49%
-
$63.11
$67.85
-
29.49%
$11.38
$53.22
$58.42
$59.13
31.83%
$9.93
$28.85
$58.42
$59.13
31.83%
3 - 4 years
3 - 4 years
2 years
3 - 4 years
3 - 4 years
3.48%
2.54%
3.48%
2.54%
3.48%
2.54%
3.20%
2.51%
3.20%
2.51%
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 85
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
2015
$64.18
$68.13
-
$68.56
$62.80
-
2015
1,416,328
(516,457)
-
138,963
1,038,834
-
2014
$65.98
$67.83
-
$59.13
$64.18
-
2014
1,738,000
(545,986)
-
224,314
1,416,328
-
No options were exercised in 2015 (2014: no options were exercised). The weighted average remaining contractual life of options outstanding
at the end of the year is three years (2014: three years).
Employee Share Plan
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. In
practice, the directors issue shares worth up to the tax concessional limit, currently $1,000 per eligible employee each 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 2015, the Company issued 19,755 shares under the Plan; see Note 6.2.
4.4 Key management personnel
The following were key management personnel (KMP) of Cochlear at any time during the financial year and unless otherwise indicated were
KMP for the entire financial year:
Non-executive directors
Mr R Holliday-Smith (Chairman), Mrs YA Allen, Mr PR Bell1, Mr G Boreham, AM2, Prof E Byrne, AC, Ms A Deans2, Mr A Denver and Mr DP O’Dwyer.
Executive director
Dr CG Roberts
Other executive KMP
Mr R Brook, Mr D Howitt3, Mr J Janssen, Mr NJ Mitchell, Mr MD Salmon4 and Mr CM Smith.
1. Retired on 17 October 2014, therefore only KMP for the period from 1 July 2014 to 17 October 2014.
2. KMP for the period from 1 January 2015 to 30 June 2015.
3. KMP for the period from 29 September 2014 to 30 June 2015.
4. Retired on 26 September 2014, therefore only KMP for the period from 1 July 2014 to 26 September 2014.
Key management personnel disclosures
The KMP compensation is included in employee expenses as follows:
Short-term
employee benefits
Post-employment
benefits
Other long-term
benefits
2015
2014
$
9,021,013
7,207,457
$
444,445
388,273
$
65,942
100,918
Directors’
retirement
benefits
$
10,729
10,902
Share based
payments
End of service
provision
$
3,017,836
1,821,874
$
1,548,418
14,108,383
-
9,529,424
Total
$
Information regarding individual KMP 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 41 to 65.
The KMP have not received any loans from Cochlear and there have been no other related party transactions with any of Cochlear’s KMP.
86
5. Operating assets and liabilities
5.1 Inventories
Inventories are measured at the lower of cost and net realisable value.
Cost is based on the first-in-first-out principle including 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 production
overheads based on normal operating capacity.
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.
2015
2014
5.2 Property, plant and equipment
Raw materials
Work in progress
Finished goods
Total inventories
$000
40,315
40,593
$000
20,162
19,214
$000
85,384
68,806
$000
145,861
128,613
Owned assets
The value of property, plant and equipment is measured as the cost of the asset, minus accumulated depreciation and impairment losses
(see Note 5.3). The cost of the asset is the consideration provided plus incidental costs directly attributable to the acquisition.
The value of self-constructed assets includes the cost of material and direct labour 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 capitalised in the carrying amount of the item if it
is probable that future economic benefits will flow to Cochlear and its cost can be measured reliably. All other costs are recognised in the
income statement as incurred.
Leased assets
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 to expense the cost of items of property, plant and equipment less their estimated residual values on a straight-line
basis over their estimated useful lives. The estimated useful lives in the current and comparative years are as follows: leasehold improvements
between one to 15 years and plant and equipment three to 14 years.
Depreciation is recognised in the income statement from the date of acquisition or, in respect of internally constructed assets, from the time
an asset is completed and held ready for use.
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.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 87
Total property, plant and equipment at net book value
At cost
Accumulated depreciation
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Additions
Disposals
Depreciation
Impairment reversal
Effect of movements in foreign exchange
Leasehold improvements
Plant and equipment
Total net book value
2015
$000
32,325
(20,941)
11,384
7,947
4,796
-
2014
$000
26,458
(18,511)
7,947
6,444
3,256
-
2015
$000
2014
$000
2015
$000
2014
$000
193,703
180,780
226,028
207,238
(124,278)
(112,951)
(145,219)
(131,462)
69,425
67,829
80,809
75,776
67,829
19,101
(617)
59,454
20,241
(2,611)
75,776
23,897
(617)
65,898
23,497
(2,611)
(1,867)
(1,868)
(18,005)
(15,580)
(19,872)
(17,448)
-
508
-
115
-
1,117
6,346
(21)
-
1,625
6,346
94
Net book value
11,384
7,947
69,425
67,829
80,809
75,776
Impairment reversal
During the year ended 30 June 2014, plant and equipment previously impaired due to the product recall was reassessed. Of the $14.0 million
impaired, $6.3 million was reversed as it can be used with the Nucleus Profile cochlear implant. Cochlear increased the product recall provision
by this amount to cover the uncertain outcomes.
For the year ended 30 June 2015, there was no further reversal of impairment.
5.3 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 tested annually for impairment.
Enterprise resource planning system
System costs are recognised as an intangible asset where Cochlear controls future economic benefits as a result of the costs incurred, and are
stated at cost less accumulated amortisation. Costs include expenditure directly related to the development and implementation (hardware
and software costs) of the system including direct labour.
Other intangible assets
Other intangible assets, comprising acquired technology, patents and licences, customer relationships, capitalised development expenditure
and intellectual property, are acquired individually or through business combinations and are stated at cost less accumulated amortisation
and impairment losses (see below).
Both customer relationships and capitalised development expenditure had a written down value of nil as at 30 June 2015.
Amortisation
Amortisation is calculated to expense the cost of the intangible asset less its estimated residual values on a straight-line basis over their
estimated useful lives. The estimated useful lives for the current and comparative years are as follows: acquired technology, patents and
licences are between four to 15 years and enterprise resource planning system between two to seven years.
Amortisation is recognised in the income statement from the date the assets are available for use unless their lives are indefinite.
Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment annually.
88
5.3 Intangible assets (continued)
2015
At cost
Accumulated amortisation
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Acquisitions
Amortisation
Effect of movements in foreign exchange
Intangible assets with indefinite
useful life
Goodwill
Technology
relationship
$000
$000
170,503
-
170,503
1,800
-
1,800
170,259
1,800
-
-
244
-
-
-
Intangible assets with finite useful life
Acquired
technology,
patents and
licences
Other
intangible
assets
Intangible
assets
Total
$000
$000
$000
64,110
(34,802)
29,308
32,498
-
(3,165)
(25)
16,936
326,627
(15,875)
(98,096)
1,061
228,531
1,315
234,115
-
4,530
(295)
(10,380)
41
266
Enterprise
resource
planning
system
$000
73,278
(47,419)
25,859
28,243
4,530
(6,920)
6
Net book value
170,503
1,800
25,859
29,308
1,061
228,531
2014
At cost
Accumulated amortisation
Net book value
Reconciliations of the carrying amounts are:
Opening balance
Acquisitions
Amortisation
Effect of movements in foreign exchange
Net book value
170,259
-
170,259
1,800
-
1,800
170,959
1,800
-
-
(700)
170,259
-
-
-
67,968
(39,725)
28,243
27,327
6,997
(6,086)
5
64,176
(31,678)
32,498
34,078
1,452
(3,030)
(2)
16,224
320,427
(14,909)
(86,312)
1,315
234,115
1,610
235,774
-
(291)
(4)
1,315
8,449
(9,407)
(701)
234,115
1,800
28,243
32,498
Impairment
Cochlear annually tests goodwill and other intangible assets with indefinite useful life for impairment. Other non-financial assets, other than
inventories (see Note 5.1) and deferred tax assets (see Note 3.2), are tested if there is any indication of impairment or if there is any indication
that an impairment loss recognised in a prior period may no longer exist or may have decreased.
Assets are impaired if their carrying value exceeds their recoverable amount. The asset’s recoverable amount is estimated based on its value
in use.
An asset that does not generate independent cash flows and its individual value in use cannot be estimated is tested for impairment as part
of a cash generating unit (CGU).
An impairment loss is recognised in the income statement when the carrying amount of an asset or CGU exceeds its recoverable amount.
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. An impairment loss in respect of goodwill is not reversed.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 89
Impairment tests for CGUs
Cochlear allocates goodwill and other intangible assets to CGUs based on the expected benefits that each CGU will receive from use of
those assets.
The aggregate carrying amounts of goodwill allocated to each CGU are:
2015
2014
Americas
$000
85,540
85,808
EMEA
$000
74,918
74,553
Asia Pacific
$000
10,045
9,898
Total
$000
170,503
170,259
The recoverable amount of each CGU is based on value-in-use calculations. Those calculations use five year cash flow projections based
on actual operating results, the next year’s budget and the mid-term business plan. Cash flows for year 6 onwards are extrapolated using a
conservative terminal growth rate of 3.0% (2014: 3.0%) per annum which is consistent with long-term economic growth rates. The pre-tax
discount rate for each CGU is as follows: Americas 14.7% (2014: 14.4%), EMEA 12.3% (2014: 12.1%) and Asia Pacific 14.1% (2014: 12.3%).
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 reflecting current market assessments of the time value of money
and risks specific to the CGU.
Sales volume growth rate
Based on a five year cash flow projection taking into account historical growth rates and product lifecycle.
Terminal value growth rate
Based on a five year cash flow projection taking into account historical growth rates and product lifecycle.
The recoverable amount of each CGU including unallocated corporate assets is in excess of the 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.
5.4 Provisions
A provision is recognised in the balance sheet when:
• Cochlear has a present obligation (legal or constructive) as a result of a past event;
• a reliable estimate can be made of the amount of the obligation; 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.
2015
Opening balance
Provision made
Provision used
Effect of movements in foreign exchange
Total provisions
Represented by:
Current
Non-current
Total provisions
Warranties
Legal and
insurance
Product recall
Make good
lease costs
Patent dispute
$000
21,551
32,249
(29,598)
1,371
25,573
17,884
7,689
25,573
$000
4,465
2,055
(1,534)
26
5,012
5,012
-
5,012
$000
21,607
-
(5,689)
-
$000
2,139
65
-
6
$000
21,333
-
-
-
15,918
2,210
21,333
3,691
12,227
15,918
65
2,145
2,210
-
21,333
21,333
Total
$000
71,095
34,369
(36,821)
1,403
70,046
26,652
43,394
70,046
90
5.4 Provisions (continued)
Warranties
A provision for warranty claims is recognised 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.
Legal and insurance
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. They 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.
Product recall
On 11 September 2011, the Company initiated a worldwide voluntary recall of its unimplanted Nucleus CI500 cochlear implant range.
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 amount has been recognised as a charge or released as a credit in the year ended 30 June 2015.
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 their original condition.
The operating lease payments do not include an element for the repairs and overhauls.
Patent dispute
In a trial of the patent infringement lawsuit by the Alfred E. Mann Foundation for Scientific Research and Advanced Bionics LLC in January
2014, a Jury found that Cochlear Limited and its US subsidiary Cochlear Americas infringed four claims across two patents, the infringement
was wilful and awarded United States dollars (USD) 131,216,325 in damages.
On 1 April 2015, a Judge in the United States District Court in Los Angeles, California held that three of the four patent claims were invalid
and Cochlear’s infringement of the remaining claim was not wilful. The Judge overturned the damages awarded because three of the four
claims were held to be invalid. On 21 April 2015, the Court entered Judgment on liability only and stayed a new trial on damages pending the
outcome of the appeal by all parties from the Judgment to the United States Court of Appeals for the Federal Circuit.
As the patents have expired, the Judgment will not disrupt Cochlear’s business or customers in the United States.
The directors have obtained external advice and are of the opinion that the facts and the law do not support the Court’s decision on
infringement of the one remaining claim.
The nature of the above legal process is such that final future outcomes are uncertain. The directors have made judgements and assumptions
relating to their best estimate of the outcome of this litigation and actual outcomes may differ from the estimated liability.
A provision was expensed in the half year ended 31 December 2013 in relation to this dispute. No additional amount has been provided
since that initial provision. For the purpose of determining this provision, Cochlear considered its independent damages expert’s assessment
prepared for the trial to estimate the liability that could result from the dispute.
5.5 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 lawsuits incidental to the ordinary course of business,
including claims for damages relating to its products and services.
In addition, Cochlear has received (and is likely to continue to receive in diminishing numbers) legal claims in various countries and lawsuits
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 substantial majority of claims and lawsuits received have been
settled, leaving a minority still pending.
Cochlear carries product liability insurance and has sought indemnification against 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.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 91
6. Capital and financial structure
6.1 Capital management
Cochlear’s capital management objectives are to safeguard its ability to continue as a going concern, provide returns to shareholders,
provide benefits to other stakeholders and 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
• 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.
Senior management tracks, manages and reports against these capital management metrics periodically as part of broader corporate
governance responsibilities. The Board undertakes periodic reviews 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.
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.
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:
Net debt
Total equity
Net gearing ratio at 30 June
6.2 Capital and reserves
Note
6.3
2015
$000
140,503
355,386
28%
2014
$000
181,288
329,205
36%
Share capital
The Company does not have authorised capital or par value in respect of its issued shares.
Number of issued shares in
market circulation
Number of shares held in Trust
Total number of issued shares
2015
2014
2015
2014
2015
2014
On issue 1 July – fully paid
56,937,519
56,915,289
124,501
125,643
57,062,020
57,040,932
Issued for nil consideration under
Employee Share Plan
19,755
21,088
Performance shares issued from Trust
-
1,142
-
-
-
19,755
21,088
(1,142)
-
-
On issue 30 June – fully paid
56,957,274
56,937,519
124,501
124,501
57,081,775
57,062,020
Cochlear has also issued shares to employees under the Employee Share Plan (see Note 4.3).
Ordinary shares are classified as equity and 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.
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.
92
6.2 Capital and reserves (continued)
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. Shares purchased by the Trust 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 the share based payment reserve.
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 1.2(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, options, performance shares and performance rights granted to eligible
executives under the CELTIP and CEIP, as detailed in Note 4.3 less any payments made to meet Cochlear’s obligations through the acquisition
of shares on market, together with any deferred tax asset/liability on such payments.
6.3 Net debt and finance costs
(a) Net debt
Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequently, 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.
Debt establishment costs are capitalised and recognised as a reduction in loans and borrowings. They are recorded initially at cost and are
amortised over the period of the loan. Included within loans and borrowings is an amount of $448,093 (2014: $725,606) in relation to
unamortised loan establishment fees.
Loans and borrowings:
Current
Non-current
Total loans and borrowings
Less: Cash and cash equivalents
Net debt
Note
2.7(a)
2015
$000
168,159
44,552
212,711
(72,208)
140,503
2014
$000
3,141
234,274
237,415
(56,127)
181,288
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 93
(b) Financing arrangements
2015
Utilised at reporting date
Not utilised at reporting date
Total facilities
2014
Utilised at reporting date
Not utilised at reporting date
Total facilities
Multi-option bank facilities
Other credit facilities
Secured bank
loan
Standby letters
of credit
Bank
guarantees
Unsecured bank
overdrafts
Secured bank
loan
Bank
guarantees
$000
$000
$000
$000
$000
$000
210,000
135,000
345,000
235,000
110,000
345,000
4,926
12,856
17,782
3,374
14,331
17,705
2,218
-
2,218
2,295
-
2,295
-
292
292
-
363
363
3,159
1,579
4,738
3,141
1,570
4,711
1,370
224
1,594
1,066
390
1,456
Multi-option bank facilities – Secured bank loan
Cochlear has two bank loan facilities. The first was amended and extended in June 2013 for a period of three years and a total commitment
limit of AUD 200.0 million. In December 2013, the total commitment limit was increased to AUD 250.0 million. The facility has an option
to allocate a letter of credit sub-facility limit of up to AUD 30.0 million for the purpose of drawing either bank guarantees or letters of credit.
This letter of credit sub-limit currently is AUD 5.0 million.
In June 2013, Cochlear negotiated a second loan facility for a period of five years. The facility has a total commitment limit of AUD 115.0 million,
made up of an AUD 100.0 million loan sub-facility limit and incorporates an AUD 15.0 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.
Other credit facilities
Unsecured bank overdrafts
Certain unsecured bank overdrafts are payable on demand and are subject to annual review. Interest on unsecured bank overdrafts is variable
and is charged at prevailing market rates.
Secured bank loan
Cochlear has a Japanese yen (JPY) 450.0 million loan facility. It is secured by a letter of guarantee and reviewed annually. Interest is charged
at prevailing market rates.
Bank guarantees
As at 30 June 2015, Cochlear had additional contingent liability facilities denominated in United States dollars (USD), Euros (EUR),
Sterling (GBP), Indian rupees and New Zealand dollars totalling AUD 1.6 million (2014: AUD 1.5 million).
(c) Finance costs
Interest income is recognised as it accrues in the income statement. Borrowing costs are recognised as they accrue in the income statement
as a finance expense.
94
6.4 Financial risk management
The activities of Cochlear are exposed to a variety of risks, including market risk (comprising currency and interest rate risk), credit risk and
liquidity risk. Cochlear’s overall risk management program considers the unpredictability of financial markets and seeks to appropriately
manage the potential adverse effects on financial performance.
The Board of directors has overall responsibility for the establishment and oversight of the risk management framework. Under instruction
of the Board, management has established a Risk Management Committee which is responsible for identifying, assessing and appropriately
managing risk throughout Cochlear. Key risks are reported to the Audit Committee on a regular basis.
A Treasury Management Committee has been established to administer aspects of risk management involving currency exposure, cash and
funding to manage the impact of short-term fluctuations on Cochlear’s earnings.
The Audit Committee oversees how management monitors compliance with Cochlear’s risk management framework, policies and procedures
and is assisted by Internal Audit which undertakes reviews of key management controls and procedures.
(a) 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 by buying and selling forward exchange contracts
and incurring financial liabilities, within acceptable parameters, whilst optimising the return, all in accordance with the treasury risk policy.
Currency risk
Cochlear is exposed to currencies other than the respective functional currencies of the controlled entities, primarily AUD, USD, EUR, GBP,
Swedish kroner (SEK), JPY 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. Risk resulting from the translation of assets and liabilities of foreign operations into Cochlear’s
reporting currency is not hedged.
Cochlear’s exposure to foreign currency risk in relation to non-derivative financial instruments was as follows, based upon notional amounts:
Amounts local currency thousands
USD
EUR
GBP
SEK
JPY
30 June 2015
Trade receivables
Secured bank loan
Trade payables
Gross balance sheet exposure
30 June 2014
Trade receivables
Secured bank loan
Trade payables
Gross balance sheet exposure
64,746
47,484
6,824
10,384
670,937
-
(14,535)
50,211
-
(4,657)
42,827
-
-
(300,000)
(5,029)
(58,466)
1,795
(48,082)
(87,752)
283,185
65,453
35,167
-
(10,572)
54,881
-
(4,299)
30,868
5,955
-
(5,919)
36
5,662
765,565
-
(300,000)
(33,040)
(27,378)
(60,776)
404,789
CHF
881
-
(2,446)
(1,565)
519
-
(2,631)
(2,112)
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 95
Derivative assets and liabilities – Forward exchange contracts
In order to reduce the impact of short-term fluctuations on Cochlear’s earnings, Cochlear enters into forward exchange contracts to
hedge anticipated sales and purchases in USD, EUR and JPY. The amounts of forward cover taken are in accordance with approved policy
and internal forecasts.
In the year ended 30 June 2015, Cochlear designated all forward exchange contracts as cash flow hedges. 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.
At the start of a hedge relationship, Cochlear designates and documents the relationship between the hedging instrument and hedged item.
This includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how Cochlear
will assess the effectiveness of the hedging relationship. Cochlear regularly assesses whether the hedging instruments are expected to be
highly effective in offsetting the changes in the cash flows of the respective hedged items.
Forward exchange contracts are recognised initially at fair value. Subsequently, forward exchange contracts are measured at fair value.
Changes in the fair value are recognised directly in equity to the extent that the hedge is effective. The ineffective part of any hedging
instrument is recognised immediately in the income statement.
If the forward exchange contract 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.
For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same
period the hedged forecast transaction affects the income statement and on the same line item as that hedged forecast transaction.
For the year ended 30 June 2015, all cash flow hedges were effective at the reporting date.
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:
30 June 2015
Sell USD
Sell EUR
Sell JPY
30 June 2014
Sell USD
Sell EUR
Sell JPY
Weighted
average rate
< 1 year
1 - 2 years
2 - 5 years
$000
$000
$000
0.84
0.67
89.17
0.91
0.68
87.27
164,538
151,143
10,335
137,518
102,714
9,724
91,800
87,390
5,392
70,077
67,665
4,626
27,079
24,167
1,447
20,014
18,320
1,220
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 2015, including hedging results and after income tax, by approximately $2.3 million (2014: $4.7 million)
and decreased Cochlear’s equity by $16.6 million (2014: $12.9 million). A 10 percent general decrease in the value of the AUD against other
foreign currencies would have increased Cochlear’s profit by $8.1 million (2014: $5.8 million) and increased equity by $11.6 million
(2014: $14.1 million).
96
6.4 Financial risk management (continued)
The following significant exchange rates applied to Cochlear during the year:
AUD 1 =
USD
EUR
GBP
SEK
JPY
Average rate
Reporting date spot rate
2015
0.844
0.697
0.532
6.483
95.725
2014
0.922
0.679
0.567
6.022
2015
0.766
0.686
0.487
6.367
92.916
94.969
2014
0.937
0.689
0.552
6.311
95.514
Interest rate risk
Cochlear is exposed to interest rate risks in Australia and Japan. See Note 6.4(c) for effective interest rates, repayment and repricing analysis
of outstanding debt.
At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments is financial assets of $72.2 million
(2014: $56.1 million) and financial liabilities of $212.7 million (2014: $237.4 million).
For the year ended 30 June 2015, 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 $1.3 million (2014: $1.3 million). A one percent general decrease in interest rates would
have had the equal but opposite effect on Cochlear’s profit and equity.
(b) 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. Cochlear is exposed to credit risk from its operating activities (primarily from trade and other receivables) and from financing
activities, including deposits with financial institutions and foreign exchange contracts. The carrying amounts of these financial assets at year
end represent Cochlear’s maximum exposure to credit risk.
Credit risk management – Trade and other receivables
Customer credit risk is managed at a regional level, subject to Board approved policies and procedures. The ageing profile of total receivables
balances, individually significant debtors by geographic region, high risk customers and collection activities are reported to management
and the Board of directors on a monthly basis. Where high risk customers are identified, regional management is responsible for placing
restrictions on future trading, including suspending future shipments and administering dispatches on a prepayment basis.
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 maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
2015
2014
Americas
$000
74,153
56,979
EMEA
$000
108,374
91,991
Asia Pacific
$000
54,201
52,325
Total
$000
236,728
201,295
Depending on the region, Cochlear’s credit terms are generally 30 days; however, there are certain jurisdictions where it is customary practice
for customers to make payment beyond 270 days. Although Cochlear discloses the balance as overdue, it is not indicative of a higher than
normal credit risk as payments are typically received by Cochlear within the extended timeframes.
At each reporting date, Cochlear assesses the collectability of trade and other receivables by reference to historical collection trends and
timing of recoveries and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater
or lesser than suggested by historical trends.
Cochlear has established an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables based on
individually significant exposures, a collective loss component established for groups of assets meeting certain ageing profiles and customer
types which have been assessed as impaired under Cochlear’s accounting policy.
Based upon past experience, Cochlear believes that no impairment allowance is necessary in respect of trade receivables not past due.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015
97
Trade and other receivables are stated at amortised cost less impairment losses. The ageing of Cochlear’s trade receivables at the reporting
date was:
Trade 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
Other receivables – current
Trade and other receivables
2015
$000
174,413
18,143
21,859
9,526
18,480
242,421
(5,693)
236,728
13,016
249,744
2014
$000
152,076
18,373
19,102
6,805
8,464
204,820
(3,525)
201,295
9,099
210,394
Credit risk management – Cash deposits and forward exchange contracts
The majority of Cochlear’s cash deposits and all hedging transactions are only executed with leading financial institutions whose credit rating
is at least A on the Standard & Poor’s rating index.
(c) Liquidity risk
Liquidity risk is the risk that Cochlear will not be able to meet its financial obligations as they fall due. Cochlear manages liquidity risk by
ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due.
Non-derivative liabilities
Contractual maturities of non-derivative financial liabilities, including estimated interest payments and excluding the impact of netting
agreements, are as follows:
30 June 2015
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
30 June 2014
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
Effective
interest rate
Per annum
Carrying
amount
$000
Contractual
cash flows
< 1 year
1 - 2 years
2 - 5 years
$000
$000
$000
$000
3.99%
0.64%
-
4.04%
0.65%
-
209,552
221,698
3,159
99,858
3,172
99,858
312,569
324,728
234,274
256,496
3,141
78,644
3,154
78,644
316,059
338,294
173,122
3,172
99,858
276,152
9,504
3,154
78,644
91,302
1,798
46,778
-
-
-
-
1,798
46,778
209,176
37,816
-
-
-
-
209,176
37,816
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly different amounts.
98
6.4 Financial risk management (continued)
Derivative assets and liabilities - Forward exchange contracts
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 2015
Assets
Liabilities
Total
30 June 2014
Assets
Liabilities
Total
Carrying amount
$000
5,763
(35,123)
(29,360)
10,009
(9,244)
765
Contractual
cash flows
$000
5,877
(35,807)
(29,930)
10,358
(9,456)
902
< 1 year
1 - 2 years
2 - 5 years
$000
$000
$000
3,899
(24,422)
(20,523)
4,627
(6,721)
(2,094)
1,897
(9,445)
(7,548)
4,118
(1,670)
2,448
81
(1,940)
(1,859)
1,613
(1,065)
548
The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted above.
(d) Fair value
The carrying amounts and estimated fair value of Cochlear’s financial assets and liabilities are materially the same.
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 benchmark bill futures and swap rates. These fair values are provided by independent third parties.
Valuation of financial assets and liabilities
For financial asset and liabilities measured and carried at fair value, Cochlear uses the following levels to categorise the valuation methods used:
• 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).
All of Cochlear’s forward exchange contracts were valued using observable market inputs (Level 2) and there were no transfers between levels
during the year.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 99
2015
$
2014
$
1,559,738
72,094
1,631,832
1,422,391
42,875
1,465,266
988,156
988,156
818,282
818,282
7. Other notes
7.1 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 and other services
Total non-audit services
7.2 Commitments
Operating lease commitments
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.
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
2015
$000
22,028
79,308
88,387
2014
$000
20,716
74,934
97,163
189,723
192,813
Capital expenditure commitments
As at 30 June 2015, Cochlear entered into contracts to purchase property, plant and equipment for $5,408,000 (2014: $1,972,000).
100
7.3 Controlled entities
Company
Cochlear Limited
Controlled entities
Acoustic Implants Limited
Cochlear AG
Cochlear Americas
Cochlear Austria GmbH
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 Middle East FZ-LLC
Cochlear Nordic AB
Cochlear NZ Limited
Cochlear Research and Development Limited
Cochlear Shared Services S.A.
Cochlear Sweden Holdings AB
Cochlear Technologies Pty Limited
Cochlear Tempe LLC
Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi
Cochlear Verwaltungs GmbH
Cochlear (HK) Limited
Cochlear (UK) Limited
(i)
(ii)
Interest held
Country of incorporation/formation
2015
%
2014
%
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
Austria
Belgium
Sweden
USA
Canada
USA
Germany
Australia
Germany
UK
Australia
Australia
France
Australia
Belgium
Australia
Australia
Italy
Korea
Panama
Malaysia
USA
China
India
UAE
Sweden
New Zealand
UK
Panama
Sweden
Australia
USA
Turkey
Germany
Hong Kong
UK
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 101
Interest held
Country of incorporation/formation
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
Medical Insurance Pte Limited
Miaki NV
Neopraxis Pty Limited
Nihon Cochlear Co Limited
(i) Deregistered during the year ended 30 June 2015.
(ii) Dormant.
7.4 Parent entity disclosures
2015
%
100
100
-
-
100
100
-
100
2014
%
100
100
100
100
100
100
100
100
(i)
(i)
(i)
At, and throughout the financial year ended, 30 June 2015, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity
Net profit
Other comprehensive (loss)/income
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
Translation reserve
Hedging reserve
Share based payment reserve
Retained earnings
Total equity
2015
$000
118,597
(20,967)
97,630
387,569
713,614
306,808
461,904
152,599
(8,463)
69
(20,547)
26,887
101,165
251,710
Dividend income from subsidiaries is recognised by the parent entity when the dividends are declared by the subsidiary.
Turkey
Australia
Australia
Australia
Singapore
Belgium
Australia
Japan
2014
$000
136,541
17,155
153,696
209,772
683,453
85,981
412,679
152,599
(8,463)
13
476
19,963
106,186
270,774
102
7.4 Parent entity disclosures (continued)
Parent entity contingencies
The details of all contingent liabilities in respect to Cochlear Limited are disclosed in Note 5.5.
Parent entity capital commitments for acquisition of plant and equipment
As at 30 June 2015, the parent entity entered into contracts but had not provided for or paid to purchase plant and equipment for
$4,823,000 (2014: $1,972,000).
7.5 Changes in accounting policies
There have been no changes to accounting standards impacting Cochlear in the current financial year.
7.6 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 2014, 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 2019 consolidated financial statements; and
• AASB 15 Revenue from Contracts with Customers, which becomes mandatory for Cochlear’s 2019 consolidated financial statements.
Cochlear is currently assessing the impact of the changes in 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 this standard early.
7.7 Events subsequent to the reporting date
Other than the matter 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 2015, see Note 2.6.
Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2015 103
Directors’ Declaration Cochlear Limited and its controlled entities for the year ended 30 June 2015
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
41 to 65, 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 2015 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 2015.
3. The directors draw attention to Note 1.2(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 11th day of August 2015.
Director
Director
104
Independent Audit Report to the Members of Cochlear Limited
Report on the financial report
Opinion
We have audited the accompanying financial report of Cochlear Limited (the Company), which comprises the balance sheet as at 30 June 2015,
the income statement, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the
year then ended, notes 1 to 7.7, 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 the year’s end or from time to time during the
financial year.
In our opinion:
(a) the accompanying financial report of the Consolidated Entity 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 2015 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 1.2(a).
Emphasis of matter
We draw attention to note 5.4 to the financial statements which describes the uncertainty related to the outcome of the lawsuit filed against
the Consolidated Entity for alleged patent infringement. Our audit report is not modified in respect of this matter.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical
requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial
report is free from material misstatement. Our responsibilities under those standards are further described in the Auditor’s responsibility
section of our report. We are independent of the Consolidated Entity in accordance with the Corporations Act 2001 and the ethical
requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code)
that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with
the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of
the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
Patent dispute provision $21.3 million
Refer to note 5.4 Provisions
The patent dispute provision relates to a specific claim that has
been made against the Consolidated Entity.
We focused on this area as a key audit matter due to the amounts
involved being material as well as the inherent uncertainty in the
application of the measurement aspects of accounting standards
to determine the amount, if any, to be provided for and the
disclosures to be made in respect of this matter.
Our procedures included, amongst others:
• Making enquiries of management and the directors to obtain their
view on this significant legal matter;
• Reviewing the information held by the Consolidated Entity and
assessing the impact of this evidence on the appropriateness of
the provision;
• Assessing correspondence from the Consolidated Entity’s
external lawyers in response to our requests for confirmation
of all significant litigation; and
• Assessing whether the Consolidated Entity’s disclosures
adequately reflect the quantitative and qualitative
considerations in relation to the matter in accordance
with accounting standards.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
105
CI500 product recall provision $15.9 million
Refer to note 5.4 Provisions
As a developer, manufacturer, marketer and distributor of medical
devices, the Consolidated Entity in certain circumstances may be
held liable for damages arising from use of its product.
On 11 September 2011, the Consolidated Entity announced the
voluntary recall of unimplanted Nucleus CI500 implantable
devices as a consequence of an increase in the number of Nucleus
CI512 implant failures. Certain assumptions have been made by
the Consolidated Entity in providing for costs associated with the
recall. The amounts involved are potentially material and require
the application of judgement and estimation to determine the
adequacy of the amount provided.
We focused on this area as a key audit matter due to the inherent
subjectivity and difficulty to reliably measure the key forward
looking assumptions including the estimated device return rates,
estimated warranty and associated claim costs and level of
insurance cover.
Recoverability of trade receivables $236.7 million
Refer to note 6.4(b) Financial risk management, credit risk
Due to the Consolidated Entity operating in a large number
of different geographical locations and the wide ranging
characteristics of individual customers within those locations,
some customers and locations have a higher days sales outstanding
than the Cochlear average days sales outstanding, consequently
there is an inherent exposure to credit risk for these customers
and/or locations.
The key elements of judgement associated with assessing the
recoverability of trade receivables include assessing the credit risk
of non-standard contract receivables, which have longer than
average payment terms, and determining credit risk in specific
locations based on relative exposure and location characteristics.
This area is a key audit matter due to the inherent subjectivity
that is involved in the Consolidated Entity making judgements in
relation to credit risk exposures to determine the recoverability of
trade receivables.
Our procedures included, amongst others:
• Assessing, challenging and comparing with historical actuals,
the key forward looking assumptions including estimated device
return rates and estimated warranty and associated claim costs,
used by the Consolidated Entity in their model to estimate the
provision. We have also considered any impact on the provision
of insurance cover;
• Assessing correspondence from the Consolidated Entity’s external
lawyers in response to our requests for information on claims
regarding known or alleged CI512 implant failures to assist us in
challenging the adequacy of the provision;
• Performing sensitivity analysis in relation to the key forward
looking assumptions including estimated device return rates
and estimated warranty and associated claim costs, used by the
Consolidated Entity in their model to estimate the provision; and
• Assessing the adequacy of the Consolidated Entity’s disclosures of
estimation uncertainties in respect of the product recall provision.
Our procedures included, amongst others:
• Testing key controls within the credit control and
approval processes;
• Assessing the recoverability of a sample of non-standard
contracts by comparing management’s views of recoverability
of amounts outstanding to historical patterns of receipts, in
conjunction with reviewing cash received subsequent to year
end for its effect in reducing amounts outstanding at year end;
• Challenging management’s view of credit risk in certain specific
locations and noting the historical patterns for long outstanding
trade receivables in those locations. We used these relative
exposure and location patterns to specifically test a sample of
large overdue customer balances for recoverability by: reviewing
cash received subsequent to year end for its effect in reducing
amounts outstanding at year end, reviewing other evidence
including customer correspondence, and holding discussions
with management personnel to challenge knowledge of future
conditions that may impact expected customer receipts; and
• Assessing the adequacy of the Consolidated Entity’s disclosures in
respect of credit risk.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
106
Independent Audit Report to the Members of Cochlear Limited
Other information
The directors are responsible for the other information. The other information comprises the information in the Consolidated Entity’s annual
report for the year ended 30 June 2015, but does not include the financial report and the auditor’s report thereon.
Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of the other information,
we are required to report that fact. We have nothing to report in this regard.
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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In
note 1.2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that
the financial report complies with International Financial Reporting Standards.
In preparing the financial report, the directors are responsible for assessing the Consolidated Entity’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend
to liquidate the Consolidated Entity or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial report based on our audit. Our objectives are to obtain reasonable assurance about
whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of this financial report.
As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional
scepticism throughout the audit.
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.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of 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 conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Consolidated Entity’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the
related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Consolidated Entity to cease to
continue as a going concern.
We evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report
represents the underlying transactions and events in a manner that achieves fair presentation.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
107
We obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Consolidated Entity to express an opinion on the financial report. We are responsible for the direction, supervision and performance of
the Consolidated Entity audit. We remain solely responsible for our audit opinion.
We communicate with the directors regarding, amongst other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
The Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements. We also provide the directors
with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the
consolidated financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication.
Report on the remuneration report
We have audited the Remuneration Report included in pages 41 to 65 of the Directors’ Report for the year ended 30 June 2015. 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 Australian Auditing Standards.
Opinion
In our opinion, the Remuneration Report of Cochlear Limited for the year ended 30 June 2015, complies with Section 300A of the
Corporations Act 2001.
KPMG
Sydney, 11 August 2015
Cameron Slapp, Partner
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
108
Additional information
Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report – the information
presented is as at 31 July 2015:
Number of ordinary shares
7,489,453
3,705,018
11,194,471
%
13.12
6.49
19.61
Number of ordinary shareholders
Shareholdings
Substantial shareholders
Investor
Baillie Gifford & Co
Schroders PLC
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 – 176 shareholders held less than a marketable parcel of ordinary shares.
Twenty largest shareholders
Shareholder
HSBC Custody Nominees (Australia) Limited
JP Morgan Nominees Australia Limited
National Nominees Limited
Citicorp Nominees Pty Limited
BNP Paribas Noms Pty Ltd (DRP)
Dr Christopher Graham Roberts
AMP Life Limited
Citicorp Nominees Pty Limited (Colonial First State Inv a/c)
RBC Investor Services Australia Nominees Pty Limited (Bkcust a/c)
UBS Nominees Pty Limited
National Nominees Limited (DB a/c)
HSBC Custody Nominees (Australia) Limited – a/c 3
Cochlear Incentive Plan Pty Ltd
BNP Paribas Nominees Pty Ltd (Agency Lending DRP a/c)
PGA (Investments) Pty Ltd
HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp a/c)
National Nominees Limited (DB a/c)
USB Wealth Management Australia Nominees Pty Ltd
Merrill Lynch (Australia) Nominees Pty Limited
Navigator Australia Ltd (MLC Investment Sett a/c)
The 20 largest shareholders held 74.57% of the ordinary shares of the Company.
On market buy-back
There is no current on market buy-back.
Number of ordinary shares held
16,267,629
9,642,973
9,471,339
2,829,202
1,259,854
611,269
488,031
381,958
375,118
222,791
147,508
138,948
124,501
124,348
100,000
92,605
81,974
78,491
69,306
57,225
25,145
2,720
165
70
14
28,114
%
28.50
16.89
16.59
4.96
2.21
1.07
0.85
0.67
0.66
0.39
0.26
0.24
0.22
0.22
0.18
0.16
0.14
0.14
0.12
0.10
74.57
109
Glossary, Key Company ASX Announcement Record and Company Information
Glossary
AGM Annual General Meeting.
ASIC Australian Securities & Investments Commission.
ASX Australian Securities Exchange.
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.
F15 Financial year 2015: 1 July 2014 to 30 June 2015.
F16 Financial year 2016: 1 July 2015 to 30 June 2016.
FDA United States Food and Drug Administration.
FX Foreign exchange.
IFRS International Financial Reporting Standards.
KMP Key management personnel.
NPAT Net profit after tax.
Processor/sound processor
The externally worn part of the cochlear implant.
R&D Research and development.
STEM Science, Technology, Engineering and Mathematics.
TSR Total shareholder return.
Key Company ASX Announcement Record
26 May 2015
Chris Smith announced as
incoming CEO of Cochlear
Cochlear Limited announced
that Mr Chris Smith is appointed
Chief Executive Officer/
President effective 1 September
2015. Dr Chris Roberts, who has
been Chief Executive Officer/
President since 1 February 2004,
will step down at the end of
August 2015.
21 April 2015
Judgment entered in US patent
infringement case
Cochlear Limited announced,
further to its 1 April
announcement, that a US
District Court in California has
now entered Judgment in the
patent infringement lawsuit by
the Alfred E. Mann Foundation
for Scientific Research and
Advanced Bionics LLC against
Cochlear Limited and its US
subsidiary Cochlear Americas.
1 April 2015
Decision in US patent
infringement case
Cochlear Limited announced
that a Court decision has
partially overturned the
jury verdict in the patent
infringement lawsuit by the
Alfred E. Mann Foundation
for Scientific Research and
Advanced Bionics LLC against
Cochlear Limited and its US
subsidiary Cochlear Americas.
A Judge in the United States
District Court in Los Angeles,
California, determined that
3 of the 4 patent claims that
the jury found Cochlear had
infringed were actually invalid.
26 March 2015
Half year report 2015
Cochlear Limited provided
an F15 half year report to
shareholders listing half year
revenues and sales.
10 February 2015
Half year results announced
Cochlear Limited announced
revenue up 18% to $438.3
million, with cochlear implant
sales of 11,698, in line with
the first half F14. The interim
dividend was $0.90 per share.
9 December 2014
Two directors’ appointments
announced
Cochlear Limited announced
the appointment of Glen
Boreham, AM and Alison Deans
as non-executive directors
for the Company, effective 1
January 2015.
14 October 2014
Chairman’s address
Cochlear Limited Chairman,
Mr Rick Holliday-Smith,
addressed shareholders at the
Annual General Meeting.
5 August 2014
Full year results for year ended
30 June 2014
Cochlear Limited announced
that sales revenue was up 15%
on the previous financial year
to a record $820.9 million.
Major product launches in the
first half had a big effect on
sales momentum in the second
half of the year. The final
dividend was $1.27 per share
(20% franked).
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 20 October 2015 at the Australian
Securities Exchange, Exchange Square Auditorium,
20 Bridge Street, Sydney. A Notice of Annual
General Meeting and Proxy Form are enclosed
with this Annual Report.
Financial calendar
2015
Dividend record date 10 September
Payment of final dividend 1 October
Annual General Meeting 20 October
2016
Interim profit announcement 9 February*
Interim dividend record date 10 March*
Payment of interim dividend 31 March*
Final profit announcement 9 August*
Annual General Meeting 18 October*
* Indicative dates only.
Non-IFRS financial measures
Given the significance of the patent dispute, 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 patent dispute provision: IFRS measures adjusted for the expense of the patent
dispute provision;
• excluding product recall costs: IFRS measures adjusted for the costs of the product recall; and
• constant currency: restatement of IFRS financial measures in comparative years using F15 FX rates.
The above non-IFRS financial measures have not been subject to review or audit. However, KPMG has
separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed to the
books and records of the Consolidated Entity.
ACE, Advance Off-Stylet, AOS, AutoNRT, Autosensitivity, Beam,
Button, Carina, Cochlear, コクレア, Codacs, Contour, Contour
Advance, Custom Sound, ESPrit, Freedom, Hear now. And always,
Hybrid, inHear, Invisible Hearing, MET, 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, DermaLock, Vistafix and WindShield are either
trademarks or registered trademarks of Cochlear Bone Anchored
Solutions AB. iPhone is a trademark of Apple Inc.
Design
Cross Media Communications Pty Ltd
As the global leader in implantable hearing solutions, Cochlear is dedicated to bringing
the gift of sound to people with moderate to profound hearing loss. We have helped over
400,000 people of all ages live full and active lives by reconnecting them with family,
friends and community.
We give our recipients the best lifelong hearing experience and access to innovative future
technologies. For our professional partners, we offer the industry's largest clinical, research
and support networks.
That’s why more people choose Cochlear than any other hearing implant company.
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
www.cochlear.com
© Cochlear Limited 2015
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