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CryoLife Inc.2018 COCHLEAR LIMITED
Annual Report
Contents
1
2
5
7
29
35
Financial history
Chairman’s report
CEO & President’s report
Operating and financial review
37
40
57
62
Executive team
Remuneration report
Directors’ report
Financial statements
Environment, social and governance
112 Shareholder information
Board of directors
113 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 details
the global tax strategy.
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).
Investor Handbook
The Investor Handbook is an all-in-one reference for shareholders covering the market for
implantable devices, Cochlear’s strategy, global footprint and product portfolio.
Cochlear Limited Annual Report 2018
Financial history
8%
in FY18
9%
in FY18
10%
in FY18
11%
in FY18
Cochlear implants
units
Sales revenue
$million
Net profit
$million – adjusted*
Dividends
per share
* FY12 excludes product recall costs of $101 million after tax and FY14 excludes patent dispute provision of $16 million after tax.
1
Chairman’s report
Cochlear reported a record net profit of $246 million,
an increase of 10% on the FY17 result. FY18 has been
a big year, with a focus on building awareness and
market access to cochlear implants, up-weighting our
marketing activities and customer servicing capability
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 the
successful launch of the Nucleus® 7 Sound Processor and
Baha® SoundArc underpinning our solid sales and
earnings growth.
It has been an important year for Cochlear milestones,
reaching our 500,000th implant sale, and for hearing
awareness, with the World Health Organization (WHO)
advocating for public health actions to prevent and treat
hearing loss.
We have been increasing our investment in health
economics, our market access capability and the
collaborative partnerships we have with the medical
research community to build on the clinical evidence that
demonstrates the effectiveness of our products and the
importance of hearing for healthy ageing.
Finally, we made a number of small investments in early
stage innovation that seek to enhance or leverage our own
R&D in the coming years.
Growing dividends
Earnings growth, combined with strong free cash flow
generation, has supported the 14% increase in the fully
franked final dividend to $1.60 per share. This takes
dividends paid for the year to $3.00 per share, fully
franked, an increase of 11% on FY17, and represents a
payout of 70% of net profit.
The board policy of paying out around 70% of net profit as
dividends to shareholders has been maintained.
2 Cochlear Limited Annual Report 2018
Over 500,000 implants sold
Cochlear reached a major milestone in early FY18, selling
its 500,000th implant. We have now provided more than
550,000 of our cochlear implants, bone conduction
implants and acoustic implants, helping a growing number
of people hear with one – or two – of our implantable
devices.
While a wonderful milestone for the Company, it is also a
reminder of the challenge, and opportunity, for Cochlear
with fewer than 5% of the people who could benefit from
an implantable hearing solution currently being treated.
40th anniversary of the first multi-channel cochlear
implant surgery
Cochlear also celebrates the 40th anniversary of Rod
Saunders receiving his cochlear implant. In a surgical
procedure conducted by Graeme Clark, assisted by Dr
Brian Pyman, at the Royal Victorian Eye and Ear Hospital
in Melbourne on 1 August 1978, Rod made history,
becoming the first person to have his hearing restored and
to understand speech with the aid of a multi-channel
cochlear implant. This day marked the beginning of a new
era in implantable hearing solutions and paved the way for
many hundreds of thousands of people to hear today
thanks to cochlear implant technology.
The growing global burden of hearing loss
Hearing loss affects a significant number of people. The
WHO has revised up its figures this year, revealing that
over 466 million people suffer from disabling hearing loss
globally. The vast majority affected are adults, with one
third of people over 65 years of age affected by disabling
hearing loss.
Hearing loss is now the fourth biggest contributor to years
lived with disability globally, with the WHO estimating the
cost of untreated hearing loss to be over US$750 billion
per annum.
With the rise and ageing of the global population, the
number of people with hearing loss is growing at a rapid
pace. WHO projections suggest that unless action is
taken, there will be 630 million people living with disabling
hearing loss by the year 2030, with that number expected
to grow to over 900 million by 2050.
The WHO is advocating for public health actions to
prevent and treat hearing loss through control of risk
factors and ensuring that the needs of those who
experience hearing loss can be addressed adequately.
Chairman’s report
It will take a collaborative effort from governments,
academia, industry, health professionals and the general
public to improve future hearing health outcomes. 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.
Healthy hearing for healthy ageing
Cochlear implantation for seniors is an important trend,
especially as we begin to better understand the
connection between high levels of hearing loss and
cognitive decline, social isolation and depression.
Developing evidence of the impact of untreated hearing
loss on people's health, on our communities and the
economy is critical to ensuring hearing loss is treated
appropriately.
Cochlear is making an investment to build collaborative
partnerships within the global medical research community
and to be actively involved in delivering evidence-based
research so we can better understand, address and
provide access to treatment options for individuals and
communities impacted by hearing loss.
Establishment of long-term research collaborations
In March 2018, we pledged to gift US$10 million over 10
years to the Johns Hopkins Bloomberg School of Public
Health to establish the ‘Cochlear Center for Hearing and
Public Health’. The Center will be a first of its kind at any
academic institution focused on addressing hearing loss
as a global public health priority, led by Frank Lin, MD,
PhD.
The Center will address hearing loss’ global impact by
conducting research studies to determine the gravity of
hearing loss, particularly among older adults, to public
health, developing and testing interventions to mitigate the
effects of hearing loss, and helping craft policies and
strategies to ensure successful implementation of hearing
loss interventions at the local, national and global levels.
In October 2017, we announced the establishment of the
co-funded Cochlear Chair in Hearing and Healthy Ageing
at Macquarie University.
The Chair will oversee the implementation of collaborative
research and education strategies, with the long-term goal
of developing a leading platform for further impactful
research in hearing in Australia.
Macquarie University is home to the Australian Hearing
Hub, and Cochlear continues to lead the market with
innovative new hearing technologies. Together, we
exemplify the strategic industry-academic engagement
called for in the Australian Government's National
Innovation and Science Agenda, and we are in a good
position for further impactful research in the hearing
space.
As well as supporting research into hearing and healthy
ageing, we aim to encourage research into alternative
models for delivering hearing care in growing economies
to provide lower cost access. In China we are
collaborating with the Government and local universities
on the establishment of an international hearing research
centre. The centre aims to host a range of hearing health
related organisations to facilitate collaboration and to
assist in improving access to hearing healthcare in China.
It will be located next to our new manufacturing facility in
Chengdu, which is currently being constructed.
Investments in advanced 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 growth of
the industry. We are also actively monitoring the world
around us for novel technologies that may enhance or
leverage our own innovation.
Over the past 18 months, we made a number of small
investments in early-stage innovation. Otoconsult provides
technology that is expected to enable a faster and more
consistent fitting of cochlear implants to deliver the best
possible patient outcomes. A collaboration with Sensorion,
a French biotech company, will evaluate therapeutic
approaches in combination with cochlear implants focused
on improving hearing outcomes. And Epi-Minder is
developing a breakthrough monitoring device aimed at
improving the treatment of patients suffering from epileptic
seizures.
Changes to the R&D tax concession
Cochlear welcomed the Australian Government’s decision
in May 2018 to support R&D intensive companies like
Cochlear, by changing the way tax incentives are
structured.
The announced changes will increase the cap on eligible
expenditure from $100 million to $150 million, as well as
increase the effective tax concession rate.
The new scheme is expected to provide Cochlear with a
small incremental benefit to net profit in the initial years
and, importantly, an incentive to continue to invest in R&D
locally. This will mean more high paying jobs in Australia,
3
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 FY18 details.
Our employees
Cochlear has a diverse global workforce focused on our
business and on transforming the lives of people with
hearing loss. We employ over 3,500 people from over 75
nationalities, with products sold into over 100 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
more valuable intellectual property held in Australia and
more spill-overs for the Australian hearing sector and
broader medical technology industry.
Inquiry into impediments to business investment
In May 2018, Cochlear and CSL made a joint submission
to the House of Representatives Standing Committee on
Economics’ ‘Inquiry into Impediments to Business
Investment’. As the nation’s two largest and most
successful innovation-focussed advanced manufacturing
companies, actively and successfully competing globally
from an Australian base, we are united in urging the
Australian Government to more actively compete for
investment and maximise the social and economic
benefits flowing from innovation.
The submission articulates some of the current policy
challenges Australia faces in retaining existing innovation-
based enterprises and building the CSLs and Cochlears of
the future. It also makes several recommendations for
enhancing Australia’s international competitiveness
including considering targeted tax and other investment
incentives, ensuring access to global talent, improving
regulatory timeframes and improving consistency and
coordination of Commonwealth and State policy. A copy of
the full submission is available on the website,
www.cochlear.com.
Retirement of Prof Edward Byrne, AC as director
Long-serving non-executive director Prof Edward Byrne,
AC will be retiring from the Company’s board at the end of
the 2018 annual general meeting. Ed has provided
invaluable counsel in his 16 years of service to Cochlear’s
board. His extensive experience in medicine and clinical
neurology and research, as well as his dedication to
Cochlear, have contributed greatly to Cochlear’s strategic
direction and success over many years.
On behalf of the board, I would like to sincerely thank Ed
for his service and contribution to Cochlear and wish him
well for the future.
The Board had anticipated Ed’s retirement and appointed
Prof Bruce Robinson, AM in December 2016 to allow for
an orderly transition and ensure the Board will continue to
be well served in the areas of research, healthcare and
medicine, and tertiary education.
Remuneration
We need to ensure our remuneration practices are
evolving to keep us competitive, ensure we can attract the
4 Cochlear Limited Annual Report 2018
CEO & President’s report
The growth we have experienced over the past few
years has continued in FY18. The business delivered
strong growth in cochlear implant units and sales
revenue, with net profit growing by 10% (10% in CC)*.
We continued to execute on our strategy of investing to
retain market leadership and drive market growth. Our
market leadership position was enhanced by new product
launches and improvements in the service offering to our
customers. Market growth continued as awareness,
indications and funding grew. And the expansion of direct-
to-consumer marketing and focus on sales force
expansion and effectiveness continued to support overall
growth.
The cochlear implant business grew strongly with CC
revenue growth of 8% and unit growth of 8% (up 11%
excluding Chinese Central Government tender units).
Developed markets continued to perform well with unit
growth increasing by 9%. Highlights include strong
performances from the US and UK and solid unit growth
across much of Western Europe, Australia and Japan.
Emerging market units grew by over 15% (adjusted for the
impact of lower Chinese Central Government tender
units), with strong growth in the Middle East and the China
private pay market.
The Nucleus® 7 Sound Processor, the world’s first Made
for iPhone cochlear implant sound processor, was
launched during the second quarter across key markets
including the US, Western Europe and Australia,
performing well in its first nine months. In June, the
Nucleus Smart App for Android™ smartphone users was
released, allowing recipients with a compatible Android
device to control their hearing with the Nucleus Smart
App. And the Baha® SoundArc was launched, providing a
non-surgical bone conduction solution that works with all
of Cochlear’s Baha 5 sound processors.
* 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 24 for
further detail.
The Services business performed strongly, delivering CC
revenue growth of 15% driven by the release of the
Nucleus 7 Sound Processor and the first full year of Sycle
revenue. Sound processor upgrade revenue increased by
12% in CC and Cochlear Family membership exceeded
100,000 members.
The Acoustics business delivered CC sales in line with last
year, following 26% CC growth last year, with demand
continuing for the Baha 5 sound processor range.
Strategic priorities focused on building awareness
and market access, particularly for seniors
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, the Company is actively strengthening its
servicing capability to provide products, programs and
services to support the lifetime relationship with recipients.
Cochlear has prioritised three market segments – adults
and seniors in developed markets; children in developed
markets; and children in emerging markets – with
strategies to improve awareness and access tailored by
segment.
The adults and seniors in the developed markets provide
the biggest opportunity for Cochlear given the large, and
growing, market size as the population ages. The segment
is however challenging to penetrate as most candidates
suffer from a progressive hearing loss and, together with
their care providers, either do not know about cochlear
and bone conduction implants, or do not understand the
indications for them.
While penetration rates are currently very low, at around
3%, the seniors segment has been the fastest growing
segment for Cochlear over the past few years as
awareness increases.
Cochlear has an important role to play in supporting
cochlear implants becoming the standard of care for adults
and seniors with severe to profound hearing loss. We
have been increasing our investment in health economics,
our market access capability and the collaborative
partnerships we have with the medical research
community to build on the clinical evidence that
demonstrates the effectiveness of our products,
particularly for seniors.
We will continue to invest in driving referrals via our
successful direct-to-consumer marketing activities as well
as through the hearing aid channel. And there continue to
5
CEO & President’s report
be opportunities to expand indications and reimbursement
in many markets.
levels to $80-100 million per annum over the next few
years.
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 FY19:
Expect growth across the developed markets, which
represent around 80% of cochlear implant revenue, to
continue;
Emerging market growth rates over time continue to
be strong, however, annual growth rates can be
variable driven by the timing of tender based activity
and macro-economic conditions;
Continued investment to retain market leadership and
drive long-term market growth with the target of
maintaining the net profit margin; and
Forecasting a weighted average AUD/USD exchange
rate of 75 cents for FY19 (77 cents in FY18) and
AUD/EUR of 0.63 EUR (0.65 EUR in FY18).
Dig Howitt
CEO & President
Strong financial position
Cochlear delivered net profit of $245.8 million, an increase
of 10% on FY17 (10% in CC), which was within the
guidance range of $240-250 million. Cochlear continues to
deliver on its objective of delivering consistent revenue
and earnings growth over time.
Our investment in sales and marketing activities is building
awareness of and access to implantable solutions and
driving market growth. The investment in R&D continues
to strengthen our leadership position through the
development of market-leading technology. And by
delivering a world-class customer experience, we
empower our recipients to connect with others and live a
full life.
In FY18, the business delivered manufacturing efficiencies
from improvements in its warranty and repair functions.
These gains were reinvested into our market growth
activities with the net profit margin maintained.
We have a strong balance sheet and delivered operating
cash flows in excess of net profit, enabling the business to
fund capital investment, reduce debt and increase
dividends to shareholders.
FY19 financial outlook
For FY19, Cochlear expects to deliver reported net profit
of $265-275 million, an 8-12% increase on FY18.
Growth is expected to continue across the business in
FY19, underpinned by the significant investments made in
product development and market growth initiatives over
the previous few years.
We will continue to invest operating cash flows in activities
aimed at building awareness and market access, with the
objective of delivering consistent revenue and earnings
growth over the long-term. Through disciplined
investment, we are targeting to maintain the net profit
margin, reinvesting any efficiency gains, currency or tax
benefits into market growth activities.
Over the next few years, we have a number of large long-
term investment projects including the development of our
China manufacturing facility, with the construction phase
expected to be complete by the end of FY20, and
investments in IT platforms to strengthen our connected
health, digital and cyber security capabilities. These
projects are expected to increase capital expenditure
6 Cochlear Limited Annual Report 2018
Operating and financial review
Company overview
Cochlear is the global leader in implantable hearing solutions with products including cochlear implants, bone conduction
implants and acoustic implants. Cochlear commenced operations in 1981 as part of the Nucleus group and in 1995,
listed on the Australian Securities Exchange. Today, Cochlear is a Top 50 listed Australian company with a market
capitalisation of over A$10 billion.
Cochlear aims to support cochlear implantation becoming 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. The Company has provided more than 550,000 implant solutions to recipients who benefit from
one – or two – of the Company’s implantable devices. Whether these hearing solutions were implanted today or many
years ago, Cochlear provides new technologies and innovations for all recipients. Cochlear invests more than $160
million each year in R&D and currently participates in over 100 collaborative research programs worldwide.
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 30 countries and a global workforce of over 3,500 employees.
7
Operating and financial review
Cochlear’s mission
Cochlear’s mission is the passion that drives the organisation and, at a high level, focuses the strategy.
Cochlear’s investment proposition
Cochlear provides shareholders with a long-term opportunity to invest in the global leader in implantable hearing devices,
in an industry that has the potential to grow over the long term. Cochlear has a clear strategy to drive market growth and
a strong financial position which enables it to fund its growth activities while rewarding shareholders along the way with a
growing dividend stream.
Global leader in implantable hearing devices with more than 550,000 implants sold, supporting the majority of the
global base of hearing implant recipients
Long-term market growth opportunity with a significant, unmet and addressable clinical need for implantable
hearing solutions and less than 5% market penetration
Unrivalled commitment to product innovation, bringing innovative new products to market as well as upgrades for
all generations of Cochlear’s recipient base
Growing annuity income stream from servicing of the expanding recipient base
Strong free cash flow generation provides funding for market growth activities and R&D as well as the ability to
reward shareholders with a growing dividend stream
8 Cochlear Limited Annual Report 2018
Operating and financial review
Hearing loss is prevalent and under-treated
Cochlear competes in the hearing loss category. The World Health Organization (WHO) estimates that there are over
460 million people worldwide – over 5% of the world’s population – who experience disabling1 hearing loss. By 2050, this
is expected to rise to over 900 million people – or 1 in every 10 people2.
Hearing loss affects people of all ages and is particularly prevalent in people over the age of 65, with one in three people
over 65 suffering a disabling hearing loss. It affects communication and can contribute to social isolation, anxiety,
depression and cognitive decline3.
Cochlear estimates that more than 15 million people could benefit from a cochlear or bone conduction implant to treat
moderate to profound hearing loss across its target segments of children globally and adults and seniors in the
developed world4.
Cochlear’s challenge, and opportunity, is that less than 5% of the people that could benefit from an implantable hearing
solution are being treated5. There remains a significant, unmet and addressable clinical need that is expected to continue
to underpin the long-term sustainable growth of the business.
Note: References on page 111.
9
Operating and financial review
Growing demand for cochlear implants
Cochlear implants started as a solution for people with a profound hearing loss, equivalent to a greater than 90 decibel
(dB) hearing loss, almost 40 years ago. Adoption of cochlear implantation for children grew rapidly, driven by the wide
spread implementation of neonatal screening which allowed for early detection of hearing loss in newborns. As a result,
cochlear implantation has been established as the standard of care for newborns across many developed markets, with
bilateral implants indicated across most markets as evidence supports the benefit of binaural hearing.
Cochlear’s investment in innovation over many years has materially improved the hearing outcomes and quality of life of
recipients and this has driven an expansion of the indications, as well as the addressable market, for cochlear implants.
Today, while indications still vary by country, the US, Germany, Australia and, since December 2017, Japan effectively
indicate cochlear implants for people with a severe to profound hearing loss, equivalent to a hearing loss of more than
70dB.
More recently, there has been a greater uptake of cochlear implantation by older adults, particularly seniors, as
awareness of the intervention has grown and the body of evidence builds connecting healthy hearing with healthy
ageing. At the same time, funding has expanded in emerging markets as awareness of cochlear implants grows and
wealth increases, driving implantation of children across the emerging world.
10 Cochlear Limited Annual Report 2018
Operating and financial review
Company strategy
To achieve its mission, Cochlear aims to support cochlear implantation becoming 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, 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.
Cochlear’s strategic priorities aim to:
11
Operating and financial review
Cochlear continues to be the global leader in implantable hearing solutions. The investment in R&D aims to strengthen
our leadership position through the development of market-leading technology. And by delivering a world-class
customer experience, we aim to empower our recipients to connect with others and live a full life.
Market-leading technology
We innovate to bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes.
Cochlear has a global innovation network with over 350 R&D employees in international locations. Primary R&D is co-
located with the Australian Hearing Hub in Sydney, with the Cochlear Technology Centre in Belgium focused on
advanced innovation. The Company has over 100 research partners in over 20 countries and a global network of design
partners and suppliers.
Product and service R&D spans implants and sound processors; sound coding; and clinical and surgical tools. R&D
investment priorities are focused on hearing indications; hearing outcomes; lifestyle; and connected care. Over the past
few years, Cochlear has launched market-leading products including:
Nucleus® 7 Sound Processor, the world’s first Made for iPhone cochlear implant sound processor;
Nucleus Smart App for Android™ smartphone users, allowing recipients with a compatible Android device to control
their hearing with the Nucleus Smart App;
Baha® SoundArc, providing a non-surgical bone conduction solution that works together with all of Cochlear’s Baha
5 sound processors;
Kanso® Sound Processor, our first off-the-ear sound processor;
Nucleus® Profile Slim Modiolar (CI532) electrode, the world’s slimmest electrode; and
Baha® 5 Power and SuperPower sound processors, Made for iPhone and designed for people with greater levels of
hearing loss.
Cochlear has invested over $1.7 billion in R&D since listing in FY96 and currently invests more than $160 million per
annum, or 12% of sales revenue, on R&D.
10%
in FY18
R&D
$million
12 Cochlear Limited Annual Report 2018
Operating and financial review
Cochlear’s implantable hearing solution portfolio
Cochlear generates sales revenue from a range of implantable solutions for people with moderate to profound hearing
loss. Cochlear’s latest products include:
Cochlear implants (88% of sales revenue)
Acoustic implants (12% of sales revenue)
Bone conduction implants
Acoustic implants
13
Operating and financial review
World-class customer experience
Providing a world-class customer experience empowers people to connect with others and live a full life and creates a
brand halo for candidates. Cochlear is focused on providing its recipients with convenience and confidence, direct
engagement and a commitment to providing an ongoing pipeline of market-leading products and services.
Convenience and confidence
Wireless connectivity;
Easy to use products and services;
Ease of access for support; and
Rehabilitation tools.
Engagement
Cochlear Family connecting recipients with Cochlear;
Growing volunteer network building awareness and increasing candidate
confidence; and
Recipient engagement improves upgrade penetration.
Market-leading products and services
Improving technology with each generation of sound processor; and
Backward compatibility of sound processors with prior generation
implants.
14 Cochlear Limited Annual Report 2018
Operating and financial review
Awareness and market access
There is a significant, unmet and addressable clinical need for cochlear and acoustic implants with less than 5% global
market penetration.
As the global leader, Cochlear is focused on meeting this long-term market growth opportunity by transforming the way
people understand and treat hearing loss through its awareness and access activities.
Three key market segments have been prioritised with strategies to improve awareness and access tailored by segment.
The segments comprise:
Adults and seniors
Children
Children
in developed markets
in developed markets
in emerging markets
Biggest market potential
and the most challenging
to penetrate
Cochlear implants have been
established as the standard of care
for newborns7 across many
developed markets
Long-term growth potential
as wealth increases
Current penetration6: ~3%
Current penetration6: ~60%
Current penetration6: ~10%
Note: References on page 111.
15
Operating and financial review
Adults and seniors in developed markets
Adults and seniors in the developed markets provide the biggest opportunity for Cochlear given the large, and growing,
market size as the population ages. The segment is however challenging to penetrate as most candidates suffer from a
progressive hearing loss and, together with their care providers, either do not know about cochlear and bone conduction
implants, or do not understand the indications for them.
While penetration rates are currently very low, at around 3%, the seniors segment has been the fastest growing segment
for Cochlear over the past few years as awareness begins to improve.
The key priority for the adult and seniors segment is to continue to build awareness and market access. This includes
initiatives to:
Support cochlear implants becoming the standard of care for adults and seniors with severe to profound hearing loss
by demonstrating:
− Hearing is an essential part of healthy ageing;
− Effectiveness of implantable solutions relative to hearing aids; and
− Treating age related hearing loss creates economic value;
Increase referrals via direct-to-consumer marketing activities and through the hearing aid channel; and
Expand indications and reimbursement in some markets.
Children in developed markets
Cochlear implants started as a solution for children with a profound hearing loss. Over the last 30 years, neonatal
screening has been successfully established across the developed world. Today, cochlear implantation has been
established as the standard of care for newborns across many developed markets, with bilateral implants indicated
across most markets as evidence supports the benefit of binaural hearing.
The key priority for this segment is to maintain our leadership position while aiming to deepen our penetration in a few
markets where rates of implantation for profoundly deaf newborns, and uptake of bilateral implantation, are below
average.
There is also an opportunity to strengthen the treatment pathway for acquired or progressive hearing loss in older
children. Poor screening rates for hearing loss in older children mean that intervention for children who lose hearing after
birth is materially lower than that of newborns.
Children in emerging markets
Cochlear’s emerging markets business has been growing rapidly as wealth grows across many of the countries. China
has been a leading market with a continuing commitment from the government to fund implants for children.
Cochlear’s priorities for this segment are focused around market expansion with activities targeted at:
Building awareness – public education campaigns, direct-to-consumer marketing and hearing screening;
Expanding funding – driven by the compelling health economics of implantation in children;
Expanding our presence – distributor relationships combined with an expanding direct presence;
Developing professional capability – surgeon training and audiology education; and
Maximising penetration through a tiered product offering.
16 Cochlear Limited Annual Report 2018
Operating and financial review
Clinical evidence
The adults and seniors segment is a key growth segment for Cochlear, and forms a major part of Cochlear’s business 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. There is also a growing body of evidence of
the superior outcomes of cochlear implants over hearing aids for many people with a severe hearing loss (>70dB)8.
We have been increasing our investment in health economics, our market access capability and the collaborative
partnerships we have with the medical research community to build on the clinical evidence that demonstrates the
effectiveness of our products, particularly for seniors. Over the past 12 months, Cochlear has pledged funds to the Johns
Hopkins Bloomberg School of Public Health to establish the ‘Cochlear Center for Hearing and Public Health’. The Center
will be a first of its kind at any academic institution focused on addressing hearing loss as a global public health priority.
Growing understanding of the link between
healthy hearing and healthy ageing
Note: References on page 111.
17
Operating and financial review
Cochlear has achieved growth across all business units over time and expects each business unit to contribute to growth
in the coming years. The key revenue growth drivers for each business unit include:
Growing revenue across all business units
Sales revenue ($ million)
Cochlear implants
Awareness and uptake by adults and
seniors; and
Emerging market expansion.
Services
Growing recipient base; and
Upgrade penetration.
Acoustics
Market expansion; and
Upgrade penetration.
To meet Cochlear’s objectives of driving market growth while maintaining market leadership, Cochlear is investing
operating cash flows into sales, marketing and R&D activities. Investment priorities are focused around:
Investing to grow
Building awareness and access to our products requires multi-year investment in sales, marketing and R&D activities;
and
Through disciplined investment, we will aim to maintain the net profit margin.
Delivering operational improvement
Optimising cost of production strengthens our competitive position; and
We will use our scale to generate efficiency gains to reinvest in market growth activities.
Maintaining the strong financial position
Strong cash flow generation funds growth; and
We aim to maintain the strong balance sheet position and continue to target a dividend payout of around 70% of net
profit.
18 Cochlear Limited Annual Report 2018
Operating and financial review
Results of operations
Product and service highlights
Cochlear implants (units)
Sales revenue
Cochlear implants
Services (sound processor upgrades and other)
Acoustics (bone conduction and acoustic implants)
2018
2017
Change %
Change %
$m
(reported)
(CC)1
$m
$m
35,260
32,554
831.0
355.2
165.2
767.8
305.6
166.3
8%
8%
8%
16%
1%
9%
15%
0%
9%
Total sales revenue
1,351.4
1,239.7
1 Constant currency (CC) removes the impact of exchange rate movements and foreign exchange (FX) contract gains/(losses) to
facilitate comparability. See Notes on page 24 for further detail.
Cochlear implants – 62% of sales revenue
Cochlear implant revenue grew 8% (8% in CC) with unit growth of 8% (up 11% excluding the impact of Chinese Central
Government tender units). Reported average selling prices were stable in constant currency driven by country mix.
However, there was continued downward pressure in prices in some markets, particularly Western Europe.
Across the developed world, the cochlear implant market continues to experience robust growth, with improving
awareness and growing uptake in the adults and seniors segment. Cochlear’s developed markets business, which
represents around 80% of revenue, grew units by 9%, with highlights including continued strong performances from the US
and UK.
The Nucleus 7 Sound Processor, the world’s first Made for iPhone cochlear implant sound processor, was launched
across key markets during the second quarter and has performed strongly, driving market share gains for Cochlear.
The increase in sales revenue also reflects continued investments in market growth initiatives including direct-to-consumer
activities and sales force expansion. These initiatives help build awareness of implantable hearing solutions and support
further penetration into the adult segment.
Emerging markets units grew by over 15% (adjusted for the impact of lower Chinese Central Government tender units),
with highlights including strong unit growth in the Middle East and the China private pay market. The FY18 result included
around 1,100 Chinese Central Government tender units compared to around 1,900 in FY17.
Services (sound processor upgrades and accessories) – 26% of sales revenue
Reported Services sales revenue increased by 16% (15% in CC) driven by the release of the Nucleus 7 Sound
Processor during the second quarter and first full year of revenue from Sycle, the audiology practice management
software business acquired in May 2017.
Sound processor upgrade revenue increased by 12% in CC, with the Nucleus 7 Sound Processor available as an
upgrade in key markets from October. Cochlear continues to invest to provide its growing customer base with a world-
class customer experience with increased connectivity and engagement. Cochlear’s recipient membership program,
Cochlear Family, continues to grow rapidly, with membership growing by 70% this year to now exceed 100,000
members.
Acoustics (bone conduction and acoustic implants) – 12% of sales revenue
Reported Acoustics revenue declined by 1% (0% in CC), following 26% growth in CC in FY17, with solid demand
continuing for the Baha 5 sound processor range.
19
Operating and financial review
Regional review
Sales revenue
Americas
EMEA (Europe, Middle East and Africa)
Asia Pacific
Total sales revenue
2017
Change %
Change %
$m
(reported)
2018
$m
648.5
478.9
224.0
595.0
428.5
216.2
9%
12%
4%
9%
1,351.4
1,239.7
(CC)
11%
7%
5%
9%
Americas (US, Canada and Latin America) – 48% of sales revenue
Reported sales revenue increased by 9% (11% in CC). The highlight was the growth in the US with cochlear implant unit
growth of around 15%, the result of market growth as well as market share gains. Growth has been driven by new
product introductions and the success of awareness building initiatives which continue to drive overall market growth
rates, particularly in the seniors segment.
The expanded field sales organisation, direct-to-consumer marketing, increased referrals from hearing aid retailers and
improvements in sales force effectiveness have continued to contribute to growth in the US.
EMEA (Europe, Middle East and Africa) – 35% of sales revenue
Reported sales revenue increased by 12% (7% in CC). Unit growth in the UK was the highlight, with solid growth across
many countries in Western Europe. Like the US, Western Europe is benefiting from the expanded field sales organisation
and direct-to-consumer marketing which are building awareness of cochlear implants and driving demand at clinics.
Expansion of indications and funding for cochlear implantation in Western Europe continues to be a key opportunity and
focus area, with much of the region restricting access and funding to candidates with a profound hearing loss.
After a soft start to the year, units and sales revenue across EMEA’s emerging markets, including Central & Eastern
Europe and the Middle East & Africa, grew strongly primarily as a result of the timing of a number of tenders.
Asia Pacific (Australasia and Asia) – 17% of sales revenue
Reported sales revenue increased by 4% (5% in CC). Australia and Japan experienced solid unit growth, with private
pay and non-tender business in Greater China growing strongly. Solid unit growth was delivered across a number of
smaller countries in the region driven by a combination of tender activity, expanded indications and Cochlear’s growing
presence.
Overall sales revenue at the regional level was impacted by Chinese Central Government tender units. The FY18 result
includes around 1,100 Chinese Central Government tender units compared to around 1,900 in FY17.
20 Cochlear Limited Annual Report 2018
Operating and financial review
Financial review
Profit and loss
Sales revenue
Cost of goods sold
% gross margin
Selling, marketing and general expenses
Administration expenses
Research and development expenses
% of sales revenue
Total expenses
Other net income
FX contract gains
Earnings before interest and tax (EBIT)
% of sales revenue
Net finance expense
Income tax expense
% effective tax rate
Net profit
2018
$m
2017
Change %
Change %
$m
(reported)
(CC)1
1,351.4
1,239.7
361.2
73%
397.0
97.4
167.7
12%
1,023.3
8.0
12.3
348.4
26%
7.9
94.7
28%
358.4
71%
347.2
85.2
151.9
12%
942.7
4.5
14.1
315.6
25%
6.8
85.2
28%
9%
1%
14%
14%
10%
9%
1%
14%
14%
9%
9%
8%
10%
11%
16%
11%
245.8
223.6
10%
10%
1 Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate comparability.
See Notes on page 24 for further detail.
Reported sales revenue increased by 9% (9% in CC) to $1,351.4 million while total expenses increased by 9% (8% in
CC) to $1,023.3 million. As a result, the business generated an EBIT increase of 10% (11% in CC) to $348.4 million, with
the EBIT margin increasing by one percentage point to 26%.
Key points of note:
Reported cost of goods sold increased by 1% (1% in CC) to $361.2 million, reflecting manufacturing efficiencies,
lower warranty costs and lower repair expenses resulting from the centralisation of repairs. As a result, gross margin
increased by two percentage points to 73%;
Selling, marketing and general expenses increased by 14% (14% in CC) to $397.0 million. The increase reflects the
continued investment in the sales force and expanded marketing activities and the first full year inclusion of
expenses related to Sycle, which was acquired in May 2017;
Administration expenses increased by 14% (14% in CC) to $97.4 million with additional corporate investment
required to support business growth;
Investment in R&D increased 10% (9% in CC) to $167.7 million, and was in line with FY17 at 12% of sales revenue;
Other net income of $8.0 million includes $5.3 million relating to a reduction in the contingent consideration value of
Sycle; and
Income tax expense includes a $4.6 million net impact resulting from the change to the US federal corporate tax rate
(see next note for details).
21
Operating and financial review
Impact of changes to US tax legislation
The US Government passed the Tax Cuts and Jobs Act which contained significant tax reform measures. The major
change in legislation to affect Cochlear is from the reduction in the US federal corporate tax rate from 35% to 21%,
effective 1 January 2018.
As a consequence of the reduction in corporate tax rates, Cochlear was required to revalue its US deferred tax assets as
at 31 December 2017, resulting in a reduction in the value of the asset. The first half result included a one-time non-cash
expense of $5.5 million, reflecting the revaluation of the deferred tax assets. There was a further $0.8 million adjustment
in the second half, taking the FY18 impact to $6.3 million.
From 1 January 2018, Cochlear generated an ongoing annual cash tax benefit from the lower corporate tax rate and this
amounted to $1.7 million in the second half.
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 land and buildings
Acquisition of subsidiary (Sycle)
Acquisition of other intangible assets
Other net investments
Free cash flow
2018
$m
348.4
34.2
(15.3)
(7.9)
(101.3)
258.1
(42.0)
(2.6)
-
(5.1)
(5.7)
202.7
2017
$m
315.6
31.2
(0.6)
(7.9)
(78.5)
259.8
(35.3)
(27.5)
(63.7)
(8.2)
(0.9)
124.2
Change
$m
32.8
3.0
(14.7)
-
(22.8)
(1.7)
(6.7)
24.9
63.7
3.1
(4.8)
78.5
The business generated $258.1 million in operating cash flow, with free cash flow increasing by $78.5 million to $202.7
million.
Key points of note:
EBIT increased by $32.8 million driven by the 9% increase in sales revenue;
Income taxes paid increased by $22.8 million to $101.3 million, reflecting higher earnings and the impact of the
timing of cash tax payments;
Capital expenditure increased by $6.7 million to $42.0 million, primarily driven by additional investment in plant and
equipment and IT systems; and
Other net investments of $5.7 million includes investments made in Sensorion, a French biotech company
pioneering novel treatments for inner ear diseases, and Epi-Minder, a new Australian venture launched to develop a
breakthrough monitoring device aiming to improve treatment of patients suffering with epileptic seizures and related
conditions.
22 Cochlear Limited Annual Report 2018
Operating and financial review
Capital employed
Trade receivables
Inventories
2018
$m
299.1
167.4
2017
$m
275.4
160.0
Less: Trade and other payables
(140.5)
(130.9)
Working capital
Working capital / sales revenue
Debtor days
Inventory days
Property, plant and equipment
Intangible assets
Other net liabilities
Capital employed
326.0
24%
69
171
128.4
345.3
(102.7)
697.0
304.5
25%
74
164
120.1
340.0
(91.6)
673.0
Change
$m
23.7
7.4
(9.6)
21.5
(5)
7
8.3
5.3
(11.1)
24.0
Capital employed increased by $24.0 million to $697.0 million since June 2017, primarily as a result of an increase in
working capital.
Key points of note:
Working capital increased by $21.5 million, reflecting increased sales revenue. Working capital as a percentage of
sales revenue declined by one percentage point to 24%, with debtor days reducing by 5 days to 69 days; and
Other net liabilities increased by $11.1 million to $102.7 million. Other net liabilities include a reduction of $6.3 million
in the value of US deferred tax assets. The reduction was a consequence of the legislated reduction in US corporate
tax rates, which required a revaluation of US deferred tax assets as at 31 December 2017.
Net debt
Loans and borrowings:
Current
Non-current
Total debt
Less: Cash and cash equivalents
Net debt
2018
$m
3.7
144.0
147.7
(61.5)
86.2
2017
$m
84.7
134.2
218.9
(89.5)
129.4
Change
$m
(81.0)
9.8
(71.2)
28.0
(43.2)
Net debt decreased by $43.2 million to $86.2 million, driven by improved earnings and initiatives to improve cash
management.
23
Operating and financial review
Dividends
Interim ordinary dividend (per share)
Final ordinary dividend (per share)
Total ordinary dividends (per share)
Payout ratio %
Franking %
2018
$1.40
$1.60
$3.00
70%
100%
2017
$1.30
$1.40
$2.70
69%
100%
Change %
8%
14%
11%
Strong free cash flow and the continued strength of the balance sheet have supported the declaration of a final dividend
of $1.60 per share, an increase of 14%. Full year dividends increased by 11% to $3.00 per share, franked at 100% and
representing a payout of 70% of net profit.
The record date for determining dividend entitlements is 18 September 2018 and the final dividend will be paid on 10
October 2018.
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 foreign 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 the
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
Spot exchange rate effect to sales and expenses1
Balance sheet revaluation1
Net profit (CC)
1 FY18 actual v FY17 at FY18 rates.
24 Cochlear Limited Annual Report 2018
2018
$m
245.8
245.8
2017
$m
223.6
(1.8)
1.4
(0.3)
222.9
Change %
10%
10%
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 2018 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 Strategies used by Cochlear to
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 receiving 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.
mitigate the risk
In FY18, Cochlear invested 12% of sales
revenue in R&D. Cochlear also works
with over 100 external research partners.
The creation of new intellectual property
and the protection of new and existing
intellectual property are a key focus for
Cochlear.
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.
25
Operating and financial review
Risk
Description and potential consequences Strategies used by Cochlear to
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. Changes to medical device
regulations or 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 five 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.
26 Cochlear Limited Annual Report 2018
mitigate the risk
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
Risk
Description and potential consequences Strategies used by Cochlear to
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
dollars (AUD), US dollars (USD), Euros
(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.
mitigate the risk
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.
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 cash flow.
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.
27
Operating and financial review
Risk
Description and potential consequences Strategies used by Cochlear to
mitigate the risk
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;
Appropriate insurance programs;
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 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.
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.
28 Cochlear Limited Annual Report 2018
Environment, social and governance
‘Hear now. And always’ embodies Cochlear’s commitment to providing its customers with the best possible hearing
support, and also reflects the long-term commitment to global communities and environments.
Cochlear products are available in over 100 countries worldwide, and Cochlear also has a direct presence in over 30
countries, supporting the medical community and thousands of employees in delivering essential hearing health services
to communities worldwide.
We continue to improve the monitoring and documentation of our environmental performance, the impact we have on
communities and our employees, and the governance of our global operations. We have developed objectives in the
following areas:
29
Environment, social and governance
Communities
Cochlear is committed to improving global health and social outcomes through the supply of implantable hearing
solutions to those in need.
Hearing loss has a social and an economic cost. Cochlear recognises the WHO recommendation of integrating holistic
hearing care into health care systems1, and supports this by seeking to deliver solutions that directly benefit people with
hearing loss and their communities through the following objectives:
Increasing access and raising awareness about hearing loss and hearing health;
Funding and supporting research studies with clinical partners to lead advancements in hearing technology; and
Partnering and providing education opportunities to increase skills and capacity to deliver hearing health services.
Awareness and access
We strive to broaden global understanding of hearing loss and availability of hearing loss treatments. This commitment is
demonstrated through our alliances with organisations and causes that promote advocacy, education, access to care
and research. 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’s recipients and their
families gain access to services and support, while advocating for resources for the institutions that support them. This is
particularly important in emerging markets.
Research
Cochlear is contributing to the global body of knowledge about hearing loss and its treatment, by funding or supporting
research studies which result in peer reviewed, publicly available findings. Cochlear aims to help fill research and
knowledge gaps, contributing to the advancement of hearing loss treatment. Globally, Cochlear-funded research and
clinical trials resulted in more than 25 scientific publications in FY18, primarily reporting on performance outcomes for
hearing impaired individuals of all ages treated with hearing implant solutions. Cochlear currently has over 100 projects
and trials in collaboration with clinical, business and research partners.
Education opportunities
Cochlear is committed to advancing the level of skills and knowledge around hearing loss and treatment, contributing to
further education for Cochlear implant recipients, and contributing to science, technology, engineering and mathematics
(STEM) education. For over 15 years we have been providing scholarships for cochlear implant and bone conduction
implant recipients. In FY18, we awarded 12 scholarships to recipients in North America, Australia, the UK and Central
Europe. These scholarships provide recipients with financial support for their university degrees. Around the globe,
Cochlear provided practical training courses to thousands of public and private health professionals including surgeons,
audiologists and speech pathologists.
Governance
Cochlear is committed to operating with integrity and in compliance with relevant laws and regulations. Furthermore,
Cochlear aims to:
Provide financial and non-financial transparency and accountability;
Deliver sustainable and responsible growth; and
Safeguard the security and privacy of all customer data.
We have global policies and procedures to ensure compliance, transparency and accountability. Our Global Code of
Conduct provides every Cochlear representative with clear expectations of the way in which we conduct business to
ensure the highest standards of honesty, fairness, professionalism and integrity. We also have policies covering Anti-
Bribery, Sanctions, Whistle-blower Protection, IT Security, and Privacy, to outline requirements and expected
behaviours. We conduct regular training and independent assessments to ensure knowledge of, and compliance with, all
obligations.
For more information on Cochlear’s governance reporting, see our Corporate Governance Statement 2018, Global Code
of Conduct and company policies which are available at www.cochlear.com.
30 Cochlear Limited Annual Report 2018
Environment, social and governance
Environment
Cochlear’s Environmental Policy (which is available at www.cochlear.com) demonstrates our commitment to respecting
our planet. It guides our decision making to reduce the environmental impact of our operations, products and supply
chain.
Cochlear has assessed its main environmental impacts and is working to improve its environmental performance through
achieving the following global objectives:
Reduce greenhouse gas (GHG) emissions;
Reduce waste to landfill; and
Improve screening of supplier environmental performance.
Environmental management system and performance measurement
In FY18, Cochlear began implementation of an Environmental Management System (EMS). The EMS is modelled on
ISO 14001, covering the main manufacturing, service and research sites, and head offices. The sites covered by the
EMS make up close to 80% of our global footprint and we have commenced reporting on the main environmental
impacts at these sites. Further environmental reporting data will be available later this year, when we publish our
Environmental, Social and Governance Report.
Greenhouse gas emissions
Our reported emissions consist of those from natural gas and other fuel use, and fugitive CO2 emissions (scope 1) and
GHG emissions from purchased energy use (scope 2). GHG emissions from employee business flights (scope 3) are
also being monitored to support identification of reduction initiatives. Cochlear is well under the thresholds that require
mandatory reporting of energy use and GHG emissions under Australian, UK or USA law. Cochlear’s global scope 1 and
2 GHG emissions are less than those generated by 1000 average Australian households per annum (based on Victorian
Environmental Protection Authority estimates).
Cochlear is a growing organisation that continues to develop, manufacture and expand its global operations. FY18 is the
first baseline year for measuring GHG emissions at our key sites. In order to better measure our environmental impact as
we produce more life-changing devices, we use intensity measurements. This will enable year-on-year comparison of
GHG emissions.
Environmental measurements
Annual energy use (MWh)a
GHGs from fuels, energy and other direct emissions (tCO2e)b
GHG emissions intensity (kgCO2e/units)c
a directly purchased natural gas and electricity.
b Total scope 1 and 2 GHG emissions.
c Total scope 1 and 2 GHG emissions per unit of production output.
Cochlear EMS sites Global Cochlear estimate
17,354
11,491
n/a
22,000
14,500
90
In FY18, Cochlear continued to work to reduce the impacts of its operational activities through new technologies and
systems and better management and monitoring of existing assets. Key environmental initiatives centred on energy-
efficiency upgrades to existing building fixtures and fittings. Cochlear’s main manufacturing operations, and the majority
of GHG emissions, currently occur in Australia. For this reason, sustainability initiatives currently centre on our Australian
sites.
31
Environment, social and governance
a European Reporting Sites: Weybridge (UK), Mechelen (Belgium) and Göteborg (Sweden)
b Asian Site: Kuala Lumpur (Malaysia)
c American Reporting Site: Denver (Colorado, USA)
d Australian Reporting sites: Macquarie University (NSW), Lane Cove (NSW), Brisbane (QLD) and Melbourne (VIC)
Initiatives planned over the next year to help reduce greenhouse gas emissions, include:
Installation of solar panels and energy-efficient lighting upgrades at our Macquarie University headquarters;
Heating, ventilation and air conditioning energy-efficiency initiatives and installation of solar panels at our Lane Cove
manufacturing facility;
Installation of power correction at our Brisbane manufacturing plant; and
Installation of energy-efficient fixtures and fittings in our office expansion in Belgium.
Waste reduction
In FY18, Cochlear commenced implementation of improved education and infrastructure to encourage increased
recycling of paper, cardboard, glass, plastic and metal at most sites. Reduction of waste, and an increased recycling
rate, will continue to be a focus in the coming year.
Supplier screening
Our environmental impact extends beyond our operations to those in our supply chain. In recognition of this, we have
established a Supplier Code of Conduct and we are currently improving our supplier due diligence assessments to
support sustainable and ethical procurement.
We will be publishing an Environment, Social and Governance Report later this year, which will provide more information
on Cochlear’s environmental sustainability metrics and activities.
32 Cochlear Limited Annual Report 2018
Environment, social and governance
People & Culture
People and culture are pivotal to Cochlear successfully delivering its business strategy. With an ambitious growth
agenda, we must not only attract and recruit the best talent, we must also optimise and develop the talented and diverse
global workforce we already have. We believe that building a safe, healthy, high performance culture where our
employees are valued, engaged and rewarded, strengthens our ability to deliver on our business goals. This will allow us
to continue to innovate and offer an life-changing experience to our customers.
Attract and recruit talent
In FY18, Cochlear grew to over 3,500 employees with significant growth in the sales, customer service and marketing
segments to support business growth. We believe that a workforce with a wide range of experiences and perspectives
will best support delivery of the Company’s strategic priorities. Through our Hiring Manager Excellence program, which
over 150 of our managers have now attended, we continue to focus on building a diverse workforce throughout our
business, with a particular focus on increasing female representation at all stages of the hiring process.
Female participation in technical careers in science, technology, engineering and maths (STEM) is comparatively low in
many of our markets despite the great potential benefit. Cochlear works closely with a number of schools, colleges and
universities, to promote the benefits of pursuing study and careers in these fields and this year hosted over 1,000
students at open days across Australia.
We highly value the pipeline of future talent we build through our graduate and intern programs which continue to attract
a high standard of applicants. We also work in partnership with The Smith Family and the Business Council of Australia
to support the Cadetship to Career program where the aim is to provide disadvantaged students with work experience to
help them explore their future career options.
Optimise and develop our talent
The continual development of our workforce is a critical part of our business strategy. Our talent development initiatives
focus on all stages of careers, ensuring employees, regardless of tenure, are able to develop both the knowledge and
skills to be successful in their role and fulfil their potential. We have introduced a new global onboarding pathway to set
all new employees up for success in their new roles, whether they are entering the workforce for the first time as a
student or joining us as an experienced professional.
We continue to embed our Leading the Way leadership competency framework built around the four pillars of Leading
Self, Leading Teams, Leading Results and Leading Strategy. The focus for FY18 has been Leading Self and Leading
Teams and in our global roll-out, over 800 employees have attended a program, including 60% of our manager
population.
Build a diverse and inclusive workplace
At Cochlear, we believe in fostering a supportive environment, one that values and encourages the ideas, capabilities
and experiences of our global workforce. We focus on creating a safe and inclusive workplace where everyone feels they
can contribute and realise their full potential. Cochlear’s workforce is ethnically diverse, with employees from more than
75 nationalities working in the Company’s offices around the globe.
This year saw the launch of our new global diversity and inclusion strategy focusing on the five pillars of Gender,
Ethnicity & Religion, Disability & Accessibility, LGBTIQ+ and Generational & Mature Age, all underpinned by our
overarching goal to ensure and support employee wellbeing. As a priority, Cochlear promotes gender equality and
supports the equal participation of men and women in the workplace.
33
Environment, social and governance
Our ongoing commitment towards increasing female representation at all levels of our organisation remains a core focus
of our recruitment and talent management processes as we recognise gender equality in the workplace is instrumental to
driving change in the broader community. Our workforce is currently 52% female and in FY18, 56% of our new hires
were female.
Support the health and wellbeing of our workforce
Cochlear has a comprehensive approach to safety and wellness and works towards providing a safe, healthy and
supportive workplace for all employees in all of Cochlear’s workplaces. The safety and wellness strategy and plan are
aligned to Cochlear’s overall business strategy.
During FY18, there was a substantial shift towards ensuring that we have consistent standards of safety and wellness
globally with the establishment of a Global Safety and Wellness Framework, providing a platform for consistent and best
practice in safety and wellness across all areas of Cochlear. We developed strategies to support the sustainability of our
ageing workforce with a focus on holistic health promotion and injury prevention.
We also delivered improvements in our key risk areas of musculoskeletal stress and psychological stress with a focus on
injury prevention, with the development of an early intervention program for musculoskeletal risks, and continuing
programs such as psychological first responder training and initiatives focused on supporting good mental health.
Reward and engage our talent
Our H.E.A.R. (Hear the Customer; Embrace Change and Innovate; Aspire to Win; and Remove Boundaries) behaviours
are integral to the way we behave and how we do business. We continue to embed them in our systems, policies and
processes from recruitment of our talent, through to our performance management processes, leadership development
and employee recognition and reward programs.
The success of our mission depends on our ability to inspire and engage our employees and their feedback is important
to us. In FY18, more than 91% of our employees completed our global engagement survey, our best ever participation
rate. Our overall engagement score was 78%, with 91% of employees feeling proud to tell people they work for Cochlear.
Cochlear is also committed to building a high performance culture, an important element of which is setting clear goals
and expectations in line with business strategy. We have made significant progress in this regard, with responses from
our engagement survey demonstrating that employees have a clear understanding of how their individual role contributes
to our business strategy (91%) and to the satisfaction of our end customers (93%). A strong emphasis on encouraging
open and honest communication and supporting our employees to own and drive engagement is a focus area for the
coming year.
34 Cochlear Limited Annual Report 2018
Board of directors
Rick Holliday-Smith
Chairman Age 68
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
Dig Howitt
CEO & President
and Managing Director Age 50
Appointed to the Board 14
November 2017 and as CEO &
President 3 January 2018: Member
of the Medical Science and
Technology & Innovation
Committees.
Background: 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, worked for Boral
and Boston Consulting Group.
Appointed as President of Cochlear
on 31 July 2017 and became CEO &
President on 3 January 2018.
Qualifications: BE (Hons), MBA
Yasmin Allen
Non-executive Director Age 54
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. Chairman,
Advance (Global Australian
Network).
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
Prof Edward Byrne, AC
Non-executive Director Age 66
Appointed to the Board 1 July
2002: Member of the Medical
Science, 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
Andrew Denver
Non-executive Director Age 69
Appointed to the Board 1 February
2007: Chairman of the Technology &
Innovation Committee. Member of
the Audit, Medical Science and
Nomination Committees.
35
Board of directors
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.
Former directorships: Executive
Chairman, Universal Biosensors.
Qualifications: BSc (Hons), MBA,
FAICD
Donal O’Dwyer
Non-executive Director Age 64
Appointed to the Board 1 August
2005: Member of the Audit, Medical
Science, Nomination and
Technology & Innovation
Committees.
Background: Executive experience
in global general management of
healthcare products and medical
devices. Former worldwide President
of Cordis Cardiology (a Johnson &
Johnson company) and President of
Baxter’s Cardiovascular Group.
Other boards: Chairman, Atcor
Medical and Director, Mesoblast
Limited, Fisher & Paykel Healthcare
Limited and NIB Holdings Ltd.
Chairman of Endoluminal Sciences.
Glen Boreham, AM
Non-executive Director Age 53
Appointed to the Board 1 January
2015: Chairman of the People &
Culture Committee. Member of the
Audit, Nomination 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, Advisory Board IXUP.
Former directorships: Director of
Data#3. Chairman of Screen
Australia, Advance (Global
Australian Network), Business
School and Industry Advisory Board
for the University of Technology,
Sydney.
Qualifications: BEc, FAICD
Qualifications: BE Civil, MBA
Alison Deans
Non-executive Director Age 50
Appointed to the Board 1 January
2015: Member of the Audit,
Nomination, People & Culture and
Technology & Innovation
Committees.
Background: Extensive experience
leading technology-enabled
businesses across e-commerce,
media and financial services. Former
Chief Executive Officer of netus,
36 Cochlear Limited Annual Report 2018
Hoyts Cinemas, ecorp and eBay
Australia and New Zealand.
Other boards: Director, Westpac
Banking Corporation, Senior Advisor
to McKinsey & Company, member of
Investment Committee, Main
Sequence Ventures, Director of
SCEGGS Darlinghurst Limited.
Former directorships: Director of
Insurance Australia Group Limited,
Social Ventures Australia and kikki.K
Holdings Pty Ltd. Chairman of
ninemsn, Allure Media and
Downstream Media.
Qualifications: BA, MBA, GAICD
Prof Bruce Robinson, AM
Non-executive Director Age 61
Appointed to the Board 13
December 2016: Chairman of
Medical Science Committee.
Member of the Nomination, People &
Culture and Technology & Innovation
Committees.
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, QBiotics
and Digital Health Agency CRC Pty
Limited.
Former directorships: Director of
Firefly.
Qualifications: MD, MSc, FRACP,
FAAHMS, FAICD
Executive team
USA and President, Cochlear Bone
Anchored Solutions, Sweden.
Qualifications: BS EET
Dig Howitt
Jan Janssen
CEO & President
Chief Technology Officer
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.
Dig was appointed as President of
Cochlear on 31 July 2017 and
became CEO & President on 3
January 2018.
Qualifications: BE (Hons), MBA
Brent Cubis
Chief Financial Officer
Brent joined Cochlear in February
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
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
of Cochlear in 2005 and became the
Chief Technology Officer in 2017.
Qualifications: MScEE
Richard Brook
President, EMEA & Latin
American Region
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.
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
Tony Manna
President,
Americas Region
Tony is responsible for the
development and execution of the
strategic direction for our North
America operations.
Tony joined Cochlear in 2005 and
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,
Anthony Bishop
President,
Asia Pacific Region
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.
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
37
Executive team
management around the world
including being Managing Director,
Johnson & Johnson Medical,
Australia/New Zealand prior to
joining Cochlear.
Qualifications: BBus (Hons),
MManagement
Rom Mendel
President, Acoustics
Rom is responsible for the
development and execution of the
strategic direction for our Acoustics
Division and is the General Manager
for Cochlear Bone Anchored
Solutions, Sweden.
Rom joined Cochlear in 2007. He
has over 20 years’ experience in
various commercial roles within
hearing care and other high-tech
industries in Denmark, the US and
Sweden including senior commercial
management roles at Oticon and
Eicon Networks. Prior roles in
Cochlear include Director of
Marketing Cochlear Bone Anchored
Solutions, Sweden and General
Manager, Cochlear Bone Anchored
Solutions, USA.
Qualifications: MSc International
Business, BSc
Stu Sayers
President, Services
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 business-
to-customer and business-to-
business 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 Phizacklea
Senior Vice President,
Global Marketing
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
38 Cochlear Limited Annual Report 2018
David Cade
Chief Medical Officer
David joined Cochlear in October
2017 as Chief Medical Officer. Prior
to joining Cochlear, he worked at
Sirtex Medical Ltd, an ASX listed
oncology company where he held
positions in the USA, Europe and
Australia. David was the Chief
Medical Officer for Sirtex Medical
Ltd, a position he held since 2012.
Earlier in his career, David trained in
general and plastic surgery at
Monash Medical Centre in
Melbourne Australia and worked at
management consultancy, Booz &
Company.
Qualifications: MBBS, MBA,
GAICD
David Hackshall
Chief Information Officer
David joined Cochlear in July 2015
as Cochlear’s first Chief Information
Officer and has global responsibility
for the Company’s information
technology strategy and
management. David’s focus is to
ensure Cochlear has the platforms
in place to deliver and drive growth.
This capability is critical in
connecting Cochlear with both
professionals and recipients, and
evolving Cochlear into both a
business-to-business as well as
business-to-customer organisation.
Prior to Cochlear, David was Chief
Information Officer at Wesfarmers
Insurance Ltd and brings over 15
Jennifer Hornery
Senior Vice President,
People & Culture
Jennifer joined Cochlear in 2008 as
Senior HR Business Partner with
responsibility for manufacturing and
logistics and safety and wellness
before taking on responsibility for
People & Culture Business
Partnering for Cochlear's global
functions in 2016. Jennifer was
appointed SVP, People & Culture in
2017.
Prior to Cochlear, Jennifer worked in
commercial, strategy and HR
leadership roles across a number of
industries within Australia and the
US, including senior positions at
Campbell Arnott’s and Booz &
Company.
Qualifications: BComm, MBA
Executive team
years of executive experience
across the Communications,
Logistics and Finance sectors.
Qualifications: DipFN, MIT, MBA
Greg Bodkin
Senior Vice President, Supply
Chain & Operational Excellence
Greg has responsibility for around
1,000 Cochlear employees who
work in the supply chain functional
areas of new product
industrialisation, procurement,
manufacturing, logistics and
warranty & repair. These functions
have responsibility for enabling the
technologies developed in design
and development to be supplied as
commercial products in Cochlear
global markets. In addition to these
functions, he also has responsibility
for the Cochlear program office and
management of the global property
portfolio.
Greg joined Cochlear in 2007 as
Head of Supply with 20 years’ prior
experience in supply chain
management and operations
consulting positions, including
appointments at Taylor Ceramic
Engineering, Warman International
Ltd, Weir Minerals PLC and National
Australia Bank. In August 2014, he
was promoted to the position of
Senior Vice President Manufacturing
and Logistics. In January 2018, he
was promoted to the position of
SVP, Supply Chain & Operational
Excellence.
Qualifications: BE (Hons), MComm
(UNSW)
39
Remuneration report
Letter from the People & Culture Committee (P&CC) Chairman
Dear Shareholders,
On behalf of the Cochlear Board, I am pleased to present Cochlear’s FY18 Remuneration report where we outline
Cochlear’s remuneration strategy, summarise the performance outcomes of this past year, and the associated
remuneration outcomes for Cochlear’s executives. This report also covers the fee arrangements for non-executive
directors (NEDs).
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. In FY18, the P&CC reviewed Cochlear’s executive remuneration framework to
ensure it continues to align with business objectives, performance and shareholder expectations. No significant changes
have been planned for FY19, however, a review is underway in relation to Cochlear’s long-term incentive (LTI) plan for
implementation in future years.
The Board views that it was another successful year for Cochlear and is satisfied that key performance targets were met
for FY18. Cochlear has achieved strong growth in sales revenue and earnings before interest and tax (EBIT), relative
total shareholder return (TSR) against the ASX 100 at the 97th percentile and growth in basic earnings per share (EPS)
representing a 18.6% compound annual growth rate (CAGR) over the last three years. As a result of these strong results,
incentives were awarded to the CEO & President (CEO&P) and executives under the FY18 short-term incentive (STI)
and the FY16-18 LTI plans. Further detail on this year’s remuneration outcomes are provided in this report.
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 and
manage the risks of the business, which meets the expectations of shareholders over the long term.
Glen Boreham, AM
Chairman, People & Culture Committee
40 Cochlear Limited Annual Report 2018
Remuneration report
CONTENTS
Cochlear is a complex and geographically diverse business, subject to rapid and changing competitive forces, technical
innovation and with a long history of growth. Cochlear’s remuneration policies must be flexible enough to enable the
Company to attract, motivate and retain high performing executives across many locations in a dynamic environment.
This report covers:
1. Key management personnel;
2. Executive KMP remuneration received in FY18 (unaudited);
3. Our remuneration strategy and framework;
4. Executive KMP remuneration and link to performance;
5. Executive KMP statutory remuneration disclosure;
6. Executive service agreements;
7. Remuneration governance;
8. Executive KMP equity disclosures; and
9. Non-executive director fees.
1. KEY MANAGEMENT PERSONNEL
This report covers key management personnel (KMP) who have authority for planning, directing and controlling the
activities of Cochlear and comprise NEDs and executive KMP as outlined in the table below.
Name
Position
Non-Executive Directors
Rick Holliday-Smith
Chairman
Yasmin Allen
Non-executive Director
Glen Boreham, AM
Non-executive Director
Edward Byrne, AC
Non-executive Director
Alison Deans
Andrew Denver
Donal O'Dwyer
Non-executive Director
Non-executive Director
Non-executive Director
Bruce Robinson, AM
Non-executive Director
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Former executive KMP
CEO & President (CEO&P) (appointed 3 January 2018)
President (31 July 2017 to 2 January 2018)
Chief Operating Officer (until 30 July 2017)
President, Asia Pacific Region
President, EMEA & Latin American Region
Chief Financial Officer
Chief Technology Officer (appointed 1 October 2017)
Senior Vice President, Design and Development, Clinical and Regulatory
(1 July 2017 to 30 September 2017)
President, Americas Region
Term as KMP
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Chris Smith
Former CEO & President
Part year
until 2 January 2018
There were no changes to KMP after the reporting date and before the date the Directors’ report was authorised for
issue. The information provided in this Remuneration report has been audited as required by section 308(3C) of the
Corporations Act 2001.
41
Remuneration report
2. EXECUTIVE KMP REMUNERATION RECEIVED IN FY18 (UNAUDITED)
The table below presents the remuneration paid to, received by or vested to each executive KMP during the year. Fixed
remuneration and cash STI relates to amounts received during the year, and vested deferred STI and vested LTI
represent equity vesting from prior years.
The figures presented below are different to the statutory disclosures in section 5 which are prepared in accordance with
the accounting standards and therefore include the accounting value for all unvested deferred STI and LTI awards
expensed in the year. The table below has been provided voluntarily to ensure shareholders are able to clearly
understand the remuneration outcomes and actual ‘take-home pay’ of executive KMP for FY18.
Amounts $
Executive KMP
Dig Howitt
Anthony Bishop5
Richard Brook
Brent Cubis5
Jan Janssen
Tony Manna
Former executive KMP
Chris Smith6
Year
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
Fixed
remuneration1
Cash STI2
Vested
deferred STI3
Vested LTI4 End of service
Total
1,547,833
1,135,893
675,381
496,754
448,010
1,077,831
1,003,249
605,656
166,765
672,817
588,976
767,602
708,418
415,368
222,571
217,735
374,457
370,182
304,304
97,857
370,955
347,930
379,388
332,891
167,895
99,774
1,084,544
1,428,167
-
-
-
-
228,060
138,762
981,182
869,316
-
-
185,378
101,312
242,865
189,907
-
-
1,100,132
729,195
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,936,165
2,618,690
719,325
665,745
2,661,530
2,381,509
909,960
264,622
2,329,282
1,767,413
1,389,855
1,231,216
1,388,677
517,468
319,253
1,523,883
1,452,589
5,201,870
1,445,173
1. Fixed remuneration earned in the year (base salary, superannuation and non-monetary benefits which may include insurances and car allowances).
1,769,960
1,320,878
167,548
4,703,559
-
FY17
For FY17, fixed remuneration has been restated to remove the long service leave accrual previously included.
2. Cash STI earned and relating to performance during the financial year. For example, FY18 is reported as first half STI payments received in March
2018, and second half STI payments which are accrued at year end, and received in August 2018, after the reporting year end.
3. Vested deferred STI is the value of the deferred STI from prior years that vested in August of the reported financial year (calculated as the number of
rights that vested multiplied by the share price on the vesting date). For example, FY18 is reported as the FY15 deferred STI grant which vested in
August 2017.
4. Vested LTI is the value of performance rights and options that vested in August of the reported financial year (rights are calculated as the number of
rights that vested multiplied by the share price on the vesting date and options are calculated as the number of options multiplied by the share price on
the date of vesting/exercise less the exercise price). For example, FY18 is reported as the FY15 LTI grant which vested in August 2017.
5. 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
to the period they were KMP.
6. The end of service payment provided to Chris Smith is per the terms of the retirement arrangements disclosed to the market on 31 July 2017 and relate
to a payment in lieu of notice of AUD 1,452,588.89. Refer to section 6.2 for further detail.
42 Cochlear Limited Annual Report 2018
Remuneration report
3. OUR REMUNERATION STRATEGY AND FRAMEWORK
Cochlear’s executive remuneration strategy is designed to attract, motivate and retain a highly qualified and experienced
group of executives employed across diverse geographies. The following diagram links each of the executive
remuneration components to Cochlear’s mission and strategy.
3.1 Target remuneration mix
The remuneration mix for executive KMP is weighted towards at-risk performance based remuneration to ensure a
strong focus on short, medium and long-term performance. A portion of executive remuneration is paid in equity
(approximately, 40% for the CEO&P and 32% for other executive KMP) to align our executives with shareholder
interests.
The Board believes this approach aligns executive KMP remuneration to shareholder interests and expectations.
Performance based
43
Achievement of business priorities and growth initiativesOur missionWe help people hear and be heard. We empower people to connect with others and live a full life.We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes.We deliver this through our corporate strategy……which is reflected in performance measures across Cochlear’sincentive plans……and actual outcomes directly drive executive remuneration Fixed remunerationShort-term incentiveLong-term incentiveTotal remunerationEarnings before interest and tax (EBIT)Sales revenueRelative total shareholder return (TSR)Compound annual growth in earnings per share (EPS)Retain market leadershipGrow the hearing implant marketDeliver consistent revenue and earnings growthBase salaryCash STIDeferred STILTI33%26%8%33%CEO&P
Remuneration report
3.2 Fixed remuneration
Fixed remuneration comprises base salary, superannuation and non-monetary benefits. Non-monetary benefits may
include health insurance, car allowances and insurances. It is set at a level to attract and retain executive talent with the
appropriate capabilities to deliver Cochlear’s objectives.
Fixed remuneration is generally positioned at the median of the relevant market and is reviewed annually to ensure
alignment with local market benchmarks and it is reflective of the executives’ expertise and performance in the role.
Market benchmarks are typically set with reference to market capitalisation and includes organisations within Cochlear’s
industry sector and/or similar in global operations and complexity as determined by the P&CC each year.
3.3 Short-term incentive
Purpose
To reward executives for the achievement of group (for group executives) and regional (for regional executives)
sales revenue, EBIT and strategic performance targets set by the Board at the beginning of the performance
period.
Performance
measures
STI is dependent on meeting financial and strategic performance measures:
Performance measure
and weighting
Description
Sales revenue and
EBIT (60%)
Sales revenue and EBIT were selected as they represent the key measures of
short-term financial success of Cochlear.
Financial targets are set by the Board, having regard to prior year performance, global
market conditions, competitive environment, future prospects and the Board approved
budgets. The specific targets are not disclosed to the market due to their commercial
sensitivity.
The weighting between Cochlear group and regional financial goals depends on the
responsibilities and scope of influence of the individual.
Validation of performance against the measures set for:
the CEO&P involves an independent review and endorsement by the Chief
Financial Officer (CFO), reviewed and approved by the P&CC and Board; and
other executive KMP involves a review by the CEO&P based on inputs from the
CFO. Final review is undertaken by the P&CC and Board.
Any anomalies or discretionary elements are validated and approved by the Board.
Strategic measures were selected to recognise that in addition to short-term financial
results, a number of strategic initiatives are required to enable sustained growth over
time.
Measures are agreed with the P&CC at the commencement of each financial year and
are aligned to the delivery of initiatives that support Cochlear’s strategic priorities.
Each executive’s contribution against the strategic measures is assessed at an
individual level at the end of the performance period. This assessment determines the
level at which awards will be made for the strategic measures component of the award.
Strategic measures
(40%)
Refer to section 4 for further detail on measures for FY18.
Opportunity
Delivery
CEO&P: target opportunity is 100% of base salary, and maximum is up to 180% of base salary.
Other executive KMP: target opportunity ranges from 70% to 75% of base salary, and maximum is up to 126%
to 135% of base salary.
A portion of the award is paid in cash twice a year, with the remainder deferred into service rights for a period of
two years (subject to a service condition) in order to reinforce alignment to longer-term shareholder interests
and for retention purposes. For the CEO&P, 24% of the award is deferred and for other executive KMP, 27% to
29% of the award is deferred.
The number of rights to be allocated is calculated using the ‘gross contract value’, which refers to a Black-
Scholes-Merton pricing model without discounting for service or performance hurdles. The model uses
Cochlear’s five day volume-weighted average share price following the announcement of full year results in
August each year.
Cessation of
employment
Prior to STI payment date: if an executive ceases employment with Cochlear prior to any awards being paid,
unless the Board determines otherwise, the executive will forfeit any awards to be paid for the performance
period.
Post STI payment date: if an executive is dismissed for serious misconduct or resigns from their position after
STI (equity) awards have been allocated but prior to the relevant vesting date, any unvested rights will
generally be forfeited.
44 Cochlear Limited Annual Report 2018
Remuneration report
3.4 Long-term incentive
Purpose
To align executive remuneration opportunity with shareholder value and provide a stimulus for the retention of
executives within the Company.
Award vehicle
LTI is delivered in the form of options and performance rights.
A minimum 30% of the LTI value must be taken as options. This ensures that the share price at
vesting/exercise must be greater than share price at grant in order for any reward to be delivered for at least
30% of the LTI. The remaining 70% of the LTI value is at the election of each executive to choose either
options or performance rights.
CEO&P: maximum opportunity is 100% of base salary.
Other executive KMP: maximum opportunity ranges from 30% to 50% of base salary.
Opportunity
Allocation
method
The LTI opportunity is calculated using the ‘gross contract value’, which refers to a Black-Scholes-Merton
pricing model without discounting for service or performance hurdles.
Cochlear has considered feedback from shareholders and maintains that the methodology of using the gross
contract value for allocating options and performance rights remains appropriate considering the current design
of Cochlear’s LTI plan. Gross contract value discounts for dividends, share price volatility and the risk free rate
of return. There is no discount for the likelihood of service or performance conditions. The model uses
Cochlear’s five day volume-weighted average price following the announcement of full year results in August
each year.
Performance is measured over a three year performance period.
Post vesting, options expire seven months after the vesting date if they have not been exercised.
There is no retesting of performance hurdles under the LTI plan.
Awards are subject to:
50% weighting on relative TSR against the constituents of the ASX 100 index; and
50% weighting on CAGR in EPS.
These measures have been selected to incentivise executives towards long-term sustainable growth of the
business and are generally accepted proxies for the creation of shareholder value.
Performance
period
Performance
measures and
hurdles
The proportion of awards that vest for performance are:
Relative TSR
Performance
Less than 50th percentile
At the 50th percentile
50th percentile to 75th
percentile
Above 75th percentile
% of instruments that
vest
0%
40%
Performance (CAGR)
EPS
Less than 10%
10%
% of instruments that
vest
0%
50%
40% to 100% (pro-rata)
10% to 20%
50% to 100% (pro-rata)
100%
Above 20%
100%
Cochlear’s performance hurdles are high compared to market practice (ASX 100 companies). Further, any LTI
awards in equity grants will only have value to the executive if the performance hurdles are met to enable
vesting to occur. LTI awards delivered in options will only have value to the executive if the share price on
vesting exceeds the exercise price.
Dividends
No dividends are attached to options or performance rights.
Cessation of
employment
If an executive ceases employment before the end of the performance period, unvested LTI awards will be
forfeited.
In exceptional circumstances such as in the case of redundancy and retirement, the Board may in its
discretion, determine that all or a portion of the award will vest in line with the original performance criteria and
vesting date.
Further detail on the remuneration framework is provided in Cochlear’s Remuneration Policy, available in the Corporate
Governance section of the Cochlear website (www.cochlear.com > About Us > Investor Centre > Corporate Governance
> Company Policies > Learn More > Remuneration Policy).
45
Remuneration report
4. EXECUTIVE KMP REMUNERATION AND LINK TO PERFORMANCE
4.1 FY18 STI outcomes
STI is based on performance against financial measures (60%) and strategic measures (40%).
In FY18, Cochlear’s sales revenue grew by 9% and EBIT grew by 10%. In addition to financial measures, the Board also
considered progress against strategic measures which are critical to the achievement of Cochlear’s longer-term goals.
The table below provides a summary and achievement against each of the financial measures and strategic measures of
the STI plan.
In FY18, performance was strong, reflecting the achievement across financial measures and strategic measures. These
performance outcomes resulted in an average actual STI of 98.9% of target for executive KMP.
The FY18 STI earned is outlined in the table below.
STI target as a
% of base
salary
STI maximum
as a % of base
salary
Actual as a % of
target
Actual as a % of
maximum
STI forfeited as
a % of
maximum
Actual STI
(total)
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
100%
70%
75%
75%
75%
75%
180%
126%
135%
135%
135%
135%
97.8%
94.2%
100.9%
95.8%
99.8%
105.1%
54.3%
52.3%
56.1%
53.2%
55.4%
58.4%
45.7%
47.7%
43.9%
46.8%
44.6%
41.6%
$1,135,893
$222,571
$374,457
$304,304
$370,955
$379,388
A portion of the actual STI will be delivered in cash in August 2018, and a portion deferred into service rights, and subject
to service conditions until August 2020.
46 Cochlear Limited Annual Report 2018
•Launch new products•Build the upgrade business•Continue to develop new products•Develop organisational talent and capability •Implement the digital strategy•Develop partnerships and alliances•Implement One Cochlear•Increase recipient engagement•Increase access and public policy•Implement direct-to-consumer•Achieve the FY18 financial targets•Launched Nucleus 7 and Baha SoundArc•Implemented campaigns to increase upgrades•Developed new products in line with the roadmap•Increased organisational capability through skill and leadership development •Developed the connected health strategy•Leveraged commercial and technology relationships, and realised value from investments •Improved customer service and efficiency by standardising and improving processes/systems and continuing global alignment of corporate functions•Implemented initiatives to improve the customer experience•Developed a plan to increase access and public policy•Generated demand from new candidates •Met guidance provided to the market (net profit of $240-$250 million)•Sales revenue grew by 9% •EBIT grew by 10%DescriptionStrategic priorityBusiness priorityAchievement= Met expectations= Exceeded expectations= Below expectationsRetain market leadershipGrow the hearing implant marketDeliver consistent revenue and earnings growthFinancial measures(60%)Strategic measures (40%)
Remuneration report
4.2 FY16-18 LTI vesting outcomes
LTI is based on performance against relative TSR (50%) and EPS growth (50%) over a three year performance period.
The graphs below illustrate Cochlear’s TSR and EPS performance over the past five years, relative to the target and
stretch performance targets set.
For FY18, Cochlear’s TSR performance was 157.0%,
which was ranked at the 97th percentile of the
ASX 100 comparator group. As a result, 100.0% of
the TSR portion of the LTI vested.
Cochlear’s EPS in FY18 was 427.3 cents, which is a
18.6% CAGR over the three year performance period.
This resulted in performance between target and
stretch and as a result, 93.0% of the EPS portion of
the LTI vested.
For the FY16-18 LTI, 96.5% vests based on performance over the three year period,
from 1 July 2015 to 30 June 2018.
4.3 Financial performance history (FY14 to FY18)
Sales revenue ($million)
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)
Total dividend per share ($)
Share price as at 30 June ($)
Relative total shareholder return (TSR) (3 years)
TSR percentile ranking2
FY141
820.9
127.1
93.7
164.6
-19.7%
2.54
61.70
-6.6%
32nd
FY15
941.9
206.4
145.8
256.1
36.8%
1.90
80.15
41.7%
38th
FY16
1,158.1
262.6
188.9
330.6
12.4%
2.30
121.25
127.2%
94th
FY17
1,239.7
315.6
223.6
389.7
33.3%
2.70
155.45
174.0%
96th
FY18
1,351.4
348.4
245.8
427.3
18.6%
3.00
200.17
157.0%
97th
1. FY14 includes the patent dispute provision of $22.5 million before tax and $15.8 million after tax.
2. TSR ranking is shown over three financial years to 30 June. For LTI, performance is compared to the TSR of the constituents of the ASX 100.
For further explanation of details on Cochlear performance, see the Operating and financial review section on pages 7 to
28 of this Annual Report.
47
-6.6%41.7%127.2%174.0%157.0%-20%0%20%40%60%80%100%120%140%160%180%200%FY14FY15FY16FY17FY18Three year TSRCochlear TSR performance against targetsCochlear TSR performanceMedian TSR (target)75th percentile TSR (stretch)-19.7%36.8%12.4%33.3%18.6%-30%-20%-10%0%10%20%30%40%FY14FY15FY16FY17FY18Three year EPS CAGRCochlear EPS performance against targetsCochlear EPS performanceTargetStretch
Remuneration report
5. EXECUTIVE KMP STATUTORY REMUNERATION DISCLOSURE
The table below presents the total remuneration for executive KMP in accordance with the accounting standards.
Amounts $
Year
Short-term benefits
Salary
Cash STI
Post-
employment
Super-
annuation
contributions
Other long-
term benefits
Long service
leave
Non-
monetary
benefits1
Share based payments
Deferred
STI2
LTI
performance
rights3
LTI
options3
End of
service
Total
% of
performance
related
remuneration
Executive KMP
Dig Howitt
Anthony
Bishop4
FY18
FY17
FY18
FY17
1,526,654
1,135,893
654,635
415,368
476,065
222,571
428,886
217,735
1,130
1,130
640
640
20,049
208,620
193,952
86,856
289,019
19,616
30,074
108,171
81,194
167,851
20,049
3,509
92,901
29,221
15,030
18,484
1,838
61,435
22,207
9,579
Richard Brook FY18
686,850
374,457
252,578
138,403
FY17
665,624
370,182
206,511
131,114
-
-
126,234
113,054
98,182
119,049
162,060
106,589
Brent Cubis4
FY18
584,967
304,304
FY17
158,654
97,857
Jan Janssen FY18
651,638
370,955
FY17
568,230
347,930
640
193
1,130
1,130
20,049
2,039
50,323
19,745
13,444
7,918
271
11,857
-
-
20,049
29,297
120,001
82,666
95,900
19,616
4,274
106,693
109,055
119,446
Tony Manna
FY18
669,798
379,388
79,195
18,609
FY17
598,375
332,891
92,122
17,921
Former executive KMP
Chris Smith5
FY18
1,243,327
517,468
128,547
16,803
1,639,249
1,445,173
95,201
35,510
-
-
-
-
121,813
37,666
116,044
117,163
34,833
85,037
-
-
-
-
-
-
-
-
-
-
-
-
3,462,173
49.27%
1,478,039
52.30%
859,986
41.83%
760,804
40.90%
1,789,758
39.78%
1,761,129
43.00%
995,511
38.96%
276,750
39.60%
1,371,636
48.81%
1,276,374
53.50%
1,422,513
46.04%
1,278,342
44.60%
Total
FY17
FY18
FY17
5,839,299
3,305,036
463,860
254,011
243,465
1,124,184
1,001,498
1,130,398
1,452,589
14,814,340
44.29%
4,713,653
3,227,136
396,927
250,179
36,457
842,594
863,483
966,460
- 11,296,889
51.80%
418,960
632,290
502,779
1,452,589
4,912,763
42.17%
318,226
454,134
477,958
-
4,465,451
60.40%
The total remuneration for FY17 of $11,296,889 in this table is less than the total for FY17 in the 2017 Remuneration report of $12,386,865 as it does not
include $1,089,476 for the former CFO, Neville Mitchell. Neville Mitchell ceased to be KMP on 13 March 2017 and retired on 1 July 2017, and did not hold a
KMP position during FY18 and is therefore not reported in the statutory table above.
1. Non-monetary benefits include housing allowances for expatriate KMP, car allowances and insurances which are market based payments.
2. Deferred STI is granted in service rights and deferred for a further two years. The cost of the plan is expensed across three years. The FY18 amount
represents the portion of the FY16, FY17 and FY18 deferred STI expensed in FY18. The FY17 amount represents the portion of the FY15, FY16 and
FY17 deferred STI expensed in FY17.
3. LTI is granted in performance rights and options are expensed evenly over the period from grant date to vesting date. The value is calculated at the
date of grant using the Black-Scholes-Merton pricing model discounted for vesting probabilities of non-market performance criteria. 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 performance rights and options. The value disclosed above is
the portion of the value of the performance rights and options recognised as an expense in the financial year. The ability to exercise the performance
rights and options is conditional on Cochlear achieving certain performance hurdles. Further details of performance rights and options granted during
the financial year are set out in this report.
4. 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
to the period they were KMP.
5. Chris Smith retired on 2 January 2018. The share based payment values presented for Chris Smith include an expense of $144,500 for deferred STI,
$270,538 for LTI performance rights and $116,759 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 if conditions are not met. The end of service payment provided to Chris Smith
is per the terms of the retirement arrangements disclosed to the market on 31 July 2017 and relate to a payment in lieu of notice of AUD 1,452,588.89.
Refer to section 6.2 for further detail.
48 Cochlear Limited Annual Report 2018
Remuneration report
6. EXECUTIVE SERVICE AGREEMENTS
6.1 Summary table of service contract details for executives
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
Post-employment
restraints
Other arrangements
CEO&P: 12 months’ written notice by either party.
Other executive KMP: between 60 days and six months’ written notice by either party (exact period
specified in each contract).
All executive KMP are subject to post-employment restraints for up to 12 months.
Richard Brook will receive a maximum of CHF 30,000 for repatriation costs in the case of termination or
resignation.
6.2 End of service for Chris Smith
Chris Smith’s retirement arrangements were disclosed to the market on 31 July 2017. On retirement, and per the terms
of his contract, the following were provided:
a payment in lieu of notice of AUD 1,452,588.89;
payment of accrued but unused annual leave; and
payment of any unpaid base salary.
The Board applied its discretion to allow prior equity grants to remain on-foot subject to the original terms of those
awards (both time and performance hurdles). The awards are detailed in section 8 and are eligible for vesting in August
2018 and August 2019.
49
Remuneration report
7. REMUNERATION GOVERNANCE
7.1 Governance framework for remuneration at Cochlear
The Board is responsible for all areas of Cochlear’s strategy and policy related to its people. Consistent with this
responsibility, the Board has established the P&CC which comprises solely of independent NEDs.
7.2 Advice from external advisors
To inform decisions, the P&CC sought advice and, at times, recommendations from the CEO&P and other management
throughout the year.
During FY18, the P&CC appointed Godfrey Remuneration Group (GRG) to provide remuneration advisory services that
included a remuneration recommendation for executive remuneration structure and design, and market remuneration
information, used as input to the annual review of NED fees and executive KMP remuneration. GRG was paid $110,000
(excluding GST) for these services.
In addition, GRG provided other remuneration advisory services and was paid a total of $48,500 (excluding GST) for
these additional services during the year.
The P&CC is satisfied that the advice received from GRG is free from undue influence of the KMP to whom the
remuneration recommendations relate. GRG also confirmed in writing that the remuneration recommendations were
made free from undue influence by management in accordance with the Corporations Act 2001.
7.3 Share ownership requirements
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. The table in section 8.2 details
the current holdings of executive KMP.
7.4 Clawback Policy
All participants of the deferred STI and LTI plan are subject to the Clawback Policy (available in the Corporate
Governance section of the Cochlear website). The policy enables the Board to claw back remuneration outcomes in the
event of a material non-compliance with any financial reporting requirement, misconduct, or following inappropriate
behaviour post employment in cases where the Board has exercised its discretion to allow retention of equity following
termination of employment. The policy is designed to further align the interests of participants with the long-term interests
of Cochlear and shareholders, and to ensure that excessive risk taking is not rewarded.
50 Cochlear Limited Annual Report 2018
Management•Makes recommendations to the P&CC with respect to individual remuneration arrangements for executive KMP and implements talent management and remuneration policies and practicesPeople & Culture Committee•The P&CC is empowered to source any internal resources and obtain external independent professional advice it considers necessary to enable it to review management proposals and make decisions on behalf of the Board on:•remuneration policy, composition, quantum and performance targets for executive KMP;•remuneration policy in respect of NEDs;•talent management policies and practices; and•design features of employee and executive STI and LTI awards.Board•Reviews, applies judgement and, as appropriate, approves recommendations from the P&CC
Remuneration report
8. EXECUTIVE KMP EQUITY DISCLOSURES
Executive KMP participate in the deferred STI and LTI plan which offers equity under the Cochlear Executive Incentive
Plan (CEIP). The purpose of the CEIP is to encourage employees and executives to hold Cochlear shares and to align
their interests to shareholders’ interests.
Under the LTI plan, vesting of options or performance rights only occurs if Cochlear achieves challenging and market
competitive hurdles related to EPS growth and relative TSR. Under the deferred STI plan, grants are based on
performance in the first year, and are then deferred for a further two years.
8.1 Equity granted as remuneration
The table below presents the number of options and performance rights granted to executive KMP as well as the number
of instruments that vested or were forfeited during the year.
No options or rights vest if the conditions are not satisfied, hence the minimum value is nil. The maximum value of the
grants has been determined as the fair value of awards at grant date that is yet to be expensed.
Plan
Grant date
Options
Number
Maximum
value to be
expensed ($)1
Performance rights
Number Maximum value to
be expensed ($)1
Vesting
date2
Vested Forfeited
Executive KMP
Dig Howitt
Richard Brook
Anthony Bishop
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY17 deferred STI
FY18 LTI
Total
FY16 deferred STI
FY17 LTI
FY17 deferred STI
FY18 LTI
Total
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY17 deferred STI
FY18 LTI
Total
FY17 deferred STI
FY18 LTI
Total
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY17 deferred STI
FY18 LTI
Total
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY17 deferred STI
FY18 LTI
Total
Former executive KMP
Chris Smith
Jan Janssen
Tony Manna
Brent Cubis
FY15 LTI
FY15 deferred STI
FY16 LTI
FY16 deferred STI
FY17 LTI
FY17 deferred STI
Total
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
24-Aug-17
18-Oct-17
16-Aug-16
19-Oct-16
24-Aug-17
18-Oct-17
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
24-Aug-17
18-Oct-17
24-Aug-17
18-Oct-17
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
24-Aug-17
18-Oct-17
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
24-Aug-17
18-Oct-17
14-Oct-14
18-Aug-15
20-Oct-15
16-Aug-16
19-Oct-16
24-Aug-17
10,970
-
18,682
-
10,375
-
46,842
86,869
-
2,171
-
1,778
3,949
7,256
-
12,601
-
5,622
-
6,965
32,444
-
3,622
3,622
11,127
-
9,736
-
7,900
-
7,060
35,823
-
10,216
-
9,414
-
10,385
30,015
15,412
-
69,047
-
28,150
-
112,609
-
-
-
-
43,033
-
347,724
390,757
-
9,005
-
13,199
22,204
-
-
-
-
23,319
-
51,704
75,023
-
26,887
26,887
-
-
-
-
32,767
-
52,409
85,176
-
-
-
39,047
-
77,091
116,138
-
-
-
-
-
-
-
2,133
1,066
-
785
1,537
949
3,372
9,842
752
751
596
697
2,796
3,293
1,448
2,402
833
1,944
944
1,170
12,034
243
1,420
1,663
2,164
1,177
1,856
775
1,171
867
1,186
9,196
1,542
834
743
598
995
436
5,148
2,998
2,027
5,641
2,787
9,736
2,970
26,159
100%
100%
0%
0%
100%
100%
0%
0%
100%
100%
0%
0%
100%
0%
100%
100%
0%
0%
-
-
-
-
42,709
46,172
93,775
182,656
-
20,868
28,997
19,384
69,249
-
-
-
-
54,019
45,929
32,538
132,486
11,823
39,490
51,313
-
-
-
-
32,539
42,182
32,983
107,704
-
-
-
16,617
48,410
12,125
77,152
-
-
-
-
-
-
-
Aug-17
Aug-17
Aug-18
Aug-18
Aug-19
Aug-19
Aug-20
Aug-18
Aug-19
Aug-19
Aug-20
Aug-17
Aug-17
Aug-18
Aug-18
Aug-19
Aug-19
Aug-20
Aug-19
Aug-20
Aug-17
Aug-17
Aug-18
Aug-18
Aug-19
Aug-19
Aug-20
Aug-17
Aug-18
Aug-18
Aug-19
Aug-19
Aug-20
Aug-17
Aug-17
Aug-18
Aug-18
Aug-19
Aug-19
1. The options granted in FY18 have an exercise price of $154.73 and an expiry date of 23 March 2021. Fair values (IFRS-2) of FY18 options and
performance rights under the LTI plan as at the date of grant are as follows: options (EPS growth: $23.91; relative TSR: $22.27) and performance rights
(EPS growth: $142.31; relative TSR: $83.43). This valuation is for accounting purposes only and reflects the expense in future years. Further detail on
the allocation methodology is provided in section 3.4.
2. To ensure plans vest as close to the end of the performance period as possible, from FY18, vesting will be aligned to the day following the full year
results announcement in August each year.
51
Remuneration report
8.2 Executive KMP equity holdings and minimum shareholding
This section details the movement in equity holdings during the financial year.
Shares held during the year
During the year, the FY15 LTI plan and FY15 deferred STI plan vested and executives’ options/rights converted into
shares under these plans.
Balance
1 July 2017
Purchases
Received on
exercise of
options/rights
Sales
Balance
30 June 2018
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Former executive KMP
Chris Smith
Total
22,112
-
8,000
-
20,684
817
18,000
69,613
Rights held during the year
-
-
-
-
-
-
-
-
14,169
-
11,997
-
14,468
1,542
20,437
62,613
(5,000)
-
(14,997)
-
(23,366)
(1,303)
(25,437)
(70,103)
31,281
-
5,000
-
11,786
1,056
N/A
49,123
Rights are acquired by executive KMP under the deferred STI and LTI plan. During the year, the FY17 STI deferral grant
was made in August 2017 (based on the FY17 performance year), the FY18 LTI grant was made in October 2017 and
100% of the FY15 LTI grant and FY15 deferred STI grant vested in August 2017.
Balance
30 June
2018
6,643
2,796
7,293
1,663
5,855
3,606
N/A
27,856
Balance
1 July 2017
Deferred STI
Vested
Granted
Forfeited
LTI performance rights
Vested
Granted
Forfeited
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Former executive KMP
Chris Smith
Total
5,521
1,503
9,920
-
7,143
3,717
23,189
50,993
949
596
944
243
867
995
(1,066)
-
(1,448)
-
(1,177)
(1,542)
2,970
7,564
(2,027)
(7,260)
-
-
-
-
-
-
-
-
3,372
697
1,170
1,420
1,186
436
(2,133)
-
(3,293)
-
(2,164)
-
-
(2,998)
8,281
(10,588)
-
-
-
-
-
-
-
-
52 Cochlear Limited Annual Report 2018
Remuneration report
Options held during the year
Options over ordinary shares are acquired by executive KMP under the LTI plan. During the year, the FY18 LTI grant
was made in October 2017 and 100% of the FY15 LTI grant vested in August 2017.
All options held at the end of the year are unvested. Under the current structure of the LTI plan, it is no longer possible to
hold options at year end which are vested but unexercised.
Balance
1 July 2017
LTI options
Granted Vested/exercised
Forfeited
Balance
30 June 2018
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Former executive KMP
Chris Smith
Total
40,027
2,171
25,479
-
28,763
19,630
112,609
228,679
46,842
1,778
6,965
3,622
7,060
10,385
-
76,652
(10,970)
-
(7,256)
-
(11,127)
-
(15,412)
(44,765)
-
-
-
-
-
-
-
-
75,899
3,949
25,188
3,622
24,696
30,015
N/A
163,369
Executive minimum shareholding
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.
As at 30 June 2018, all executive KMP are compliant with the Share Ownership Policy (minimum shareholding
requirements). For new KMP, it is expected that executives will achieve the minimum shareholding requirement over
time. The table below presents a summary of executive KMP holdings and compliance with minimum shareholding
requirements.
Ordinary
shares
Shareholding
Value of
Cochlear
shares at
year end ($)1
Unvested awards
% of
base
salary2
Unvested
deferred
STI rights
Unvested
LTI rights
Unvested
LTI
options
Intrinsic
value of
unvested
awards ($)1
% of
base
salary2
Total shareholding and
unvested awards
Intrinsic
value ($)1
% of base
salary2
Executive KMP
Dig Howitt
Anthony Bishop
Richard Brook
Brent Cubis
Jan Janssen
Tony Manna
Total
31,281
-
5,000
-
11,786
1,056
5,448,145
-
870,839
-
2,052,742
183,921
49,123
8,555,647
357%
-
127%
-
315%
27%
186%
1,734
1,348
1,777
243
1,642
1,738
8,482
4,909
1,448
5,516
1,420
4,213
1,868
75,899
3,949
3,823,204
669,902
250% 9,271,349
669,902
141%
25,188
3,622
24,696
30,015
2,537,839
415,175
2,157,421
1,859,628
71%
369% 3,408,678
415,175
331% 4,210,163
278% 2,043,549
19,374
163,369 11,463,169
249% 20,018,816
607%
141%
496%
71%
646%
305%
435%
1. The intrinsic value of awards is calculated as:
shares: calculated using the average daily share price over the previous 12 months ($174.17, rounded to two decimal places), as at closing on the
ASX up to 30 June 2018, times the number of shares. The numbers presented in the table above are based on the unrounded average share
price;
performance rights/deferred rights: calculated as the closing share price on the ASX on 30 June 2018 ($200.17) times the number of rights; and
options: calculated as the closing share price on the ASX on 30 June 2018 ($200.17) less the applicable exercise price, times the number of
options (negative values are treated as zero in the totals). 50% of the intrinsic value of options is counted.
2. The % of base salary is calculated as the value divided by the actual base salary for the preceding 12 months to 30 June 2018.
53
Remuneration report
8.3 Potential dilution if options vest and ordinary shares issued (unaudited)
The Board encourages employee ownership of Cochlear shares. To restrict dilution of shareholders’ interests, the total
employee interests in unvested equity cannot exceed 5% of share capital.
At the date of this report, the number of ordinary shares that would be issued if all options were vested, having met the
service and performance conditions, and exercised and assuming ordinary shares were issued, is as follows:
Grant date
Number of options
FY16 LTI
FY17 LTI
FY18 LTI
Total
20-Oct-15
19-Oct-16
18-Oct-17
Issued
162,451
95,586
106,713
364,750
Forfeited/
lapsed1
27,606
16,580
2,337
46,523
At report
date
134,845
79,006
104,376
318,227
Exercise
price per
share ($)
82.89
135.84
154.73
Exercise period
Aug-18 to Mar-19
Aug-19 to Mar-20
Aug-20 to Mar-21
Current net value of
outstanding options as
at 30 June 2018 ($)2
15,814,621
5,082,456
4,742,845
25,639,922
1. Forfeited/lapsed options from unvested grants relate to plan participants who have departed Cochlear.
2. Closing share price as at 30 June 2018 was $200.17.
Total unvested equity currently accounts for approximately 0.77% of the total number of issued shares, as set out below:
Instrument
Unvested LTI options
Unvested LTI rights
Unvested deferred STI rights
Service rights under the APAC Employee Equity Plan1
Total
as % of total shares
Number of issued shares2
Number of equivalent
shares at 30 June 2018
318,227
49,157
70,226
3,439
441,049
0.77%
57,547,820
1. Refer to Note 4.3 in the Notes to the Financial Statements for further information on the APAC Employee Equity Plan.
2. 31,268 shares are in a holding lock under the Cochlear Employee Share Plan.
8.4 Transactions and loans with KMP
No transactions or loans involving directors or executive KMP, their close family members or entities they control or have
significant influence over, were made during the year.
54 Cochlear Limited Annual Report 2018
Remuneration report
9. NON-EXECUTIVE DIRECTOR FEES
NEDs are paid from an aggregate annual fee pool of $3,000,000, as approved by shareholders at the Annual General
Meeting on 17 October 2017. Total remuneration paid during the year was $2,265,233 which is within the fee pool limit
(represents 75.5% of fee pool). NEDs do not receive any performance-related remuneration, options or performance
rights. NEDs receive reimbursement for costs directly related to Cochlear business.
9.1 Fee policy and changes during the year
Board fees must recognise the effort required to fulfil the responsibilities of a director. Reflecting the increasing
governance requirements and the work of the Board, the Board considered it appropriate to increase annual base fees
by 4%, and increase annual fees for the P&CC chair and members, effective 1 July 2017. This decision was made with
reference to external remuneration benchmarking of companies of a similar market capitalisation to Cochlear.
The table below outlines the policy fees for FY17 and FY18.
Amounts $
Cochlear Board
Committees
Audit
People & Culture
Medical Science
Technology and Innovation
Nomination
FY171
Chair2
472,274
50,000
30,000
30,000
40,000
No fee
Member
154,760
25,000
15,000
15,000
20,000
No fee
FY181
Chair2
491,165
50,000
40,000
30,000
40,000
No fee
Member
160,950
25,000
20,000
15,000
20,000
No fee
1. Superannuation contributions have been made in accordance with Australian superannuation legislation at a rate of 9.5% up to the Australian
Government’s prescribed maximum contributions limit. Fees are presented exclusive of superannuation.
2. Committee fees are not paid to the Chairman of the Board.
9.2 NED statutory remuneration
The table below presents the total remuneration for NEDs.
Amounts $
Short-term benefits
Year
Post-employment benefits
Total
Rick Holliday-Smith
Yasmin Allen
Glen Boreham
Edward Byrne
Alison Deans
Andrew Denver
Donal O'Dwyer
Bruce Robinson2
Total3
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
FY17
Fees
Accrued interest1
Superannuation
490,802
471,747
250,735
239,625
245,639
229,625
202,754
204,625
225,735
214,625
240,831
234,625
220,831
214,625
220,985
101,448
2,098,312
1,910,945
-
-
-
-
-
-
8,366
7,996
-
-
-
-
-
-
-
-
8,366
7,996
20,049
19,616
20,049
19,616
20,049
19,616
18,890
18,786
19,931
19,224
20,049
19,616
19,712
19,224
19,826
9,064
510,851
491,363
270,784
259,241
265,688
249,241
230,010
231,407
245,666
233,849
260,880
254,241
240,543
233,849
240,811
110,512
158,555
144,762
2,265,233
2,063,703
1. Amounts accrued for interest during the financial year relating to the directors’ retirement scheme. Prior to 2003, Cochlear operated a directors’
retirement scheme which provided retirement benefits of three times a NED’s 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 2018, 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 2018 was $458,397.
2. Bruce Robinson was appointed to the Board on 13 December 2016.
3. The year-on-year changes in Board fees reflect the appointment of an additional director half way through FY17, changes in Board committee
membership and increases to Board NED base fees.
55
Remuneration report
9.3 Minimum shareholding requirement for NEDs
NEDs are requested to hold shares equivalent to the fees (including both Board and committee fees) received in the
previous 12 months. The share ownership requirement must be satisfied within three years of appointment to the Board.
As at 30 June 2018, all NEDs are compliant with the Share Ownership Policy which allows three years to build their
shareholdings. The table below presents Cochlear Limited shareholdings for each NED.
Rick Holliday-Smith
Yasmin Allen
Glen Boreham
Edward Byrne
Alison Deans
Andrew Denver
Donal O’Dwyer
Bruce Robinson2
Total
Balance 1 July
2017
Purchases
Sales
Balance 30
June 2018
Policy value of
shares as at 30
June 2018 ($)1
% of fees
10,000
3,500
2,800
3,250
2,000
4,000
6,000
-
-
-
-
-
1,000
-
-
322
31,550
1,322
-
-
-
-
-
-
-
-
-
10,000
1,741,679
3,500
2,800
3,250
3,000
4,000
6,000
322
32,872
609,588
487,670
566,046
522,504
696,671
1,045,007
56,082
5,725,247
341%
225%
184%
246%
213%
267%
434%
23%
253%
1.
In line with the Share Ownership Policy (available on the Cochlear website), the value of Cochlear Limited ordinary shares is calculated using the
average daily share price over the previous 12 months ($174.17, rounded to two decimal places), as at closing on the ASX up to 30 June 2018, times
the number of shares. The numbers presented in the table above are based on the unrounded average share price,
2. Bruce Robinson was appointed to the Board on 13 December 2016, and in accordance with the policy has until 13 December 2019 to build his
shareholding.
56 Cochlear Limited Annual Report 2018
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 2018, 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 D Howitt, Mr DP
O’Dwyer, Prof B Robinson, AM and Mr C Smith.
Information on the current 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 Ray Jarman was the Company Secretary during and since the end of the financial year. 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 and
Innovation
Committee
Attended Held Attended Held Attended Held
-
5
5
5
9
5
Attended Held
3
-
Attended Held
-
3
Attended
-
Mr R Holliday-Smith
Held
9
Mrs YA Allen
Mr G Boreham, AM
Prof E Byrne, AC1,2
Ms A Deans
Mr A Denver
Mr D Howitt3
Mr DP O’Dwyer
Prof B Robinson, AM4
Mr C Smith5
9
9
9
9
9
9
9
9
9
9
9
9
9
9
5
9
9
6
5
5
-
5
5
-
5
-
-
5
5
-
5
5
-
5
-
-
5
5
-
5
-
-
-
5
-
5
5
-
5
-
-
-
3
-
-
-
2
-
2
2
2
2
2
-
-
2
-
2
1
2
2
2
3
3
3
3
3
-
3
3
-
3
3
2
3
3
-
3
3
-
4
4
4
4
4
4
4
4
4
1. Prof E Byrne passed chairmanship of the Medical Science Committee to Prof B Robinson, effective from 11 December 2017.
2. Prof E Byrne remains a member of the Medical Science Committee until his retirement.
3. Mr D Howitt was appointed to the Board of Directors on 14 November 2017.
4. Prof B Robinson was appointed to the People & Culture Committee on 17 August 2017.
5. Mr C Smith retired on 2 January 2018.
4
4
4
4
4
3
4
4
2
57
Directors’ report
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 7 to 28 of this Annual 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
$m
Franked/
unfranked
Date of payment
Interim 2018 ordinary
Final 2017 ordinary
Total amount
Subsequent event
Since the end of the financial year, the
directors declared the following dividends:
Final 2018 ordinary
Total amount
1.40
1.40
2.80
1.60
1.60
80.6
100% Franked
12 April 2018
80.5
100% Franked
11 October 2017
161.1
92.3
100% Franked
10 October 2018
92.3
The financial effect of the 2018 final dividend will be recognised in the subsequent financial year as it was declared after
30 June 2018. Franked dividends paid or declared during the financial year were franked at the tax rate of 30% (2017:
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.
58 Cochlear Limited Annual Report 2018
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
Consolidated
2018
$
2017
$
1,780,268
1,539,847
100,866
70,801
1,881,134
1,610,648
Taxation compliance and advisory services
1,031,640
1,361,901
IT advisory
Acquisition due diligence services
Other
Total non-audit services
STATE OF AFFAIRS
673,000
-
147,973
-
581,843
202,001
1,852,613
2,145,745
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 FY18 for the Cochlear Limited Board, the
CEO&P and other KMP, and changes for FY19, is included in the Remuneration report on pages 40 to 56 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.
59
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 2018, see Note 2.6 to the financial statements.
LEAD AUDITOR’S INDEPENDENCE DECLARATION
The lead auditor’s independence declaration is set out on page 61 and forms part of the Directors’ report for the financial
year ended 30 June 2018.
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 hundred
thousand dollars unless otherwise indicated.
Dated at Sydney this 14th day of August 2018.
Signed in accordance with a resolution of the directors:
Director
Director
60 Cochlear Limited Annual Report 2018
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 2018 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, 14 August 2018
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.
61
Income statement
Revenue
Cost of sales
Gross profit
Selling, marketing and general expenses
Administration expenses
Research and development expenses
Other income
Other expenses
Results from operating activities
Finance income - interest
Finance expense - interest
Net finance expense
Profit before income tax
Income tax expense
Net profit
Basic earnings per share (cents)
Diluted earnings per share (cents)
Note
2.2
2.3
2.4
2.3
3.1
2.5
2.5
2018
$m
1,363.7
(361.2)
1,002.5
(397.0)
(97.4)
(167.7)
10.2
(2.2)
348.4
0.6
(8.5)
(7.9)
340.5
(94.7)
245.8
427.3
426.7
2017
$m
1,253.8
(358.4)
895.4
(347.2)
(85.2)
(151.9)
4.5
-
315.6
0.7
(7.5)
(6.8)
308.8
(85.2)
223.6
389.7
389.1
The notes on pages 67 to 101 are an integral part of these consolidated financial statements.
62 Cochlear Limited Annual Report 2018
Statement of comprehensive income
Net profit
Other comprehensive (loss)/income
Items that will not be reclassified subsequently to the income statement:
Defined benefit plan actuarial (losses)/gains
Total items that will not be reclassified subsequently to the income statement
Items that may be reclassified subsequently to the income statement:
2018
$m
245.8
(0.2)
(0.2)
2017
$m
223.6
2.7
2.7
Foreign currency translation differences
3.7
(15.1)
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 items that may be reclassified subsequently to the income statement
Other comprehensive loss, net of tax
Total comprehensive income
(19.4)
(8.6)
0.1
(24.2)
(24.4)
221.4
20.9
(9.9)
(0.3)
(4.4)
(1.7)
221.9
The notes on pages 67 to 101 are an integral part of these consolidated financial statements.
63
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
6.3(a)
4.2
5.6
3.2
2018
$m
61.5
316.7
3.7
167.4
9.6
25.3
584.2
2.1
0.4
128.4
345.3
15.8
80.7
2017
$m
89.5
292.1
18.4
160.0
7.3
18.6
585.9
0.8
7.8
120.1
340.0
15.1
66.6
572.7
1,156.9
550.4
1,136.3
140.5
130.9
13.1
3.7
22.1
57.3
24.5
26.5
287.7
28.1
9.2
144.0
12.0
54.4
8.1
2.6
258.4
546.1
610.8
173.0
(33.8)
471.6
610.8
2.0
84.7
26.3
52.4
25.0
25.3
346.6
33.9
3.2
134.2
11.0
54.7
5.8
3.3
246.1
592.7
543.6
169.4
(12.9)
387.1
543.6
The notes on pages 67 to 101 are an integral part of these consolidated financial statements.
64 Cochlear Limited Annual Report 2018
Statement of changes in equity
Amounts $m
Issued
capital
Treasury
reserve
Translation
reserve
Hedging
reserve
Fair value
reserve
Share based
payment
reserve
Retained
earnings
Total
equity
2017
Balance at 1 July 2016
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
Share options exercised
Performance rights vested
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2017
2018
Balance at 1 July 2017
Total comprehensive income/(loss)
Net profit
Other comprehensive (loss)/income
Defined benefit plan actuarial losses
Foreign currency translation differences
Effective portion of changes in fair value of
cash flow hedges, net of tax
Net change in fair value of cash flow hedges
transferred to the income statement, net of tax
Net change in fair value of available for sale
financial assets, net of tax
Total other comprehensive income/(loss)
Total comprehensive income/(loss)
Transactions with owners, recorded directly
in equity
Share options exercised
Performance rights vested
Share based payment transactions
Deferred tax recognised in equity
Dividends to shareholders
Balance at 30 June 2018
159.3
(0.4)
(48.4)
4.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10.1
0.4
-
-
-
-
169.4
169.4
-
-
-
-
-
-
-
-
3.6
-
-
-
-
173.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(15.1)
-
-
-
(15.1)
(15.1)
-
-
-
-
-
(63.5)
-
-
-
20.9
(9.9)
-
11.0
11.0
-
-
-
-
-
15.2
-
-
-
-
-
-
(0.3)
(0.3)
(0.3)
-
-
-
-
-
(0.3)
29.5
304.3
448.5
-
-
-
-
-
-
-
-
223.6
223.6
2.7
-
2.7
(15.1)
-
-
20.9
(9.9)
-
2.7
226.3
(0.3)
(1.7)
221.9
(0.9)
(0.5)
8.1
(0.5)
-
35.7
-
-
-
9.6
(0.5)
8.1
-
(143.5)
387.1
(0.5)
(143.5)
543.6
(63.5)
15.2
(0.3)
35.7
387.1
543.6
-
-
3.7
-
-
-
3.7
3.7
-
-
-
-
-
-
-
-
(19.4)
(8.6)
-
(28.0)
(28.0)
-
-
-
-
-
-
-
-
-
-
0.1
0.1
0.1
-
-
-
-
-
-
-
-
-
-
-
-
-
245.8
245.8
(0.2)
-
(0.2)
3.7
-
-
-
(0.2)
245.6
(19.4)
(8.6)
0.1
(24.4)
221.4
(2.5)
(1.5)
8.5
(1.2)
-
-
-
-
1.1
(1.5)
8.5
-
(161.1)
(1.2)
(161.1)
(59.8)
(12.8)
(0.2)
39.0
471.6
610.8
The notes on pages 67 to 101 are an integral part of these consolidated financial statements.
65
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
Net cash provided by operating activities
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
Net (outlay)/proceeds from exercise of share options and performance rights
Dividends paid
Net cash used in financing activities
Net (decrease)/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
Note
2018
$m
2017
$m
3.1
2.7(b)
5.2
5.2
5.3
5.3
5.4
2.6
1,350.3
(987.8)
4.8
0.6
(8.5)
(101.3)
258.1
(2.6)
(25.8)
0.3
(16.2)
(5.1)
(6.0)
-
(55.4)
1,220.7
(878.6)
4.1
0.7
(8.6)
(78.5)
259.8
(27.5)
(26.0)
0.6
(9.3)
(8.2)
(1.5)
(63.7)
(135.6)
(321.2)
(193.0)
250.0
(0.4)
(161.1)
(232.7)
(30.0)
89.5
2.0
61.5
219.1
9.1
(143.5)
(108.3)
15.9
75.4
(1.8)
89.5
The notes on pages 67 to 101 are an integral part of these consolidated financial statements.
66 Cochlear Limited Annual Report 2018
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 2018 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 14 August 2018.
(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 hundred 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
67
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.
68 Cochlear Limited Annual Report 2018
Notes to the financial statements
Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or
payable to, the relevant taxation authority is included as a current asset or liability in the balance sheet.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from
investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified
as operating cash flows.
2. PERFORMANCE FOR THE YEAR
2.1 Operating segments
Cochlear’s three reportable segments, determined on a geographical basis, are the strategic business units of Cochlear.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be
allocated on a reasonable basis. Unallocated items comprise corporate and other net expenses and corporate and
manufacturing assets and liabilities.
Performance is measured based on segment earnings before interest and income tax (EBIT) as included in the internal
management reports that are reviewed by Cochlear’s Chief Executive Officer & President (CEO&P), who is also the chief
operating decision-maker.
Information about reportable segments
Americas
EMEA1
Asia Pacific
Total
2018
2017
2018
2017
2018
2017
$m
$m
$m
$m
$m
$m
2018
$m
2017
$m
Reportable segment revenue
648.5
595.0
478.9
428.5
224.0
216.2
1,351.4
1,239.7
Reportable segment EBIT
349.4
314.6
213.7
181.5
71.3
67.1
634.4
563.2
Reportable segment assets
215.2
215.7
245.2
225.0
125.0
117.7
585.4
558.4
Reportable segment liabilities
81.2
72.4
54.2
44.5
37.0
28.5
172.4
145.4
Other material items
Depreciation and amortisation
1.4
1.1
1.0
1.7
1.0
1.0
3.4
3.8
Write-down in value of
inventories
Acquisition of non-current
assets
1. Europe, Middle East and Africa.
0.7
0.6
1.6
0.6
0.4
0.2
2.7
1.4
6.0
1.2
1.9
1.1
0.7
0.5
8.6
2.8
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items
Revenues
Cochlear
implants
Services
2018
2017
$m
831.0
767.8
$m
355.2
305.6
Total
Cochlear
implants
$m
1,186.2
1,073.4
Acoustics
$m
165.2
166.3
Reportable
segment
revenue
$m
1,351.4
1,239.7
Foreign
exchange gain
on hedged
sales
$m
12.3
14.1
Consolidated
revenue
$m
1,363.7
1,253.8
69
Notes to the financial statements
Profit or loss
2018
2017
Reportable
segment EBIT
Corporate
and other
net
expenses
Foreign
exchange gain
on hedged
sales
Net finance
expense
Consolidated
profit before
income tax
$m
634.4
563.2
$m
(298.3)
(261.7)
$m
12.3
14.1
$m
(7.9)
(6.8)
$m
340.5
308.8
Assets and liabilities
Reportable
segment assets
Corporate
and
manufacturing
assets
Consolidated
total assets
Reportable
segment
liabilities
Corporate and
manufacturing
liabilities
Consolidated
total liabilities
2018
2017
$m
585.4
558.4
$m
571.5
577.9
$m
1,156.9
1,136.3
$m
172.4
145.4
$m
373.7
447.3
$m
546.1
592.7
Other material items
Reportable segment total
Corporate and
manufacturing total
Consolidated total
2018
$m
2017
$m
3.4
2.7
8.6
3.8
1.4
2.8
2018
$m
30.8
0.1
47.1
2017
$m
27.4
5.2
69.7
2018
$m
34.2
2.8
55.7
2017
$m
31.2
6.6
72.5
Depreciation and
amortisation
Write-down in value of
inventories
Acquisition of non-
current assets
inventoryinveninventories
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 gain on hedged sales
Revenue from sale of goods
Rendering of services
Total revenue
70 Cochlear Limited Annual Report 2018
2018
$m
1,324.9
12.3
1,337.2
26.5
1,363.7
2017
$m
1,227.2
14.1
1,241.3
12.5
1,253.8
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
2018
$m
352.7
5.7
2.8
361.2
2017
$m
344.6
7.2
6.6
358.4
(b) Profit before income tax has been arrived at after charging the following
item:
Operating lease rental expense
27.0
22.3
Other expenses
Impairment of available for sale financial assets
Total other expenses
2.4 Other income
2018
$m
2.2
2.2
2017
$m
-
-
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/losses are recognised in accordance with
the accounting policy at Note 1.2(d).
Changes to the contingent consideration value recognised for the Sycle, LLC business acquisition were considered at 30
June 2018. Based on FY18 revenue growth relative to the performance hurdle, $5.3 million has been released to the
income statement and $28 million remains as contingent consideration (2017: $33.3 million).
Grant received or due and receivable
Release of contingent consideration
Foreign exchange gain
Other income
Total other income
2018
2017
$m
2.3
5.3
0.1
2.5
10.2
$m
2.4
-
0.4
1.7
4.5
71
Notes to the financial statements
2.5 Earnings per share
Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares.
Basic earnings per share
The calculation of basic EPS has been based on the following net profit attributable to equity holders of the parent entity
and weighted average number of ordinary shares of the Company:
2018
2017
Net profit attributable to equity holders of the parent entity
$245,792,000 $223,616,000
Weighted average number of ordinary shares (basic):
Issued ordinary shares at 1 July (number)
Effect of options, performance shares and performance rights exercised (number)
Effect of shares issued under Employee Share Plan (number)
57,426,649
57,199,264
94,306
6,710
181,834
7,216
Weighted average number of ordinary shares (basic) at 30 June
57,527,665
57,388,314
Basic earnings per share (cents)
427.3
389.7
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
$245,792,000
$223,616,000
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)
57,527,665
57,388,314
Effect of options, performance shares and performance rights unvested (number)
73,803
78,352
Weighted average number of ordinary shares (diluted) at 30 June
57,601,468
57,466,666
Diluted earnings per share (cents)
426.7
389.1
2018
2017
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 $m
Franked/unfranked
Date of payment
2018
Interim 2018 ordinary
Final 2017 ordinary
Total amount
2017
Interim 2017 ordinary
Final 2016 ordinary
Total amount
1.40
1.40
2.80
1.30
1.20
2.50
80.6
80.5
161.1
74.6
68.9
143.5
100% Franked
12 April 2018
100% Franked
11 October 2017
100% Franked
6 April 2017
100% Franked 29 September 2016
72 Cochlear Limited Annual Report 2018
Notes to the financial statements
Dollars per share
Total amount $m
Franked/unfranked Date of payment
Subsequent event
Since the end of the financial year, the directors declared the following dividends:
Final 2018 ordinary
Total amount
1.60
1.60
92.3
92.3
100% Franked
10 October 2018
The financial effect of the 2018 final dividend will be recognised in the subsequent financial year as it was declared after
30 June 2018.
Dividend franking account
Franked dividends paid during the financial year were franked at the tax rate of 30% (2017: 30%). There are no further
tax consequences as a result of paying dividends other than a reduction in the franking account.
At 30 June 2018, there are $39.2 million of franking credits (2017: $27.6 million) available to shareholders of Cochlear
Limited for subsequent financial years.
The dividend franking account at year end is adjusted for:
franking credits that will arise from the payment of the current tax liability;
franking debits that will arise from the payment of dividends recognised as a liability at the year end; and
franking credits that the Company may be prevented from distributing in subsequent financial years.
The ability to utilise the franking account credits is dependent upon the ability to declare dividends. The impact on the
dividend franking account of dividends proposed after the balance sheet date but not recorded as a liability is to reduce it
by $39.5 million (2017: $34.5 million).
Dividends in excess of the dividend franking account balance will be unfranked.
73
Notes to the financial statements
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 0.73% (2017: 0.77%) per annum.
(b) Reconciliation of net profit to net cash provided by operating activities
Net profit
Add item classified as investing activities:
Loss on disposal of property, plant and equipment
Add/(less) non-cash items:
Depreciation and amortisation
Release of contingent consideration
Impairment of available for sale financial assets
Equity settled share based payment transactions
2018
$m
245.8
0.6
34.2
(5.3)
2.2
8.5
2017
$m
223.6
0.5
31.2
-
-
8.1
Net cash provided by operating activities before changes in assets and
liabilities
Changes in assets and liabilities:
286.0
263.4
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
(25.9)
(7.4)
(6.7)
(11.8)
3.8
(6.5)
5.9
(0.8)
0.5
21.0
258.1
(5.9)
(5.9)
(4.7)
5.8
(24.6)
11.0
2.9
2.0
(7.8)
23.6
259.8
74 Cochlear Limited Annual Report 2018
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 is 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
2018
2017
$m
103.1
81.3
$m
(1.6)
0.4
$m
101.5
81.7
$m
(6.8)
3.5
Total
deferred
tax
(benefit)/
expense
$m
(6.8)
3.5
Total
income tax
expense
$m
94.7
85.2
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% (2017: 30%)
Increase in income tax expense due to:
Non-deductible expenses, net
Effect of tax rate in foreign jurisdictions
Restatement of US deferred tax asset1
Decrease in income tax expense due to:
Research and development allowances
Effects of different tax rates in foreign jurisdictions
Adjustment for prior years
2018
$m
340.5
102.1
0.1
-
6.3
(9.8)
(2.4)
96.3
(1.6)
2017
$m
308.8
92.6
0.8
0.6
-
(9.2)
-
84.8
0.4
Income tax expense on profit before income tax
85.2
1. Restatement of US deferred tax balances as at 31 December 2017 resulting from the enactment of H.R. 1 (US tax reform legislation) on 22 December
2017.
94.7
75
Notes to the financial statements
Tax expense for items relating to other comprehensive (loss)/income or equity
Note
2018
$m
2017
$m
Total deferred tax recognised in other comprehensive (loss)/income relating
to derivative financial instruments
Total deferred tax recognised directly in equity relating to share based
payments
3.2
(12.0)
3.2
1.2
Consolidated Entity - Numerical reconciliation between income tax expense and cash taxes paid
Income tax expense on profit before income tax
Timing differences recognised in deferred tax
Effect of tax rate in foreign jurisdictions
Current year tax instalments payable next year
Prior year tax instalments paid this year
Cash taxes paid per statement of cash flows
2018
$m
94.7
0.4
0.1
(15.0)
21.1
101.3
4.7
0.5
2017
$m
85.2
5.3
0.1
(21.1)
9.0
78.5
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% (2017: 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
2018
$m
274.2
47.1
321.3
96.4
1.0
2.1
(8.5)
(14.1)
76.9
(1.0)
75.9
2017
$m
240.4
1.5
241.9
72.6
2.4
1.7
(8.1)
(0.5)
68.1
(0.1)
68.0
76 Cochlear Limited Annual Report 2018
Notes to the financial statements
3.2 Current and deferred tax assets and liabilities
Deferred tax is recognised on all temporary differences between the carrying amounts of assets and liabilities for
financial reporting and taxation purposes.
The measurement of deferred tax mirrors the tax consequences that the Consolidated Entity expects to recover or settle
the carrying amount of its assets and liabilities.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse.
A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against
which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced if it is no longer
probable that the related tax benefit will be realised.
Recognised deferred tax assets and liabilities
Assets
Liabilities
Net
2018
$m
0.3
0.4
25.7
32.8
1.6
5.6
19.9
86.3
(5.6)
80.7
2017
$m
0.1
-
26.6
33.3
2.1
-
21.3
83.4
(16.8)
66.6
2018
$m
(2.6)
(6.2)
-
-
-
-
(4.9)
(13.7)
5.6
(8.1)
2017
$m
(2.7)
(8.1)
-
-
-
(6.5)
(5.3)
(22.6)
16.8
(5.8)
2018
$m
(2.3)
(5.8)
25.7
32.8
1.6
5.6
15.0
72.6
-
72.6
2017
$m
(2.6)
(8.1)
26.6
33.3
2.1
(6.5)
16.0
60.8
-
60.8
Property, plant and equipment
Intangible assets
Inventories
Provisions
Deferred revenue
Forward exchange contracts
Other
Deferred tax assets/(liabilities)
Set off tax
Deferred tax assets/(liabilities)
Unrecognised deferred tax liabilities
At 30 June 2018, a deferred tax liability of $32.5 million (2017: $37.8 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
Deferred tax arising from business acquisition
Recognised in other comprehensive (loss)/income
Recognised directly in equity
Restatement of US deferred tax asset
Effects of movements in foreign exchange
Carrying amount at end of financial year
Note
3.1
3.1
3.1
3.1
3.1
2018
$m
60.8
6.8
-
12.0
(1.2)
(6.3)
0.5
72.6
2017
$m
70.0
0.5
(4.0)
(4.7)
(0.5)
-
(0.5)
60.8
77
Notes to the financial statements
Current tax assets and liabilities
The current tax assets for the Consolidated Entity of $9.6 million (2017: $7.3 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 $22.1 million (2017: $26.3 million)
represent the amount of income taxes payable in respect of current and prior financial years.
4. EMPLOYEE BENEFITS
4.1 Employee expenses
Wages and salaries
Contributions to superannuation plans
Increase in leave liabilities
Equity settled share based payment transactions
Total employee expenses
4.2 Employee benefit liabilities
Wages, salaries and annual leave
2018
$m
338.0
25.3
4.7
8.5
2017
$m
300.1
22.7
4.7
8.1
376.5
335.6
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, 80 employees (2017: 78 employees). Cochlear contributed cash of $1.2
million (2017: $1.4 million) to defined benefit plans in the year ended 30 June 2018 and expects to contribute $1.3 million
in the year ending 30 June 2019.
78 Cochlear Limited Annual Report 2018
Notes to the financial statements
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 2018, Prof E Byrne, AC is the only non-executive director entitled to this
benefit.
Current
Provision for long service leave
Provision for annual leave
Provision for short-term incentives
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
2018
$m
11.0
26.5
19.8
57.3
5.9
5.6
0.5
12.0
69.3
2017
$m
9.5
23.7
19.2
52.4
5.5
5.1
0.4
11.0
63.4
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.
79
Notes to the financial statements
At 30 June 2018, 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
November 20151
August 20162
October 20161
August 20172
October 20171
Total
Exercise price of
options
Number of
options
Number of
performance
rights
Contractual life
$82.89
N/A
$135.84
N/A
$154.73
134,845
-
79,006
-
104,376
318,227
16,596
32,001
20,726
38,225
11,835
119,383
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 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 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:
18 October 2017
24 August 2017
19 October 2016
16 August 2016
TSR
based
conditions
EPS
performance
based
conditions
Deferred STI
service
based
conditions
TSR
based
conditions
EPS
performance
based
conditions
Deferred STI
service
based
conditions
Fair value of options at grant date
$22.27
$23.91
N/A
$14.46
$18.65
N/A
Fair value of performance rights at
grant date
$83.43
$142.31
$145.96
$96.40
$125.82
$129.27
Share price at valuation date
$155.18
$155.18
$155.18
$138.43
$138.43
$137.72
Option exercise price
$154.73
$154.73
N/A
$135.84
$135.84
N/A
Expected volatility (weighted
average volatility)
24.91%
24.91%
24.91%
23.15%
23.15%
23.15%
Option life
3-4 years
3-4 years
2 years 3-4 years
3-4 years
2 years
Expected dividend yield
2.95%
2.95%
2.95%
3.29%
3.29%
3.29%
Risk free interest rate (based on
government bonds)
2.00%
2.00%
2.00%
1.39%
1.39%
1.39%
80 Cochlear Limited Annual Report 2018
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
Number of
options
2018
$93.51
$149.52
$68.56
$154.73
$119.60
$82.89
2018
292,934
(3,228)
(78,192)
106,713
318,227
134,845
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
78,192 options were exercised in 2018 (2017: 187,178 options were exercised). The weighted average market share
price on the Australian Securities Exchange (ASX) at date of exercise was $160.23 (2017: $134.53). The weighted
average remaining contractual life of options outstanding at the end of the year is two years (2017: 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 2018, the Company issued 8,874 shares under the Plan; see Note 6.2.
APAC Employee Equity Plan
The APAC Employee Equity Plan aligns with the Cochlear Employee Share Plan and provides up to $1,000 of service
rights annually per eligible employee in selected Asian countries. Upon vesting, each service right converts to one share.
The plan was established in 2016 and the first vesting under this plan will occur in FY19.
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, AM
Executive KMP
Mr D Howitt1, Mr A Bishop, Mr R Brook, Mr B Cubis, Mr J Janssen and Mr T Manna
Former executive KMP
Mr C Smith2
1. Appointed as Chief Operating Officer for the period from 1 July 2017 to 30 July 2017, President on 31 July 2017 and became CEO&P on 3 January
2018.
2. Retired on 2 January 2018, therefore only a KMP for the period 1 July 2017 to 2 January 2018.
81
Notes to the financial statements
Key management personnel disclosures
The KMP compensation is included in employee expenses as follows:
Short-term
employee
benefits
$
11,706,507
Post-
employment
benefits
$
412,566
Other long-
term
benefits
$
243,465
Directors’
retirement
benefits
$
8,366
Share
based
payments
$
3,256,080
End of
service
Total
$
1,452,589
$
17,079,573
10,956,867
538,236
48,707
7,996
2,898,262
-
14,450,068
2018
2017
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 40 to 56.
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
$m
68.3
60.5
Work in
progress
$m
22.1
27.2
Finished
goods
$m
77.0
72.3
Total
inventories
$m
167.4
160.0
2018
2017
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 internally-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.
82 Cochlear Limited Annual Report 2018
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 30 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
At cost
Accumulated
depreciation
2018
$m
38.6
2017
$m
35.0
2018
$m
221.8
2017
$m
2018
$m
201.9
30.1
(25.3)
(22.2)
(136.5)
(121.9)
(0.3)
Net book value
13.3
12.8
85.3
80.0
29.8
2017
$m
27.5
(0.2)
27.3
-
-
27.5
-
2018
$m
290.5
2017
$m
264.4
(162.1)
(144.3)
128.4
120.1
120.1
86.9
-
28.4
(0.6)
0.2
53.5
(0.5)
12.8
12.9
80.0
74.0
27.3
-
3.0
-
-
2.5
-
-
22.8
(0.6)
0.2
23.5
(0.5)
-
2.6
-
(2.7)
(2.4)
(17.7)
(16.7)
(0.1)
(0.2)
(20.5)
(19.3)
0.2
13.3
(0.2)
12.8
0.8
85.3
(0.5)
-
-
1.0
80.0
29.8
27.3
128.4
(0.7)
120.1
Reconciliations of the
carrying amounts are:
Opening balance
Acquisition of
subsidiary
Additions
Disposals
Depreciation
Effect of movements in
foreign exchange
Net book value
5.3 Intangible assets
Goodwill
All business combinations are accounted for by applying the acquisition method. Goodwill represents the difference
between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is tested annually for impairment.
Enterprise resource planning system
System costs are recognised as an intangible asset where Cochlear controls future economic benefits as a result of the
costs incurred, and are stated at cost less accumulated amortisation. Costs include expenditure directly related to the
development and implementation (hardware and software costs) of the system including direct labour.
83
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
2018
At cost
Accumulated amortisation
Net book value
$m
263.6
-
263.6
Reconciliations of the carrying amounts are:
Opening balance
Additions
Amortisation
Effect of movements in
foreign exchange
Net book value
2017
At cost
Accumulated amortisation
Net book value
267.1
-
-
(3.5)
263.6
267.1
-
267.1
Reconciliations of the carrying amounts are:
Opening balance
Acquisition of subsidiary
Additions
Amortisation
Effect of movements in
foreign exchange
Net book value
171.4
101.5
-
-
(5.8)
267.1
$m
1.8
-
1.8
1.8
-
-
-
1.8
1.8
-
1.8
1.8
-
-
-
-
1.8
Intangible assets with finite useful
life
Intangible
assets
Enterprise
resource
planning
system
$m
Acquired
technology,
patents and
licences
$m
Other
intangible
assets
Total
$m
$m
82.3
(49.4)
32.9
24.1
16.2
(7.6)
0.2
32.9
66.0
(41.9)
24.1
23.0
0.2
9.3
(8.3)
(0.1)
24.1
74.3
(45.3)
29.0
32.1
1.5
(4.6)
-
29.0
72.9
(40.8)
32.1
27.4
-
8.0
(3.2)
(0.1)
32.1
37.9
(19.9)
18.0
14.9
3.6
(1.5)
1.0
18.0
33.2
(18.3)
14.9
0.8
14.3
0.2
(0.4)
-
14.9
459.9
(114.6)
345.3
340.0
21.3
(13.7)
(2.3)
345.3
441.0
(101.0)
340.0
224.4
116.0
17.5
(11.9)
(6.0)
340.0
84 Cochlear Limited Annual Report 2018
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:
2018
2017
Americas
EMEA
Asia Pacific
$m
181.6
183.8
$m
72.4
73.7
$m
9.6
9.6
Total
$m
263.6
267.1
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% (2017: 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 10.4%
(2017: 13.7%), EMEA 9.4% (2017: 12.3%) and Asia Pacific 10.5% (2017: 13.1%).
The key assumptions and the approach to determining their value in the current year are:
Assumption
Discount rate
How determined
Based on weighted average cost of capital reflecting current market assessments of
the time value of money and risks specific to the CGU.
Sales volume growth rate
Based on a five year cash flow projection taking into account historical growth rates
and product lifecycle.
Terminal value growth rate
Based on 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.
85
Notes to the financial statements
5.4 Business combinations
On 11 May 2017, Cochlear acquired 100% of the shares in Sycle, LLC (Sycle) for $107.2 million comprising a cash
outflow of $64.4 million ($63.7 million net of cash acquired), $9.5 million of deferred consideration and $33.3 million of
contingent consideration. 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. At the date of acquisition, the fair value of net identifiable assets acquired for Sycle was $5.7
million, resulting in $101.5 million of goodwill being recognised.
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.
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.
2018
Opening balance
Provision made
Provision used
Effect of movements in foreign exchange
Total provisions
Represented by:
Current
Non-current
Total provisions
Warranties
Warranties
Legal and
insurance
Product
recall
Make
good lease
costs
$m
41.1
16.1
(18.4)
1.0
39.8
17.7
22.1
39.8
$m
3.2
2.4
(0.7)
-
4.9
4.9
-
4.9
$m
12.5
-
(1.4)
-
11.1
1.9
9.2
11.1
$m
1.6
0.1
-
0.1
1.8
-
1.8
1.8
Patent
dispute
$m
21.3
-
-
-
21.3
-
21.3
21.3
Total
$m
79.7
18.6
(20.5)
1.1
78.9
24.5
54.4
78.9
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 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 defending
86 Cochlear Limited Annual Report 2018
Notes to the financial statements
or 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 2018.
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 (AMF) and
Advanced Bionics LLC (AB) 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 Limited and Cochlear Americas 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.
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 willfulness of infringement of two claims
in the remaining patent at issue.
AMF and AB have asked the Judge in the District Court to enter Judgment against Cochlear Limited and Cochlear
Americas for USD 131,216,325 based upon the Jury award in January 2014 and to increase those damages for willful
infringement. Cochlear Limited and Cochlear Americas have asked the Judge to find non-infringement of claim 1 of the
‘616 Patent, to hold a second Jury trial on damages on claim 10 of the ‘616 Patent, and to decline to increase damages
for willful infringement. The Judge has notified the parties that he intends to make his decision by 31 August 2018.
As the patents have expired, the trial Judgment and the Court of Appeals decision will not disrupt Cochlear Americas
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, the directors considered the 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.
87
Notes to the financial statements
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.
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)
2018
$m
86.2
610.8
12%
2017
$m
129.4
543.6
19%
88 Cochlear Limited Annual Report 2018
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
2018
2017
2018
2017
2018
2017
On issue 1 July – fully paid
57,426,649 57,199,264
Issued for nil consideration under
Employee Share Plan
8,874
9,828
Issued from the exercise of
options
Issued from the exercise of
performance rights
Options vesting from Trust
52,046
169,707
60,251
-
42,477
5,373
On issue 30 June – fully paid
57,547,820 57,426,649
-
-
-
-
-
-
5,373 57,426,649 57,204,637
-
-
-
8,874
9,828
52,046
169,707
60,251
42,477
(5,373)
-
-
- 57,547,820 57,426,649
During 2018, Cochlear purchased 35,706 shares (2017: 15,884 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.
89
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 $1.0
million (2017: $0.8 million) 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
2018
$m
3.7
144.0
147.7
(61.5)
86.2
2017
$m
84.7
134.2
218.9
(89.5)
129.4
Multi-option bank facilities
Unsecured
bank loan
Bank
guarantees1
Other credit facilities
Unsecured
bank loan
Bank
guarantees
Unsecured
bank
overdrafts
2018
Utilised at reporting date
Not utilised at reporting date
Total facilities
2017
Utilised at reporting date
Not utilised at reporting date
Total facilities
1. Bank guarantees include standby letters of credit.
$m
145.0
205.0
350.0
215.0
230.0
445.0
90 Cochlear Limited Annual Report 2018
$m
6.5
8.5
15.0
4.9
15.1
20.0
$m
-
2.7
2.7
-
0.3
0.3
$m
3.7
1.8
5.5
4.7
0.6
5.3
$m
2.9
1.5
4.4
2.1
1.2
3.3
Notes to the financial statements
Multi-option bank facilities - Unsecured bank loan
In June 2018, Cochlear refinanced its bank loan facilities as follows:
Facility type
2 year term
3 year term
4 year term
5 year term
Total facilities
$m
$m
$m
$m
$m
Committed debt including
guarantees
50.0
100.0
100.0
115.0
365.0
All facilities are unsecured and have 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.
Unsecured bank loan
Cochlear has a Japanese yen (JPY) 450.0 million loan facility. It is an unsecured bank loan, reviewed annually. Interest
is charged at prevailing market rates.
Bank guarantees/Standby letters of credit
As at 30 June 2018, Cochlear had additional contingent liability facilities denominated in United States dollars (USD),
Euros (EUR), Sterling (GBP), Indian rupees and New Zealand dollars totalling AUD 4.4 million (2017: AUD 3.3 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.
91
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 at 30 June was as follows,
based upon notional amounts:
Amounts local currency/millions
CHF
EUR
GBP
JPY
SEK
USD
2018
Trade receivables
Unsecured bank loan
Trade payables
Gross balance sheet exposure
2017
Trade receivables
Unsecured bank loan
Trade payables
Gross balance sheet exposure
0.4
-
(1.8)
(1.4)
0.7
-
(2.0)
(1.3)
58.3
-
(7.7)
50.6
49.8
-
(7.5)
42.3
5.3
928.1
-
(300.0)
(7.3)
(2.0)
(104.5)
523.6
5.7
654.3
-
(400.0)
(5.3)
0.4
(44.5)
209.8
7.2
-
(61.2)
(54.0)
4.3
-
(60.5)
(56.2)
82.7
-
(22.0)
60.7
83.0
-
(47.8)
35.2
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 CHF, EUR, GBP, JPY, SEK and USD. The amounts of forward
cover taken are in accordance with approved policy and internal forecasts.
In the year ended 30 June 2018, 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.
92 Cochlear Limited Annual Report 2018
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 2018, all cash flow hedges were effective at the reporting date.
The following table sets out the gross value to be received or paid under forward exchange contracts and the weighted
average contracted exchange rates of outstanding contracts:
Weighted
average rate
< 1 year
$m
1 - 2 years
$m
2 - 5 years
$m
2018
Sell CHF
Sell EUR
Sell GBP
Sell JPY
Sell SEK
Sell USD
2017
Sell EUR
Sell JPY
Sell USD
0.742
0.633
0.554
80.510
6.367
0.761
0.646
79.844
0.734
17.8
125.7
19.3
14.7
41.7
305.6
154.9
15.3
256.2
-
77.5
12.7
10.6
1.5
184.9
87.5
8.3
131.2
-
13.4
1.9
2.7
-
32.5
27.6
2.3
12.5
Currency risk - Sensitivity analysis
An analysis based on a 10% strengthening of foreign currencies would have decreased Cochlear’s profit for the year
ended 30 June 2018 after tax, by approximately AUD 6.5 million (2017: AUD 4.7 million) and increased Cochlear’s equity
by AUD 33.9 million (2017: decrease by AUD 12.9 million). A 10% weakening of the foreign currencies would have
increased Cochlear’s profit after tax by $7.6 million (2017: AUD 9.4 million) and decreased equity by $69.5 million (2017:
increase by AUD 18.7 million).
This analysis assumes that all other variables remain constant and ignores any impact from the translation of foreign
operations.
93
Notes to the financial statements
The following significant exchange rates applied to Cochlear during the year:
AUD 1 =
CHF
EUR
GBP
JPY
SEK
USD
Interest rate risk
Average rate
Reporting date spot rate
2018
0.749
0.649
0.575
85.288
6.453
0.772
2017
0.746
0.689
0.592
81.988
6.614
0.753
2018
0.735
0.635
0.564
81.765
6.629
0.739
2017
0.730
0.670
0.594
85.345
6.529
0.761
Cochlear is exposed to interest rate risks in Australia and Japan. See Note 6.4(c) for effective interest rates, repayment
and repricing analysis of outstanding debt.
At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments is financial assets of
$61.5 million (2017: $89.5 million) and financial liabilities of $147.7 million (2017: $218.9 million).
For the year ended 30 June 2018, 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 $1.0 million (2017: $1.5 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:
2018
2017
Americas
EMEA
Asia Pacific
$m
95.1
94.5
$m
131.5
118.1
$m
72.5
62.8
Total
$m
299.1
275.4
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
94 Cochlear Limited Annual Report 2018
Notes to the financial statements
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.
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
2018
$m
247.3
34.8
18.0
2.6
6.3
309.0
(9.9)
299.1
17.6
316.7
2017
$m
206.3
37.5
17.0
12.1
20.2
293.1
(17.7)
275.4
16.7
292.1
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.
95
Notes to the financial statements
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
$m
$m
$m
$m
$m
More
than 5
years
$m
2.99%
0.55%
-
3.26%
0.53%
-
144.0
3.7
168.6
316.3
214.2
4.7
164.8
383.7
159.3
3.7
168.6
331.6
226.2
4.7
164.8
395.7
4.3
3.7
140.5
148.5
87.0
4.7
130.9
222.6
4.3
109.3
41.4
-
12.0
16.3
139.2
-
7.0
146.2
-
16.1
125.4
-
-
26.9
26.9
-
-
41.4
-
-
-
-
2018
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
2017
AUD floating rate loan
JPY floating rate loan
Trade and other payables
Total
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly
different amounts.
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:
2018
Assets
Liabilities
Total
2017
Assets
Liabilities
Total
Carrying
amount
$m
Contractual
cash flows
$m
4.1
(22.3)
(18.2)
26.2
(5.2)
21.0
4.3
(22.9)
(18.6)
28.5
(3.7)
24.8
< 1 year
$m
3.8
(13.3)
(9.5)
19.0
(1.9)
17.1
1 - 2
years
$m
2 - 5
years
$m
0.4
(8.2)
(7.8)
8.3
(1.2)
7.1
0.1
(1.4)
(1.3)
1.2
(0.6)
0.6
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
96 Cochlear Limited Annual Report 2018
Notes to the financial statements
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.
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:
2018
$
2017
$
1,780,268
1,539,847
100,866
70,801
1,881,134
1,610,648
- taxation compliance and advisory services
1,031,640
1,361,901
- IT advisory
- acquisition due diligence services
- other
Total non-audit services
7.2 Commitments
Operating lease commitments
673,000
-
147,973
-
581,843
202,001
1,852,613
2,145,745
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.
97
Notes to the financial statements
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
2018
$m
30.3
77.9
63.6
171.8
2017
$m
22.1
70.0
58.9
151.0
As at 30 June 2018, Cochlear entered into contracts to purchase property, plant and equipment for $40.2 million (2017:
$4.8 million).
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
2018
%
2017
%
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.
98 Cochlear Limited Annual Report 2018
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Australia
UK
Switzerland
USA
Austria
Belgium
Sweden
USA
Canada
USA
Germany
Australia
Germany
UK
Australia
Australia
France
Australia
Belgium
Australia
Australia
Australia
Italy
Korea
Panama
Notes to the financial statements
Interest held
Country of
incorporation/formation
Cochlear Malaysia Sdn. Bhd.
Cochlear Manufacturing Corporation
Cochlear Medical Device (Beijing) Co., Ltd
Cochlear Medical Device (Chengdu) Co Ltd
Cochlear Medical Device Company India Private Limited
Cochlear Middle East FZ-LLC
Cochlear Nordic AB
Cochlear Norway AS
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
Cochlear (HK) Limited
Cochlear (UK) Limited
Medical Insurance Pte Limited
Nihon Cochlear Co Limited
Sichuan Keli ShuangChuang Technology Co Ltd
Sycle, LLC
Sycle.Net Technologies (Canada) Ltd
(i) Name changed in 2018, previously Medisan Hørselsimplantater AS
(ii) Name changed in 2017, previously Lachlan Project Development Pty Ltd.
(iii) Dormant.
(i)
(ii)
(iii)
2018
%
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
51
100
100
2017
%
100
100
100
-
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
-
100
100
Malaysia
USA
China
China
India
UAE
Sweden
Norway
New Zealand
UK
Panama
Sweden
Australia
Australia
Turkey
Germany
Hong Kong
UK
Singapore
Japan
China
USA
Canada
7.4 Parent entity disclosure
At, and throughout the financial year ended, 30 June 2018, the parent company of Cochlear was Cochlear Limited.
Result of the parent entity:
Net profit
Other comprehensive (loss)/income
Total comprehensive income
Financial position of the parent entity at year end:
Current assets
Total assets
Current liabilities
Total liabilities
2018
$m
244.0
(28.3)
215.7
451.0
935.0
158.0
481.0
2017
$m
176.0
11.0
187.0
459.3
923.2
223.9
532.2
99
Notes to the financial statements
Total equity of the parent entity comprising:
Issued capital
Translation reserve
Hedging reserve
Share based payment reserve
Retained earnings
Total equity
2018
$m
173.0
-
(13.0)
39.0
255.0
454.0
2017
$m
169.4
0.1
15.2
34.2
172.1
391.0
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.
Parent entity capital commitments for acquisition of plant and equipment
As at 30 June 2018, the parent entity entered into contracts but had not provided for or paid to purchase plant and
equipment for $10.2 million (2017: $4.8 million).
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 2018, 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 will be effective for Cochlear’s 2019 consolidated financial statements replacing the
existing AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 contains a new classification and
measurement approach for financial assets that reflects the business model in which assets are managed and their
cash flow characteristics.
AASB 9 contains three classification categories for financial assets: measured at Amortised Cost, Fair Value through
Other Comprehensive Income and Fair Value through Profit or Loss. The new standard eliminates the existing
AASB 139 categories of Held to Maturity, Loans and Receivables and Available for Sale.
AASB 9 also changes the requirements for hedge accounting and the approach for assessing hedge effectiveness.
Based on procedures completed to date, Cochlear expects the following impacts on adoption of AASB 9:
-
-
-
there will be no significant impact on the classification and measurement of its financial assets and financial
liabilities;
investments which are currently classified as Available for Sale investments will be classified as Fair Value
through Other Comprehensive Income under AASB 9. Under AASB 139 fair value gains or losses are
recognised in Other Comprehensive Income whilst impairment losses are recognised in the Income
Statement. Under AASB 9 all gains or losses from these investments, including impairment losses, will be
recognised in Other Comprehensive Income. In addition, any realised gains or losses on disposal will no
longer be recycled through the Income Statement;
impairment losses on financial assets, including trade receivables, are now required to be measured using an
expected credit losses model rather than the incurred credit losses. Under the new model, Cochlear is
required to recognise the expected credit loss from possible future default events rather the credit losses
arising from counterparties that are currently in default. This is expected to result in an increase in the
impairment losses for trade receivables. Based on the work performed to date, the adoption of AASB 9 is
100 Cochlear Limited Annual Report 2018
Notes to the financial statements
expected to result in a $2 million (before tax) increase to the impairment losses on trade receivables effective
from 1 July 2018. Other financial assets held by Cochlear are not expected to be impacted by the new
standard; and
-
existing hedge relationships will qualify as continuing hedge relationships upon the adoption of the new
standard.
As permitted under AASB 9, on transition Cochlear plans to adopt the cumulative effect method, with the effect of
initially applying the standard recognised at the date of initial application (i.e. 1 July 2018). As a result, Cochlear will
not apply the requirements of AASB 9 to the comparative period and any impacts on adoption will result in an
offsetting (after tax) change in the opening retained earnings as at 1 July 2018.
Whilst Cochlear’s analysis is still ongoing, the adoption of AASB 9 is expected to have an immaterial impact on
financial asset and liability recognition with an opening retained earnings adjustment of $2 million (before tax). All
impacts are based on current estimates which are subject to finalisation prior to final implementation.
AASB 15 Revenue from Contracts with Customers will be effective for Cochlear’s 2019 consolidated financial
statements replacing existing revenue recognition guidance including AASB 118 Revenue.
The core principle of AASB 15 is that an entity recognises revenue related to the transfer of goods or services when
control of the goods or services passes to the customer. It also requires the identification of discrete performance
obligations within a transaction and an allocation of a portion of the transaction price to each of these obligations.
In preparation for AASB 15, Cochlear has established a project team including representatives from each
geographical region. The project team has reviewed a representative sample of sales contracts to identify potential
impacts from the adoption of AASB 15 including possible changes in timing of revenue recognition, measurement of
the amount of revenue and note disclosures.
Cochlear plans to adopt AASB 15 using the cumulative effect method, with the effect of initially applying the
standard recognised at the date of initial application (i.e. 1 July 2018). As a result, Cochlear will not apply the
requirements of AASB 15 to the comparative period and any impacts on adoption will result in an offsetting (after
tax) change in the opening retained earnings as at 1 July 2018.
Whilst Cochlear’s analysis is still ongoing, the adoption of AASB 15 is expected to have an immaterial impact on
revenue recognition with an opening retained earnings adjustment of $5 million (before tax). All impacts are based
on current estimates which are subject to finalisation prior to final implementation.
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:
-
-
-
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.
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 2018, see Note 2.6.
101
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 2018 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 2018.
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 14th day of August 2018.
Director
Director
102 Cochlear Limited Annual Report 2018
Independent audit report to the shareholders 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 2018 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 2018;
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 significant 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.
103
Independent audit report to the shareholders of Cochlear Limited
consistency to facts and conditions gathered across our work;
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;
and
Warranty provision.
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 $299.1 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.
Our procedures included:
Testing key controls within the credit control process
including credit account application approvals, credit
limit assessments, trade receivables aging and
management review of overdue trade receivables;
Assessing the recoverability of a sample of
outstanding trade receivable balances across
different geographies. We compared the
Consolidated Entity’s views of recoverability of
amounts outstanding to historical patterns of receipts
and our understanding of the impact of the political
and economic environment. This is done in
conjunction with assessing cash received
subsequent to year end for its effect in reducing
amounts outstanding at year end;
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.
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 which 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.
104 Cochlear Limited Annual Report 2018
Independent audit report to the shareholders of Cochlear Limited
Warranty provision $39.8 million
Refer to note 5.6 Provisions
The key audit matter
How the matter was addressed in our audit
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 impact 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.
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 which have been
based on historical actuals as the best estimate for
forecast failure rates, repair replacement ratios and
cost. We did this by enquiring with management to
understand the strategy and the impact of the Global
Repair Centre. Specifically, 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.
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.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
105
Independent audit report to the shareholders of Cochlear Limited
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 and whether the use of the going concern
basis of accounting is appropriate. 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 the 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_responsibilities/ar1.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.
106 Cochlear Limited Annual Report 2018
Independent audit report to the shareholders of Cochlear Limited
Report on the Remuneration report
Opinion
In our opinion, the Remuneration report of Cochlear Limited for the year ended 30 June 2018, 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 40 to 56 of the Annual Report for the year ended 30 June
2018.
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, 14 August 2018
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
107
Notes
108 Cochlear Limited Annual Report 2018
Notes
109
Notes
110 Cochlear Limited Annual Report 2018
References
1. 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.
2. Deafness and hearing loss. World Health Organization [Internet].[cited July 2018]. Available from:
http://www.who.int/news-room/fact-sheets/detail/deafness-and-hearing-loss.
3. Fact 5. Deafness and hearing loss. World Health Organization [Internet]. [cited July 2018]. Available from:
http://www.who.int/features/factfiles/deafness/en/
4. Cochlear internal data.
5. Market penetration estimate based on Cochlear sourced data.
6. Estimate based on information available to Cochlear.
7. Year 2007 position statement: Principles and guidelines for early hearing detection and intervention programs.
Pediatrics 2007;120:898-921; World Health Organization. Newborn and infant hearing screening: current issues and
guiding principles for action 2009. Available from:
http://www.who.int/blindness/publications/Newborn_and_Infant_Hearing_Screening_Report.pdf
8. Hoppe U, Hocke T, Hast A, Hornung J. [Longterm Results of a Screening Procedure for Adult Cochlear Implant
Candidates]. Laryngo- Rhino- Otologie [serial on the Internet]. (2017, Apr), [cited July 4, 2018]; 96(4): 234-238.
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3902673-2734.
10. Hsu W, Hsu C, Wen M, Lin H, Tsai H, Hsu Y, et al. Increased risk of depression in patients with acquired sensory
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e5312.
11. Stam M, Kostense P, Lemke U, Merkus P, Smit J, Kramer S, et al. Comorbidity in adults with hearing difficulties:
which chronic medical conditions are related to hearing impairment? International Journal Of Audiology [serial on the
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12. Barnett S. A hearing problem. American Family Physician [serial on the Internet]. (2002, Sep 1), [cited July 3, 2018];
66(5): 911.
13. Mick P, Kawachi I, Lin F. The Association between Hearing Loss and Social Isolation in Older Adults.
Otolaryngology And Head And Neck Surgery [serial on the Internet]. (2014), [cited July 3, 2018]; (3): 378.
14. Tomaka J, Thompson S, Palacios R. The Relation of Social Isolation, Loneliness, and Social Support to Disease
Outcomes Among the Elderly. Journal Of Aging And Health [serial on the Internet]. (2006), [cited July 3, 2018]; (3):
359.
15. Kramer S, Kapteyn T, Houtgast T. Occupational performance: comparing normally-hearing and hearing-impaired
employees using the Amsterdam Checklist for Hearing and Work. International Journal Of Audiology [serial on the
Internet]. (2006, Sep), [cited July 3, 2018]; 45(9): 503-512.
16. Nachtegaal J, Festen J, Kramer S. Hearing ability in working life and its relationship with sick leave and self-reported
work productivity. Ear And Hearing [serial on the Internet]. (2012, Jan), [cited July 3, 2018]; 33(1): 94-103.
17. Nachtegaal J, Kuik D, Anema J, Goverts S, Festen J, Kramer S. Hearing status, need for recovery after work, and
psychosocial work characteristics: Results from an internet-based national survey on hearing. International Journal
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111
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 2018.
Number of ordinary shares
4,532,973
3,457,684
7,990,657
%
7.9
6.0
13.9
Number of ordinary shareholders
Substantial shareholders
Investor
Baillie Gifford & Co
BlackRock Group
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 – 134 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
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