2017 COCHLEAR LIMITED
Annual Report
Contents
1
2
5
6
21
25
27
Financial history
Chairman’s report
CEO & President’s report
Operating and financial review
30
33
51
56
Senior executives
Remuneration report
Statutory report – Directors’ report
Statutory report – Financial statements
Environment, social and governance
103 Shareholder information
People and culture
Board of directors
105 Contact information
Shareholder reports
Cochlear publishes a number of online shareholder reports aimed at improving transparency and making information
easier to access. They are a great companion to the Annual Report and are all available at the Investor Centre of the
website, www.cochlear.com.
Tax Contribution Report
The Tax Contribution Report covers Cochlear’s taxes paid in Australia and globally and
provides detail on 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.
Corporate Governance Statement
The 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.
Cochlear continues to refine and improve the governance framework and practices in place to
ensure they meet the interests of shareholders.
Investor Handbook
The Investor Handbook is an all-in-one reference for shareholders covering Cochlear’s
history, global footprint, product portfolio, the hearing loss market and how the Company’s
products work.
Cochlear Limited Annual Report 2017
Financial history
8%
in FY17
7%
in FY17
18%
in FY17
17%
in FY17
Cochlear implants
units
Sales revenue
$million
Net profit
$million - adjusted1
Dividends
per share
1. FY12 excludes product recall costs of $101 million after tax and FY14 excludes patent dispute provision of $16 million after tax.
1
Commitment to innovation
Cochlear continues to lead the market with innovative new
technology that improves the quality of life of so many
people around the globe and contributes to the continued
growth of the industry. We have a team of over 300
engineers across the globe who work together to develop
innovative technologies that really change the lives of our
recipients. In FY17, we invested over $150 million –
representing 12% of revenue – in our R&D activities.
Cochlear implants recognised as a cost effective
intervention by the World Health Organization
In March this year, the WHO reaffirmed the importance of
making progress in dealing with the rising prevalence of
hearing loss.
The WHO has estimated that over 360 million people –
over 5% of the world’s population – live with disabling
hearing loss, 32 million of whom are children. With
prevalence rates rising, the global cost of unaddressed
hearing loss has been estimated at $750 billion per year.
Hearing loss is a significant public health issue that
requires all countries to make hearing health a priority,
with the need for the development of national action plans
around prevention, intervention and treatment of hearing
loss.
In May this year, the World Health Assembly (WHA), the
WHO governing body, passed a resolution outlining
practical, cost effective steps to deal with hearing loss,
starting with awareness, hearing screening programs, and
making hearing aids and assistive hearing technologies,
such as cochlear implants, more accessible to those who
need them. Passed unanimously, this is the first WHA
resolution tackling prevention of deafness and hearing
loss in 22 years and sets out the ground work needed for
action.
At Cochlear, we are driven by our mission to improve the
lives of people with hearing loss, and as a hearing health
expert, we join with other global stakeholders to play our
part in tackling this global health issue.
Chairman’s report
Cochlear reported a record net profit of $224 million,
an increase of 18% on the FY16 result. FY17 has been
a big year, with a continued focus on strengthening
our customer servicing capability and market growth
activities while maintaining our commitment to
product innovation through our extensive investment
in research and development (R&D).
Steady progress was made throughout the year, with a
number of successful new product launches which
underpinned our solid sales and earnings growth. Our
continued investment in sales and marketing activities has
supported a healthy rate of industry growth with the
cochlear implant market across the developed world
estimated to have grown by around 8-10% over the past
three years.
It has been an important year for hearing awareness with
the World Health Organization (WHO) recognising that
untreated hearing loss is a significant public health issue.
We have also expanded our operations with the
announcement of the expansion of our manufacturing
footprint into China as well as the acquisition of Sycle, the
global leader in audiology practice management software.
Finally, in July 2017, we announced the retirement
timeline for Chris Smith as Chief Executive Officer &
President, and the appointment of Dig Howitt as
Cochlear’s new CEO & President.
Growing dividends
Earnings growth, combined with strong free cash flow
generation, has supported the 17% increase in the fully
franked final dividend to $1.40 per share. This takes
dividends paid for the year to $2.70 per share, fully
franked, an increase of 17% on FY16.
2 Cochlear Limited Annual Report 2017
Chairman’s report
Shifting demographics driving demand
A major part of Cochlear’s business is in developed
markets like Australia, North America and Western
Europe. Over the past decade, we have experienced a
shift in these markets to cochlear implantation in seniors –
the over 65 year olds – driven in part by the ageing
population and the higher incidence of hearing loss in this
age group.
Cochlear implantation for seniors is an important trend,
especially as we begin to better understand the link
between high levels of hearing loss and cognitive decline,
social isolation and depression.
We have been increasing our investment in health
economics and the collaborative partnerships we have
with the medical research community to better understand
these impacts on individuals and societies, so that we can
create stronger awareness and build better access for
those affected.
Expanding global manufacturing footprint
In July 2017, we announced plans to expand our global
manufacturing capacity for cochlear implants with a new
$50 million facility to be built in China. Products produced
in the new facility, which is expected to commence
production within four years, will be for China and our
emerging markets business.
We believe that this investment should allow us to further
extend our market position and deepen our commitment to
China. The new facility will have the capacity to increase
our global cochlear implant production by around 50%.
The investment is part of a broader plan to increase
production capacity across the product portfolio. In 2010,
we opened our state-of-the-art global headquarters and
manufacturing facility on the Macquarie University campus
in Sydney. Earlier this year, we acquired the Lane Cove
manufacturing facility and we are also currently upgrading
and adding capacity to our Brisbane manufacturing facility.
Acquisition of global leader in audiology practice
management software
In May 2017, we announced the acquisition of Sycle, the
world’s largest provider of audiology practice management
software, for an estimated US$78 million.
The acquisition is a strategic investment that will
strengthen our service offering to our clinical partners.
Sycle offers a market-leading practice management
solution with a product suite that can be expanded to
provide a solution for cochlear implant clinics. This
acquisition will enable our partners to enhance clinic
efficiency, freeing up more time to deliver patient care.
We are also excited by the opportunity to strengthen the
relationship between the hearing aid and cochlear implant
channels. There is an opportunity to leverage best practice
processes and systems across the hearing services
industry, and streamline patient care.
Sycle provides a single platform from which we can build
awareness of the hearing loss treatment options available
as patients are managed through the continuum of care.
CEO & President transition timeline announced
In July 2017, we announced the retirement timeline for
Chris Smith as Chief Executive Officer & President, and
the appointment of Dig Howitt as Cochlear’s new CEO &
President. Dig became President, Cochlear, effective 31
July 2017 and will work closely with Chris as operating
responsibilities and relationships are transferred over the
coming months, with Chris to retire effective 2 January
2018.
Dig has been Cochlear’s Chief Operating Officer since
July 2016, with his appointment part of a succession
process. Dig joined Cochlear in 2000 and has been a key
member of the leadership team for many years. He has a
wealth of experience across the Company in roles
including Chief Operating Officer; President, Asia Pacific;
and SVP, Manufacturing and Logistics.
Chris has overseen a period of substantial growth for
Cochlear with the Company exceeding a billion dollars in
annual sales revenue during his time as CEO & President.
With his leadership team, Chris has focused the strategic
priorities on the customer and reorganised the
management team around growth initiatives for a
sustainable future. Chris will leave the Company and its
management in a strong position. The Board and
management wish Chris well in his retirement and thank
him for his substantial contributions during a distinguished
13 year career at Cochlear.
Dig will transition into the CEO & President role over the
coming months and you can expect Cochlear to continue
to pursue its well-established strategic priorities under his
leadership.
3
Building transparency and openness with
shareholders
We publish a number of online shareholder reports aimed
at improving transparency and making information easier
to access. The Corporate Governance Statement, Tax
Contribution Report and Investor Handbook are great
companions to the Annual Report and I encourage you to
read them. They are all available at the Investor Centre of
the 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 over 3,000 people
from over 75 nationalities, with a direct presence in over
20 countries. The knowledge, expertise and passion of our
employees are 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
Chairman’s report
Remuneration
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.
Remuneration oversight of the CEO & 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 People & Culture Committee. The
Remuneration report sets out our approach to
remuneration and provides the FY17 details.
FY18 financial outlook
For FY18, Cochlear expects reported net profit to increase
to $240-250 million, with currency headwinds expected to
moderate strong underlying business growth.
Positive momentum continues across the business with
the significant investments made in product development
and market growth initiatives over the previous few years
expected to underpin growth in FY18. In particular, we
expect the launch of the Nucleus® 7 Sound Processor,
which commences its full market release from September,
to contribute to both implant growth and upgrade demand
over the coming years. The stronger Australian dollar will
however have an impact on earnings, and is likely to
reduce underlying net profit growth by a few percentage
points in FY18.
The balance sheet and free cash flow generation remain
strong and we continue to target a dividend payout ratio of
around 70% of net profit.
Key guidance considerations for FY18:
expect solid momentum in unit growth to continue,
which will be supported by further investment in
market access and market growth activities;
expect net profit to be weighted to the second half
given the timing of the Nucleus 7 Sound Processor
launch;
expect R&D expenditure to be $160-170 million; and
forecasting a weighted average AUD/USD exchange
rate of 80 cents for FY18 versus 75 cents in FY17.
4 Cochlear Limited Annual Report 2017
Chief Executive Officer’s report
The positive momentum we have experienced over the
past few years has continued throughout FY17 with
strong growth in sales revenue and units delivered
across all regions, with reported net profit growing by
18%.
Cochlear’s market leadership position has strengthened
with market growth and market share improvements
throughout the year underpinned by successful new
product launches, growing investment in direct-to-
consumer marketing and sales force expansion.
The core cochlear implant business grew strongly with
constant currency (CC)1 revenue growth of 10% and unit
growth of 8%.
Developed market unit growth was particularly strong,
increasing by 12%, with highlights including continued
strong performances from the US and Western Europe.
Emerging market units grew by around 20% (adjusted for
the impact of lower Chinese Central Government tender
units), with continuing strong growth in India and solid
improvements in Latin America and Central & Eastern
Europe.
During the year, the Kanso® Sound Processor, our first off-
the-ear sound processor, and the Nucleus® Profile Slim
Modiolar (CI532) electrode, the world’s slimmest
electrode, were launched, with both products experiencing
strong uptake.
In July 2017, we introduced the Nucleus 7 Sound
Processor, the world’s first Made for iPhone cochlear
implant sound processor, which will allow users to stream
sound from an iPhone®, iPad® and iPod touch® directly to
their sound processor, offering greater accessibility,
connectivity and wireless solutions. The Nucleus 7 Sound
Processor has received FDA and CE mark approval and
will commence full commercial rollout in September.
The Services business, which includes sound processor
upgrades and accessories, delivered CC revenue growth
of 10% driven by continuing demand for the Nucleus 6
Sound Processor and the popularity of the Kanso Sound
Processor. Second half momentum was particularly strong
with 17% CC sales growth, with upgrade penetration
reaching around 40% across the developed markets.
The Acoustics business had a strong year with sales
growth of 26% in CC. Strong growth in both new system
sales and upgrades was driven by the popularity of the
Baha® 5 range of sound processors.
You can find a detailed review of the Product and service
highlights and Regional review on pages 10 and 11.
Solid progress made against business priorities
Cochlear’s priorities are focused on the customer with
initiatives aimed at maintaining technology leadership and
accelerating market growth through global expansion of
awareness and increased market access initiatives. With a
growing recipient base, now numbering over 450,000, we
are actively strengthening our servicing capability to
provide products, programs and digital services to support
the lifetime relationship with our recipients.
We made progress against our business priorities which
are focused on growing the core, building a service
business, shaping the organisation and value creation.
The key areas of focus have been on continuing to expand
the sales force across major developed and emerging
markets, expanding our direct-to-consumer programs in
the US, Australia, Germany, UK and India and building
greater engagement with our recipient base.
Thank you
Over the last several years, I have been honoured to lead
a company that has positively impacted the lives of so
many patients, and to work with an amazing team of
people within our Company and industry. Cochlear has
clear momentum in its business, a well-defined strategy
and a strong leadership team. It is a good time to
transition out of the Company.
I hand over to Dig Howitt as part of a succession process
which will ensure we have a smooth transition as the
leadership baton passes.
Chris Smith
Chief Executive Officer
1 Constant currency (CC) removes the impact of foreign exchange (FX)
rate movements and FX contract gains/(losses) to facilitate comparability.
See the Operating and financial review on page 16 for further detail.
5
Operating and financial review
The Operating and financial review outlines Cochlear’s activities, performance during the year, financial position and
main business strategies. It also discusses the key risks and uncertainties that could impact on Cochlear and its ability to
achieve its financial and other objectives.
Business model
Cochlear is the global leader in implantable hearing solutions with products including cochlear implants, bone conduction
implants and acoustic implants. Cochlear’s implant systems comprise an implant which is inserted during surgery and an
external sound processor. The external sound processor can be upgraded with new technology as it becomes available.
Cochlear commenced operations in 1981 as part of the Nucleus group and in 1995, listed on the Australian Securities
Exchange. Cochlear’s global headquarters are on the campus of Macquarie University in Sydney, with regional
headquarters in Asia Pacific, Europe and the Americas. Cochlear has a deep geographical reach, selling in over 100
countries, with a direct presence in over 20 countries and a global workforce of over 3,000 employees.
The Company estimates that over 450,000 recipients have been implanted with one of its implants. Cochlear’s promise is
‘Hear now. And always’ – to provide recipients with the best possible hearing and support for the rest of their lives.
Whether these hearing solutions were implanted today or many years ago, Cochlear provides new technologies and
innovations for all recipients.
The Company invests more than $150 million each year in research and development (R&D) and currently participates in
over 100 collaborative research programs worldwide.
The Company’s principal manufacturing facilities are in Australia and Sweden. Manufacturing for the cochlear implant
product range is based in Australia, at three sites: Macquarie University and Lane Cove, in Sydney, and Brisbane. Latest
generation cochlear implant ranges are manufactured at Cochlear’s Macquarie University headquarters, including the
Nucleus Profile implant, while Lane Cove manufactures Cochlear’s legacy products. The Brisbane site is responsible for
manufacturing non-implant components. The bone conduction implant product range is manufactured in Sweden. The
acoustic implant product range is manufactured across sites in Australia, the US and Belgium.
Cochlear’s 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.
6 Cochlear Limited Annual Report 2017
Operating and financial review
Hearing loss market opportunity
Over 360 million people worldwide experience disabling hearing loss, with nearly one in three people over the age of 65
affected by hearing loss. With the global market penetration for implantable hearing solutions at less than 5%, there
remains a significant, unmet and addressable clinical need that is expected continue to underpin the long-term
sustainable growth of the business.
* 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.
1. Who.int. WHO | Deafness and hearing loss [Internet]. 2015.
2. Who.int. WHO | 10 facts on deafness [Internet]. 2015.
3. Hearing Loss Prevalence in the US [Internet]. Lin, Niparko, Ferrucci [cited 26 April 2016].
4. The Severely to Profoundly Hearing-Impaired Population in the US [Internet]. Blanchfield, Feldman, Dunbar, Gardner [cited 26 April
2016].
5. Market penetration - global estimate based on Cochlear sourced data.
7
Operating and financial review
Company strategy
Cochlear aims to make cochlear implantation the standard of care for people with severe to profound hearing loss and
provide bone conduction implants for patients with conductive hearing loss, mixed hearing loss and single sided
deafness.
Cochlear’s priorities are 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 is committed to being the technology leader in the industry by investing in R&D to improve hearing outcomes
and expand the indications for implantable solutions so recipients can have the quality of life they expect.
The Company’s 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. There are plans to launch a series of new products across all
categories of the business over the coming years, focused on both market share and market growth;
Stimulate market growth by increasing awareness of hearing loss. Over the last few 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.
8 Cochlear Limited Annual Report 2017
Operating and financial review
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 and quality systems to drive efficiencies and
leverage best practice across the organisation; and
Build organisational capabilities to support customer-focused activities.
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; and
Meet or exceed forecast financial targets.
9
Operating and financial review
Results of operations
Product and service highlights
Cochlear implants (units)
32,554
30,172
8%
2017
$000
2016
$000
Change %
Change %
(reported)
(CC)1
Sales revenue
Cochlear implants
Services (sound processor upgrades and
accessories)
Acoustics (bone conduction and acoustic
implants)
767,781
305,589
729,171
289,418
5%
6%
10%
10%
166,363
139,542
19%
26%
Total sales revenue
1,239,733
1,158,131
7%
12%
1 Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate
comparability. See Notes on page 16 for further detail.
Cochlear implants – 62% of sales revenue
Cochlear implant revenue grew 5% in Australian dollars (10% in CC) with unit growth of 8% (14% excluding the benefit of
Chinese Central Government tender units). Globally, the average selling price declined modestly driven by currency,
regional mix and some minor pricing reductions.
Developed markets grew units by 12% with highlights including continued strong performances from the US and Western
Europe. Emerging markets units grew by around 20% (adjusted for Chinese Central Government tender units) with
continuing strong growth in India with solid improvements in Latin America and Central & Eastern Europe.
Cochlear’s first off-the-ear sound processor, Kanso, was released during the first half. Uptake has exceeded expectations
and contributed to market share gains during the year. The electrode portfolio was expanded with the full market release of
the new Slim Modiolar electrode in Europe, the US and Canada with a strong uptake of the electrode since launch.
The increase in sales revenue also reflects continued investments in market growth initiatives including direct-to-consumer
activities and field expansion of over 100 people. 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 by 6% in Australian dollars (an increase of 10% in CC) driven by the continuing uptake
of the Nucleus 6 Sound Processor and the popularity of the Kanso Sound Processor. Second half momentum was
particularly strong with 17% CC sales growth.
Upgrade penetration since the release of the Nucleus 6 Sound Processor has been strong with close to 40% of
recipients in developed markets upgrading their processors since it was first launched in September 2013, with
penetration rates exceeding 50% in a number of key markets including Australia and the UK.
As part of the commitment to increase recipient engagement and provide recipients with great customer experience, the
business continued to rollout a number of service-oriented programs. Cochlear’s recipient membership program,
Cochlear Family, is growing rapidly, with membership growing by over 150%, to around 60,000 recipients, this year.
Recruitment continues to be a priority with Cochlear Family members upgrading their sound processors at a significantly
higher rate than that of non-members.
10 Cochlear Limited Annual Report 2017
Operating and financial review
Acoustics (bone conduction and acoustic implants) – 13% of sales revenue
Acoustics, which includes bone conduction and acoustic implant sales revenue, grew 19% in Australian dollars (26% in
CC) with solid performances across all regions. Strong growth in both new system sales and upgrades was driven by the
popularity of the Baha 5 range of sound processors.
Regional review
Sales revenue
Americas
EMEA (Europe, Middle East and Africa)
Asia Pacific
Total sales revenue
2017
$000
594,997
428,513
216,223
2016
$000
519,688
427,896
210,547
1,239,733
1,158,131
Change %
Change %
(reported)
14%
0%
3%
7%
(CC)
18%
7%
4%
12%
Americas (US, Canada and Latin America) – 48% of sales revenue
Sales revenue increased by 14% in Australian dollars (18% in CC). The highlight was the growth in the US with cochlear
implant unit growth of over 15%. Growth overall has been driven by new product introductions and the success of
awareness building initiatives which continue to drive overall market growth rates. Services revenue grew strongly,
supported by the success of the Kanso Sound Processor.
The expanded field sales organisation, direct-to-consumer marketing and improvements in sales force effectiveness
have also supported strong market growth rates.
Overall Latin American unit growth and sales revenue have recovered well after declining in the financial year ended 30
June 2016 (FY16).
EMEA (Europe, Middle East and Africa) – 35% of sales revenue
Sales revenue was flat in Australian dollars (increasing by 7% in CC). Western Europe unit growth was over 10% with
consistent rates of growth delivered across most countries. Investments in market growth initiatives and the positive
reception to the Kanso Sound Processor, the Slim Modiolar electrode and the Baha 5 range of sound processors drove
market share across many markets.
Central & Eastern Europe also performed well with the region benefiting from Cochlear’s expanding presence, while units
declined in a number of emerging markets, a result of the timing of tenders.
Asia Pacific (Australasia and Asia) – 17% of sales revenue
Sales revenue increased by 3% in Australian dollars (4% in CC). Strong growth was experienced across India, Korea
and several South East Asian markets driven by the expansion of the field force, growing clinic numbers and
improvements in reimbursement. Growth at the regional level was however moderated by the impact of tender units. In
particular, the result includes around 1,900 Chinese Central Government tender units, which compares to over 3,300
units in FY16.
11
Operating and financial review
Financial review
Profit and loss
Sales revenue
Cost of goods sold
% of sales revenue
2017
$000
2016
$000
1,239,733
1,158,131
358,373
333,593
29%
29%
Selling, marketing and general expenses
348,928
324,144
Administration expenses
83,474
79,287
Research and development expenses
151,929
145,080
% of sales revenue
Total expenses
Other income
FX contract gains / (losses)
Earnings before interest and tax (EBIT)
% of sales revenue
Net finance costs
Taxation expense
% effective tax rate
Net profit
12%
13%
942,704
882,104
4,466
14,105
315,600
25%
6,775
85,209
28%
14,156
(27,579)
262,604
23%
8,338
65,345
26%
Change %
Change %
(reported)
7%
7%
8%
5%
5%
7%
(CC)1
12%
10%
13%
6%
7%
10%
20%
15%
(19%)
30%
223,616
188,921
18%
11%
1 Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate comparability.
See Notes on page 16 for further detail.
Sales revenue increased by 7% (12% in CC) to $1,239.7 million while total expenses increased by 7% (10% in CC) to
$942.7 million. As a result, the business generated an EBIT increase of 20% (15% in CC) to $315.6 million with the EBIT
margin increasing by two points to 25%.
Key points of note:
Cost of goods sold (COGS) increased by 7% (10% in CC) to $358.4 million, primarily as a result of growing volumes.
COGS as a percentage of sales revenue remained steady at 29%;
Selling, marketing and general expenses increased by 8% (13% in CC) to $348.9 million. The increase reflects the
continued investment in the sales force and expanded marketing activities;
Investment in R&D increased 5% (7% in CC) to $151.9 million, representing 12% of sales revenue;
Other income of $4.5 million includes $0.4 million in foreign exchange (FX) gains on translation of certain balance
sheet assets, primarily working capital. This compares to $8.7 million in FX gains in FY16, an $8.3 million reduction;
Reported net profit includes $20.0 million of FX translation impacts, a result of the rising Australian dollar. The most
significant impacts were from the increase in the weighted average AUD/USD (from around 73 cents to over 75
cents), AUD/GBP (from around 49 cents to 59 cents) and AUD/EUR (from 66 cents to 69 cents) in the financial year
ended 30 June 2017 (FY17);
12 Cochlear Limited Annual Report 2017
Operating and financial review
FX contract gains on hedged sales were $14.1 million, reflecting the impact of the AUD appreciation against many of
the major currencies compared to FY16 rates. This compared to FX contract losses on hedged sales of $27.6 million
in FY16 as unfavourable FX contracts rolled off;
Net finance costs reduced by 19% to $6.8 million, reflecting lower average net debt levels for the year, more
favourable facility terms and improved interest income; and
During the first half, the Australian Government reduced the R&D tax concession rate from 40.0% to 38.5%,
effective from 30 June 2016. In FY16, Cochlear had approximately $100 million in qualifying R&D investments which
delivered a full year benefit to net profit of around $10 million. The change in legislation reduced the tax benefit to
around $8.5 million, a $1.5 million reduction in FY17 compared to FY16. Cochlear’s effective tax rate increased from
26% to 28%, reflecting the reduced R&D concession rate.
Cash flow
EBIT
Depreciation and amortisation
Changes in working capital and other
Net interest paid
Income taxes paid
Operating cash flow
Capital expenditure
Acquisition of Lane Cove property
Acquisition of subsidiary (Sycle)
Other investments
Free cash flow
2017
$000
315,600
31,214
(693)
(7,895)
(78,454)
259,772
(26,031)
(27,559)
(63,709)
(18,301)
124,172
2016
$000
262,604
33,491
(20,006)
(10,291)
(80,685)
185,113
(28,858)
-
-
(21,276)
134,979
Change
$000
52,996
(2,277)
19,313
2,396
2,231
74,659
2,827
(27,559)
(63,709)
2,975
(10,807)
The business generated strong cash flows with operating cash flow increasing by $74.7 million, up 40%, to $259.8
million, primarily driven by increased earnings. Free cash flow declined by $10.8 million, reflecting acquisitions made
during the year.
Key points of note:
Cochlear acquired its long-term manufacturing facility at Lane Cove in Sydney for $27.6 million; and
In May 2017, Cochlear acquired practice management software company, Sycle, for an estimated US$78 million. Net
$63.7 million was paid in FY17 with the balance to be paid over three years as the acquisition is finalised and based
on business performance.
13
Operating and financial review
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
2017
$000
275,360
160,011
2016
$000
268,538
154,103
(130,911)
(110,354)
304,460
312,287
79
164
120,107
339,976
(91,514)
673,029
85
169
86,878
224,338
(57,125)
566,378
Change
$000
6,822
5,908
(20,557)
(7,827)
(6)
(5)
33,229
115,638
(34,389)
106,651
Capital employed increased by $106.6 million to $673.0 million since June 2016, primarily as a result of an increase in
intangible assets.
Key points of note:
Trade and other payables increased by $20.6 million, reflecting current payables relating to the Sycle acquisition and
the gearing up of the supply chain for production of the Nucleus 7 Sound Processor;
Property, plant and equipment increased by $33.2 million, primarily reflecting the $27.6 million acquisition of the
Lane Cove manufacturing facility;
Intangible assets increased by $115.6 million to $340.0 million, with $101.5 million of the increase comprising
goodwill for the acquisition of Sycle in May 2017;
All intangible assets are tested for impairment on an annual basis. There were no impairments or write-downs of
intangible assets in FY17; and
Other net liabilities increased by $34.4 million, largely reflecting the deferred consideration, and expected earn-out,
for Sycle, which is to be paid over the next three years based on business performance.
14 Cochlear Limited Annual Report 2017
Operating and financial review
Net debt
Loans and borrowings:
Current
Non-current
Total debt
Cash and cash equivalents
Net debt
2017
$000
84,687
134,235
218,922
(89,540)
129,382
2016
$000
3,978
189,260
193,238
(75,417)
117,821
Change
$000
80,709
(55,025)
25,684
(14,123)
11,561
Average net debt levels were lower in FY17, resulting in lower net finance costs compared to FY16. The $11.6 million
increase in net debt to $129.4 million since June 2016 reflects:
Net $63.7 million in cash paid for Sycle acquisition in May 2017;
$27.6 million in cash paid for the Lane Cove manufacturing facility; which was almost entirely offset by
Strong cash flow from operations.
Dividends
Interim ordinary dividend (per share)
Final ordinary dividend (per share)
Total ordinary dividends (per share)
Payout ratio %
Franking %
2017
$1.30
$1.40
$2.70
69%
100%
2016
$1.10
$1.20
$2.30
70%
100%
Change %
18%
17%
17%
Strong free cash flow and the continued strength of the balance sheet have supported the payment of a final dividend of
$1.40 per share, franked at 100%. Total fully franked dividends of $2.70 per share were declared for the year, an
increase of 17% on dividends paid last year, representing a payout of 69% of net profit.
The record date for determining dividend entitlements is 20 September 2017 and the final dividend will be paid on 11
October 2017.
15
Operating and financial review
Notes
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.
Non-International Financial Reporting Standards (IFRS) financial measures
Given the significance of exchange rate movements, the directors believe the presentation of the non-IFRS financial
measure, constant currency, is useful for the users of this document as it reflects the underlying financial performance of
the business. This non-IFRS financial measure has 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
group.
Constant currency
Constant currency removes the impact of exchange rate movements to facilitate comparability of operational
performance for Cochlear. This is done by converting the prior comparable period net profit of entities in the group that
use currencies other than Australian dollars at the rates that were applicable to the current period (translation currency
effect) and by adjusting for current year foreign currency gains and losses (foreign currency effect). The sum of
translation currency effect and foreign currency effect is the amount by which reported EBIT and net profit is adjusted to
calculate the result at constant currency.
Reconciliation of constant currency net profit to reported net profit
Net profit (reported)
FX contract gains/(losses)
Spot exchange rate effect to sales and expenses1
Balance sheet revaluation1
Net profit (CC)
1 FY17 actual v FY16 at FY17 rates
Total currency translation and transaction impact on reported net profit
FX contract gains/(losses)
Spot exchange rate effect to sales and expenses1
Balance sheet revaluation1
Total currency impact to net profit (reported)
1 reporting year actual v prior year at reporting year rates
2017
$000
223,616
223,616
2016
$000
188,921
41,684
(19,998)
(8,307)
202,300
Change %
18%
11%
2017
$000
14,105
(19,998)
(8,307)
(14,200)
2016
$000
(27,579)
48,779
7,517
28,717
16 Cochlear Limited Annual Report 2017
Operating and financial review
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 2017 Corporate Governance Statement, which is
available on the website.
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
Product innovation
and competition
Infringement litigation
Misappropriation of
know-how and
intellectual property
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 for
future candidates. This could result in a
loss of new business.
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 of litigation for alleged
infringement. This could result in Cochlear
paying royalties to be able to continue to
manufacture product, or paying damages
and/or injunctions preventing Cochlear
selling products it had developed.
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 third parties 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.
Strategies used by Cochlear to
mitigate the risk
In FY17, Cochlear invested around 12%
of total revenue in R&D. Cochlear also
works with over 100 external research
partners. The creation of new intellectual
property and the protection of new and
existing intellectual property are a key
focus for Cochlear.
Cochlear has plans to launch a series of
new products across all categories of the
business over the coming years focused
on both market share and market growth.
Cochlear has a comprehensive patent
portfolio across its technologies.
Cochlear conducts freedom to operate
searches as part of its internal processes
before launching new products.
Cochlear has a Legal department and
utilises internal and external legal
resources to deal with any litigation
issues.
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.
17
Operating and financial review
Medical device
regulations
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
which may lead to pressure on reimbursed
prices. 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 made at this facility. This
approval could take many months.
18 Cochlear Limited Annual Report 2017
Cochlear has a worldwide quality
assurance system in place.
Cochlear continues to work with
reimbursement and government agencies
throughout the world to emphasise the
health and economic benefits and cost
effectiveness of intervention to restore
hearing.
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 and maintains
business interruption insurance.
Operating and financial review
Political, economic or
social instability
Foreign exchange rates
Credit
Cochlear sells in over 100 countries.
Several of the emerging markets are
heavily biased to tender sales, including the
Chinese Central Government 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 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 (GBP),
Swedish kroner (SEK) and Swiss francs
(CHF). Over 90% of Cochlear’s revenues
and over 50% of costs are denominated in
currencies other than AUD.
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 significant
debtors are governments, government
supported universities and clinics or major
hospital chains.
Interest rates
Cochlear is exposed to interest rate risks in
Australia.
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 checklists on
an ongoing basis. Cochlear reviews
tenders carefully and participates at a
level that makes commercial sense.
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 can be achieved by
entering into interest rate swaps. At 30
June 2017, no hedging had been entered
into.
19
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.
Cochlear regularly assesses its
information governance and cyber
security controls in light of emerging
technological threats and expanding
privacy laws. These assessments are
used to determine any appropriate
corrective actions. In the last 18 months,
Cochlear has recruited senior information
security and privacy leaders to lead these
efforts, including a Chief Information
Security Officer and Chief Privacy Officer,
each with a global remit. In addition to the
ongoing assessment and remediation of
operational privacy and security activities,
Cochlear maintains cyber insurance as
part of its overall risk mitigation strategy
for information privacy and security risk.
Talent management programs are in
place, both within Australia and in our key
international markets.
Operating and financial review
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.
Information security
Cochlear handles and stores personal
information, including health information, for
its customers and employees. With
expanding information privacy and security
regulations, and an increasingly hostile
cyber environment, Cochlear recognises
information privacy and cyber security as
an increasing risk.
Talent management
Cochlear operates in a very competitive
environment, particularly in relation to
attracting scientific talent into the group.
20 Cochlear Limited Annual Report 2017
Environment, social and governance
Cochlear’s approach to environment, social and governance (ESG) issues 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. 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.
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.
Cochlear 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 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 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.
21
Environment, social and governance
Cochlear Bone Anchored Solutions (CBAS) headquarters
The CBAS headquarters in Mölnlycke, Sweden, makes extensive efforts to reduce electricity use and waste. 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 is used
for both residential and commercial premises. 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.
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.
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.
A lean philosophy is used 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.
22 Cochlear Limited Annual Report 2017
Environment, social and governance
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 are 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, 71 students have engaged in post-graduate 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.
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.
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.
Many Cochlear employees are engaged in advocacy to improve hearing health policies around the world.
Cochlear encourages its executives to participate in forums and bodies that advance Australia’s competitiveness and the
promotion of innovation and technology.
Raising awareness and preventing hearing loss
Hearing loss is a major global public health issue and Cochlear is increasingly engaged in raising awareness of this and
the treatments available. The World Health Assembly passed a resolution in May that recognises the global cost of
untreated hearing loss and the need for every country to take comprehensive action and have a plan to address it. The
resolution, which represents a major milestone in global hearing health policy, recognises the need to raise awareness,
improve access to cochlear implants and hearing aids and the need for screening programs.
23
Environment, social and governance
At a global and country level, Cochlear engaged in a range of awareness activities as part of World Hearing Day,
organised by the World Health Organization on 3 March every year. World Hearing Day aims to raise awareness, and
promote access to ear and hearing care across the world. The theme for World Hearing Day 2017 was ‘Action for
hearing loss: Make a Sound Investment’. Cochlear supported the WHO’s messages through an engaging social media
campaign inviting people around the world to share their ‘HappiestSound’.
One highlight of World Hearing Day 2017 was an invitation by the WHO to its headquarters in Geneva to participate in a
seminar to discuss the cost to society of untreated hearing loss, and the importance of advocacy to achieve better
access to hearing health care. Cochlear initiated media, education and awareness activities in Europe and Russia, the
Middle East and Turkey.
Innovative efforts by Cochlear’s Australian team to raise awareness through the power of film received high international
recognition in 2017. Cochlear Australia launched their Lost and Found campaign which included a hidden hearing test in
a film called, "Does Love Last Forever?" The film and "Hearing Test in Disguise" won significant praise, including four
Lion awards from the Cannes Film Festival - awards that recognise advertising and creative communications industry
excellence.
Cochlear Australia continues to sponsor the Power of Speech, a public speaking competition for deaf children to
challenge common perceptions and demonstrate what deaf children can achieve.
Efforts continued in India to address the issue of awareness of hearing health and universal newborn hearing screening.
Brett Lee, Cochlear’s Global Hearing Ambassador, visited key cities like Bengaluru, New Delhi, Chandigarh, Kochi and
Kozhikode and met with hearing health professionals and recipients.
Cochlear’s Latin American team initiated media and community engagement involving thousands of recipients in
Cochlear ‘family fun’ days, including sporting, music and arts activities in Brazil, Chile and Argentina
Cochlear Americas conducted its third annual Million Ear Challenge campaign for Better Speech and Hearing Month
(May) that educated more than 2.4 million people about hearing loss via social media. The team partnered with the
Hearing Loss Association of America, Hearing Charities of America and Songs for Sound in 38 awareness events. The
team also held over 120 Hearing Health Seminars to educate people on hearing loss and Cochlear solutions.
Japan launched a website to provide support for parents of infants diagnosed with hearing loss. The website
www.kikoesupport.jp provides Japanese-specific information and advice on a range of treatments for paediatric hearing
loss and the cochlear implant referral pathway. It also provides a mechanism for parents to get in touch with Cochlear
Japan for personalised support.
Access to healthcare
Cochlear sells its products in over 100 countries. Cochlear provides, particularly in emerging markets, support and
education to local professionals in the healthcare area. Part of enabling access to our products in emerging markets is
our ability to provide tiered products to suit the needs and financial ability of customers.
Governance
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 2017, which is
available on Cochlear’s website, www.cochlear.com.
24 Cochlear Limited Annual Report 2017
People and culture
Cochlear delivers industry-leading products and services through a highly skilled, passionate workforce of over 3,000
people across more than 30 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.
In FY17, the People & Culture team continued to focus on the growth and development of our workforce to enable the
organisation to deliver against its strategic priorities. To support this, we created four global centres of excellence, each
focusing on a cornerstone of the employee lifecycle: talent acquisition, talent development, talent assessment,
succession and talent reward.
Talent acquisition
Cochlear remains an employer of choice, receiving a record 27,000 applications last year for over 750 permanent and
contract roles. The Company maintains high staff retention levels above industry benchmarks, with global annualised
turnover of 9.1%.
During FY17, we continued to build and expand our capabilities to support our business priorities required to deliver
future growth. We increased our field force talent base significantly, recruiting more than 100 people into these roles,
with a significant number of these into our emerging markets. We also made a significant investment in growing our
global repair and warranty team based in Kuala Lumpur, and expanding our marketing, clinical and services expertise.
We build our pipeline of future talent through our highly regarded graduate and internship programs, where we rank in
the Top 50 of GradAustralia’s most sought-after employers. We have eight new engineering graduates commencing in
early 2018 who were selected from our 2016/2017 Summer Intern Program, which was comprised of 24 students in their
penultimate year of study. We continue to build a diverse pipeline of talent, with females representing 20% of graduate
applicants and 38% of graduates recruited into permanent roles. This is significantly higher than the representation of
females undertaking engineering tertiary studies and continues to remain a strong focus of this program.
Talent development
Our Talent Development team supports the global build and enhancement of individual, leader and organisational
capabilities through designing, delivering and investing in effective and engaging development programs.
During FY17, to support our One Cochlear initiative, we developed a new global leadership capability framework,
Leading the Way. The framework identifies the critical leadership capabilities essential for our people leaders to
demonstrate, to ensure we are able to meet the business demands of the future and deliver on our strategy. Leading the
Way will also provide a consistent global framework across a range of People & Culture activities to support the
employee lifecycle, including recruitment, performance, development and succession. This will enable us to identify,
develop and deploy talent around the globe in an agile and effective manner.
During the year, Project Learn, a new learning and collaboration program, was initiated. The program is designed to
build broader business knowledge and collaboration across our senior leader population through exposure to diverse
Cochlear functions and businesses. The program is aligned to our business priorities and individuals’ development goals,
and is structured to ensure that learnings are shared, efficiencies realised and business outcomes optimised.
Through Cochlear Academy, the Company’s learning management system, we have continued to provide employees
with an extended range of learning programs. These programs support employees to build the skills and capabilities
required to deliver future growth, with a strong focus on understanding our customer needs and products.
25
People and culture
Talent assessment and succession
Our Talent & Succession practice area aims to provide a globally consistent, best practice approach to how we identify
talent and develop succession plans within the business. This is crucial in ensuring we have the right people in the right
place at the right time to support Cochlear in delivering on its business strategy now and in the future. The focus this year
has been the development of the global strategy and processes for identifying talent, and aligning these to our new
Leading the Way leadership capability framework.
FY17 saw the successful implementation of our new performance management process – My Performance Pathway
which not only measures the achievement of employees’ strategically aligned goals but also embeds our H.E.A.R
behaviours (Hear the customer, Embrace change and innovate, Aspire to win and Remove boundaries) by measuring
how these goals are achieved. 74% of employees now have a better understanding of how their work contributes to
Cochlear’s business priorities and 83% know how to demonstrate the H.E.A.R behaviours to be successful in their role.
Talent reward
Our continued growth and success depend on attracting and retaining engaged and motivated people. During FY17, we
continued to review our global reward strategy to support Cochlear’s strategic priorities, to ensure alignment with One
Cochlear goals, and enable performance-based reward and recognition of highly capable talent while remaining aligned
to market practice and in the interests of our shareholders.
Diversity
As a global company, Cochlear strongly believes that a workforce with diverse experiences and perspectives drives
improved performance for our business and better supports the communities we serve. Our ethnically diverse domestic
workforce is represented by people from more than 76 different nations.
Gender equality remains a primary focus. 51% of our permanent full time workforce is female and we are continuing to
focus on increasing our female representation in senior level roles. During FY17, 47% of new hires to roles across our
three most senior leadership levels were female. We will continue to focus on growing and developing our pipeline of
female senior leaders through our talent management, succession and development initiatives. We also continued to
support the development of our female leaders through our Women in Leadership program.
Safety and wellbeing
Safety remains a key area of focus and continuous improvement for us. We work closely with design and operation
employees to explore innovative solutions to improve our processes. Our continued aim will be to drive consistency in
safety practices and systems across all our operations and support services, in all our global sites, driving best practice
to the benefit of all our employees.
FY17 saw a desire to increase our focus on the wellbeing of Cochlear employees. A wellbeing framework was developed
in consultation with representatives from across the breadth of the business and a new Employee Assistance and
Wellbeing provider was engaged to bring focus to the areas identified as being of importance to our employees.
To date, we have seen a substantial take-up in the offerings provided in the physical, nutritional and mental health and
wellbeing spaces. More than 46% of employees globally took up the opportunity to spend 100 days setting up great
habits for their wellbeing by engaging in a 100 day Global Challenge.
26 Cochlear Limited Annual Report 2017
Board of directors
Rick Holliday-Smith
Chris Smith
Yasmin Allen
Chairman Age 67
Chief Executive Officer Age 54
Non-executive Director Age 53
Appointed to the Board 1 March
2005: Chairman of the Nomination
Committee. Member of the Audit
and People & Culture Committees.
Background: Global executive and
leadership experience in capital
markets and derivatives, and a
background in venture capital
activities. Former President of
NationsBank-CRT, Chicago and
Managing Director of Hong Kong
Bank Limited, London.
Other boards: Chairman, ASX
Limited and Director, Servcorp
Limited. Non-executive Chairman,
QBiotics and member of the
Macquarie University Faculty of
Business and Economics Advisory
Board.
Former directorships: Chairman,
Snowy Hydro Limited and SFE
Corporation Limited. Director, St
George Bank Limited, Exco
Resources NL, DCA Group Limited
and MIA Group Limited.
Qualifications: BA (Hons), FAICD,
CA
Appointed to the Board 1
September 2015 and will retire on
2 January 2018: Member of the
Medical Science and Technology &
Innovation Committees.
Background: Chris joined Cochlear
in 2004. Has more than 30 years'
experience in the healthcare and
medical device industry in the US
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.
Qualifications: BSc
Appointed to the Board 2 August
2010: Chairman of the Audit
Committee. Member of the People
& Culture, Nomination and
Technology & Innovation
Committees.
Background: Extensive career in
investment banking with senior roles
in strategic analysis and corporate
advice. Former Vice President of
Deutsche Bank AG.
Other boards: Director, Santos
Limited, ASX Limited and National
Portrait Gallery. Member of the
George Institute for Global Health
Board and Australian Government
Takeovers Panel.
Former directorships: Director,
Insurance Australia Group Limited.
National director of the Australian
Institute of Company Directors.
Member of The Salvation Army
Advisory Board. Chair of Macquarie
Specialised Asset Management.
Director, ANZ Investment Bank and
Associate Director, HSBC London.
Qualifications: BCom, FAICD
27
Board of directors
Prof Edward Byrne, AC
Andrew Denver
Donal O’Dwyer
Non-executive Director Age 65
Non-executive Director Age 68
Non-executive Director Age 64
Appointed to the Board 1
February 2007: Chairman of the
Technology & Innovation
Committee. Member of the Audit,
Medical Science and Nomination
Committees.
Background: Extensive experience
in the life sciences industry. Former
director of Principals Cornerstone
Management Pty Limited. Former
Managing Director of Memtec
Limited and President Asia for Pall
Corporation.
Other boards: Chairman, SpeeDx
Pty Ltd and Director, Vaxxas and
QBiotics.
Qualifications: BSc (Hons), MBA,
FAICD
Appointed to the Board 1 August
2005: Member of the Audit, Medical
Science, Nomination and
Technology & Innovation
Committees.
Background: Executive experience
in global sales and marketing of
healthcare products and medical
devices. Former worldwide
President of Cordis Cardiology and
President of Baxter’s
Cardiovascular Group.
Other boards: Chairman, Atcor
Medical and Director, Mesoblast
Limited, Fisher & Paykel Healthcare
Limited and NIB Holdings Ltd.
Qualifications: BE Civil, MBA
Appointed to the Board 1 July
2002: Chairman of the Medical
Science Committee. Member of the
Nomination and Technology &
Innovation Committees.
Background: A neuroscientist with
extensive experience in clinical
neurology and basic neurological
research. Vice Chancellor of
Monash University (2009–2014).
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).
Other boards: President and
Principal, King’s College London.
Chairman, King’s Health Partners,
and Director, Russell Group UK.
Former directorships: Deputy
Chairman, Group of Eight Vice
Chancellors, Australia and
Chairman, Global Foundation.
Director, Bupa Group Board,
London and Bupa Australia Pty Ltd.
Qualifications: DSc, MD, MBA,
FRCP, FRACP, FTSE
28 Cochlear Limited Annual Report 2017
Board of directors
Glen Boreham, AM
Alison Deans
Prof Bruce Robinson, AM
Non-executive Director Age 52
Non-executive Director Age 49
Non-executive Director Age 60
Appointed to the Board 1 January
2015: Chairman of the People &
Culture Committee. Member of the
Audit, Nomination and Technology
& Innovation Committees.
Appointed to the Board 1 January
2015: Member of the Audit, People
& Culture, Nomination and
Technology & Innovation
Committees.
Appointed to the Board 13
December 2016: Member of the
Medical Science, Nomination,
People & Culture and Technology &
Innovation Committees.
Background: Led organisations in
information technology, new media
and the creative industries through
periods of rapid change and
innovation. Former Managing
Director of IBM Australia and New
Zealand.
Other boards: Director, Southern
Cross Media Group and Link Group.
Chairman, Advance (representing
Australians living overseas) and
Chairman, Business School
Advisory Board for the University of
Technology, Sydney.
Former directorships: Director of
Data#3. Chairman of Screen
Australia.
Qualifications: BEc, FAICD
Background: More than 20 years’
experience in senior management
and strategy consulting roles
focused on e-commerce, media and
financial services. 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).
Other boards: Director, Westpac
Banking Corporation, Insurance
Australia Group Limited and kikki.K
Holdings Pty Ltd.
Qualifications: BA, MBA, GAICD
Background: Over 20 years’
leadership experience as an
academic physician/scientist across
research, healthcare and medicine,
and tertiary education. Former
Dean, The University of Sydney’s
Sydney Medical School, Head of
Medicine at Sydney’s Royal North
Shore Hospital and Head of the
Cancer Genetics Laboratory at the
Kolling Institute for Medical
Research.
Other boards: Chairman, National
Health and Medical Research
Council and Medical Benefits
Schedule Review Taskforce.
Director, MaynePharma, Firefly and
QBiotics.
Qualifications: MD, MSc, FRACP,
FAAHMS, FAICD
29
Senior executives
Chris Smith
Dig Howitt
Brent Cubis
Jan Janssen
Chief Executive Officer
President
Chief Financial Officer
Chris joined Cochlear in
2004 and will retire on 2
January 2018. Chris has
more than 30 years'
experience in the
healthcare and medical
device industry in the US
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.
Qualifications: BSc
Dig was appointed as
President, Cochlear on
31 July 2017 and will
become CEO &
President on 3 January
2018.
Dig joined Cochlear in
2000 and has a wealth of
experience across the
Company in roles
including Chief Operating
Officer, SVP,
Manufacturing and
Logistics and President,
Asia Pacific. Prior to
joining Cochlear, Dig
worked for Boral and
Boston Consulting
Group.
Qualifications: BE
(Hons), MBA
Brent joined Cochlear in
2017 and has over 30
years’ experience working
in senior finance roles
across a broad range of
companies and industries.
He is responsible for
accounting, corporate
finance, treasury, audit,
and investor relations. Prior
to joining Cochlear, Brent
worked for companies
including National Home
Doctor Service, Fitness
First, Chris O’Brien
Lifehouse, PBL Media
(Nine Network and ACP
Magazines), Bankers
Trust, Westfield, Sheraton
Hotels and Deloitte.
Qualifications: BComm,
CA
Senior Vice President,
Research and
Development
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
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.
Qualifications: MScEE
30 Cochlear Limited Annual Report 2017
Senior executives
Richard Brook
Tony Manna
Anthony Bishop
President, Europe, Middle East
and Africa Region
President,
Americas Region
President,
Asia Pacific Region
Tony is responsible for the
development and execution of the
strategic direction for our North
America operations.
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.
Qualifications: BS EET
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.
Qualifications: BSc Management,
MBA
Anthony was appointed President,
Asia Pacific in July 2016. Anthony is
responsible for the development
and execution of the strategic
direction for all our operations in
Australia, Asia and the South
Pacific. This high potential region
has complex regulatory sales and
marketing drivers which require
coordination of sales, marketing,
third-party distribution, regulatory
and clinical infrastructure
development activities.
Anthony joined Cochlear in July
2015 as Director of Marketing and
Business Development, Asia
Pacific. Prior to Cochlear, Anthony
spent 21 years at Johnson &
Johnson Medical in various roles
including marketing, sales and
general management around the
world including being Managing
Director, Johnson & Johnson
Medical, Australia/New Zealand
prior to joining Cochlear.
Qualifications: BBus (Hons),
MManagement
31
Senior executives
Stu Sayers
Dean Phizacklea
Katharine McLennan
President,
Services
Senior Vice President,
Global Marketing
Senior Vice President,
People & Culture
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.
Qualifications: BEc (Hons), MBA
Dean joined Cochlear in June 2016.
Dean has responsibility for product
marketing and commercialisation,
consumer marketing, innovation,
market access, market insights and
corporate communications.
Dean has more than 20 years'
experience in medical devices and
pharmaceuticals, covering a range
of senior commercial roles in the
US, Japan, Europe and Australia.
Prior to joining Cochlear, Dean led
Global Strategic Marketing for
Abbott Diabetes Care. Other roles
include General Manager for
Abbott's pharmaceutical and
diabetes care businesses in
Australia/New Zealand and
commercial roles in Asia with
AstraZeneca.
Qualifications: BSc Microbiology,
MBA
Katharine joined Cochlear in March
2016 and has responsibility for
talent acquisition, development,
reward and succession planning for
Cochlear as well as driving the
overall culture strategy for
leadership and innovation.
Katharine has experience in
corporate strategy, talent and
leadership development, as well as
executive psychotherapy. Katharine
has held leadership roles in Booz &
Co, QBE Insurance, Commonwealth
Bank of Australia and the Sydney
Organising Committee for the
Olympic Games.
Qualifications: BS Biology (Hons),
BA History (Hons), MBA, MA
Political Science
32 Cochlear Limited Annual Report 2017
Remuneration report
CONTENTS
Section Title
1.
Introduction
Description
Describes the scope of the Remuneration report and the individuals whose
remuneration details are disclosed. Outlines the link between performance and
remuneration.
2.
3.
4.
Non-executive director
remuneration
Provides details regarding the fees paid to non-executive directors.
Executive remuneration Details the remuneration provided to executives.
Employee share
scheme and other share
information
Provides details regarding Cochlear’s employee equity plans including that
information required by the Corporations Act 2001 and applicable accounting
standards.
The Remuneration Policy, available in the Corporate Governance section of the Cochlear website (www.cochlear.com >
About Cochlear > Investor Centre > Corporate Governance > Company Policies > Remuneration Policy), details:
the role of the Board and the People & Culture Committee and the use of remuneration consultants when making
remuneration decisions;
the philosophy and structure of remuneration for non-executive directors; and
the philosophy and structure of remuneration for executives, including:
-
remuneration mix and an outline of incentive programs (short-term (cash) incentive, deferred short-term (equity)
incentive, and long-term incentive (equity));
clawback, hedging and minimum shareholding policies;
employment agreements; and
timing and receipt of termination arrangements.
-
-
-
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 across many locations in a dynamic environment.
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 FY17.
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 Chief
Executive Officer & President who is an executive director). Details of the KMP during the year are set out in the
following table:
33
Remuneration report
Title
Non-executive directors
Rick Holliday-Smith
Yasmin Allen
Glen Boreham, AM
Chairman
Chairman, Nomination Committee
Member, Audit Committee, People & Culture Committee
Director
Chairman, Audit Committee
Member, People & Culture Committee, Nomination Committee, Technology &
Innovation Committee
Director
Chairman, People & Culture Committee
Member, Audit Committee, Nomination Committee, Technology & Innovation
Committee
Edward Byrne, AC
Director
Chairman, Medical Science Committee
Member, Nomination Committee, Technology & Innovation Committee
Alison Deans
Andrew Denver
Donal O'Dwyer
Director
Member, Audit Committee, People & Culture Committee, Nomination Committee,
Technology & 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 & Innovation Committee
Bruce Robinson, AM
Appointed 13 December 2016
Director
Member, Medical Science Committee, Nomination Committee, Technology &
Innovation Committee
Executive director
Chris Smith
Other executive KMP
Anthony Bishop
Appointed 18 July 2016
Chief Executive Officer & President (CEO&P)
Member, Medical Science Committee, Technology & Innovation Committee
President, Asia Pacific Region
Richard Brook
President, European, Middle East and African Region
Brent Cubis
Appointed 13 March 2017
Chief Financial Officer
Dig Howitt
Chief Operating Officer
Jan Janssen
Senior Vice President, Design and Development, Clinical and Regulatory
Tony Manna
President, Americas Region
34 Cochlear Limited Annual Report 2017
Remuneration report
Neville Mitchell
Ceased as KMP 13 March 2017
Chief Financial Officer and Company Secretary
Title
The following changes are noted for FY17: at the start of the financial year, Dig Howitt was promoted to the newly
created role of Chief Operating Officer effective 1 July 2016, and Anthony Bishop promoted to the vacated role of
President, Asia Pacific Region effective 18 July 2016. Neville Mitchell, the Chief Financial Officer (CFO) and Company
Secretary, announced his intention to retire. Mr Mitchell ceased to be a KMP on 13 March 2017 (further detail in section
3.3.3 Executive end of service). Brent Cubis was appointed to the CFO role, commencing 13 March 2017. Bruce
Robinson was appointed to the Board as an additional non-executive director, commencing 13 December 2016.
1.2 Relationship between Cochlear performance and executive KMP remuneration
1.2.1 Cochlear financial performance (FY12 to FY17)
FY121
FY13
FY142
FY15
FY16
FY17
Sales revenue ($million)
704.6
715.0
820.9
941.9
1,158.1
1,239.7
Earnings before interest and tax (EBIT)
($million)
Net profit after tax ($million)
Basic earnings per share (EPS) (cents)
EPS growth (3 year compound annual growth
rate)
76.5
56.8
100.0
178.9
132.6
233.0
127.1
93.7
164.6
206.4
145.8
256.1
262.6
188.9
330.6
315.6
223.6
389.7
-24.6%
-5.5%
-19.7%
36.8%
12.4%
33.3%
Total dividend per share ($)
2.45
2.52
2.54
1.90
2.30
2.70
Share price as at 30 June ($)
65.84
61.71
61.70
80.15
121.25
155.45
Relative total shareholder return (TSR) (3
years)
TSR percentile ranking3
24.1%
-14.5%
65th
28th
-6.6%
32nd
41.7%
127.2%
174.0%
38th
94th
96th
1. FY12 includes product recall expenses of $138.8 million before tax and $101.3 million after tax.
2. FY14 includes the patent dispute provision of $22.5 million before tax and $15.8 million after tax.
3. TSR ranking is shown over three financial years to 30 June. For long-term incentives, performance is compared to TSR for ASX 100 companies.
For further explanation of details on Cochlear performance, see the Operating and financial review section on pages 6 to
20 of this Annual Report.
1.2.2 Cochlear one year performance and relationship to executive KMP remuneration
Cochlear’s short-term incentive (STI) is dependent on revenue, EBIT and personal goals in the performance year.
Cochlear sales revenue grew 7% year on year. New product launches combined with investments in market growth
initiatives drove this growth. EBIT in FY17 was 20% above that for FY16.
35
Remuneration report
m
$
1,400
1,200
1,000
800
600
400
200
0
Executive KMP STI against sales revenue & EBIT
1,158.1
1,239.7
820.9
715.0
941.9
178.9
127.1
206.4
262.6
315.6
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
%
I
T
S
FY13
FY14
FY15
FY16
FY17
Sales revenue $m
EBIT $m
Average executive KMP STI %
The STI payouts to executive KMP this year ranged from 96.8% to 115.8% of their target STI opportunity, reflecting the
strong performance against financial targets and performance at expectations against personal objectives. Individual
details are provided in section 3.2.
The payout ratios on STI in FY17 reflect individual, business and Cochlear performance against targets in accordance
with the STI plan rules. The Board has worked to ensure the overall executive KMP remuneration recognises Company
performance and enables the business to build, develop and retain a talented leadership team with promotion of internal
candidates.
The Board approved a factor of 110% to be applied to the One Cochlear portion of the STI pool, reflecting the strong
performance against the established measures which included:
Grow the Core
Build a Service
Business
Shape the
Organisation
Development and launch of new products; increase access and public policy; and implement
direct to consumer.
Increase recipient engagement; and build the upgrade business.
Implement One Cochlear; develop organisational talent and capability; and implement the
digital strategy.
Value Creation
Develop partnerships and alliances; and achieve financial targets.
1.2.3 Cochlear three year performance and relationship to executive KMP remuneration
As explained in the Remuneration Policy (available in the Corporate Governance section of the Cochlear 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:
deferred STI in the form of performance rights, although dependent on sales revenue and EBIT performance and
outcomes for the completed performance year, 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. 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.
36 Cochlear Limited Annual Report 2017
Remuneration report
Earnings per share (EPS)
Vesting of the EPS portion of Cochlear executives’ LTI over the last five years is displayed in the graphs following. This
vesting is overlaid with the compound annual growth rate (CAGR) of EPS for the corresponding performance period.
Cochlear’s basic EPS in FY17 was 389.7 cents, which is a 33.3% CAGR over the three year vesting period. The vesting
scale for the LTI plan generates 100% of the award at this growth level. This is the third time any part of the EPS portion
has vested in the past five years.
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 following. This information is 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.
EPS vesting
TSR vesting
g
n
i
t
s
e
v
I
T
L
100%
80%
60%
40%
20%
0%
FY13 FY14 FY15 FY16 FY17
50%
30%
10%
-10%
-30%
-50%
R
G
A
C
r
a
e
y
3
S
P
E
g
n
i
t
s
e
v
I
T
L
100%
80%
60%
40%
20%
0%
100
80
60
40
20
0
g
n
i
k
n
a
r
e
l
i
t
n
e
c
r
e
p
R
S
T
0
0
0
FY13 FY14 FY15 FY16 FY17
LTI vesting
EPS 3 year CAGR
LTI vesting
TSR percentile ranking (3 years)
Cochlear’s TSR for the three years ended 30 June 2017 was ranked at the 96th percentile in the ASX 100. As a result,
100% of the TSR portion of the LTI vested this year.
Vesting outcomes (performance shares/rights and options granted FY11 to FY15)
Grant date
Vesting
date1
EPS 3
year
CAGR2
%
vested3
%
forfeited3
Relative
TSR 3
year
percentile
ranking
%
vested3
%
forfeited3
Performance
rights
Market price
as at 30
June ($)4
Options
Exercise
price ($)
16-Aug-10
15-Aug-11
13-Aug-12
15-Oct-13
14-Oct-145
Aug 2013
Aug 2014
Aug 2015
Aug 2016
Aug 2017
-5.5%
-19.7%
36.8%
12.4%
33.3%
0.0%
0.0%
100.0%
61.8%
100.0%
100.0%
100.0%
0.0%
38.2%
0.0%
28th
32nd
38th
94th
96th
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
100.0%
100.0%
0.0%
0.0%
N/A
N/A
80.15
121.25
155.45
69.80
68.56
62.78
59.13
68.56
Net
market
value
as at
30
June
($)4
N/A
N/A
17.37
62.12
86.89
1. While the vesting period ends on 30 June of each year, participants are not able to exercise any awards until the Board approves the opening of the
first trading window under the Cochlear Trading Policy (typically immediately following the Cochlear full-year results announcement).
2. Compound annual growth rate.
3. All plan participants had the same vesting and forfeiture percentage outcome for LTI.
4. Closing share price 30 June of applicable vesting year.
5. The performance hurdles for the LTI plans are considered demanding such that in the last five years, only 46% of allocations vested.
37
Remuneration report
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 guidelines 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 maintains a watching brief on changing market practice for 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 NEDs. Reflecting the increasing
governance requirements and the work of the Board, the Board considered it appropriate to revise base fees for FY17 by
4.6% in aggregate. Prior to this, the base fee had not changed since 2011. Fees are detailed in section 2.1. Total fees
now represent 82.5% of the $2.5 million aggregate amount approved by shareholders at the October 2015 Annual
General Meeting (AGM). This is up from 74.0% for FY16 with the inclusion of an additional Board member. The Board
will request an increase in the fee pool at the 2017 AGM to provide flexibility in adding capability to the Board’s skill base.
38 Cochlear Limited Annual Report 2017
Remuneration report
2. NON-EXECUTIVE DIRECTOR REMUNERATION
2.1 NED fees FY17
Board fees
FY17
FY16 Committee fees
Board Chairman fee1
$472,274
$438,000 Audit
FY17 and FY16
Committee
Chair
Committee
member
$50,000
$25,000
Board NED base fee
$154,760
$146,000 People & Culture
$30,000
$15,000
Medical Science
$30,000
$15,000
Nomination
No fee
No fee
Technology and Innovation
$40,000
$20,000
1. Committee fees are not paid to the Chairman of the Board.
2.2 Post-employment benefits and other policy items
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 2017, Edward Byrne was the only NED entitled to this benefit. The accrued
entitlement for Edward Byrne under the Cochlear directors’ retirement scheme as at 30
June 2017 was $450,031.
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.
39
Remuneration report
2.3 NED total remuneration
Amounts $
Rick Holliday-Smith (Chairman)
Yasmin Allen
Glen Boreham
Edward Byrne
Alison Deans
Andrew Denver
Donal O'Dwyer
Bruce Robinson2
Total3
Year
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY17
FY16
Short-term
benefits
Post-employment
benefits
Fees
Accrued
interest1
Superannuation
benefits
471,747
438,000
239,625
230,731
229,625
220,654
204,625
195,846
214,625
192,154
234,625
225,769
214,625
205,846
101,448
1,910,945
1,709,000
-
-
-
-
-
-
7,996
9,586
-
-
-
-
-
-
-
7,996
9,586
Total
491,363
457,308
259,241
250,039
249,241
239,962
231,407
223,680
233,849
210,409
254,241
245,077
233,849
224,532
110,512
19,616
19,308
19,616
19,308
19,616
19,308
18,786
18,248
19,224
18,255
19,616
19,308
19,224
18,686
9,064
144,762
132,421
2,063,703
1,851,007
1.
2.
3.
Amounts accrued for interest during the financial year relating to the directors’ retirement scheme.
Appointed 13 December 2016.
The year-on-year changes in Board fees reflect the appointment of an additional director half way through FY17, changes in Board committee
membership and increases to Board NED base fees.
The table below indicates Cochlear Limited shareholdings:
Held at 1
July 2016
Purchases
Sales
Cochlear Limited
ordinary shares
held as at 30
June 2017
Rick Holliday-Smith
10,000
Yasmin Allen
Glen Boreham
Edward Byrne
Alison Deans
Andrew Denver
Donal O’Dwyer
Bruce Robinson
Total
3,500
2,800
3,250
2,000
4,000
6,000
N/A
31,550
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total intrinsic
value of Cochlear
Limited securities
as at year end
($)1
1,334,400
467,040
373,632
433,680
266,880
533,760
800,640
-
% of fees
283%
195%
163%
212%
124%
227%
373%
-
10,000
3,500
2,800
3,250
2,000
4,000
6,000
-
31,550
4,210,032
220%
1.
In line with the Share Ownership Policy (available on the Cochlear website), the intrinsic value of Cochlear Limited ordinary shares is calculated using
the average daily share price over the previous 12 months ($133.44), as at closing on the ASX up to 30 June 2017, times the number of shares.
All NEDs are compliant with the Share Ownership Policy which allows three years to build holdings equivalent in value to
their previous year’s total annual Cochlear director’s fees (including committee fees).
40 Cochlear Limited Annual Report 2017
Remuneration report
3. EXECUTIVE REMUNERATION
3.1 Executive remuneration table - Audited statutory disclosure (accounting cost to Cochlear)
Amounts $
Year
Fixed remuneration
Variable remuneration
Total
Short-term
Other employee
costs
Total Short-term incentive
Long-term incentive (LTI)2
Total
(STI)2
Name
Salary
Non-
monetary
benefits1
Superan-
nuation
benefits
Long
service
leave
Cash STI
and special
incentive3
Deferred
STI4
Value of
options5
Value of
performance
rights5
Chris Roberts6 FY16
609,526 165 9,654 - 619,345
204,759
32,056
80,829
-
317,644 936,989
Chris Smith6
FY17 1,639,249 95,201 35,510 - 1,769,960 1,445,173 318,226 477,958 454,134
2,695,491 4,465,451
Anthony
Bishop7
FY16 1,341,409 285,865 - - 1,627,274
1,200,924
192,418
481,906
252,384
2,127,632
3,754,906
FY17
428,886
640 18,484 1,838 449,848 217,735 61,435 9,579 22,207
310,956 760,804
Richard Brook FY17
665,624 206,511 131,114 - 1,003,249 370,182 119,049 106,589 162,060
757,880 1,761,129
FY16
674,740 205,799 126,953 - 1,007,492
374,074
91,517
150,138
188,994
804,723 1,812,215
Brent Cubis7
FY17
158,654
193 7,918 271 167,036 97,857 11,857 -
-
109,714 276,750
Dig Howitt
FY17
654,635
1,130 19,616 30,074 705,455 415,368 108,171 167,851 81,194
772,584 1,478,039
FY16
528,951 990 19,308 13,563 562,812
371,964
54,991
249,140
61,731
737,826 1,300,638
Jan Janssen
FY17
568,230
1,130 19,616 4,274 593,250 347,930 106,693 119,446 109,055
683,124 1,276,374
FY16
552,032 990 19,308
(2,274) 570,056
348,992
79,795
140,048
162,097
730,932 1,300,988
Tony Manna
FY17
598,375 92,122 17,921 - 708,418 332,891 117,163 85,037 34,833
569,924 1,278,342
FY16
585,992 82,017 22,451 - 690,460
335,386
32,039
56,921
18,284
442,630 1,133,090
Neville Mitchell8 FY17
420,742
526 143,295 12,250 576,813 286,938 92,648 43,588 89,489
512,663 1,089,476
FY16
583,293 660 191,351 27,680 802,984
435,969
98,370
147,082
223,846
905,267 1,708,251
Total
FY17 5,134,395 397,453 393,474
48,707 5,974,029 3,514,074 935,242 1,010,048 952,972
6,412,336 12,386,365
FY16 4,875,943
576,486
389,025
38,969
5,880,423
3,272,068
581,186
1,306,064
907,336
6,066,654 11,947,077
Proportion of
total
remuneration
Performance
related
%
33.9%
60.4%
56.7%
40.9%
43.0%
44.4%
39.6%
52.3%
56.7%
53.5%
56.2%
44.6%
39.1%
47.1%
53.0%
51.8%
50.8%
1. Benefits include housing allowances for expatriate KMP, car allowances and insurances which are market based payments. Some insurance items
were omitted from FY16 non-monetary amounts in the FY16 report; they have been restated above.
2. Equity STI and LTI are awarded annually, with cash STI paid half yearly. The service and performance criteria are set out in this report.
3. During FY16, the Board approved a special incentive program specific to the One Cochlear change initiative – detailed in a separate column in the
table on the next page.
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 FY17
amount represents the portion of the FY15, FY16 and FY17 deferred STI expensed in FY17. The FY16 amount represents the portion of the FY14,
FY15 and FY16 deferred STI expensed in FY16.
5. The value of options and performance 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 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 rights. The value disclosed above is the portion of the value of the options and performance rights recognised as an expense in the
financial year. The ability to exercise the options and performance 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.
6. Chris Roberts was an executive director and retired on 31 August 2015. Chris Smith is an executive director in FY17 and FY16.
7. Anthony Bishop was promoted to a KMP role on 18 July 2016 and Brent Cubis was appointed as a KMP on 13 March 2017. Values in this table relate
only to the period they were KMP.
8. Neville Mitchell ceased to be a KMP on 13 March 2017 and retired on 1 July 2017. The above table reflects amounts earned in the period to 13 March
2017. Full details for Mr Mitchell’s earnings for the full year are provided in section 3.3.3.
41
Remuneration report
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
Future at risk remuneration
awarded
Total
remuneration
awarded
Name
Fixed
remuneration1
Special
incentive2
Cash ST
incentive3
%
achieved
%
forfeited
Value of
vested
deferred STI
Intrinsic value
of vested
options4
Intrinsic value of
vested
performance
shares (LTI)4
Deferred
STI5
LTI
(equity)
granted during
year5
Chris Roberts
FY16
619,345
-
204,759
108.1%
-
- 2,583,213
-
3,407,317
-
-
824,104
Chris Smith
FY17
1,769,960
- 1,445,173
107.4%
- 167,548
959,371
361,507
4,703,559 433,627 1,236,297
4,885,057
FY16
1,627,274
-
1,200,924
107.7%
-
-
490,489
66,980
3,385,667 360,340 1,306,785
4,495,323
Anthony Bishop6
FY17
449,848
- 217,735
96.8%
3.2% - - -
667,583 87,094
95,358
850,035
Richard Brook
FY17
1,003,249
- 370,182
98.6%
1.4% 138,762
460,437
408,879
2,381,509 134,612
246,870
1,754,913
FY16
1,007,492
15,000
359,074
96.8%
3.2% -
469,399 -
1,850,965 107,722
328,759
1,818,047
Brent Cubis6
FY17
167,036
- 97,857
107.3%
Dig Howitt
FY17
705,455
- 415,368
107.3%
-
-
- - -
264,893 35,571 -
300,464
99,774 1,428,167 -
2,648,764 138,456
273,676
1,532,955
FY16
562,812
33,500
338,464
112.0%
- - -
260,427
1,195,203 101,539
253,191
1,289,506
Jan Janssen
FY17
593,250
- 347,930
107.3%
- 101,312
353,434 375,761
1,771,687 126,519
208,447
1,276,146
FY16
570,056
15,000
333,992
106.1%
-
-
302,913
105,863
1,327,824 100,197
254,020
1,273,265
Tony Manna
FY17
708,418
- 332,891
115.8%
- 189,907 - -
1,231,216 133,157
177,656
1,352,122
FY16
690,460
15,000
320,386
108.7%
- -
287,046 -
1,312,892
96,116
193,307
1,315,269
Neville Mitchell7
FY17
825,636 - 286,938
103.3%
- 124,788
880,309
331,603
2,449,274 149,351
-
1,261,925
FY16
802,984
22,000
413,969
107.3%
-
-
124,962
262,089
1,626,004 124,191
306,439
1,669,583
Total
FY17
6,222,852
- 3,514,074
105.5%
- 822,091 4,081,718 1,477,750 16,118,485 1,238,387 2,238,304
13,213,617
FY16
5,880,423 100,500 3,171,568
106.7%
- - 4,258,022 695,359 14,105,872 890,105 2,642,501 12,685,097
1. Represents the value of base salary, non-monetary benefits and superannuation received during the year (includes the accrued value of long service
leave) – as detailed in the statutory table. Previously, long service leave accrual and some insurance items were omitted from FY16 non-monetary
amounts in the FY16 report. FY16 fixed remuneration numbers in this table are restated to reflect this change.
2. During FY16, the Board approved a special incentive program specific to the One Cochlear change initiative. For FY17, One Cochlear change
initiatives were included in the individual elements of the main STI program.
3. Represents STI payments earned during the financial year. For example, FY17 data includes first half STI payments received in February, and second
half STI payments which are accrued at year end, and received in August 2017, 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 vested unexercised 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. 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 and service
hurdles.
6. Anthony Bishop was promoted to a KMP role on 18 July 2016 and Brent Cubis became a KMP on 13 March 2017. Values included in this table relate
only to the period they were KMP. Both the deferred STI and the LTI are annual programs and Mr Cubis will receive his first allocations after FY17.
7. Neville Mitchell ceased to be a KMP on 13 March 2017 and retired on 1 July 2017. The above table reflects pay for the full year, not only the period as
a KMP.
42 Cochlear Limited Annual Report 2017
Remuneration report
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. Fixed remuneration components are determined
having regard to the specific skills and competencies of the executive with reference to both internal and external
relativities, particularly local market conditions. The at risk components of remuneration are strategically directed to
encourage management to strive for superior (risk-balanced) performance by rewarding the achievement of targets that
are challenging, clearly defined, understood and communicated within the ambit of accountability of the relevant
executive.
Total target remuneration is set by reference to the relevant geographic market
Fixed pay
At risk pay
Total fixed remuneration (TFR)
Short-term incentives (STI)
Long-term incentives (LTI)
TFR is set relative to market and reflects
responsibilities, performance,
qualifications, experience and geographic
location
STI performance criteria are set by
reference to Cochlear group and/or
regional revenue and EBIT and individual
strategic performance targets relevant to
the specific position
LTI targets are linked to Cochlear group
performance measures:
50%: to internal EPS growth
50%: external relative TSR
Remuneration will be delivered as:
Cash plus any fixed elements related to
local markets, including superannuation
or equivalents
Part cash and part equity (performance
rights). The equity component will be
subject to service and deferred for 2 years
to build alignment to longer-term
shareholders’ interests
Equity in options and/or performance
rights. All equity is held subject to
service and performance for 3 years
from grant date. The equity is at risk
until vesting. Performance is tested
once at the vesting date
Strategic intent and market positioning
Quantum and mix will take account of
relevant market data considering the
individual’s expertise in the role.
TFR must be competitive to attract and
retain executive talent
STI is directed to achieving Board
approved targets, reflective of market
circumstances. Targets are set as interim
milestones on the longer-term strategy,
and equity delivery discourages short
termism
LTI is intended to reward executives
for sustainable long-term growth
aligned to shareholders’ interests.
Executives eligible for LTI may also be
subject to the Share Ownership Policy
Each remuneration component and the overall total target reward levels are tested regularly for market competiveness by
reference to appropriate independent and externally sourced comparable benchmark information, taking into account an
executive’s responsibilities, performance, qualifications, experience and geographic location
Total target remuneration
43
Remuneration report
3.3.1 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:
Remuneration mix
Chris Smith
33%
26%
Anthony Bishop
50%
8%
25%
33%
10%
15%
Fixed
STI (cash)
Richard Brook
Brent Cubis
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
45%
45%
42%
45%
47%
45%
3.3.2 Service contracts
Deferred STI (equity)
LTI (equity)
24%
24%
9%
9%
22%
22%
25%
8%
25%
24%
9%
22%
24%
10%
19%
24%
9%
22%
Cochlear does not enter into (limited) 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 contract 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).
Post-employment
restraints
All executive KMP are subject to post-employment restraints for up to 12 months.
Other arrangements Richard Brook - President, European, Middle East and African Region will receive a maximum
of CHF 30,000 for repatriation costs in the case of termination or resignation.
3.3.3 Executive end of service
When Neville Mitchell announced the possibility of retirement, the Board approved a retention award of $145,000 to be
paid if he remained with Cochlear until 1 July 2017 to enable Cochlear to manage a smooth transition to a new CFO.
Although the Board does not deem this retention payment to be a “termination payment”, if it was deemed to be a
termination payment within the definition of the Corporations Act 2001, the payment is well within the one times pay limit
set out within the Act. In addition, Mr Mitchell received $327,245 in statutory entitlements. The Board also used its
discretion to allow several previous equity grants to remain on foot subject to the original terms of those grants (both time
and performance hurdles) – details provided in section 4.2, including the FY17 deferred STI grant valued at $123,188.
44 Cochlear Limited Annual Report 2017
Remuneration report
The statutory executive remuneration table (section 3.1) shows the payments earned by Mr Mitchell up to the date of
appointment of the new CFO (13 March 2017), at which point Mr Mitchell ceased to be a KMP. The following table
shows the corresponding full year of payments to Mr Mitchell for FY17:
Fixed remuneration
Variable remuneration
Amounts $
Total
Short-term incentive (STI)
Long-term incentive
(LTI)
Total
Name
Salary
Non-
monetary
benefits
Superan-
nuation
benefits
Long
service
leave
Cash
STI
Deferred STI
Value
of
options
Value of
perform-
ance rights
End of
service
Total
Proportion of
total
remuneration
Performance
related %
Neville
Mitchell
602,239
753
205,109
17,535
825,636
410,715
273,030
93,560
195,231
972,536
145,000
1,943,172
50.0%
Payments made in FY18 were accrued and expensed at 30 June 2017.
The incentive values include an expense of $140,934 for deferred STI, $67,639 for LTI performance rights and $31,413
for LTI options that would normally have been amortised over future years for awards that remain subject to vesting
hurdles and timeframes, and LTI may not be paid out.
Mr Mitchell remained on a transitional defined contribution superannuation plan based on a fixed percentage (19.5%) of
base salary and STI.
45
Remuneration report
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 Purpose
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
Date established:
2016
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 2016 (FY17) grant,
1,404 employees in Australia and Belgium each received an award
of seven 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 FY17 grant, 164 employees each received an award of
seven service rights. Executive KMP are not eligible for this
program.
Cochlear Executive
Incentive Plan (CEIP)
Options and
performance rights
The purpose of the CEIP is to encourage employees and
executives to hold Cochlear shares and to align their interests to
shareholders’ interests.
Date established:
2013
Under the LTI plan, vesting of options or performance rights occurs
only if Cochlear achieves challenging and market competitive
hurdles related to EPS growth and relative TSR. The first grant of
options and performance rights under the CEIP was made on 15
October 2013. Refer also to the Remuneration Policy for more
detail.
Under the deferred STI plan, grants are based on performance in
the first year, and are then deferred for a further two years. They
provide more certainty of building an equity holding as no further
performance hurdles apply other than tenure.
46 Cochlear Limited Annual Report 2017
Remuneration report
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 rights granted as remuneration to each executive KMP is set out
below:
Name
Reward vehicle
Grant date
Vesting date
Options
Performance rights1
Chris Smith
Anthony Bishop
Richard Brook
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY16 deferred STI
FY17 LTI
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY14 LTI
FY14 deferred STI
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
16-Aug-16
19-Oct-16
Total
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
15-Oct-13
12-Aug-14
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
Total
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
17-Aug-18
15-Aug-19
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
15-Aug-16
12-Aug-16
12-Aug-17
18-Aug-17
17-Aug-18
17-Aug-18
15-Aug-19
Number
granted
Number
vested
14,955
-
15,412
-
69,047
-
28,150
127,564
-
2,171
2,171
7,249
-
7,256
-
12,601
-
5,622
32,728
21,900
-
10,970
-
18,682
-
10,375
61,927
6,664
-
11,127
-
9,736
-
7,900
35,427
-
-
-
-
10,216
-
9,414
19,630
13,723
-
8,168
-
7,159
-
5,812
34,862
12,098
-
-
-
-
-
-
12,098
-
-
-
5,864
-
-
-
-
-
-
5,864
17,717
-
-
-
-
-
-
17,717
5,391
-
-
-
-
-
-
5,391
-
-
-
-
-
-
-
-
11,101
-
-
-
-
-
-
11,101
Number
forfeited/
lapsed
2,857
-
-
-
-
-
-
2,857
-
-
-
1,385
-
-
-
-
-
-
1,385
4,183
-
-
-
-
-
-
4,183
1,273
-
-
-
-
-
-
1,273
-
-
-
-
-
-
-
-
2,622
-
-
-
-
-
5,812
8,434
Number
granted
Number
vested
3,198
1,199
2,998
2,027
5,641
2,787
9,736
27,586
752
751
1,503
3,617
993
3,293
1,448
2,402
833
1,944
14,530
-
714
2,133
1,066
-
785
1,537
6,235
3,325
725
2,164
1,177
1,856
775
1,171
11,193
-
1,359
-
1,542
834
743
598
5,076
2,934
893
3,707
1,444
3,184
960
2,010
15,132
2,587
1,199
-
-
-
-
-
3,786
-
-
-
2,926
993
-
-
-
-
-
3,919
-
714
-
-
-
-
-
714
2,689
725
-
-
-
-
-
3,414
-
1,359
-
-
-
-
-
1,359
2,373
893
-
-
-
-
-
3,266
Number
forfeited/
lapsed
611
-
-
-
-
-
-
611
-
-
-
691
-
-
-
-
-
-
691
-
-
-
-
-
-
-
-
636
-
-
-
-
-
-
636
-
-
-
-
-
-
-
-
561
-
-
-
-
-
2,010
2,571
1. During FY17, Cochlear made changes to the way the deferred STI is administered to better reflect how it operates in practice. Previously, the deferred
STI grant was formally offered in the year following performance assessment. For example, the FY16 plan was formally offered in FY17. Going
forward, the plan will be formally offered in the year it is earned. This does not alter the reward delivered under the plan. As the number of rights is
based on the volume weighted average price of Cochlear shares in the five days following results announcement, the details of the FY17 grant are not
provided in the above table.
The options granted in FY17 have an exercise price of $135.84 and an expiration date of 16 March 2020. Fair values of
FY17 option and performance rights granted under the LTI plan are as follows:
Fair value (IFRS-2)
EPS based
TSR based
Options
$18.65
$14.46
Performance rights
$125.82
$96.40
47
Remuneration report
4.2.2 Exercise of options and performance shares/rights granted as remuneration
During FY17, 56,733 options were exercised by executive KMP. The FY14 LTI grant met the EPS hurdle so there was an
80.9% vesting from this grant. There are no amounts unpaid on the shares issued as a result of the exercise of the
options in prior years.
4.2.3 Analysis of movement in options and performance shares/rights
The tables below detail movements in number and value during FY17 of:
options over ordinary shares of Cochlear Limited acquired under the LTI; and
performance shares/rights acquired under the LTI and deferred STI, held by executive KMP.
Options
Opening
Granted in year
Exercised in year
Number
Number
Value ($)1
Number
Intrinsic
value ($)2
Forfeited/
lapsed in year
Closing
Number
Number
Chris Smith
Anthony Bishop
Richard Brook
Brent Cubis
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
Total
Performance
shares/rights
99,414
28,150
372,600
12,098
959,371
2,857
112,609
-
27,106
-
51,552
27,527
14,778
29,050
2,171
5,622
-
10,375
7,900
9,414
5,812
28,736
74,414
-
137,326
104,566
-
-
-
2,171
5,864
460,437
1,385
25,479
-
-
-
-
17,717
1,428,167
4,183
40,027
5,391
353,434
1,273
28,763
124,606
4,562
351,092
-
19,630
76,929
11,101
880,309
8,434
N/A
249,427
69,444
919,177
56,733
4,432,810
18,132
228,679
Opening
Granted in year
Exercised in year
Number
LTI
number
LTI value
($)1
Deferred
STI
number
Deferred
STI value
($)3
Number
Intrinsic
value ($)4
Closing
Forfeited/
lapsed in
year
Number
Number
Chris Smith
15,063
9,736
863,697
2,787
360,275
3,786
529,056
611
23,189
Anthony Bishop
-
751
66,622
752
97,211
-
-
-
1,503
Richard Brook
11,753
1,944
172,456
833
107,682
3,919
547,641
691
9,920
Brent Cubis
-
-
-
-
-
-
-
Dig Howitt
3,913
1,537
136,350
785
101,477
714
99,774
-
-
-
5,521
Jan Janssen
9,247
1,171
103,881
775
100,184
3,414
477,072
636
7,143
Tony Manna
3,735
598
53,050
Neville Mitchell
12,162
2,010
178,311
743
960
96,048
1,359
189,907
-
3,717
124,099
3,266
456,391
2,571
N/A
Total
55,873
17,747
1,574,367
7,635
986,976
16,458
2,299,841
4,509
50,993
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. the FY17
grant is allocated in each of FY17 to FY19).
2. The intrinsic value of exercised options is calculated as the closing market price of Cochlear shares on the Australian Securities Exchange (ASX) on
the date of exercise less the applicable exercise price, times the number of options.
3. Deferred STI value represents performance rights under the deferred STI plan for the FY16 performance year.
4. The intrinsic value of vested performance shares/rights 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/rights.
48 Cochlear Limited Annual Report 2017
Remuneration report
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:
Exercise period Current net value
of outstanding
options as at 30
June 2017 ($)1
Aug-17 to Mar-18
6,794,103
Aug-18 to Mar-19
9,784,353
Grant date
Number of options
Issued
Exercised
Forfeited/
lapsed
At report
date
Exercise
price per
share ($)
14-Oct-142
138,963
20-Oct-152
162,451
19-Oct-162
95,586
Total
397,000
-
-
-
-
60,771
78,192
27,606
134,845
68.56
82.89
15,689
79,897
135.84
Aug-19 to Mar-20
1,566,780
104,066
292,934
18,145,236
1. Closing share price as at 30 June 2017 was $155.45.
2. Lapsed options from unvested grants relate to plan members who have departed Cochlear.
Total unvested equity currently accounts for approximately 0.8% of total market capitalisation, as set out below:
Instrument
Unvested LTI options
Unvested LTI performance rights
Unvested deferred STI rights
Service rights under the AEEP
Number of equivalent shares
at 30 June 2017
292,934
56,332
83,758
2,426
Shares in holding lock under the CESP
45,699
Total
as % of total shares
Number of shares
481,149
0.8%
57,426,649
49
Remuneration report
4.4 KMP equity interests
In accordance with the Corporations Act 2001 (section 205G(1)), Cochlear is required to notify the interests (shares and
rights to shares) of directors to the ASX. In the interests of transparency and completeness of disclosure, this
information is provided for each NED in section 2.3 (as required under the Corporations Act 2001) and all executive KMP
as well. Also refer to the Remuneration Policy (Minimum shareholding guidelines and Hedging and margin lending
prohibition) and Share Ownership Policy available on the Cochlear website.
The table below indicates Cochlear Limited shareholdings. In previous years, this table included any vested but
unexercised options and performance shares; however, under the current structure of the LTI plan, it is no longer
possible to have options that are vested but unexercised at year end.
Purchases
Held at 1
July
2016
Sales
Received on
exercise of
options and
performance
shares
Cochlear
Limited
ordinary
shares held
as at 30
June 2017
Policy value of
Cochlear
Limited
securities as at
year end ($)1
% of base
salary
Chris Smith
Anthony Bishop
Richard Brook
Brent Cubis
Dig Howitt
Jan Janssen
Tony Manna
Neville Mitchell
Total executive KMP
18,288
-
8,000
-
21,398
15,379
-
11,000
74,065
-
-
-
-
-
-
-
-
15,884
-
9,783
-
18,431
8,805
5,921
14,367
73,191
16,172
-
9,783
-
17,717
3,500
5,104
14,367
66,643
18,000
-
8,000
-
22,112
20,684
817
N/A
69,613
2,401,920
-
1,067,520
-
2,950,625
2,760,073
109,020
N/A
9,289,158
147%
-
160%
-
451%
486%
18%
N/A
182%
1.
In line with the Share Ownership Policy (available on the Cochlear website), the “Policy value” of Cochlear Limited ordinary shares is calculated using
the average daily share price as at closing on the ASX over the previous 12 months up to 30 June 2017 ($133.44), times the number of shares.
The table below indicates any unvested options and performance rights issued to executive KMP but still subject to
performance hurdles and deferred STI service conditions:
Unvested
LTI options1
Unvested
LTI
performance
rights2
Unvested
deferred STI
performance
rights3
Total intrinsic value of
unvested options and
performance rights as at
year end ($)4
Total intrinsic
value of shares
held and
unvested equity
% of base
salary
Chris Smith
112,609
18,375
4,814
7,055,340
9,457,260
Anthony Bishop
2,171
751
752
254,928
254,928
Richard Brook
25,479
7,639
2,281
2,369,589
3,437,109
Brent Cubis
Dig Howitt
Jan Janssen
Tony Manna
-
-
-
-
-
40,027
3,670
1,851
2,114,341
5,064,966
28,763
5,191
1,952
2,024,473
4,784,546
19,630
1,432
2,285
1,040,748
1,149,769
577%
59%
516%
-
774%
842%
192%
Total executive KMP
228,679
1. The number of unvested LTI options over Cochlear Limited ordinary shares.
2. The number of unvested LTI performance rights over Cochlear Limited ordinary shares.
3. The number of unvested deferred STI performance rights over Cochlear Limited ordinary shares.
4. The intrinsic value of unvested options calculated as the closing Cochlear Limited share price on the ASX on 30 June 2017 less the applicable exercise
14,859,419
24,148,578
13,935
37,058
473%
price, times the number of options (negative values are treated as zero in the totals). For the purposes of the policy, only 50% of the intrinsic value of
options is counted. The intrinsic value of unvested performance rights calculated as at the closing Cochlear Limited share price on the ASX on 30 June
2017 ($155.45) times the number of performance rights.
All executive KMP are compliant with the Share Ownership Policy (minimum shareholding requirements).
50 Cochlear Limited Annual Report 2017
Directors’ report
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 2017, 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, Prof B
Robinson, AM 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.
COMPANY SECRETARY
The Company Secretarial function is responsible for ensuring that the Company complies with its statutory duties and
maintains proper documentation, registers and records. It also provides advice to directors and officers about corporate
governance and gives practical effect to any decisions made by the Board.
Mr Neville Mitchell resigned as Company Secretary on 13 February 2017. Mr Ray Jarman was appointed Company
Secretary on 13 February 2017. He has qualifications in law and science from the University of New South Wales and is
an admitted solicitor in New South Wales. Mr Jarman joined Cochlear in 2008 as the inaugural Group General Counsel.
He has over 30 years’ experience in corporate and commercial law, litigation & dispute resolution, legal compliance and
corporate governance across medical device, steel, mining and consumer goods industries.
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 &
Innovation
Committee
Held Attended
9
9
Held Attended
5
5
Held Attended
3
4
Held Attended
-
-
Held Attended
4
4
Held Attended
-
-
9
9
9
9
9
9
4
9
9
9
9
9
9
9
4
9
5
5
-
5
5
5
-
-
5
5
-
5
5
5
-
-
4
4
-
4
-
-
-
-
4
4
-
4
-
-
-
-
-
-
2
-
2
2
1
2
-
-
2
-
2
2
1
2
4
4
4
4
4
4
1
-
4
4
4
4
4
4
1
-
3
3
3
3
3
3
2
3
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
Prof B Robinson, AM1
Mr C Smith
1. Prof Bruce Robinson, AM appointed to the Board effective 13 December 2016.
PRINCIPAL ACTIVITIES
Information on the principal activities, operations and financial position of Cochlear Limited and its business strategies
and prospects is set out in the Operating and financial review on pages 6 to 20 of this Annual Report.
3
3
3
3
3
3
2
3
51
Directors’ report
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 2017 ordinary
Final 2016 ordinary
Total amount
Subsequent event
Since the end of the financial year, the
directors declared the following dividends:
Final 2017 ordinary
Total amount
1.30
1.20
2.50
1.40
1.40
74,655 100% Franked
6 April 2017
68,883 100% Franked
29 September 2016
143,538
80,397 100% Franked
11 October 2017
80,397
The financial effect of the 2017 final dividend will be recognised in the subsequent financial year as it was declared after
30 June 2017. Franked dividends paid or declared during the financial year were franked at the tax rate of 30% (2016:
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.
52 Cochlear Limited Annual Report 2017
Directors’ report
Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit
services during the year are set out below:
Audit services
Audit and review of financial reports
Other regulatory compliance services
Total audit services
Non-audit services
Taxation compliance services
Acquisition due diligence services
Other
Total non-audit services
STATE OF AFFAIRS
2017
$
2016
$
1,539,847
1,583,831
70,801
58,734
1,610,648
1,642,565
1,361,901
1,019,724
581,843
202,001
-
31,674
2,145,745
1,051,398
There were no significant changes to the state of affairs of Cochlear during the financial year.
REMUNERATION REPORT
Information on Cochlear’s remuneration framework and the outcomes for FY17 for the Cochlear Limited Board, the CEO
and the CEO’s direct reports, and changes for FY18, is included in the Remuneration report on pages 33 to 50 of this
Annual Report.
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 R Jarman, 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.
53
Directors’ report
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 2017, see Note 2.6 to the financial statements.
LEAD AUDITOR’S INDEPENDENCE DECLARATION
The lead auditor’s independence declaration is set out on page 55 and forms part of the Directors’ report for the financial
year ended 30 June 2017.
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 17th day of August 2017.
Signed in accordance with a resolution of the directors:
Director
Director
54 Cochlear Limited Annual Report 2017
Auditor’s independence declaration
Lead auditor’s independence declaration under section 307C of the Corporations Act 2001
To: the directors of Cochlear Limited
I declare that, to the best of my knowledge and belief, in relation to the audit for the year ended 30 June 2017 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, 17 August 2017
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.
55
Income statement
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)
Note
2.2
2.3
2017
$000
2016
$000
1,253,838
1,130,552
(358,373)
(333,593)
895,465
796,959
(348,928)
(324,144)
(83,474)
(79,287)
(151,929)
(145,080)
2.4
4,466
14,156
315,600
262,604
742
468
(7,517)
(8,806)
(6,775)
(8,338)
308,825
254,266
3.1
(85,209)
(65,345)
223,616
188,921
2.5
2.5
389.7
389.1
330.6
330.0
The notes on pages 61 to 95 are an integral part of these consolidated financial statements.
56 Cochlear Limited Annual Report 2017
Statement of comprehensive income
Net profit
Other comprehensive income/(loss)
2017
$000
2016
$000
223,616
188,921
Items that will not be reclassified subsequently to the income statement:
Defined benefit plan actuarial gains/(losses)
2,724
(2,000)
Total items that will not be reclassified subsequently to the income statement
2,724
(2,000)
Items that may be reclassified subsequently to the income statement:
Foreign currency translation differences
(15,125)
(15,832)
Effective portion of changes in fair value of cash flow hedges, net of tax
20,912
5,431
Net change in fair value of cash flow hedges transferred to the income statement, net
of tax
(9,873)
19,305
Net change in fair value of available for sale financial assets, net of tax
Total items that may be reclassified subsequently to the income statement
Other comprehensive (loss)/income, net of tax
Total comprehensive income
(246)
(4,332)
(1,608)
-
8,904
6,904
222,008
195,825
The notes on pages 61 to 95 are an integral part of these consolidated financial statements.
57
Balance sheet
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
Trade and other payables
Forward exchange contracts
Loans and borrowings
Employee benefit liabilities
Provisions
Deferred tax liabilities
Deferred revenue
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
Retained earnings
Total equity
Note
6.4(b)
5.1
3.2
5.2
5.3
5.5
3.2
6.3(a)
3.2
4.2
5.6
2017
$000
2016
$000
89,540
292,139
18,430
160,011
7,278
18,562
75,417
281,925
11,454
154,103
6,208
13,921
585,960
543,028
906
7,760
120,107
339,976
15,064
66,586
550,399
1,136,359
1,507
10,713
86,878
224,338
13,755
77,144
414,335
957,363
130,911
110,354
2,041
84,687
26,326
52,412
24,992
25,246
12,643
3,978
13,701
45,485
33,675
31,264
346,615
251,100
33,917
3,111
-
3,547
6.3(a)
134,235
189,260
4.2
5.6
3.2
11,038
54,711
5,837
3,248
246,097
592,712
543,647
169,367
(12,801)
387,081
543,647
13,750
44,027
7,122
-
257,706
508,806
448,557
158,940
(14,662)
304,279
448,557
The notes on pages 61 to 95 are an integral part of these consolidated financial statements.
58 Cochlear Limited Annual Report 2017
Statement of changes in equity
Amounts $000
2016
Issued
capital
Treasury
reserve
Translation
reserve
Hedging
reserve
Fair value
reserve
Balance at 1 July 2015
152,599
(8,463)
(32,541)
(20,547)
Total comprehensive (loss)/income
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
Share options exercised
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2016
2017
-
-
-
-
-
-
-
-
6,704
-
-
-
-
-
-
-
-
-
-
-
-
(15,832)
-
-
-
-
-
5,431
19,305
(15,832)
24,736
(15,832)
24,736
2,099
6,001
-
-
-
-
-
-
-
-
-
-
-
-
-
159,303
(363)
(48,373)
4,189
Balance at 1 July 2016
159,303
(363)
(48,373)
4,189
Total comprehensive (loss)/income
Net profit
Other comprehensive income/(loss)
Defined benefit plan actuarial gains
Foreign currency translation differences
Effective portion of changes in fair value of cash
flow hedges, net of tax
Net change in fair value of cash flow hedges
transferred to the income statement, net of tax
Net change in fair value of available for sale
financial assets, net of tax
Total other comprehensive (loss)/income
Total comprehensive (loss)/income
Transactions with owners, recorded directly
in equity
Performance rights vested
Share options exercised
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,064
363
-
-
-
-
-
-
-
-
-
(15,125)
-
-
-
-
-
-
20,912
(9,873)
-
(15,125)
11,039
(15,125)
11,039
-
-
-
-
-
-
-
-
-
-
Retained
earnings
Total equity
Share
based
payment
reserve
26,887 237,451 355,386
- 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)
29,522 304,279 448,557
29,522 304,279 448,557
- 223,616 223,616
-
-
-
-
-
-
2,724
2,724
-
-
-
-
(15,125)
20,912
(9,873)
(246)
2,724
(1,608)
- 226,340 222,008
(495)
(893)
8,095
(514)
-
-
-
-
(495)
9,534
8,095
(514)
- (143,538) (143,538)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(246)
(246)
(246)
-
-
-
-
-
Balance at 30 June 2017
169,367
(63,498)
15,228
(246)
35,715 387,081 543,647
The notes on pages 61 to 95 are an integral part of these consolidated financial statements.
59
Statement of cash flows
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
Note
2017
$000
2016
$000
1,220,749
1,105,512
(878,706)
(834,884)
4,078
5,461
704
454
(8,599)
(10,745)
3.1
(78,454)
(80,685)
Net cash provided by operating activities
2.7(b)
259,772
185,113
Cash flows from investing activities
Acquisition of land and buildings
Acquisition of leasehold improvements and plant and equipment
Proceeds from sale of non-current assets
Acquisition of enterprise resource planning system
Acquisition of other intangible assets
Acquisition of investments
Acquisition of subsidiary, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Repayments of borrowings
Proceeds from borrowings
5.2
5.2
5.3
5.3
5.5
5.4
(27,559)
-
(26,031)
(28,858)
628
1,175
(9,252)
(7,556)
(8,228)
(1,140)
(1,449)
(13,755)
(63,709)
-
(135,600)
(50,134)
(193,000)
(332,971)
219,212
312,971
Net proceeds from exercise of share options and performance rights
9,039
9,203
Dividends paid
2.6
(143,538)
(120,093)
Net cash used in financing activities
(108,287)
(130,890)
Net increase in cash and cash equivalents
Cash and cash equivalents, net of overdrafts at 1 July
Effect of exchange rate fluctuations on cash held
Cash and cash equivalents, net of overdrafts at 30 June
15,885
4,089
75,417
72,208
(1,762)
(880)
89,540
75,417
The notes on pages 61 to 95 are an integral part of these consolidated financial statements.
60 Cochlear Limited Annual Report 2017
Notes to the financial statements
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 2017 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 approved the consolidated financial statements on 17 August 2017.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for derivative financial
instruments and available for sale investments which are measured at fair value. The fair value measurement method of
derivative instruments and available for sale investments 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
61
Notes to the financial statements
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.
Management discussed with the Audit Committee the development, selection and disclosure of Cochlear’s critical
accounting policies and estimates and the application of these policies and estimates.
Information about critical judgements in applying accounting policies that have the most significant effect on the amounts
recognised in the consolidated financial statements is included in the following notes:
Note 4.2 – Employee benefit liabilities
Note 4.3 – Share based payments
Note 5.3 – Intangible assets
Note 5.4 – Business combinations
Note 5.6 – Provisions
Note 5.7 – 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
62 Cochlear Limited Annual Report 2017
Notes to the financial statements
payable to, the relevant taxation authority is included as a current asset or liability in the balance sheet.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from
investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified
as operating cash flows.
2. PERFORMANCE FOR THE YEAR
2.1 Operating segments
Cochlear’s three reportable segments, determined on a geographical basis, are the strategic business units of Cochlear.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be
allocated on a reasonable basis. Unallocated items comprise corporate and other net expenses and corporate and
manufacturing assets and liabilities.
Performance is measured based on segment earnings before interest and income tax (EBIT) as included in the internal
management reports that are reviewed by Cochlear’s Chief Executive Officer & President, who is also the chief operating
decision-maker.
Information about reportable segments
Americas
EMEA1
Asia Pacific
Total
2017
$000
2016
$000
2017
$000
2016
$000
2017
$000
2016
$000
2017
$000
2016
$000
Reportable segment revenue
594,997
519,688
428,513
427,896
216,223
210,547 1,239,733 1,158,131
Reportable segment EBIT
314,597
276,931
181,527
180,925
67,058
64,842
563,182
522,698
Reportable segment assets
221,543
184,881
225,013
213,843
117,708
124,775
564,264
523,499
Reportable segment liabilities
72,413
49,257
44,492
47,132
28,537
32,772
145,442
129,161
Other material items
Depreciation and amortisation
1,092
1,016
1,741
2,179
992
1,046
3,825
4,241
Write-down in value of
inventories
Acquisition of non-current
assets
1. Europe, Middle East and Africa.
585
302
609
250
165
175
1,359
727
1,145
741
1,086
1,769
530
973
2,761
3,483
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Revenues
Cochlear
implants
Services
Acoustics
Total
Cochlear
implants
Reportable
segment
revenue
2017
2016
$000
$000
767,781
305,589
729,171
289,418
$000
1,073,370
1,018,589
$000
166,363
139,542
$000
1,239,733
1,158,131
Foreign
exchange
gain/(losses)
on hedged
sales
$000
Consolidated
revenue
$000
14,105
1,253,838
(27,579)
1,130,552
63
Notes to the financial statements
Profit or loss
2017
2016
Reportable
segment EBIT
Corporate
and other
net
expenses
$000
$000
563,182
(261,687)
Foreign
exchange
gain/(losses)
on hedged
sales
$000
14,105
522,698
(232,515)
(27,579)
Net finance
expense
Consolidated
profit before
income tax
$000
(6,775)
(8,338)
$000
308,825
254,266
Assets and liabilities
Reportable
segment assets
Corporate
and
manufacturing
assets
Consolidated
total assets
Reportable
segment
liabilities
Corporate and
manufacturing
liabilities
Consolidated
total liabilities
2017
2016
$000
564,264
523,499
$000
572,095
433,864
$000
$000
1,136,359
145,442
957,363
129,161
$000
447,270
379,645
$000
592,712
508,806
Other material items
Reportable segment total
Corporate and
manufacturing total
Consolidated total
2017
$000
2016
$000
2017
$000
2016
$000
2017
$000
2016
$000
3,825
4,241
27,389
29,250
31,214
33,491
1,359
727
5,246
15,566
6,605
16,293
2,761
3,483
69,758
47,826
72,519
51,309
Depreciation and
amortisation
Write-down in value of
inventories
Acquisition of non-
current assets
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 gains/(losses) on hedged sales
Revenue from sale of goods
Rendering of services
Total revenue
64 Cochlear Limited Annual Report 2017
2017
$000
2016
$000
1,227,151
1,145,492
14,105
(27,579)
1,241,256
1,117,913
12,582
12,639
1,253,838
1,130,552
Notes to the financial statements
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
2017
$000
2016
$000
344,596
308,990
7,172
6,605
8,310
16,293
358,373
333,593
(b) Profit before income tax has been arrived at after charging the following
item:
Operating lease rental expense
22,325
26,261
2.4 Other income
Other income, including government grants, is recognised on a systematic basis over the years necessary to match it
with the related costs for which it is intended to compensate. If the costs have already been incurred, the amount is
recognised in the year the entitlement is confirmed. 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
2.5 Earnings per share
2017
$000
2,345
388
1,733
4,466
2016
$000
2,579
8,695
2,882
14,156
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:
2017
2016
Net profit attributable to equity holders of the parent entity
$223,616,000 $188,921,000
Weighted average number of ordinary shares (basic):
Issued ordinary shares at 1 July (number)
57,199,264
56,957,274
Effect of options, performance shares and performance rights exercised (number)
181,834
175,635
Effect of shares issued under Employee Share Plan (number)
7,216
11,669
Weighted average number of ordinary shares (basic) at 30 June
57,388,314
57,144,578
Basic earnings per share (cents)
389.7
330.6
65
Notes to the financial statements
Diluted earnings per share
The calculation of diluted EPS has been based on the following net profit attributable to equity holders of the parent entity
and weighted average number of shares outstanding after adjustments for the effects of all dilutive potential ordinary
shares:
Net profit attributable to equity holders of the parent entity
$223,616,000
$188,921,000
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)
57,388,314
57,144,578
Effect of options, performance shares and performance rights unvested (number)
78,352
98,707
Weighted average number of ordinary shares (diluted) at 30 June
57,466,666
57,243,285
Diluted earnings per share (cents)
389.1
330.0
2017
2016
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
2017
Interim 2017 ordinary
Final 2016 ordinary
Total amount
2016
Interim 2016 ordinary
Final 2015 ordinary
Total amount
Subsequent event
1.30
1.20
2.50
1.10
1.00
2.10
74,655
68,883
143,538
62,925
57,168
120,093
100% Franked
6 April 2017
100% Franked 29 September 2016
100% Franked
1 April 2016
100% Franked
1 October 2015
Since the end of the financial year, the directors declared the following dividends:
Final 2017 ordinary
Total amount
1.40
1.40
80,397
80,397
100% Franked
11 October 2017
The financial effect of the 2017 final dividend will be recognised in the subsequent financial year as it was declared after
30 June 2017.
Dividend franking account
Franked dividends paid during the financial year were franked at the tax rate of 30% (2016: 30%). There are no further
tax consequences as a result of paying dividends other than a reduction in the franking account.
At 30 June 2017, there are $27,585,000 of franking credits (2016: $25,101,000) 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
66 Cochlear Limited Annual Report 2017
Notes to the financial statements
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 $34,455,989 (2016: $29,521,471).
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.
The operating cash account received an average interest rate of 0.77% (2016: 0.67%) per annum.
(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
2017
$000
2016
$000
223,616
188,921
550
335
31,214
8,095
33,491
8,342
263,475
231,089
(5,995)
(5,908)
(4,641)
5,752
(24,691)
10,990
2,932
2,001
(7,840)
23,697
259,772
(33,625)
(8,242)
(167)
(11,186)
10,496
(9,546)
4,533
7,656
10,679
(16,574)
185,113
67
Total
deferred
tax
expense/
(benefit)
$000
3,503
Total
income tax
expense
$000
85,209
65,345
Notes to the financial statements
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
Origination
and reversal
of temporary
differences
2017
2016
$000
81,334
77,907
$000
372
(1,270)
$000
81,706
76,637
$000
3,503
(11,292)
(11,292)
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% (2016: 30%)
Increase in income tax expense due to:
Non-deductible expenses, net
Effect of tax rate in foreign jurisdictions
Decrease in income tax expense due to:
Research and development allowances
Adjustment for prior years
Income tax expense on profit before income tax
2017
$000
2016
$000
308,825
254,266
92,648
76,280
801
597
1,604
6
(9,209)
(11,275)
84,837
372
85,209
66,615
(1,270)
65,345
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
3.2
4,731
10,601
Total deferred tax recognised directly in equity relating to share based
payments
3.2
514
106
Note
2017
$000
2016
$000
68 Cochlear Limited Annual Report 2017
Notes to the financial statements
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
2017
$000
85,209
5,323
1
(21,107)
9,028
78,454
2016
$000
65,345
6,333
(66)
(9,028)
18,101
80,685
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% (2016: 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
Adjustment for prior years
Income tax expense on profit before income tax
3.2 Current and deferred tax assets and liabilities
2017
$000
2016
$000
240,435
200,913
1,493
9,645
241,928
210,558
72,578
63,167
2,380
1,736
2,337
758
(8,124)
(10,163)
(448)
68,122
(140)
(2,894)
53,205
203
67,982
53,408
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.
69
Notes to the financial statements
Recognised deferred tax assets and liabilities
Property, plant and equipment
Intangible assets
Inventories
Provisions
Deferred revenue
Forward exchange contracts
Assets
Liabilities
Net
2017
$000
130
49
26,583
33,259
2,072
-
2016
$000
121
63
29,116
33,932
1,488
2017
$000
2016
$000
2017
$000
2016
$000
(2,696)
(2,500)
(2,566)
(2,379)
(8,067)
(1,762)
(8,018)
(1,699)
-
-
-
-
-
-
26,583
33,259
2,072
29,116
33,932
1,488
-
(6,524)
(1,793)
(6,524)
(1,793)
Other
21,314
13,877
(5,374)
(2,860)
15,940
11,017
Tax losses carried forward
3
340
-
-
3
340
Deferred tax assets/(liabilities)
83,410
78,937
(22,661)
(8,915)
60,749
70,022
Set off tax
(16,824)
(1,793)
16,824
1,793
-
-
Deferred tax assets/(liabilities)
66,586
77,144
(5,837)
(7,122)
60,749
70,022
Unrecognised deferred tax liabilities
At 30 June 2017, a deferred tax liability of $37.8 million (2016: $11.0 million) relating to investments in subsidiaries has
not been recognised because the Company controls whether the asset will be recovered or the liability will be incurred
and it is satisfied that it will not be incurred in the foreseeable future.
Movement in temporary differences during the year
Carrying amount at beginning of financial year
Recognised in the income statement
Recognised in other comprehensive income/(loss)
Deferred tax arising from business acquisitions
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
5.4
3.1
2017
$000
70,022
543
(4,731)
(4,046)
(514)
(525)
2016
$000
68,717
11,292
(10,601)
-
(106)
720
60,749
70,022
The current tax assets for the Consolidated Entity of $7.3 million (2016: $6.2 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 $26.3 million (2016: $13.7 million)
represent the amount of income taxes payable in respect of current and prior financial years.
70 Cochlear Limited Annual Report 2017
Notes to the financial statements
4. EMPLOYEE BENEFITS
4.1 Employee expenses
Wages and salaries
Contributions to superannuation plans
Increase in leave liabilities
Equity settled share based payment transactions
Total employee expenses
4.2 Employee benefit liabilities
Wages, salaries and annual leave
2017
$000
300,080
22,695
4,715
8,095
2016
$000
278,083
21,583
2,925
8,342
335,585
310,933
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, 78 employees (2016: 91 employees). Cochlear contributed cash of $1.4
million (2016: $1.5 million) to defined benefit plans in the year ended 30 June 2017 and expects to contribute $1.2 million
in the year ending 30 June 2018.
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 2017, Prof E Byrne, AC is the only non-executive director entitled to this
benefit.
71
Notes to the financial statements
Current
Provision for long service leave
Provision for annual leave
Provision for short-term incentives
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
2017
$000
9,472
23,747
19,193
52,412
5,478
5,110
450
11,038
63,450
2016
$000
8,478
20,075
16,932
45,485
5,429
7,879
442
13,750
59,235
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.
72 Cochlear Limited Annual Report 2017
Notes to the financial statements
At 30 June 2017, there were no issued shares held in the Trust. The unissued ordinary shares of the Company under
option and rights and the terms and conditions of the grants and issues are as follows:
Grant date
October 20141
August 20152
October 20151
August 20162
October 20161
Total
Exercise price of
options
Number of
options
Number of
performance
rights
Contractual life
$68.56
N/A
$82.89
N/A
$135.84
78,192
-
134,845
-
79,897
292,934
18,702
50,994
16,596
32,764
21,034
140,090
4 years
2 years
4 years
2 years
4 years
1. Options and performance rights offered under long-term incentives.
2. Performance rights offered under deferred short-term incentives.
Grants are split between deferred short-term incentives (STI) and long-term incentives (LTI).
For deferred STI, certain employees under the CEIP are granted performance rights based on achievement of a
mandatory portion of their STI. The number of performance rights under the deferred STI grants is 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 total
shareholder return (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 and performance rights 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:
19 October 2016
16 August 2016
20 October 2015
18 August 2015
EPS
performance
based
conditions
TSR
based
conditions
Deferred STI
service
based
conditions
EPS
performance
based
conditions
TSR
based
conditions
Deferred STI
service
based
conditions
Fair value of options at grant date
$18.65
$14.46
N/A
$14.70
$12.41
N/A
Fair value of performance rights at
grant date
$125.82
$96.40
$129.27
$77.11
$54.43
Share price at valuation date
$138.43
$138.43
$137.72
$85.13
$85.13
$79.30
$85.13
Option exercise price
$135.84
$135.84
N/A
$82.89
$82.89
N/A
Expected volatility (weighted
average volatility)
23.15%
23.15%
23.15%
24.47%
24.47%
24.47%
Option life
3-4 years 3-4 years
2 years
3-4 years
3-4 years
2 years
Expected dividend yield
3.29%
3.29%
3.29%
3.41%
3.41%
3.41%
Risk free interest rate (based on
government bonds)
1.39%
1.39%
1.39%
1.98%
1.98%
1.98%
73
Notes to the financial statements
The number and weighted average exercise prices of options are as follows:
Outstanding at 1 July
Forfeited
Exercised
Granted
Outstanding at 30 June
Exercisable at 30 June
Weighted
average
exercise price
Number of
options
Weighted
average
exercise price
2017
$68.67
$80.93
$59.40
$135.84
$93.51
$68.56
2017
456,253
(71,727)
(187,178)
95,586
292,934
78,192
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
187,178 options were exercised in 2017 (2016: 328,885 options were exercised). The weighted average market share
price on the Australian Securities Exchange (ASX) at date of exercise was $134.53 (2016: $86.35). The weighted
average remaining contractual life of options outstanding at the end of the year is three years (2016: three years).
Employee Share Plan
Cochlear’s Employee Share Plan (Plan) was approved by special resolution at the Annual General Meeting 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 2017, the Company issued 9,828 shares under the Plan; see Note 6.2.
4.4 Key management personnel
The following were key management personnel (KMP) of Cochlear at any time during the financial year and unless
otherwise indicated were KMP for the entire financial year:
Non-executive directors
Mr R Holliday-Smith (Chairman), Mrs YA Allen, Mr G Boreham, AM, Prof E Byrne, AC, Ms A Deans, Mr A Denver, Mr DP
O’Dwyer and Prof B Robinson, AM1
Executive director
Mr C Smith
Other executive KMP
Mr A Bishop2, Mr R Brook, Mr B Cubis3, Mr D Howitt, Mr J Janssen, Mr T Manna and Mr NJ Mitchell4.
1. Appointed on 13 December 2016.
2. Appointed on 18 July 2016.
3. Appointed on 13 March 2017.
4. Ceased to be a KMP on 13 March 2017 and retired on 1 July 2017.
74 Cochlear Limited Annual Report 2017
Notes to the financial statements
Key management personnel disclosures
The KMP compensation is included in employee expenses as follows:
Short-term
employee
benefits
$
10,956,867
10,433,497
Post-
employment
benefits
$
538,236
521,446
Other long-
term benefits
$
48,707
38,969
Directors’
retirement
benefits
$
7,996
9,586
Share based
payments
Total
$
2,898,262
$
14,450,068
2,794,586
13,798,084
2017
2016
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 of this Annual Report on pages 33 to 50.
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.
Raw
materials
$000
60,541
49,248
Work in
progress
$000
27,222
25,512
Finished
goods
$000
72,248
79,343
Total
inventories
$000
160,011
154,103
2017
2016
5.2 Property, plant and equipment
Owned assets
The value of property, plant and equipment is measured as the cost of the asset, minus accumulated depreciation and
impairment losses (see Note 5.3). The cost of the asset is the consideration provided plus incidental costs directly
attributable to the acquisition.
The value of self-constructed assets includes the cost of material and direct labour and any other costs directly
attributable to bringing the asset to a working condition for its intended use.
Subsequent costs in relation to replacing a part of property, plant and equipment are capitalised in the carrying amount of
the item if it is probable that future economic benefits will flow to Cochlear and its cost can be measured reliably. All other
costs are recognised in the income statement as incurred.
Leased assets
Payments made under operating leases are expensed on a straight-line basis over the term of the lease, except where
an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Minimum
lease payments include fixed rate increases.
75
Notes to the financial statements
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, plant and equipment three to 14 years and
buildings 10 to 20 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
Plant and equipment
Land and
buildings
Total net book value
2017
$000
2016
$000
2017
$000
2016
$000
2017
$000
2016
$000
2017
$000
2016
$000
At cost
Accumulated
depreciation
35,027
34,657
201,960
193,401
27,559
(22,280)
(21,774)
(121,937)
(119,406)
(222)
Net book value
12,747
12,883
80,023
73,995
27,337
Reconciliations of the
carrying amounts are:
Opening balance
Acquisition of
subsidiary
Additions
Disposals
Depreciation
Effect of movements in
foreign exchange
12,883
11,384
73,995
69,425
-
2,493
(6)
-
232
-
3,930
(185)
23,538
24,928
27,559
(544)
(3,398)
-
(2,403)
(2,359)
(16,727)
(17,508)
(222)
(220)
113
(471)
548
-
-
-
Net book value
12,747
12,883
80,023
73,995
27,337
5.3 Intangible assets
Goodwill
-
-
-
-
-
-
-
-
-
-
264,546
228,058
(144,439)
(141,180)
120,107
86,878
86,878
80,809
232
-
53,590
28,858
(550)
(3,583)
(19,352)
(19,867)
(691)
661
120,107
86,878
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.
76 Cochlear Limited Annual Report 2017
Notes to the financial statements
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).
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:
enterprise resource planning system between two to seven years, acquired technology, patents and licences between
four to 15 years and customer relationships and capitalised development expenditure between four to 10 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
Intangible assets with finite useful
life
Intangible
assets
Enterprise
resource
planning
system
$000
Acquired
technology,
patents and
licences
$000
Other
intangible
assets
Total
$000
$000
267,104
1,800
66,008
72,884
33,229
441,025
2017
At cost
Accumulated amortisation
-
-
(41,865)
(40,850)
(18,334)
(101,049)
Net book value
267,104
1,800
24,143
32,034
14,895
339,976
Reconciliations of the carrying amounts are:
Opening balance
Acquisition of subsidiary
Acquisitions
Amortisation
Effect of movements in
foreign exchange
Net book value
2016
At cost
171,356
101,514
-
-
(5,766)
267,104
1,800
22,951
27,474
-
-
-
-
1,800
260
9,252
(8,190)
(130)
24,143
-
7,888
(3,237)
(91)
32,034
757
14,298
340
(435)
(65)
14,895
171,356
1,800
56,880
65,322
16,966
Accumulated amortisation
-
-
(33,929)
(37,848)
(16,209)
Net book value
171,356
1,800
22,951
27,474
757
224,338
116,072
17,480
(11,862)
(6,052)
339,976
312,324
(87,986)
224,338
Reconciliations of the carrying amounts are:
Opening balance
Acquisitions
Amortisation
Effect of movements in
foreign exchange
Net book value
170,503
1,800
-
-
853
-
-
-
171,356
1,800
25,859
7,556
(10,353)
(111)
22,951
29,308
1,140
(2,972)
(2)
27,474
1,061
228,531
-
8,696
(299)
(13,624)
(5)
757
735
224,338
77
Notes to the financial statements
Impairment
Cochlear annually tests goodwill and other intangible assets with indefinite useful life for impairment. Other non-financial
assets, other than inventories (see Note 5.1) and deferred tax assets (see Note 3.2), are tested if there is any indication
of impairment or if there is any indication that an impairment loss recognised in a prior period may no longer exist or may
have decreased.
Assets are impaired if their carrying value exceeds their recoverable amount. The asset’s recoverable amount is
estimated based on its value in use.
An asset that does not generate independent cash flows and its individual value in use cannot be estimated is tested for
impairment as part of a cash generating unit (CGU).
An impairment loss is recognised in the income statement when the carrying amount of an asset or CGU exceeds its
recoverable amount. An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had
been recognised. An impairment loss in respect of goodwill is not reversed.
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:
2017
2016
Americas
EMEA
Asia Pacific
$000
183,830
86,141
$000
73,638
75,341
$000
9,636
9,874
Total
$000
267,104
171,356
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% (2016: 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%
(2016: 13.7%), EMEA 12.3% (2016: 12.4%) and Asia Pacific 13.1% (2016: 13.9%).
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 long-term economic growth rates.
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.
78 Cochlear Limited Annual Report 2017
Notes to the financial statements
5.4 Business combinations
Cochlear accounts for business combinations using the acquisition method when control is transferred to Cochlear. The
consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets
acquired. Any goodwill that arises is tested annually for impairment (see Note 5.3).
Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.
Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured
at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are
recognised in profit or loss.
Sycle, LLC
On 11 May 2017, Cochlear acquired 100% of the shares of Sycle, LLC (Sycle). Sycle is the world’s largest provider of
audiology practice management software, based in San Francisco. Cochlear acquired Sycle to strengthen its service
offering to its clinical partners to support their practice management capabilities.
In the two months to 30 June 2017, Sycle contributed revenue of $2.0 million and operating profit after tax of $508,000. If
the acquisition had occurred on 1 July 2016, management estimates that consolidated revenue would have been $14.9
million, and consolidated operating profit after tax for the year would have been $2.4 million. In determining these
amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of
acquisition would have been the same if the acquisition had occurred on 1 July 2016.
(a) Consideration transferred
The following table summarises the acquisition fair value of each major class of consideration transferred
Cash
Deferred consideration
Contingent consideration
Total consideration transferred
$000
64,430
9,457
33,332
107,219
The cash consideration net of cash acquired has been included in investing activities disclosed in the statement of cash
flows. The consideration for the acquisition is comprised of an element of cash consideration and a deferred element of
consideration. Cochlear has agreed to pay Sycle Inc. an estimated contingent consideration of $33.3 million based on
future performance hurdles of revenue growth and referrals over the next three to four years.
(b) Acquisition related costs
Cochlear incurred acquisition related costs of $2.3 million on legal fees and due diligence costs. These costs have been
included in administration expenses.
79
Notes to the financial statements
(c) Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of
acquisition:
Property, plant and equipment
Intangible assets
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Current tax liabilities
Deferred tax liabilities
Employee benefit liabilities
Deferred revenue
Fair value of net assets acquired
Note
5.2
5.3
3.2
$000
232
14,558
721
3,618
(2,460)
(565)
(4,046)
(1,283)
(5,070)
5,705
The acquisition accounting has been performed on a provisional basis and will be finalised on completion of the final
valuations and working capital adjustments expected to occur within the first half of F18.
(d) Goodwill
Goodwill arising from the acquisition has been recognised as follows:
Consideration transferred
Fair value of net assets acquired
Goodwill
$000
107,219
(5,705)
101,514
The goodwill is attributable mainly to the synergies expected to be achieved from integrating into Cochlear’s existing
business. The goodwill is not deductible for tax purposes.
5.5 Investments
The available for sale equity securities 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 the
income statement.
5.6 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.
80 Cochlear Limited Annual Report 2017
Notes to the financial statements
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.
2017
Opening balance
Provision made
Provision used
Warranties
Legal and
insurance
Product
recall
$000
36,604
34,202
$000
4,401
838
$000
13,020
-
(29,181)
(2,027)
(532)
Effect of movements in foreign exchange
(500)
(7)
-
Make
good lease
costs
$000
2,344
-
(757)
(35)
Patent
dispute
$000
21,333
-
-
-
Total
$000
77,702
35,040
(32,497)
(542)
Total provisions
Represented by:
Current
Non-current
Total provisions
Warranties
41,125
3,205
12,488
1,552
21,333
79,703
19,641
21,484
41,125
3,205
2,146
-
10,342
3,205
12,488
-
1,552
1,552
-
21,333
21,333
24,992
54,711
79,703
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 2017.
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.
81
Notes to the financial statements
On 18 November 2016, the Court of Appeals affirmed the Judgment as to infringement, affirmed the Judgment as to
invalidity of two claims in one patent and reversed the Judgment of invalidity of one claim in the remaining patent. The
Court of Appeals then remanded to the District Court the issue of damages and wilfulness of infringement of two claims
in the remaining patent at issue.
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 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. 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 infringement of four claims. No additional amount has been provided since
that initial provision.
5.7 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 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.
82 Cochlear Limited Annual Report 2017
Notes to the financial statements
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
Note
6.3(a)
2017
$000
129,382
543,647
19%
2016
$000
117,821
448,557
21%
83
Notes to the financial statements
6.2 Capital and reserves
Share capital
The Company does not have authorised capital or par value in respect of its issued shares.
Number of issued shares
in market circulation
Number of shares held
in Trust
Total number of issued
shares
2017
2016
2017
2016
2017
2016
On issue 1 July – fully paid
57,199,264 56,957,274
5,373
124,501 57,204,637 57,081,775
Issued for nil consideration under
Employee Share Plan
9,828
16,116
Issued from the exercise of
options
Issued from the exercise of
performance rights
Options vesting from Trust
Performance shares vesting from
Trust
169,707
106,746
42,477
5,373
-
88,098
(5,373)
(88,098)
-
-
-
-
-
-
9,828
16,116
169,707
106,746
42,477
-
-
-
-
-
On issue 30 June – fully paid
57,426,649 57,199,264
5,373 57,426,649 57,204,637
-
31,030
(31,030)
-
-
During 2017, Cochlear purchased 15,884 shares (2016: 134,041 shares) on market to satisfy exercise of options and
performance rights.
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.
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.
84 Cochlear Limited Annual Report 2017
Notes to the financial statements
Fair value reserve
The fair value reserve comprises the cumulative net change in the fair value of available for sale investments until the
assets are derecognised or impaired.
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
$766,633 (2016: $739,755) 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
2017
$000
84,687
134,235
218,922
(89,540)
129,382
2016
$000
3,978
189,260
193,238
(75,417)
117,821
Multi-option bank facilities
Other credit facilities
Secured
bank loan
Standby
letters of
credit
Bank
guarantees
Unsecured
bank
overdrafts
Secured
bank loan
Bank
guarantees
$000
$000
$000
$000
$000
$000
2017
Utilised at reporting date
215,000
Not utilised at reporting date
230,000
Total facilities
445,000
2016
Utilised at reporting date
190,000
Not utilised at reporting date
155,000
Total facilities
345,000
3,755
15,112
18,867
6,916
10,951
17,867
1,133
-
1,133
2,133
-
2,133
-
299
299
-
299
299
4,689
584
5,273
3,978
1,989
5,967
2,095
1,194
3,289
1,393
222
1,615
85
Notes to the financial statements
Multi-option bank facilities - Secured bank loan
Cochlear has three bank loan facilities.
In June 2013, Cochlear negotiated a 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.
In June 2016, a facility with a total commitment limit of AUD 250.0 million was established for a three year period to 14
June 2019. The facility had a letter of credit sub-facility limit of up to AUD 5.0 million for the purpose of drawing either
letters of credit or bank guarantees.
In April 2017, a facility with a total commitment limit of AUD 100.0 million was established for a four year period to 12
April 2021. The letter of credit sub-facility of up to AUD 5.0 million was transferred to this new facility from the previous
one established in June 2016.
All 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 2017, Cochlear had additional contingent liability facilities denominated in United States dollars (USD),
Euros (EUR), Sterling (GBP), Indian rupees and New Zealand dollars totalling AUD 3.3 million (2016: 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 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.
86 Cochlear Limited Annual Report 2017
Notes to the financial statements
(a) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will
affect Cochlear’s net profit or the value of its holdings of financial instruments.
The objective of market risk management is to manage and control market risk exposures by buying and selling forward
exchange contracts and incurring financial liabilities, within acceptable parameters, whilst optimising the return, all in
accordance with the treasury risk policy.
Currency risk
Cochlear is exposed to currencies other than the respective functional currencies of the controlled entities, primarily
AUD, USD, EUR, GBP, Swedish kroner (SEK), JPY and Swiss francs (CHF).
Over 90% of Cochlear’s revenues and over 50% of costs are denominated in currencies other than AUD. Currency risk is
hedged in accordance with the treasury risk policy. Risk resulting from the translation of assets and liabilities of foreign
operations into Cochlear’s reporting currency is not hedged.
Cochlear’s exposure to foreign currency risk in relation to non-derivative financial instruments was as follows, based
upon notional amounts:
Amounts local currency/thousands
USD
EUR
GBP
SEK
JPY
CHF
2017
Trade receivables
Secured bank loan
Trade payables
82,971
49,799
5,677
4,299
654,286
-
-
-
-
(400,000)
686
-
(47,758)
(7,489)
(5,269)
(60,484)
(44,534)
(2,049)
Gross balance sheet exposure
35,213
42,310
408
(56,185)
209,752
(1,363)
2016
Trade receivables
Secured bank loan
Trade payables
72,845
46,439
5,818
6,690
752,963
-
-
-
-
(300,000)
616
-
(13,234)
(5,348)
(5,025)
(63,160)
(63,133)
(2,219)
Gross balance sheet exposure
59,611
41,091
793
(56,470)
389,830
(1,603)
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 2017, Cochlear designated the majority of 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.
87
Notes to the financial statements
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 2017, 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:
2017
Sell USD
Sell EUR
Sell JPY
2016
Sell USD
Sell EUR
Sell JPY
Weighted
average rate
< 1 year
$000
1 - 2 years
$000
2 - 5 years
$000
0.734
0.646
79.844
0.735
0.641
83.762
256,159
154,895
15,277
195,817
188,358
12,210
131,172
87,511
8,263
117,236
109,493
6,575
12,450
27,557
2,339
23,468
27,203
1,359
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 2017, including hedging results and after income tax, by
approximately $4.7 million (2016: $8.5 million) and decreased Cochlear’s equity by $12.9 million (2016: $51.8 million). A
10 percent general decrease in the value of the AUD against other foreign currencies would have increased Cochlear’s
profit by $9.4 million (2016: $12.2 million) and increased equity by $18.7 million (2016: $50.2 million).
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
2017
0.753
0.689
0.592
6.614
2016
0.729
0.658
0.494
6.141
2017
0.761
0.670
0.594
6.529
2016
0.740
0.669
0.557
6.285
81.988
85.089
85.345
75.410
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.
88 Cochlear Limited Annual Report 2017
Notes to the financial statements
At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments is financial assets of
$89.5 million (2016: $75.4 million) and financial liabilities of $218.9 million (2016: $193.2 million).
For the year ended 30 June 2017, 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 $1.5 million (2016: $1.1 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 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 political and 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:
2017
2016
Americas
EMEA
Asia Pacific
$000
94,489
86,115
$000
118,108
108,937
$000
62,763
73,486
Total
$000
275,360
268,538
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.
89
Notes to the financial statements
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
2017
$000
2016
$000
206,244
199,164
37,536
16,919
12,129
20,236
293,064
(17,704)
275,360
16,779
292,139
33,162
13,469
14,924
19,749
280,468
(11,930)
268,538
13,387
281,925
Credit risk management - Cash deposits and forward exchange contracts
The majority of Cochlear’s cash deposits and all forward exchange contracts 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:
Effective
interest
rate
Carrying
amount
Contractual
cash flows
< 1
year
1 - 2
years
2 - 5
years
Per annum
$000
$000
$000
$000
$000
2017
AUD floating rate loan
JPY floating rate loan
3.26%
0.53%
214,233
226,158
86,966
139,192
4,689
4,703
4,703
-
Trade and other payables
-
164,828
164,828
130,911
7,061
383,750
395,689
222,580
146,253
Total
2016
AUD floating rate loan
JPY floating rate loan
3.76%
0.61%
189,260
207,650
7,152
107,110
93,388
3,978
3,994
3,994
-
-
-
-
Trade and other payables
-
110,354
110,354
110,354
Total
93,388
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly
different amounts.
303,592
121,500
107,110
321,998
90 Cochlear Limited Annual Report 2017
-
-
26,856
26,856
Notes to the financial statements
Derivative assets and liabilities - Forward exchange contracts
The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives are expected to
occur:
2017
Assets
Liabilities
Total
2016
Assets
Liabilities
Total
Carrying
amount
$000
Contractual
cash flows
$000
< 1 year
$000
1 - 2
years
$000
26,190
(5,152)
21,038
22,167
(16,190)
5,977
28,470
(3,667)
24,803
18,956
8,301
(1,869)
(1,219)
17,087
7,082
22,634
11,573
8,642
(16,400)
(12,756)
(3,416)
6,234
(1,183)
5,226
2 - 5
years
$000
1,213
(579)
634
2,419
(228)
2,191
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.
91
Notes to the financial statements
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 services
- acquisition due diligence services
- other
Total non-audit services
7.2 Commitments
Operating lease commitments
2017
$
2016
$
1,539,847
1,583,831
70,801
58,734
1,610,648
1,642,565
1,361,901
1,019,724
581,843
202,001
-
31,674
2,145,745
1,051,398
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
2017
$000
22,142
70,016
58,897
2016
$000
22,372
82,528
65,312
151,055
170,212
As at 30 June 2017, Cochlear entered into contracts to purchase property, plant and equipment for $4,769,000 (2016:
$4,426,000).
92 Cochlear Limited Annual Report 2017
Notes to the financial statements
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
2017
%
2016
%
Country of
incorporation/formation
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 Ltd
Cochlear Investments (No. 2) Pty Ltd
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 Technology Innovation Fund LP
Cochlear Technology Innovation Fund Pty Limited
Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi
Cochlear Verwaltungs GmbH
(i)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
100
100
100
Australia
UK
Switzerland
USA
Austria
Belgium
Sweden
USA
Canada
USA
Germany
Australia
Germany
UK
Australia
Australia
France
Australia
Belgium
Australia
Australia
Australia
Italy
Korea
Panama
Malaysia
USA
China
India
UAE
Sweden
New Zealand
UK
Panama
Sweden
Australia
Australia
Turkey
Germany
93
Notes to the financial statements
Cochlear (HK) Limited
Cochlear (UK) Limited
Isitme Implantlari Tibbi Cihazlar ve Saglik Hizmetleri Ltd Sti
Medical Insurance Pte Limited
Medisan Hørselsimplantater AS
Nihon Cochlear Co Limited
Sycle, LLC
Sycle.Net Technologies (Canada) Ltd
(i) Name changed in 2017, previously Lachlan Project Development Pty Ltd.
(ii) Dormant.
(iii) Deregistered during the year ended 30 June 2017.
7.4 Parent entity disclosures
(ii)
(iii)
Interest held
2017
%
2016
%
100
100
-
100
100
100
100
100
100
100
100
100
-
100
-
-
Country of
incorporation/formation
Hong Kong
UK
Turkey
Singapore
Norway
Japan
USA
Canada
At, and throughout the financial year ended, 30 June 2017, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity:
Net profit
Other comprehensive income
Total comprehensive income
Financial position of the parent entity at year end:
Current assets
Total assets
Current liabilities
Total liabilities
Total equity of the parent entity comprising:
Issued capital
Treasury reserve
Translation reserve
Hedging reserve
Share based payment reserve
Retained earnings
Total equity
2017
$000
176,042
11,012
187,054
459,267
923,196
223,853
532,185
2016
$000
158,544
24,751
183,295
392,777
816,734
141,427
486,883
169,367
159,303
-
56
15,228
34,240
172,120
391,011
(363)
83
4,189
27,023
139,616
329,851
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 5.7.
94 Cochlear Limited Annual Report 2017
Notes to the financial statements
Parent entity capital commitments for acquisition of plant and equipment
As at 30 June 2017, the parent entity entered into contracts but had not provided for or paid to purchase plant and
equipment for $4,759,000 (2016: $4,420,000).
7.5 Changes in accounting policies
There have been no changes to accounting standards materially 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 2017, 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.
AASB 9 Financial Instruments, which becomes mandatory for Cochlear’s 2019 consolidated financial statements.
Whilst Cochlear has yet to undertake a detailed assessment of the classification and measurement impact of the
new standard, Cochlear expects the following:
o
o
o
there will be no significant impact on the classification and measurement of its financial assets and financial
liabilities;
existing hedge relationships would qualify as continuing hedge relationships upon the adoption of the new
standard; and
the new impairment model requires the recognition of impairment provisions based on expected credit losses
rather than only incurred credit losses. Whilst Cochlear has not yet finalised its detailed assessment of the
impact of AASB 9 and its interaction with AASB 15 Revenue from Contracts with Customers, it may result in
earlier recognition of credit loss provisions.
AASB 15 Revenue from Contracts with Customers, which becomes mandatory for Cochlear’s 2019 consolidated
financial statements. Based on the guidance, Cochlear does not expect the recognition and measurement of
revenue to materially change under the new standard but has not yet completed its final assessment.
AASB 16 Leases, which becomes mandatory for Cochlear’s 2020 consolidated financial statements. Cochlear has
yet to complete a detailed assessment on the potential impact on its consolidated financial statements resulting from
the application of AASB 16; however, the following impacts are expected:
o
o
o
the total assets and liabilities on the balance sheet will increase with a decrease in net total assets, due to the
depreciation of right of use assets being on a straight-line basis whilst the lease liability reduces by the
principal amount of repayments;
interest expense will increase due to the unwinding of the effective interest rate implicit in the lease liability.
Interest expense will be greater earlier in a lease’s life, due to the higher principal value, causing profit
variability over the term of lease. This effect may be partially mitigated due to the number of leases held by
Cochlear at various stages of their terms; and
operating cash flows will be higher and financing cash flows will be lower, as repayment of the principal
portion of all lease liabilities will be classified as financing activities.
Cochlear does not plan to adopt these standards early.
7.7 Events subsequent to the reporting date
Other than the matter noted below, there has not arisen in the interval between the reporting date and the date of this
Financial Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of
the Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of
Cochlear in future financial years:
Dividends
For dividends declared after 30 June 2017, see Note 2.6.
95
Directors’ declaration
1. In the opinion of the directors of Cochlear Limited (the Company):
(a) the consolidated financial statements and notes and the Remuneration report 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 2017 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 2017.
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 17th day of August 2017.
Director
Director
96 Cochlear Limited Annual Report 2017
Independent audit report to the members of Cochlear Limited
Report on the audit of the Financial report
Opinion
We have audited the Financial report of Cochlear Limited
(the Company).
In our opinion, the accompanying Financial report of the
Company is in accordance with the Corporations Act
2001, including:
giving a true and fair view of the Consolidated Entity’s
financial position as at 30 June 2017 and of its
financial performance for the year ended on that date;
and
complying with Australian Accounting Standards and
the Corporations Regulations 2001.
The Financial report comprises:
The Consolidated Balance Sheet as at 30 June 2017;
The Consolidated Income Statement, Consolidated
Statement of Comprehensive Income, Consolidated
Statement of Changes in Equity and Consolidated
Statement of Cash Flows for the year then ended;
Notes including a summary of significant accounting
policies; and
The Directors’ Declaration.
The Consolidated Entity comprises (the Company) and
the entities it controlled at the year end or from time to
time during the financial year.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the
Financial report 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 fulfilled our other
ethical responsibilities in accordance with the Code.
Emphasis of matter – Patent dispute
We draw attention to Note 5.6 in the Financial report which describes the inherent uncertainty in the final future
outcome related to the patent infringement lawsuit filed against the Consolidated Entity (the lawsuit).
The uncertainty relates to the outcome of the lawsuit remanded to the United States District Court regarding the issue
of damages and wilfulness of infringement of two claims. There remains significant uncertainty in the range of possible
financial outflows associated with the lawsuit, the resolution of which may significantly impact the Consolidated Entity.
In our judgement, this uncertainty is fundamental to users’ understanding of the Financial report, the financial position
and performance of the Consolidated Entity. Our opinion is not modified in respect of this matter.
In concluding there is significant uncertainty we evaluated the extent of uncertainty regarding the outcome of the
lawsuit remanded to the District Court and its impact on the Financial report.
This included checking the following against our detailed audit work performed when the Consolidated Entity originally
determined and recognised their best estimate of the patent dispute provision:
enquiries of management and the directors regarding updates to the lawsuit and quantifications of outcomes;
confirmation from the Consolidated Entity’s external lawyers regarding the lawsuit and quantification of outcomes;
correspondence between the Consolidated Entity and external lawyers, in particular relating to the Court of
Appeals and remand order to the District Court;
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.
97
Independent audit report to the members of Cochlear Limited
consistency to facts and conditions gathered across our work; and
the Consolidated Entity’s disclosures in relation to the patent dispute provision, against the requirements of the
accounting standards.
Key audit matters
The key audit matters we identified are:
Recoverability of trade receivables,
Warranty provision, and
Business Acquisition.
Key audit matters are those matters that, in our
professional judgment, 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.
Recoverability of trade receivables $275.4 million
Refer to note 6.4(b) Financial risk management, credit risk
The key audit matter
How the matter was addressed in our audit
Recoverability of trade receivables was considered a key
audit matter due to:
The wide ranging characteristics of individual
customers;
The large number of different geographic locations of
customers each with a unique political and economic
environment that may restrict the timely recoverability
of certain receivables;
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 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 greater
involvement by our senior team members.
Our procedures included;
Testing key controls within the credit control process
including credit account application approvals and
credit limit assessments;
Assessing the recoverability of a sample of
outstanding trade receivable balances across
different geographies by comparing the Consolidated
Entity’s views of recoverability of amounts
outstanding to historical patterns of receipts, our
understanding of the impact of the political and
economic environment, in conjunction with assessing
cash received subsequent to year end for its effect in
reducing amounts outstanding at year end;
Challenging the Consolidated Entity’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 the Consolidated Entity’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
and the requirements of the accounting standards.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
98 Cochlear Limited Annual Report 2017
Independent audit report to the members of Cochlear Limited
Warranty provision $41.1 million
Refer to note 5.6 Provisions
The key audit matter
The warranty provision was considered a key audit
matter due to the estimation uncertainty inherent in the
Consolidated Entity’s key assumptions applied, due to:
The constantly evolving product portfolio where each
product has different design and quality attributes;
These different products have different warrantable
periods;
The introduction of the Global Repair Centre
intended to reduce repair costs; and
The inherent unpredictability of future failures
resulting in claims under warranty.
The key assumptions used in the calculation model of the
warranty provision subject to the greatest estimation
uncertainty are:
The warrantable population;
The forecast product failure rate;
The ratio of repairing to replacing failed product;
The forecast repair cost; and
The forecast replacement cost
These assumptions required greater involvement by our
senior team members to challenge the key assumptions
adopted by the Consolidated Entity in their calculation
that determined the amount provided.
How the matter was addressed in our audit
Our procedures included;
Obtaining an understanding of the evolving product
portfolio, each product’s different warrantable period
and history of failure rates, and the different attributes
that impact the key assumptions used in the
calculation of the warranty provision;
Performing sensitivity analysis by varying key
assumptions within a reasonably possible range, to
focus our further procedures;
Assessing the integrity of the Consolidated Entity’s
calculation model, for the warranty provision. This
included the accuracy of the underlying calculation
formulas.
Comparing key assumptions used in the warranty
provision calculation such as the warrantable
population, forecast product failure rates, ratio of
repairing to replacing failed product and forecast
repair and replacement cost to historical actuals;
Challenging key assumptions that have been based
on historical actuals as the best estimate for forecast
failure rates, repair replacement ratios and cost. We
did this by holding discussions with management to
understand the strategy, the introduction of the
Global Repair Centre and improvements in design
and quality assurance over repairs and how these
factors are built into the assumptions and interlink
with other assumptions (i.e. failure rates);
Assessing the warranty provision methodology
against the requirements of the accounting
standards;
Assessing the disclosures of the quantitative and
qualitative considerations in relation to the warranty
provision, by comparing these to our understanding
of the matter and the requirements of the accounting
standards.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
99
Independent audit report to the members of Cochlear Limited
Business acquisition $107.2 million
Refer to note 5.4, Business combinations
Key audit matter
The Consolidated Entity’s acquisition of Sycle LLC for
consideration of US$79.5 million on 11 May 2017
represents a significant single transaction for the
Consolidated Entity. This was a key audit matter due to
the:
Size of the acquisition having a pervasive impact on
the financial statements;
Complexity of the master Membership Interest
Purchase Agreement and associated side
agreements. We focus on accounting for the
consideration paid, transaction costs or future
business expenses against the criteria of the
accounting standards;
Significant judgements made by the Consolidated
Entity relating to the valuation and preliminary
purchase price allocation (PPA) at 30 June 2017.
The Consolidated Entity engaged an independent
valuation expert to advise on the identification and
measurement of acquired assets and liabilities, in
particular determining the allocation of purchase
consideration to goodwill and separately identifiable
intangible assets; and
Level of judgement applied by the Consolidated
Entity to measure the fair value of contingent
consideration relating to the ‘earn-out’ liability due to
estimates of the forecast future performance of the
acquired business.
These conditions and associated complex acquisition
accounting required significant audit effort and greater
involvement by senior team members and our valuation
specialists.
How the matter was addressed in our audit
Our procedures included;
Reading the Membership Interest Purchase
Agreement and associated side agreements related to
the acquisition to understand the structure, key terms
and conditions; and nature of certain payments. Using
this, we evaluated the accounting treatment of
acquisition consideration, transaction costs and future
business expenses against the criteria in the
accounting standards.
Working with our valuation specialists to assess and
challenge the key assumptions used in the PPA to
identify and value separate assets. This involved:
-
assessing the objectivity, competence, experience
and scope of the independent valuation expert.
comparing the inputs used by the Consolidated
Entity’s independent valuation expert to approved
business forecasts;
challenging the Consolidated Entity’s significant
judgemental assumptions such as identification of
separate identifiable intangible assets and the
Consolidated Entity’s independent expert’s
approach and methodology to valuing these
assets by comparing to accepted industry practice
and the requirements of the accounting standards;
and
Assessing the Consolidated Entity’s determination of
the fair value measurement of contingent
consideration relating to the ‘earn-out’ liability. This
involved:
-
checking key inputs from the Consolidated Entity’s
calculation of the earn-out liability to the
Membership Interest Purchase Agreement and
associated side agreements and board approved
investment proposal for the acquisition;
comparing growth assumptions within the
Consolidated Entity’s calculation of the earn-out
liability to historical performance, our
understanding of industry trends, and the board
approved investment proposal for the acquisition;
checking the mathematical accuracy of the earn-
out liability and net present value of future
expected payments.
-
-
-
-
Assessing the Consolidated Entity’s disclosures of the
quantitative and qualitative considerations in relation to
the business acquisition, by comparing these
disclosures to our understanding of the acquisition and
the requirements of the accounting standards.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
100 Cochlear Limited Annual Report 2017
Independent audit report to the members of Cochlear Limited
Other information
Other Information is financial and non-financial information in Cochlear Limited’s annual reporting which is provided in
addition to the Financial report and the Auditor's report. The Directors are responsible for the Other Information.
Our opinion on the Financial report does not cover the Other Information and, accordingly, we do not express an audit
opinion or any form of assurance conclusion thereon, with the exception of the Remuneration report.
In connection with our audit of the Financial report, our responsibility is to read the Other Information. In doing so, we
consider whether the Other Information is materially inconsistent with the Financial report or our knowledge obtained in
the audit, or otherwise appears to be materially misstated.
We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the
work we have performed on the Other Information that we obtained prior to the date of this Auditor’s report we have
nothing to report.
Responsibilities of the Directors for the Financial report
The Directors are responsible for:
preparing the Financial report that gives a true and fair view in accordance with Australian Accounting Standards and
the Corporations Act 2001;
implementing necessary internal control to enable the preparation of a Financial report that gives a true and fair view
and is free from material misstatement, whether due to fraud or error; and
assessing the Consolidated Entity’s ability to continue as a going concern. This includes disclosing, as applicable,
matters related to going concern and using the going concern basis of accounting unless they either intend to
liquidate the Consolidated Entity or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the Financial report
Our objective is:
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. They 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.
A further description of our responsibilities for the Audit of the Financial report is located at the Auditing and Assurance
Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s
report.
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.
101
Independent audit report to the members of Cochlear Limited
Report on the Remuneration report
Opinion
In our opinion, the Remuneration Report of Cochlear Limited for the year ended 30 June 2017, complies with Section
300A of the Corporations Act 2001.
Directors’ responsibilities
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 responsibilities
We have audited the Remuneration report included in pages 33 to 50 of the Annual Report for the year ended 30 June
2017.
Our responsibility is to express an opinion on the Remuneration Report, based on our Audit conducted in accordance
with Australian Auditing Standards.
Cameron Slapp, Partner
KPMG
Sydney, 17 August 2017
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.
102 Cochlear Limited Annual Report 2017
Shareholder information
Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this
report – the information presented is as at 31 July 2017.
Number of ordinary shares
5,081,925
4,116,410
3,358,001
12,556,336
%
8.85
7.17
5.85
21.86
Number of ordinary shareholders
Substantial shareholders
Investor
Baillie Gifford & Co
BlackRock Group
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 – 145 shareholders held less than a marketable parcel of ordinary shares.
Twenty largest shareholders
Shareholder
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Limited
Citicorp Nominees Pty Limited
National Nominees Limited
BNP Paribas Nominees Pty Ltd
BNP Paribas Noms Pty Ltd
Citicorp Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited - A/C 2
HSBC Custody Nominees (Australia) Limited
Dr Christopher Graham Roberts
AMP Life Limited
HSBC Custody Nominees (Australia) Limited - GSCO ECA
Australian Foundation Investment Company Limited
SBN Nominees Pty Limited <10004 Account>
PGA (Investments) Pty Ltd
BNP Paribas Nominees Pty Ltd
National Nominees Limited
HSBC Custody Nominees (Australia) Limited
Nulis Nominees (Australia) Limited
Navigator Australia Ltd
The 20 largest shareholders held 76.86% of the ordinary shares of the Company.
On market buy-back
There is no current on market buy-back.
Number of ordinary shares
24,896,044
9,576,223
3,081,569
2,442,584
1,122,938
757,852
387,991
337,295
286,656
236,682
226,985
157,575
137,000
105,000
100,000
68,500
66,403
50,985
48,985
48,791
44,136,058
26,010
2,417
137
63
15
28,642
%
43.35
16.68
5.37
4.25
1.96
1.32
0.68
0.59
0.50
0.41
0.40
0.27
0.24
0.18
0.17
0.12
0.12
0.09
0.09
0.08
76.86
103
Notes
104 Cochlear Limited Annual Report 2017
Contact information
Cochlear headquarters
1 University Avenue
Macquarie University NSW 2109
Australia
Telephone: +612 9428 6555
Fax: +612 9428 6353
Website: www.cochlear.com
Shareholder enquiries
Access to shareholding information is available to investors through Computershare.
Computershare Investor Services Pty Limited
GPO Box 2975
Melbourne VIC 8060
Australia
Telephone: 1300 850 505
Email: web.queries@computershare.com.au
Website: www.computershare.com.au
Calendar of events
17 August 2017
FY17 results announced
20 September 2017
Dividend record date (final dividend)
11 October 2017
Payment date (final dividend)
17 October 2017
Annual general meeting
13 February 2018
HY18 results announced*
14 August 2018
FY18 results announced*
* Indicative dates only
Annual general meeting
The Annual general meeting of Cochlear Limited will be held on 17 October 2017 at 10.00am at the Australian Securities
Exchange, Exchange Square Auditorium, 20 Bridge Street, Sydney.
105
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
450,000 people of all ages live full and active lives by reconnecting them with family,
friends and community.
We aim to 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.
www.cochlear.com
Please seek advice from your medical practitioner or health professional about treatments for hearing loss. They will be able to
advise you on a suitable solution for your hearing loss condition. All products should be used only as directed by your medical
practitioner or health professional.
Not all products are available in all countries. Please contact your local Cochlear representative.
ACE, Advance Off-Stylet, AOS, AutoNRT, Autosensitivity, Beam, Button, CareYourWay, Carina, Cochlear, Cochlear SoftWear,
, Codacs, ConnectYourWay, Contour, Contour Advance, Custom Sound, ESPrit, Freedom, Hear now. And always,
HearYourWay, Hugfit, Hybrid, inHear, Invisible Hearing, Kanso, MET, MicroDrive, MP3000, myCochlear, mySmartSound, NRT,
Nucleus,
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.
, Off-Stylet, Slimline, SmartSound, Softip, SPrint, True Wireless, the elliptical logo, WearYourWay and Whisper are
© Cochlear Limited 2017. D1274784 ISS1 AUG17