2016 COCHLEAR ANNUAL REPORT
Innovation for life
Little sounds. Big sounds.
Life is full of sounds. Little sounds, big sounds,
fun sounds, urgent sounds.
These sounds might be different for each of us,
but whatever we do, and however we do it, we
need to hear them.
In FY16, Cochlear continued to deliver
products and services that help improve our
customers’ lives by making their hearing
clearer, easier and more enjoyable.
We aim to give more people access to
technologies that reflect their lifestyle. Our
lifetime commitment means that when they
eat out with friends, play sports or stream
favourite movies from iPads, they get the
hearing experience they want.
Contents
4 Chairman’s Report
FY16 Performance Overview
5
Chief Executive Officer & President’s Report
6
Environment, Social and Governance
9
Innovation for Life
13
14 People and Culture
16 Board of Directors
17 Senior Executive Team
19 Financial Report
90 Glossary, Company ASX Announcement
Record and Company Information
M u s i c i s w h o I am. There is no reason
I h a v e t o g i v e up anything at all.
Lindy Crocker
Recipient since 2013
2
2
Dr Lindy Crocker
• Musician, music teacher, Doctor of Philosophy
• Cochlear™ Nucleus® 6 recipient since 2013
• Enjoys integrated stereo sound with her
Nucleus 6 sound processor and her GN
ReSound hearing aid – ‘bimodal hearing’
3
Lindy Crocker
4
Chairman’s Report
and from 2017 we will commence a process of Board renewal,
ensuring we have a smooth transition of longer-serving Board
members over the next few years.
Remuneration
Remuneration oversight of the Chief Executive Officer & President,
the other key management personnel, and employees generally,
is an important aspect of the Board’s responsibilities. The role is
carried out by the newly defined People & Culture Committee. The
Remuneration Report sets out our approach to remuneration, and
provides the FY16 details.
We need to ensure our remuneration practices are continually
evolving to keep us competitive, ensure we can attract the best
people, and effectively contribute to aligning performance and effort
to our key business objectives. For FY17, we have introduced changes
to our short-term incentives to strengthen alignment around global
integration priorities under the banner of One Cochlear.
Building transparency and openness with shareholders
In FY16 we published a number of online shareholder reports aimed
at improving transparency and making information easier to access.
These include Cochlear’s Corporate Governance Statement, Tax
Contribution Report and Investor Handbook.
Cochlear’s Corporate Governance Statement summarises the
Company’s corporate governance practices and incorporates the
disclosures required by the ASX Corporate Governance Council’s
Corporate Governance Principles and Recommendations (3rd
Edition). The Board is committed to achieving and demonstrating
the highest standards of corporate governance. We continue to
refine and improve the governance framework and practices in
place to ensure they meet the interests of shareholders.
The Tax Contribution Report reports on Cochlear’s taxes paid in
Australia and globally and provides detail on our global tax strategy.
Cochlear has a strong commitment to transparency and compliance
from a regulatory and financial perspective and values the principles
of being transparent with respect to its tax strategy and compliance
in Australia and globally.
The Investor Handbook is an all-in-one reference for shareholders
covering Cochlear’s history, our global footprint, our product
portfolio, the hearing loss market and how our products work, as
well as providing summary financial information.
These publications are a great companion to the Annual Report and
I encourage you to read them. They are all available at the Investor
Centre of our website, www.cochlear.com.
Our employees
We all recognise Cochlear has a diverse global workforce focused on
our business and on transforming the lives of people with hearing
loss. We employ around 3,000 people from over 75 nationalities,
and we operate in 20 different countries. The knowledge, expertise
and passion of our employees is key to our future and the focus on
delivering excellence for our customers is an important part of our
success and our market leadership position.
On behalf of the Board, I congratulate and thank all of Cochlear’s
employees for their outstanding efforts and contributions this year.
Rick Holliday-Smith Chairman
Cochlear reported a record net profit of $189 million, an
increase of 30% on the FY15 full year result. Earnings per
share (EPS) increased by 29% to $3.31 per share.
FY16 has been an important year for Cochlear involving renewal
at the top level with incoming Chief Executive Officer & President,
Chris Smith, transitioning into his new role, injecting a sharp focus
on customer and market growth activities, while maintaining the
Company’s strong commitment to product development
and innovation.
I have been pleased to see steady progress made throughout the
year, with the suite of products launched over the past few years
across all product categories laying the foundations for solid sales
and earnings growth. Additional focus has been on more broadly
reshaping the senior executive team with the addition of new and
experienced talent.
It has also been a year where the balance sheet has been carefully
reviewed and the new Chief Executive Officer & President has taken
the opportunity to make some adjustments, as may be expected,
in the first year of the new role. It has also been a year to continue
the effort to focus on growth into the future and to make longer-
term investments.
Dividends up 21%
Earnings growth, combined with strong free cash flow generation,
has supported a 20% increase in the fully franked final dividend to
$1.20 per share. This takes dividends for the year to $2.30 per share,
fully franked, an increase of 21% on FY15. The dividend payout
ratio of 70% of net profit is in line with the Board’s target dividend
payout ratio.
Australian company. Global presence
As a significant proportion of our activities are overseas, the Board
meets each year in one of our global regions. This year we travelled
to the United Kingdom (UK) and Europe and gained a stronger
appreciation of the region generally, and the issues facing the UK and
European markets, in particular.
Our business is performing well and we are confident that we have
an appropriate strategy to grow over the coming years. We do
however recognise that we are operating in an environment of global
uncertainty as characterised by recent events including the UK’s
decision to withdraw from the European Union. While these events
are not expected to have an immediate impact on our business, we
remain alert to the potential for uncertainty to curtail economic
growth and put pressure on health budgets.
The Board
During FY16 we involved an external consultant to independently
review the Board with positive results in terms of the balance
of backgrounds, experience and mix of tenure on the Board. We
recognise the importance of undergoing a regular process of renewal
5
FY16 Performance Overview
Net profit adjusted1,2
FY16
30
on FY15
189
Dividends per share
FY16
21
on FY15
180
155
158
131
133
146
110
115
100
$2.52
$2.54
$2.45
$2.25
$2.30
$1.90
$2.00
$1.75
$1.50
$1.25
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
10 year financial summary
Cochlear implant system sales (units)
30,172 26,838 25,997
26,674 23,087
24,661
21,023
18,553
18,228
15,947
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
Total revenue ($million)
R&D expenses ($million)
EBITDA ($million)
EBIT ($million)
Net profit - adjusted ($million)
Net profit - reported ($million)
1,131
143
296
263
189
189
926
128
237
206
146
146
805
128
1772
1502
1102
94
753
125
202
179
133
133
779
119
2391
2151
1581
57
810
109
270
243
180
180
735
95
244
221
155
155
695
97
206
183
131
131
602
80
193
167
115
115
559
66
171
150
100
100
Basic EPS ($)
$3.31
$2.56
$1.65
$2.33
$1.00
$3.18
$2.76
$2.34
$2.08
$1.83
Dividends per share ($)
$2.30
$1.90
$2.54
$2.52
$2.45
$2.25
$2.00
$1.75
$1.50
$1.25
Closing share price as at 30 June ($)
$121.25 $80.15
$61.70
$61.71 $65.84 $72.00
$74.32
$57.70 $43.65 $61.00
Market capitalisation as at 30 June ($million)
6,935
4,565
3,513
3,512
3,744
4,081
4,198
3,230
2,423
3,341
Number of permanent employees
2,934
2,632
2,536
2,531
2,390
2,319
2,006
1,888
1,789
1,655
1. Excludes product recall costs of $139 million before tax and $101 million after tax.
2. Excludes patent dispute provision of $23 million before tax and $16 million after tax.
The following non-International Financial reporting Standards (IFRS) financial measures are included in this report:
• excluding patent dispute provisions;
• excluding product recall costs; and
• constant currency.
refer to page 90 for a discussion of these items.
6
Chief Executive Officer & President’s Report
Chris Smith
Chief Executive Officer & President
The positive momentum we saw in FY15 has continued
throughout FY16 with strong growth delivered across all product
categories and regions. The business achieved a major milestone
with sales revenue increasing by 23% (12% in constant currency)
to $1.158 billion, exceeding $1 billion for the first time.
The cochlear implant business delivered revenue growth of 21%
(10% in constant currency) and unit growth of 12%. Our leading
developed markets, including the United States (US), the United
Kingdom (UK), Germany and Australia, each grew implant units
by around 10%. Emerging markets performed well with highlights
including China, both in the private pay and tender market, India and
the Middle East.
We have strengthened our market-leading position with the success
of a suite of product releases made over the past 18 months. In FY16
we introduced Cochlear’s first off-the-ear sound processor Cochlear™
Kanso™; expanded the bone conduction portfolio with Baha® 5
Power and SuperPower sound processors; introduced the Nucleus®
Profile™ Slim Modiolar electrode, the world’s slimmest electrode and
launched the next generation True Wireless™ Mini Microphone 2+.
Cochlear continues to demonstrate its commitment to being the
technology leader in our industry with ongoing investment in
research and development (R&D). Our aim is to improve hearing
outcomes and expand the indications for implantable solutions so
our recipients can have the quality of life they expect. In FY16, R&D
spend increased by 12% to $143 million, representing approximately
12% of sales revenue. As we move forward, we are injecting greater
discipline into our R&D processes to ensure our investments are
customer-driven and returns focused. We expect to deliver new
products across all categories over the next 18 months as well as
advance our long-term technology development pipeline.
The Services business, which includes sound processor upgrades
and accessories, continues to perform well with sales revenue
increasing 30% (20% in constant currency). Services now represents
approximately 25% of sales revenue and has been established as a
separate business unit. We expect its sales contribution to continue
to trend upward over time as both the recipient base and service
offering expand.
You can find a detailed review of the Product & Service Highlights
and Regional Review on page 22.
Strong financial position
Cochlear has delivered a strong profit result with net profit of
$189 million, up 30%, the high end of the guidance range. Free
cash flow remains strong and has supported the 21% increase in full
year dividends.
We have benefited from the devaluation of the Australian dollar
and have taken the opportunity to accelerate our investment in
market growth initiatives, including direct-to-consumer marketing
and expansion of the sales force, as well as increasing our investment
in R&D. We believe these investments have contributed to market
growth this year and will help underpin growth in the coming years.
At the same time, we have undertaken a balance sheet review
in the context of new generation products launched over the past
18 months. The review has contributed to a $16 million non-cash
inventory write-off, pre tax, reflecting old and obsolete parts
and products.
Our corporate strategy is centred on the customer
The hearing loss market offers an incredible business opportunity
with over 360 million people worldwide experiencing disabling
hearing loss, with nearly one in three people over the age of 65
affected by hearing loss.
With global market penetration for implantable hearing solutions
less than 5%, there remains a significant, unmet and addressable
clinical need that will continue to underpin the long-term sustainable
growth of our business.
Hearing loss market
360 million
Over 5% of the world’s population - 360 million people - has disabling
hearing* loss (328 million adults and 32 million children).1
1 in 3
Nearly 1 out of every 3 people over the age of 65 are affected by hearing
loss. It affects communication and can contribute to social isolation,
anxiety, depression and cognitive decline.2
<5%
Market penetration3
1. Who.int. WHO | Deafness and hearing loss [Internet]. 2015.
2. Who.int. WHO | 10 facts on deafness [Internet]. 2015.
3. Market penetration. This figure is a global estimate based on Cochlear sourced data.
* Disabling hearing loss refers to hearing loss greater than 40 decibels (dB) in the better hearing ear in adults
and a hearing loss greater than 30 dB in the better hearing ear in children.
7
Our corporate strategy is centred
on the customer
As Cochlear looks forward, priorities will be centred on the customer
with activities aimed at expanding awareness and increasing patient
access to the industry for implant candidates. And with a growing
recipient base, now numbering over 450,000, the business is
actively strengthening its servicing capability to provide products,
programmes and services to support its lifetime relationship with
recipients we well as drive revenue growth.
• improve access for candidates by expanding the cochlear implant
clinic base as well as continuing to work with the referral channel
to assist the Company’s clinic partners to grow and become
more efficient. The development of hybrid and acoustic implants,
together with a broader range of electrodes, play an important role
in broadening the indications for Cochlear’s implantable hearing
solutions; and
• business model innovation. Exploring new referral pathways and
servicing models and where appropriate open Company-operated
Cochlear clinics to manage the aftercare of recipients.
Focus on the Customer
Grow
the Core
Build a Service
Business
We have made solid progress in FY16. The highlights include:
• successfully introduced a range of new market-leading products
including Kanso, Baha 5 Power and SuperPower, Nucleus Profile
Slim Modiolar electrode and Mini Microphone 2+;
• appointed a Chief Medical Officer to expand clinical programs,
enhance the regulatory path to market and strengthen the value
proposition of Cochlear’s products; and
• expanded the direct-to-consumer programs in the US and
strengthened direct-to-consumer activities in other developed
markets including in Australia, Germany and the UK.
Shape the Organisation
Build a service business
With an ever growing base of recipients, now totalling over 450,000,
Cochlear has both a lifetime responsibility and a significant business
opportunity to service these recipients. Throughout the life of a
recipient, Cochlear provides support with upgrades and services that
improve their quality of life by improving hearing performance.
The Company will:
• support the growing recipient base with upgrades, accessories and
seamless recipient service and repair;
• increase connectivity and engagement with recipients with
enhanced digital services; and
• introduce technology solutions for clinicians to help the Company’s
clinic partners grow and make aftercare for recipients more seamless.
The FY16 highlights include:
• established Services as a separate business unit and appointed
a President;
• expanded the recipient recruitment program and clinical support
tools with the roll out of Cochlear Family, MyCochlear.com and
CochlearLink; and
• expanded the wireless product offering.
Value Creation
Grow the core
Implantable hearing devices will continue to be the driver of growth
for the coming years. The focus will be to:
• strengthen the Company’s technology leadership position. Over
the next 18 months a series of new products are expected to be
launched across all categories of the business focused on both
share and market growth;
• stimulate market growth by increasing awareness of hearing loss,
especially around severe to profound hearing loss, affecting nearly
40 million people world-wide. Over the last two years Cochlear
has developed a direct-to-consumer marketing strategy in the
US to target potential candidates, follow up leads and nurture
candidates through the channel, which has contributed to higher
market growth rates. Learnings from the US market are now being
taken into other countries;
8
Chief Executive Officer & President’s Report — continued
Shape the organisation
The organisation is being reshaped to better utilise and deploy
resources to enhance capabilities, leverage best practice and improve
the efficiency and effectiveness of operations and market initiatives.
Cochlear will:
• expand its presence in customer facing activities across developed
markets by expanding the field force and marketing activities to
be closer to customers and clinic partners. The Company will also
increase its presence in emerging markets like China;
• globally integrate enabling activities to fund market growth
initiatives; and
• build organisational capabilities to support customer
focused activities.
The FY16 highlights include:
2017 financial outlook
For FY17, net profit is expected to be within a range of $210-225
million, an increase of around 10-20% on FY16. Cochlear expects
positive momentum to continue, with investments made in product
development and market growth initiatives expected to underpin
growth for FY17.
Key considerations for FY17:
• expect continued strong uptake of the Nucleus 6 and Kanso sound
processors over the next few years with the current penetration
rate for the Nucleus 6 at around 22% of potential recipients;
• Chinese Central Government tender units expected to be at similar
levels to FY16 with delivery of units biased to the first half;
• in Europe, Cochlear does not expect any immediate impact on the
business from the UK’s decision to withdraw from the European
Union. However, the Company remains alert to the potential
for uncertainty to curtail economic growth and put pressure on
health budgets;
• expect FY17 R&D expenditure to be broadly in line with that for
• expanded the sales force across major markets with over 50
FY16, representing a lower percentage of sales revenue;
additional professional, clinical and customer-focused employees;
• forecasting a weighted average AUD/USD FX rate of 75 cents for
• expanded the sales office in Dubai to improve service in the
FY17 versus 73 cents in FY16; and
Middle East and established an office in Vienna to service Central
and Eastern Europe; and
• appointed a Chief Operating Officer to drive global integration of
support functions and focus the organisation on operating as one
global company to drive efficiencies and effectiveness.
• the balance sheet position and free cash flow generation remain
strong. The Company will continue to target a dividend payout
ratio of around 70% of net profit.
Value creation
To deliver long-term sustainable growth, Cochlear will:
• develop alliances and partnerships, like the Smart Hearing Alliance
with GN ReSound, that enable the Company to leverage its
technology and leadership position to either expand the market
or fast-track growth.
The FY16 highlights include:
• strengthened the Smart Hearing Alliance commercial relationship
with GN ReSound; and
• established an innovation fund to focus on innovative
technologies which potentially assist Cochlear’s future business
activities. $14 million was invested in FY16.
Environment, Social and Governance (ESG)
9
Supporting environment
awareness activities
Engaging with universities
and research groups
Our approach to ESG reflects the Company’s commitment to
excellence. The importance we place on ESG issues can be seen in
the work we do to deliver quality, innovative products and services.
Cochlear is involved in a range of ESG related activities and
initiatives, some of which are highlighted in this report.
High performance and strict legal compliance on environmental,
privacy and safety issues are also integral to our culture. For more
information on Cochlear’s Governance reporting, see our Corporate
Governance Statement 2016, which is available on Cochlear’s website,
www.cochlear.com.
Our products and performance reflect the quality of our people.
We seek the best people and support them to be successful in their
work. We are proud of our environmental and governance record as
well as our social contribution.
Cochlear follows a global Code of Business Conduct, which helps us
best serve our recipients and give them the best hearing possible.
Environmental awareness
Cochlear is committed to improving the lives of its recipients,
driving innovation within the medical device industry, and in doing
so, promoting best practice business principles.
Property footprint
Cochlear seeks to ensure that global offices reflect Cochlear’s
commitment to creating and maintaining consistent and high
quality work environments. We have prepared guidelines to
help with establishing work environments that are efficient and
effective in the use of space and resources, utilising environmentally
sustainable materials and conducive to productivity.
Cochlear Limited global headquarters
Cochlear’s global headquarters on the Macquarie University campus,
Sydney, which also houses our Asia Pacific regional headquarters,
was awarded a 4 Star Green Star rating by the Green Building
Council of Australia, confirming good practice in environmentally
sustainable design/construction of the building.
The headquarters building achieved a rating equivalent to a 5
star NABERS rating¹ (carbon emissions associated with electricity
and gas consumption are 270% better than those for an “average
performance” building). This high rating was achieved through
a high efficiency façade design, energy efficient lighting and an
innovative air conditioning system.
Water efficient fittings and fixtures have been used throughout
the building. The building reuses rainwater that is collected from
the roof and is stored in underground reuse tanks. The tanks have a
capacity of 350 cubic metres. The water is filtered and then used to
supply all the toilets and the cooling towers within the building and
used to irrigate the landscape outside.
The waste recycling systems in place at the Sydney
headquarters include:
• commingle recycle waste collection in all break-out and kitchen
areas, collecting approximately 20 tonnes a year;
• paper and recyclable collection at workstations and utility areas;
• 1 x 10 tonne cardboard compactor, replaced approximately every
three months;
• battery recycle collection, collecting approximately 225 kilograms
of waste a year;
• used machine oil recycling of approximately 2,000 litres per year;
• e-waste recycle collection, collecting approximately 600 kilograms
of waste a year;
• fluorescent tube recycling, collecting approximately 400 kilograms
of waste a year;
• 240 litre capacity security paper destruction bins, collecting
approximately 180 bins a year; and
• pallet recycling of approximately 300 wooden pallets per year.
We maximise office recycling, for instance with batteries, toner
cartridges and used IT equipment, by providing employees with
instructions as well as clear stations for materials to be collected.
We encourage cycling to work and a reduction in car use, by
providing 160 bicycle parking spaces as well as change rooms and
bike storage facilities. Carpooling is encouraged with 11 car spaces
allocated for users.
One of Cochlear’s key procurement principles is the requirement
to consider the economic, social and environmental impact when
acquiring goods or services from selected suppliers.
Consideration where appropriate is given to energy usage,
emissions, water usage, resource use, waste generation, recyclability,
toxicity, biodiversity, land use, social responsibility, economic
viability, innovation and health and safety.
1. NABERS (National Australian Built Environment Rating System) is a national rating scheme managed by the NSW Government in Australia.
10
Environment, Social and Governance (ESG)
Encouraging participation
in national debate
Increasing global
awareness of hearing loss
Cochlear Bone Anchored Solutions (CBAS) headquarters
The CBAS headquarters in Mölnlycke, Sweden, makes extensive
efforts to reduce electricity use and waste.
A Green Building Silver level fulfils mainly demands for highly
efficient use of energy, healthy materials, good indoor environment,
good ventilation and high moisture resistance.
The business works with Sweden’s leading recycling and
environmental company, Ragn-Sells, to ensure best environmental
practice. This involves a commitment to continuously improve
waste separation and ensure that whenever possible waste products
are reused, recycled or used for energy recovery before disposal.
Waste sorting includes for:
• combustibles;
• office and confidential paper;
• corrugated paper;
• metallic packaging;
• shrink and stretch wrap;
• glass;
• sharps;
• electronics;
• small batteries;
• light bulbs;
• wood;
• mixed waste;
• dangerous goods (chemicals); and
• toners.
We also place focus on the supply chain so that all transport is
conducted in an environmentally safe and efficient manner.
The CBAS building has been awarded a Green Building Silver
Certificate by the Sweden Green Building Council.
Designed for Swedish conditions, the Green Building Certificate
system certifies buildings in terms of energy efficiency, indoor
climate and materials. The system has been developed by
researchers in collaboration with companies in the construction
and real estate industries. The system gives the awards of Gold,
Silver or Bronze Certificates and are used for both residential and
commercial premises.
Cochlear Technology Centre
The Cochlear Technology Centre in Mechelen, Belgium, which is
Cochlear’s largest R&D facility outside Australia, makes similar
efforts to reduce the operation’s impact on the environment.
Showers and lockers have been installed to encourage cycling
to work and sport at lunch time. Company cars are costed
proportionally to carbon gas emissions, to encourage employees to
choose more environmentally-friendly cars. Sun protection film on
all windows reduces the need for cooling.
Special ‘waste lanes’ have been created to more efficiently separate
and collect recyclable materials. Batteries, electrical devices and
wooden pallets are also collected separately.
Cochlear Americas headquarters
In our regional headquarters in Denver, US, an extensive ongoing
program is run to boost environmental sustainability and ensure
compliance with the requirements of local authorities. Some of
these activities include:
• installation of sink fixture aerators in the rest rooms to reduce
water consumption;
• single source recycling in all kitchens, break rooms and printer
stations to reduce waste going to landfill;
• use of a cardboard compactor for all used boxes; recycling of all
fluorescent bulbs (per United States Environmental Protection
Agency mandate); and
• recycling of all used or out-of-date batteries and e-waste.
The office has locker rooms with shower facilities to allow
individuals to cycle to work or exercise during off hours.
Cochlear Europe, Middle East and Africa (EMEA) headquarters
Cochlear has undertaken two key initiatives to promote
environmental sustainability in our EMEA headquarters in
Basel, Switzerland.
These comprise:
• a new agreement with an energy provider to use power from
renewable energy sources; and
• office-wide education programs to reduce workspace and
IT energy usage.
11
Supporting employee participation in
community fundraising and activities
Educating visitors to
headquarters with facility tours
Manufacturing
The majority of Cochlear’s manufacturing is located at the global
and CBAS headquarters sites. Cochlear actively manages all inputs
and outputs to promote environmental best practice.
Cochlear holds environmental licences governing generation and
control of waste and pollution in Australia. Cochlear retains or
recycles nearly all of its waste product material from manufacturing
in Australia.
A lean philosophy in Cochlear’s manufacturing process, which is
a systematic method for the elimination of waste. This enables us
to reduce overproduction, reprocessing and defects, and increase
recycling and paperless operation documentation. Redesigned
packaging and flexible printing have also reduced packaging waste.
Social support
Supporting the tertiary education sector
Cochlear is a knowledge based organisation and strongly supports
and engages with the tertiary education sector.
The Australian Hearing Hub is adjacent to Cochlear’s global
headquarters at Macquarie University. The Hub brings together over
2,000 people, across a range of disciplines, dedicated to promoting
hearing health.
The Cochlear Clinical Skills Institute, a world-class surgical training
centre in the Australian Hearing Hub, was recently opened and
Cochlear’s Australian and New Zealand sales office has moved there
to be close to key customers.
There is a range of activities where Cochlear engages with Macquarie
University, including placement opportunities for students, guest
lecturing and public advocacy. There are also a number of research
projects underway involving both organisations, into areas such as
engineering, computing, audiology, linguistics and cognitive science.
Cochlear has research agreements and arrangements with over
100 external research partners around the world. Cochlear’s
support is focused on increasing the understanding and treatment
of hearing loss.
Cochlear is a core member of The HEARing Cooperative Research
Centre based in Australia, which combines academic, business and
government interests to further understanding and development
of technologies for diagnosis and remediation of hearing loss. Since
2007, 38 students have engaged in postgraduate doctoral studies in
hearing related topics under this scheme.
Supporting the community
In 2007, the Cochlear Foundation was established to promote
community leadership and the awareness of, and research into,
treatments for hearing loss. The foundation has provided support
for a range of projects including STELR (Science and Technology
Education Leveraging Relevance), an initiative to advance Science,
Technology, Engineering and Mathematics (STEM) education.
The Cochlear Foundation also supported other Australian
educational awareness activities in FY16 as well as charity events
and clinical research associated with the treatment of hearing loss.
Cochlear encourages its employees to participate in volunteering
and community fundraising and corporate sporting activities and
directly supports its employees in a number of activities. Employees
who are engaged in eligible community service activities are granted
time off.
In Europe, Cochlear supported community activities in several
countries in FY16 through team involvement and financial help.
In the United States, Cochlear continues its support of several
non-profit hearing loss organisations including the Hearing
Loss Association of America, AG Bell, Ear Community, Songs
for Sound and the American Cochlear Implant Alliance. During
FY16, scholarships were awarded to eight gifted students in the
US who have overcome hearing loss and achieved academic and
personal success. Cochlear has awarded more than US$568,000 in
scholarships to 80 college students in the US since 2002.
Supporting employees
Cochlear’s global team operates in safe and healthy work
environments. Numerous workplace health and safety activities are
undertaken and support is provided for healthy living initiatives as
well as access to a range of health services.
More information can be found in the People and Culture section of
the Annual Report.
Industry and advocacy
Cochlear has many professional staff involved in helping relevant
research and community programs in their regions, partnering
with academic, industry and health professionals to assist Cochlear
recipients gain access to services and support and also advocates for
resources for the institutions that support them. This is particularly
important in developing countries.
12
Environment, Social and Governance (ESG)
Introducing Cochlear
Global Hearing Ambassador
Offering tiered products
in developing markets
Many Cochlear employees are engaged in advocacy to improve
hearing health policies around the world.
Cochlear proactively supports the World Health Organisation’s
global effort to highlight the need for prevention and treatment of
hearing loss.
Cochlear encourages its executives to participate in forums and
bodies that advance Australia’s competitiveness and the promotion
of innovation and technology.
Hearing loss awareness
Hearing loss is a global public health issue and Cochlear is engaged
in raising awareness of it and the relevant treatments available to
address it.
In Australia and New Zealand, Cochlear sponsored the Power of
Speech public speaking competition for deaf children to challenge
the common perceptions of what a deaf child can achieve. Cochlear
has also set up and works closely with the Cochlear Awareness
Network of volunteers who connect candidates in the community
and offer support.
On 25 February, Cochlear launched a global social media
campaign for International Cochlear Implant Day to celebrate
the successes of people with Cochlear implants using the hashtag
#CelebrateCochlear.
International Ear Care Day is an annual advocacy event held on
3 March. In 2016, it was elevated in status by the World Health
Organisation to World Hearing Day and aims to raise awareness, and
promote ear and hearing care across the world. The theme for World
Hearing Day 2016 was ‘Childhood hearing loss: act now, here is
how!’. Macquarie University, with Cochlear’s support, issued a media
release calling for more action on hearing loss by governments,
communities and individuals.
On World Hearing Day, comprehensive education and awareness
activities took place in Australia, the UK, Benelux, Poland, Ukraine,
Russia and Lebanon.
In May, the Australian Deafness Forum and partners launched a
national campaign, Break the Sound Barrier, in Australia to call for
hearing loss to be made the 10th national health priority.
Every year, Cochlear supports Hearing Awareness Week in August to
raise awareness of hearing loss and treatments for hearing loss, such
as Cochlear implants, especially among adults.
Cochlear’s Global Hearing Ambassador, Brett Lee, launched the
Sounds of Cricket campaign in the UK, the Middle East, India, Sri
Lanka and Australia. The campaign draws attention to hearing loss
through the iconic sounds of the game watched by a quarter of the
world’s population. The campaign has generated extensive media
coverage and social media engagement, especially in India. Brett
has used his personal experience with his son’s hearing loss to drive
public awareness of the issue.
Cochlear makes an effort to educate visitors to its headquarters
by giving tours of the facility and providing information about the
significant medical, social and economic impacts of hearing loss.
Plans are underway for a new hi-tech, interactive tour to enhance
this experience.
Cochlear Americas initiated a Million Ear Challenge campaign for
Better Speech and Hearing Month (May) that urged people to share
the facts about hearing loss with one million people via social media.
The campaign teamed up with the Hearing Loss Association of
America in over 20 awareness events (Walk4Hearing). The team also
held over 90 Hearing Health Seminars to educate people on hearing
loss and Cochlear solutions.
Access to healthcare
Cochlear sells its products in over 100 countries. Cochlear provides,
particularly in emerging markets, support to professionals in the
healthcare area. We facilitate partnering of surgeons and supporting
education of local professionals. Part of enabling access to our
products in developing markets is our ability to provide tiered
products to suit the needs and financial ability of customers.
Governance
Cochlear’s key corporate governance principles and practices are
outlined in the Corporate Governance Statement 2016, which is
available on Cochlear’s website, www.cochlear.com.
13
Innovation for Life
Cochlear continues to make investment in innovation a priority so
as to deliver products and services that best meet our customers’
needs. Cochlear has invested more than $600 million in global
R&D activities over the past five years. In FY16, Cochlear’s total
R&D investment was $143 million, which was around 12% of
sales revenue.
More than 350 specialists from a range of technical disciplines are
employed in the Company’s Design and Development department.
These teams are based in Australia, Belgium, Sweden and the United
States. Cochlear also works with over 100 external research partners
based in 20 countries.
Cochlear continues to develop solutions that drive improved hearing
performance outcomes, improved lifestyle solutions and expanded
indications for candidates and recipients of the Company’s products.
Research covers scientific research, new technology development
and new product development. This includes work on Cochlear’s
sound processing algorithms, electrode technology, totally invisible
hearing implants, wireless connectivity, biology research and the
continued expansion of Cochlear’s portfolio of implantable
hearing devices.
The Company also continues to expand its offering of clinical care tools
that support professionals with a growing set of options to manage
their customers, including cloud based connection technologies.
Product highlights during FY16 included:
• CE approval and market introduction of Kanso;
• CE, Canada Health and FDA approval of the Cochlear Nucleus
Profile Implant with Slim Modiolar electrode (CI532), including
regulatory approval and roll-out in the US;
• CE and FDA regulatory approval of the Cochlear True Wireless Mini
Microphone 2 and Mini Microphone 2+;
• CE and FDA regulatory approval of the Cochlear Nucleus Profile
Auditory Brainstem Implant (ABI541) and market introduction;
• market introduction of Cochlear Custom Sound 4.3 and Nucleus
Fitting Software 1.4;
• market introduction of Cochlear Baha 5 Power and SuperPower
sound processors, to complete the Baha 5 portfolio;
• market roll-out of the next generation of Cochlear Baha 5 smart
App for iPhone and for Android;
• market roll-out of the next generation Cochlear Baha Fitting
Software 5.2; and
• continued market development and roll-out of Cochlear’s acoustic
implants in Europe and Latin America.
Manufacturing and supply chain operations
Cochlear has a global supply chain with sales into more than
100 countries. Components are sourced across Europe, Asia and
the Americas. Manufacturing operations are primarily located in
Australia and Sweden, with smaller sites in Belgium and the US.
Suppliers and the manufacturing sites are aligned to enable the
Company to deliver products of the highest quality and reliability.
The structure and execution of the supply chain play an important
part in our customers’ experience as well as for the introduction of
new products and technologies. Over 1,000 people are currently
employed in Cochlear’s manufacturing facilities around the world.
The Company’s manufacturing strategy is to make sure that
capacity production methods deliver the highest quality products
to meet demand whilst at the same time improving the operational
efficiency. To achieve this, Cochlear adopts continuous improvement
programs, which incorporate lean manufacturing principles and
ongoing investment in new manufacturing technologies. These
programs are designed to deliver the capacity, flexibility and
productivity to satisfy our customer requirements.
Non-military use
Other than where our products are used by military personnel,
Cochlear produces or contributes to no products or services designed
or used for military purposes.
Quality management system
Cochlear has implemented a quality management system to ensure
the quality of its products and services. This system is regularly
assessed by external regulators. Certificates include (but are not
limited to): ISO 13485, ISO 9001, Medical Device Directive and
Active Implantable Medical Device Directive.
Device approvals
Medical devices must be approved by relevant regulatory authorities.
At present, Cochlear (or an affiliate or distributor/representative)
has the necessary licences and approvals to enable the marketing of
each product in the jurisdictions in which the product is marketed.
Ongoing approvals are regularly being sought for new products in a
variety of jurisdictions.
Intellectual property
The creation and protection of our intellectual property remain a key
strategic imperative for the business. Cochlear currently holds over
1,100 patents and patent applications globally, and filed many new
patent applications in FY16.
14
People and Culture
Cochlear delivers industry leading products and services through a
highly skilled, passionate workforce of approximately 3,000 people
in over 20 countries.
Cochlear people represent a diverse range of disciplines,
nationalities and working styles all dedicated to our mission. Our
people strategies focus on engaging everyone in delivering the
mission, aligning to our business priorities and building capabilities
to deliver future growth.
Our People
Cochlear strives to attract and retain passionate and highly skilled
professionals. We achieve this through interesting and challenging
work, the opportunity for development within a growing business but
most importantly through our passion to achieve a common purpose
– our mission. We have a high level of engagement built on our shared
goals to improve the experience we provide to our customers.
In FY16, we continued to be an Employer of Choice, attracting over
18,000 applications from around the world to fill just over 500
permanent and fixed-term positions, a record for the company.
The Company maintains high staff retention levels with global
annualised turnover under 10%, which is low by industry standards.
Over the year, Cochlear continued to focus on building the
capabilities of our workforce to meet business needs by promoting
from within and providing employees with opportunities to build
their careers. In FY16, 29% of positions were filled internally.
The year saw an increase in the number of employees moving
internationally to broaden their experience and facilitate learning
and sharing.
At the executive level, we had nine appointments over the year:
• Chief Executive Officer & President, Chris Smith, formerly the
President, Americas Region;
• Tony Manna, President, Americas Region, formerly General
Manager, CBAS;
• Rom Mendel, General Manager, Cochlear Acoustics, formerly
General Manager CBAS;
• David Hackshall, Chief Information Officer, joining Cochlear from
Wesfarmers Insurance;
• Dig Howitt, Chief Operating Officer, moving from President, Asia
Pacific Region. This position was created to support the integration
and alignment of Cochlear’s global operations and to ensure
efficiencies and effectiveness are maximised as the Company
grows globally;
• Stu Sayers, inaugural President, Services. The Services business
provides aftercare support, product and direction for cochlear
implant recipients. It generates revenue from the sale of sound
processor upgrades and accessories as well as focusing on the
development of software solutions that will serve our customer
over a lifetime;
• Dr Rich Toselli, inaugural Chief Medical Officer. Rich will lead the
Global Clinical and Regulatory teams, bringing greater global
coordination and integration of these activities as well as leading
Cochlear’s Health Economics and Outcome Research activities;
• Amanda Lampe, Senior Vice President, Corporate Affairs,
Strategic Alignment and Public Health, moves from SVP Global
Marketing. The new role will build public health policy advocacy
and hearing loss awareness initiatives, lead global alignment of
communications and coordinate and deliver corporate strategy;
• Dean Phizacklea, Senior Vice President, Global Marketing, bringing
to Cochlear many years of marketing experience with both the
medical device and pharmaceutical industries across the world;
and
• Katharine McLennan, Senior Vice President, People & Culture,
responsible for building out Cochlear’s strategic capability in
talent management, acquisition, development, remuneration,
performance, engagement and succession planning.
Cochlear has continued its commitment to developing a strong
talent pipeline for future growth, employing the largest cohort of
engineering summer students since the program began in 2008.
In February 2016, we welcomed a record number of graduates
who were selected from the students who completed the summer
student intern program in the summer of 2014/2015.
In FY16, we launched our first ever Graduate Lawyer program.
Throughout the year, Cochlear also hired new employees into new
and specialised skill areas to support key global projects, transforming
our customer experience and communications capabilities.
Cochlear employs a highly flexible workforce in our manufacturing
department by providing ongoing opportunities for job enrichment
through the Manufacturing People Program. Our Learn about
Cochlear program connects the manufacturing workforce with our
recipients to ensure we are regularly focusing on our customers.
We celebrate a highly diverse workforce and consult and engage
regularly through our Employee Communications Committee,
providing a forum for collaboration between the manufacturing and
leadership groups.
Development
Cochlear continues to invest in employee development programs to
help individuals and enhance organisational capabilities. During the
year, we launched a new approach to goal setting and performance
called My Performance Pathway.
My Performance Pathway is designed to increase employee
engagement by helping employees to create strategically aligned
goals. The program includes a focus on building the skills of people
managers to help their teams set goals and coach them in achieving
their goals on a regular basis.
Performance in Cochlear means not only what employees achieve in
outcomes but how they achieve it with our new HEAR behaviours,
which we expect all employees to exhibit:
• Hear the customer;
• Embrace change and innovate;
• Aspire to win; and
• Remove boundaries.
15
Cochlear accelerated its development of leadership capability
amongst its global executive cohort with a total of 78 Cochlear
leaders completing programs in Leading Innovative Change,
Leading Strategic Growth and Leading Operational Excellence. This
development was aligned to key business projects, to facilitate rapid
transfer of learning back to the workplace and to ensure leaders are
supported and equipped to move our business forward.
Improvements to our learning management system have delivered
an even stronger learner experience for employees, providing
employees with access to an expanding range of learning programs
through different media. Manufacturing Academy was further rolled
out to support the delivery of training and skill-building processes in
our manufacturing environment in Brisbane.
Diversity
As a global business, Cochlear strongly encourages all forms of
diversity to support our leadership and innovation strategies. In our
Sydney offices, employees come from 75 different countries and
approximately 80% of our workforce was born outside Australia.
The Company’s global workforce is 51% female and women make
up 34% of our senior manager population. Of the new permanent
employees recruited globally in FY16, 57% were women. This
outcome was achieved even though 37% of all job applicants
were women.
During FY16, Cochlear maintained programs to promote diversity
in its workforce, including support for the Women in Leadership
initiative, Leadership Presence programs aimed at developing the
pipeline of female leaders at Cochlear and Talent planning also
focused on engendering a more diverse talent pipeline.
We consider gender and STEM talent needs in all talent process
design, and we measure and monitor outcomes to continuously
improve our employee value proposition and minimise any potential
sources of bias in areas like selection, promotion and performance
assessment and reward.
Health and Safety
Cochlear always seek to provide innovative Health and Safety
solutions to enhance the working and personal lives of all our people.
Cochlear views Health and Safety as an integrated element of our
overall operations and seeks to involve all levels of the organisation
in the solutions and continual improvement of all aspects of the
execution of Health and Safety.
During FY16, the Australian operations expanded on last year’s
introduction of the Enterprise Risk Management solution, refining
the elements of the Risk Management and Inspection and Audit
Modules. These two modules will increase the capability of our
people to participate in the ongoing continual improvement of the
management of risk at Cochlear.
The Health and Safety team and personnel from Design, Engineering,
People and Culture and Production collaborated substantially across
the year to look closely at the process of design and manufacture
to improve Health and Safety outcomes for production personnel
and drive efficient processes. This will contribute to the continued
drive for improvement of the production process to be safer and
more efficient.
The Health and Safety team provided support and expertise to
coach and collaborate with all personnel, driving improvement in risk
management, hazardous substances and emergency management
across the organisation. FY16 saw the focus on safe, simple and
collaborative process, building a responsive and flexible framework
for personnel to operate within.
Workers compensation and health insurance premiums have reduced
substantially across the organisation and we are tracking favourably
against our comparative industry; the continued improvements in
the manufacturing process should see this favourable trend continue.
Wellness continues to be a focus across the organisation and the
provision of preventive programs to enhance wellness was offered
to all personnel, with a focus on physical, social, financial and
occupational wellness. Lifestyle programs, vaccinations and support
for external events, sports and challenges were provided during FY16.
The provision of an Employee Assistance Program as a resource to
all personnel and eligible family members is a continuing priority.
All aspects of wellness and wellbeing are a continuing and very
high priority and will play an increasing factor in how Cochlear will
differentiate itself in talent attraction and retention.
Our Culture
Most important to all that we do is our focus on a culture of One
Cochlear, which is about:
• integrating our operations, strategy and behaviour across our 25
countries;
• standardising our processes;
• collaborating across the world to generate new ideas and better
ways of working; and
• sharing resources to drive innovation, effectiveness and efficiency.
We are building out our talent mobility as we begin to create “global
citizens” whose functions, presence, influence and travel cover the
world. We are increasingly globalising all of our functions as our
global footprint continues to expand.
In FY16, we began the process of globalising our approach to IT,
quality, talent management, repair, manufacturing and inventory
management, and we will extend this process to all of our functions
in the coming year.
Having created the approach to My Performance Pathway, we have
further reinforced One Cochlear by setting 12 global goals so that
all 3,000 employees can align their individual goals commonly,
understand how they fit across the world of Cochlear, and identify
their counterparts and collaborators across the world.
Now more than ever before, we will insist all of our people know
our end customers’ needs, desires and motivations as we expand
the education, experience and exposure we give our people to our
customers, our audiologists, our reimbursement parties and our
surgeons all over the world. Hearing the customer is at the core
of everything we do – and we are now instilling the importance of
candidates and customers that we serve for their lifetime, which is at
the heart of our mission.
16
Board of Directors
1. Rick Holliday-Smith
Age 66. BA (Hons), FAICD, CA
3. Yasmin Allen
Age 52. BCom, FAICD
Appointed 1 March 2005.
Eleven years’ service.
Director of Servcorp Limited
since 1999. Director of ASX
Limited since 2006 and
Chairman since March 2012.
Former Chairman of Snowy
Hydro Limited (not publicly
listed) (2006–2012) and SFE
Corporation Limited since
1999 until it merged with
ASX Limited in 2006. Former
director of St George Bank
Limited (2007–2008), Exco
Resources NL (1999–2006),
DCA Group Limited (2004–
2006) and MIA Group Limited
(2000–2004). Former President
of NationsBank-CRT, Chicago
and Managing Director of Hong
Kong Bank Limited, London.
Chairman of the Board of
Directors and Nomination
Committee. Member of
the Audit and People &
Culture Committees.
2. Chris Smith
Chief Executive Officer
& President
Age 53. BSc
Appointed 1 September 2015.
Nine months’ service.
Joined Cochlear in 2004. Has
more than 20 years’ experience
in the healthcare and medical
device industry in the United
States including assisting
Warburg Pincus in identifying
market opportunities for
investment. Prior to this, was
Group President for Gyrus
Group (ENT and Surgical
Divisions). Previous Cochlear
roles include President,
Americas Region and Senior
Vice President, Cochlear Bone
Anchored Solutions and Global
Support Operations.
Member of the Medical
Science and Technology &
Innovation Committees.
Appointed 2 August 2010. Six
years’ service.
Director of Santos Limited
and member of the Santos
Environment, Safety and
Sustainability Committee and
Audit Committee. Director of
ASX Limited and member of
ASX Audit Committee and ASX
Clearing and Settlement Board.
Director of National Portrait
Gallery since 2013. Member of
the George Institute for Global
Health Board.
Former Director of Insurance
Australia Group Limited (IAG).
Former National director of
the Australian Institute of
Company Directors. Former
member of The Salvation Army
Advisory Board. Former Chair
of Macquarie Specialised Asset
Management. Former Vice
President of Deutsche Bank AG,
Director of ANZ Investment
Bank and Associate Director,
HSBC London.
Chairman of the Audit
Committee. Member of the
People & Culture, Nomination
and Technology & Innovation
Committees.
4. Prof Edward Byrne, AC
Age 64. DSc, MD, MBA, FRCP,
FRACP, FTSE
Appointed 1 July 2002. Fourteen
years’ service.
Chairman of King’s Health
Partners. President and Principal
of King’s College London since
1 September 2014. Former
Deputy Chairman of Group
of Eight Vice Chancellors,
Australia, and Chairman of
Global Foundation. Former
director of Bupa Group Board,
London and Bupa Australia Pty
Limited. Former Vice Chancellor
of Monash University (June
2009 – August 2014). Former
executive Dean of the Faculty
of Biomedical Sciences, Vice
Provost and Head of the
Medical School at University
College London. Former
Dean of Faculty of Medicine,
Nursing and Health Sciences at
Monash University, Melbourne
(2003–2006).
Chairman of the Medical
Science Committee. Member
of the Nomination and
Technology & Innovation
Committees.
5. Andrew Denver
Age 67. BSc (Hons), MBA,
FAICD
Appointed 1 February 2007.
Nine years’ service.
Chairman of Universal
Biosensor Pty Limited since
2005 (director since 2002) and
SpeeDx Pty Limited since 2009.
Director of Vaxxas Pty Limited
since 2012. Former director
of Principals Cornerstone
Management Pty Limited.
Former Managing Director of
Memtec Limited and President
Asia for Pall Corporation.
Chairman of the Technology
& Innovation Committee.
Member of the Audit,
Medical Science and
Nomination Committees.
6. Donal P O’Dwyer
Age 63. BE Civil, MBA
Appointed 1 August 2005.
Eleven years’ service.
Chairman of Atcor Medical
since 2004 and a director
of Mesoblast Limited since
2004 and Fisher & Paykel
Healthcare Limited since 2012.
Non-executive Director of
NIB Holdings Ltd since 2016.
Former director of Sunshine
Heart Inc (2004–2013). Former
Worldwide President of Cordis
Cardiology (Johnson & Johnson
medical device business unit)
between 2000 and 2004.
Member of the Audit, Medical
Science, Nomination and
Technology & Innovation
Committees.
7. Glen Boreham, AM
Age 51. BEc, FAICD
Appointed 1 January 2015.
Eighteen months’ service.
Director of Southern Cross
Austereo since 2014 and Link
Group since 2015. Chairman
of Advance since 2012 and the
Industry Advisory Board for
the University of Technology,
Sydney, since 2010. Former
Director of Data#3 (2011-
2015). Former Chairman of
Screen Australia (2008–2014).
Former Managing Director of
IBM Australia and New Zealand
(2006–2010).
Chairman of the People
& Culture Committee.
Member of the Audit,
Nomination and Technology
& Innovation Committees.
8. Alison Deans
Age 48. BA, MBA, GAICD
Appointed 1 January 2015.
Eighteen months’ service.
Director of Westpac Banking
Corporation since 2014,
Insurance Australia Group
Limited since 2013 and kikki.K
Holdings Pty Limited. Former
Chief Executive Officer of the
technology-based investment
company Netus Pty Limited
(2006–2013), Hoyts Cinemas
(2003–2004), eCorp Limited
(2000–2003) and eBay
Australia and New Zealand
(1999–2000).
Member of the Audit, People
& Culture, Nomination and
Technology & Innovation
Committees.
17
3
7
3
7
4
8
4
8
Board of Directors
1
5
Senior Executive Team
1
5
9
2
6
2
6
10
1. Chris Smith
Chief Executive Officer
& President
See “Board of Directors” on
page 16.
2. Richard Brook
President, Europe, Middle East
and Africa Region
BSc Management, MBA
Richard is responsible for the
development and execution
of the strategic direction for
all our operations in Europe,
Middle East and Africa (EMEA)
and Latin America. This includes
sales in over 60 countries.
Operations in EMEA and
Latin America include sales,
marketing, distribution, service,
finance, clinical, regulatory and
administration across these
complex and diverse regions.
Before joining Cochlear in
2003, Richard held senior roles
in Guidant Corporation and
Alaris Medical Systems. He has
over 20 years’ experience in the
medical device industry.
3. Dig Howitt
Chief Operating Officer
BE (Hons), MBA
Dig was President, Asia Pacific
Region in FY16 and was
appointed Chief Operating
Officer (COO) in July 2016.
The COO will support the
integration and alignment of
Cochlear’s global activities
to ensure efficiency and
effectiveness are maximised as
the Company grows globally.
Functions included in the COO
remit include global marketing,
global IT, global quality, global
supply chain, Bone Conduction
and Acoustics. Dig will also
retain responsibility for the
China business.
Dig joined Cochlear in 2000
and has a wealth of experience
across the Company in roles
including SVP, Manufacturing
and Logistics and President,
Asia Pacific. Prior to joining
Cochlear, Dig worked for Boral
and Boston Consulting Group.
4. Jan Janssen
Senior Vice President, Design
and Development, Clinical
and Regulatory
MScEE
Jan leads a team of over 300
highly qualified engineers and
scientists who implement the
R&D strategy. This includes
responsibility for identifying
and developing cutting-
edge technologies and
commercial products.
Jan joined Cochlear in 2000
as Head of the Cochlear
Technology Centre based in
Belgium, having previously
worked with Philips Electronics
18
Senior Executive Team — continued
where he was involved in
R&D in the fields of high-
tech electronics and cochlear
implants. Jan was promoted to
Senior Vice President, Design
and Development in 2005.
Since August 2013, Jan has
also had responsibility for
Clinical and Regulatory.
5. Amanda Lampe
Senior Vice President,
Corporate Affairs, Strategic
Alignment & Public Health
BPE, GAICD
Amanda joined Cochlear in
2014. Previously held the role
of SVP, Global Marketing in
Cochlear. Has extensive senior
management experience in
government and corporate
sectors. Previous experience
includes ASX Group Executive
for Corporate Affairs and
Government Relations, chief
of staff for a former Prime
Minister and media director for
a former NSW Premier.
6. Tony Manna
President, Americas Region
BS EET
Tony joined Cochlear in
2005. Has over 30 years
medical device experience,
including senior commercial
management roles at BEI
Medical and Gyrus Medical.
Prior roles in Cochlear include
VP, Sales USA, General
Manager, Cochlear Bone
Anchored Solutions, USA
and President, Cochlear Bone
Anchored Solutions, Sweden.
He joined the Company in
1990 and has been Chief
Financial Officer since listing
in 1995. He is a director of
Osprey Medical Inc., President
of the Group of 100 and a
member of the Board
of Taxation.
7. Katharine McLennan
9. Stuart (Stu) Sayers
Senior Vice President, People
& Culture
President, Services
BEc (Hons), MBA
BS Biology (Hons),
History (Hons), MBA,
MA Political Science
Katharine joined Cochlear in
March 2016 with experience
in corporate strategy, talent
and leadership development,
and executive psychotherapy.
Katharine has held leadership
roles in Booz & Co, QBE
Insurance and Commonwealth
Bank of Australia.
8. Neville Mitchell
Chief Financial Officer and
Company Secretary
BComm, CA (SA), CA
Neville is responsible for
accounting, corporate finance,
treasury and audit, together
with investor relations,
company secretarial and the
corporate legal functions
at Cochlear.
Stu was appointed as Cochlear’s
inaugural President, Services
in May 2016. The Services
business provides aftercare
services for Cochlear recipients
and professionals, generating
revenue from post-implant
products and other offerings.
Stu comes with a wealth of
experience in establishing
and building customer-
focused B2C and B2B service
businesses, online and at scale.
Most recently, Stu led the
Amazon subsidiary Audible in
Asia Pacific. Prior to Amazon,
Stu ran E*TRADE and then
Yahoo!7 in Australia and New
Zealand. He previously held
senior roles with Procter &
Gamble and McKinsey
& Company.
10. Dr Richard (Rich) Toselli
Chief Medical Officer
BA Biology, MD, MBA
Rich was appointed as
Cochlear’s inaugural Chief
Medical Officer in June 2016.
Rich will lead the Global
Clinical, Regulatory and
Health Economics teams to
bring more strategic global
coordination and integration.
His focus will be on bringing
stronger voice of customer
to the product development
process and sharpening the
value proposition on our
products by creating high
quality clinical and health
economic data.
Rich joined Cochlear from
Sanofi Genzyme Biologics
Division where he was Head
of Global Medical Affairs for
Immunology. Rich trained as
a neurosurgeon and has more
than 12 years of experience
in R&D, medical affairs and
evidence based medicine. He
previously held senior roles
with Sanofi, Covidien and
Johnson & Johnson.
Financial Report
Cochlear Limited ACN 002 618 073 and its controlled entities for the year ended 30 June 2016
Contents
Directors’ Report
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
Notes to the Financial Statements
1. Basis of preparation
1.1 Reporting entity
1.2 Basis of preparation
2. Performance for the year
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. Income taxes
3.1 Income tax expense
3.2 Current and deferred tax assets and liabilities
4. Employee benefits
4.1 Employee expenses
4.2 Employee benefit liabilities
4.3 Share based payments
4.4 Key management personnel
5. Operating assets and liabilities
5.1 Inventories
5.2 Property, plant and equipment
5.3 Intangible assets
5.4 Investments
5.5 Provisions
5.6 Contingent liabilities
6. 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. Other notes
7.1 Auditors’ remuneration
7.2 Commitments
7.3 Controlled entities
7.4 Parent entity disclosures
7.5 Changes in accounting policies
7.6 New standards and interpretations not yet adopted
7.7 Events subsequent to the reporting date
Directors’ Declaration
Independent Audit Report
Additional Information
20
20
31
51
52
53
54
55
56
57
57
57
57
59
59
60
60
60
61
61
62
63
63
64
65
65
65
66
68
68
68
68
69
71
71
72
73
73
73
74
75
80
80
80
81
82
82
82
83
84
85
89
19
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
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 2016, 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 G Boreham, AM, Prof E Byrne, AC, Ms A Deans, Mr A Denver, Mr DP O’Dwyer, Dr CG Roberts and Mr C Smith.
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
People &
Culture
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 G Boreham, AM
Prof E Byrne, AC
Ms A Deans
Mr A Denver
Mr DP O’Dwyer
Dr CG Roberts1
9
9
9
9
9
9
9
2
9
9
9
9
9
9
9
2
Mr C Smith2
1. Dr CG Roberts retired 31 August 2015.
2. Mr C Smith was appointed on 1 September 2015.
7
7
5
5
5
-
4
5
5
-
-
5
5
5
-
4
5
5
-
-
4
4
4
-
3
-
-
-
-
4
4
4
-
3
-
-
-
-
-
-
-
4
-
4
4
1
3
-
-
-
4
-
4
4
1
3
2
2
2
2
2
2
2
-
-
2
2
2
2
2
2
2
-
-
-
2
2
2
2
2
2
1
1
-
1
1
1
2
2
2
1
1
Principal activities and review of operations and results
Operations
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.
Cochlear estimates that over 450,000 recipients 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.
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 (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 over 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.
20
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
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 (UK) and Panama. The product is then further distributed to the end customer.
Cochlear’s mission
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.
Strategic priorities
The hearing loss market offers an incredible business opportunity with over 360 million people worldwide experiencing disabling
hearing loss, with nearly one in three people over the age of 65 affected by hearing loss.
With global market penetration for implantable hearing solutions being at less than 5%, there remains a significant, unmet and
addressable clinical need that will continue to underpin the long-term sustainable growth of the business.
Cochlear’s priorities will be centred on the customer with activities aimed at growing awareness and access to the industry for implant
candidates. And with a growing recipient base, now numbering over 450,000, the Company is actively strengthening its servicing
capability to provide products, programs and services to support the lifetime relationship with recipients.
Cochlear will continue with its commitment to being the technology leader in the industry by investing in research and development to
improve hearing outcomes and expand the indications for implantable solutions so recipients can have the quality of life they expect.
Priorities are centred on four strategic platforms for the business:
1. Grow the core business
Implantable hearing devices will continue to be the driver of growth for the coming years. The focus will be to:
Strengthen the technology leadership position. Over the next 18 months, there are plans to launch a series of new products
across all categories of the business focused on both share and market growth;
Stimulate market growth by increasing awareness of hearing loss. Over the last two years, Cochlear has developed a direct-to-
consumer marketing strategy in the US to target potential candidates, follow up leads and nurture candidates through the channel.
These learnings are now being taken to other countries;
Improve access for candidates by expanding the cochlear implant clinic base as well as continuing to work with the referral
channel to assist clinic partners to grow and become more efficient. The development of hybrid and acoustic implants, together
with a broader range of electrodes, plays an important role in broadening the indications for implantable hearing solutions; and
Business model innovation. Exploring new referral pathways and servicing models and where appropriate open company-
owned Cochlear clinics to manage the aftercare of recipients.
2. Build a service business
With an ever growing base of recipients, now totalling over 450,000, Cochlear has both a lifetime responsibility and a significant
business opportunity to service these recipients with upgrades and services that improve their quality of life by improving hearing
performance. Cochlear will:
Support the growing recipient base with upgrades, accessories and seamless service and repair;
Increase connectivity and engagement with recipients with enhanced digital services; and
Introduce technology solutions for clinicians to help clinic partners grow and make aftercare for recipients seamless.
3. Shape the organisation
Cochlear is reshaping the organisation to better-utilise and deploy resources. The focus is to:
Expand the Company’s presence in customer facing activities across developed markets by expanding the field force and
marketing activities to be closer to customers and clinic partners. Cochlear will also increase its presence in emerging markets like
China;
Globally integrate enabling activities such as information technology (IT) to drive efficiencies and leverage best practice to fund
market growth activities; and
Build organisational capabilities to support customer-focused activities.
21
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
4. Value creation
To deliver long-term sustainable growth, Cochlear will:
Develop alliances and partnerships, like the Smart Hearing Alliance with GN ReSound, which enables the Company to leverage
its technology and leadership position to either expand the market or fast track growth.
Operating result FY16
Product highlights
Cochlear implants (units)
Sales revenue
Cochlear implants
Services (sound processor upgrades and accessories)
Acoustics (bone conduction and acoustic implants)
Total sales revenue
2016
$000
30,172
729,171
289,418
139,542
1,158,131
2015
$000
Change %
Constant
currency
26,838
12%
604,346
222,458
115,096
941,900
21%
30%
21%
23%
10%
20%
9%
12%
Cochlear implants – 63% of sales revenue
Cochlear implant revenue grew 21% (10% in constant currency) and unit sales grew 12% (8% excluding the benefit of China tender
units) with solid growth experienced across developed and emerging markets. Leading developed markets, including the US, UK,
Germany and Australia, all grew implant units by around 10%. Emerging markets performed well with highlights including strong growth
in China, both in the private pay and tender markets, India and the Middle East.
There has been a strong uptake of the Nucleus Profile implants since release in FY15. The Profile series are the most reliable implants
on the market and feature the world’s thinnest electrodes, allowing for a reduction in surgery time and a less traumatic insertion. The
Profile series implants are providing recipients with significant improvements in hearing performance in challenging listening situations
when used with True Wireless accessories1.
During the second half of FY16, we commenced a controlled market release of the new Slim Modiolar electrode (CI532) in Europe, the
US and Canada. The CI532 is 60% thinner than the previous generation Contour Advance electrode, allowing for optimised surgical
placement and an even less traumatic insertion.
Cochlear extended its sound processor portfolio during the second half with the introduction of Kanso. Kanso is a discrete, easy-to-use,
off-the-ear sound processor that delivers the same hearing performance as the Nucleus 6 Sound Processor.
The increase in sales revenue also reflects earlier investments in sales and marketing capabilities including direct-to-consumer activities
and field expansion across many markets. These initiatives help build awareness of implantable hearing solutions and support further
penetration into the adult segment.
Services (sound processor upgrades and accessories) – 25% of sales revenue
Services sales revenue increased 30% (20% in constant currency) driven by the continuing strong uptake of the Nucleus 6 Sound
Processor. With the launch of the Nucleus 6 for Nucleus 22 recipients, the latest sound processor is now compatible with all generations
of implants released over the last 30 years.
Accessories growth was supported by the continued uptake of True Wireless and the Aqua+ for Nucleus 6 users.
Wireless Mini Microphone 2+, which streams speech directly to the Cochlear sound processor, was launched during the second half,
providing further enhancements in hearing performance to the True Wireless range.
As part of the commitment to provide recipients with great customer experience, the business commenced the rollout of a number of
service-oriented products. These products include the recipient membership program, Cochlear Family; a personalised online portal to
connect recipients directly with Cochlear, MyCochlear.com; and Cochlear Link, which uses cloud based technology to provide
recipients with simpler and faster servicing of their sound processors.
1 Wolfe J, Morais M, Schafer E. Improving hearing performance for cochlear implant recipients with use of a digital, wireless, remote-microphone, audio-streaming accessory.
J Am Acad Audiol. 2015 Jun;26(6):532-9.
22
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Acoustics (bone conduction and acoustic implants) – 12% of sales revenue
Acoustics, which includes bone conduction and acoustic implant sales revenue, grew 21% (9% in constant currency) with solid
performances across all regions. The bone conduction portfolio grew 10% in constant currency.
The Baha 5 portfolio was extended during the second half with the launch of Baha 5 Power and Baha 5 SuperPower Sound
Processors, designed for recipients with higher degrees of hearing loss.
The Baha 5 System now provides the widest range of sound processors, including the industry’s smallest, smartest and most powerful
head-worn bone conduction solutions for those with single-sided deafness or who have conductive or mixed hearing loss. The Baha 5
System is also the only hearing implant system with MFi (made for iPhone) capabilities, allowing direct streaming between the sound
processor and iPhones.
The Baha 5 Power and SuperPower Sound Processors are now commercially available in most key markets. They will be made
available in other markets over the next 12 months as regulatory approvals are obtained.
Regional review
Sales revenue
Americas
EMEA (Europe, Middle East and Africa)
Asia Pacific
Total sales revenue
2016
$000
519,688
427,896
210,547
1,158,131
2015
$000
402,962
377,633
161,305
941,900
Change %
29%
13%
31%
23%
Constant
currency
12%
7%
23%
12%
Americas (US, Canada and Latin America) – 45% of sales revenue
Sales revenue increased 29% to $519.7 million (12% in constant currency). The highlight was the growth in the US with revenue
growth of 16% in constant currency and cochlear implant unit sales up around 10%. Growth overall has been driven by new product
introductions and growing services revenue, supported by strategic growth initiatives commenced over the past few years.
The expanded field sales organisation, direct-to-consumer marketing and new customer relationship management system
(Salesforce.com) have supported accelerated market growth.
Services revenue increased by over 20% in constant currency driven by upgrades to the Nucleus 6 Sound Processor. The uptake by
Nucleus 22 recipients has been enthusiastic since launch in November 2015.
Overall Latin American sales revenue declined in constant currency as a result of deteriorating economic conditions.
EMEA (Europe, Middle East and Africa) – 37% of sales revenue
Sales revenue increased 13% to $427.9 million (7% in constant currency) with solid performances across the whole region.
The highlight was the performance of Germany, the largest market in EMEA, which grew units by around 10%. The German result
reflects the impact of an expanded field sales team and investment in direct-to-consumer marketing activities.
Other key markets in Western Europe, particularly the UK and France, performed well with units also growing around 10% driven by
investments in market growth initiatives and the positive impact of a strong product portfolio across all product categories.
Despite a challenging political and macro-economic year, sales revenue in the Middle East grew strongly, coming off a low base in
FY15. The Middle East is benefiting from Cochlear’s expanded presence since the opening of a new Middle East headquarters in
Dubai in 2014. A headquarters was established in Vienna to service Central and Eastern Europe in April 2016.
Asia Pacific (Australasia and Asia) – 18% of sales revenue
Sales revenue increased 31% to $210.5 million (23% in constant currency) with solid growth experienced across most markets.
Australia continues to grow consistently with unit growth of around 10% as the combination of field sales expansion and new marketing
programs contributes to growing awareness.
China performed strongly in both the private pay and tender markets. Private pay sales and services revenue were boosted by the
expansion of Cochlear’s field sales presence. The region benefited from Chinese Central Government tenders of around 3,300 units.
India represents a small but rapidly growing market. The growing number of clinics, expansion of the field force and improvements in
reimbursement all contributed to double-digit unit growth.
23
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Financial review
Major expenses
Cost of goods sold
% of sales revenue
Selling and general expenses
Administration expenses
Research and development expenses
% of sales revenue
Other income
EBIT
% of total revenue
2016
$000
333,593
28.8%
326,090
79,287
143,134
12.4%
(14,156)
262,604
23.2%
2015
$000
275,320
29.2%
260,809
59,536
127,985
13.6%
(4,428)
206,408
22.3%
Change
$000
58,273
(0.4%)
65,281
19,751
15,149
(1.2%)
(9,728)
56,196
0.9%
EBIT increased by $56.2 million, up 27%, to $262.6 million, with the operating margin (EBIT to total revenue) increasing by 0.9% to
23.2%.
Cost of goods sold (COGS) increased $58.3 million to $333.6 million, primarily as a result of growing volumes. COGS as a percentage
of sales revenue improved by 0.4% to 28.8%, reflecting the impact of changes in foreign exchange (FX) rates, product and geographic
mix as well as the higher COGS associated with the initial introduction of the Nucleus Profile series implant.
A balance sheet review was conducted in the context of new generation products launched over the past 18 months. This review has
contributed to a $16.3 million non-cash inventory write-off, pre tax, reflecting old and obsolete parts and products.
Selling and general expenses increased by $65.3 million to $326.1 million. The 25% increase reflects the increased investment in
market growth initiatives as well as the impact on translation of the depreciation of the Australian dollar. In constant currency, the
increase in selling and general expenses was 15%.
Administration expenses increased by $19.8 million to $79.3 million, an increase of 33%. More than half of the increase is related to
investments in IT systems. The investment in global IT platforms will enable the business to strengthen its sales processes and build
upon its services offering.
Investment in research and development (R&D) increased 12% to $143.1 million, which is consistent with Cochlear’s stated
commitment to continue to invest in R&D to strengthen its technology leadership position. It follows several years of limited incremental
investment in R&D.
Other income increased by $9.7 million. A $7.5 million increase in FX gains on asset translation is included in this line item.
Foreign currency impacts on the income statement
Income statement impacts
Reported FX contract gains/(losses) on hedged sales (transaction impact)
-
-
FX losses – FY16
FX losses – FY15
Sales revenue and expenses (translation impact)1
-
-
Sales revenue
Total expenses including tax
Reported asset translation impacts (translation impact)
-
-
FX gain on asset translation – FY16
FX gain on asset translation – FY15
1. FY16 actual v FY15 at FY16 rates.
$000
(27,579)
(16,270)
(11,309)
93,467
(44,688)
48,779
8,695
1,178
7,517
24
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Transaction impacts
Cochlear utilises currency hedging to provide some certainty around near-term cash flow. Over 90% of revenue and around 50% of
costs are denominated in foreign currency. Most of the cash that is generated is repatriated to Australia to fund operating and investing
activities, including R&D and dividends. In order to provide some certainty around near-term cash flow, expected cash flows are
hedged back to Australian dollars (AUD).
In FY16, the AUD depreciated against most of the major currencies. As a result, FX losses on hedged sales were $28 million. This
compared to FX losses on hedged sales of $16 million in FY15.
Translation impacts
The key translation impacts from translating foreign sales and expenses into AUD include:
a net benefit to sales revenue of $93.5 million;
a net increase in expenses of $44.7 million; and
a net benefit to net profit of $8.7 million from the translation of assets, primarily trade receivables. This compares to a $1.2 million
net benefit in FY15.
Capital employed
Trade receivables
Inventories
Less: Trade and other payables
Working capital
Debtor days
Inventory days
Property, plant and equipment
Intangible assets
Other net liabilities
Capital employed
2016
$000
268,538
154,103
(110,354)
312,287
85
169
86,878
224,338
(57,125)
566,378
2015
$000
236,728
145,861
(99,858)
282,731
83
193
80,809
228,531
(96,182)
495,889
Change
$000
31,810
8,242
(10,496)
29,556
2
(24)
6,069
(4,193)
39,057
70,489
Capital employed increased by $70.5 million to $566.4 million since 30 June 2015 primarily as a result of an increase in working capital
and a reduction in other net liabilities.
Working capital increased by $29.6 million to $312.3 million largely reflecting increased sales.
Trade receivables increased $31.8 million to $268.5 million. In constant currency, trade receivables increased by 11%, reflecting sales
growth during the year. Debtors days increased by two days to 85 days.
Inventories increased $8.2 million to $154.1 million. Inventory days reduced 24 days to 169 days, reflecting the reduction in stock which
had been built up in June 2015 ahead of tender shipments made during the first half and the higher sales, as well as the $16.3 million
inventory write off (as detailed in the prior major expenses commentary).
Net property, plant and equipment remained largely unchanged.
Intangible assets decreased by $4.2 million to $224.3 million, largely a result of revaluation to period end FX rates. All intangible assets
are tested for impairment on an annual basis. There were no impairments or write-downs of intangible assets in FY16.
Other net liabilities reduced by $39.0 million, largely reflecting higher tax payments made during the year.
25
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Cash flow
EBIT
Depreciation and amortisation
Changes in working capital and other
Net interest paid
Income taxes paid
Operating cash flow
Capital expenditure
Other investments
Free cash flow
2016
$000
262,604
33,491
(20,006)
(10,291)
(80,685)
185,113
(28,858)
(21,276)
134,979
2015
$000
206,408
30,252
(8,418)
(7,330)
(32,211)
188,701
(23,897)
(4,530)
160,274
Change
$000
56,196
3,239
(11,588)
(2,961)
(48,474)
(3,588)
(4,961)
(16,746)
(25,295)
The business generated strong cash flow with cash realisation of operating cash flow approximately equating to net profit.
An increase in EBIT of $56.2 million was offset by a $48.5 million increase in income taxes paid and a net $11.5 million investment in
working capital and other to fund business growth.
Income taxes paid increased by $48.5 million, reflecting improved profitability and $18.1 million of timing related payments following a
change in the timing of Australian tax instalment payments. The effective tax rate has remained at approximately 26%. Further details
are included in the 2016 Tax Contribution report which is available at the Investor Centre of the website, www.cochlear.com.
Net debt
Loans and borrowings:
Current
Non-current
Total debt
Cash and cash equivalents
Net debt
Total loan facilities
Unused portion of debt facilities
2016
$000
3,978
189,260
193,238
(75,417)
117,821
350,000
155,000
2015
$000
168,159
44,552
212,711
(72,208)
140,503
350,000
135,000
Change
$000
(164,181)
144,708
(19,473)
(3,209)
(22,682)
Net debt reduced by $22.6 million to $117.9 million since 30 June 2015. During FY16, the $250 million debt facility was renewed for a
further three years at lower interest rates.
At 30 June 2016, there was $350.0 million in total loan facilities and the unused portion of the bank facility was $155.0 million.
Dividends
Interim ordinary dividend (dollars per share)
Franking %
Final ordinary dividend (dollars per share)
Franking %
Total ordinary dividends (dollars per share)
Payout ratio %
Franking %
2016
$1.10
100%
$1.20
100%
$2.30
70%
100%
2015
$0.90
35%
$1.00
100%
$1.90
74%
69%
Change %
22%
20%
21%
26
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Strong free cash flow and the continued strength of the balance sheet have supported the payment of a final dividend of $1.20 per
share, franked at 100%. Total fully franked dividends of $2.30 per share were declared for the year, an increase of 21% on dividends
paid last year, representing a payout of 70% of net profit.
The record date for determining dividend entitlements is 8 September 2016 and the final dividend will be paid on 29 September 2016.
2017 financial outlook
For FY17, net profit is expected to be within a range of $210-225 million, an increase of around 10-20% on FY16. Cochlear expects
positive momentum to continue, with investments made in product development and market growth initiatives expected to underpin
growth for FY17.
Key considerations for FY17:
expect continued strong uptake of the Nucleus 6 and Kanso sound processors over the next few years with the current penetration
rate for the Nucleus 6 at around 25% of potential recipients;
Chinese Central Government tender units expected to be at similar levels to FY16 with delivery of units biased to the first half;
in Europe, Cochlear does not expect any immediate impact on the business from the UK’s decision to withdraw from the European
Union. However, the Company remains alert to the potential for uncertainty to curtail economic growth and put pressure on health
budgets;
expect FY17 R&D expenditure to be broadly in line with that for FY16, representing a lower percentage of sales revenue;
forecasting a weighted average AUD/USD FX rate of 75 cents for FY17 versus 73 cents in FY16; and
the balance sheet position and free cash flow generation remain strong. The Company will continue to target a dividend payout
ratio of around 70% of net profit.
Non-International Financial Reporting Standards (IFRS) financial measures
Given the significance of 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:
Constant currency: restatement of IFRS financial measures in comparative years using FY16 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.
Forward looking statements
Cochlear advises that this document contains forward looking statements which may be subject to significant uncertainties outside of
Cochlear’s control.
No representation is made as to the accuracy or reliability of forward looking statements or the assumptions on which they are based.
Actual future events may vary from these forward looking statements and it is cautioned that undue reliance not be placed on any
forward looking statement.
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 2016 which is available at the Investor
Centre on the website (www.cochlear.com).
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
Description and potential consequences
Strategies used by Cochlear to mitigate the risk
Product
innovation
and competition
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 FY16, Cochlear invested around 12% of
sales 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.
27
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Risk
Description and potential consequences
Strategies used by Cochlear to mitigate the risk
Infringement
litigation
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 penalties or royalties to be able to continue
to manufacture product, or injunctions preventing Cochlear
selling products it had developed.
Cochlear has a comprehensive patent portfolio
across its technologies.
Cochlear has a Legal department and utilises
internal and external legal resources to deal
with any litigation issues.
Misappropriation
of know-how
and intellectual
property
Cochlear is exposed to the risk of its know-how and intellectual
property being misappropriated either through hacking of its
systems or by employees, consultants and others who from time
to time have access to Cochlear’s know-how and intellectual
property. This could result in competitors using this information
and increasing their competitiveness. Cochlear could lose
market share as a result.
Cochlear monitors its systems and considers
that it 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.
Regulation
Reimbursement
Product liability
Interruption to
product supply
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.
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 latest generation products across six
sites globally. 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.
Political,
economic or
social instability
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 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.
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 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.
28
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Risk
Description and potential consequences
Strategies used by Cochlear to mitigate the risk
FX rates
Cochlear is exposed to currency risk on sales and purchases
that are denominated in a currency other than the respective
functional currencies of the legal entities. The currencies in
which these transactions primarily are denominated are
Australian dollar (AUD), US dollar (USD), Euro (EUR), Japanese
yen (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.
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.
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.
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
potential 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
2016, 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;
employee health and safety programs; and
ethical and business standards.
29
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Consolidated results
The consolidated results for the financial year are:
Revenue
Profit before income tax
Net profit
Basic earnings per share (cents)
Diluted earnings per share (cents)
2016
$000
1,130,552
254,266
188,921
330.6
330.0
2015
$000
925,630
196,303
145,840
256.1
254.8
Dividends
Dividends paid or declared by the Company to members since the end of the previous financial year are:
Dollars per
share
Total amount
$000
Franked/
unfranked
Date of payment
Interim 2016 ordinary
Final 2015 ordinary
Total amount
Subsequent event
Since the end of the financial year, the directors
declared the following dividends:
Final 2016 ordinary
Total amount
1.10
1.00
2.10
1.20
1.20
62,925
100% Franked
1 April 2016
57,168
100% Franked
1 October 2015
120,093
68,646
100% Franked
29 September 2016
68,646
The financial effect of the 2016 final dividend will be recognised in the subsequent financial year as it was declared after 30 June 2016.
Franked dividends paid or declared during the financial year were franked at the tax rate of 30% (2015: 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.
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 and other services
Total non-audit services
State of affairs
There were no significant changes to the state of affairs of Cochlear during the financial year.
Consolidated
2016
$
2015
$
1,583,831
58,734
1,642,565
1,051,398
1,051,398
1,559,738
72,094
1,631,832
988,156
988,156
30
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Remuneration Report
Contents
Section Title
Description
1.
2.
3.
4.
5.
Introduction
Non-executive director
remuneration
Executive remuneration
Employee share scheme
and other share
information
Describes the scope of the Remuneration Report and the individuals whose
remuneration details are disclosed. Outlines the link between performance and
remuneration.
Provides details regarding the fees paid to non-executive directors.
Details the remuneration provided to executives. Outlines the principles applied to
executive remuneration decisions and the framework used to deliver the various
components of remuneration.
Provides details regarding Cochlear’s employee equity plans including that information
required by the Corporations Act 2001 and applicable accounting standards.
Remuneration governance Describes the role of the Board and the People & Culture Committee, and the use of
remuneration consultants when making remuneration decisions.
31
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
1.
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 the remuneration of directors and executives are outlined in the Remuneration Policy, along
with the role of the Board and the People & Culture Committee, and the use of remuneration consultants when making remuneration
decisions. The Remuneration Policy is available in the Investor Centre/Corporate Governance/Company Policies section of our website
(www.cochlear.com). This report refers to several other policies also available in the same section of the website.
During the year, the Board changed the name of the Human Resources Committee to the People & Culture Committee (P&CC) to
better reflect the nature of the work of the P&CC, particularly in the context of the One Cochlear strategic initiative.
Our Chief Executive Officer/President (CEO/P) retired in FY16, and the role transitioned from Chris Roberts to Chris Smith on 1
September 2015 as Chief Executive Officer & President (CEO&P).
The Board believes Cochlear’s approach to Board and executive 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.
1.1 Key management personnel
This Remuneration Report sets out, in accordance with the Corporations Act 2001 and accounting standard requirements, the
remuneration arrangements in place for key management personnel (KMP) of Cochlear during FY16.
KMP 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 senior executives named in this report, including the CEO&P who is an executive
director). Details of the KMP during the year are set out in the table below:
Title
Non-executive directors
Rick Holliday-Smith
Chairman
Chairman, Nomination Committee
Member, Audit Committee, People & Culture Committee
Yasmin Allen
Glen Boreham, AM
Edward Byrne, AC
Alison Deans
Andrew Denver
Donal O'Dwyer
Director
Chairman, Audit Committee
Member, People & Culture Committee, Nomination Committee, Technology and Innovation
Committee
Director
Chairman, People & Culture Committee
Member, Audit Committee, Nomination Committee, Technology and Innovation Committee
Director
Chairman, Medical Science Committee
Member, Nomination Committee, Technology and Innovation Committee
Director
Member, Audit Committee, People & Culture Committee, Nomination Committee, Technology and
Innovation Committee
Director
Chairman, Technology and Innovation Committee
Member, Audit Committee, Medical Science Committee, Nomination Committee
Director
Member, Audit Committee, Medical Science Committee, Nomination Committee, Technology and
Innovation Committee
32
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Title
Executive director
Chris Roberts
Retired 31 August 2015
Chief Executive Officer/President (CEO/P)
Member, Medical Science Committee
Member, Technology and Innovation Committee
Chris Smith
Appointed 1 September 2015
Chief Executive Officer & President (CEO&P)
Member, Medical Science Committee
Member, Technology and Innovation Committee
Other executive KMP
Richard Brook
President, European, Middle East and African Regions
Dig Howitt
Jan Janssen
President, Asia Pacific Region
Senior Vice President, Design and Development, Clinical and Regulatory
Neville Mitchell
Chief Financial Officer and Company Secretary
Tony Manna
Appointed 1 July 2015
President, Americas Region
1.2 Relationship between Cochlear performance and executive KMP remuneration
1.2.1 Cochlear financial performance (FY11 to FY16)
Sales revenue ($million)
Earnings before interest and tax (EBIT) ($million)
Net profit after tax ($million)
Basic earnings per share (EPS) (cents)
FY11
732.2
242.7
180.1
318.2
FY121
704.6
76.5
56.8
100.0
EPS growth (3 years compound annual growth rate)
15.2%
-24.6%
Total dividend per share ($)
Share price as at 30 June ($)
2.25
72.00
70.8%
2.45
65.84
24.1%
FY13
715.0
178.9
132.6
233.0
-5.5%
2.52
61.71
-14.5%
FY142
820.9
127.1
93.7
164.6
FY15
941.9
206.4
145.8
256.1
FY16
1,158.1
262.6
188.9
330.6
-19.7%
36.8%
12.4%
2.54
61.70
-6.6%
1.90
80.15
2.30
121.25
41.7%
127.2%
Total shareholder return (TSR) (3 years)
TSR percentile ranking3
1.
2.
3.
65th
FY12 includes product recall expenses of $138.8 million before tax and $101.3 million after tax.
FY14 includes the patent dispute provision of $22.5 million before tax and $15.8 million after tax.
TSR ranking is shown over three financial years to 30 June. For long-term incentives performance is compared to TSR for ASX 100 companies.
32nd
28th
96th
38th
94th
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 20 to 30.
1.2.2 Cochlear one year performance and relationship to executive KMP remuneration
Cochlear sales revenue grew 23% year on year. New product launches combined with investments in market growth initiatives drove
this growth. EBIT in FY16 was 27% above that for FY15.
33
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
The short-term incentive (STI) payouts to executive KMP this year ranged from 97% to 112% of their target STI opportunity, reflecting
the strong performance against targets and performance at expectations against personal objectives. Individual details are provided in
table 3.2.
The payout ratios on STI in FY16 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 and allows Cochlear to promote internal candidates.
1.2.3 Cochlear three year performance and relationship to executive KMP remuneration
As explained in the Remuneration Policy (available on the website www.cochlear.com), Cochlear’s remuneration framework aims to
incentivise executive KMP towards long-term sustainable growth of the business and the creation of shareholder value in the short,
medium and long term. The focus towards the longer term is developed in two ways:
Equity STI, although dependent on sales revenue and EBIT performance and outcomes for the completed performance year (as
explained in section 3.6) is deferred for a further two years; and
Long-term incentive (LTI), in the form of options and performance rights, is linked to compound annual growth in EPS and relative
TSR performance (as explained in section 3.6).
EPS growth (internal) and relative TSR (external) are generally accepted proxies for creation of shareholder value. The Board reviews
the suitability of these performance criteria and settings on a regular basis to ensure they best serve shareholders’ interests.
Earnings per share (EPS)
Vesting of the EPS portion of Cochlear executives’ LTI over the last five years is displayed in the graphs below, overlaid with the
compound annual growth rate (CAGR) of EPS for the corresponding performance period:
Cochlear’s basic EPS in FY16 was 330.6 cents, which is a 12.4% compound annual growth rate (CAGR) over the three year vesting
period. The vesting scale for our LTI plan generates 61.8% of the award at this growth level. This is the second time any part of the
EPS portion has vested in the past five years. While this provides a strong alignment to shareholders’ interests to grow EPS, the Board
considers that the alignment is less strong if a lack of vesting results in executives not actually owning the shares that they are striving
for.
Total shareholder return (TSR)
Cochlear’s relative TSR performance over the relevant performance periods up to 30 June in respect of vested equity grants is
displayed in the graphs below. This information was provided by an independent third party.
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. The ASX 100 is biased towards high performance as lower performing companies drop out of the index and are
replaced by growing companies.
Cochlear’s TSR for the three years ended 30 June 2016 was ranked at the 94th percentile in the ASX 100. As a result, 100% of the
TSR portion of the LTI has vested this year.
34
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Vesting outcomes (performance shares/rights and options granted FY10 to FY14)
Grant date
Vesting
date1
EPS 3
year
CAGR2
%
vested3
%
forfeited3
%
vested3
Relative 3
year TSR
percentile
ranking
%
forfeited3
Performance
rights
Market price
as at 30
June ($)4
Options
Exercise
price ($)
17-Aug-09
Aug 2012
-24.6%
0.0%
100.0%
16-Aug-10
Aug 2013
-5.5%
0.0%
100.0%
15-Aug-11
Aug 2014
-19.7%
0.0%
100.0%
13-Aug-12
Aug 2015
36.8%
100.0%
0.0%
65th
28th
32nd
38th
79.3%
20.7%
65.84
0.0%
100.0%
0.0%
100.0%
N/A
N/A
0.0%
100.0%
80.15
60.04
69.80
68.56
62.78
Net market
value as at
30 June
($)4
5.80
N/A
N/A
17.37
15-Oct-135
94th
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
Aug 2016
100.0%
121.25
61.8%
12.4%
38.2%
62.12
59.13
0.0%
under the Cochlear Trading Policy (typically immediately following the Cochlear full-year results announcement).
Compound annual growth rate.
All plan participants had the same vesting and forfeiture percentage outcome.
30 June of applicable vesting date.
The performance hurdles for the LTI plans are considered demanding such that in the last four years, only 33% of allocations have vested.
2.
3.
4.
5.
1.2.4 Minimum shareholding guidelines
Executive KMP are requested to retain vested equity until they hold and maintain a holding of Cochlear shares equivalent to their
annual salary in the previous year. The Board considers the minimum shareholding guideline to be best practice to strengthen the
alignment of executives’ interests to those of shareholders. New executives are likely to take some length of time to build such a
holding if the LTI plan fails to vest as it has in recent times. With that in mind, the Board intends to review the performance hurdles for
future LTI equity grants.
The table in section 4.4 details the current holdings of executive KMP.
1.3 Fee changes
Board fees must recognise the effort required to fulfil the responsibilities of the non-executive directors. Reflecting the increasing
governance requirements, the work of the Board and its various committees has increased, and the Board considered it appropriate to
revise committee fees for FY16. This is detailed in section 2.1 and base fees represent 74.0% of the $2.5 million aggregate amount
approved by shareholders at the October 2015 AGM.
The Board approved a 4.6% increase in total Board remuneration effective 1 July 2016. This increase will apply to base fees which
have not changed since 2011.
2. Non-executive director remuneration
2.1 NED fees FY16
Board fees
Committee fees
Board Chairman fee1
Board NED base fee
$438,000
$146,000
Audit
People & Culture
Medical Science
Nomination
Technology and Innovation
1.
Committee fees are not paid to the Chairman of the Board.
2.2 Post-employment benefits and other policy items
FY16
Committee
Chair
$50,000
$30,000
$30,000
No fee
$40,000
FY15
Committee
member
$25,000
$15,000
$15,000
No fee
$20,000
Committee
Chair
$40,000
$30,000
$20,000
No fee
$20,000
Committee
member
$20,000
$10,000
$10,000
No fee
$10,000
Superannuation
Retirement scheme
Where required, superannuation contributions have been made in accordance with Australian
superannuation legislation, at a rate of 9.5% of the base fee up to the Australian Government’s
prescribed maximum contributions limit. Contributions are not included in the base fee.
Prior to 2003, Cochlear operated a directors’ retirement scheme which provided retirement benefits
of three times their average annual remuneration over the previous three years. In 2006, the Board
resolved to discontinue the ongoing accrual of benefits subject to a transition period to 2011. The
benefits accrued are indexed by reference to the bank bill rate.
At 30 June 2016, 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 2016 was $442,034.
Equity instruments
NEDs do not receive any performance related remuneration, options or performance shares/rights.
Other fees/benefits
NEDs receive reimbursement for costs directly related to Cochlear business.
Minimum shareholding
guidelines
NEDs are requested to hold shares equivalent to the fees received in the previous 12 months. The
Share Ownership Policy is available on the website.
35
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
2.3 NED total remuneration
Amounts $
Rick Holliday-Smith (Chairman)
Yasmin Allen
Paul Bell2
Glen Boreham3
Edward Byrne
Alison Deans3
Andrew Denver
Donal O'Dwyer
Total4
Short-term
benefits
Post-employment
benefits
Fees
438,000
438,000
230,731
196,000
54,154
220,654
85,969
195,846
176,000
192,154
76,200
225,769
196,000
205,846
186,000
Accrued
interest1
-
Superannuation
benefits
19,308
Total
457,308
-
-
-
-
-
-
9,586
10,729
-
-
-
-
-
-
18,783
456,783
19,308
250,039
17,986
213,986
5,145
59,299
19,308
239,962
8,167
94,136
18,248
223,680
16,720
203,449
18,255
210,409
7,239
83,439
19,308
245,077
17,986
213,986
18,686
224,532
17,547
203,547
1,709,000
9,586
132,421 1,851,007
Year
FY16
FY15
FY16
FY15
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
FY15
FY16
1.
2.
3.
4.
1,408,323
Amounts accrued for interest during the financial year relating to the directors’ retirement scheme.
Retired 17 October 2014.
Appointed 1 January 2015.
The year-on-year changes in Board fees reflect the appointment of two additional directors half way through FY15 and loss of one, changes in Board committee
membership and increases to committee fees. There have been no increases in Board NED base fees for four years.
109,573 1,528,625
10,729
FY15
The table below indicates Cochlear Limited shareholdings:
Held at 1 July 2015
Purchases
Sales
Cochlear Limited
ordinary shares held as
at 30 June 2016
Rick Holliday-Smith
Yasmin Allen
Glen Boreham
Edward Byrne
Alison Deans
Andrew Denver
Donal O’Dwyer
9,250
3,500
-
3,250
2,000
4,000
6,000
750
-
2,800
-
-
-
-
Total intrinsic value of
Cochlear Limited securities
as at year end ($)1
968,300
338,905
271,124
314,698
193,660
387,320
580,980
10,000
3,500
2,800
3,250
2,000
4,000
6,000
-
-
-
-
-
-
-
-
Total
1.
In line with the Share Ownership Policy (available on our website), the intrinsic value of Cochlear Limited ordinary shares is calculated using the average daily share
price over the previous 12 months ($96.83), as at closing on the ASX up to 30 June 2016, times the number of shares.
28,000
3,550
31,550
3,054,987
All NEDs are compliant with the Share Ownership Policy which allows an additional three year window to increase holdings where
increased directors’ committee responsibilities have resulted in increased fees.
36
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3. Executive remuneration
3.1 Executive remuneration table – Audited statutory disclosure (accounting cost to Cochlear)
Year
Fixed remuneration
Variable remuneration
Short-term
Other employee costs
Total
Short-term incentive (STI)2
Long-term incentive (LTI)6, 7
Total
Salary
Non-
monetary
benefits1
Superann-
uation
benefits
Long
service
leave
Cash STI and
special
incentive3
Deferred
STI4,5
Value of
options
FY16
609,526
FY15
1,431,029
-
-
9,654
-
619,180
204,759
32,056
80,829
18,783
32,349
1,482,161
1,338,462
518,549
1,055,244
Value of
performance
shares/
rights
-
-
317,644
-
936,824
33.9%
2,912,255
1,548,418
5,942,834
49.0%
End of
service
Total
Proportion of
total
remuneration
Performance
related
%
FY16
1,341,409
285,865
-
FY15
786,650
26,797
16,290
FY16
674,740
105,353
126,953
FY15
611,858
91,970
103,860
-
-
-
-
1,627,274
1,200,924
192,418
481,906
252,384
2,127,632
829,737
464,806
72,305
186,605
81,625
805,341
907,046
374,074
91,517
150,138
188,994
804,723
807,688
342,690
55,609
141,217
58,134
597,650
FY16
528,951
FY15
387,709
FY16
552,032
FY15
515,161
-
-
-
-
19,308
13,563
561,822
371,964
54,991
249,140
61,731
737,826
14,088
-
401,797
212,412
21,145
51,190
104,771
389,518
19,308
(2,274)
569,066
348,992
79,795
140,048
162,097
730,932
18,783
6,416
540,360
311,250
46,396
115,591
85,174
558,411
FY16
585,992
26,073
22,451
-
634,516
335,386
32,039
56,921
18,284
442,630
FY16
583,293
FY15
543,609
FY15
143,181
-
-
-
191,351
27,680
802,324
435,969
98,370
147,082
223,846
905,267
157,325
17,325
718,259
381,709
56,973
78,902
168,892
686,476
5,743
9,852
158,776
23,397
(15,737)
(10,692)
145,943
142,911
Total
FY16
4,875,943
417,291
389,025
38,969
5,721,228
3,272,068
581,186
1,306,064
907,336
6,066,654
-
-
-
-
-
-
-
-
-
-
-
-
-
3,754,906
56.7%
1,635,078
49.3%
1,711,769
47.0%
1,405,338
42.5%
1,299,648
56.8%
791,315
49.2%
1,299,998
56.2%
1,098,771
50.8%
1,077,146
41.1%
1,707,591
53.0%
1,404,735
48.9%
301,687
47.4%
11,787,882
51.5%
Amounts $
Name
Chris
Roberts8, 9
Chris
Smith9, 10
Richard
Brook
Dig
Howitt11
Jan
Janssen
Tony
Manna12
Neville
Mitchell13
Mark
Salmon14
FY15
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
48.4%
1. Benefits include housing allowances for expatriate KMP, car allowances and health insurance which are market based payments.
2. STI and LTI are awarded annually, with cash incentives paid half yearly. The service and performance criteria are set out in this report.
3. During the year the Board approved a Special Incentive program specific to the One Cochlear change initiative.
4. Deferred STI is granted in performance rights and deferred for a further two years. The cost of the plan is expensed across three years. The FY16 amount represents
the portion of the FY14, FY15 and FY16 deferred STI expensed in FY16. The FY15 amount represents the portion of the FY14 and FY15 deferred STI expensed in
FY15. The Cochlear Executive Incentive Plan (CEIP) was introduced in FY14, so there was no FY13 grant to be included in the FY15 expense.
5. FY15 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. FY15 also includes a credit of $15,737 for Mark Salmon, reversing prior years’ expenses on plans that have been forfeited.
6. 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
non-market 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.
7. FY15 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.
8. FY15 included an 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 to bring his total reward for FY15 to $5,942,834. In FY16, Chris Roberts did not accrue any more end of service amounts.
9. Chris Roberts was an executive director and retired on 31 August 2015. Chris Smith is an executive director in FY16.
10. Chris Smith’s remuneration increase reflects an increase in base salary due to his promotion to the CEO&P role, allowances due to his relocation to Sydney,
overachievement on STI and currency variations.
11. Dig Howitt became a KMP on 29 September 2014. Values in this table relate only to the period he was a KMP.
12. Tony Manna became a KMP on 1 July 2015. Values in this table relate only to the period he was a KMP.
13. Neville Mitchell remains on a transitional defined contribution superannuation plan based on a fixed percentage of base and STI.
14. Mark Salmon retired on 26 September 2014.
37
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3.2 Executive remuneration table - Unaudited
The table below aims to show actual remuneration received during the year including equity vesting from prior years, and separately to
show actual remuneration granted during the year including equity deferred to future years:
Amounts $
Year
Fixed remuneration and
cash incentives
received
Proportion of STI
Past at risk remuneration received
during year
Actual
remuneration
received
Name
Fixed
remuneration1
Special
incentive2
STI Cash
Incentives3
Achieved
%
Forfeited
%
Value of
vested
deferred
STI
Intrinsic value
of vested
performance
shares (LTI)4
Future at risk
remuneration received
Deferred
STI5
LTI (equity)
granted
during
year6
Chris Roberts7
Chris Smith
FY16
FY15
FY16
FY15
619,180
1,449,812
1,627,274
829,737
-
-
-
-
204,759
108.1%
1,338,462
120.0%
1,200,924
107.7%
464,806
109.4%
-
-
-
-
Richard Brook
FY16
907,046
15,000
359,074
96.8%
3.2%
Dig Howitt8
Jan Janssen
Tony Manna9
FY15
FY16
FY15
FY16
FY15
FY16
807,688
-
342,690
101.8%
548,259
33,500
338,464
112.0%
-
-
401,797
-
212,412
97.9%
2.1%
571,340
15,000
333,992
106.1%
533,944
-
311,250
106.6%
634,516
15,000
320,386
108.7%
Neville Mitchell
FY16
774,644
22,000
413,969
107.3%
Mark Salmon10
Total
FY15
FY15
FY16
FY15
700,934
148,924
-
-
381,709
106.8%
23,397
100.0%
5,682,259
100,500
3,171,568
4,872,836
-
3,074,726
-
-
-
-
-
-
-
-
-
-
Intrinsic
value of
vested
options4
2,583,213
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,407,152
-
-
2,788,274
401,538
1,300,967
490,489
66,980
3,385,667
360,340
1,306,785
-
469,399
-
-
-
-
-
-
1,294,543
139,442
329,947
1,750,519
107,722
328,759
1,150,378
102,807
249,928
260,427
1,180,650
101,539
253,191
-
614,209
63,724
234,804
302,913
105,863
1,329,108
100,197
254,020
-
287,046
-
-
845,194
93,375
238,188
1,256,948
96,116
193,307
124,962
262,089
1,597,664
124,191
306,439
-
-
-
-
1,082,643
114,513
281,347
172,321
-
-
4,258,022
695,359
13,907,708
890,105
2,642,501
-
-
7,947,562
915,399
2,635,181
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. During the year the Board approved a Special Incentive program specific to the One Cochlear change initiative.
3. Represents STI payments earned during the financial year. For example, FY16 data includes first half STI payments received in February, and second half STI payments
which are accrued at year end, and received in August 2016, after the reporting year end.
4. Reflects the intrinsic value of vested employee share scheme benefits at the date of exercise. In the case of options, this represents the market price on the date of
exercise (or market price on date of vesting in the case of unvested options) less the exercise price multiplied by the number of options. For performance shares, this
represents the share price on the date of exercise.
5. Deferred STI in FY16 reflects STI achievement of between 97% and 112% for performance in FY16.
6. Represents the value of equity grants (options and/or performance rights) calculated at the date of grant using the percentage of salary reflected in the remuneration mix.
These grants were awarded during the year, are unvested and will be subject to achievement of future performance hurdles.
7. For FY15, Chris Roberts also received an end of service payment of $1,548,418.
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 2017) and the LTI value (granted in October 2014) are included in full as they were granted after he became a KMP.
9. Tony Manna became a KMP on 1 July 2015.
10. Mark Salmon retired on 26 September 2014.
The table is not mandatory, and there is no prescribed approach to providing it. Our approach in FY16 has changed from FY15 as
follows:
Cochlear’s STI is paid half yearly. In the FY15 report, the STI shown comprised the payments paid during the year i.e. August 2014
payment relating to second half performance FY14, and February 2015 payment relating to first half performance FY15. We
believe shareholders are interested in the STI earned during the year. The FY16 approach adds the two half year performances for
FY16. We have restated the FY15 numbers to include the February 2015 and the August 2015 payments; and
in the FY15 report, the value disclosed for the LTI granted in the year and deferred to future years was calculated in accordance
with IFRS-2. For FY16, we have shown the intended value of the grant under the remuneration framework (i.e. a percentage of
base or fixed remuneration). We believe this simpler approach meets the needs of shareholders. We have restated the FY15
numbers to reflect this new approach.
38
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3.3 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.
Executive KMP remuneration objectives are delivered through three categories of remuneration, as illustrated below:
Executive KMP remuneration objectives
Attract, motivate and retain
executive talent across
diverse geographies
Differentiate reward to drive
performance including values
and behaviours components
An appropriate balance of fixed
and at risk components
focused on long-term strategy
and shorter-term milestones
Alignment to shareholder
interests and 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 relative to market, 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 strategic
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 a
further 2 years
Equity in options and 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 quantum will take account of
relevant market data considering the
individual’s expertise and performance in
the role
Performance incentive is directed to
achieving Board approved targets,
reflective of market circumstances
LTI is intended to reward executive KMP
for sustainable long-term growth aligned
to shareholders’ interests
Total target remuneration
TTR is positioned to achieve the remuneration objectives outlined above. Outperformance generates higher reward. The remuneration
structure is designed to ensure top quartile executive KMP remuneration and is only achieved if Cochlear outperforms
39
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3.4 Remuneration composition mix and timing of receipt
3.4.1 Current remuneration mix
Cochlear aims 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:
3.4.2 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
FY16
TFR
STI cash
opportunity
STI equity deferral (2 years)
LTI
TFR
FY17
STI cash
opportunity
STI equity deferral (2 years)
LTI
TFR
FY18
STI cash
opportunity
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 rolling 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.
3.5 Total fixed remuneration explained
Total fixed remuneration includes all remuneration and benefits paid to executive KMP calculated on a total employment cost basis. In
addition to base salary, executives may receive benefits in line with local practice, such as health insurance, car allowances and
relocation allowances. Retirement benefits are generally paid in line with local legislation and practice.
Executive KMP remuneration is tested regularly for market competitiveness by reference to appropriate independent and externally
sourced comparable benchmark information, taking into account an executive’s responsibilities, performance, qualifications, experience
and geographic location. The review examines fixed and variable components separately and in totality. Any adjustments to executive
KMP remuneration are approved by the Board, based on P&CC and CEO&P recommendations.
40
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3.6 Variable (at risk) remuneration explained
As set out in section 3.4, variable remuneration forms a significant portion of executive KMP remuneration opportunity. Cochlear’s
performance hurdles are at the higher end of the “difficult to achieve” spectrum compared to market practice within ASX 100
companies. 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:
3.6.1 Short-term incentives (STI)
Purpose
The STI arrangements at Cochlear are designed to reward executives for achievement against annual
performance targets set by the Board at the beginning of the performance period. The STI program is
reviewed annually by the P&CC and approved by the Board.
All STI awards to executive KMP are approved by the P&CC and Board. The deferred STI is designed
to encourage a longer-term focus, and ensure reward is linked to longer-term outcomes from shorter-
term goals.
Performance targets
For FY16, 80% of STI was based on financial targets set by the Board and having regard to prior year
performance, global market conditions, the competitive environment, future prospects and the Board
approved budgets. The specific targets are not detailed in this report due to their commercial
sensitivity.
For FY16, two financial targets (sales revenue and EBIT) had equal weighting. The weighting between
Cochlear group and regional financial goals depends on the responsibilities and scope of influence of
the individual executive KMP.
In FY16, individual performance goals accounted for a 20% weighting for executive KMP based on a
range of strategic objectives determined each year.
For FY17, the weighting will change to 60% financial and 40% One Cochlear goals. One Cochlear
goals are specific to the individual and aligned to Cochlear’s strategic priorities.
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. The deferred STI target is a percentage of base pay. Based on
performance as measured under the (cash) STI plan, grants are calculated at the end of each year and
then held for two years until vesting. This achieves additional retention and alignment of executives
with longer-term shareholder interests.
The number of performance rights is determined based on Black-Scholes-Merton valuations (without
discounting for performance) using the Cochlear five day volume weighted average share price
following the announcement of full-year results in August each year.
Once the performance rights are awarded, there are no further performance measures other than
continued tenure for the vesting period (two years).
3.6.2 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. This 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 target 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 FY13 was provided under the Cochlear Executive Long Term Incentive Plan (CELTIP). Previous
reports have detailed that plan.
The Cochlear Executive Incentive Plan (CEIP) was introduced in July 2013. See section 4.1 for further details.
Under the CEIP, selected senior executives are offered options (being an option at a pre-set exercise price to
acquire a fully paid ordinary share of Cochlear Limited) or performance rights (being a nil exercise price right to
a fully paid ordinary share of Cochlear Limited). A minimum 30% of the LTI value must be taken as options.
The share price at vesting must be greater than share price at grant in order for any reward to be delivered
under the option program.
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 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 and performance rights lapse.
41
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
Performance hurdles
and vesting schedule
Equity grants to executive KMP are in two equal tranches assigned 50% to growth in EPS and 50% subject to
relative TSR. The performance conditions applying to the latest grant (FY16) were as follows:
Compound annual growth rate in EPS (3 years)
Ranking of TSR against S&P/ASX 100 (3 years)
Performance
< 10%
10% to 20%
> 20%
% of equity to vest
0%
50% to 100% pro-rata
100%
Performance
< 50th percentile
50th to 75th percentile
> 75th percentile
% of equity to vest
0%
40% to 100% pro-rata
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. Under the CEIP, 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 the LTI plan.
LTI allocation
The size of individual LTI grants for executive KMP is determined in accordance with the Board approved
remuneration strategy mix. See section 3.4.
The target LTI dollar value for each executive is converted to options and 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:
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.
3.7 Other remuneration elements and disclosures relevant to executive KMP
3.7.1 Minimum shareholding guidelines
In March 2007, the Board approved minimum shareholding guidelines for NEDs and executive KMP. All NEDs are requested to
accumulate a minimum shareholding in Cochlear shares equivalent in value to the prior year’s fees. NEDs have three years in which to
build this requirement, and an additional three years if an increase is required resulting from increased committee responsibilities. 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. They are not required to purchase shares for this purpose, but are restricted from selling shares
derived from vesting equity plan awards until they accumulate their minimum shareholding. The value of shareholdings for the purpose
of these guidelines is based on the 365 day average Cochlear Limited closing share price for the prior year.
All NEDs and executive KMP are compliant with the share ownership guidelines. The guidelines are available on the Cochlear
website.
3.7.2 Clawback
Cochlear implemented a Clawback Policy to take effect from 1 July 2014 to meet good governance practice. The policy is available on
the Cochlear website. There have been no circumstances to date where the policy was invoked.
3.7.3 Hedging and margin lending prohibition
In line with good corporate governance, Cochlear 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.
Under the Cochlear Trading Policy and in accordance with the Corporations Act 2001, equity granted under Cochlear equity incentive
schemes must remain at risk until vested, or until exercised if options. 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 options or performance rights allocated.
Cochlear also prohibits 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.
42
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
3.7.4 Cessation of employment provisions
On 26 May 2015, the Company announced that Chris Roberts would be stepping down as CEO/P on 31 August 2015. In keeping with
the terms of Chris Roberts’ executive service contract entered into on 1 February 2004, Chris Roberts received an end of service
payment of $1,410,801, plus $137,617 in statutory entitlements. In line with IFRS, these were accrued at 30 June 2015 and were paid
on 31 August 2015.
The Board used its discretion to permit Chris Roberts to retain 123,023 options from the 2013 CEIP and 2,781 performance rights from
the 2013 CEIP (deferred STI) subject to existing performance hurdles and timeframes. Awards from the 2014 CEIP LTI grant were
forfeited (see the table in section 4.2.3 for more details).
3.7.5 Service contracts
Cochlear does not enter into service contracts for executive KMP. The terms for executive KMP meet local employment law
requirements. Key provisions are similar but do, on occasion, vary to suit different needs.
The following sets out details of the employment agreements relating to executive KMP:
Length of contract
Permanent contracts until notice is given by either party.
Notice periods
Executive KMP are required to give between 60 days’ and six months’ written notice.
Cochlear is required to give between 60 days’ and 12 months’ written notice (exact period specified in
each contract).
Resignation
On resignation, unless the Board determines otherwise, all unvested STI or LTI benefits are forfeited.
Redundancy
If Cochlear terminates employment for reasons of redundancy, under Cochlear policy a severance
payment comprises up to 12 months’ fixed pay.
STI and LTI benefits may be allowed to remain subject to performance criteria and vesting date, on a pro-
rata basis, 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, in full or on a pro-rata basis.
Termination for
serious misconduct
Cochlear may immediately terminate employment at any time in the case of serious misconduct, and
executive KMP will only be entitled to payment of fixed pay 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 equity instruments provided to the employee on vesting of STI or LTI awards that are held in
trust, or subject to a holding lock, will be forfeited.
At the Board’s discretion, Cochlear may seek reimbursement of amounts previously paid (see section
3.7.2 (Clawback)).
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 executive KMP are subject to post-employment restraints for up to 12 months.
43
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
4. 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.
4.1 Employee share schemes operated by Cochlear
Plan details
Type of
instruments
Details
Purpose
Issue of ordinary shares annually to
eligible employees.
Cochlear
Employee Share
Plan (CESP)
Ordinary
shares held
under holding
lock
Date
established:
1999
APAC Employee
Equity Plan
(AEEP)
Service rights
held under
holding lock
Issue of service rights annually to eligible
employees within the Asia Pacific region.
Date
established:
2016
Cochlear
Executive
Incentive Plan
(CEIP)
Date
established:
2013
Performance
rights and
options
A performance incentive scheme
designed to reward participants for
achieving market competitive business
outcomes. Participants receive an award
based on a predetermined formula, as
approved by the Board from time to time
based on market standards and trends.
The purpose of the CESP is to encourage general
employee equity participation through tax
concessional legislation which currently facilitates tax
effective issues of up to $1,000 of shares annually
per eligible employee. Under the September 2015
(FY16) grant, 1,343 employees in Australia and
Belgium each received an award of 12 shares.
Executive KMP are not eligible for this program.
The AEEP replaces the Cash Incentive Plan that was
previously in place for selected Asian countries and
aligns with the CESP via provision of up to $1,000 of
service rights annually per eligible employee. Upon
vesting, each service right converts to one share.
Under the FY16 grant, 112 employees each received
an award of 13 service rights. Executive KMP are not
eligible for this program.
The purpose of the CEIP is to encourage employees
and executives to hold Cochlear shares, and to align
their interests to shareholders’ interests.
Under the LTI, vesting of options or performance
rights occurs only if Cochlear achieves challenging
and market competitive EPS growth and relative TSR
hurdles. The first grant of options and performance
rights under the CEIP was made on 15 October
2013. Also refer to section 3.6.2.
Under the deferred STI, grants are based on
performance in the prior year, and provide more
certainty of building an equity holding as no further
performance hurdles apply other than tenure.
44
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
4.2
Employee share scheme grants to executive KMP
4.2.1 Analysis of share based payments granted as remuneration
The vesting profile of the options and performance shares/rights granted as remuneration to each executive KMP is set out below:
Name
Reward vehicle
Grant date
Vesting date
Number
granted
Options
Number
vested
Number
forfeited/
lapsed
Performance shares/rights1
Number
granted
Number
vested
Number
forfeited/
lapsed
Chris Roberts
FY13 CELTIP
13-Aug-12
17-Aug-15
231,161
115,580
115,581
FY14 CEIP LTI
15-Oct-13
15-Aug-16
123,023
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
-
FY15 CEIP LTI
14-Oct-14
12-Aug-17
60,771
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
-
-
-
-
-
-
-
Total
414,955
115,580
Chris Smith
FY13 CELTIP
13-Aug-12
17-Aug-15
FY14 CEIP LTI
15-Oct-13
15-Aug-16
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
45,063
14,955
-
FY15 CEIP LTI
14-Oct-14
12-Aug-17
15,412
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
Total
Richard Brook
FY13 CELTIP
13-Aug-12
17-Aug-15
FY14 CEIP LTI
15-Oct-13
15-Aug-16
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
FY15 CEIP LTI
14-Oct-14
12-Aug-17
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
Total
Dig Howitt
FY13 CELTIP
13-Aug-12
17-Aug-15
-
69,047
144,477
41,448
7,249
-
7,256
-
12,601
68,554
-
FY14 CEIP LTI
15-Oct-13
15-Aug-16
21,900
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
-
FY15 CEIP LTI
14-Oct-14
12-Aug-17
10,970
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
Total
Jan Janssen
FY13 CELTIP
13-Aug-12
17-Aug-15
FY14 CEIP LTI
15-Oct-13
15-Aug-16
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
-
18,682
51,552
26,491
6,664
-
FY15 CEIP LTI
14-Oct-14
12-Aug-17
11,127
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
Total
Tony Manna
FY13 CELTIP
13-Aug-12
17-Aug-15
FY14 CEIP LTI
15-Oct-13
15-Aug-16
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
FY15 CEIP LTI
14-Oct-14
12-Aug-17
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
Total
Neville Mitchell
FY13 CELTIP
13-Aug-12
17-Aug-15
FY14 CEIP LTI
15-Oct-13
15-Aug-16
FY14 CEIP deferred STI
12-Aug-14
12-Aug-16
FY15 CEIP LTI
14-Oct-14
12-Aug-17
FY15 CEIP deferred STI
18-Aug-15
18-Aug-17
FY16 CEIP LTI
2-Nov-15
17-Aug-18
-
9,736
54,018
18,124
-
-
-
-
10,216
28,340
10,928
13,723
-
8,168
-
7,159
-
-
60,771
-
-
176,352
22,532
-
-
-
-
-
22,531
-
-
-
-
-
22,531
20,724
22,532
20,724
-
-
-
-
-
-
-
-
-
-
-
3,617
993
3,293
1,448
2,402
-
-
2,781
11,821
5,063
-
19,665
1,577
3,198
1,199
2,998
2,027
5,641
-
-
-
-
-
-
-
788
-
-
-
-
-
-
-
-
11,821
-
-
11,821
789
-
-
-
-
-
16,640
788
789
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,724
20,724
11,753
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,245
13,246
-
-
-
-
-
-
-
-
-
-
13,245
9,062
13,246
9,062
-
-
-
-
-
-
-
-
-
-
9,062
5,464
9,062
5,464
-
-
-
-
-
-
-
-
-
-
6,095
3,047
3,048
-
714
2,133
1,066
-
10,008
2,473
3,325
725
2,164
1,177
1,856
-
-
-
-
-
-
-
-
-
-
3,047
1,236
3,048
1,237
-
-
-
-
-
-
-
-
-
-
11,720
1,236
1,237
-
-
1,359
-
1,542
834
3,735
6,120
2,934
893
3,707
1,444
3,184
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,060
3,060
-
-
-
-
-
-
-
-
-
-
1.
39,978
For grants made under the CELTIP for 2012, participants were granted either options or performance shares, so all holdings referred to under the “Performance shares/rights” columns granted for
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.
18,282
3,060
5,464
5,464
3,060
Total
45
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
The options granted in FY16 have an exercise price of $82.89 and an expiration date of 16 March 2019. Fair values of FY16 option and
performance rights granted under the LTI plan are as follows:
Fair value (IFRS-2)
EPS based
TSR based
Options
$14.70
$12.41
Performance rights
$77.11
$54.43
4.2.2 Exercise of options and performance shares/rights granted as remuneration
During FY16, 182,044 options were exercised by executive KMP. The FY13 CEIP grant met the EPS hurdle so there was a 50%
vesting from this grant.
There are no amounts unpaid on the shares issued as a result of the exercise of the options in prior years.
4.2.3 Analysis of movement in options and shares
The tables below detail movements in number and value during FY16 of:
held by executive KMP.
options over ordinary shares of Cochlear Limited acquired under the CELTIP and CEIP LTI; and
performance shares/rights acquired under the CELTIP, CEIP LTI and CEIP deferred STI,
Options
Opening
Granted in year
Exercised in year
Chris Roberts3
Chris Smith
Richard Brook
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
Total
Performance
shares/rights
Number
Number
Value ($)1
Number
414,955
75,430
55,953
32,870
44,282
18,124
32,819
-
69,047
12,601
18,682
9,736
10,216
7,159
-
115,580
935,771
170,777
253,191
131,949
138,454
97,024
22,531
20,724
-
13,245
4,500
5,464
Intrinsic
value ($)2
2,583,213
490,489
469,399
-
302,913
185,085
124,962
Forfeited/
lapsed in
year
Number
176,352
22,532
20,724
-
13,246
9,062
5,464
Closing
Number
N/A
99,414
27,106
51,552
27,527
14,778
29,050
674,433
127,441
1,727,166
182,044
4,156,061
247,380
249,427
Opening
Granted in year
Exercised in year
Number
LTI
number
LTI value
($)1
Deferred
STI
number
Deferred
STI value
($)4
Number
Intrinsic
value ($)5
Forfeited/
lapsed in
year
Number
Closing
Number
Chris Roberts3, 6
14,602
Chris Smith
Richard Brook
Dig Howitt
Jan Janssen
Tony Manna
8,972
7,903
8,942
8,687
1,359
-
5,641
2,402
-
-
371,014
157,982
-
1,856
122,071
834
54,853
Neville Mitchell
13,654
3,184
209,415
5,063
2,027
1,448
1,066
1,177
1,542
1,444
401,496
160,741
114,826
84,534
93,336
122,281
114,509
-
788
-
3,047
1,236
-
-
11,821
66,980
-
260,427
105,863
-
789
-
3,048
1,237
-
N/A
15,063
11,753
3,913
9,247
3,735
3,060
262,089
3,060
12,162
13,767
Total
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 performance rights
granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in each of FY16 to FY18).
1,091,723
695,359
915,335
13,917
55,873
64,119
19,955
8,131
2. The intrinsic value of exercised options is calculated as the closing market price of Cochlear shares on the ASX on the date of exercise less the applicable exercise price
times the number of options.
3. For Chris Roberts closing balances at 30 June 2016 have not been disclosed as he retired on 31 August 2015.
4. Deferred STI value represents performance rights under the CEIP deferred STI plan.
5. 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.
6. The “Granted in year” deferred STI performance rights were forfeited at the discretion of the Board at the end of Chris Roberts’ service on 31 August 2015.
46
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
4.3 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 ($)
Exercise period
Issued
Exercised Forfeited/lapsed
At report date
Current net
value of
outstanding
options as at 30
June 2016 ($)1
13-Aug-12
15-Oct-132
14-Oct-142
2-Nov-152
759,828
328,885
416,948
224,314
138,963
162,451
-
-
-
10,239
60,771
12,460
13,995
214,075
78,192
149,991
Total
328,885
1. Share price as at 30 June 2016 was $121.25.
2. Lapsed options from unvested grants relate to plan members who have departed Cochlear.
1,285,556
500,418
456,253
62.78
Aug-15 to 30-Jun-17
818,288
59.13
Aug-16 to 10-Mar-17
13,298,339
68.56
Aug-17 to 9-Mar-18
82.89
Aug-18 to 16-Mar-19
4,119,936
5,753,655
23,990,218
The total current net value of the options is equivalent to 197,857 shares. In addition, there are 140,058 unvested performance rights
and 56,959 shares held under holding lock. The total potential dilution under employee equity plans is equivalent to 394,874 shares or
0.7% of issued capital.
4.4 KMP equity interests - Audited
In accordance with the Corporations Act 2001 (section 205G(1)), Cochlear is required to notify the interests (shares and rights to
shares) of directors to the ASX. In the interests of transparency and completeness of disclosure, this information is provided for each
NED in section 2.3 (as required under the Corporations Act 2001) and all executive KMP as well. Please refer sections 3.7.1 and 3.7.3
(Minimum shareholding guidelines and Hedging and margin lending prohibition).
The table below indicates Cochlear Limited shareholding including any vested but unexercised options and performance shares:
Executive KMP
Held at 1 July
2015
Purchases
Received on
exercise of
options and
perform-
ance shares
Sales
Cochlear
Limited
ordinary
shares held
as at 30
June 2016
Vested options
over
Cochlear
Limited
ordinary
shares1
Policy value of
Cochlear
Limited
securities
as at year
end ($)2
Executive director
Chris Smith
Other executive KMP
Richard Brook
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
-
7,700
21,351
5,898
-
11,000
Total executive KMP
1. The number of vested but unexercised options.
2.
45,949
-
-
-
-
-
-
-
23,319
5,031
18,288
8,000
21,398
15,379
20,724
3,047
14,481
4,500
8,524
74,595
20,424
3,000
5,000
4,500
8,524
46,479
-
-
-
-
1,770,827
774,640
2,071,968
1,489,149
-
4,562
77,668
11,000
74,065
-
1,065,130
4,562
7,249,382
In line with the Share Ownership Policy (available on our website), the Policy value of Cochlear Limited ordinary shares is calculated using the average daily share price
over the previous 12 months as at closing on the ASX up to 30 June 2016, times the number of shares. The Policy value of vested options is calculated using the
average daily share price over the previous 12 months as at closing on the ASX up to 30 June 2016 less the applicable exercise price times the number of options
(negative values are treated as zero in the totals). The Policy allows only half of the monetary gain of vested but unexercised options. Total Policy value of securities is
therefore the sum of the value of shares plus half of the monetary gain of unexercised options.
All executive KMP are compliant with the minimum shareholding guidelines.
47
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
The table below indicates any unvested options and performance rights issued to executive KMP but still subject to performance
hurdles and deferred STI service conditions:
Executive director
Chris Smith
Other executive KMP
Richard Brook
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
Unvested options over
Cochlear Limited ordinary
shares1
Unvested LTI
performance rights over
Cochlear Limited
ordinary shares2
Unvested deferred STI
performance rights over
Cochlear Limited ordinary
shares3
Total intrinsic value of
unvested options and
performance rights as at
year end ($)4
99,414
11,837
3,226
3,788,427
27,106
51,552
27,527
14,778
29,050
9,312
2,133
7,345
834
9,825
2,441
1,780
1,902
2,901
2,337
2,079,118
1,870,611
1,822,701
595,288
2,322,688
Total executive KMP
249,427
41,286
14,587
12,478,833
1. The number of unvested options.
2. The number of unvested CEIP LTI performance rights.
3. The number of unvested CEIP deferred STI performance rights.
4. The intrinsic value of unvested performance rights calculated as at the closing Cochlear Limited share price on the ASX on 30 June 2016 times the number of
performance rights and the intrinsic value of unvested options calculated as at the closing Cochlear Limited share price on the ASX on 30 June 2016 less the applicable
exercise price times the number of options (negative values are treated as zero in the totals).
All executive KMP are compliant with the Share Ownership Policy (minimum shareholding requirements).
XX
48
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
5. Remuneration governance
This section of the Remuneration Report describes the role of the Board and the P&CC, and the use of remuneration consultants when
making remuneration decisions.
The Board is responsible for all areas of Cochlear’s strategy and policy related to its people. Consistent with this responsibility, the
Board has established the P&CC which comprises solely independent NEDs. The role of the P&CC is set out in its Terms of
Reference, which is reviewed annually and was last revised and approved by the Board in May 2016. It is available on the Cochlear
website (www.cochlear.com) through the Investor Centre. In addition, the Remuneration Policy and the Corporate Governance
Statement are available on the Cochlear website. The Corporate Governance Statement shows how the ASX Corporate Governance
Council’s Corporate Governance Principles and Recommendations are met. Principle 8 relates to remuneration.
The Remuneration Policy for both NEDs and executive KMP is designed to attract and retain high calibre people.
The P&CC’s role and interaction with Board, internal and external advisors, as illustrated below:
Reviews, applies judgement and, as appropriate, approves the P&CC’s recommendations.
The Board
The People & Culture Committee
The P&CC operates under the delegated authority of the Board.
The P&CC is empowered to source any internal resources and obtain external independent professional advice it considers
necessary to enable it to make recommendations to the Board on the following:
Remuneration policy,
composition and
quantum of
remuneration
components for
executive KMP, and
performance targets
Remuneration policy in
respect of NEDs
Talent management
policies and practices
including
superannuation
arrangements
Design features of
employee and
executive STI and LTI
plan awards, including
setting of performance
and other vesting
criteria
External consultants
Internal resources
In FY16, data was provided in relation to salary benchmarking, but the P&CC did not seek advice from external consultants. Fees paid
for this data were not material to either party (i.e. less than $50,000).
49
DIRECTORS’ REPORT Cochlear Limited for the year ended 30 June 2016
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 2016, see Note 2.6 to the financial statements.
Lead auditor’s independence declaration
The lead auditor’s independence declaration is set out on page 51 and forms part of the Directors’ Report for the financial year ended
30 June 2016.
Rounding off
The Company is of a kind referred to in Australian Securities and Investments Commission (ASIC) (Rounding in Financial/Directors’
Reports) Instrument 2016/191 (Rounding instrument) dated 24 March 2016 and in accordance with that Instrument, 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 9th day of August 2016.
Signed in accordance with a resolution of the directors:
Director
Director
50
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 2016 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
Cameron Slapp, Partner
Sydney, 9 August 2016
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.
51
INCOME STATEMENT Cochlear Limited and its controlled entities for the year ended 30 June 2016
Revenue
Cost of sales
Gross profit
Selling and general expenses
Administration expenses
Research and development expenses
Other income
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 57 to 83 are an integral part of these consolidated financial statements.
Note
2.2
2016
$000
2015
$000
1,130,552
925,630
2.3(a)
(333,593)
(275,320)
796,959
650,310
(326,090)
(260,809)
(79,287)
(59,536)
(143,134)
(127,985)
2.4
3.1
2.5
2.5
14,156
262,604
468
(8,806)
(8,338)
254,266
(65,345)
188,921
330.6
330.0
4,428
206,408
300
(10,405)
(10,105)
196,303
(50,463)
145,840
256.1
254.8
52
STATEMENT OF COMPREHENSIVE INCOME Cochlear Limited and its controlled entities for the year ended 30 June 2016
Net profit
Other comprehensive (loss)/income
Items that will not be reclassified subsequently to the income statement:
Defined benefit plan actuarial losses
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 income/(loss), net of tax
Total comprehensive income
The notes on pages 57 to 83 are an integral part of these consolidated financial statements.
2016
$000
2015
$000
188,921
145,840
(2,000)
(2,000)
(1,806)
(1,806)
(15,832)
5,431
19,305
8,904
6,904
20,089
(32,412)
11,389
(934)
(2,740)
195,825
143,100
53
BALANCE SHEET Cochlear Limited and its controlled entities as at 30 June 2016
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
Investments
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
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
Retained earnings
Total equity
Note
2.7(a)
6.4(b)
5.1
3.2
5.2
5.3
5.4
3.2
6.3
3.2
4.2
5.5
6.3
4.2
5.5
3.2
The notes on pages 57 to 83 are an integral part of these consolidated financial statements.
2016
$000
2015
$000
75,417
281,925
11,454
154,103
6,208
13,921
543,028
1,507
10,713
86,878
224,338
13,755
77,144
414,335
957,363
110,354
12,643
3,978
13,701
45,485
33,675
31,264
251,100
3,547
189,260
13,750
44,027
7,122
257,706
508,806
448,557
158,940
(14,662)
304,279
448,557
72,208
249,744
3,853
145,861
3,606
13,754
489,026
63
1,910
80,809
228,531
-
75,063
386,376
875,402
99,858
24,162
168,159
20,645
43,223
26,652
20,585
403,284
10,961
44,552
11,479
43,394
6,346
116,732
520,016
355,386
144,136
(26,201)
237,451
355,386
54
STATEMENT OF CHANGES IN EQUITY Cochlear Limited and its controlled entities for the year ended 30 June 2016
Amounts $000
Issued
capital
Treasury
reserve
Translation
reserve
Hedging
reserve
Retained
earnings
Total
equity
Share
based
payment
reserve
2015
Balance at 1 July 2014
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
2016
Balance at 1 July 2015
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
(loss)/income
Total comprehensive (loss)/income
Transactions with owners,
recorded directly in equity
Performance shares vested
152,599
(8,463)
(52,630)
476
19,963
217,260
329,205
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20,089
-
-
-
-
-
(32,412)
11,389
20,089
20,089
(21,023)
(21,023)
-
-
-
-
-
-
-
145,840
145,840
(1,806)
(1,806)
-
-
-
20,089
(32,412)
11,389
(1,806)
(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
152,599
(8,463)
(32,541)
(20,547)
26,887
237,451
355,386
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,099
6,001
-
-
-
-
-
(15,832)
-
-
(15,832)
(15,832)
-
-
-
-
-
-
-
-
5,431
19,305
24,736
24,736
-
-
-
-
-
-
-
188,921
188,921
(2,000)
(2,000)
-
-
-
(15,832)
5,431
19,305
(2,000)
6,904
186,921
195,825
-
-
-
-
-
(2,099)
(3,502)
8,342
(106)
-
-
-
-
-
9,203
8,342
(106)
-
(120,093)
(120,093)
Share options exercised
6,704
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
-
-
-
Balance at 30 June 2016
159,303
(363)
(48,373)
4,189
29,522
304,279
448,557
The notes on pages 57 to 83 are an integral part of these consolidated financial statements.
55
STATEMENT OF CASH FLOWS Cochlear Limited and its controlled entities for the year ended 30 June 2016
Note
2016
$000
2015
$000
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
Proceeds from sale of non-current assets
Acquisition of enterprise resource planning system
Acquisition of other intangible assets
Acquisition of investments
Net cash used in investing activities
Cash flows from financing activities
Repayments of borrowings
Proceeds from borrowings
Net proceeds from exercise of share options
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
2.7(b)
5.4
2.6
Cash and cash equivalents, net of overdrafts at 30 June
2.7(a)
The notes on pages 57 to 83 are an integral part of these consolidated financial statements.
1,105,512
(834,884)
5,461
454
(10,745)
(80,685)
185,113
919,280
(694,288)
3,250
297
(7,627)
(32,211)
188,701
(28,858)
(23,897)
1,175
(7,556)
(1,140)
(13,755)
(50,134)
(332,971)
312,971
9,203
(120,093)
(130,890)
4,089
72,208
(880)
75,417
-
(4,530)
-
-
(28,427)
(148,701)
123,701
-
(123,843)
(148,843)
11,431
56,127
4,650
72,208
56
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 2016 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 9 August 2016.
(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 Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191
(Rounding instrument) dated 24 March 2016 and in accordance with that Instrument, 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.
57
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 5.5 – Provisions
Note 5.6 – 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) 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.
58
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 Chief Executive Officer & President, who is also the chief operating decision-
maker.
Information about reportable segments
Americas
EMEA1
Asia Pacific
Total
2016
$000
2015
$000
2016
$000
2015
$000
2016
$000
2015
$000
2016
$000
2015
$000
Reportable segment revenue
519,688
402,962 427,896 377,633 210,547 161,305 1,158,131
941,900
Reportable segment EBIT
276,931
204,879 180,925 172,113
64,842
47,292
522,698
424,284
Reportable segment assets
184,881
149,767 213,843 225,300 124,775
89,096
523,499
464,163
Reportable segment liabilities
49,257
41,524
47,132
42,721
32,772
18,719
129,161
102,964
Other material items
Depreciation and amortisation
Write-down in value of inventories
Acquisition of non-current assets
1. Europe, Middle East and Africa.
1,016
302
741
865
14
351
2,179
2,097
1,046
1,180
250
534
1,769
1,842
175
973
308
347
4,241
727
3,483
4,142
856
2,540
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Revenues
Cochlear
implants
Services
$000
729,171
604,346
$000
289,418
222,458
2016
2015
Profit or loss
Total
Cochlear
implants
$000
1,018,589
826,804
Acoustics
Reportable
segment
revenue
Foreign
exchange
losses on
hedged sales
Consolidated
revenue
$000
139,542
115,096
$000
1,158,131
941,900
$000
(27,579)
(16,270)
$000
1,130,552
925,630
Reportable
segment EBIT
Corporate and
other net
expenses
$000
522,698
424,284
$000
(232,515)
(201,606)
Foreign
exchange
losses on
hedged sales
$000
(27,579)
(16,270)
Net finance
expense
Consolidated
profit before
income tax
$000
(8,338)
(10,105)
$000
254,266
196,303
Reportable
segment
assets
Corporate and
manufacturing
assets
Consolidated
total assets
Reportable
segment
liabilities
Corporate and
manufacturing
liabilities
Consolidated
total
liabilities
$000
523,499
464,163
$000
433,864
411,239
$000
957,363
875,402
$000
129,161
102,964
$000
379,645
417,052
$000
508,806
520,016
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
2016
$000
4,241
727
3,483
2015
$000
4,142
856
2,540
2016
$000
29,250
15,566
47,826
2015
$000
26,110
9,269
25,887
2016
$000
33,491
16,293
51,309
2015
$000
30,252
10,125
28,427
59
2016
2015
Assets and liabilities
2016
2015
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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(a).
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) Profit before income tax has been arrived at after charging the following item:
Operating lease rental expense
2.4 Other income
2016
$000
1,145,492
(27,579)
1,117,913
12,639
1,130,552
2016
$000
308,990
8,310
16,293
333,593
2015
$000
931,390
(16,270)
915,120
10,510
925,630
2015
$000
256,593
8,602
10,125
275,320
26,261
24,420
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. Foreign exchange gains are recognised in accordance with the accounting policy at Note 1.2(d).
Grant received or due and receivable
Net foreign exchange gain
Other income
Total other income
2016
$000
2,579
8,695
2,882
14,156
2015
$000
1,809
1,178
1,441
4,428
60
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
2.5 Earnings per share
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)
Diluted earnings per share
2016
2015
$188,921,000
$145,840,000
56,957,274
56,937,519
175,635
11,669
-
13,693
57,144,578
56,951,212
330.6
256.1
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)
2016
2015
$188,921,000
$145,840,000
57,144,578
98,707
57,243,285
330.0
56,951,212
277,028
57,228,240
254.8
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:
Dollars per
share
Total amount
$000
Franked/
unfranked
Date of payment
2016
Interim 2016 ordinary
Final 2015 ordinary
Total amount
2015
Interim 2015 ordinary
Final 2014 ordinary
Total amount
Subsequent event
Since the end of the financial year, the directors
declared the following dividends:
Final 2016 ordinary
Total amount
1.10
1.00
2.10
0.90
1.27
2.17
1.20
1.20
62,925
100% Franked
1 April 2016
57,168
100% Franked
1 October 2015
120,093
51,374
72,469
123,843
35% Franked
26 March 2015
20% Franked
25 September 2014
68,646
100% Franked
29 September 2016
68,646
The financial effect of the 2016 final dividend will be recognised in the subsequent financial year as it was declared after 30 June
2016.
Dividend franking account
Franked dividends paid during the financial year were franked at the tax rate of 30% (2015: 30%). There are no further tax
consequences as a result of paying dividends other than a reduction in the franking account.
61
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
At 30 June 2016, there are $25,101,000 of franking credits (2015: $21,820,000) 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 $29,409,152
(2015: $24,463,618).
Dividends in excess of the dividend franking account balance will be unfranked.
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
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/liabilities
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
2016
$000
43,367
32,050
75,417
2015
$000
46,864
25,344
72,208
188,921
145,840
335
617
33,491
8,342
30,252
6,004
231,089
182,713
(33,625)
(8,242)
(167)
(11,186)
10,496
(9,546)
4,533
7,656
10,679
(16,574)
185,113
(39,358)
(17,248)
(1,168)
(5,536)
21,214
17,197
14,885
(1,049)
5,434
11,617
188,701
The operating cash account received an average interest rate of 0.47% (2015: 0.58%) per annum. Cash held on deposit for periods
not exceeding 90 days received an average interest rate of 1.51% (2015: 1.70%) per annum.
62
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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
2016
2015
$000
77,907
54,051
$000
(1,270)
1,028
$000
76,637
55,079
Origination
and reversal
of temporary
differences
$000
(11,292)
(4,616)
Total
deferred tax
benefit
Total income
tax expense
$000
(11,292)
(4,616)
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% (2015: 30%)
Increase in income tax expense due to:
Non-deductible expenses
Effect of tax rate in foreign jurisdictions
Decrease in income tax expense due to:
Research and development allowances
Effect of tax rate in foreign jurisdictions
Adjustment for prior years
Income tax expense on profit before income tax
Tax expense relating to items relating to other comprehensive income/(loss) or equity
Total deferred tax recognised in other comprehensive income/(loss) relating to
derivative financial instruments
Total deferred tax recognised directly in equity relating to share based payments
Note
3.2
3.2
Consolidated Entity - Numerical reconciliation between income tax expense and cash taxes paid
Income tax expense on profit before income tax
Timing differences recognised in deferred tax
Effect of tax rate in foreign jurisdictions
Current year tax instalments payable next year
Prior year tax instalments paid this year
Cash taxes paid per statement of cash flows
2016
$000
254,266
76,280
1,604
6
(11,275)
-
66,615
(1,270)
65,345
2016
$000
10,601
106
2016
$000
65,345
6,333
(66)
(9,028)
18,101
80,685
$000
65,345
50,463
2015
$000
196,303
58,891
1,252
-
(9,029)
(1,679)
49,435
1,028
50,463
2015
$000
(9,010)
(920)
2015
$000
50,463
(1,195)
631
(18,101)
413
32,211
63
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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% (2015: 30%)
Increase in income tax expense due to:
Controlled foreign company income
Other non-deductible expenses
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
2016
$000
200,913
9,645
210,558
63,167
2,337
758
(10,163)
(2,894)
-
53,205
203
53,408
2015
$000
154,528
14,068
168,596
50,579
851
-
(8,417)
(4,220)
(1,037)
37,756
(321)
37,435
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
Assets
Liabilities
Net
2016
$000
121
63
29,116
33,932
1,488
-
13,877
340
78,937
(1,793)
77,144
2015
$000
98
57
23,575
30,338
1,380
8,808
10,244
563
75,063
-
75,063
2016
$000
(2,500)
(1,762)
-
-
-
(1,793)
(2,860)
-
(8,915)
1,793
(7,122)
2015
$000
(1,523)
(1,893)
-
-
-
-
(2,930)
-
(6,346)
-
2016
$000
(2,379)
(1,699)
29,116
33,932
1,488
(1,793)
11,017
340
70,022
-
2015
$000
(1,425)
(1,836)
23,575
30,338
1,380
8,808
7,314
563
68,717
-
(6,346)
70,022
68,717
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
Deferred tax assets/(liabilities)
Unrecognised deferred tax liabilities
At 30 June 2016, a deferred tax liability of $11.0 million (2015: $16.7 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.
64
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
Movement in temporary differences during the year
Carrying amount at beginning of financial year
Recognised in the income statement
Recognised in other comprehensive income/(loss)
Recognised directly in equity
Effects of movements in foreign exchange
Carrying amount at end of financial year
Current tax assets and liabilities
Note
3.1
3.1
3.1
2016
$000
68,717
11,292
(10,601)
(106)
720
70,022
2015
$000
52,761
4,616
9,010
920
1,410
68,717
The current tax assets for the Consolidated Entity of $6.2 million (2015: $3.6 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 $13.7 million (2015: $20.6 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
Wages, salaries and annual leave
2016
$000
278,083
21,583
2,925
8,342
-
2015
$000
243,822
19,007
2,806
6,004
1,548
310,933
273,187
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.
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 $1.5 million (2015: $1.3 million) to
defined benefit plans in the year ended 30 June 2016 and expects to contribute $2.4 million in the year ending 30 June 2017.
65
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 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 2016, 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
2016
$000
8,478
20,075
16,932
-
45,485
5,429
7,879
442
13,750
59,235
2015
$000
7,370
18,582
15,723
1,548
43,223
5,105
5,941
433
11,479
54,702
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.
At 30 June 2016, 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
August 20152
November 20151
Total
1. Options and performance shares/rights offered under long-term incentives.
2. Performance rights offered under deferred short-term incentives.
Exercise price of
options
Number of
options
Number of
performance
rights
Contractual life
$62.78
$59.13
N/A
$68.56
N/A
$82.89
13,995
214,075
-
78,192
-
149,991
456,253
-
16,419
32,836
18,702
53,061
17,584
138,602
5 years
4 years
2 years
4 years
2 years
4 years
66
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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:
2 November 2015
EPS
performance
based
conditions
$14.70
TSR based
conditions
$12.41
18 August
2015
STI deferral
service
based
conditions
N/A
14 October 2014
EPS
performance
based
conditions
$11.93
TSR based
conditions
$11.33
12 August
2014
STI deferral
service
based
conditions
N/A
$77.11
$54.43
$85.13
$82.89
$85.13
$82.89
$79.30
$85.13
N/A
$61.33
$39.21
$67.85
$68.56
$67.85
$68.56
$63.11
$67.85
N/A
24.47%
24.47%
24.47%
29.49%
29.49%
29.49%
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
3 - 4 years
3 - 4 years
2 years
3 - 4 years
3 - 4 years
Expected dividend yield
3.41%
3.41%
3.41%
3.48%
3.48%
2 years
3.48%
Risk free interest rate (based on
government bonds)
1.98%
1.98%
1.98%
2.54%
2.54%
2.54%
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
2016
$62.80
$64.23
$62.78
$82.89
$68.67
$62.78
Number of
options
2016
1,038,834
(416,147)
(328,885)
162,451
456,253
13,995
Weighted
average
exercise
Number of
options
price
2015
$64.18
$68.13
-
$68.56
$62.80
-
2015
1,416,328
(516,457)
-
138,963
1,038,834
-
328,885 options were exercised in 2016. The weighted average market share price on the ASX at date of exercise was $86.35
(2015: no options were exercised). The weighted average remaining contractual life of options outstanding at the end of the year is
three years (2015: 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 2016, the Company issued 16,116 shares under the Plan; see Note 6.2.
67
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 G Boreham, AM, Prof E Byrne, AC, Ms A Deans, Mr A Denver and Mr DP
O’Dwyer
Executive director
Dr CG Roberts1 and Mr C Smith2
Other executive KMP
Mr R Brook, Mr D Howitt, Mr J Janssen, Mr NJ Mitchell and Mr T Manna.
1. Retired on 31 August 2015, therefore, only a KMP from 1 July 2015 to 31 August 2015.
2. Appointed executive director on 1 September 2015 and was an other executive KMP from 1 July 2015 to 31 August 2015.
Key management personnel disclosures
The KMP compensation is included in employee expenses as follows:
Short-term
employee
benefits
$
10,274,302
9,021,013
Post-
employment
benefits
$
521,446
444,445
Other long-
term benefits
$
38,969
65,942
Directors’
retirement
benefits
$
9,586
10,729
Share based
payments
End of service
provision
Total
$
2,794,586
3,017,836
$
-
$
13,638,889
1,548,418
14,108,383
2016
2015
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 31 to 49.
The KMP have not received any loans from Cochlear and there have been no other related party transactions with any of Cochlear’s
KMP.
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.
2016
2015
5.2 Property, plant and equipment
Owned assets
Raw
materials
$000
49,248
40,315
Work in
progress
$000
25,512
20,162
Finished
goods
$000
79,343
85,384
Total
inventories
$000
154,103
145,861
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.
68
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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.
Total property, plant and equipment at net book value
Leasehold improvements
2015
$000
2016
$000
Plant and equipment
2015
$000
2016
$000
Total net book value
2015
$000
2016
$000
At cost
Accumulated depreciation
Net book value
34,657
(21,774)
12,883
32,325
193,401
193,703
228,058
226,028
(20,941)
(119,406)
(124,278)
(141,180)
(145,219)
11,384
73,995
69,425
86,878
80,809
Reconciliations of the carrying amounts are:
Opening balance
Additions
Disposals
Depreciation
Effect of movements in foreign
exchange
Net book value
5.3 Intangible assets
Goodwill
11,384
3,930
(185)
(2,359)
113
12,883
7,947
4,796
-
69,425
24,928
(3,398)
67,829
19,101
(617)
80,809
28,858
(3,583)
75,776
23,897
(617)
(1,867)
(17,508)
(18,005)
(19,867)
(19,872)
508
11,384
548
73,995
1,117
69,425
661
86,878
1,625
80,809
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 2016.
69
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
Amortisation
Amortisation is calculated to expense the cost of intangible assets less their 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.
Intangible assets with
indefinite useful
life
Goodwill
Technology
relationship
$000
$000
2016
At cost
Accumulated amortisation
171,356
-
Net book value
Reconciliations of the carrying amounts are:
171,356
1,800
-
1,800
Opening balance
170,503
1,800
Acquisitions
Amortisation
Effect of movements in foreign
exchange
Net book value
2015
At cost
Accumulated amortisation
-
-
853
171,356
170,503
-
Net book value
Reconciliations of the carrying amounts are:
170,503
-
-
-
1,800
1,800
-
1,800
170,259
1,800
Opening balance
Acquisitions
Amortisation
Effect of movements in foreign
exchange
Net book value
Impairment
-
-
244
170,503
-
-
-
1,800
25,859
Intangible assets with finite useful
life
Intangible
assets
Total
Enterprise
resource
planning
system
$000
Acquired
technology,
patents and
licences
$000
Other
intangible
assets
$000
$000
56,880
(33,929)
22,951
25,859
7,556
(10,353)
(111)
22,951
73,278
(47,419)
25,859
28,243
4,530
(6,920)
6
65,322
(37,848)
27,474
29,308
1,140
(2,972)
(2)
27,474
64,110
(34,802)
29,308
32,498
-
(3,165)
(25)
29,308
16,966
(16,209)
757
1,061
-
(299)
(5)
757
16,936
(15,875)
1,061
1,315
-
(295)
41
1,061
312,324
(87,986)
224,338
228,531
8,696
(13,624)
735
224,338
326,627
(98,096)
228,531
234,115
4,530
(10,380)
266
228,531
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.
70
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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:
2016
2015
Americas
$000
86,141
85,540
EMEA
$000
75,341
74,918
Asia Pacific
$000
9,874
10,045
Total
$000
171,356
170,503
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% (2015: 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 13.7% (2015: 14.7%), EMEA 12.4% (2015:
12.3%) and Asia Pacific 13.9% (2015: 14.1%).
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 Investments
The available for sale equity securities were acquired during 2016. These assets are initially measured at fair value, plus any
directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other
than impairment losses which are recognised in the income statement, are recognised in other comprehensive income and
accumulated in the fair value reserve. When these assets are derecognised, the gain or loss accumulated in equity is reclassified to
profit or loss.
5.5 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.
2016
Warranties
Opening balance
Provision made
Provision used
Effect of movements in foreign
exchange
Total provisions
Represented by:
Current
Non-current
Total provisions
$000
25,573
45,759
(34,999)
271
36,604
26,101
10,503
36,604
Legal and
insurance
$000
Product recall Make good
lease costs
$000
$000
5,012
2,607
(3,228)
10
4,401
4,401
-
4,401
15,918
-
(2,898)
-
13,020
3,173
9,847
13,020
2,210
164
(67)
37
2,344
-
2,344
2,344
Patent dispute
Total
$000
21,333
-
-
-
21,333
-
21,333
21,333
$000
70,046
48,530
(41,192)
318
77,702
33,675
44,027
77,702
71
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 2016.
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 “willful” and awarded 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 “willful”. 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 appeals by all parties from the Judgment to the United States Court of Appeals for the
Federal Circuit. Oral argument before a panel of Federal Circuit judges was held on 7 July 2016 and a decision on all appeals is
expected during financial year 2017.
As the patents have expired, the trial Judgment and the Court of Appeals decision 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 District 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.
5.6 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/or 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 legal claims and lawsuits in various countries including 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.
Cochlear carries product liability insurance and has made claims under the policies. The insurers have agreed to indemnify
Cochlear in accordance with the terms and conditions of the policies including deductibles and exclusions. In the opinion of the
72
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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.
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
Share capital
The Company does not have authorised capital or par value in respect of its issued shares.
Note
6.3
2016
$000
117,821
448,557
21%
2015
$000
140,503
355,386
28%
Number of issued shares in
market circulation
Number of shares held in
Trust
Total number of issued
shares
2016
2015
2016
2015
2016
2015
56,957,274
56,937,519
124,501
124,501
57,081,775
57,062,020
On issue 1 July – fully paid
Issued for nil consideration under
Employee Share Plan
16,116
19,755
Issued from the exercise of options
106,746
Options vesting from Trust
Performance shares vesting from Trust
88,098
31,030
-
-
-
-
-
(88,098)
(31,030)
-
-
-
-
16,116
19,755
106,746
-
-
-
-
-
On issue 30 June – fully paid
57,199,264
56,957,274
5,373
124,501
57,204,637
57,081,775
During 2016, Cochlear purchased 134,041 shares on market to satisfy exercise of options.
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.
73
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 $739,755 (2015: $448,093) in
relation to unamortised loan establishment fees.
Loans and borrowings:
Current
Non-current
Total loans and borrowings
Less: Cash and cash equivalents
Net debt
(b) Financing arrangements
2016
Utilised at reporting date
Not utilised at reporting date
Total facilities
2015
Utilised at reporting date
Not utilised at reporting date
Total facilities
Note
2.7(a)
2016
$000
3,978
189,260
193,238
(75,417)
117,821
2015
$000
168,159
44,552
212,711
(72,208)
140,503
Multi-option bank facilities
Other credit facilities
Secured
bank loan
$000
190,000
155,000
345,000
210,000
135,000
345,000
Standby
letters of
credit
$000
6,916
10,951
17,867
4,926
12,856
17,782
Bank
guarantees
$000
2,133
-
2,133
2,218
-
2,218
Unsecured
bank
overdrafts
$000
Secured
bank loan
Bank
guarantees
$000
$000
-
299
299
-
292
292
3,978
1,989
5,967
3,159
1,579
4,738
1,393
222
1,615
1,370
224
1,594
74
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 letters of
credit or bank guarantees. This letter of credit sub-limit currently is AUD 5.0 million. This facility was extended in June 2016 for a
further three year period to 14 June 2019.
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 2016, 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 (2015: AUD 1.6 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.
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.
75
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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
CHF
30 June 2016
Trade receivables
Secured bank loan
Trade payables
Gross balance sheet exposure
30 June 2015
Trade receivables
Secured bank loan
Trade payables
Gross balance sheet exposure
72,845
46,439
-
(13,234)
59,611
-
(5,348)
41,091
5,818
-
(5,025)
793
6,690
752,963
-
(300,000)
(63,160)
(56,470)
(63,133)
389,830
64,746
47,484
6,824
10,384
670,937
-
(14,535)
50,211
-
(4,657)
42,827
-
(5,029)
1,795
-
(300,000)
(58,466)
(48,082)
(87,752)
283,185
616
-
(2,219)
(1,603)
881
-
(2,446)
(1,565)
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 2016, 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 2016, 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 2016
Sell USD
Sell EUR
Sell JPY
30 June 2015
Sell USD
Sell EUR
Sell JPY
Weighted
< 1 year
1 - 2 years
2 - 5 years
average
rate
0.74
0.64
83.76
0.84
0.67
89.17
$000
$000
$000
195,817
188,358
12,210
164,538
151,143
10,335
117,236
109,493
6,575
91,800
87,390
5,392
23,468
27,203
1,359
27,079
24,167
1,447
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 2016, including hedging results and after income tax, by approximately $8.5 million
(2015: $2.3 million) and decreased Cochlear’s equity by $51.8 million (2015: $16.6 million). A 10 percent general decrease in the
value of the AUD against other foreign currencies would have increased Cochlear’s profit by $12.2 million (2015: $8.1 million) and
increased equity by $50.2 million (2015: $11.6 million).
76
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
The following significant exchange rates applied to Cochlear during the year:
AUD 1 =
USD
EUR
GBP
SEK
JPY
Interest rate risk
Average rate
Reporting date spot rate
2016
0.729
0.658
0.494
6.141
2015
0.844
0.697
0.532
6.483
2016
0.740
0.669
0.557
6.285
2015
0.766
0.686
0.487
6.367
85.089
95.725
75.410
94.969
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 $75.4 million
(2015: $72.2 million) and financial liabilities of $193.2 million (2015: $212.7 million).
For the year ended 30 June 2016, 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 $1.1 million (2015: $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:
2016
2015
Americas
EMEA
Asia Pacific
$000
86,115
74,153
$000
108,937
108,374
$000
73,486
54,201
Total
$000
268,538
236,728
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.
77
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 1 – 60 days
Past due 61 – 180 days
Past due 181 – 360 days
Past due 361 days and over
Impairment losses
Trade receivables net of allowance for impairment losses
Other receivables – current
Trade and other receivables
Credit risk management - Cash deposits and forward exchange contracts
2016
$000
2015
$000
199,164
162,018
33,162
13,469
14,924
19,749
280,468
(11,930)
268,538
13,387
281,925
26,644
25,315
13,252
15,192
242,421
(5,693)
236,728
13,016
249,744
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 2016
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
30 June 2015
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
Effective
interest rate
Per annum
Carrying
amount
Contractual
cash flows
$000
$000
< 1
year
$000
1 - 2
years
$000
2 - 5
years
$000
3.76%
0.61%
-
3.99%
0.64%
-
189,260
207,650
3,978
110,354
303,592
3,994
110,354
321,998
7,152
3,994
110,354
121,500
107,110
93,388
-
-
-
-
107,110
93,388
209,552
221,698
173,122
1,798
46,778
3,159
99,858
3,172
99,858
3,172
99,858
-
-
-
-
312,569
324,728
276,152
1,798
46,778
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly different
amounts.
78
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 2016
Assets
Liabilities
Total
30 June 2015
Assets
Liabilities
Total
Carrying
amount
$000
Contractual
cash flows
$000
22,167
(16,190)
5,977
5,763
(35,123)
(29,360)
22,634
(16,400)
6,234
5,877
(35,807)
(29,930)
< 1 year
$000
11,573
(12,756)
(1,183)
3,899
(24,422)
(20,523)
1 - 2
years
$000
8,642
(3,416)
5,226
1,897
(9,445)
(7,548)
2 - 5
years
$000
2,419
(228)
2,191
81
(1,940)
(1,859)
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 values 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.
The equity securities classified as available for sale financial assets are valued using unobservable market inputs (Level 3).
Unobservable inputs are those not readily available in an active market. These inputs are generally derived from other observable
inputs that match the risk profile of the financial instruments and validated against current market assumptions and historical
transactions where available.
79
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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
2016
$
2015
$
1,583,831
1,559,738
58,734
72,094
1,642,565
1,631,832
1,051,398
1,051,398
988,156
988,156
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
Capital expenditure commitments
2016
$000
22,372
82,528
65,312
2015
$000
22,028
79,308
88,387
170,212
189,723
As at 30 June 2016, Cochlear entered into contracts to purchase property, plant and equipment for $4,426,000 (2015: $5,408,000).
80
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
7.3 Controlled entities
Subsidiaries conduct business transactions with various controlled entities. Such transactions include purchases and sales of
certain products, dividends, interest and loans.
Interest held
Country of
incorporation/
formation
2016
%
2015
%
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 Tempe LLC
Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi
Cochlear Verwaltungs GmbH
Cochlear (HK) Limited
Cochlear (UK) Limited
Isitme Implantlari Tibbi Cihazlar ve Saglik Hizmetleri Ltd Sti
Lachlan Project Development Pty Ltd
Medical Insurance Pte Limited
Miaki NV
Nihon Cochlear Co Limited
(i) Divested on 14 December 2015.
(ii) Dormant.
(iii) Deregistered during the year ended 30 June 2016.
(i)
(ii)
(iii)
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
100
Switzerland
100
USA
100
Austria
100
Belgium
100
Sweden
100
USA
100
Canada
100
USA
100
Germany
100
100
Australia
100
Germany
100
UK
100
Australia
100
Australia
100
France
100
Australia
100
Belgium
100
Australia
100
Australia
100
Italy
100
Korea
100
Panama
100
Malaysia
100
USA
100
China
100
India
UAE
100
100
Sweden
100 New Zealand
100
UK
Panama
100
100
Sweden
USA
100
100
Turkey
100
Germany
100
Hong Kong
100
UK
Turkey
100
100
Australia
100
Singapore
100
Belgium
100
Japan
81
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
7.4 Parent entity disclosures
At, and throughout the financial year ended, 30 June 2016, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity:
Net profit
Other comprehensive income/(loss)
Total comprehensive income
Financial position of the parent entity at year end:
Current assets
Total assets
Current liabilities
Total liabilities
Total equity of the parent entity comprising:
Issued capital
Treasury reserve
Translation reserve
Hedging reserve
Share based payment reserve
Retained earnings
Total equity
2016
$000
158,544
24,751
183,295
392,777
816,734
141,427
486,883
159,303
(363)
83
4,189
27,023
139,616
329,851
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.
Parent entity contingencies
The details of all contingent liabilities in respect to Cochlear Limited are disclosed in Note 5.6.
Parent entity capital commitments for acquisition of plant and equipment
As at 30 June 2016, the parent entity entered into contracts but had not provided for or paid to purchase plant and equipment for
$4,420,000 (2015: $4,823,000).
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 on or after 1
July 2016, and have not been applied in preparing these consolidated financial statements. Of the new standards, only the below
are expected to have an effect on the consolidated financial statements of Cochlear.
Cochlear is currently assessing the impact of the changes in the below standards and it is not expected that the changes will have a
significant impact on 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 below standard:
AASB 16 Leases, which becomes mandatory for Cochlear’s 2020 consolidated financial statements.
Cochlear does not plan to adopt these standards early.
82
NOTES TO THE FINANCIAL STATEMENTS Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 2016, see Note 2.6.
83
DIRECTORS’ DECLARATION Cochlear Limited and its controlled entities for the year ended 30 June 2016
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 31 to 49, 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 2016 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 Chief
Executive Officer & President and Chief Financial Officer for the financial year ended 30 June 2016.
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 9th day of August 2016.
Director Director
84
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 2016, 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 2016 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 5.5 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 5.5 Provisions
The patent dispute provision relates to a specific claim that
has been made against the Consolidated Entity.
Our procedures included, amongst others:
Making enquiries of management and the directors to obtain
We focused on this area as a key audit matter due to the:
their view on this significant legal matter;
Quantum of amounts involved; and
Inherent uncertainty in the application of the
measurement aspects of accounting standards to
determine the amount, if any, to be provided for when
an item is subject to dispute and a legal process
between parties.
Evaluating the information held by the Consolidated Entity
and assessing the impact of this evidence on the
appropriateness of the provision in relation to the
measurement criteria in the accounting standards;
Issuing requests for confirmation of all significant litigation to
the Consolidated Entity’s external lawyers. We assessed the
correspondence received from external lawyers by
comparing this to our understanding of views expressed by
management and the directors, and the consistency to facts
and conditions gathered across our work; and
Assessing the Consolidated Entity’s disclosures of the
quantitative and qualitative considerations in relation to the
provision, by comparing these disclosures to our
understanding of the matter.
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.
85
INDEPENDENT AUDIT REPORT to the Members of Cochlear Limited
Key audit matter
How our audit addressed the key audit matter
CI500 product recall provision $13.0 million
Refer to note 5.5 Provisions
On 11 September 2011, the Consolidated Entity
announced the voluntary recall of unimplanted Nucleus
CI500 series implantable devices as a consequence of an
increase in the number of Nucleus CI500 series implant
failures. Certain assumptions have been made by the
Consolidated Entity in providing for costs associated with
the recall.
The CI500 series product recall provision was considered a
key audit matter due to:
The inherent uncertainty associated with estimating
device return and claim rates, and associated future
warranty claim costs;
The inherent subjectivity in assessing the associated
level of insurance cover; and
The potentially significant amounts involved.
These conditions necessitated greater involvement by our
senior team members to challenge the forward looking
assumptions adopted by the Consolidated Entity in their
model that determined the amount provided.
Recoverability of trade receivables $268.5 million
Refer to note 6.4(b) Financial risk management, credit risk
Recoverability of trade receivables is a key audit matter
due to:
The wide ranging characteristics of individual
customers;
The large number of different geographic locations of
customers;
Some customers and locations having experienced
higher days sales outstanding than the Consolidated
Entity’s average days sales outstanding, increasing
their inherent exposure to credit risk;
The use of non-standard and unique contracts with
customers, some of which have longer than average
payment terms specifically negotiated by the
Consolidated Entity; and
The inherent subjectivity involved in the Consolidated
Entity making judgements in relation to credit risk
exposures.
These conditions gave rise to additional audit effort to
gather evidence across the unique profiles of customers
and their accounts receivable, including focusing our work
on those with greater credit risk exposures, whether driven
from relative exposure or location characteristics.
Our procedures included, amongst others:
Assessing the key forward looking assumptions used by the
Consolidated Entity in their model to estimate the provision,
including estimated device return rates and estimated
warranty and associated claim costs, by comparing with
historical actuals;
Assessing the impact on the provision of insurance cover by
comparing the forward looking insurance recovery
assumptions with historical actuals;
Assessing correspondence from the Consolidated Entity’s
external lawyers in response to our requests for information
on claims regarding known or alleged CI500 implant failures
to assist us in challenging the CI500 provision. We
compared this to our understanding of facts and conditions
gathered across our work;
Challenging the key forward looking assumptions used by
the Consolidated Entity in their model to estimate the
provision by performing sensitivity analysis in relation to
estimated device return and claim rates, and estimated
warranty and associated claim costs; and
Assessing the Consolidated Entity’s disclosures of the
quantitative and qualitative considerations in relation to the
provision, by comparing these disclosures to our
understanding of the matter.
Our procedures included, amongst others:
Testing key controls within the credit control process
including credit account application approvals and credit limit
review;
Assessing the recoverability of a sample of outstanding trade
receivable balances by comparing management’s views of
recoverability of amounts outstanding to historical patterns of
receipts, in conjunction with assessing cash received
subsequent to year end for its effect in reducing amounts
outstanding at year end;
Challenging management’s view of credit risk and
recoverability in certain locations by selecting a sample of
overdue customer balances and:
- noting the historical patterns for long outstanding trade
receivables in those locations;
- assessing cash received subsequent to year end for its
effect in reducing amounts outstanding at year end;
- evaluating other evidence including customer
correspondence; and
- questioning management’s knowledge of future
conditions that may impact expected customer receipts.
Assessing the Consolidated Entity’s disclosures of the
quantitative and qualitative considerations in relation to trade
receivables credit risk, by comparing these disclosures to our
understanding of the matter.
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.
86
INDEPENDENT AUDIT REPORT to the Members of Cochlear Limited
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.
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.
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.
87
INDEPENDENT AUDIT REPORT to the Members of Cochlear Limited
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 31 to 49 of the Directors’ Report for the year ended 30 June 2016. 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 2016, complies with Section 300A of the
Corporations Act 2001.
KPMG
Cameron Slapp, Partner
Sydney, 9 August 2016
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.
88
ADDITIONAL INFORMATION
Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report – the
information presented is as at 29 July 2016:
Number of
ordinary shares
held
6,019,800
2,861,780
8,881,580
%
10.52
5.00
15.52
Number of ordinary
shareholders
Shareholdings
Substantial investors
Investor
Baillie Gifford & Co
Hyperion Asset Management Limited
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 – 141 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)
AMP Life Limited
RBC Investor Services Australia Nominees Pty Limited (Bkcust a/c)
Dr Christopher Graham Roberts
BNP Paribas Nominees Pty Ltd (Agency Lending DRP a/c)
Citicorp Nominees Pty Limited (Colonial First State Inv a/c)
HSBC Custody Nominees (Australia) Limited – a/c 2
HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp a/c)
RBC Investor Services Australia Nominees Pty Ltd (Bkmini a/c)
PGA (Investments) Pty Ltd
RBC Investor Services Australia Pty Limited (VFA a/c)
National Nominees Limited (DB a/c)
Australian Foundation Investment Company Limited
Share Direct Nominees Pty Ltd (10015 a/c)
HSBC Custody Nominees (Australia) Limited
Navigator Australia Ltd (MLC Investment Sett a/c)
The 20 largest shareholders held 75.47% of the ordinary shares of the Company.
Number of
ordinary shares
held
15,158,679
10,084,945
9,567,204
2,958,943
1,701,927
763,871
517,403
396,348
385,555
375,868
295,460
287,366
132,400
100,000
100,000
77,361
75,000
74,594
72,518
53,954
25,556
2,542
152
69
14
28,333
%
26.50
17.63
16.72
5.17
2.98
1.34
0.90
0.69
0.67
0.66
0.52
0.50
0.23
0.17
0.17
0.14
0.13
0.13
0.13
0.09
75.47
89
XX
90
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.
FY11 Financial year 2011: 1 July 2010 to 30 June 2011.
FY12 Financial year 2012: 1 July 2011 to 30 June 2012.
FY13 Financial year 2013: 1 July 2012 to 30 June 2013.
FY14 Financial year 2014: 1 July 2013 to 30 June 2014.
FY15 Financial year 2015: 1 July 2014 to 30 June 2015.
FY16 Financial year 2016: 1 July 2015 to 30 June 2016.
FY17 Financial year 2017: 1 July 2016 to 30 June 2017.
FDA United States Food and Drug Administration.
FX Foreign exchange.
IFRS International Financial Reporting Standards.
KMP Key management personnel.
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
11 August 2015
Full year results for year ended 30 June 2015
11 February 2016
Half year results announced
Cochlear announced that sales revenue
increased 15% to $941.9 million on the
previous financial year. Total dividends for
the year were $1.90, 71% franked, a decrease
of 25% on the prior year.
Cochlear announced that sales revenue
increased 32% to $581.7 million on the
previous half year. An interim dividend of
$1.10 was declared, 100% franked, and an
increase of 22% on the prior half.
31 August 2015
CEO handover effective
28 April 2016
Cochlear hosts investor day
Cochlear hosted an investor day for
institutional shareholders and analysts with
presentations made by senior management
across a number of areas of the business.
Cochlear confirmed the appointment of
Chief Executive Officer & President Chris
Smith effective from 1 September 2015.
He was appointed as an Executive Director
from that same date.
20 October 2015
AGM Chairman’s address
Cochlear Chairman, Rick Holliday-Smith,
addressed shareholders at the Annual
general Meeting.
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 FY16 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.
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 18 October 2016 at the Australian
Securities Exchange, Exchange Square Auditorium,
20 Bridge Street, Sydney.
Financial calendar
2016
Dividend record date 8 September
Payment of final dividend 29 September
Annual General Meeting 18 October
2017
Interim profit announcement 14 February*
Interim dividend record date 16 March*
Payment of interim dividend 6 April*
Final profit announcement 17 August*
Annual General Meeting 17 October*
* Indicative dates only.
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, Hugfit, Hybrid, inHear, Invisible Hearing, MET, MP3000,
myCochlear, NRT, Nucleus, 科利耳, Off-Stylet, SmartSound,
Softip, SPrint, True Wireless, the elliptical logo and Whisper are
either trademarks or registered trademarks of Cochlear Limited.
Ardium, Baha, Baha SoftWear, BCDrive, DermaLock, EveryWear,
Vistafix and WindShield are either trademarks or registered
trademarks of Cochlear Bone Anchored Solutions AB.
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 2016
D1062277 ISS1 AUG16